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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
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COMMISSION FILE NUMBER 1-14328
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TRAVELERS PROPERTY CASUALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 06-1445591
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION IDENTIFICATION NO.)
OR ORGANIZATION)
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ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(860) 277-0111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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CLASS A COMMON STOCK, PAR VALUE $ .01 PER NEW YORK STOCK EXCHANGE
SHARE
6-3/4% NOTES DUE APRIL 15, 2001 NEW YORK STOCK EXCHANGE
8.08% TRUST PREFERRED SECURITIES OF NEW YORK STOCK EXCHANGE
SUBSIDIARY TRUST (AND REGISTRANT'S
GUARANTY WITH RESPECT THERETO)
8% TRUST PREFERRED SECURITIES OF NEW YORK STOCK EXCHANGE
SUBSIDIARY TRUST (AND REGISTRANT'S
GUARANTY WITH RESPECT THERETO)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT AS OF MARCH 5, 1997 WAS APPROXIMATELY $2.56 BILLION.
AS OF MARCH 5, 1997, 72,176,747 SHARES OF THE REGISTRANT'S CLASS A COMMON STOCK,
PAR VALUE $ .01 PER SHARE, AND 328,020,170 SHARES OF THE REGISTRANT'S CLASS B
COMMON STOCK, PAR VALUE $.01 PER SHARE, WERE OUTSTANDING.
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
(FORMER NAME OF REGISTRANT)
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996 ARE INCORPORATED BY REFERENCE INTO PART II
OF THIS FORM 10-K.
CERTAIN PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1997 ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD ON APRIL 23, 1997 ARE INCORPORATED BY REFERENCE INTO
PART III OF THIS FORM 10-K.
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TRAVELERS PROPERTY CASUALTY CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
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TABLE OF CONTENTS
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FORM 10-K
ITEM NUMBER PAGE
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PART I
1. Business.................................................................. 1
2 Properties................................................................ 53
3. Legal Proceedings......................................................... 54
4. Submission of Matters to a Vote of Security Holders....................... 55
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters............................................. 56
6. Selected Financial Data................................................... 56
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 57
8. Financial Statements and Supplementary Data............................... 57
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................... 57
PART III
10. Directors and Executive Officers of the Registrant........................ 57
11. Executive Compensation.................................................... 57
12. Security Ownership of Certain Beneficial Owners
and Management.......................................................... 57
13. Certain Relationships and Related Transactions............................ 58
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................................. 58
Exhibit Index............................................................. 59
Signatures................................................................ 64
Index to Consolidated Financial Statements and Schedules.................. F-1
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PART I
ITEM 1. BUSINESS.
Travelers Property Casualty Corp. (formerly Travelers/Aetna Property
Casualty Corp.) is a property-casualty insurance holding company engaged,
through its subsidiaries, principally in two business segments: Commercial
Lines, which includes Specialty Accounts, and Personal Lines. The Company
provides a wide range of commercial and personal property and casualty
insurance products and services to businesses, government units, associations
and individuals. Except as the context otherwise requires, as used herein
the "Company" refers to Travelers Property Casualty Corp. and its
consolidated subsidiaries.
Travelers Property Casualty Corp. was formed in January 1996 to hold the
property and casualty insurance subsidiaries (collectively, "Travelers P&C") of
The Travelers Insurance Group Inc. ("TIGI"), a wholly owned subsidiary of
Travelers Group Inc. ("Travelers Group"). On April 2, 1996, the Company
purchased from Aetna Services Inc. (formerly Aetna Life and Casualty Company)
("Aetna") all of the outstanding capital stock of The Aetna Casualty and Surety
Company ("Aetna Casualty") and The Standard Fire Insurance Company ("Standard
Fire"), Aetna's property and casualty insurance subsidiaries (collectively,
"Aetna P&C"), for approximately $4.16 billion in cash. The acquisition of Aetna
P&C (the "Acquisition") was treated as a purchase and, accordingly, the
Company's consolidated financial statements include the results of Aetna P&C's
operations only from the date of the Acquisition. As part of the financing of
the Acquisition, the Company sold approximately 33 million shares of its Class A
Common Stock (representing approximately 9% of its outstanding common stock at
that time) to four private investors, including Aetna, for an aggregate of $525
million. TIGI acquired approximately 328 million shares of the Company's Class B
Common Stock in exchange for its contribution of the outstanding capital stock
of The Travelers Indemnity Company ("Travelers Indemnity") and a capital
contribution of approximately $1.14 billion. In April 1996, the Company sold in
a public offering approximately 39 million shares of its Class A Common Stock
(representing approximately 9.75% of its outstanding common stock at that time)
for total proceeds of $928 million. For additional information about the
Acquisition, the public offering and other related transactions, see Note 2 of
Notes to Consolidated Financial Statements.
Pursuant to an agreement with Aetna, the Company was required to
discontinue its use of the name "Aetna" as part of its corporate name by
December 31, 1997. Effective March 7, 1997, the Company changed its corporate
name to Travelers Property Casualty Corp.
Travelers Group owns approximately 82% of the Company's outstanding common
stock. Travelers Group is a financial services holding company engaged, through
its subsidiaries, principally in four business segments: (i) Investment
Services; (ii) Consumer Finance Services; (iii) Life Insurance Services; and
(iv) Property & Casualty Insurance
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Services (through the Company). The periodic reports of Travelers Group provide
additional business and financial information concerning that company and its
consolidated subsidiaries.
The principal executive offices of the Company are located at One Tower
Square, Hartford, Connecticut 06183; telephone number (860) 277-0111.
This discussion of the Company's business is organized as follows: (i) a
description of each of the Company's two business segments and related services;
(ii) a description of the Corporate and Other segment; and (iii) certain other
information. A glossary of insurance terms is included beginning on page 44.
COMMERCIAL LINES
The Company is the third largest writer of commercial lines insurance in
the United States based on 1995 direct written premiums published by A.M. Best
Company ("A.M. Best"), after giving effect to the Acquisition and recent
industry consolidation. The Company's Commercial Lines offers a broad array of
property and casualty insurance and insurance-related services. Commercial Lines
is organized into four marketing and underwriting groups that are designed to
focus on a particular client base or industry segment to provide products and
services that specifically address customers' needs: National Accounts,
primarily serving large national corporations; Commercial Accounts, serving
mid-size businesses; Select Accounts, serving small businesses and individuals
with commercial exposures; and Specialty Accounts, providing a variety of
specialty coverages. The Company also has a dedicated group within Commercial
Lines that serves the construction industry. The Company distributes its
commercial products through approximately 4,600 brokers and independent agencies
located throughout the United States.
The commercial coverages marketed by the Company include workers'
compensation, general liability (including product liability), commercial
multi-peril, commercial automobile, property (including fire and allied lines)
and several other miscellaneous coverages. The Company also underwrites
specialty coverages through three separate units, Travelers Specialty, Gulf
Specialty and Bond Specialty, which have historically focused on unique risks
that typically require specialized underwriting. Coverages offered by Travelers
Specialty include general liability for selected product liability risks,
medical malpractice and umbrella and excess liability. Coverages offered by Gulf
Specialty include directors' and officers' liability and errors and omissions
insurance for various professions, umbrella insurance, insurance for
municipalities, hard to place coverages sold on an excess and surplus lines
basis and fidelity and surety coverage. Coverages offered by Bond Specialty
include fidelity and surety, fiduciary liability insurance, directors' and
officers' and other professional liability insurance and other related coverages
such as kidnap and ransom and mail insurance. In addition, the Company offers
various risk management services, generally including claims settlement, loss
control and engineering services, to businesses that choose to self-insure
certain exposures, to state funds and insurance carriers that participate in
state involuntary workers' compensation pools and to employers seeking to manage
workers' compensation medical and disability costs. In 1996, Commercial Lines
generated combined net written
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premiums of $4.7 billion and combined premium equivalents of $2.7 billion. As
used herein, unless the context otherwise requires, "combined" refers to the
operations of both Travelers P&C and Aetna P&C, without regard to the date of
the Acquisition.
SELECTED PRODUCT AND MARKET INFORMATION
The following table sets forth by product line and market net written
premiums and premium equivalents for Commercial Lines for the periods indicated.
For a description of the product lines and markets referred to in the table
below, see "-- Product Lines" and "--Principal Markets and Methods of
Distribution," respectively.
Over the past several years, National Accounts customers have moved
increasingly from traditional insurance coverages to service-type products,
primarily for workers' compensation coverage and to a lesser extent in general
liability and commercial automobile coverages. These types of products include
risk management services such as claims settlement, loss control and
engineering. The volume of business handled by the Company in servicing
relationships is measured by "premium equivalents." Premium equivalents do not
represent actual premium revenues. Premium equivalents are determined in the
pricing process and represent the Company's estimates of premiums that its
customers would have been charged under a fully insured arrangement, based on
expected losses associated with non-risk-bearing components of each account.
Because the Acquisition occurred on April 2, 1996, the Company's results
of operations for periods prior to April 2, 1996 do not include the results of
Aetna P&C. Accordingly, premium and other operational information provided for
the Company's combined businesses prior to such time is for informational
purposes only.
COMBINED NET WRITTEN PREMIUMS AND PREMIUM EQUIVALENTS
(Dollars in millions)
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PERCENTAGE OF
TOTAL NET
WRITTEN
YEAR ENDED DECEMBER 31, PREMIUMS AND
----------------------------
PREMIUM
EQUIVALENTS
YEAR ENDED
DECEMBER 31,
1996 1995 1994 1996
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NET WRITTEN PREMIUMS BY
PRODUCT LINE:
Workers' compensation $1,223 $1,312 $1,617 16.6%
General liability 836 815 876 11.3
Commercial multi-peril 1,223 1,188 1,069 16.6
Commercial automobile 806 888 883 10.9
Property 342 457 437 4.7
Fidelity and surety 215 233 184 2.9
Other 23 251 136 0.3
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Net written premiums(1) $4,668 $5,144 $5,202 63.3%
Premiums equivalents(2) 2,712 3,458 2,990 36.7
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Total Commercial Lines $7,380 $8,602 $8,192 100.0%
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(see footnotes on following page)
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PERCENTAGE OF
TOTAL NET
WRITTEN
YEAR ENDED DECEMBER 31, PREMIUMS AND
------------------------------
PREMIUM
EQUIVALENTS
YEAR ENDED
DECEMBER 31,
1996 1995 1994 1996
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(Dollars in millions)
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NET WRITTEN PREMIUMS
AND PREMIUM EQUIVALENTS
BY MARKET:
National Accounts $3,477 $4,550 $ 4,463 47.1%
Commercial Accounts 1,812 1,962 2,039 24.6
Select Accounts 1,412 1,466 1,293 19.1
Specialty Accounts 679 624 397 9.2
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Total Commercial
Lines (2) $7,380 $8,602 $ 8,192 100.0%
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(1) The decreases in net written premiums during the periods shown reflect the
highly competitive marketplace and the Company's selective underwriting
practices.
(2) Premium equivalents for the year ended December 31, 1994 are provided for
Travelers P&C only. Historically, Aetna P&C did not track premium
equivalents and such amounts are not available for that period. The
decreases in premium equivalents during the periods shown reflect a
depopulation of involuntary pools as the loss experience of workers'
compensation improves and insureds move to voluntary markets, the Company's
selective renewal activity to address the competitive pricing environment
and its continued success in lowering workers' compensation losses of
customers.
PRODUCT LINES
The Company writes a broad range of commercial property and casualty
insurance for risks of all sizes. The core products in the Company's Commercial
Lines are as follows:
WORKERS' COMPENSATION provides coverage for employers' liability for
injuries to employees under common law as well as the obligation of an employer
under state or federal law to provide its employees with specified benefits for
work-related injuries, deaths and diseases, regardless of fault. In addition to
the liability exposure that may arise under common law, there are typically four
types of benefits payable under workers' compensation policies: medical
benefits, disability benefits, death benefits and vocational rehabilitation
benefits. Workers' compensation policies are often written in conjunction with
other commercial policies. The Company offers two types of workers' compensation
products: (i) insurance products, including guaranteed cost policies, in which
policy premiums charged are fixed and do not vary as a result of the insured's
loss experience, and loss sensitive plans, including retrospectively rated
policies, in which premiums are adjusted based on actual loss experience of the
insured during the policy period, and large deductible plans, in which the
customer bears the insurance risk up to its deductible amount, and (ii) service
programs, which are generally sold to the Company's larger National Accounts,
where the Company receives fees for providing loss prevention, risk management,
claims administration and benefit administration services to organizations
pursuant to service agreements. The Company also participates in state assigned
risk pools servicing workers' compensation policies as a servicing carrier and
pool participant. The Company emphasizes managed care cost containment
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strategies (which involve employers, employees and care providers in a
cooperative effort that focuses on the injured employee's early return to work),
cost-effective quality care, and customer service in this market. Workers'
compensation comprehensive claim and managed care cost containment services are
integrated through the Company's claims management system to maximize cost
savings on both service delivery and loss payout. For the year ended December
31, 1996, the Company's workers' compensation line generated $1.2 billion of
combined net written premiums and $2.2 billion of combined premium equivalents.
GENERAL LIABILITY provides coverage for liability exposures including
bodily injury and property damage arising from products sold and general
business operations. General liability also includes coverage for directors' and
officers' liability arising in their official capacities, fiduciary liability
for trustees and sponsors of pension, health and welfare and other employee
benefit plans, errors and omissions insurance for employees, agents,
professionals and others arising from acts or failures to act under specified
circumstances, as well as medical malpractice, umbrella and excess insurance.
For the year ended December 31, 1996, the Company's general liability line
generated $836 million of combined net written premiums and $299 million of
combined premium equivalents.
COMMERCIAL MULTI-PERIL provides a combination of property and liability
coverage for businesses and business property for damages such as that caused by
fire, wind, hail, water, theft and vandalism, and protects businesses from
financial loss due to business interruption. It also insures businesses against
third-party liability from accidents occurring on their premises or arising out
of their operations, such as injuries sustained from products sold. For the year
ended December 31, 1996, the Company's commercial multi-peril line generated
$1.2 billion of combined net written premiums.
COMMERCIAL AUTOMOBILE provides coverage for businesses against losses
incurred from personal bodily injury, bodily injury to third parties, property
damage to an insured's vehicle, and property damage to other vehicles and other
property resulting from the ownership, maintenance or use of automobiles and
trucks in a business. For the year ended December 31, 1996, the Company's
commercial automobile line generated $806 million of combined net written
premiums and $240 million of combined premium equivalents.
PROPERTY provides coverage for loss or damage to buildings, inventory and
equipment from natural disasters, including hurricanes, windstorms, earthquakes,
hail, explosions, severe winter weather and other events such as theft and
vandalism, fires and storms and financial loss due to business interruption.
Property also includes inland marine, which provides coverage for goods in
transit and unique, one-of-a-kind exposures. For the year ended December 31,
1996, the Company's property line generated $342 million of combined net written
premiums.
FIDELITY AND SURETY provides fidelity insurance coverage which protects an
insured for loss due to embezzlement or misappropriation of funds by an
employee. Surety is a three-party agreement whereby the insurer agrees to pay a
second party or make complete an obligation in response to the default, acts or
omissions of a third party. Surety is generally
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provided for construction performance, legal matters such as appeals, trustees
in bankruptcy and probate and other performance bonds. For the year ended
December 31, 1996, the Company's fidelity and surety line generated $215 million
of combined net written premiums.
OTHER coverages include boiler and machinery insurance, which provides
coverage for loss or damage resulting from the malfunction of boilers and
machinery, as well as miscellaneous assumed reinsurance. For the year ended
December 31, 1996, these other coverages generated $23 million of combined net
written premiums.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The Company's Commercial Lines are organized into four marketing groups
that are designed to focus on a particular client base or industry segment to
provide products and services that specifically address customers' needs:
National Accounts, primarily serving large national corporations; Commercial
Accounts, serving mid-size businesses; Select Accounts, serving small
businesses; and Specialty Accounts, providing a variety of specialty coverages.
The Company also has a dedicated group within Commercial Lines that serves the
construction industry.
The Company distributes its commercial products primarily through
approximately 4,600 brokers and independent agencies located throughout the
United States that are serviced by 99 field offices. The Company seeks to
establish relationships with well-established, independent insurance agencies
and brokers. In selecting new independent agencies and brokers to distribute the
Company's products, the Company considers each agency's or broker's
profitability, financial stability, staff experience and strategic fit with the
Company's operating and marketing plans. Once an agency or broker is appointed,
the Company carefully monitors its performance.
NATIONAL ACCOUNTS
The Company's National Accounts serves large companies, as well as
employee groups, associations and franchises. The Company's National Accounts
also includes the Company's alternative market business (the "Alternative
Market"), which primarily covers workers' compensation products and services to
voluntary and involuntary state pools. National Accounts customers typically
generate annual direct written premiums and premium equivalents of over $1
million per account and generally select products under retrospectively rated
plans, large self-insured retentions or some other loss-responsive arrangement.
National Accounts programs involve both traditional insurance (risk transfer)
and risk service (claims settlement, loss control and risk management).
Customers are usually national in scope and range in size from businesses with
sales of approximately $10 million per year to Fortune 2000 corporations.
Products are marketed through national brokers and regional agents with offices
throughout the United States. Based on combined net written premiums of $852
million and combined premium equivalents of $2.6 billion, National Accounts
constituted approximately 47% of the Commercial Lines business in 1996.
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National Accounts customers often demand risk service programs where the
ultimate cost is based on their own loss experience. Programs offered by the
Company include claims settlement, loss control and risk management services and
are generally offered in connection with a retrospectively rated insurance
policy, a large deductible plan or a self-insured program. Workers' compensation
accounted for approximately 76% of the products sold in 1996 to National
Accounts customers, based on combined net written premiums and premium
equivalents.
The Alternative Market business of the Company's National Accounts sells
claims and policy management services to workers' compensation and automobile
assigned risk plans, self-insurance pools throughout the United States and to
niche voluntary markets. Since 1993, most state assigned workers' compensation
risk plan contracts have been awarded through a formal state-by-state bid
process. Contracts, which are generally for three-year terms, are awarded by
state agencies based on quality of service and price. The Company has emerged as
the largest workers' compensation assigned risk plan servicing insurer in the
industry with approximately 28% share of the market in 1996. Assigned risk plan
contracts generated approximately $456 million in combined premium equivalents
in 1996 for the Company.
The Company also services self-insurance groups, sells excess workers'
compensation coverage to these groups and markets various workers' compensation
specialty programs. Self-insurance groups and these specialty programs generated
combined net written premiums and premium equivalents of $89 million in 1996.
National Accounts also participates in various involuntary assigned risk pools,
which provide insurance coverage to individuals or other entities that otherwise
are unable to purchase such coverage in the voluntary market. Participation in
these pools in most states is generally in proportion to voluntary writings of
related lines of business in that state.
COMMERCIAL ACCOUNTS
The Company's Commercial Accounts sells a broad range of property and
casualty insurance products through a large network of independent agents and
brokers. Commercial Accounts targets businesses with 75 to 1,000 employees that
generate between $50,000 and $1 million in annual direct written premiums and
premium equivalents. The Company offers a full line of products to its
Commercial Accounts customers, with an emphasis on guaranteed cost products. The
Company also offers retrospectively rated or large deductible programs to these
customers. Based on combined net written premiums of $1.7 billion and combined
premium equivalents of $87 million, Commercial Accounts constituted
approximately 25% of the Commercial Lines business in 1996.
Commercial Accounts targets certain industries in which the Company has
claims, engineering and underwriting expertise and to which the Company has
established dedicated operations. Industry segments include from the
manufacturing sector: advanced technology, metal products, mineral products,
plastic and rubber products manufacturing and wood products. Also targeted are
colleges and universities, transportation, retail, financial, property
management and the wholesale industry. The Company continues to develop new
industry-
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targeted programs both on a national and local level. Specific industry
knowledge enables the Company to select, as customers, better managed companies
in an industry segment, to tailor specialized coverages for those companies, and
to link price to the individual exposure and to control risk. Instead of relying
on rating bureaus to establish rates for products, the Company generally uses
its proprietary data, which it has compiled from many years of data generated by
its extensive underwriting and pricing experience. Accordingly, subject to
applicable state insurance regulations, prices are derived from those
proprietary rates and numerous variables that apply to specific risks. The
Company believes that relying on extensive proprietary data to assess individual
risk characteristics, rather than relying on data from industry rating bureaus,
provides it with a competitive advantage in pricing and underwriting commercial
risks. The Company uses components of this approach specifically in connection
with loss control and claims management processing. Through a network of field
offices, the Company's marketing and underwriting specialists, who have point of
sale authority, work closely with local brokers and agents to tailor insurance
coverage to individual customer needs.
Construction. The Company has established dedicated operations that
exclusively target the construction industry, providing insurance and risk
management services for virtually all areas of construction, including general
contractors, heavy construction (including street and road) and special trade
contractors, except artisan or smaller trade contractors. The Company offers all
product lines to midsize and national customers in the construction market,
including both guaranteed cost and loss-responsive products, with general
liability, workers' compensation, commercial auto, commercial property and
inland marine coverages. The dedicated construction operations provide
specialized service and underwriting, with local market expertise and national
capability, that enable the Company to tailor specialized coverages, have
competitive pricing and control risk. This includes local underwriters who
understand their state's laws and claim climates, engineering and loss control
specialists, professional claim management and legal personnel with extensive
construction experience. Construction's products are distributed through
independent agents and brokers throughout the United States.
SELECT ACCOUNTS
Select Accounts serves individuals who have commercial exposures and firms
typically with one to 75 employees, typically generating up to $50,000 in annual
direct written premiums per account. Products offered to Select Accounts are
generally guaranteed cost policies, often a packaged product covering property
and liability exposures. Products are sold through independent agents, who are
often the same agents that sell the Company's Commercial Accounts and Personal
Lines products. Based on combined net written premiums of $1.4 billion, Select
Accounts constituted approximately 19% of the Commercial Lines business in 1996.
Personnel in the Company's field offices and other points of local
service, which are located throughout the United States, work closely with
agents to ensure a strong local presence in the marketplace. The Company
utilizes a marketing and underwriting approach
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based on agency automation and defined underwriting criteria. Agency automation
allows agents access to the Company's price quotation and policy issuance
systems and enables agents to provide faster and more cost-effective service to
customers with supervision and underwriting control. Agents that do not utilize
the automated quotation and policy issuance systems work with the Company's
sales and marketing representatives who have point of sale authority. Agents
serving Select Accounts are given greater control and discretion over
underwriting decisions, within predefined parameters, than brokers selling to
larger accounts. Because underwriting criteria and pricing tend to be more
standardized for smaller businesses, Select Accounts uses a standard industry
classification (S.I.C.) based process to allow agents and field marketing
representatives to make underwriting and pricing decisions within predetermined
classifications. Business in other classes is subject to consultative review by
in-house underwriters. The Company believes that its breadth of products, highly
qualified field staff and its technology offer distinct competitive advantages.
SPECIALTY ACCOUNTS
Specialty Accounts markets products to national, midsize and small
customers, as well as individuals, and distributes them through both wholesale
brokers and retail agents and brokers throughout the United States. The
Company's fast response time on underwriting decisions, industry expertise and
quality service are important to maintaining relationships with Specialty
Accounts insureds and producers. The Company believes that it has a competitive
advantage with respect to many of these products based on its reputation for
clear, timely decision-making, underwriting and industry expertise and strong
producer and customer relationships as well as its ability to cross-sell with
National Accounts, Commercial Accounts and Select Accounts. Based on combined
net written premiums of $679 million, Specialty Accounts constituted
approximately 9% of the Commercial Lines business in 1996.
The Company has three separate marketing and underwriting groups within
Specialty Accounts:
Travelers Specialty provides a broad range of products targeting risks
that do not fall within the underwriting guidelines of the other Commercial
Lines segments and that require highly specialized underwriting. The core
products include general liability for select product liability risks, umbrella
and excess liability, medical malpractice, various types of professional
liability, errors and omissions liability, primary and excess property, and
various coverages that target the transportation industry.
Gulf Specialty focuses on many non-traditional lines of business with a
particular emphasis on the financial services market. Products include
directors' and officers' liability insurance, errors and omissions coverage for
bankers, investment counselors and mutual fund advisors, and fidelity and surety
coverage for related classes. In addition, Gulf Specialty offers errors and
omissions coverage for professionals and non-professionals such as lawyers,
architects and engineers, insurance agents, podiatrists and chiropractors. Gulf
Specialty also writes umbrella coverage for various industries, provides
insurance products to the entertainment industry and to municipalities and
provides insurance products for other industry
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specific programs. In addition, Gulf Specialty has developed a book of excess
and surplus lines business through its non-admitted company.
Bond Specialty's range of products includes fidelity and surety bonds,
directors' and officers' and other professional liability insurance, fiduciary
liability insurance and other related coverages. The customer base ranges from
large financial services companies and commercial entities to small businesses
and individuals. Products and services are distributed primarily through agents
and brokers. Bond is organized around four broad customer segments: Financial
Services, Construction, National Risk (customers with more than $500 million in
revenues) and Commercial Risk (companies with less than $500 million in revenues
and individuals). Bond's agency agreement with Executive Risk Management
Associates ("ERMA"), a partnership owned by Executive Risk, Inc., was
restructured effective January 1, 1997. The restructured agreement replaces the
prior exclusive underwriter status of ERMA for directors' and officers'
liability insurance written by Aetna Casualty with a non-exclusive agreement.
PRICING AND UNDERWRITING
Pricing levels for property and casualty insurance products by the
Company's Commercial Lines are generally developed based upon the frequency and
severity of estimated losses, the expenses of producing business and
administering claims, and a reasonable allowance for profit. The Company's
strategy emphasizes a profit-oriented approach rather than a premium volume or
market share-oriented approach to underwriting. The Company's National Accounts
business, which sells primarily risk management services and loss sensitive
products, continues to be very competitive on price. Commercial Accounts and
Select Accounts primarily sell guaranteed cost products.
A significant portion of Commercial Lines business is written with
retrospectively rated insurance policies as well as large deductible policies in
which the ultimate cost of insurance for a given policy year is dependent on the
loss experience of the insured. Retrospectively rated policies are primarily
used in workers' compensation coverage. Although the payment terms and long-term
nature of the loss development reduces insurance risk, it introduces some
additional credit risk. Receivables from holders of retrospectively rated and
large deductible policies totaled approximately $755 million at December 31,
1996. Collateral, primarily letters of credit and, to a lesser extent, cash
collateral, is generally requested for contracts that provide for deferred
collection of ultimate premiums. The amount of collateral requested is
predicated upon the creditworthiness of the customer and the nature of the
insured risks. Commercial Lines continually monitors the credit exposure on
individual accounts and the adequacy of collateral.
Under certain workers' compensation insurance contracts with deductible
features, the Company is obligated to pay the claimant the full amount of the
claim. The Company is subsequently reimbursed by the contractholder for the
deductible amount, and is subject to credit risk until such reimbursement is
made. At December 31, 1996, contractholder receivables and payables were
approximately $1.8 billion.
10
<PAGE> 13
The Company has developed an underwriting methodology that incorporates
underwriting, claims, engineering, actuarial and product development disciplines
for particular industries. This approach is designed to maintain high quality
underwriting and pricing discipline. This approach utilizes proprietary data
gathered and analyzed by the Company with respect to its Commercial Lines
business over many years. The underwriters and engineers use this information to
assess and evaluate risks prior to quotation. This information provides
specialized knowledge about industry segments and catastrophe management and
helps analyze risk based on account characteristics and pricing parameters
designed to ensure that the Company does not compromise its underwriting
integrity. This process is linked with strong underwriting interaction and
review at the Company's and agents' locations.
The Company is also a member of and participates in the underwriting
operations of insurance and reinsurance pools and associations, several of which
make independent underwriting decisions on behalf of their members. These pools
insure specialized risks such as exposures related to the aviation and nuclear
power industries.
The Company continually reviews its exposure to catastrophic losses and
attempts to mitigate such exposure. See "Reinsurance." The Company uses
sophisticated computer modeling techniques to assess underwriting risks and
renewal of business in catastrophe-prone areas.
GEOGRAPHIC DISTRIBUTION
The following table shows the distribution of Commercial Lines' direct
written premiums for the states that accounted for the majority of combined
premium volume for the year ended December 31, 1996:
<TABLE>
<CAPTION>
STATE % OF TOTAL
----- ----------
<S> <C>
New York 13.5%
California 8.8
Texas 5.9
Massachusetts 5.9
Pennsylvania 4.5
Florida 4.5
New Jersey 4.1
Illinois 4.0
Connecticut 3.7
North Carolina 3.1
All Others (1) 42.0
------
TOTAL 100.0%
======
</TABLE>
- ---------------------
(1) No other single state accounted for 3.0% or more of the total combined
direct written premiums written in 1996 by the Company.
11
<PAGE> 14
PERSONAL LINES
The Company is the largest writer of personal lines insurance through
independent agents and the seventh largest writer of personal lines insurance
overall in the United States based on 1995 direct written premiums published by
A.M. Best, after giving effect to the Acquisition and recent industry
consolidation. In 1996, Personal Lines generated combined net written premiums
of approximately $2.7 billion. Personal Lines primarily offers personal
automobile and homeowners insurance.
Personal Lines distributes products primarily through approximately 5,000
independent agents located throughout the United States. The Company is also
pursuing a number of initiatives to broaden its distribution of Personal Lines
products, including targeted marketing to affinity groups, employee groups and
other sponsoring organizations and establishing co-marketing arrangements with
other insurers. In 1994, the Company began a pilot program to market personal
automobile and homeowners insurance through the independent agents of Primerica
Financial Services ("PFS"), a unit of Travelers Group. The product is sold under
the name Secure-SM-, and the program has expanded to reach 37 states. Over 6,300
PFS agents were licensed to sell Secure-SM- products by the end of 1996, and
approximately 5,000 new automobile and homeowners policies are now being sold
through this program each month.
SELECTED PRODUCT INFORMATION
The following table sets forth by product line net written premiums for
Personal Lines for the periods indicated. For a description of the product lines
referred to in the table below, see "-- Product Lines."
Because the Acquisition occurred on April 2, 1996, the Company's results
of operations for periods prior to April 2, 1996 do not include the results of
Aetna P&C. Accordingly, premium and other operational information provided for
the Company's combined businesses prior to such time is for informational
purposes only.
COMBINED NET WRITTEN PREMIUMS
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL NET
WRITTEN
PREMIUMS YEAR
YEAR ENDED DECEMBER 31, ENDED
-------------------------- DECEMBER 31,
1996 1995 1994 1996
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
NET WRITTEN PREMIUMS BY
PRODUCT LINE:
Personal automobile $1,851 $1,822 $1,969 69.2%
Homeowners and other 824 721 773 30.8
------ ------ ------ ------
Total Personal Lines $2,675 $2,543 $2,742 100.0%
====== ====== ====== ======
</TABLE>
12
<PAGE> 15
PRODUCT LINES
The Company writes virtually all types of property and casualty insurance
covering personal risks. Personal Lines had approximately 4.2 million policies
in force at December 31, 1996. The primary coverages in Personal Lines are
personal automobile and homeowners insurance sold to individuals.
PERSONAL AUTOMOBILE provides coverage for liability to others for both
bodily injury and property damage and for physical damage to an insured's own
vehicle from collision and various other perils. In addition, many states
require policies to provide first-party personal injury protection, frequently
referred to as no-fault coverage. For the year ended December 31, 1996, the
Company's personal automobile policies generated $1.9 billion of combined net
written premiums.
HOMEOWNERS AND OTHER provides protection against losses to dwellings and
contents from a wide variety of perils, as well as coverage for liability
arising from ownership or occupancy. The Company writes homeowners insurance for
dwellings, condominiums, mobile homes and rental property contents. Other
products include coverage for boats, personal articles such as jewelry, and
umbrella liability protection. For the year ended December 31, 1996, the
Company's homeowners and other policies generated $824 million of combined net
written premiums.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The Company's Personal Lines products are distributed primarily through
approximately 5,000 independent agents located throughout the United States,
supported by a network of 23 field marketing offices and five customer service
centers. The principal markets for Personal Lines insurance are in states along
the East Coast, in the South, and in the Midwest. In the states of Florida, New
Jersey and Massachusetts, the Company operates stand-alone domestic companies to
enhance its competitive capability in these highly regulated markets. Separate
business units within Personal Lines market to affinity groups and through the
sales force of PFS.
Insurance companies generally market personal automobile and homeowners
insurance through one of two distribution systems: independent agents or direct
writing. The independent agents that distribute the Company's Personal Lines
products usually represent several unrelated property and casualty companies. In
contrast, direct writing companies operate either by mail or through exclusive
agents or sales representatives. Due in part to the expense advantage that
direct writers may have relative to companies using independent agents, the
direct writing companies have gradually expanded their market share in recent
years.
The Company's Personal Lines continues to focus on the independent agency
distribution system, recognizing the service and underwriting advantages the
agent can deliver. In addition to its agency distribution system, the Company is
pursuing a number of initiatives
13
<PAGE> 16
to broaden its distribution of Personal Lines products, including targeted
marketing to affinity groups, employee groups and other sponsoring organizations
and establishing co-marketing arrangements with other insurers. In 1994, the
Company began writing personal automobile and homeowners insurance through the
independent agents of PFS, an affiliate of the Company, in order to broaden the
distribution of its Personal Lines products. This program is now available in 37
states. The PFS sales force primarily sells life insurance products issued by
affiliates of the Company, as well as mutual funds and other Travelers Group
products.
In 1995, Aetna P&C entered into a marketing agreement with GEICO to write
the majority of GEICO's homeowners business, and to receive referrals from GEICO
for new homeowners business. This agreement added historically profitable
business and helped geographically diversify the homeowners line of business.
New business referrals began in July 1995 and, on January 1, 1996, Personal
Lines began writing renewal policies. This marketing agreement provides for
limits on Personal Lines' obligation to write new and renewal business in
certain catastrophe-prone areas.
The Company believes that its focus on service, including prompt and
efficient claims handling, a high level of automation and development of
long-term relationships with individual agents gives it a competitive advantage
in the Personal Lines market. In addition, the Company is leveraging its
service, claims handling and automation experience in the expansion of its
distribution channels through its PFS and affinity marketing initiatives.
PRICING AND UNDERWRITING
Pricing for personal automobile insurance is driven by changes in the
relative frequency of claims and by inflation in the cost of automobile repairs,
medical care and litigation of liability claims. As a result, the profitability
of the business is largely dependent on promptly identifying and rectifying
disparities between premium levels and expected claim costs, and obtaining
approval of the state regulatory authorities for indicated rate increases.
Premiums charged for physical damage coverage reflect insured car values and,
accordingly, premium levels are somewhat related to the volume of new car sales.
Pricing in the homeowners business is also driven by changes in the
frequency of claims and by inflation in building supplies, labor costs and
household possessions. Most homeowners policies offer (but do not require)
automatic increases in coverage to reflect growth in replacement costs and
property values. In addition to the normal risks associated with any multiple
peril coverage, the profitability and pricing of homeowners insurance is
affected by the incidence of natural disasters, particularly hurricanes, winter
storms, earthquakes and tornadoes. The high level of catastrophe losses in
recent years has resulted in a reduced availability of homeowners insurance and
has led to higher prices for homeowners policies in some markets. In order to
reduce its exposure to catastrophe losses, the Company has limited the writing
of new homeowners business and selectively non-renewed existing homeowners
business in certain markets, tightened underwriting standards and implemented
price increases in certain hurricane-prone areas, subject to restrictions
imposed by insurance regulatory authorities. In California, the Company has
introduced an endorsement that reduces
14
<PAGE> 17
its exposure to catastrophic earthquake claims by increasing the deductible and
limiting other policy coverages in the event of an earthquake loss. The Company
uses computer modeling techniques to assess its level of exposure to loss in
catastrophe-prone areas. Changes to methods of marketing and underwriting in
coastal areas of Florida and New York and in California are subject to
state-imposed restrictions, the general effect of which is to make it more
difficult for an insurer to reduce exposures.
Insurers writing property-casualty policies are generally unable to
increase rates until some time after the costs associated with coverage have
increased, primarily as a result of state insurance rate regulation laws. The
pace at which an insurer can change rates in response to competition or to
increased costs depends, in part, on whether the applicable rate regulation law
requires prior approval of a rate increase or notification to the regulator
either before or after a rate increase is imposed. In states having prior
approval laws, a rate must be approved by the regulator before it may be used by
the insurer. In states having "file-and-use" laws, the insurer must file the
rate with the regulator, but does not need to wait for approval before using it.
A "use-and-file" law requires an insurer to file rates within a certain period
of time after the insurer begins using the new rate. Approximately one-half of
the states, including New York and Pennsylvania, require prior approval of rate
increases.
Underwriting of Personal Lines products is conducted primarily by
independent agents. Agents underwrite Personal Lines policies under strict
underwriting guidelines established and monitored by the Company. Each agent is
assigned to a specific employee of the Company or team of employees responsible
for working with the agent on business plan development, marketing, and overall
growth and profitability. The Company uses agency level management information
to analyze and understand results and to identify problems and opportunities.
GEOGRAPHIC DISTRIBUTION
The following table shows the distribution of Personal Lines' direct
written premiums for the states that accounted for the majority of combined
premium volume for the year ended December 31, 1996:
<TABLE>
<CAPTION>
STATE % OF TOTAL
- ----- ----------
<S> <C>
New York 23.2%
Pennsylvania 9.0
New Jersey 8.6
Florida 8.5
Texas 8.3
Massachusetts 6.9
Connecticut 6.1
Virginia 3.8
All others (1) 25.6
-----
TOTAL 100.0%
=====
</TABLE>
15
<PAGE> 18
- ---------------------
(1) No other single state accounted for 3.0% or more of the total combined
direct written premiums written in 1996 by the Company.
CLAIMS ADMINISTRATION
The Company employs approximately 8,900 claims employees located
throughout the United States. These employees include telephone and road
adjusters, appraisers, litigation specialists, staff attorneys, regional and
home office management and support staff. The Company handles over 90% of its
claims internally and employs external adjusters primarily where geographic
location makes it impractical to use the Company's own adjusters. The Company
has an investigative unit that handles claims that the Company suspects may be
fraudulent. The Company also employs a staff of lawyers who are responsible for
the management of the Company's claims litigation. The Company's claims handlers
include professionals with the technical expertise necessary to deal with more
complex coverage, liability and damage issues.
In its handling of claims, the Company strives to balance customer
expectations of service with its business objectives of effectively managing
loss exposure and controlling claims expense. In an effort to resolve claims
efficiently, the Company matches claims settlement authority to the ability of
its claims personnel and matches its in-house expertise with the issues involved
in the claim. The Company's workers' compensation claim adjudication process is
being re-engineered to encompass a higher level of nursing/medical intervention,
a more effective use of preferred provider networks to better manage medical and
lost-time claims, and a renewed emphasis on prompt and thorough investigations.
The Company's new Personal Lines claims workstation implemented in 1995
and workers' compensation claim workstation implemented in 1994 have improved
the speed and quality of both Personal Lines and Commercial Lines claims
service, and have helped loss payout performance. Use of technology such as VRUs
(voice response units) has lowered the cost of settling claims and shortened the
time to claim payment. The claim department also provides automated feedback
from claim handlers to underwriters to help with risk assessment and accurate
pricing information. Since the date of the Acquisition, significant progress has
been made in converting all of the Company's claims processing to this
technology. In Personal Lines, all new automobile and homeowners notices are now
entered into the Company's claims database through the new workstation which
provides access to data for both Aetna P&C and Travelers P&C sourced customers
through one professional claim workstation. In Commercial Lines workers'
compensation, all first reports of injury have been converted to the new
telephone reporting system and a conversion of all open claims to utilize the
new workstation is under way.
The home office claims department periodically conducts internal file
reviews of claims offices to monitor adherence to claims policies and
procedures, the adequacy of case reserves, claims loss control, claims expense
control, productivity and service standards. Regional claims management
periodically audits sample files of claims representatives as part of their
supervisory process.
16
<PAGE> 19
Environmental, asbestos and cumulative injury claims are segregated from
other claims and are handled separately by the Company's Special Liability
Group, a special unit staffed by dedicated legal, claim, finance and engineering
professionals. See "Environmental, Asbestos and Cumulative Injury Claims."
REINSURANCE
The Company reinsures a portion of the risks it underwrites in order to
control its exposure to losses, stabilize earnings and protect surplus. The
Company cedes to reinsurers a portion of these risks and pays premiums based
upon the risk and exposure of the policies subject to such reinsurance.
Reinsurance is subject to collectibility in all cases and to aggregate loss
limits. Although the reinsurer is liable to the Company to the extent of the
reinsurance ceded, the Company remains primarily liable as the direct insurer on
all risks reinsured. Reinsurance recoverables are reported after allowances for
uncollectible amounts. The Company also holds collateral, including escrow funds
and letters of credit, under certain reinsurance agreements. The Company
monitors the financial condition of reinsurers on an ongoing basis, and reviews
its reinsurance arrangements periodically. Reinsurers are selected based on
their financial condition, business practices and the price of their product
offerings. For additional information concerning reinsurance, see Note 5 of
Notes to Consolidated Financial Statements.
The Company utilizes a variety of reinsurance agreements to control its
exposure to large property and casualty losses. The Company utilizes the
following types of reinsurance: (i) facultative reinsurance, in which
reinsurance is provided for all or a portion of the insurance provided by a
single policy and each policy reinsured is separately negotiated; (ii) treaty
reinsurance, in which reinsurance is provided for a specified type or category
of risks; and (iii) catastrophe reinsurance, in which the ceding company is
indemnified for an amount of loss in excess of a specified retention with
respect to losses resulting from a catastrophic event.
The Company's top five reinsurers, except Lloyd's of London ("Lloyd's")
(which is not rated), are rated "A" or higher by A.M. Best. The ratings and
reinsurance recoverable at December 31, 1996 follow (in millions):
<TABLE>
<CAPTION>
REINSURANCE
REINSURER RECOVERABLE A.M. BEST RATING OF REINSURER
--------- ----------- -----------------------------
<S> <C> <C>
General Reinsurance Corporation $483 A++ highest of 15 ratings
American Re-Insurance Company 262 A+ 2nd highest of 15 ratings
Executive Risk Indemnity Inc. 193 A 3rd highest of 15 ratings
Employers Reinsurance Corporation 96 A++ highest of 15 ratings
NAC Reinsurance Corporation 75 A 3rd highest of 15 ratings
</TABLE>
As of December 31, 1996, the Company had ceded to Lloyd's and General
Reinsurance Corporation, two reinsurers with which the Company does the most
business, approximately $488 million and $483 million, respectively, of
insurance losses and loss adjustment expenses. In 1996, Lloyd's restructured its
operations with respect to claims for years prior to 1993.
17
<PAGE> 20
The Company is in arbitration with underwriters at Lloyd's in New York State to
enforce reinsurance contracts with respect to recoveries for certain asbestos
claims that constitute a portion of the total reinsurance recoverable referred
to above. The dispute involves the ability of the Company to aggregate asbestos
claims under a market agreement between Lloyd's and the Company or under the
applicable reinsurance treaties. See Item 3, "Legal Proceedings."
The outcome of the arbitration referred to above is uncertain and the
impact, if any, on collectibility of amounts recoverable by the Company from
Lloyd's cannot be quantified at this time. The Company believes that it is
possible that an unfavorable resolution of this matter could have a material
adverse effect on the Company's operating results in a future period. However,
the Company believes that it is not likely that the outcome could have a
material adverse effect on the Company's financial condition or liquidity.
The Company participates in pools with other insurers to provide capacity
for unique and high-valued risks such as exposures related to the aviation and
nuclear power industries. The Company's maximum net exposure to this type of
business at December 31, 1996 was $29 million per risk. For policies written on
or after January 1, 1997, the exposure was reduced to $15 million per risk.
At December 31, 1996, the Company had $9.7 billion in reinsurance
recoverables. Of this amount, $4.2 billion is for pools and associations which
relate primarily to workers' compensation service business and have the strength
of the participating insurance companies on a joint basis supporting these
cessions. Of the remaining $5.5 billion ceded to reinsurers at December 31,
1996, $497 million was environmental and asbestos-related and the remainder
principally reflects reinsurance in support of ongoing business. In addition, at
December 31, 1996, $465 million was collateralized by letters of credit against
the asset. The descriptions below relate to reinsurance arrangements of the
Company in effect at January 1, 1997.
Net Retention Policy. Currently, for third-party liability, including
automobile no-fault, the reinsurance agreements used by Commercial Accounts,
Select Accounts and Construction limit the net retention to a maximum of $4
million per insured, per occurrence. For Travelers Specialty, the reinsurance
agreements for third-party liability, including professional and healthcare
liability, limit the Company's net retention to a maximum of $4 million per
policy, per occurrence. Gulf Specialty utilizes various reinsurance mechanisms
and has limited its net retention to $4 million for any line of business. For
commercial property insurance, there is a $5 million maximum retention per
insured with 100% reinsurance coverage for risks with higher limits. The
reinsurance agreement in place for workers' compensation policies written by
Commercial Accounts, Select Accounts, Construction, Travelers Specialty and some
segments of Alternative Markets covers 100% of each loss between $2 million and
$10 million. For National Accounts, reinsurance arrangements are typically
tiered, or layered, such that only levels of risk acceptable to the Company are
retained. The reinsurance agreement in place for Personal Lines umbrella
policies covers 100% of each loss between $1 million and $5 million. The
reinsurance agreements in place for Personal Lines property policies covers 100%
of each loss between $1
18
<PAGE> 21
million and $6 million. For surety protection, Bond has reinsurance coverage for
95% of up to $50 million of liability in excess of $50 million of liability. In
addition, Bond's accident year results are protected by an aggregate excess of
loss treaty that provides 93.85% of approximately $52 million of reinsurance
coverage in excess of a $119 million retention.
Catastrophe Reinsurance. The Company utilizes reinsurance agreements with
nonaffiliated reinsurers to control its exposure to losses resulting from one
occurrence. For the accumulation of net property losses arising out of one
occurrence, reinsurance agreements cover 75% of total losses between $250
million and $650 million. For multiple workers' compensation losses arising from
a single occurrence, reinsurance agreements cover 100% of losses between $10
million and $250 million and, for workers' compensation losses caused by
property perils, reinsurance agreements cover 75% of losses between $250 million
and $650 million.
For commercial property insurance sold through Commercial Accounts, Select
Accounts, Construction and certain National Accounts, 10% of all losses are
reinsured in 1997, subject to an occurrence limitation of $275 million. For
Personal Lines homeowners insurance, in 1997, 25% of losses in states along the
East Coast are reinsured up to a maximum recovery of $180 million per
occurrence. The covered territory of this Homeowners Quota Share includes Maine,
New Hampshire, Massachusetts, Rhode Island, Connecticut, New York, New Jersey,
Delaware, Maryland, Virginia, North Carolina, South Carolina, Georgia, Florida
and Washington, D.C.
REINSURANCE FUND
The Company also participates in the Florida Hurricane Catastrophe Fund
("FHCF"), which is a state-mandated catastrophe reinsurance fund. FHCF is
primarily funded by premiums from insurance companies that write residential
property business in Florida and, if insufficient, assessments on insurance
companies that write other property and casualty insurance, excluding workers'
compensation. FHCF's resources are limited to these contributions and to its
borrowing capacity at the time of a significant catastrophe. There can be no
assurance that these resources will be sufficient to meet the obligations of
FHCF.
The Company's recovery of less than contracted amounts from FHCF could
have a material adverse effect on the Company's results of operations in the
event of a significant catastrophe in Florida.
RESERVES
Property and casualty claim reserves are established to account for the
estimated ultimate costs of claims and claim adjustment expenses for claims that
have been reported but not yet settled and claims that have been incurred but
not reported. The Company establishes reserves by line of business, coverage and
year.
19
<PAGE> 22
The process of estimating claim reserves is imprecise due to a number of
variables. These variables are affected by both internal and external events
such as changes in claims handling procedures, inflation, judicial trends and
legislative changes. Many of these items are not directly quantifiable,
particularly on a prospective basis. Additionally, there may be significant
reporting lags between the occurrence of the insured event and the time it is
actually reported to the insurer. The Company continually refines reserve
estimates in a regular ongoing process as experience develops and further claims
are reported and settled. The Company reflects adjustments to reserves in the
results of operations in the periods in which the estimates are changed. In
establishing reserves, the Company takes into account estimated recoveries for
reinsurance, salvage and subrogation.
The Company derives estimates for unreported claims and development on
reported claims principally from actuarial analyses of historical patterns of
claims development by accident year for each line of business and market
segment. Similarly, the Company derives estimates of unpaid claim adjustment
expenses principally from actuarial analyses of historical development patterns
of the relationship of claim adjustment expenses to losses for each line of
business and market segment. For a description of the Company's reserving
methods for environmental and asbestos claims, see "Environmental, Asbestos and
Cumulative Injury Claims."
Discounting. The liability for losses for certain long-term disability
payments under workers' compensation insurance and workers' compensation excess
insurance has been discounted using a maximum interest rate of 5%. At December
31, 1996, 1995 and 1994 the combined amounts of discount for the Company were
$1.012 billion, $1.206 billion and $1.120 billion, respectively.
For a reconciliation of beginning and ending property and casualty
insurance claims and claim adjustment expense reserves of the Company for each
of the last three years, see Note 6 of Notes to Consolidated Financial
Statements.
The following table sets forth the year-end reserves from 1986 through
1996 and the subsequent changes in those reserves, presented on a combined basis
for Travelers P&C and Aetna P&C. The data in the table are presented in
accordance with reporting requirements of the Securities and Exchange
Commission. Care must be taken to avoid misinterpretation by those unfamiliar
with such information or familiar with other data commonly reported by the
insurance industry. The following data is not accident year data, but rather a
display of 1986-1996 year-end reserves and the subsequent changes in those
reserves.
For instance, the "cumulative deficiency or redundancy" shown in the
following table for each year represents the aggregate amount by which original
estimates of reserves as of that year-end have changed in subsequent years.
Accordingly, the cumulative deficiency for a year relates only to reserves at
that year-end and such amounts are not additive. Expressed another way, if the
original reserves at the end of 1986 included $4 million for a loss that is
finally settled in 1996 for $5 million, the $1 million deficiency (the excess of
the actual
20
<PAGE> 23
settlement of $5 million over the original estimate of $4 million) would be
included in the cumulative deficiencies in each of the years 1986-1995 shown in
the following table.
Certain factors may distort the re-estimated reserves and cumulative
deficiency or redundancy shown in the following table. For example, a
substantial portion of the cumulative deficiencies in each of the years
1986-1996 arises from claims on policies written prior to the mid-1970s
involving liability exposures such as environmental, asbestos and cumulative
injury claims. In the post-1984 period, the Company has developed more stringent
underwriting standards and policy exclusions and has significantly contracted or
terminated the writing of such risks. See "Environmental, Asbestos and
Cumulative Injury Claims." General conditions and trends that have affected the
development of these liabilities in the past will not necessarily recur in the
future.
Other factors that affect the data in the following table include the
discounting of workers' compensation reserves and the use of retrospectively
rated insurance policies. To the extent permitted under applicable accounting
practices, workers' compensation reserves are discounted to reflect the time
value of money, due to the relatively long time period over which these claims
are to be paid. Apparent deficiencies will continue to occur as the discount on
these workers' compensation reserves is accreted at the appropriate interest
rates. Also, a significant portion of National Accounts business is underwritten
with retrospectively rated insurance policies in which the ultimate loss
experience is primarily borne by the insured. Increases in loss experience
result in an increase in reserves, and an offsetting increase in amounts
recoverable from insureds. These amounts recoverable mitigate the impact of the
cumulative deficiencies but are not reflected in the following table.
Retrospective rating is particularly significant for National Accounts business
for workers' compensation, and to a lesser extent in general liability and
commercial automobile coverages. This mechanism affords the Company a
significant financial protection against adverse development on a large block of
net reserves.
Because of these and other factors, it is difficult to develop meaningful
extrapolation of estimated future redundancies or deficiencies in loss reserves
from the data in the following table.
The differences between the reserves for claims and claim adjustment
expenses shown in the following table, which is prepared in accordance with
GAAP, and those reported in the annual statements of the Company filed with
state insurance departments, which are prepared in accordance with statutory
accounting practices, were: $14 million, $(7) million and $(26) million for the
years 1996, 1995 and 1994, respectively.
21
<PAGE> 24
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for claims and
claim adjustment
expenses originally
estimated: $14,076 $16,241 $17,851 $19,401 $20,182 $20,694 $21,454 $21,223 $21,272 $21,675 $21,816
Cumulative amounts
paid as of:
One year later 4,006 4,914 5,263 5,480 5,476 5,080 5,064 4,609 4,415 3,887
Two years later 6,963 8,152 8,553 8,949 9,020 8,639 8,363 7,812 7,190
Three years later 9,218 10,407 10,911 11,447 11,660 11,100 10,887 9,949
Four years later 10,779 12,036 12,643 13,390 13,450 13,097 12,586
Five years later 11,941 13,273 14,064 14,717 14,986 14,430
Six years later 12,868 14,370 15,051 15,964 16,058
Seven years later 13,745 15,129 16,031 16,815
Eight years later 14,373 15,963 16,751
Nine years later 15,117 16,598
Ten years later 15,683
Reserves
re-estimated as
of:
One year later 14,443 16,780 18,204 19,629 20,358 21,178 21,645 21,458 22,101 22,095
Two years later 15,173 17,268 18,589 19,908 21,087 21,704 22,087 22,567 22,522
Three years later 15,738 17,696 19,056 20,676 21,820 22,397 23,303 23,031
Four years later 16,278 18,210 19,795 21,459 22,728 23,731 24,004
Five years later 16,755 18,967 20,595 22,501 24,133 24,547
Six years later 17,501 19,737 21,641 23,964 24,960
Seven years later 18,312 20,788 23,069 24,790
Eight years later 19,328 22,206 23,865
Nine years later 20,770 22,946
Ten years later 21,388
Cumulative deficiency 7,312 6,705 6,014 5,389 4,778 3,853 2,550 1,808 1,250 420
Gross
liability--end of
year $31,167 $30,969
Reinsurance and
deductible
recoverables 9,492 9,153
----------------
Net
liability--end of year $21,675 $21,816
================
Gross reestimated
liability--latest $31,166
Reestimated
reinsurance and
deductible
recoverables--latest 9,071
-------
Net reestimated
liability--latest $22,095
=======
Gross cumulative
deficiency
(redundancy) $ (1)
=======
</TABLE>
STATUTORY COMBINED RATIO INFORMATION
The following table sets forth the statutory loss and LAE ratios,
underwriting expense ratios and combined ratios for the periods indicated for
the Company.
The statutory combined ratio is an industry measurement of the results of
property and casualty insurance underwriting. This ratio is the sum of the ratio
of incurred losses and loss adjustment expenses to net premiums earned (the
"loss and LAE ratio"), the ratio of underwriting expenses incurred to net
premiums written (the "underwriting expense ratio") and, where applicable, the
ratio of dividends to policyholders to net premiums earned. A combined ratio
under 100% generally indicates an underwriting profit; a combined ratio over
100% generally indicates an underwriting loss. However, investment income,
federal income taxes and other non-underwriting income (e.g., service fee
income) or expenses are not reflected in the combined ratio. The profitability
of property and casualty insurance companies depends on income from
underwriting, investment and service operations. Lines of
22
<PAGE> 25
business where claims are paid out over a longer period of time, such as
workers' compensation, also provide investment income over a longer period of
time and therefore can be profitable at higher combined ratios than lines where
claims are paid out over a shorter period. Insurers with a high proportion of
long-tail policies will generally have higher combined ratios than insurers with
more short-tail business.
The ratios shown in the table below are computed based upon statutory
accounting practices, not GAAP. For information on GAAP combined ratios, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
STATUTORY COMBINED RATIOS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Commercial Lines:
Loss and LAE ratio 96.2% 80.6% 104.2%
Underwriting expense ratio 32.7 24.4 24.0
Combined ratio before
policyholder dividends 128.9 (1) 105.0 128.2 (2)
Combined ratio 129.6 106.3 126.2
Personal Lines:
Loss and LAE ratio 68.7 74.5 71.0
Underwriting expense ratio 28.9 29.9 29.4
Combined ratio 97.6 (3) 104.4 100.4
Total:
Loss and LAE ratio 85.5 78.2 90.2
Underwriting expense ratio 31.3 26.4 26.2
Combined ratio before
policyholder dividends 116.8 104.6 116.4
Combined ratio 117.2 105.4 115.3
</TABLE>
- ---------------------
(1) Includes the effect of charges associated with the Acquisition and also
includes statutory charges made to conform accounting policies and Company
strategies in connection with the Acquisition (but not for GAAP reporting
purposes due to purchase accounting). The combined ratio excluding such
charges was 110.0%.
(2) Includes statutory reserve increases for environmental claims and a
reduction of ceded reinsurance balances amounting to $225 million by the
Company. The combined ratio excluding this item was 114.2%.
(3) Includes the effect of the Company's review of reserves associated with the
Acquisition. The combined ratio excluding this item was 100.1%.
ENVIRONMENTAL, ASBESTOS AND CUMULATIVE INJURY CLAIMS
Environmental, asbestos and cumulative injury claims are segregated from
other claims and are handled separately by the Company's Special Liability
Group, a special unit staffed by dedicated legal, claim, finance and engineering
professionals.
23
<PAGE> 26
ENVIRONMENTAL CLAIMS
As a result of various state and federal regulatory efforts aimed at
environmental remediation, the insurance industry has been, and continues to be,
involved in extensive litigation involving policy coverage and liability issues.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") was first enacted in 1980, and significantly expanded in 1984. CERCLA
enables private parties and the federal and state governments to take action
with respect to releases and threatened releases of hazardous substances and to
recover their response costs from certain liable parties or such parties may be
ordered to undertake remedial action directly. Liability under CERCLA may be
joint and several with other responsible persons. In addition to the regulatory
pressures, the Company believes that certain court decisions have expanded
insurance coverage beyond the original intent of the insurers and insureds,
frequently involving policies that were issued prior to the mid-1970s. The
results of court decisions affecting the industry's coverage positions continue
to be inconsistent. Accordingly, the ultimate responsibility and liability for
environmental remediation costs remain uncertain.
The Company continues to receive claims alleging liability exposures
arising out of insureds' alleged disposition of toxic substances. These claims
when submitted rarely indicate the monetary amount being sought by the claimant
from the insured and the Company does not keep track of the monetary amount
being sought in those few claims which indicated such a monetary amount. The
Company's review and investigation of environmental claims includes an
assessment of the probable liability, available coverage, judicial
interpretations and historical value of similar claims. In addition, the unique
facts presented in each claim are evaluated individually and collectively. Due
consideration is given to the many variables presented in each claim, such as:
the nature of the alleged activities of the insured at each site; the
allegations of environmental damage at each site; the number of sites; the total
number of potentially responsible parties at each site; the nature of
environmental harm and the corresponding remedy at a site; the nature of
government enforcement activities at each site; the ownership and general use of
each site; the overall nature of the insurance relationship between the Company
and the insured; the identification of other insurers; the potential coverage
available, if any; the number of years of coverage, if any; the obligation to
provide a defense to insureds, if any; and the applicable law in each
jurisdiction.
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. Environmental loss and loss expense
reserves of the Company at December 31, 1996 were $1.242 billion, net of
reinsurance of $127 million. Approximately 12% of such loss and loss expense
reserves (i.e., approximately $146 million) were case reserves for resolved
claims. The balance, approximately 88% of the net aggregate reserve (i.e.,
approximately $1.096 billion), is carried in a bulk reserve and
24
<PAGE> 27
includes incurred but not yet reported environmental claims for which the
Company has not received any specific claims.
The duration of the Company's investigation and review of such claims and
the extent of time necessary to determine an appropriate estimate, if any, of
the value of the claim to the Company, varies significantly and is dependent
upon a number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and the
Company to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, the Company cannot provide a meaningful average of the
duration of an environmental claim. However, based upon the Company's experience
in resolving such claims, the duration may vary from months to several years.
The property and casualty insurance industry does not have a standard
method of calculating claim activity for environmental losses. Generally for
environmental claims, Travelers P&C establishes a claim file for each insured on
a per site, per claimant basis. If there is more than one claimant such as a
federal and a state agency, this method will result in two claims being set up
for a policyholder at that one site. Similarly, if one hundred claimants file a
lawsuit against ten policyholders alleging injury as a result of the discharge
of wastes or pollutants, one thousand claims would be established. Travelers P&C
adheres to this method of calculating claim activity on all
environmental-related claims, whether such claims are tendered on primary,
excess or umbrella policies.
As of December 31, 1996, Travelers P&C had approximately 30,800 pending
environmental-related claims tendered by 664 active policyholders. The pending
environmental-related claims represent federal or state EPA-type claims as well
as plaintiffs' claims alleging bodily injury and property damage due to the
discharge of waste or pollutants. In 1996, the pending inventory increased by
approximately 20,000 claims as a result of several lawsuits being filed in the
states of Louisiana and Texas. These lawsuits, filed against one or more
policyholders of Travelers P&C, allege that the plaintiffs were injured or
damaged as a result of either alleged waste disposal or the alleged release of
deleterious substances from ongoing business operations which have taken place
near the plaintiffs' residences. Claims of this nature have historically been
considered in the level of TAP's environmental reserves. To date, Travelers P&C
has resolved environmental-related claims on behalf of 1,628 policyholders.
The Company is preparing a claims system conversion which when completed
will apply Travelers P&C's method of establishing claim files to Aetna P&C's
environmental-related claims. The Company anticipates that this process should
be completed in 1997. As of December 31, 1996, Aetna P&C had pending
environmental-related claims tendered by approximately 948 active policyholders.
Approximately 129 of these 948 active policyholders are also included in the 664
active Travelers P&C policyholders. Aetna P&C's policyholders, like those of
Travelers P&C, have tendered both EPA-type claims and individual claims
25
<PAGE> 28
alleging injury or damage as a result of the discharge of wastes or pollutants.
To date, Aetna P&C has resolved environmental-related claims on behalf of 1,870
policyholders.
To date, the Company generally has been successful in resolving its
coverage litigation and continues to reduce its potential exposure through
favorable settlements with certain insureds. These settlement agreements with
certain insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds. In addition,
with respect to settlement of many of the environmental claims, the agreement
between the Company and the insured extinguishes any obligation the Company may
have under any policy issued to the insured for future environmental liabilities
risks. This form of settlement is commonly referred to as a "buy-back" of
policies for future environmental liability risks. Additional provisions of
these agreements include the appropriate indemnities and hold harmless
provisions to protect the Company. The Company's general purpose in executing
such agreements is to reduce its potential environmental exposure and eliminate
both the risks presented by coverage litigation with the insured and the cost of
such litigation.
ASBESTOS CLAIMS
In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. The Company continues to receive
asbestos claims alleging insureds' liability from claimants' asbestos-related
injuries. These claims, when submitted, rarely indicate the monetary amount
being sought by the claimant from the insured and the Company does not keep
track of the monetary amount being sought in those few claims which indicated
such a monetary amount. Originally the cases involved mainly plant workers and
traditional asbestos manufacturers and distributors. However, in the mid-1980s,
a new group of plaintiffs, whose exposure to asbestos was less direct and whose
injuries were often speculative, began to file lawsuits in increasing numbers
against the traditional defendants as well as peripheral defendants who had
produced products that may have contained small amounts of some form of
encapsulated asbestos. These claims continue to arise and on an individual basis
generally involve smaller companies with smaller limits of potential coverage.
Also, there has emerged a group of non-product claims by plaintiffs,
mostly independent labor union workers, mainly against companies, alleging
exposure to asbestos while working at these companies' premises. In addition,
various insurers, including the Company, remain defendants in an action brought
in Philadelphia regarding potential consolidation and resolution of future
asbestos bodily injury claims.
In summary, various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as premises
owners, are tendering asbestos-related claims to the industry. Because each
insured presents different
26
<PAGE> 29
liability and coverage issues, the Company evaluates those issues on an
insured-by-insured basis.
The Company's evaluations have not resulted in any meaningful data from
which an average asbestos defense or indemnity payment may be determined. The
varying defense and indemnity payments made by the Company on behalf of its
insureds have also precluded the Company from deriving any meaningful data by
which it can predict whether its defense and indemnity payments for asbestos
claims (on average or in the aggregate) will remain the same or change in the
future. Based upon the Company's experience with asbestos claims, the duration
period of an asbestos claim from the date of submission to resolution is
approximately two years.
At December 31, 1996, asbestos claims reserves of the Company were $1.073
billion, net of reinsurance of $370 million. Approximately 25% of the net
aggregate reserve (i.e., approximately $263 million) is for pending asbestos
claims. The balance, approximately 75% (i.e., approximately $810 million), of
the net asbestos reserves represents incurred but not yet reported losses for
which the Company has not received any specific claims.
UNCERTAINTY REGARDING ADEQUACY OF ENVIRONMENTAL AND ASBESTOS RESERVES
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are not
used to estimate such reserves.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance, and applicable coverage defenses, if any. Once the gross ultimate
exposure for indemnity and allocated claim adjustment expense is determined for
a policyholder by policy year, a ceded projection is calculated based on any
applicable facultative and treaty reinsurance. In addition, a similar review is
conducted for asbestos property damage claims. However, due to the relatively
minor claim volume, these reserves have remained at a constant level.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1996 are the Company's best
estimate of ultimate claims
27
<PAGE> 30
and claim adjustment expenses based upon known facts and current law. However,
the environment surrounding the final resolution of these claims continues to
change. Currently, it is not possible to predict changes in the legal and
legislative environment and their impact on the future development of asbestos
and environmental claims. Such development will be affected by future court
decisions and interpretations and changes in Superfund and other legislation.
Because of these future unknowns, additional liabilities may arise for amounts
in excess of the current reserves. These additional amounts, or a range of these
additional amounts, cannot now be reasonably estimated, and could result in a
liability exceeding reserves by an amount that would be material to the
Company's operating results in a future period. However, the Company believes
that it is not likely that these claims will have a material adverse effect on
the Company's financial condition or liquidity.
CUMULATIVE INJURY OTHER THAN ASBESTOS
Cumulative injury other than asbestos ("CIOTA") claims are generally
submitted to the Company under general liability policies and often involve an
allegation by a claimant against an insured that the claimant has suffered
injuries as a result of long-term or continuous exposure to potentially harmful
products or substances. Such potentially harmful products or substances include,
but are not limited to, lead paint, pesticides, pharmaceutical products,
silicone-based personal products, solvents and other deleterious substances.
Due to claimants' allegations of long-term bodily injury in CIOTA claims,
numerous complex issues regarding such claims are presented. The claimants'
theories of liability must be evaluated, evidence pertaining to a causal link
between injury and exposure to a substance must be reviewed, the potential role
of other causes of injury must be analyzed, the liability of other defendants
must be explored, and assessment of a claimant's damages must be made and the
law of the jurisdiction must be applied. In addition, the Company must review
the number of policies issued by the Company to the insured and whether such
policies are triggered by the allegations, the terms and limits of liability of
such policies, the obligations of other insurers to respond to the claim, and
the applicable law in each jurisdiction.
To the extent disputes exist between the Company and a policyholder
regarding the coverage available for CIOTA claims, the Company resolves the
disputes, where feasible, through settlements with the policyholder or through
coverage litigation. Generally, the terms of a settlement agreement set forth
the nature of the Company's participation in resolving CIOTA claims, the scope
of coverage to be provided by the Company and contain the appropriate
indemnities and hold harmless provisions to protect the Company. These
settlements generally eliminate uncertainties for the Company regarding the
risks extinguished, including the risk that losses would be greater than
anticipated due to evolving theories of tort liability or unfavorable coverage
determinations. The Company's approach also has the effect of determining losses
at a date earlier than would have occurred in the absence of such settlement
agreements. On the other hand, in cases where future developments are favorable
to insurers, this approach could have the effect of resolving claims for amounts
in excess of those that would ultimately have been paid had the claims not been
settled in this manner. No
28
<PAGE> 31
inference should be drawn that because of the Company's method of dealing with
CIOTA claims, its reserves for such claims are more conservatively stated than
those of other insurers.
Aetna P&C did not distinguish CIOTA from other general liability claims or
treat CIOTA claims as a special class of claims. In addition, there were
substantial differences in claim approach and resolution between the Company and
Aetna P&C regarding CIOTA claims.
During the second quarter, the Company completed its review of Aetna P&C's
exposure to CIOTA claims in order to determine an appropriate level of reserves
using the Company's approach as described above. Based on the results of that
review, the Company's general liability insurance reserves were increased $360
million, net of reinsurance ($234 million after tax).
At December 31, 1996, CIOTA claims reserves of the Company were $1.114
billion, net of reinsurance of $446 million. Approximately 19% of the net
aggregate reserve (i.e., approximately $215 million) is for pending CIOTA
claims. The balance, approximately 81% (i.e., approximately $899 million), of
the net CIOTA reserves represents incurred but not yet reported losses for which
the Company has not received any specific claims.
INSURANCE POOLS
Most of the Company's insurance subsidiaries are members of one of three
separate intercompany property and casualty reinsurance pooling arrangements:
the Travelers Indemnity pool, the Aetna Insurance pool and the Gulf pool. Each
of these insurance pools permits the participating companies to rely on the
capacity of the entire pool rather than on its own capital and surplus. Under
the arrangements of each insurance pool, the members share substantially all
insurance business that is written and prorate the combined premiums, losses and
expenses.
RATINGS
Insurance companies are rated by rating agencies to provide both industry
participants and insurance consumers with meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and a
strong ability to pay claims. These ratings are based upon factors relevant to
policyholders and are not directed toward protection of investors. Such ratings
are neither a rating of securities nor a recommendation to buy, hold or sell any
security and may be revised or withdrawn at any time. Ratings focus primarily on
the following factors: capital resources, financial strength, demonstrated
management expertise in the insurance business, credit analysis, systems
development, market segment position and growth opportunities, marketing, sales
conduct practices, investment operations, minimum policyholders' surplus
requirements and capital sufficiency to meet projected growth, as well as access
to such traditional capital as may be necessary to continue to meet standards
for capital adequacy.
29
<PAGE> 32
The following table summarizes the current claims-paying and financial
strength ratings of the Company's property-casualty insurance pools and Aetna
Casualty and Surety Company of America ("Aetna C&S of America") by A. M. Best,
Duff & Phelps Corp. ("Duff & Phelps"), Moody's Investor's Service Inc.
("Moody's") and Standard & Poor's Ratings Group ("Standard & Poor's"). The table
also presents the position of each rating in the applicable agency's rating
scale.
<TABLE>
<CAPTION>
STANDARD &
A.M. BEST DUFF & PHELPS MOODY'S POOR'S
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Travelers Indemnity pool(1) A (3rd of 15) AA- (4th of 18) A1 (5th of 19) A+ (5th of 18)
Aetna Insurance pool (2) A- (4th of 15) A+ (5th of 18) A1 (5th of 19) A+ (5th of 18)
Gulf pool (3) A+ (2nd of 15) -- -- AA (3rd of 18)
Aetna C&S of America A (3rd of 15) A+ (5th of 18) A1 (5th of 19) A+ (5th of 18)
</TABLE>
- -------------------
(1)The Travelers Indemnity pool consists of Travelers Indemnity, The Phoenix
Insurance Company, The Charter Oak Fire Insurance Company, The Travelers
Indemnity Company of Connecticut, The Travelers Indemnity Company of America,
The Travelers Indemnity Company of Missouri, The Travelers Indemnity Company
of Illinois, TravCo Insurance Company and The Travelers Home and Marine
Insurance Company.
(2)The Aetna Insurance pool consists of Aetna Casualty, Standard Fire, Aetna
Casualty & Surety Company of Illinois, The Farmington Casualty Company, The
Automobile Insurance Company of Hartford, Connecticut, Aetna Casualty Company
of Connecticut, Aetna Commercial Insurance Company, Aetna Insurance Company,
Aetna Insurance Company of Illinois and Aetna Personal Security Insurance
Company.
(3)The Gulf pool consists of Gulf Insurance Company, Gulf Underwriters
Insurance Company, Select Insurance Company, Atlantic Insurance Company and
Gulf Group Lloyds.
INVESTMENTS
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities, real
estate mortgages and real estate.
The Company's investment policies are determined by its Board of Directors
and are reviewed on a regular basis. At December 31, 1996, the carrying value of
the Company's investment portfolio was $29.4 billion, of which 91.1% was
invested in fixed maturity investments and short-term investments, 4.0% in
mortgage loans and real estate held for sale, 2.6% in common stocks and other
equity securities and 2.3% in other investments. The average duration of the
fixed maturity portfolio, including short-term investments, was 5.3 years at
such date. Non-investment grade securities totaled $599 million, representing
approximately 2.4% of the Company's fixed maturity investment portfolio as of
December 31, 1996.
For additional information regarding these investment portfolios, see Note
4 of Notes to Consolidated Financial Statements, the discussion of Investment
Portfolio in Item 7 of this Form 10-K and Note 3 of Notes to the 1995 Combined
Financial Statements of Aetna P&C.
30
<PAGE> 33
The following table sets forth information regarding the investments of
the Company. It reflects the average amount of investments, net investment
income earned and the yield thereon for the years ended December 31, 1996, 1995
and 1994. The table includes information on the investments of Aetna P&C for
periods prior to April 2, 1996 (the date of the Acquisition). See Note 4 of
Notes to Consolidated Financial Statements and Note 3 of Notes to the 1995
Combined Financial Statements of Aetna P&C for information regarding the
investment portfolio of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in millions)
<S> <C> <C> <C>
Average investments $28,018.7 $24,824.9 $24,068.0
Net investment income $ 1,898.6 $ 1,611.8 $ 1,397.3
Average yield (1) 7.2% 6.4% 6.0%
Average tax equivalent yield (1) 7.7% 6.9% 6.5%
Average tax equivalent yield
excluding real estate (1) 7.6% 6.8% 6.3%
</TABLE>
- ---------
(1) Excluding realized and unrealized capital gains and losses.
MORTGAGE LOANS AND REAL ESTATE HELD FOR SALE
At December 31, 1996, the mortgage loan and real estate held for sale
portfolios of the Company consisted of approximately $1.0 billion and $157
million, respectively. The 1996 increase in mortgage loans and real estate held
for sale is primarily attributable to the Acquisition.
Management evaluates the real estate portfolio on an ongoing basis,
assessing the probabilities of loss with respect to a comprehensive series of
projections, including a host of variables relating to the borrower, the
property, the term of the loan, the tenant composition, rental rates, other
supply and demand factors, and overall economic conditions.
The following table summarizes by property type the mortgage loan
portfolio and real estate held for sale included in the investment portfolio of
the Company as of December 31, 1996, 1995 and 1994. For informational purposes
only, the table includes the investments of Aetna P&C for all periods presented.
31
<PAGE> 34
<TABLE>
<CAPTION>
---------------------------- ---------------------------
MORTGAGE LOANS REAL ESTATE
---------------------------- ---------------------------
(Dollars in millions)
1996 1995 1994 1996 1995 1994
-------- -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Property Type:
Commercial:
Office $ 503.4 $ 591.0 $ 764.2 $ 69.2 $ 139.7 $ 133.1
Apartment 181.6 243.3 269.1 7.7 4.8 19.8
Hotel 26.6 74.4 147.0 35.8 56.8 46.3
Retail 210.8 285.4 415.8 19.6 20.2 24.4
Industrial 47.8 51.9 55.6 21.9 22.6 22.2
Other 26.0 52.1 62.7 0.6 41.5 38.5
-------- -------- -------- ------ ------ ------
Total commercial 996.2 1,298.1 1,714.4 154.8 285.3 284.3
Agriculture 9.4 20.8 26.3 1.9 2.2 7.4
Residential - - 7.3 - - 0.2
Less: valuation
reserve (1) - (44.4) (58.5) - - -
-------- -------- -------- ------ ------ ------
Total $1,005.6 $1,274.5 $1,689.5 $156.7 $287.5 $291.9
======== ======== ======== ====== ====== ======
</TABLE>
- ---------------------
(1) In 1996, reflects purchase accounting adjustments related to the
Acquisition.
For additional information regarding the mortgage loan and real estate
held for sale portfolios of the Company, see Note 4 of Notes to Consolidated
Financial Statements and Notes 3 and 15 of Notes to the 1995 Combined Financial
Statements of Aetna P&C. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay loans with or without
prepayment penalties. The Company's combined unscheduled payments and sales of
mortgage loans were $163 million in 1996 and $227 million in 1995. The average
remaining life of the mortgage portfolio is five years.
DERIVATIVES
See Note 12 of Notes to Consolidated Financial Statements for a discussion
of the policies and transactions related to derivatives of the Company.
COMPETITION
The property and casualty insurance industry is highly competitive in the
areas of price, service, product offerings, agent relationships and, in the case
of personal property and casualty business, method of distribution (i.e., use of
independent agents, captive agents and/or salaried employees). There are
approximately 3,400 property-casualty insurance companies in the United States.
Of those companies, approximately 800 operate in all or most states and write
the vast majority of the business in the industry while approximately 2,600
offer one or more personal or commercial lines property-casualty products
similar to those marketed by the Company. In addition, an increasing amount of
commercial risks are covered
32
<PAGE> 35
by purchaser self-insurance, large deductibles, risk-purchasing groups,
risk-retention groups and captive companies.
COMMERCIAL LINES. The insurance industry is represented in the commercial
lines marketplace by many insurance companies of varying size. The industry is
comprised of small local firms, large regional firms and large national firms,
as well as self-insurance programs or captive insurers. Market competition works
to set the price charged for insurance products and the level of service
provided within the insurance regulatory framework. Growth is driven by a
company's ability to provide insurance and services at a price that is
reasonable and acceptable to the customer. In addition, the marketplace is
affected by available capacity of the insurance industry as measured by
policyholders' surplus. Surplus expands and contracts primarily in conjunction
with profit levels generated by the industry. Growth in premium and service
business is also measured by a company's ability to retain existing customers
and to attract new customers.
The National Accounts market is highly competitive. Competition is based
primarily on quality and service and, to a lesser extent, on the basis of price.
National Accounts business is generally written through national brokers and
regional agents. The Company also competes for state contracts to provide claims
and policy management services. These contracts, which generally have three-year
terms, are selected by state agencies through a bid process based on quality of
service and price. The Company has emerged as the largest assigned risk plan
service insurer in the industry with approximately 28% of the market in 1996.
The Commercial Accounts market is highly competitive. Commercial Accounts
business has historically been written through independent agents and brokers,
although some companies use direct writing. Competitors in this market are
primarily national property-casualty insurance companies willing to write most
classes of business using traditional products and pricing and, to a lesser
extent, regional insurance companies and companies that have developed niche
programs for specific industry segments. Companies compete on price, product
offerings, response time in policy issuance and claim and loss prevention
services. Additionally, reduced overhead and improved efficiency through
automation and response time to customer needs are key to success in this
market.
The Construction market has become a focused industry segment for several
large insurance companies. Construction market business is written through
agents and brokers. Insurance companies compete in this market based upon price,
product offering and claims service. The Company utilizes its specialized
underwriters and engineers who have extensive experience and knowledge of the
construction industry to work with agents and brokers to compete effectively in
this market.
The Select Accounts market is highly competitive and is typically written
through independent agents and, to a lesser extent, regional brokers. Both
national and regional property-casualty insurance companies compete in the
Select Accounts market which is generally comprised of low risk, "main street"
business customers. Risks are underwritten
33
<PAGE> 36
and priced using standard industry practices and a combination of proprietary
and standard industry product offerings. Competition in this market is primarily
based on price, product offerings and response time in policy services. The
Company has established a strong marketing relationship with its distribution
network and has provided it with defined underwriting policies, competitive
prices and efficient automated environments.
The market in which Specialty Accounts competes includes small to
mid-sized niche companies that target certain lines of insurance and larger,
multi-line companies that focus on various segments of the Specialty Accounts
market. Specialty Accounts business is generally written through wholesale
brokers and retail agents and brokers throughout the United States. Gulf
Specialty derives a competitive advantage through its underwriting practices,
low expense levels and broad product offering base. Bond Specialty's reputation
for clear, timely decision-making, underwriting and industry expertise and
strong producer and customer relationships as well as its ability to offer its
customers a full range of financial services products, enable it to compete
effectively. Its ability to cross-sell Bond products to customers of National
Accounts, Commercial Accounts, Select Accounts and through other Travelers Group
units provides further competitive advantages for the Company.
PERSONAL LINES. Personal lines insurance is written by hundreds of
insurance companies of varying sizes. Although national companies write the
majority of the business, the Company also faces competition from local or
regional companies which often have a competitive advantage because of their
expense structure or because they specialize in providing coverage to particular
risk groups. The Company believes that the principal competitive factors are
price, service, perceived stability of the insurer and name recognition. The
Company also competes for business within each of the independent agencies
representing it, because these agencies also offer policies of competing
independent agency companies. At the agency level, the Company believes that
competition is primarily based on the level of service, including claims
handling, level of automation and the development of long-term relationships
with the individual agents. The Company also competes with insurance companies
that use captive agents or salaried employees to sell their products. Because
these companies generally pay lower commissions than independent agency
companies, they may be able to generate business at a lower cost than the
Company. Due to this expense advantage, the direct writing companies have
gradually expanded their market share in recent years. However, in addition to
its traditional independent agency distribution, Personal Lines is pursuing a
number of initiatives to broaden its distribution of Personal Lines products,
including marketing through the PFS sales force, marketing to affinity groups
and establishing co-marketing arrangements with other insurers.
REGULATION
STATE REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision in the various states and jurisdictions in which they transact
business. The extent of regulation varies but generally has its source in
statutes that delegate regulatory, supervisory and administrative
34
<PAGE> 37
authority to a department of insurance of each state. The regulation,
supervision and administration relate, among other things, to the standards of
solvency that must be met and maintained, the licensing of insurers and their
agents, the nature of and limitations on investments, premium rates,
restrictions on the size of risks that may be insured under a single policy,
reserves and provisions for unearned premiums, losses and other obligations,
deposits of securities for the benefit of policyholders, approval of policy
forms and the regulation of market conduct including underwriting and claims
practices. In addition, many states have enacted variations of competitive
rate-making laws which allow insurers to set certain premium rates for certain
classes of insurance without having to obtain the prior approval of the state
insurance department. State insurance departments also conduct periodic
examinations of the affairs of insurance companies and require the filing of
annual and other reports relating to the financial condition of companies and
other matters.
At the present time, the Company's insurance subsidiaries are collectively
licensed to transact insurance business in all states, the District of Columbia,
Guam, Puerto Rico, and the U.S. Virgin Islands, as well as Canada and the United
Kingdom.
Although the Company is not regulated as an insurance company, it is the
owner of the capital stock of its insurance subsidiaries and as such is subject
to state insurance holding company statutes, as well as certain other laws, of
each of the states of domicile of its insurance subsidiaries. All holding
company statutes, as well as certain other laws, require disclosure and, in some
instances, prior approval of material transactions between an insurance company
and an affiliate. The holding company statutes, as well as certain other laws,
also require, among other things, prior approval of an acquisition of control of
a domestic insurer and the payment of extraordinary dividends or distributions.
The Company's insurance subsidiaries are subject to various state
statutory and regulatory restrictions in each company's state of domicile, which
limit the amount of dividends or distributions by an insurance company to its
stockholders. As a holding company whose principal assets are the capital stock
of Travelers Indemnity, Aetna Casualty and Standard Fire, the Company relies
primarily on dividends from these subsidiaries to meet its obligations for
payment of interest and principal on outstanding debt obligations, dividends to
stockholders and corporate expenses. The ability of these subsidiaries to pay
dividends to the Company in the future will depend on their statutory surplus,
future earnings and regulatory restrictions. Dividend payments to the Company
from its insurance subsidiaries are limited to $647 million in 1997 without
prior approval of the Connecticut Insurance Department.
The Company's principal insurance subsidiaries are domiciled in the State
of Connecticut. The insurance holding company law of Connecticut requires notice
to, and approval by, the state insurance commissioner for the declaration or
payment of any dividend, which together with other distributions made within the
preceding twelve months, exceeds the greater of (i) 10% of the insurer's surplus
or (ii) the insurer's net income for the twelve-month period ending the
preceding December 31st, in each case determined in accordance with statutory
accounting practices. Such declaration or payment is further limited by adjusted
unassigned funds (surplus), as determined in accordance with statutory
accounting practices.
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<PAGE> 38
The insurance holding company laws of other states in which the Company's
insurance subsidiaries are domiciled generally contain similar (although in
certain instances somewhat more restrictive) limitations on the payment of
dividends.
Virtually all states require insurers licensed to do business in their
state to bear a portion of the loss suffered by certain insureds as a result of
the insolvency of other insurers. Depending upon state law, insurers can be
assessed an amount that is generally equal to between 1% and 2% of premiums
written for the relevant lines of insurance in that state each year to pay the
claims of an insolvent insurer. Most of these payments are recoverable through
premium rates, premium tax credits or policy surcharges. Significant increases
in assessments could limit the ability of the Company's insurance subsidiaries
to recover such assessments through tax credits. In addition, there have been
some legislative efforts to limit or repeal the tax offset provisions, which
efforts, to date, have been generally unsuccessful. These assessments may
increase or decrease in the future depending upon the rate of insolvencies of
insurance companies.
The Company also participates in FHCF, which is a state-mandated
catastrophe reinsurance fund that provides reimbursement to insurers for a
portion of their future catastrophic hurricane losses. FHCF is primarily funded
by premiums from the insurance companies that write residential property
business in Florida and, if insufficient, assessments on insurance companies
that write other property and casualty insurance in Florida, excluding workers'
compensation. FHCF's resources are limited to these contributions and to its
borrowing capacity at the time of a significant catastrophe in Florida.
The Company's insurance subsidiaries are also required to participate in
various involuntary assigned risk pools, principally involving workers'
compensation and automobile insurance, which provide various insurance coverages
to individuals or other entities that otherwise are unable to purchase such
coverage in the voluntary market. Participation in these pools in most states is
generally in proportion to voluntary writings of related lines of business in
that state. The underwriting results of these pools traditionally have been
unprofitable, although the effect of their performance has been partially
mitigated in certain lines of insurance by the states' allowance of increases in
rates for business voluntarily written by pool participants in such states.
Combined earned premiums related to such pools and assigned risks for the
Company were $379 million, $315 million and $509 million in 1996, 1995 and 1994,
respectively. The related combined underwriting losses for the Company were $39
million, $152 million and $300 million in 1996, 1995 and 1994, respectively.
Proposed legislation and regulatory changes have been introduced in the
states from time to time that would modify certain laws and regulations
affecting the financial services industry, including the provisions governing
relationships among insurance companies and agents, investment banks and
commercial banks. The potential impact of such legislation on the Company's
businesses cannot be predicted at this time.
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<PAGE> 39
INSURANCE REGULATIONS CONCERNING CHANGE OF CONTROL
Many state insurance regulatory laws intended primarily for the protection
of policyholders contain provisions that require advance approval by state
agencies of any change in control of an insurance company that is domiciled (or,
in some cases, having such substantial business that it is deemed to be
commercially domiciled) in that state. The Company owns, directly or indirectly,
all of the shares of stock of certain property and casualty insurance companies
domiciled in the States of Connecticut, Florida, Georgia, Illinois, Indiana,
Massachusetts, Missouri, New Jersey and Texas. "Control" is generally presumed
to exist through the ownership of 10% or more of the voting securities of a
domestic insurance company or of any company that controls a domestic insurance
company. Any purchaser of shares of Common Stock representing 10% or more of the
voting power of the Company will be presumed to have acquired control of the
Company's domestic insurance subsidiaries unless, following application by such
purchaser in each insurance subsidiary's state of domicile, the relevant
Insurance Commissioner determines otherwise. In addition, many state insurance
regulatory laws contain provisions that require prenotification to state
agencies of a change in control of a nondomestic admitted insurance company in
that state. While such prenotification statutes do not authorize the state
agency to disapprove the change of control, such statutes do authorize issuance
of a cease and desist order with respect to the nondomestic admitted insurer if
certain conditions exist such as undue market concentration. Any future
transactions that would constitute a change in control of the Company would
generally require prior approval by the insurance departments of the states in
which the Company's insurance subsidiaries are domiciled or commercially
domiciled and may require preacquisition notification in those states that have
adopted preacquisition notification provisions and in which such insurance
subsidiaries are admitted to transact business.
Certain insurance subsidiaries of the Company are authorized to conduct
insurance business in the United Kingdom. Authorized insurers in the United
Kingdom are subject to certain change of control restrictions in the Insurance
Companies Act of 1982 which require the approval of The Department of Trade and
Industry if any person is to become a "controller" (which is defined as a person
entitled to exercise control of 15% or more of the voting power) of an
authorized insurance company.
Certain other insurance subsidiaries of the Company are authorized to
conduct insurance business in Canada. Authorized insurers in Canada are subject
to certain change of control restrictions in Section 407 of the Insurance
Companies Act, which requires the approval of the Minister of Finance if any
person acquires a "significant interest" (beneficial ownership, directly or
through one or more entities controlled by such person, of 10% of the
outstanding shares of such Company) in an authorized insurance company.
Such requirements may deter, delay or prevent certain transactions
affecting the control of or the ownership of Common Stock, including
transactions that could be advantageous to the stockholders of the Company.
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<PAGE> 40
Insurance Regulatory Information System
The NAIC has developed a set of financial relationships or "tests" called
the Insurance Regulatory Information System ("IRIS") that were designed for
early identification of companies that may require special attention by
insurance regulatory authorities. These tests were developed primarily to assist
state insurance departments in executing their statutory mandate to oversee the
financial condition of insurance companies. Insurance companies submit data on
an annual basis to the NAIC, which in turn analyzes the data using ratios
covering twelve categories of financial data with defined "usual ranges" for
each category.
Falling outside the usual range of IRIS ratios is not considered a failing
result; rather, unusual values are viewed as part of the regulatory early
monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges of four or more of the ratios. In normal years,
15% of the companies included in the IRIS system are expected by the NAIC to be
outside the usual range on four or more ratios.
In each of the last three years, certain of the Company's insurance
subsidiaries have been outside of the usual range for certain IRIS ratios. In
all such instances, the regulators have been satisfied upon follow-up that there
is no solvency problem. It is possible that similar events could occur this
year, and management believes that the resolution would be the same. No
regulatory action has been taken by any state insurance department or the NAIC
with respect to IRIS ratios of any of the Company's insurance subsidiaries for
the three years ended December 31, 1996.
For 1996, Travelers Indemnity did not have any IRIS ratios outside the
usual range. However, both the two-year overall operating ratio and the two-year
reserve development to surplus ratios were outside the usual range for Aetna
Casualty and Standard Fire because of actions taken during 1996 and 1995 to
strengthen reserves for environmental and asbestos-related claims. In addition,
the change in writings ratio produced an unusual value for Standard Fire and the
estimated current reserve deficiency to surplus ratio was outside the usual
range for Aetna C&S of America, both as a result of management's decision in
1995 to combine its two intercompany pooling arrangements (one for Personal
Lines and one for Commercial Lines) into one pool. If these two ratios were
recalculated to have all items reflect the new agreement, the ratios would not
produce unusual values. Concurrent with the change in the intercompany pooling
arrangements, capital was reallocated among Aetna P&C insurers, which resulted
in an unusual value in the change in surplus ratio for Standard Fire.
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<PAGE> 41
The following table sets forth information regarding the premium to
surplus ratios of the Company. For informational purposes only, the table
includes Aetna P&C for all periods presented.
SCHEDULE OF PREMIUM TO SURPLUS RATIOS (STATUTORY BASIS)(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Net written premiums $7,343 $7,701 $7,981
Capital and surplus 5,423 5,231 4,659
Ratio of net written premiums
to capital and surplus 1.35x 1.47x 1.71x
</TABLE>
- ------
(1) Including accident and health business.
RISK-BASED CAPITAL (RBC) REQUIREMENTS
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement RBC requirements for most property
and casualty insurance companies, which is designed to assess minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. The RBC requirements are to be used as
early warning tools by the NAIC and states to identify companies that merit
further regulatory action. The RBC formula for property and casualty insurance
companies measures four major areas of risk facing property and casualty
insurers: (i) underwriting, which encompasses the risk of adverse loss
developments and inadequate pricing; (ii) declines in asset values arising from
credit risk; (iii) declines in asset values arising from investment risks; and
(iv) off-balance sheet risk arising from adverse experience from non-controlled
assets, guarantees for affiliates or other contingent liabilities and reserve
and premium growth. Pursuant to the law, insurers having less statutory surplus
than that required by the RBC calculation will be subject to varying degrees of
regulatory action, depending on the level of capital inadequacy.
The RBC law provides for four levels of regulatory action. The extent of
regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the Company Action Level (as defined by the NAIC),
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing corrective
actions and permits the relevant Insurance Commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) allows the relevant Insurance Commissioner to rehabilitate or liquidate an
insurer in addition to the aforementioned actions if surplus falls below 100% of
the RBC amount. The fourth action level is the Mandatory Control Level (as
defined by the NAIC) which requires the relevant Insurance Commissioner to
rehabilitate or liquidate the insurer if surplus falls below 70% of
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<PAGE> 42
the RBC amount. Based on the foregoing formula, at December 31, 1996, the RBC
ratios of the Company's insurance subsidiaries were in excess of levels that
would require company or regulatory action.
The formulas have not been designed to differentiate among adequately
capitalized companies which operate with higher levels of capital. Therefore, it
is inappropriate and ineffective to use the formulas to rate or to rank such
companies. At December 31, 1996, all of the Company's property-casualty
insurance companies had adjusted capital in excess of amounts requiring
regulatory action at any of the four levels.
FEDERAL REGULATION
Although the federal government does not directly regulate the business of
insurance, other than flood insurance, federal initiatives often have an impact
on the insurance industry. Legislation has been introduced in Congress during
the past several sessions that, if enacted, would result in substantially
greater federal regulation of the insurance business. Current and proposed
federal measures that may affect the property and casualty industry may include
possible changes to CERCLA and the tax laws governing property and casualty
insurance companies, proposed limits to product liability lawsuits and other
tort reform proposals. In addition, proposed legislation has been introduced in
Congress from time to time that would modify certain laws and regulations
affecting the financial services industry, including the provisions regarding
affiliations among insurance companies, investment banks and commercial banks.
It is not possible to predict whether such proposed legislation will be
enacted, what form such legislation might take when enacted, or the potential
effects of such legislation on the Company and its competitors.
CORPORATE AND OTHER OPERATIONS
In addition to its two business segments, the Company's Corporate and
Other segment consists primarily of financing costs associated with the
Acquisition.
OTHER INFORMATION
GENERAL BUSINESS FACTORS
In the judgment of the Company, no material part of the business of the
Company and its subsidiaries is dependent upon a single customer or group of
customers, the loss of any one of which would have a materially adverse effect
on the Company, and no one customer or group of affiliated customers accounts
for as much as 10% of the Company's consolidated revenues.
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At December 31, 1996, the Company had approximately 20,600 full-time and
670 part-time employees. The Company believes that its employee relations are
satisfactory. None of the Company's employees is subject to collective
bargaining agreements.
SOURCE OF FUNDS
For a discussion of the Company's sources of funds and maturities of the
long-term debt of the Company, see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources," and Note 7 of Notes to Consolidated Financial Statements.
TAXATION
For a discussion of tax matters affecting the Company and its operations,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Note 8 of Notes to Consolidated Financial
Statements.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial information regarding industry segments of the Company, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and Note 3 of Notes to Consolidated Financial Statements.
EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers of the Company are indicated below. Ages
are given as of March 5, 1997.
<TABLE>
<CAPTION>
Officer
Name Age Positions Since
- ---- --- --------- -------
<S> <C> <C> <C>
Robert I. Lipp 58 Chairman of the Board, President and 1996
Chief Executive Officer
Jay S. Fishman 44 Vice Chairman and Chief Administrative 1996
Officer; President and Chief Operating
Officer - Commercial Lines
Stanton F. Long 55 Vice Chairman 1997
Jon C. Madonna 53 Vice Chairman 1997
Charles J. Clarke 61 Chairman and Chief Executive Officer - 1996
Commercial Lines
Joseph P. Kiernan 56 Chairman and Chief Executive Officer - 1996
Bond
Robert P. Restrepo, 46 Chairman and Chief Executive Officer - 1996
Jr. Personal Lines
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
Officer
Name Age Positions Since
- ---- --- --------- -------
<S> <C> <C> <C>
Ronald E. Foley 51 Chairman and Chief Executive Officer - 1996
Risk Management
William P. Hannon 48 Chief Financial Officer 1996
Glenn D. Lammey 35 Senior Vice President 1996
James M. Michener 44 Senior Vice President, General 1996
Counsel and Secretary
Thomas P. Shugrue 39 Vice President and Chief Accounting 1996
Officer
</TABLE>
Mr. Lipp has been Chairman of the Board, President and Chief Executive
Officer of the Company since January 1996. Mr. Lipp has been a director of
Travelers Group since 1991 and is a Vice Chairman of Travelers Group. Mr. Lipp
has been Chairman of the Board and Chief Executive Officer of The Travelers
Insurance Group Inc. since December 1993. From 1991 to 1993, he was Chairman and
Chief Executive Officer of Travelers Group's Consumer Finance Services group.
From April 1986 through September 1991, he was an Executive Vice President of
Travelers Group and its corporate predecessor. Prior to joining Travelers Group
in 1986, he was a President and a director of Chemical New York Corporation and
Chemical Bank where he held senior executive positions for more than five years
prior thereto. Mr. Lipp is a director of The New York City Ballet, Wadsworth
Atheneum and the Massachusetts Museum of Contemporary Art and Chairman of
Dance-On Inc., a private foundation.
Mr. Fishman has been President and Chief Operating Officer of Commercial
Lines since October 1996. In addition, he has been Vice Chairman and Chief
Administrative Officer of the Company since January 1996. Mr. Fishman has served
as Senior Vice President of Travelers Group since October 1991. He has also
served as Vice Chairman of TIGI since September 1995 and as Chief Financial
Officer of that company since December 1993. Mr. Fishman was Treasurer of
Travelers Group from 1991 to December 1993. Prior thereto, he held various other
positions with Travelers Group and its subsidiaries since 1989, when he joined
that company from Shearson Lehman Brothers Inc., where he was Senior Vice
President of Merchant Banking.
Mr. Long was elected Vice Chairman of the Company in January 1997. Prior
to joining the Company, Mr. Long was Vice President of American International
Group since 1992. From 1988 to 1992, he was President and Chief Executive
Officer of SAIF Corporation. Prior to his association with SAIF Corporation in
1988, Mr. Long was an attorney in private practice for 20 years.
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<PAGE> 45
Mr. Madonna joined the Company in February 1997 as Vice Chairman and also
serves as Vice Chairman of Travelers Group. Prior to joining the Company, Mr.
Madonna was Chairman of KPMG International since October 1995. From 1990 to
1996, he was Chairman and Chief Executive Officer of KPMG Peat Marwick LLP.
Mr. Clarke has been Chairman and Chief Executive Officer--Commercial Lines
of the Company since January 1996. From 1990 to January 1996, Mr. Clarke was
Chairman of Commercial Lines of Travelers P&C. Prior thereto, Mr. Clarke was
Senior Vice President of the National Accounts and the Reinsurance business
units of Travelers P&C. Mr. Clarke has served in several positions at Travelers
P&C since 1958.
Mr. Kiernan has been Chairman and Chief Executive Officer--Bond of the
Company since March 1996. From 1989 to March 1996, Mr. Kiernan was Vice
President of Aetna's bond business and has worked in the bond business lines at
Aetna since 1963. From June 1995 to March 1996, Mr. Kiernan was Vice President
of Standard Commercial Accounts of Aetna.
Mr. Restrepo has been Chairman and Chief Executive Officer--Personal Lines
of the Company since March 1996. Mr. Restrepo was Senior Vice President of the
Personal Auto and Homeowners business units of Aetna from 1995 to 1996 and was
head of the Homeowners business unit of Aetna from 1993 to 1996. Prior thereto,
Mr. Restrepo served in a variety of property/casualty business areas of Aetna.
Mr. Foley has been Chairman and Chief Executive Officer--Risk Management
of the Company since January 1996. Mr. Foley served as Chairman of Personal
Lines of Travelers P&C from 1994 until his present appointment and from 1987 to
1991 and served as Chief Financial Officer of The Travelers Corporation from
1991 through 1993.
Mr. Hannon has been Chief Financial Officer of the Company since January
1996. Prior to joining the Company, Mr. Hannon served as Deputy Managing Partner
of the Financial Services practice of KPMG Peat Marwick LLP, which he joined in
1969, and also served as a member of the firm's Securities and Exchange
Commission reviewing partner's committee.
Mr. Lammey has been Senior Vice President of the Company since October
1996. Mr. Lammey served as Vice President of Travelers P&C from 1992 until his
present appointment and has served in several positions at Travelers P&C since
1988.
Mr. Michener has been Senior Vice President, General Counsel and Corporate
Secretary of the Company since July 1996. Prior to joining the Company, Mr.
Michener was General Counsel of The MetraHealth Companies, Inc. from January
1995 to October 1995 and Deputy General Counsel of United HealthCare Corporation
from October 1995 to May 1996. From August 1977 to December 1994, Mr. Michener
served in several positions at TIGI.
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<PAGE> 46
Mr. Shugrue has been Vice President and Controller of the Company since
October 1996 and Chief Accounting Officer of the Company since November 1996.
Mr. Shugrue has served in several positions at TIGI since 1983.
GLOSSARY OF INSURANCE TERMS
<TABLE>
<S> <C>
Accident year................. The annual accounting period in which loss
events occurred, regardless of when the losses
are actually reported, booked or paid.
Adjusted unassigned surplus... Unassigned surplus as of the most recent
statutory annual report reduced by twenty-five
percent of that year's unrealized appreciation
in value or revaluation of assets or unrealized
profits on investments, as defined in such
report.
Admitted insurer.............. A company licensed to transact insurance
business within a state.
Alternative market............ The segment of the insurance market which has
developed in response to volatility in cost and
availability of traditional commercial
insurance coverage and consists of various risk
financing mechanisms, including self insurance,
captive insurance companies, risk retention
groups and residual market business.
Annuity....................... A contract that pays a periodic income benefit
for the life of a person (the annuitant), the
lives of two or more persons or for a specified
period of time.
Assigned risk pools........... Reinsurance pools which cover risks for those
unable to purchase insurance in the voluntary
market because the risk is too great or rate
inadequacy has reduced the supply of insurance.
The costs of the risks associated with these
pools are charged back to insurance carriers in
proportion to their direct writings.
Assumed reinsurance........... Insurance liabilities acquired from a ceding
company.
Assumption reinsurance........ A transaction whereby the ceding company
transfers its entire obligation under the
policy to the reinsurer, who becomes directly
liable to the policyholder in all respects,
including collecting premiums and paying
benefits. See "Reinsurance."
Attachment point.............. The amount of losses above which excess of loss
reinsurance becomes operative.
</TABLE>
44
<PAGE> 47
<TABLE>
<S> <C>
Broker................... One who negotiates contracts of insurance or reinsurance on behalf of an insured
party, receiving a commission from the insurer or reinsurer for placement and
other services rendered.
Capacity................. The percentage of surplus, or the dollar amount of exposure, that an insurer or
reinsurer is willing to place at risk. Capacity may apply to a single risk, a
program, a line of business or an entire book of business. Capacity may be
constrained by legal restrictions, corporate restrictions or indirect
restrictions.
Captive company.......... An insurance company formed to insure the risks of its parent entity or entities.
Case reserves............ Loss reserves, established with respect to specific, individual reported claims.
Casualty insurance....... Insurance which is primarily concerned with the losses caused by injuries to
third persons (i.e., not the insured) and the legal liability imposed on the
insured resulting therefrom. It includes, but is not limited to, employers'
liability, workers' compensation, public liability, automobile liability,
personal liability and aviation liability insurance. It excludes certain types
of losses that by law or custom are considered as being exclusively within the
scope of other types of insurance, such as fire or marine.
Catastrophe.............. A severe loss, usually involving risks such as fire, earthquake, windstorm,
explosion and other similar events.
Catastrophe loss......... Loss and directly identified loss adjustment expenses from catastrophes.
Catastrophe reinsurance.. A form of excess of loss property reinsurance which,
subject to a specified limit, indemnifies the ceding
company for the amount of loss in excess of a
specified retention with respect to an accumulation
of losses resulting from a catastrophic event. The
actual reinsurance document is called a "catastrophe
cover."
Cede; ceding company..... When an insurer reinsures its liability with another insurer (a "cession"), it
"cedes" business and is referred to as the "ceding company."
</TABLE>
45
<PAGE> 48
<TABLE>
<S> <C>
Ceded reinsurance........ Risks transferred to another company as reinsurance. See "Reinsurance."
Claim.................... Request by an insured for indemnification by an insurance company for loss
incurred from an insured peril.
Claim adjustment expense. See "Loss adjustment expense."
Claims and claim
adjustment expense.. See "Loss and loss adjustment expenses."
Claims and claim
adjustment
expense reserves.... See "Loss reserves."
Clash cover.............. An excess of loss agreement with a retention higher than the limits on any one
reinsured policy. The agreement is thus only exposed to loss when two or more
policies (perhaps from different lines of business) are involved in a common
occurrence in an amount greater than the clash cover retention. Also known as
contingency cover.
Combined ratio........... The sum of the loss and LAE ratio, the underwriting expense ratio and, where
applicable, the ratio of dividends to policyholders to net premiums earned. A
combined ratio under 100% generally indicates an underwriting profit. A combined
ratio over 100% generally indicates an underwriting loss.
Commercial lines......... The various kinds of insurance which are written for businesses.
Commutation agreement.... An agreement between a reinsurer and a
ceding company whereby the reinsurer pays an agreed
upon amount in exchange for a complete discharge of
all obligations, including future obligations,
between the parties for reinsurance losses incurred.
Deductible............... The amount of loss that an insured retains.
Deferred acquisition
costs .............. Commissions and premium taxes, which vary with and are primarily related to the
production of new business, are deferred and
amortized to achieve a matching of revenues and
expenses when reported in financial statements
prepared in accordance with GAAP.
</TABLE>
46
<PAGE> 49
<TABLE>
<S> <C>
Direct written premiums.. The amounts charged by a primary
insurer to insureds in exchange for coverages
provided in accordance with the terms of an insurance
contract.
Earned premiums or
premiums earned..... That portion of property-liability premiums written that applies to the expired
portion of the policy term. Earned premiums are recognized as revenues under
both SAP and GAAP.
Excess liability......... Additional casualty coverage above the first layer.
Excess of loss
reinsurance ........ Reinsurance that indemnifies the
reinsured against all or a specified portion of
losses under reinsured policies in excess of a
specified dollar amount or "retention."
Expense ratio............ See "Underwriting expense ratio."
Extra contractual
obligations losses... Losses incurred by an insurer, beyond those that would have been incurred as
specified in the insurance agreement with an insured, due to monetary awards
required by a court of law against the insurer for its negligence to or bad
faith in dealing with its insured.
Facultative reinsurance.. The reinsurance of all or a portion of
the insurance provided by a single policy. Each
policy reinsured is separately negotiated.
Fidelity and surety
programs ............ Insurance which guarantees performance of an obligation or indemnifies for loss
due to embezzlement or wrongful abstraction of money,
securities or other property.
Guaranteed cost products. An insurance policy where the premiums
charged will not be adjusted for actual loss
experience during the covered period.
Guaranty fund............ State-regulated mechanism which is financed by assessing insurers doing business
in those states. Should insolvencies occur, these funds are available to meet
some or all of the insolvent insurer's obligations to policyholders.
Incurred but not reported
("IBNR") reserves... Reserves for estimated losses and LAE which have been incurred but not yet
reported to the insurer.
</TABLE>
47
<PAGE> 50
<TABLE>
<S> <C>
Indemnity reinsurance.... A transaction whereby the reinsurer
agrees to indemnify the ceding company against all or
part of the loss that the latter may sustain under
the policies it issued that are being reinsured. The
ceding company remains primarily liable as the direct
insurer on all risks ceded. See "reinsurance."
Inland marine............ A broad type of insurance generally covering articles that may be transported
from one place to another, as well as bridges, tunnels and other
instrumentalities of transportation. It includes goods in transit (generally
other than transoceanic) and may include policies for movable objects such as
personal effects, personal property, jewelry, furs, fine art and others.
IRIS ratios.............. Financial ratios calculated by the NAIC to assist state insurance departments in
monitoring the financial condition of insurance companies.
Large deductible policy.. An insurance policy where the
customer assumes at least $25,000 or more of each
loss.
Loss..................... An occurrence that is the basis for submission and/or payment of a claim.
Losses may be covered, limited or excluded from coverage, depending on the terms
of the policy.
Loss adjustment expense
("LAE")............. The expenses of settling claims, including legal and other fees and the portion
of general expenses allocated to claim settlement costs.
Loss and LAE ratio....... For SAP it is the ratio of incurred losses and loss adjustment expenses to net
premiums earned. For GAAP it is the ratio of incurred losses and loss
adjustment expenses to net premiums earned plus fee income.
Loss reserves............ Liabilities established by insurers and reinsurers to reflect the estimated cost
of claims incurred that the insurer or reinsurer will ultimately be required to
pay in respect of insurance or reinsurance it has written. Reserves are
established for losses and for LAE, and consist of case reserves and IBNR
reserves.
Losses and loss adjustment
expenses............ The sum of losses incurred and loss adjustment expenses.
</TABLE>
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<PAGE> 51
<TABLE>
<S> <C>
Losses incurred.......... The total losses sustained by an insurance company under a policy or policies, whether
paid or unpaid. Incurred losses includes a provision
for IBNR.
Multi-peril policies..... Refers to policies which cover both property and third party liability exposures.
National Association
of Insurance
Commissioners
("NAIC")............ An organization of the insurance commissioners or directors of all 50 states and
the District of Columbia organized to promote consistency of regulatory practice
and statutory accounting standards throughout the United States.
Net written premiums..... Direct written premiums plus assumed reinsurance less premiums ceded to
reinsurers.
Non-admitted coverage.... Insurance coverage written in a given state by an insurer not licensed in that
state.
Novation................. A transaction in which the original direct insurer's obligations are completely
extinguished, resulting in no further exposure to loss arising on the business
novated.
Personal lines........... Types of insurance written for individuals or families, rather than for
businesses.
Pool..................... An organization of insurers or reinsurers through which particular types of
risks are underwritten with premiums, losses and expenses being shared in agreed
percentages.
Premium equivalents...... Premium equivalents represent estimates of premiums that customers would have
been charged under a fully insured arrangement, based on expected losses
associated with non-risk-bearing components of each account, as determined in
the pricing process. Premium equivalents are indicative of the volume of
business handled by an insurer in servicing relationships. Premium equivalents
do not represent actual premium revenues.
Premiums................. The amount charged during the year on policies and contracts issued, renewed or
reinsured by an insurance company.
Producer................. Contractual entity which directs insureds to the insurer for coverage. See
"Broker."
</TABLE>
49
<PAGE> 52
<TABLE>
<S> <C>
Property insurance....... Insurance that provides coverage to
a person with an insurable interest in tangible
property for that person's property loss, damage or
loss of use.
Quota share reinsurance.. Reinsurance wherein the insurer
cedes an agreed fixed percentage of liabilities,
premiums and losses for each policy covered on a pro
rata basis.
Rate of renewal/retention
ratio............... Current period renewal accounts or policies as a percentage of expired accounts
or policies.
Rates.................... Amounts charged per unit of insurance.
Reinsurance.............. The practice whereby one insurer, called the reinsurer, in consideration of a
premium paid to such insurer, agrees to indemnify another insurer, called the
ceding company, for part or all of the liability assumed by the ceding company
under one or more policies or contracts of insurance which it has issued.
Reinsurance agreement.... A contract specifying the terms of a reinsurance transaction.
Residual market
(involuntary
business)........... Insurance market which provides coverage for risks unable to purchase insurance
in the voluntary market either because the risk is too great or rate inadequacy
has reduced the supply of insurance. Residual markets are frequently created by
state legislation either because of lack of available coverage such as property
coverage in a windstorm prone area or protection of the accident victim as in
the case of workers' compensation. The costs of the residual market are usually
charged back to the direct insurance carriers in proportion to the carriers'
voluntary market shares for the type of coverage involved.
Retention................ The amount of exposure an insurance company retains on any one risk or group of
risks.
Retrospective premiums... Premiums related to retrospectively rated policies.
Retrospective rating..... A plan or method which permits adjustment of the final premium or commission on
the basis of actual loss experience, subject to certain minimum and maximum
limits.
</TABLE>
50
<PAGE> 53
<TABLE>
<S> <C>
Risk-based capital
("RBC") ............. A measure adopted by the NAIC for
assessing the minimum statutory capital and surplus
requirements of insurers.
Risk retention........... The amount or portion of a risk an insurer retains for its own account after
ceded reinsurance. Losses above the stated retention level are collectible from
the reinsurer. The retention level may be stated as a percentage or dollar
amount.
Salvage.................. The amount of money an insurer recovers through the sale of property transferred
to the insurer as a result of a loss payment.
Second injury fund....... The employer of an injured, impaired worker is responsible only for the workers'
compensation benefit for the most recent injury; the second injury fund would
cover the cost of any additional benefits for aggravation of a prior condition.
The cost is shared by the insurance industry, funded through assessments to
insurance companies based on either premiums or losses.
Self-insured retentions.. That portion of the risk retained by a person for its own account.
Servicing carrier........ An insurance company that provides,
for a fee, various services including policy
issuance, claims adjusting and customer service for
insureds in a reinsurance pool.
Standard policy forms.... Self-contained pre-printed policy language used when a large number of insureds
face similar loss exposures.
Statutory accounting
practices ("SAP")... The rules and procedures prescribed or permitted by United States state
insurance regulatory authorities for recording transactions and preparing
financial statements. Statutory accounting practices generally reflect a
modified going concern basis of accounting.
Statutory surplus........ As determined under SAP, the amount remaining after all liabilities, including
loss reserves, are subtracted from all admitted assets. Admitted assets are
assets of an insurer prescribed or permitted by a state to be recognized on the
statutory balance sheet. Statutory surplus is also referred to as "surplus" or
"surplus as regards policyholders" for statutory accounting purposes.
</TABLE>
51
<PAGE> 54
<TABLE>
<S> <C>
Structured settlements... Periodic payments to an injured person
or survivor for a determined number of years or for
life, typically in settlement of a claim under a
liability policy, usually funded through the purchase
of an annuity.
Subrogation.............. A principle of law incorporated in insurance policies, which enables an
insurance company, after paying a loss to its insured, to recover the amount of
the loss from another who is legally liable for it.
Third party liability.... A liability owed to a claimant (or "third party") who is not one of the two
parties to the insurance contract. Insured liability claims are referred to as
third party claims.
Treaty reinsurance....... The reinsurance of a specified type or category of risks defined in a
reinsurance agreement (a "treaty") between a primary insurer or other reinsured
and a reinsurer. Typically, in treaty reinsurance, the primary insurer or
reinsured is obligated to offer and the reinsurer is obligated to accept a
specified portion of all such type or category of risks originally written by
the primary insurer or reinsured.
Umbrella coverage........ A form of insurance protection against losses in excess of amounts covered by other
liability insurance policies or amounts not covered
by the usual liability policies.
Unassigned funds
(surplus) ........... The undistributed and unappropriated amount of statutory surplus.
Underwriter.............. An employee of an insurance company who examines, accepts or rejects risks and
classifies accepted risks in order to charge an appropriate premium for each
accepted risk. The underwriter is expected to select business that will produce
an average risk of loss no greater than that anticipated for the class of
business.
Underwriting............. The insurer's or reinsurer's process of reviewing applications for insurance
coverage, and the decision whether to accept all or part of the coverage and
determination of the applicable premiums; also refers to the acceptance of such
coverage.
Underwriting expense
ratio ............. For SAP it is the ratio of underwriting
expenses incurred to net premiums written. For GAAP
it is the ratio of underwriting expenses incurred to
net premiums written plus fee income.
</TABLE>
52
<PAGE> 55
<TABLE>
<S> <C>
Underwriting profit or
underwriting loss... The pre-tax profit or loss experienced by a
property and casualty insurance company after
deducting loss and loss adjustment expenses and
operating expenses from net earned premiums. This
profit or loss calculation includes reinsurance
assumed and ceded but excludes investment income.
Unearned premium......... The portion of premiums written that is allocable to the unexpired portion of
the policy term.
Voluntary market......... The market in which a person seeking
insurance obtains coverage without the assistance of
residual market mechanisms.
Wholesale broker......... An independent or exclusive agent that represents both admitted and non admitted
insurers in market areas which include standard, non-standard, specialty and
excess and surplus lines of insurance. The wholesaler does not deal directly
with the insurance consumer. The wholesaler deals with the retail agent or
broker.
Workers' compensation.... A system (established under state and federal laws) under which employers provide
insurance for benefit payments to their employees for
work-related injuries, deaths and diseases,
regardless of fault.
</TABLE>
ITEM 2. PROPERTIES.
The Company's executive offices are located in Hartford, Connecticut. The
Company rents from an affiliate of Travelers Group approximately 1,030,000
square feet of office space in Hartford, Connecticut, under a ten-year lease
that expires on April 1, 2006 and, subject to certain conditions, is renewable
by the Company for additional five-year terms. Under certain circumstances, the
Company may be required to purchase the leased premises. In addition, the
Company leases 302 field offices totaling approximately 6,650,000 square feet
throughout the United States under leases or subleases with third parties. The
Company also rents from Aetna approximately 373,000 square feet of office space
at City Place, located in Hartford, Connecticut, under an eight-year sublease
that expires in 2004, and approximately 225,000 square feet of office space in
Windsor, Connecticut, under a two-year lease that expires in 1998 and is
renewable by the Company for up to two additional three-year terms.
The Company owns an office building with approximately 267,000 square feet
of office space in Tampa, Florida, of which it occupies approximately 125,000
square feet.
The Company believes its properties are adequate and suitable for its
business as presently conducted and are adequately maintained. For further
information concerning leases, see Note 11 of Notes to Consolidated Financial
Statements.
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<PAGE> 56
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, the Company receives claims asserting
alleged injuries and damages from asbestos and other hazardous waste and toxic
substances. The environment surrounding the final resolution of these claims
continues to change. Currently, it is not possible to predict changes in the
legal and legislative environment and their impact on the future development of
asbestos and environmental claims. Such development will be affected by future
court decisions and interpretations and changes in Superfund and other
legislation. Because of these future unknowns, additional liabilities may arise
for amounts in excess of the current reserves. These additional amounts, or a
range of these additional amounts, cannot now be reasonably estimated, and could
result in a liability exceeding reserves by an amount that would be material to
the Company's operating results in a future period. However, the Company
believes that it is not likely that these claims will have a material adverse
effect on the Company's financial condition or liquidity.
For information concerning a case involving the enforcement of certain
reinsurance contracts with Lloyd's, see the description that appears in the
fifth full paragraph on page 90 of the Company's Prospectus dated April 22,
1996, which description is incorporated by reference herein. A copy of the
pertinent paragraph of such filing is included as an exhibit to this Form 10-K.
Hearings before the American Arbitration Association began in the second half of
1996 and are expected to continue into the second quarter of 1997.
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
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<PAGE> 57
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.
For information concerning the appeal of a Memorandum of Decision issued
by the Connecticut Department of Insurance approving the acquisition by the
Company of Aetna P&C, see the description that appears in the second full
paragraph on page 91 of the Company's Prospectus dated April 22, 1996, which
description is incorporated by reference herein. A copy of the pertinent
paragraph of such filing is included as an exhibit to this Form 10-K. In October
1996, the court dismissed the appeal. Plaintiffs have appealed the dismissal.
The Company is involved in numerous other lawsuits (other than
environmental and asbestos claims) arising, from the most part, in the ordinary
course of its business operations either as a liability insurer defending
third-party claims brought against its insureds or as an insurer defending
coverage claims brought against it. 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 the Company's results of operations, financial condition or
liquidity. See "Business -- Environmental, Asbestos and Cumulative Injury
Claims," Note 13 of Notes to Consolidated Financial Statements and Note 14 of
Notes to the 1995 Combined Financial Statements of Aetna P&C.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to an action by written consent of TIGI, dated February 19, 1997,
the Company was authorized to amend and restate Article FIRST of its Restated
Certificate of Incorporation to change its corporate name to Travelers Property
Casualty Corp. The consent was signed by the holder of 328,020,170 shares of the
Company's Class B Common Stock, representing approximately 82% of the Company's
outstanding common stock and approximately 98% of the total voting power of the
outstanding common stock. Through this consent, 3,280,201,700 votes were cast
for the amendment. No other votes were cast.
The action by written consent was taken in accordance with the terms of
the Company's Restated Certificate of Incorporation and Delaware law and prompt
notice thereof was provided to all stockholders. The name change was effective
March 7, 1997, upon filing of the Certificate of Amendment to the Company's
Restated Certificate of Incorporation.
55
<PAGE> 58
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock is listed on the NYSE under the symbol
"TAP." There is no established public trading market for the Company's Class B
Common Stock. The high and low sale prices, as reported on the consolidated
transaction reporting system, for the Class A Common Stock for the periods
indicated, and the dividends per share, are set forth below.
<TABLE>
<CAPTION>
1996 1997
------------------------------ -------
2ND Q* 3RD Q 4TH Q 1ST Q**
------- ------- ------- -------
<S> <C> <C> <C> <C>
Class A Common
Stock Price
High $28.500 $29.375 $36.000 $39.500
Low $26.000 $23.125 $28.000 $33.750
Dividends per
Share of Class A
Common Stock $ .075 $ .075 $ .075
</TABLE>
- -------------------
* Since April 23, 1996.
** Through March 5, 1997.
At March 5, 1997, the Company had approximately 300 holders of record of
its Class A Common Stock. This figure does not represent the actual number of
beneficial owners of common stock because shares are frequently held in "street
name" by securities dealers and others for the benefit of individual owners who
may vote the shares. At March 5, 1997, TIGI was the sole holder of record of the
Company's Class B Common Stock.
For information on dividend restrictions in certain long-term loan and
credit agreements of the Company and its subsidiaries, as well as restrictions
on the ability of certain of the Company's subsidiaries to transfer funds to the
Company in the form of cash dividends or otherwise, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 6. SELECTED FINANCIAL DATA.
See "Five-Year Summary of Selected Financial Data" on page 17 of the
Company's 1996 Annual Report to Stockholders (the "1996 Annual Report"),
included as part of Exhibit 13 to this Form 10-K and incorporated herein by
reference.
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<PAGE> 59
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 18 of the 1996 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page F-1
hereof. There is also incorporated by reference herein in response to this Item
the material under the caption "Selected Quarterly Financial Data (unaudited)"
on page 54 of the 1996 Annual Report, which material is included as part of
Exhibit 13 to this Form 10-K.
The combined financial statements of Aetna P&C as of December 31, 1995
and 1994 and for the years ended December 31, 1995, December 31, 1994 and
December 31, 1993, together with the notes thereto and the related report of
Independent Accountants, are included as Exhibit 99.01 to this Form 10-K and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information on the directors of the Company, see the material under
the caption "Election of Directors," in the definitive Proxy Statement for the
Company's Annual Meeting of Stockholders to be held on April 23, 1997, filed
with the Securities and Exchange Commission (the "Proxy Statement"),
incorporated herein by reference. For information on executive officers, see
Item 1, "Business -- Other Information -- Executive Officers of the Company"
herein.
ITEM 11. EXECUTIVE COMPENSATION.
See the material under the caption "Executive Compensation" of the Proxy
Statement, incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
See the material under the captions "Voting Rights", "Security Ownership
of Certain Beneficial Owners" and "Security Ownership of Management" of the
Proxy Statement, incorporated herein by reference.
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<PAGE> 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the material under the captions "Election of Directors" and "Executive
Compensation" of the Proxy Statement, incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated Financial Statements
and Schedules on page F-1 hereof. Also filed as a part of this report
are the combined financial statements of Aetna P&C as of December 31,
1995 and 1994 and for the years ended December 31, 1995, December 31,
1994 and December 31, 1993, together with the notes thereto and the
related report of Independent Accountants. See Exhibit 99.01.
(2) Financial Statement Schedules. See Index to Consolidated Financial
Statements and Schedules on page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On October 8, 1996, the Company filed a Current Report on Form 8-K
dated October 4, 1996, filing certain exhibits under Item 7 thereof
relating to the offer and sale of the Company's 6 1/4% Notes due
October 1, 1999.
On November 14, 1996, the Company filed a Current Report on Form 8-K
dated November 12, 1996, filing certain exhibits under Item 7 thereof
relating to the offer and sale of the Company's 6 3/4% Notes due
November 15, 2006.
No other reports on Form 8-K were filed during the fourth quarter of
1996; however, on January 21, 1997, the Company filed a Current Report
on Form 8-K dated January 21, 1997, reporting under Item 5 thereof
certain additional financial information for the three months and the
year ended December 31, 1996, and on February 10, 1997, the Company
filed a Current Report on Form 8-K dated February 10, 1997, reporting
under Item 5 thereof certain additional financial information as of
December 31, 1996.
58
<PAGE> 61
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
3.01 Restated Certificate of Incorporation of Travelers Property Electronic
Casualty Corp. (formerly Travelers/Aetna Property Casualty
Corp.) (the "Company"), Certificate of Designations, Powers,
Preferences and Rights of 7.5% Redeemable Preferred Stock,
Series Z, of the Company, and Certificate of Amendment to the
Restated Certificate of Incorporation.
3.02 Restated By-Laws of the Company, effective March 29, 1996,
incorporated by reference to Exhibit 3.2 to the Company's Form
S-1.
4.01 Intercompany Agreement, dated as of April 2, 1996, between
Travelers Group Inc. and the Company, incorporated by
reference to Exhibit 4.1 to the Company's Form S-1.
4.02 Shareholders Agreement, dated as of April 2, 1996, by and
among the Company, Aetna Life and Casualty Company, J.P.
Morgan Capital Corporation, The Trident Partnership L.P. and
Fund American Enterprises Holdings, Inc., incorporated by
reference to Exhibit 4.2 to the Company's Form S-1.
10.01.1 Stock Purchase Agreement, dated as of November 28, 1995,
between The Travelers Insurance Group Inc. and Aetna Life and
Casualty Company, incorporated by reference to Exhibit 10.1 to
the Annual Report on Form 10-K of Aetna Life and Casualty
Company for the fiscal year ended December 31, 1995 (File No.
1-5704).
10.01.2 Assignment of Stock Purchase Agreement, dated as of March 22,
1996, between the Company and The Travelers Insurance Group
Inc., incorporated by reference to Exhibit 2.2 to the
Company's Form S-1.
10.01.3 Amendment to Stock Purchase Agreement, dated as of April 2,
1996, between the Company and Aetna Life and
</TABLE>
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<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
Casualty Company, incorporated by reference to Exhibit 2.3 to
the Company's Form S-1.
10.02* Travelers Property Casualty Corp. Capital Accumulation Plan
(as amended through September 1, 1996), incorporated by
reference to Exhibit 10.01 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1996
(File No. 1-14328) (the "Company's 9/30/96 10-Q").
10.03* Travelers Property Casualty Corp. 1996 Executive Option Plan Electronic
(as amended through March 7, 1997).
10.04* Travelers Property Casualty Corp. Executive Electronic
Performance Compensation Plan (as amended through
March 7, 1997).
10.05* Travelers Property Casualty Corp. 1996 Deferred Compensation
Plan for Non-Employee Directors (as amended through September
25, 1996), incorporated by reference to Exhibit 10.02 to the
Company's 9/30/96 10-Q.
10.06* Travelers Group Capital Accumulation Plan (as
amended through September 25, 1996),
incorporated by reference to Exhibit 10.03 to
the Quarterly Report on Form 10-Q of Travelers
Group Inc. for the fiscal quarter ended
September 30, 1996 (File No. 1-9924) (the "TRV
9/30/96 10-Q").
10.07.1* Travelers Group Stock Option Plan (as amended
and restated as of April 24, 1996),
incorporated by reference to Exhibit 10.02.1 to
the Annual Report on Form 10-K of Travelers
Group Inc. for the fiscal year ended December
31, 1996 (File No. 1-9924).
10.07.2* Amendment No. 14 to the Travelers Group Stock
Option Plan, incorporated by reference to
Exhibit 10.01 to the TRV 9/30/96 10-Q.
10.08* Travelers Group 1996 Stock Incentive Plan (as
amended
</TABLE>
60
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
through November 22, 1996), incorporated by reference to
Exhibit 10.03 to the Annual Report on Form 10-K of Travelers
Group Inc. for the fiscal year ended December 31, 1996 (File
No. 1-9924).
10.09* Retirement Benefit Equalization Plan of Travelers Group Inc.
(as amended and restated as of January 1, 1994) incorporated
by reference to Exhibit 10.04 to the Annual Report on
Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1996 (File No. 1-9924).
10.10 License Agreement, dated November 28, 1995, by and between
Aetna Life and Casualty Company and The Aetna Casualty and
Surety Company and The Standard Fire Insurance Company,
incorporated by reference to Exhibit 10.7 to the Company's
Form S-1.
10.11* The Travelers Corporation Supplemental Benefit Plan, effective
December 20, 1992, incorporated by reference to Exhibit 10(d)
to the Annual Report on Form 10-K of The Travelers Corporation
("old Travelers") for the fiscal year ended December 31, 1992
(File No. 1-5799).
10.12 TAPC Tax Allocation Agreement, effective as of
January 1, 1996 between Travelers Group Inc.
and the Company, incorporated by reference to
Exhibit 10.9 to the Company's Form S-1.
10.13 Lease for office space at City Place, dated March 28, 1996, by
and between Aetna Life and Casualty Company and The Travelers
Indemnity Company, incorporated by reference to Exhibit 10.10
to the Company's Form S-1.
10.14 Lease for office space in Hartford, Electronic
Connecticut, dated as of April 2, 1996, by and
between The Travelers Insurance Company and The
Travelers Indemnity Company.
10.15* Letter Agreement, dated November 17, 1996, Electronic
between the Company and Stanton F. Long.
10.16* Letter Agreement, dated April 12, 1996, between the Company
and James M. Michener, incorporated by reference to Exhibit
10.01 to the Company's Quarterly
</TABLE>
61
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
Report on Form 10-Q for the
fiscal quarter ended June 30, 1996 (File No. 1-14328).
10.17* Letter Agreement, dated as of December 12, 1995, between
Travelers Insurance Companies and William Hannon, incorporated
by reference to Exhibit 10.12 to the Company's Form S-1.
10.18* Employment Agreement, dated as of October 27, 1995, between
Aetna Life and Casualty Company and Robert P. Restrepo, as
assumed by the Company, incorporated by reference to Exhibit
10.13 to the Company's Form S-1.
10.19* Employment Agreement, dated as of October 27, 1995, between
Aetna Life and Casualty Company and Joseph P. Kiernan, as
assumed by the Company, incorporated by reference to Exhibit
10.14 to the Company's Form S-1.
10.20* Employment Agreement, dated as of December 31,
1993, between The Travelers Insurance Group,
Inc. and Ronald E. Foley, incorporated by
reference to Exhibit 10.15 to the Company's
Form S-1.
10.21* The Travelers Corporation TESIP Restoration and Non-Qualified
Savings Plan, effective January 1, 1991, incorporated by
reference to Exhibit 10(e) to the Annual Report on Form 10-K
of old Travelers for the fiscal year ended December 31, 1991
(File No. 1-5799).
11.01 Computation of Earnings Per Share. Electronic
12.01 Computation of Ratio of Earnings to Fixed Electronic
Charges.
13.01 Pages 17 through 55 of the 1996 Annual Report to Electronic
Stockholders of the Company (pagination of exhibit does not
correspond to pagination in the 1996 Annual Report to
Stockholders).
21.01 Subsidiaries of the Registrant. Electronic
23.01 Consent of KPMG Peat Marwick LLP, Independent Certified Electronic
Public Accountants.
23.02 Consent of KPMG Peat Marwick LLP, Independent Certified Electronic
Public Accountants.
</TABLE>
62
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT FILING
NUMBER DESCRIPTION OF EXHIBIT METHOD
------- ---------------------- ------
<S> <C> <C>
24.01 Powers of Attorney. Electronic
27.01 Financial Data Schedule. Electronic
99.01 Combined Financial Statements of The Aetna Electronic
Casualty and Surety Company and The Standard
Fire Insurance Company as of December 31, 1995
and 1994 and for the years ended December 31, 1995,
December 31, 1994 and December 31, 1993, together
with the notes thereto and the related reports of
Independent Accountants.
99.02 The fifth full paragraph on page 90 of the Electronic
Company's Prospectus dated April 22, 1996.
99.03 The paragraph that begins on page 90 and ends Electronic
on page 91 of the Company's Prospectus dated
April 22, 1996, the first paragraph on page 24
of the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1996 and
the first paragraph on page 25 of the Company's
9/30/96 10-Q.
99.04 The second full paragraph on page 91 of the Electronic
Company's Prospectus dated April 22, 1996.
</TABLE>
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the Commission upon request.
Copies of any of the exhibits referred to above will be furnished at a cost of
$.25 per page (although no charge will be made for the 1996 Annual Report on
Form 10-K) to security holders who make written request therefor to Corporate
Communications, Travelers Property Casualty Corp., One Tower Square, Hartford,
Connecticut 06183.
- -------------------
* Denotes a management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
63
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
March, 1997.
TRAVELERS PROPERTY CASUALTY CORP.
(Registrant)
By: /s/ Robert I. Lipp
--------------------------------------
Robert I. Lipp, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on the 26th day of March, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Robert I. Lipp Chairman of the Board, President
- --------------------------------- and Chief Executive Officer
Robert I. Lipp (Principal Executive Officer) and
Director
/s/ William P. Hannon Chief Financial Officer
- --------------------------------- (Principal Financial Officer)
William P. Hannon
/s/ Thomas P. Shugrue Vice President and Chief
- --------------------------------- Accounting Officer (Principal
Thomas P. Shugrue Accounting Officer)
* Director
- ---------------------------------
Kenneth J. Bialkin
Director
- ---------------------------------
John J. Byrne
* Director
- ---------------------------------
James Dimon
</TABLE>
64
<PAGE> 67
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Director
- ---------------------------------
Dudley C. Mecum
* Director
- ---------------------------------
Roberto G. Mendoza
* Director
- ---------------------------------
Frank J. Tasco
* Director
- ---------------------------------
Sanford I. Weill
* Director
- ---------------------------------
Arthur Zankel
*By:
/s/ Jay S. Fishman
- ----------------------------------
Jay S. Fishman
Attorney-in-fact
</TABLE>
65
<PAGE> 68
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES *
<TABLE>
<CAPTION>
Incorporated
By Reference from
the Company's 1996
Annual Report to
Page Stockholders at
Herein Page Indicated
------ --------------
<S> <C> <C>
Independent Auditors' Report F-2 55
Consolidated Statement of Income for the years ended
December 31, 1996, 1995 and 1994 32
Consolidated Balance Sheet at
December 31, 1996 and 1995 33
Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 1996, 1995 and 1994 34
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 35
Notes to Consolidated Financial Statements 36-54
Schedules:
Schedule I - Summary of Investments - Other than
Investments in Related Parties F-1
Schedule II - Condensed Financial Information of
Registrant (Parent Company only) F-4 - F-7
Schedule III - Supplementary Insurance Information F-8 - F-10
Schedule VI - Supplementary Information Concerning
Property-Casualty Insurance Operations F-11
</TABLE>
* Schedules not listed are omitted as not applicable or not required by
Regulation S-X.
F-1
<PAGE> 69
Independent Auditors' Report
The Board of Directors and Stockholders
Travelers Property Casualty Corp.:
Under date of January 17, 1997, we reported on the consolidated balance sheets
of Travelers Property Casualty Corp. (formerly Travelers/Aetna Property Casualty
Corp.) and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996, as
contained in the 1996 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year ended December 31, 1996. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedules which are listed on the
accompanying index. These financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 17, 1997
F-2
<PAGE> 70
SCHEDULE I
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Summary of Investments - Other Than
Investments in Related Parties
December 31, 1996
(in millions)
<TABLE>
<CAPTION>
Amount at which
shown in the
Type of Investment Cost Value balance sheet(1)
- ------------------ ------- ------- ----------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government and government agencies and
authorities $ 6,402 $ 6,514 $ 6,514
States, municipalities and political subdivisions 5,127 5,219 5,219
Foreign governments 581 596 596
Public utilities 1,953 1,974 1,974
Convertible bonds and bonds with warrants attached 197 211 211
All other corporate bonds (2) 9,663 9,802 9,802
------- ------- -------
Total bonds 23,923 24,316 24,316
Redeemable preferred stocks 75 75 75
------- ------- -------
Total fixed maturities 23,998 24,391 24,391
------- ------- -------
Equity securities:
Common stock
Banks, trust and insurance companies 8 8 8
Industrial, miscellaneous and all other 156 168 168
------- ------- -------
Total common stocks 164 176 176
Nonredeemable preferred stocks 592 603 603
------- ------- -------
Total equity securities 756 779 779
------- ------- -------
Mortgage loans 1,005 1,005
Real estate held for sale 157 157
Short-term securities 2,311 2,311
Other investments 644 666
------- -------
Total investments $28,871 $29,309
======= =======
</TABLE>
(1) Determined in accordance with methods described in notes 1 and 4 of the
notes to the consolidated financial statements.
(2) Excludes $54 million cost and $55 million fair value of Commercial Credit
Company bonds. See note 14 of the notes to the consolidated financial
statements.
F-3
<PAGE> 71
SCHEDULE II
Travelers Property Casualty Corp.
(formerly Travelers/Aetna Property Casualty Corp.)
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the period January 16, 1996
to December 31, 1996
--------------------
<S> <C>
REVENUES
Net investment income and other $ 2
EXPENSES
Interest 120
Other 36
-----
156
Loss before federal income taxes and equity in net income of subsidiaries (154)
Federal income tax benefit 54
-----
Loss before equity in net income of subsidiaries (100)
Equity in net income of subsidiaries 491
-----
NET INCOME $ 391
=====
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-4
<PAGE> 72
SCHEDULE II
Travelers Property Casualty Corp.
(formerly Travelers/Aetna Property Casualty Corp.)
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions)
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1996
-----------------
<S> <C>
ASSETS
Cash $ 1
Investment in subsidiaries at equity 8,686
Federal income tax receivable 32
Deferred federal income taxes 12
Deferred charges 10
Other (primarily investments) 6
-------
Total assets $ 8,747
-------
LIABILITIES
Commercial paper $ 25
Long-term debt 2,177
Other liabilities 65
-------
Total liabilities 2,267
-------
STOCKHOLDERS' EQUITY
Common Stock:
Class A, $.01 par value, 700 million shares authorized,
71,979,829 shares issued 1
Class B, $.01 par value, 700 million shares authorized,
328,020,170 shares issued and outstanding 3
Additional paid-in capital 5,455
Retained earnings 749
Treasury stock, at cost (shares, 406,860) (13)
Unrealized gain on investment securities, net of tax 285
-------
Total stockholders' equity 6,480
-------
Total liabilities and stockholders' equity $ 8,747
-------
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-5
<PAGE> 73
SCHEDULE II
Travelers Property Casualty Corp.
(formerly Travelers/Aetna Property Casualty Corp.)
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the period January 16, 1996
to December 31, 1996
--------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 391
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in net income of subsidiaries (491)
Dividends received from consolidated subsidiaries 299
Amortization expense 1
Deferred federal income tax benefit (12)
Federal income tax receivable (32)
Other assets (14)
Other liabilities 52
-------
Net cash provided by operating activities 194
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contribution to subsidiaries (710)
Short-term securities, (purchases) sales, net (6)
Business acquisition (4,160)
-------
Net cash used in investing activities (4,876)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of commercial paper, net 25
Issuance of long-term debt 2,177
Borrowings on revolving line of credit 2,650
Payments on revolving line of credit (2,650)
Contributions from TIGI 1,138
Purchase of treasury stock (13)
Private offering of common stock 525
Initial public offering of common stock 928
Issuance of Series Z preferred stock 540
Redemptions of Series Z preferred stock (540)
Fees paid on behalf of subsidiaries (33)
Dividends on Series Z preferred stock (4)
Dividends to TIGI (49)
Dividends to minority shareholders (11)
-------
Net cash provided by financing activities 4,683
-------
Net increase in cash 1
Cash at beginning of period --
-------
Cash at end of period $ 1
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 100
=======
Cash received during the period for taxes $ 10
=======
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-6
<PAGE> 74
SCHEDULE II
NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
1. GENERAL
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.) was organized on
January 16, 1996. TIGI contributed The Travelers Indemnity Company and its
subsidiaries to TAP in March 1996. In April 1996, TAP purchased all of the
outstanding capital stock of The Aetna Casualty and Surety Company and The
Standard Fire Insurance Company (collectively, Aetna P&C) for a purchase
price of approximately $4.2 billion in cash.
2. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of TAP and, on
an equity basis, its subsidiaries and affiliates and should be read in
conjunction with the Consolidated Financial Statements and notes thereto.
3. DEBT
Aggregate annual maturities on long-term debt obligations are as follows:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
1997 $ --
1998 --
1999 400
2000 --
2001 500
Thereafter 1,277
-----------------------
Total $ 2,177
-----------------------
</TABLE>
4. SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of Aetna P&C and the formation of TAP,
TIGI acquired approximately 328 million shares of Class B Common Stock of
TAP in exchange for contributing the outstanding capital stock of The
Travelers Indemnity Company and a capital contribution of approximately
$1.1 billion.
F-7
<PAGE> 75
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1996
(in millions)
<TABLE>
<CAPTION>
Amortization
Segment Deferred policy Claims and Unearned Premium Net Claims of deferred Other Premiums
acquisition costs claim adjust- premiums revenue investment and claim policy operating written
ment expense income adjustment acquisition expenses
reserves (a) expenses costs (b)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
Lines $253 $28,017 $2,303 $3,695 $1,343 $3,679 $533 $1,081 $3,973
Personal
Lines 173 2,952 1,251 2,323 311 1,599 373 294 2,359
Corporate
and Other
Operations -- 208 -- 10 2 4 -- 147 10
---- ------- ------ ------ ------ ------ ---- ------ ------
Consolidated $426 $31,177 $3,554 $6,028 $1,656 $5,282 $906 $1,522 $6,342
==== ======= ====== ====== ====== ====== ==== ====== ======
</TABLE>
(a) Net investment income for each segment is accounted for separately, except
for the portion earned on the investment of stockholders' equity which is
allocated based on assigned capital.
(b) Expense allocations are determined in accordance with prescribed statutory
accounting practices. These practices make a reasonable allocation of all
expenses to those product lines with which they are associated.
F-8
<PAGE> 76
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1995
(in millions)
<TABLE>
<CAPTION>
Amortization
Segment Deferred policy Claims and Unearned Premium Net Claims of deferred Other Premiums
acquisition costs claim adjust- premiums revenue investment and claim policy operating written
ment expense income adjustment acquisition expenses
reserves (a) expenses costs (b)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
Lines $ 122 $13,725 $1,154 $2,017 $ 548 $1,853 $ 291 $ 502 $2,309
Personal
Lines 80 1,488 541 1,284 161 957 221 157 1,298
Corporate
and Other
Operations -- 247 -- 14 1 7 - 30 14
------ ------- ------ ------ ------ ------ -------- ----- ------
Consolidated $ 202 $15,460 $1,695 $3,315 $ 710 $2,817 $ 512 $ 689 $3,621
====== ======= ====== ====== ====== ====== ======== ===== ======
</TABLE>
(a) Net investment income for each segment is accounted for separately, except
for the portion earned on the investment of stockholders' equity which is
allocated based on assigned capital.
(b) Expense allocations are determined in accordance with prescribed statutory
accounting practices. These practices make a reasonable allocation of all
expenses to those product lines with which they are associated.
F-9
<PAGE> 77
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1994
(in millions)
<TABLE>
<CAPTION>
Amortization
Segment Deferred policy Claims and Unearned Premium Net Claims of deferred Other Premiums
acquisition costs claim adjust- premiums revenue investment and claim policy operating written
ment expense income adjustment acquisition expenses
reserves (a) expenses costs (b)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
Lines $140 $13,622 $1,238 $1,810 $444 $1,836 $248 $458 $2,112
Personal
Lines 81 1,391 539 1,353 128 977 225 182 1,433
Corporate
and Other
Operations -- 286 1 15 1 6 -- 26 15
---- ------- ------ ------ ---- ------ ---- ---- ------
Consolidated $221 $15,299 $1,778 $3,178 $573 $2,819 $473 $666 $3,560
==== ======= ====== ====== ==== ====== ==== ==== ======
</TABLE>
(a) Net investment income for each segment is accounted for separately, except
for the portion earned on the investment of stockholders' equity which is
allocated based on assigned capital.
(b) Expense allocations are determined in accordance with prescribed statutory
accounting practices. These practices make a reasonable allocation of all
expenses to those product lines with which they are associated.
F-10
<PAGE> 78
SCHEDULE VI
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (1)
1994-1996
(IN MILLIONS)
<TABLE>
<CAPTION>
Claims and
Reserves for claim adjust-
unpaid Discount ment expenses
Deferred claims from incurred related to:
Affiliation policy and claim reserves Net --------------------
with acquisition adjustment for unpaid Unearned Earned investment Current Prior
registrant costs expenses claims(2) premiums premiums income Year Year
---------- ----------- ------------ ---------- -------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 Consolidated property -
casualty operations . . . $426 $30,969 $1,012 $3,554 $6,018 $1,654 $4,839 $ 192
1995 Consolidated property -
casualty operations . . . $202 $15,213 $ 528 $1,695 $3,301 $ 709 $2,903 $(226)
1994 Consolidated property -
casualty operations . . . $221 $15,013 $ 476 $1,777 $3,163 $ 572 $3,041 $(255)
</TABLE>
<TABLE>
<CAPTION>
Amortization
of deferred Paid claims
Affiliation policy and claim
with acquisition adjustment Premiums
registrant costs expenses written
---------- ------------ ----------- --------
<S> <C> <C> <C>
1996 Consolidated property -
casualty operations . . . $906 $5,057 $6,332
1995 Consolidated property -
casualty operations . . . $512 $2,819 $3,607
1994 Consolidated property -
casualty operations . . . $473 $2,646 $3,545
</TABLE>
(1) Excludes accident and health business.
(2) See "Discounting" on page 22.
F-11
<PAGE> 1
Exhibit 3.01
RESTATED CERTIFICATE OF INCORPORATION
OF
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
(Pursuant to Sections 242 and 245 of the Delaware General
Corporation Law)
Travelers/Aetna Property Casualty Corp., a corporation
organized and existing under the laws of the State of Delaware (the
"Corporation"), does hereby certify as follows:
1. The name of the Corporation is Travelers/Aetna Property
Casualty Corp. The name under which the Corporation was originally incorporated
was Travelers P&C Holdings Inc. and the original Certificate of Incorporation
was filed with the Secretary of State on January 3, 1996.
2. This Restated Certificate of Incorporation restates and
integrates and also further amends the Certificate of Incorporation of the
Corporation, as heretofore amended. This Restated Certificate of Incorporation
was proposed by the Board of Directors and duly adopted by the sole stockholder
of the Corporation in the manner and by the vote prescribed by Sections 228, 242
and 245 of the General Corporation Law of the State of Delaware. The text of the
Certificate of Incorporation, as so amended and restated is as follows:
FIRST: The name of the Corporation is: Travelers/Aetna
Property Casualty Corp. (hereinafter the "Corporation").
SECOND: The address of the registered office of the
Corporation in the State of Delaware is 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of its registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any
lawful act or activity for which a corporation may be organized under the
General Corporation Law of the State of Delaware as set forth in Title 8 of the
Delaware Code (the "GCL").
<PAGE> 2
FOURTH: A. Authorized Shares. The total number of shares of
stock which the Corporation shall have the authority to issue is 1,425,000,000
shares consisting of 700,000,000 shares of Class A common stock with a par value
of $.01 per share (the "Class A Common Stock"), 700,000,000 shares of Class B
common stock with a par value of $.01 per share (the "Class B Common Stock" and,
together with the Class A Common Stock, the "Common Stock"), and 25,000,000
shares of preferred stock with a par value of $.10 per share (the "Preferred
Stock"). The number of authorized shares of Class A Common Stock or Class B
Common Stock may be increased or decreased (but not below the number of shares
of Class A Common Stock or Class B Common Stock then outstanding) by the
affirmative vote of a majority of the aggregate voting power of the outstanding
shares of Class A Common Stock and Class B Common Stock, voting together without
regard to class.
Effective upon the filing of this Restated Certificate of
Incorporation with the Secretary of State, each share of Common Stock, par value
$.01 per share, of the Corporation outstanding as of the close of business on
the day prior to the date of such filing shall be reclassified on a basis of one
share of Class B Common Stock for each share of Common Stock outstanding and,
accordingly, each share of Common Stock outstanding as of the close of business
on the day prior to the date of such filing, each having a par value of $.01 per
share, shall, without further action by the Corporation or any stockholder, be
deemed to represent one share of Class B Common Stock, par value $.01 per share.
B. Ranking. The powers, preferences and rights of the Class A
Common Stock and Class B Common Stock, and the qualifications, limitations and
restrictions thereof, shall be in all respects identical, except as otherwise
required by law or expressly provided in this Restated Certificate of
Incorporation.
C. Voting. Except as otherwise required by law or in this
Restated Certificate of Incorporation, with respect to all matters upon which
stockholders are entitled to vote or to which stockholders are entitled to give
consent, the holders of any outstanding shares of the Class A Common Stock and
the holders of any outstanding shares of Class B Common Stock shall vote
together without regard to class, and every holder of the Class A
2
<PAGE> 3
Common Stock shall be entitled to cast thereon one (1) vote in person or by
proxy for each share of the Class A Common Stock standing in such holder's name,
and every holder of the Class B Common Stock shall be entitled to cast thereon
ten (10) votes in person or by proxy for each share of Class B Common Stock
standing in such holder's name.
D. Amendments Affecting Stock. So long as any shares of Class
A Common Stock are outstanding, the Corporation shall not, without the
affirmative vote of at least a majority (or such higher percentage, if any, as
may then be required by applicable law) of the outstanding shares of Class A
Common Stock voting as a single class, (i) amend, alter or repeal any provision
of Sections B through K of this Article FOURTH so as to affect adversely the
relative rights, preferences, qualifications, limitations or restrictions of the
Class A Common Stock as compared to those of the Class B Common Stock or (ii)
take any other action upon which class voting is required by law.
E. Dividends; Changes in Stock. No dividend or distribution
may be declared or paid on any share of Class A Common Stock unless a dividend
or distribution, payable in the same consideration and manner, is simultaneously
declared or paid, as the case may be, on each share of Class B Common Stock, nor
shall any dividend or distribution be declared or paid on any share of Class B
Common Stock unless a dividend or distribution, payable in the same
consideration and manner, is simultaneously declared or paid, as the case may
be, on each share of Class A Common Stock, in each case without preference or
priority of any kind; provided, however, that if dividends are declared that are
payable in shares of Class A Common Stock or in Class B Common Stock or in
rights, options, warrants or other securities convertible into or exchangeable
for shares of Class A Common Stock or Class B Common Stock, dividends shall be
declared that are payable at the same rate on both classes of Common Stock and
the dividends payable in shares of Class A Common Stock or in rights, options,
warrants or other securities convertible into or exchangeable for shares of
Class A Common Stock shall be payable to holders of Class A Common Stock and the
dividends payable in shares of
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Class B Common Stock or in rights, options, warrants or other securities
convertible into or exchangeable for shares of Class B Common Stock shall be
payable to holders of Class B Common Stock. If the Corporation in any manner
subdivides or combines the outstanding shares of Class B Common Stock, the
outstanding shares of the Class A Common Stock shall be proportionately
subdivided or combined, as the case may be. Similarly, if the Corporation in any
manner subdivides or combines the outstanding shares of Class A Common Stock,
the outstanding shares of the Class B Common Stock shall be proportionately
subdivided or combined, as the case may be.
F. Optional Conversion. (i) Each share of Class B Common Stock
shall be convertible at any time while beneficially owned by Travelers (as
defined in Article SEVENTH hereof) or a Class B Transferee (as defined below),
if any, at the option of the holder thereof into one share of Class A Common
Stock, subject to adjustment as provided in paragraph (iv) of this Section F and
subject to the conditions and limitations described below and in the manner
described below; provided, however, that following the disposition of Class B
Common Stock beneficially owned by Travelers Group Inc. ("Travelers Group") or a
Class B Transferee (as defined in Section G below) effected in connection with a
transfer of such Class B Common Stock to stockholders of Travelers Group or
stockholders of a Class B Transferee, as the case may be, as a spin-off,
split-off or split-up which is intended to be on a tax-free basis (a "Tax-Free
Spin-Off") under the United States Internal Revenue Code of 1986, as amended
(the "Code"), no shares of Class B Common Stock shall be so convertible into
shares of Class A Common Stock at the option of the holder thereof from and
after the date of such disposition.
(ii) In order to convert shares of Class B Common Stock into
Class A Common Stock pursuant to this Section F, the holder thereof shall
surrender to the Corporation the certificate or certificates therefor, duly
endorsed or assigned to the Corporation or in blank, and give written notice to
the Corporation that he elects to convert such shares. Such notice shall be
dated and received by the Corporation at least one business day prior to the
date fixed for conversion and shall state (a) the number of shares of Class B
Common Stock to be converted, (b) the date fixed for conversion, (c) the
denominations in which the shares of Class A Common Stock issuable upon such
conversion are to be issued, (d) the
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name in which the shares of Class A Common Stock are to be registered, if
different from the registered holder of the Class B Common Stock being converted
and (e) the name and address of the registered holder requesting such
conversion.
(iii) Shares of Class B Common Stock shall be deemed to have
been converted immediately prior to the close of business on the day of the
surrender of such shares for conversion in accordance with the foregoing
provisions, and the person or persons entitled to receive Class A Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such Class A Common Stock at such time. As promptly as
practicable on or after the conversion date, the Corporation shall issue and
shall deliver a certificate or certificates for the number of shares of Class A
Common Stock issuable upon such conversion to the person or persons entitled to
receive the same.
(iv) If there occurs any capital reorganization or any
reclassification of the capital stock of the Corporation (other than a
subdivision or combination described in Section E or pursuant to a merger or
consolidation referred to in Section I), each share of Class B Common Stock
shall thereafter be convertible into, in lieu of one share of Class A Common
Stock, the same kind and amounts of securities or other assets, or both, which
were issuable or distributable to the holders of shares of outstanding Class A
Common Stock of the Corporation upon such reorganization or reclassification in
respect to that number of shares of Class A Common Stock into which such share
of Class B Common Stock would have been converted had such share of Class B
Common Stock been converted into Class A Common Stock immediately prior to such
reorganization or reclassification.
(v) Upon any event described in paragraph (iv) above, the
Corporation shall promptly mail to each holder of Class B Common Stock a notice
which shall describe such event and the change in the number of shares or other
assets or securities issuable upon the conversion of Class B Common Stock,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
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(vi) The Corporation will pay any and all taxes that may be
payable in respect of the issue or delivery of shares of Class A Common Stock on
conversion of the Class B Common Stock pursuant hereto. The Corporation shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Class A Common Stock in
a name other than that in which the shares of Class B Common Stock so converted
were registered, and no such issue or delivery shall be made unless and until
the person requesting such issue has paid to the Corporation the amount of any
such tax, or has established to the satisfaction of the Corporation that such
tax has been paid.
G. Automatic Conversion. (i) Except as otherwise provided in
subsections (ii) and (iii) below, upon any issuance by the Corporation, or any
sale or other transfer by a stockholder of the Corporation, of shares of Class B
Common Stock, of rights, options or warrants to purchase Class B Common Stock or
of securities convertible into or exchangeable for shares of Class B Common
Stock to any person or persons other than Travelers (as defined in Article
SEVENTH hereof) or a Class B Transferee, including, without limitation, pursuant
to any private placement or public sale of such shares (including a public
offering registered under the Securities Act of 1933 and a sale pursuant to Rule
144 under the Securities Act of 1933 or any similar rule then in force), such
shares shall automatically convert into an equal number of shares of Class A
Common Stock (with the same rights and restrictions as shares of Class A Common
Stock generally), and such rights, options, warrants or convertible or
exchangeable securities shall automatically convert into rights, options or
warrants to purchase Class A Common Stock or securities convertible into or
exchangeable for shares of Class A Common Stock (otherwise with terms identical
to the rights, options, warrants or convertible or exchangeable securities that
so automatically convert), in each case, without any further action on the part
of the Corporation or any other person, and the certificates representing such
shares, rights, options, warrants or convertible or exchangeable securities
shall be deemed to represent shares of Class A Common Stock, rights, options or
warrants to purchase shares of Class A Common Stock or securities convertible
into or exchangeable for shares of Class A Common Stock,
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as the case may be. For purposes of this Section G: (a) a "person" shall mean a
corporation, a trust, a limited liability company, an association, a
partnership, a joint venture, an organization, a business, an individual, a
government or a subdivision thereof or a governmental agency and (b) the term
"transfer" shall not include a bona fide pledge of shares of Class B Common
Stock.
(ii) Notwithstanding the foregoing, if shares of Class B
Common Stock representing more than 50% of all of the then outstanding shares of
Common Stock are transferred by Travelers in a single transaction, or series of
related transactions, to one person (other than an underwriter of such stock in
connection with a bona fide underwriting of such stock), or group of affiliated
persons, that is not an affiliate (within the meaning of the rules and
regulations under the Securities Act of 1933) of Travelers (together with any
wholly owned subsidiary of such transferee to whom such transferee transfers all
or a portion of such shares of Class B Common Stock, a "Class B Transferee")
such shares of Class B Common Stock so transferred shall not automatically
convert into shares of Class A Common Stock upon such transfer. Any shares of
Class B Common Stock retained by Travelers following any such transfer to a
Class B Transferee shall automatically convert into shares of Class A Common
Stock upon such transfer without any further action by the Corporation or any
other person and the certificates representing such shares shall be deemed to
represent shares of Class A Common Stock.
(iii) Notwithstanding the foregoing, (a) if shares of Class B
Common Stock are transferred to stockholders of Travelers Group or stockholders
of a Class B Transferee in a Tax-Free Spin-Off, each share of Class B Common
Stock so transferred shall not automatically convert into shares of Class A
Common Stock upon such transfer and (b) following a Tax-Free Spin-Off, all
outstanding shares of Class B Common Stock shall not automatically convert into
shares of Class A Common Stock upon the transfer thereof by any holder thereof;
provided, however, that all outstanding shares of Class B Common Stock shall
automatically convert into shares of Class A Common Stock on the fifth
anniversary of a Tax-Free Spin-Off, unless prior to the occurrence of such
Tax-Free Spin-Off, Travelers Group or the Class B Transferee, as the case may
be, delivers to the Corporation a written opinion
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reasonably satisfactory to the Corporation (which, in the case of Travelers
Group, may include, without limitation, an opinion of Travelers Group's Chief
Accounting Officer or Vice President of Taxes) to the effect that such
conversion would preclude Travelers Group or the Class B Transferee, as the case
may be, from obtaining a favorable ruling from the Internal Revenue Service that
such transfer of Class B Common Stock would be a Tax-Free Spin-Off. If such an
opinion is received, such Class B Common Stock shall not automatically convert
into Class A Common Stock on such fifth anniversary date and the Corporation
shall cause approval of such conversion to be submitted to a vote of the holders
of the Common Stock as soon as practicable after the fifth anniversary of the
Tax-Free Spin-Off unless Travelers Group or the Class B Transferee, as the case
may be, delivers to the Corporation a written opinion reasonably satisfactory to
the Corporation (which, in the case of Travelers Group, may include, without
limitation, an opinion of Travelers Group's Chief Accounting Officer or Vice
President of Taxes) prior to such fifth anniversary to the effect that such vote
would adversely affect the status of the Tax-Free Spin-Off as tax free under the
Code. Approval of such conversion shall require the affirmative vote of the
holders of a majority of the shares of Common Stock present and voting, voting
together without regard to class, with each share entitled to one vote for such
purpose.
H. Liquidation. Shares of Class B Common Stock shall rank pari
passu with the Class A Common Stock as to distribution of assets in the event of
any liquidation, dissolution or winding up of the affairs of the Corporation.
I. Reorganization or Merger. In the event of a merger or
consolidation of the Corporation with or into another entity (whether or not the
Corporation is the surviving entity), the holders of each share of Class A
Common Stock and Class B Common Stock shall be entitled to receive the same per
share consideration as the per share consideration, if any, received by the
holders of each share of such other class of stock.
J. Status of Converted Stock. Any shares of Class B Common
Stock that shall have been converted into Class A Common Stock at any time
pursuant to the provi-
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sions of Section F or Section G of this Article FOURTH shall, after such
conversion, be cancelled and shall not be reissued.
K. Reservation. The Corporation shall at all times reserve and
keep available, free from pre-emptive rights, out of its authorized but unissued
shares of Class A Common Stock solely for the purpose of issuance upon the
conversion of the Class B Common Stock, such number of shares of Class A Common
Stock issuable upon the conversion of all outstanding Class B Common Stock. All
shares of Class A Common Stock which are so issuable shall, when issued, be duly
and validly issued, fully paid and nonassessable. The Corporation shall take all
such actions as it deems necessary or appropriate to assure that all such shares
of Class A Common Stock may be so issued without violation of any applicable law
or governmental regulation or any requirements of any securities exchange upon
which shares of Class A Common Stock may be listed.
L. Preferred Stock. The Corporation may issue Preferred Stock
from time to time in one or more series as the Board of Directors may establish
by the adoption of a resolution or resolutions relating thereto, each series to
have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions providing for the issue of
such series adopted by the Board of Directors pursuant to authority to do so,
which authority is hereby granted to the Board of Directors.
FIFTH: A. The business and affairs of the Corporation shall be
managed by or under the direction of a Board of Directors, the number of
directors to be determined from time to time by resolution adopted by
affirmative vote of a majority of the entire Board of Directors which the
Corporation would have if there were no vacancies. The directors shall be
divided into three classes, designated Class I, Class II and Class III. Each
class shall consist, as nearly as may be possible, of one-third of the total
number of directors constituting the entire Board of Directors. The initial
division of the Board of Directors into classes shall be made by
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the decision of the affirmative vote of a majority of the entire Board of
Directors. Class I directors shall be elected initially for a one-year term,
Class II directors initially for a two-year term and Class III directors
initially for a three-year term. At each succeeding annual meeting of
stockholders beginning in 1997, successors to the class of directors whose term
expires at that annual meeting shall be elected for a three-year term. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional director of any class elected to
fill a vacancy resulting from an increase in such class shall hold office for a
term that shall coincide with the remaining term of that class, but in no case
will a decrease in the number of directors shorten the term of any incumbent
director. A director shall hold office until the annual meeting for the year in
which his term expires and until his successor shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Any vacancy on the Board of Directors
that results from an increase in the number of directors may be filled by a
majority of the Board of Directors then in office, provided that a quorum is
present, and any other vacancy occurring in the Board of Directors may be filled
by a majority of the Board of Directors then in office, subject to any
contractual provisions to the contrary, even if less than a quorum, or a sole
remaining director. Any director elected to fill a vacancy not resulting from an
increase in the number of directors shall have the same remaining term as that
of his predecessor. Notwithstanding the foregoing, whenever the holders of any
one or more classes or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of stockholders, the election, term of office, filling
of vacancies and other features of such directorships shall be governed by the
terms of this Restated Certificate of Incorporation applicable thereto, and such
directors so elected shall not be divided into classes pursuant to this Article
FIFTH unless expressly provided by such terms.
B. Notwithstanding any other provision of this Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
eighty percent (80%) of
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the voting power of the shares entitled to vote at an election of directors
shall be required to amend, alter, change or repeal, or to adopt any provision
as part of this Restated Certificate of Incorporation inconsistent with the
purpose and intent of, this Article FIFTH.
SIXTH: The books and records of the Corporation may be kept
(subject to any mandatory requirement of law) outside the State of Delaware at
such place or places as may be designated from time to time by the Board of
Directors or by the By-Laws of the Corporation.
SEVENTH: A. In anticipation that the Corporation and Travelers
may engage in the same or similar activities or lines of business and have an
interest in the same areas of corporate opportunities, and in recognition of the
benefits to be derived by the Corporation through its continued contractual,
corporate and business relations with Travelers (including service of officers
and directors of Travelers as directors of the Corporation), the provisions of
this Article SEVENTH are set forth to regulate and define the conduct of certain
affairs of the Corporation as they may involve Travelers and its officers and
directors, and the powers, rights, duties and liabilities of the Corporation and
its officers, directors and stockholders in connection therewith.
B. Subject to any contractual provisions to the contrary,
Travelers shall have the right to, and shall have no duty not to, (i) engage in
the same or similar business activities or lines of business as the Corporation,
(ii) do business with any client or customer of the Corporation and (iii) employ
or otherwise engage any officer or employee of the Corporation, and neither
Travelers nor any officer or director thereof (except as provided in Section C
of this Article SEVENTH) shall be liable to the Corporation or its stockholders
for breach of any fiduciary duty by reason of any such activities of Travelers
or of such person's participation therein. In the event that Travelers acquires
knowledge of a potential transaction or matter which may be a corporate
opportunity for both Travelers and the Corporation, Travelers shall have no duty
to communicate or present such corporate opportunity to the Corporation and
shall not be liable to the Corporation or its stockholders for breach of any
fiduciary duty as a stockholder of the Corporation by reason of the fact that
Travelers pursues
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or acquires such corporate opportunity for itself, directs such corporate
opportunity to another person or entity, or does not present such corporate
opportunity to the Corporation.
C. In the event that a director or officer of the Corporation
who is also a director or officer of Travelers acquires knowledge of a potential
transaction or matter which may be a corporate opportunity for both the
Corporation and Travelers, such director or officer of the Corporation (a) shall
have fully satisfied and fulfilled his fiduciary duty to the Corporation and its
stockholders with respect to such corporate opportunity, (b) shall not be liable
to the Corporation or its stockholders for breach of any fiduciary duty by
reason of the fact that Travelers pursues or acquires such corporate opportunity
for itself or directs such corporate opportunity to another person or does not
present such corporate opportunity to the Corporation, (c) shall be deemed to
have acted in good faith and in a manner such person reasonably believes to be
in and not opposed to the best interests of the Corporation for the purposes of
Article TWELFTH and the other provisions of this Restated Certificate of
Incorporation and (d) shall be deemed not to have breached his duty of loyalty
to the Corporation or its stockholders or to have derived an improper personal
benefit therefrom for the purposes of Article TWELFTH and the other provisions
of this Restated Certificate of Incorporation, if such director or officer acts
in good faith in a manner consistent with the following policy:
(i) a corporate opportunity offered to any person who is an
officer of the Corporation and who is also a director but not an
officer of Travelers shall belong to the Corporation, unless such
opportunity is expressly offered to such person solely in his capacity
as a director of Travelers in which case such opportunity shall belong
to Travelers;
(ii) a corporate opportunity offered to any person who is a
director but not an officer of the Corporation and who is also a
director or officer of Travelers shall belong to the Corporation only
if such opportunity is expressly offered to such person solely in his
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capacity as a director of the Corporation, and otherwise shall belong
to Travelers; and
(iii) a corporate opportunity offered to any person who is an
officer of both the Corporation and Travelers shall belong to Travelers
unless (x) such person is an employee of the Corporation or (y) such
opportunity is expressly offered to such person solely in his capacity
as an officer of the Corporation, in either of which case such
opportunity shall belong to the Corporation.
D. For the purposes of this Article SEVENTH, "corporate
opportunities" shall include, but not be limited to, business opportunities
which the Corporation is financially able to undertake, which are, from their
nature, in the line of the Corporation's business, are of practical advantage to
it and are ones in which the Corporation has an interest or a reasonable
expectancy, and in which, by embracing the opportunities, the self-interest of
Travelers or its officers or directors, will be brought into conflict with that
of the Corporation.
E. Any person or entity purchasing or otherwise acquiring any
interest in shares of capital stock of the Corporation shall be deemed to have
notice of and consented to the provisions of this Article SEVENTH.
F. For purposes of this Article SEVENTH, and, to the extent
set forth therein, Article EIGHTH and Article NINTH (subject to Section E of
Article NINTH) hereof:
1. "Travelers" shall mean Travelers Group Inc., a
Delaware corporation, all successors to Travelers Group Inc.
by way of merger, consolidation or sale of all or
substantially all of its assets, and all corporations,
partnerships, joint ventures, limited liabilities companies,
trusts, associations and other entities in which Travelers
Group Inc. owns (directly or indirectly) fifty percent (50%)
or more of the outstanding voting stock, voting power,
partnership interests or similar ownership interests, but
shall not include the Corporation; and
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2. the "Corporation" shall mean the Corporation and
all corporations, partnerships, joint ventures, limited
liability companies, trusts, associations and other entities
in which the Corporation owns (directly or indirectly) fifty
percent (50%) or more of the outstanding voting stock, voting
power, partnership interests or similar ownership interests.
G. If any contract, agreement, arrangement or transaction
between the Corporation and Travelers involves a corporate opportunity and is
approved in accordance with the procedures set forth in Article EIGHTH of this
Restated Certificate of Incorporation, Travelers and its officers and directors
shall also for the purposes of this Article SEVENTH and the other provisions of
this Restated Certificate of Incorporation (a) have fully satisfied and
fulfilled their fiduciary duties to the Corporation and its stockholders, (b) be
deemed to have acted in good faith and in a manner such persons reasonably
believe to be in and not opposed to the best interests of the Corporation and
(c) be deemed not to have breached their duties of loyalty to the Corporation
and its stockholders and not to have derived an improper personal benefit
therefrom. Any such contract, agreement, arrangement or transaction involving a
corporate opportunity not so approved shall not by reason thereof result in any
such breach of any fiduciary duty or duty of loyalty or failure to act in good
faith or in the best interests of the Corporation or derivation of any improper
personal benefit, but shall be governed by the other provisions of this Article
SEVENTH, this Restated Certificate of Incorporation, the By-Laws, the GCL and
other applicable law.
H. Notwithstanding anything in this Restated Certificate of
Incorporation to the contrary and in addition to any vote of the Board of
Directors required by this Restated Certificate of Incorporation, until the
occurrence of the Trigger Date (as defined below), the affirmative vote of the
holders of more than eighty percent (80%) of the voting power of the Common
Stock then outstanding shall be required to alter, amend or repeal, or adopt any
provision inconsistent with, any provision of this Article SEVENTH. Neither the
alteration, amendment or repeal of this Article SEVENTH nor the adoption of any
provision inconsistent with this
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Article SEVENTH shall eliminate or reduce the effect of this Article SEVENTH in
respect of any matter occurring, or any cause of action, suit or claim that, but
for this Article SEVENTH, would accrue or arise, prior to such alteration,
amendment, repeal or adoption.
"Trigger Date" shall mean the first date on which Travelers
ceases to beneficially own (excluding for such purposes shares of Common Stock
beneficially owned by Travelers but not for its own account, including (in such
exclusion) beneficial ownership which arises by virtue of some entity that is an
affiliate of Travelers (as hereinafter defined) being a sponsor or advisor of a
mutual or similar fund that beneficially owns shares of Common Stock) twenty
percent (20%) or more of the voting power of the then outstanding Common Stock.
EIGHTH: A. In anticipation that (i) the Corporation and
Travelers may enter into contracts or otherwise transact business with each
other and that the Corporation may derive benefits therefrom and (ii) the
Corporation may from time to time enter into contractual, corporate or business
relations with one or more of its directors, or one or more corporations,
partnerships, associations or other organizations in which one or more of its
directors have a financial interest (collectively, "Related Entities"), the
provisions of this Article EIGHTH are set forth to regulate and define certain
contractual relations and other business relations of the Corporation as they
may involve Travelers, Related Entities and their respective officers and
directors, and the powers, rights, duties and liabilities of the Corporation and
its officers, directors and stockholders in connection therewith. The provisions
of this Article EIGHTH are in addition to, and not in limitation of, the
provisions of the GCL and the other provisions of this Restated Certificate of
Incorporation. Any contract or business relation which does not comply with the
procedures set forth in this Article EIGHTH shall not by reason thereof be
deemed void or voidable or result in any breach of any fiduciary duty or duty of
loyalty or failure to act in good faith or in the best interests of the
Corporation or derivation of any improper personal benefit, but shall be
governed by the provisions of this Restated Certificate of Incorporation, the
By-Laws, the GCL and other applicable law.
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B. No contract, agreement, arrangement or transaction between
the Corporation and Travelers or between the Corporation and one or more of the
directors or officers of the Corporation, Travelers or any Related Entity or
between the Corporation and any Related Entity shall be void or voidable solely
for the reason that Travelers, any Related Entity or any one or more of the
officers or directors of the Corporation, Travelers or any Related Entity are
parties thereto, or solely because any such directors or officers are present at
or participate in the meeting of the Board of Directors or committee thereof
which authorizes the contract, agreement, arrangement or transaction, or solely
because his or their votes are counted for such purpose, and Travelers, any
Related Entity and such directors and officers (a) shall have fully satisfied
and fulfilled their fiduciary duties to the Corporation and its stockholders
with respect thereto, (b) shall not be liable to the Corporation or its
stockholders for any breach of fiduciary duty by reason of the entering into,
performance or consummation of any such contract, agreement, arrangement or
transaction, (c) shall be deemed to have acted in good faith and in a manner
such persons reasonably believe to be in and not opposed to the best interests
of the Corporation for purposes of Article TWELFTH and the other provisions of
this Restated Certificate of Incorporation and (d) shall be deemed not to have
breached their duties of loyalty to the Corporation and its stockholders and not
to have derived an improper personal benefit therefrom for the purposes of
Article TWELFTH and the other provisions of this Restated Certificate of
Incorporation, if:
(i) the material facts as to the contract, agreement,
arrangement or transaction are disclosed or are known to the Board of
Directors or the committee thereof that authorizes the contract,
agreement, arrangement or transaction, and the Board of Directors or
such committee in good faith authorizes the contract, agreement,
arrangement or transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors be
less than a quorum; or
(ii) the material facts as to the contract, agreement,
arrangement or transaction are disclosed or are known to the holders of
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Common Stock entitled to vote thereon, and the contract, agreement,
arrangement or transaction is specifically approved in good faith by
vote of the holders of a majority of the voting power of the Common
Stock then outstanding not owned by Travelers or a Related Entity, as
the case may be.
C. Directors of the Corporation who are also directors or
officers of Travelers or any Related Entity may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract, agreement, arrangement or transaction. Common
Stock owned by Travelers and any Related Entities may be counted in determining
the presence of a quorum at a meeting of stockholders which authorizes the
contract, agreement, arrangement or transaction.
D. Any person or entity purchasing or otherwise acquiring any
interest in any shares of capital stock of the Corporation will be deemed to
have notice of and to have consented to the provisions of this Article EIGHTH.
E. For purposes of this Article EIGHTH, Travelers shall have
the meaning set forth in Article SEVENTH.
F. For purposes of this Article EIGHTH, any contract,
agreement, arrangement or transaction with any corporation, partnership, joint
venture, limited liability companies, trusts, association or other entity in
which the Corporation owns (directly or indirectly) fifty percent (50%) or more
of the outstanding voting stock, voting power, partnership interests or similar
ownership interests, or with any officer or director thereof, shall be deemed to
be a contract, agreement, arrangement or transaction with the Corporation.
G. Notwithstanding anything in this Restated Certificate of
Incorporation to the contrary and in addition to any vote of the Board of
Directors required by this Restated Certificate of Incorporation, until the
occurrence of the Trigger Date, the affirmative vote of the holders of more than
eighty percent (80%) of the voting power of the Common Stock then outstanding
shall
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be required to alter, amend or repeal, or adopt any provision inconsistent with,
any provision of this Article EIGHTH. Neither the alteration, amendment or
repeal of this Article EIGHTH nor the adoption of any provision inconsistent
with this Article EIGHTH shall eliminate or reduce the effect of this Article
EIGHTH in respect of any matter occurring, or any cause of action, suit or claim
that, but for this Article EIGHTH, would accrue or arise, prior to such
alteration, amendment, repeal or adoption.
NINTH: A. In anticipation that Travelers will remain a
stockholder of the Corporation and may have continued contractual, corporate and
business relations with the Corporation, the provisions of this Article NINTH
are set forth to regulate and define the conduct of certain affairs of the
Corporation as they may impact Travelers and its legal and regulatory status.
B. The Corporation shall not, without the written consent of
Travelers, engage, directly or indirectly, in any act or activity which would
result, either alone or giving effect to the business, operations, properties,
activities and legal and regulatory status of Travelers and the Corporation, in
(a) Travelers being required to file any notice, report or other document or
make any registration with, obtain any approval, consent or authorization of or
otherwise become subject to any statutes, rules, regulations, ordinances,
orders, decrees or other legal restrictions of any federal, state, local or
foreign governmental, administrative or regulatory authority, agency or
instrumentality (collectively, "Applicable Law") or (b) any director of the
Corporation who is also a director or officer of Travelers being ineligible to
serve or prohibited from so serving as a director of the Corporation under or
pursuant to any Applicable Law. Travelers shall not be liable to the Corporation
or its stockholders for breach of any fiduciary duty by reason of the fact that
Travelers gives or withholds any consent for any reason in connection with this
Article NINTH. No vote cast or other action taken by any person who is an
officer, director or other representative of Travelers which vote is cast or
action is taken by such person in his capacity as a director of this Corporation
shall constitute a consent of Travelers for the purpose of this Article NINTH.
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C. Any person or entity purchasing or otherwise acquiring any
interest in shares of capital stock of the Corporation shall be deemed to have
notice of and to have consented to the provisions of this Article NINTH.
D. For purposes of this Article NINTH, Travelers shall have
the meaning set forth in Article SEVENTH.
E. For purposes of Section B of this Article NINTH, only the
consent of Travelers Group Inc. (and not any such corporation, partnership,
joint venture, limited liability company, trust, association or other entity)
shall be required.
F. Notwithstanding anything in this Restated Certificate of
Incorporation to the contrary and in addition to any vote of the Board of
Directors required by this Restated Certificate of Incorporation, until the
occurrence of the Trigger Date, the affirmative vote of the holders of more than
eighty percent (80%) of the voting power of the Common Stock then outstanding
shall be required to alter, amend or repeal, or adopt any provision inconsistent
with, any provision of this Article NINTH. Neither the alteration, amendment or
repeal of this Article NINTH nor the adoption of any provision inconsistent with
this Article NINTH shall eliminate or reduce the effect of this Article NINTH in
respect of any matter occurring, or any cause of action, suit or claim that, but
for this Article NINTH, would accrue or arise, prior to such alteration,
amendment, repeal or adoption.
G. This Article NINTH shall become inoperative and of no
effect on and after the date six months following the Trigger Date.
TENTH: Following the consummation of an initial public
offering of Common Stock or any transaction or event as a result of which any
Common Stock is listed on a national securities exchange or registered under
Section 12 of the Securities Exchange Act of 1934, as amended, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at a duly called annual or special meeting of stockholders of the
Corporation, and the ability of the stockholders to consent in writ-
19
<PAGE> 20
ing to the taking of any action is hereby specifically denied; provided,
however, stockholders of the Corporation shall have the right to consent in
writing to the taking of action by the Corporation in connection with a change
in the Corporation's name from "Travelers/Aetna Property Casualty Corp." Except
as otherwise required by law, special meetings of stockholders of the
Corporation may be called only by (i) the Chairman of the Board, the Vice
Chairman, Chairman of the Executive Committee, the President or the Secretary of
the Corporation or (ii) any such officer at the request in writing of the Board
of Directors or of the Executive Committee.
ELEVENTH: In furtherance and not in limitation of the powers
conferred upon it by the laws of the State of Delaware, the Board of Directors
shall have the power to adopt, amend, alter or repeal the Corporation's By-Laws.
The affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of
the entire Board of Directors shall be required to adopt, amend, alter or repeal
the Corporation's By-Laws. Notwithstanding any other provisions of this Restated
Certificate of Incorporation or the By-Laws of the Corporation (and
notwithstanding the fact that a lesser percentage or separate class vote may be
specified by law, this Restated Certificate of Incorporation or the By-Laws of
the Corporation), the affirmative vote of the holders of at least eighty percent
(80%) of the voting power of the shares entitled to vote at an election of
directors shall be required to adopt, amend, alter or repeal, or adopt any
provision as part of this Restated Certificate of Incorporation inconsistent
with the purpose and intent of, this Article ELEVENTH.
TWELFTH: No director or officer of the Corporation shall be
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director or officer, except for liability (i) for any breach
of the director's or officer's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit.
THIRTEENTH: In accordance with Section 203(b)(3) of the GCL,
the Corporation expressly elects not to be governed by Section 203 of the GCL.
20
<PAGE> 21
FOURTEENTH: Except as provided in Articles FOURTH, FIFTH and
ELEVENTH of this Restated Certificate of Incorporation, the Corporation reserves
the right to amend and repeal any provision contained in this Restated
Certificate of Incorporation in the manner prescribed by the laws of the State
of Delaware, and all rights of stockholders shall be subject to this
reservation.
21
<PAGE> 22
THE UNDERSIGNED, being the Vice President and Secretary of the
Corporation, does hereby certify that the Corporation has restated its
Certificate of Incorporation as set forth above, does hereby certify that such
restatement has been duly adopted in accordance with the applicable provisions
of Sections 242 and 245 of the General Corporation Law of the State of Delaware,
and does hereby make and file this Restated Certificate of Incorporation.
Dated: March 29, 1996
/s/ Charles O. Prince, III
--------------------------------
Charles O. Prince, III
Vice President and Secretary
22
<PAGE> 23
Certificate of Designations, Powers,
Preferences and Rights
of the
7.5% Redeemable Preferred Stock, Series Z
($250,000 liquidation preference per share)
of
Travelers/Aetna Property Casualty Corp.
--------------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
--------------------------------------------
Travelers/Aetna Property Casualty Corp., a Delaware
corporation (the "Corporation"), hereby certifies that:
1. The Restated Certificate of Incorporation of the
Corporation (the "Certificate of Incorporation") fixes the total number of
shares of all classes of capital stock that the Corporation shall have the
authority to issue at 700,000,000 shares of Class A common stock, par value $.01
per share, 700,000,000 shares of Class B common stock, par value $.01 per share,
and 25,000,000 shares of preferred stock, par value $0.10 per share ("Preferred
Stock").
2. The Certificate of Incorporation expressly grants to the
Board of Directors of the Corporation authority to provide for the issuance of
the shares of Preferred Stock in series, and to establish from time to time the
number of shares to be included in each such series and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
3. Pursuant to the authority conferred upon the Board of
Directors of the Corporation by the Certificate of Incorporation, the Board of
Directors, by action duly taken on March 29, 1996, adopted resolutions providing
for the 7.5% Redeemable Preferred Stock, Series Z as follows:
<PAGE> 24
"RESOLVED, that an issue of a series of Preferred
Stock is hereby provided for, and the number of shares to be included
in such series is established, and the designation, powers, preferences
and rights and qualifications, limitations and restrictions of such
series are fixed hereby as follows:
1. Designation and Number of Shares. The designation
of such series shall be 7.5% Redeemable Preferred Stock, Series Z (the
"Series Z Preferred Stock"), and the number of shares constituting such
series shall be 2,160. Shares of the Series Z Preferred Stock shall
have a par value of $0.10 per share, and a liquidation preference of
$250,000 per share (the "Liquidation Preference"). The number of
authorized shares of Series Z Preferred Stock may be reduced (but not
below the number of shares thereof then outstanding) by further
resolution duly adopted by the Board of Directors or the Executive
Committee of the Board of Directors and by the filing of a certificate
pursuant to the provisions of the General Corporation Law of the State
of Delaware stating that such reduction has been so authorized, but the
number of authorized shares of Series Z Preferred Stock shall not be
increased.
2. Dividends. (a) Holders of shares of Series Z
Preferred Stock will be entitled to receive, when, as and if declared
by the Board of Directors or a duly authorized committee thereof (the
"Board of Directors") out of assets of the Corporation legally
available for payment, cash dividends payable quarterly at the Annual
Dividend Rate (as defined below) per annum. Dividends on the Series Z
Preferred Stock shall be payable with respect to each three month
period beginning on the last day of March, June, September and December
of each year and ending on the day immediately prior to the first day
of the next succeeding three month period (each, a "Quarterly Dividend
Period"), in arrears, payable on March 31, June 30, September 30 and
December 31 of each year, commencing June 30, 1996, provided that if
such day is not a Business Day (as hereinafter defined), such dividend
shall be paid on the next succeeding Business Day (each, a
2
<PAGE> 25
"Dividend Payment Date"). Dividends shall be fully cumulative from the
date of initial issuance of such shares. Dividends shall be paid to the
holders of record of shares of the Series Z Preferred Stock as they
appear on the books of the Corporation at the close of business on the
15th day immediately preceding the applicable Dividend Payment Date (or
if such day is not a Business Day, the applicable record date shall be
the next preceding day that is a Business Day). Dividends in arrears
for any past Quarterly Dividend Periods may be declared and paid at any
time, without reference to any regular Dividend Payment Date, to
holders of record on such date, not exceeding 45 days preceding the
payment date thereof, as may be fixed by the Board of Directors.
The amount of dividends payable for each full
Quarterly Dividend Period in respect of each share of Series Z
Preferred Stock shall be equal to the product of (i) $62,500 multiplied
by (ii) the Annual Dividend Rate. The amount of dividends payable in
respect of each share of Series Z Preferred Stock for the initial
dividend period or any period shorter than a full Quarterly Dividend
Period shall be equal to the result obtained by multiplying (x) the
Annual Dividend Rate times (y) the Liquidation Preference times (z) a
fraction, the numerator of which is the actual number of days elapsed
in such period and the denominator of which is 360.
(b) "Annual Dividend Rate" means 0.075.
(c) "Business Day" means any day that is not a
Saturday, Sunday or a legal holiday in the State of New York.
(d) No dividends may be declared or paid or set apart
for payment on any Parity Preferred Stock (as defined in paragraph 8(b)
below) with regard to the payment of dividends unless (i) there shall
also be or have been declared and paid or set apart for payment on the
Series Z Preferred Stock, full cumulative dividends for all dividend
payment periods of the Series Z Preferred Stock ending on or before the
dividend payment date of such Parity Preferred Stock, ratably in
proportion to the re-
3
<PAGE> 26
spective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and
unpaid through the dividend payment period or periods of the Series Z
Preferred Stock next preceding such dividend payment date, on the other
hand, and (ii) the Corporation is not in default with respect to any
obligation (including its obligations pursuant to Sections 3 and 4
hereof) to redeem shares of the Series Z Preferred Stock.
(e) Except as set forth in the preceding paragraph
(d), unless (i) full cumulative dividends on the Series Z Preferred
Stock have been paid through the most recent Dividend Payment Date and
(ii) the Corporation is not in default with respect to any obligation
(including its obligations pursuant to Sections 3 and 4 hereof) to
redeem shares of the Series Z Preferred Stock, no dividends (other than
in Common Stock (as defined below)) may be paid or declared and set
aside for payment or other distribution made upon the Corporation's
Class A Common Stock, par value $.01 per share ("Class A Common
Stock"), Class B Common Stock, par value $.01 per share (together with
the Class A Common Stock, the "Common Stock"), or on any other stock of
the Corporation ranking junior to or on a parity with the Series Z
Preferred Stock as to dividends, nor may any Common Stock or any other
stock of the Corporation ranking junior to or on a parity with the
Series Z Preferred Stock as to dividends or as to amounts distributable
upon liquidation, dissolution or winding up of the Corporation be
redeemed, purchased or otherwise acquired for any consideration (or any
payment be made to or available for a sinking fund for the redemption
of any shares of such stock) by the Corporation; provided that any such
junior or parity stock may, in accordance with their respective
provisions, be converted into or exchanged or redeemed solely for stock
of the Corporation ranking junior to the Series Z Preferred Stock as to
dividends and as to amounts distributable upon liquidation, dissolution
or winding up of the Corporation.
3. Optional Redemption. (a) The Corporation, at its
option, out of funds legally avail-
4
<PAGE> 27
able therefor, may redeem shares of the Series Z Preferred Stock, in
whole or in part, on any Dividend Payment Date on or after June 30,
2002, at a redemption price of $250,000 per share, plus an amount equal
to accrued and unpaid dividends (whether or not earned or declared)
thereon to, but excluding, the date fixed for redemption.
(b) In the event that fewer than all the outstanding
shares of the Series Z Preferred Stock are to be redeemed, the shares
to be redeemed from each holder of record shall be determined by lot or
pro rata as may be determined by the Board of Directors or by any other
method as may be determined by the Board of Directors in its sole
discretion to be equitable.
(c) In the event the Corporation elects to redeem
shares of the Series Z Preferred Stock, written notice of such
redemption shall be given by first class mail, postage prepaid, mailed
not less than 30 days and not more than 60 days prior to the redemption
date, to each holder of record of the shares to be redeemed, at such
holder's address as the same appears on the books of the Corporation.
Each such notice shall state: (i) the redemption date; (ii) the number
of shares of the Series Z Preferred Stock to be redeemed and, in the
case of a partial redemption pursuant to paragraph 3(b) hereof, the
identification (by the number of the certificate or otherwise) of the
shares of Series Z Preferred Stock to be redeemed; (iii) the redemption
price; (iv) the place or places where certificates for such shares are
to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue from and
after such redemption date. On such redemption date, the Corporation
shall pay the redemption price, plus an amount equal to all accrued and
unpaid dividends thereon (whether or not earned or declared), to the
holders of Series Z Preferred Stock so to be redeemed.
(d) If notice of redemption shall have been duly
given, and if, on or before the redemption date specified therein, all
funds necessary for such redemption shall have been set aside by the
Corpora-
5
<PAGE> 28
tion, separate and apart from its other funds, in trust for the pro
rata benefit of the holders of the shares of Series Z Preferred Stock
called for redemption, so as to be and continue to be available
therefor, then, notwithstanding that any certificate for shares so
called for redemption shall not have been surrendered for cancellation,
all shares so called for redemption shall no longer be deemed
outstanding on and after such redemption date, all dividends shall
cease to accrue from and after such redemption date, and all rights
with respect to such shares shall forthwith on such redemption date
cease and terminate, except only the right of the holders thereof to
receive the amount payable on redemption thereof, without interest.
If such notice of redemption shall have been duly
given or if the Corporation shall have given to the bank or trust
company hereinafter referred to irrevocable authorization promptly to
give such notice, and if on or before the redemption date specified
therein the funds necessary for such redemption shall have been
deposited by the Corporation with such bank or trust company in trust
for the pro rata benefit of the holders of the shares called for
redemption, then, notwithstanding that any certificate for shares so
called for redemption shall not have been surrendered for cancellation,
from and after the time of such deposit, all shares so called for
redemption shall no longer be deemed to be outstanding and all rights
with respect to such shares shall forthwith cease and terminate, except
only the right of the holders thereof to receive from such bank or
trust company at any time after the time of such deposit the funds so
deposited, without interest. The aforesaid bank or trust company shall
be a bank or trust company organized and in good standing under the
laws of the United States of America or of the State of New York, doing
business in the Borough of Manhattan, the City of New York, having
capital surplus and undivided profits aggregating at least $50,000,000
according to its latest published statement of condition, and shall be
identified in the notice of redemption. Any interest accrued on such
funds shall be for the benefit of the Corporation. Any funds so set
aside or deposited, as the case may be, and unclaimed at
6
<PAGE> 29
the end of one year from such redemption date shall, to the extent
permitted by law, be released or repaid to the Corporation, after which
repayment the holders of the shares so called for redemption shall look
only to the Corporation for payment thereof.
(e) Notwithstanding the foregoing provisions of this
Section 3, unless the full cumulative dividends on all outstanding
shares of the Series Z Preferred Stock shall have been paid or
contemporaneously are declared and paid through the most recent
Dividend Payment Date, no shares of the Series Z Preferred Stock shall
be redeemed unless all outstanding shares of the Series Z Preferred
Stock are simultaneously redeemed, and neither the Corporation nor a
subsidiary of the Corporation shall purchase or otherwise acquire any
shares of the Series Z Preferred Stock.
(f) Any shares of the Series Z Preferred Stock that
shall at any time have been redeemed or repurchased pursuant to this
Section 3 or otherwise shall, after such redemption or repurchase, have
the status of authorized but unissued shares of Preferred Stock,
without designation as to class or series until such shares are once
again designated as part of a particular class or series by the Board
of Directors.
4. Mandatory Redemption. (a) Any holder of shares of
Series Z Preferred Stock that is a member of the Travelers Affiliated
Group (as defined below) shall have the right, subject to paragraph (b)
below, to require the Corporation, at any time, to repurchase, out of
funds legally available therefore on the date specified in the notice
duly given by such holder to the Corporation pursuant to paragraph (c)
below (the "Mandatory Redemption Date"), all or part of the Series Z
Preferred Stock then owned by such holder at a purchase price in cash
equal to 100% of the aggregate Liquidation Preference of such shares,
together with all accrued and unpaid dividends (whether or not earned
or declared) on such shares to but not including the Mandatory
Redemption Date (the "Redemption Price"), in accordance with the
procedures set forth below. "Travelers Affiliated Group" means
Travelers Group
7
<PAGE> 30
Inc., a Delaware corporation, and all of its direct and indirect
subsidiaries now or hereafter existing, other than the Corporation and
its direct and indirect subsidiaries.
(b) The aggregate amount of Series Z Preferred Stock
required to be redeemed by the Corporation on any Mandatory Redemption
Date pursuant to the provisions of paragraph (a) above will be limited
to the Applicable Amount as of such Mandatory Redemption Date. The
"Applicable Amount," as of any date, means an amount equal to the
aggregate net proceeds (regardless of the actual use of such proceeds)
received by the Corporation or a subsidiary of the Corporation, after
the date of issuance of the Series Z Preferred Stock to and including
such Mandatory Redemption Date, from any issuance and sale by the
Corporation or a subsidiary of the Corporation of shares of its capital
stock (or, in the case of a subsidiary trust of the Corporation,
beneficial interests in the trust) (other than offerings pursuant to
employee plans, or non-cash offerings in connection with an
acquisition, exchange offer, recapitalization or similar transaction)
(a "Stock Issuance"), less the aggregate Liquidation Preference of all
shares of Series Z Preferred Stock redeemed by the Corporation pursuant
to the provisions of this Section 4 prior to such Mandatory Redemption
Date; provided, however, that the Applicable Amount shall not include
proceeds received by the Corporation from the issuance and sale of
shares of Common Stock to The Travelers Insurance Group Inc., Aetna
Life and Casualty Company, J.P. Morgan Capital Corporation, The Trident
Partnership L.P. and Fund American Enterprises Holdings, Inc. pursuant
to those separate stock purchase agreements with the Corporation, each
dated as of March 11, 1996. The Corporation shall be obligated to
redeem shares of Series Z Preferred Stock only to the extent that it
has funds legally available therefor.
(c) The Corporation shall provide written notice to
the holders of record of shares of Series Z Preferred Stock of the
Applicable Amount as of the date of such notice and after giving effect
to any Stock Issuance, (i) on the first day of each calendar month
following the date of initial issuance of
8
<PAGE> 31
the Series Z Preferred Stock and (ii) at any time the Corporation or a
subsidiary of the Corporation intends to make a Stock Issuance (but in
no event later than the fifth Business Day prior to the consummation of
any such issuance and sale); provided, however, that the Corporation's
failure to give such notice shall in no way affect its obligation to
redeem the shares of Series Z Preferred Stock as provided in this
Section 4. Any holder who desires to cause the Corporation to redeem
such holder's shares of Series Z Preferred Stock shall send by
first-class mail, postage prepaid, or by hand delivery, to the
Corporation at its principal executive offices, not less than two
Business Days nor more than 60 days prior to the Mandatory Redemption
Date specified in such notice, a notice stating (i) that such holder
desires to cause the Corporation to redeem such holder's shares of
Series Z Preferred Stock, (ii) the number of shares to be redeemed and
(iii) the Mandatory Redemption Date (which date may be specified by
reference to the estimated closing date of any proposed Stock
Issuance). Holders electing to have shares of the Series Z Preferred
Stock redeemed will be required to surrender the certificate or
certificates representing such shares to the Corporation at least one
full Business Day prior to such Mandatory Redemption Date, and on such
Mandatory Redemption Date the Corporation shall pay to such holder the
Redemption Price.
(d) Any shares of Series Z Preferred Stock that shall
at any time have been redeemed or repurchased pursuant to this Section
4 or otherwise shall, after such redemption or repurchase, have the
status of authorized but unissued shares of Preferred Stock, without
designation as to class or series until such shares are once again
designated as part of a particular class or series by the Board of
Directors.
(e) If fewer than all the shares of Series Z
Preferred Stock requested to be redeemed are required to be redeemed as
a result of the provisions of paragraph (b) above, then the Corporation
will select those shares to be redeemed by lot or pro rata as may be
determined by the Board of Directors or by any other method as may be
deter-
9
<PAGE> 32
mined by the Board of Directors in its sole discretion to be
equitable.
(f) The provisions of this Section 4 shall
automatically terminate and shall cease to have any further force or
effect with respect to, but only with respect to, any shares of Series
Z Preferred Stock that are transferred to a person other than a member
of the Travelers Affiliated Group. For purposes of this Section 4,
"person" shall mean a corporation, a trust, a limited liability
company, an association, a partnership, a joint venture, an
organization, a business, an individual, a government or a subdivision
thereof or a governmental agency; and the term "transfer" shall not
include a bona fide pledge of shares of Series Z Preferred Stock.
(g) Notwithstanding the foregoing provisions of this
Section 4, unless the full cumulative dividends on all outstanding
shares of the Series Z Preferred Stock shall have been paid or
contemporaneously are declared and paid through the most recent
Dividend Payment Date, no shares of the Series Z Preferred Stock shall
be redeemed unless all outstanding shares of the Series Z Preferred
Stock are simultaneously redeemed, and neither the Corporation nor a
subsidiary of the Corporation shall purchase or otherwise acquire any
shares of the Series Z Preferred Stock.
5. Conversion or Exchange; Sinking Fund. The holders
of shares of the Series Z Preferred Stock shall not have any rights to
convert such shares into, or exchange such shares for, shares of any
other class or classes or of any other series of any class or classes
of capital stock of the Corporation; nor shall the holders of shares of
the Series Z Preferred Stock be entitled to the benefits of a sinking
fund in respect of their shares of the Series Z Preferred Stock.
6. Voting. (a) Except as otherwise provided in this
Section 6 or as otherwise required by law, the Series Z Preferred Stock
shall have no voting rights.
10
<PAGE> 33
(b) If the equivalent of six quarterly dividends
(whether or not consecutive) payable on shares of Series Z Preferred
Stock or on any Parity Preferred Stock upon which like voting rights
have been conferred and are exercisable are in arrears at the time of
the record date to determine stockholders for any annual meeting of
stockholders of the Corporation, the authorized number of directors of
the Corporation shall be automatically increased by two, and the
holders of shares of Series Z Preferred Stock (voting separately as a
class with the holders of shares of any one or more other series of
Parity Preferred Stock outstanding at the time upon which like voting
rights have been conferred and are exercisable ("Voting Parity Stock"))
shall be entitled at such annual meeting of stockholders (and at each
subsequent annual meeting of stockholders until such arrearages have
been paid or set apart for payment, at which time such right shall
terminate, except as herein or by law expressly provided, subject to
revesting in the event of each and every subsequent default of the kind
referred to above) to elect two directors of the Corporation, with the
remaining directors of the Corporation to be elected by the holders of
shares of any other class or classes or series of stock entitled to
vote therefor. In any such election, holders of shares of Series Z
Preferred Stock shall have 10,000 votes for each share held (the
holders of shares of any other class or Series of Voting Parity Stock
being entitled to such number of votes, if any, for each share of such
stock held as may be granted to them).
At all meetings of stockholders at which holders of
Preferred Stock shall be entitled to vote for Directors as a single
class, the holders of a majority of the outstanding shares of all
classes and series of capital stock of the Corporation having the right
to vote as a single class shall be necessary to constitute a quorum,
whether present in person or by proxy, for the election by such single
class of its designated Directors. In any election of Directors by
stockholders voting as a class, such Directors shall be elected by the
vote of at least a plurality of shares held by such stockholders
present or represented at the meeting. At any such meeting, the
election of Directors by stockholders
11
<PAGE> 34
voting as a class shall be valid notwithstanding that a quorum of other
stockholders voting as one or more classes may not be present or
represented at such meeting.
(c) Any director who has been so elected pursuant to
the preceding paragraph (b) may be removed at any time, with or without
cause, only by the affirmative vote of the holders of the shares at the
time entitled to cast a majority of the votes entitled to be cast for
the election of any such director at a special meeting of such holders
called for that purpose, and any vacancy thereby created may be filled
by the vote of such holders. If a vacancy occurs among the Directors
elected pursuant to the preceding paragraph (b), other than by removal
from office as set forth in the preceding sentence, such vacancy may be
filled by the remaining Director elected pursuant to the preceding
paragraph (b), or his or her successor then in office, and the Director
so elected to fill such vacancy shall serve until the next meeting of
stockholders for the election of Directors.
(d) The voting rights of the holders of Series Z
Preferred Stock to elect Directors as set forth above shall continue
until all dividend arrearages on the Series Z Preferred Stock have been
paid or declared and set apart for payment. Upon the termination of
such voting rights, the terms of office of all persons who may have
been elected pursuant to such voting rights shall immediately
terminate, and the number of directors of the Corporation shall be
decreased by two.
(e) So long as any shares of Series Z Preferred Stock
remain outstanding, the consent of the holders of at least two-thirds
of the shares of Series Z Preferred Stock then outstanding, given in
person or by proxy, in writing or at any meeting called for the
purpose, shall be necessary to permit, effect or validate the
following:
i) the creation, issuance or increase in
the authorized amount of any class or series of stock ranking
prior to the shares of Series Z Preferred Stock either as to
dividends
12
<PAGE> 35
or upon liquidation, dissolution or winding up of the
Corporation; or
ii) an alteration or change in the
provisions of the Restated Certificate of Incorporation of the
Corporation (including any Certificate of Amendment or
Certificate of Designations relating to the Series Z Preferred
Stock) that would adversely affect the powers, preferences or
rights of the holders of shares of Series Z Preferred Stock;
provided, however, that any increase in the amount of
authorized Common Stock or authorized Preferred Stock or any
increase or decrease in the number of shares of any series of
Preferred Stock or the authorization, creation and issuance of
other classes or series of stock, in each case ranking on a
parity with or junior to the Series Z Preferred Stock with
respect to the payment of dividends and as to the distribution
of assets upon liquidation, dissolution or winding up, shall
not be deemed to adversely affect such powers, preferences or
rights.
(f) The foregoing voting provisions shall not apply
if, at or prior to the time when the act with respect to which such
vote would otherwise be required or upon which the holders of Series Z
Preferred Stock shall be entitled to vote shall be effected, all
outstanding shares of Series Z Preferred Stock shall have been redeemed
or called for redemption and sufficient funds shall have been deposited
in trust to effect such redemption.
7. Liquidation Rights. (a) Upon the dissolution,
liquidation or winding up of the Corporation, the holders of the shares
of the Series Z Preferred Stock shall be entitled to receive out of the
assets of the Corporation available for distribution to stockholders,
whether from capital, surplus or earnings, before any payment or
distribution shall be made on the Common Stock or on any other class or
series of stock ranking junior to shares of the Series Z Preferred
Stock as to amounts distributable on dissolution, liquidation or
winding up, $250,000 per share, plus an amount equal to all dividends
(whether or not earned or declared) on
13
<PAGE> 36
such shares accrued and unpaid thereon to the date of final
distribution.
(b) Neither the merger or consolidation of the
Corporation into or with any other corporation nor the merger or
consolidation of any other corporation into or with the Corporation,
nor a sale or transfer of all or any part of the Corporation's assets,
shall be deemed to be a dissolution, liquidation or winding up,
voluntary or involuntary, of the Corporation for the purpose of this
Section 7.
(c) After the payment to the holders of the shares of
the Series Z Preferred Stock of the full preferential amounts provided
for in this Section 7, the holders of the Series Z Preferred Stock as
such shall have no right or claim to any of the remaining assets of the
Corporation.
(d) In the event the assets of the Corporation
available for distribution to the holders of shares of the Series Z
Preferred Stock upon any dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, shall be insufficient to
pay in full all amounts to which such holders are entitled pursuant to
paragraph (a) of this Section 7, the holders of shares of the Series Z
Preferred Stock and of any Parity Preferred Stock or any other stock of
the Corporation ranking, as to the amounts distributable upon
dissolution, liquidation or winding up, on a parity with the Series Z
Preferred Stock, shall share ratably in any distribution in proportion
to the full respective preferential amounts to which they are entitled.
8. Ranking. For purposes of this Resolution, any
stock of any class or classes or series of the Corporation shall be
deemed to rank:
(a) prior to the shares of Series Z Preferred Stock,
either as to dividends or upon liquidation, dissolution or winding up
if the holders of such stock shall be entitled to either the receipt of
dividends or of amounts distributable upon dissolution, liquidation or
winding up of the Corporation, whether voluntary or involuntary, as
14
<PAGE> 37
the case may be, in preference or priority to the holders of shares of
the Series Z Preferred Stock;
(b) on a parity with shares of the Series Z Preferred
Stock, either as to dividends or upon liquidation, dissolution or
winding up, or both, whether or not the dividend rates, dividend
payment dates, redemption amounts per share or liquidation values per
share or sinking fund provisions, if any, are different from those of
the Series Z Preferred Stock, if the holders of such stock shall be
entitled by the terms thereof to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, as the case may be, in
proportion to their respective dividend rates or liquidation values,
without preference or priority of one over the other, as between the
holders of such stock and the holders of shares of Series Z Preferred
Stock (the term "Parity Preferred Stock" being used to refer to any
stock on a parity with the shares of Series Z Preferred Stock, either
as to dividends or upon liquidation, dissolution or winding up, or
both, as the context may require); and
(c) junior to shares of the Series Z Preferred Stock,
as to dividends and upon liquidation, dissolution or winding up, or
both, if such stock shall be Common Stock or if the holders of shares
of the Series Z Preferred Stock shall be entitled to receipt of
dividends and of amounts distributable upon dissolution, liquidation or
winding up of the Corporation, whether voluntary or involuntary, as the
case may be, in preference or priority to the holders of such stock.
9. Waiver, Modification and Amendment.
Notwithstanding any other provisions relating to the Series Z Preferred
Stock, any of the rights or benefits of the holders of the Series Z
Preferred Stock may be waived, modified or amended with the consents of
the holders of all of the then outstanding shares of Series Z Preferred
Stock. Any such waiver, modification or amendment, shall be deemed to
have the same effect as satisfaction in full of any such right or
benefit as though actually received by such holders."
15
<PAGE> 38
Travelers/Aetna Property Casualty Corp. has caused this
Certificate to be duly executed by its Vice President and Secretary this 29th
day of March, 1996.
Travelers/Aetna
Property Casualty Corp.
By: /s/ Charles O. Prince, III
------------------------------------
Charles O. Prince, III
Vice President and
Secretary
16
<PAGE> 39
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION OF
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
-------------------
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
-------------------
TRAVELERS/AETNA PROPERTY CASUALTY CORP., a Delaware corporation (the
"Company"), does hereby certify as follows:
FIRST: Article FIRST of the Restated Certificate of Incorporation of
the Company is hereby amended to read in its entirety as set forth below:
FIRST: The name of the Corporation is Travelers Property Casualty Corp.
(hereinafter the "Corporation").
SECOND: The foregoing amendment has been duly adopted in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware and by written consent of the holders of a majority of the stock of
the Corporation entitled to vote in accordance with Section 228 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Certificate to be
executed in its corporate name this 7th day of March, 1997.
TRAVELERS/AETNA PROPERTY CASUALTY CORP.
By: /S/ JAMES M. MICHENER
___________________________________________
James M. Michener
Secretary
<PAGE> 1
TRAVELERS PROPERTY CASUALTY CORP.
1996 EXECUTIVE OPTION PLAN
as amended through March 7, 1997
1. Purpose. The purpose of the Travelers Property Casualty Corp. 1996
Executive Option Plan (the "Plan") is to advance the interests of the Company,
its Subsidiaries and stockholders by providing incentives in the form of
options to purchase shares of common stock of Travelers Group Inc.
("Travelers") to Executive Officers of Travelers Property Casualty Corp. (the
"Company") and its Subsidiaries. Option grants will be made under the Travelers
Group 1996 Stock Incentive Plan, as the same may be amended from time to time
("SIP").
2. Definitions. For purposes of the Plan, the capitalized terms used,
but not defined herein, shall have the meanings set forth in SIP, and the
following terms shall have the following meanings:
"Board" shall mean the Board of Directors of the Company.
"Committee" shall mean a subcommittee of the Nominations and
Compensation Committee of the Company, appointed by such Nominations and
Compensation Committee, consisting of at least two (2) persons, the
composition of which subcommittee shall satisfy the requirements of
Rule 16b-3 under the 1934 Act (with respect to grants to Section 16(a)
Persons) and who also qualify, and shall remain qualified as "outside
directors" as defined in Section 162(m) of the Code.
"Common Stock" shall mean the common stock of Travelers, par value $.01
per share.
"Company" shall mean Travelers Property Casualty Corp., a Delaware
corporation.
"Executive Officers" shall mean (a) executive officers of the Company
who hold the office of vice-president or higher, and/or who are
subject to the reporting requirements of Section 16 of the 1934 Act
and who contribute significantly to the long term performance and
growth of the Company and (b) executive officers of Subsidiaries who
hold the office of Senior Vice President or higher and who contribute
significantly to the long-term performance and growth of the Company
or its Subsidiaries.
"Nominations and Compensation Committee" shall mean the Nominations,
Compensation and Corporate Governance Committee appointed by the Board.
"Plan" shall mean the Travelers Property Casualty Corp. 1996 Executive
Option Plan, as the same may be amended from time to time.
1
<PAGE> 2
"SIP" shall mean the Travelers Group 1996 Stock Incentive Plan, as the
same may be amended from time to time.
"SIP Committee" shall mean the Incentive Compensation Subcommittee of
the Nominations and Compensation Committee of Travelers, or such other
committee that may, from time to time, have the power and authority to
grant awards under SIP to Section 16(a) Persons.
"Subsidiary" shall mean any entity at least one-half of whose
outstanding voting stock, or beneficial ownership for entities other
than corporations, is owned, directly or indirectly, by the Company,
or which is otherwise controlled directly or indirectly by the Company.
"Travelers" shall mean Travelers Group Inc., a Delaware corporation
and currently, the majority stockholder of the Company.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
3. Committee Powers and Authority.
(a) Granting of Awards. Awards under SIP may be granted to
Executive Officers by the Committee, as authorized by the SIP Committee. Awards
granted hereunder shall be governed by the terms of SIP and this Plan. No Award
shall be granted hereunder to any member of the Committee. The Committee shall
have the power and authority, subject to any limitations which may be
specifically set forth in SIP or in this Plan, and as authorized by the SIP
Committee, to determine the type, the Exercise Price and the number of shares
exercisable in connection with each Option and Reload Option, to determine the
terms, conditions and limitations applicable to the vesting and exercisability
of Awards, to determine the time when Awards will be granted and paid and
whether payment of any Award may be deferred, to determine whether Options
should be transferable and whether any conditions should be imposed on such
transfer, to establish objectives and conditions for earning Awards, to
determine whether such objectives or conditions have been met, to determine the
payment provisions applicable to the exercise of Options and Reload Options, to
determine, modify, waive, extend or accelerate the terms and conditions for
vesting, exercisability and forfeiture of Awards, to determine whether payment
of an Award should be reduced or eliminated, to determine whether the Common
Stock issued pursuant to Awards should be restricted in any manner, and the
nature, terms and conditions of any such restrictions and to interpret the
provisions of the Plan and all Awards granted thereunder to Executive Officers.
At the discretion of the Committee, and as authorized by the SIP Committee, an
Executive Officer may also be eligible to receive a Reload Option in connection
with an Option exercise, subject to the terms, conditions and limitations set
forth in SIP.
(b) Administration of the Plan. The Committee shall have
the power and authority to administer the Plan in connection with Awards made
to Executive Officers, and, as authorized by the SIP Committee, to establish,
amend and rescind such rules, regulations and
2
<PAGE> 3
administrative guidelines relating to the Executive Officers who are granted
Awards under the Plan, to correct any defect, supply any omission or clarify
any inconsistency in the Plan and/or in any Award Agreement and to take such
actions and make such administrative determinations that the Committee deems
necessary or advisable. Any decision of the Committee in the administration of
the Plan, as described herein, shall be conclusive and binding on all parties
concerned, including the Company, its stockholders and Subsidiaries and all
Executive Officers.
(c) Delegation of Authority. The Committee may not delegate its
authority over the administration of the Plan.
(d) Committee Action. The Committee may act in writing by a
majority of its members in office. The members of the Committee may authorize
any one or more of the members of the Committee or any officer of the Company
to execute and deliver documents on behalf of such Committee. No member of the
Committee shall be personally liable for anything done or omitted to be done by
him or her or by any other member of the Committee in connection with the
Plan, except for his or her own willful misconduct or as expressly provided by
statute.
4. Participation by Subsidiaries. Upon approval by the Board or a
committee authorized by the Board, Subsidiaries of the Company may participate
in the Plan. A Subsidiary's participation in the Plan may be terminated at any
time by the Board or an authorized committee. If the participation in the Plan
of a Subsidiary shall terminate, such termination shall not relieve it of any
obligations theretofore incurred by it under the Plan, except with the approval
of the Board or a committee authorized by the Board.
5. Maximum Number of Shares Issuable to any One Executive Officer. The
aggregate number of shares of Common Stock that may be granted to any one
Executive Officer pursuant to Awards made under this Plan between the
effective date of this Plan and April 23, 2006 shall not exceed four million
(4,000,000) shares, subject to adjustment as provided in Section 15 of SIP.
6. Award Agreements. Awards granted under the Plan shall be evidenced
in the manner prescribed by the Committee, as authorized by the SIP Committee
from time to time in accordance with SIP, and shall be governed by the terms,
conditions, restrictions and limitations of SIP. The Committee may require that
an Executive Officer execute and deliver an Award Agreement to the Company in
order to evidence an Executive Officer's acceptance of an Award.
7. Incentive Stock Options. The terms and conditions of any Incentive
Stock Options granted to Executive Officers shall be subject to and shall be
designed to comply with the provisions of Section 422 of the Code, and any
other administrative procedures adopted by Travelers or the Committee, from
time to time. Incentive Stock Options may not be granted hereunder to any
person who is not an employee of the Company or a Subsidiary at the time of
grant.
3
<PAGE> 4
8. Income and Withholding Taxes. The Company and it Subsidiaries
shall have the right to deduct from all amounts paid to an Executive Officer
(or his or her beneficiaries or any Permitted Transferee) under the Plan any
Federal, state or local income or other taxes required by law to be withheld
with respect to such payment. It shall be a condition to the obligation of
Travelers to issue Common Stock upon exercise of an Option or Reload Option
that the Executive Officer (or any beneficiary or person entitled to act on
behalf of the Executive Officer) pay to the Company, upon demand, such amount
as may be requested by the Company for the purpose of satisfying any liability
to withhold Federal, state or local income or other taxes. If the amount
requested is not paid, Travelers may refuse to issue shares. Unless the
Committee shall in its discretion determine otherwise, and provided same is
permitted under SIP, payment for taxes required to be withheld may be made in
whole or in part by an Executive Officer's election, in accordance with rules
adopted by Travelers or the Committee from time to time, (a) to have shares of
Common Stock otherwise issuable pursuant to the Plan having a Fair Market Value
equal to such tax liability withheld to satisfy such tax obligation and/or (b)
to tender shares of Common Stock of Travelers owned by the Executive Officer
(or the person exercising the Option), including Common Stock of Travelers
owned jointly with his or her spouse, and acquired at least six (6) months
prior to such tender (excluding restricted shares of Common Stock of Travelers
awarded under The Travelers Group Capital Accumulation Plan or the Travelers
Group Employee Incentive Plan) and having a Fair Market Value equal to such tax
liability.
9. No Rights to Awards or Employment. No Executive Officer shall
have any claim or right to be granted an Award under the Plan. There shall be
no obligation of uniformity of treatment of Executive Officers under the Plan.
Neither the Plan nor any action taken thereunder shall be construed as giving
any Executive Officer any right to employment with the Company or any
Subsidiary. In addition, the Company and each Subsidiary expressly reserve the
right at any time to dismiss an Executive Officer free from liability, or any
claim under the Plan, except as provided herein or in an Award Agreement.
10. Governing Law. The validity, construction, interpretation,
administration and effect of the Plan and of its rules and regulations, and
rights relating to the Plan, shall be determined solely in accordance with the
laws of the State of Delaware.
11. Expenses of the Plan. The expenses of the administration of
the Plan shall be borne by the Company and its participating Subsidiaries.
12. Arbitration. All claims and disputes between an Executive
Officer, Travelers, the Company and/or any Subsidiary arising out of the Plan
or any Award granted hereunder shall be submitted to arbitration in accordance
with the then current arbitration policy of the Company or the Subsidiary with
whom the Executive Officer is employed. Notice of demand for arbitration shall
be given in writing to the other party and shall be made within a reasonable
time after the claim or dispute has arisen. The award rendered by the
arbitrator shall be made in accordance with the provisions of the Plan, shall be
final, and judgment may be entered upon it in accordance with applicable law in
any court having jurisdiction thereof. The provisions of this
4
<PAGE> 5
Section shall be specifically enforceable under applicable law in any court
having jurisdiction thereof.
13. Termination; Amendment. The Plan shall terminate on the earlier to
occur of (a) a resolution of the Board of Directors terminating the Plan, (b)
April 23, 2006 or (c) termination of SIP. The Plan may be amended or suspended
at any time and from time to time by the Board, provided that no amendment shall
be made without the approval of the Board of Directors of Travelers, and no
amendment shall be made without stockholder approval, if stockholder approval by
the Company's stockholders is required under applicable law. No termination,
amendment or suspension of the Plan shall adversely affect any right of any
Executive Officer with respect to any Award theretofore granted, as determined
by the Committee, without such Executive Officer's written consent. Subject to
the foregoing limitations, and as authorized by the SIP Committee, the Committee
shall have the authority to amend certain Plan provisions to the extent
necessary to permit participation in the Plan by Executive Officers who are
employed outside of the United States on terms and conditions which are
comparable to those afforded to Executive Officers located within the United
States.
14. Partial Invalidity. If any term or provision of this Plan or the
application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, then the remainder of the Plan, or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby, and each
term and provision hereof shall be valid and be enforced to the fullest extent
permitted by applicable law.
15. Deferrals. If authorized by the SIP Committee, the Committee may
postpone the exercising of Awards, the issuance or delivery of Common Stock
under any Award or any action permitted under the Plan to prevent the Company
or any Subsidiary from being denied a Federal income tax deduction with respect
to any Award other than an Incentive Stock Option. In addition, the Committee
may, as authorized by the SIP Committee, determine that all or a portion of a
payment to an Executive Officer, whether to be made in cash, shares of Common
Stock or a combination thereof, shall be deferred. Deferrals shall be for such
periods and upon such terms and conditions as the Committee shall determine, as
authorized by the SIP Committee.
16. Effective Date. The Plan shall become effective on July 24, 1996. No
Award shall be granted hereunder unless and until the Plan has been so adopted.
5
<PAGE> 1
EXHIBIT 10.04
TRAVELERS PROPERTY CASUALTY CORP.
EXECUTIVE PERFORMANCE COMPENSATION PLAN
as amended through March 7, 1997
ARTICLE I
PURPOSE
SECTION 1.1 The purpose of the Travelers Property Casualty Corp. (the
"Company") Executive Performance Compensation Plan (the "Plan") is to establish
certain performance criteria for determining the maximum amount of any bonus
that may be paid under the Plan including that portion of the bonus paid in the
form of restricted stock under the Company's Capital Accumulation Plan, for
those executive officers who, on the last day of the Company's taxable year,
consist of the chief executive officer and the four other most highly
compensated executive officers of the Company or its subsidiaries named in the
Summary Compensation Table in the Company proxy statement from time to time.
The Plan is intended to address certain limitations on the
deductibility of executive compensation under Section 162(m) of the Internal
Revenue Code of 1986, as amended by the Omnibus Budget Reconciliation Act of
1993 (the "Revenue Act"). The Revenue Act limits the deductibility of certain
compensation in excess of $1 million per year paid by a publicly traded
corporation to Covered Employees (as defined in such Act).
ARTICLE II
DEFINITIONS
SECTION 2.1 The following words and phrases shall have the meanings
indicated for the purpose of the Plan unless the context clearly indicates
otherwise:
(a) ADJUSTED NET INCOME shall mean the Net Income (i) reduced by the
aggregate amount of dividends on the Company's preferred stock, if any and (ii)
increased or reduced by the after-tax earnings impact of each of the following
items if they occur during a Bonus Year;
(i) realized investment gains and losses, including those
resulting from the sale of subsidiaries and affiliates, for the Bonus
Year;
(ii) the cumulative effect to the beginning of the year of
changes in accounting principles for the Bonus Year required by the
Financial Accounting Standards Board, the Securities and Exchange
Commission or any other governing body that sets accounting standards
as set forth in the Consolidated Statement of Income or the Notes
thereto as reported in the Annual Report;
(iii) the cumulative effect to the beginning of the year of
changes in the tax law occurring during the Bonus Year as set forth in
the Consolidated Statement of Income or the Notes thereto as reported
in the Annual Report; and
(iv) extraordinary items, as defined under generally accepted
accounting principles, during the Bonus Year as set forth in the
Consolidated Statement of Income as reported in the Annual Report.
Extraordinary items would not include such items as catastrophic
insurance losses or restructuring charges.
(v) charges related to the acquisition and integration of a
company or business acquired within twelve months of such acquisition.
Such charges would result primarily from anticipated costs of the
D-1
<PAGE> 2
acquisition and the application of the company's strategies, policies
and practices to the acquired company's reserves.
(b) ANNUAL REPORT shall mean the Annual Report to Stockholders
of the Company containing the audited financial statements of the
Company.
(c) BOARD shall mean the Board of Directors of the Company.
(d) BONUS POOL shall mean the total maximum amount available
to be paid as bonus compensation to all Covered Employees for each
Bonus Year, whether paid in cash or restricted stock under the CAP
Plan.
(e) BONUS YEAR shall mean the annual period corresponding to a
calendar year for which the calculation of a bonus award is to be made.
(f) CAP PLAN shall mean the Company's Capital Accumulation
Plan, as the same shall be in effect from time to time.
(g) CHIEF EXECUTIVE OFFICER shall mean the Chief Executive
Officer of the Company or the individual acting in such capacity.
(h) CODE shall mean the Internal Revenue Code of 1986, as
amended and the regulations promulgated thereunder.
(i) COMMITTEE shall mean the Incentive Compensation
Subcommittee of the Nominations, Compensation and Corporate Governance
Committee of the Board, or any subcommittee thereof.
(j) COMMON EQUITY shall mean the common stockholders' equity
appearing on the Consolidated Statements of Changes in Stockholders'
Equity in the Company's Annual Report as of the beginning of the Bonus
Year.
(k) COMPANY shall mean Travelers Property Casualty Corp. and
its successors. Where the context requires, the "Company" shall mean
Travelers Property Casualty Corp. and its consolidated subsidiaries.
(l) COVERED EMPLOYEE shall mean the Chief Executive Officer of
the Company (or the individual acting in such capacity) and the four
other most highly compensated executive officers of the Company as
determined on the last day of the taxable year and in accordance with
Section 162(m) of the Code.
(m) EXCHANGE ACT shall mean the Securities Exchange Act of
1934, as amended.
(n) MD&A shall mean Management's Discussion and Analysis of
Financial Condition and Results of Operations as reported in the
Company's Annual Report.
(o) MEASUREMENT PERIOD shall mean any period other than the
calendar year determined by the Committee pursuant to Section 5.1.
(p) NET INCOME shall mean the consolidated net income of the
Company as disclosed in the Consolidated Statement of Income as
reported in the Company's Annual Report for the Bonus Year.
(q) OUTSIDE DIRECTOR shall mean a member of the Board who
falls within the definition of an "outside director" under Section
162(m) of the Code.
(r) PERFORMANCE GOAL shall mean the financial measurements of
corporate performance that must be met in order for a Covered Employee
to receive a payment under this Plan.
(s) RETURN ON EQUITY shall mean the percentage equivalent to
the fraction resulting from dividing (i) Adjusted Net Income by (ii)
Common Equity.
D-2
<PAGE> 3
ARTICLE III
ADMINISTRATION OF THE PLAN
SECTION 3.1 The Plan shall be administered by the Committee. If,
however, the Committee shall fail to be composed solely of Outside Directors,
then those members of the Committee that are Outside Directors shall act as the
Committee.
SECTION 3.2 The Plan shall be interpreted and construed in accordance
with Section 162(m) of Code. Any action by the Committee that would be violative
of Section 162(m) of the Code shall be void. Otherwise the Committee shall have
full and exclusive authority, power and discretion to construe and interpret the
Plan (subject to the advice of the Company's General Counsel with respect to any
question of law), and generally to determine any and all questions arising under
the Plan. The Committee shall have the authority to reduce the bonus of any
Covered Employee earned under this Plan even if the Performance Goals applicable
to maximum bonus awards to such Employee have been met. The Committee shall not
have any authority hereunder to increase any bonus compensation calculated in
accordance with this Plan.
SECTION 3.3 The Committee shall be responsible for certifying in
writing to the Company that the applicable Performance Goals have been met
before any bonus payments are made under this Plan. If permitted under Section
162(m) of the Code, such certification may be based upon reasonably estimated
financial information available prior to the end of the Bonus Year.
ARTICLE IV
CALCULATION OF BONUS AMOUNTS FOR COVERED EMPLOYEES
SECTION 4.1 As soon as practicable following the certification
described in Section 3.3 above, and subject to the Committee's discretion to
reduce bonuses under Section 3.2, Covered Employees shall be entitled to receive
for the Bonus Year a maximum bonus (whether paid in cash or restricted stock
under the CAP Plan) not exceeding the following percentages of the Bonus Pool:
<TABLE>
<S> <C>
Chief Executive Officer......................... 31.00%
Each other Covered Employee..................... 17.25%
</TABLE>
SECTION 4.2 The Bonus Pool for any Bonus Year shall be equal to a
percentage of the Adjusted Net Income for such Bonus Year. Adjusted Net Income
shall be calculated without giving effect to the payment of bonuses provided for
under the Plan. The percentage shall be based upon the Return on Equity, as
follows:
<TABLE>
IF THE RETURN ON EQUITY IS: THE MAXIMUM AMOUNT OF THE BONUS POOL SHALL BE:
- -------------------------------------- ----------------------------------------------------------------------
<S> <C>
less than 10% (A) = 0%
10% (B) = 1.4% of Adjusted Net Income.
greater than 10% up to (C) = the amount determined under (B) PLUS 2.4% of the amount by which
and including 12.5% Adjusted Net Income exceeds 10% of Common Equity.
greater than 12.5% up to and (D) = the amount determined under (C) PLUS 3.4% of the amount by which
including 15% Adjusted Net Income exceeds 12.5% of Common Equity.
greater than 15% (E) = the amount determined under (D) PLUS 3.8% of the amount by which
Adjusted Net Income exceeds 15% of Common Equity.
</TABLE>
D-3
<PAGE> 4
In the event that any of the Covered Employees does not qualify as a
Covered Employee for a particular Bonus Year, the percentage share of the Bonus
Pool otherwise allocable to such person shall be allocated to the executive
officer who replaces him or her as a Covered Employee for such Bonus Year. In
the event one of the Covered Employees or his replacement becomes the chief
executive officer of the Company, such Covered Employee shall be allocated the
percentage share allocated to the chief executive officer.
SECTION 4.3 Any portion (up to $3 million) of a share of the Bonus Pool
calculated for any Covered Employee for a particular Bonus Year may be awarded
by the Committee to such Covered Employee in a succeeding year to the extent not
awarded for the Bonus Year; provided that such award by the Committee will only
be made to reward extraordinary performance by any such Covered Employee.
ARTICLE V
CHANGE OF MEASUREMENT PERIOD
SECTION 5.1 If permitted by Section 162(m) of the Code, the Committee
may establish a Measurement Period other than the calendar year for determining
the Bonus Pool if the Committee concludes that all or a portion of the Bonus
Pool for any Bonus Year should be paid to Covered Employees before the end of
any calendar year. Any such change will be made before the new Measurement
Period begins. In such event all relevant criteria will be based upon the books
and records of the Company for the Measurement Period in a manner consistent
with the terms of this Plan.
ARTICLE VI
STOCKHOLDER APPROVAL AND AMENDMENT
SECTION 6.1 This Plan shall become effective as of January 1, 1997,
subject, however, to the approval of the Company's stockholders at the 1997
Annual Meeting of the Stockholders of the Company.
SECTION 6.2 The Plan applicable to Covered Employees may be amended at
any time by the Committee. In the event that subsequent guidance under Section
162(m) is substantially different, with the effect that the Plan fails to ensure
the deductibility of the compensation payable hereunder, the Committee shall
retain the right to modify the Plan for Covered Employees to the extent
necessary to conform any provisions hereof to bring them into compliance,
including but not limited to deletion of any non-conforming provisions, or to
discontinue the Plan altogether. No amendment shall be made without approval of
the stockholders of the Company if such approval is required in order for the
Plan to continue to meet the requirements of Section 162(m) of the Code.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 The validity, construction, interpretation, administration
and effect of the Plan and its rules and regulations, and rights relating to the
Plan, shall be determined solely in accordance with the laws of the State of
Delaware.
SECTION 7.2 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.
D-4
<PAGE> 1
EXHIBIT 10.14
LEASE AGREEMENT
ARTICLE I. BASIC LEASE PROVISIONS
1.01. DATE AND PARTIES
This Lease (this "Lease") is made and entered into as of the 2nd day of April,
1996, by and between THE TRAVELERS INSURANCE COMPANY, a corporation organized
and existing under the laws of the state of Connecticut, having its principal
offices at One Tower Square, Hartford, Connecticut 06183-2030 (the "Landlord")
and THE TRAVELERS INDEMNITY COMPANY, a corporation organized and existing under
the laws of the state of Connecticut, having its principal offices at One Tower
Square, Hartford, Connecticut 06183-7130 (the "Tenant").
1.02. NOTICES
All notices and notifications required or permitted under this Lease shall be in
writing and sent by a nationally recognized private carrier of overnight mail
(e.g. Federal Express) or by United States certified mail, return receipt
requested and postage prepaid, to the parties at the following addresses or at
such other addresses as the parties may designate by notice from time to time:
<TABLE>
<S> <C>
Landlord: The Travelers Insurance Company Tenant: The Travelers Indemnity Company
c/o Travelers Real Estate Investment Group Corporate Real Estate & Services
One Tower Square, 9 PB One Tower Square, 1 MSA
Hartford, Connecticut 06183-2030 Hartford, Connecticut 06183-7130
With a Copy To:
With a Copy To: The Travelers Indemnity Company
The Travelers Insurance Company Corporate Real Estate & Services
c/o Travelers Real Estate Investment Group Director of Asset Management
One Tower Square, 9 PB One Tower Square, 1 MSA
Hartford, Connecticut 06183-2030 Hartford, Connecticut 06183-7130
Attn:General Counsel - Real Estate
</TABLE>
All notices shall be deemed given one (1) day after the date of delivery to the
overnight carrier, or three (3) days after the date of the mailing thereof or on
the date of actual receipt or refusal, if sooner.
1.03. PREMISES
Landlord leases to Tenant, and Tenant leases from Landlord, upon the terms and
conditions contained in this Lease, the Premises consisting of approximately
1,027,944 rentable square feet in the aggregate, as further identified on
Exhibit A-1 (SITE PLAN OF PREMISES), attached hereto and made a part hereof. The
Premises individually contain the following rentable square footages and are
located at the following addresses (hereafter collectively known as the
"Buildings" and individually as a "Building"):
<TABLE>
<S> <C>
a. 740 Main Street, Hartford, Connecticut - 201,484 rentable square feet
b. One Tower Square, Hartford, Connecticut - 77,920 rentable square feet
c. 26 Grove Street, Hartford, Connecticut - 181,380 rentable square feet
d. 9 - 18 Central Row, Hartford, Connecticut - 199,996 rentable square feet
e. 19 - 25 Central Row, Hartford, Connecticut - 24,988 rentable square feet
f. 50 Prospect Street, Hartford, Connecticut - 342,176 rentable square feet
----------------------------
Premises Total = 1,027,944 rentable square feet
</TABLE>
It is hereby understood and agreed by Landlord and Tenant, that due to the
nature of Tenant's business, and Tenant's use and occupancy of the Premises, the
total rentable area of the Premises and the location of the Premises in each of
the Buildings may change from time to time, as mutually agreed to between the
parties, and therefore, Landlord and Tenant hereby agree to update the same on a
semi-annual basis in order to accurately depict the description of the Premises,
as part of this Lease.
The Buildings are located on the properties described in certain legal
descriptions, which are available in the Town Clerk's office (the "Land").
Tenant shall have the right, in common with others, to use the common area
facilities of the Buildings (collectively known as the "Common Area
Facilities"), which may include passenger and freight elevators, loading docks,
sidewalks, parking areas, driveways, hallways, stairways, public restrooms,
common entrances, lobby, emergency systems and other similar public areas and
accessways of the Buildings and the Land.
1.04. AREA MEASUREMENT
For purposes of this Lease, the total rentable area of the Premises is deemed to
be as stated above.
1.05. USE
Tenant may use the Premises for general office use, and uses incidental thereto,
permitted under applicable law.
[1]
<PAGE> 2
1.06. LEASE TERM
The term of this Lease is for ten (10) years and shall commence on April 2, 1996
(the "Lease Commencement Date"), and shall expire on April 1, 2006 (the "Lease
Expiration Date"), unless sooner terminated as hereafter provided (the "Lease
Term"), in accordance with, and subject to the terms of that certain
Intercompany Agreement, dated as of April 2, 1996, and entered into by and
between Travelers/Aetna Property Casualty Corp. (hereafter "Travelers/Aetna")
(of which Tenant is a subsidiary) and Travelers Group Inc. (hereafter "Travelers
Group") (of which Landlord is a subsidiary) (as the same may be amended from
time to time, the "Intercompany Agreement"), the terms, provisions, conditions
and covenants of which are hereby incorporated by reference as if fully set
forth herein. It is hereby understood and agreed that the Lease Term may be
terminated prior to the Lease Expiration Date, in accordance with the expressed
terms of Section 9.7(a) of the Intercompany Agreement, a copy of which is
attached hereto as Exhibit H (SECTION 9.7(a)).
<PAGE> 3
1.07. IMPROVEMENTS
The Premises shall be delivered to Tenant in its "as is" condition. No promise
of the Landlord to alter, remodel or improve the Premises or the Buildings and
no representation by Landlord or its agents respecting the condition of the
Premises or the Buildings have been made to Tenant or relied upon by Tenant
other than as may be contained in this Lease or in any written amendment hereto
signed by Landlord and Tenant.
ARTICLE II. TENANT'S OBLIGATION TO PAY RENT
2.01. RENT
Tenant shall pay Rent to Landlord (the "Rent"), in accordance with the Rent
Schedule attached hereto as Exhibit F (RENT SCHEDULE), and as otherwise provided
in Exhibit H (SECTION 9.7(a)), attached hereto. It is hereby acknowledged and
agreed, by both parties hereto, that (i) the Rent set forth on Exhibit F is
consistent with the past cost allocation practices of Landlord and its members,
and (ii) after the Lease Expiration Date, or early termination of this Lease,
the Rent shall be in accordance with the terms of Exhibit H, attached hereto.
Tenant shall pay the monthly Rent, in advance, and either by check or by
electronic direct deposit, at Tenant's option, within the first ten (10)
business days of each month. The Rent contemplated herein is calculated on a
"full service/gross" basis and includes all utilities, operating costs, building
services and real estate taxes.
Landlord shall designate a bank account and shall furnish Tenant with a "Direct
Deposit Authorization" in the form of Exhibit E (DIRECT DEPOSIT FORM). The Rent
shall be prorated on a per diem basis for the first month or the last month of
the Lease Term if the Lease Commencement Date is not the first day of a calendar
month, or the Lease Expiration Date is not the last day of a calendar month.
ARTICLE III - LANDLORD'S OBLIGATIONS
FOR ALL PURPOSES HEREOF, IT IS HEREBY UNDERSTOOD AND AGREED BY BOTH PARTIES
HERETO, THAT THE FOLLOWING SERVICES, AS SET FORTH IN SUBSECTIONS 3.01 THROUGH
3.05, TO BE PROVIDED BY LANDLORD, SHALL BE PROVIDED IN A MANNER CONSISTENT WITH
HISTORICAL PRACTICES BY AND BETWEEN THE PARTIES, WHICH MAY IN SOME EVENTS,
INCLUDE THE TENANT PROVIDING OR OBTAINING ITS OWN SERVICES ON BEHALF OF THE
LANDLORD, AND OR PERFORMING ITS OWN REPAIRS AND MAINTENANCE.
3.01. SERVICES PROVIDED BY LANDLORD
Landlord shall provide Tenant with the services stated below at Landlord's sole
cost and expense and in a manner consistent with that which has historically
been provided to the Buildings prior to the Lease Commencement Date, and
consistent with those services provided by other landlords of similar buildings
of comparable age, condition, character, size and tenant composition in the same
geographic market sector. Landlord shall provide these services, Monday through
Friday from 7 a.m. to 7 p.m. and Saturday from 8 a.m. to 1 p.m. (the "Business
Hours"). Landlord shall not be required to provide services on the following
holidays: New Year's Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day (the "Holidays").
Services provided by Landlord are, (a) a heating, ventilation and air
conditioning ("HVAC") system for the Premises; (b) electricity for the Premises
for ordinary office use, and lighting; (c) complete janitorial service and
supplies, as described in Exhibit D (JANITORIAL SERVICE AND SUPPLIES); (d) hot
and cold water sufficient for drinking, lavatory, toilet and ordinary cleaning
purposes; (e) security guard service; (f) automatic passenger elevators and
freight elevators which shall provide access to the Premises twenty four (24)
hours a day, seven (7) days a week, including the Holidays and when Tenant moves
into and out of the Premises; (g) extermination and pest control when necessary;
(h) maintenance of and service to all Common Area Facilities, which shall
include cleaning, HVAC, electrical current and illumination, snow removal,
de-icing, repairs, replacements, lawn care, trash disposal.
Tenant may request any or all of the above services outside of the Business
Hours or Holidays, and the same shall be supplied to Tenant upon Tenant's
advance notice. The cost for additional HVAC service shall be at a rate which is
derived annually; however, the costs for this additional service, or any other
additional service, shall, in no event, exceed Landlord's actual costs for
supplying the same.
<PAGE> 4
3.02. REPAIRS AND MAINTENANCE
Landlord shall pay for and make all repairs and replacements to the Buildings,
the Premises, the Common Area Facilities and the Land, including the Buildings
structure, systems, fixtures and equipment; except, however, repairs or
replacements which Tenant shall make to the Premises due to the misuse or
negligence of Tenant.
Landlord may obtain reasonable access to the Premises to perform repairs to the
Buildings, the Common Area Facilities and the Premises at reasonable times upon
twenty four (24) hours prior notice to Tenant. Landlord may make emergency
repairs without giving Tenant prior notice. Any repairs or replacements which
Landlord is required to make shall be made within a reasonable period of time
after receiving notice or having actual knowledge of the need for such repair or
replacement. When making repairs, Landlord shall take all necessary actions to
protect Tenant's property and personnel from loss, damage and injury and to
avoid disrupting Tenant's use and occupancy of the Premises.
3.03. PARKING
It is hereby understood and agreed that parking shall be provided and charged to
Tenant on the basis which is consistent with past cost allocation practices of
Landlord and its members.
3.04. LIFE SAFETY AND SECURITY REQUIREMENTS
Landlord shall, without cost to Tenant, maintain all life safety and security
systems of the Buildings, which shall include, however not be limited to fire
alarms, smoke detectors, emergency lighting and other related life safety
equipment which is necessary to comply with the current edition of the National
Fire Code Bulletin entitled "NFPA 101 -Code for Safety to Life,", along with all
present and future requirements of federal, state, county and city governments
and all other governmental authorities having or claiming jurisdiction with
respect to the occupancy of the Building, the Premises, the Common Area
Facilities and the Land.
3.05 NON-SOLICITATION
Landlord shall implement, maintain and enforce a policy which prohibits
solicitation, canvassing, peddling, demonstrations, public protests, or any
other activity which would be disruptive to tenants in the Buildings, from
occurring in the Common Area Facilities. Landlord shall post written
notification of such policy in all public Common Area Facilities, as is
reasonably practicable.
ARTICLE IV. TENANT'S RIGHTS AND OPTIONS
4.01. SUBLEASING AND ASSIGNMENT
Tenant may sublease all or any part of the Premises or assign this Lease upon
the consent of Landlord which consent shall not be unreasonably withheld or
delayed. Notwithstanding the foregoing, Tenant may sublease all or any portion
of the Premises, or assign this Lease to its subsidiaries, affiliates or parent
corporation, without necessity of Landlord's prior consent. Any assignment or
subleasing shall not release Tenant from any liability under this Lease, except,
Tenant may request to be released from liability due to an assignment of the
entire Lease to an Affiliate, provided that the creditworthiness of the proposed
assignee shall be accepted by Landlord. In order for Landlord to make such
determination, Tenant shall provide Landlord, within thirty (30) days of the
anticipated commencement date of the assignment: (i) the name and address of the
proposed assignee; (ii) the nature of the proposed assignee's business; (iii)
the terms of the proposed assignment; and (iv) reasonable financial information
so that Landlord can evaluate the proposed assignee. For the purpose of this
Section, an "affiliate" shall mean a general or limited partnership in which
Tenant or its parent or successor owns a general partnership interest and has
the right to manage the partnership business, or an entity in which Tenant owns
at least twenty-five percent (25%) of the equity interests, or owns or has the
right to cast the votes attributable to a majority of the voting interests, or
any entity with which Tenant may merge or consolidate, any entity that purchases
or owns substantially all of the assets or stock of Tenant, any parent of
Tenant, or any parent or subsidiary of Tenant's parent.
4.02 ALTERATIONS
Tenant may make improvements, additions, installations, decorations and changes
("Alterations") of a non-structural nature to the Premises, without necessity of
Landlord's prior written approval, consistent with historical and current
practices by and between the parties. Non-structural Alterations means any
Alterations which do not affect any of the major Buildings systems or structural
components. Tenant may make any other Alterations to the Premises with the prior
written consent of Landlord, which consent shall not be unreasonably withheld,
conditioned or delayed, and shall be provided consistent with historical
practices by and between the parties. All Alterations shall become Landlord's
property upon completion, unless otherwise agreed to in writing.
All work with respect to any Alterations shall be done in a good and workman
like manner and diligently prosecuted to completion. Tenant hereby agrees that
Tenant's contractors performing any such Alterations shall maintain adequate
levels of insurance, including, however, not limited to (i) commercial general
liability and property damage, (ii) workmen's compensation and (iii) automobile
liability, and shall be required to evidence the same to Tenant and Landlord,
prior to the commencement of any such Alterations.
Systems furniture and Tenant trade fixtures, including moveable partitions,
panels, screens, and HVAC systems provided by Tenant, are Tenant's property and
shall remain Tenant's property at the expiration of the Lease Term, unless
otherwise so elected by Tenant.
4.03. TENANT SIGNAGE
It is hereby understood and agreed that Tenant may maintain all existing
identification and signage which is currently present on or about the Premises
and Buildings. Any additional signage or identification may be installed or
erected by Tenant, in accordance with any local codes governing the same, upon
the prior approval of Landlord, which approval shall not be unreasonably
withheld or delayed.
<PAGE> 5
4.04. SUCCESSOR LEASE
In accordance with Exhibit H (SECTION 9.7(a)), attached hereto, in the event
the Trigger Date (as defined in the Intercompany Agreement), has occurred or
the Lease Term has expired, but the Sale (as defined in Exhibit H) is not
required to be consummated because the Valuation Condition (as defined in
Exhibit H) has not been satisfied, as of such date, Tenant shall enter into a
new lease with Landlord for succeeding terms of five (5) years each (hereafter
a "Successor Lease"), in accordance with the terms of Exhibit H, commencing on
the Trigger Date or upon the Lease Expiration Date, as the case may be, and
continuing until the Sale occurs, upon the same terms and conditions as in the
Lease Term, except that the Rent for such Successor Lease shall be in
accordance with the terms of Exhibit H, attached hereto.
In the event the parties cannot agree upon the Rent for a Successor Lease, the
determination of the same may be subject to arbitration, in accordance with the
requirements of the Intercompany Agreement.
ARTICLE V. LIABILITY
5.01. INSURANCE AND INDEMNITY
A. Landlord's Insurance
Landlord shall maintain in full force and effect during the Lease Term
(including any extensions or renewals thereof): the insurance services
office Special Property Form of property damage ("all risk") insurance for
the Buildings, the Common Area Facilities and the Land and all
improvements on the Land, including the base Building improvements, in the
amounts of the full replacement values thereof, as the values may exist
from time to time; Boiler and Machinery Insurance; Commercial General
Liability Form Insurance, including contractual liability, on an
occurrence basis with limits of not less than $5,000,000 per occurrence;
Worker's compensation and Employer's Liability Insurance for all of
Landlord's agents, employees and contractors; Automobile Liability
Insurance for any automobiles or vehicles operated by Landlord, its
agents, employees or contractors in connection with the operation or
maintenance of the Buildings, the Common Area Facilities and the Land,
with limits of not less than $1,000,000. Landlord's insurance shall be
issued by insurance companies licensed to do business in the state where
the Buildings is situated, with a general policyholder surplus rating of
at least A- and a financial rating of at least VIII in the most current
Best Insurance Report available at the time of execution of this Lease. If
the Best's ratings are changed or discontinued, Landlord and Tenant shall
agree to an equivalent method of rating insurance companies. Landlord
shall provide Tenant with applicable certificates of insurance if so
requested by Tenant.
Landlord reserves the right to self-insure or to insure with a blanket
policy of insurance the liabilities and casualties specified in this
Lease. Therefore, Landlord shall not be required to provide Tenant with
any certificates or policies of insurance; however, Landlord shall provide
Tenant with a letter confirming such insurance, if requested by Tenant.
Landlord's insurance policies shall be primary in the event of an injury,
damage, loss, claim or liability in the Common Area Facilities which is
not due to the negligence of Tenant, its agents, contractors, employees or
invitees.
B. Tenant's Insurance
Tenant shall maintain in full force and effect during the Lease Term
(including any extensions or renewals thereof): the special property form
of property damage insurance ("all-risk") for Tenant's personal property
and trade fixtures; Worker's Compensation Insurance for all of Tenant's
employees working on the Premises and Commercial General Liability
Insurance (including contractual liability) with limits of not less than
$1,000,000 per occurrence, and four (4) million in excess coverage per
occurrence, for injuries, losses, claims or damages to persons or property
occurring on the Premises, and due to Tenant's use or occupancy of the
Premises or to the negligence or willful misconduct of Tenant, its agents,
contractors, employees or invitees. Tenant shall name Landlord as an
additional insured on its liability policy.
Tenant reserves the right to self-insure or to insure with a blanket
policy of insurance the liabilities and casualties specified in this
Lease. Therefore, Tenant shall not be required to provide Landlord with
any certificates or policies of insurance; however, Tenant shall provide
Landlord with a letter confirming such insurance, if requested by
Landlord.
C. Indemnification
Tenant hereby agrees to indemnify and hold Landlord, including its
successor, assigns, director and officers, harmless from and against any
and all costs, damages, claims, liabilities, and expenses (including
reasonable attorney fees) suffered by or claimed against Landlord, based
on, or arising out of, or resulting from: (i) Tenant's use and occupancy
of the Premises or the business conducted by Tenant therein, (ii) any
negligent act or omission by Tenant or its employees, agents or invitees,
or (iii) any breach or default by Tenant in the performance or observance
of its covenants or obligations under this Lease.
Landlord hereby agrees to indemnify and hold Tenant, including its
successor, assigns, director and officers, harmless from and against any
and all costs, damages, claims, liabilities and expenses (including
reasonable attorney fees) suffered by or claimed against Tenant, based on,
or arising out of, or resulting from (i) any negligent act or omission by
Landlord, or its employees, agents or invitees, (ii) latent defects in the
Buildings, Premises or Common Area Facilities; or (iii) any breach or
default by Landlord in the performance or observance of its covenants or
obligations under this Lease.
<PAGE> 6
5.02. ENVIRONMENTAL COMPLIANCE
Landlord hereby agrees to maintain the Building, the Common Area Facilities and
the Land in compliance with all Environmental Laws (as hereinafter defined) and
shall comply with all Environmental Laws in regards to any matters pertaining to
the same. "Environmental Laws" shall mean all federal, state, county or local
laws, statutes, codes, regulations, rules, guidelines, ordinances, or orders of
all governmental agencies, departments, commissions, boards or instrumentalities
of the United States, states or their political subdivisions, and judgments
concerning environmental matters, or the public health and safety of the
environment.
Landlord and Tenant shall handle, use, store, treat, dispose of and
transport any Hazardous Materials (as hereinafter defined) in accordance with
all Environmental Laws. For purposes hereof, "Hazardous Materials" shall be
defined as any toxic, dangerous or hazardous chemicals, materials, substances,
pollutants or wastes as defined from time to time under Environmental Laws.
Hazardous Materials shall not include incidental quantities which are commonly
used in offices, such as copier fluid, typewriter correction fluids and ordinary
cleaning solvents, provided that such are at all times used, kept and stored in
a manner which complies with all Environmental Laws.
[4]
<PAGE> 7
It is hereby acknowledged and understood, by and between the parties,
that asbestos containing material currently exist in certain areas of the
Buildings, and both parties hereto agree that the current operation and
maintenance practices, in existence, are acceptable and shall be continued until
one (1) year after all asbestos containing material has been removed. In
addition to the foregoing, if at any time during the Lease Term, additional
non-friable asbestos containing material is found to be present in the Premises,
the Building, or the Common Area Facilities, and such is not due to an act of
Tenant, Landlord hereby agrees to implement and maintain throughout the Lease
Term, as renewed or extended, or until the sooner of the termination of the
Lease, or one (1) year after all asbestos containing material has been removed
from the Premises, the Building, or the Common Area Facilities, and such removal
properly documented, at Landlord's sole cost and expense, without cost to
Tenant, an ongoing Operations and Maintenance Program, in accordance with any
guidelines established by the Environmental Protection Agency (EPA) (hereafter
the "O& M Program").
5.03. REQUIREMENTS OF LAW
A. Landlord's Compliance with Laws
Landlord shall be responsible for compliance, at Landlord's sole cost and
expense, with all statutes, rules, ordinances, orders, codes and
regulations, and legal requirements and standards issued thereunder, as
the same may be enacted and amended from time to time (collectively
referred to in this Lease as the "Laws"), which are applicable to all or
any part of the physical condition and occupancy of the Buildings, the
Common Area Facilities or the Land or additions thereto.
Landlord represents and warrants that the Buildings, the Common Area
Facilities, the Premises, and the Land are or shall be in compliance with
the Laws as of the Lease Commencement Date.
Landlord shall also obtain (and maintain), at Landlord's sole cost and
expense, any permit, license, certificate or other authorization required
for the lawful and proper use and occupancy by Tenant or any other party
of all or any part of the Premises and shall exhibit the same to Tenant
upon Tenant's request.
Landlord shall notify Tenant of any violation notices or waivers of
building, OSHA or life safety codes or outstanding insurance carrier
recommendations, which Landlord receives, with respect to the Buildings,
the Common Area Facilities or the Land. Tenant shall notify Landlord of
any OSHA violation notices with respect to the Premises.
Except to the extent affected by Tenant's particular use of the Premises,
Landlord shall be responsible for the compliance of the Common Area
Facilities with applicable laws relating to architectural barriers to the
disabled, including but not limited to the law commonly known as the
"Americans with Disabilities Act of 1990" (the "ADA"). Landlord hereby
agrees to indemnify, defend and hold Tenant harmless from any and all
loss, cost, liability or expense, including, without limitation,
reasonable attorney fees, resulting from Landlord's failure to comply with
all Laws relating to the Premises, the Buildings, the Land and condition
of the Common Area Facilities.
B. Tenant's Compliance with Laws
Tenant shall be responsible for compliance with all of the Laws which are
applicable to Tenant's particular use and manner of use of the Premises
and the Common Area Facilities.
In the event that Tenant's particular use of the Premises and the Common
Area Facilities violates any provision of the Laws, including but not
limited to the ADA, Tenant shall bear all expense, cost and liability for
compliance with such Laws, including but not limited to the ADA. Tenant
hereby agrees to indemnify, defend and hold Landlord harmless from any and
all loss, cost, liability or expense, including, without limitation,
reasonable attorney fees, resulting from Tenant's failure to comply with
all Laws relating to its occupancy of the Premises and use of the Common
Area Facilities.
ARTICLE VI. LOSS OF PREMISES
6.01. DAMAGES/DESTRUCTION
Notwithstanding anything hereafter contained to the contrary, for purposes of
this Section 6.01, the Premises, as further described in Section 1.03
(PREMISES), shall be considered individually as separate and distinct
structures, and in the event of a casualty, damage or destruction to one
individual Building, or a group of Buildings, the following provisions shall
apply only to that individual structure (or
<PAGE> 8
group of structures) and not to all of the Buildings as a whole, and this Lease
shall remain in full force and effect to those individual Buildings which are
otherwise not affected by such casualty, damage or destruction.
If the Premises, Building, Common Area Facilities, or any portion thereof is
damaged by fire or other casualty, then, except as provided below, the damage
shall be promptly repaired by and at the expense of Landlord. If the Premises or
the Building are totally destroyed by fire or any other casualty, this Lease
shall automatically terminate as of the date of such destruction. If the
Building, the Common Area Facilities or the Premises are damaged to the extent
that, in Tenant's reasonable judgment, Tenant will not be able to use the same
to conduct its business for at least ninety (90) days, Tenant may terminate this
Lease as of the date of such damage by written notice to Landlord within (30)
days after such date. In the event such damage or casualty is not susceptible of
complete repair and restoration (to the standard of "substantial completion",
within ninety (90) days after the occurrence of such damage or casualty, then
either Landlord or Tenant may, by written notice to the other terminate this
Lease as of the date of such damage, provided such notice is given within thirty
(30) days after the date of the damage or casualty. Substantial completion shall
mean that a certificate of occupancy, or the equivalent, has been provided by
the appropriate authority, permitting the Building to be occupied by Tenant, or
other tenants in accordance with all public health, safety and building codes.
The only remaining items shall be minor details of construction. Until such
repairs and restoration are completed, the Rent, and any other sums due
hereunder, shall be abated in proportion to the portion of the Premises or the
Common Area Facilities which are unusable or inaccessible by Tenant in the
conduct of its business by virtue of such casualty. If such damage can be
repaired within ninety (90) days and Landlord fails to repair or restore such
damage within such period, Tenant may, upon thirty (30) days written notice to
Landlord, in addition to all other remedies Tenant may have under this Lease, at
law or in equity, terminate this Lease. If any such damage causes any portion of
the Premises or the Common Area Facilities to become unusable or inaccessible by
Tenant in the conduct of its business during the last nine (9) months of the
Lease Term, Tenant may, upon thirty (30) days written notice to Landlord,
terminate this Lease.
6.02. EMINENT DOMAIN
Notwithstanding anything hereafter contained to the contrary, for purposes of
this Section 6.02, the Premises, as further described in Section 1.03
(PREMISES), shall be considered individually as separate and distinct
structures, and in the event of a Taking (as hereafter defined) of one
individual Building, or a group of Buildings (or portions thereof), the
following provisions shall apply only to that individual structure (or group of
structures) and not to all of the Buildings as a whole, and this Lease shall
remain in full force and effect to those individual Buildings which are
otherwise not affected by such Taking.
If all of the Land, the Buildings, the Common Area Facilities, or the Premises
are taken by eminent domain or condemnation, (a "Taking") this Lease shall
terminate immediately upon the effective date of the Taking.
If there is a partial Taking of the Land, the Buildings, the Common Area
Facilities or the Premises, Tenant may terminate this Lease by written notice to
Landlord if the remaining Premises, Buildings, or Common Area Facilities are
not, in Tenant's judgment, adequate for the conduct of Tenant's business.
If Tenant does not terminate this Lease, Landlord shall proceed with due
diligence to make all necessary repairs to the Land, the Buildings, the Common
Area Facilities, or the Premises in order to render and restore the same to the
condition that they were prior to the Taking. Tenant shall remain in possession
of the portion of the Premises, with use of the Common Area Facilities not
taken, upon the same terms and conditions of this Lease, except that the Rent
shall be reduced in direct proportion to the area of the Premises and the Common
Area Facilities subject to the Taking.
If Tenant is not able to occupy the Premises or any portion thereof not taken,
or to use the Common Area Facilities or any portion thereof not taken, while
Landlord is making the required repairs, the Rent shall be abated in proportion
to the portion of the Premises or the Common Area Facilities which are unusable
or inaccessible by Tenant in the conduct of its business.
All compensation awarded for any Taking of the Premises, or any portion of the
Buildings or any interest in any of them shall belong to and be the property of
Landlord, and Tenant hereby assigns to Landlord all rights with respect thereto;
provided, however, nothing contained herein shall preclude Tenant from seeking
in a separate action reimbursement from the condemning authority for moving
expenses, expenses for removal of Tenant's property, including Tenant's personal
property, and the interruption of Tenant's business.
ARTICLE VII. NON-DISTURBANCE
7.01. SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE
This Lease shall be subject and subordinate to the lien of any mortgage or deed
of trust or other encumbrance(s) which may now or which may at any time
hereafter be made upon the Building or Land of which the Premises is a part, or
any portion thereof, or upon Landlord's interest therein, provided that
If any mortgage is foreclosed or ground lease or air space lease terminated,
then: (a) this Lease shall continue in full force and effect, and; (b) Tenant's
quiet enjoyment shall not be disturbed if Tenant is not in default of this Lease
beyond any applicable grace and notice periods provided in this Lease for the
cure thereof, and; (c) Tenant shall attorn to and recognize the mortgagee,
purchaser at a foreclosure sale or ground or other lessor ("Successor Landlord")
as Tenant's landlord for the remaining Lease Term; and; (d) Successor Landlord
shall not be bound by: (i) any payment of Rent for more than one month in
advance except for any free rent or other rent abatement specified in this
Lease; (ii) any amendment, modification, or termination of the Lease without
Successor Landlord's consent, after the Successor Landlord's name is given to
Tenant, unless the amendment, modification, or ending is specifically authorized
by this Lease and does not require Successor Landlord's prior agreement or
consent.
This Subsection 7.01 is self-operating; however, Landlord shall use best efforts
to cause a Subordination, Attornment and Non-Disturbance Agreement in a form
satisfactory to Tenant to be executed and delivered to Tenant, in the event of
the same.
<PAGE> 9
7.02. ESTOPPEL CERTIFICATE
Each party agrees, from time to time, within thirty (30) days following written
notice by the other party, to execute and deliver to the party who gave such
notice, an estoppel certificate (the "Estoppel Certificate"). The Estoppel
Certificate may be relied upon by Landlord or Tenant, as appropriate, and any
third party with whom the Landlord or Tenant is dealing, and shall certify the
following, as of the date thereof: (i) the Lease Term; (ii) the Lease
Commencement Date and the Lease Expiration Date; (iii) that this Lease is
unmodified and in full force and effect or in full force and effect as modified,
stating the date and nature of all modifications; (iv) whether to the executing
party's knowledge the other party is in default or whether the executing party
has any claims or demands against the other party and, if so, specifying the
claim or demand; (v) the amount of Rent and the dates through which Rent and any
other sums due under the Lease have been paid; and (v) such other reasonable
information or facts covered by the terms of the Lease, as requested by either
party.
7.03. QUIET ENJOYMENT
Provided that Tenant is not in Default (as hereafter defined) of any covenant or
obligation of this Lease, to be performed by Tenant, Tenant shall have the
peaceful and quiet enjoyment and possession of the Premises without any
interference from Landlord or any person claiming by, through or under Landlord.
ARTICLE VIII. DISPUTES
8.01. DEFAULT BY TENANT
Tenant shall be considered in default ("Default") of this Lease if; (i) Tenant
fails to pay Rent within fifteen (15) days after Tenant receives notice from
Landlord that the Rent was not received; or (ii) Tenant fails to perform any of
its other obligations under this Lease within thirty (30) days or within a
reasonable period of time thereafter if a cure cannot be accomplished with
thirty (30) days after receiving written notice from Landlord specifying the
Default.
If Tenant is in Default, as stated above, Landlord, in addition to the remedies
given in this lease or under the law, may; (i) terminate this Lease after giving
Tenant thirty (30) days written notice of its intention to do so in accordance
with any laws governing such termination and subsequent repossession, and Tenant
shall then surrender the Premises to Landlord; or (ii) Landlord may enter and
take possession of the Premises, in accordance with any laws governing such
repossession, and remove Tenant, with or without having terminated the Lease.
Landlord's exercise of any of its remedies or its receipt of Tenant's keys shall
not be considered an acceptance or surrender of the Premises by Tenant. A
surrender must be agreed to in writing signed by both parties.
If Landlord terminates this Lease or terminates Tenant's right to possess the
Premises because of a Tenant Default, Landlord may hold Tenant liable for; (i)
the Rent and other indebtedness that otherwise would have been payable by Tenant
to Landlord prior to the Lease Expiration Date, less any amounts which Landlord
receives in reletting the Premises during the remainder of the Lease Term; and
(ii) other necessary and reasonable expenses incurred by Landlord in enforcing
its remedies. Tenant shall be liable for only those actual damages suffered by
Landlord. Tenant shall pay any such sums due within thirty (30) days of
receiving Landlord's proper and correct invoice for the amounts. Landlord is not
entitled to accelerate the Rent or any other amounts which would become due from
Tenant to Landlord. During each collection action, Landlord shall be limited to
the amount of any Base Rent due that would have accrued had the Lease not been
terminated. Landlord shall mitigate any damage by making best efforts to relet
the Premises on reasonable terms.
8.02. DEFAULT BY LANDLORD
If Landlord fails to perform any of its obligations under this Lease (except as
specifically provided for in Article 8.03 (REDUCTION OF SERVICES) hereof (a
"Landlord Default"), Tenant shall give Landlord written notice specifying the
Landlord Default. If a cure is not accomplished within thirty (30) days after
receiving notice from Tenant or within a reasonable period of time thereafter,
if the Landlord Default cannot be cured within thirty (30) days and Landlord is
pursuing a cure with due diligence, then in addition to all rights, powers or
remedies permitted by law, or in equity, Tenant may; (i) correct the Landlord
Default and deduct the cost from the Rent; or (ii) withhold the payment of Rent
and any other sums due hereunder until Landlord has corrected the specified
Landlord Default; or (iii) upon the failure of Landlord to cure any Landlord
Default within ninety (90) days of receipt of notice thereof, Tenant shall have
the right to seek the judicial remedy of specific performance, or to terminate
this Lease by providing Landlord with written notice of such termination.
8.03. REDUCTION OF SERVICES
The Rent is based in part upon services which Landlord shall provide as
described in Article 3.01 (SERVICES PROVIDED BY LANDLORD). If, for any reason,
Landlord does not provide any or all of these services in the manner described
in Article 3.01 for more than five (5) consecutive days following written notice
of such failure, reduction or interruption from Tenant, and such failure,
reduction or interruption materially OR adversely affects Tenant's use of or
occupancy of the Premises, in addition to any rights or remedies as provided to
Tenant under Law or in equity, the Rent may be abated (proportionately based
upon the individual Premises, or portions thereof which are affected by such
failure, reduction or interruption of service(s)), on a per diem basis for the
period of interruption beginning with the date the interruption in services
began and ending when the services are fully restored. Upon the failure of
Landlord to fully restore a service (or services) to the manner as described in
Article 3.01, within ninety (90) days after receipt of Tenant's notice, Tenant
shall have the option to terminate this Lease by providing Landlord with written
notice of such termination.
<PAGE> 10
8.04. GOVERNING LAW
This Lease, and the rights and obligations of the parties hereto, shall be
construed and enforced in accordance with the laws of the state (commonwealth)
of where the Buildings are located.
8.05. WAIVER OF CONSEQUENTIAL DAMAGES
Neither Landlord nor Tenant shall be liable to the other under or in connection
with this Lease for any consequential damages and both Landlord and Tenant
waive, to the full extent permitted by law, any claim for consequential damages.
ARTICLE IX. MISCELLANEOUS
9.01. FORCE MAJEURE
Neither party shall be responsible to the other for any losses resulting from
the failure to perform any terms or provisions of this Lease if the party's
failure to perform is attributable to war, riot, acts of God or the elements or
any other unavoidable act not within the control of the party whose performance
is interfered with and which by reasonable diligence such party is unable to
prevent. However, neither party shall be excused from the timely performance of
its obligations under this Lease for a period of time greater than ninety (90)
days on account of force majeure.
9.02. END OF TERM
Upon the termination of this Lease, Tenant shall return the Premises in exactly
the same condition as when Tenant took possession, excluding: ordinary wear and
tear; loss from fire or other casualty; the removal of communications cabling;
and the restoration of the Premises to its condition prior to any Tenant
Improvements or Alterations made to it during the Lease Term.
9.03. ENTIRE AGREEMENT
This Lease and all of its written and attached Exhibits, riders, addendums,
modifications, and amendments constitutes the entire agreement between Landlord
and Tenant with respect to the Premises, the Buildings, the Land and the Common
Area Facilities, and may be amended or altered only by written agreement
executed by both parties, and supersedes any and all prior agreements between
the parties, whether oral or written. Landlord warrants that it owns the
Buildings and Land as described herein, and each party warrants that it is
authorized to enter into this Lease.
9.04. NON-DISCRIMINATION
Landlord and Tenant shall not discriminate on the basis of race, age, color,
religion, sex, national origin, disability or veteran's status in the use or
occupancy of the Premises or the Buildings.
Landlord and Tenant shall not discriminate on the basis of race, age, color,
religion, sex, national origin, disability or veteran's status in their
employment or choice of contractors, subcontractors, or suppliers of materials
for or used for the installation of any improvements in the Premises or the
Buildings.
9.05. BINDING ON SUCCESSORS
This Lease shall bind the parties, their heirs, successors, representatives and
permitted assigns.
<PAGE> 11
9.06. AMBIGUITIES
Any rule of construction to the effect that any ambiguities are to be resolved
against the drafting party shall not apply to the interpretation of this Lease
or any amendments or exhibits hereto.
9.07. BROKER'S WARRANTY
Landlord and Tenant warrant and represent that they have dealt with no real
estate broker in connection with this Lease, and that no broker is entitled to
any commission on account of this Lease. The party who breaches this warranty
shall defend, hold harmless and indemnify the other from any loss, cost, damage
or expense, including reasonable attorney fees, arising from the breach.
9.08. PARTIAL INVALIDITY
If any part, term or provision of this Lease, or the application thereof to any
person or circumstance, shall, to any extent, be invalid or unenforceable, the
remainder of this Lease and the application of such provision to all other
persons and circumstances shall not be affected and shall be valid and
enforceable to the fullest extent of the law; provided, however, if the
provisions of this Lease relating to Tenant's stated use of the Premises shall
be determined by any government agency having jurisdiction to be invalid or
unenforceable, this Lease, effective as of the date of such determination, shall
be, and shall be deemed to be, void and of no further force or effect and Tenant
shall have no further obligations hereunder.
9.09 WAIVER
The failure of either party to exercise any of its rights is not a waiver of
those rights. A party waives only those rights specified in writing and signed
by the party waiving its rights.
9.10 CONFLICTS
In the event of any conflicts between the terms of the Lease and the terms of
the Intercompany Agreement, such conflicts shall be resolved in favor of the
Intercompany Agreement.
9.11. ATTACHMENTS
The following exhibits are part of this Lease and were attached before this
lease was signed by the parties:
Exhibits: A-1 Site Plan of Premises
B. Intentionally Deleted
C. Intentionally Deleted
D. Janitorial Service and Supplies
E. Direct Deposit Form
F. Rent Schedule
G. Intentionally Deleted
H. Section 9.7(a) of the Intercompany Agreement
[8]
<PAGE> 12
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease, as of the date
first above written.
LANDLORD: THE TRAVELERS INSURANCE TENANT: THE TRAVELERS INDEMNITY
COMPANY COMPANY
BY /s/ Joseph W. Sprouts BY /s/ Wayne E. Mills
-------------------------------- ----------------------------------
Title Vice President Title Vice President
----------------------------- -------------------------------
IDENTIFYING NUMBER
06-0566090
- ------------------------------------------
For Reporting to U.S. Treasury Department
Internal Revenue Service
[9]
<PAGE> 1
EXHIBIT 10.15
Dear Stan:
We are pleased to offer you a contract of employment with
Travelers/Aetna Property Casualty Corp. ("TAP") as Vice Chairman reporting
directly to the Chairman of TAP. If you accept this offer, your employment will
commence as soon as practicable. You will devote yourself full-time to this new
position, except for charitable and personal investment activities consistent
with a senior executive position at TAP. This letter summarizes the special
contract terms that will govern your employment relationship. Except as provided
in this letter agreement, your employment will be governed by the terms,
policies and practices that are applied generally by TAP from time to time to
its senior executive employees.
In this position your base salary will be $18,750.00 payable
semi-monthly ($450,000 per annum) in 1997. Your base salary in 1998 will be no
less than your base salary in 1997. Your base salary in 1999 will be no less
than your base salary in 1998. In addition you will participate in the
Management Bonus Program which is discretionary and based on individual
contribution and the performance of the Company. In your case, the bonus for the
calendar year 1997 and for the calendar year 1998 will each be guaranteed to be
a minimum of $450,000. The bonus for calendar year 1999 will be guaranteed to be
a minimum of $650,000. Your compensation will be subject to participating in the
Travelers/Aetna Property Casualty Corp. Capital Accumulation Plan (CAP) as in
effect from time to time.
We will recommend to the Nominations and Compensation Committee of the
Board of Directors that you be granted a non-qualified stock option for 60,000
shares in the Travelers Group Stock Option Program. The price of this option
would be determined by the closing price on the day before the Board of
Directors Meeting or the date of your commencement of employment, whichever is
later. The options would vest at a rate of 20% per year for 5 years.
In addition, you will be entitled to the benefit of the following
special provisions relating to severance:
(i) If you are terminated without cause or if you die or become
disabled prior to December 31, 1998, you or your heirs will be entitled
to a severance payment equal to the greater of (x) $1,800,000 less the
gross amount of salary and bonus already paid from January 1, 1997,
through the date of termination and (y) $900,000. This severance amount
will be paid in equal monthly installments over a two-year period
following termination and will be subject to your non-competition with
TAP during the period you receive such payments.
1
<PAGE> 2
(ii) If you are terminated without cause after December 31, 1998, but
prior to December 31, 1999, you will be entitled to a severance payment
of $1,200,000 plus $25,000 for each calendar month or portion of a
month that you are employed by TAP in 1999. That severance amount will
be paid in equal monthly installments over a three-year period
following termination and will be subject to your non-competition with
TAP during the period you receive severance payments.
(iii) If, at December 31, 1999, you have not been elected or appointed
to a mutually acceptable position with TAP on reasonable and mutually
acceptable terms, then you may elect during the thirty days following
December 31, 1999, to terminate your employment and receive a severance
payment of $1,500,000. This severance amount will be paid in equal
monthly installments over a three-year period following termination and
will be subject to your non-competition with TAP during the period you
receive such payments.
(iv) If you die or become permanently disabled after December 31,1998,
but prior to December 31, 2001, or if you are terminated without cause
after January 30, 2000, and before December 31, 2001, you or your heirs
will be entitled to a severance payment of $900,000. That severance
amount will be paid in equal monthly installments over a three-year
period following termination and will be subject to your
non-competition with TAP during the period you receive severance
payments. After December 31, 2001, normal company severance policy will
apply.
(v) The foregoing severance provisions will be in lieu of all other
claims relating to severance or other payments relating to a
termination of your employment. All severance payments will be subject
to normal withholding. Except as provided in paragraph (vi) below, the
provisions of the CAP and Stock Options Plans, and all other employee
plans, as in effect from time to time, shall apply to any termination.
(vi) Notwithstanding any provision of the CAP to the contrary, if we
owe you severance payments pursuant to paragraphs (i) through (iv)
above, you will be entitled to receive in lieu of any benefit under
CAP, an amount equal to the sum of the cash contributed to CAP in your
name plus interest thereon at the rate of one year treasury notes
calculated from the date of credit of the cash to CAP until the date of
payment hereunder.
2
<PAGE> 3
For purposes of the severance provisions in this agreement, you will be
considered to be engaged in competition with TAP if you are employed in an
executive management position or retained as a consultant to management by an
insurance company or insurance holding company which is engaged in direct and
substantial competition with TAP or any of its affiliated or associated
companies. If, after the termination of your employment with us, you elect to
return to the practice of law, we will not claim that you are engaged in
competition with TAP if you or members of your firm perform legal work or are
engaged to provide legal representation to competitors of TAP so long as you do
not personally represent a client in a matter in which your client's interests
conflict directly with TAP's interests. If the circumstances of your termination
of employment with TAP entitle you to severance pay conditioned upon your
non-competition, and you engage in competition with TAP, our sole remedy shall
be to discontinue making further severance payments to you.
You further agree that as long as you are employed by TAP and for three
years following any termination of employment, you shall keep confidential all
confidential information and trade secrets of TAP, or any subsidiaries or
affiliates of TAP, and shall not disclose such information to any person without
the prior approval of TAP, or use such information for any purpose other than in
the course of fulfilling your duties pursuant to this Agreement. Upon any
termination of your employment with TAP, you shall return any documents,
records, data, books or materials of or pertaining to TAP, or its subsidiaries
or affiliates in your possession or control and any work papers in your
possession or control containing confidential information or trade secrets.
You also agree that for a period of three years after your employment
you will not induce or attempt to induce, directly or indirectly, any employees
of TAP, or its subsidiaries or affiliates to terminate their employment with
TAP, or its subsidiaries or affiliates.
Your employment with us shall terminate upon the earlier occurrence of:
(i) your death or permanent disability; or (ii) the lapse of three (3) months
from either party's receipt of written notice of termination from the other
party. For purposes of this Agreement, you will be considered "permanently
disabled" if, for a continuous period of six (6) months, you are unable to carry
out the material duties of your office due to a physical or mental impairment or
condition, as determined by an independent physician mutually selected by you
and TAP.
3
<PAGE> 4
Although we may terminate you for cause or without cause, if we
terminate you without cause before January 1, 2002, we will pay you severance in
accordance with this Agreement. For purposes of this Agreement, you will be
considered terminated "for cause" if you commit: (i) an unlawful act during the
course and scope of your employment with TAP or an act of moral turpitude or a
serious felony even if outside the course or scope of your employment with TAP;
or (ii) an act of gross negligence or willful misconduct that causes TAP to
suffer a material monetary loss; or (iii) a material failure to attempt to
perform your duties after TAP has given you written notice of such failure and a
reasonable opportunity to cure; or (iv) a breach of the non-disclosure and
non-solicitation provision of this Agreement. If you are terminated for any
other reason, including, without limitation, if you resign your employment at
our request or for good reason, you will be considered terminated "without
cause." For purposes of this Agreement, your resignation shall be "for good
reason" if we: (i) have materially breached the agreement and failed to cure the
breach; (ii) assigned responsibilities or duties to you which are not of a
senior executive nature and consistent with your title, expertise and prior
employment history; or (iii) require you to relocate your principal office,
other than to New York, without your consent. Your resignation shall not be
considered to be "for good reason" unless you have given us reasonable notice
and an opportunity to cure.
You will be credited with five (5) years of service for purposes of
vesting credit under the Company's retirement plan. We also agree that, if you
do not collect your bonus for 1996 and certain other amounts which would have
vested by December 31, 1996, due to you from your present employer, as a result
of your resignation from your present employer and the commitment of your
employment with TAP, we will reimburse you for such amounts up to an aggregate
amount of $100,000. This amount will be paid to you on January 2, 1997. In
connection with the foregoing, you represent to us that you are not subject to a
contract or other legal prohibition which would prevent you from working for
TAP.
Your principal office will be in Hartford, Connecticut. In
consideration for your willingness to relocate your principal office from New
York City to Hartford, in addition to your regular salary, TAP will provide an
apartment in Hartford or a housing allowance, all on a basis consistent with
that employed for other senior executives of TAP. We will also reimburse you for
the reasonable attorney fees and other transaction expenses which you incur in
connection with this change of employment. This reimbursement shall not exceed
$50,000. Finally, we will pay the reasonable moving expenses incurred in
relocating your principal residence from New York City to Hartford.
TAP offers a comprehensive employee benefits program which includes
medical and dental coverage, life insurance, disability insurance, retirement
plan, and 401(k) savings plan. You are eligible to participate in most of these
plans on the first day your employment commences. An orientation to company
benefits and other services will be provided soon after you begin employment.
4
<PAGE> 5
This letter describes the terms of TAP's offer of employment. Any other
discussions that you may have had with us are not part of our offer unless they
are described in this letter or in the Travelers Group Principles of Employment
which you should read carefully. In all respects this agreement will be governed
by the laws of the State of Connecticut. If these terms are acceptable, please
sign and return one copy of this letter, indicating thereby your acceptance of
our offer and the special contract terms described herein. This offer will
remain open and subject to your acceptance for a period of ten days from the
date that your receive this letter.
The federal government requires that you establish your employment
eligibility within three days of your actual employment. Therefore, please
complete the I-9 form and bring the requested documentation with you on your
first day.
We are confident that we can offer you a challenging and rewarding
opportunity. We look forward to your acceptance of our offer and hope to hear
from you as soon as possible. If you have any questions, please do not hesitate
to contact me.
Sincerely,
/s/ James M. Michener
- ------------------------
James M. Michener
I accept the above offer of employment on the terms described.
/s/ Stanton F. Long
- --------------------------------------
Stanton F. Long
November 17, 1996
- --------------------------------------
Date
<PAGE> 1
EXHIBIT 11.01
Computation of Earnings Per Share
<PAGE> 2
Exhibit 11.01
Travelers Property Casualty Corp. and Subsidiaries
Computation of Earnings Per Share
(In millions, except for per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Earnings:
Net income $ 391 $ 419 $ 188
Preferred dividends - series Z (4) -- --
----- ------ ------
Income applicable to common stock $ 387 $ 419 $ 188
===== ====== ======
Average shares:
Common 367.1 294.5 294.5
===== ====== ======
Earnings Per Share:
Net income $1.05 $ 1.42 $ 0.64
===== ====== ======
</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 share equivalents outstanding during the period. For purposes
of the computation of earnings per share, the weighted average number of common
shares and common share equivalents was computed by treating the common stock
issued within a one-year period prior to the initial filing of the registration
statement relating to the initial public offering (IPO) as outstanding for all
reported periods. This amount was then reduced by the dilutive effect of such
issuances of stock prior to the IPO determined by using the actual proceeds and
the number of shares that could have been repurchased using the IPO price as the
repurchase price for all periods presented. Fully diluted 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
Computation of Ratio of Earnings to Fixed Charges
<PAGE> 2
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>
Year ended December 31,
------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations,
before income taxes and cumulative
effect of accounting changes $487 $551 $210 $170 $(354)
Interest 118 -- -- -- --
Portion of rentals deemed to be interest 45 33 32 40 40
---- ---- ---- ---- -----
Income (loss) available for fixed charges $650 $584 $242 $210 $(314)
==== ==== ==== ==== =====
Fixed charges:
Interest $118 $-- $-- $-- $--
Portion of rentals deemed to be interest 45 33 32 40 40
---- ---- ---- ---- -----
Total fixed charges $163 $ 33 $ 32 $ 40 $ 40
==== ==== ==== ==== =====
Ratio of earnings to fixed charges 3.99x 17.53x 7.56x 5.29x N/A(a)
---- ---- ---- ---- -----
</TABLE>
(a) For the year ended December 31, 1992, TAP's earnings were not sufficient to
cover fixed charges by $354 million.
The ratio of earnings to fixed charges has been 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.
<PAGE> 1
EXHIBIT 13.01
TAP's Annual Report to Stockholders of the Company
Pages 17-55
(pagination of exhibit does not
correspond to pagination in the
1996 Annual Report to Stockholders)
<PAGE> 2
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------------------------------------------
(at and for the year ended December 31,
in millions except per share amounts) (1) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 8,197 $4,569 $ 4,168 $4,715 $ 5,245
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting changes $ 391 $ 419 $ 188 $ 167 $ (186)
Cumulative effect of accounting changes (2) - - - - (71)
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 391 $ 419 $ 188 $ 167 $ (257)
- -----------------------------------------------------------------------------------------------------------------
Total assets $49,779 $24,062 $22,481 $21,416 $20,842
Long-term debt 1,249 - - - -
TAP-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debt securities of TAP 900 - - - -
Stockholders' equity (3) 6,480 3,601 2,581 2,977 2,600
Per common share data:
Income (loss) before cumulative effect of
accounting changes $ 1.05 $ 1.42 $ 0.64 $ 0.57 $ (0.63)
Cumulative effect of accounting changes - - - - (0.24)
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) (4) $ 1.05 $ 1.42 $ 0.64 $ 0.57 $ (0.87)
- --------------------------------------------------------------------------------------------------------------------
Cash dividends $ 0.15 N/A N/A N/A N/A
Book value 16.22 N/A N/A N/A N/A
Book value excluding FAS 115 adjustment 15.50 N/A N/A N/A N/A
Other data:
Average number of common shares and equivalents (4) 367.1 294.5 294.5 294.5 294.5
Year-end common shares outstanding (5) 399.6 N/A N/A N/A N/A
</TABLE>
(1) Includes amounts related to Aetna P&C from April 2, 1996, the date of the
acquisition. GAAP financial data related to balance sheet data as of
December 31, 1993 and subsequent, and income statement data related to
periods ended after December 31, 1993, are presented on a purchase
accounting basis.
(2) Included in net income for 1992 is an after-tax charge of $130 million
resulting from the adoption of Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions" and an after-tax benefit of $59 million resulting from the
adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
(3) Stockholders' equity at December 31, 1996, 1995 and 1994 reflects $285
million, $280 million and ($443) million, respectively, of net unrealized
gains (losses) on investment securities pursuant to the adoption of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" in 1994.
(4) Net income per common share is computed after recognition of preferred
stock dividend requirements and is based on the weighted average number of
common shares and common share equivalents outstanding during the period.
For purposes of the computation of net income per share, the weighted
average number of common shares and common share equivalents was computed
by treating the common stock issued within a one-year period prior to the
initial filing of the registration statement relating to the initial public
offering (IPO) as outstanding for all reported periods. This amount was
then reduced by the dilutive effect of such issuances of stock prior to the
IPO determined by using the actual proceeds and the number of shares that
could have been repurchased using the IPO price as the repurchase price for
all periods presented.
(5) In April 1996, in conjunction with the acquisition of Aetna P&C, the
Company issued common stock through its IPO. See note 2.
1
<PAGE> 3
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Results of Operations reflect the consolidated results of operations of
Travelers Property Casualty Corp. (formerly Travelers/Aetna Property Casualty
Corp.) (TAP) and its subsidiaries (the Company).
CONSOLIDATED OVERVIEW
On April 2, 1996, TAP purchased from Aetna Services Inc. (formerly Aetna Life
and Casualty Company) (Aetna) all of the outstanding capital stock of The Aetna
Casualty and Surety Company and The Standard Fire Insurance Company
(collectively, Aetna P&C) for approximately $4.2 billion in cash. To finance the
$4.2 billion purchase price, including transaction costs, plus capital
contributions totaling $710 million to Aetna P&C, TAP borrowed $2.7 billion from
a syndicate of banks under a five-year revolving credit facility, as amended,
that expires on December 19, 2001 (the Credit Facility) and sold approximately
33 million shares of its Class A Common Stock representing approximately 9% of
its outstanding common stock (at that time) to four private investors, including
Aetna, for an aggregate of $525 million. The Travelers Insurance Group Inc.
(TIGI) acquired approximately 328 million shares of Class B Common Stock of TAP
in exchange for contributing the outstanding capital stock of The Travelers
Indemnity Company (Travelers Indemnity) and a capital contribution of
approximately $1.1 billion. In addition, Travelers Group Inc. (Travelers Group)
purchased from TAP $540 million of Series Z Preferred Stock of TAP.
Approximately $18 million of the purchase price was funded through the
settlement of receivables from Aetna. The acquisition was accounted for under
the purchase method of accounting and, accordingly, the consolidated financial
statements include the results of Aetna P&C's operations only from the date of
acquisition.
On April 23, 1996, TAP sold in a public offering approximately 39 million shares
of its Class A Common Stock, representing approximately 9.75% of its outstanding
common stock, for total proceeds of $928 million. On April 24, 1996, TAP sold in
a public offering $500 million of 6-3/4% Notes due April 15, 2001 and $200
million of 7-3/4% Notes due April 15, 2026. On April 26, 1996, Travelers P&C
Capital I, a wholly owned subsidiary trust of TAP, issued $800 million of 8.08%
Trust Preferred Securities in a public offering. On May 10, 1996, Travelers P&C
Capital II, a wholly owned subsidiary trust of TAP, issued $100 million of 8.00%
Trust Preferred Securities in a public offering. These Trust Preferred
Securities, which are fully and unconditionally guaranteed by TAP, have a
liquidation value of $25 per Trust Preferred Security and are mandatorily
redeemable under certain circumstances. The aggregate proceeds from the above
offerings of $2.5 billion, together with the proceeds from the issuance by TAP
of approximately $700 million of commercial paper, were used to repay in full
the borrowings under the Credit Facility and to redeem in full TAP's Series Z
Preferred Stock.
Prior to the acquisition, the Company was a wholly owned subsidiary of TIGI,
which is an indirect wholly owned subsidiary of Travelers Group.
On December 31, 1994, the Company acquired the remaining 50% of Gulf Insurance
Company (Gulf) which it did not already own from Travelers Group for
approximately $150 million. The effects of this transaction were not
significant.
The Company provides a wide range of commercial and personal property and
casualty insurance products and services to businesses, associations and
individuals throughout the United States.
2
<PAGE> 4
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues (millions) $8,197 $4,569 $4,168
Net income (millions) $ 391 $ 419 $ 188
Preferred dividends (millions) 4 -- --
------ ------ ------
Net income available to common
stockholders (millions) $ 387 $ 419 $ 188
====== ====== ======
Net income per share $ 1.05 $ 1.42 $ 0.64
Weighted average number of common
shares outstanding and common stock
equivalents (millions) 367.1 294.5 294.5
</TABLE>
Net income of $391 million in 1996 decreased $28 million from 1995. Net income
of $419 million in 1995 increased $231 million over 1994. The decrease in 1996
from 1995 was primarily due to $423 million of net charges related to the
acquisition and integration of Aetna P&C. This was mostly offset by the
post-acquisition results of operations of Aetna P&C. These net
acquisition-related charges include, on an after-tax basis, $318 million in
reserve increases, net of reinsurance, related primarily to cumulative injury
claims other than asbestos, insurance products involving financial guarantees,
reserve strengthening, and assumed reinsurance, $121 million in uncollectible
reinsurance and other receivables, and $23 million in lease and severance costs
related to the restructuring plan for the acquisition, partially offset by $39
million in decreases in Personal Lines automobile reserves. The increase in 1995
from 1994 was the result of the increases in realized investment gains and net
investment income, as well as improved loss trends in the workers' compensation
line of business and expense reduction initiatives, partially offset by an
after-tax gain of $19 million from the 1994 sale of Bankers and Shippers
Insurance Company (Bankers and Shippers).
Excluding realized investment gains and losses in all years, net
acquisition-related charges of $423 million described above and the 1994 gain on
the sale of Bankers and Shippers, the Company's earnings were $802 million, $373
million and $266 million in 1996, 1995 and 1994, respectively. The increase in
1996 was due to the inclusion of Aetna P&C from April 2, 1996. The increase also
reflects strong net investment income, favorable loss experience in personal
auto lines and the benefits of expense-reduction initiatives associated with the
acquisition, marginally offset by higher catastrophe losses.
Revenues of $8.197 billion in 1996 increased $3.628 billion from 1995. Revenues
of $4.569 billion in 1995 increased $401 million from 1994. The 1996 increase
was primarily attributable to the acquisition of Aetna P&C and includes a $2.713
billion increase in earned premiums and a $946 million increase in net
investment income. The increase in revenues in 1995 compared to 1994 is
primarily attributable to an increase in realized investment gains of $203
million, an increase in net investment income of $137 million and an increase in
earned premiums of $137 million.
Commercial Lines earned premiums increased $1.678 billion to $3.695 billion for
1996 primarily reflecting the acquisition of Aetna P&C. The increase in
Commercial Lines earned premiums is net of continued decreases resulting from
the Company's selective underwriting and the highly competitive marketplace.
Personal Lines earned premiums of $2.323 billion for 1996 increased $1.039
billion from $1.284 billion in 1995, primarily reflecting the acquisition of
Aetna P&C. In addition, the increase in Personal Lines earned premiums is due to
growth in targeted automobile and homeowners markets, partially offset by
reductions in catastrophe-prone areas.
3
<PAGE> 5
Net investment income was $1.656 billion in 1996, an increase of $946 million
from 1995, primarily due to the acquisition of Aetna P&C, increased funds
available for investment and a higher return on investments. Net investment
income was $710 million in 1995, an increase of $137 million from 1994. The
increase in 1995 compared to 1994 is primarily due to increased funds available
for investment and a higher return on investments.
National Accounts within Commercial Lines is the primary source of fee income
due to its service business. Fee income of $455 million in 1996 was virtually
the same as in 1995. Fee income was $456 million in 1995, a $40 million decrease
from 1994. Fee income in both 1996 and 1995 was negatively impacted by the
depopulation of involuntary pools as the loss experience of workers'
compensation improved and insureds moved to voluntary markets, the Company's
selective renewal activity to address the competitive pricing environment and
its continued success in lowering workers' compensation losses of customers. The
negative impact of the above factors on 1996 was mostly offset by the
acquisition of Aetna P&C.
Claims and expenses of $7.710 billion in 1996 increased $3.692 billion from
1995. The increase was primarily attributable to the claims and expenses related
to the Aetna P&C business and financing costs associated with the acquisition of
Aetna P&C, partially offset by expense reductions. Claims and expenses of $4.018
billion in 1995 increased $60 million from 1994. In 1995, the decrease in claims
and expenses due to expense reduction initiatives and improved loss trends in
the workers' compensation line of business was more than offset by the
consolidation of Gulf.
The Company's effective tax rate was 20%, 24% and 10% for 1996, 1995 and 1994,
respectively. These rates differed from the statutory tax rate in those years
primarily due to municipal bond interest not taxed for federal income tax
purposes. The 1996 effective rate was lower than 1995 due to an increased level
of tax-exempt income and lower pre-tax income, partially offset by higher
goodwill amortization resulting from the acquisition of Aetna P&C. The 1995
effective rate was higher than 1994 due to approximately the same level of
tax-exempt income and higher pre-tax income.
The overall statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory:
Loss and Loss Adjustment Expense (LAE) ratio .. 85.5% 78.2% 90.2%
Underwriting expense ratio .................... 31.3 26.4 26.2
Combined ratio before policyholder dividends .. 116.8 104.6 116.4
Combined ratio ................................ 117.2 105.4 115.3
GAAP:
Loss and LAE ratio ............................ 81.0 74.6 78.6
Underwriting expense ratio .................... 33.6 29.0 27.7
Combined ratio before policyholder dividends .. 114.6 103.6 106.3
Combined ratio ................................ 115.2 104.3 105.3
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
differences in reporting of revenues and expenses related to service business,
including servicing fees from carriers, large deductible policies and service
contracts. In addition, certain 1996 purchase accounting adjustments recorded in
connection with the Aetna P&C acquisition resulted in a charge to statutory
expenses, but not GAAP expenses.
4
<PAGE> 6
The increase in the 1996 overall statutory and GAAP combined ratios compared to
1995 was primarily attributable to charges taken in 1996 related to the
acquisition and integration of Aetna P&C. Excluding these charges, the statutory
and GAAP combined ratios before policyholder dividends for 1996 would have been
106.3% and 105.5%, respectively. The increase in the 1996 statutory and GAAP
combined ratios excluding acquisition-related charges compared to the 1995
statutory and GAAP combined ratios is primarily due to the inclusion in 1996 of
Aetna P&C's results. Aetna P&C historically has had a higher underwriting
expense ratio, partially offset by a lower loss and LAE ratio, which reflects
the mix of business including the favorable effect of the lower loss and LAE
ratio of the Bond business. The 1994 statutory combined ratio includes a
statutory charge of $225 million for reserve increases for environmental claims
and for a reduction of ceded reinsurance balances. Excluding this charge, the
statutory combined ratio before policyholder dividends for 1994 was 109.4%.
RESULTS OF OPERATIONS BY SEGMENT
<TABLE>
<CAPTION>
Commercial Lines
(in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues...............................$5,497 $3,070 $2,626
Net income.............................$ 197 $ 329 $ 93
</TABLE>
Net income of $197 million in 1996 decreased $132 million from 1995, and 1995
net income of $329 million increased $236 million compared to 1994. The 1996
decrease compared to 1995 is primarily due to $453 million of after-tax charges
related to the acquisition of Aetna P&C, partially offset by higher premiums and
net investment income due to the acquisition of Aetna P&C. These
acquisition-related charges include $318 million in reserve increases, net of
reinsurance, principally for cumulative injury other than asbestos, insurance
products involving financial guarantees, reserve strengthening and assumed
reinsurance, $116 million in uncollectible reinsurance and other receivables,
and $19 million in lease and severance costs related to the restructuring plan
for the acquisition. The increase in 1995 from 1994 reflected a $112 million
after-tax increase in realized investment gains, higher net investment income,
benefits from expense reduction initiatives and improved loss trends in the
workers' compensation line.
Excluding realized investment gains and losses in all years and the 1996
acquisition-related charges, Commercial Lines' earnings were $633 million, $288
million and $164 million in 1996, 1995 and 1994, respectively. The increase in
1996 was primarily the result of the acquisition of Aetna P&C, combined with
higher net investment income and the benefits of expense-reduction initiatives.
Commercial Lines net written premiums totaled $4.062 billion for 1996 (excluding
a one-time adjustment associated with a reinsurance transaction), up $1.753
billion compared to 1995, reflecting the acquisition of Aetna P&C. The net
written premiums in 1995 of $2.309 billion reflect an increase of $197 million
from $2.112 billion in 1994, primarily reflecting the consolidation of Gulf.
Premium equivalents for 1996 totaled $2.596 billion, down $225 million compared
to $2.821 billion in 1995, which was down $169 million from $2.990 billion in
1994. Premium equivalents, which are associated largely with National Accounts,
represent estimates of premiums that customers would have been charged under a
fully insured arrangement and do not represent actual premium revenues.
5
<PAGE> 7
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Commercial Lines net written premiums
totaled $4.668 billion for 1996, down $476 million from $5.144 billion for 1995,
which was down $58 million from $5.202 billion for 1994. These decreases reflect
the highly competitive marketplace and the Company's selective underwriting. On
a combined total basis including Aetna P&C, premium equivalents totaled $2.712
billion for 1996, down $746 million from $3.458 billion for 1995. The decrease
in premium equivalents reflects a depopulation of involuntary pools as the loss
experience of workers' compensation improves and insureds move to voluntary
markets, the Company's selective renewal activity to address the competitive
pricing environment and its continued success in lowering workers' compensation
losses of customers. Premium equivalents of $2.990 billion for 1994 does not
include Aetna P&C. (Historically, Aetna P&C did not track premium equivalents
and such amounts are not available for 1994).
A significant component of Commercial Lines is National Accounts, which works
with national brokers and regional agents providing insurance coverages and
services, primarily workers' compensation, mainly to large corporations.
National Accounts also includes the alternative market business which covers
primarily workers' compensation products and services. On a combined total basis
including Aetna P&C (for periods prior to April 2, 1996 for comparative purposes
only), National Accounts net written premiums of $852 million in 1996 decreased
$340 million from 1995. Net written premiums of $1.192 billion in 1995 decreased
$312 million from 1994. The 1996 and 1995 decreases reflect the Company's
selective renewal activity and the highly competitive marketplace. On a combined
total basis including Aetna P&C (for periods prior to April 2, 1996 for
comparative purposes only), National Accounts premium equivalents of $2.625
billion for 1996 were $733 million below 1995. The decrease in premium
equivalents in 1996 reflects a depopulation of involuntary pools as the loss
experience of workers' compensation improves and insureds move to voluntary
markets, the Company's selective renewal activity to address the competitive
pricing environment and its continued success in lowering workers' compensation
losses of customers.
National Accounts premium equivalents of $2.780 billion for Travelers Indemnity
and its subsidiaries (Travelers P&C) in 1995 were $179 million below 1994. The
1995 decrease reflected Travelers P&C's selective renewal activity in response
to the competitive pricing environment, continued success in lowering workers'
compensation losses of customers and a depopulation of involuntary pools as the
loss experience of workers' compensation improves and insureds move to voluntary
markets.
For 1996, National Accounts new business, including both premiums and premium
equivalents, was $389 million compared to $444 million in 1995, and $325 million
in 1994. This decrease, despite the Aetna acquisition, is due to the highly
competitive marketplace. Retention ratios dropped to 82% in 1996 from 84% in
1995 and 88% in 1994. These new business and retention ratio declines in 1996
reflect the Company's selective renewal activity and the highly competitive
marketplace.
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. On a combined total basis including Aetna P&C (for periods
prior to April 2, 1996 for comparative purposes only), Commercial Accounts net
written premiums of $1.725 billion for 1996 were $137 million below 1995 premium
levels, which were $146 million below 1994 premium levels. The decrease in 1996
and 1995 in net written premiums is due to the highly competitive marketplace,
the Company's selective underwriting and the continued softness in guaranteed
cost products. The decrease in 1995 compared to 1994 in net written premiums was
partly offset by the continued growth in Commercial Accounts' industry-specific
programs and in retrospectively rated policies and other loss-responsive
products. On a combined total basis including Aetna P&C (for periods prior to
April 2, 1996 for comparative purposes only), Commercial Accounts premium
equivalents of $87 million in 1996 were $13 million below 1995 due to the
competitive marketplace.
6
<PAGE> 8
For 1996, new business in Commercial Accounts was $360 million compared to $269
million in 1995, and $207 million in 1994. The 1996 increase in new business is
due to the acquisition of Aetna P&C. The Commercial Accounts business retention
ratio was 72% in 1996, 73% in 1995 and 79% in 1994. These retention ratios
reflect Commercial Accounts selective underwriting policy. Commercial Accounts
continues to focus on industry specific programs which meet strict underwriting
guidelines.
Select Accounts serves small businesses through a network of independent agents.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Select Accounts net written premiums of
$1.412 billion for 1996 were $54 million lower than 1995. This decrease reflects
the highly competitive marketplace and the Company's selective underwriting.
Select Accounts net written premiums of $1.466 billion for 1995 were $173
million above 1994 premium levels, due primarily to an increase in new business.
New business in Select Accounts was $276 million, $131 million and $112 million
in 1996, 1995 and 1994, respectively. The 1996 increase in new premium business
is due to the acquisition of Aetna P&C. The Select Accounts business retention
ratio was 78%, 75% and 73% in 1996, 1995 and 1994, respectively. The increase in
the 1996 business retention ratio reflects the industry and product line
expertise of the combined company.
Specialty Accounts markets products to national, midsize and small customers and
distributes them through both wholesale brokers and retail agents and brokers
throughout the United States. On a combined total basis including Aetna P&C (for
periods prior to April 2, 1996 for comparative purposes only), Specialty
Accounts net written premiums of $679 million for 1996 were $55 million higher
than 1995, which was $227 million above 1994. The 1996 increase compared to 1995
is due to increases in directors' and officers' liability insurance and errors
and omissions coverages. The 1995 increase compared to 1994 primarily reflects
consolidation of Gulf following the acquisition of the 50% of Gulf that the
Company did not already own. Gulf's net written premiums were $176 million for
1995.
Commercial Lines claims and expenses of $5.292 billion in 1996 increased $2.646
billion from 1995, and increased $103 million from 1994 to 1995. The 1996
increase was primarily attributable to the acquisition of Aetna P&C and the net
acquisition-related charges of $697 million recorded during the second and
fourth quarters of 1996, offset in part by benefits from expense reduction
initiatives associated with the integration of Aetna P&C and cost efficiencies
in operations and in competitive workers' compensation managed care delivery
programs. Excluding the effects of consolidating Gulf in 1995, claims and
expenses decreased $20 million from 1994 to 1995. This decrease was primarily
attributable to favorable current year loss development in certain workers'
compensation lines and residual markets in 1995.
Catastrophe losses, net of tax and reinsurance, were $31 million, $7 million and
$30 million in 1996, 1995 and 1994, respectively. Catastrophe losses in 1996
were primarily due to Hurricane Fran and December storms on the West Coast.
Effective April 1, 1995, the threshold of losses incurred to qualify a specific
event as a catastrophe was increased. In 1994, catastrophe losses were primarily
comprised of winter storms in the first quarter.
7
<PAGE> 9
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory:
Loss and LAE ratio.......................................................96.2% 80.6% 104.2%
Underwriting expense ratio...............................................32.7 24.4 24.0
Combined ratio before policyholder dividends ...........................128.9 105.0 128.2
Combined ratio..........................................................129.6 106.3 126.2
GAAP:
Loss and LAE ratio.......................................................89.0 74.6 82.3
Underwriting expense ratio...............................................36.9 28.9 27.4
Combined ratio before policyholder dividends ...........................125.9 103.5 109.7
Combined ratio..........................................................126.8 104.6 108.1
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to differences in reporting of revenues and expenses related to
service business, including servicing of residual market pools and deductible
policies. In addition, in 1996, GAAP combined ratios for Commercial Lines differ
from statutory combined ratios due to certain purchase accounting adjustments
recorded in connection with the Aetna P&C acquisition resulting in a charge to
statutory expenses, but not GAAP expenses.
The increase in the 1996 statutory and GAAP combined ratios for Commercial Lines
compared to 1995 was primarily attributable to the charges taken in 1996 related
to the acquisition and integration of Aetna P&C. Excluding these amounts, the
statutory and GAAP combined ratios before policyholder dividends for 1996 both
would have been 110.0%. The increase in the 1996 statutory and GAAP combined
ratios excluding acquisition-related charges compared to the 1995 statutory and
GAAP combined ratios is primarily due to the inclusion in 1996 of Aetna P&C's
results. Aetna P&C historically has had a higher underwriting expense ratio,
partially offset by a lower loss and LAE ratio that reflects the mix of business
including the favorable effect of the lower loss and LAE ratio of the Bond
business. The 1994 statutory combined ratio includes a statutory charge of $225
million for reserve increases for environmental claims and for a reduction of
ceded reinsurance balances. Excluding this charge, the statutory combined ratio
for 1994 was 114.2%. The improvement in the 1995 combined ratios compared to the
adjusted 1994 combined ratios was due to the first quarter 1994 catastrophe
losses and favorable loss development in certain workers' compensation lines and
residual markets in 1995.
<TABLE>
<CAPTION>
Personal Lines
(in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues..................................$2,685 $1,481 $1,519
Net income................................$ 282 $ 107 $ 97
</TABLE>
Net income of $282 million in 1996 increased $175 million from $107 million in
1995, which increased $10 million from $97 million in 1994. The 1996 increase
was primarily attributable to the post-acquisition results of operations of
Aetna P&C (including $30 million principally resulting from a review of Aetna
P&C reserves), as well as approximately $70 million of favorable prior year loss
development primarily in the automobile bodily injury line, the continued
benefit of expense reduction initiatives and higher net investment income. The
increase in 1995 from 1994 was attributable to higher net investment income and
higher realized investment gains as well as expense reduction initiatives,
largely offset by benefits from favorable prior year loss reserve development in
1994 in the personal automobile line of business, a one-time contribution of $9
million from the favorable resolution of the New Jersey Market Transition
Facility (MTF) deficit and the earnings from Bankers and Shippers (which was
sold in October 1994).
8
<PAGE> 10
Net written premiums were $2.359 billion for 1996 compared to $1.298 billion in
1995 and $1.433 billion in 1994. The 1996 increase compared to 1995 primarily
reflects the acquisition of Aetna P&C and, to a lesser extent, growth in target
markets, partially offset by reductions due to catastrophe management
strategies. The 1995 decline of $135 million compared to 1994 was attributable
to the sale of Bankers and Shippers in October 1994. Excluding Bankers and
Shippers business, net written premiums for 1995 were up approximately 8% from
1994, reflecting reduced insurance ceded and targeted growth in sales through
independent agents.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Personal Lines net written premiums for
1996 totaled $2.675 billion, up $132 million from $2.543 billion in 1995. This
increase on a combined basis reflects continued growth in targeted automobile
and homeowners markets, partially offset by reductions due to catastrophe
management strategies.
Personal Lines claims and expenses of $2.267 billion in 1996 increased $932
million from 1995. This increase was primarily attributable to the acquisition
of Aetna P&C, partially offset by favorable prior year loss development
primarily in the automobile bodily injury line in 1996 and the continued benefit
of expense reduction initiatives. Claims and expenses of $1.335 billion in 1995
decreased $49 million from 1994. The decline was primarily attributable to
expense reduction initiatives. In addition, 1995 reflected lower expenses due to
the October 1994 sale of Bankers and Shippers, while 1994 benefited from the
resolution of the MTF deficit and favorable reserve development on prior years'
business.
Included in 1996 are after-tax catastrophe losses, net of reinsurance, of $58
million compared to $12 million in 1995 and $26 million in 1994. Catastrophe
losses in 1996 were primarily due to Hurricane Fran, severe first quarter winter
storms and second quarter hail and wind storms. Effective April 1, 1995, the
threshold of losses incurred to qualify a specific event as a catastrophe was
increased. Catastrophe losses in 1994 were primarily due to the severe winter
storms in the Northeast during the first quarter.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory:
Loss and LAE ratio...........................68.7% 74.5% 71.0%
Underwriting expense ratio...................28.9 29.9 29.4
Combined ratio...............................97.6 104.4 100.4
GAAP:
Loss and LAE ratio...........................67.2 74.5 72.2
Underwriting expense ratio...................27.7 29.1 28.3
Combined ratio...............................94.9 103.6 100.5
</TABLE>
In 1996, GAAP combined ratios for Personal Lines differ from statutory combined
ratios primarily due to certain purchase accounting adjustments recorded in
connection with the Aetna P&C acquisition resulting in a charge to statutory
expenses, but not GAAP expenses.
The 1996 statutory and GAAP combined ratios for Personal Lines include a benefit
resulting from the Company's review of reserves associated with the acquisition
of Aetna P&C. Excluding this item, the 1996 statutory and GAAP combined ratios
were 100.1% and 97.4%, respectively. The decrease in the 1996 statutory and GAAP
combined ratios excluding this item is predominantly due to the favorable prior
year loss development, primarily in the automobile bodily injury line, partially
offset by higher catastrophe losses. The lower ratio in 1994 compared to 1995
was primarily due to the benefit of favorable loss reserve development and the
favorable resolution of the MTF deficit in 1994.
9
<PAGE> 11
<TABLE>
<CAPTION>
Corporate and Other
(in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues..............................$ 15 $ 18 $23
Net loss..............................$(88) $(17) $(2)
</TABLE>
The primary component of net loss for 1996 was interest expense of $77 million
after tax, reflecting financing costs associated with the acquisition of Aetna
P&C.
Environmental Claims
The Company continues to receive claims alleging liability exposures arising out
of insureds' alleged disposition of toxic substances. These claims when
submitted rarely indicate the monetary amount being sought by the claimant from
the insured and the Company does not keep track of the monetary amount being
sought in those few claims which indicated such a monetary amount. The Company's
review and investigation of such claims includes an assessment of the probable
liability, available coverage, judicial interpretations and historical value of
similar claims. In addition, the unique facts presented in each claim are
evaluated individually and collectively. Due consideration is given to the many
variables presented in each claim, such as: the nature of the alleged activities
of the insured at each site; the allegations of environmental damage at each
site; the number of sites; the total number of potentially responsible parties
at each site; the nature of environmental harm and the corresponding remedy at a
site; the nature of government enforcement activities at each site; the
ownership and general use of each site; the overall nature of the insurance
relationship between the Company and the insured; the identification of other
insurers; the potential coverage available, if any; the number of years of
coverage, if any; the obligation to provide a defense to insureds, if any, and
the applicable law in each jurisdiction.
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At December 31, 1996, approximately 12% of
the net environmental loss reserve (i.e., approximately $146 million) consists
of case reserve for resolved claims. The balance, approximately 88% of the net
aggregate reserve (i.e., approximately $1.096 billion), is carried in a bulk
reserve and includes incurred but not yet reported environmental claims for
which the Company has not received any specific claims.
10
<PAGE> 12
The following table displays activity for environmental losses and loss expenses
and reserves for 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Environmental Losses
(in millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning reserves:
Direct...............................................$ 454 $ 449 $ 466
Ceded................................................. (50) (8) (7)
------- ------- -------
Net................................................. 404 441 459
Acquisition of Aetna P&C:
Direct................................................ 968 - -
Ceded................................................. (39) - -
Incurred losses and loss expenses:
Direct................................................ 114 117 45
Ceded................................................. (52) (61) (4)
Losses paid:
Direct ............................................... 167 145 65
Ceded................................................. (14) (22) (4)
Other:
Direct................................................ - 33 3
Ceded................................................. - (3) (1)
------- ------- -------
Ending reserves:
Direct................................................ 1,369 454 449
Ceded................................................. (127) (50) (8)
------- ------- -------
Net................................................$ 1,242 $ 404 $ 441
======== ======== ========
</TABLE>
In the above table, "Other" represents (i) the 1994 acquisition by the Company
of the remaining 50% of Gulf that it did not already own and (ii) the
termination in 1995 of certain agreements with TIGI whereby TIGI had assumed
certain reserves from the Company.
The duration of the Company's investigation and review of such claims and the
extent of time necessary to determine an appropriate estimate, if any, of the
value of the claim to the Company, varies significantly and is dependent upon a
number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and the
Company to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, the Company cannot provide a meaningful average of the
duration of an environmental claim. However, based upon the Company's experience
in resolving such claims, the duration may vary from months to several years.
The industry does not have a standard method of calculating claim activity for
environmental losses. Generally for environmental claims, Travelers P&C
establishes a claim file for each insured on a per site, per claimant basis. If
there is more than one claimant such as a federal and a state agency, this
method will result in two claims being set up for a policyholder at that one
site. Similarly, if one hundred claimants file a lawsuit against ten
policyholders alleging injury as a result of the discharge of wastes or
pollutants, one thousand claims would be established. Travelers P&C adheres to
this method of calculating claim activity on all environmental-related claims,
whether such claims are tendered on primary, excess or umbrella policies.
11
<PAGE> 13
As of December 31, 1996, Travelers P&C had approximately 30,800 pending
environmental-related claims tendered by 664 active policyholders. The pending
environmental-related claims represent federal or state EPA-type claims as well
as plaintiffs' claims alleging bodily injury and property damage due to the
discharge of waste or pollutants. In 1996, the pending inventory increased by
approximately 20,000 claims as a result of several lawsuits being filed in the
States of Louisiana and Texas. These lawsuits, filed against one or more
policyholders of Travelers P&C allege that the plaintiffs were injured or
damaged as a result of either alleged waste disposal or the alleged release of
deleterious substances from ongoing business operations which have taken place
near the plaintiffs' residences. Claims of this nature have historically been
considered in the level of TAP's environmental reserves. To date, Travelers P&C
has resolved environmental-related claims on behalf of 1,628 policyholders.
The Company is preparing a claims system conversion which when completed will
apply Travelers P&C's method of establishing claim files to Aetna P&C's
environmental-related claims. The Company anticipates that this process should
be completed in 1997. As of December 31, 1996, Aetna P&C had pending
environmental-related claims tendered by approximately 948 active policyholders,
approximately 129 of these 948 active policyholders are also included in the 664
active Travelers P&C policyholders. Aetna P&C's policyholders, like those of
Travelers P&C, have tendered both EPA-type claims and individual claims alleging
injury or damage as a result of the discharge of wastes or pollutants. To date,
Aetna P&C has resolved environmental-related claims on behalf of 1,870
policyholders.
To date, the Company generally has been successful in resolving its coverage
litigation and continues to reduce its potential exposure through favorable
settlements with certain insureds. These settlement agreements with certain
insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds. In addition,
with respect to settlement of many of the environmental claims, the agreement
between the Company and the insured extinguishes any obligation the Company may
have under any policy issued to the insured for future environmental liabilities
risks. This form of settlement is commonly referred to as a "buy-back" of
policies for future environmental liability risks. Additional provisions of
these agreements include the appropriate indemnities and hold harmless
provisions to protect the Company. The Company's general purpose in executing
such agreements is to reduce its potential environmental exposure and eliminate
both the risks presented by coverage litigation with the insured and the cost of
such litigation.
Asbestos Claims
In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. The Company continues to receive
asbestos claims alleging insureds' liability from claimants' asbestos-related
injuries. These claims, when submitted, rarely indicate the monetary amount
being sought by the claimant from the insured and the Company does not keep
track of the monetary amount being sought in those few claims which indicated
such a monetary amount. Originally the cases involved mainly plant workers and
traditional asbestos manufacturers and distributors. However, in the mid-1980s,
a new group of plaintiffs, whose exposure to asbestos was less direct and whose
injuries were often speculative, began to file lawsuits in increasing numbers
against the traditional defendants as well as peripheral defendants who had
produced products that may have contained small amounts of some form of
encapsulated asbestos. These claims continue to arise and on an individual basis
generally involve smaller companies with smaller limits of potential coverage.
Also, there has emerged a group of non-product claims by plaintiffs, mostly
independent labor union workers, mainly against companies, alleging exposure to
asbestos while working at these companies' premises. In addition, various
insurers, including the Company, remain defendants in an action brought in
Philadelphia regarding potential consolidation and resolution of future asbestos
bodily injury claims.
12
<PAGE> 14
In summary, various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as premises
owners, are tendering asbestos-related claims to the industry. Because each
insured presents different liability and coverage issues, the Company evaluates
those issues on an insured-by-insured basis.
The Company's evaluations have not resulted in any meaningful data from which an
average asbestos defense or indemnity payment may be determined. The varying
defense and indemnity payments made by the Company on behalf of its insureds
have also precluded the Company from deriving any meaningful data by which it
can predict whether its defense and indemnity payments for asbestos claims (on
average or in the aggregate) will remain the same or change in the future. Based
upon the Company's experience with asbestos claims, the duration period of an
asbestos claim from the date of submission to resolution is approximately two
years.
At December 31, 1996, approximately 25% of the net aggregate reserve (i.e.,
approximately $263 million) is for pending asbestos claims. The balance,
approximately 75% (i.e., approximately $810 million) of the net asbestos
reserves represents incurred but not yet reported losses for which the Company
has not received any specific claims.
The following table displays activity for asbestos losses and loss expenses and
reserves for 1996, 1995 and 1994. In general, the Company posts case reserves
for pending asbestos claims within approximately 30 business days of receipt of
such claims.
<TABLE>
<CAPTION>
Asbestos Losses
(in millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning reserves:
Direct............................................$ 695 $ 614 $ 683
Ceded............................................. (293) (278) (336)
-------- -------- --------
Net............................................. 402 336 347
Acquisition of Aetna P&C:
Direct............................................ 801 - -
Ceded............................................. (121) - -
Incurred losses and loss expenses:
Direct............................................ 120 109 52
Ceded............................................. (35) (66) (9)
Losses paid:
Direct ........................................... 173 116 121
Ceded............................................. (79) (92) (67)
Other:
Direct............................................ - 88 -
Ceded............................................. - (41) -
-------- -------- --------
Ending reserves:
Direct............................................ 1,443 695 614
Ceded............................................. (370) (293) (278)
-------- -------- --------
Net.............................................$ 1,073 $ 402 $ 336
======== ======== ========
</TABLE>
In the above table, "Other" represents the termination in 1995 of certain
agreements with TIGI whereby TIGI had assumed certain reserves from the Company.
The largest reinsurer of the Company's asbestos risks is Lloyd's of London
(Lloyd's). In 1996, Lloyd's restructured its operations with respect to claims
for years prior to 1993. The Company is in arbitration with underwriters at
Lloyd's in New York State to enforce reinsurance contracts with respect to
recoveries for certain asbestos claims. The dispute involves the ability of the
Company to aggregate asbestos claims under a market agreement between Lloyd's
and the Company or under the applicable reinsurance treaties.
13
<PAGE> 15
The outcome of the arbitration referred to above is uncertain and the impact, if
any, on collectibility of amounts recoverable by the Company from Lloyd's cannot
be quantified at this time. The Company believes that it is possible that an
unfavorable resolution of this matter could have a material adverse effect on
the Company's operating results in a future period. However, the Company
believes that it is not likely that the outcome of this matter could have a
material adverse effect on the Company's financial condition or liquidity.
Uncertainty Regarding Adequacy of Environmental and Asbestos Reserves
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance, and applicable coverage defenses, if any. Once the gross ultimate
exposure for indemnity and allocated claim adjustment expense is determined for
a policyholder by policy year, a ceded projection is calculated based on any
applicable facultative and treaty reinsurance. In addition, a similar review is
conducted for asbestos property damage claims. However, due to the relatively
minor claim volume, these reserves have remained at a constant level.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1996 are the Company's best
estimate of ultimate claims and claim adjustment expenses based upon known facts
and current law. However, the environment surrounding the final resolution of
these claims continues to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations and changes in Superfund
and other legislation. Because of these future unknowns, additional liabilities
may arise for amounts in excess of the current reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated, and could result in a liability exceeding reserves by an amount that
would be material to the Company's operating results in a future period.
However, the Company believes that it is not likely that these claims will have
a material adverse effect on the Company's financial condition or liquidity.
Cumulative Injury Other Than Asbestos (CIOTA) Claims
CIOTA claims are generally submitted to the Company under general liability
policies and often involve an allegation by a claimant against an insured that
the claimant has suffered injuries as a result of long-term or continuous
exposure to potentially harmful products or substances. Such potentially harmful
products or substances include, but are not limited to, lead paint, pesticides,
pharmaceutical products, silicone-based personal products, solvents and other
deleterious substances.
Due to claimants' allegations of long-term bodily injury in CIOTA claims,
numerous complex issues regarding such claims are presented. The claimants'
theories of liability must be evaluated, evidence pertaining to a causal link
between injury and exposure to a substance must be reviewed, the potential role
of other causes of injury must be analyzed, the liability of other defendants
must be explored, and assessment of a claimant's damages must be made and the
law of the jurisdiction must be applied. In addition, the Company must review
the number of policies issued by the Company to the insured and whether such
policies are triggered by the allegations, the terms and limits of liability of
such policies, the obligations of other insurers to respond to the claim, and
the applicable law in each jurisdiction.
14
<PAGE> 16
To the extent disputes exist between the Company and a policyholder regarding
the coverage available for CIOTA claims, the Company resolves the disputes,
where feasible, through settlements with the policyholder or through coverage
litigation. Generally, the terms of a settlement agreement set forth the nature
of the Company's participation in resolving CIOTA claims, the scope of coverage
to be provided by the Company and contain the appropriate indemnities and hold
harmless provisions to protect the Company. These settlements generally
eliminate uncertainties for the Company regarding the risks extinguished,
including the risk that losses would be greater than anticipated due to evolving
theories of tort liability or unfavorable coverage determinations. The Company's
approach also has the effect of determining losses at a date earlier than would
have occurred in the absence of such settlement agreements. On the other hand,
in cases where future developments are favorable to insurers, this approach
could have the effect of resolving claims for amounts in excess of those that
would ultimately have been paid had the claims not been settled in this manner.
No inference should be drawn that because of the Company's method of dealing
with CIOTA claims, its reserves for such claims are more conservatively stated
than those of other insurers.
Aetna P&C did not distinguish CIOTA from other general liability claims or treat
CIOTA claims as a special class of claims. In addition, there were substantial
differences in claim approach and resolution between the Company and Aetna P&C
regarding CIOTA claims.
During the second quarter of 1996, the Company completed its review of Aetna
P&C's exposure to CIOTA claims in order to determine an appropriate level of
reserves using the Company's approach as described above. Based on the results
of that review, the Company's general liability insurance reserves were
increased by $360 million, net of reinsurance ($234 million after tax).
At December 31, 1996, approximately 19% of the net aggregate reserve (i.e.,
approximately $215 million) is for pending CIOTA claims. The balance,
approximately 81% (i.e., approximately $899 million) of the net CIOTA reserves
represents incurred but not yet reported losses for which the Company has not
received any specific claims.
15
<PAGE> 17
The following table displays activity for CIOTA losses and loss expenses and
reserves for 1996, 1995 and 1994. In general, the Company posts case reserves
for pending CIOTA claims within approximately 30 business days of receipt of
such claims.
<TABLE>
<CAPTION>
CIOTA Losses
(in millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning reserves:
Direct.....................................$ 374 $ 355 $ 357
Ceded...................................... - - -
-------- -------- --------
Net...................................... 374 355 357
Acquisition of Aetna P&C:
Direct..................................... 709 - -
Ceded...................................... (293) - -
Incurred losses and loss expenses:
Direct..................................... 565 21 16
Ceded...................................... (155) - -
Losses paid:
Direct .................................... 88 22 18
Ceded...................................... (2) - -
Other:
Direct..................................... - 20 -
Ceded...................................... - - -
-------- -------- --------
Ending reserves:
Direct..................................... 1,560 374 355
Ceded...................................... (446) - -
-------- -------- --------
Net......................................$ 1,114 $ 374 $ 355
======== ======== ========
</TABLE>
In the above table, "Other" represents the termination in 1995 of certain
agreements with TIGI whereby TIGI had assumed certain reserves from the Company.
Investment Portfolio
At December 31, 1996, the carrying value of the Company's investment portfolio
was $29.4 billion, representing 59% of total assets of $49.8 billion. The
average yield (excluding realized and unrealized investment gains) was 7.0% and
6.2% in 1996 and 1995, respectively. Because the primary purpose of the
investment portfolio is to fund future policyholder benefits and claims
payments, the Company seeks to employ a conservative investment philosophy. The
Company's fixed maturity portfolio at December 31, 1996 totaled $24.4 billion,
comprised of $22.5 billion of publicly traded fixed maturities and $1.9 billion
of private fixed maturities. The weighted average quality ratings of the
Company's publicly traded fixed maturity portfolio and private fixed maturity
portfolio at December 31, 1996 were Aa3 and A3, respectively. Included in the
fixed maturity portfolio at such date were approximately $599 million of below
investment grade securities. The average duration of the fixed maturity
portfolio, including short-term investments, was 5.3 years at such date.
16
<PAGE> 18
The following table sets forth the Company's combined fixed maturity investment
portfolio classified by Moody's Investor's Service Inc. ratings as of December
31, 1996:
<TABLE>
<CAPTION>
At December 31, 1996
Percent of
Carrying Value Total Carrying Value
-------------- --------------------
(Dollars in Millions)
<S> <C> <C>
Quality Rating:
Aaa $10,532 43.1%
Aa 3,868 15.8
A 6,306 25.8
Baa 3,141 12.9
------- ------
Total investment grade 23,847 97.6
Non-investment grade 599 2.4
------- ------
Total fixed maturity investments $24,446 100.0%
======= ======
</TABLE>
The Company makes investments in collateralized mortgage obligations (CMOs).
CMOs typically have high credit quality, offer good liquidity, and provide a
significant advantage in yield and total return compared to U.S. Treasury
securities. The Company's investment strategy is to purchase CMO tranches which
are protected against prepayment risk, including planned amortization class
(PAC) tranches. Prepayment protected tranches are preferred because they provide
stable cash flows in a variety of scenarios. The Company does invest in other
types of CMO tranches if a careful assessment indicates a favorable risk/return
tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 1996, the Company held CMOs with a market value of $2.1 billion.
Approximately 81% of CMO holdings were fully collateralized by GNMA, FNMA or
FHLMC securities at such date, and the balance were fully collateralized by
portfolios of individual mortgage loans. In addition, the Company held $2.4
billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
December 31, 1996. Virtually all of these securities were rated AAA.
The Company uses derivative financial instruments, including financial futures
contracts, forward contracts and interest rate swaps and caps, as a means of
hedging exposure to interest rate and foreign currency risk. The Company does
not hold or issue derivative instruments for trading purposes.
These derivative financial instruments have off-balance-sheet risk. Financial
instruments with off-balance-sheet risk involve, to varying degrees, elements of
credit and market risk in excess of the amount recognized in the balance sheet.
The contract or notional amounts of these instruments reflect the extent of
involvement the Company has in a particular class of financial instrument.
However, the maximum loss of cash flow associated with these instruments can be
less than these amounts. For forward contracts and interest rate swaps, credit
risk is limited to the amounts calculated to be due the Company on such
contracts. Financial futures contracts have very little credit risk since
organized exchanges are the counterparties.
The Company monitors creditworthiness of counterparties to these financial
instruments by using criteria of acceptable risk that are consistent with
on-balance-sheet financial instruments. The controls include credit approvals,
limits and other monitoring procedures.
The Company may occasionally enter into interest rate swaps in connection with
other financial instruments to provide greater risk diversification and to
better match an asset with a corresponding liability. Under interest rate swaps,
the Company agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made by
either party. A single net payment is usually made by one counterparty at each
due date. Swaps are not exchange-traded so they are subject to the risk of
default by the counterparty.
17
<PAGE> 19
The Company uses exchange-traded financial futures to manage its exposure to
changes in interest rates arising from the need to reinvest proceeds from the
sale or maturity of investments. To hedge against adverse changes in interest
rates, the Company enters long positions in financial futures contracts which
offset asset price changes resulting from changes in market interest rates until
an investment is purchased.
Margin payments are required to enter a futures contract and contract gains or
losses are settled daily in cash. The contract amount of futures contracts
represents the extent of the Company's involvement, but not future cash
requirements, as open positions are typically closed out prior to the delivery
date of the contract.
At December 31, 1996 and 1995, the Company held financial futures contracts with
notional amounts of approximately $522 million and $220 million, respectively,
and a deferred loss of $2 million and a deferred gain of $3 million,
respectively. Total gains from financial futures of $15 million are deferred at
December 31, 1996 relating to anticipated investment purchases expected to occur
by the end of the second quarter of 1997. These deferred gains are reported in
other liabilities. At December 31, 1996 and 1995, the Company's futures
contracts had no fair value because these contracts are marked to market and
settled in cash.
At December 31, 1996, the Company held interest rate swaps with notional amounts
of $763 million. The fair value of these financial instruments was $12 million
(gain position) and $13 million (loss position) at December 31, 1996, which was
determined using a discounted cash flow method. The off-balance-sheet risks of
interest rate swaps were not significant at December 31, 1995.
The off-balance-sheet risks of forward contracts were not significant at
December 31, 1996 and 1995.
Outlook
A variety of factors continue to affect the property and casualty insurance
market and the Company's core business outlook, including the competitive
pressures affecting pricing and profitability, inflation in the cost of medical
care, litigation and losses from involuntary markets.
Commercial Lines will continue to focus on its core product lines and markets,
with particular emphasis on both product and industry specialization. This
includes specific industry program marketing efforts in Commercial Accounts and
product offerings in Specialty Accounts. In most of Commercial Lines, pricing
did not improve in 1996. For Commercial Accounts and Select Accounts, the soft
underwriting cycle continues to pressure the pricing of guaranteed cost
products, as pricing trends have not kept pace with loss cost inflation in
recent years. The Company's focus is to retain existing profitable business and
obtain new accounts where it can maintain its selective underwriting policy.
National Accounts premiums are primarily loss sensitive and therefore less
affected by these pricing pressures. The market for National Accounts guaranteed
cost products is very competitive and has resulted in a decline in the Company's
new business. The Company will continue to adhere to strict guidelines to
maintain high quality underwriting. The Company's adherence to its selective
underwriting criteria has had an adverse effect on premium levels during the
last two years and, if the competitive pressures on pricing do not improve in
1997, it may continue to affect future premium levels unfavorably. The Company
believes that the competitive pricing environment for Commercial Lines is not
likely to improve in 1997.
Personal Lines strategy includes the control of operating expenses to improve
competitiveness and profitability, growth in sales through independent agents in
target markets, expansion of alternative marketing channels to broaden the
distribution of Personal Lines products, and a reduction of exposure to
catastrophe losses. In order to reduce its exposure to catastrophe losses, the
Company has limited the writing of new homeowners business and selectively
non-renewed existing homeowners business in certain markets, tightened
underwriting standards and implemented price increases in certain
hurricane-prone areas, subject to restrictions imposed by insurance regulatory
authorities, and introduced new policy forms in certain markets to limit the
Company's exposure to earthquake losses.
18
<PAGE> 20
The property casualty insurance industry in the United States continues to
consolidate. The Company's strategic objectives are to enhance its position as a
consistently profitable market leader and to become a low-cost provider of
property and casualty insurance in the United States, as the industry
consolidates.
In relation to the Company's objective of being a low-cost provider of property
and casualty insurance, cost reductions and enhanced productivity efforts are
expected to continue. These efforts include reducing overhead expenses,
integrating Aetna P&C to make it more consistent with the decentralized,
streamlined structure of the Company, and eliminating redundant expenses between
the two companies. The Company is approximately two-thirds of the way toward its
objective of achieving $300 million in annual cost savings in the first two
years after the acquisition.
Changes in the general interest rate environment affect the return received on
newly invested and reinvested funds. While a rising interest rate environment
enhances the returns available, it reduces the market value of existing fixed
maturity investments and the availability of gains on disposition. A decline in
interest rates reduces the return available on investment of funds but could
create the opportunity for realized investment gains on disposition of fixed
maturity investments.
As required by various state laws and regulations, the Company's insurance
subsidiaries are subject to assessments from state-administered guaranty
associations, second injury funds and similar associations. Management believes
that such assessments will not have a material impact on the Company's results
of operations, financial condition or liquidity.
Certain social, economic and political issues have led to an increased number of
legislative and regulatory proposals aimed at addressing the cost and
availability of certain types of insurance. While most of these provisions have
failed to become law, these initiatives may continue as legislators and
regulators try to respond to public availability and affordability concerns and
the resulting laws, if any, could adversely affect the Company's ability to
write business with appropriate returns.
Liquidity and Capital Resources
TAP was formed in January 1996 to hold the property and casualty insurance
subsidiaries of TIGI. TIGI contributed to TAP all of the outstanding shares of
common stock of Travelers Indemnity on April 1, 1996. On April 2, 1996, TAP
acquired the domestic property and casualty insurance subsidiaries of Aetna for
approximately $4.2 billion. TAP is a holding company and has no direct
operations. TAP's principal asset is the capital stock of its insurance
subsidiaries. For a description of the acquisition and the manner in which it
was funded, see Note 2 of Notes to Consolidated Financial Statements.
The liquidity requirements of the Company's business have been met primarily by
funds generated from operations, asset maturities and income received on
investments. Cash provided from these sources is used primarily for claims and
claim adjustment expense payments and operating expenses. Catastrophe claims,
the timing and amount of which are inherently unpredictable, may create
increased liquidity requirements. Additional sources of cash flow include the
sale of invested assets and financing activities. The Company believes that its
future liquidity needs will be met from all of the above sources.
Net cash flows are generally invested in marketable securities. The Company
closely monitors the duration of these investments, and investment purchases and
sales are executed with the objective of having adequate funds available to
satisfy the Company's maturing liabilities. As the Company's investment strategy
focuses on asset and liability durations, and not specific cash flows, asset
sales may be required to satisfy liability obligations and/or rebalance asset
portfolios. The Company's combined invested assets at December 31, 1996 totaled
$29.4 billion and consisted primarily of highly liquid public debt securities of
$22.5 billion, readily marketable private debt securities of $1.9 billion,
mortgage loans and real estate of $1.2 billion, equity securities of $779
million, short-term investments of $2.3 billion and other investments of $666
million.
19
<PAGE> 21
Cash flow needs at TAP include stockholder dividends and debt service. TAP meets
its cash flow needs primarily through dividends from operating subsidiaries. In
addition, TAP currently has available to it a $200 million line of credit for
working capital and other general corporate purposes from a subsidiary of
Travelers Group. The lender has no obligation to make any loan to TAP under this
line of credit. Moreover, the Company will continue to be able to make
borrowings under the Credit Facility, which it has reduced to $500 million, none
of which is currently utilized. Under the Credit Facility, TAP is required to
maintain a certain level of consolidated stockholders' equity (as defined in the
agreement). At December 31, 1996, this requirement was exceeded by approximately
$2.8 billion. In addition, the Credit Facility places restrictions on the amount
of consolidated debt TAP can incur. TAP also issues commercial paper directly to
investors and maintains unused credit availability under the Credit Facility at
least equal to the amount of commercial paper outstanding. At December 31, 1996,
TAP had $25 million outstanding under its commercial paper program.
As more fully described in Note 2 of Notes to Consolidated Financial Statements,
on April 24, 1996 TAP sold in a public offering $500 million of 6-3/4% Notes due
April 15, 2001 and $200 million of 7-3/4% Notes due April 15, 2026, in
connection with the acquisition of Aetna P&C. During the remainder of 1996, TAP
also sold $200 million of 6-3/4% Notes due September 1, 1999, $200 million of
6-1/4% Notes due October 1, 1999 and $150 million of 6-3/4% Notes due November
15, 2006. At December 31, 1996, TAP had issued a total of $1.25 billion of, and
had $750 million available for, debt offerings under its shelf registration
statement.
Because the principal operating subsidiaries of the Company are Connecticut
insurance companies, the amount of dividends that each entity may pay to the
parent company is restricted. The insurance holding company law of Connecticut
requires notice to, and approval by, the state insurance commissioner for the
declaration or payment of any dividend that together with other distributions
made within the preceding twelve months exceeds the greater of (i) 10% of the
insurer's surplus or (ii) the insurer's net income for the twelve-month period
ended the preceding December 31st, in each case determined in accordance with
statutory accounting practices. Such declaration or payment is further limited
by adjusted unassigned funds (surplus), as determined in accordance with
statutory accounting practices. The insurance holding company laws of other
states in which the Company's subsidiaries are domiciled generally contain
similar (although in certain instances somewhat more restrictive) limitations on
the payment of dividends. In 1997, dividend payments to TAP from its insurance
subsidiaries are limited to $647 million without prior approval of the
Connecticut Insurance Department.
In addition, pursuant to an intercompany agreement, TAP may not pay any
dividends on its common stock without the prior written consent of Travelers
Group, so long as Travelers Group maintains certain minimum beneficial ownership
requirements of the Common Stock. That agreement also limits the Company's
ability to incur indebtedness, issue equity securities and make certain capital
expenditures, among other things, without the prior written consent of Travelers
Group.
The National Association of Insurance Commissioners (NAIC) adopted risk-based
capital (RBC) requirements for property-casualty companies in December 1993,
effective with reporting for 1994. The RBC requirements are to be used as early
warning tools by the NAIC and states to identify companies that merit further
regulatory action. The formulas have not been designed to differentiate among
adequately capitalized companies that operate with levels of capital higher than
RBC requirements. Therefore, it is inappropriate and ineffective to use the
formulas to rate or to rank such companies. At December 31, 1996, all of the
Company's property-casualty companies had adjusted capital in excess of amounts
requiring any regulatory action.
20
<PAGE> 22
The Company has a net deferred tax asset of $1.6 billion at December 31, 1996
which relates to temporary differences that are expected to reverse as net
ordinary deductions for tax purposes. The Company will have to generate
approximately $4.5 billion of taxable income, before reversal of these temporary
differences, primarily over the next 10 to 15 years, to realize the deferred tax
assets. Management expects to realize the deferred tax asset based upon its
expectation of future positive taxable income, after reversal of these
deductible temporary differences, in the consolidated federal income tax return
of Travelers Group. The taxable income of the consolidated return of Travelers
Group, after reversal of the deductible temporary differences, is expected to be
at least $1.5 billion annually.
Certain of the Company's loss reserves are for environmental and asbestos
claims. The Company believes that it is not likely that these claims will have a
material adverse effect on the Company's financial condition or liquidity.
See discussion of environmental and asbestos claims starting on page 10.
In connection with the 1992 sale of American Re-Insurance Company (Am Re) by
Aetna P&C, Am Re and Aetna P&C entered into a reinsurance agreement which
provides that to the extent Am Re incurred losses in 1991 and prior that were
still outstanding at January 1, 1992 in excess of $2.7 billion, Aetna P&C has an
80% participation in payments on those losses up to a maximum payment by Aetna
P&C of $500 million. In 1995, Am Re increased reserves for asbestos,
environmental and other latent liabilities. As a result of the increase, losses
of approximately $228 million ($120 million after discount), which were largely
workers' compensation life table indemnity claims, were ceded to Aetna P&C. This
agreement has been accounted for as a deposit and a liability has been
established for the present value of the expected payout under the agreement.
On July 24, 1996, TAP's Board of Directors authorized the expenditure of up to
$100 million for the repurchase of common stock. The repurchases may be made
from time to time in the open market or through negotiated transactions and will
be used primarily for stock grants related to employee benefit and director
compensation plans. At December 31, 1996, the Company had repurchased 406,860
shares of its common stock for approximately $13 million pursuant to the
repurchase program.
Accounting Standards not yet Adopted
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS
125 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. These standards are based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered
and derecognizes liabilities when extinguished. FAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The requirements of FAS 125 are effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and are to be applied
prospectively. However, in December 1996 the FASB issued Statement of Financial
Accounting Standards No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125," which delays until January 1, 1998 the
effective date for certain provisions. The adoption of the provisions of this
statement effective January 1, 1997 will not have a material impact on results
of operations, financial condition or liquidity.
21
<PAGE> 23
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(for the year ended December 31, in millions,
except per share amounts ) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $6,028 $3,315 $3,178
Net investment income 1,656 710 573
Fee income 455 456 496
Realized investment gains (losses) 18 71 (132)
Other 40 17 53
- ---------------------------------------------------------------------------------------------------
Total revenues 8,197 4,569 4,168
- ---------------------------------------------------------------------------------------------------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 5,282 2,817 2,819
Amortization of deferred acquisition costs 906 512 473
Interest expense 118 - -
General and administrative expenses 1,404 689 666
- ---------------------------------------------------------------------------------------------------
Total claims and expenses 7,710 4,018 3,958
- ---------------------------------------------------------------------------------------------------
Income before federal income taxes 487 551 210
- ---------------------------------------------------------------------------------------------------
Federal income taxes:
Current expense (benefit) (100) 160 (6)
Deferred expense (benefit) 196 (28) 28
- ---------------------------------------------------------------------------------------------------
Total federal income taxes 96 132 22
- ---------------------------------------------------------------------------------------------------
Net income $ 391 $ 419 $ 188
- ---------------------------------------------------------------------------------------------------
Net income per share of common stock $ 1.05 $ 1.42 $ 0.64
- ---------------------------------------------------------------------------------------------------
Weighted average number of common
and equivalent shares outstanding 367.1 294.5 294.5
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 24
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(at December 31, in millions, except shares) 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $24,052; $10,534) $24,446 $10,908
Equity securities, at fair value (cost, $756; $565) 779 603
Mortgage loans 1,005 213
Real estate held for sale 157 23
Short-term securities 2,311 786
Other investments 666 287
- -------------------------------------------------------------------------------------------------------------
Total investments 29,364 12,820
- -------------------------------------------------------------------------------------------------------------
Cash 106 51
Investment income accrued 381 165
Premium balances receivable 2,976 2,213
Reinsurance recoverables 9,714 5,407
Deferred acquisition costs 426 202
Deferred federal income taxes 1,583 650
Contractholder receivables 1,828 1,154
Goodwill 1,549 419
Other assets 1,852 981
- -------------------------------------------------------------------------------------------------------------
Total assets $49,779 $24,062
- -------------------------------------------------------------------------------------------------------------
LIABILITIES
Claims and claim adjustment expense reserves $31,177 $15,460
Unearned premium reserves 3,554 1,695
Contractholder payables 1,828 1,154
Commercial paper 25 -
Long-term debt 1,249 -
Other liabilities 4,566 2,152
- -------------------------------------------------------------------------------------------------------------
Total liabilities 42,399 20,461
- -------------------------------------------------------------------------------------------------------------
TAP-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely junior subordinated debt securities of TAP 900 -
- -------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock:
Class A, $.01 par value, 700 million shares authorized,
71,979,829 shares issued in 1996 1 -
Class B, $.01 par value, 700 million shares authorized,
328,020,170 shares issued and outstanding in 1996 3 -
Common stock, $100 par value, 150,000 shares
authorized, 100,000 shares issued and outstanding in 1995 - 10
Additional paid-in capital 5,455 2,889
Retained earnings 749 422
Treasury stock, at cost (shares, 406,860; 0) (13) -
Unrealized gain on investment securities, net of tax 285 280
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,480 3,601
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $49,779 $24,062
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 25
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
All Common
Shares (in thousands)
- ------------------------------------------------------------------------------- ------------------------
(for the year ended December 31,
in millions) 1996 1995 1994 1996 1995 1994
- ------------------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK AND ADDITIONAL
PAID-IN CAPITAL
Balance, beginning of year $ 2,899 $ 2,921 $ 2,965 100 100 100
Capitalization of Travelers
Property Casualty Corp. 2,560 -- -- 399,900 -- --
Other -- (22) (44) -- -- --
- ------------------------------------------------------------------------------- ------------------------
Balance, end of year 5,459 2,899 2,921 400,000 100 100
- ------------------------------------------------------------------------------- ------------------------
RETAINED EARNINGS
Balance, beginning of year 422 103 --
Net income 391 419 188
Dividends (64) (100) (85)
- -------------------------------------------------------------------------------
Balance, end of year 749 422 103
- -------------------------------------------------------------------------------
TREASURY STOCK (at cost)
Balance, beginning of year -- -- -- -- -- --
Treasury stock acquired (13) -- -- (407) -- --
- ------------------------------------------------------------------------------- ------------------------
Balance, end of year (13) -- -- (407) -- --
- ------------------------------------------------------------------------------- ------------------------
UNREALIZED GAIN (LOSS) ON
INVESTMENT SECURITIES,
NET OF TAX
Balance, beginning of year 280 (443) 12
Net change in unrealized gains and losses
on investment securities, net of tax 5 723 (455)
- -------------------------------------------------------------------------------
Balance, end of year 285 280 (443)
- -------------------------------------------------------------------------------
Total stockholders' equity $ 6,480 $ 3,601 $ 2,581 399,593 100 100
- ------------------------------------------------------------------------------- ------------------------
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 26
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 391 $ 419 $ 188
Adjustments to reconcile net income to net
cash provided by operating activities
Realized (gains) losses (18) (71) 132
Depreciation and amortization 40 15 5
Deferred federal income taxes 196 (28) 28
Amortization of deferred policy acquisition costs 906 512 473
Premium balances receivable 212 387 367
Reinsurance recoverables (159) 364 (8)
Deferred policy acquisition costs (935) (493) (474)
Insurance reserves 691 (18) 295
Other (143) 407 (332)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,181 1,494 674
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,567 684 638
Mortgage loans 133 15 33
Proceeds from sales of investments
Fixed maturities 12,606 4,871 1,806
Equity securities 558 157 121
Mortgage loans 23 36 32
Real estate held for sale 16 22 69
Purchases of investments
Fixed maturities (15,049) (6,497) (3,191)
Equity securities (785) (472) (141)
Mortgage loans (161) (40) (1)
Short-term securities, (purchases) sales, net (1,044) (211) 78
Other investments, net (90) 16 167
Business acquisitions (4,160) - (150)
Business divestments 1 - 135
Securities transactions in course of settlement 571 44 (178)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,814) (1,375) (582)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of commercial paper, net 25 - -
Issuance of long-term debt 1,249 - -
Borrowings on revolving line of credit 2,650 - -
Payments on revolving line of credit (2,650) - -
Contribution from TIGI 1,138 - -
Purchase of treasury stock (13) - -
Private offering of common stock 525 - -
Initial public offering of common stock 928 - -
Issuance of mandatorily redeemable preferred securities 900 - -
Issuance of Series Z preferred stock 540 - -
Redemptions of Series Z preferred stock (540) - -
Dividends on Series Z preferred stock (4) - -
Dividends to TIGI (49) (100) (85)
Dividends to minority shareholders (11) - -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,688 (100) (85)
- ---------------------------------------------------------------------------------------------------------------------
Net increase in cash 55 19 7
Cash at beginning of period 51 32 25
- ---------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 106 $ 51 $ 32
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes refunded $ 208 $ 28 $ 30
Interest paid $ 99 $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 27
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Travelers
Property Casualty Corp. (TAP), formerly Travelers/Aetna Property Casualty
Corp., (a direct majority-owned subsidiary of The Travelers Insurance
Group Inc. (TIGI) and an indirect majority-owned subsidiary of Travelers
Group Inc.) and its subsidiaries (collectively, the Company). On April 2,
1996, TAP purchased from Aetna Services Inc., (formerly Aetna Life and
Casualty Company) (Aetna) all of the outstanding capital stock of The
Aetna Casualty and Surety Company and The Standard Fire Insurance Company
(collectively, Aetna P&C) for approximately $4.2 billion in cash. The
acquisition was accounted for under the purchase method of accounting
and, accordingly, the consolidated financial statements include the
results of Aetna P&C's operations only from the date of acquisition.
Significant intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and claims and
expenses during the reporting period. Actual results could differ from
those estimates.
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
Accounting Changes
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This
statement establishes accounting standards for the impairment of
long-lived assets and certain identifiable intangibles to be disposed of.
This statement requires a write down to fair value when long-lived assets
to be held and used are impaired. The statement also requires that
long-lived assets to be disposed of (e.g. real estate held for sale) be
carried at the lower of cost or fair value less costs to sell and does
not allow such assets to be depreciated. The adoption of this standard
did not have a material impact on results of operations, financial
condition or liquidity.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). FAS 123 establishes financial
accounting and reporting standards for stock-based employee compensation
plans as well as transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. This
statement defines a fair value-based method of accounting for employee
stock options or similar equity instruments, and encourages all entities
to adopt this method of accounting for all employee stock compensation
plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value-based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Entities electing to
remain with the accounting method prescribed in APB 25 must make pro
forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined by FAS 123 had been
26
<PAGE> 28
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
applied. FAS 123 is applicable to fiscal years beginning after December
15, 1995. The Company has elected to continue to account for its
stock-based compensation plans using the accounting method prescribed by
APB 25 and has included in the notes to consolidated financial statements
the pro forma disclosures required by FAS 123. See note 14.
Accounting Policies
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities are valued based upon quoted market prices, or if quoted
market prices are not available, discounted expected cash flows using
market rates commensurate with the credit quality and maturity of the
investment. Fixed maturities are classified as "available for sale" and
are reported at fair value, with unrealized investment gains and losses,
net of income taxes, charged or credited directly to stockholders'
equity.
Equity securities, which include common and nonredeemable preferred
stocks, are classified as available for sale and carried at fair value
based primarily on quoted market prices. Changes in fair values of equity
securities are charged or credited directly to stockholders' equity, net
of income taxes.
Mortgage loans are carried at amortized cost. A mortgage loan is
considered impaired when it is probable that the Company will be unable
to collect principal and interest amounts due. For mortgage loans that
are determined to be impaired, a reserve is established for the
difference between the amortized cost and fair market value of the
underlying collateral. In estimating fair value, the Company uses
interest rates reflecting the higher returns required in the current real
estate financing market. Impaired loans were not significant at December
31, 1996 and 1995.
Real estate held for sale is carried at the lower of cost or fair value
less estimated costs to sell. Fair value was established at time of
foreclosure by internal analysis or external appraisers, using discounted
cash flow analyses and other acceptable techniques. Thereafter, an
allowance for losses on real estate held for sale is established if the
carrying value of the property exceeds its current fair value less
estimated costs to sell. There was no such allowance at December 31, 1996
and 1995.
Accrual of income is suspended on fixed maturities or mortgage loans that
are in default, or on which it is likely that future payments will not be
made as scheduled. Interest income on investments in default is
recognized only as payment is received. Investments included in the
consolidated balance sheet that were non-income producing for the
preceding 12 months were not significant.
Short-term securities, consisting primarily of money market instruments
and other debt issues purchased with a maturity of less than one year,
are carried at amortized cost which approximates market.
Investment Gains and Losses
Realized investment gains and losses are included as a component of
pretax revenues based upon specific identification of the investments
sold on the trade date. Other than temporary declines in market value of
investments are included in realized investment gains and losses.
27
<PAGE> 29
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Reinsurance Recoverables
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured business. The
Company evaluates and monitors the financial condition of its reinsurers
under voluntary reinsurance arrangements to minimize its exposure to
significant losses from reinsurer insolvencies.
Deferred Acquisition Costs
Commissions and premium taxes, which vary with and are primarily related
to the production of new business, are deferred and amortized pro rata
over the contract periods in which the related premiums are earned.
Future investment income attributable to related premiums is taken into
account in measuring the recoverability of the carrying value of this
asset. Deferred acquisition costs are reviewed to determine if they are
recoverable from future income, and if not, are charged to expense. All
other acquisition expenses are charged to operations as incurred.
Contractholder Receivables and Payables
Under certain workers' compensation insurance contracts with deductible
features, the Company is obligated to pay the claimant for the full
amount of the claim. The Company is subsequently reimbursed by the
policyholder for the deductible amount. These amounts are included on a
gross basis in the consolidated balance sheet in contractholder payables
and contractholder receivables, respectively.
Goodwill
Goodwill is amortized on a straight-line basis over a 40-year period.
The carrying amount is regularly reviewed for indicators of
other-than-temporary impairments in value. Impairments would be
recognized in operating results if a permanent diminution in value is
deemed to have occurred.
Claims and Claim Adjustment Expense Reserves
Claims and claim adjustment expense reserves represent estimated
provisions for both reported and unreported claims incurred and related
expenses. The reserves are adjusted regularly based on experience.
Included in the claims and claim adjustment expense reserves in the
consolidated balance sheet at December 31, 1996 and 1995 are $1.6
billion and $778 million, respectively, of reserves related to workers'
compensation that have been discounted using an interest rate of 5%.
In determining claims and claim adjustment expense reserves, the Company
carries on a continuing review of its overall position, its reserving
techniques and its reinsurance. These reserves represent the estimated
ultimate cost of all incurred claims and claim adjustment expenses.
Since the reserves are based on estimates, the ultimate liability may be
more or less than such reserves. The effects of changes in such
estimated reserves are included in the results of operations in the
period in which the estimates are changed. Such changes may be material
to the results of operations and could occur in a future period.
Permitted Statutory Accounting Practices
The Company's insurance subsidiaries, domiciled principally in
Connecticut, prepare statutory financial statements in accordance with
the accounting practices prescribed or permitted by the insurance
departments of the states of domicile. Prescribed statutory accounting
practices include certain publications of the National Association of
Insurance Commissioners as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. The impact of any permitted
accounting practices on statutory surplus of the Company is not
material.
28
<PAGE> 30
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Premiums and Unearned Premium Reserves
Premiums are recognized as revenues pro rata over the policy period.
Unearned premium reserves represent the unexpired portion of policy
premiums. Accrued retrospective premiums are included in premium
balances receivable.
Fee Income
Fee income includes servicing fees from carriers and revenues from large
deductible policies and service contracts and are recognized pro rata
over the contract or policy periods. Also included in fee income are
revenues from premium installment charges, which are recognized as
collected.
Other Revenues
Other revenues include gains and losses on dispositions of assets and
operations other than realized investment gains and losses, revenues of
noninsurance subsidiaries other than fee income and the pretax operating
results of real estate joint ventures.
Federal Income Taxes
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income
taxes arise from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and
liabilities.
Net Income Per Share
Net income per common share is computed after recognition of preferred
stock dividend requirements and is based on the weighted average number
of common shares and common share equivalents outstanding during the
period. For purposes of the computation of net income per share, the
weighted average number of common shares and common share equivalents
was computed by treating the common stock issued within a one-year
period prior to the initial filing of the registration statement
relating to the initial public offering (IPO) as outstanding for all
reported periods. This amount was then reduced by the dilutive effect of
such issuances of stock prior to the IPO determined by using the actual
proceeds and the number of shares that could have been repurchased using
the IPO price as the repurchase price for all periods presented. Fully
diluted net income per common share, assuming the dilutive effect of
common stock equivalents, has not been presented because the effects are
not significant.
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures contracts, forward contracts and interest rate swaps and caps,
as a means of hedging exposure to interest rate and foreign currency
risk. Hedge accounting is used to account for derivatives. To qualify
for hedge accounting the changes in value of the derivative must be
expected to substantially offset the changes in value of the hedged
item. Hedges are monitored to ensure that there is a high correlation
between the derivative instruments and the hedged investment.
Gains and losses arising from financial futures contracts are used to
adjust the basis of hedged investments and are recognized in net
investment income over the life of the investment.
Interest rate swaps are carried at market value and reported in other
invested assets. Unrealized gains and losses are reflected in
stockholders' equity. Swap payments are accrued and recognized in net
investment income.
29
<PAGE> 31
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Forward contracts and interest rate caps were not significant at
December 31, 1996 and 1995. Information concerning derivative financial
instruments is included in note 12.
Accounting Standards not yet Adopted
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (FAS 125). FAS 125 provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are
based on consistent application of a financial-components approach that
focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities
when extinguished. FAS 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The requirements of FAS 125 are
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and
are to be applied prospectively. However, in December 1996 the FASB
issued Statement of Financial Accounting Standards No. 127 "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125"
which delays until January 1, 1998 the effective date for certain
provisions. Earlier or retroactive application is not permitted. The
adoption of the provisions of this statement effective January 1, 1997
will not have a material impact on the Company's results of operations,
financial condition or liquidity.
Nature of Operations
The Company is comprised of two major business segments: Commercial
Lines and Personal Lines.
Commercial Lines
Commercial Lines is divided into four marketing groups that are designed
to focus on a particular client base or industry segment to provide
products and services that specifically address customers' needs:
National Accounts, Commercial Accounts, Select Accounts, and Specialty
Accounts. Protection is afforded to customers of Commercial Lines for
the risks of property loss such as fire and windstorm, financial loss
such as business interruption, liability claims arising from operations
and workers' compensation benefits through insurance products where risk
is transferred from the customer to Commercial Lines. Such coverages
include workers' compensation, general liability, commercial
multi-peril, commercial automobile, property, fidelity and surety and
several miscellaneous coverages.
National Accounts serves large companies, as well as employee groups,
associations and franchises. Products are marketed through national
brokers and regional agents. Programs offered by National Accounts
include risk transfer and risk service, such as claims settlement, loss
control and risk management services and are generally offered in
connection with a retrospectively rated insurance policy, a large
deductible plan or a self-insured program. National Accounts also
includes the Company's alternative market business, which primarily
covers workers' compensation products and services to voluntary and
involuntary state pools.
Commercial Accounts serves medium-sized businesses. Commercial Accounts
sells a broad range of property and casualty insurance products, with an
emphasis on guaranteed cost products, through a large network of
independent agents and brokers.
30
<PAGE> 32
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Select Accounts serves small businesses and individuals with commercial
exposures. Select Accounts products are generally guaranteed cost
policies, often a packaged product covering property and liability
exposures. The products are sold through independent agents.
Specialty Accounts markets products to national, mid-size and small
customers, including individuals. The principal products of Specialty
Accounts include professional liability insurance, directors' and
officers' liability insurance, fiduciary liability insurance, product
liability, fidelity and surety bonds, commercial umbrella and excess
liability, excess property insurance and coverages relating to the
entertainment industry and other industry specific programs. Its
products and services are distributed through both wholesale brokers and
retail agents and brokers.
Personal Lines
Personal Lines writes virtually all types of property and casualty
insurance covering personal risks. The primary coverages in Personal
Lines are personal automobile and homeowners insurance sold to
individuals.
Personal automobile policies provide coverage for liability to others
for both bodily injury and property damage, and for physical damage to
an insured's own vehicle from collision and various other perils. In
addition, many states require policies to provide first-party personal
injury protection, frequently referred to as no-fault coverage.
Homeowners policies are available for dwellings, condominiums, mobile
homes and rental property contents. Protection against losses to
dwellings and contents from a wide variety of perils is included in
these policies, as well as coverage for liability arising from ownership
or occupancy.
The Company has a geographic exposure to catastrophe losses in certain
North Atlantic states, California and South Florida. Catastrophes can be
caused by various events including hurricanes, windstorms, earthquakes,
hail, severe winter weather, explosions and fires. The incidence and
severity of catastrophes are inherently unpredictable. The extent of
losses from a catastrophe is a function of both the total amount of
insured exposure in the area affected by the event and the severity of
the event. Most catastrophes are restricted to small geographic areas;
however, hurricanes and earthquakes may produce significant damage in
large, heavily populated areas. The Company generally seeks to reduce
its exposure to catastrophe through individual risk selection and the
purchase of catastrophe reinsurance.
31
<PAGE> 33
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. ACQUISITION AND DISPOSITION OF SUBSIDIARIES
The Aetna Casualty and Surety Company and The Standard Fire Insurance
Company
As discussed in note 1, on April 2, 1996, TAP purchased from Aetna all
of the outstanding capital stock of Aetna P&C. To finance the $4.2
billion purchase price including transaction costs, plus capital
contributions totaling $710 million to Aetna P&C, TAP borrowed $2.7
billion from a syndicate of banks under a five-year revolving credit
facility (the Credit Facility) and sold approximately 33 million shares
of its Class A Common Stock representing approximately 9% of its
outstanding common stock (at that time) to four private investors,
including Aetna, for an aggregate of $525 million. TIGI acquired
approximately 328 million shares of Class B Common Stock of TAP in
exchange for contributing the outstanding capital stock of The Travelers
Indemnity Company and a capital contribution of approximately $1.1
billion. In addition, Travelers Group Inc. purchased from TAP $540
million of Series Z Preferred Stock of TAP. Approximately $18 million of
the purchase price was funded through the settlement of receivables from
Aetna.
On April 23, 1996, TAP sold in a public offering approximately 39
million shares of its Class A Common Stock, representing approximately
9.75% of its outstanding common stock, for total proceeds of $928
million. On April 24, 1996, TAP sold in a public offering $500 million
of 6-3/4% Notes due April 15, 2001 and $200 million of 7-3/4% Notes due
April 15, 2026. On April 26, 1996, Travelers P&C Capital I, a wholly
owned subsidiary trust of TAP, issued $800 million of 8.08% Trust
Preferred Securities in a public offering. On May 10, 1996, Travelers
P&C Capital II, a wholly owned subsidiary trust of TAP, issued $100
million of 8.00% Trust Preferred Securities in a public offering. These
Trust Preferred Securities, which are fully and unconditionally
guaranteed by TAP, have a liquidation value of $25 per Trust Preferred
Security and are mandatorily redeemable under certain circumstances.
Dividends on the Trust Preferred Securities have been classified as
interest expense in the consolidated statement of income. The aggregate
proceeds from the above offerings of $2.5 billion, together with the
proceeds from the issuance by TAP of approximately $700 million of
commercial paper, were used to repay in full the borrowings under the
Credit Facility and to redeem in full TAP's Series Z Preferred Stock.
The assets and liabilities of Aetna P&C are reflected in the
consolidated balance sheet at December 31, 1996 on a fully consolidated
basis at management's best estimate of their fair values at the
acquisition date, based on currently available information. Evaluation
and appraisal of assets and liabilities is continuing, including:
adjustments to investments; deferred acquisition costs; financial
guarantee obligations which the Company has assumed, designated as held
for sale and actively markets; claims reserves to conform the accounting
policy regarding discounting to that historically used by the Company;
liabilities for lease and severance costs relating to the restructuring
plan for the business acquired; other assets and liabilities and related
deferred income tax amounts; and the allocation of the purchase price
may be adjusted. The excess of the purchase price over the estimated
fair value of net assets is approximately $1.2 billion and is being
amortized over 40 years.
During 1996, the Company recorded charges related to the acquisition and
integration of Aetna P&C. These charges resulted primarily from
anticipated costs of the acquisition and the application of the
Company's strategies, policies and practices to Aetna P&C reserves and
include: $279 million after tax ($430 million before tax) in reserve
increases, net of reinsurance, related primarily to cumulative injury
claims other than asbestos (CIOTA), insurance products involving
financial guarantees, and assumed reinsurance; $121 million after tax
($185 million before tax) in uncollectible reinsurance and other
receivables; and $23 million after tax ($35 million before tax) in lease
and severance costs of The Travelers Indemnity Company related to the
restructuring plan for the acquisition.
32
<PAGE> 34
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. ACQUISITION AND DISPOSITION OF SUBSIDIARIES, Continued
The following unaudited pro forma information presents the results of
operations of the Company and Aetna P&C for the years ended December 31,
1996 and 1995, with pro forma adjustments as if the acquisition and
transactions related to the funding of the acquisition had been
consummated as of the beginning of the periods presented. This pro forma
information is not necessarily indicative of what would have occurred
had the acquisition and related transactions been made on the dates
indicated, or of future results of the Company.
<TABLE>
<CAPTION>
(for the year ended December 31, in millions, except per share amounts) 1996 1995*
---------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $9,805 $9,876
Net income 584 73
Earnings per common share 1.46 0.18
---------------------------------------------------------------------------------------------
</TABLE>
* Historical results of Aetna P&C include charges of $1.1 billion ($705
million after tax) representing an addition to environmental-related
and asbestos-related claims reserves.
Excluding the net acquisition-related charges outlined above, pro forma
net income would have been $1.0 billion or $2.52 per share for the year
ended December 31, 1996.
Supplemental Information to the Consolidated Statement of Cash Flows
Relating to the Acquisition of Aetna P&C
Noncash investing and financing transactions relating to the acquisition
of Aetna P&C that are not reflected in the consolidated statement of
cash flows follows:
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996
---------------------------------------------------------------------------------------------
<S> <C>
Fair value of investments acquired $ 13,899
Fair value of other assets acquired 10,409
Claims and claim adjustment expense reserves assumed (16,845)
Other liabilities assumed (3,303)
---------------------------------------------------------------------------------------------
Cash payment related to business acquisition $ 4,160
---------------------------------------------------------------------------------------------
</TABLE>
Bankers and Shippers Insurance Company
In October 1994, the Company sold Bankers and Shippers Insurance Company
(Bankers and Shippers) and received cash proceeds of $142 million. The
$30 million pretax gain on the sale is included in other revenues.
Bankers and Shippers' revenues, income before federal income taxes and
net income were $178 million, $14 million and $9 million, respectively,
for the year ended December 31, 1994.
33
<PAGE> 35
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<TABLE>
<CAPTION>
3. SEGMENT INFORMATION
-----------------------------------------------------------------------------------------------------------------------
(at and for the year ended December 31, in millions)
Corporate
Commercial Personal and Other
Lines Lines Operations Consolidated
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Revenues
Premiums $ 3,695 $ 2,323 $ 10 $ 6,028
Net investment income 1,343 311 2 1,656
Fee income 399 56 - 455
Realized investment gains (losses) 26 (8) - 18
Other 34 3 3 40
-----------------------------------------------------------------------------------------------------------------------
Total revenues $ 5,497 $ 2,685 $ 15 $ 8,197
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes $ 205 $ 417 $ (135) $ 487
Net income (loss) 197(1) 282(2) (88) 391
Assets 42,345 7,030 404 49,779
-----------------------------------------------------------------------------------------------------------------------
1995
Revenues
Premiums $ 2,017 $ 1,284 $ 14 $ 3,315
Net investment income 548 161 1 710
Fee income 435 21 - 456
Realized investment gains 62 9 - 71
Other 8 6 3 17
-----------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,070 $ 1,481 $ 18 $ 4,569
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes $ 424 $ 146 $ (19) $ 551
Net income (loss) 329 107 (17) 419
Assets 20,168 3,617 277 24,062
-----------------------------------------------------------------------------------------------------------------------
1994
Revenues
Premiums $ 1,810 $ 1,353 $ 15 $ 3,178
Net investment income 444 128 1 573
Fee income 468 27 1 496
Realized investment gains (losses) (109) (27) 4 (132)
Other 13 38 2 53
-----------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,626 $ 1,519 $ 23 $ 4,168
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes $ 83 $ 135 $ (8) $ 210
Net income (loss) 93 97 (2) 188
Assets 19,138 3,029 314 22,481
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Results of operations and assets include amounts related to Aetna P&C from
April 2, 1996, the date of the acquisition.
(1) Includes $453 million of acquisition-related charges.
(2) Includes $39 million of benefit related to the review of Aetna P&C's
insurance reserves, partially offset by $9 million of other
acquisition-related charges.
34
<PAGE> 36
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVESTMENTS
Fixed Maturities
The amortized cost and fair value of investments in fixed maturities
classified as available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
(at December 31, 1996, in millions) cost gains losses value
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities -
CMOs and pass through securities $ 4,462 $ 75 $ 10 $ 4,527
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 2,403 51 3 2,451
Obligations of states, municipalities and
political subdivisions 5,127 123 31 5,219
Debt securities issued by foreign governments 581 16 1 596
All other corporate bonds 11,404 201 27 11,578
Redeemable preferred stock 75 - - 75
----------------------------------------------------------------------------------------------------------------
Total $ 24,052 $ 466 $ 72 $ 24,446
----------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
(at December 31, 1995, in millions) cost gains losses value
----------------------------------------------------------------------------------------------------------------
Mortgage-backed securities -
CMOs and pass through securities $ 1,518 $ 59 $ 3 $ 1,574
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,183 65 - 1,248
Obligations of states, municipalities and
political subdivisions 3,855 109 11 3,953
Debt securities issued by foreign governments 97 3 - 100
All other corporate bonds 3,792 164 12 3,944
Redeemable preferred stock 89 - - 89
----------------------------------------------------------------------------------------------------------------
Total $ 10,534 $ 400 $ 26 $ 10,908
----------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of fixed maturities by contractual
maturity are shown below. Actual maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
35
<PAGE> 37
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVESTMENTS, Continued
<TABLE>
<CAPTION>
Amortized Fair
(at December 31, 1996, in millions) cost value
---------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 951 $ 955
Due after 1 year through 5 years 5,906 5,967
Due after 5 years through 10 years 5,235 5,321
Due after 10 years 7,498 7,676
---------------------------------------------------------------------------------------------
19,590 19,919
Mortgage-backed securities 4,462 4,527
---------------------------------------------------------------------------------------------
Total $24,052 $24,446
---------------------------------------------------------------------------------------------
</TABLE>
The Company makes investments in collateralized mortgage obligations
(CMOs). CMOs typically have high credit quality, offer good liquidity,
and provide a significant advantage in yield and total return compared to
U.S. Treasury securities. The Company's investment strategy is to
purchase CMO tranches which are protected against prepayment risk,
including planned amortization class (PAC) tranches. Prepayment protected
tranches are preferred because they provide stable cash flows in a
variety of scenarios. The Company does invest in other types of CMO
tranches if a careful assessment indicates a favorable risk/return
tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 1996 and 1995, the Company held CMOs classified as
available for sale with a fair value of $2.1 billion and $956 million,
respectively. Approximately 81% and 90% of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31,
1996 and 1995, respectively. In addition, the Company held $2.4 billion
and $618 million of GNMA, FNMA or FHLMC mortgage-backed pass-through
securities at December 31, 1996 and 1995, respectively. Virtually all of
these securities are rated AAA.
Proceeds from sales of fixed maturities classified as available for sale
were $12.6 billion, $4.9 billion and $1.8 billion in 1996, 1995 and 1994,
respectively. Gross gains of $82 million, $65 million and $12 million and
gross losses of $177 million, $90 million and $67 million, respectively,
were realized on those sales.
36
<PAGE> 38
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVESTMENTS, Continued
Equity Securities
The cost and fair value of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Fair
(at December 31, 1996, in millions) Cost gains losses value
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $164 $29 $17 $176
Nonredeemable preferred stocks 592 16 5 603
-----------------------------------------------------------------------------------------------
Total $756 $45 $22 $779
-----------------------------------------------------------------------------------------------
(at December 31, 1995, in millions)
Common stocks $171 $38 $ 6 $203
Nonredeemable preferred stocks 394 11 5 400
-----------------------------------------------------------------------------------------------
Total $565 $49 $11 $603
-----------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of equity securities were $558 million, $157 million
and $121 million in 1996, 1995 and 1994, respectively, resulting in gross
realized gains of $147 million, $28 million and $19 million and gross
realized losses of $28 million, $6 million and $1 million, respectively.
Real Estate Held for Sale and Mortgage Loans
Underperforming mortgage loans include delinquent loans, loans in the
process of foreclosure and loans modified at interest rates below
market.
The Company's real estate held for sale and mortgage loan portfolios
consisted of the following:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
---------------------------------------------------------------------------
<S> <C> <C>
Current mortgage loans $ 965 $ 201
Underperforming mortgage loans 40 12
---------------------------------------------------------------------------
Total mortgage loans 1,005 213
Real estate held for sale 157 23
---------------------------------------------------------------------------
Total $1,162 $ 236
---------------------------------------------------------------------------
</TABLE>
37
<PAGE> 39
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVESTMENTS, Continued
Aggregate annual maturities on mortgage loans are as follows:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996
----------------------------------------------------
<S> <C>
Past maturity $ 33
1997 163
1998 85
1999 245
2000 192
2001 53
Thereafter 234
----------------------------------------------------
Total $1,005
----------------------------------------------------
</TABLE>
Concentrations
At December 31, 1996 and 1995, the Company had concentrations of credit
risk in tax exempt investments of the State of Texas of $1.1 billion and
$602 million, respectively.
The Company participates in a short-term investment pool maintained by an
affiliate. See note 14.
Included in fixed maturities are below investment grade assets totaling
$599 million and $402 million at December 31, 1996 and 1995,
respectively. The Company defines its below investment grade assets as
those securities rated "Ba1" or below by external rating agencies, or the
equivalent by the internal analysts when a public rating does not exist.
Such assets include publicly traded below investment grade bonds and
certain other privately issued bonds that are classified as below
investment grade loans.
The Company also has significant concentrations of investments in the
following industries:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
---------------------------------------------------------------------------------------------
<S> <C> <C>
Financing $2,027 $ 599
Banking 2,001 575
Electric utilities 947 513
Oil and gas 882 454
Transportation 697 533
---------------------------------------------------------------------------------------------
</TABLE>
Below investment grade assets included in the preceding table, are as
follows:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
---------------------------------------------------------------------------------------------
<S> <C> <C>
Financing $ 13 $ 15
Banking - 1
Electric utilities 36 21
Oil and gas 10 55
Transportation 15 28
---------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 40
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INVESTMENTS, Continued
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, limits and
other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit.
Net Investment Income
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross investment income
Fixed maturities $1,344 $586 $528
Short-term securities 77 73 17
Mortgage loans 90 21 27
Other 197 49 26
---------------------------------------------------------------------------------------
1,708 729 598
Investment expenses 52 19 25
---------------------------------------------------------------------------------------
Net investment income $1,656 $710 $573
---------------------------------------------------------------------------------------
</TABLE>
Realized and Unrealized Investment Gains (Losses)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized
Fixed maturities $(95) $(40) $(147)
Equity securities 119 25 12
Real estate held for sale 3 1 -
Other (9) 85 3
--------------------------------------------------------------------------------------
Realized investment gains (losses) $ 18 $ 71 $(132)
---------------------------------------------------------------------------------------
</TABLE>
Changes in net unrealized investment gains (losses) that are included as
a separate component of stockholders' equity were as follows:
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized
Fixed maturities $ 20 $1,039 $(637)
Equity securities (15) 55 (25)
Other 1 20 (41)
----------------------------------------------------------------------------------------
6 1,114 (703)
Related taxes 1 391 (248)
----------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) 5 723 (455)
Balance beginning of year 280 (443) 12
----------------------------------------------------------------------------------------
Balance end of year $285 $ 280 $(443)
----------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 41
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. REINSURANCE
The Company participates in reinsurance in order to limit losses,
minimize exposure to large risks, provide additional capacity for future
growth and to effect business-sharing arrangements. In addition, the
Company assumes 100% of the workers' compensation premiums written by the
Accident Department of its affiliate, The Travelers Insurance Company
(TIC). The Company is also a member of and participates as a servicing
carrier for several pools and associations.
Reinsurance is placed on both a quota-share and excess of loss basis.
Reinsurance ceded arrangements do not discharge the Company as the
primary insurer, except for cases involving a novation.
Effective January 1, 1995, the Company terminated a reinsurance agreement
with TIGI whereby TIGI assumed 8% of the Company's business written prior
to 1991. Also, effective January 1, 1995, the Company terminated certain
agreements with TIGI whereby TIGI had assumed certain casualty reserves
subject to a stop loss arrangement. As a result of the termination of
these agreements, TIGI transferred $520 million of invested assets and of
insurance liabilities to the Company.
In connection with the 1992 sale of American Re-Insurance Company (Am Re)
by Aetna P&C, Am Re and Aetna P&C entered into a reinsurance agreement
which provides that to the extent Am Re incurred losses in 1991 and prior
that were still outstanding at January 1, 1992 in excess of $2.7 billion,
Aetna P&C has an 80% participation in payments on those losses up to a
maximum payment by Aetna P&C of $500 million. In 1995, Am Re increased
reserves for asbestos, environmental and other latent liabilities. As a
result of this increase, losses of approximately $228 million ($120
million after discount), which were largely workers' compensation life
table indemnity claims, were ceded to Aetna P&C. This agreement has been
accounted for as a deposit and a liability has been established for the
present value of the expected payout under the agreement.
In conjunction with its reserve addition for environmental-related
claims, Aetna P&C purchased reinsurance in 1995 which provided aggregate
protection of $335 million for the adverse loss development beyond
reserves held (net of existing reinsurance). Under this arrangement,
approximately $165 million of the existing reserves for such losses were
ceded at the time the contract was entered into. Substantially all of the
available statutory surplus protection was utilized during 1995. This
agreement was commuted in June 1996 after an evaluation of the
agreement's impact on statutory surplus. Due to the capital additions
made at acquisition, it was determined that the contract was no longer
cost-effective. The impact of the commutation of the agreement was not
significant.
Aetna P&C had in place in 1995 an aggregate excess of loss arrangement
with respect to all of its property-casualty lines for accident year
1995, providing up to approximately $250 million of additional net
protection. This agreement was commuted in June 1996 in order to conform
reinsurance strategies in conjunction with the acquisition of Aetna P&C.
The impact of the commutation of the agreement was not significant.
40
<PAGE> 42
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. REINSURANCE, Continued
A summary of reinsurance financial data reflected within the
consolidated statement of income is presented below:
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Written premiums:
Direct $ 7,585 $ 4,261 $ 4,036
Assumed from:
Affiliated companies 264 374 373
Non-affiliated companies 320 301 371
Ceded to:
Affiliated companies (58) (48) (61)
Non-affiliated companies (1,769) (1,267) (1,159)
---------------------------------------------------------------------------------------------------
Total net written premiums $ 6,342 $ 3,621 $ 3,560
---------------------------------------------------------------------------------------------------
Earned premiums:
Direct $ 7,263 $ 4,007 $ 3,738
Assumed from:
Affiliated companies 201 284 399
Non-affiliated companies 395 346 332
Ceded to:
Affiliated companies (58) (48) (61)
Non-affiliated companies (1,773) (1,274) (1,230)
---------------------------------------------------------------------------------------------------
Total net earned premiums $ 6,028 $ 3,315 $ 3,178
---------------------------------------------------------------------------------------------------
Percentage of amount assumed to net earned 9.9% 19.0% 23.0%
---------------------------------------------------------------------------------------------------
Ceded claims incurred $ 1,558 $ 1,245 $ 724
---------------------------------------------------------------------------------------------------
</TABLE>
Reinsurance recoverables, net of valuation allowance, include amounts
recoverable on unpaid and paid claims and were as follows:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
---------------------------------------------------------------------------
<S> <C> <C>
Reinsurance recoverables:
Property-casualty business:
Pools and associations $4,160 $2,775
Non-affiliated companies 4,553 1,713
Affiliated companies 793 675
Accident and health business:
Affiliated companies 208 244
----------------------------------------------------------------------------
Total reinsurance recoverables $9,714 $5,407
----------------------------------------------------------------------------
</TABLE>
41
<PAGE> 43
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. REINSURANCE, Continued
Amounts of reinsurance ceded claims and claim adjustment expenses
recoverable from unaffiliated insurers at December 31, 1996 and 1995
include $488 million and $289 million, respectively, recoverable from
Lloyd's of London (Lloyd's). In 1996, Lloyd's restructured its operations
with respect to claims for years prior to 1993. The Company is in
arbitration with underwriters at Lloyd's in New York State to enforce
reinsurance contracts with respect to recoveries for certain asbestos
claims. The dispute involves the ability of the Company to aggregate
asbestos claims under a market agreement between Lloyd's and the Company
or under the applicable reinsurance treaties.
The outcome of the arbitration referred to above is uncertain and the
impact, if any, on collectibility of amounts recoverable by the Company
from Lloyd's cannot be quantified at this time. The Company believes that
it is possible that an unfavorable resolution of this matter could have a
material adverse effect on the Company's results of operations in a
future period. However, the Company believes that it is not likely that
the outcome could have a material adverse effect on the Company's
financial condition or liquidity. The Company carries an allowance for
uncollectible reinsurance which is not allocated to any specific
proceedings or disputes, whether for financial impairments or coverages
defenses. The Company believes that such allowance properly states the
net receivable from reinsurance contracts.
42
<PAGE> 44
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. INSURANCE CLAIMS RESERVES
Claims and claim adjustment expense reserves were as follows:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
---------------------------------------------------------------------------------------
<S> <C> <C>
Claims and claim adjustment expense reserves:
Property-casualty $30,969 $15,213
Accident and health 208 247
---------------------------------------------------------------------------------------
Total $31,177 $15,460
---------------------------------------------------------------------------------------
</TABLE>
The table below is a reconciliation of beginning and ending
property-casualty reserve balances for claims and claim adjustment
expenses.
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Claims and claim adjustment expense
reserves at beginning of year $15,213 $15,013 $14,638
Less reinsurance recoverables on unpaid losses 5,123 5,301 5,319
------------------------------------------------------------------------------------------------------------
Net balance at beginning of year 10,090 9,712 9,319
------------------------------------------------------------------------------------------------------------
Provision for claims and claim adjustment expenses
for claims arising in the current year 4,839 2,903 3,041
Estimated claims and claim adjustment
expenses for claims arising in prior years 192 (226) (255)
Acquisitions 11,752 - 289
Termination of reinsurance agreements with TIGI (see note 5) - 520 -
Other - - (36)
------------------------------------------------------------------------------------------------------------
Total increases 16,783 3,197 3,039
------------------------------------------------------------------------------------------------------------
Claims and claim adjustment expense payments for claims arising in:
Current year 1,858 886 930
Prior years 3,199 1,933 1,716
------------------------------------------------------------------------------------------------------------
Total payments 5,057 2,819 2,646
------------------------------------------------------------------------------------------------------------
Net balance at end of year 21,816 10,090 9,712
Plus reinsurance recoverables on unpaid losses 9,153 5,123 5,301
------------------------------------------------------------------------------------------------------------
Claims and claim adjustment expense
reserves at end of year $30,969 $15,213 $15,013
------------------------------------------------------------------------------------------------------------
</TABLE>
In 1996, estimated claims and claim adjustment expenses for claims
arising in prior years included $238 million of net favorable
development in certain Commercial Lines and Personal Lines coverages.
Also included in 1996 is $430 million within Commercial Lines of
acquisition-related charges primarily for CIOTA, insurance products
involving financial guarantees, and assumed reinsurance. In addition, as
a result of the Company's review of Aetna P&C's insurance reserves,
Commercial Lines reserves were increased by $60 million and Personal
Lines reserves were decreased by $60 million.
43
<PAGE> 45
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. INSURANCE CLAIMS RESERVES, Continued
In 1995, estimated claims and claim adjustment expenses for claims
arising in prior years included favorable loss development in certain
workers' compensation, general liability and commercial auto lines of
approximately $150 million; however, since the business to which it
relates is subject to premium adjustments on retrospectively rated
policies, the net impact on results of operations is not significant. In
addition, in 1995 estimated claims and claim adjustment expenses for
claims arising in prior years included favorable loss development in
Personal Lines of approximately $60 million.
In 1994, estimated claims and claim adjustment expenses for claims
arising in prior years included favorable loss development in Personal
Lines automobile and homeowners coverage of $100 million, offset by
unfavorable development of $100 million for Commercial Lines asbestos and
environmental claims from 1985 and prior. In addition, in 1994 Commercial
Lines experienced favorable prior year loss development in workers'
compensation, other liability and commercial automobile product lines in
its National Accounts business for post-1985 accident years. This
favorable development amounted to $261 million; however, since the
business to which it relates is subject to premium adjustments on
retrospectively rated policies, the net impact on results of operations
is not significant.
The claims and claim adjustment expense reserves included $2.3 billion
and $806 million for asbestos and environmental related claims net of
reinsurance at December 31, 1996 and 1995, respectively.
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are
not used to estimate such reserves.
For environmental claims, the Company estimates its financial exposure
and establishes reserves based upon an analysis of its historical claim
experience and the facts of the individual underlying claims. The unique
facts presented in each claim are evaluated individually and
collectively. Due consideration is given to the many variables presented
in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve
for asbestos-related claims: available insurance coverage; limits and
deductibles; an analysis of each policyholder's potential liability;
jurisdictional involvement; past and projected future claim activity;
past settlement values of similar claims; allocated claim adjustment
expense; potential role of other insurance, and applicable coverage
defenses, if any. Once the gross ultimate exposure for indemnity and
allocated claim adjustment expense is determined for a policyholder by
policy year, a ceded projection is calculated based on any applicable
facultative and treaty reinsurance. In addition, a similar review is
conducted for asbestos property damage claims. However, due to the
relatively minor claim volume, these reserves have remained at a constant
level.
44
<PAGE> 46
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. INSURANCE CLAIMS RESERVES, Continued
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1996 are the Company's
best estimate of ultimate claims and claim adjustment expenses based upon
known facts and current law. However, the conditions surrounding the
final resolution of these claims continues to change. Currently, it is
not possible to predict changes in the legal and legislative environment
and their impact on the future development of asbestos and environmental
claims. Such development will be affected by future court decisions and
interpretations and changes in Superfund and other legislation. Because
of these future unknowns, additional liabilities may arise for amounts in
excess of the current reserves. These additional amounts, or a range of
these additional amounts, cannot now be reasonably estimated, and could
result in a liability exceeding reserves by an amount that would be
material to the Company's operating results in a future period. However,
the Company believes that it is not likely that these claims will have a
material adverse effect on the Company's financial condition or
liquidity.
45
<PAGE> 47
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. DEBT
As discussed in note 2, during the first quarter of 1996, TAP entered
into a five-year revolving credit facility, as amended, in the amount of
$2.7 billion with a syndicate of banks. The Credit Facility, which
expires in December 2001, was used to finance in part the purchase of
Aetna P&C. As of April 30, 1996, all borrowings under the Credit Facility
had been repaid in full and the amount of the Credit Facility was
subsequently reduced to $500 million, none of which is currently
utilized. Under the Credit Facility TAP is required to maintain a certain
level of consolidated stockholders' equity (as defined in the agreement).
At December 31, 1996, this requirement was exceeded by approximately $2.8
billion. In addition, the Credit Facility places restrictions on the
amount of consolidated debt TAP can incur. TAP also issues commercial
paper directly to investors and maintains unused credit availability
under the Credit Facility at least equal to the amount of commercial
paper outstanding. At December 31, 1996, TAP had $25 million outstanding
under its commercial paper program. The weighted average interest rate on
commercial paper as of December 31, 1996 was 5.64%. TAP also currently
has available to it a $200 million line of credit for working capital and
other general corporate purposes from a subsidiary of Travelers Group
Inc. The lender has no obligation to make any loan to TAP under this line
of credit.
During 1996, the Company completed the following long-term debt
offerings, leaving $750 million available for debt offerings under its
shelf registration statement:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996
----------------------------------------------------------
<S> <C>
6-3/4% Notes due 1999 $ 200
6-1/4% Notes due 1999 200
6-3/4% Notes due 2001 500
6-3/4% Notes due 2006 150
7-3/4% Notes due 2026 200
----------------------------------------------------------
1,250
Debt discount (1)
----------------------------------------------------------
Total $1,249
----------------------------------------------------------
</TABLE>
Aggregate annual maturities on long-term debt obligations are as follows:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996
----------------------------------------------------------
<S> <C>
1997 $ -
1998 -
1999 400
2000 -
2001 500
Thereafter 350
----------------------------------------------------------
Total $1,250
----------------------------------------------------------
</TABLE>
46
<PAGE> 48
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) 1996 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Effective tax rate
Income before federal income taxes $ 487 $551 $210
Statutory tax rate 35% 35% 35%
---------------------------------------------------------------------------------------------------
Expected federal income taxes $ 170 $193 $ 74
Tax effect of:
Nontaxable investment income (86) (68) (62)
Goodwill 12 4 4
Other, net - 3 6
---------------------------------------------------------------------------------------------------
Federal income taxes $ 96 $132 $ 22
---------------------------------------------------------------------------------------------------
Effective tax rate 20% 24% 10%
---------------------------------------------------------------------------------------------------
Composition of federal income taxes
Current expense (benefit):
United States $(102) $155 $(11)
Foreign 2 5 5
---------------------------------------------------------------------------------------------------
Total (100) 160 (6)
---------------------------------------------------------------------------------------------------
Deferred expense (benefit):
United States 196 (28) 28
Foreign - - -
---------------------------------------------------------------------------------------------------
Total 196 (28) 28
---------------------------------------------------------------------------------------------------
Federal income tax expense $ 96 $132 $ 22
---------------------------------------------------------------------------------------------------
</TABLE>
The net deferred tax assets were comprised of the tax effects of
temporary differences related to the following assets and liabilities:
<TABLE>
<CAPTION>
(at December 31, in millions) 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Claims and claim adjustment expense reserves $1,241 $ 598
Acquisition-related reserves 221 77
Unearned premium reserves 141 42
Employee benefits 87 93
Other 186 80
------------------------------------------------------------------------------------------
Total 1,876 890
------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 149 70
Investments 103 142
Other 41 28
------------------------------------------------------------------------------------------
Total 293 240
------------------------------------------------------------------------------------------
Net deferred tax asset $1,583 $ 650
------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 49
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. FEDERAL INCOME TAXES, Continued
The Company is a member of a subgroup of companies comprised of TIGI and
its non-life insurance subsidiaries. This subgroup is included in the
consolidated federal income tax return filed by Travelers Group Inc. TIGI
allocates federal income taxes to its subsidiaries on a separate return
basis adjusted for credits and other amounts required by the
consolidation process. Any resulting liability is paid currently to TIGI.
Any credits for losses will be paid by TIGI currently to the extent that
such credits are for tax benefits that have been utilized in the
consolidated federal income tax return. TIGI will reimburse the Company
for any remaining receivable at the end of the federal statutory
carryforward period.
In the event that the consolidated return develops an alternative minimum
tax (AMT), each company with an AMT on a separate company basis will be
allocated a portion of the consolidated AMT. Settlement of the AMT will
be made in the same manner and timing as the regular tax. If the AMT is
available as a credit against the regular tax, each subsidiary remitting
the AMT may establish a receivable from TIGI. The receivable will be paid
as the credit is utilized on the consolidated return or at the end of the
federal statutory carryforward period for operating losses.
The Company has a net deferred tax asset which relates to temporary
differences that are expected to reverse as net ordinary deductions. The
Company will have to generate approximately $4.5 billion of taxable
income, before reversal of these temporary differences, primarily over
the next 10 to 15 years, to realize the deferred tax asset. Management
expects to realize the deferred tax asset based upon its expectation of
future positive taxable income, after the reversal of these deductible
temporary differences, in the consolidated federal income tax return of
Travelers Group Inc. The taxable income of the consolidated return of
Travelers Group Inc., after reversal of the deductible temporary
differences, is expected to be at least $1.5 billion annually. At
December 31, 1996, the Company has no ordinary or capital loss
carryforwards.
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY
Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
During 1996, the Company formed the following statutory business trusts
under the laws of the state of Delaware. Each trust exists for the
exclusive purposes of (i) issuing Trust Securities (both common and
preferred) representing undivided beneficial interests in the assets of
the Trust; (ii) investing the gross proceeds of the Trust Securities in
Junior Subordinated Deferrable Interest Debentures (Subordinated
Debentures) of its parent; and (iii) engaging in only those activities
necessary or incidental thereto. These Subordinated Debentures and the
related income effects are eliminated in the consolidated financial
statements. The outstanding Preferred Securities of subsidiary trusts
were as follows:
<TABLE>
<CAPTION>
Liquidation Interest
(at December 31, 1996, in millions) Value Rate
-----------------------------------------------------------------------
<S> <C> <C>
Travelers P&C Capital I $ 800 8.08%
Travelers P&C Capital II 100 8.00%
-----------------------------------------------------------------------
Total $ 900
-----------------------------------------------------------------------
</TABLE>
48
<PAGE> 50
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, Continued
In April 1996, Travelers P&C Capital I, a wholly owned subsidiary trust
of TAP, issued 32 million 8.08% Trust Preferred Securities (TAP I 8.08%
Preferred Securities) with a liquidation preference of $25 per TAP I
8.08% Preferred Security to the public and 989,720 common securities to
TAP, the proceeds of which were invested by Travelers P&C Capital I in
$825 million of 8.08% Junior Subordinated Deferrable Interest Debentures
due 2036 issued by TAP (TAP 8.08% Debentures). The TAP 8.08% Debentures
mature on April 30, 2036 and are redeemable by TAP in whole or in part at
any time after April 30, 2001. Travelers P&C Capital I will use the
proceeds from any such redemption to redeem a like amount of TAP I 8.08%
Preferred Securities and common securities. Distributions on the TAP I
8.08% Preferred Securities and common securities are cumulative and
payable quarterly in arrears.
In May 1996, Travelers P&C Capital II, a wholly owned subsidiary trust of
TAP, issued 4 million 8.00% Trust Preferred Securities (TAP II 8.00%
Preferred Securities; and together with the TAP I 8.08% Preferred
Securities, the TAP Preferred Securities) with a liquidation value of $25
per TAP II 8.00% Preferred Security to the public and 123,720 common
securities to TAP, the proceeds of which were invested by Travelers P&C
Capital II in $103 million of 8.00% Junior Subordinated Deferrable
Interest Debentures issued by TAP (TAP 8.00% Debentures; and together
with the TAP 8.08% Debentures, TAP Debentures). The TAP 8.00% Debentures
mature on May 15, 2036 and are redeemable by TAP in whole or in part at
any time after May 15, 2001. Travelers P&C Capital II will use the
proceeds from any such redemption to redeem a like amount of TAP II 8.00%
Preferred Securities and common securities. Distributions on the TAP II
8.00% Preferred Securities and common securities are cumulative and
payable quarterly in arrears.
TAP has guaranteed, on a subordinated basis, distributions and other
payments due on each series of TAP Preferred Securities. The obligations
of TAP with respect to the TAP Debentures, when considered together with
certain undertakings of TAP with respect to Travelers P&C Capital I and
Travelers P&C Capital II, constitute full and unconditional guarantees by
TAP of Travelers P&C Capital I's and Travelers P&C Capital II's
obligations under the respective TAP Preferred Securities. The TAP
Preferred Securities are classified in the consolidated balance sheet as
"TAP-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debt securities of TAP" at
their liquidation value of $900 million. TAP has the right, at any time,
to defer payments of interest on the TAP Debentures and consequently the
distributions on the TAP Preferred Securities and common securities would
be deferred (though such distributions would continue to accrue with
interest thereon since interest would accrue on the TAP Debentures during
any such extended interest payment period). TAP cannot pay dividends on
its common stock during such deferments. Distributions on the TAP
Preferred Securities have been classified as interest expense in the
consolidated statement of income.
Common Stock
Class A
On April 2, 1996, TAP sold approximately 33 million shares of its Class A
Common Stock to four private investors, including Aetna, for an aggregate
of $525 million. On April 23, 1996, TAP sold in a public offering
approximately 39 million shares of its Class A Common Stock, for net
proceeds of $928 million. On all matters submitted to vote of the TAP
stockholders, holders of Class A Common Stock are entitled to one vote
per share. During 1996, the Company repurchased 406,860 shares of its
Class A Common Stock at an aggregate cost of $13 million.
49
<PAGE> 51
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, Continued
On January 22, 1997, the Company, through its Capital Accumulation Plan
(the Plan), issued 414 thousand shares of the Company's Class A Common
Stock and reissued 502 thousand shares of treasury stock in the form of
restricted stock to participating officers and other key employees. The
restricted stock generally vests after a three-year period. Except under
limited circumstances, the stock cannot be sold or transferred during the
restricted period by the participant, who is required to render service
to the Company during the restricted period. Unearned compensation
expense associated with the restricted stock grants represents the market
value of the Company's common stock at the date of grant and is
recognized as a charge to income ratably over the vesting period.
Class B
In exchange for contributing the outstanding capital stock of The
Travelers Indemnity Company and a capital contribution of approximately
$1.1 billion, TIGI acquired approximately 328 million shares of Class B
Common Stock of TAP. TIGI owns all of the outstanding shares of Class B
Common Stock representing approximately 82% of the economic interest in
TAP. Class B holders are entitled to 10 votes per share on any matter
submitted to vote of the TAP stockholders.
Preferred Stock
In connection with the financing of the acquisition of Aetna P&C,
Travelers Group Inc. purchased from TAP $540 million of Series Z
Preferred Stock of TAP. On April 26, 1996 and May 10, 1996, TAP redeemed
the Series Z Preferred Stock with the proceeds of the public offering of
Class A Common Stock and various Note and Trust Preferred Securities
offerings. Prior to their redemption, TAP paid $4 million of dividends on
the Series Z Preferred Stock.
Dividends
TAP declared dividends (in the form of two quarterly dividends of $0.075
per share each) on its common stock of $60 million ($11 million and $49
million on Class A Common Stock and Class B Common Stock, respectively)
in 1996.
The Company's insurance subsidiaries are currently subject to various
regulatory restrictions that limit the maximum amount of dividends
available to be paid to their parent without prior approval of insurance
regulatory authorities. Dividend payments to TAP from its insurance
subsidiaries are limited to $647 million in 1997 without prior approval
of the Connecticut Insurance Department.
Statutory Net Income and Surplus
Statutory net income of the Company's insurance subsidiaries was $120
million, which includes $285 million related to the first quarter of
Aetna P&C, for the year ended December 31, 1996. Statutory net income was
$313 million and $67 million for the years ended December 31, 1995 and
1994, respectively.
Statutory capital and surplus of the Company's insurance subsidiaries was
$5.4 billion and $2.4 billion at December 31, 1996 and 1995,
respectively.
50
<PAGE> 52
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. BENEFIT PLANS
Pension Plans
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by Travelers Group Inc. covering the majority of
Travelers Group Inc.'s U.S. employees. Benefits for the qualified plan
are based on an account balance formula. Under this formula, each
employee's accrued benefit can be expressed as an account that is
credited with amounts based upon the employee's pay, length of service
and a specified interest rate, all subject to a minimum benefit level.
This plan is funded in accordance with the Employee Retirement Income
Security Act of 1974 and the Internal Revenue Code.
The Company sponsors a nonqualified, noncontributory defined benefit
pension plan covering the majority of the Company's U.S. employees except
former Aetna P&C employees. Contributions are based on benefits paid. On
April 2, 1996, the Company assumed the obligations of a nonqualified,
noncontributory defined benefit plan covering certain employees who were
former Aetna P&C employees. Benefit accruals ceased as of April 1, 1996.
The Company's share of net pension expense was $17 million, $4 million
and $7 million for 1996, 1995 and 1994, respectively.
Other Benefit Plans
In addition to pension benefits, the Company provides certain health care
and life insurance benefits for retired employees, excluding former Aetna
P&C employees, through a plan sponsored by TIGI. Retirees may elect
certain prepaid health care benefit plans. Life insurance benefits are
generally set at a fixed amount. Beginning January 1, 1996, these plans
were amended to restrict benefit eligibility to retirees and certain
retiree-eligible employees. The cost recognized by the Company for these
benefits represents its allocated share of the total costs of the plan,
net of retiree contributions. The Company's share of the total cost of
the plan for 1996, 1995 and 1994 was $10 million, $14 million and $16
million, respectively.
401(k) Savings Plan
Substantially all employees of the Company are eligible to participate in
a 401(k) savings plan sponsored by Travelers Group Inc. under which a
portion of employee contributions is matched and invested in Series C
Preferred Stock issued by Travelers Group Inc. Effective January 1, 1996,
the Company's matching contribution, for all employees except former
Aetna P&C employees, is 100% of pre-tax contributions up to an annual
maximum of $1,000. Former Aetna P&C employees received a match equal to
100% of their pre-tax contributions up to 5% of salary. Prior to January
1, 1996, the Company matched 50% of the first 5% of pre-tax
contributions, and provided for a variable match based on the
profitability of TIGI and its subsidiaries. The Company's expense was $2
million, $7 million and $8 million in 1996, 1995 and 1994, respectively.
51
<PAGE> 53
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. LEASES
Most leasing functions for TIGI and its subsidiaries are administered by
the Company. Rent expense related to these leases is shared by the
companies on a cost allocation method based generally on estimated usage
by department. Rent expense was $90 million, $61 million and $70 million
in 1996, 1995 and 1994, respectively.
Future minimum annual rentals under noncancellable operating leases are:
<TABLE>
<CAPTION>
(for the year ending December 31, in millions)
--------------------------------------------------------
<S> <C> <C>
1997 $ 88
1998 59
1999 44
2000 29
2001 15
Thereafter 98
--------------------------------------------------------
Total $333
--------------------------------------------------------
</TABLE>
Future sublease rental income of approximately $98 million will partially
offset these commitments.
12. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures contracts, forward contracts and interest rate swaps and caps as
a means of hedging exposure to interest rate and foreign currency risk.
The Company does not hold or issue derivative instruments for trading
purposes. These derivative financial instruments have off-balance-sheet
risk. Financial instruments with off-balance-sheet risk involve, to
varying degrees, elements of credit and market risk in excess of the
amount recognized in the balance sheet. The contract or notional amounts
of these instruments reflect the extent of involvement the Company has in
a particular class of financial instrument. However, the maximum loss of
cash flow associated with these instruments can be less than these
amounts. For forward contracts and interest rate swaps, credit risk is
limited to the amounts calculated to be due the Company on such
contracts. Financial futures contracts have very little credit risk since
organized exchanges are the counterparties.
The Company monitors creditworthiness of counterparties to these
financial instruments by using criteria of acceptable risk that are
consistent with on-balance-sheet financial instruments. The controls
include credit approvals, limits and other monitoring procedures.
The Company may occasionally enter into interest rate swaps in connection
with other financial instruments to provide greater risk diversification
and to better match an asset with a corresponding liability. Under
interest rate swaps, the Company agrees with other parties to exchange,
at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed
notional principal amount. Generally, no cash is exchanged at the outset
of the contract and no principal payments are made by either party. A
single net payment is usually made by one counterparty at each due date.
Swaps are not exchange traded so they are subject to the risk of default
by the counterparty.
52
<PAGE> 54
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
Continued
The Company uses exchange traded financial futures to manage its exposure
to changes in interest rates which arise from the need to reinvest
proceeds from the sale or maturity of investments. To hedge against
adverse changes in interest rates, the Company enters long positions in
financial futures contracts which offset asset price changes resulting
from changes in market interest rates until an investment is purchased.
Margin payments are required to enter a futures contract and contract
gains or losses are settled daily in cash. The contract amount of futures
contracts represents the extent of the Company's involvement, but not
future cash requirements, as open positions are typically closed out
prior to the delivery date of the contract.
At December 31, 1996 and 1995, the Company held financial futures
contracts with notional amounts of approximately $522 million and $220
million, respectively, and a deferred loss of $2 million and a deferred
gain of $3 million, respectively. Total gains from financial futures of
$15 million are deferred at December 31, 1996 relating to anticipated
investment purchases expected to occur by the end of the second quarter
of 1997. These deferred gains are reported in other liabilities. At
December 31, 1996 and 1995, the Company's futures contracts had no fair
value because these contracts are marked to market and settled in cash.
At December 31, 1996, the Company held interest rate swaps with notional
amounts of $763 million. The fair value of these financial instruments
was $12 million (gain position) and $13 million (loss position) at
December 31, 1996, which was determined using a discounted cash flow
method. The off-balance-sheet risks of interest rate swaps were not
significant at December 31, 1995.
The off-balance-sheet risks of forward contracts were not significant at
December 31, 1996 and 1995. Financial guarantees are described in note
13.
Fair Value of Financial Instruments
The Company uses various financial instruments in the normal course of
its business. Certain insurance contracts are excluded by Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," and, therefore, are not included in the amounts
discussed.
At December 31, 1996 and 1995, investments in fixed maturities had a fair
value, which equaled carrying value, of $24.4 billion and $10.9 billion,
respectively. See note 4. The carrying values of cash, short-term
securities, mortgage loans, investment income accrued and commercial
paper approximated their fair values.
At December 31, 1996, the carrying value of $1.2 billion of long-term
debt approximated its fair value. Fair value is based upon the average of
the closing bid and asked price at December 31, 1996.
The carrying values of $1.4 billion and $747 million of financial
instruments classified as other assets approximated their fair values at
December 31, 1996 and 1995, respectively. The carrying values of $3.5
billion and $1.4 billion of financial instruments classified as other
liabilities at December 31, 1996 and 1995, respectively, also
approximated their fair values. Fair value is determined using various
methods including discounted cash flows, as appropriate for the various
financial instruments.
53
<PAGE> 55
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance-Sheet Risk
See note 12 and the following, "Guarantees of the Securities of Other
Issuers," for a discussion of financial instruments with
off-balance-sheet risk.
In the normal course of business, the Company issues fixed and variable
rate loan commitments and has unfunded commitments to partnerships. The
off-balance-sheet risks of these financial instruments were not
significant at December 31, 1996 and 1995.
Guarantees of the Securities of Other Issuers
The Company underwrote insurance guaranteeing the securities of other
issuers, primarily corporate and industrial revenue bond issuers. The
aggregate net amount of guarantees of principal and interest for such
securities was approximately $729 million ($8.3 billion before
reinsurance) and $127 million ($1.7 billion before reinsurance) at
December 31, 1996 and 1995, respectively. The scheduled maturities for
these guarantees are $142 million, $250 million, $8 million, $13 million
and $316 million for 1997, 1998, 1999, 2000 and 2001 and thereafter,
respectively.
Reserves for the financial guarantee business, which includes reserves
for defaults, incurred but not reported losses and unearned premiums,
totaled $71 million at December 31, 1996 and were not significant at
December 31, 1995.
Included in the gross amounts are financial guarantees representing the
Company's participation in the Municipal Bond Insurance Association's
guarantee of municipal bond obligations of $7.6 billion and $1.6 billion
at December 31, 1996 and 1995, respectively. The bonds are generally
rated A or above, and the Company's participation has been reinsured.
It is not practicable to estimate a fair value for the Company's
financial guarantees because there is no quoted market price for such
contracts, it is not practicable to reliably estimate the timing and
amount of all future cash flows due to the unique nature of each of these
contracts, and the Company no longer writes such guarantees.
Litigation
In the ordinary course of business, the Company is a defendant or
codefendant in various litigation matters other than environmental and
asbestos claims. Although there can be no assurances, as of December 31,
1996, the Company believes, based on information currently available,
that the ultimate resolution of these legal proceedings would not be
likely to have a material adverse effect on its results of operations,
financial condition or liquidity.
54
<PAGE> 56
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and
expenses, for certain subsidiaries and affiliates of TIGI, including the
Company, are handled by TIC. The Company provides certain administrative
services to TIC. Settlements for these functions between the Company and
its affiliates are made regularly. Investment advisory and management
services and data processing services are provided by affiliated
companies. Charges for these services are shared by the companies on cost
allocation methods based generally on estimated usage by department.
An affiliate maintains a short-term investment pool in which the Company
participates. The positions of each company participating in the pool are
calculated and adjusted daily. At December 31, 1996 and 1995, the pool
totaled approximately $2.9 billion and $2.2 billion, respectively. The
Company's share of the pool amounted to $1.9 billion and $722 million at
December 31, 1996 and 1995, respectively, and is included in short-term
securities in the consolidated balance sheet.
The Company participates in a stock option plan sponsored by Travelers
Group Inc. that provides for the granting of stock options in Travelers
Group Inc. common stock to officers and key employees.
The Company applies APB 25 and related interpretations in accounting for
stock options. Since stock options under the Travelers Group Inc. plans
are issued at fair market value on the date of award, no compensation
cost has been recognized for these awards. FAS 123 provides an
alternative to APB 25 whereby fair values may be ascribed to options
using a valuation model and amortized to compensation cost over the
vesting period of the options.
Had the Company applied FAS 123 in accounting for Travelers Group Inc.
stock options, net income and net income per share would have been the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
(for the year ended December 31, Net Net income Net Net income
in millions, except per share amounts) income per share income per share
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income, as reported $391 $1.05 $419 $1.42
FAS 123 pro forma adjustments, after tax (6) (0.01) (2) -
--------------------------------------------------------------------------------------------------------
Net income, pro forma $385 $1.04 $417 $1.42
--------------------------------------------------------------------------------------------------------
</TABLE>
Most leasing functions for TIGI and its subsidiaries are administered by
the Company. See note 11.
The Company leases new furniture and equipment from a noninsurance
subsidiary of TIGI. The rental expense charged to the Company for this
furniture and equipment was $44 million, $39 million and $26 million in
1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Company had an investment of $55
million and $34 million, respectively, in bonds of its affiliate,
Commercial Credit Company. This is included in fixed maturities in the
consolidated balance sheet.
The Company participates in reinsurance agreements with TIC and has
participated in reinsurance agreements with TIGI. See note 5.
55
<PAGE> 57
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. RELATED PARTY TRANSACTIONS, Continued
The Company purchases annuities from affiliates to settle certain claims.
Reinsurance recoverables at December 31, 1996 and 1995 included $793
million and $672 million, respectively, related to these annuities.
15. NONCASH FINANCING AND INVESTING ACTIVITIES
Significant noncash financing activities include the transfer of
approximately 328 million shares of Class B Common Stock to TIGI in
exchange for the outstanding capital stock of The Travelers Indemnity
Company in 1996. See note 2.
Significant noncash investing activities include: a) the conversion of
$24 million of convertible preferred stock for $24 million of common
stock in 1996; b) the conversion of $38 million and $23 million of
convertible bonds for $38 million and $23 million of common stock in 1996
and 1995, respectively; c) the conversion of $31 million of convertible
preferred stock for $31 million of convertible bonds in 1995; d) the
receipt of $28 million of shares of common stock distributed by a venture
capital limited partnership in 1994; and e) the acquisition of real
estate through foreclosures of mortgage loans amounting to $14 million,
$13 million and $24 million in 1996, 1995 and 1994, respectively.
56
<PAGE> 58
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
(1996, in millions, except per share amounts) Quarter Quarter Quarter Quarter Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $1,152 $2,202 $2,452 $2,391 $8,197
Total expenses 1,027 2,563 2,099 2,021 7,710
--------------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes 125 (361) 353 370 487
Federal income tax expense (benefit) 27 (145) 106 108 96
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 98 $ (216) $ 247 $ 262 $ 391
--------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share of common stock $ 0.33 $(0.59) $ 0.62 $ 0.65 $ 1.05
--------------------------------------------------------------------------------------------------------------------------
Common stock price
High N/A $ 28 1/2 $ 29 3/8 $ 36 $ 36
Low N/A $ 26 $ 23 1/8 $ 28 $ 23 1/8
Close N/A $ 28 3/8 $ 27 1/2 $ 35 3/8 $ 35 3/8
Dividends per share of common stock N/A - $0.075 $0.075 $0.150
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
(1995, in millions, except per share amounts) Quarter Quarter Quarter Quarter Total
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $1,162 $1,183 $1,175 $1,049 $4,569
Total expenses 1,072 1,056 1,031 859 4,018
---------------------------------------------------------------------------------------------------------------
Income before federal income taxes 90 127 144 190 551
Federal income tax expense 15 28 34 55 132
---------------------------------------------------------------------------------------------------------------
Net income $ 75 $ 99 $ 110 $ 135 $ 419
---------------------------------------------------------------------------------------------------------------
Net income per share of common stock $ 0.25 $ 0.34 $ 0.37 $ 0.46 $ 1.42
---------------------------------------------------------------------------------------------------------------
</TABLE>
Includes amounts related to Aetna P&C from April 2, 1996, the date of
acquisition.
1996 results include charges of $391 million and $32 million in the
second and fourth quarter, respectively, related to the acquisition of
Aetna P&C. See note 2.
Due to changes in the number of average shares outstanding during 1996,
quarterly earnings per share of common stock do not add to the total for
the year.
Common stock prices for 1995 and for the first quarter of 1996 are not
applicable as shares began trading in April 1996.
57
<PAGE> 59
Independent Auditors' Report
The Board of Directors and Stockholders
Travelers Property Casualty Corp.:
We have audited the accompanying consolidated balance sheets of Travelers
Property Casualty Corp. (formerly Travelers/Aetna Property Casualty Corp.) and
Subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Travelers Property
Casualty Corp. and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations, changes in stockholders' equity and their cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 17, 1997
58
<PAGE> 1
Exhibit 21.01
SUBSIDIARIES OF TRAVELERS PROPERTY CASUALTY CORP.
AS OF MARCH 7, 1997
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY COMPANY JURISDICTION OF INCORPORATION
<S> <C>
..... The Aetna Casualty and Surety Company Connecticut
.......... AE Development Group, Inc. Connecticut
.......... Aetna Casualty & Surety Company of Canada Canada
.......... Aetna Casualty and Surety Company of America Connecticut
.......... Aetna Casualty and Surety Company of Illinois Illinois
.......... Aetna Casualty Company of Connecticut Connecticut
.......... Aetna Commercial Insurance Company Connecticut
.......... Aetna Excess and Surplus Lines Company Connecticut
.......... Aetna Information Services Inc. Connecticut
.......... Aetna Lloyds of Texas Insurance Company Texas
.......... Aetna National Accounts U.K. Limited United Kingdom
.......... Axia Services, Inc. New York
.......... Farmington Casualty Company Connecticut
.......... Farmington Management, Inc. Connecticut
.......... Urban Diversified Properties, Inc. Connecticut
..... The Standard Fire Insurance Company Connecticut
.......... AE Properties, Inc. California
.......... Aetna Insurance Company Connecticut
.......... Aetna Insurance Company of Illinois Illinois
.......... Aetna Personal Security Insurance Company Connecticut
.......... Community Rehabilitation Investment Corporation Connecticut
.......... The Automobile Insurance Company of Hartford, Connecticut Connecticut
..... The Travelers Indemnity Company Connecticut
.......... Commercial Insurance Resources, Inc. Delaware
............... Gulf Insurance Company Missouri
.................... Atlantic Insurance Company Texas
.................... Gulf Group Lloyds Texas
.................... Gulf Risk Services, Inc. Delaware
.................... Gulf Underwriters Insurance Company North Carolina
.................... Select Insurance Company Texas
.......... Countersignature Agency, Inc. Florida
.......... First Floridian Auto and Home Insurance Company Florida
.......... First Trenton Indemnity Company New Jersey
.......... Laramia Insurance Agency, Inc. North Carolina
.......... Secure Affinity Agency, Inc. Delaware
.......... The Charter Oak Fire Insurance Company Connecticut
.......... The Parker Realty and Insurance Agency, Inc. Vermont
.......... The Phoenix Insurance Company Connecticut
............... Constitution State Service Company Montana
............... The Travelers Indemnity Company of America Georgia
............... The Travelers Indemnity Company of Connecticut Connecticut
............... The Travelers Indemnity Company of Illinois Illinois
.......... The Premier Insurance Company of Massachusetts Massachusetts
.......... The Travelers Home and Marine Insurance Company Indiana
.......... The Travelers Indemnity Company of Missouri Missouri
.......... The Travelers Lloyds Insurance Company Texas
</TABLE>
1
<PAGE> 2
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY COMPANY JURISDICTION OF INCORPORATION
<S> <C>
.......... The Travelers Marine Corporation California
.......... TI Home Mortgage Brokerage, Inc. Delaware
.......... TravCo Insurance Company Indiana
.......... Travelers Bond Investments, Inc. Connecticut
.......... Travelers General Agency of Hawaii, Inc. Hawaii
.......... Travelers Medical Management Services Inc. Delaware
.......... Travelers Specialty Property Casualty Company, Inc. Connecticut
</TABLE>
2
<PAGE> 1
Exhibit 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Travelers Property Casualty Corp.:
We consent to incorporation by reference in the Registration Statements on:
- - Form S-3 Nos. 333-2682 and 333-2684; and
- - Form S-8 Nos. 333-07073, 333-07077 and 333-10143.
of Travelers Property Casualty Corp. (formerly Travelers/Aetna Property Casualty
Corp.) of our reports dated January 17, 1997, relating to the consolidated
balance sheets of Travelers Property Casualty Corp. and Subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996 and the related financial statement
schedules, which reports are incorporated by reference or included in the annual
report on Form 10-K of Travelers Property Casualty Corp. for the year ended
December 31, 1996.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
March 26, 1997
<PAGE> 1
Exhibit 23.02
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Aetna Services Inc. (formerly Aetna Life and Casualty Company):
We consent to incorporation by reference in the Registration Statements on:
- - Form S-3 Nos. 333-2682 and 333-2684; and
- - Form S-8 Nos. 333-07073, 333-07077 and 333-10143.
of Travelers Property Casualty Corp. (formerly Travelers/Aetna Property Casualty
Corp.) of our report dated February 28, 1996, relating to the combined balance
sheets of The Aetna Casualty and Surety Company and The Standard Fire Insurance
Company and their Subsidiaries as of December 31, 1995 and 1994, and the related
combined statements of income, shareholder's equity and cash flows for each of
the years in the three-year period ended December 31, 1995, which report is
incorporated by reference in the annual report on Form 10-K of Travelers
Property Casualty Corp. for the year ended December 31, 1996. Our report
refers to a change to the methods of accounting for certain investments in
debt and equity securities, workers' compensation life table indemnity reserves
and retrospectively rated reinsurance contracts in 1993.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
March 26, 1997
<PAGE> 1
Exhibit 24.01
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
TRAVELERS PROPERTY CASUALTY CORP.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Robert I. Lipp, Jay S. Fishman and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1996, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any one of them; and I
do hereby grant unto said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in or about the premises, as fully and to all intents and purposes as I
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Kenneth J. Bialkin
-----------------------
Kenneth J. Bialkin
<PAGE> 2
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
TRAVELERS PROPERTY CASUALTY CORP.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Robert I. Lipp, Jay S. Fishman and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1996, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any one of them; and I
do hereby grant unto said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in or about the premises, as fully and to all intents and purposes as I
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ James Dimon
---------------------------
James Dimon
<PAGE> 3
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
TRAVELERS PROPERTY CASUALTY CORP.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Robert I. Lipp, Jay S. Fishman and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1996, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any one of them; and I
do hereby grant unto said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in or about the premises, as fully and to all intents and purposes as I
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Dudley C. Mecum
---------------------------
Dudley C. Mecum
<PAGE> 4
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
TRAVELERS PROPERTY CASUALTY CORP.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Robert I. Lipp, Jay S. Fishman and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1996, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any one of them; and I
do hereby grant unto said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in or about the premises, as fully and to all intents and purposes as I
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Roberto G. Mendoza
---------------------------
Roberto G. Mendoza
<PAGE> 5
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
TRAVELERS PROPERTY CASUALTY CORP.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Robert I. Lipp, Jay S. Fishman and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1996, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any one of them; and I
do hereby grant unto said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in or about the premises, as fully and to all intents and purposes as I
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Frank J. Tasco
---------------------------
Frank J. Tasco
<PAGE> 6
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
TRAVELERS PROPERTY CASUALTY CORP.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Robert I. Lipp, Jay S. Fishman and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1996, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any one of them; and I
do hereby grant unto said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in or about the premises, as fully and to all intents and purposes as I
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Sanford I. Weill
---------------------------
Sanford I. Weill
<PAGE> 7
POWER OF ATTORNEY
ANNUAL REPORT ON FORM 10-K
TRAVELERS PROPERTY CASUALTY CORP.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Robert I. Lipp, Jay S. Fishman and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1996, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any one of them; and I
do hereby grant unto said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in or about the premises, as fully and to all intents and purposes as I
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 26,
1997.
/s/ Arthur Zankel
---------------------------
Arthur Zankel
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 24,446
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 779
<MORTGAGE> 1,005
<REAL-ESTATE> 157
<TOTAL-INVEST> 29,364
<CASH> 106
<RECOVER-REINSURE> 9,714
<DEFERRED-ACQUISITION> 426
<TOTAL-ASSETS> 49,779
<POLICY-LOSSES> 31,177
<UNEARNED-PREMIUMS> 3,554
<POLICY-OTHER> 1,828
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,274
0
0
<COMMON> 4
<OTHER-SE> 6,476
<TOTAL-LIABILITY-AND-EQUITY> 49,779
6,028
<INVESTMENT-INCOME> 1,656
<INVESTMENT-GAINS> 18
<OTHER-INCOME> 40
<BENEFITS> 5,282
<UNDERWRITING-AMORTIZATION> 906
<UNDERWRITING-OTHER> 1,404
<INCOME-PRETAX> 487
<INCOME-TAX> 96
<INCOME-CONTINUING> 391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 391
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 0
<RESERVE-OPEN> 15,213
<PROVISION-CURRENT> 4,839
<PROVISION-PRIOR> 192
<PAYMENTS-CURRENT> 1,858
<PAYMENTS-PRIOR> 3,199
<RESERVE-CLOSE> 30,969
<CUMULATIVE-DEFICIENCY> (1)
</TABLE>
<PAGE> 1
Exhibit 99.01
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Aetna Life and Casualty Company:
We have audited the accompanying combined balance sheets of The Aetna
Casualty and Surety Company and The Standard Fire Insurance Company and their
subsidiaries (the "Companies") as of December 31, 1995 and 1994, and the related
combined statements of income, shareholder's equity, and cash flows for each of
the years in the three-year period ended December 31, 1995. These combined
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The Aetna
Casualty and Surety Company and The Standard Fire Insurance Company and their
subsidiaries as of December 31, 1995 and 1994, and the combined results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the combined financial statements, in 1993 the
Companies changed their methods of accounting for certain investments in debt
and equity securities, workers' compensation life table indemnity reserves and
retrospectively rated reinsurance contracts.
KPMG PEAT MARWICK LLP
Hartford, Connecticut
February 28, 1996
1
<PAGE> 2
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(MILLIONS)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Premiums................................................................................. $ 4,117.7 $ 4,354.8 $ 4,609.8
Net investment income.................................................................... 902.1 824.3 963.8
Fees and other income.................................................................... 82.0 115.8 154.3
Net realized capital gains............................................................... 199.0 5.9 144.0
---------- ---------- ----------
Total revenue............................................................................ 5,300.8 5,300.8 5,871.9
---------- ---------- ----------
Claims and Expenses:
Claims and claim adjustment expenses..................................................... 4,232.0 3,747.1 4,191.1
Operating expenses....................................................................... 851.8 1,011.2 1,093.1
Amortization of deferred policy acquisition costs........................................ 622.7 633.7 646.2
Severance and facilities charge.......................................................... -- -- 155.0
---------- ---------- ----------
Total claims and expenses................................................................ 5,706.5 5,392.0 6,085.4
---------- ---------- ----------
Loss from continuing operations before income tax benefits and cumulative effect
adjustments.............................................................................. (405.7) (91.2) (213.5)
Income tax benefits...................................................................... (162.8) (53.9) (159.0)
---------- ---------- ----------
Loss from continuing operations before cumulative effect adjustments..................... (242.9) (37.3) (54.5)
Discontinued Operations, net of tax...................................................... -- -- 27.0
---------- ---------- ----------
Loss before cumulative effect adjustments for continuing operations...................... (242.9) (37.3) (27.5)
Cumulative effect adjustments for continuing operations, net of tax...................... -- -- 266.5
---------- ---------- ----------
Net income (loss)........................................................................ $ (242.9) $ (37.3) $ 239.0
========== ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
2
<PAGE> 3
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
COMBINED BALANCE SHEETS
(AS OF DECEMBER 31, MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Debt securities:
Available for sale, at fair value (amortized cost $11,182.3 and $9,696.4)..................... $ 11,598.3 $ 9,096.8
Held for investment, at amortized cost (fair value $407.1).................................... -- 413.5
Equity securities, at fair value (cost $289.5 and $779.5)........................................ 499.9 1,017.9
Short-term investments........................................................................... 137.2 106.0
Mortgage loans................................................................................... 1,061.7 1,453.7
Real estate...................................................................................... 264.7 262.0
Other............................................................................................ 291.1 301.2
----------- -----------
Total investments.................................................................................. 13,852.9 12,651.1
----------- -----------
Cash and cash equivalents........................................................................ 1,136.5 676.3
Reinsurance recoverables and receivables......................................................... 5,276.6 4,903.2
Accrued investment income........................................................................ 184.5 178.0
Premiums due and other receivables............................................................... 1,002.1 1,063.5
Federal and foreign income taxes:
Current....................................................................................... 12.6 20.1
Deferred...................................................................................... 633.7 862.5
Deferred policy acquisition costs................................................................ 305.8 316.0
Other assets....................................................................................... 994.3 1,000.4
----------- -----------
Total assets..................................................................................... $ 23,399.0 $ 21,671.1
=========== ===========
LIABILITIES
Unpaid claims and claim adjustment expenses...................................................... $ 16,558.5 $ 15,977.2
Unearned premiums................................................................................ 1,398.4 1,423.8
Policyholders' funds left with the companies..................................................... 39.2 46.7
----------- -----------
Total insurance liabilities........................................................................ 17,996.1 17,447.7
Short-term debt.................................................................................. -- 9.1
Long-term debt................................................................................... 35.2 35.5
Other liabilities................................................................................ 1,486.3 1,057.9
----------- -----------
Total liabilities.................................................................................. 19,517.6 18,550.2
----------- -----------
Commitments and Contingent Liabilities (Notes 12, 13 and 14)
SHAREHOLDER'S EQUITY
Common capital stock (1,000 share authorized, issued and outstanding with a par value of $25,000
and 20,000 shares authorized, issued and outstanding with a par value of $250)................ 30.0 30.0
Paid in capital.................................................................................. 1,477.5 1,174.5
Net unrealized capital gains (losses)............................................................ 312.8 (387.9)
Retained earnings................................................................................ 2,061.1 2,304.3
----------- -----------
Total shareholder's equity......................................................................... 3,881.4 3,120.9
----------- -----------
Total liabilities and shareholder's equity....................................................... $ 23,399.0 $ 21,671.1
=========== ===========
</TABLE>
See Notes to Combined Financial Statements.
3
<PAGE> 4
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C>
Shareholder's equity, beginning of year.................................................. $ 3,120.9 $ 3,858.3 $ 3,507.2
Capital Contribution..................................................................... 303.0 -- --
Dividends to shareholder................................................................. (.3) -- --
Net change in unrealized capital gains and losses........................................ 700.7 (700.1) 112.1
Net income (loss)........................................................................ (242.9) (37.3) 239.0
---------- ---------- ----------
Shareholder's equity, end of year........................................................ $ 3,881.4 $ 3,120.9 $ 3,858.3
========== ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
4
<PAGE> 5
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
(MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................................................... $ (242.9) $ (37.3) $ 239.0
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating
activities:
Cumulative effect adjustments........................................................ -- -- (266.5)
(Increase) Decrease in accrued investment income..................................... (6.6) 25.4 (13.3)
Decrease (Increase) in premiums due and other receivables............................ 154.0 (232.8) 148.3
Increase in reinsurance recoverables and receivables................................. (373.4) (191.9) (70.3)
Decrease (Increase) in deferred policy acquisition costs............................. 10.2 13.5 (.8)
Depreciation and amortization........................................................ 8.6 15.0 19.3
(Decrease) Increase in federal and foreign income taxes.............................. 239.3 (205.1) 65.3
Net decrease (increase) in other assets and other liabilities........................ 413.1 (513.1) 569.3
Increase (Decrease) in insurance liabilities......................................... 555.5 423.9 (349.8)
Net purchases of debt trading securities............................................. -- -- (1,209.0)
Gain on sale of subsidiaries......................................................... -- -- (27.0)
Net realized capital gains........................................................... (199.0) (5.9) (144.0)
Amortization of net investment discounts............................................. 3.2 55.0 21.3
Other, net........................................................................... 0.9 70.0 (58.8)
----------- ----------- -----------
Net cash provided by (used for) operating activities............................... 562.9 (583.3) (1,077.0)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Debt securities available for sale................................................... 3,845.9 4,173.2 --
Debt securities prior to adoption of FAS No. 115..................................... -- -- 2,174.9
Equity securities.................................................................... 1,041.4 550.0 746.2
Mortgage loans....................................................................... 29.0 33.1 17.5
Real estate.......................................................................... 94.9 69.5 52.3
Short-term investments............................................................... 9,917.5 7,361.3 9,892.1
Investment maturities and repayments of:
Debt securities available for sale................................................... 1,526.4 914.7 --
Debt securities held for investment.................................................. -- 279.9 --
Debt securities prior to adoption of FAS No. 115..................................... -- -- 1,341.4
Mortgage loans....................................................................... 319.2 258.4 169.7
Cost of investment purchases in:
Debt securities available for sale................................................... (6,508.1) (4,751.4) --
Debt securities prior to adoption of FAS No. 115..................................... -- -- (3,328.6)
Equity securities.................................................................... (317.3) (420.4) (772.3)
Mortgage loans....................................................................... .3 (9.9) (7.3)
Real estate.......................................................................... (18.0) -- --
Short-term investments............................................................... (9,955.7) (7,331.4) (9,627.2)
Decrease (increase) in property and equipment........................................... 1.9 1.3 (8.9)
Other, net.............................................................................. (373.0) 135.3 (67.1)
----------- ----------- -----------
Net cash (used for) provided by investing activities................................. (395.6) 1,263.6 582.7
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to shareholder........................................................ (.3) -- --
Capital contribution from shareholder................................................ 303.0 -- --
Issuance of long-term debt........................................................... -- -- (.3)
Repayment of long-term debt.......................................................... (.3) (12.3) (6.5)
Net increase (decrease) in short-term debt........................................... (9.1) 9.1 --
----------- ----------- -----------
Net cash provided by (used for) financing activities............................... 293.3 (3.2) (6.8)
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents............................ (.4) (.3) (1.3)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.................................... 460.2 676.8 (502.4)
Cash and cash equivalents, beginning of year............................................ 676.3 (.5) 501.9
----------- ----------- -----------
Cash and cash equivalents, end of year.................................................. $ 1,136.5 $ 676.3 $ (.5)
=========== =========== ===========
</TABLE>
See Notes to Combined Financial Statements.
5
<PAGE> 6
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF ENTITY AND PRINCIPLES OF COMBINATION
The combined financial statements include The Aetna Casualty and Surety
Company and The Standard Fire Insurance Company and their subsidiaries
(collectively, the 'Companies') which are wholly-owned subsidiaries of Aetna
Life and Casualty Company ('Aetna'). Aetna entered into a definitive agreement,
dated November 28, 1995, to sell the Companies to The Travelers Insurance Group
Inc. ('Travelers'). The sale is subject to state regulatory approval and other
customary conditions and is expected to be completed no later than midyear 1996.
The Companies' commercial insurance operations provide most types of commercial
property-casualty insurance (primarily workers' compensation, auto, liability
and other specialty products), bonds, and insurance-related services for
businesses, government units and associations. The personal insurance operations
underwrite private-passenger auto and homeowner insurance, which is sold to
individuals through independent agents, with a significant market in the
Northeastern states.
Due to the related business activities, common management control, common
ownership and the interdependence of the affiliated entities, combined financial
statements have been prepared in accordance with generally accepted accounting
principles. Intercompany transactions between the Companies have been
eliminated. Certain reclassifications have been made to 1994 and 1993 financial
information to conform to 1995 presentation.
ACCOUNTING CHANGES
Accounting by Creditors for Impairment of a Loan
As of January 1, 1995, the Companies adopted Financial Accounting Standard
('FAS') No. 114, Accounting by Creditors for Impairment of a Loan and FAS No.
118, Accounting by Creditors for Impairment of a Loan-- Income Recognition and
Disclosures. In accordance with these standards, a loan is considered impaired
when it is probable that the Companies will be unable to collect amounts due
according to the contractual terms of the loan agreement. For impaired loans, a
specific impairment reserve is established for the difference between the
recorded investment in the mortgage loan and the fair value of the collateral.
General reserves are established for losses management believes are likely to
arise from the overall portfolio but cannot be attributed to specific loans.
Prior to the adoption of FAS Nos. 114 and 118, the Companies included the
reserve for estimated losses on potential problem loans which management
believed were likely to become classified as problem or restructured in the next
12 months or so in the general reserve. Adoption of these standards had no
impact on 1995 net income.
Accounting for Certain Investments in Debt and Equity Securities
On December 31, 1993, the Companies adopted FAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, which requires the
classification of debt securities into three categories and equity securities
into two categories. (Please refer to Note 3.)
Initial adoption of this standard in 1993 resulted in a net increase of
$107.6 million, net of taxes of $57.9 million, to net unrealized capital gains
in shareholder's equity as of December 31, 1993.
Discounting of Workers' Compensation Life Table Indemnity Reserves
In 1993, the Companies elected to change, retroactive to January 1, 1993,
the accounting policy for reporting reserves for current and expected workers'
compensation life table indemnity claims to a discounted basis. These reserves
are discounted at 5% for voluntary business and 3.5% for involuntary business. A
cumulative effect benefit of $250.0 million, net of taxes of $134.7 million, was
reported in the 1993 Combined Statement of Income. The effect of the change for
the year ended December 31, 1993 was an increase to results from continuing
operations before cumulative effect adjustments of $78.0 million, net of taxes
of $42.0 million.
6
<PAGE> 7
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Accounting for Retrospectively Rated Reinsurance Contracts
In 1993, the Companies changed their method of accounting for
retrospectively rated reinsurance contracts to conform to the consensus reached
by the Emerging Issues Task Force of the Financial Accounting Standards Board
('FASB'). Accordingly, the Companies reported a cumulative effect adjustment,
retroactive to January 1, 1993, to recognize an asset for the amounts due from
reinsurers related to the experience through January 1, 1993 under
retrospectively rated reinsurance contracts. The Companies reported a cumulative
effect benefit related to this accounting change of $16.5 million, net of taxes
of $8.6 million, in the 1993 Combined Statement of Income. The effect of the
change for the year ended December 31, 1993 was an increase to results from
continuing operations before cumulative effect adjustments of $3.3 million, net
of taxes of $1.8 million.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of
In March 1995, the FASB issued FAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement
requires write-down to fair value when long-lived assets to be held and used are
impaired. The statement also requires long-lived assets to be disposed of (e.g.,
real estate held for sale) to be carried at the lower of cost or fair value less
estimated selling costs and does not allow such assets to be depreciated. The
Companies will adopt this statement in 1996 and the impact on earnings is not
expected to be material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from reported results using
those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of 90 days or less when purchased.
INVESTMENTS
Debt securities which may be sold prior to maturity are classified as
available for sale and carried at fair value. Available for sale debt securities
are written down (as realized losses) for other than temporary declines in
value. Unrealized gains and losses related to available for sale investments,
net of related taxes, are reflected in shareholder's equity.
Debt securities which the Companies have the positive intent and ability to
hold to maturity are classified as held for investment and are carried at
amortized cost, net of write-downs for other than temporary declines in value.
The Companies had no held for investment securities at December 31, 1995.
In December 1995, in accordance with guidance published by the FASB, the
Companies reassessed the classifications of all debt securities. As a result of
this review, debt securities with an amortized cost of $403.1 million (fair
value of $400.8 million) were reclassified from the held for investment category
to the available for sale category.
Debt securities which are held with the objective of trading to generate
profits on short-term differences in price ("trading securities") are carried at
fair value. Changes in fair value related to the trading portfolio are
7
<PAGE> 8
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
reflected in net realized capital gains or losses in the Combined Statements of
Income. The Companies had no trading securities at December 31, 1995 or 1994.
Equity securities are classified as available for sale and carried at fair
value. Equity securities are written down (as realized losses) for other than
temporary declines in value. Unrealized gains and losses related to such
securities, net of related taxes, are reflected in shareholder's equity.
Fair values for debt and equity securities are based on quoted market
prices or dealer quotations. Where quoted market prices or dealer quotations are
not available, fair values are measured utilizing quoted market prices for
similar securities or by using discounted cash flow methods. Cost for
mortgage-backed securities is adjusted for unamortized premiums and discounts,
which are amortized using the interest method over the estimated remaining term
of the securities, adjusted for anticipated prepayments.
Purchases and sales of debt and equity securities are recorded on the trade
date. Purchases and sales of mortgage loans are recorded on the closing date.
Mortgage loans are carried at unpaid principal balances, net of impairment
reserves, and are generally secured. A mortgage loan is considered impaired when
it is probable that the Companies will be unable to collect amounts due
according to the contractual terms of the loan agreement. For impaired loans, a
specific impairment reserve is established for the difference between the
recorded investment in the mortgage loan and the fair value of the collateral. A
general reserve is established for losses management believes are likely to
arise from the overall portfolio but cannot be attributed to specific loans.
Investment real estate, which the Companies have the intent to hold for the
production of income, is carried at depreciated costs including capital
additions, net of write-downs for other than temporary declines in fair value.
Properties held for sale (primarily acquired through foreclosure) are carried at
the lower of depreciated cost (fair value at foreclosure plus capital additions
less accumulated depreciation) or fair value less estimated selling costs.
Adjustments to the carrying value of properties held for sale are recorded in a
valuation reserve when the fair value less estimated selling costs is below
depreciated cost.
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which approximates
amortized cost.
Other invested assets consist primarily of partnerships, equity
subsidiaries and agency loans. Partnerships and equity subsidiaries are carried
on an equity basis and agency loans are carried at the unpaid principal balance.
The Companies utilize foreign exchange forward contracts and swap
agreements for other than trading purposes in order to manage investment returns
and align maturities, interest rates, currency rates and funds availability with
its obligations. (Please refer to Note 13.)
Foreign exchange forward contracts which are designated at inception and
effective as hedges of foreign translation exposures and foreign transaction
exposures related to investments classified as available for sale are accounted
for using the deferral method. Under the deferral method, realized and
unrealized gains and losses from these forward contracts are deferred on the
balance sheet, net of tax, in net unrealized capital gains or losses. Upon
disposal of the hedged item, deferred gains and losses are recognized in net
realized capital gains or losses in the Combined Statements of Income. Excess
realized or unrealized gain or loss, if any, from the foreign exchange forward
contract compared to the foreign investment being hedged, is reported as a net
realized gain or loss in the Combined Statements of Income.
Swap agreements which are designated as interest rate or foreign exchange
rate risk management instruments at inception are accounted for using the
accrual method. Under the accrual method, the difference between
8
<PAGE> 9
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
amounts paid and received on such agreements is reported in net investment
income in the Combined Statements of Income; there is no recognition in the
Combined Balance Sheets for changes in the fair value of the agreement.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring insurance business are deferred. These costs,
all of which vary with and are primarily related to the production of new and
renewal business, consist principally of commissions, certain expenses of
underwriting and issuing contracts and certain agency expenses. Acquisition
costs are amortized over the life of the insurance contract.
Deferred policy acquisition costs would be written off to the extent that
it is determined that future policy premiums and investment income would not be
adequate to cover related losses and expenses.
OTHER ASSETS
Property and equipment are reported at depreciated cost using the
straight-line method based upon the estimated useful lives of the assets. The
carrying value of property and equipment at December 31, 1995 and 1994 was $12.1
million and $20.9 million, respectively, and was net of accumulated depreciation
of $92.8 million and $92.9 million, respectively.
INSURANCE LIABILITIES
Liabilities for unpaid claims and claim adjustment expenses include, to the
extent reasonably estimable, provisions for payments to be made on reported
claims, and claims incurred but not reported and for associated claim adjustment
expenses. (Please refer to Note 12.) Workers' compensation life table indemnity
reserves are discounted at 5% for voluntary business and 3.5% for involuntary
business. Workers' compensation life table indemnity reserves, net of the
related discount, totaled $863 million and $821 million at December 31, 1995 and
1994, respectively, which were 26% and 24% of the Companies' total workers'
compensation reserves for unpaid claims and claim adjustment expenses at
December 31, 1995 and 1994, respectively. Certain other reserves with fixed or
determinable payment patterns over periods of up to seven years, including
reserves related to certain environmental and asbestos-related claim
settlements, have also been discounted. The rates used in discounting such
reserves range from 4% to 7%, and the amount of such discounted reserves, net of
reinsurance was approximately $190 million at December 31, 1995.
The Companies' insurance reserve liabilities are reported net of estimated
amounts of salvage and subrogation.
Unearned premiums are calculated on a pro rata basis. Additional premiums
under retrospectively-rated policies are excluded from unearned premiums and
classified as premiums due.
PREMIUMS, CLAIMS AND EXPENSES
Premiums are generally recognized as revenue on a pro rata basis over the
policy term. Certain policies allow the Companies to charge additional premiums
as a result of recognizing additional claim and expense costs under the
policies. Such premiums are recognized when the related losses are provided.
Claims and expenses, including acquisition costs such as commissions,
certain premium taxes and certain other items, are charged to current operations
as incurred. Claims are reported net of salvage and subrogation received and
anticipated. Premiums, claims and expenses are also reported net of deductions
for reinsurance ceded.
9
<PAGE> 10
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
STRUCTURED SETTLEMENTS
In cases where the Company has obtained a structured settlement with a
qualified assignment, i.e., the structured settlement annuity is owned by a
party other than the Company, the cost of the annuity is recognized as a paid
loss and gains, if any, are recognized in income. For cases where no qualified
assignment is obtained, the related loss amount and the annuity cost plus
accrued interest are included in loss reserves and reinsurance recoverables,
respectively.
FEDERAL AND FOREIGN INCOME TAXES
The Companies are included in the consolidated federal income tax return of
Aetna. The Companies are taxed at regular corporate rates after adjusting
income/(loss) reported for financial statement purposes for certain items.
Foreign subsidiaries and U.S. subsidiaries operating outside of the United
States are taxed under applicable foreign statutes. Deferred income tax
expenses/benefits result from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
DISCONTINUED OPERATIONS
On September 30, 1992, The Aetna Casualty and Surety Company ("AC&S")
completed the sale of American Re-Insurance Company ("Am Re"), formerly a wholly
owned subsidiary. As part of the sale, AC&S received 70,000 shares of American
Re Corporation's (the new holding company) Preferred Stock which were redeemed
in 1993 resulting in an after-tax gain of $27.0 million.
2. SEVERANCE AND FACILITIES CHARGE
The Companies recorded a $101 million after-tax ($155 million pretax)
severance and facilities charge in the fourth quarter of 1993. The planned
actions included the elimination of approximately 2,000 positions. The severance
and facilities charge included costs related to vacating excess leased office
space and costs related to vacating and selling a property owned by Aetna in
Hartford, Connecticut. During 1995 and 1994, the Companies charged costs of
$12.6 million and $142.4 million (pretax), respectively, to the 1993 severance
and facilities reserve related to the cost reduction actions.
3. INVESTMENTS
Debt securities at December 31, 1995 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
(MILLIONS)
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury securities and obligations of U.S. government agencies
and corporations......................................................... $ 3,048.2 $ 122.3 $ 8.1 $ 3,162.4
Obligations of states and political subdivisions....................... 628.5 10.9 7.6 631.8
Utilities.............................................................. 735.3 37.6 2.5 770.4
Financial.............................................................. 1,304.7 83.9 1.2 1,387.4
Transportation/Capital Goods........................................... 649.8 27.1 4.9 672.0
Other corporate securities............................................. 366.4 12.0 2.0 376.4
Mortgage-backed securities............................................. 1,655.5 46.2 4.3 1,697.4
Other loan-backed securities........................................... 708.5 12.5 1.4 719.6
Foreign governments.................................................... 1,125.7 64.6 6.5 1,183.8
Other.................................................................. 959.7 39.4 2.0 997.1
----------- --------- --------- -----------
Total Available for Sale............................................ $ 11,182.3 $ 456.5 $ 40.5 $ 11,598.3
=========== ========= ========= ===========
</TABLE>
10
<PAGE> 11
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS--(CONTINUED)
Debt securities at December 31, 1994 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
(MILLIONS)
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury securities and obligations of U.S. government agencies
and corporations......................................................... $ 3,680.2 $ 1.2 $ 254.9 $ 3,426.5
Obligations of states and political subdivisions....................... 1,048.0 3.9 46.6 1,005.3
Utilities.............................................................. 519.7 1.4 22.8 498.3
Financial.............................................................. 530.2 .1 17.5 512.8
Transportation/Capital Goods........................................... 625.6 2.9 26.2 602.3
Other corporate securities............................................. 274.0 .6 21.1 253.5
Mortgage-backed securities............................................. 1,370.4 3.5 102.3 1,271.6
Other loan-backed securities........................................... 332.2 -- 14.7 317.5
Foreign governments.................................................... 759.4 1.8 74.0 687.2
Other.................................................................. 556.7 1.2 36.1 521.8
----------- ----------- ----------- -----------
Total Available for Sale............................................ $ 9,696.4 $ 16.6 $ 616.2 $ 9,096.8
=========== ========= ========= ===========
Held for Investment:
Obligations of states and political subdivisions....................... $ 246.1 $ 1.1 $ 8.0 $ 239.2
Utilities.............................................................. 37.7 .1 .6 37.2
Financial.............................................................. 42.8 .2 .3 42.7
Transportation/Capital Goods........................................... 13.8 .5 .2 14.1
Other corporate securities............................................. 3.7 .1 .3 3.5
Foreign governments.................................................... 23.3 .1 .3 23.1
Other.................................................................. 46.1 1.8 .6 47.3
----------- ----------- ----------- -----------
Total Held for Investment........................................... $ 413.5 $ 3.9 $ 10.3 $ 407.1
=========== ========= ========= ===========
</TABLE>
The carrying and fair value of debt securities are shown below by
contractual maturity. Actual maturities may differ from contractual maturities
because securities may be restructured, called or prepaid.
<TABLE>
<CAPTION>
1995
------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
(MILLIONS)
<S> <C> <C>
Available for Sale:
Due to mature:
One year or less................................................................................. $ 793.7 $ 837.2
After one year through five years................................................................ 3,812.9 3,864.4
After five years through ten years............................................................... 2,494.6 2,610.3
After ten years.................................................................................. 1,717.1 1,869.4
Mortgage-backed securities....................................................................... 1,655.5 1,697.4
Other loan-backed securities..................................................................... 708.5 719.6
----------- -----------
Total Available for Sale...................................................................... $ 11,182.3 $ 11,598.3
=========== ===========
</TABLE>
11
<PAGE> 12
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS--(CONTINUED)
The Companies engage in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time. Cash
collateral, which is in excess of the market value of the loaned securities, is
deposited by the borrower with a lending agent, and retained and invested by the
lending agent to generate additional income for the Companies. The market value
of the loaned securities is monitored on a daily basis with additional
collateral obtained or refunded as the market value fluctuates. At December 31,
1995, the Companies had loaned securities (which are reflected as invested
assets on the Combined Balance Sheets) with a market value of approximately $.9
billion.
Investments in equity securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ----------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
1995
Equity securities........................................................... $ 289.5 $ 287.0 $ 76.6 $ 499.9
1994
Equity securities........................................................... $ 779.5 $ 335.8 $ 97.4 $ 1,017.9
</TABLE>
Real estate holdings at December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(MILLIONS)
<S> <C> <C>
Properties held for sale................................................................................. $ 173.0 $ 98.6
Investment real estate................................................................................... 106.8 197.7
--------- ---------
279.8 296.3
Valuation reserve........................................................................................ 15.1 34.3
--------- ---------
Net carrying value..................................................................................... $ 264.7 $ 262.0
========= =========
</TABLE>
The accumulated depreciation for real estate was $29.0 million and $19.1
million at December 31, 1995 and 1994, respectively.
Total real estate write-downs included in the net carrying value of the
Companies' real estate holdings on the Combined Balance Sheets at December 31,
1995 and 1994 were $116.4 million and $83.3 million, respectively.
At December 31, 1995, the total recorded investment in mortgage loans that
are considered to be impaired (which include problem loans, restructured loans
and potential problem loans) under FAS No. 114 and related specific reserves are
$164.4 million and $21.3 million, respectively. Included in the total recorded
investment are impaired loans of $61.0 million for which no specific reserves
are considered necessary.
The activity in the mortgage loan impairment reserves for the twelve months
ended December 31, 1995 is summarized below:
<TABLE>
<CAPTION>
(MILLIONS)
<S> <C>
Balance at December 31, 1994.................................................................. $ 136.6
Charged to net realized capital loss.......................................................... 6.4
Principal write-offs.......................................................................... (77.3)
-----------
Balance at December 31, 1995(1)............................................................... $ 65.7
=========
</TABLE>
- ---------------
(1) Total reserves at December 31, 1995 included $21.3 million of specific
reserves and $44.4 million of general reserves.
12
<PAGE> 13
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS--(CONTINUED)
The Companies accrue interest income on impaired loans to the extent it is
deemed collectible and the loan continues to perform under its original or
restructured contractual terms. Interest income on problem loans is generally
recognized on a cash basis. Cash payments on loans in the process of foreclosure
are generally treated as a return of principal.
Income earned (pretax) and received were each $12.2 million on the average
recorded investment in impaired loans of $227.0 million for the twelve months
ended December 31, 1995.
The carrying values of investments that were nonincome producing for the
twelve months preceding the balance sheet date were as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(MILLIONS)
<S> <C> <C>
Debt securities............................................................................................. $ .6 $ 2.4
Equity securities........................................................................................... 12.6 9.3
Mortgage loans.............................................................................................. .3 14.9
Real estate................................................................................................. 71.4 47.9
--------- ---------
Total nonincome producing investments..................................................................... $ 84.9 $ 74.5
========= =========
</TABLE>
Significant noncash investing activities include acquisition of real estate
through foreclosures (including in-substance foreclosures) of mortgage loans
amounting to $40 million in 1995, $59 million in 1994 and $17 million in 1993.
4. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold. Provisions for impairments
and changes in the fair value of real estate subsequent to foreclosure are also
included in net realized capital gains. Unrealized capital gains and losses on
available for sale investments, net of related taxes, are reflected in
shareholder's equity.
Net realized capital gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Debt securities.................................................................................. $ (38.0) $ 9.7 $ 230.5
Equity securities................................................................................ 239.5 30.7 75.9
Mortgage loans................................................................................... (5.5) (52.8) (107.5)
Real estate...................................................................................... 28.7 12.2 (51.9)
Sales of subsidiaries............................................................................ -- 20.8 --
Other............................................................................................ (25.7) (14.7) (3.0)
--------- --------- ---------
Pretax realized capital gains.................................................................. $ 199.0 $ 5.9 $ 144.0
========= ========= =========
After tax realized capital gains............................................................... $ 128.6 $ 3.8 $ 96.8
========= ========= =========
</TABLE>
Proceeds from the sale of investments in debt securities available for sale
during 1995 were $3.8 billion. Gross gains of $56.5 million and gross losses of
$94.5 million were realized on those sales. Proceeds from sales of investments
in held for investment, available for sale and trading debt securities during
1994 and 1993 were $4.2 billion and $2.2 billion, respectively. Gross gains of
$66.5 million and $257.8 million, and gross losses of $57.9 million and $20.9
million were realized on those sales.
13
<PAGE> 14
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS--(CONTINUED)
Net realized capital gains in 1994 included a $14 million after tax gain
resulting from the sale of a portion of an unconsolidated subsidiary.
Changes in shareholder's equity included changes in unrealized capital
gains (losses), for the periods as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Equity securities........................................................................... $ (28.0) $ (132.9) $ 72.0
Debt trading securities..................................................................... -- -- (99.3)
Debt securities available for sale.......................................................... 1,015.6 (808.1) 208.5
Foreign exchange and other, net............................................................. (33.0) 35.2 (3.5)
---------- --------- ---------
954.6 (905.8) 177.7
Increase (Decrease) in deferred federal income taxes........................................ 253.9 (205.7) 65.6
---------- --------- ---------
Net changes in unrealized capital gains (losses)............................................ $ 700.7 $ (700.1) $ 112.1
========== ========= =========
</TABLE>
Changes in unrealized capital gains (losses) for the periods exclude pretax
changes in debt securities carried at amortized cost. The unrecorded
appreciation (depreciation) for debt securities carried at amortized cost is the
difference between estimated market and carrying values, and amounted to $(6.4)
million and $20.6 million at December 31, 1994 and 1993, respectively. The
change in unrecorded appreciation (depreciation) was $6.4 million, $(27.0)
million and $(202.6) million in 1995, 1994 and 1993, respectively.
Shareholder's equity included the following unrealized capital gains
(losses) at December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Equity securities:
Gross unrealized capital gains.............................................................. $ 287.0 $ 335.8 $ 400.2
Gross unrealized capital losses............................................................. (76.6) (97.4) (28.9)
--------- --------- ---------
210.4 238.4 371.3
Debt securities available for sale:
Gross unrealized capital gains.............................................................. 456.5 16.6 251.1
Gross unrealized capital losses............................................................. (40.5) (616.2) (42.6)
--------- --------- ---------
416.0 (599.6) 208.5
Foreign exchange and other, net............................................................... (96.7) (63.7) (98.9)
Deferred federal income taxes (benefits)...................................................... 216.9 (37.0) 168.7
--------- --------- ---------
Net unrealized capital gains (losses)....................................................... $ 312.8 $ (387.9) $ 312.2
========= ========= =========
</TABLE>
At December 31, 1994, approximately $290 million of net unrealized capital
losses, primarily on available for sale debt and equity securities, were
reflected in shareholder's equity without deferred tax benefits. (Please refer
to Note 8 for a discussion of the tax treatment for unrealized capital losses on
available for sale debt and equity securities.)
14
<PAGE> 15
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. NET INVESTMENT INCOME
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Debt securities............................................................................... $ 683.2 $ 626.5 $ 721.2
Equity securities............................................................................. 31.3 27.0 11.2
Short-term investments........................................................................ .8 -- 13.4
Mortgage loans................................................................................ 121.8 154.4 189.1
Real estate................................................................................... 56.6 59.2 70.1
Other......................................................................................... 23.0 8.8 31.6
Cash equivalents.............................................................................. 48.3 25.6 11.6
--------- --------- ---------
Gross investment income....................................................................... 965.0 901.5 1,048.2
Less investment expenses...................................................................... 62.9 77.2 84.4
--------- --------- ---------
Net investment income....................................................................... $ 902.1 $ 824.3 $ 963.8
========= ========= =========
</TABLE>
6. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
The amount of dividends that may be paid to Aetna by AC&S and The Standard
Fire Insurance Company in 1996, without prior approval by the Insurance
Commissioner of the State of Connecticut (the "Department") is $216.6 million
(the sale agreement with Travelers prohibits the payment of dividends from the
Companies). Dividends of $.3 million were paid by AC&S to Aetna in 1995. No
dividends have been paid by The Standard Fire Insurance Company during 1995.
Dividend payments by the domestic insurance subsidiaries of AC&S and The
Standard Fire Insurance Company are subject to similar restrictions in
Connecticut and other states, and are limited in 1996 to approximately $164.4
million in the aggregate. Dividends of $5.0 million were paid to AC&S by the
domestic insurance subsidiaries during 1995.
The Department recognizes as net income and shareholder's equity those
amounts determined in conformity with statutory accounting practices prescribed
or permitted by the Department, which differ in certain respects from generally
accepted accounting principles.
Statutory net income (loss) was $(196.2) million, $(170.1) million and $7.8
million for the years ended December 31, 1995, 1994 and 1993, respectively.
Statutory shareholder's equity was $2,793.4 million and $2,525.7 million as of
December 31, 1995 and 1994, respectively.
In recent years, state insurance regulators have been considering changes
in statutory accounting practices and other initiatives to strengthen solvency
regulation. Under the risk-based capital ("RBC") standards for property-casualty
insurers adopted by the NAIC, each of the Companies applies the RBC formula
which compares adjusted surplus to required surplus and reflects the risk
profile of the company (RBC ratio). The RBC ratio at December 31, 1995 for each
of the Companies is above the levels which would require regulatory action.
As of December 31, 1995, the Companies do not utilize any statutory
accounting practices which are not prescribed by insurance regulators that,
individually or in the aggregate, materially affect statutory shareholder's
equity.
15
<PAGE> 16
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(MILLIONS)
<S> <C> <C>
Long-term debt:
Mortgage Notes and Other Notes, 6.9%-11% due in varying amounts to 2018................................... $ 35.2 $ 35.5
========= =========
</TABLE>
Aggregate maturities of long-term debt and sinking fund requirements for
1996 through 2000 are $.3 million, $.2 million, $29.5 million, $.1 million, $.1
million, respectively, and $5.0 million thereafter.
8. FEDERAL AND FOREIGN INCOME TAXES
The Companies are included in the consolidated federal income tax return of
Aetna. Aetna allocates to each member an amount approximating the tax it would
have incurred were it not a member of the consolidated group, and credits the
member for the use of its tax saving attributes in the consolidated return.
In August 1993, the Omnibus Budget Reconciliation Act of 1993 ("OBRA") was
enacted which resulted in an increase in the federal corporate tax rate from 34%
to 35% retroactive to January 1, 1993. The enactment of OBRA resulted in an
increase in the deferred tax asset of $26.0 million at date of enactment, which
is included in the 1993 deferred tax benefit.
Components of income tax benefits were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Current taxes (benefits):
Income (Loss)--from operations............................................................. $ (179.7) $ 4.2 $ (169.3)
Income--foreign taxes...................................................................... .9 -- --
Realized capital gains (losses)............................................................ 65.6 (47.4) 71.1
--------- --------- ---------
(113.2) (43.2) (98.2)
Deferred taxes (benefits):
Loss--from operations...................................................................... (54.3) (60.2) (36.9)
Income--foreign taxes...................................................................... (.1) -- --
Realized capital gains (losses)............................................................ 4.8 49.5 (23.9)
--------- --------- ---------
(49.6) (10.7) (60.8)
--------- --------- ---------
Total........................................................................................ $ (162.8) $ (53.9) $ (159.0)
========= ========= =========
</TABLE>
16
<PAGE> 17
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. FEDERAL AND FOREIGN INCOME TAXES--(CONTINUED)
Income tax benefits on loss from continuing operations were different from
the amount computed by applying the federal income tax rate to loss from
continuing operations before income tax benefits for the following reasons:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Loss before income tax benefits.............................................................. $ (405.7) $ (91.2) $ (213.5)
Tax rate..................................................................................... 35% 35% 35%
--------- --------- ---------
Application of the tax rate.................................................................. (142.0) (31.9) (74.7)
Tax effect of:
Tax-exempt interest........................................................................ (16.2) (31.1) (42.0)
Foreign operations......................................................................... .8 6.9 0.7
Excludable dividends....................................................................... (6.2) (8.1) (12.0)
Tax rate change on deferred assets and liabilities......................................... -- -- (24.7)
Other, net................................................................................. .8 10.3 (6.3)
--------- --------- ---------
Income tax benefits.......................................................................... $ (162.8) $ (53.9) $ (159.0)
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(MILLIONS)
<S> <C> <C>
Deferred tax assets:
Insurance reserves..................................................................................... $ 814.4 $ 756.6
Reserve for severance and facilities expense........................................................... 5.6 26.3
Impairment reserves.................................................................................... 1.8 49.5
Net unrealized capital losses.......................................................................... -- 139.5
Net operating loss carryforward........................................................................ 122.2 113.2
Other.................................................................................................. 27.4 9.4
--------- ---------
Total gross assets....................................................................................... 971.4 1,094.5
Less valuation allowance................................................................................. -- 102.1
--------- ---------
Assets net of valuation.................................................................................. 971.4 992.4
Deferred tax liabilities:
Deferred policy acquisition costs...................................................................... 107.0 110.5
Market discount........................................................................................ 11.2 17.1
Net unrealized capital gains........................................................................... 216.9 --
Other.................................................................................................. 2.6 2.3
--------- ---------
Total gross liabilities.................................................................................. 337.7 129.9
--------- ---------
Net deferred tax asset................................................................................. $ 633.7 $ 862.5
========= =========
</TABLE>
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. During the twelve months ended December 31, 1995,
the Companies moved from a net unrealized capital loss position of $(387.9)
million at December 31, 1994, to a net unrealized capital gain position of
$312.8 million at December 31, 1995, primarily due to decreases in interest
rates. As a result, the $102.1 million of valuation allowances previously
established in 1994 related to deferred tax assets were reversed, which had no
impact on net income in 1995.
Management believes that it is more likely than not that the Companies will
realize the benefit of the net deferred tax asset of $633.7 million. Aetna's
election of special estimated tax payments in years 1989 through 1994 assures
realizability of a substantial portion of deferred tax assets arising from the
discounting of property-casualty
17
<PAGE> 18
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. FEDERAL AND FOREIGN INCOME TAXES--(CONTINUED)
reserves. The Companies have more than 15 years to generate sufficient taxable
income to cover the reversal of its temporary differences due to the long-term
reversal patterns of these differences. Because of Aetna's long-term history of
taxable income, which is projected to continue, and the availability of
significant tax planning strategies, such as converting tax-exempt bonds to
taxable bonds, the Companies expect sufficient taxable income in the future to
realize the net deferred tax asset.
The net deferred tax asset includes $122.2 million related to the
Companies' expected utilization of its current U.S. net operating loss
carryforward of $349.2 million, $111.2 million of which expires in the year
2008, $226.3 million of which expires in the year 2009 and $11.7 million of
which expires in the year 2010.
The Internal Revenue Service (the "Service") has completed examination of
the consolidated federal income tax returns of Aetna through 1986. Discussions
are being held with the Service with respect to proposed adjustments. The
Service has commenced its examination for the years 1987 through 1990. However,
management believes there are adequate defenses against, or sufficient reserves
recorded by Aetna to provide for, such challenges.
The Companies received net federal income tax refunds for continuing
operations of $148.4 million, $60.8 million and $141.2 million in 1995, 1994 and
1993, respectively.
9. BENEFIT PLANS
Pension Plans--The Companies, in conjunction with Aetna, have
noncontributory defined benefit plans covering substantially all employees and
certain agents. The plans provide pension benefits based on years of service and
average annual compensation (measured over 60 consecutive months of highest
earnings in a 120-month period). Contributions are determined by using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to the amounts that are currently deductible for tax
reporting purposes. The accumulated benefit obligations and plan assets are
recorded by Aetna. Data on a separate company basis regarding the proportionate
share of the accumulated benefit obligation and plan assets is not available.
The accumulated plan assets exceed accumulated benefits. Pretax charges to
operations for the pension plan (based on the Companies' total salary cost as a
percentage of Aetna's total salary cost) were $22.3 million, $12.0 million and
$6.4 million in 1995, 1994 and 1993, respectively. There has been no funding to
the plan in 1995, 1994 or 1993.
Postretirement Benefits--In addition to providing pension benefits, Aetna
also provides certain health care and life insurance benefits for retired
employees. A comprehensive medical and dental plan is offered to all full-time
employees retiring at age 50 with 15 years of service or at age 65 with 10 years
of service. Retirees are generally required to contribute to the plans based on
their years of service with Aetna.
In January 1994, Aetna announced a modification of its postretirement
benefit plan to cap the portion of the cost paid by Aetna relating to medical
and dental benefits for individuals retiring after March 1, 1994. The
accumulated benefit obligations and plan assets are recorded by Aetna. Data on a
separate company basis regarding the proportionate share of employee costs is
not available. An allocation, based on headcount, of Aetna's total cash costs
for retirees was approximately $5.0 million (pretax) in 1995, 1994 and 1993,
respectively, and is reflected in the Combined Statements of Income.
Incentive Saving Plan--Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which may be
invested in common stock of Aetna or certain other investments, are matched, up
to 5% of compensation, by Aetna. Pretax charges to operations for the incentive
savings plan were $21.5 million, $24.3 million, and $25.4 million in 1995, 1994
and 1993, respectively.
1994 Stock Incentive Plan--Certain employees participate in Aetna's 1994
stock incentive plan (which replaced the 1984 stock option plan). The 1994 plan
provides for stock options (see (1) Stock Option Plans), and deferred contingent
common stock or cash awards (see (2) Incentive Units) to certain key employees.
The
18
<PAGE> 19
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. BENEFIT PLANS--(CONTINUED)
Companies' pretax charges to operations for the Stock Incentive Plan were $12.7
million in 1995. There was an immaterial impact to the results of operations in
1994.
(1) Stock Option Plans--Executive and middle management employees may
be granted options to purchase common stock of Aetna at the market price on
the date of grant. Certain options granted prior to 1992 contain stock
appreciation rights permitting the employee to exercise those rights and
receive the excess of fair market value at the date of exercise over the
grant date fair market value in cash and/or stock.
(2) Incentive Units--Executive and middle management employees may be
granted incentive units under the Aetna 1994 Stock Incentive Plan, which
are rights to receive Aetna common stock or cash at the end of a vesting
period (currently 1996 and 1998) conditioned upon the employee's continued
employment during that period and achievement of Aetna performance goals.
The incentive unit holders are not entitled to dividends during the vesting
period.
10. RELATED PARTY TRANSACTIONS
A substantial portion of the administrative and support functions of the
Companies are provided by Aetna and its affiliates. The financial statements
reflect allocated charges for these services based upon measures which
management considers reasonable and appropriate for the type and nature of
service provided. The Companies have agreements and contracts with certain Aetna
affiliates to provide administrative and technical services. The types of
services provided by Aetna and its affiliates to the Companies related to such
functions include, but are not limited to, general ledger processing, including
subsidiary expense ledgers, use of the corporate conference center, office
services, purchasing, security, facilities management, payroll and other human
resources services, bank administration and other treasury services. The
Companies are also allocated charges for certain corporate staff area costs
which include, but are not limited to, salaries, certain employee benefit and
incentive plans, legal fees, travel and taxes (including payroll and personal
property).
Hartford-area home office properties occupied by the Companies are owned by
Aetna affiliates. The Companies are charged rent based on their proportionate
share (based on square footage occupied) of the total occupancy cost (including
depreciation) of Aetna's Hartford-area properties. Certain other facilities
owned by the Companies, either directly or through partnerships, are leased by
Aetna and its affiliates. In addition, the Combined Balance Sheets reflect
certain mortgage and real estate investments that are held jointly by Companies
and Aetna affiliates.
The Companies, by virtue of their participation in the consolidated
operations of Aetna, benefit from certain costs which are incurred in other
Aetna legal entities and not subsequently allocated back to the Companies. Such
costs include, but are not limited to, advertising, interest expense, charitable
contributions, certain postretirement benefits other than pensions, certain
postemployment benefits and certain other employee benefit plans.
The Companies utilize intercompany receivable/payable accounts to settle
allocated charges primarily related to general and administrative expenses of
Aetna and its affiliates. Such expenses are paid by the parent company, Aetna
Life and Casualty Company which acts as a clearinghouse in allocating such
expenses to each of the parent company's subsidiaries. Settlements generally
take place within 45 days after the end of each month.
AC&S had entered into a stop-loss agreement with an affiliate, Aetna
Re-Insurance Company (U.K.) Ltd., a wholly-owned subsidiary of Aetna. Such
agreement covered all policies-in-force, written, renewed or accepted during
1992 and prior years. AC&S had a 100% participation, capped at a maximum of
$58.0 million, in net losses in excess of the retention limits which result from
adverse development on known losses valued as of December 31, 1992 and/or
reported subsequent to December 31, 1992. Effective December 31, 1995, AC&S
entered into an agreement with Aetna whereby Aetna was substituted as primary
obligor under the stop-loss agreement for a payment equal to the held reserves
for such coverage of $35.7 million.
19
<PAGE> 20
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
11. REINSURANCE
The Companies utilize reinsurance agreements to reduce their exposure to
large losses in all aspects of their insurance business. Reinsurance permits
recovery of a portion of losses from reinsurers, although it does not discharge
the primary liability of the Companies as direct insurers of the risks
reinsured. The Companies evaluate the financial strength of potential reinsurers
and continually monitor the financial condition of present reinsurers. Only
those reinsurance recoverables deemed probable of recovery are reflected as
assets on the Combined Balance Sheets.
Prepaid reinsurance premiums were $.4 billion for the year ended December
31, 1995 and $.3 billion for both the years ended December 31, 1994 and 1993. A
summary of earned premiums for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C>
Direct Amount............................................................................ $ 5,006.4 $ 5,093.4 $ 5,488.2
Ceded to Other Companies(1).............................................................. 1,307.0 1,177.7 1,232.3
Assumed from Other Companies(2).......................................................... 418.3 439.1 353.9
---------- ---------- ----------
Net Amount............................................................................. $ 4,117.7 $ 4,354.8 $ 4,609.8
========== ========== ==========
Percentage of Amount Assumed to Net...................................................... 10.2% 10.1% 7.7%
</TABLE>
- ---------------
(1) Includes $165.4 million, $184.7 million, and $215.5 million in 1995, 1994
and 1993, respectively, of premiums ceded to Aetna affiliates.
(2) Includes $115.3 million, $130.8 million, and $160.9 million in 1995, 1994
and 1993, respectively, of premiums assumed from Aetna affiliates.
There is not a material difference in premiums on a written versus an
earned basis.
Ceded claims and claim adjustment expenses were $.8 billion for the year
ended December 31, 1995 and $1.2 billion for the year ended December 31, 1994
and $1.1 billion for the year ended December 31, 1993.
Certain subsidiaries of the Companies act as servicing carriers for several
involuntary pools. This business is ceded completely to the pools, and the
Companies have no direct underwriting risk associated with it. Reinsurance
recoverables for this business were approximately $1.7 billion and $1.8 billion
as of December 31, 1995 and 1994, respectively. The Companies also participate
as members in a number of the involuntary pools, and as a result assume their
share of premiums and losses associated with these pools.
The Companies also utilize a variety of reinsurance agreements, primarily
with nonaffiliated insurers, to control their exposure to large
property-casualty losses. These agreements, most of which are renegotiated
annually as to coverage, limits and price, are structured either on a treaty
basis (where all risks meeting prescribed criteria are automatically covered) or
on a facultative basis (where the circumstances of specific individual insurance
risks are reflected). The amount of risk retained by the Companies depends on
the underwriter's evaluation of the specific risk, subject to maximum limits
based on risk characteristics and the type of coverage. The principal
catastrophe reinsurance agreement currently in force covers approximately 90% of
specified property losses between $150 million and $325 million. The Companies
also have in place an aggregate excess of loss arrangement with respect to all
of its property-casualty lines for accident year 1995, providing up to
approximately $250 million of additional net protection.
Unpaid claims and claim adjustment expenses and reinsurance recoverables on
the Combined Balance Sheets are reported net of amounts ceded to and assumed
from certain affiliates. The total amount of unpaid claims and claim adjustment
expenses and reinsurance recoverables related to these reinsurance agreements
was $658.8 million and $642.0 million at December 31, 1995 and 1994,
respectively, of which $657.1 million and $639.9
20
<PAGE> 21
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
11. REINSURANCE--(CONTINUED)
million, respectively, relates to an arrangement which terminated effective
January 1, 1996. There was no impact to the Combined Statements of Income in
1995, 1994 or 1993 as a result of these agreements.
12. RESERVES
The following represents changes in aggregate reserves for unpaid claims
and claim adjustment expenses:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(MILLIONS)
<S> <C> <C> <C>
Net unpaid claims and claim adjustment expenses at beginning of year....................... $ 11,022 $ 11,259 $ 11,581
Incurred claims and claim adjustment expenses:
Provision for insured events of the current year......................................... 3,095 3,484 3,526
Increases in provision for insured events of prior years(1)(2)........................... 1,137 263 51
--------- --------- ---------
Total incurred claims and claim adjustment expenses................................... 4,232 3,747 3,577
--------- --------- ---------
Payments: Claim and claim adjustment expenses attributable to insured events of the current
year....................................................................................... 1,118 1,275 1,041
Claim and claim adjustment expenses attributable to insured events of prior years.......... 2,563 2,709 2,858
--------- --------- ---------
Total payments........................................................................ 3,681 3,984 3,899
--------- --------- ---------
Net unpaid claims and claim adjustment expenses at end of the year......................... 11,573 11,022 11,259
Plus: Reinsurance recoverables............................................................. 4,573 4,603 4,407
Deductible amounts recoverable from policyholders.......................................... 412 352 --
--------- --------- ---------
Gross unpaid claims and claim adjustment expenses at end of the year....................... $ 16,558 $ 15,977 $ 15,666
========= ========= =========
</TABLE>
- ---------------
(1) 1995 includes increases in provision for insured events of prior years of
$399 million related to asbestos-related claims and $778 million related to
environmental-related claims.
(2) 1993 includes increases in provision for insured events of prior years of
$665 million, offset by the cumulative effect adjustment related to the
change in accounting to report workers' compensation life table indemnity
claims on a discounted basis of $(514) million and the current year effect
of this change in accounting of $(100) million related to the provision for
insured events of prior years.
Environmental and Asbestos-Related Claims
The Companies added $778 million ($505.7 million, after tax) to
environmental-related claims reserves in 1995. In the opinion of management, the
Companies' reserves for environmental-related claims at December 31, 1995
represent the Companies' best estimate of their ultimate environmental-related
liability, based on currently known facts, current law (including Superfund),
current technology, and assumptions considered reasonable where facts are not
known. Due to the significant uncertainties and related management judgment
involved in estimating the Companies' environmental liability, no assurances can
be given that the environmental reserve represents the amount that will
ultimately be paid by the Companies for all environmental-related losses. The
amount ultimately paid could differ materially from the Companies' currently
recorded reserve as legal and factual issues are clarified, but any difference
cannot be reasonably estimated at this time.
As a result of this addition to the environmental-related claims reserves,
Aetna contributed $303 million of additional capital to the Companies in the
fourth quarter of 1995 in order to restore capital levels (including risk-based
capital), to appropriate levels for regulatory and other purposes.
In conjunction with the reserve addition for environmental-related claims,
the Companies purchased reinsurance which provided aggregate protection of $335
million for the adverse loss development beyond reserves held (net of existing
reinsurance). Under this arrangement, approximately $165 million of the existing
reserves for such losses were ceded at the time the contract was entered into.
As a result of the asbestos-related reserve addition (see
21
<PAGE> 22
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. RESERVES--(CONTINUED)
below) and other reserve developments, substantially all of, the available
statutory surplus protection was utilized during 1995. There was an immaterial
benefit to the results of operations under this arrangement.
In 1995, the Companies settled a case involving a policyholder (a major
producer of asbestos and asbestos products) that had exhausted applicable policy
limits on asbestos products claims and asserted coverage under policy provisions
for other types of liability. The Companies obtained a release from the insured
for all current and future asbestos bodily injury claims and certain asbestos
property damage claims (along with all environmental claims) under existing
policies in exchange for fixed, scheduled cash payments, which were recorded on
a discounted basis. In connection with this settlement, $120 million of
property-casualty reserves not previously classified as covering
asbestos-related claims were transferred to asbestos reserves. No amounts were
transferred from environmental reserves, and the environmental-related portion
of the settlement was covered by existing environmental reserves. As a result,
this settlement did not affect 1995 results of operations. As part of the
settlement, the Companies also agreed, among other things, to make insurance
coverage available to the insured in the year 2000 (on a one-time basis), for a
percentage of all asbestos defense and indemnity claim payments made by the
insured during the years 2000 through 2007. The Companies' payment obligations
would be subject to annual dollar caps. Given the uncertainty as to whether the
insured will elect to purchase this additional insurance, no related premiums or
losses have been recorded by the Companies at this time. Related premiums and
losses will be recorded if it becomes probable that the insured will elect to
purchase the additional insurance coverage.
Reserving for asbestos-related claims is subject to significant
uncertainties and management is currently unable to make a reasonable estimate
as to the ultimate amount of losses or a reasonable range of losses for all
asbestos-related claims and related litigation expenses. Management has
continued to evaluate reserves for asbestos liabilities as the Companies
continue to gather and analyze new information and reassess its reserving
techniques for these claims in order to determine whether it can better estimate
its liability. In connection with such evaluation, the Companies added $335
million ($218 million, after tax) to asbestos-related claims reserves in the
fourth quarter of 1995. While the Companies expect to recover some of its
asbestos losses from its reinsurers, due to the uncertainty in estimating
amounts to be recovered, no reinsurance benefits were recorded in establishing
this addition to reserves. Further adjustments may be made to such reserves as
loss patterns develop and other information is obtained, and the amount
ultimately paid for such claims could differ materially from reserves, although
any difference cannot be reasonably estimated at this time.
Environmental and asbestos-related loss and loss adjustment expense
reserves as reflected on the Combined Balance Sheets at December 31, were as
follows (before reinsurance and net of discounts on certain environmental and
asbestos settlement):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
(MILLIONS)
<S> <C> <C>
Environmental Liability................................................................................ $ 1,005.9 $ 436.1
Asbestos Bodily Injury*................................................................................ 754.3 295.9
Asbestos Property Damage*.............................................................................. 22.3 29.9
---------- ---------
Total Environmental and Asbestos-Related Reserves...................................................... $ 1,782.5 $ 761.9
========== =========
</TABLE>
- ---------------
* Includes $107.4 million and $12.6 million of reserves transferred to asbestos
bodily injury and asbestos property damage reserves, respectively, in 1995.
Workers' Compensation Claims
Estimating workers' compensation reserves is particularly difficult (and,
therefore, more subject to change than many other types of property-casualty
claims), largely because of the length of the "tail" associated with workers'
compensation claims. Workers' compensation claim costs are dependent on a number
of complex factors including social and economic trends and changes in doctrines
of legal liability and damage awards. Adjustments will be made to such reserves
as loss patterns develop and new information becomes available and such
adjustments may be material.
22
<PAGE> 23
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
12. RESERVES--(CONTINUED)
Other
Policyholders of the Companies also seek insurance coverage from the
Companies for other long-term exposure claims against them, including claims
relating to silicone-based personal products, lead paint and other allegedly
toxic or harmful substances. Evaluating and reserving for these types of
exposures is complex and subject to many uncertainties including those stemming
from coverage issues, long latency periods and changing or expanding laws and
legal theories of liability. Adjustments will be made to such reserves as loss
patterns develop and new information becomes available and such adjustments may
be material.
13. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUE
The carrying values and estimated fair values of the Companies' financial
instruments at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents............................................... $ 1,136.5 $ 1,136.5 $ 676.3 $ 676.3
Short-term investments.................................................. 137.2 137.2 106.0 106.0
Debt securities......................................................... 11,598.3 11,598.3 9,510.3 9,503.9
Equity securities....................................................... 499.9 499.9 1,017.9 1,017.9
Mortgage loans.......................................................... 1,061.7 1,052.7 1,453.7 1,416.0
Liabilities:
Short-term debt......................................................... $ -- $ -- $ 9.1 $ 9.1
Long-term debt.......................................................... 35.2 35.2 35.5 35.5
</TABLE>
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial instrument, such
as estimates of timing and amount of expected future cash flows. Such estimates
do not reflect any premium or discount that could result from offering for sale
at one time the Companies' entire holdings of a particular financial instrument,
nor do they consider the tax impact of the realization of unrealized gains or
losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in
immediate settlement of the instrument. In evaluating the Companies' management
of interest rate and liquidity risk, and currency exposures, the fair values of
all assets and liabilities should be taken into consideration, not only those
presented above.
The following valuation methods and assumptions were used by the Companies
in estimating the fair value of the above financial instruments:
Short-term instruments: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, the carrying amounts reported in the Combined Balance Sheets
approximate fair value. Short-term instruments have a maturity date of one year
or less and include cash and cash equivalents, short-term investments and
short-term debt.
Debt and equity securities: Fair values are based on quoted market prices
or dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are estimated by using quoted market prices for similar
securities or discounted cash flow methods.
Mortgage loans: Fair values are estimated by discounting expected mortgage
loan cash flows at market rates which reflect the rates at which similar loans
would be made to similar borrowers. The rates reflect management's
23
<PAGE> 24
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
13. FINANCIAL INSTRUMENTS--(CONTINUED)
assessment of the credit quality and the remaining duration of the loans. The
fair value estimates of mortgage loans of lower credit quality, including
problem and restructured loans, are based on the estimated fair value of the
underlying collateral.
Long-term debt: Fair value is based on quoted market prices for the same or
similar issued debt or, if no quoted market prices are available, on the current
rates estimated to be available to the Companies for debt of similar terms and
remaining maturities.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS):
The notional amounts, carrying values and estimated fair values of the
Companies' off-balance-sheet financial instruments at December 31, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
CARRYING
VALUE
NOTIONAL ASSET
AMOUNT (LIABILITY)
----------- -------------
(MILLIONS)
<S> <C> <C>
1995
Foreign exchange forward contracts--sell:
Related to investments in nondollar denominated assets....................................... $ 65.2 $ (.1)
Interest rate swaps:
Unrecognized gains........................................................................... 380.0 --
Unrecognized losses.......................................................................... 380.0 --
</TABLE>
<TABLE>
<CAPTION>
FAIR
VALUE
---------
<S> <C>
1995
Foreign exchange forward contracts--sell:
Related to investments in nondollar denominated assets....................................... $ (.2)
Interest rate swaps:
Unrecognized gains........................................................................... 20.4
Unrecognized losses.......................................................................... (20.2)
</TABLE>
<TABLE>
<CAPTION>
CARRYING
VALUE
NOTIONAL ASSET
AMOUNT (LIABILITY)
----------- -------------
(MILLIONS)
<S> <C> <C>
1994
Foreign exchange forward contracts--sell:
Related to net investments in foreign affiliates............................................. $ 27.1 $ .2
Related to investments in nondollar denominated assets....................................... 206.1 .2
Foreign exchange forward contracts--buy:
Related to investments in nondollar denominated assets....................................... 3.8 (.4)
Interest rate swaps:
Unrecognized gains........................................................................... 386.4 --
Unrecognized losses.......................................................................... 386.4 --
</TABLE>
<TABLE>
<CAPTION>
FAIR
VALUE
---------
<S> <C>
1994
Foreign exchange forward contracts--sell:
Related to net investments in foreign affiliates............................................. $ .2
Related to investments in nondollar denominated assets....................................... (1.5)
Foreign exchange forward contracts--buy:
Related to investments in nondollar denominated assets....................................... (.1)
Interest rate swaps:
Unrecognized gains........................................................................... 18.3
Unrecognized losses.......................................................................... (18.3)
</TABLE>
The notional amounts of these instruments do not represent the Companies'
risk of loss. The fair value amounts of these instruments were estimated based
on quoted market prices, dealer quotations or internal price estimates believed
to be comparable to dealer quotations. These amounts reflect the estimated
amounts that the Companies would have to pay or would receive if the contracts
were terminated.
The Companies engage in hedging activities to manage foreign exchange and
interest rate risk. Such hedging activities have principally consisted of using
off-balance-sheet instruments including foreign exchange forward contracts and
interest rate swap agreements. All of these instruments involve, to varying
degrees, elements of market risk and credit risk in excess of the amounts
recognized in the Combined Balance Sheets. The Companies evaluate the risks
associated with off-balance-sheet financial instruments in a manner similar to
that used to evaluate the risks associated with on-balance-sheet financial
instruments. Market risk is the possibility that future
24
<PAGE> 25
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
13. FINANCIAL INSTRUMENTS--(CONTINUED)
changes in market prices may make a financial instrument less valuable. For
off-balance-sheet financial instruments used for hedging, such market price
changes are generally offset by the market price changes in the hedged
instruments held by the Companies. Credit risk arises from the possibility that
counterparties may fail to perform under the terms of the contract, which could
result in an unhedged position. However, unlike on-balance-sheet financial
instruments, where credit risk generally is represented by the notional or
principal amount, the off-balance-sheet financial instruments' risk of credit
loss generally is significantly less than the notional value of the instrument
and is represented by the positive fair value of the instrument. The Companies
generally do not require collateral or other security to support the financial
instruments discussed below. However, the Companies control their exposure to
credit risk through credit approvals, credit limits and regular monitoring
procedures. There were no material concentrations of off-balance-sheet financial
instruments at December 31, 1995.
Foreign Exchange Forward Contracts:
Foreign exchange forward contracts are agreements to exchange fixed amounts
of two different currencies at a specified future date and at a specified price.
The Companies utilize foreign exchange forward contracts to hedge their foreign
currency exposure arising from certain investments in foreign affiliates and
nondollar denominated investment securities. The Companies generally utilize
foreign currency contracts with terms of up to three months.
At December 31, 1995 the Companies has unhedged foreign currency exposures
of $29.8 million and $41.2 million related to net investments in foreign
affiliates and investments in nondollar denominated assets, respectively. These
exposures include $40.1 million of investments in nondollar denominated assets
for which effective markets for hedging vehicles do not currently exist.
Interest Rate Swaps
The Companies utilize interest rate swaps to manage certain exposures
related to changes in interest rates. This swap activity included transactions
which were entered into in prior years where the Companies act as an
intermediary for entities whose debt the Companies have guaranteed to allow them
to convert variable rate debt to a fixed rate, with the Companies retaining no
interest rate risk. (Please refer to Note 14.) Interest rate swap activity also
includes exchanging variable rate asset returns for fixed rate returns.
14. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
Commitments to extend credit are legally binding agreements to lend monies
at a specified interest rate and within a specified time period. Risk arises
from the potential inability of counterparties to perform under the terms of the
contracts and from interest rate fluctuations. The Companies' exposure to credit
risk is reduced by the existence of conditions within the commitment agreements
which release the Companies from their obligations in the event of a material
adverse change in the counterparty's financial condition. At December 31, 1995
and 1994, the Companies had $79.8 million and $120.0 million, respectively, in
commitments to fund partnerships.
Through the normal course of investment operations, the Companies commit to
either purchase or sell securities or money market instruments at a specified
future date and at a specified price or yield. The inability of counterparties
to honor these commitments may result in either a higher or lower replacement
cost. Also, there is likely to be a change in the value of the securities
underlying the commitments. At December 31, 1995, the Companies had commitments
to purchase investments of $66.9 million, the fair value of which was $67.3
million. The Companies had no commitments to purchase investments in 1994.
25
<PAGE> 26
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES--(CONTINUED)
FINANCIAL GUARANTEES
The Companies no longer write municipal bond insurance and such business
previously written by the Companies was reinsured with another company. It is
not practicable to estimate the fair value of the business that has been ceded.
AC&S was a writer of financial guarantees on obligations secured by real
estate, corporate debt obligations, and of municipal and non-municipal
tax-exempt entities through December 31, 1987, and ceased writing such
guarantees as of January 1, 1988. The aggregate net par value of financial
guarantees outstanding at December 31, 1995 and 1994 was $656.4 million and
$728.3 million, respectively. Future runoff of financial guarantees as of
December 31, 1995 after adjusting for extensions granted on certain guarantees,
is estimated to be $31.9 million for 1996, $135.4 million for 1997, $276.7
million for 1998, $3.8 million for 1999, $7.4 million for 2000 and $201.2
million thereafter. It is not practicable to estimate a fair value for AC&S'
financial guarantees because AC&S no longer writes such guarantees, there is no
quoted market price for such contracts, and it is not practicable to reliably
estimate the timing and amount of all future cash flows due to the unique nature
of each of these contracts.
Total reserves for the financial guarantee business, which include reserves
for defaults, probable losses not yet identified and unearned premiums, were
$40.5 million and $47.7 million at December 31, 1995 and 1994, respectively.
Premium income received from such guarantees is recognized pro rata over the
contract coverage period.
REINSURANCE AGREEMENT
In connection with the 1992 sale of Am Re, Am Re and AC&S entered into a
reinsurance agreement which provides that to the extent Am Re incurred losses in
1991 and prior that were still outstanding at January 1, 1992 in excess of $2.7
billion, AC&S has an 80% participation in payments on those losses up to a
maximum payment by AC&S of $500 million. In 1995, Am Re increased reserves for
asbestos, environmental and other latent liabilities. As a result of this
increase, losses of approximately $228 million ($120 million after discount),
which were largely workers' compensation life table indemnity claims, were ceded
to AC&S. There was no material impact on 1995 earnings as AC&S had previously
established reserves. It is reasonably possible that additional undiscounted
losses of up to approximately $270 million pretax could be ceded to the company
in the future.
STRUCTURED SETTLEMENTS
The Companies have settled claims through the purchase of structured
settlement annuities under which they remain liable to the claimants. Such
structured settlements of $1,189.3 million and $1,097.2 million are reflected in
reinsurance recoverables on the Combined Balance Sheet at December 31, 1995 and
1994, respectively. Included in such liabilities is $352.4 million and $280.0
million of structured settlements purchased from affiliates, consisting of
$177.2 million and $153.4 million from Aetna Life Insurance Company at December
31, 1995 and 1994, respectively, and $175.2 million and $126.6 million from
Aetna Life Insurance and Annuity Company at December 31, 1995 and 1994,
respectively.
LITIGATION
The Companies are continuously involved in numerous lawsuits arising, for
the most part, in the ordinary course of their business operations either as
liability insurers defending third-party claims brought against their insureds
or as insurers defending coverage claims brought against them, including
lawsuits related to issues of policy coverage and judicial interpretation. One
such area of coverage litigation involves legal liability for environmental and
asbestos-related claims. These lawsuits and other factors make reserving for
these claims subject to significant uncertainties.
26
<PAGE> 27
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES--(CONTINUED)
While the ultimate outcome of such litigation cannot be determined at this
time, such litigation, net of reserves established therefore and giving effect
to reinsurance probable of recovery, is not expected to result in judgments for
amounts material to the financial condition of the Companies, although it may
adversely affect results of operations in future periods.
15. CONCENTRATIONS OF INVESTMENT CREDIT RISK
At December 31, 1995, the Companies had an investment in common stock of
MBIA, Inc. with a carrying value of $286.0 million representing 7% of
shareholder's equity, and an investment in preferred stock of Federated
Investors with a carrying value of $100.7 million representing 3% of
shareholder's equity. Subsequent to December 31, 1995, the Companies sold all of
their investment in Federated Investors and 82% of their investment in MBIA,
Inc. These sales resulted in a combined realized capital gain of $173.8 million
(pretax) which will be reflected in 1996 results.
The Companies' holdings in debt securities were $11.6 billion and $9.5
billion as of December 31, 1995 and 1994, respectively. The debt securities in
the Companies' portfolio are generally rated by external rating agencies, and,
if not externally rated, are rated by the Companies on a basis believed to be
similar to that used by the rating agencies. At December 31, 1995 and 1994, the
average quality rating of the Companies' portfolio of debt securities was AA and
the composition by quality ratings and market sector were as follows:
DEBT SECURITIES QUALITY RATINGS
DEBT SECURITIES INVESTMENTS BY MARKET SECTOR
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
AAA...................................... 54% 59%
AA....................................... 11% 10%
A........................................ 21% 18%
BBB...................................... 11% 9%
BB & Below............................... 3% 4%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Corporate................................ 28% 23%
Treasuries/Agencies...................... 27% 36%
Mortgage-Backed Securities............... 15% 13%
Financial................................ 12% 6%
Public Utilities......................... 7% 6%
Other Loan Backed........................ 6% 3%
Municipals............................... 5% 13%
</TABLE>
At December 31, 1995 and 1994, mortgage loan balances, net of specific
impairment reserves, by property type and geographic region were as follows:
27
<PAGE> 28
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
15. CONCENTRATIONS OF INVESTMENT CREDIT RISK--(CONTINUED)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
MIXED
OFFICE RETAIL APARTMENT HOTEL/MOTEL INDUSTRIAL USE/OTHER TOTAL
--------- --------- ----------- ------------- ----------- ------------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
South Atlantic.......................... $ 175.6 $ 60.9 $ 51.8 $ 2.7 $ 3.1 $ 49.5 $ 343.6
Middle Atlantic......................... 147.1 64.8 -- -- 19.9 .1 231.9
New England............................. 120.5 66.9 59.7 44.2 -- -- 291.3
South Central........................... 10.7 14.6 .5 1.7 -- -- 27.5
North Central........................... 3.4 20.2 38.3 11.1 .8 .9 74.7
Pacific and Mountain.................... 69.9 28.9 18.4 -- 7.3 3.1 127.6
Other................................... -- -- -- -- -- 9.5 9.5
--------- --------- --------- --------- --------- --------- ----------
Total.............................. $ 527.2 $ 256.3 $ 168.7 $ 59.7 $ 31.1 $ 63.1 1,106.1
========= ========= ========= ========= ========= =========
Less general portfolio loss reserve..... 44.4
----------
Adjusted total, net of reserves.... $ 1,061.7
==========
</TABLE>
DECEMBER 31, 1994
<TABLE>
<CAPTION>
MIXED
OFFICE RETAIL APARTMENT HOTEL/MOTEL INDUSTRIAL USE/OTHER TOTAL
--------- --------- ----------- ------------ ----------- ------------- ----------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
South Atlantic.......................... $ 159.5 $ 165.2 $ 58.9 $ 62.1 $ 3.2 $ 59.0 $ 507.9
Middle Atlantic......................... 196.1 67.0 30.1 -- 17.6 .5 311.3
New England............................. 122.6 65.6 59.4 45.1 .4 3.8 296.9
South Central........................... 32.1 12.1 13.3 2.0 3.8 .9 64.2
North Central........................... 31.7 40.3 55.1 23.5 .9 1.2 152.7
Pacific and Mountain.................... 118.6 29.2 7.6 -- 7.7 4.3 167.4
Other................................... -- -- -- -- -- 11.8 11.8
--------- --------- --------- ---------- --------- --------- ----------
Total.............................. $ 660.6 $ 379.4 $ 224.4 $ 132.7 $ 33.6 $ 81.5 1,512.2
========= ========= ========= ========== ========= =========
Less general portfolio loss reserve..... 58.5
----------
Adjusted total, net of reserves.... $ 1,453.7
==========
</TABLE>
As of December 31, 1995 and 1994, the Companies' investments in problem,
potential problem and restructured mortgage loans by property type and
geographic distribution were as follows:
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED MORTGAGE LOANS BY PROPERTY TYPE
GEOGRAPHIC DISTRIBUTION OF PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED MORTGAGE
LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Apartment............................... 13.3% 9.0%
Hotel/Motel............................. -- % .8%
Office.................................. 48.8% 72.4%
Retail.................................. 37.9% 17.0%
Other................................... -- % .8%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Middle Atlantic......................... 11.9% 22.1%
New England............................. .2% 1.3%
North Central........................... 13.4% 32.6%
Pacific and Mountain.................... 62.2% 7.3%
South Atlantic.......................... 12.3% 17.6%
South Central........................... -- % 19.1%
</TABLE>
28
<PAGE> 29
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
15. CONCENTRATIONS OF INVESTMENT CREDIT RISK--(CONTINUED)
"Problem loans" are defined to be loans with payments over 60 days past
due, loans on properties in the process of foreclosure, loans on properties
involved in bankruptcy proceedings and loans on properties subject to
redemption.
"Restructured loans" are loans whose original contract terms have been
modified to grant concessions to the borrower and are currently performing
pursuant to such modified terms.
In connection with the Companies' adoption of FAS Nos. 114 and 118 on
January 1, 1995 (please see Note 1 of Notes to Combined Financial Statements),
management has revised the definition of "potential problem loans" to include
all loans which are performing pursuant to existing terms and are considered
likely to become classified as problem or restructured loans. Prior to January
1, 1995, potential problem loans were performing loans which management believed
were likely to become classified as problem or restructured loans in the next 12
months or so. As a result of the revised definition, potential problem loans at
December 31, 1995 are approximately $65 million higher than they would have been
had the definition not been changed. Potential problem loans are identified
through the portfolio review process on the basis of known information about the
ability of borrowers to comply with present loan terms. Identifying such
potential problem loans requires significant judgment as to likely future market
conditions and developments specific to individual properties and borrowers.
Provision for losses that management believes are likely to arise from such
potential problem loans is included in the specific impairment reserves. (Please
see Note 3 for a discussion of mortgage loan impairment reserves.)
The Companies' equity real estate balances were $264.7 million and $262.0
million at December 31, 1995 and 1994, respectively. The Companies' equity real
estate balances at December 31, 1995 and 1994 by property type and geographic
distribution were as follows:
EQUITY REAL ESTATE BY PROPERTY TYPE
GEOGRAPHIC DISTRIBUTION OF EQUITY REAL ESTATE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Apartment............................... -- % 6.0%
Hotel/Motel............................. 21.3% 17.3%
Industrial.............................. 8.6% 8.7%
Land.................................... 14.3% 13.2%
Office.................................. 47.1% 44.1%
Retail.................................. 7.6% 9.5%
Other................................... 1.1% 1.2%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Middle Atlantic......................... 7.9% 8.2%
New England............................. 12.5% 16.1%
North Central........................... 18.3% 12.3%
Pacific and Mountain.................... 37.9% 40.1%
South Atlantic.......................... 16.7% 20.4%
South Central........................... 6.7% 2.9%
</TABLE>
29
<PAGE> 30
THE AETNA CASUALTY AND SURETY COMPANY
AND THE STANDARD FIRE INSURANCE COMPANY
AND THEIR SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
16. SEGMENT INFORMATION
<TABLE>
<CAPTION>
COMMERCIAL PERSONAL
LINES LINES COMBINED
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
1995
Revenues
Premiums.............................................................................. $ 2,833 $ 1,285 $ 4,118
Net investment income................................................................. 757 145 902
Fee & other income.................................................................... 78 4 82
Realized investment gains (losses).................................................... 151 48 199
--------- --------- ---------
Total............................................................................ 3,819 1,482 5,301
--------- --------- ---------
Income (loss) before federal income taxes............................................... (607) 201 (406)
Net income (loss)....................................................................... (377) 134 (243)
--------- --------- ---------
Total assets............................................................................ 19,670 3,729 23,399
========= ========= =========
1994
Revenues
Premiums.............................................................................. 3,006 1,349 4,355
Net investment income................................................................. 661 163 824
Fee & other income.................................................................... 110 6 116
Realized investment gains (losses).................................................... (2) 8 6
--------- --------- ---------
Total............................................................................ 3,775 1,526 5,301
--------- --------- ---------
Income (loss) before federal income taxes............................................... (135) 44 (91)
Net income (loss)....................................................................... (74) 37 (37)
--------- --------- ---------
Total assets............................................................................ 18,057 3,614 21,671
========= ========= =========
1993
Revenues
Premiums.............................................................................. 3,120 1,489 4,609
Net investment income................................................................. 739 225 964
Fee & other income.................................................................... 149 5 154
Realized investment gains (losses).................................................... 142 2 144
--------- --------- ---------
Total............................................................................ 4,150 1,721 5,871
--------- --------- ---------
Income (loss) before federal income taxes and cumulative effect adjustments............. (242) 28 (214)
Net income (loss)....................................................................... 200 39 239
--------- --------- ---------
Total assets............................................................................ 17,825 4,075 21,900
========= ========= =========
</TABLE>
30
<PAGE> 1
EXHIBIT 99.02
Company's Prospectus
April 22, 1996
Page 90
In The Travelers Insurance Company, et al., v. Richard John Ratcliffe Keeling,
filed in New York Supreme Court in June 1991, Travelers P&C and certain of its
affiliates seek to enforce reinsurance contracts against certain underwriters at
Lloyd's and certain London companies with respect to recoveries for certain
asbestos claims. In January 1994, the court stayed litigation of this matter in
favor of arbitration. The issues before the arbitration panel include the
underwriters' breach of contract and anticipated breach of their agreement with
the plaintiffs on asbestos-related reinsurance claims. The Travelers P&C/Lloyd's
dispute related to asbestos recoveries involves approximately $100 million of
current ceded receivables and approximately $60 million collected by Travelers
P&C as of December 31, 1995, plus future potential recoverables. The dispute
will be determined by an arbitration panel at an arbitration commencing in May
1996, based on the panel's interpretation of the reinsurance arrangement between
Travelers P&C and Lloyd's.
<PAGE> 1
Exhibit 99.03
Company's Prospectus
April 22, 1996
Pages 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.
<PAGE> 2
Company's Form 10-Q
June 30, 1996
Page 24
For information concerning actions filed against several insurance companies and
industry organizations relating to service fee charges and premium calculations
on certain workers' compensation insurance, see the description that appears in
the paragraph beginning on page 90 and continuing on page 91 of the Company's
Prospectus dated April 22, 1996, which description is incorporated by reference
herein. A copy of the pertinent paragraph of such filing is included as an
exhibit to this Form 10-Q. Two of such actions, Four Way Plant Farm v. NCCI and
Weatherford Roofing Company v. Employees National Insurance Company, have been
settled, subject to approval of the court. In another such action, NC Steel,
Inc. v. NCCI, the North Carolina Court of Appeals affirmed the trial court's
dismissal in part, reversed in part and remanded for further proceedings.
<PAGE> 3
Company's Form 10-Q
September 30, 1996
Page 25
ITEM 1. LEGAL PROCEEDINGS.
For information concerning actions filed against several insurance companies and
industry organizations relating to service fee charges and premium calculations
on certain workers' compensation insurance, see the descriptions that appear in
the paragraph that begins on page 90 and ends on page 91 of the Company's
Prospectus dated April 22, 1996, and in the first paragraph on page 24 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
which descriptions are incorporated by reference herein. A copy of the pertinent
paragraphs of such filings is included as an exhibit to this Form 10-Q. In
October 1996, certain subsidiaries of the Company were named as defendants in a
purported class action filed in the District Court of Wyandotte County, Kansas,
Civil Court Department under the name Amundson & Associates Art Studio Ltd. v.
NCCI, et al. The plaintiffs make allegations and seek damages that are similar
to those in the cases referred to above.
<PAGE> 1
Exhibit 99.04
Company's Prospectus
April 22, 1996
Page 91
On April 2, 1996, individual and institutional plaintiffs, on their own behalf
and also purporting to represent a putative class of similarly situated persons
who may lose their employment as a result of the Acquisition, filed an appeal
captioned Capital Region Conference of Churches, et al. vs. State of Connecticut
Department of Insurance, et al., ( Judicial District of Hartford/New Britain at
Hartford, Superior Court of the State of Connecticut) (the "Appeal"), from the
Memorandum of Decision issued by the Deputy Commissioner of the State of
Connecticut Department of Insurance approving the Acquisition. The Appeal
alleges procedural defects in the approval process. However, the Appeal does not
seek a specific remedy. TIGI believes the Appeal is without merit and plans
vigorously to oppose it. On April 9, 1996, TIGI, Aetna Casualty and Standard
Fire moved for dismissal of the Appeal.
