<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 1-14328
TRAVELERS PROPERTY CASUALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1445591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(Address of principal executive offices) (Zip Code)
(860) 277-0111
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE:
COMMON STOCK OUTSTANDING AS OF OCTOBER 31, 1998:
<TABLE>
<S> <C>
CLASS A 64,857,372
CLASS B 328,020,170
</TABLE>
<PAGE> 2
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
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Page No.
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<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Statement of Income (Unaudited) -
Three and Nine Months Ended September 30, 1998 and 1997 3
Condensed Consolidated Balance Sheet - September 30, 1998 (Unaudited)
and December 31, 1997 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Unaudited) -
Nine Months Ended September 30, 1998 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II - Other Information
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Exhibit Index 27
Signatures 28
</TABLE>
2
<PAGE> 3
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums $1,975 $1,806 $5,776 $5,418
Net investment income 501 528 1,529 1,535
Fee income 74 90 233 279
Realized investment gains 33 57 109 58
Other revenues 18 26 80 79
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 2,601 2,507 7,727 7,369
- -----------------------------------------------------------------------------------------------------------------------------------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 1,531 1,363 4,416 4,111
Amortization of deferred acquisition costs 304 286 894 848
Interest expense 40 41 121 121
General and administrative expenses 301 350 959 1,039
- -----------------------------------------------------------------------------------------------------------------------------------
Total claims and expenses 2,176 2,040 6,390 6,119
- -----------------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes 425 467 1,337 1,250
Federal income taxes 110 140 362 374
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 315 $ 327 $ 975 $ 876
===================================================================================================================================
BASIC EARNINGS PER SHARE
Net income $ 0.80 $ 0.83 $ 2.49 $ 2.21
Weighted average number of common shares outstanding 392.3 392.2 392.3 396.6
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Net income $ 0.80 $ 0.83 $ 2.48 $ 2.21
Weighted average number of common shares outstanding
and common stock equivalents 392.9 392.5 392.9 396.8
===================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except shares)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Fixed maturities, available for sale at fair value (cost, $26,733 and $26,127) $ 28,446 $ 27,188
Equity securities, at fair value (cost, $768 and $977) 799 1,037
Mortgage loans 579 691
Real estate held for sale 75 95
Short-term securities 2,464 1,446
Other investments 809 574
- ----------------------------------------------------------------------------------------------------------------------------------
Total investments 33,172 31,031
- ----------------------------------------------------------------------------------------------------------------------------------
Cash 75 47
Investment income accrued 420 387
Premium balances receivable 2,901 2,897
Reinsurance recoverables 9,169 9,188
Deferred acquisition costs 529 501
Deferred federal income taxes 1,020 1,316
Contractholder receivables 2,010 1,923
Goodwill 1,467 1,497
Other assets 1,870 1,895
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 52,633 $ 50,682
==================================================================================================================================
LIABILITIES
Claims and claim adjustment expense reserves $ 29,866 $ 30,324
Unearned premium reserves 4,231 3,867
Contractholder payables 2,010 1,923
Commercial paper -- 108
Long-term debt 1,250 1,249
Other liabilities 5,329 4,534
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 42,686 42,005
- ----------------------------------------------------------------------------------------------------------------------------------
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;
72,393,407 shares issued 1 1
Class B, $.01 par value, 700 million shares authorized;
328,020,170 shares issued and outstanding 3 3
Additional paid-in capital 5,479 5,473
Retained earnings 2,723 1,866
Accumulated other changes in equity from nonowner sources 1,127 722
Treasury stock, at cost (shares, 6,884,380 and 7,314,688) (248) (266)
Unearned compensation (38) (22)
- ----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,047 7,777
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 52,633 $ 50,682
==================================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(in millions, except shares)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
AMOUNT SHARES
----- ------------------------------------
COMMON STOCK AND ADDITIONAL
PAID-IN CAPITAL CLASS A CLASS B
----------- -----------
<S> <C> <C> <C>
Balance, beginning of period $ 5,477 72,393,407 328,020,170
Capital Accumulation Plan grants, net of forfeitures 6 -- --
- --------------------------------------------------------------------------------- -----------------------------------
Balance, end of period 5,483 72,393,407 328,020,170
- --------------------------------------------------------------------------------- -----------------------------------
RETAINED EARNINGS
Balance, beginning of period 1,866
Net income 975
Dividends (118)
- ---------------------------------------------------------------------------------
Balance, end of period 2,723
- ---------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES IN
EQUITY FROM NONOWNER SOURCES (1)
Balance, beginning of period 722
Net unrealized gain on securities 406
Foreign currency translation adjustments (1)
- ---------------------------------------------------------------------------------
Balance, end of period 1,127
- ---------------------------------------------------------------------------------
TREASURY STOCK (AT COST)
Balance, beginning of period (266) (7,314,688) --
Capital Accumulation Plan grants, net of forfeitures 30 799,974 --
Treasury stock acquired (13) (386,500) --
Other 1 16,834 --
- --------------------------------------------------------------------------------- -----------------------------------
Balance, end of period (248) (6,884,380) --
- --------------------------------------------------------------------------------- -----------------------------------
UNEARNED COMPENSATION
Balance, beginning of period (22)
Issuance of restricted stock under Capital
Accumulation Plan, net of forfeitures (30)
Restricted stock amortization 14
- ---------------------------------------------------------------------------------
Balance, end of period (38)
- --------------------------------------------------------------------------------- -----------------------------------
Total stockholders' equity and shares outstanding $9,047 65,509,027 328,020,170
================================================================================= ===================================
</TABLE>
(1) All items of accumulated other changes in equity from nonowner sources are
displayed net of tax.
See notes to condensed consolidated financial statements.
5
<PAGE> 6
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
INCREASE (DECREASE) IN CASH
(in millions)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 745 $ 462
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,153 1,099
Mortgage loans 151 113
Proceeds from sales of investments
Fixed maturities 6,383 8,059
Equity securities 394 365
Mortgage loans -- 178
Real estate held for sale 33 49
Purchase of investments
Fixed maturities (7,888) (10,525)
Equity securities (275) (423)
Mortgage loans (15) (37)
Short-term securities, (purchases) sales, net (964) 577
Other investments, net (221) 16
Securities transactions in course of settlement 770 321
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (479) (208)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repayment) of commercial paper, net (108) 102
Purchase of treasury stock (12) (268)
Dividend to TIGI (98) (74)
Dividend to minority shareholders (20) (15)
- ------------------------------------------------------------------------------------------------
Net cash used in financing activities (238) (255)
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 28 (1)
- ------------------------------------------------------------------------------------------------
Cash at beginning of period 47 106
- ------------------------------------------------------------------------------------------------
Cash at end of period $ 75 $ 105
================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 294 $ 506
Interest paid $ 107 $ 106
================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. General
The interim condensed consolidated financial statements include the accounts
of Travelers Property Casualty Corp. (TAP) (a direct majority-owned
subsidiary of The Travelers Insurance Group Inc. (TIGI) and an indirect
majority-owned subsidiary of Citigroup Inc. (Citigroup) (see note 6)) and its
subsidiaries (collectively, the Company), are prepared in conformity with
generally accepted accounting principles (GAAP) and are unaudited. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation have been reflected. The
accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report to Stockholders for the year ended
December 31, 1997.
Certain financial information that is normally included in annual financial
statements prepared in accordance with GAAP, but that is not required for
interim reporting purposes, has been condensed or omitted.
2. Changes in Accounting Principles and Accounting Standards not yet Adopted
Effective January 1, 1998, the Company adopted 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 thus represents the sum of net income and other changes
in equity from nonowner sources. The accumulated balance of other changes in
equity from nonowner sources is required to be displayed separately from
retained earnings and additional paid-in capital in the consolidated balance
sheet. The adoption of FAS 130 resulted primarily in the Company reporting
unrealized gains and losses on investments in debt and equity securities in
changes in equity from nonowner sources. The Company's total changes in
equity from nonowner sources are as follows:
<TABLE>
<CAPTION>
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in millions) 1998 1997 1998 1997
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 315 $ 327 $ 975 $ 876
Other changes in equity from nonowner sources 355 293 405 309
-------------------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 670 $ 620 $1,380 $1,185
=========================================================================================================================
</TABLE>
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS 125" (FAS 127), which was effective for transfers and
pledges of certain financial assets and collateral made after December 31,
1997. The adoption of the provisions of FAS 127 effective January 1, 1998 did
not have a significant impact on results of operations, financial condition
or liquidity.
During the third quarter of 1998, the Company adopted the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants' (AcSEC) Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use and for determining when
specific costs should be capitalized and when they should be expensed. The
impact of SOP 98-1 was not significant.
7
<PAGE> 8
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
2. Changes in Accounting Principles and Accounting Standards not yet Adopted,
Continued
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
consolidated balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,
an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends
on the intended use of the derivative and the resulting designation. FAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Upon initial application of FAS 133, hedging relationships must be
designated anew and documented pursuant to the provisions of this statement.
The Company has not yet determined the impact that FAS 133 will have on its
consolidated financial statements.
In October 1998, the AcSEC issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk" (SOP 98-7). SOP 98-7 provides guidance on how to
account for insurance and reinsurance contracts that do not transfer
insurance risk and applies to all entities and all such contracts, except
for long-duration life and health insurance contracts. The method used to
account for such contracts is referred to as deposit accounting. This SOP
does not address when deposit accounting should be applied. SOP 98-7
identifies several methods of deposit accounting for insurance and
reinsurance contracts that do not transfer insurance risk and provides
guidance on the application of each method. This SOP is effective for
financial statements for fiscal years beginning after June 15, 1999, with
earlier adoption encouraged. Restatement of previously issued financial
statements is not permitted. The effect of initially adopting SOP 98-7
should be reported as a cumulative catch-up adjustment. The Company does not
expect the adoption of this SOP to have a material impact on results of
operations, financial condition or liquidity.
3. Earnings per Share (EPS)
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 nine months ended September 30, 1998, INCOME SHARES PER SHARE
in millions, except per share amount) (NUMERATOR) (DENOMINATOR) AMOUNT
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS - income available to common stockholders $975 392.3 $ 2.49
Effects of Dilutive Securities - Restricted Stock -- .6 (0.01)
---------------------------------------------------------------------------------------------------------
Diluted EPS - income available to common
stockholders and assumed conversions $975 392.9 $ 2.48
========================================================================================================
</TABLE>
For the three months ended September 30, 1998 and the three and nine months
ended September 30, 1997, there was no effect on EPS from dilutive securities
issued.
8
<PAGE> 9
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
4. Capital and Debt
TAP has a five-year revolving credit facility, which it has reduced to $250
million, with a syndicate of banks that expires in December 2001. Under this
facility TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At September 30, 1998,
this requirement was exceeded by approximately $4.0 billion. In addition,
this facility places restrictions on the amount of consolidated debt TAP can
incur. At September 30, 1998, there were no borrowings outstanding under this
facility. If the Company had borrowings under this facility, the interest
rate would be based upon LIBOR plus a negotiated margin. TAP also issues
commercial paper directly to investors and maintains unused credit
availability under the revolving credit facility at least equal to the amount
of commercial paper outstanding. At September 30, 1998, TAP had no commercial
paper outstanding. TAP also currently has available a $200 million line of
credit for working capital and other general corporate purposes from a
subsidiary of Citigroup. The lender has no obligation to make any loan to TAP
under this line of credit.
The Company's insurance subsidiaries are subject to various regulatory
restrictions that limit the maximum amount of dividends available to be paid
to their parent without prior approval of insurance regulatory authorities.
Dividend payments to TAP from its insurance subsidiaries are limited to $805
million in 1998 without prior approval of the Connecticut Insurance
Department. TAP received $430 million of dividends from its insurance
subsidiaries during the first nine months of 1998.
On June 3, 1998, TAP filed a registration statement covering 8,918,395 shares
of Class A Common Stock, which were sold by Aetna Services, Inc. (Aetna) and
J.P. Morgan Capital Corporation (J.P. Morgan). All expenses incurred in
connection with the offering were paid by TAP. TAP did not receive any
proceeds from the sale of the Class A Common Stock. The sale represented
approximately 88% of the remaining aggregate holdings of Aetna, J.P. Morgan,
Fund American Enterprise Holdings, Inc. and The Trident Partnership, L.P.
(collectively, the "Private Investors"). Immediately following this sale,
the Private Investors held less than 1% of the total outstanding shares of
common stock.
5. Commitments and Contingencies
In 1996, Lloyd's of London (Lloyd's) restructured its operations with respect
to claims for years prior to 1993. The outcome of the restructuring of
Lloyd's remains uncertain and the impact, if any, on collectibility of
amounts recoverable by the Company from Lloyd's cannot be quantified at this
time. The Company believes that it is possible that an unfavorable impact on
collectibility could have a material adverse effect on the Company's results
of operations in a future period. However, the Company believes that it is
not likely that the outcome could have a material adverse effect on the
Company's financial condition or liquidity. The Company carries an allowance
for uncollectible reinsurance which is not allocated to any specific
proceedings or disputes, whether for financial impairments or coverage
defenses. Including this allowance, the Company believes that the net
receivable from reinsurance contracts is properly stated.
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are not
used to estimate such reserves.
9
<PAGE> 10
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
5. Commitments and Contingencies, Continued
The reserves carried for environmental and asbestos claims at September 30,
1998 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.
In the ordinary course of business, the Company is a defendant or codefendant
in various litigation matters other than those described above. Although
there can be no assurances, the Company believes, based on information
currently available, that the ultimate resolution of these legal proceedings
would not be likely to have a material adverse effect on its results of
operations, financial condition or liquidity.
6. Travelers Group Merger with Citicorp
On October 8, 1998, Citicorp merged (the "Merger") with and into a newly
formed wholly-owned subsidiary of Travelers Group Inc. (Travelers Group),
the indirect owner of approximately 83% of the outstanding common stock of
TAP. Concurrent with the Merger, Travelers Group changed its name to
Citigroup Inc. ("Citigroup").
Upon consummation of the Merger, Citigroup became a bank holding company
subject to the provisions of the Bank Holding Company Act of 1956 (the
"BHCA") and the terms of an Order of the Federal Reserve Board effective
September 23, 1998 (the "Order").
The BHCA precludes a bank holding company and its affiliates from engaging in
certain activities, generally including insurance underwriting. Under the
BHCA in its current form, Citigroup has two years from October 8, 1998 to
comply with all applicable provisions of the BHCA. Such period may be
extended, at the discretion of the Federal Reserve Board, for three
additional one-year periods so long as the extension is not deemed to be
detrimental to the public interest (the "BHCA Compliance Period").
It is not expected that the restrictions of the BHCA or the Order will impede
the Company's existing businesses in any material respect, although the
Company may be limited in its ability to make certain acquisitions. At this
time, the Company believes that its compliance with applicable law and the
Order will not have a material adverse effect on the Company's financial
condition or results of operations.
Before the expiration of the BHCA Compliance Period, each of the Company and
Citigroup will evaluate its alternatives in order to comply with the laws
applicable at the expiration of the BHCA Compliance Period.
10
<PAGE> 11
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Results of Operations reflect the consolidated results of operations of
Travelers Property Casualty Corp. (TAP) and its subsidiaries (the Company),
which includes Travelers Casualty and Surety Company (formerly The Aetna
Casualty and Surety Company) and The Standard Fire Insurance Company
(collectively, Aetna P&C), which TAP purchased from Aetna Services, Inc.
(Aetna) in 1996.
The Company provides a wide range of commercial and personal property and
casualty insurance products and services to businesses, associations and
individuals throughout the United States.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30,
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
(in millions, except per share data) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 2,601 $ 2,507 $ 7,727 $ 7,369
- ------------------------------------------------------------------------------------------------------------------------
Net income (1) $ 315 $ 327 $ 975 $ 876
- ------------------------------------------------------------------------------------------------------------------------
Net income per share - assuming dilution $ 0.80 $ 0.83 $ 2.48 $ 2.21
- ------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding
and common stock equivalents - assuming dilution 392.9 392.5 392.9 396.8
========================================================================================================================
</TABLE>
(1) Net income includes $21 million and $37 million of realized investment
gains in the three months ended September 30, 1998 and 1997, respectively,
and $71 million and $38 million of realized investment gains in the nine
months ended September 30, 1998 and 1997, respectively.
Consolidated Results of Operations for the Three Months Ended September 30,
1998 and 1997
Operating earnings, which exclude realized investment gains, were $294 million
or $0.75 per share (diluted) in the third quarter of 1998, an increase of $4
million or $0.01 per share from $290 million or $0.74 per share (diluted) in the
third quarter of 1997. The increase in operating earnings was primarily the
result of continued productivity improvements and expense reductions in all
lines and increased production in Personal Lines, partially offset by increased
catastrophe and other weather-related losses.
Revenues of $2.601 billion in the third quarter of 1998 increased $94 million
from $2.507 billion in the third quarter of 1997. This increase was attributable
to a $169 million increase in earned premiums, reflecting production growth in
Personal Lines. This increase was partially offset by a $27 million decrease in
net investment income, a $24 million decrease in realized investment gains and a
$16 million reduction in fee income.
Net investment income was $501 million in the third quarter of 1998, a decrease
of $27 million from the third quarter of 1997, primarily reflecting an increase
in tax-exempt securities in the third quarter of 1998 and a lower yield on
invested assets in the third quarter of 1998.
Fee income in the third quarter of 1998 was $74 million, a $16 million decrease
from the third quarter of 1997. National Accounts within Commercial Lines is the
primary source of fee income due to its service business. This decrease in fee
income was due to the depopulation of involuntary pools as the loss experience
of workers' compensation improved and insureds moved to voluntary markets, the
Company's continued success in lowering workers' compensation losses of service
customers and a slight increase in demand in the marketplace for guaranteed cost
products as opposed to service fee-based products.
Claims and expenses of $2.176 billion in the third quarter of 1998 increased
$136 million from the third quarter of 1997. The increase was primarily the
result of higher catastrophe and other weather-related losses and higher claims
related to the growth in premiums in Personal Lines, partially offset by a
reduction in general and administrative expenses.
11
<PAGE> 12
The Company's effective tax rate was 26% in the third quarter of 1998 compared
to 30% in the third quarter of 1997. These rates were lower than the statutory
tax rate in both periods primarily due to non-taxable investment income. In
addition, the rate in the third quarter of 1998 was less than the rate in the
third quarter of 1997 due to the Company's decision to invest more heavily in
tax-exempt securities as well as the favorable resolution of a tax credit issue.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Three Months Ended September 30, 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and loss adjustment expense (LAE) ratio . 74.8% 71.8%
Underwriting expense ratio ................... 28.2 30.8
Combined ratio before policyholder dividends . 103.0 102.6
Combined ratio ............................... 103.7 103.4
- -----------------------------------------------------------------------------
GAAP:
Loss and LAE ratio ........................... 74.7% 71.6%
Underwriting expense ratio ................... 27.5 30.3
Combined ratio before policyholder dividends . 102.2 101.9
Combined ratio ............................... 102.9 102.9
=============================================================================
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses, including the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), for GAAP reporting
purposes only.
The increase in the third quarter of 1998 statutory and GAAP combined ratios
compared to the third quarter of 1997 statutory and GAAP combined ratios was due
to higher catastrophe and other weather-related losses in both Commercial and
Personal Lines, mostly offset by lower operating expense levels in both
Commercial and Personal Lines.
Consolidated Results of Operations for the Nine Months Ended September 30,
1998 and 1997
Excluding realized investment gains (losses), operating income was $904 million
or $2.30 per share (diluted) for the nine months ended September 30, 1998,
compared to $838 million or $2.11 per share (diluted) for the nine months ended
September 30, 1997. The increase in operating income in the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997 was due
to higher after-tax net investment income and continued productivity
improvements and expense reductions, partially offset by increased catastrophe
and other weather-related losses.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Nine Months Ended September 30, 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio ........................... 73.7% 72.7%
Underwriting expense ratio ................... 28.7 29.6
Combined ratio before policyholder dividends . 102.4 102.3
Combined ratio ............................... 103.1 103.0
- -----------------------------------------------------------------------------
GAAP:
Loss and LAE ratio ........................... 73.4% 72.4%
Underwriting expense ratio ................... 28.5 29.1
Combined ratio before policyholder dividends . 101.9 101.5
Combined ratio ............................... 102.6 102.1
=============================================================================
</TABLE>
12
<PAGE> 13
The first nine months of 1997 statutory and GAAP combined ratios include an
adjustment in Commercial Lines due to a change to conform the Aetna P&C method
with The Travelers Indemnity Company and its subsidiaries (Travelers P&C) method
of recording certain net written premiums, and an adjustment in Personal Lines
associated with a change in the quota share reinsurance arrangement. Excluding
these adjustments, the statutory and GAAP combined ratios before policyholder
dividends for the first nine months of 1997 would have been 102.7% and 102.6%,
respectively. The decrease in the first nine months of 1998 statutory and GAAP
combined ratios compared to the first nine months of 1997 statutory and GAAP
combined ratios excluding these adjustments was due to continued productivity
improvements and expense reductions, partially offset by higher catastrophe and
other weather-related losses.
The other consolidated operating trends for the nine months ended September 30,
1998 and 1997 are substantially the same as noted above for the quarters then
ended.
SEGMENT RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Commercial Lines
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended September 30, 1998 1997
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues.............................................. $1,655 $1,651
Net income (1)........................................ $ 247 $ 255
================================================================================
</TABLE>
(1) Commercial Lines net income includes $16 million and $31 million of
realized investment gains in the three months ended September 30, 1998 and
1997, respectively.
Commercial Lines operating income, which excludes realized investment gains, was
$231 million in the third quarter of 1998 compared to $224 million in the third
quarter of 1997. This increase was due to continued expense savings and a
decline in asbestos and environmental incurred losses, partially offset by
increased losses from catastrophes and other weather-related events.
Revenues were $1.655 billion in the third quarter of 1998 compared to $1.651
billion in the third quarter of 1997. This increase primarily reflected higher
earned premiums, mostly offset by lower net investment income, lower realized
investment gains and a decline in fee income. The higher earned premiums were
primarily due to premium adjustments on retrospectively rated policies in 1997
in the workers' compensation line.
Commercial Lines net written premiums in the third quarter of 1998 totaled
$1.168 billion, down $8 million from $1.176 billion in the third quarter of
1997. Net written premium levels continue to be unfavorably impacted by the
difficult pricing environment and reflect the Company's disciplined approach to
underwriting and risk management.
Fee income in the third quarter of 1998 was $74 million, a $16 million decrease
from the third quarter of 1997. This decrease was due to the depopulation of
involuntary pools as the loss experience of workers' compensation improved and
insureds moved to voluntary markets, the Company's continued success in lowering
workers' compensation losses of service customers and a slight increase in
demand in the marketplace for guaranteed cost products as opposed to service
fee-based products.
13
<PAGE> 14
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. National Accounts net written
premiums of $175 million in the third quarter of 1998 increased $24 million from
the third quarter of 1997. This increase was primarily the result of two new
large accounts written in the third quarter of 1998, partially offset by pricing
declines due to the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management. National Accounts new
business was significantly higher in the third quarter of 1998 than in the third
quarter of 1997, reflecting the addition of two large accounts in the third
quarter of 1998. National Accounts business retention ratio was significantly
higher in the third quarter of 1998 than in the third quarter of 1997, due to
the loss of one large account in the third quarter of 1997.
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. Commercial Accounts net written premiums were $446 million
in the 1998 third quarter, down $56 million from $502 million a year ago. The
decrease in Commercial Accounts net written premiums reflected continued pricing
declines due to the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management, partially offset by
growth through programs designed to leverage underwriting experience in specific
industries. Commercial Accounts new business in the third quarter of 1998 was
significantly lower than in the third quarter of 1997. The decrease in new
business reflected the Company's focus on maintaining its selective underwriting
policy. Commercial Accounts business retention ratio remained strong and was
virtually the same in the third quarter of 1998 and 1997.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $366 million in the third quarter of
1998 compared to $354 million in the third quarter of 1997. The increase in
Select Accounts net written premiums was due to a decrease in ceded premiums,
partially offset by the highly competitive marketplace and the Company's
continued disciplined approach to underwriting and risk management. New premium
business in Select Accounts in the third quarter of 1998 was significantly lower
than in the third quarter of 1997. The decrease in new business reflected the
Company's focus on maintaining its selective underwriting policy. Select
Accounts business retention ratio remained strong in the third quarter of 1998
and was virtually the same as the third quarter of 1997.
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. Specialty Accounts net
written premiums were $181 million in the third quarter of 1998 compared to $169
million in the third quarter of 1997. This increase primarily reflects strong
production in excess and surplus lines.
Commercial Lines claims and expenses of $1.325 billion in the third quarter of
1998 were up from $1.290 billion in the third quarter of 1997. This increase was
primarily due to higher catastrophe and other weather-related property losses in
the third quarter of 1998, partially offset by continued expense savings.
Catastrophe losses, net of taxes and reinsurance, were $15 million in the third
quarter of 1998, primarily due to Hurricane Georges. There were no catastrophe
losses in the third quarter of 1997.
14
<PAGE> 15
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Three Months Ended September 30, 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio................................. 78.7% 77.3%
Underwriting expense ratio......................... 29.3 31.9
Combined ratio before policyholder dividends....... 108.0 109.2
Combined ratio..................................... 109.2 110.6
- ---------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................. 78.5% 77.0%
Underwriting expense ratio......................... 29.4 31.0
Combined ratio before policyholder dividends....... 107.9 108.0
Combined ratio..................................... 109.1 109.7
============================================================================
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses, including
SOP 98-1, for GAAP reporting purposes only.
The increase in the third quarter of 1998 statutory and GAAP loss and LAE ratios
compared to the third quarter of 1997 statutory and GAAP loss and LAE ratios was
due to higher catastrophe and other weather-related losses and lower fee income,
partially offset by a decline in asbestos and environmental incurred losses. The
decrease in the third quarter of 1998 statutory and GAAP underwriting expense
ratios compared to the third quarter of 1997 statutory and GAAP underwriting
expense ratios was due to continued expense reductions.
Personal Lines
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Three Months Ended September 30, 1998 1997
- -----------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues.............................................. $944 $ 853
Net income (1)........................................ $ 95 $ 101
=============================================================================
</TABLE>
(1) Personal Lines net income includes $5 million and $6 million of realized
investment gains in the three months ended September 30, 1998 and 1997,
respectively.
Personal Lines operating income, which excludes realized investment gains and
losses, was $90 million in the third quarter of 1998 compared to $95 million in
the third quarter of 1997. The 1998 results include higher catastrophe losses,
partially offset by an increase in production and net investment income compared
to the third quarter of 1997.
Revenues were $944 million in the third quarter of 1998 compared to $853 million
in the third quarter of 1997. This increase primarily reflected an increase in
earned premiums of $92 million as a result of increased production in all
distribution channels.
Net written premiums in the third quarter of 1998 were $909 million, compared to
$775 million in the third quarter of 1997. This increase reflected growth in
target markets served by independent agents and growth in affinity group
marketing, joint marketing arrangements and the TRAVELERS SECURE(R) program. The
TRAVELERS SECURE(R) program markets Personal Lines products through the
independent agents of Primerica Financial Services (PFS), a unit of Citigroup
Inc.
15
<PAGE> 16
The growth in independent agent premiums has been primarily due to the Company's
success in pursuing book-of-business transfers within certain independent
insurance agencies. Many independent agencies are consolidating their business
to a smaller number of insurance carriers resulting in transfers of business to
their preferred carriers.
Personal Lines claims and expenses of $808 million in the 1998 third quarter
increased $106 million from the 1997 third quarter. This increase was primarily
the result of higher losses associated with the business growth and higher
catastrophe losses, as well as an increase in investments in service centers and
market expansions.
Catastrophe losses, net of taxes and reinsurance, were $22 million in the third
quarter of 1998. There were no catastrophe losses in the third quarter of 1997.
The 1998 catastrophe losses were primarily due to Hurricanes Bonnie and Georges
and windstorms in the Midwest and Northeast.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Three Months Ended September 30, 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio................................. 69.5% 63.9%
Underwriting expense ratio......................... 26.8 29.1
Combined ratio..................................... 96.3 93.0
- ----------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................. 69.5% 63.9%
Underwriting expense ratio......................... 25.0 29.3
Combined ratio..................................... 94.5 93.2
============================================================================
</TABLE>
GAAP combined ratios differ from statutory combined ratios for Personal Lines
primarily due to the deferral and amortization of certain expenses, including
SOP 98-1, for GAAP reporting purposes only.
The increase in the third quarter of 1998 statutory and GAAP loss and LAE ratios
compared to the third quarter of 1997 statutory and GAAP loss and LAE ratios was
primarily due to the higher catastrophe losses and a decrease in favorable prior
year reserve development in the automobile bodily injury line. The decrease in
the third quarter of 1998 statutory and GAAP underwriting expense ratios
compared to the third quarter of 1997 statutory and GAAP underwriting expense
ratios was primarily due to benefits from productivity improvements as premium
levels increased.
Corporate and Other
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Three Months Ended September 30, 1998 1997
- -----------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues.............................................. $ 2 $ 3
Net income (loss)..................................... $ (27) $ (29)
=============================================================================
</TABLE>
The primary component of net income (loss) for the 1998 and 1997 third quarter
was after-tax interest expense of $26 million, reflecting financing costs
associated with the 1996 acquisition of Aetna P&C.
16
<PAGE> 17
SEGMENT RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Commercial Lines
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Nine Months Ended September 30, 1998 1997
- ------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues.............................................. $4,971 $4,887
Net income (1)....................................... $ 742 $ 666
==============================================================================
</TABLE>
(1) Commercial Lines net income includes $59 million and $39 million of
realized investment gains in the nine months ended September 30, 1998 and
1997, respectively.
Commercial Lines operating income, which excludes realized investment gains, was
$683 million in the nine months ended September 30, 1998 compared to $627
million in the nine months ended September 30, 1997. The increase in operating
income in the 1998 period was due to continued expense reductions, increased
after-tax net investment income and a decline in asbestos and environmental
incurred losses, partially offset by increased losses from catastrophes and
other weather-related events.
Revenues were $4.971 billion in the first nine months of 1998 compared to $4.887
billion in the first nine months of 1997. This increase primarily reflected
higher earned premiums and realized investment gains, partially offset by
declines in net investment income and fee income.
Commercial Lines net written premiums in the first nine months of 1998 totaled
$3.501 billion, down $155 million from $3.656 billion in the first nine months
of 1997, reflecting a $142 million adjustment in the first quarter of 1997 to
net written premiums due to a change to conform the Aetna P&C method with the
Travelers P&C method of recording certain net written premiums. Without this
adjustment, net written premiums were about level with the prior year.
Fee income in the first nine months of 1998 was $233 million, a $46 million
decrease from the first nine months of 1997. This decrease was the result of the
depopulation of involuntary pools as the loss experience of workers'
compensation improved and insureds moved to voluntary markets, the Company's
continued success in lowering workers' compensation losses of service customers
and a slight increase in demand in the marketplace for guaranteed cost products
as opposed to service fee-based products.
National Accounts net written premiums were $484 million in the first nine
months of 1998 compared to $522 million in the first nine months of 1997. This
decrease was primarily the result of pricing declines due to the highly
competitive marketplace, a decrease in the Company's level of involuntary pool
participation, and the Company's continued disciplined approach to underwriting
and risk management. National Accounts new business was significantly higher in
the first nine months of 1998 compared to the first nine months of 1997,
reflecting the addition of two large accounts in the third quarter of 1998.
National Accounts business retention ratio was virtually the same in the first
nine months of 1998 than in the first nine months of 1997. National Accounts
experienced an increase in claim service-only business as well as favorable
results from continued product development efforts, especially in workers'
compensation managed care programs.
17
<PAGE> 18
Commercial Accounts net written premiums were $1.349 billion in the first nine
months of 1998 compared to $1.516 billion in the first nine months of 1997. This
decrease reflected a $127 million adjustment in the first quarter of 1997 to net
written premiums due to the change to conform the Aetna P&C method with the
Travelers P&C method of recording certain net written premiums. Excluding this
adjustment, net written premiums decreased $40 million reflecting pricing
declines due to the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management. For the first nine
months of 1998, new premium business in Commercial Accounts significantly
declined compared to the first nine months of 1997, reflecting the Company's
focus on obtaining new business accounts where it can maintain its selective
underwriting policy. The Commercial Accounts business retention ratio remained
strong and was virtually the same in the first nine months of 1998 as compared
to the first nine months of 1997. Commercial Accounts continues to focus on the
retention of existing business while maintaining its product pricing standards
and its selective underwriting policy.
Select Accounts net written premiums of $1.138 billion in the first nine months
of 1998 increased $51 million from $1.087 billion in the first nine months of
1997. The 1997 amount included a first quarter increase of $15 million to net
written premiums due to the change to conform the Aetna P&C method with the
Travelers P&C method of recording certain net written premiums. Excluding this
adjustment, the increase in Select Accounts net written premiums reflected lower
ceded premiums, partially offset by the highly competitive marketplace and the
Company's continued disciplined approach to underwriting and risk management.
New premium business in Select Accounts was moderately lower in the first nine
months of 1998 compared to the first nine months of 1997. The decrease in new
business reflected the Company's focus on maintaining its selective underwriting
policy. Select Accounts business retention ratio remained strong in the first
nine months of 1998 and was virtually the same as that in the first nine months
of 1997.
Specialty Accounts net written premiums were $530 million in the first nine
months of 1998 and 1997. This result reflects strong production in excess and
surplus lines, offset by a highly competitive marketplace and the Company's
continued disciplined approach to underwriting and risk management.
Commercial Lines claims and expenses of $3.968 billion in the first nine months
of 1998 increased $18 million from the first nine months of 1997. This increase
was primarily attributable to higher catastrophe and other weather-related
losses in the first nine months of 1998, partially offset by continued expense
savings.
Catastrophe losses, net of taxes and reinsurance, were $25 million and $5
million in the first nine months of 1998 and 1997, respectively. The 1998
catastrophe losses were primarily due to Hurricane Georges in the third quarter
and tornadoes in Nashville, Tennessee in the second quarter. The 1997
catastrophe losses were primarily due to tornadoes in the Midwest in the first
quarter.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Nine Months Ended September 30, 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio................................. 78.6% 79.0%
Underwriting expense ratio......................... 29.5 30.3
Combined ratio before policyholder dividends....... 108.1 109.3
Combined ratio..................................... 109.3 110.4
- ----------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................. 78.2% 78.4%
Underwriting expense ratio......................... 30.3 29.9
Combined ratio before policyholder dividends....... 108.5 108.3
Combined ratio..................................... 109.7 109.4
============================================================================
</TABLE>
18
<PAGE> 19
The first nine months of 1997 statutory and GAAP combined ratios for Commercial
Lines include an adjustment due to the change to conform the Aetna P&C method
with the Travelers P&C method of recording certain net written premiums.
Excluding this adjustment, the statutory and GAAP combined ratios before
policyholder dividends for the first nine months of 1997 would have been 109.9%
and 109.5%, respectively. The decrease in the first nine months of 1998
statutory and GAAP combined ratios compared to the first nine months of 1997
statutory and GAAP combined ratios excluding this adjustment was due to
continued expense reductions and a decline in asbestos and environmental
incurred losses, partially offset by higher catastrophe and other
weather-related losses and lower fee income.
Personal Lines
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Nine Months Ended September 30, 1998 1997
- -----------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues.............................................. $2,747 $2,473
Net income (1)........................................ $ 318 $ 303
=============================================================================
</TABLE>
(1) Personal Lines net income includes $12 million of realized investment
gains in the nine months ended September 30, 1998 and $1 million of
realized investment losses in the nine months ended September 30, 1997.
Personal Lines operating income, which excludes realized investment gains
(losses), was $306 million in the first nine months of 1998 compared to $304
million in the first nine months of 1997. The increase in operating income in
the 1998 period was primarily due to increased production and higher net
investment income, substantially offset by higher catastrophe losses.
Net written premiums in the first nine months of 1998 were $2.589 billion,
compared to $2.226 billion (excluding a one-time adjustment of $69 million due
to a change in the quota share reinsurance arrangement) in the first nine months
of 1997. This increase primarily reflects growth in target markets served by
independent agents and growth in affinity group marketing, joint marketing
arrangements and the TRAVELERS SECURE(R) program.
Personal Lines claims and expenses of $2.283 billion in the first nine months of
1998 increased $265 million from the first nine months of 1997. This increase
was the result of higher losses associated with the growth in premiums and
higher catastrophe losses, as well as an increase in investments in service
centers and market expansions.
Catastrophe losses, after taxes and reinsurance, were $44 million in the first
nine months of 1998 compared to $5 million in the first nine months of 1997. The
1998 catastrophe losses were due to Hurricanes Bonnie and Georges and windstorms
in the Midwest and Northeast in the third quarter, tornadoes and wind and hail
storms in the Southeast and Midwest in the second quarter and ice storms in
northern New York and New England and windstorms on the East Coast in the first
quarter.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Nine Months Ended September 30, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio................................. 66.7% 63.3%
Underwriting expense ratio......................... 27.5 28.6
Combined ratio..................................... 94.2 91.9
- -------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................. 66.7% 63.3%
Underwriting expense ratio......................... 26.1 28.0
Combined ratio..................................... 92.8 91.3
===============================================================================
</TABLE>
19
<PAGE> 20
The first nine months of 1997 statutory and GAAP combined ratios for Personal
Lines include an adjustment associated with a change in the quota share
reinsurance arrangement. Excluding this adjustment, the statutory and GAAP
combined ratios for the first nine months of 1997 would have been 91.8% and
92.1%, respectively. The increase in the first nine months of 1998 statutory and
GAAP combined ratios compared to the first nine months of 1997 statutory and
GAAP combined ratios excluding this adjustment was due to higher catastrophe
losses and a decrease in favorable prior year reserve development in the
automobile bodily injury line, partially offset by productivity improvements.
Corporate and Other
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Nine Months Ended September 30, 1998 1997
- -------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues.............................................. $ 9 $ 9
Net income (loss)..................................... $ (85) $ (93)
===============================================================================
</TABLE>
The primary component of net income (loss) for the nine months ended September
30, 1998 and 1997 was interest expense of $79 million after tax, reflecting
financing costs associated with the 1996 acquisition of Aetna P&C.
ENVIRONMENTAL CLAIMS
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At September 30, 1998, approximately 16% of
the net aggregate reserve (i.e., approximately $149 million) consists of case
reserve for resolved claims. The balance, approximately 84% of the net aggregate
reserve (i.e., approximately $761 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 following table displays activity for environmental losses and loss expenses
and reserves for the nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Environmental Losses
Nine Months Ended September 30, 1998 1997
- ---------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning reserves:
Direct................................................ $1,193 $1,369
Ceded................................................. (74) (127)
- ---------------------------------------------------------------------------------
Net.................................................. 1,119 1,242
Incurred losses and loss expenses:
Direct................................................ 96 55
Ceded................................................. (57) (1)
Losses paid:
Direct ............................................... 292 181
Ceded................................................. (44) (48)
- ---------------------------------------------------------------------------------
Ending reserves:
Direct................................................ 997 1,243
Ceded................................................. (87) (80)
- ---------------------------------------------------------------------------------
Net.................................................. $ 910 $1,163
=================================================================================
</TABLE>
20
<PAGE> 21
ASBESTOS CLAIMS
At September 30, 1998, approximately 22% of the net aggregate reserve (i.e.,
approximately $226 million) is for pending asbestos claims. The balance,
approximately 78% (i.e., approximately $794 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending asbestos claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for asbestos losses and loss expenses and reserves for the
nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Asbestos Losses
Nine Months Ended September 30, 1998 1997
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning reserves:
Direct................................................ $1,363 $1,443
Ceded................................................. (249) (370)
- --------------------------------------------------------------------------------
Net.................................................. 1,114 1,073
Incurred losses and loss expenses:
Direct................................................ 119 60
Ceded................................................. (69) (15)
Losses paid:
Direct ............................................... 193 114
Ceded................................................. (49) (60)
- --------------------------------------------------------------------------------
Ending reserves:
Direct................................................ 1,289 1,389
Ceded................................................. (269) (325)
- --------------------------------------------------------------------------------
Net.................................................. $1,020 $1,064
================================================================================
</TABLE>
UNCERTAINTY REGARDING ADEQUACY OF ENVIRONMENTAL AND ASBESTOS RESERVES
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
The reserves carried for environmental and asbestos claims at September 30, 1998
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.
21
<PAGE> 22
CUMULATIVE INJURY OTHER THAN ASBESTOS (CIOTA) CLAIMS
CIOTA claims are generally submitted to the Company under general liability
policies and often involve an allegation by a claimant against an insured that
the claimant has suffered injuries as a result of long-term or continuous
exposure to potentially harmful products or substances. Such potentially harmful
products or substances include, but are not limited to, lead paint, pesticides,
pharmaceutical products, silicone-based personal products, solvents and other
deleterious substances.
At September 30, 1998, approximately 18% of the net aggregate reserve (i.e.,
approximately $184 million) is for pending CIOTA claims. The balance,
approximately 82% (i.e., approximately $864 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending CIOTA claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for CIOTA losses and loss expenses and reserves for the nine
months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CIOTA Losses
Nine Months Ended September 30, 1998 1997
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning reserves:
Direct................................................ $1,520 $1,560
Ceded................................................. (432) (446)
- --------------------------------------------------------------------------------
Net.................................................. 1,088 1,114
Incurred losses and loss expenses:
Direct................................................ (15) 26
Ceded................................................. 22 (6)
Losses paid:
Direct................................................ 52 51
Ceded................................................. (5) (14)
Ending reserves:
Direct................................................ 1,453 1,535
Ceded................................................. (405) (438)
- --------------------------------------------------------------------------------
Net.................................................. $1,048 $1,097
================================================================================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
TAP was formed in January 1996 to hold the property and casualty insurance
subsidiaries of The Travelers Insurance Group Inc. (TIGI). TAP's principal asset
is the capital stock of its insurance subsidiaries.
The liquidity requirements of the Company's business have been met primarily by
funds generated from operations, asset maturities and income received on
investments. Cash provided from these sources is used primarily for claims and
claim adjustment expense payments and operating expenses. Catastrophe claims,
the timing and amount of which are inherently unpredictable, may create
increased liquidity requirements. Additional sources of cash flow include the
sale of invested assets and financing activities. The Company believes that its
future liquidity needs will be met from all of the above sources.
22
<PAGE> 23
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 September 30, 1998 totaled $33.2 billion, of
which 85.7% was invested in fixed maturity investments, 2.4% in common stocks
and other equity securities, 2.0% in mortgage loans and real estate held for
sale and 9.9% in short-term and other investments. The average duration of the
fixed maturity portfolio, including short-term investments, was 5.1 years at
such date. Included in fixed maturity investments are non-investment grade
securities totaling $759 million, representing 2.7% of the Company's fixed
maturity investments as of September 30, 1998. The following table reflects the
average yield (annualized) of the investment portfolio excluding unrealized and
realized investment gains and losses:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Average Yield (Annualized) September 30, September 30,
- -------------------------- ------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Before tax 6.77% 7.38% 6.95% 7.14%
After tax 4.93% 5.15% 5.02% 4.97%
</TABLE>
Cash flow needs at TAP include stockholder dividends and debt service. TAP is a
holding company and has no direct operations. Accordingly, 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 Citigroup Inc.
The lender has no obligation to make any loan to TAP under this line of credit.
Also, TAP will continue to be able to make borrowings from a syndicate of banks
under a Credit Facility, which it has reduced to $250 million. The Credit
Facility 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 September 30, 1998, this
requirement was exceeded by approximately $4.0 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
September 30, 1998, TAP had no commercial paper outstanding.
At September 30, 1998, TAP had issued a total of $1.25 billion of, and had $750
million available for, debt offerings under its shelf registration statement.
TAP's insurance subsidiaries are subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to their parent
without prior approval of insurance regulatory authorities. Dividend payments to
TAP from its insurance subsidiaries are limited to $805 million in 1998 without
prior approval of the Connecticut Insurance Department. The Company has received
$430 million of dividends from its insurance subsidiaries during the first nine
months of 1998.
On August 12, 1998, TAP's Board of Directors authorized the expenditure of up to
$150 million for the repurchase of its Class A Common Stock. The repurchases may
be made from time to time in the open market or through negotiated transactions
and will be used primarily for the issuance of stock for employee benefit plans.
During the first nine months of 1998, TAP repurchased 386,500 shares of its
common stock pursuant to the repurchase program.
23
<PAGE> 24
On June 23, 1997, TAP 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 October 24, 1997, TAP 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, TAP 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 offering were paid by
the Company. TAP did not receive any proceeds from the sale of the Class A
Common Stock. The sale represented approximately 54% of the remaining holdings
of each of the Private Investors.
On June 3, 1998, TAP filed a registration statement covering 8,918,395 shares of
Class A Common Stock, which were sold by certain Private Investors. All expenses
incurred in connection with the offering were paid by TAP. TAP did not receive
any proceeds from the sale of the Class A Common Stock. The sale represented
approximately 88% of the remaining aggregate holdings of the Private Investors.
Immediately following this sale, the Private Investors held less than 1% of the
total outstanding shares of common stock.
On January 28, 1998, TAP, 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, TAP issued 413,578 shares of TAP'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 TAP's common stock at the date of grant and is recognized as a charge to
income ratably over the vesting period. At September 30, 1998, there were
2,320,338 shares available for future grants under TAP's restricted stock plan.
YEAR 2000 DATE CONVERSION
The Company is highly dependent on computer systems and system applications for
conducting its ongoing business functions. In 1996, the Company began the
process of identifying, assessing and implementing changes to computer programs
to address the year 2000 issue and developed a comprehensive plan to address the
issue. The issue involves the ability of computer systems that have time
sensitive programs to recognize properly the year 2000. The inability to do so
could result in major failures or miscalculations that would disrupt the
Company's ability to meet its customer and other obligations on a timely basis.
The Company is in the process of implementing necessary changes, in accordance
with its Year 2000 plan, to bring all its critical business systems into year
2000 compliance by year-end 1998. As part of, and following, achievement of year
2000 compliance, all critical business systems are subjected to testing and a
certification process. In addition, the Company is developing contingency plans
to be used in the event of an unexpected failure, which may result from the
complex interrelationships among our clients, business partners, and other
parties upon whom it relies. These plans are expected to be in place by December
31, 1998.
24
<PAGE> 25
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 communicated with them on their plans to address and
resolve year 2000 issues on a timely basis. While it is likely that these
efforts by third party vendors will be successful, 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.
An additional Year 2000 issue for the Company is the potential future impact of
claims for insurance coverage from customers who suffer Year 2000 business
losses. The Company has taken certain initiatives to mitigate this risk,
including addressing Year 2000 issues, where applicable, in the underwriting
process and modifying certain contract language. Losses for possible future Year
2000 insurance claims and litigation costs related to such claims, if any, are
not reasonably estimable at this time.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 2 of Notes to Condensed 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. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," and similar expressions. These forward-looking statements involve
risks and uncertainties including, but not limited to, the following: the
resolution of legal proceedings and related matters; the conduct of the
Company's businesses following the Citicorp merger; customer responsiveness to
both new products and distribution channels; and the ability of the Company and
third party vendors to modify computer systems for the Year 2000 date conversion
in a timely manner. Readers are also directed to other risks and uncertainties
discussed in documents filed by the Company with the Securities and Exchange
Commission.
25
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning sixteen purported class actions and one multi-party
suit, with substantially the same allegations, commenced in various courts
against certain subsidiaries of TAP, dozens of other insurers and the National
Council on Compensation Insurance ("NCCI"), see the description that appears in
the third paragraph under the caption "Legal Proceedings" beginning on page 53
of the Annual Report on Form 10-K of TAP for the year ended December 31, 1997
(File No. 1-14328) and the description that appears under "Legal Proceedings" on
page 25 of the Quarterly Report on Form 10-Q of TAP for the quarter ended June
30, 1998 (File No. 1-14328), which descriptions are incorporated by reference
herein. Copies of the foregoing descriptions are included as exhibits to this
Form 10-Q. Three of the seventeen cases have been dismissed during 1998. The
Madison County, Illinois state court plaintiffs voluntarily dismissed that case
in April 1998. The Richmond County, Georgia state court dismissed the first of
two suits filed there in February 1998, and the Florida federal court dismissed
the case filed there in August 1998. The Illinois state court dismissal is
final, while the others, based on defendants' jurisdictional motions, are on
appeal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September
30, 1998.
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
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 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.
11.01+ Computation of Earnings Per Share.
12.01+ Computation of Ratio of Earnings to Fixed Charges.
27.01+ Financial Data Schedule.
99.01+ The third paragraph under the caption "Legal Proceedings" beginning
on page 53 of the Annual Report on Form 10-K of the Company for the
year ended December 31, 1997 (File No. 1-14328).
99.02+ The paragraph under the caption "Legal Proceedings" on page 25 of
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998 (File No. 1-14328).
</TABLE>
The total amount of securities authorized pursuant to any instrument
defining rights of holders of long-term debt of the Company does not exceed
10% of the total assets of the Company and its consolidated subsidiaries.
The Company will furnish copies of any such instrument to the SEC upon
request.
+ Filed herewith.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRAVELERS PROPERTY CASUALTY
CORP.
Date: November 12, 1998 By /s/ William P. Hannon
---------------------------------
William P. Hannon
Chief Financial Officer
(Principal Financial
Officer)
Date: November 12, 1998 By /s/ Thomas P. Shugrue
---------------------------------
Thomas P. Shugrue
Chief Accounting Officer
(Principal Accounting Officer)
28
<PAGE> 1
Exhibit 11.01
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In millions, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Earnings:
Net income $ 315 $ 327 $ 975 $ 876
====== ====== ====== ======
Average shares:
Basic 392.3 392.2 392.3 396.6
====== ====== ====== ======
Diluted 392.9 392.5 392.9 396.8
====== ====== ====== ======
Earnings per share (EPS):
Net income per common share $ 0.80 $ 0.83 $ 2.49 $ 2.21
====== ====== ====== ======
Net income per common
share - assuming dilution $ 0.80 $ 0.83 $ 2.48 $ 2.21
====== ====== ====== ======
</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.
<PAGE> 1
Exhibit 12.01
Travelers Property Casualty Corp. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In millions of dollars, except for ratio)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income before income taxes $ 425 $ 467 $1,337 $1,250
Interest 40 41 121 121
Portion of rentals deemed to be interest 10 9 34 27
----- ------ ------ ------
Earnings available for fixed charges $ 475 $ 517 $1,492 $1,398
===== ====== ====== ======
Fixed charges:
Interest $ 40 $ 41 $ 121 $ 121
Portion of rentals deemed to be interest 10 9 34 27
----- ------ ------ ------
Total fixed charges $ 50 $ 50 $ 155 $ 148
===== ====== ====== ======
Ratio of earnings to fixed charges 9.50x 10.34x 9.63x 9.45x
===== ====== ====== ======
</TABLE>
The ratio of earnings to fixed charges is computed by dividing income before
income taxes and fixed charges by the fixed charges. For purposes of this
ratio, fixed charges consist of that portion of rentals deemed representative
of the appropriate interest factor.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TRAVELERS PROPERTY CASUALTY CORP.'S FINANCIAL STATEMENTS AS OF SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 28,446
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 799
<MORTGAGE> 579
<REAL-ESTATE> 75
<TOTAL-INVEST> 33,172
<CASH> 75
<RECOVER-REINSURE> 9,169
<DEFERRED-ACQUISITION> 529
<TOTAL-ASSETS> 52,633
<POLICY-LOSSES> 29,866
<UNEARNED-PREMIUMS> 4,231
<POLICY-OTHER> 2,010
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,250
900
0
<COMMON> 4
<OTHER-SE> 9,043
<TOTAL-LIABILITY-AND-EQUITY> 52,633
1,975
<INVESTMENT-INCOME> 501
<INVESTMENT-GAINS> 33
<OTHER-INCOME> 92
<BENEFITS> 1,531
<UNDERWRITING-AMORTIZATION> 304
<UNDERWRITING-OTHER> 341
<INCOME-PRETAX> 425
<INCOME-TAX> 110
<INCOME-CONTINUING> 315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 315
<EPS-PRIMARY> 0.80<F1>
<EPS-DILUTED> 0.80<F1>
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>EFFECTIVE DECEMBER 31, 1997, THE COMPANY ADOPTED STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE" (FAS 128). FAS 128 REPLACES
THE PRESENTATION OF PRIMARY EPS WITH A PRESENTATION OF BASIC EPS. IT ALSO
REQUIRES DUAL PRESENTATION OF BASIC AND DILUTED EPS. ACCORDINGLY, THE COMPANY
HAS DISCLOSED EPS USING THE GUIDELINES IN FAS 128. THE EPS AMOUNTS FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1997 USING THE FAS 128 GUIDELINES WERE
AS FOLLOWS:
THREE MONTHS ENDED
SEPTEMBER 30, 1997
EPS:
BASIC $0.83
DILUTED $0.83
</FN>
</TABLE>
<PAGE> 1
Exhibit 99.01
The third paragraph under the
caption "Legal Proceedings"
beginning on page 53 of the
Annual Report on Form 10-K of
Travelers Property Casualty Corp.
for the year ended
December 31, 1997
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
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.
<PAGE> 1
Exhibit 99.02
The paragraph under the
caption "Legal Proceedings"
on page 25 of Travelers Property
Casualty Corp.'s Quarterly Report
on Form 10-Q for the quarter
ended June 30, 1998
For information concerning nine purported class actions, with substantially the
same allegations, commenced in various courts against certain subsidiaries of
TAP, dozens of other insurers and the National Council on Compensation Insurance
("NCCI"), see the description that appears in the third paragraph under the
caption "Legal Proceedings" beginning on page 53 of the Annual Report on Form
10-K of TAP for the year ended December 31, 1997 (File No. 1-14328), which
description is incorporated by reference herein. A copy of the foregoing
description is included as an exhibit to this Form 10-Q. In May 1998, the
Georgia action, which had been pending in the Superior Court, Richmond County,
was dismissed by that court. Commencing in April 1998, seven additional
purported class actions, with substantially the same allegations, have been
filed against subsidiaries of the Company, other insurers and the NCCI. In April
1998, Dal-Tile Corporation, et al. v. NCCI, et al. was filed in the Superior
Court, Riverside County, California. In May 1998, Sandwich Chef of Texas, Inc.,
et al. v. Reliance National Insurance Company, et al. was filed in Judicial
District Court, Harris County, Texas and Alumax Inc., et al. v. Allianz
Insurance Company, et al. was filed in Circuit Court, Jefferson County, Alabama.
In June 1998, FFE Transportation Services, Inc., et al. v. NCCI, et al. was
filed in Superior Court, Richmond County, Georgia; American Association of
Retired Persons, et al. v. National Surety Corp., et al. was filed in Circuit
Court, Wayne County, Michigan; Payless Cashways, Inc., et al. v. National Surety
Corp., et al. was filed in Circuit Court, Fayette County, Kentucky; and Burnham
Service Corporation v. NCCI, et al. was filed in Supreme Court, New York County,
New York. Additionally, in June 1998, a non-class action, with substantially the
same allegations, entitled Albany International Corporation v. American National
Fire Insurance Company, et al. was filed against a subsidiary of the Company in
Superior Court, Maricopa County, Arizona. The Company intends to contest
vigorously all of the above-described cases.
