<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
/ / FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________
COMMISSION FILE NUMBER 1-14328
TRAVELERS PROPERTY CASUALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1445591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(Address of principal executive offices) (Zip Code)
(860) 277-0111
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE:
COMMON STOCK OUTSTANDING AS OF OCTOBER 31, 1997:
<TABLE>
<S> <C>
CLASS A 65,088,734
CLASS B 328,020,170
</TABLE>
<PAGE> 2
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements: Page No.
--------
<S> <C>
Condensed Consolidated Statement of Income (Unaudited) -
Three and Nine Months Ended September 30, 1997 and 1996 3
Condensed Consolidated Balance Sheet -
September 30, 1997 (Unaudited) and December 31, 1996 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Unaudited) -
Nine Months Ended September 30, 1997 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II - Other Information
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Exhibit Index 27
Signatures 28
</TABLE>
2
<PAGE> 3
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------ ------ ------ -------
<S> <C> <C> <C> <C>
REVENUES
Premiums $1,806 $1,818 $5,418 $ 4,311
Net investment income 528 493 1,535 1,161
Fee income 90 101 279 294
Realized investment gains (losses) 57 2 58 (31)
Other revenues 26 38 79 71
------ ------ ------ -------
Total revenues 2,507 2,452 7,369 5,806
------ ------ ------ -------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 1,363 1,442 4,111 3,979
Amortization of deferred acquisition costs 286 279 848 649
Interest expense 41 40 121 78
General and administrative expenses 350 338 1,039 983
------ ------ ------ -------
Total claims and expenses 2,040 2,099 6,119 5,689
------ ------ ------ -------
Income before federal income taxes 467 353 1,250 117
Federal income taxes (benefit) 140 106 374 (12)
------ ------ ------ -------
Net income $ 327 $ 247 $ 876 $ 129
====== ====== ====== =======
Net income per share of common stock
and common stock equivalents $ 0.83 $ 0.62 $ 2.21 $ 0.35
====== ====== ====== =======
Weighted average number of common shares
outstanding and common stock equivalents 392.5 400.0 396.8 356.2
====== ====== ====== =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except shares)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $25,441 and $24,052) $ 26,265 $ 24,446
Equity securities, at fair value (cost, $982 and $756) 1,051 779
Mortgage loans 768 1,005
Real estate held for sale 183 157
Short-term securities 1,745 2,311
Other investments 466 666
-------- --------
Total investments 30,478 29,364
-------- --------
Cash 105 106
Investment income accrued 398 381
Premium balances receivable 2,918 2,976
Reinsurance recoverables 9,361 9,714
Deferred acquisition costs 495 426
Deferred federal income taxes 1,446 1,583
Contractholder receivables 1,987 1,828
Goodwill 1,507 1,549
Other assets 2,022 1,852
-------- --------
Total assets $ 50,717 $ 49,779
======== ========
LIABILITIES
Claims and claim adjustment expense reserves $ 30,610 $ 31,177
Unearned premium reserves 3,900 3,554
Contractholder payables 1,987 1,828
Commercial paper 127 25
Long-term debt 1,249 1,249
Other liabilities 4,650 4,566
-------- --------
Total liabilities 42,523 42,399
-------- --------
TAP - obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debt securities of TAP 900 900
STOCKHOLDERS' EQUITY
Common stock:
Class A, $.01 par value, 700 million shares authorized;
(issued shares, 72,393,407 and 71,979,829) 1 1
Class B, $.01 par value, 700 million shares authorized,
328,020,170 shares issued and outstanding 3 3
Additional paid-in capital 5,473 5,455
Retained earnings 1,536 749
Treasury stock, at cost (shares, 7,298,577 and 406,860) (266) (13)
Unrealized gain on investment securities, net of tax 573 285
Unearned compensation (26) --
-------- --------
Total stockholders' equity 7,294 6,480
-------- --------
Total liabilities and stockholders' equity $ 50,717 $ 49,779
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(in millions, except shares)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
------------------------------------
Amount Shares
------ ------
COMMON STOCK AND ADDITIONAL
PAID-IN CAPITAL Class A Class B
----------- -----------
<S> <C> <C> <C>
Balance, beginning of period $ 5,459 71,979,829 328,020,170
Capital Accumulation Plan grant 18 413,578 --
------- ----------- -----------
Balance, end of period 5,477 72,393,407 328,020,170
------- ----------- -----------
RETAINED EARNINGS
Balance, beginning of period 749
Net income 876
Dividends (89)
-------
Balance, end of period 1,536
-------
TREASURY STOCK (at cost)
Balance, beginning of period (13) (406,860)
Treasury stock acquired (268) (7,357,516)
Capital Accumulation Plan grant, net of forfeitures 15 465,799
------- -----------
Balance, end of period (266) (7,298,577)
------- -----------
UNREALIZED GAIN ON INVESTMENT
SECURITIES, NET OF TAX
Balance, beginning of period 285
Net change in unrealized gains and losses
on investment securities, net of tax 288
-------
Balance, end of period 573
-------
UNEARNED COMPENSATION
Balance, beginning of period --
Issuance of restricted stock under Capital
Accumulation Plan, net of forfeitures (33)
Restricted stock amortization 7
-------
Balance, end of period (26)
-------
Total stockholders' equity and shares outstanding $ 7,294 65,094,830 328,020,170
======= =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
1997 1996
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ 462 $ 903
-------- --------
Cash flows from investing activities:
Proceeds from maturities of investments
Fixed maturities 1,099 982
Mortgage loans 113 20
Proceeds from sales of investments
Fixed maturities 8,059 11,162
Equity securities 365 403
Mortgage loans 178 23
Real estate held for sale 49 15
Purchase of investments
Fixed maturities (10,525) (12,389)
Equity securities (423) (504)
Mortgage loans (37) --
Short-term securities, (purchases) sales, net 577 (1,594)
Other investments, net 16 (108)
Business acquisition -- (4,160)
Securities transactions in course of settlement 321 550
-------- --------
Net cash used in investing activities (208) (5,600)
-------- --------
Cash flows from financing activities:
Issuance of commercial paper, net 102 388
Issuance of long-term debt -- 900
Borrowings on revolving line of credit -- 2,650
Payments on revolving line of credit -- (2,650)
Contribution from TIGI -- 1,138
Purchase of treasury stock (268) --
Private offering of common stock -- 525
Initial public offering of common stock -- 928
Issuance of mandatorily redeemable preferred securities -- 900
Issuance of Series Z preferred stock -- 540
Redemptions of Series Z preferred stock -- (540)
Dividends on Series Z preferred stock -- (4)
Dividend to TIGI (74) (25)
Dividend to minority shareholders (15) (5)
-------- --------
Net cash provided by (used in) financing activities (255) 4,745
-------- --------
Net increase (decrease) in cash (1) 48
Cash at beginning of period 106 51
-------- --------
Cash at end of period $ 105 $ 99
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ 506 $ 104
======== ========
Interest paid $ 106 $ 53
======== ========
Supplemental disclosure of business acquisition:
Fair value of investments acquired $ -- $ 13,969
Fair value of other assets acquired -- 10,386
Claims and claim adjustment expense reserves assumed -- (16,907)
Other liabilities assumed -- (3,288)
-------- --------
Business acquisition $ -- $ 4,160
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. General
The interim condensed consolidated financial statements include the accounts
of Travelers Property Casualty Corp. (TAP) (a direct majority-owned
subsidiary of The Travelers Insurance Group Inc. (TIGI) and an indirect
majority-owned subsidiary of Travelers Group Inc.) and its subsidiaries
(collectively, the Company), are prepared in conformity with generally
accepted accounting principles (GAAP) and are unaudited. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation have been reflected. The accompanying
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
Company's Annual Report to Stockholders for the year ended December 31, 1996.
On April 2, 1996, TAP purchased from Aetna Services, Inc. all of the
outstanding capital stock of Travelers Casualty and Surety Company (formerly
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 condensed consolidated financial statements include the
results of Aetna P&C's operations only from the date of acquisition.
Prior to January 1, 1997, Aetna P&C recorded certain written premiums within
Commercial Lines when the premiums were billed. The Company conformed the
Aetna P&C method to the method employed by The Travelers Indemnity Company
and its subsidiaries (Travelers P&C), which is to record written premiums
when the policies are written. There was no change in earned premiums as a
result of conforming the method; however, certain written premium comparisons
were impacted by this change, although not significantly.
During the second quarter of 1996, the Company recorded charges related to
the acquisition and integration of Aetna P&C. These charges resulted
primarily from anticipated costs of the acquisition and the application of
the Company's strategies, policies and practices to Aetna P&C reserves and
include: $269 million after tax ($414 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; a $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; a $17 million
after tax ($27 million before tax) charge related to premium collection
issues; a $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 Travelers P&C related to
the restructuring plan for the acquisition.
Certain financial information that is normally included in annual financial
statements prepared in accordance with GAAP, but that is not required for
interim reporting purposes, has been condensed or omitted. Certain prior year
amounts have been reclassified to conform with the 1997 presentation.
7
<PAGE> 8
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
2. Aetna P&C Acquisition - Pro Forma Results of Operations
The following unaudited pro forma information presents the results of
operations of the Company and Aetna P&C for the nine months ended September
30, 1996, 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 period presented. This pro forma information is not
indicative of what would have occurred had the acquisition and related
transactions occurred on the date indicated, or of future results of the
Company.
<TABLE>
<CAPTION>
Nine Months Ended
(in millions, except per share data) September 30, 1996 *
--------------------
<S> <C>
Revenues $7,414
Net income 322
Net income per share of common stock 0.81
</TABLE>
* Historical results of Aetna P&C for the first quarter of 1996 include $307
million ($200 million after tax) of realized investment gains.
3. Changes in Accounting Principles and Accounting Standards not yet Adopted
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). This
statement establishes accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on an approach that focuses on control. Under this
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 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 Financial Accounting Standards
Board (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 did not have a
material impact on results of operations, financial condition or liquidity,
and the Company is currently evaluating the impact of the provisions whose
effective date has been delayed until January 1, 1998.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (FAS 128). This statement establishes standards
for computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock. This statement simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
Opinion No. 15, "Earnings per Share" (Opinion 15), and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised.
8
<PAGE> 9
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
3. Changes in Accounting Principles and Accounting Standards not yet Adopted,
Continued
FAS 128 supersedes Opinion 15 and related accounting interpretations and is
effective for financial statements issued for periods ending after December
15, 1997, including interim periods; earlier application is not permitted.
However, an entity is permitted to disclose pro forma amounts computed using
this statement in the notes to the financial statements in periods prior to
required adoption.
Based upon the Company's current capital structure, the adoption of FAS 128
will not materially impact the Company's EPS computation.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All items
that are required to be recognized under accounting standards as components
of comprehensive income are to be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in equity
of an enterprise during a period from transactions and other events and
circumstances from nonowner sources. Comprehensive income will thus represent
the sum of net income and other comprehensive income, although FAS 130 does
not require the use of the terms comprehensive income or other comprehensive
income. The accumulated balance of other comprehensive income is required to
be displayed separately from retained earnings and additional paid-in capital
in the consolidated balance sheet. This statement is effective for fiscal
years beginning after December 15, 1997. The Company anticipates that the
adoption of FAS 130 will result primarily in reporting unrealized gains and
losses on investments in debt and equity securities in comprehensive income.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (FAS 131). FAS 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that selected information about those operating
segments be reported in interim financial statements. This statement
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise." FAS 131 requires that all
public enterprises report financial and descriptive information about its
reportable operating segments. Operating segments are defined as components
of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. This statement is
effective for fiscal years beginning after December 15, 1997. The Company's
reportable operating segments are not expected to change as a result of the
adoption of FAS 131.
4. Earnings Per Share
Earnings per common share is based on the weighted average number of common
shares and common stock equivalents outstanding during the period. For
purposes of the computation of earnings per share for the three and nine
months ended September 30, 1996, the weighted average number of common shares
and common stock 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
earnings per common share, assuming the dilutive effect of common stock
equivalents, has not been presented because the effects are not significant.
9
<PAGE> 10
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
5. Capital and Debt
TAP has a five-year revolving credit facility in the amount of $500 million
with a syndicate of banks that expires in December 2001. Under this facility
TAP is required to maintain a certain level of consolidated stockholders'
equity (as defined in the agreement). At September 30, 1997, this requirement
was exceeded by approximately $3.1 billion. In addition, this facility places
restrictions on the amount of consolidated debt TAP can incur. At September
30, 1997, there were no borrowings outstanding under this facility. If the
Company had borrowings on this facility, the interest rate would be based
upon LIBOR plus a negotiated margin. TAP also issues commercial paper
directly to investors and maintains unused credit availability under the
revolving credit facility at least equal to the amount of commercial paper
outstanding. At September 30, 1997, TAP had $127 million of commercial paper
outstanding. TAP also currently has available 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.
The Company's insurance subsidiaries are subject to various regulatory
restrictions that limit the maximum amount of dividends available to be paid
to their parent without prior approval of insurance regulatory authorities.
Dividend payments to TAP from its insurance subsidiaries are limited to $647
million in 1997 without prior approval of the Connecticut Insurance
Department. TAP received $245 million of dividends from its insurance
subsidiaries during the first nine months of 1997.
On June 23, 1997, the Company repurchased, in the aggregate, 6,600,102 shares
of Class A Common Stock held by Aetna Services, Inc., J.P. Morgan Capital
Corporation, Fund American Enterprise Holdings, Inc. and The Trident
Partnership, L.P. (collectively, the Private Investors) for a total purchase
price of approximately $240.8 million, representing a discount to the then
current market price. The repurchases represent 20% of the holdings of each
of the Private Investors. As part of the repurchase agreement, each of the
Private Investors agreed to extend its contractual sale restrictions on 50%
of the remaining shares held by the Private Investors for an additional
period of approximately six months, to March 15, 1998. Following these
transactions, Travelers Group Inc.'s beneficial ownership of the Company
increased to approximately 83.4%.
On October 24, 1997, the Company filed a registration statement covering
14,200,207 shares of Class A Common Stock (which includes an over-allotment
option for 1,000,000 shares) which will be offered by the Private Investors.
In order to permit the grant by the Private Investors to the underwriters in
the offering of an over-allotment option to purchase up to an additional
1,000,000 shares in the aggregate, the Company waived the restricted period
on such shares, the sale of which would otherwise be restricted until March
15, 1998. In the event that the option is not exercised or it is not
exercised in full, those remaining shares will continue to be restricted.
Except for underwriting commissions, all expenses incurred in connection with
the offering will be paid by the Company. The Company will not receive any
proceeds from the sale of the Class A Common Stock. The sale, assuming the
over-allotment option is not exercised, will represent 50% of the remaining
holdings of each of the Private Investors.
On January 22, 1997, the Company, through the Travelers Property Casualty
Corp. Capital Accumulation Plan, issued approximately 414,000 shares of the
Company's Class A Common Stock and reissued approximately 502,000 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 participants, who are
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.
10
<PAGE> 11
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
6. Commitments and Contingencies
The Company recently finalized an agreement to settle the arbitration with
underwriters at Lloyd's of London (Lloyd's) and certain London companies in
New York State to enforce reinsurance contracts with respect to recoveries
for certain asbestos claims. The dispute involved 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 this
agreement will have no impact on earnings.
In 1996, Lloyd's restructured its operations with respect to claims for years
prior to 1993. The outcome of the restructuring of Lloyd's 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 impact on collectibility 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 coverage defenses. Including this allowance, the
Company believes that the net receivable from reinsurance contracts is
properly stated.
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.
The reserves carried for environmental and asbestos claims at September 30,
1997 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 continue 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 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.
In the ordinary course of business, the Company is a defendant or codefendant
in various litigation matters other than those described above. Although
there can be no assurances, 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.
11
<PAGE> 12
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Results of Operations reflect the consolidated results of operations of
Travelers Property Casualty Corp. (TAP) and its subsidiaries (the Company).
On April 2, 1996, TAP purchased from Aetna Services, Inc. (Aetna) all of the
outstanding capital stock of Travelers Casualty and Surety Company (formerly 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 condensed consolidated financial statements include the results
of Aetna P&C's operations only from the date of acquisition.
The Company provides a wide range of commercial and personal property and
casualty insurance products and services to businesses, associations and
individuals throughout the United States.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 1997 AND 1996
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(in millions, except per share data) September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 2,507 $ 2,452 $ 7,369 $ 5,806
========= ========= ========= =========
Net income $ 327 $ 247 $ 876 $ 129
========= ========= ========= =========
EARNINGS PER SHARE:
Net income $ 0.83 $ 0.62 $ 2.21 $ 0.35
========= ========= ========= =========
Weighted average number of common
shares outstanding and common stock equivalents 392.5 400.0 396.8 356.2
--------- --------- --------- ---------
</TABLE>
Consolidated Results of Operations for the Three Months Ended September 30, 1997
and 1996
Net income for the third quarter of 1997 was $327 million or $0.83 per share
compared to $247 million or $0.62 per share in the third quarter of 1996.
Operating earnings, which exclude realized investment gains, were $290 million
or $0.74 per share in the third quarter of 1997, an increase of $44 million or
$0.12 per share from $246 million or $0.62 per share in the third quarter of
1996. The increase in operating earnings was primarily the result of increased
net investment income, a lower level of catastrophe losses and continued
favorable prior year reserve development in personal automobile lines.
Revenues of $2.507 billion in the third quarter of 1997 increased $55 million
from $2.452 billion in the third quarter of 1996. This increase was primarily
attributable to a $55 million increase in realized investment gains.
Net investment income was $528 million in the third quarter of 1997, an increase
of $35 million from the third quarter of 1996, reflecting the higher level of
invested assets in the third quarter of 1997.
National Accounts within Commercial Lines is the primary source of fee income
due to its service business. Fee income for the third quarter of 1997 was $90
million, an $11 million decrease from the third quarter of 1996. This decrease
in fee income was due to the depopulation of involuntary pools as the loss
experience of workers' compensation improves and insureds move to voluntary
markets and the Company's continued success in lowering workers' compensation
losses of service customers, partially offset by the Company writing more
service fee-based product versus premium-based product.
12
<PAGE> 13
Claims and expenses of $2.040 billion in the third quarter of 1997 decreased $59
million from the third quarter of 1996. The decrease was primarily attributable
to the absence of catastrophe losses in the third quarter of 1997 compared to
$55 million (pre-tax) of catastrophe losses in the third quarter of 1996.
The Company's effective tax rate was 30% in the third quarter of 1997 and 1996.
These rates were lower than the statutory tax rate in both periods primarily due
to non-taxable investment income.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and loss adjustment expense (LAE) ratio ..... 71.8% 75.7%
Underwriting expense ratio ....................... 30.8 31.0
Combined ratio before policyholder dividends ..... 102.6 106.7
Combined ratio ................................... 103.4 107.4
GAAP:
Loss and LAE ratio ............................... 71.6% 75.7%
Underwriting expense ratio ....................... 30.3 30.1
Combined ratio before policyholder dividends ..... 101.9 105.8
Combined ratio ................................... 102.9 106.4
</TABLE>
Beginning in 1997, for purposes of computing GAAP combined ratios, fee income is
now allocated as a reduction of losses and loss adjustment expenses and other
underwriting expenses. Previously fee income was included with premiums for
purposes of computing GAAP combined ratios. The 1996 GAAP combined ratios have
been restated to conform to the current year's presentation.
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
The decrease in the 1997 third quarter statutory and GAAP combined ratios
compared to the 1996 third quarter statutory and GAAP combined ratios was
primarily due to lower catastrophe losses and the favorable prior year reserve
development in personal auto lines.
Consolidated Results of Operations for the Nine Months Ended September 30, 1997
and 1996
Net income for the nine months ended September 30, 1997 was $876 million or
$2.21 per share compared to $129 million or $0.35 per share for the nine months
ended September 30, 1996. This $747 million increase in net income was primarily
due to charges related to the acquisition and integration of Aetna P&C by the
Company in the second quarter of 1996 consisting of $269 million after tax ($414
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; a $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; a $17
million after tax ($27 million before tax) charge related to premium collection
issues; a $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 Travelers P&C related to the
restructuring plan and the inclusion in 1997 of Aetna P&C for the entire nine
months compared to only six months in 1996. Excluding realized investment gains
(losses) and the acquisition-related charges, operating income was $838 million
or $2.11 per share in the nine months ended September 30, 1997 compared to $540
million or $1.51 per share in the nine months ended September 30, 1996. The
increase in operating income in the nine months ended September 30, 1997
compared to the nine months ended September 30, 1996 was due to the inclusion in
1997 of Aetna P&C for the entire nine months compared to only six months in
1996, increased net investment income, lower catastrophe losses and continued
favorable prior year reserve development in personal auto lines.
13
<PAGE> 14
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and LAE ratio ............................... 72.7% 89.8%
Underwriting expense ratio ....................... 29.6 31.4
Combined ratio before policyholder dividends ..... 102.3 121.2
Combined ratio ................................... 103.0 121.7
GAAP:
Loss and LAE ratio ............................... 72.4% 88.2%
Underwriting expense ratio ....................... 29.1 32.5
Combined ratio before policyholder dividends ..... 101.5 120.7
Combined ratio ................................... 102.1 121.3
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
In addition, the purchase accounting adjustments recorded for GAAP in connection
with the Aetna P&C acquisition resulted in a statutory charge in 1996.
The decrease in the first nine months of 1997 statutory and GAAP combined ratios
before policyholder dividends from the first nine months of 1996 was primarily
attributable to charges taken in the second quarter of 1996 related to the
acquisition and integration of Aetna P&C. Excluding these amounts, the statutory
and GAAP combined ratios before policyholder dividends for the nine months ended
September 30, 1996 would have been 107.5% and 107.7%, respectively. The decrease
in the first nine months of 1997 statutory and GAAP combined ratios from the
first nine months of 1996 statutory and GAAP combined ratios excluding
acquisition-related charges was generally due to the inclusion in 1997 of Aetna
P&C's results for the entire nine months compared to only six months in 1996.
Aetna P&C has historically had a higher underwriting expense ratio, partially
offset by a lower loss ratio, which reflects the mix of business including the
favorable effect of the lower loss ratio of the Bond business. In addition, the
first nine months of 1997 statutory and GAAP combined ratios were lower than the
first nine months of 1996 statutory and GAAP combined ratios excluding
acquisition-related charges due to lower catastrophe losses and the favorable
prior year reserve development in personal auto lines.
The other consolidated operating trends for the nine months ended September 30,
1997 and 1996 are substantially the same as noted above for the quarters then
ended, after taking into consideration the inclusion of Aetna P&C for the entire
nine months of 1997 compared to only six months of 1996.
SEGMENT RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Commercial Lines
<TABLE>
<CAPTION>
(in millions) Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues .......................... $1,651 $1,669
Net income ........................ $ 255 $ 203
</TABLE>
Commercial Lines net income in the 1997 third quarter was $255 million compared
to $203 million in the 1996 third quarter. This increase was due to higher
realized investment gains, higher net investment income, expense savings and
lower catastrophe losses. Excluding realized investment gains, Commercial Lines
operating income was $224 million in the third quarter of 1997 compared to $203
million in the third quarter of 1996.
Commercial Lines net written premiums for the third quarter of 1997 totaled
$1.176 billion, down $41 million from $1.217 billion for the third quarter of
1996, reflecting the highly competitive conditions in the marketplace and the
Company's continuing selective underwriting.
14
<PAGE> 15
Fee income in the third quarter of 1997 was $90 million, an $11 million decrease
from the third quarter of 1996. This decrease was due to the depopulation of
involuntary pools as the loss experience of workers' compensation improves and
insureds move to voluntary markets and the Company's continued success in
lowering workers' compensation losses of service customers, partially offset by
the Company writing more service fee-based product versus premium-based product.
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 to voluntary and
involuntary pools. National Accounts net written premiums of $151 million in the
third quarter of 1997 decreased $90 million from the third quarter of 1996. This
decrease was primarily due to a decrease in the Company's level of involuntary
pool participation as well as National Accounts writing less premium-based
product versus service fee-based product and the competitive marketplace. In the
third quarter of 1997, National Accounts new business was moderately higher and
the business retention ratio was significantly higher in the third quarter of
1997 when compared to the third quarter of 1996. Both the amount of new business
and the business retention ratio were unusually low in the third quarter of
1996. Premiums from involuntary pools are not included in the amount of new
business or the business retention ratio.
Commercial Accounts serves mid-sized businesses through a network of independent
agencies and brokers. Commercial Accounts net written premiums were $502 million
in the 1997 third quarter compared to $451 million in the 1996 third quarter. In
the third quarter of 1997, new premium business in Commercial Accounts was
significantly higher than in the third quarter of 1996. This increase reflects
continued growth through programs designed to leverage underwriting experience
in specific industries. The Commercial Accounts business retention ratio was
also significantly higher in the third quarter of 1997 than in the third quarter
of 1996. Commercial Accounts continues to focus on the retention of existing
business while maintaining its product pricing standards and its selective
underwriting policy.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $354 million in the third quarter of
1997 compared to $345 million in the third quarter of 1996. New premium business
in Select Accounts was virtually the same in the third quarter of 1997 as in the
third quarter of 1996. Select Accounts business retention ratio was moderately
higher in the third quarter of 1997 than in the third quarter of 1996. Select
Accounts continues to benefit from the broader industry and product line
expertise of the combined company, partially offset by the competitive
marketplace.
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. Specialty Accounts net written premiums were $169
million in the 1997 third quarter compared to $180 million in the 1996 third
quarter. This decrease primarily reflects lower directors' and officers'
liability insurance writings due to the termination of an exclusive arrangement
with a managing general agent.
Commercial Lines claims and expenses of $1.290 billion in the third quarter of
1997 decreased $91 million from the third quarter of 1996. This decrease was due
to expense savings and favorable loss development in certain workers'
compensation, general liability and commercial auto lines; however, since the
business to which it relates is subject to premium adjustments on
retrospectively rated policies, the net impact of the favorable loss development
on results of operations is not significant.
There were no catastrophe losses in the third quarter of 1997 compared to $16
million, net of taxes and reinsurance, in the third quarter of 1996. The 1996
catastrophe losses were primarily due to Hurricane Fran.
15
<PAGE> 16
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and LAE ratio ......................... 77.3% 76.8%
Underwriting expense ratio ................. 31.9 32.2
Combined ratio before policyholder dividends 109.2 109.0
Combined ratio ............................. 110.6 110.1
GAAP:
Loss and LAE ratio ......................... 77.0% 76.7%
Underwriting expense ratio ................. 31.0 31.8
Combined ratio before policyholder dividends 108.0 108.5
Combined ratio ............................. 109.7 109.4
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
The increase in the third quarter 1997 combined ratio before policyholder
dividends for Commercial Lines from the third quarter of 1996 was primarily
attributable to a decline in earned premiums due to the competitive marketplace.
The decrease in the third quarter 1997 GAAP combined ratio before policyholder
dividends from the 1996 third quarter was primarily attributable to expense
reductions in the 1997 third quarter, partially offset by a higher loss and loss
adjustment expense in the third quarter of 1997.
Personal Lines
<TABLE>
<CAPTION>
(in millions) Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues .......................... $853 $781
Net income ........................ $101 $ 72
</TABLE>
Net income in the third quarter of 1997 increased $29 million to $101 million
from $72 million in the third quarter of 1996. Excluding realized investment
gains, Personal Lines operating income was $95 million in the third quarter of
1997 compared to $71 million in the third quarter of 1996. These increases
primarily reflect lower catastrophe losses and continued favorable prior year
reserve development in the automobile line.
Net written premiums in the third quarter of 1997 were $775 million, compared to
$668 million in the third quarter of 1996. This increase reflects growth in
target markets served by independent agents and growth in the affinity marketing
and TRAVELERS SECURE(R) programs, partially offset by reductions due to
catastrophe management strategies. Business retention continued to be strong.
Personal Lines claims and expenses of $702 million in the 1997 third quarter
increased $30 million from the 1996 third quarter. This increase was primarily
the result of higher production-related expenses associated with the growth in
premiums, partially offset by lower catastrophe losses and the continued
favorable prior year reserve development in the automobile line.
16
<PAGE> 17
There were no catastrophe losses in the third quarter of 1997 compared to $20
million of catastrophe losses, after taxes and reinsurance, in the third quarter
of 1996. The catastrophe losses in the third quarter of 1996 were primarily from
Hurricane Fran.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and LAE ratio........................ 63.9% 73.9%
Underwriting expense ratio................ 29.1 28.6
Combined ratio............................ 93.0 102.5
GAAP:
Loss and LAE ratio........................ 63.9% 73.9%
Underwriting expense ratio................ 29.3 27.0
Combined ratio............................ 93.2 100.9
</TABLE>
GAAP combined ratios differ from statutory combined ratios for Personal Lines
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
The decrease in the combined ratios in 1997 from 1996 was due to lower
catastrophe losses and the favorable prior year reserve development in personal
auto lines.
Corporate and Other
<TABLE>
<CAPTION>
(in millions) Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues................................... $ 3 $ 2
Net income (loss).......................... $ (29) $ (28)
</TABLE>
The primary component of net income (loss) for the 1997 and 1996 third quarter
was interest expense of $27 million and $26 million after tax, respectively,
reflecting financing costs associated with the acquisition of Aetna P&C.
SEGMENT RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Commercial Lines
<TABLE>
<CAPTION>
(in millions) Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues............................ $4,887 $3,889
Net income.......................... $ 666 $ 42
</TABLE>
Net income in the first nine months of 1997 was $666 million compared to $42
million in the first nine months of 1996. Excluding realized investment gains
(losses) and acquisition-related charges, Commercial Lines operating income was
$627 million in the nine months ended September 30, 1997 compared to $441
million in the nine months ended September 30, 1996. This increase was due to
the inclusion in 1997 of Aetna P&C for the entire nine months compared to only
six months in 1996, higher net investment income and expense savings associated
with the acquisition and integration of Aetna P&C.
17
<PAGE> 18
Commercial Lines net written premiums in the first nine months of 1997 totaled
$3.656 billion, up $721 million from $2.935 billion in the first nine months of
1996 (excluding an adjustment associated with a reinsurance transaction in
1996), reflecting the inclusion in 1997 of Aetna P&C for the entire nine months
compared to only six months in 1996 and a $142 million increase due to a change
to conform the Aetna P&C method of recording certain net written premiums within
Commercial Lines to the method employed by The Travelers Indemnity Company and
its subsidiaries (Travelers P&C). This increase was offset in part by the highly
competitive conditions in the marketplace and the Company's selective
underwriting focus.
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 in
the first nine months of 1997 totaled $3.656 billion, up $115 million from
$3.541 billion in the first nine months of 1996. This increase was primarily
attributable to the change to conform the Aetna P&C method with the Travelers
P&C method of recording net written premiums partially offset by the competitive
marketplace.
Fee income in the first nine months of 1997 was $279 million, a $15 million
decrease from the first nine months of 1996. This decrease was the result of the
depopulation of involuntary pools as the loss experience of workers'
compensation improves and insureds move to voluntary markets and the Company's
continued success in lowering workers' compensation losses of service customers,
partially offset by the acquisition of Aetna P&C and the Company writing more
service fee-based product versus premium-based product.
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 were
$522 million in the first nine months of 1997 compared to $666 million in the
first nine months of 1996. This reduction was primarily due to a decrease in the
Company's level of involuntary pool participation, National Accounts writing
less premium-based products versus service fee-based products and the
competitive marketplace. National Accounts new business in the first nine months
of 1997 was moderately higher than in the first nine months of 1996. National
Accounts business retention ratio was significantly higher in the first nine
months of 1997 than in the first nine months of 1996, reflecting an unusually
low retention ratio in the first and third quarters of 1996.
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
were $1.516 billion in the first nine months of 1997 compared to $1.272 billion
in the first nine months of 1996. This increase reflected $127 million due to
the change to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums and the continued growth through programs
designed to leverage underwriting experience in specific industries, partially
offset by the competitive marketplace. In the first nine months of 1997, new
premium business in Commercial Accounts has significantly improved compared to
the first nine months of 1996, reflecting continued growth in programs designed
to leverage underwriting experience in specific industries. The Commercial
Accounts business retention ratio in the first nine months of 1997 has
significantly improved compared to the first nine months of 1996. Commercial
Accounts continues to focus on the retention of existing business while
maintaining its product pricing standards and its selective underwriting policy.
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
$1.087 billion in the first nine months of 1997 were $11 million above the
premium levels for the first nine months of 1996. This increase reflected $15
million due to the change to conform the Aetna P&C method with the Travelers P&C
method of recording certain net written premiums, partially offset by a decrease
due to the competitive marketplace. New premium business in Select Accounts was
moderately higher in the first nine months of 1997 than in the first nine months
of 1996 reflecting an increase due to the acquisition of Aetna P&C, partially
offset by a decrease due to the competitive marketplace. The Select Accounts
business retention ratio was moderately higher in the first nine months of 1997
than in the comparable 1996 period, reflecting the broader industry and product
line expertise of the combined company.
18
<PAGE> 19
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
were $530 million in the first nine months of 1997 compared to $527 million in
the first nine months of 1996. The growth is primarily attributable to increased
writings of its excess and surplus lines business, partially offset by lower
directors' and officers' liability insurance writings due to the termination of
an exclusive arrangement with a managing general agent.
Commercial Lines claims and expenses of $3.950 billion in the first nine months
of 1997 increased $56 million from the first nine months of 1996. This increase
was primarily attributable to the inclusion in 1997 of Aetna P&C for the entire
nine months compared to only six months in 1996, partly offset by the net
acquisition-related charges and financing costs associated with the acquisition
in 1996.
Catastrophe losses, net of taxes and reinsurance, were $5 million and $23
million in the first nine months of 1997 and 1996, respectively. The 1997
catastrophe losses were primarily due to tornadoes in the Midwest in the first
quarter. The 1996 catastrophe losses were due to winter storms in the first
quarter and Hurricane Fran in the third quarter.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and LAE ratio................................. 79.0% 100.1%
Underwriting expense ratio......................... 30.3 32.9
Combined ratio before policyholder dividends....... 109.3 133.0
Combined ratio..................................... 110.4 133.8
GAAP:
Loss and LAE ratio................................. 78.4% 97.3%
Underwriting expense ratio......................... 29.9 35.0
Combined ratio before policyholder dividends....... 108.3 132.3
Combined ratio..................................... 109.4 133.2
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only. In addition, the purchase accounting adjustments
recorded for GAAP in connection with the Aetna P&C acquisition resulted in a
statutory charge in 1996.
The decreases in the first nine months of 1997 statutory and GAAP combined
ratios for Commercial Lines compared to the first nine months of 1996 were
primarily attributable to the 1996 charges related to the acquisition and
integration of Aetna P&C. Excluding these amounts, the statutory and GAAP
combined ratios before policyholder dividends for the nine months ended
September 30, 1996 would have been 110.7% and 111.1%, respectively. The decrease
in the first nine months of 1997 statutory and GAAP combined ratios compared to
the first nine months of 1996 statutory and GAAP combined ratios excluding
acquisition-related charges was generally due to the inclusion in 1997 of Aetna
P&C's results for the entire nine months compared to only six months in 1996.
Aetna P&C has historically had a higher underwriting expense ratio, partially
offset by a lower loss ratio, which reflects the mix of business including the
favorable effect of the lower loss ratio of the Bond business.
19
<PAGE> 20
Personal Lines
<TABLE>
<CAPTION>
(in millions) Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues............................. $2,473 $1,903
Net income........................... $ 303 $ 146
</TABLE>
Net income in the first nine months of 1997 of $303 million increased $157
million from $146 million in the first nine months of 1996. Excluding realized
investment gains (losses) and acquisition-related charges, Personal Lines
operating income was $304 million in the first nine months of 1997 compared to
$158 million in the first nine months of 1996. These increases primarily reflect
the inclusion in 1997 of Aetna P&C for the entire nine months compared to only
six months in 1996, reduced catastrophe losses and continued favorable prior
year reserve development in personal auto lines.
Net written premiums in the first nine months of 1997 were $2.295 billion,
compared to $1.685 billion in the first nine months of 1996. This increase
primarily reflects the acquisition of Aetna P&C and, to a lesser extent, lower
ceded premiums due to a change in a reinsurance arrangement in January 1997,
growth in target markets served by independent agents and growth in the affinity
marketing and TRAVELERS SECURE(R) programs. Business retention continued to be
strong. 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 in the first nine months of 1996 totaled $2.001 billion.
Personal Lines claims and expenses of $2.018 billion in the first nine months of
1997 increased $329 million from the first nine months of 1996. This increase
was primarily attributable to the inclusion of Aetna P&C's operations for the
entire nine months of 1997 compared to only six months of 1996 and higher
production-related expenses associated with the growth in premiums, partially
offset by lower catastrophe losses and continued favorable prior year reserve
development in the automobile line.
Catastrophe losses, after taxes and reinsurance, were $5 million in the first
nine months of 1997 compared to $52 million in the first nine months of 1996.
The 1996 catastrophe losses were primarily due to Hurricane Fran as well as
first quarter winter storms and second quarter hail and wind storms.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Statutory:
Loss and LAE ratio........................ 63.3% 73.3%
Underwriting expense ratio................ 28.6 28.8
Combined ratio............................ 91.9 102.1
GAAP:
Loss and LAE ratio........................ 63.3% 73.6%
Underwriting expense ratio................ 28.0 28.3
Combined ratio............................ 91.3 101.9
</TABLE>
The decrease in the combined ratios in 1997 compared to 1996 was due to the
favorable prior year reserve development in personal auto lines, lower
catastrophe losses and expense reductions.
20
<PAGE> 21
Corporate and Other
<TABLE>
<CAPTION>
(in millions) Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenues.......................... $ 9 $ 14
Net income (loss)................. $ (93) $ (59)
</TABLE>
The primary component of net income (loss) in the nine months ended September
30, 1997 and 1996 was interest expense of $79 million and $51 million after tax,
respectively, reflecting financing costs associated with the acquisition of
Aetna P&C in the second quarter of 1996.
ENVIRONMENTAL CLAIMS
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the volume of in-process environmental claims and the Company's experience in
resolving such claims. At September 30, 1997, approximately 15% of the net
environmental reserve (i.e., approximately $173 million) is case reserves for
resolved claims. The balance, approximately 85% of the net environmental reserve
(i.e., approximately $990 million), 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 following table displays activity for environmental losses and loss expenses
and reserves for the nine months ended September 30, 1997 and 1996.
Environmental Losses
<TABLE>
<CAPTION>
(in millions) Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Beginning reserves:
Direct ......................... $ 1,369 $ 454
Ceded .......................... (127) (50)
------- -------
Net ........................... 1,242 404
Acquisition of Aetna P&C:
Direct ......................... -- 938
Ceded .......................... -- (24)
Incurred losses and loss expenses:
Direct ......................... 55 82
Ceded .......................... (1) (31)
Losses paid:
Direct ......................... 181 113
Ceded .......................... (48) (20)
Ending reserves:
Direct ......................... 1,243 1,361
Ceded .......................... (80) (85)
------- -------
Net ........................... $ 1,163 $ 1,276
======= =======
</TABLE>
21
<PAGE> 22
ASBESTOS CLAIMS
At September 30, 1997, approximately 26% of the net asbestos reserve (i.e.,
approximately $274 million) is for pending asbestos claims. The balance,
approximately 74% (i.e., approximately $790 million) of the net asbestos
reserves, represents incurred but not yet reported losses.
The following table displays activity for asbestos losses and loss expenses and
reserves for the nine months ended September 30, 1997 and 1996. In general, the
Company posts case reserves for pending asbestos claims within approximately 30
business days of receipt of such claims.
Asbestos Losses
<TABLE>
<CAPTION>
(in millions) Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Beginning reserves:
Direct ......................... $ 1,443 $ 695
Ceded .......................... (370) (293)
------- -------
Net ........................... 1,073 402
Acquisition of Aetna P&C:
Direct ......................... -- 776
Ceded .......................... -- (116)
Incurred losses and loss expenses:
Direct ......................... 60 83
Ceded .......................... (15) (8)
Losses paid:
Direct ......................... 114 135
Ceded .......................... (60) (58)
Ending reserves:
Direct ......................... 1,389 1,419
Ceded .......................... (325) (359)
------- -------
Net ........................... $ 1,064 $ 1,060
======= =======
</TABLE>
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.
The reserves carried for environmental and asbestos claims at September 30, 1997
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 continue 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 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.
22
<PAGE> 23
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.
At September 30, 1997, approximately 19% of the net CIOTA reserve (i.e.,
approximately $204 million) is for pending CIOTA claims. The balance,
approximately 81% (i.e., approximately $893 million) of the net CIOTA reserves,
represents incurred but not yet reported losses for which the Company has not
received any specific claims.
The following table displays activity for CIOTA losses and loss expenses and
reserves for the nine months ended September 30, 1997 and 1996. In general, the
Company posts case reserves for pending CIOTA claims within approximately 30
business days of receipt of such claims.
CIOTA Losses
<TABLE>
<CAPTION>
(in millions) Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Beginning reserves:
Direct ......................... $ 1,560 $ 374
Ceded .......................... (446) --
------- -------
Net ............................ 1,114 374
Acquisition of Aetna P&C:
Direct ......................... -- 709
Ceded .......................... -- (293)
Incurred losses and loss expenses:
Direct ......................... 26 557
Ceded .......................... (6) (155)
Losses paid:
Direct ......................... 51 53
Ceded .......................... (14) (7)
Ending reserves:
Direct ......................... 1,535 1,587
Ceded .......................... (438) (441)
------- -------
Net ........................... $ 1,097 $ 1,146
======= =======
</TABLE>
Liquidity and Capital Resources
TAP was formed in January 1996 to hold the property and casualty insurance
subsidiaries of The Travelers Insurance Group Inc. (TIGI). TIGI contributed to
TAP all of the outstanding shares of common stock of The Travelers Indemnity
Company on April 1, 1996. On April 2, 1996, TAP acquired the domestic property
and casualty insurance subsidiaries of Aetna for approximately $4.2 billion in
cash. TAP is a holding company and has no direct operations. TAP's principal
asset is the capital stock of its insurance subsidiaries.
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.
23
<PAGE> 24
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 invested assets at September 30, 1997 totaled $30.5
billion, of which 86.2% was invested in fixed maturity investments, 3.1% in
mortgage loans and real estate held for sale, 3.4% in common stocks and other
equity securities and 7.3% in short-term and other investments. The average
duration of the fixed maturity portfolio, including short-term investments, was
5.2 years at such date. Included in fixed maturity investments are
non-investment grade securities totaling $798 million, representing 3.0% of the
Company's fixed maturity investments as of September 30, 1997. The following
table reflects the average yield (annualized) of the investment portfolio
excluding unrealized and realized investment gains and losses:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Yield (Annualized) 7.4% 7.5% 7.1% 7.0%
</TABLE>
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 Inc. The lender has no obligation to make any loan to TAP under
this line of credit. Also, TAP will continue to be able to borrow under a $500
million five-year revolving credit facility with a syndicate of banks that
expires on December 19, 2001 (the Credit Facility). Under the Credit Facility,
TAP is required to maintain a certain level of consolidated stockholders' equity
(as defined in the agreement). At September 30, 1997, this requirement was
exceeded by approximately $3.1 billion. In addition, the Credit Facility places
restrictions on the amount of consolidated debt TAP can incur. At September 30,
1997, there were no borrowings outstanding under this facility. If the Company
had borrowings on the Credit Facility, the interest rate would be based upon
LIBOR plus a negotiated margin. TAP also issues commercial paper directly to
investors and maintains unused credit availability under the Credit Facility at
least equal to the amount of commercial paper outstanding. At September 30,
1997, TAP had $127 million outstanding under its commercial paper program.
At September 30, 1997, TAP had issued a total of $1.25 billion of, and had $750
million available for, debt offerings under its shelf registration statement.
The Company's insurance subsidiaries are subject to various regulatory
restrictions that limit the maximum amount of dividends available to be paid to
their parent without prior approval of insurance regulatory authorities.
Dividend payments to TAP from its insurance subsidiaries are limited to $647
million in 1997 without prior approval of the Connecticut Insurance Department.
The Company has received $245 million of dividends from its insurance
subsidiaries during the first nine months of 1997.
On June 23, 1997, the Company repurchased, in the aggregate, 6,600,102 shares of
Class A Common Stock held by Aetna, J.P. Morgan Capital Corporation, Fund
American Enterprise Holdings, Inc. and The Trident Partnership, L.P.
(collectively, the "Private Investors") for a total purchase price of
approximately $240.8 million, representing a discount to the then current market
price. The repurchases represent 20% of the holdings of each of the Private
Investors. As part of the repurchase agreement, each of the Private Investors
agreed to extend its contractual sale restrictions on 50% of the remaining
shares held by the Private Investors for an additional period of approximately
six months, to March 15, 1998. On July 24, 1996, TAP's Board of Directors had
authorized the expenditure of up to $100 million for the repurchase of common
stock. This transaction satisfied the Company's previously announced program to
repurchase $100 million of its shares. The Company had repurchased in the open
market approximately 1.17 million shares under the repurchase program, which was
terminated.
24
<PAGE> 25
On October 24, 1997, the Company filed a registration statement covering
14,200,207 shares of Class A Common Stock (which includes an over-allotment
option for 1,000,000 shares) which will be offered by the Private Investors. In
order to permit the grant by the Private Investors to the underwriters in the
offering of an over-allotment option to purchase up to an additional 1,000,000
shares in the aggregate, the Company waived the restricted period on such
shares, the sale of which would otherwise be restricted until March 15, 1998. In
the event that the option is not exercised or it is not exercised in full, those
remaining shares will continue to be restricted. Except for underwriting
commissions, all expenses incurred in connection with the offering will be paid
by the Company. The Company will not receive any proceeds from the sale of the
Class A Common Stock. The sale, assuming the over-allotment option is not
exercised, will represent 50% of the remaining holdings of each of the Private
Investors.
On January 22, 1997, the Company, through the Travelers Property Casualty Corp.
Capital Accumulation Plan, issued approximately 414,000 shares of the Company's
Class A Common Stock and reissued approximately 502,000 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.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 3 of Notes to Condensed Consolidated Financial Statements for a
discussion of recently issued accounting pronouncements.
25
<PAGE> 26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning actions filed against several insurance companies and
industry organizations relating to service fee charges and premium calculations
on certain workers' compensation insurance, see the descriptions that appear in
the paragraph that begins on page 90 and ends on page 91 of the Company's
Prospectus dated April 22, 1996, the first paragraph on page 25 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 and the
paragraph that begins on page 54 and ends on page 55 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, which descriptions are
incorporated by reference herein. A copy of the pertinent paragraphs of such
filings is included as an exhibit to this Form 10-Q. In September 1997, Amundson
& Associates Art Studio v. NCCI, et al. was remanded to District Court,
Wyandotte County, Kansas. In August 1997, all pending motions to dismiss were
denied in South Carolina ex rel. Medlock v. NCCI. In October 1997, El Chico
Restaurants, Inc. v. The Aetna Casualty and Surety Company, et al. was remanded
to Superior Court, Richmond County, Georgia.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
See Exhibit Index.
(b) REPORTS ON FORM 8-K:
On July 21, 1997, the Company filed a Current Report on Form 8-K, dated July 15,
1997, reporting under Item 5 thereof the results of its operations for the three
and six months ended June 30, 1997, and certain other selected financial data.
No other reports on Form 8-K were filed during the quarter ended September 30,
1997; however, on October 14, 1997, the Company filed a Current Report on Form
8-K, dated October 13, 1997, reporting under Item 5 thereof the results of its
operations for the three and nine months ended September 30, 1997, and certain
other selected financial data.
26
<PAGE> 27
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,
Certificate of Amendment to the Restated Certificate of
Incorporation, filed March 7, 1997, and Certificate of Amendment to
the Restated Certificate of Incorporation, filed April 23, 1997,
incorporated by reference to Exhibit 3.01 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1997
(File No. 1-14328) (the "Company's 3/31/97 10-Q").
3.02 Restated By-laws of the Company, effective April 23, 1997,
incorporated by reference to Exhibit 3.02 to the Company's 3/31/97
10-Q.
10.01 Travelers Property Casualty Corp. Capital Accumulation Plan (as
amended through July 23, 1997). Electronic
11.01 Computation of Earnings Per Share. Electronic
12.01 Computation of Ratio of Earnings to Fixed Charges. Electronic
27.01 Financial Data Schedule. Electronic
99.01 The paragraph that begins on page 90 and ends on page 91 of the
Company's Prospectus dated April 22, 1996, the first paragraph on
page 25 of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1996 and the paragraph that
begins on page 54 and ends on page 55 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996. Electronic
</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 Securities and Exchange Commission
upon request.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRAVELERS PROPERTY CASUALTY CORP.
Date: November 11, 1997 By /s/ William P. Hannon
----------------------
William P. Hannon
Chief Financial Officer
(Principal Financial Officer)
Date: November 11, 1997 By /s/ Thomas P. Shugrue
----------------------
Thomas P. Shugrue
Chief Accounting Officer
(Principal Accounting Officer)
28
<PAGE> 29
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,
Certificate of Amendment to the Restated Certificate of
Incorporation, filed March 7, 1997, and Certificate of Amendment to
the Restated Certificate of Incorporation, filed April 23, 1997,
incorporated by reference to Exhibit 3.01 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1997
(File No. 1-14328) (the "Company's 3/31/97 10-Q").
3.02 Restated By-laws of the Company, effective April 23, 1997,
incorporated by reference to Exhibit 3.02 to the Company's 3/31/97
10-Q.
10.01 Travelers Property Casualty Corp. Capital Accumulation Plan (as
amended through July 23, 1997). Electronic
11.01 Computation of Earnings Per Share. Electronic
12.01 Computation of Ratio of Earnings to Fixed Charges. Electronic
27.01 Financial Data Schedule. Electronic
99.01 The paragraph that begins on page 90 and ends on page 91 of the
Company's Prospectus dated April 22, 1996, the first paragraph on
page 25 of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1996 and the paragraph that
begins on page 54 and ends on page 55 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996. Electronic
</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 Securities and Exchange Commission
upon request.
<PAGE> 1
EXHIBIT 10.01
TRAVELERS PROPERTY CASUALTY CORP.
CAPITAL ACCUMULATION PLAN
AS AMENDED THROUGH JULY 23, 1997
SECTION 1. PURPOSE OF THE PLAN.
The name of this plan is TRAVELERS PROPERTY CASUALTY CORP. CAPITAL
ACCUMULATION PLAN (the "Plan"). The purpose of the Plan is to enable TRAVELERS
PROPERTY CASUALTY CORP. (the "Company") and its Subsidiaries to attract, retain
and motivate officers and certain other employees, to compensate them for their
contributions to the growth and profits of the Company and to encourage
ownership of stock in the Company on the part of such personnel. The Plan
provides incentives to participating officers and certain other employees which
are linked directly to increases in stockholder value and will therefore inure
to the benefit of all stockholders of the Company.
SECTION 2. DEFINITIONS.
For purposes of the Plan, the following terms shall be defined as set
forth below:
"BOARD" shall mean the Board of Directors of the Company.
"CAUSE" shall mean (1) failure by a Participant to perform substantially
his or her duties with the Company or a Subsidiary, after reasonable
notice to the Participant of such failure; (2) conduct by a Participant
that is in material competition with the Company or a Subsidiary or (3)
conduct by a Participant that breaches his or her duty of loyalty to the
Company or a Subsidiary, or that is materially injurious to the Company or
a Subsidiary, monetarily or otherwise, which conduct shall include, but
not be limited to (i) disclosing or misusing any confidential information
pertaining to the Company or a Subsidiary; (ii) any attempt, directly or
indirectly to induce any employee, agent, insurance agent, insurance
broker or broker-dealer of the Company or any Subsidiary to be employed or
perform services elsewhere or (iii) any attempt by a Participant directly
or indirectly to solicit the trade of any customer or supplier or
prospective customer or supplier of the Company or any Subsidiary or (iv)
disparaging the Company, any Subsidiary or any of their respective
officers or directors. The determination of whether any conduct, action or
failure to act constitutes "Cause" shall be made by the Committee.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from time
to time, and the regulations promulgated thereunder.
A-1
<PAGE> 2
"COMMITTEE" shall mean, with respect to Section 16(a) Persons, the
Incentive Compensation Subcommittee, and with respect to all other
Participants, either the Nominations, Compensation and Corporate
Governance Committee or the Incentive Compensation Subcommittee, as the
case may be.
"COMMON STOCK" shall mean the Class A common stock, par value $.01 per
share, of the Company.
"DISABILITY" shall have the meaning set forth on Schedule A.
"EARLY RETIREMENT" shall have the meaning set forth on Schedule A.
"ELIGIBLE EMPLOYEE" shall mean an employee of the Company or any
Subsidiary as described in Section 3.
"EMPLOYMENT" shall mean continuous employment with the Company or a
Subsidiary, or in the case of a consultant, advisor or agent, a continuous
contractual association between such person and the Company or a
Subsidiary.
"INCENTIVE COMPENSATION SUBCOMMITTEE" shall mean a subcommittee of the
Nominations, Compensation and Corporate Governance Committee, appointed by
the Nominations, Compensation and Corporate Governance Committee, the
composition of which subcommittee shall satisfy the requirements of Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the "1934
Act"), with respect to grants made to Section 16(a) Persons, and who also
qualify, and remain qualified, as "outside directors" as defined in
Section 162(m) of the Code.
"INCREMENTAL SHARES" shall have the meaning set forth in Section 6(i).
"LEAVE OF ABSENCE" shall have the meaning set forth in Schedule A.
"NOMINATIONS, COMPENSATION AND CORPORATE GOVERNANCE COMMITTEE" shall
mean the Nominations, Compensation and Corporate Governance Committee
appointed by the Board.
"OPTIONS" shall mean non-qualified stock options to purchase shares of
Common Stock which are not incentive stock options under Section 422 of
the Code and which are granted under Section 6 herein.
"PARTICIPANT" shall mean an Eligible Employee selected by the Committee,
pursuant to the Committee's authority in Section 7, to receive an award of
Restricted Stock.
A-2
<PAGE> 3
"RELATED EMPLOYMENT" shall mean the employment of an individual by an
employer which is neither the Company nor a Subsidiary provided (i) such
employment is undertaken by the individual at the request of the Company
or a Subsidiary, (ii) immediately prior to undertaking such employment,
the individual was an officer or employee of the Company or a Subsidiary,
or was engaged in Related Employment as herein defined and (iii) such
employment is recognized by the Committee, in its discretion, as Related
Employment for purposes of this Plan.
"RESTRICTED STOCK" shall mean an award of shares of Common Stock that is
subject to the restrictions set forth in Section 5.
"RETIREMENT" shall have the meaning set forth on Schedule A.
"SECTION 16(a) PERSON" shall mean any officer or director of the Company
or any Subsidiary who is subject to the reporting requirements of Section
16(a) of the 1934 Act.
"SUBSIDIARY" shall mean any entity at least one-half of whose outstanding
voting stock, or beneficial ownership for entities other than
corporations, is owned, directly or indirectly, by the Company, or which
is otherwise controlled directly or indirectly by the Company.
SECTION 3. ELIGIBILITY AND PARTICIPATION.
Officers and certain other employees of the Company and its Subsidiaries
who are responsible for or contribute to the management, growth and/or
profitability of the Company or its Subsidiaries shall be eligible to
participate in the Plan. The Participants under the Plan shall be selected from
time to time by the Committee, in its discretion, from among Eligible Employees.
SECTION 4. AMOUNT AND FORM OF AWARDS.
(a) Awards under the Plan shall be determined by the Committee and will be
granted at such time as the Committee may in its discretion determine. The
Committee may also, in its discretion, provide for alternative methods for
grants of awards. A Participant will receive such award in Restricted Stock or,
if permitted by the Committee and so elected by the Participant pursuant to
Section 6, a portion of such award may be received in Options.
(b) The number of shares of Common Stock which may be issued under the
Plan shall be equal to the lesser of (i) the number of shares of Common Stock
repurchased by the Company on or after April 23, 1996 or (ii) four million
(4,000,000) shares of Common Stock, in each case subject to adjustment as
provided in Section 8. The Committee may, in its discretion, modify or eliminate
the repurchase limitation set forth in the preceding sentence. The shares issued
hereunder may be authorized but unissued shares, or previously issued shares
reacquired by the Company, or both. In the event Restricted Stock is forfeited,
or an outstanding Option is terminated, expires or is canceled, prior to the end
of the period during which the restrictions on Restricted Stock expire, or
A-3
<PAGE> 4
the Options can be exercised, the shares of Common Stock called for by such
award of Restricted Stock or the unexercised portion of the Option award will
become available for future awards.
SECTION 5. RESTRICTED STOCK.
(a) The number of shares of Restricted Stock awarded to a Participant
under the Plan will be determined by a formula or formulas approved by the
Committee. In order to reflect the impact of the restrictions on the value of
the Restricted Stock, as well as the possibility of forfeiture of Restricted
Stock, the fair market value of Common Stock shall be discounted at a rate of
25% in determining the number of shares of Restricted Stock to be awarded. The
Committee may, where it deems appropriate, and in its discretion, provide for an
alternative discount rate. For purposes of this Plan, the fair market value of
Common Stock for an award will be the average of the Common Stock's closing
prices on the Composite Tape of the New York Stock Exchange, Inc. ("NYSE") for
the five trading days prior to the date of the award. The dollar value of an
award will be divided by the discounted market value to determine the number of
shares of Restricted Stock in an award. The value of fractional shares will be
paid in cash. In the event the Committee provides for alternative methods for
grants of awards, the Committee, in its discretion, may provide for alternative
methods of determining the fair market value of the Common Stock for such
awards, and may also provide for alternative forfeiture provisions.
(b) Unless the Committee determines otherwise, a Participant shall not
have any rights with respect to an award, unless or until such Participant has
executed an agreement evidencing the award (a "Restricted Stock Award
Agreement") and has delivered a fully executed copy thereof to the Company. Each
Participant who is awarded Restricted Stock may, but need not, be issued a stock
certificate in respect of such shares of Restricted Stock. A "book entry" (i.e.,
a computerized or manual entry) shall be made in the records of the Company to
evidence an award of shares of Restricted Stock to a Participant where no
certificate is issued in the name of the Participant. Such Company records
shall, absent manifest error, be binding on the Participants. Each certificate,
if any, registered in the name of a Participant shall bear an appropriate legend
referring to the terms, conditions, and restrictions applicable to such award,
substantially in the following form:
"The transferability of the certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the Travelers Property Casualty Corp. Capital Accumulation
Plan and a Restricted Stock Award Agreement entered into between the
registered owner and Travelers Property Casualty Corp. Copies of such Plan
and Agreement are on file in the offices of Travelers Property Casualty
Corp."
The Committee shall require that any stock certificate issued in the name
of a Participant evidencing shares of Restricted Stock be held in the custody of
the Company until the restrictions thereon shall have lapsed, and that, as a
condition of such issuance of a certificate for Restricted Stock, the
Participant shall have delivered a stock power, endorsed in blank, relating to
the shares covered by such certificate.
A-4
<PAGE> 5
(c) The shares of Restricted Stock awarded pursuant to this Section 5
shall be subject to the following restrictions and conditions:
(i) Subject to the provisions of the Plan and the Restricted Stock
Award Agreements, during the three-year period (together with any
extensions thereof approved as provided herein) commencing on the date of
the award (the "Restricted Period"), the Participant shall not be
permitted to sell, transfer, pledge or assign shares of Restricted Stock
awarded under the Plan. The Committee may, in its discretion, (x)
initially provide for an alternative Restricted Period or alter the
three-year Restricted Period for a previously granted award (provided that
the Committee may not extend the Restricted Period for a previously
granted award without the Participant's written consent), (y) during any
extension of such Restricted Period, provide for alternative restrictions
and (z) provide for the lapse of any such restrictions in installments and
accelerate or waive any such restrictions in whole or in part based on
such factors and such circumstances as the Committee may determine, in its
discretion, including, but not limited to, the Participant's Retirement,
termination, death or Disability. The terms, conditions and restrictions
applicable to shares of Restricted Stock in the event of a Participant's
termination of Employment, death, Disability, Retirement, Related
Employment and/or Leave of Absence are set forth on Schedule A attached
hereto and made a part hereof, which terms, conditions and restrictions
remain subject to amendment from time to time by the Committee.
(ii) Unless the Committee in its discretion shall determine
otherwise at or prior to the time of the grant of any award, the
Participant shall have the right to direct the vote of his shares of
Restricted Stock during the Restricted Period, in accordance with
paragraph (e) of this Section 5. The Participant shall have the right to
receive any regular dividends on such shares of Restricted Stock. The
Committee shall in its discretion determine the Participant's rights with
respect to extraordinary dividends or distributions on the shares of
Restricted Stock.
(iii) Shares of Common Stock shall be delivered to the Participant
either in certificate form or by crediting the Participant's brokerage
account at Smith Barney Inc. promptly after, and only after, the
Restricted Period shall expire (or such earlier time as the restrictions
may lapse in accordance with paragraph (c)(i) of this Section 5) without
forfeiture in respect of such shares of Restricted Stock.
(d) Unless the Committee in its discretion shall determine otherwise at or
prior to the time of the grant of any award, during the Restricted Period the
shares of Restricted Stock shall be voted by the Company's senior administrative
officer in charge of administering the Plan, or such other person as the
Committee may designate (the "Plan Administrator"), and the Plan Administrator
shall vote such shares in accordance with instructions received from
Participants (unless to do so would constitute a violation of the Plan
Administrator's fiduciary duties). Shares as to which no instructions are
received shall be voted by the Plan Administrator proportionately in
A-5
<PAGE> 6
accordance with instructions received from Participants in the Plan (unless to
do so would constitute a violation of the Plan Administrator's fiduciary
duties).
(e) In any instance where the vesting of an award of Restricted Stock or
the vesting and/or exercisability of an Option or reload option extends past the
date of termination of a Participant's Employment, either pursuant to the terms
of the Plan or by action of the Committee, the Restricted Stock as well as any
rights of continued vesting and exercisability with respect to Options and
reload options shall be forfeited, if, in the determination of the Committee,
the Participant, at any time within any such remaining period of continued
vesting or exercisability engages in any of the conduct described in
subparagraphs (2) or (3) of the definition of "Cause" under this Plan. In
addition, if, in the determination of the Committee, the Participant engages in
any of the conduct described in subparagraph (3) of the definition of "Cause"
under this Plan, while holding any Incremental Shares which remain subject to
restrictions on transferability, at the option of the Committee, the Participant
shall forfeit such Incremental Shares and receive instead a cash payment,
without interest, equal to the original exercise price for the Option or reload
option under which the Incremental Shares were issued, multiplied by the number
of Incremental Shares forfeited.
SECTION 6. ELECTION OF OPTIONS.
(a) The Company does not intend to grant Options under the Plan. However,
the Committee may, at such times and under such circumstances as the Committee
in its discretion may deem to be appropriate, permit a Participant to elect to
receive up to a maximum of one-third (1/3) of his or her award in the form of
Options. The Committee shall determine the number of Options to be awarded in
lieu of each share of Restricted Stock given up and may alter the maximum
percentage of Restricted Stock which may be exchanged for Options. Such election
shall be made within a period of sixty (60) days after the grant of the award
(or such other period after the date of the award as the Committee may specify).
In the absence of such an election, the award will be paid entirely in shares of
Restricted Stock.
(b) Options will be granted with an exercise price equal to the fair
market value of Common Stock, which will be the average of the Common Stock's
closing prices on the Composite Tape of the NYSE on the five trading days prior
to the grant date. The Committee in its discretion shall determine the
expiration date of the Options, provided that in no event shall the expiration
date be later than ten (10) years from the date of the award. Options granted
under the Plan shall vest pursuant to a schedule determined by the Committee, in
its discretion, prior to the Participant's election to receive Options.
(c) In order to evidence acceptance of an Option, the Committee may
require recipients of Options to enter into a stock option agreement with the
Company, in such form as the Committee shall determine, which agreement shall
set forth, among other things, the exercise price of the Option, the term of the
Option and provisions regarding exercisability of the Option granted thereunder.
A-6
<PAGE> 7
(d) If an Option is exercised by a Participant, then, at the discretion of
the Committee, the Participant may receive a replacement or reload option, on
such terms, conditions and limitations as determined by the Committee. Reload
Options may also be granted under other benefit plans of the Company, as
determined by the Committee.
(e) Options, reload options, and, during any period of restrictions on
transferability, Incremental Shares may not be sold, assigned, pledged,
hypothecated or otherwise transferred by the Participant other than by will or
the laws of descent and distribution, except as provided in this Section 6(e).
The Committee may permit (on such terms, conditions and limitations as it shall
establish) Options and reload options to be transferred one time to or to a
trust or similar vehicle for the benefit of the Participant's immediate family
members (the "Permitted Transferee"). Except to the extent required by law, no
right or interest of any Participant in the Plan or any award granted hereunder
shall be subject to any lien, levy, attachment, pledge, obligation, liability or
bankruptcy of the Participant. All rights with respect to awards granted to a
Participant shall be exercisable during his or her lifetime only by the
Participant, or if applicable, the Permitted Transferee.
(f) An Option shall not be exercisable unless payment in full is made for
the shares being acquired thereunder at the time of exercise; such payment shall
be made (A) in United States dollars by cash or check, (B) in lieu thereof,
unless the Committee shall in its discretion determine otherwise, by tendering
to the Company Common Stock owned by the person exercising the Option (or owned
by the person exercising the Option and his or her spouse, jointly) and acquired
at least six (6) months prior to such tender, including shares of Restricted
Stock awarded hereunder at least six (6) months prior to such tender, and having
a fair market value equal to the cash exercise price applicable to such Option,
such fair market value to be determined in such reasonable manner as may be
provided for from time to time by the Committee or as may be required in order
to comply with or to conform to the requirements of any applicable or relevant
laws or regulations, (C) by a combination of United States dollars and Common
Stock as aforesaid, or (D) if permitted by the Committee, by authorizing the
Company to sell, on behalf of the Participant, the appropriate number of shares
otherwise issuable to the Participant upon the exercise of the Option with the
proceeds of sale applied to pay the exercise price.
(g) An Option shall not be exercisable unless the person exercising the
Option has been, at all times during the period beginning with the date of grant
of the Option and ending on the date of such exercise, an officer or Employee of
the Company or a Subsidiary, except as set forth on Schedule A attached hereto
and made a part hereof. Notwithstanding the foregoing provisions of this Section
6(g) and those contained in Schedule A, the Committee shall have the authority,
on a case by case basis, in its discretion, to alter and/or waive the period of
vesting and/or exercisability, however such periods may not be changed to the
detriment of the Participant after the date of grant without the Participant's
written consent.
(h) If the exercise price of an Option is paid by delivery of a number of
shares of Restricted Stock, then the Participant shall receive, in connection
with the exercise, an equal
A-7
<PAGE> 8
number of identically restricted shares of Common Stock; the Incremental Shares
of Common Stock issued upon such exercise shall contain any applicable
restrictions that are set forth in the Participant's stock option agreement
and/or in the Plan. In such event, the fair market value of shares of Restricted
Stock delivered or withheld, for purposes of this Plan, shall not take into
account the restrictions on such shares.
(i) The Incremental Shares issued as a result of the exercise of an Option
may not be sold, assigned, pledged, hypothecated or otherwise transferred by the
Participant, except as specifically permitted pursuant to Section 6(e) above,
for a period of one (1) year following the date of exercise if no reload option
is granted in connection with such exercise or for a period of two (2) years if
a reload option is granted in connection with such exercise, or such other
shorter or longer periods of restriction on transferability as may be determined
by the Committee. For purposes of the Plan, the term "Incremental Shares" shall
mean those shares of Common Stock actually issued to a Participant upon the
exercise of an Option. The number of Incremental Shares will equal the number of
Option shares exercised minus the sum of (a) the number of shares of Common
Stock surrendered by the Participant or sold by the Company on behalf of the
Participant to pay the exercise price and (b) the number of shares of Common
Stock sold or withheld by the Company, at the Participant's election, to pay the
applicable withholding taxes arising as a result of the Option exercise.
SECTION 7. ADMINISTRATION.
The Plan shall be administered by the Committee.
The Committee shall have the power and authority to grant Restricted Stock
or Options to Participants, pursuant to the terms of the Plan.
In particular, the Committee shall have the authority:
(a) to select those employees of the Company and its Subsidiaries who
are Eligible Employees;
(b) to determine whether and to what extent Restricted Stock or
Options are to be granted to Participants hereunder;
(c) to determine the number of shares of Common Stock to be covered by
each such award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder; and
(e) to determine the terms and conditions, not inconsistent with the terms
of the Plan, which shall govern all written instructions evidencing the
Options and Restricted Stock.
A-8
<PAGE> 9
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan; and to otherwise supervise the
administration of the Plan. All decisions made by the Committee pursuant to the
provisions of the Plan shall be final and binding on all persons, including the
Company and the Participants. The Committee may delegate some or all of its
authority over the administration of the Plan to any other committee, with
approval by the Board, but only with respect to persons who are not Section
16(a) Persons.
SECTION 8. ADJUSTMENTS UPON A CHANGE IN COMMON STOCK.
In the event of any change in the outstanding Common Stock of the Company
by reason of any stock split, stock dividend, distribution, recapitalization,
merger, consolidation, reorganization, combination or exchange of shares or
other similar event if such change equitably requires an adjustment in the
number or kind of shares that may be issued under the Plan pursuant to Section
4(b), or in the number or kind of shares subject to, or the option price per
share under, any outstanding Option which has been granted to any Participant,
such adjustment shall be made by the Committee and shall be conclusive and
binding for all purposes of the Plan. In no event shall the excess of the
aggregate fair market value of the Common Stock subject to the Options
immediately after any substitution, exchange or adjustment over the aggregate
option price for such Common Stock be more than the excess of the aggregate fair
market value of all of the Common Stock subject to the Option immediately before
any such substitution, exchange or adjustment over the aggregate option price of
such Common Stock nor shall the adjusted Option give the holder thereof any
additional benefits he or she did not have under the old Option.
SECTION 9. AMENDMENT AND TERMINATION.
The Plan may be amended or terminated at any time and from time to time by
the Board, but no amendment which increases the aggregate number of shares of
Common Stock which may be issued pursuant to the Plan (except as provided in
Section 8) shall be effective unless and until the same is approved by the
stockholders of the Company. Neither an amendment to the Plan nor the
termination of the Plan shall adversely affect any right of any Participant with
respect to any Restricted Stock or Option theretofore granted without such
Participant's written consent. Subject to the foregoing limitations, the
Committee shall have the authority to amend certain Plan provisions to the
extent necessary to permit participation in the Plan by employees who are
employed outside of the United States on terms and conditions which are
comparable to those afforded to employees located within the United States.
A-9
<PAGE> 10
SECTION 10. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares pursuant to an
Option to represent and agree with the Company in writing that such person is
acquiring the shares without a view to distribution thereof. The certificates
for such shares may include any legend which the Committee deems appropriate to
reflect any restriction on transfer. All certificates for shares of Common Stock
delivered under the Plan shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations,
and other requirements of the Securities and Exchange Commission, any stock
exchange upon which the Common Stock is then listed, and any applicable federal
or state securities law.
(b) Nothing contained in the Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of the Plan shall
not confer upon any employee of the Company or any Subsidiary any right to
continued Employment with the Company or a Subsidiary, as the case may be, nor
shall it interfere in any way with the right of the Company or a Subsidiary to
terminate the Employment of any of its employees at any time.
(c) No member of the Board or the Committee, nor any officer or employee
of the Company acting on behalf of the Board or the Committee, shall be
personally liable for any action, determination, or interpretation taken or made
in good faith with respect to the Plan, and all members of the Board and the
Committee and each and any officer or employee of the Company acting on their
behalf shall, to the extent permitted by law, be fully indemnified and protected
by the Company in respect of any such action, determination or interpretation.
(d) A Participant's rights and interest under the Plan may not be assigned
or transferred in whole or in part either directly or by operation of law or
otherwise (except in the event of a Participant's death or as provided in
Section 6(e) above) including, but not by way of limitation, execution, levy,
garnishment, attachment, pledge, bankruptcy or in any other manner and no such
right or interest of any Participant in the Plan shall be subject to any
obligation or liability of such Participant. Upon the death of a Participant,
the Participant's estate shall succeed to the rights of the Participant with
respect to awards granted under the Plan.
(e) The Company and its Subsidiaries shall have the right to deduct from
any payment made under the Plan any federal, state or local income or other
taxes required by law to be withheld with respect to such payment. It shall be a
condition to the obligation of the Company to issue Common Stock upon the lapse
of restrictions on Restricted Stock or upon exercise of an Option that the
Participant (or any beneficiary or person entitled to exercise the Option) pay
to the Company, upon its demand, such amount as may be requested by the Company
for the purpose of satisfying any liability to withhold federal, state or local
income or other taxes. If the amount requested is not paid, the Company may
refuse to issue shares. Unless the Committee shall in its discretion determine
otherwise, payment for taxes required to be withheld may be made in whole or
A-10
<PAGE> 11
in part upon election by a Participant, in accordance with rules adopted by the
Committee from time to time (A) in cash, in United States dollars, (B) by having
the Company sell or withhold shares of Common Stock otherwise issuable pursuant
to the Plan having a fair market value equal to such tax liability (C) by
tendering to the Company shares of Common Stock owned by the Participant (or the
person exercising the Option) including Common Stock owned jointly with his or
her spouse and acquired at least six (6) months prior to such tender (excluding
shares of Restricted Stock awarded hereunder or under any other restricted stock
program of the Company) and having a fair market value equal to such tax
liability, such fair market value (in the case of clause (B) or (C)), to be
determined in such reasonable manner as may be provided for from time to time by
the Committee or as may be required in order to comply with or to conform to the
requirements of any applicable or relevant laws or regulations.
(f) Notwithstanding anything to the contrary contained herein, upon a
"Change of Control" (defined below), the restrictions on each award of
Restricted Stock shall immediately lapse, and all outstanding Options and reload
options shall become immediately exercisable with respect to one hundred percent
(100%) of the Common Stock subject thereto. "Change of Control" shall mean the
occurrence of any of the following, unless such occurrence shall have been
approved or ratified by at least a two-thirds (2/3) vote of the Continuing
Directors (defined below): (A) any person within the meaning of Sections 13(d)
and 14(d) of the 1934 Act, shall have become the beneficial owner, within the
meaning of Rule 13d-3 under the 1934 Act, of shares of stock of the Company
having twenty five percent (25%) or more of the total number of votes that may
be cast for election of the directors of the Company, or (B) there shall have
been a change in the composition of the Board such that at any time a majority
of the Board shall have been members of the Board for less than twenty-four (24)
months, unless the election of each new director who was not a director at the
beginning of the period was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who were directors at the beginning of such
period, or who were approved as directors pursuant to the provisions of this
paragraph (the "Continuing Directors").
(g) All claims and disputes between a Participant and the Company or any
Subsidiary or affiliate arising out of the Plan or any award granted hereunder
shall be submitted to arbitration in accordance with the then current
arbitration policy of the Company or if the Subsidiary with whom the Participant
is employed has adopted an arbitration policy, then the arbitration policy of
such Subsidiary. Notice of demand for arbitration shall be given in writing to
the other party and shall be made within a reasonable time after the claim or
dispute has arisen. The award rendered by the arbitrator shall be made in
accordance with the Plan, shall be final, and judgment may be entered upon it in
accordance with applicable law in any court having jurisdiction thereof. The
provisions of this Section 10(g) shall be specifically enforceable under
applicable law in any court having jurisdiction thereof.
(h) The validity, construction, interpretation, administration and effect
of the Plan and of its rules and regulations, and rights relating to the Plan,
shall be determined solely in accordance with the laws of the State of Delaware.
A-11
<PAGE> 12
(i) No Common Stock or other securities shall be issued hereunder unless
counsel for the Company shall be satisfied that such issuance will be in
compliance with all applicable Federal, state and international securities
statutes, rules and regulations. The appropriate officers of the Company or its
Subsidiaries shall cause to be filed any reports, returns or other information
regarding awards or Common Stock issued under the Plan as may be required by
Section 13 or 15(d) of the 1934 Act or any other applicable statute, rule or
regulation.
(j) If any term or provision of this Plan or the application thereof to
any person or circumstances shall, to any extent, be invalid or unenforceable,
then the remainder of the Plan, or the application of such term or provision to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and provision hereof
shall be valid and be enforced to the fullest extent permitted by applicable
law.
SECTION 11. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on the date it is adopted by the Board and the
Company's stockholder and shall remain effective until terminated by the Board
in accordance with Section 9.
A-12
<PAGE> 13
SCHEDULE A
TO THE
TRAVELERS PROPERTY CASUALTY CORP.
CAPITAL ACCUMULATION PLAN
Pursuant to action taken by the Board and the Nominations, Compensation
and Corporate Governance Committee in the event of a Participant's termination
of Employment, death, Disability, Retirement, Early Retirement, Related
Employment and/or Leave of Absence the following terms, conditions and
restrictions shall apply to Restricted Stock and Options granted under the Plan
on or after July 23, 1997. Capitalized terms used, but not otherwise defined
below shall have the meanings set forth in the Plan.
1. DEFINITIONS. For purposes of the Plan and this Schedule A, the
following terms shall have the following meanings:
"Disability" shall mean a disability that renders an Employee unable to be
occupied within his or her business or profession and as a result of such
disability is receiving benefits under the Company's or a Subsidiary's
short term or long term disability plan or, in the case of an Employee who
did not elect to participate in a long term disability plan, would be
eligible to receive benefits under such long term disability plan if the
Participant had elected to participate.
"Early Retirement" shall mean no longer being occupied within one's
business or profession, and terminating active Employment after reaching
at least age sixty (60) and having completed at least ten (10) years of
service with the Company or a Subsidiary.
"Leave of Absence" shall mean a temporary cessation from active
Employment, as authorized in each individual case by the Company or the
Subsidiary, in connection with military leave, personal leave or family
and medical leave, but shall not include such a cessation resulting from
or in connection with a Disability.
"Retirement" shall mean no longer being occupied in one's business or
profession and terminating Employment after reaching at least age
fifty-five (55) and having a number of years of service with the Company
or a Subsidiary which number when added together with the Employee's age
shall not be less than seventy-five (75).
A-13
<PAGE> 14
2. TERMINATION OF EMPLOYMENT. The following provisions supplement and
shall remain subject to Sections 5(c)(i) and 6(g) of the Plan:
(a) Voluntary Termination.
(i) Restricted Stock. In the event of a voluntary termination of
Employment, other than pursuant to Retirement, Restricted Stock
shall be forfeited.
(ii) Options. In the event of a voluntary termination of Employment,
vested Options (or portions thereof) that have not been exercised
and have not expired shall be canceled upon the close of business on
the last day of Employment.
(b) Involuntary Termination for Cause.
(i) Restricted Stock. In the event of an involuntary termination
of Employment for Cause, Restricted Stock shall be forfeited.
(ii) Options. In the event of an involuntary termination of
Employment for Cause, vested Options (or portions thereof) that have
not been exercised and have not expired shall be canceled upon the
close of business on the last day of Employment.
(c) Involuntary Termination other than for Cause.
(i) Restricted Stock. If a Participant is involuntarily terminated
other than for Cause, such Participant shall forfeit his or her
Restricted Stock and receive in return a cash payment equal to
seventy-five percent (75%) of the fair market value of the number of
shares of Restricted Stock forfeited, calculated as of the date of
the award.
(ii) Options. If a Participant is involuntarily terminated other
than for Cause, vested Options (or vested portions thereof) that
have not been exercised and have not expired may be exercised at any
time within thirty (30) days following the last day of Employment,
but in no event after the Option has expired. At the end of such
thirty day period, vested Options (or vested portions thereof) that
have not been exercised and have not expired shall be canceled. If a
Participant shall die or become Disabled within thirty (30) days of
his or her involuntary termination of Employment other than for
Cause, vested Options (or vested portions thereof) that have not
been exercised and have not expired may be exercised by the
Participant or his or her executors, administrators, heirs or
distributees, as the case may be, at any time within one (1) year
after the date of such event, but in no event after the Option has
expired.
A-14
<PAGE> 15
(d) Death.
(i) Restricted Stock. Upon the death of a Participant, the
restrictions on his or her Restricted Stock shall immediately
lapse.
(ii) Options. Upon the death of a Participant, unvested Options
shall immediately vest and become exercisable. Vested Options that
have not been exercised and have not expired may be exercised by the
Participant's executors, administrators, heirs or distributees
within two (2) years following the date of death, but in no event
later than the expiration date of the Option. At the end of such two
(2) year period, all unexercised Options shall be canceled.
(e) Disability.
(i) Restricted Stock. In the event of a Participant's Disability
prior to the termination of Employment, awards of Restricted Stock
shall continue to vest as originally scheduled provided (a) the
Participant continues to meet the definition of Disability and has
not voluntarily terminated his or her Employment or (b) the
Disability is discontinued and the Participant resumes active
Employment upon the earlier to occur of (i) the end of the
Disability period or (ii) twelve (12) months after the onset of the
Disability. If the Disability continues for more than twelve (12)
months, then the restrictions on the Participant's Restricted Stock
shall lapse on the twelve (12) month anniversary of the onset of
Disability.
(ii) Options. Vested Options (or vested portions thereof) that have
not been exercised and have not expired may be exercised during the
Disability period, but in no event later than two (2) years from the
onset of Disability or the expiration date of the Option, whichever
is sooner, provided the Participant continues to meet the definition
of Disability. If a Participant holds any unvested Options at the
onset of Disability no further vesting shall occur unless the
Participant resumes active Employment upon the earlier to occur of
(a) the end of the period of Disability, or (b) twelve (12) months
after the onset of Disability. If the Participant resumes active
Employment within the applicable time limit, then vesting shall be
restored and newly vested options shall become exercisable on the
return-to-work date. If the Participant does not resume active
Employment within the applicable time limit or, if at any time prior
to the end of any remaining period of exercisability of Options, the
Participant no longer meets the definition of Disability, vested
Options (or vested portions thereof) that have not been exercised
and have not expired shall be canceled.
A-15
<PAGE> 16
(f) Retirement.
(i) Restricted Stock. A Participant who meets the conditions for
Retirement shall receive his or her Restricted Stock upon completion
of the Restricted Period. If a Participant "retires" from
Employment, (i.e., such person is no longer occupied within his or
her business or profession and has terminated active Employment
after reaching age fifty-five (55) and having completed at least
five (5) years of Employment but has not met the definition of
"Retirement" such Participant shall forfeit his or her Restricted
Stock and receive instead, a cash payment equal to seventy-five
percent (75%) of the fair market value of the number of shares of
Restricted Stock forfeited, calculated as of the date of the award.
(ii) Options. Upon Retirement, all of such Participant's unvested
Options shall immediately vest and be exercisable. Vested Options
that have not been exercised and have not expired may be exercised
at any time within two (2) years following the last day of
Employment, but in no event after the Option has expired. At the end
of such two (2) year period, all unexercised Options shall be
canceled. However, if at any time after such Retirement and prior to
the end of any remaining period of exercisability, the Participant
is occupied within his or her business or profession then all
unexercised Options shall be canceled. If a Participant meets the
conditions for Early Retirement, but does not meet the conditions
for Retirement, Options which vest (or portions thereof) on or
before the date of such Early Retirement may be exercised for a
period of two (2) years thereafter, but in no event later than the
expiration date of the Option.
(g) Leave of Absence.
(i) Restricted Stock. In the event a Participant takes a Leave of
Absence, the Restricted Period will be extended for a period equal
to the length of the Leave of Absence or three (3) months, whichever
is shorter, provided the Participant resumes active Employment
within twelve (12) months of the commencement date of the Leave of
Absence, and remains actively Employed for a period (the
"Restoration Period") equal to (x) three (3) months or (y) the
length of the Leave of Absence, whichever is shorter. If the
Participant remains on Leave of Absence for more than twelve (12)
months, all Restricted Stock shall be forfeited.
(ii) Options. Vested Options (or vested portions thereof) that have
not been exercised and have not expired may be exercised during such
Leave of Absence, but in no event later than one (1) year from the
commencement of the Leave of Absence or the expiration date of the
Option, whichever is sooner, provided the Participant continues to
meet the conditions prescribed by the Committee for the Leave of
Absence approved for such Participant. If a Participant holds any
unvested Options at the time a Leave of Absence commences, no
further vesting
A-16
<PAGE> 17
shall occur unless the Participant resumes active Employment upon
the earlier to occur of (a) the end of the Leave of Absence period,
or (b) twelve (12) months (or such other shorter or longer period as
may be determined by the Committee) after the commencement of a
Leave of Absence and remains an active Employee for the duration of
the Restoration Period, in which event vesting shall be restored and
newly vested options shall become exercisable at the end of the
Restoration Period. If the Participant does not resume active
Employment within the applicable time limit, or does resume active
Employment but does not remain an active Employee for the duration
of the Restoration Period or, if at any time prior to the end of any
remaining period of exercisability of Options, the Participant no
longer meets the conditions prescribed by the Committee in
connection with the approved Leave of Absence, vested Options (or
vested portions thereof) that have not been exercised and have not
expired shall be canceled.
(h) Related Employment. If a Participant ceases to be an Employee solely
by reason of a period of Related Employment, then during such period of Related
Employment (i) Restricted Stock shall be distributed at the end of the
Restricted Period; (ii) vested Options (or vested portions thereof) that have
not been exercised and have not expired shall remain exercisable; (iii) unvested
Options shall continue to vest as scheduled; and (iv) death, Disability, Leave
of Absence, Early Retirement and Retirement of a Participant during a period of
Related Employment shall be treated, for purposes of the Plan, as if the death,
Disability, Leave of Absence, Early Retirement or Retirement had occurred while
an individual was an Employee of the Company or a Subsidiary. A termination of
Related Employment shall be treated in the same manner as a termination of
Employment.
A-17
<PAGE> 1
Exhibit 11.01
Travelers Property Casualty Corp. and Subsidiaries
Computation of Earnings Per Share
(In millions, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Earnings:
Net income $ 327 $ 247 $ 876 $ 129
Preferred Dividends:
7.5% Preferred Stock - Series Z -- -- -- (4)
--------- --------- --------- ---------
$ 327 $ 247 $ 876 $ 125
========= ========= ========= =========
Average shares:
Common 392.5 400.0 396.8 356.2
========= ========= ========= =========
Earnings per share $ 0.83 $ 0.62 $ 2.21 $ 0.35
========= ========= ========= =========
</TABLE>
Earnings 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 stock equivalents outstanding during the period. For purposes
of the computation of earnings per share for the three and nine months ended
September 30, 1996, the weighted average number of common shares and common
stock 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 earnings per common share
assuming the dilutive effect of common stock equivalents has not been presented
because the effects are not significant.
<PAGE> 1
Exhibit 12.01
Travelers Property Casualty Corp. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In millions of dollars, except for ratio)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ------ ----
<S> <C> <C> <C> <C>
Income before income taxes $467 $353 $1,250 $117
Interest 41 40 121 78
Portion of rentals deemed to be interest 9 9 27 27
---- ---- ------ ----
Earnings available for fixed charges $517 $402 $1,398 $222
==== ==== ====== ====
Fixed charges:
Interest $ 41 $ 40 $ 121 $ 78
Portion of rentals deemed to be interest 9 9 27 27
---- ---- ------ ----
Total fixed charges $ 50 $ 49 $ 148 $105
==== ==== ====== ====
Ratio of earnings to fixed charges 10.34x 8.20x 9.45x 2.11x
==== ==== ====== ====
</TABLE>
The ratio of earnings to fixed charges is computed by dividing income before
income taxes and fixed charges by the fixed charges. For purposes of this ratio,
fixed charges consist of that portion of rentals deemed representative of the
appropriate interest factor.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 FINANCIAL STATEMENTS OF TRAVELERS PROPERTY CASUALTY CORP.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001010551
<NAME> TRAVELERS PROPERTY CASUALTY CORP.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 26,265
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,051
<MORTGAGE> 768
<REAL-ESTATE> 183
<TOTAL-INVEST> 30,478
<CASH> 105
<RECOVER-REINSURE> 9,361
<DEFERRED-ACQUISITION> 495
<TOTAL-ASSETS> 50,717
<POLICY-LOSSES> 30,610
<UNEARNED-PREMIUMS> 3,900
<POLICY-OTHER> 1,987
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,376
900
0
<COMMON> 4
<OTHER-SE> 7,290
<TOTAL-LIABILITY-AND-EQUITY> 50,717
1,806
<INVESTMENT-INCOME> 528
<INVESTMENT-GAINS> 57
<OTHER-INCOME> 26
<BENEFITS> 1,363
<UNDERWRITING-AMORTIZATION> 286
<UNDERWRITING-OTHER> 350
<INCOME-PRETAX> 467
<INCOME-TAX> 140
<INCOME-CONTINUING> 327
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 327
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.01
Company's Prospectus
April 22, 1996
Page 90 and 91
A number of cases have been filed against several insurance companies and
industry organizations relating to service fee charges and premium calculations
on certain workers' compensation insurance. Certain subsidiaries of the Company
are defendants in South Carolina ex rel. Medlock v. National Council on
Compensation Insurance ("NCCI"), an action filed by the Attorney General of
South Carolina in August 1994 in the Court of Common Pleas, County of
Greenville, South Carolina; Four Way Plant Farm v. NCCI, a purported class
action filed in September 1994 in the Circuit Court for Bullock County, Alabama,
and NC Steel, Inc. v. NCCI, a purported class action filed in November 1993 in
the Superior Court Division of the General Court of Justice, Wake County, North
Carolina. In these cases, the plaintiffs generally allege that the
administration of each state's workers' compensation assigned risk pool
conspired with servicing carriers for the pool to collect excessive fees in
violation of state antitrust and/or unfair trade practice laws. The plaintiffs
seek unspecified compensatory, treble and/or punitive damages and injunctive
relief. The Company believes it has meritorious defenses and intends to contest
the allegations. In NC Steel, Inc. v. NCCI, the defendants' motion to dismiss
was granted in February 1995, and the plaintiffs have appealed to the North
Carolina Court of Appeals. In April 1994, certain subsidiaries of [the Company]
were named as additional defendants in a purported class action pending in the
116th District of Dallas County, Texas, entitled Weatherford Roofing Company v.
Employers National Insurance Company. The plaintiffs in this case allege that
the workers' compensation carriers in Texas have conspired to collect excessive
or improper premiums in violation of state insurance laws, antitrust laws and/or
state unfair trade practices laws. The plaintiffs seek compensatory, treble
and/or punitive damages as well as declaratory and injunctive relief. In a
statutory demand letter, plaintiffs' counsel allege classwide compensatory
damages, including interest through October 1994, of approximately $572 million.
Since that time, court-approved settlements with certain other insurers have
been based on single damage, or alleged overcharge, calculations which, if
applied to Company-issued policies of class members, would yield single damages
of $50 million or less. The Company believes it has meritorious defenses and
intends to contest the allegations unless an attractive settlement opportunity
arises.
Company's Form 10-Q
September 30, 1996
Pages 25
For information concerning actions filed against several insurance companies and
industry organizations relating to service fee charges and premium calculations
on certain workers' compensation insurance, see the descriptions that appear in
the paragraph that begins on page 90 and ends on page 91 of the Company's
Prospectus dated April 22, 1996, and in the first paragraph on page 24 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
which descriptions are incorporated by reference herein. A copy of the pertinent
paragraphs of such filings is included as an exhibit to this Form 10-Q. In
October 1996, certain subsidiaries of the Company were named as defendants in a
purported class action filed in the District Court of Wyandotte County, Kansas,
Civil Court Department under the name Amundson & Associates Art Studio Ltd. v.
NCCI, et al. The plaintiffs make allegations and seek damages that are similar
to those in the cases referred to above.
<PAGE> 2
Company's Form 10-K
December 31, 1996
Pages 54 and 55
For information concerning actions filed against several insurance
companies and industry organizations relating to service fee charges and premium
calculations on certain workers' compensation insurance, see the descriptions
that appear in the paragraph that begins on page 90 and ends on page 91 of the
Company's Prospectus dated April 22, 1996, the first paragraph on page 24 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and
the first paragraph on page 25 of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, which descriptions are incorporated by
reference herein. A copy of the pertinent paragraphs of such filings is included
as an exhibit to this Form 10-K. In NC Steel, Inc. v. NCCI, plaintiffs and
defendants have appealed to the North Carolina State Supreme Court. In November
1996, Amundson & Associates Art Studio v. NCCI, et al. was removed to the U.S.
District Court for the District of Kansas. In December 1996, a purported class
action entitled Forman, Inc. v. NCCI, et al. was filed in Chancery Court, Marion
County, Tennessee, with allegations similar to those in NC Steel and seeking
unspecified monetary damages. In January 1997, two additional purported class
actions, each entitled El Chico Restaurants, Inc. v. The Aetna Casualty and
Surety Company, et al., were filed in Chancery Court, Davidson County,
Tennessee, and Superior Court, Richmond County, Georgia, respectively, with
allegations similar to those in Weatherford Roofing Company v. Employers
National Insurance Company, which was settled in mid-1996. Plaintiffs seek
unspecified monetary damages. In February 1997, one action was removed to the
U.S. District Court for the Middle District of Tennessee and the other action
was removed to the U.S. District Court for the Southern District of Georgia.
Also in January 1997, a purported class of Texas workers' compensation insureds
filed a petition to intervene in a lawsuit pending since 1995 in District Court,
Travis County, Texas, entitled Travelers Indemnity Company of Connecticut v.
Texas Workers Compensation Insurance Facility. The pending lawsuit arose out of
a fee dispute between certain subsidiaries of the Company and the administration
of the Texas assigned risk pool. The proposed class challenges both the fees
paid to servicing carriers for the pool from 1991 to 1993 and certain premium
calculations on certain workers' compensation policies from 1991 forward. The
Company believes it has meritorious defenses to these actions and intends to
contest the allegations.
