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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-14328
TRAVELERS PROPERTY CASUALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1445591
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(860) 277-0111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
CLASS A COMMON STOCK, PAR VALUE $ .01 PER SHARE NEW YORK STOCK EXCHANGE
6-3/4% NOTES DUE APRIL 15, 2001 NEW YORK STOCK EXCHANGE
8.08% TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST (AND NEW YORK STOCK EXCHANGE
REGISTRANT'S GUARANTY WITH RESPECT THERETO)
8% TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST (AND NEW YORK STOCK EXCHANGE
REGISTRANT'S GUARANTY WITH RESPECT THERETO)
</TABLE>
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 4, 1998 WAS APPROXIMATELY $2.76 BILLION.
AS OF MARCH 4, 1998, 65,828,627 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.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1997 ARE INCORPORATED BY REFERENCE INTO PART II
OF THIS FORM 10-K.
CERTAIN PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1998 ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD ON APRIL 22, 1998 ARE INCORPORATED BY REFERENCE INTO
PART III OF THIS FORM 10-K.
<PAGE> 2
TRAVELERS PROPERTY CASUALTY CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER PAGE
PART I
1. Business..............................................................1
2. Properties...........................................................52
3. Legal Proceedings....................................................53
4. Submission of Matters to a Vote of Security Holders..................55
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters........................................55
6. Selected Financial Data..............................................56
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................56
7A. Quantitative and Qualitative Disclosures About Market Risk...........56
8. Financial Statements and Supplementary Data..........................56
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................56
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.......................57
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................................58
Exhibit Index........................................................59
Signatures...........................................................63
Index to Consolidated Financial Statements and Schedules............F-1
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PART I
ITEM 1. BUSINESS.
Travelers 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"), an indirect 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 Travelers Casualty
and Surety Company (formerly The Aetna Casualty and Surety Company) ("Travelers
Casualty") and The Standard Fire Insurance Company ("Standard Fire"), Aetna's
property and casualty insurance subsidiaries (collectively, "Aetna P&C"), for
approximately $4.2 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. For additional information about the
Acquisition, the public offering and other related transactions, see Note 2 of
Notes to Consolidated Financial Statements.
Travelers Group owns approximately 83% of the Company's outstanding
common stock. Travelers Group is a diversified financial services holding
company engaged, through its subsidiaries, principally in four business
segments: (i) Investment Services, including Asset Management; (ii) Consumer
Finance Services; (iii) Life Insurance Services; and (iv) Property & Casualty
Insurance Services (primarily 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.
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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.(1) A glossary of insurance terms is included
beginning on page 43.
COMMERCIAL LINES
The Company is the third largest writer of commercial lines insurance
in the United States based on 1996 direct written premiums published by A.M.
Best Company ("A.M. Best"). 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
Accounts that serves the construction industry. The Company distributes its
commercial products through approximately 5,200 brokers and independent agencies
located throughout the United States. In 1997, Commercial Lines generated net
written premiums of $4.8 billion.
SELECTED PRODUCT AND MARKET INFORMATION
The table on the next page sets forth by product line and market net
written premiums for Commercial Lines for the periods indicated. For a
description of the product lines and markets referred to in the table, see "--
Product Lines" and "-- Principal Markets and Methods of Distribution,"
respectively.
Many National Accounts customers often demand 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. Many of these products generate fee income rather than net written
premiums, and are not reflected in the table below.
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 has been
included below for informational purposes only. As used herein,
- --------
(1) Certain items in this Form 10-K, including certain matters
discussed under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" (the "MD&A"), are forward-looking
statements. The matters referred to in such statements could be affected by the
risks and uncertainties involved in the Company's business, including the effect
of economic and market conditions, the level and volatility of interest rates
and currency values, the impact of current or pending legislation and regulation
and the other risks and uncertainties detailed in the section under the heading
"Outlook" and in the Forward Looking Statements section of the MD&A.
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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.
COMBINED NET WRITTEN PREMIUMS
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
NET WRITTEN PREMIUMS
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995 1997
---- ---- ---- ----
(Dollars in millions)
NET WRITTEN PREMIUMS BY PRODUCT
LINE:
<S> <C> <C> <C> <C>
Workers' compensation $1,176 $ 1,223 $ 1,312 24.7%
Commercial multi-peril 1,037 1,223 1,188 21.8
General liability 931 836 815 19.6
Commercial automobile 866 806 888 18.2
Property 383 342 457 8.1
Fidelity and surety 201 215 233 4.2
Other 163 23 251 3.4
------ ------ ------ ------
Total Commercial Lines (1) $4,757 $4,668 $5,144 100.0%
====== ====== ====== ======
NET WRITTEN PREMIUMS BY MARKET:
National Accounts (2) $657 $852 $1,192 13.8%
Commercial Accounts 1,986 1,725 1,862 41.8
Select Accounts 1,432 1,412 1,466 30.1
Specialty Accounts 682 679 624 14.3
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Total Commercial Lines (1) $4,757 $ 4,668 $ 5,144 100.0%
====== ======= ======= ======
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(1) 1997 includes a $142 million increase due to a change to conform
the Aetna P&C method of recording certain net written premiums to
the method employed by Travelers P&C.
(2) The decreases in National Accounts net written premiums during the
periods shown primarily reflect the highly competitive marketplace
and the Company's selective underwriting practices.
The following table sets forth service fee income by market for
Commercial Lines for the periods indicated and includes information with respect
to Aetna P&C only from the date of the Acquisition.
COMMERCIAL LINES SERVICE FEE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
SERVICE FEE INCOME BY MARKET:
National Accounts $346 $382 $424
Commercial Accounts 19 10 8
---- ---- ----
Total Commercial Lines $365 $392 $432
==== ==== ====
</TABLE>
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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 three types of workers'
compensation products: (i) guaranteed cost insurance products, in which policy
premiums charged are fixed and do not vary as a result of the insured's loss
experience, (ii) loss sensitive insurance products, 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 (iii)
service programs, which are generally sold to the Company's larger national
accounts, where the Company receives fees for providing loss prevention, risk
management, claim 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 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.
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.
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, employment practices
liability insurance, 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.
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,
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and property damage to other vehicles and other property resulting from the
ownership, maintenance or use of automobiles and trucks in a business.
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 resulting from property damage. Property also includes inland
marine, which provides coverage for goods in transit and unique, one-of-a-kind
exposures.
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 provided for construction
performance, legal matters such as appeals, trustees in bankruptcy and probate
and other performance bonds.
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.
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, primarily 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 Accounts that serves
the construction industry.
The Company distributes its commercial products primarily through
approximately 5,200 brokers and independent agencies located throughout the
United States that are serviced by 98 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 provides a variety of casualty products
to 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 generally select products under retrospectively
rated plans, large self-insured retentions or some other loss-responsive
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arrangement. 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.
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 69% of the products sold in 1997 to National
Accounts customers, based on net written premiums and service fee income.
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 25% share of the market in 1997.
Assigned risk plan contracts generated approximately $75 million in service fee
income in 1997 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
net written premiums of $43 million and service fee income of $4 million in
1997. 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 casualty products target businesses with 75 to
1,000 employees, while its property products target both large and medium sized
businesses. The Company offers a full line of products to its Commercial
Accounts customers, with an emphasis on guaranteed cost products.
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 and wood products. Also targeted are colleges and
universities, food, retail, financial, property management and the wholesale
industries. The Company continues to develop new industry-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
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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 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, and wrap-up
insurance programs, 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 states' 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. Construction operations contributed approximately 22% of the Commercial
Accounts premium-based business in 1997. Additionally, construction operations
service-based business contributed $6 million of service fees to the Company in
1997.
SELECT ACCOUNTS
Select Accounts serves individuals who have commercial exposures and
firms typically with one to 75 employees. 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.
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 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
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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 classifications 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,
broad range of products 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.
The Company has two separate marketing and underwriting groups within
Specialty Accounts:
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
medical malpractice, primary and excess property, and various coverages that
target the transportation industry. 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 specific programs. In addition, Gulf Specialty has developed a book of
excess and surplus lines business through Gulf Underwriters Insurance Company.
Effective January 1, 1998, the Company's former Travelers Specialty unit has
been combined with Gulf Specialty, and it is anticipated that during 1998 and
1999 renewal policies within the former Travelers Specialty unit will be written
as Gulf Specialty policies.
Bond Specialty's range of products includes fidelity and surety bonds,
directors' and officers' and other professional liability insurance, employment
practices 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 Specialty is
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organized around three broad customer segments: Financial Services, Construction
and Commercial Risk and one specialized product niche: National Commercial
Surety.
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 sells primarily risk management services and loss sensitive products.
Commercial Accounts and Select Accounts primarily sell guaranteed cost products.
The market conditions for all Commercial Lines products are characterized by
difficult pricing and increased competition.
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 the insured is dependent on the loss
experience of the insured. Retrospectively rated policies are primarily used in
workers' compensation coverage. Although the retrospectively rated feature of
the policy substantially reduces insurance risk to the Company, it introduces
credit risk to the Company. Receivables on unpaid losses from holders of
retrospectively rated policies totaled approximately $502 million at December
31, 1997. 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, 1997, contractholder receivables and payables on unpaid
losses were each approximately $1.9 billion.
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 local offices 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
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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 premium
volume for the year ended December 31, 1997:
<TABLE>
<CAPTION>
STATE % OF TOTAL
----- ----------
<S> <C>
New York 12.6%
California 8.0
Texas 6.4
Massachusetts 6.4
Pennsylvania 4.5
Florida 4.3
New Jersey 4.0
Connecticut 3.8
Illinois 3.7
North Carolina 3.3
All Others (1) 43.0
------
TOTAL 100.0%
======
</TABLE>
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(1) No other single state accounted for 3.0% or more of the total direct
written premiums written in 1997 by the Company.
PERSONAL LINES
The Company is the second largest writer of personal lines insurance
through independent agents and the eighth largest writer of personal lines
insurance overall in the United States based on 1996 direct written premiums
published by A.M. Best. In 1997, Personal Lines generated net written premiums
of approximately $3.1 billion. Personal Lines primarily offers personal
automobile and homeowners insurance.
Personal Lines distributes products primarily through approximately
5,000 independent agencies located throughout the United States. The Company is
also marketing its Personal Lines products through alternative distribution
channels, including sponsoring organizations such as employee and affinity
groups, joint marketing arrangements with other insurers and through the
independent agents of Primerica Financial Services ("PFS"), a unit of Travelers
Group. The property-casualty licensed PFS agents market Personal Lines products
under the name TRAVELERS SECURE(R) in 39 states. At the end of 1997,
approximately 8,700 PFS agents were
10
<PAGE> 13
licensed to sell TRAVELERS SECURE(R) products and approximately 10,000 new
automobile and homeowners policies are now being sold through this program each
month. Approximately one-third of Personal Lines new business originated from
alternative distribution channels in 1997.
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 ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
NET WRITTEN PREMIUMS BY PRODUCT
LINE:
Personal automobile $1,950 $1,851 $ 1,822 63.4%
Homeowners and other 1,124 824 721 36.6
------ ------ ------- ------
Total Personal Lines $3,074 (1) $2,675 $ 2,543 100.0%
====== ====== ======= ======
</TABLE>
(1) In 1997, $371 million of Personal Lines net written premiums were
generated by alternative distribution channels.
PRODUCT LINES
The Company writes virtually all types of property and casualty
insurance covering personal risks. Personal Lines had approximately 4.4 million
policies in force at December 31, 1997. 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. In 1997, the Company introduced a nonstandard
automobile product in Texas and Alabama, distributed through independent agents.
In February 1998, the Company expanded its nonstandard auto product into New
York, and later this year it plans to further expand such product into its
larger markets, including Pennsylvania, Florida and Connecticut.
11
<PAGE> 14
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.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The Company's Personal Lines products are distributed primarily through
approximately 5,000 independent agencies located throughout the United States,
supported by a network of 15 field marketing offices and five customer service
centers. Personal Lines also markets through affinity groups, the sales force of
PFS and under joint marketing arrangements with other insurers. While the
Company's principal markets for Personal Lines insurance are in states along the
East Coast, in the South, and Texas, Personal Lines is expanding its
geographical presence across the United States. 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. In
addition, in October 1997, the Company commenced operations in stand-alone
California domestic companies, which sell personal automobile policies.
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 distribute its products
through the independent agency distribution system, recognizing the service and
underwriting advantages the agent can deliver. In addition to its agency
distribution system, the Company has broadened its distribution channels for
Personal Lines products to include sponsoring organizations such as employee and
affinity groups, joint marketing arrangements with other insurers and sales
through the independent agents of PFS, who primarily sell life insurance
products issued by affiliates of the Company, as well as mutual funds and other
Travelers Group products. This program is available in 39 states. In general,
the PFS agents contact potential customers directly, and then transmit
information about the customer to one of four regional telemarketing centers. An
authorized telemarketing sales representative contacts the customer to
underwrite, sell and ultimately process new business.
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, Aetna P&C
began writing renewal policies. This marketing
12
<PAGE> 15
agreement provided 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 and development of
long-term relationships with individual agents gives it a competitive advantage
in the Personal Lines market. The Company believes that its expense management
practices, including prompt and efficient claims handling and high level of
automation, allow it to offer a competitively priced product. In addition, the
Company is leveraging its service, claims handling and automation experience in
the expansion of the distribution of Personal Lines products through its
alternative channels.
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. 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 catastrophe-prone areas, subject to restrictions imposed by insurance
regulatory authorities. In California, the Company introduced in 1996 an
endorsement that reduces 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
13
<PAGE> 16
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 New
Jersey, require prior approval of most 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 premium
volume for the year ended December 31, 1997:
<TABLE>
<CAPTION>
STATE % OF TOTAL
- ----- ----------
<S> <C>
New York 22.0%
New Jersey 9.4
Texas 9.2
Pennsylvania 8.7
Florida 7.2
Connecticut 5.9
Massachusetts 5.7
Virginia 3.8
Georgia 3.2
All others (1) 24.9
-----
TOTAL 100.0%
=====
</TABLE>
- ---------------------
(1) No other single state accounted for 3.0% or more of the total direct
written premiums written in 1997 by the Company.
CLAIM ADMINISTRATION
The Company employs approximately 8,200 claim adjusters, appraisers,
investigators, staff attorneys, system specialists and training, management and
support personnel in the claim department. These employees manage over 90% of
the Company's claims. Approved external vendors, such as claim adjusters,
appraisers, investigators and attorneys, are used only when the geographic
location or unique issues raised by a claim warrant such use. To be approved,
these vendors must have a proven record and have demonstrated cost-consciousness
and relevant technical skills.
14
<PAGE> 17
The Company is dedicated to providing outstanding service standards to
its customers while seeking to reach optimal levels of losses and loss
adjustment expenses. During 1997, the Company reorganized the claim department
to more effectively meet these goals. The new structure features seven operating
regions, and grants to the regions wider authority to address the needs of local
customers, underwriters, agents and brokers across Commercial Lines and Personal
Lines. In addition, the home office and legal personnel created teams around
technical specialties to better support the regional operations. This
streamlined structure of the claim department permits the Company to maintain
the economies of scale of a larger, established company while enjoying the
flexibility of a smaller company that can more quickly respond to the needs of
its customers, underwriters, agents and brokers. The home office continues to
monitor adherence to claims policies and procedures, the adequacy of case
reserves, loss and expense controls and productivity and service standards.
In 1997, the Company also introduced TravComp, a workers' compensation
claim and medical management program that assists adjusters in promptly
investigating, validating or rejecting workers' compensation claims. New medical
management workstations also permit nurse professionals to access additional
information that supports the Company's emphasis on early return to work
strategies for these claims. These new technologies, together with better
matching of professional skills and authority to specific claim issues, have
resulted in workers' compensation cases closing faster and with lower losses and
loss adjustment expenses. A new, loss and analytical reporting tool made
possible by the implementation of the new workers' compensation process is now
available to employers.
Environmental, asbestos and cumulative injury claims are separately
managed by the Company's Special Liability Group. This group is comprised of
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 capital
resources. 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 involves credit risk and is subject 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)
15
<PAGE> 18
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 Company is indemnified for an amount of loss in excess of a specified
retention with respect to losses resulting from a catastrophic event.
The following presents the Company's top five reinsurers (except
Lloyd's of London ("Lloyd's") which is discussed in more detail below) by
reinsurance recoverable at December 31, 1997 (in millions):
<TABLE>
<CAPTION>
REINSURANCE
REINSURER RECOVERABLE A.M. BEST RATING OF REINSURER
--------- ----------- ------------------------------------
<S> <C> <C>
General Reinsurance Corporation $444 A++ highest of 15 ratings
American Re-Insurance Company 428 A+ 2nd highest of 15 ratings
Executive Risk Indemnity Inc. 182 A 3rd highest of 15 ratings
Employers Reinsurance Corporation 97 A++ highest of 15 ratings
New England Reinsurance Corporation (Subsidiary of 77 NR-3 rating not applicable
The Hartford Insurance Group) because company is in
run-off
</TABLE>
As of December 31, 1997, the Company had ceded insurance losses and
loss adjustment expenses to Lloyd's of $352 million. In 1996, Lloyd's
restructured its operations with respect to claims for years prior to 1993 and
reinsured these into Equitas Limited ("Equitas"). Approximately $266 million of
the Company's Lloyd's reinsurance recoverable at year end relates to Equitas
liabilities and is currently unrated. The remaining recoverables of $86 million
is from Lloyd's continuing market which was recently rated A (3rd highest of 15
ratings) by A.M. Best.
The impact of the Lloyd's restructuring on the collectibility of
amounts recoverable by the Company from Lloyd's cannot be quantified at this
time. The Company believes that it is possible that an unfavorable impact on
collectibility could have a material adverse effect on the Company's operating
results in a future period. However, the Company believes that it is not likely
that the outcome of these matters could have a material adverse effect on the
Company's financial condition or liquidity.
The Company 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, 1997 was $15 million per risk.
At December 31, 1997, the Company had $9.2 billion in reinsurance
recoverables. Of this amount, $3.4 billion is for pools and associations that
relate primarily to workers' compensation service business and have the strength
of the participating insurance companies on a joint basis supporting these
cessions. Also, $2.5 billion is attributable to structured settlements relating
primarily to personal injury claims for which the Company has purchased an
annuity and remains contingently liable in the event of a default by the company
issuing the annuity. Of the
16
<PAGE> 19
remaining $3.5 billion ceded to reinsurers at December 31, 1997, $755 million
was environmental, asbestos and cumulative injury-related and the remainder
principally reflects reinsurance in support of ongoing business. In addition, at
December 31, 1997, $397 million of reinsurance recoverables were collateralized
by letters of credit.
Net Retention Policy. The descriptions below relate to reinsurance
arrangements of the Company in effect at January 1, 1998. For third-party
liability, including automobile no-fault, the reinsurance agreements used by
Commercial Accounts and Select Accounts limit the net retention to a maximum of
$4 million per insured, per occurrence. Gulf Specialty utilizes various
reinsurance mechanisms and has limited its net retention to $4.5 million per
risk for any line of business. For commercial property insurance, there is a $5
million maximum retention per risk with 100% reinsurance coverage for risks with
higher limits. The reinsurance agreement in place for workers' compensation
policies written by Commercial Accounts and Select Accounts, and some segments
of Alternative Markets and Gulf Specialty covers 100% of each loss between $1
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.
For personal property insurance, there is a $6 million maximum retention per
risk. For directors' and officers' liability, employment practices liability and
blended insurance, Bond Specialty retains up to $5 million per risk. For surety
protection, Bond Specialty has reinsurance coverage for 95% of up to $50 million
of liability in excess of $50 million of liability. In addition, Bond
Specialty's accident year results are protected by an aggregate excess of loss
treaty that provides 100% of approximately $53 million of reinsurance coverage
in excess of a $122 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 40% of total losses between $250
million and $750 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 40% of losses between $250 million
and $750 million.
For commercial property insurance sold through Commercial Accounts and
certain National Accounts, 10% of all losses are reinsured in 1998, subject to
an occurrence limitation of $200 million. For Personal Lines homeowners
insurance, in 1998, 25% of losses in states along the East Coast are reinsured
up to a maximum recovery of $187 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.
For the accumulation of net casualty losses arising out of one
occurrence, a casualty clash agreement covers 95% of losses between $10 million
and $50 million.
17
<PAGE> 20
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. However, the Company believes
that it is not likely that the Company's recovery of less than contracted
amounts from FHCF would have a material adverse effect on the Company's
financial condition or liquidity.
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.
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
18
<PAGE> 21
discounted using a maximum interest rate of 5%. At December 31, 1997, 1996 and
1995 the combined amounts of discount for the Company were $912 million, $1.012
billion and $1.206 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 1987 through
1997 and the subsequent changes in those reserves, presented on a historical
basis for the Company. Accordingly, the original estimates, cumulative amounts
paid and reestimated reserves in the table for the years 1987-1995 have not been
restated to include Aetna P&C. Beginning in 1996, the table includes the reserve
activity of Aetna P&C. The data in the table are presented in accordance with
reporting requirements of the Securities and Exchange Commission. Care must be
taken to avoid misinterpretation by those unfamiliar with such information or
familiar with other data commonly reported by the insurance industry. The
following data is not accident year data, but rather a display of 1987-1997
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 1987 included $4 million for a loss that is
finally settled in 1997 for $5 million, the $1 million deficiency (the excess of
the actual settlement of $5 million over the original estimate of $4 million)
would be included in the cumulative deficiencies in each of the years 1987-1996
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
1987-1997 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
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<PAGE> 22
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. Likewise, decreases in
loss experience result in a decrease in reserves, and an offsetting decrease in
amounts recoverable from insureds. These amounts recoverable mitigate the impact
of the cumulative deficiencies or redundancies 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 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: $31 million, $14 million and $(7) million for the
years 1997, 1996 and 1995 respectively.
20
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1987(a) 1988(a) 1989(a) 1990(a) 1991(a) 1992(a)
------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Reserves for Loss and Loss Adjustment
Expense Originally Estimated: $6,569 $6,954 $7,729 $8,022 $8,360 $8,955
Cumulative amounts paid as of
One year later 2,061 1,828 2,091 2,135 1,869 2,005
Two years later 3,132 3,101 3,488 3,422 3,161 3,199
Three years later 4,003 4,063 4,415 4,351 4,041 4,063
Four years later 4,666 4,710 5,095 4,996 4,706 4,662
Five years later 5,141 5,227 5,597 5,492 5,182 5,465
Six years later 5,550 5,620 5,995 5,887 5,878
Seven years later 5,870 5,952 6,333 6,466
Eight years later 6,152 6,251 6,851
Nine years later 6,421 6,725
Ten years later 6,875
Reserves re-estimated as of
One year later 6,732 7,080 7,832 8,128 8,362 9,058
Two years later 6,890 7,243 7,929 8,197 8,637 9,139
Three years later 7,057 7,405 8,077 8,592 8,906 9,183
Four years later 7,246 7,585 8,560 9,003 9,026 9,189
Five years later 7,466 8,098 8,991 9,159 9,123 9,405
Six years later 7,988 8,531 9,189 9,295 9,367
Seven years later 8,411 8,715 9,328 9,551
Eight years later 8,567 8,871 9,592
Nine years later 8,732 9,163
Ten years later 9,058
Cumulative deficiency (redundancy) 2,489 2,209 1,863 1,529 1,007 450
Gross liability -- end of year
Reinsurance recoverables
Net liability -- end of year
Gross reestimated liability -- latest
Reestimated reinsurance
recoverables -- latest
Net reestimated liability -- latest
Gross cumulative deficiency (redundancy)
1993(a) 1994(a) 1995(a) 1996(b) 1997(b)
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Reserves for Loss and Loss Adjustment
Expense Originally Estimated: $9,319 $9,712 $10,090 $21,816 $21,406
Cumulative amounts paid as of
One year later 1,706 1,595 1,521 3,704
Two years later 2,843 2,631 2,809
Three years later 3,610 3,798
Four years later 4,563
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Reserves re-estimated as of
One year later 9,270 9,486 9,848 21,345
Two years later 9,234 9,310 9,785
Three years later 9,108 9,395
Four years later 9,271
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative deficiency (redundancy) (48) (317) (305) (471)
Gross liability -- end of year $14,638 $15,013 $15,213 $30,969 $30,138
Reinsurance recoverables 5,319 5,301 5,123 9,153 8,732
------- ------- ------- ------- -------
Net liability -- end of year $9,319 $9,712 $10,090 $21,816 $21,406
====== ====== ======= ======= =======
Gross reestimated liability -- latest $14,684 $15,061 $14,891 $30,504
Reestimated reinsurance
recoverables -- latest 5,413 5,666 5,106 9,159
----- ----- ----- -----
Net reestimated liability -- latest $9,271 $9,395 $9,785 $21,345
====== ====== ====== =======
Gross cumulative deficiency $46 $48 $(322) $(465)
(redundancy) === === ===== =====
</TABLE>
(a) Reflects reserves of Travelers P&C, excluding Aetna P&C reserves which
were acquired on April 2, 1996. Accordingly, the reserve development
(net reserves for loss and loss adjustment expense recorded at the end
of the year, as originally estimated, less net reserves reestimated as
of subsequent years) relates only to losses recorded by Travelers P&C
and does not include reserve development recorded by Aetna P&C.
(b) Includes Aetna P&C gross reserves of $16,775 million and net reserves
of $11,752 million acquired on April 2, 1996 and subsequent development
recorded by Aetna P&C.
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<PAGE> 24
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 or expenses are not
reflected in the statutory combined ratio. The profitability of property and
casualty insurance companies depends on income from underwriting, investment and
service operations. Lines of business where claims are paid out over a longer
period of time, such as workers' compensation ("long-tail"), 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 ("short-tail"). 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 generally accepted accounting principles ("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,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Commercial Lines:
Loss and LAE ratio 78.4% 96.2% 80.6%
Underwriting expense ratio 30.6 32.7 24.4
Combined ratio before
policyholder dividends 109.0 128.9 (1) 105.0
Combined ratio 111.0 129.6 106.3
Personal Lines:
Loss and LAE ratio 63.5 68.7 74.5
Underwriting expense ratio 28.7 28.9 29.9
Combined ratio 92.2 97.6 (2) 104.4
Total:
Loss and LAE ratio 72.4 85.5 78.2
Underwriting expense ratio 29.9 31.3 26.4
Combined ratio before
policyholder dividends 102.3 116.8 104.6
Combined ratio 103.5 117.2 105.4
</TABLE>
(See footnotes on following page.)
22
<PAGE> 25
(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). Excluding such changes,
the combined ratio before policyholder dividends was 110.0%.
(2) 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.
ENVIRONMENTAL CLAIMS
As a result of various state and federal regulatory efforts aimed at
environmental remediation, the insurance industry has been, and continues to be,
involved in extensive litigation involving policy coverage and liability issues.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") was first enacted in 1980, and significantly expanded in 1984. CERCLA
enables private parties and the federal and state governments to take action
with respect to releases and threatened releases of hazardous substances and to
recover their response costs from certain liable parties or such parties may be
ordered to undertake remedial action directly. Liability under CERCLA may be
joint and several with other responsible persons. In addition to the regulatory
pressures, the Company believes that certain court decisions have expanded
insurance coverage beyond the original intent of the insurers and insureds,
frequently involving policies that were issued prior to the mid-1970s. The
results of court decisions affecting the industry's coverage positions continue
to be inconsistent. Accordingly, the ultimate responsibility and liability for
environmental remediation costs remain uncertain.
The Company continues to receive claims alleging liability exposures
arising out of insureds' alleged disposition of toxic substances. These claims
when submitted rarely indicate the monetary amount being sought by the claimant
from the insured and the Company does not keep track of the monetary amount
being sought in those few claims which indicated such a monetary amount.
The Company's reserves for environmental claims are not established on
a claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. Environmental loss and loss expense
reserves of the Company at December 31, 1997 were $1.119 billion, net of
reinsurance of $74 million. Approximately 17% of such loss and loss expense
reserves (i.e., approximately $192 million) were case reserves for resolved
claims. The balance, approximately 83% of the net aggregate
23
<PAGE> 26
reserve (i.e., approximately $927 million), is carried in a bulk reserve and
includes incurred but not reported environmental claims for which the Company
has not received any specific claims.
The Company's reserving methodology is preferable to one based on
"identified claims" since the resolution of environmental exposures by the
Company generally occurs on an insured-by-insured basis as opposed to a
claim-by-claim basis. The nature of the resolution often is through coverage
litigation, which often pertains to more than one claim, as well as through a
settlement with an insured. Generally, the settlement between the Company and
the insured extinguishes any obligation the Company may have under any policy
issued to the insured for past, present and future environmental liabilities.
This form of settlement is commonly referred to as a "buy-back" of policies for
future environmental liability. Additional provisions of these agreements
include the appropriate indemnities and hold harmless provisions to protect the
Company. The Company's general purpose in executing such agreements is to reduce
its potential environmental exposure and eliminate both the risks presented by
coverage litigation with the insured and the cost of such litigation.
The reserving methodology includes an analysis by the Company of the
exposure presented by each insured and the anticipated cost of resolution, if
any, for each insured. This analysis is completed by the Company on a quarterly
basis. In the course of its analysis, an assessment of the probable liability,
available coverage, judicial interpretations and historical value of similar
exposures is considered by the Company. In addition, due consideration is given
to the many variables presented, such as the nature of the alleged activities of
the insured at each site; the allegations of environmental damage at each site;
the number of sites; the total number of potentially responsible parties at each
site; the nature of environmental harm and the corresponding remedy at each
site; the nature of government enforcement activities at each site; the
ownership and general use of each site; the overall nature of the insurance
relationship between the Company and the insured; the identification of other
insurers; the potential coverage available, if any, including the number of
years of coverage, if any; and the applicable law in each jurisdiction. Analysis
of these and other factors, including the potential for future claims, results
in the establishment of the bulk reserve.
The duration of the Company's investigation and review of such claims
and the extent of time necessary to determine an appropriate estimate, if any,
of the value of the claim to the Company, varies significantly and is dependent
upon a number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and the
Company to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, the Company cannot provide a meaningful average of the
duration of an environmental claim. However, based upon the Company's experience
in resolving such claims, the duration may vary from months to several years.
The property and casualty insurance industry does not have a standard
method of calculating claim activity for environmental losses. Generally for
environmental (Superfund remediation type) claims, the Company establishes a
claim file for each insured on a per site, per
24
<PAGE> 27
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. The Company adheres to this method of calculating claim activity
on all environmental-related claims, whether such claims are tendered on
primary, excess or umbrella policies. Since the implementation of the claim
system conversion in 1997, the Company's method of establishing claims in the
foregoing manner now applies to claims tendered under the Travelers P&C and
Aetna P&C policies.
In addition, the Company establishes claim files for bodily injury or
property damage claims brought by individual claimants who allege injury or
damage as a result of the discharge of wastes or pollutants. As it pertains to
such claims tendered on policies issued by Travelers P&C, the Company
establishes a claim file on a per claim, per insured, per site basis. For
example, if 100 claimants file a lawsuit against five policyholders alleging
bodily injury and property damage as a result of the discharge of wastes or
pollutants, 1,000 claims (500 for the bodily injury claims and 500 for the
property damage claims) would be established.
As it pertains to the bodily injury and property damage claims tendered
on Aetna P&C policies, the Company's claim system conversion has not been
completed to permit the establishment of such claims in a manner consistent with
establishment of Travelers P&C bodily injury and property damage claims. As it
pertains to such claims tendered on policies issued by Aetna P&C, the Company
currently establishes a claim file on a per insured basis, per site basis. For
example, if 100 claimants file a lawsuit against five policyholders alleging
bodily injury and property damage as a result of the discharge of wastes or
pollutants, five claims would be established for all the bodily injury claims
and five claims would be established for all of the property damage claims.
As of December 31, 1997, calculated as described above, the Company had
approximately 40,300 pending environmental-related claims tendered by 1,400
active policyholders. Of the total pending environmental-related claims, 29,800
claims relate to Travelers P&C policies tendered by 569 policyholders and 10,500
claims relate to Aetna P&C policies tendered by 961 policyholders. Approximately
130 of these Aetna P&C policyholders are also included in the 569 Travelers P&C
policyholders' count. 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.
To date, the Company generally has been successful in resolving its
coverage litigation and continues to reduce its potential exposure through
favorable settlements with certain insureds. These settlement agreements with
certain insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds. Based upon the
Company's reserving methodology and the experience of its historical resolution
of environmental exposures, it believes that the environmental reserve position
is appropriate. As of December 31, 1997, the Company, for approximately $1.16
billion, has resolved the environmental liabilities presented by 3,931 of the
5,331 policyholders who
25
<PAGE> 28
have tendered environmental claims to the Company. This resolution comprises 74%
of the policyholders who have tendered such claims. The Company has reserves of
approximately $800 million included in its bulk reserve relating to the
remaining 1,400 policyholders (26% of the total) with unresolved environmental
claims, as well as for any other policyholder which may tender an environmental
claim in the future.
ASBESTOS CLAIMS
In the area of asbestos claims, the Company believes that the property
and casualty insurance industry has suffered from judicial interpretations that
have attempted to maximize insurance availability from both a coverage and
liability standpoint far beyond the intent of the contracting parties. These
policies generally were issued prior to the 1980s. The Company continues to
receive asbestos claims alleging insureds' liability from claimants'
asbestos-related injuries. These claims, when submitted, rarely indicate the
monetary amount being sought by the claimant from the insured and the Company
does not keep track of the monetary amount being sought in those few claims
which indicated such a monetary amount. Originally the cases involved mainly
plant workers and traditional asbestos manufacturers and distributors. However,
in the mid-1980s, a new group of plaintiffs, whose exposure to asbestos was less
direct and whose injuries were often speculative, began to file lawsuits in
increasing numbers against the traditional defendants as well as peripheral
defendants who had produced products that may have contained small amounts of
some form of encapsulated asbestos. These claims continue to arise and on an
individual basis generally involve smaller companies with smaller limits of
potential coverage. Also, there has emerged a group of non-product claims by
plaintiffs, mostly independent labor union workers, mainly against companies,
alleging exposure to asbestos while working at these companies' premises. The
Company continues to receive this type of asbestos claim.
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, 1997, asbestos claims reserves of the Company were
$1.114 billion, net of reinsurance of $249 million. Approximately 24% of the net
aggregate reserve (i.e., approximately $266 million) is for pending asbestos
claims. The balance, approximately 76% (i.e., approximately $848 million), of
the net asbestos reserve represents incurred but not reported losses for which
the Company has not received any specific claims.
26
<PAGE> 29
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 and past
ceded experience. 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, 1997 are the Company's best
estimate of ultimate claims and claim adjustment expenses based upon known facts
and current law. However, the conditions surrounding the final resolution of
these claims continue to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations and changes in 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
27
<PAGE> 30
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, an 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 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.
Prior to the Acquisition, 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 $360 million, net
of reinsurance ($234 million after tax).
At December 31, 1997, CIOTA claims reserves of the Company were $1.088
billion, net of reinsurance of $432 million. Approximately 18% of the net
aggregate reserve (i.e., approximately $195 million) is for pending CIOTA
claims. The balance, approximately 82% (i.e., approximately $893 million), of
the net CIOTA reserve represents incurred but not reported losses for which the
Company has not received any specific claims.
INSURANCE POOLS
28
<PAGE> 31
Most of the Company's insurance subsidiaries are members of one of two
separate intercompany property and casualty reinsurance pooling arrangements:
the Travelers Property Casualty 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. Travelers
Casualty and Surety Company of America does not participate in either pool and
is dedicated to the Bond Specialty business.
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.
The following table summarizes the current claims-paying and financial
strength ratings of the Company's property-casualty insurance pools and
Travelers Casualty and Surety Company of America ("Travelers 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 Property Casualty pool (1) A (3rd of 15) AA- (4th of 18) Aa3 (4th of 19) A+ (5th of 18)
Gulf pool (2) A+ (2nd of 15) -- -- AA (3rd of 18)
Travelers C&S of America A+ (2nd of 15) AA- (4th of 18) Aa3 (4th of 19) A+ (5th of 18)
</TABLE>
- ---------------------
(1) The Travelers Property Casualty pool consists of The Travelers
Indemnity Company, Travelers Casualty and Surety Company, The Phoenix
Insurance Company, The Standard Fire Insurance Company, Travelers
Casualty and Surety Company of Illinois, Farmington Casualty Company,
The Travelers Indemnity Company of Connecticut, The Automobile
Insurance Company of Hartford, Connecticut, The Charter Oak Fire
Insurance Company, The Travelers Indemnity Company of America, The
Travelers Indemnity Company of Missouri, Travelers Casualty Company of
Connecticut, Travelers Commercial Insurance Company, The Travelers
Indemnity Company of Illinois, Travelers Property Casualty Insurance
Company, TravCo Insurance Company, The Travelers Home and Marine
Insurance Company, Travelers Personal Security Insurance
(footnotes continued on following page)
29
<PAGE> 32
Company, Travelers Property Casualty Insurance Company of Illinois and
Travelers Excess and Surplus Lines Company.
(2) The Gulf pool consists of Gulf Insurance Company, Gulf Insurance
Company U.K. Limited, 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, mortgage
loans, real estate and certain other investments.
The Company's investment policies are determined by its Board of
Directors and are reviewed on a regular basis. At December 31, 1997, the
carrying value of the Company's investment portfolio was $31.0 billion, of which
92.3% was invested in fixed maturity investments and short-term investments,
2.5% in mortgage loans and real estate held for sale, 3.3% in common stocks and
other equity securities and 1.9% in other investments. The average duration of
the fixed maturity portfolio, including short-term investments, was 5.2 years at
such date. Non-investment grade securities totaled $832 million, representing
approximately 3.1% of the Company's fixed maturity investment portfolio as of
December 31, 1997.
For additional information regarding these investment portfolios, see
Note 4 of Notes to Consolidated Financial Statements and the discussion of
Investment Portfolio in Item 7 of this Form 10-K.
The table on the next page 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,
1997, 1996 and 1995. 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.
30
<PAGE> 33
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Average investments $30,197.7 $28,018.7 $24,824.9
Net investment income $2,050.8 $1,898.6 $1,611.8
Average yield (1) 7.4% 7.2% 6.4%
Average tax equivalent yield (1) 8.0% 7.7% 6.9%
Average tax equivalent yield excluding
real estate (1) 7.7% 7.6% 6.8%
</TABLE>
- ---------------------
(1) Excluding realized and unrealized capital gains and losses.
MORTGAGE LOANS AND REAL ESTATE HELD FOR SALE
At December 31, 1997, the mortgage loan and real estate held for sale
portfolios of the Company consisted of approximately $691 million and $95
million, respectively. The 1997 decrease in mortgage loans and real estate held
for sale is primarily attributable to asset sales and payoff of mortgage loans.
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.
31
<PAGE> 34
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, 1997, 1996 and 1995. For informational purposes
only, the table includes the investments of Aetna P&C for all periods presented.
<TABLE>
<CAPTION>
MORTGAGE LOANS REAL ESTATE
------------------------------------ ------------------------------------
(Dollars in millions)
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Property Type:
Commercial:
Office $368.5 $503.4 $591.0 $25.9 $69.2 $139.7
Apartment 112.7 181.6 243.3 5.7 7.7 4.8
Hotel 6.7 26.6 74.4 50.4 35.8 56.8
Retail 140.7 210.8 285.4 12.3 19.6 20.2
Industrial 33.1 47.8 51.9 - 21.9 22.6
Other 20.2 26.0 52.1 0.8 0.6 41.5
------ ------ ------- ------ ------ -------
Total commercial 681.9 996.2 1,298.1 95.1 154.8 285.3
Agriculture 8.8 9.4 20.8 - 1.9 2.2
Less: valuation
reserve (1) - - (44.4) - - -
------ ------ ------- ------ ------ -------
Total $690.7 $1,005.6 $1,274.5 $95.1 $156.7 $287.5
====== ======== ======== ====== ====== =======
</TABLE>
- ---------------------
(1) In 1996, decrease 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 $297 million in 1997 and $163 million in 1996. 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 1,140 property-casualty organizations in the United States,
comprised of approximately 2,400 property-casualty companies. Of those
organizations, the top
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<PAGE> 35
200 account for over 90% of the consolidated industry's total net written
premiums. In addition, an increasing amount of commercial risks are covered 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 price and breadth of products and services. 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 25% of the market in 1997.
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 claim and risk management service. The Company
utilizes its specialized underwriters, engineers, auditors and claim handlers,
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 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
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<PAGE> 36
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, a nationwide network of local underwriting
and industry experts 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 Specialty
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
knowledge of the local marketplace and their relationship with local independent
agents. 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 price and the level of service, including claims handling, as
well as the level of automation and the development of long-term relationships
with 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 has broadened its distribution
of Personal Lines products to include marketing through the PFS sales force,
marketing to sponsoring organizations including employee and affinity groups,
and establishment of joint marketing arrangements with other insurers. The
Company believes that its continued focus on expense management practices
enables it to price its products competitively in all of its distribution
channels.
REGULATION
STATE REGULATION
The Company's insurance subsidiaries are subject to regulation 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 authority to a
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<PAGE> 37
department of insurance in 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 the use of credit information in underwriting as well
as other 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 The Travelers Indemnity Company, Travelers 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 $805
million in 1998 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. Combined earned premiums related to such pools and assigned risks
for the Company were $226 million, $379 million and $315 million in 1997, 1996
and 1995, respectively. The related combined underwriting losses for the Company
were $16 million, $39 million and $152 million in 1997, 1996 and 1995,
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.
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
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<PAGE> 39
companies domiciled in the States of California, Connecticut, Florida, 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.
A subsidiary of the Company is domiciled in the United Kingdom.
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 domiciled in,
or 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, 1997.
For 1997, Travelers Indemnity was outside the usual range for the
liabilities to liquid assets ratio. Travelers Indemnity is the lead company for
the Travelers Property Casualty pool and is also the parent of 19 insurance
companies and several other non-insurance entities. As a result, this ratio is
distorted because all of the liabilities are included in the calculation while
Travelers Indemnity's significant investment in affiliates, which increased in
1997, is excluded from liquid assets. For 1996, both the two-year overall
operating ratio and the two-year reserve development to surplus ratios were
outside the usual range for Travelers 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 Travelers C&S of America, both as
a result of a 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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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)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Net written premiums $7,832 $7,343 $7,701
Capital and surplus 6,188 5,423 5,231
Ratio of net written premiums to capital
and surplus 1.27x 1.35x 1.47x
</TABLE>
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 the RBC
amount. Based on the foregoing formula, at December 31, 1997, the RBC ratios of
the
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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, 1997, 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; proposals regarding natural disaster protection, tort
reform (including limits to product liability lawsuits) and the use of credit
history; and the enforcement of territorial underwriting in Personal Lines. 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.
President Clinton's recent budget proposal (the "Budget Proposal")
contains a number of tax provisions that could adversely impact the Company,
including a provision relating to tax-exempt interest obligations. The Budget
Proposal, which is in its early stages of consideration, has not yet been
introduced as part of any legislation in Congress but has engendered
considerable opposition from the public and members of Congress.
It is not possible to predict whether the Budget Proposal or any of the
proposed legislation discussed above 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
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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.
At December 31, 1997, the Company had approximately 19,500 full-time
and 630 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 4, 1998.
<TABLE>
<CAPTION>
Officer
Name Age Positions Since
- ---- --- --------- -----
<S> <C> <C> <C>
Robert I. Lipp 59 Chairman of the Board, President and Chief 1996
Executive Officer
Jay S. Fishman 45 Vice Chairman; President and Chief 1996
Executive Officer - Commercial Lines
Stanton F. Long 56 Vice Chairman 1997
Jon C. Madonna 54 Vice Chairman 1997
Charles J. Clarke 62 Vice Chairman; Chairman - Commercial 1996
Lines
Joseph P. Kiernan 57 Chairman and Chief Executive Officer - 1996
Bond Specialty
Robert P. Restrepo, Jr 47 Chairman and Chief Executive Officer - 1996
Personal Lines
</TABLE>
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<TABLE>
<CAPTION>
Officer
Name Age Positions Since
- ---- --- --------- -----
<S> <C> <C> <C>
Ronald E. Foley 52 Chairman and Chief Executive Officer - 1996
Risk Management
William P. Hannon 49 Chief Financial Officer 1996
James M. Michener 45 Senior Vice President, General Counsel and 1996
Secretary
Thomas P. Shugrue 40 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 was named Chief Executive Officer of Commercial Lines in
January 1998, and has been President of Commercial Lines since October 1996.
From October 1996 through January 1998, he also served as Chief Operating
Officer of Commercial Lines. Mr. Fishman has been Vice Chairman of the Company
since January 1996, and from January 1996 through January 1998 he was the Chief
Administrative Officer of the Company. Mr. Fishman has also served as Vice
Chairman of The Travelers Insurance Group Inc. since September 1995, and has
been Chief Financial Officer and Chief Administrative Officer of that Company
since December 1993 and June 1996, respectively. Mr. Fishman has also served as
Senior Vice President of Travelers Group since October 1991, and as Treasurer of
Travelers Group from 1991 to December 1993. From 1989 to 1991, he held various
other positions with Travelers Group and its subsidiaries.
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.
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.
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<PAGE> 45
Mr. Clarke was named Vice Chairman of the Company in January 1998. He
has been Chairman of Commercial Lines since 1990, and served as Chief Executive
Officer of Commercial Lines from January 1996 through January 1998. 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
Specialty 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. Michener has been Senior Vice President, General Counsel and
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.
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
Accident year........................ The annual accounting period in which
loss events occurred, regardless of when
the losses are actually reported, booked
or paid.
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<PAGE> 46
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.
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 or able
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.
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<PAGE> 47
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."
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."
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<PAGE> 48
Clash agreement...................... 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 agreement 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 property and
casualty 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.
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-casualty
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."
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<PAGE> 49
Extra contractual obligations........ Amounts 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.
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.
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<PAGE> 50
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 expenses
("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 earned premiums. For GAAP it is the
ratio of incurred losses and loss
adjustment expenses reduced by an
allocation of fee income to net earned
premiums.
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.
Losses incurred...................... The total losses sustained by an
insurance company under a policy or
policies, whether paid or unpaid.
Incurred losses include 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.
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Personal lines....................... Types of property and casualty
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-upon percentages.
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."
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-upon 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 total
accounts or policies available for
renewal.
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.
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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.
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.
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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.
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
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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 written
premiums. For GAAP it is the ratio of
underwriting expenses incurred reduced
by an allocation of fee income to net
written premiums.
Underwriting gain 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.
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 248 field offices totaling approximately 5,890,000 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 CityPlace, located in Hartford, Connecticut, under an eight-year sublease
that expires in 2004.
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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.
ITEM 3. LEGAL PROCEEDINGS.
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which the Company or
its subsidiaries is a party or to which any of their property is subject.
A number of cases have been filed against large segments of the
property-casualty insurance industry, including certain industry organizations,
relating to service fee charges and premium calculations on certain workers'
compensation insurance. A subsidiary of the Company is one of ten 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. Suing
on behalf of all employers insured through the South Carolina workers'
compensation assigned risk pool, the plaintiff alleges that the pool's
administrator and servicing carriers conspired to set excessive fees in
violation of the state's unfair trade practices law. The plaintiff seeks
declaratory and injunctive relief, disgorgement of unspecified excess profits,
and additional statutory penalties. In August 1997, all pending motions to
dismiss were denied in this case.
Beginning in January 1997, nine purported class actions were commenced
in various courts against certain subsidiaries of the Company, dozens of other
insurers, and the NCCI. The allegations in these nine lawsuits are substantially
the same. The plaintiffs generally allege that the defendants conspired to
collect excessive or improper premiums on certain loss-sensitive workers'
compensation insurance policies, in violation of state insurance laws, antitrust
laws, and state unfair trade practices laws. Plaintiffs seek unspecified
monetary damages. In January 1997, two of these purported class actions, both
entitled El Chico Restaurants, Inc. v. The Aetna Casualty and Surety Company,
et. al., were filed in the Chancery Court, Davidson County, Tennessee, and
Superior Court, Richmond County, Georgia. In February 1997, the Tennessee
action was removed to the U.S. District Court for the Middle District of
Tennessee and the Georgia action was removed to the U.S. District Court for
the Southern District of Georgia. In October 1997, the Georgia action was
remanded to the Superior Court, Richmond County, Georgia. In December 1997, the
Tennessee action was remanded to the Chancery Court, Davidson County,
Tennessee. In July 1997, Bristol Hotel Management Corp. et al. v. The Aetna
Casualty and Surety Company, et al., was filed in the U.S. District Court for
the Southern District of
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Florida. In December 1997, three actions, entitled Foodarama Supermarkets,
Inc., et al. v. The Aetna Casualty and Surety Company, et al.; Bristol Hotel
Management Corp. et al. v. The Aetna Casualty and Surety Company, et al.,
and Hill-Behan Lumber Co. v. Hartford Insurance Co., et al. were
commenced, respectively, in the Superior Court of New Jersey (Law Division),
Morris County, New Jersey; the Circuit Court of Palm Beach County, Florida and
the Circuit Court of Madison County, Illinois. In February 1998, three
additional lawsuits were commenced: CR/PL Management Co., et al. v. Allianz
Insurance Company Group, et al., in the Circuit Court of Cook County, Illinois,
Foodarama Supermarkets, Inc., et al. v. The Aetna Casualty and Surety Company,
et al. in the Court of Common Pleas, Philadelphia, Pennsylvania, and Hill-Behan
Lumber Co. v. Hartford Insurance Co., et al., in the Circuit Court of the City
of St. Louis, Missouri.
The Company intends to contest vigorously all of the above-described
cases.
In January 1997, a purported class of Texas workers' compensation
insureds filed a petition to intervene in a lawsuit pending in District Court,
Travis County, Texas, entitled Travelers Indemnity Company of Connecticut v.
Texas Workers Compensation Insurance Facility. In its most recent pleadings, the
purported class challenges certain premium calculations on certain workers'
compensation policies from 1992 through 1994. In July 1997, the Texas Department
of Insurance issued a rule addressing the same premium calculation issues raised
by the purported class. The Company joined with several other insurers in an
appeal proceeding, entitled Highlands Insurance Company v. Texas Department of
Insurance, which was filed in July 1997 in the District Court of Travis County,
Texas, challenging the rule on the ground that it exceeds the Department's
regulatory authority. In January 1998, the Company, the Department and the
purported class reached an agreement in principle to settle all claims among
themselves, subject to court approval. If approved, the settlement will not have
a material effect on the Company's results of operations, financial condition or
liquidity.
In the ordinary course of business, certain of the Company's
subsidiaries receive claims asserting alleged injuries and damages from asbestos
and other hazardous waste and toxic substances. The conditions surrounding the
final resolution of these claims continue to change. Currently, it is not
possible to predict legal and legislative changes 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
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<PAGE> 57
excess of current reserves. The magnitude of 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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 1998
--------------------------------- ------------------------------------------- ----------
2ND Q* 3RD Q 4TH Q 1ST Q 2ND Q 3RD Q 4TH Q 1ST Q**
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Class A Common
Stock Price
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $28.500 $29.375 $36.000 $39.625 $40.375 $43.563 $45.000 $46.063
Low $26.000 $23.125 $28.000 $31.750 $31.375 $37.875 $34.875 $39.125
Dividends per
Share of Class A
Common Stock $.075 $.075 $.075 $.075 $.075 $.075 $.10
</TABLE>
- -----------------------
* From April 23, 1996
** Through March 4, 1998
At March 4, 1998, the Company had approximately 630 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
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others for the benefit of individual owners who may vote the shares. At March 4,
1998, 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 1997 Annual Report to Stockholders (the "1997 Annual Report"),
included as part of Exhibit 13 to this Form 10-K and incorporated herein by
reference.
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 1997 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 18 of the 1997 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 1997 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.
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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 22, 1998, 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.
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.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated Financial
Statements and Schedules on page F-1 hereof. Also filed as a
part of this report are the combined financial statements of
Aetna P&C as of December 31, 1995 and 1994 and for the years
ended December 31, 1995, December 31, 1994 and December 31,
1993, together with the notes thereto and the related report
of Independent Accountants. See Exhibit 99.01.
(2) Financial Statement Schedules. See Index to Consolidated
Financial Statements and Schedules on page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On October 14, 1997, the Company filed a Current Report on
Form 8-K dated October 13, 1997, reporting under Item 5
thereof the results of its operations for the three and nine
months ended September 30, 1997, and certain other selected
financial data.
No other reports on Form 8-K were filed during the fourth
quarter of 1997.
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<PAGE> 61
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.01 Restated Certificate of Incorporation of Travelers Property
Casualty Corp. (the "Company"), Certificate of Designations,
Powers, Preferences and Rights of 7.5% Redeemable Preferred
Stock, Series Z, of the Company, Certificate of Amendment to
the Restated Certificate of Incorporation, filed March 7,
1997, and Certificate of Amendment to the Restated Certificate
of Incorporation, filed April 23, 1997, incorporated by
reference to Exhibit 3.01 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1997 (File
No.1-14328) (the "Company's 3/31/97 10-Q").
3.02 Restated By-Laws of the Company, effective April 23, 1997,
incorporated by reference to Exhibit 3.02 to the Company's
3/31/97 10-Q.
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.
4.02.1 Shareholders Agreement, dated as of April 2, 1996, by and
among the Company, The Travelers Insurance Group Inc., Aetna
Life and Casualty Company (now known as Aetna Services, Inc.),
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.
4.02.2+ Amendment to Shareholders Agreement, dated June 20, 1997, by
and among the Company, Aetna Services, Inc., J.P. Morgan
Capital Corporation, The Trident Partnership L.P. and Fund
American Enterprises Holdings, Inc.
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<PAGE> 62
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.01* Travelers Property Casualty Corp. Capital Accumulation Plan
(as amended through July 23, 1997), incorporated by reference
to Exhibit 10.01 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1997 (File No.
1-14328).
10.02* Travelers Property Casualty Corp. 1996 Executive Option Plan
(as amended through March 7, 1997), incorporated by reference
to Exhibit 10.03 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (File No.1-14328)
(the "Company's 1996 10-K").
10.03* Travelers Property Casualty Corp. Executive Performance
Compensation Plan (as amended through March 7, 1997),
incorporated by reference to Exhibit 10.04 to the Company's
1996 10-K.
10.04* 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 Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1996 (File No.1-14328).
10.05* Travelers Group Capital Accumulation Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.02 to
the Quarterly Report on Form 10-Q of Travelers Group Inc. for
the fiscal quarter ended September 30, 1997 (File No. 1-9924)
(the "TRV 9/30/97 10-Q").
10.06.1* 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) (the "TRV 1996 10-K").
10.06.2* Amendment No. 14 to the Travelers Group Stock Option Plan,
incorporated by reference to Exhibit 10.01 to the Quarterly
Report on Form 10-Q of Travelers Group Inc. for the fiscal
quarter ended September 30, 1996 (File No. 1-9924).
10.06.3* Amendment No. 15 to the Travelers Group Stock Option Plan,
incorporated by reference to Exhibit 10.04 to the TRV 9/30/97
10-Q.
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<PAGE> 63
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.07* Travelers Group 1996 Stock Incentive Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.03 to
the TRV 9/30/97 10-Q.
10.08* 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 TRV 1996 10-K.
10.09* 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).
10.10 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.
10.11 Lease for office space at CityPlace, 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.
10.12 Lease for office space in Hartford, Connecticut, dated as of
April 2, 1996, by and between The Travelers Insurance Company
and The Travelers Indemnity Company, incorporated by reference
to Exhibit 10.14 to the Company's 1996 10-K.
10.13* Letter Agreement, dated November 17, 1996, between the Company
and Stanton F. Long, incorporated by reference to Exhibit
10.15 to the Company's 1996 10-K.
10.14*+ The Travelers Insurance Deferred Compensation Plan (formerly
The Travelers Corporation TESIP Restoration and Non-Qualified
Savings Plan) (as amended and restated through January 1,
1997).
10.15.1 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.
10.15.2+ License Agreement Amendment, dated April 2, 1996, by and
between Aetna Life and Casualty Company and The Aetna Casualty
and Surety Company and The Standard Fire Insurance Company.
61
<PAGE> 64
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
11.01+ Computation of Earnings Per Share.
12.01+ Computation of Ratio of Earnings to Fixed Charges.
13.01+ Pages 17 through 55 of the 1997 Annual Report to Stockholders
of the Company (pagination of exhibit does not correspond to
pagination in the 1997 Annual Report to Stockholders).
21.01+ Subsidiaries of the Registrant.
23.01+ Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
23.02+ Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
24.01+ Powers of Attorney.
27.01+ Financial Data Schedule.
99.01 Combined Financial Statements of The Aetna Casualty and Surety
Company and The Standard Fire Insurance Company as of December
31, 1995 and 1994 and for the years ended December 31, 1995,
December 31, 1994 and December 31, 1993, together with the
notes thereto and the related reports of Independent
Accountants, incorporated by reference to Exhibit 99.01 to the
Company's 1996 10-K.
The total amount of securities authorized pursuant to any instrument
defining rights of holders of long-term debt of the Company does not
exceed 10% of the total assets of the Company and its consolidated
subsidiaries. The Company will furnish copies of any such instrument to
the Commission upon request.
The financial statements required by Form 11-K for 1997 for the
Travelers Group 401(k) Savings Plan will be filed as an exhibit by
amendment to this Form 10-K pursuant to Rule 15d-21 of the Securities
Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished at a
cost of $.25 per page (although no charge will be made for the 1997
Annual Report on Form 10-K) to security holders who make written
request therefor to Corporate Communications, Travelers Property
Casualty Corp., One Tower Square, Hartford, Connecticut 06183.
- -------------------
* Denotes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
+ Filed herewith.
62
<PAGE> 65
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 23rd day of
March, 1998.
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 23rd day of March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Robert I. Lipp Chairman of the Board, President and Chief
- ------------------------------------------------- Executive Officer (Principal Executive Officer)
Robert I. Lipp 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 Accounting Officer)
Thomas P. Shugrue
* Director
- -------------------------------------------------
Kenneth J. Bialkin
* Director
- -------------------------------------------------
John J. Byrne
* Director
- -------------------------------------------------
James Dimon
</TABLE>
63
<PAGE> 66
<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
</TABLE>
*By:
/s/ Jay S. Fishman
--------------------------------------------
Jay S. Fishman
Attorney-in-fact
64
<PAGE> 67
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES *
<TABLE>
<CAPTION>
Incorporated
by reference from
the Company's 1997
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, 1997, 1996 and 1995 32
Consolidated Balance Sheet at
December 31, 1997 and 1996 33
Consolidated Statement of Changes in Stockholders'
Equity for the years ended December 31, 1997, 1996 and 1995 34
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 35
Notes to Consolidated Financial Statements 36-54
Schedules:
Schedule II - Condensed Financial Information of
Registrant (Parent Company only) F-3 - F-6
Schedule III - Supplementary Insurance Information F-7 - F-9
Schedule VI - Supplementary Information Concerning
Property-Casualty Insurance Operations F-10
</TABLE>
* Schedules not listed are omitted as not applicable or not required by
Regulation S-X.
F-1
<PAGE> 68
Independent Auditors' Report
The Board of Directors and Stockholders
Travelers Property Casualty Corp.:
Under date of January 26, 1998, except for note 1, Accounting Policies -
Earnings per Share, as to which the date is February 3, 1998, we reported on the
consolidated balance sheets of Travelers Property Casualty Corp. and
Subsidiaries as of December 31, 1997 and 1996, 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, 1997, as contained in
the 1997 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, 1997. 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 26, 1998
F-2
<PAGE> 69
SCHEDULE II
Travelers Property Casualty Corp.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the period
For the year January 16, 1996
ended December 31, to December 31,
1997 1996
---- ----
<S> <C> <C>
REVENUES
Net investment income and other $ 9 $ 2
EXPENSES
Interest 165 120
Other 7 36
-------- ---------
172 156
-------- ---------
Loss before federal income taxes and equity in
net income of subsidiaries (163) (154)
Federal income tax benefit 59 54
-------- ---------
Loss before equity in net income of subsidiaries (104) (100)
Equity in net income of subsidiaries 1,340 491
-------- ---------
Net income $ 1,236 $ 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-3
<PAGE> 70
SCHEDULE II
Travelers Property Casualty Corp.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions)
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash $ - $ 1
Investment in subsidiaries at equity 10,122 8,686
Federal income taxes receivable - 32
Deferred federal income taxes 14 12
Other assets 19 16
---------- ----------
Total assets $ 10,155 $ 8,747
========== ==========
LIABILITIES
Commercial paper $ 108 $ 25
Long-term debt 2,177 2,177
Other liabilities 93 65
---------- ----------
Total liabilities 2,378 2,267
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock:
Class A, $.01 par value, 700 million shares authorized;
(issued shares, 72,393,407 and 71,979,829) 1 1
Class B, $.01 par value, 700 million shares authorized;
328,020,170 shares issued and outstanding 3 3
Additional paid-in capital 5,473 5,455
Retained earnings 1,866 749
Treasury stock, at cost (shares, 7,314,688 and 406,860) (266) (13)
Unrealized gain on investment securities, net of tax 722 285
Unearned compensation (22) -
----------- ----------
Total stockholders' equity 7,777 6,480
---------- ----------
Total liabilities and stockholders' equity $ 10,155 $ 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-4
<PAGE> 71
SCHEDULE II
Travelers Property Casualty Corp.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the period
For the year January 16, 1996
ended December 31, to December 31,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,236 $ 391
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net income of subsidiaries (1,340) (491)
Dividends received from consolidated subsidiaries 340 299
Amortization expense 2 1
Deferred federal income tax benefit (2) (12)
Federal income taxes receivable 32 (32)
Other assets - (14)
Other liabilities 6 52
---------- ----------
Net cash provided by operating activities 274 194
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contribution to subsidiaries - (710)
Short-term securities, purchases, net (5) (6)
Business acquisition - (4,160)
---------- ----------
Net cash used in investing activities (5) (4,876)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of commercial paper, net 83 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 (268) (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)
Restricted stock issuance 34 -
Dividends to TIGI (98) (49)
Dividends to minority shareholders (21) (11)
---------- ----------
Net cash provided by (used in) financing activities (270) 4,683
---------- ----------
Net increase (decrease) in cash (1) 1
Cash at beginning of period 1 -
---------- ----------
Cash at end of period $ - $ 1
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 163 $ 100
========== ==========
Cash received during the period for taxes $ 79 $ 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-5
<PAGE> 72
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. In
April 1996, TIGI contributed The Travelers Indemnity Company and its
subsidiaries to TAP. In addition, TAP purchased all of the outstanding
capital stock of Travelers Casualty and Surety Company (formerly The Aetna
Casualty and Surety Company) and The Standard Fire Insurance Company
(collectively, Aetna P&C) for 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
The annual maturities of the outstanding debt are as follows: $400 million
in 1999; $500 million in 2001 and $1,277 million after 2002.
4. SUPPLEMENTARY DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
In 1996, 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-6
<PAGE> 73
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1997
(In millions)
<TABLE>
<CAPTION>
Segment Deferred policy Claims and Unearned Premium Net Claims
acquisition costs claim adjust- premiums revenue investment and claim
ment expense income adjustment
reserves (a) expenses
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial
Lines $ 309 $ 27,356 $ 2,519 $ 4,308 $ 1,695 $ 3,631
Personal
Lines 192 2,782 1,348 2,917 353 1,853
Corporate
and Other
Operations - 186 - - 3 -
--------- ----------- --------- --------- -------- ---------
Consolidated $ 501 $ 30,324 $ 3,867 $ 7,225 $ 2,051 $ 5,484
========= =========== ========= ========= ======== =========
</TABLE>
<TABLE>
<CAPTION>
Amortization
Segment of deferred Other Premiums
policy operating written
acquisition expenses
costs (b)
- -----------------------------------------------------------------
<S> <C> <C> <C>
Commercial
Lines $ 622 $ 980 $ 4,758
Personal
Lines 505 366 3,074
Corporate
and Other
Operations - 202 -
--------- -------- ---------
Consolidated $ 1,127 $ 1,548 $ 7,832
========= ======== =========
</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-7
<PAGE> 74
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1996
(In millions)
<TABLE>
<CAPTION>
Segment Deferred policy Claims and Unearned Premium Net Claims
acquisition costs claim adjust- premiums revenue investment and claim
ment expense income adjustment
reserves (a) expenses
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial
Lines $ 253 $ 28,017 $ 2,303 $ 3,695 $ 1,343 $ 3,679
Personal
Lines 173 2,952 1,251 2,323 311 1,599
Corporate
and Other
Operations - 208 - 10 2 4
-------- ----------- --------- ---------- ----------- --------
Consolidated $ 426 $ 31,177 $ 3,554 $ 6,028 $ 1,656 $ 5,282
======== =========== ========= ========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
Amortization
Segment of deferred Other Premiums
policy operating written
acquisition expenses
costs (b)
- --------------------------------------------------------------
<S> <C> <C> <C>
Commercial
Lines $ 533 $ 1,081 $ 3,973
Personal
Lines 373 294 2,359
Corporate
and Other
Operations - 147 10
----------- --------- ---------
Consolidated $ 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> 75
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1995
(In millions)
<TABLE>
<CAPTION>
Segment Deferred policy Claims and Unearned Premium Net Claims
acquisition costs claim adjust- premiums revenue investment and claim
ment expense income adjustment
reserves (a) expenses
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial
Lines $ 122 $ 13,725 $ 1,154 $ 2,017 $ 548 $ 1,853
Personal
Lines 80 1,488 541 1,284 161 957
Corporate
and Other
Operations - 247 - 14 1 7
----------- ----------- --------- -------- --------- --------
Consolidated $ 202 $ 15,460 $ 1,695 $ 3,315 $ 710 $ 2,817
=========== =========== ========= ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Amortization
Segment of deferred Other Premiums
policy operating written
acquisition expenses
costs (b)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Commercial
Lines $ 291 $ 502 $ 2,309
Personal
Lines 221 157 1,298
Corporate
and Other
Operations - 30 14
--------- -------- ---------
Consolidated $ 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> 76
SCHEDULE VI
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (1)
1995-1997
(IN MILLIONS)
<TABLE>
<CAPTION>
Reserves for
unpaid Discount
Deferred claims from
Affiliation policy and claim reserves Net
with acquisition adjustment for unpaid Unearned Earned investment
registrant costs expenses claims (2) premiums premiums income
---------- ----- -------- ---------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 Consolidated property -
casualty operations . . . $ 501 $ 30,138 $ 912 $ 3,867 $ 7,225 $ 2,048
1996 Consolidated property -
casualty operations . . . $ 426 $ 30,969 $ 1,012 $ 3,554 $ 6,018 $ 1,654
1995 Consolidated property -
casualty operations . . . $ 202 $ 15,213 $ 528 $ 1,695 $ 3,301 $ 709
</TABLE>
<TABLE>
<CAPTION>
Claims and
claim adjust-
ment expenses Amortization
incurred related to: of deferred Paid claims
Affiliation -------------------- policy and claim
with Current Prior acquisition adjustment Premiums
registrant Year Year costs expenses written
---------- ---- ---- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1997 Consolidated property -
casualty operations . . . $5,730 $ (492) $ 1,127 $ 5,648 $ 7,832
1996 Consolidated property -
casualty operations . . . $4,839 $ 192 $ 906 $ 5,057 $ 6,332
1995 Consolidated property -
casualty operations . . . $2,903 $ (226) $ 512 $ 2,819 $ 3,607
</TABLE>
(1) Excludes accident and health business.
(2) See "Discounting" on page 20.
F-10
<PAGE> 77
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.01 Restated Certificate of Incorporation of Travelers Property
Casualty Corp. (the "Company"), Certificate of Designations,
Powers, Preferences and Rights of 7.5% Redeemable Preferred
Stock, Series Z, of the Company, Certificate of Amendment to
the Restated Certificate of Incorporation, filed March 7,
1997, and Certificate of Amendment to the Restated Certificate
of Incorporation, filed April 23, 1997, incorporated by
reference to Exhibit 3.01 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1997 (File
No.1-14328) (the "Company's 3/31/97 10-Q").
3.02 Restated By-Laws of the Company, effective April 23, 1997,
incorporated by reference to Exhibit 3.02 to the Company's
3/31/97 10-Q.
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.
4.02.1 Shareholders Agreement, dated as of April 2, 1996, by and
among the Company, The Travelers Insurance Group Inc., Aetna
Life and Casualty Company (now known as Aetna Services, Inc.),
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.
4.02.2+ Amendment to Shareholders Agreement, dated June 20, 1997, by
and among the Company, Aetna Services, Inc., J.P. Morgan
Capital Corporation, The Trident Partnership L.P. and Fund
American Enterprises Holdings, Inc.
<PAGE> 78
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.01* Travelers Property Casualty Corp. Capital Accumulation Plan
(as amended through July 23, 1997), incorporated by reference
to Exhibit 10.01 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1997 (File No.
1-14328).
10.02* Travelers Property Casualty Corp. 1996 Executive Option Plan
(as amended through March 7, 1997), incorporated by reference
to Exhibit 10.03 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 (File No.1-14328)
(the "Company's 1996 10-K").
10.03* Travelers Property Casualty Corp. Executive Performance
Compensation Plan (as amended through March 7, 1997),
incorporated by reference to Exhibit 10.04 to the Company's
1996 10-K.
10.04* 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 Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1996 (File No.1-14328).
10.05* Travelers Group Capital Accumulation Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.02 to
the Quarterly Report on Form 10-Q of Travelers Group Inc. for
the fiscal quarter ended September 30, 1997 (File No. 1-9924)
(the "TRV 9/30/97 10-Q").
10.06.1* 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) (the "TRV 1996 10-K").
10.06.2* Amendment No. 14 to the Travelers Group Stock Option Plan,
incorporated by reference to Exhibit 10.01 to the Quarterly
Report on Form 10-Q of Travelers Group Inc. for the fiscal
quarter ended September 30, 1996 (File No. 1-9924).
10.06.3* Amendment No. 15 to the Travelers Group Stock Option Plan,
incorporated by reference to Exhibit 10.04 to the TRV 9/30/97
10-Q.
<PAGE> 79
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.07* Travelers Group 1996 Stock Incentive Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.03 to
the TRV 9/30/97 10-Q.
10.08* 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 TRV 1996 10-K.
10.09* 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).
10.10 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.
10.11 Lease for office space at CityPlace, 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.
10.12 Lease for office space in Hartford, Connecticut, dated as of
April 2, 1996, by and between The Travelers Insurance Company
and The Travelers Indemnity Company, incorporated by reference
to Exhibit 10.14 to the Company's 1996 10-K.
10.13* Letter Agreement, dated November 17, 1996, between the Company
and Stanton F. Long, incorporated by reference to Exhibit
10.15 to the Company's 1996 10-K.
10.14*+ The Travelers Insurance Deferred Compensation Plan (formerly
The Travelers Corporation TESIP Restoration and Non-Qualified
Savings Plan) (as amended and restated through January 1,
1997).
10.15.1 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.
10.15.2+ License Agreement Amendment, dated April 2, 1996, by and
between Aetna Life and Casualty Company and The Aetna Casualty
and Surety Company and The Standard Fire Insurance Company.
<PAGE> 80
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
11.01+ Computation of Earnings Per Share.
12.01+ Computation of Ratio of Earnings to Fixed Charges.
13.01+ Pages 17 through 55 of the 1997 Annual Report to Stockholders
of the Company (pagination of exhibit does not correspond to
pagination in the 1997 Annual Report to Stockholders).
21.01+ Subsidiaries of the Registrant.
23.01+ Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
23.02+ Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
24.01+ Powers of Attorney.
27.01+ Financial Data Schedule.
99.01 Combined Financial Statements of The Aetna Casualty and Surety
Company and The Standard Fire Insurance Company as of December
31, 1995 and 1994 and for the years ended December 31, 1995,
December 31, 1994 and December 31, 1993, together with the
notes thereto and the related reports of Independent
Accountants, incorporated by reference to Exhibit 99.01 to the
Company's 1996 10-K.
The total amount of securities authorized pursuant to any instrument
defining rights of holders of long-term debt of the Company does not
exceed 10% of the total assets of the Company and its consolidated
subsidiaries. The Company will furnish copies of any such instrument to
the Commission upon request.
The financial statements required by Form 11-K for 1997 for the
Travelers Group 401(k) Savings Plan will be filed as an exhibit by
amendment to this Form 10-K pursuant to Rule 15d-21 of the Securities
Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished at a
cost of $.25 per page (although no charge will be made for the 1997
Annual Report on Form 10-K) to security holders who make written
request therefor to Corporate Communications, Travelers Property
Casualty Corp., One Tower Square, Hartford, Connecticut 06183.
- -------------------
* Denotes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
+ Filed herewith.
<PAGE> 1
Exhibit 4.02.2
[Form of Amendment]
June 20, 1997
J.P. Morgan Capital Corporation
60 Wall Street
New York, New York 10005
Attn: Meryl Hartzband
Aetna Services Inc.
185 Asylum Street, City Place YF37
Hartford, Connecticut 06156
Attn: Alfred P. Quirk, Jr.
The Trident Partnership, L.P.
c/o Marsh & McClennan Risk Capital Corp.
80 Field Point Road
Greenwich, Connecticut 06830
Attn: Philip F. Petronis
Fund American Enterprises Holdings, Inc.
80 South Main Street
Hanover, New Jersey 03755
Attn: Allan L. Waters
Dear Private Investors:
Reference is hereby made to the Shareholders Agreement, dated as of April
2, 1996 (the "Shareholders Agreement"), by and among each of Travelers Property
Casualty Corp. (f/k/a Travelers/Aetna Property Casualty Corp.) (the "Company"),
The Travelers Insurance Group Inc. and each of J.P. Morgan Capital Corporation,
Aetna Services Inc. (f/k/a Aetna Life and Casualty Company), The Trident
Partnership, L.P. and Fund American Enterprises Holdings, Inc. (collectively,
the "Private Investors"). All terms used but not defined herein shall have the
meanings ascribed to such terms in the Shareholders Agreement.
By this letter, the Company hereby offers (the "Offer") to purchase up to
20% of the Shares held by each of the Private Investors for a purchase price of
$36.4856 per Share, representing a 8.5% discount to fair market value based on
the average closing prices of the Company's Class A Common Stock, par value $.01
per share, on the Composite Transactions Tape of the New York Stock Exchange,
Inc. on June 19, 1997 and June 20, 1997 of $39.875 per share. In consideration
thereof, each Private Investor that accepts the Offer (each, an "Accepting
Investor") agrees to extend the Restricted Period for 50% of the Shares retained
by such Accepting Investor following the consummation of the sale described
herein (the
<PAGE> 2
"Sale") until March 15, 1998. For purposes of the Shareholders Agreement,
references to the "Restricted Period" in reference to Shares of Accepting
Investors shall be deemed to be a period ending on October 2, 1997 for 50% of
the Shares retained by the Accepting Investors following the Sale and March 15,
1998 for 50% of the Shares retained by the Accepting Investors following the
Sale.
The Offer expires at 8:00 a.m., New York time, on June 23, 1997. The
closing of the Sale will occur on July 1, 1997.
Other than as set forth above, all terms and conditions of the
Shareholders Agreement shall remain unchanged. Please indicate your acquiescence
in these arrangements and whether or not you accept the Offer and, if
applicable, the number of Shares with respect to which you would like to
participate. Please fax your signed letter to the attention of William P. Hannon
at Travelers Property Casualty Corp., One Tower Square, Hartford, Connecticut
06183, Fax number: (860) 277-5873.
Very truly yours,
TRAVELERS PROPERTY CASUALTY
CORP.
By: _____________________________
Name:
Title:
[Each Private Investor agreed to participate in the Offer for the full amount.]
<PAGE> 1
Exhibit 10.14
THE TRAVELERS INSURANCE
DEFERRED COMPENSATION PLAN
[FORMERLY THE TRAVELERS TESIP
RESTORATION AND NON-QUALIFIED SAVINGS PLAN]
ARTICLE 1
PURPOSE
The purpose of The Travelers Insurance Deferred Compensation Plan (the
"Plan") is to provide a means whereby The Travelers Insurance Group Inc. (the
"Company"), as successor to The Travelers Corporation, may restore the
tax-deferral savings opportunities to employees of The Travelers Insurance
Company and The Travelers Indemnity Company and certain of their affiliates who
are treated as "highly compensated employees" under the Internal Revenue Code of
1986, as amended (the "Code"), and as such are restricted in the level of
participation under 401(k) and similar plans as are afforded non-highly
compensated employees and to offer improved flexibility for retirement, tax and
estate planning to a select group of key management employees of the Company and
its subsidiaries (including, at the Committee's option, subsidiaries the
employees of which are not eligible to participate in TESIP) who have rendered
and continue to render valuable services to the Company.
The Plan incorporates and replaces the TESIP Restoration Plan which was
effective as of January 1, 1990 and The Travelers TESIP Restoration and
Non-Qualified Savings Plan which was effective as of January 1, 1991. The Plan
includes the rollover of non-qualified balances for Transferred Employees that
had previously been part of Aetna Life and Casualty Company's Incentive Deferral
Plan and Aetna Life and Casualty Company's Supplemental Incentive Savings Plan
("SISP"). The Plan set forth herein is amended and restated as of January 1,
1997.
ARTICLE 2
DEFINITIONS AND CERTAIN PROVISIONS
Beneficiary. "Beneficiary" means the person or persons designated as
such in accordance with Article 6.
Board. "Board" means the Board of Directors of the Company.
Committee. "Committee" means the Plans Administration Committee of
Travelers Group Inc.
Fixed Income Declared Rate. "Fixed Income Declared Rate" means the
fixed interest rate expressed as an effective annual yield for the Plan Year for
Fund 2 under TESIP which is invested in a group annuity contract. The Fixed
Income Declared Rate will be determined annually at the beginning of each Plan
Year and credited monthly as of the last business day of the month.
Deferral Account. "Deferral Account" means the account maintained on
the books of account of the Company for each Participant for each Deferral
Account Cycle pursuant to Section 4.2.
<PAGE> 2
Deferral Account Cycle. "Deferral Account Cycle" means a period of five
(5) Plan Years as determined by the Committee over which a Participant defers
Salary and/or Incentive Award. The first Deferral Account Cycle covers the Plan
Years 1990 through 1994.
Disability. "Disability" means any disability as defined under the
terms of The Travelers Group Long-Term Disability Plan.
Eligible Employee. "Eligible Employee" means any Employee of the
Company or any designated subsidiary who is considered by the Company to be a
key management employee, including employees of a subsidiary which does not
participate in TESIP and employees who have not yet met the TESIP service
requirements.
Employee. "Employee" means any person employed by an Employer on a
regular full-time salaried basis, including officers of the Employer.
Employer. "Employer" means the Company and any of its subsidiaries.
Enrollment Agreement. "Enrollment Agreement" means the authorization
form which an Eligible Employee files with the Company to participate in the
Plan.
Enrollment Period. "Enrollment Period" means the period from 10/31 to
12/31 of the calendar year preceding the Plan Year or for newly hired employees,
within 30 days of employment and otherwise as determined by the Committee.
Incentive Award. "Incentive Award" means with respect to a Participant
for any Plan Year the incentive award paid to the Participant for such Plan Year
under an annual incentive plan.
Participant. "Participant" means an Eligible Employee who has filed a
completed and executed Enrollment Agreement with the Committee and is
participating in the Plan in accordance with the provisions of Article 4.
Plan Year. "Plan Year" means the calendar year beginning January 1 and
ending December 31.
Retirement. "Retirement" means the termination of a Participant's
employment with an Employer for reasons other than death or disability on or
after attaining age 55 with 5 or more years of Continuous Service, as determined
under The Travelers Pension Plan, or termination of employment on or after
attaining age 50 with 5 or more years of continuous service under circumstances
where the Participant is separated from service and entitled to payments under
the terms of The Travelers Separation Pay Plan. Retirement also means, where
applicable, the termination of a Participant's employment with the ability to
begin receiving benefits following such termination under the Retirement Plan
for Employees of Aetna Life and Casualty Company, however, in such event,
certain payments may not commence until a participant reaches age 62 in
accordance with elections made at the time of deferral.
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Salary. "Salary" means with respect to a Participant for any Plan Year
such Participant's annual base salary, as established on the books and records
of the participating employers.
TESIP. "TESIP" means the Travelers Group 401(k) Savings Plan, as
successor plan to The Travelers Savings, Investment and Stock Ownership Plan, as
amended from time to time.
The Travelers Pension Plan means The Pension Plan for Salaried
Employees of The Travelers Insurance Company and certain affiliates and any
successor plan thereto as amended from time to time.
ARTICLE 3
ADMINISTRATION OF THE PLAN
The Plan is administered by the Committee which is responsible for
overseeing the operation of the Plan and has the power to interpret provisions
of the plan. The Committee shall have all of the powers vested in it pursuant to
the terms of the Plan, including but not limited to the power and authority to
establish and modify eligibility criteria for participation and to modify the
terms and provisions of the Plan.
Members of the Committee are appointed by the Board of Directors of
Travelers Group Inc. ("Travelers") for indefinite terms, may resign or be
removed at any time and serve without compensation for their services. Travelers
indemnifies such members to the fullest extent permitted by law and the By-Laws
of Travelers. Members of the Committee currently are officers or employees of
Travelers or its subsidiaries. The Committee maintains an office at 388
Greenwich Street, 36th Floor, New York, New York 10013. Correspondence to the
Committee should be sent to such address c/o Travelers Group Inc., Attention:
Plans Administration Committee.
The Committee has delegated the day-to-day operations of the Plan which
are managed by the Corporate Compensation Department. Corporate Compensation can
be reached by dialing (860) 954-4099.
Additional information about the Plan, the Committee and its members
may be obtained upon written request to Travelers Group Inc., Attn: Corporation
Compensation Department, 388 Greenwich Street, 36th Floor, New York, New York
10013 or by calling (212) 816-2577.
ARTICLE 4
PARTICIPATION
4.1 Election to Participate. Any Eligible Employee may elect to
participate in the Plan effective as of the first day of the Plan Year by filing
during the Enrollment Period a completed and fully executed Enrollment Agreement
with the Committee prior to the beginning of such Plan Year. A separate
Enrollment Agreement must be completed for each Plan Year in which a Participant
makes deferrals under the Plan.
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For any Plan Year an Eligible Employee may elect to defer a percentage
of Salary (not to exceed 50% of the Participant's Salary at the rate in effect
during the Plan Year, or for newly hired eligible employees 50% of their initial
annual salary prorated for the remaining months of the Plan Year) and/or a
percentage of an Incentive Award (up to 70% of the Participant's cash Incentive
Award). This plan is offered in addition to the Travelers Group Capital
Accumulation Plan (CAP), Travelers Property Casualty Corp. Capital Accumulation
Plan (TAP CAP), and the Greenwich Street Capital Partners, L.P. (GSP). Incentive
deferrals to this plan will be made subsequent to any deferrals which may apply
due to voluntary or automatic participation in CAP, TAP CAP, or GSP.
The Committee may establish minimum or maximum individual or aggregate
deferral amounts for each Plan Year. The Company reserves the right to make a
reduction in individual deferral amounts if the individual or aggregate
deferrals exceed a Company-determined dollar threshold. The Committee may
establish a minimum account value for continued participation in the plan and
may pay to participants the value of accounts below the minimum.
4.2 Deferral Accounts. The Company shall establish and maintain a
separate Deferral Account for each Participant for each Deferral Account Cycle.
The amount by which a Participant's Salary or Incentive Award is reduced
pursuant to Section 4.1 shall be credited to the Participant's Deferral Account
no later than the first day of the month following the month in which such
compensation would otherwise have been paid. The Deferral Account shall be
debited by the amount of any such payments made to the Participant or the
Participant's Beneficiary with respect to such Deferral Account pursuant to this
Plan.
(a) Company Contributions. Prior to the 1997 Plan Year, the
Plan provided that certain eligible Participants received Company
Contributions. For 1990, the Company made contributions in accordance
with Appendix A hereto. For 1991 to 1993 the Company made contributions
in accordance with Appendix B hereto. For 1994 and 1995 the Company
made contributions in accordance with Appendix C hereto. For 1996 the
Company made contributions in accordance with Appendix D hereto for
participants in Aetna Life and Casualty Company's Incentive Deferral
Plan and Aetna Life and Casualty Company's Supplemental Incentive
Savings Plan.
(b) Interest on Deferral Accounts. Prior to 1996 two types of
returns were credited on Deferral Accounts prior to commencement of
payment of benefits depending on the Declared Rate option which a
Participant chose. These options were the Fixed Income Declared Rate
and Equity Simulator Declared Rate.
Under the Fixed Income Declared Rate interest will be credited
monthly to Deferral Accounts in the same manner as interest is credited
on Fund 2 under TESIP. Under the Equity Simulator Declared Rate in
effect prior to 1996, a rate of return (which may be positive or
negative) was credited as of the end of each month at the same rate
which was credited on Fund 1 under TESIP. After 1995 all Deferral
Accounts are credited with the Fixed Income Declared Rate.
A Participant's Deferral Account will continue to be credited
with the Fixed Income Declared Rate after benefit payments from such
Deferral Account commence.
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<PAGE> 5
4.3 Valuation of Accounts. The value of a Deferral Account as of any
date shall equal the amounts theretofore credited to such account, plus the
interest deemed to be earned on such account in accordance with Section 4.2
through the valuation date, less the amounts theretofore debited to such
account. Any valuation shall be made as of the last business day of the month.
4.4 Statement of Accounts. The Committee shall submit to each
Participant, within one hundred twenty (120) days after the close of each Plan
Year, a statement in such form as the Committee deems desirable setting forth
the balance standing to the credit of each Participant in each of his or her
Deferral Accounts.
ARTICLE 5
BENEFITS
5.1 Retirement Benefit. A Participant is eligible for a Retirement
Benefit under this Plan when he or she has satisfied all of the requirements for
Retirement (as defined in Article 2). The Retirement Benefit for a Deferral
Account will be based on the total value of the Deferral Account.
The Retirement Benefit for a Deferral Account will be paid beginning
approximately 30 days of the date and in the manner which the Participant elects
when he or she enrolls in the Deferral Account. After the Participant elects the
commencement date and the form of payment, he or she may not change the
election. At the time of enrollment a Participant may elect to receive a
Retirement Benefit for a Deferral Account at Retirement or at age 65, if later,
in either a lump sum or annual installments over 5, 10 or 15 years. The lump-sum
payment will be made or annual installment payments will commence approximately
30 days after Retirement or approximately 30 days following the date on which
the Participant attains age 65, according to the Participant's enrollment
agreement. The account valuation will be as of the last business day of the
month preceding the payment date.
If a Participant elects to receive his or her Retirement Benefit in
installment payments, the account will be valued on the last business day of the
month in which the Participant is deemed to be retired, or attained age 65 if
applicable. Retirements are deemed to be the first of a month following the
termination of employment. The payments will be determined annually by dividing
the Participant's then current Deferral Account balance at commencement and on
each anniversary of the valuation year by the number of remaining years in the
payment period based on the Participant's retirement payment election. The Fixed
Income Declared Rate will be credited during any payment year on the unpaid
Deferral Account balance. After the Participant's death, interest earned during
the payment period will instead be distributed in full.
The Committee may, in its discretion, permit alternative payment
elections for future deferrals and may permit the form and timing of payments
elected by participants (in accordance with the terms and provisions of a plan
then in effect) with respect to balances transferred into the Plan when such
transfers are authorized by the Company or the Employer in connection with a
merger, acquisition or other business combination.
5.2 Disability. If a Participant becomes disabled, Participant
deferrals that otherwise would have been credited to the Participant's Deferral
Accounts will cease during such Disability. The Participant's Deferral Accounts
will continue to earn interest at the Declared Rate. The Participant's Deferral
Account balances will be distributed as a Retirement Benefit or Survivor
5
<PAGE> 6
Benefit, whichever is applicable, beginning on the date and in the form which
the Participant elected in his Enrollment Agreement, but in no event beginning
earlier than 12 months after the date of the Participant's Disability. In the
sole discretion of the Committee, the Company may commence payments on an
earlier date.
5.3 Termination Benefit. Notwithstanding other provisions of this plan
if a Participant (i) ceases to be an Employee for any reason other than death,
Disability or Retirement, or (ii) fails to return to the status of an Active
Employee within sixty (60) days following recovery from a Disability prior to
Retirement, the Company shall pay to the Participant in one lump sum an amount
(the "Termination Benefit") equal to the value of the Participant's Deferral
Accounts as provided in Section 4.3.
The account valuation will be as of the last business day of the month
of termination of employment (or the end of the 60-day period following the end
of a disability).
5.4 Survivor Benefits.
If a Participant dies, a Survivor Benefit will be paid to his
Beneficiary in a lump sum in the month following the Participant's death. The
Survivor Benefit will be equal to the Deferral Account balance(s) of the
Participant.
The account valuation will be as of the last business day of the month
of the death.
5.5 Emergency Benefit. In the event that the Committee, upon written
petition of the Participant or beneficiary of such Participant, determines in
its sole discretion that the Participant has suffered an unforeseeable financial
emergency, the Employer shall pay to the Participant, as soon as practicable
following such determination, an amount necessary to meet the emergency.
Participants who suffer an emergency prior to commencement of benefit payments
would receive an amount not in excess of the Deferral Account balance to which
such Participant would have been entitled pursuant to Section 5.3 if he or she
had a termination of employment on the date of such determination and received a
lump sum payment (the "Emergency Benefit"). Participants in the process of
receiving installment payments would receive an amount not in excess of the
present value of the remaining installment payments. For purposes of this Plan,
an unforeseeable financial emergency is an unexpected need for cash arising from
an illness, casualty loss, sudden financial reversal, or other such
unforeseeable occurrence. The amount of the benefits otherwise payable under the
Plan shall thereafter be adjusted to reflect the early payment of the Emergency
Benefit.
5.6 Small Benefit. In the event the Committee determines that the
balance of a Participant's Deferral Account is less than $10,000 at the time of
commencement of payment of his or her Retirement Benefit, or the portion of the
balance of the Participant's Deferral Account payable to any Beneficiary is less
than $10,000 at the time of commencement of payment of a Survivor Benefit to
such Beneficiary, the Company may pay the benefit in the form of a lump-sum
payment, notwithstanding any provision of this Article 5 to the contrary. Such
lump-sum payment shall be equal to the balance of the Participant's Deferral
Account or the portion thereof payable to a Beneficiary.
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5.7 Withholding; Unemployment Taxes. To the extent required by the law
in effect at the time payments are made, the Company shall withhold from any
amounts deferred under the Plan or from payments made hereunder the taxes
required to be withheld by the federal or any state or local government.
ARTICLE 6
BENEFICIARY DESIGNATION
Each Participant shall have the right, at any time, to designate any
person or persons as Beneficiary or Beneficiaries to whom payments under this
Plan shall be made in the event of the Participant's death prior to complete
distribution to the Participant of the benefits due under the Plan. Each
Beneficiary designation shall become effective only when filed in writing with
the Committee on a form prescribed or accepted by the Committee.
Any Participant shall have the right to designate a new Beneficiary at
any time by filing with the Committee a written request for such change, but any
such change shall become effective only upon receipt of such request by the
Committee. Upon receipt by the Committee of such request, the change shall
relate back to and take effect as of the date the Participant signs such request
whether or not the Participant is living at the time the Committee receives such
request.
To the extent a Participant designates a beneficiary other than a
spouse, the administrative rules under the Travelers Group 401(k) Savings Plan
apply. If there is no designated Beneficiary living at the death of the
Participant when any payment hereunder shall be payable to a Beneficiary, then
such payment shall be made as follows:
To such Participant's wife or husband, if living and if not living, to
such Participant's then living lineal descendants, in equal shares, per
stirpes; if none survives, to such Participant's surviving parents,
equally; if neither survives, to such Participant's executors or
administrators.
ARTICLE 7
AMENDMENT AND TERMINATION OF PLAN
7.1 Amendment. The Senior Vice President, Human Resources of Travelers
Group Inc. or the Board may at any time amend the Plan in whole or in part;
provided, however, that no such amendment shall be effective to decrease the
benefits accrued by any Participant prior to the date of such amendment and any
change in the definitions of the Declared Rates shall be effective only as to
Plan Years beginning after the date of such amendment. Written notice of any
amendment shall be given to each current or former Employee then participating
in the Plan.
7.2 Termination.
(a) Company's Right to Terminate. The Senior Vice President,
Human Resources of Travelers Group Inc. or the Board may at any time
terminate the Plan, if in his or her or its judgment, the continuance
of the Plan would not be in the best interests of Travelers Group Inc.,
the Company or its affiliates.
(b) Payments Upon Termination. Upon termination of the Plan
under this Section 7.2, the Participants will be deemed to have
voluntarily terminated their participation
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under the Plan as of the date of such termination. Salary and Incentive
Awards shall cease to be deferred, and the Company will pay to each
Participant the value of each of the Participant's Deferral Accounts,
determined as if each Participant had terminated employment on the date
of such termination of the Plan, at such times and pursuant to such
terms and conditions as the Committee in its sole discretion shall
determine. Participants or Beneficiaries receiving Retirement Benefit
installments shall receive a lump sum payment equal to the remaining,
unpaid Deferred Account balance.
ARTICLE 8
MISCELLANEOUS
8.1 Unsecured General Creditor. Participants and their Beneficiaries,
heirs, successors, and assigns shall have no legal or equitable rights, claims,
or interests in any specific property or assets of the Company, nor shall they
be beneficiaries of, or have any rights, claims, or interests in any life
insurance policies, annuity contracts, or the proceeds therefrom owned or which
may be acquired by the Company ("Policies"). Such Policies or other assets of
the Company shall not be held under any trust for the benefit of Participants,
their Beneficiaries, heirs, successors, or assigns (other than a grantor trust
established to assist the Company in meeting its obligations hereunder and the
assets of which are available to general creditors if the Company becomes
insolvent), or held as collateral security for the fulfilling of the obligation
of the Company under this Plan. Any and all of the Company's assets and Policies
shall be, and remain, the general, unpledged, unrestricted assets of the
Company. The Company's obligation under the Plan shall be merely that of an
unfunded and unsecured promise of the Company to pay money in the future.
8.2 Obligations to Company. If a Participant becomes entitled to a
distribution of benefits under the Plan, and if at such time the Participant has
outstanding any debt, obligation, or other liability representing an amount
owing to the Company or its affiliates, then the Company may offset such amount
owed to it against the amount of benefits otherwise distributable. Such
determination shall be made by the Committee.
8.3 Nonassignability. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage
or otherwise encumber, hypothecate or convey in advance of actual receipt the
amounts, if any, payable, hereunder, or any part thereof, or interest therein
which are, and all rights to which are, expressly declared to be unassignable
and non-transferable. No part of the amounts payable shall, prior to actual
payment, be subject to seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by a Participant or any other
person, nor be transferable by operation of law in the event of a Participant's
or any other person's bankruptcy or insolvency.
8.4 Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed as a contract of employment or as
giving any Employee any right to be retained in the employ of the Company or its
affiliates.
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8.5 Protective Provisions. Each Participant shall cooperate with the
Company by furnishing any and all information requested by the Company in order
to facilitate the payment of benefits hereunder, by taking such physical
examinations as the Company may deem necessary and by taking such other relevant
action as may be requested by the Company. If a Participant refuses to
cooperate, the Company shall have no further obligation to the Participant under
the Plan, other than payment to such Participant of the cumulative reductions in
Salary and Incentive Awards theretofore made pursuant to this Plan.
8.6 Gender, Singular & Plural. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as the identity
of the person or persons may require. As the context may require, the singular
may be read as the plural and the plural as the singular.
8.7 Captions. The captions of the articles, sections, and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
of construction of any of its provisions.
8.8 Validity. In the event any provision of this Plan is held invalid,
void, or unenforceable, the same shall not affect, in any respect, whatsoever,
the validity of any other provision of this Plan.
8.9 Notice. Any notice or filing required or permitted to be given to
the Committee under the Plan shall be sufficient if in writing and hand
delivered, or sent by registered or certified mail, to the Company, directed to
the attention of the Plans Administration Committee of the Company, Attention:
Administrator, at the address set forth in Article 3. Such notice shall be
deemed given as to the date of delivery or, if delivery is made by mail, as of
the date shown on the postmark on the receipt for registration or certification.
8.10 Applicable Law. This Plan shall be governed and construed in
accordance with the laws of the State of Connecticut.
8.11 Trust Fund. The Company shall be responsible for the payment of
all benefits provided under the Plan. At its discretion, the Company may
establish one or more trusts, with such trustees as the Board or the Committee
may approve, for the purpose of providing for the payment of such benefits. Such
trust or trusts may be irrevocable, but the assets thereof shall be subject to
the claims of the Company's creditors. To the extent any benefits provided under
the Plan are actually paid from any such trust, the Company shall have no
further obligation with respect thereto, but to the extent not so paid, such
benefits shall remain the obligation of, and shall be paid by, the Company.
8.12 Ineligible Participant. Notwithstanding any other provisions of
this Plan to the contrary, if any Participant is determined not to be a
"management or highly compensated employee" within the meaning of ERISA or
Regulations thereunder, such Participant will not be eligible to participate in
this Plan and shall receive an immediate lump-sum payment equal to the amounts
standing credited to his or her Deferral Accounts. Upon such payment, no
survivor benefit or other benefit shall thereafter be payable under this Plan
either to the Participant or any Beneficiary of the Participant.
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APPENDIX A
TESIP RESTORATION PLAN
The TESIP Restoration Plan was effective only for 1990. Deferral
Accounts under the TESIP Restoration Plan were converted to Deferral Accounts
under The Travelers TESIP Restoration and Non-Qualified Savings Plan effective
January 1, 1991.
Eligible Employees were permitted to make Salary deferrals for the
period from July through December 1990 and were permitted to defer Incentive
Awards paid in 1990. The maximum deferral permitted was 17% of compensation
(year-end 1989 Salary plus last paid Incentive Award) minus the TESIP Offset
($10,480 for 1990).
For 1990 the Company contributed to the Deferral Account of a
Participant the following amounts:
(a) Company Matching Contribution. The Company made a matching
contribution of 100% of the amount of compensation the Participant
deferred (up to a maximum of the first 5% of compensation), less the
TESIP Offset of $10,480.
(b) TESIP Restoration Contribution. The Company also made an
additional contribution if participation in the TESIP Restoration Plan
reduced the Participant's Company contribution under TESIP.
The Fixed Income Declared Rate was credited during 1990 on all Deferral
Accounts under the TESIP Restoration Plan.
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APPENDIX B
1991 - 1993
- Deferral of up to 50% of salary and up to 100% of incentive
plan award (eg., MIP) on a pre-tax basis.
- Restore matching contributions from The Travelers up to a full
5% of compensation.
- Earn tax-deferred interest based on either a fixed rate of
return or a simulated equity rate of return, eg., S&P 500
Index.
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APPENDIX C
1994 AND 1995
- Deferral of up to 50% of salary and up to 100% of eligible
incentive plan awards on a pre-tax basis.
- Restore matching contributions from The Travelers up to 2.5%
of compensation plus a variable matching contribution in the
event such a contribution is made under TESIP.
- Earn tax-deferred interest based on either a fixed rate of
return or a simulated equity rate of return, e.g., S&P 500
Index.
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APPENDIX D
Pursuant to section 4.2 of the Plan, the Company allows the tax deferred
rollover of non-qualified balances that had previously been part of Aetna's
Incentive Deferral Plan and Aetna's Supplemental Incentive Savings Plan (SISP)
and will credit to Deferral Accounts any amounts deferred during 1996 and
Company Contributions made pursuant to Aetna's Incentive Deferral Plan and
Aetna's SISP during 1996.
Distribution Elections
For all balances transferred from Aetna's Incentive Deferral plan, the payment
elections that were made under Aetna's Plan will continue to govern the
distribution of those balances.
For all balances transferred from Aetna's SISP, participants will make a payment
election based on choices that are similar to those that existed under Aetna's
Incentive Deferral Plan. The Company reserves the right to require participants
to provide new payment elections consistent with those then available under the
Plan. Elections for payment upon retirement for balances transferred from
Aetna's SISP plan commence by definition under such plan on or after age 62.
13
<PAGE> 1
Exhibit 10.15.2
LICENSE AGREEMENT
AMENDMENT
Pursuant to paragraph 17 of the License Agreement (the "Agreement")
dated as of November 28, 1995 by and between Aetna Life and Casualty Company
("Licensor") and the Aetna Casualty and Surety Company and The Standard Fire
Insurance Company (collectively, "Licensee"), Licensor and Licensee hereby agree
as follows:
1. to amend paragraph 24 of the Agreement by replacing the address
for Licensee provided therein with the following address:
The Aetna Casualty and Surety Company
The Standard Fire Insurance Company
c/o Travelers/Aetna Property Casualty Corp.
One Tower Square
Hartford, Connecticut 06183
Attn: Corporate Secretary
Fax: (860) 954-6529
2. to add a new paragraph 25 to this Agreement, which paragraph
shall read in its entirety as follows:
25. Additional Survival. In addition to those provisions of
this Agreement that explicitly survive the termination of this
Agreement, the following paragraphs shall also survive the
termination of this Agreement: 16, 17, 18, 20 and 24.
In addition, Licensor hereby grants to Licensee and its
subsidiaries and Licensee for itself and its subsidiaries also accepts a
temporary, non-exclusive, non-transferable, royalty-free license to use the
Licensed Names and Marks set forth in Schedule C attached hereto and made a part
hereof, which Schedule sets forth those Licensed Names and Marks used by
Licensor and it subsidiaries in connection with the Services within Canada and
the United Kingdom. Licensor hereby agrees to use its best efforts to amend
Schedule C to add any Licensed Names and Marks that were inadvertently left off
as of the date hereof.
1
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto by their duly authorized
representatives have executed this Amendment this 2nd day of April, 1996.
AETNA LIFE AND CASUALTY COMPANY
By: /s/ Robert J. Price
-----------------------------------------
Name: Robert J. Price
Title: Vice President & Corporate Controller
THE AETNA CASUALTY AND
SURETY COMPANY
By: /s/ Robert E. Broatch
-----------------------------------------
Name: Robert E. Broatch
Title: Senior Vice President, Finance
THE STANDARD FIRE INSURANCE
COMPANY
By: /s/ Robert E. Broatch
-----------------------------------------
Name: Robert E. Broatch
Title: Senior Vice President, Finance
2
<PAGE> 3
Schedule C
AMLP (Aetna Manufacturers Liability Program)
Aenterprise 2000
AE Bond
AE 2000
3
<PAGE> 1
Exhibit 11.01
Travelers Property Casualty Corp.
Computation of Earnings Per Share
(In millions, except for per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Earnings:
Net income $ 1,236 $ 391 $ 419
Preferred dividends - series Z -- (4) --
---------- ---------- ----------
Income applicable to common stock $ 1,236 $ 387 $ 419
========== ========== ==========
Average shares:
Basic 395.5 379.8 328.0
========== ========== ==========
Diluted 395.8 379.8 328.0
========== ========== ==========
Earnings Per Share:
Net income per common share $ 3.13 $ 1.02 $ 1.28
========== ========== ==========
Net income per common share - assuming dilution $ 3.12 $ 1.02 $ 1.28
========== ========== ==========
</TABLE>
Net income per common share (Basic EPS) is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Net income per common share-assuming dilution
(Diluted EPS) reflects the effect of potentially dilutive securities,
principally stock-based incentive plans. On February 3, 1998, the Staff of the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 98 (SAB
98). SAB 98 requires that FAS 128 should be used to compute earnings per share
for periods prior to an initial public offering (IPO). For purposes of computing
basic and diluted EPS for periods prior to the IPO, the 328 million shares of
common stock issued to TIGI in April 1996 were assumed to be outstanding for all
reported periods. Previously, all common stock issued within a one-year period
prior to an IPO was treated 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. Accordingly, the Company has restated its earnings per share
for 1996 and 1995 in accordance with the guidelines of SAB 98.
<PAGE> 1
Exhibit 12.01
Travelers Property Casualty Corp. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In millions of dollars, except for ratio)
<TABLE>
<CAPTION>
All Companies Consolidated
Year ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Income from continuing operations,
before income taxes and cumulative
effect of accounting changes $ 1,752 $ 487 $ 551 $ 210 $ 170
Interest 163 118 - - -
Portion of rentals deemed to be interest 55 45 33 32 40
--------- --------- --------- --------- --------
Income available for fixed charges $ 1,970 $ 650 $ 584 $ 242 $ 210
========= ========= ========= ========= ========
Fixed charges:
Interest $ 163 $ 118 $ - $ - $ -
Portion of rentals deemed to be interest 55 45 33 32 40
--------- --------- --------- --------- --------
Total fixed charges $ 218 $ 163 $ 33 $ 32 $ 40
========= ========= ========= ========= ========
Ratio of earnings to fixed charges 9.04x 3.99x 17.53x 7.56x 5.29x
-------- --------- --------- --------- --------
</TABLE>
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
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(In millions, except per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
At and for the Year Ended December 31, (1) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 9,911 $ 8,197 $ 4,569 $ 4,168 $ 4,715
Net income $ 1,236 $ 391 $ 419 $ 188 $ 167
Total assets $ 50,682 $ 49,779 $ 24,062 $ 22,481 $ 21,416
Long-term debt $ 1,249 $ 1,249 - - -
TAP-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debt securities of TAP $ 900 $ 900 - - -
Stockholders' equity (2) $ 7,777 $ 6,480 $ 3,601 $ 2,581 $ 2,977
Per common share data:
Net income (3, 5) $ 3.13 $ 1.02 $ 1.28 $ 0.57 $ 0.51
Net income-assuming dilution (4, 5) $ 3.12 $ 1.02 $ 1.28 $ 0.57 $ 0.51
Cash dividends $ 0.30 $ 0.15 N/A N/A N/A
Book value $ 19.78 $ 16.22 N/A N/A N/A
Book value excluding FAS 115 adjustment $ 17.95 $ 15.50 N/A N/A N/A
Other data:
Year-end common shares outstanding (6) 393.1 399.6 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) Stockholders' equity at December 31, 1997, 1996, 1995 and 1994 reflects
$722 million, $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.
(3) Net income per common share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period.
(4) Net income per common share-assuming dilution (diluted EPS) reflects the
effect of potentially dilutive securities, principally stock-based
incentive plans.
(5) For purposes of computing basic and diluted earnings per share for periods
prior to the IPO, the 328 million shares of common stock issued to TIGI in
April 1996 were assumed to be outstanding for all reported periods. See
note 2 to the consolidated financial statements.
(6) In April 1996, in conjunction with the acquisition of Aetna P&C, the
Company issued common stock through its IPO. See note 2 to the
consolidated financial statements.
1
<PAGE> 2
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. (TAP) and its subsidiaries (the Company).
CONSOLIDATED OVERVIEW
On April 2, 1996, TAP purchased from Aetna Services, Inc. (Aetna) all of the
outstanding capital stock of Travelers Casualty and Surety Company (formerly The
Aetna Casualty and Surety Company) and The Standard Fire Insurance Company
(collectively, Aetna P&C) for approximately $4.2 billion in cash. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the consolidated financial statements include the results of Aetna
P&C's operations only from the date of acquisition. For additional information
about the financing of the purchase price see Note 2 of Notes to Consolidated
Financial Statements.
The Company provides a wide range of commercial and personal property and
casualty insurance products and services to businesses, associations and
individuals throughout the United States.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
(in millions, except per share data) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues.............................................................. $ 9,911 $ 8,197 $ 4,569
---------- --------- ----------
Net income ........................................................... $ 1,236 $ 391 $ 419
Preferred dividends................................................... - 4 -
---------- --------- ----------
Net income available to common stockholders........................... $ 1,236 $ 387 $ 419
========== ========= ==========
Net income per share - assuming dilution.............................. $ 3.12 $ 1.02 $ 1.28
========== ========= ==========
Weighted average number of common shares outstanding
and common stock equivalents - assuming dilution...................... 395.8 379.8 328.0
========== ========= ==========
</TABLE>
Net income of $1.236 billion in 1997 increased $845 million over 1996. Net
income of $391 million in 1996 decreased $28 million from 1995. The increase in
1997 from 1996 was primarily due to $423 million of net charges related to the
acquisition and integration of Aetna P&C by the Company in 1996, higher net
investment income, higher realized gains, lower catastrophe losses, favorable
reserve development in personal auto lines and expense reductions. The net
acquisition-related charges include, on an after-tax basis, $318 million in
reserve increases, net of reinsurance, primarily related to cumulative injury
claims other than asbestos, insurance products involving financial guarantees,
reserve strengthening, and assumed reinsurance, $55 million in an additional
asbestos liability pursuant to an existing settlement agreement with a
customer of Aetna P&C, $39 million in charges related to premium collection
issues on loss sensitive programs, specifically large deductible products, a $27
million provision for uncollectibility of reinsurance recoverables of Aetna P&C
determined by applying the Company's normal guidelines for estimating
collectibility of such accounts, and $23 million in lease and severance costs of
The Travelers Indemnity Company (Travelers Indemnity) related to the
restructuring plan for the acquisition, partially offset by $39 million in
decreases in Personal Lines automobile reserves. The decrease in 1996 from 1995
was primarily due to the $423 million of net charges related to the acquisition,
mostly offset by the post-acquisition results of operations.
Excluding realized investment gains and the acquisition-related charges,
operating income was $1.126 billion, $802 million and $373 million in 1997, 1996
and 1995, respectively. The increase in 1997 was due to higher net investment
income, lower catastrophe losses, favorable reserve development in personal auto
lines and expense reductions. The 1996 increase reflects higher net investment
income, favorable reserve development in personal auto lines and the benefits of
expense-reduction initiatives associated with the acquisition, marginally offset
by higher catastrophe losses. The increases in 1997 and 1996 were also due to
the inclusion of the results of operations of Aetna P&C for twelve months in
1997 and nine months in 1996.
2
<PAGE> 3
Revenues of $9.911 billion in 1997 increased $1.714 billion from 1996. Revenues
of $8.197 billion in 1996 increased $3.628 billion from 1995. The 1997 increase
was primarily attributable to the inclusion of Aetna P&C for the entire year
compared to only nine months in 1996 and growth in Personal Lines earned
premiums. The increase in revenues in 1996 compared to 1995 was primarily
attributable to the post-acquisition results of operations and includes a $2.713
billion increase in earned premiums and a $946 million increase in net
investment income.
Commercial Lines earned premiums increased $613 million to $4.308 billion in
1997, primarily reflecting the post-acquisition results of operations for the
entire year compared to only nine months in 1996. The increase in Commercial
Lines earned premiums is net of continued decreases resulting from the Company's
selective underwriting and market conditions characterized by difficult pricing
and increased competition. Personal Lines earned premiums of $2.917 billion in
1997 increased $594 million from $2.323 billion in 1996, reflecting lower ceded
premiums due to a change in a reinsurance arrangement in January 1997, growth in
sales in targeted markets served by independent agents and growth in affinity
marketing, joint marketing arrangements and TRAVELERS SECURE(R). The increase
also reflects the post-acquisition results of operations for the entire year
compared to only nine months in 1996.
Net investment income was $2.051 billion in 1997, an increase of $395 million
from 1996, reflecting the higher level of invested assets in 1997. 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.
Fee income was $365 million in 1997, a $27 million decrease from 1996. Fee
income was $392 million in 1996, a $40 million decrease from 1995. National
Accounts within Commercial Lines is the primary source of fee income due to its
service business. Fee income in both 1997 and 1996 was negatively impacted by
the depopulation of involuntary pools as the loss experience of workers'
compensation improved and insureds moved to voluntary markets and the Company's
success in lowering workers' compensation losses of service customers, partially
offset by the Company writing more service fee-based product versus
premium-based product and the acquisition of Aetna P&C.
Claims and expenses of $8.159 billion in 1997 increased $449 million from 1996.
The increase was due to the post-acquisition results of operations for the
entire year compared to only nine months in 1996, partially offset by
acquisition-related expense reductions and lower catastrophe losses in 1997.
Claims and expenses of $7.710 billion in 1996 increased $3.692 billion from
1995. In 1996, the increase in claims and expenses 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.
The Company's effective tax rate was 29%, 20% and 24% in 1997, 1996 and 1995,
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 1997 effective tax rate was higher than 1996 due to a
proportionately smaller amount of tax-exempt income versus pre-tax income in
1997. The 1996 effective tax 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.
3
<PAGE> 4
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
STATUTORY:
Loss and Loss Adjustment Expense (LAE) ratio............ 72.4% 85.5% 78.2%
Underwriting expense ratio.............................. 29.9 31.3 26.4
Combined ratio before policyholder dividends............ 102.3 116.8 104.6
Combined ratio.......................................... 103.5 117.2 105.4
GAAP:
Loss and LAE ratio...................................... 72.3% 83.6% 77.7%
Underwriting expense ratio.............................. 29.6 33.2 26.6
Combined ratio before policyholder dividends............ 101.9 116.8 104.3
Combined ratio.......................................... 102.6 117.4 105.1
</TABLE>
Beginning in 1997, for purposes of computing GAAP combined ratios, fee income is
allocated as a reduction of losses and loss adjustment expenses and other
underwriting expenses. Previously fee income was included with premiums for
purposes of computing GAAP combined ratios. The 1996 and 1995 GAAP combined
ratios have been restated to conform to the current year's presentation.
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
In addition, certain 1996 purchase accounting adjustments recorded in connection
with the Aetna P&C acquisition resulted in a charge to statutory expenses.
The decrease in the 1997 statutory and GAAP combined ratios compared to 1996 was
primarily attributable to 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 would have been 106.3%
and 107.0%, respectively. The decrease in the 1997 statutory and GAAP combined
ratios compared to the 1996 statutory and GAAP combined ratios excluding
acquisition-related charges was due to lower catastrophe losses, favorable prior
year reserve development in personal auto lines and expense reductions,
partially offset by the inclusion in 1997 of Aetna P&C's results for the entire
year compared to only nine months in 1996. Aetna P&C historically has had a
higher underwriting expense ratio, partially offset by a lower loss and LAE
ratio, which reflected the mix of business including the favorable effect of the
lower loss and LAE ratio of the Bond Specialty business. The increase in the
1996 statutory and GAAP combined ratios excluding acquisition-related charges
compared to the 1995 statutory and GAAP combined ratios was primarily due to the
inclusion in 1996 of Aetna P&C's results.
RESULTS OF OPERATIONS BY SEGMENT
<TABLE>
<CAPTION>
COMMERCIAL LINES
(in millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues............................ $ 6,557 $ 5,497 $ 3,070
Net income.......................... $ 946 $ 197 $ 329
</TABLE>
4
<PAGE> 5
Net income of $946 million in 1997 increased $749 million from 1996, and 1996
net income of $197 million decreased $132 million compared to 1995. The 1997
increase compared to 1996 was primarily due to $453 million of after-tax charges
related to the acquisition of Aetna P&C included in 1996, higher net investment
income and realized investment gains, lower catastrophe losses, expense savings
associated with the acquisition and integration of Aetna P&C and the inclusion
in 1997 of Aetna P&C for the entire year compared to only nine months for 1996.
These acquisition-related charges included $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, a $55 million provision for an additional asbestos
liability related to an existing settlement agreement with a customer of Aetna
P&C, a $39 million charge related to premium collection issues on loss sensitive
programs, specifically large deductible products, a $22 million provision for
uncollectibility of reinsurance recoverables of Aetna P&C determined by applying
the Company's normal guidelines for estimating collectibility of such accounts,
and $19 million in lease and severance costs related to the restructuring plan
for the acquisition. Operating results also reflected market conditions
characterized by difficult pricing and increased competition. The impact of this
trend in market conditions on 1997 operating results was offset by the factors
noted above as well as a continued disciplined approach to underwriting and risk
management. The 1996 decrease compared to 1995 was primarily due to $453 million
of after-tax charges related to the acquisition of Aetna P&C included in 1996,
partially offset by higher net investment income, the benefits of
expense-reduction initiatives and the inclusion of Aetna P&C's results of
operations for nine months in 1996.
Excluding realized investment gains in all years and the acquisition-related
charges, Commercial Lines earnings were $846 million, $633 million and $288
million in 1997, 1996 and 1995, respectively. The 1997 increase compared to 1996
was due to higher net investment income, lower catastrophe losses, expense
savings associated with the acquisition and integration of Aetna P&C and the
post-acquisition results of operations for the entire year compared to only nine
months in 1996. Operating results also reflected market conditions characterized
by difficult pricing and increased competition. The impact of this trend in
market conditions on 1997 operating results was offset by the factors previously
indicated as well as a continued disciplined approach to underwriting and risk
management. The 1996 increase compared to 1995 was primarily the result of
higher net investment income, the benefits of expense-reduction initiatives and
the inclusion of Aetna P&C's results of operations for nine months in 1996.
Commercial Lines net written premiums totaled $4.757 billion in 1997, up $695
million from $4.062 billion in 1996 (excluding an adjustment associated with a
reinsurance transaction), reflecting the inclusion in 1997 of Aetna P&C for the
entire year compared to only nine months in 1996 and a $142 million adjustment
due to the change to conform the Aetna P&C method of recording certain net
written premiums to the method employed by Travelers Indemnity and its
subsidiaries (Travelers P&C). This increase was offset in part by the highly
competitive conditions in the marketplace and the Company's continued
disciplined approach to underwriting and risk management. Net written premiums
in 1996 of $4.062 billion increased $1.753 billion from $2.309 billion in 1995,
reflecting the acquisition of Aetna P&C.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Commercial Lines net written premiums
totaled $4.757 billion in 1997, up $89 million from $4.668 billion in 1996,
which was down $476 million from $5.144 billion in 1995. The 1997 increase was
attributable to the change to conform the Aetna P&C method with the Travelers
P&C method of recording net written premiums, partially offset by the highly
competitive marketplace and the Company's disciplined approach to underwriting
and risk management. The 1996 decrease reflected the highly competitive
marketplace and the Company's selective underwriting.
Fee income was $365 million, $392 million and $432 million in 1997, 1996 and
1995, respectively. The decreases in fee income were the result of the
depopulation of involuntary pools as the loss experience of workers'
compensation improved and insureds moved to voluntary markets and the Company's
continued success in lowering workers' compensation losses of service customers,
partially offset by the Company writing more service fee-based product versus
premium-based product.
5
<PAGE> 6
National Accounts 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 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. 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 $657 million in 1997 decreased
$195 million from 1996. Net written premiums of $852 million in 1996 decreased
$340 million from 1995. The 1997 decrease was primarily due to a decrease in the
Company's level of involuntary pool participation, National Accounts writing
less premium-based product versus service fee-based product, the highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management. The 1996 decrease reflected the Company's
selective renewal activity and the highly competitive marketplace.
National Accounts new business in 1997 was significantly higher than in 1996
reflecting continued product development efforts, especially in workers'
compensation managed care programs. National Accounts business retention ratio
was also significantly higher in 1997 than in 1996, reflecting the Company's
continued focus on retaining profitable business. National Accounts new business
in 1996 was significantly lower than in 1995 despite the Aetna P&C acquisition,
and was due to the highly competitive marketplace. National Accounts business
retention ratio in 1996 was moderately lower than in 1995 and reflected 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 $1.986 billion in 1997 were $261 million above 1996 premium
levels, which were $137 million below 1995 premium levels. The increase in 1997
reflected a $127 million adjustment due to the change to conform the Aetna P&C
method with the Travelers P&C method of recording certain net written premiums
and the continued growth through programs designed to leverage underwriting
experience in specific industries, partially offset by the highly competitive
marketplace and the Company's continued disciplined approach to underwriting and
risk management. The decrease in 1996 in net written premiums was due to the
highly competitive marketplace, the Company's selective underwriting and the
continued softness in guaranteed cost pricing.
In 1997, new business in Commercial Accounts significantly improved compared to
1996, reflecting continued growth in programs designed to leverage underwriting
experience in specific industries. The Commercial Accounts business retention
ratio in 1997 significantly improved compared to 1996. Commercial Accounts
continues to focus on the retention of existing business while maintaining its
product pricing standards and its selective underwriting policy. For 1996, new
business in Commercial Accounts was significantly higher than in 1995. The 1996
increase in new business was due to the acquisition of Aetna P&C. The Commercial
Accounts business retention ratio in 1996 was virtually the same as in 1995 and
reflected Commercial Accounts selective underwriting policy.
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
$1.432 billion for 1997 were $20 million higher than 1996. This increase
reflected a $15 million adjustment due to the change to conform the Aetna P&C
method with the Travelers P&C method of recording certain net written premiums
and the continued benefit from the broader industry and product line expertise
of the combined company, partially offset by the highly competitive marketplace
and the Company's continued disciplined approach to underwriting and risk
management. Select Accounts net written premiums of $1.412 billion for 1996 were
$54 million lower than 1995. This decrease reflected the highly competitive
marketplace and the Company's selective underwriting.
6
<PAGE> 7
New premium business in Select Accounts was moderately higher in 1997 than in
1996 reflecting an increase due to the acquisition of Aetna P&C, partially
offset by a decrease due to the competitive marketplace. The Select Accounts
business retention ratio remains very strong in 1997 and was moderately higher
than in 1996, reflecting the Company's focus on retaining profitable business.
New premium business in Select Accounts was significantly higher in 1996 than in
1995 due to the acquisition of Aetna P&C. The Select Accounts business retention
ratio was moderately higher in 1996 than in 1995 reflecting the industry and
product line expertise of the combined company.
Specialty Accounts markets products to national, midsize and small customers,
including individuals, 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 $682 million in 1997
were $3 million higher than 1996, which was $55 million above 1995. The 1997
increase compared to 1996 was due to increased writings of its excess and
surplus lines business, partially offset by lower directors' and officers'
liability insurance writings due to the termination of an exclusive arrangement
with a managing general agent. The 1996 increase compared to 1995 was due to
increases in directors' and officers' liability insurance and errors and
omissions coverages.
Commercial Lines claims and expenses of $5.233 billion in 1997 decreased $59
million from 1996, and increased $2.646 billion in 1996 compared to 1995. The
1997 decrease was primarily attributable to the net acquisition-related charges
of $697 million associated with the acquisition of Aetna P&C in 1996, expense
savings in 1997 and cost efficiencies in operations and in competitive workers'
compensation managed care delivery programs, mostly offset by the inclusion in
1997 of Aetna P&C for the entire year compared to only nine months in 1996. 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.
Catastrophe losses, net of tax and reinsurance, were $5 million, $31 million and
$7 million in 1997, 1996 and 1995, respectively. The 1997 catastrophe losses
were primarily due to tornadoes in the Midwest in the first quarter. Catastrophe
losses in 1996 were primarily due to Hurricane Fran and December storms on the
West Coast.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
STATUTORY:
Loss and LAE ratio..................................... 78.4% 96.2% 80.6%
Underwriting expense ratio............................. 30.6 32.7 24.4
Combined ratio before policyholder dividends........... 109.0 128.9 105.0
Combined ratio......................................... 111.0 129.6 106.3
GAAP:
Loss and LAE ratio..................................... 78.3% 92.8% 79.6%
Underwriting expense ratio............................. 30.4 36.1 25.2
Combined ratio before policyholder dividends........... 108.7 128.9 104.8
Combined ratio......................................... 109.9 129.9 106.1
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only. In 1996, the net deferral for GAAP was offset by
certain 1996 purchase accounting adjustments recorded in connection with the
Aetna P&C acquisition which adjustments resulted in a charge to statutory
expenses.
7
<PAGE> 8
The decreases in the 1997 statutory and GAAP combined ratios for Commercial
Lines compared to 1996 were primarily attributable to the 1996 charges related
to the acquisition and integration of Aetna P&C. Excluding these amounts, the
statutory and GAAP combined ratios before policyholder dividends for 1996 would
have been 110.0% and 111.3%, respectively. The decrease in the 1997 statutory
and GAAP combined ratios compared to the 1996 statutory and GAAP combined ratios
excluding acquisition-related charges was due to lower catastrophe losses and
reduced expenses, partially offset by the post-acquisition results of operations
for the entire year compared to only nine months in 1996. Aetna P&C has
historically had a higher underwriting expense ratio, partially offset by a
lower loss ratio, which reflected the mix of business including the favorable
effect of the lower loss ratio of the Bond Specialty business. The increase in
the 1996 statutory and GAAP combined ratios excluding acquisition-related
charges compared to the 1995 statutory and GAAP combined ratios was primarily
due to the inclusion in 1996 of Aetna P&C's results.
<TABLE>
<CAPTION>
PERSONAL LINES
(in millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues................................. $ 3,341 $ 2,685 $ 1,481
Net income............................... $ 413 $ 282 $ 107
</TABLE>
Net income of $413 million in 1997 increased $131 million from $282 million in
1996, which increased $175 million from $107 million in 1995. The 1997 increase
primarily reflected the inclusion in 1997 of Aetna P&C for the entire year
compared to only nine months in 1996, lower catastrophe losses, an increase in
favorable prior year reserve development of $40 million primarily in the
automobile bodily injury line and production-related growth, partially offset by
investments in service centers and market expansions. The 1996 increase was
primarily attributable to the post-acquisition results of operations of Aetna
P&C (including a $30 million benefit principally resulting from a review of
Aetna P&C reserves), as well as approximately $70 million of favorable prior
year reserve development primarily in the automobile bodily injury line, the
continued benefit of expense reduction initiatives and higher net investment
income.
Revenues were $3.341 billion in 1997 compared to $2.685 billion in 1996 and
$1.481 billion in 1995. The 1997 increase compared to 1996 primarily reflected
higher net investment income, and to a lesser extent, lower ceded premiums due
to a change in a reinsurance arrangement in January 1997, growth in target
markets served by independent agents and growth in affinity marketing, joint
marketing arrangements and TRAVELERS SECURE(R). The 1996 increase compared to
1995 reflected growth in sales in targeted markets, partially offset by
reductions due to catastrophe management strategies. The 1997 and 1996 increases
also reflect the inclusion of Aetna P&C for twelve months in 1997 and nine
months in 1996.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Personal Lines net written premiums in 1997
totaled $3.074 billion compared to $2.675 billion in 1996 and $2.543 billion in
1995. The 1997 increase compared to 1996 primarily reflected lower ceded
premiums due to a change in a reinsurance arrangement in January 1997, growth in
sales in targeted markets served by independent agents and growth in affinity
marketing, joint marketing arrangements and TRAVELERS SECURE(R). Business
retention continued to be strong. The 1996 increase compared to 1995 was due to
the continued growth in targeted automobile and homeowners markets, partially
offset by reductions due to catastrophe management strategies.
Personal Lines claims and expenses of $2.724 billion in 1997 increased $457
million from 1996. This increase was primarily attributable to higher
production-related expenses associated with the growth in premiums, partially
offset by lower catastrophe losses and favorable prior year reserve development
in the automobile bodily injury line in 1997. The increase also reflects the
post-acquisition results of operations for the entire year compared to only nine
months in 1996. 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 reserve development
primarily in the automobile bodily injury line in 1996 and the continued benefit
of expense reduction initiatives.
8
<PAGE> 9
Included in 1997 are after-tax catastrophe losses, net of reinsurance, of $10
million compared to $58 million in 1996 and $12 million in 1995. Catastrophe
losses in 1996 were primarily due to Hurricane Fran, severe first quarter winter
storms and second quarter hail and wind storms.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
STATUTORY:
Loss and LAE ratio........................... 63.5% 68.7% 74.5%
Underwriting expense ratio................... 28.7 28.9 29.9
Combined ratio............................... 92.2 97.6 104.4
GAAP:
Loss and LAE ratio........................... 63.5% 68.8% 74.5%
Underwriting expense ratio................... 28.3 28.3 29.1
Combined ratio............................... 91.8 97.1 103.6
</TABLE>
GAAP combined ratios for Personal Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only. In addition, certain 1996 purchase accounting
adjustments recorded in connection with the Aetna P&C acquisition resulted in a
charge to statutory expenses.
The 1996 statutory and GAAP combined ratios for Personal Lines included 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 99.7%, respectively. The decrease in the 1997
statutory and GAAP combined ratios compared to the 1996 statutory and GAAP
combined ratios excluding this item was due to lower catastrophe losses and
favorable prior year reserve development, primarily in the automobile bodily
injury line. The decrease in the 1996 statutory and GAAP combined ratios
excluding this item compared to the 1995 statutory and GAAP combined ratios was
predominantly due to favorable prior year reserve development, partially offset
by higher catastrophe losses.
<TABLE>
<CAPTION>
CORPORATE AND OTHER
(in millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues..................................... $ 13 $ 15 $ 18
Net loss..................................... $ (123) $ (88) $ (17)
</TABLE>
The primary component of net loss for 1997 and 1996 was after-tax interest
expense of $106 million and $77 million, respectively, reflecting financing
costs associated with the acquisition of Aetna P&C.
ENVIRONMENTAL CLAIMS
The Company continues to receive claims alleging liability exposures arising out
of insureds' alleged disposition of toxic substances. These claims when
submitted rarely indicate the monetary amount being sought by the claimant from
the insured and the Company does not keep track of the monetary amount being
sought in those few claims which indicated such a monetary amount.
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At December 31, 1997, approximately 17% of
the net environmental loss reserve (i.e., approximately $192 million) consists
of case reserve for resolved claims. The balance, approximately 83% of the net
aggregate reserve (i.e., approximately $927 million), is carried in a bulk
reserve and includes incurred but not reported environmental claims for which
the Company has not received any specific claims.
9
<PAGE> 10
The Company's reserving methodology is preferable to one based on "identified
claims" since the resolution of environmental exposures by the Company generally
occurs on an insured-by-insured basis as opposed to a claim-by-claim basis. The
nature of the resolution is through coverage litigation, which often pertains to
more than one claim, as well as through a settlement with an insured. Generally,
the settlement between the Company and the insured extinguishes any obligation
the Company may have under any policy issued to the insured for past, present
and future environmental liabilities. This form of settlement is commonly
referred to as a "buy-back" of policies for future environmental liability.
Additional provisions of these agreements include the appropriate indemnities
and hold harmless provisions to protect the Company. The Company's general
purpose in executing such agreements is to reduce its potential environmental
exposure and eliminate both the risks presented by coverage litigation with the
insured and the cost of such litigation.
The reserving methodology includes an analysis by the Company of the exposure
presented by each insured and the anticipated cost of resolution, if any, for
each insured. This analysis is completed by the Company on a quarterly basis. In
the course of its analysis, an assessment of the probable liability, available
coverage, judicial interpretations and historical value of similar exposures is
considered by the Company. In addition, due consideration is given to the many
variables presented, such as the nature of the alleged activities of the insured
at each site; the allegations of environmental damage at each site; the number
of sites; the total number of potentially responsible parties at each site; the
nature of environmental harm and the corresponding remedy at a site; the nature
of government enforcement activities at each site; the ownership and general use
of each site; the overall nature of the insurance relationship between the
Company and the insured; the identification of other insurers; the potential
coverage available, if any, including the number of years of coverage, if any;
and the applicable law in each jurisdiction. Analysis of these and other
factors, including the potential for future claims, results in the establishment
of the bulk reserve.
The following table displays activity for environmental losses and loss expenses
and reserves for 1997, 1996 and 1995.
<TABLE>
<CAPTION>
ENVIRONMENTAL LOSSES
(in millions) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Beginning reserves:
Direct.................................... $ 1,369 $ 454 $ 449
Ceded..................................... (127) (50) (8)
--------- --------- ---------
Net..................................... 1,242 404 441
Acquisition of Aetna P&C:
Direct.................................... - 968 -
Ceded..................................... - (39) -
Incurred losses and loss expenses:
Direct.................................... 79 114 117
Ceded..................................... (14) (52) (61)
Losses paid:
Direct ................................... 271 167 145
Ceded..................................... (67) (14) (22)
Other:
Direct.................................... 16 - 33
Ceded..................................... - - (3)
--------- --------- ---------
Ending reserves:
Direct.................................... 1,193 1,369 454
Ceded..................................... (74) (127) (50)
--------- --------- ---------
Net..................................... $ 1,119 $ 1,242 $ 404
========= ========= =========
</TABLE>
10
<PAGE> 11
In the above table, "Other" represents reallocation of certain general liability
reserves to environmental reserves in 1997 and the termination in 1995 of
certain agreements with The Travelers Insurance Group Inc. (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 property and casualty insurance industry does not have a standard method of
calculating claim activity for environmental losses. Generally for Superfund
remediation type environmental claims, the Company 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. The Company adheres to
this method of calculating claim activity on all environmental-related claims,
whether such claims are tendered on primary, excess or umbrella policies. Since
the implementation of the claim system conversion in 1997, the Company's method
of establishing claims in the foregoing manner now applies to claims tendered
under the Travelers P&C and Aetna P&C policies.
In addition, the Company establishes claim files for bodily injury or property
damage environmental claims brought by individual claimants who allege injury or
damage as a result of the discharge of wastes or pollutants. As it pertains to
such claims tendered on policies issued by Travelers P&C, the Company
establishes a claim file on a per claim, per insured, per site basis. For
example, if one hundred claimants file a lawsuit against five policyholders
alleging bodily injury and property damage as a result of the discharge of
wastes or pollutants, one thousand claims (five hundred for the bodily injury
claims and five hundred for the property damage claims) would be established.
As it pertains to bodily injury and property damage claims tendered on Aetna P&C
policies, the Company's claim system conversion has not been completed to permit
the establishment of such claims in a manner consistent with the establishment
of Travelers P&C bodily injury and property damage claims. As it pertains to
such claims tendered on policies issued by Aetna P&C, the Company currently
establishes a claim file on a per insured, per site basis. For example, if one
hundred claimants file a lawsuit against five policyholders alleging bodily
injury and property damage as a result of the discharge of wastes or pollutants,
five claims would be established for all the bodily injury claims and five
claims would be established for all of the property damage claims.
As of December 31, 1997, calculated as described above, the Company had
approximately 40,300 pending environmental-related claims tendered by 1,400
active policyholders. Of the total pending environmental-related claims, 29,800
claims relate to Travelers P&C policies tendered by 569 policyholders and 10,500
claims relate to Aetna P&C policies tendered by 961 policyholders. Approximately
130 of these Aetna P&C policyholders are also included in the 569 Travelers P&C
policyholders' count. 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.
11
<PAGE> 12
To date, the Company generally has been successful in resolving its coverage
litigation and continues to reduce its potential exposure through favorable
settlements with certain insureds. These settlement agreements with certain
insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds. Based upon the
Company's reserving methodology and the experience of its historical resolution
of environmental exposures, it believes that the environmental reserve position
is appropriate. As of December 31, 1997, the Company, for approximately $1.16
billion, has resolved the environmental liabilities presented by 3,931 of the
5,331 policyholders who have tendered environmental claims to the Company. This
resolution comprises 74% of the policyholders who have tendered such claims. The
Company has reserves of approximately $800 million included in its bulk reserve
relating to the remaining 1,400 policyholders (26% of the total) with unresolved
environmental claims, as well as for any other policyholder that may tender an
environmental claim in the future.
ASBESTOS CLAIMS
In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. The Company continues to receive
asbestos claims alleging insureds' liability from claimants' asbestos-related
injuries. These claims, when submitted, rarely indicate the monetary amount
being sought by the claimant from the insured and the Company does not keep
track of the monetary amount being sought in those few claims that 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. The Company continues to
receive this type of asbestos claim.
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, 1997, approximately 24% of the net aggregate reserve (i.e.,
approximately $266 million) is for pending asbestos claims. The balance,
approximately 76% (i.e., approximately $848 million) of the net asbestos
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
12
<PAGE> 13
The following table displays activity for asbestos losses and loss expenses and
reserves for 1997, 1996 and 1995. 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) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Beginning reserves:
Direct..................................... $ 1,443 $ 695 $ 614
Ceded...................................... (370) (293) (278)
-------- --------- ---------
Net...................................... 1,073 402 336
Acquisition of Aetna P&C:
Direct..................................... - 801 -
Ceded...................................... - (121) -
Incurred losses and loss expenses:
Direct..................................... 87 120 109
Ceded...................................... (18) (35) (66)
Losses paid:
Direct .................................... 174 173 116
Ceded...................................... (140) (79) (92)
Other:
Direct..................................... 7 - 88
Ceded...................................... (1) - (41)
-------- --------- ---------
Ending reserves:
Direct..................................... 1,363 1,443 695
Ceded...................................... (249) (370) (293)
-------- --------- ---------
Net...................................... $ 1,114 $ 1,073 $ 402
======== ========= =========
</TABLE>
In the above table, "Other" represents reallocation of certain reserves to
asbestos reserves in 1997 and the termination in 1995 of certain agreements with
TIGI whereby TIGI had assumed certain reserves from the Company.
In 1997, the Company reached an agreement to settle the arbitration with
underwriters at Lloyd's of London (Lloyd's) and certain London companies in New
York State to enforce reinsurance contracts with respect to recoveries for
certain asbestos claims. The dispute involved the ability of the Company to
aggregate asbestos claims under a market agreement between Lloyd's and the
Company or under the applicable reinsurance treaties. This agreement had no
impact on earnings.
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 previously discussed.
13
<PAGE> 14
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, and past ceded experience. 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, 1997 are the Company's best
estimate of ultimate claims and claim adjustment expenses based upon known facts
and current law. However, the conditions surrounding the final resolution of
these claims continue to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations and changes in 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, an 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 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.
14
<PAGE> 15
Prior to the acquisition, 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, 1997, approximately 18% of the net aggregate reserve (i.e.,
approximately $195 million) is for pending CIOTA claims. The balance,
approximately 82% (i.e., approximately $893 million) of the net CIOTA reserve,
represents incurred but not reported losses for which the Company has not
received any specific claims.
The following table displays activity for CIOTA losses and loss expenses and
reserves for 1997, 1996 and 1995. 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) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Beginning reserves:
Direct................................... $ 1,560 $ 374 $ 355
Ceded.................................... (446) - -
--------- --------- ---------
Net.................................... 1,114 374 355
Acquisition of Aetna P&C:
Direct................................... - 709 -
Ceded.................................... - (293) -
Incurred losses and loss expenses:
Direct................................... 32 565 21
Ceded.................................... (6) (155) -
Losses paid:
Direct .................................. 72 88 22
Ceded.................................... (20) (2) -
Other:
Direct................................... - - 20
Ceded.................................... - - -
--------- --------- ---------
Ending reserves:
Direct................................... 1,520 1,560 374
Ceded.................................... (432) (446) -
--------- --------- ---------
Net.................................... $ 1,088 $ 1,114 $ 374
========= ========= =========
</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.
15
<PAGE> 16
INVESTMENT PORTFOLIO
At December 31, 1997, the carrying value of the Company's investment portfolio
was $31.0 billion, representing 61% of total assets of $50.7 billion. The
average yield (excluding realized and unrealized investment gains) was 7.4%,
7.0% and 6.2% for the years ended December 31, 1997, 1996 and 1995,
respectively. Because the primary purpose of the investment portfolio is to fund
future claims payments, the Company employs a conservative investment
philosophy. The Company's fixed maturity portfolio at December 31, 1997 totaled
$27.2 billion, comprised of $25.2 billion of publicly traded fixed maturities
and $2.0 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, 1997 were Aa3 and A3, respectively.
Included in the fixed maturity portfolio at such date was approximately $832
million of below investment grade securities. The average duration of the fixed
maturity portfolio, including short-term investments, was 5.2 years at such
date.
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, 1997:
<TABLE>
<CAPTION>
PERCENT OF
(in millions) CARRYING VALUE TOTAL CARRYING VALUE
-------------- --------------------
<S> <C> <C>
QUALITY RATING:
Aaa.................................... $ 12,054 44.3%
Aa..................................... 4,696 17.3
A...................................... 6,042 22.2
Baa.................................... 3,564 13.1
----------- -----
Total investment grade................. 26,356 96.9
Non-investment grade................... 832 3.1
----------- -----
Total fixed maturity investments.......... $ 27,188 100.0%
=========== =====
</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, 1997, the Company held CMOs with a market value of $2.2 billion.
Approximately 77% 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 $2.6
billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
December 31, 1997. Virtually all of these securities were rated Aaa.
DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 1997.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.
16
<PAGE> 17
The carrying value of the Company's investment portfolio as of December 31, 1997
was $31.0 billion, 88% of which is invested in fixed maturity securities. The
primary market risk to the investment portfolio is interest rate risk associated
with investments in fixed maturity securities. The Company's exposure to equity
price risk and foreign exchange risk is not significant. The Company has no
direct commodity risk.
For fixed maturity securities, short-term liquidity needs and the potential
liquidity needs of the business are key factors in managing the portfolio. The
portfolio duration relative to the liabilities' duration is primarily managed
through cash market transactions. For additional information regarding the
Company's objectives and strategies pertaining to the investment portfolio, see
the Investment Portfolio section of this management's discussion and analysis
(MD&A).
For the Company's investment portfolio, there were no significant changes in the
Company's primary market risk exposures or in how those exposures are managed
compared to the year ended December 31, 1996. The Company does not anticipate
significant changes in the Company's primary market risk exposures or in how
those exposures are managed in future reporting periods based upon what is known
or expected to be in effect in future reporting periods.
The primary market risk for all of the Company's long-term debt and mandatorily
redeemable preferred securities of subsidiary trusts (trust preferred
securities) is interest rate risk at the time of refinancing. All of the
Company's fixed rate debt is non-redeemable and the fixed rate trust securities
are not redeemable until April 30, 2001 at the earliest. The Company will
continue to monitor the interest rate environment and to evaluate refinancing
opportunities as the maturity/redemption date is approached. For additional
information regarding the Company's long-term debt and trust preferred
securities see Notes 7 and 9 of Notes to Consolidated Financial Statements and
the Liquidity and Capital Resources section of this MD&A.
Sensitivity Analysis
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near term" means a period of time going forward up to one year from the
date of the consolidated financial statements.
In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, interest-bearing non-redeemable preferred stocks,
mortgage loans, short-term securities, cash, investment income accrued,
commercial paper, long-term debt, fixed rate trust preferred securities and
derivative financial instruments. The primary market risk to the Company's
market sensitive instruments is interest rate risk. The sensitivity analysis
model uses a 100 basis point change in interest rates to measure the
hypothetical change in fair value of financial instruments included in the
model.
For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and interest
rate reset features. Duration on tax exempt securities is adjusted for the fact
that the yield on such securities is less sensitive to changes in interest rates
compared to Treasury securities. Invested asset portfolio durations are
calculated on a market value weighted basis, including accrued investment
income, using holdings as of December 31, 1997.
For long-term debt and fixed rate trust preferred securities, the change in fair
value is determined by calculating hypothetical December 31, 1997 ending prices
based on yields adjusted to reflect a 100 basis point change, comparing such
hypothetical ending prices to actual ending prices, and multiplying the
difference by the par or shares outstanding.
17
<PAGE> 18
The sensitivity analysis model used by the Company produces a loss in fair value
of market sensitive instruments of $1.250 billion based on a 100 basis point
increase in interest rates as of December 31, 1997. This loss value only
reflects the impact of an interest rate increase on the fair value of the
Company's financial instruments, which constitute approximately 59% of total
assets and approximately 5% of total liabilities. As a result, the loss value
excludes a significant portion of the Company's consolidated balance sheet which
would materially mitigate the impact of the loss in fair value associated with a
100 basis point increase in interest rates.
For example, certain non-financial instruments, primarily insurance accounts for
which the fixed maturity portfolio's primary purpose is to fund future claims
payments related thereto, are not reflected in the development of the above loss
value. These non-financial instruments include premium balances receivable,
reinsurance recoverables, claims and claim adjustment expense reserves and
unearned premium reserves. The Company's sensitivity model also calculates a
potential loss in fair value with the inclusion of these non-financial
instruments. For non-financial instruments, changes in fair value are determined
by calculating the present value of the estimated cash flows associated with
such instruments using risk-free rates as of December 31, 1997, calculating the
resulting duration, then using that duration to determine the change in value
for a 100 basis point change.
Based on the sensitivity analysis model used by the Company, the loss in fair
value of market sensitive instruments, including these non-financial
instruments, as a result of a 100 basis point increase in interest rates as of
December 31, 1997 is not material.
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 and litigation.
Commercial Lines operating results for 1997 reflected the negative impact of
pricing declines in all markets. This trend in market conditions, characterized
by difficult pricing and increased competition, continued from prior years.
In National Accounts, where the majority of products are loss-sensitive
retrospectively rated or high deductible policies, pricing declines have been
the most severe. This business continues to reflect the negative impact of price
declines as evidenced by the decrease in premium and fee levels and, more
importantly, in the narrowing of profit margins earned on this business.
Additionally, there has been an increasing trend in this marketplace for
guaranteed cost products at what the Company believes are inadequate price
levels.
For Commercial Accounts and Select Accounts, the highly competitive marketplace
and soft underwriting cycle continue to pressure the pricing of guaranteed cost
products. Premiums on this business continue to reflect price declines, and have
not kept pace with loss cost inflation in recent years. The impact of this
negative trend in market conditions and resultant price declines has been
partially offset by a continued disciplined approach to underwriting and risk
management by the Company. The Company's focus is to retain existing profitable
business and obtain new accounts where it can maintain its selective
underwriting policy. The Company continues to adhere to strict guidelines to
maintain high quality underwriting and to focus on its core product lines and
markets, with particular emphasis on both product and industry specialization.
Specialty Accounts also operates within a highly competitive marketplace
characterized by pressure on both price and terms. The Company's focus in this
market is to sustain its emphasis on strict adherence to underwriting standards
and to increase its efforts to cross-sell its expanding array of specialty
products to existing customers of National Accounts, Commercial Accounts and
Select Accounts where it believes it has the greatest sales and profit
opportunities.
The combination of price declines associated with the highly competitive
marketplace and the Company's selective underwriting criteria has had an adverse
impact on premium and fee levels during the past several years. If the
competitive pressures on pricing do not improve in 1998, these factors may
continue to affect premium and fee levels unfavorably. The Company believes that
the competitive pricing environment for Commercial Lines is not likely to
improve in 1998.
18
<PAGE> 19
Personal Lines strategy includes the control of operating expenses to improve
competitiveness and profitability, growth in sales through independent agents,
and continued expansion of alternative marketing channels to broaden its
distribution of personal lines products. Personal Lines is expanding its product
capabilities, including nonstandard auto coverages, in conjunction with this
growth strategy. In addition, Personal Lines continues to take action to reduce
its exposure to catastrophe losses, including limiting the writing of new
homeowners business and selectively non-renewing existing homeowners business in
certain markets, tightening underwriting standards and implementing price
increases in certain hurricane-prone areas, subject to restrictions imposed by
insurance regulatory authorities.
The property and 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,
completing the integration of Aetna P&C to make it more consistent with the
decentralized, streamlined structure of the Company, and improving claims
expense control. The Company has reached its objective of achieving $300 million
in annual cost savings in the first two years after the acquisition of Aetna
P&C.
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.
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 obligations and/or rebalance asset portfolios.
The Company's invested assets at December 31, 1997 totaled $31.0 billion and
consisted primarily of highly liquid public debt securities of $25.2 billion,
private debt securities of $2.0 billion, equity securities of $1.0 billion,
mortgage loans and real estate of $786 million, short-term investments of $1.4
billion and other investments of $574 million.
19
<PAGE> 20
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. Also, the Company will continue to be able to make borrowings
under a $500 million Credit Facility with a syndicate of banks, which expires in
December 2001, 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, 1997, this requirement was
exceeded by approximately $3.4 billion. In addition, the Credit Facility places
restrictions on the amount of consolidated debt TAP can incur. If the Company
had borrowings under the Credit Facility, the interest rate would be based upon
LIBOR plus a negotiated margin. TAP compensates the banks for the Credit
Facility through commitment fees. 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, 1997,
TAP had $108 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, 1997, 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 1998, dividend payments to TAP from its insurance
subsidiaries are limited to $805 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.
In 1996, the Company began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue. This issue involves the ability of computer systems that have
time-sensitive programs to properly recognize the year 2000. The inability to do
so could result in major failures or miscalculations. The Company has a
comprehensive plan in progress to address its internal year 2000 issue with
modifications to existing programs and conversions to new programs to bring all
its critical business systems into year 2000 compliance by year-end 1998. The
total cost associated with the required modifications and conversions, which are
expensed as incurred, is not expected to have a material effect on its financial
position, results of operations or liquidity. The Company also has third party
customers, financial institutions, vendors and others with which it conducts
business and has confirmed their plans to address year 2000 issues. While it is
likely that these efforts by third party vendors and customers will be
successfully completed in a timely manner, it is possible that a series of
failures by third parties could have a material adverse effect on the Company's
results of operations in future years.
20
<PAGE> 21
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, 1997, all of the
Company's insurance subsidiaries had adjusted capital in excess of amounts
requiring any regulatory action.
The Company has a net deferred tax asset of $1.3 billion at December 31, 1997
which relates to temporary differences that are expected to reverse as net
ordinary deductions for tax purposes. The Company will have to generate
approximately $3.8 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 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 $3.3 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
the discussion of environmental and asbestos claims in this MD&A.
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. 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 June 23, 1997, the Company repurchased, in the aggregate, 6,600,102 shares of
its Class A Common Stock held by Aetna, J.P. Morgan Capital Corporation, Fund
American Enterprise Holdings, Inc. and The Trident Partnership, L.P.
(collectively, the "Private Investors") for a total purchase price of
approximately $240.8 million, representing a discount to the then current market
price. The repurchases represented 20% of the holdings of each of the Private
Investors. As part of the repurchase agreement, each of the Private Investors
agreed to extend its contractual sale restrictions on 50% of the remaining
shares held by the Private Investors for an additional period of approximately
six months, to March 15, 1998. On July 24, 1996, TAP's Board of Directors had
authorized the expenditure of up to $100 million for the repurchase of common
stock. This transaction satisfied the Company's previously announced program to
repurchase $100 million of its shares. During 1997 and 1996, the Company had
previously repurchased in the open market 758,700 and 406,860 shares of its
Class A Common Stock at an aggregate cost of $27 million and $13 million,
respectively, under the repurchase program, which was terminated.
On October 24, 1997, the Company filed a registration statement covering
14,200,207 shares of Class A Common Stock (which included an over-allotment
option for 1,000,000 shares) which were sold by the Private Investors. In order
to permit the grant by the Private Investors to the underwriters in the offering
of an over-allotment option to purchase up to an additional 1,000,000 shares in
the aggregate, the Company waived the restricted period on such shares, the sale
of which would otherwise be restricted until March 15, 1998. Except for
underwriting commissions, all expenses incurred in connection with the sale were
paid by the Company. The Company did not receive any proceeds from this sale of
the Class A Common Stock. The sale represented approximately 54% of the
remaining holdings of each of the Private Investors.
21
<PAGE> 22
On January 28, 1998, the Company, through the Travelers Property Casualty Corp.
Capital Accumulation Plan, reissued 763,654 shares of treasury stock in the form
of restricted stock to participating officers and other key employees. In
addition, on January 22, 1997, the Company issued 413,578 shares of the
Company's Class A Common Stock and reissued 502,430 shares of treasury stock in
the form of restricted stock to participating officers and other key employees.
The fair market values per share of the 1998 and 1997 restricted stock awards
were $43.71 and $37.58, respectively. 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 grant 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. At December
31, 1997, 3,083,992 shares were available for future grants under TAP's
restricted stock plan.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. Actual results may differ materially from those
contemplated by the forward-looking statements. In particular, the information
appearing in the section under the heading "Outlook" is forward-looking. These
forward-looking statements involve risks and uncertainties including, but not
limited to, the following: changes in general economic conditions, including the
performance of financial markets and interest rates; customer responsiveness to
both new products and distribution channels; competitive, regulatory, or tax
changes that affect the cost of or demand for the Company's products; and
adverse litigation results.
22
<PAGE> 23
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 7,225 $ 6,028 $ 3,315
Net investment income 2,051 1,656 710
Fee income 365 392 432
Realized investment gains 169 18 71
Other revenues 101 103 41
------- ------- -------
Total revenues 9,911 8,197 4,569
------- ------- -------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 5,484 5,282 2,817
Amortization of deferred acquisition costs 1,127 906 512
Interest expense 163 118 --
General and administrative expenses 1,385 1,404 689
------- ------- -------
Total claims and expenses 8,159 7,710 4,018
------- ------- -------
Income before federal income taxes 1,752 487 551
------- ------- -------
Federal income taxes:
Current expense (benefit) 422 (100) 160
Deferred expense (benefit) 94 196 (28)
------- ------- -------
Total federal income taxes 516 96 132
------- ------- -------
Net income $ 1,236 $ 391 $ 419
======= ======= =======
Net income per common share $ 3.13 $ 1.02 $ 1.28
Net income per common share-assuming dilution $ 3.12 $ 1.02 $ 1.28
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 24
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In millions, except shares)
<TABLE>
<CAPTION>
At December 31, 1997 1996
---- ----
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $26,127 and $24,052) $ 27,188 $ 24,446
Equity securities, at fair value (cost, $977 and $756) 1,037 779
Mortgage loans 691 1,005
Real estate held for sale 95 157
Short-term securities 1,446 2,311
Other investments 574 666
-------- --------
Total investments 31,031 29,364
-------- --------
Cash 47 106
Investment income accrued 387 381
Premium balances receivable 2,897 2,976
Reinsurance recoverables 9,188 9,714
Deferred acquisition costs 501 426
Deferred federal income taxes 1,316 1,583
Contractholder receivables 1,923 1,828
Goodwill 1,497 1,549
Other assets 1,895 1,852
-------- --------
Total assets $ 50,682 $ 49,779
======== ========
LIABILITIES
Claims and claim adjustment expense reserves $ 30,324 $ 31,177
Unearned premium reserves 3,867 3,554
Contractholder payables 1,923 1,828
Commercial paper 108 25
Long-term debt 1,249 1,249
Other liabilities 4,534 4,566
-------- --------
Total liabilities 42,005 42,399
-------- --------
TAP-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debt securities of TAP 900 900
-------- --------
STOCKHOLDERS' EQUITY
Common stock:
Class A, $.01 par value, 700 million shares authorized;
(issued shares, 72,393,407 and 71,979,829) 1 1
Class B, $.01 par value, 700 million shares authorized;
328,020,170 shares issued and outstanding 3 3
Additional paid-in capital 5,473 5,455
Retained earnings 1,866 749
Treasury stock, at cost (shares, 7,314,688 and 406,860) (266) (13)
Unrealized gain on investment securities, net of tax 722 285
Unearned compensation (22) --
-------- --------
Total stockholders' equity 7,777 6,480
-------- --------
Total liabilities and stockholders' equity $ 50,682 $ 49,779
======== ========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 25
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions, except shares)
<TABLE>
<CAPTION>
SHARES (IN THOUSANDS)
For the Year Ended December 31, 1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK AND ADDITIONAL
PAID-IN CAPITAL
Balance, beginning of year $ 5,459 $ 2,899 $ 2,921 400,000 100 100
Capital Accumulation Plan grant 18 -- -- 414 -- --
Capitalization of Travelers
Property Casualty Corp. -- 2,560 -- -- 399,900 --
Other -- -- (22) -- -- --
-------- -------- -------- ------- ------- ---
Balance, end of year 5,477 5,459 2,899 400,414 400,000 100
-------- -------- -------- ------- ------- ---
RETAINED EARNINGS
Balance, beginning of year 749 422 103
Net income 1,236 391 419
Dividends (119) (64) (100)
-------- -------- --------
Balance, end of year 1,866 749 422
-------- -------- --------
TREASURY STOCK (at cost)
Balance, beginning of year (13) -- -- (407) -- --
Capital Accumulation Plan grant,
net of forfeitures 15 -- -- 449 -- --
Treasury stock acquired (268) (13) -- (7,359) (407) --
Other -- -- -- 2 -- --
-------- -------- -------- ------- ------- ---
Balance, end of year (266) (13) -- (7,315) (407) --
-------- -------- -------- ------- ------- ---
UNREALIZED GAIN (LOSS) ON
INVESTMENT SECURITIES,
NET OF TAX
Balance, beginning of year 285 280 (443)
Net change in unrealized gains and losses
on investment securities, net of tax 437 5 723
-------- -------- --------
Balance, end of year 722 285 280
-------- -------- --------
UNEARNED COMPENSATION
Balance, beginning of year -- -- --
Issuance of restricted stock under Capital
Accumulation Plan, net of forfeitures (33) -- --
Restricted stock amortization 11 -- --
-------- -------- --------
Balance, end of year (22) -- --
-------- -------- -------- ------- ------- ---
Total stockholders' equity
and shares outstanding $ 7,777 $ 6,480 $ 3,601 393,099 399,593 100
======== ======== ======== ======= ======= ===
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 26
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,236 $ 391 $ 419
Adjustments to reconcile net income to net cash provided by operating activities
Realized investment gains (169) (18) (71)
Depreciation and amortization 47 40 15
Deferred federal income taxes 94 196 (28)
Amortization of deferred policy acquisition costs 1,127 906 512
Premium balances receivable 79 212 387
Reinsurance recoverables 97 (159) 364
Deferred policy acquisition costs (1,210) (935) (493)
Insurance reserves (121) 691 (18)
Other (557) (143) 407
-------- -------- --------
Net cash provided by operating activities 623 1,181 1,494
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,422 1,567 684
Mortgage loans 154 133 15
Proceeds from sales of investments
Fixed maturities 10,045 12,606 4,871
Equity securities 504 558 157
Mortgage loans 231 23 36
Real estate held for sale 129 16 22
Purchases of investments
Fixed maturities (13,421) (15,049) (6,497)
Equity securities (554) (785) (472)
Mortgage loans (38) (161) (40)
Short-term securities, (purchases) sales, net 872 (1,044) (211)
Other investments, net (57) (90) 16
Business acquisitions -- (4,160) --
Business divestments -- 1 --
Securities transactions in course of settlement 335 571 44
-------- -------- --------
Net cash used in investing activities (378) (5,814) (1,375)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of commercial paper, net 83 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 (268) (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 (98) (49) (100)
Dividends to minority shareholders (21) (11) --
-------- -------- --------
Net cash provided by (used in) financing activities (304) 4,688 (100)
-------- -------- --------
Net increase (decrease) in cash (59) 55 19
Cash at beginning of period 106 51 32
-------- -------- --------
Cash at end of period $ 47 $ 106 $ 51
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid (refunded) $ 677 $ (208) $ (28)
Interest paid $ 163 $ 99 $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
26
<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) (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.
(Aetna) all of the outstanding capital stock of Travelers Casualty and
Surety Company (formerly The Aetna Casualty and Surety Company) and The
Standard Fire Insurance Company (collectively, Aetna P&C) for
approximately $4.2 billion in cash. The acquisition was accounted for
under the purchase method of accounting and, accordingly, the
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
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (FAS 132).
FAS 132 supersedes the disclosure requirements in FASB Statements No. 87,
"Employers' Accounting for Pensions," No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and
Termination of Benefits," and No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." FAS 132 addresses
disclosure only and does not address measurement or recognition. In
addition to other disclosure changes, FAS 132 allows employers to
disclose total contributions to multiemployer plans without
disaggregating the amounts attributable to pensions and other
postretirement benefits. This statement is effective for fiscal years
beginning after December 15, 1997. Earlier application is encouraged.
Effective December 31, 1997, the Company adopted FAS 132. The adoption of
this standard did not have any impact on results of operations, financial
condition or liquidity.
EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS 128). This
statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock. FAS
128 requires restatement of all prior period EPS data presented. It
simplifies the standards for computing earnings per share previously
found in Accounting Principles Board Opinion No. 15, "Earnings per Share"
(APB 15), and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. See note 1, Accounting Policies, Earnings per
Share. FAS 128 supersedes APB 15 and related accounting interpretations
and is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods.
27
<PAGE> 28
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the effect of potentially dilutive
securities, principally stock-based incentive plans.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES Effective January 1, 1997, the Company
adopted Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (FAS 125). This statement establishes accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. These standards are based on an approach
that focuses on control. Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets
it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities
when extinguished. FAS 125 provides standards for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. 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 FAS 125 effective January 1, 1997 did not have a material impact on
results of operations, financial condition or liquidity. The adoption of
the provisions of FAS 127 effective January 1, 1998 will not have a
material impact on results of operations, financial condition or
liquidity.
ACCOUNTING POLICIES
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities are valued based upon quoted market prices or dealer
quotes, or if quoted market prices or dealer quotes are not available,
discounted expected cash flows using market rates commensurate with the
credit quality and maturity of the investment. Also included in fixed
maturities are loan-backed and structured securities, which are amortized
using the retrospective method. The effective yield used to determine
amortization is calculated based on actual historical and projected
future cash flows, which are obtained from a widely-accepted securities
data provider. 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 returns required in the current real estate
financing market. There were no impaired loans at December 31, 1997 and
1996.
Real estate held for sale is carried at the lower of cost or fair value
less estimated costs to sell. Fair value is established at the 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, 1997
and 1996.
28
<PAGE> 29
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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, 1997 and 1996 are $1.5 billion
and $1.6 billion, respectively, of reserves related to workers'
compensation that have been discounted using an interest rate of 5%.
29
<PAGE> 30
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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.
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.
OTHER REVENUES
Other revenues include revenues from premium installment charges, which
are recognized as collected, revenues of noninsurance subsidiaries other
than fee income, gains and losses on dispositions of assets and
operations other than realized investment gains and losses 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.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the
accounting method prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and has included in the
notes to consolidated financial statements the pro forma disclosures
required by FAS No. 123 "Accounting for Stock-Based Compensation." See
note 14. The Company accounts for its stock-based non-employee
compensation plans at fair value.
30
<PAGE> 31
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EARNINGS PER SHARE
Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the effect of potentially dilutive
securities, principally stock-based incentive plans. The following table
is a reconciliation of the numerators and denominators of the basic and
diluted earnings per share computation for net income:
<TABLE>
<CAPTION>
(for the year ended December 31, 1997, PER SHARE
in millions, except per share amounts) INCOME(1) SHARES(2) AMOUNT
--------- --------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders $1,236 395.5 $ 3.13
Effects of Dilutive Securities
Restricted Stock -- .3 (0.01)
------ ----- ------
Diluted EPS
Income available to common stockholders
and assumed conversions $1,236 395.8 $ 3.12
====== ===== ======
</TABLE>
(1) Numerator
(2) Denominator
For the years ended December 31, 1996 and 1995, there were no dilutive
securities issued.
On February 3, 1998, the Staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 98 (SAB 98). SAB 98 requires that
FAS 128 should be used to compute earnings per share for periods prior to
an initial public offering (IPO). For purposes of computing basic and
diluted EPS for periods prior to the IPO, the 328 million shares of
common stock issued to TIGI in April 1996 were assumed to be outstanding
for all reported periods. See note 2. Previously, all common stock issued
within a one-year period prior to an IPO was treated 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.
Accordingly, the Company has restated its earnings per share for 1996 and
1995 in accordance with the guidelines of SAB 98.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, forward contracts and interest rate swaps, 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 included in other
investments in the consolidated balance sheet. Unrealized gains and
losses are reflected in stockholders' equity. Swap payments are accrued
and recognized in net investment income.
31
<PAGE> 32
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Forward contracts were not significant at December 31, 1997 and 1996.
Information concerning derivative financial instruments is included in
note 12.
ACCOUNTING STANDARDS NOT YET ADOPTED
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund
and other insurance-related assessments, how to measure that liability,
and when an asset may be recognized for the recovery of such assessments
through premium tax offsets or policy surcharges. This SOP is effective
for financial statements for fiscal years beginning after December 15,
1998, and the effect of initial adoption is to be reported as a
cumulative catch-up adjustment. Restatement of previously issued
financial statements is not allowed. The Company has not yet determined
the impact that SOP 97-3 will have on its consolidated financial
statements or when it will be implemented.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All
items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This statement stipulates that comprehensive income reflect
the change in equity of an enterprise during a period from transactions
and other events and circumstances from nonowner sources. Comprehensive
income will thus represent the sum of net income and other comprehensive
income, although FAS 130 does not require the use of the terms
comprehensive income or other comprehensive income. The accumulated
balance of other comprehensive income is required to be displayed
separately from retained earnings and additional paid-in capital in the
consolidated balance sheet. This statement is effective for fiscal years
beginning after December 15, 1997. The Company anticipates that the
adoption of FAS 130 will result primarily in reporting unrealized gains
and losses on investments in debt and equity securities in comprehensive
income.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (FAS 131). FAS 131 establishes standards for the way
that public enterprises report information about operating segments in
annual financial statements and requires that selected information about
those operating segments be reported in interim financial statements.
This statement supersedes Statement of Financial Accounting Standards No.
14, "Financial Reporting for Segments of a Business Enterprise". FAS 131
requires that all public enterprises report financial and descriptive
information about its reportable operating segments. Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years
beginning after December 15, 1997. The Company's reportable operating
segments are not expected to change as a result of the adoption of FAS
131.
32
<PAGE> 33
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NATURE OF OPERATIONS
The Company is comprised of two major business segments: Commercial Lines
and Personal Lines.
COMMERCIAL LINES
Commercial Lines offers a broad array of property and casualty insurance
and insurance-related services. 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 from property
damage, 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, professional
liability, and several miscellaneous coverages. 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.
National Accounts provides a variety of casualty products to 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 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.
Commercial Accounts serves medium-sized businesses for casualty products
and both large and medium-sized businesses for property products.
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. Within Commercial
Accounts the Company has established dedicated operations that
exclusively target the construction industry, providing insurance and
risk management services for virtually all areas of construction. The
dedicated construction operations are reflective of the Company's focus
on industry specialization.
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, employment
practices liability insurance, product liability, fidelity and surety
bonds, commercial umbrella and excess liability, excess property
insurance and coverages relating to the entertainment industry, excess
and surplus lines coverages and other industry specific programs. Its
products are distributed through both wholesale brokers and retail agents
and brokers.
33
<PAGE> 34
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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. These products are distributed through independent agents,
sponsoring organizations such as employee and affinity groups, joint
marketing arrangements with other insurers and through the independent
agents of Primerica Financial Services, a unit of Travelers Group Inc.
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.
CATASTROPHE EXPOSURE
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 catastrophes through individual risk selection and the
purchase of catastrophe reinsurance.
2. ACQUISITION OF SUBSIDIARIES
TRAVELERS 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.
34
<PAGE> 35
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. ACQUISITION OF SUBSIDIARIES, CONTINUED
On April 23, 1996, TAP sold in a public offering approximately 39 million
shares of its Class A Common Stock, representing approximately 9.75% of
its outstanding common stock, for total proceeds of $928 million. On
April 24, 1996, TAP sold in a public offering $500 million of 6-3/4%
Notes due April 15, 2001 and $200 million of 7-3/4% Notes due April 15,
2026. On April 26, 1996, Travelers P&C Capital I, a wholly owned
subsidiary trust of TAP, issued $800 million of 8.08% Trust Preferred
Securities in a public offering. On May 10, 1996, Travelers P&C Capital
II, a wholly owned subsidiary trust of TAP, issued $100 million of 8.00%
Trust Preferred Securities in a public offering. These Trust Preferred
Securities, which are fully and unconditionally guaranteed by TAP, have a
liquidation value of $25 per Trust Preferred Security and are mandatorily
redeemable under certain circumstances. Dividends on the Trust Preferred
Securities have been classified as interest expense in the 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 on a fully consolidated basis at management's best estimate
of their fair values at the acquisition date. Evaluation and appraisal of
assets and liabilities included: adjustments to investments; deferred
acquisition costs; financial guarantee obligations which the Company
assumed, designated as held for sale and actively marketed; 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; and
other assets and liabilities and related deferred income tax amounts. The
excess of the purchase price over the estimated fair value of net assets
was 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, primarily related to cumulative injury claims other
than asbestos (CIOTA), insurance products involving financial guarantees,
and assumed reinsurance; a $55 million after-tax ($84 million before tax)
provision for an additional asbestos liability related to an existing
settlement agreement with a customer of Aetna P&C; a $39 million
after-tax ($60 million before tax) charge related to premium collection
issues on loss sensitive programs, specifically large deductible
products; a $27 million after-tax ($41 million before tax) provision for
uncollectibility of reinsurance recoverables of Aetna P&C determined by
applying the Company's normal guidelines for estimating collectibility of
such accounts; and $23 million after tax ($35 million before tax) in
lease and severance costs of The Travelers Indemnity Company related to
the restructuring plan for the acquisition.
35
<PAGE> 36
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. ACQUISITION 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
Net income per common share 1.46 0.18
------- -------
</TABLE>
* Historical results of Aetna P&C include $307 million ($200 million after
tax) and $199 million ($129 million after tax) of realized investment
gains in 1996 and 1995, respectively.
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 $ 13,969
Fair value of other assets acquired 10,386
Claims and claim adjustment expense reserves assumed (16,907)
Other liabilities assumed (3,288)
---------
Cash payment related to business acquisition $ 4,160
=========
</TABLE>
36
<PAGE> 37
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SEGMENT INFORMATION
<TABLE>
<CAPTION>
CORPORATE
COMMERCIAL PERSONAL AND OTHER
(at and for the year ended December 31, in millions) LINES LINES OPERATIONS CONSOLIDATED
---------- --------- ---------- ------------
<S> <C> <C> <C> <C>
1997
Revenues
Premiums $ 4,308 $ 2,917 $ -- $ 7,225
Net investment income 1,695 353 3 2,051
Fee income 365 -- -- 365
Realized investment gains 154 15 -- 169
Other 35 56 10 101
-------- --------- --------- --------
Total revenues $ 6,557 $ 3,341 $ 13 $ 9,911
======== ========= ========= ========
Income (loss) before federal income taxes $ 1,324 $ 617 $ (189) $ 1,752
Net income (loss) 946 413 (123) 1,236
Assets 43,208 7,113 361 50,682
-------- --------- --------- --------
1996
Revenues
Premiums $ 3,695 $ 2,323 $ 10 $ 6,028
Net investment income 1,343 311 2 1,656
Fee income 392 -- -- 392
Realized investment gains (losses) 26 (8) -- 18
Other 41 59 3 103
-------- --------- --------- --------
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 432 -- -- 432
Realized investment gains 62 9 -- 71
Other 11 27 3 41
-------- --------- --------- --------
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
======== ========= ========= ========
</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 a benefit of $39 million related to the review of Aetna P&C's
insurance reserves, partially offset by $9 million of other
acquisition-related charges.
37
<PAGE> 38
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 UNREALIZED
AMORTIZED -------------------- FAIR
(at December 31, 1997, in millions) COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mortgage-backed securities -
CMOs and pass-through securities $ 4,625 $ 171 $ -- $ 4,796
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,965 108 1 2,072
Obligations of states, municipalities and
political subdivisions 7,599 366 2 7,963
Debt securities issued by foreign governments 638 26 1 663
All other corporate bonds 11,249 407 14 11,642
Redeemable preferred stock 51 1 -- 52
------- ------- ------- -------
Total $26,127 $ 1,079 $ 18 $27,188
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED --------------------- 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
======= ======= ======= =======
</TABLE>
The amortized cost and fair value of fixed maturities by contractual
maturity follow. 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.
38
<PAGE> 39
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS, CONTINUED
<TABLE>
<CAPTION>
AMORTIZED FAIR
(at December 31, 1997, in millions) COST VALUE
--------- -------
<S> <C> <C>
Due in one year or less $ 898 $ 903
Due after 1 year through 5 years 6,146 6,290
Due after 5 years through 10 years 5,895 6,153
Due after 10 years 8,563 9,046
------- -------
21,502 22,392
Mortgage-backed securities 4,625 4,796
------- -------
Total $26,127 $27,188
======= =======
</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, 1997 and 1996, the Company held CMOs classified as
available for sale with a fair value of $2.2 billion and $2.1 billion,
respectively. Approximately 77% and 81% of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31,
1997 and 1996, respectively. In addition, the Company held $2.6 billion
and $2.4 billion of GNMA, FNMA or FHLMC mortgage-backed pass-through
securities at December 31, 1997 and 1996, respectively. Virtually all of
these securities are rated Aaa.
Proceeds from sales of fixed maturities classified as available for sale
were $10.0 billion, $12.6 billion and $4.9 billion in 1997, 1996 and
1995, respectively. Gross gains of $172 million, $82 million and $65
million and gross losses of $94 million, $177 million and $90 million,
respectively, were realized on those sales.
EQUITY SECURITIES
The cost and fair value of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
------------------- FAIR
(at December 31, 1997, in millions) COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Common stocks $ 202 $ 31 $ 14 $ 219
Nonredeemable preferred stocks 775 46 3 818
------ ------ ------ ------
Total $ 977 $ 77 $ 17 $1,037
====== ====== ====== ======
(at December 31, 1996, in millions)
Common stocks $ 164 $ 29 $ 17 $ 176
Nonredeemable preferred stocks 592 16 5 603
------ ------ ------ ------
Total $ 756 $ 45 $ 22 $ 779
====== ====== ====== ======
</TABLE>
39
<PAGE> 40
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS, CONTINUED
Proceeds from sales of equity securities were $504 million, $558 million
and $157 million in 1997, 1996 and 1995, respectively, resulting in gross
realized gains of $78 million, $147 million and $28 million and gross
realized losses of $55 million, $28 million and $6 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) 1997 1996
---- ----
<S> <C> <C>
Current mortgage loans $ 675 $ 965
Underperforming mortgage loans 16 40
------ ------
Total mortgage loans 691 1,005
Real estate held for sale 95 157
------ ------
Total $ 786 $1,162
====== ======
</TABLE>
Aggregate annual maturities on mortgage loans include $16 million which
are past maturity and $56 million, $205 million, $173 million, $52
million, $5 million and $184 million for 1998, 1999, 2000, 2001, 2002
and 2003 and thereafter, respectively.
CONCENTRATIONS
At December 31, 1997 and 1996, the Company had concentrations of credit
risk in tax-exempt investments of the State of Texas of $1.2 billion and
$1.1 billion, respectively, and in the State of New York of $1.2 billion
and $400 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
$832 million and $599 million at December 31, 1997 and 1996,
respectively. The Company defines its below investment grade assets as
those securities rated "Ba1" or lower by external rating agencies, or the
equivalent by 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) 1997 1996
---- ----
<S> <C> <C>
Banking $2,444 $2,001
Financing 1,645 2,027
===== =====
</TABLE>
Below investment grade assets included in the preceding table are not
significant.
40
<PAGE> 41
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) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross investment income:
Fixed maturities $ 1,695 $ 1,344 $586
Mortgage loans 103 90 21
Short-term securities 57 77 73
Other 267 197 49
------- ------- ----
2,122 1,708 729
Investment expenses 71 52 19
------- ------- ----
Net investment income $ 2,051 $ 1,656 $710
======= ======= ====
</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) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REALIZED
Fixed maturities $ 78 $ (95) $ (40)
Equity securities 23 119 25
Mortgage loans 20 (1) 2
Real estate held for sale 18 3 1
Other 30 (8) 83
------- ------- -------
Realized investment gains $ 169 $ 18 $ 71
======= ======= =======
</TABLE>
Changes in net unrealized gains (losses) on investment securities that
are included as a separate component of stockholders' equity were as
follows:
<TABLE>
<CAPTION>
(for the year ended December 31, in millions) . 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
UNREALIZED
Fixed maturities $ 667 $ 20 $ 1,039
Equity securities 37 (15) 55
Other (30) 1 20
------- ------- -------
674 6 1,114
Related taxes 237 1 391
------- ------- -------
Change in unrealized gains (losses) on
investment securities 437 5 723
Balance, beginning of year 285 280 (443)
------- ------- -------
Balance, end of year $ 722 $ 285 $ 280
======= ======= =======
</TABLE>
41
<PAGE> 42
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. 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.
42
<PAGE> 43
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) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
WRITTEN PREMIUMS
Direct $ 8,862 $ 7,585 $ 4,261
Assumed from:
Affiliated companies 264 264 374
Non-affiliated companies 421 320 301
Ceded to:
Affiliated companies (54) (58) (48)
Non-affiliated companies (1,661) (1,769) (1,267)
------- ------- -------
Total net written premiums $ 7,832 $ 6,342 $ 3,621
======= ======= =======
EARNED PREMIUMS
Direct $ 8,250 $ 7,263 $ 4,007
Assumed from:
Affiliated companies 305 201 284
Non-affiliated companies 429 395 346
Ceded to:
Affiliated companies (50) (58) (48)
Non-affiliated companies (1,709) (1,773) (1,274)
------- ------- -------
Total net earned premiums $ 7,225 $ 6,028 $ 3,315
======= ======= =======
Percentage of amount assumed to net earned 10.2% 9.9% 19.0%
------- ------- -------
Ceded claims incurred $ 1,082 $ 1,558 $ 1,245
======= ======= =======
</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) 1997 1996
---- ----
<S> <C> <C>
REINSURANCE RECOVERABLES
Property-casualty business:
Pools and associations $3,378 $4,160
Non-affiliated companies 4,829 4,553
Affiliated companies 795 793
Accident and health business:
Affiliated companies 186 208
------ ------
Total reinsurance recoverables $9,188 $9,714
====== ======
</TABLE>
43
<PAGE> 44
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. REINSURANCE, CONTINUED
Amounts of ceded claims and claim adjustment expenses recoverable from
unaffiliated insurers at December 31, 1997 and 1996 include $352 million
and $488 million, respectively, recoverable from Lloyd's of London
(Lloyd's). In 1997, the Company reached an agreement to settle the
arbitration with underwriters at Lloyd's and certain London companies in
New York State to enforce reinsurance contracts with respect to
recoveries for certain asbestos claims. The dispute involved the ability
of the Company to aggregate asbestos claims under a market agreement
between Lloyd's and the Company or under the applicable reinsurance
treaties. The outcome of this agreement had no impact on earnings.
In 1996, Lloyd's restructured its operations with respect to claims for
years prior to 1993. The outcome of the restructuring of Lloyd's is
uncertain and the impact, if any, on collectibility of amounts
recoverable by the Company from Lloyd's cannot be quantified at this
time. The Company believes that it is possible that an unfavorable impact
on collectibility could have a material adverse effect on the Company's
results of operations in a future period. However, the Company believes
that it is not likely that the outcome could have a material adverse
effect on the Company's financial condition or liquidity. The Company
carries an allowance for uncollectible reinsurance which is not allocated
to any specific proceedings or disputes, whether for financial
impairments or coverage defenses. Including this allowance, the Company
believes that the net receivable from reinsurance contracts is properly
stated.
6. INSURANCE CLAIMS RESERVES
Claims and claim adjustment expense reserves were as follows:
<TABLE>
<CAPTION>
(at December 31, in millions) 1997 1996
---- ----
<S> <C> <C>
Claims and claim adjustment expense reserves:
Property-casualty $30,138 $30,969
Accident and health 186 208
------- -------
Total $30,324 $31,177
======= =======
</TABLE>
44
<PAGE> 45
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INSURANCE CLAIMS RESERVES, CONTINUED
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) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Claims and claim adjustment expense
reserves at beginning of year $ 30,969 $ 15,213 $ 15,013
Less reinsurance recoverables on unpaid losses 9,153 5,123 5,301
-------- -------- --------
Net balance at beginning of year 21,816 10,090 9,712
-------- -------- --------
Provision for claims and claim adjustment expenses
for claims arising in the current year 5,730 4,839 2,903
Estimated claims and claim adjustment
expenses for claims arising in prior years (492) 192 (226)
Acquisitions -- 11,752 --
Termination of reinsurance agreements with TIGI (see note 5) -- -- 520
-------- -------- --------
Total increases 5,238 16,783 3,197
-------- -------- --------
Claims and claim adjustment expense payments for claims arising in:
Current year 1,944 1,858 886
Prior years 3,704 3,199 1,933
-------- -------- --------
Total payments 5,648 5,057 2,819
-------- -------- --------
Net balance at end of year 21,406 21,816 10,090
Plus reinsurance recoverables on unpaid losses 8,732 9,153 5,123
-------- -------- --------
Claims and claim adjustment expense
reserves at end of year $ 30,138 $ 30,969 $ 15,213
======== ======== ========
</TABLE>
In 1997, estimated claims and claim adjustment expenses for claims
arising in prior years included $154 million of net favorable
development in certain Personal Lines coverages and Commercial Lines
coverages, predominantly automobile coverages. In addition, in 1997
Commercial Lines experienced $122 million of favorable prior year loss
development on retrospectively rated policies in the workers'
compensation line; however, since the business to which it relates is
subject to premium adjustments, there was no impact on results of
operations. Also in 1997, the Company adopted newly prescribed statutory
allocations of certain claim adjustment expenses. The new allocations
resulted in favorable prior year loss development of $216 million offset
by an increase in the current accident year provision of the same
amount.
In 1996, estimated claims and claim adjustment expenses for claims
arising in prior years included $238 million of net favorable
development in certain Personal Lines coverages and Commercial 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.
45
<PAGE> 46
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 on
retrospectively rated policies 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, 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.
The claims and claim adjustment expense reserves included $2.2 billion
and $2.3 billion for asbestos and environmental-related claims net of
reinsurance at December 31, 1997 and 1996, 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.
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, and past ceded experience. 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, 1997 are the Company's
best estimate of ultimate claims and claim adjustment expenses based upon
known facts and current law. However, the conditions surrounding the
final resolution of these claims continue to change. Currently, it is not
possible to predict changes in the legal and legislative environment and
their impact on the future development of asbestos and environmental
claims. Such development will be affected by future court decisions and
interpretations and changes in 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.
46
<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. Under this facility TAP is required
to maintain a certain level of consolidated stockholders' equity (as
defined in the agreement). At December 31, 1997, this requirement was
exceeded by approximately $3.4 billion. In addition, the Credit Facility
places restrictions on the amount of consolidated debt TAP can incur. At
December 31, 1997, there were no borrowings outstanding under this
facility. If TAP had borrowings under this facility, the interest rate
would be based upon LIBOR plus a negotiated margin. TAP compensates the
banks for the Credit Facility through commitment fees. 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, 1997, TAP had $108 million
outstanding under its commercial paper program. The weighted average
interest rate on commercial paper as of December 31, 1997 was 6.11%. 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.
The Company completed the following long-term debt offerings during 1996.
At December 31, 1997, $750 million is available for debt offerings under
its shelf registration statement. Long-term debt outstanding at December
31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
(in millions)
<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>
47
<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) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
EFFECTIVE TAX RATE
Income before federal income taxes $ 1,752 $ 487 $ 551
Statutory tax rate 35% 35% 35%
------- ------- -------
Expected federal income taxes 613 170 193
Tax effect of:
Nontaxable investment income (108) (86) (68)
Goodwill 14 12 4
Other, net (3) -- 3
------- ------- -------
Federal income taxes $ 516 $ 96 $ 132
======= ======= =======
Effective tax rate 29% 20% 24%
------- ------- -------
COMPOSITION OF FEDERAL INCOME TAXES
Current expense (benefit):
United States $ 413 $ (102) $ 155
Foreign 9 2 5
------- ------- -------
Total 422 (100) 160
------- ------- -------
Deferred expense (benefit):
United States 94 196 (28)
------- ------- -------
Federal income tax expense $ 516 $ 96 $ 132
======= ======= =======
</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) 1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Claims and claim adjustment expense reserves $1,206 $1,241
Acquisition-related reserves 146 221
Unearned premium reserves 183 141
Employee benefits 98 87
Other 211 186
----- -----
Total 1,844 1,876
----- -----
Deferred tax liabilities:
Deferred acquisition costs 175 149
Investments 314 103
Other 39 41
----- -----
Total 528 293
----- -----
Net deferred tax asset $1,316 $1,583
====== ======
</TABLE>
48
<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 $3.8 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 $3.3 billion annually. At
December 31, 1997, 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 at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
LIQUIDATION INTEREST
(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>
49
<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, Aetna, J.P. Morgan Capital
Corporation, Fund American Enterprise Holdings, Inc. and The Trident
Partnership, L.P. (collectively, the Private Investors), 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.
50
<PAGE> 51
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED
On June 23, 1997, the Company repurchased, in the aggregate, 6,600,102
shares of Class A Common Stock held by the Private Investors for a total
purchase price of approximately $241 million, representing a discount to
the then current market price. Following this transaction, Travelers
Group Inc.'s beneficial ownership of the Company increased to
approximately 83.4%. The repurchases represented 20% of the holdings of
each of the Private Investors. As part of the repurchase agreement, each
of the Private Investors agreed to extend its contractual sale
restrictions on 50% of the remaining shares held by the Private Investors
for an additional period of approximately six months, to March 15, 1998.
On July 24, 1996, TAP's Board of Directors had authorized the expenditure
of up to $100 million for the repurchase of common stock. This
transaction satisfied the Company's previously announced program to
repurchase $100 million of its shares. During 1997 and 1996, the Company
had previously repurchased in the open market 758,700 and 406,860 shares
of its Class A Common Stock at an aggregate cost of $27 million and $13
million, respectively, under the repurchase program, which was
terminated.
On January 28, 1998, the Company, through the Travelers Property Casualty
Corp. Capital Accumulation Plan, reissued 763,654 shares of treasury
stock in the form of restricted stock to participating officers and other
key employees. Previously, on January 22, 1997, the Company issued
413,578 shares of the Company's Class A Common Stock and reissued 502,430
shares of treasury stock in the form of restricted stock to participating
officers and other key employees. The fair market values per share of the
1998 and 1997 restricted stock awards were $43.71 and $37.58,
respectively. 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. At December 31, 1997, 3,083,992 shares were available for future
grants under the Company's restricted stock plans.
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 83.4% of the economic interest in
TAP at December 31, 1997. 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
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 $805 million in 1998 without prior approval
of the Connecticut Insurance Department.
51
<PAGE> 52
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED
STATUTORY NET INCOME AND SURPLUS
Statutory net income of the Company's insurance subsidiaries was $1.1
billion for the year ended December 31, 1997, and 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 for
the year ended December 31, 1995, excluding Aetna P&C.
Statutory capital and surplus of the Company's insurance subsidiaries was
$6.2 billion and $5.4 billion at December 31, 1997 and 1996,
respectively.
10. BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by an affiliate. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by an affiliate. The Company's share of net expense for the
qualified pension and other postretirement benefit plans was $26 million,
$19 million and $15 million for 1997, 1996 and 1995, respectively.
Beginning January 1, 1996, the Company's other postretirement benefit
plans were amended to restrict benefit eligibility to retirees and
certain retiree-eligible employees. Previously, covered employees could
become eligible for postretirement benefits if they reached retirement
age while working for the Company.
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. Effective January
1, 1997, there are no Company matching contributions for substantially
all employees. For 1996, the Company's matching contribution, for almost
all employees except former Aetna P&C employees, was 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. These matching
contributions were invested in Series C Preferred Stock issued by
Travelers Group Inc. On January 2, 1998, the Series C Preferred Stock was
converted into Travelers Group Inc.'s common stock at an exchange rate of
approximately 2.42 shares of Travelers Group Inc.'s common stock for each
share of Series C Preferred Stock. The Company's expense was ($11)
million, $2 million and $7 million in 1997, 1996 and 1995, respectively.
The 1997 amount reflects the effect of forfeitures.
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 $118 million, $90 million and $61 million
in 1997, 1996 and 1995, respectively.
Future minimum annual rentals under noncancellable operating leases are
$81 million, $70 million, $57 million, $40 million, $25 million and $96
million for 1998, 1999, 2000, 2001, 2002 and 2003 and thereafter,
respectively. Future sublease rental income of approximately $67 million
will partially offset these commitments.
52
<PAGE> 53
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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, 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 on the consolidated 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 amount that it would cost the Company to
replace the contract. 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 upon
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.
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.
The Company held no financial futures contracts at December 31, 1997. At
December 31, 1996, the Company held financial futures contracts with
notional amounts of approximately $522 million and a deferred loss of $2
million. Total gains from financial futures of $15 million were deferred
at December 31, 1996 and reported in other liabilities. At December 31,
1996, the Company's futures contracts had no fair value because these
contracts are marked to market and settled daily in cash.
At December 31, 1997 and 1996, the Company held interest rate swaps with
notional amounts of $311 million and $763 million, respectively. The fair
value of these financial instruments was $11 million (gain position) and
$10 million (loss position) at December 31, 1997 and was $12 million
(gain position) and $13 million (loss position) at December 31, 1996. The
fair values were determined using a discounted cash flow method.
The off-balance-sheet risk of forward contracts was not significant at
December 31, 1997 and 1996. Financial guarantees are described in note
13.
53
<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
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, 1997 and 1996, investments in fixed maturities had a fair
value, which equaled carrying value, of $27.2 billion and $24.4 billion,
respectively. The fair value of investments in fixed maturities for which
a quoted market price or dealer quote are not available was $1.5 billion
and $1.7 billion at December 31, 1997 and 1996, respectively. The
carrying values of cash, short-term securities, mortgage loans,
investment income accrued and commercial paper approximated their fair
values. See notes 1 and 4.
At December 31, 1997 and 1996, the carrying value of $1.2 billion of
long-term debt approximated its fair value. Fair value is based upon bid
price at December 31, 1997 and 1996. At December 31, 1997 and 1996, the
carrying value of $900 million of TAP Preferred Securities approximated
their fair value. Fair value is based upon the closing price at December
31, 1997 and 1996.
The carrying values of $1.5 billion and $1.4 billion of financial
instruments classified as other assets approximated their fair values at
December 31, 1997 and 1996, respectively. The carrying values of $3.8
billion and $3.5 billion of financial instruments classified as other
liabilities at December 31, 1997 and 1996, respectively, also
approximated their fair values. Fair value is determined using various
methods including discounted cash flows, as appropriate for the various
financial instruments.
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, 1997 and 1996.
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 $334 million ($5.6 billion before
reinsurance) and $729 million ($8.3 billion before reinsurance) at
December 31, 1997 and 1996, respectively. The scheduled maturities for
these guarantees are $6 million, $6 million, $8 million, $4 million and
$310 million for 1998, 1999, 2000, 2001 and 2002 and thereafter,
respectively.
Reserves for the financial guarantee business, which include reserves for
defaults, incurred but not reported losses and unearned premiums, totaled
$71 million at December 31, 1997 and 1996.
54
<PAGE> 55
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. COMMITMENTS AND CONTINGENCIES, CONTINUED
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 $5.3 billion and $7.6 billion
at December 31, 1997 and 1996, 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,
1997, 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.
14. RELATED PARTY TRANSACTIONS
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, 1997 and 1996, the pool
totaled approximately $2.6 billion and $2.9 billion, respectively. The
Company's share of the pool amounted to $1.2 billion and $1.9 billion at
December 31, 1997 and 1996, 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. To further
encourage employee stock ownership, during 1997 Travelers Group Inc.
introduced the WealthBuilder stock option program. Under this program all
employees meeting certain requirements have been granted Travelers Group
Inc. stock options.
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.
55
<PAGE> 56
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED PARTY TRANSACTIONS, CONTINUED
Had the Company applied FAS 123 in accounting for Travelers Group Inc.
stock options, net income and net income per share-assuming dilution
would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(for the year ended December 31, NET INCOME
in millions, except per share amounts) NET INCOME PER SHARE
---------- ---------
<S> <C> <C>
1997
Net income, as reported $ 1,236 $ 3.12
FAS 123 pro forma adjustments, after tax (16) (0.04)
------- ------
Net income, pro forma $ 1,220 $ 3.08
======= ======
1996
Net income, as reported $ 391 $ 1.02
FAS 123 pro forma adjustments, after tax (6) (0.01)
------- ------
Net income, pro forma $ 385 $ 1.01
======= ======
1995
Net income, as reported $ 419 $ 1.28
FAS 123 pro forma adjustments, after tax (2) -
------- ------
Net income, pro forma $ 417 $ 1.28
======= ======
</TABLE>
Most leasing functions for TIGI and its subsidiaries are administered by
the Company. See note 11.
The Company leases furniture and equipment from subsidiaries of TIGI. The
rental expense charged to the Company for this furniture and equipment
was $48 million, $44 million and $39 million in 1997, 1996 and 1995,
respectively.
At December 31, 1996, the Company had an investment of $55 million in
bonds of its affiliate, Commercial Credit Company. This is included in
fixed maturities in the consolidated balance sheet.
In the ordinary course of business, the Company purchases and sells
securities through affiliated broker-dealers. These transactions are
conducted on an arm's length basis.
The Company participates in reinsurance agreements with TIC and has
participated in reinsurance agreements with TIGI. See note 5.
The Company purchases annuities from affiliates to settle certain claims.
Reinsurance recoverables at December 31, 1997 and 1996 included $795
million and $793 million, respectively, related to these annuities.
56
<PAGE> 57
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 $8
million and $24 million of convertible preferred stock for $8 million and
$24 million of common stock in 1997 and 1996, respectively; b) the
conversion of $26 million, $38 million and $23 million of convertible
bonds for $26 million, $38 million and $23 million of common stock in
1997, 1996 and 1995, respectively; c) the conversion of $81 million of
real estate held for sale for $81 million of joint venture participation
in 1997; d) the conversion of $31 million of convertible preferred stock
for $31 million of convertible bonds in 1995; and e) the acquisition of
real estate through foreclosures of mortgage loans amounting to $14
million and $13 million in 1996 and 1995, respectively.
57
<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
1997 (in millions, except per share amounts) QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,431 $ 2,431 $ 2,507 $ 2,542 $ 9,911
Total expenses 2,041 2,038 2,040 2,040 8,159
-------- -------- --------- --------- ---------
Income before federal income taxes 390 393 467 502 1,752
Federal income tax expense 117 117 140 142 516
-------- -------- --------- --------- ---------
Net income $ 273 $ 276 $ 327 $ 360 $ 1,236
========= ========= ========= ========= =========
Net income per common share $ 0.68 $ 0.69 $ 0.83 $ 0.92 $ 3.13
Net income per common share-
assuming dilution $ 0.68 $ 0.69 $ 0.83 $ 0.92 $ 3.12
========= ========= ========= ========= =========
Common stock price
High $ 39 5/8 $ 40 3/8 $ 43 9/16 $ 45 $ 45
Low $ 31 3/4 $ 31 3/8 $ 37 7/8 $ 34 7/8 $ 31 3/8
Close $ 31 3/4 $ 39 7/8 $ 40 1/2 $ 44 $ 44
Dividends per share of common stock $ 0.075 $ 0.075 $ 0.075 $ 0.075 $ 0.300
========= ========= ========= ========= =========
FIRST SECOND THIRD FOURTH
1996 (in millions, except per share amounts) QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
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 common share $ 0.30 $ (0.56) $ 0.62 $ 0.65 $ 1.02
Net income (loss) per common share-
assuming dilution $ 0.30 $ (0.56) $ 0.62 $ 0.65 $ 1.02
========= ========= ========= ========= =========
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>
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, quarterly
earnings per share of common stock do not add to the total for the years.
Common stock prices for the first quarter of 1996 are not applicable as
shares began trading in April 1996.
58
<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. and Subsidiaries as of December 31, 1997 and 1996, 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,
1997. 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, 1997 and 1996, 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, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 26, 1998, except for note 1,
Accounting Policies - Earnings per Share,
as to which the date is February 3, 1998
59
<PAGE> 1
Exhibit 21.01
SUBSIDIARIES OF TRAVELERS PROPERTY CASUALTY CORP.
AS OF MARCH 4, 1998
THE FOLLOWING LIST OMITS CERTAIN SUBSIDIARIES WHICH, CONSIDERED IN THE AGGREGATE
AS A SINGLE SUBSIDIARY, WOULD NOT CONSTITUTE A SIGNIFICANT SUBSIDIARY. THE
JURISDICTION OF INCORPORATION OF EACH SUBSIDIARY IS ALSO INDICATED.
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- ---------------------------------------- ------------------------------
<S> <C>
The Standard Fire Insurance Company Connecticut
AE Properties, Inc. California
Crossroads Limited California
Industry Land Development Company Connecticut
Community Rehabilitation Investment Corporation Connecticut
The Automobile Insurance Company of Hartford, Connecticut Connecticut
TravCal Secure Insurance Company California
TravCal Indemnity Company California
Travelers Personal Security Insurance Company Connecticut
Travelers Property Casualty Insurance Company Connecticut
Travelers Property Casualty Insurance Company of Illinois Illinois
The Travelers Indemnity Company Connecticut
Commercial Insurance Resources, Inc. Delaware
Gulf Insurance Company Missouri
Gulf National Accounts U.K. Limited United Kingdom
Atlantic Insurance Company Texas
Gulf Group Lloyds Texas
Gulf Risk Services, Inc. Delaware
Gulf Underwriters Insurance Company Missouri
Select Insurance Company Texas
Countersignature Agency, Inc. Florida
First Floridian Auto and Home Insurance Company Florida
First Trenton Indemnity Company New Jersey
Red Oak Insurance 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
Constitution State Services LLC Delaware
The Travelers Indemnity Company of America Connecticut
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
The Travelers Marine Corporation California
TI Home Mortgage Brokerage, Inc. Delaware
TravCo Insurance Company Indiana
Travelers Bond Investments, Inc. Connecticut
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- ---------------------------------------- ---------------------------
<S> <C>
Travelers General Agency of Hawaii, Inc. Hawaii
Travelers Medical Management Services Inc. Delaware
Travelers Casualty and Surety Company Connecticut
Travelers Casualty & Surety Company of Canada Canada
Charter Oak Services Corporation New York
Farmington Casualty Company Connecticut
Farmington Management, Inc. Connecticut
Travelers Casualty and Surety Company of America Connecticut
Travelers Casualty and Surety Company of Illinois Illinois
Travelers Casualty Company of Connecticut Connecticut
Travelers Commercial Insurance Company Connecticut
Travelers Excess and Surplus Lines Company Connecticut
Travelers Lloyds of Texas Insurance Company Texas
</TABLE>
- --------
* The Travelers Indemnity Company owns 58% of The Parker Realty and
Insurance Agency, Inc.
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, 333-2684, and 333-30293;
- - Form S-8 Nos. 333-07073, 333-07077, 333-10143, and 333-25605.
of Travelers Property Casualty Corp. of our reports dated January 26, 1998,
except for note 1, Accounting Policies - Earnings per Share, as to which the
date is February 3, 1998, relating to the consolidated balance sheets of
Travelers Property Casualty Corp. and Subsidiaries as of December 31, 1997 and
1996, 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, 1997, and related schedules, which reports are
incorporated by reference or included in the December 31, 1997 annual report on
Form 10-K of Travelers Property Casualty Corp.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
March 23, 1998
<PAGE> 1
EXHIBIT 23.02
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Aetna Services Inc. (formerly Aetna Life and Casualty Company):
We consent to incorporation by reference in the registration statements on:
- - Form S-3 Nos. 333-2682, 333-2684, and 333-30293;
- - Form S-8 Nos. 333-07073, 333-07077, 333-10143, and 333-25605.
of Travelers 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 December 31,
1997 annual report on Form 10-K of Travelers Property Casualty Corp. 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 23, 1998
<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, 1997, 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 January 28,
1998.
/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, 1997, 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 January 28,
1998.
/s/ John J. Byrne
------------------------------
John J. Byrne
<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, 1997, 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 January 28,
1998.
/s/ James Dimon
------------------------------
James Dimon
<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, 1997, 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 January 28,
1998.
/s/ Dudley C. Mecum
------------------------------
Dudley C. Mecum
<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, 1997, 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 January 28,
1998.
/s/ Roberto G. Mendoza
------------------------------
Roberto G. Mendoza
<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, 1997, 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 January 28,
1998.
/s/ Frank J. Tasco
------------------------------
Frank J. Tasco
<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, 1997, 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 January 28,
1998.
/s/ Sanford I. Weill
------------------------------
Sanford I. Weill
<PAGE> 8
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, 1997, 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 January 28,
1998.
/s/ Arthur Zankel
------------------------------
Arthur Zankel
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TRAVELERS PROPERTY CASUALTY CORP.'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 27,188
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,037
<MORTGAGE> 691
<REAL-ESTATE> 95
<TOTAL-INVEST> 31,031
<CASH> 47
<RECOVER-REINSURE> 9,188
<DEFERRED-ACQUISITION> 501
<TOTAL-ASSETS> 50,682
<POLICY-LOSSES> 30,324
<UNEARNED-PREMIUMS> 3,867
<POLICY-OTHER> 1,923
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,357
900
0
<COMMON> 4
<OTHER-SE> 7,773
<TOTAL-LIABILITY-AND-EQUITY> 50,682
7,225
<INVESTMENT-INCOME> 2,051
<INVESTMENT-GAINS> 169
<OTHER-INCOME> 101
<BENEFITS> 5,484
<UNDERWRITING-AMORTIZATION> 1,127
<UNDERWRITING-OTHER> 1,385
<INCOME-PRETAX> 1,752
<INCOME-TAX> 516
<INCOME-CONTINUING> 1,236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,236
<EPS-PRIMARY> 3.13<F1>
<EPS-DILUTED> 3.12<F1>
<RESERVE-OPEN> 30,969
<PROVISION-CURRENT> 5,730
<PROVISION-PRIOR> (492)
<PAYMENTS-CURRENT> 1,944
<PAYMENTS-PRIOR> 3,704
<RESERVE-CLOSE> 30,138
<CUMULATIVE-DEFICIENCY> (465)
<FN>
<F1>As previously discussed, the SEC issued SAB 98 which requires that FAS 128
be used to compute earnings per share (EPS) for periods prior to an initial
public offering. See Note 1 to Notes to Consolidated Financial Statements.
Accordingly, the Company has restated EPS for the first and second quarters of
1996 and for full year 1996. Restated amounts are as follows:
<CAPTION>
Three months ended Three months ended Twelve months ended
March 31, 1996 June 30, 1996 December 31, 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
EPS:
Basic $0.30 ($0.56) $1.02
Diluted $0.30 ($0.56) $1.02
</FN>
</TABLE>
