<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, 1999
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)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 06-1445591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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, 1999:
<TABLE>
<S> <C>
CLASS A 61,220,454
CLASS B 328,020,170
</TABLE>
<PAGE> 2
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements: Page No.
<S> <C>
Condensed Consolidated Statement of Income (Unaudited) -
Three and Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheet - September 30, 1999 (Unaudited)
and December 31, 1998 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Unaudited) -
Nine Months Ended September 30, 1999 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
</TABLE>
Part II - Other Information
<TABLE>
<S> <C>
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 30
Exhibit Index 31
Signatures 32
</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,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 2,026 $ 1,975 $ 5,997 $ 5,776
Net investment income 523 501 1,536 1,529
Fee income 70 74 204 233
Realized investment gains (losses) (17) 33 30 109
Other revenues 17 18 59 80
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 2,619 2,601 7,826 7,727
- ------------------------------------------------------------------------------------------------------------------------------------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 1,591 1,531 4,551 4,416
Amortization of deferred acquisition costs 326 304 951 894
Interest expense 38 40 118 121
General and administrative expenses 234 301 845 959
- ------------------------------------------------------------------------------------------------------------------------------------
Total claims and expenses 2,189 2,176 6,465 6,390
- ------------------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes and cumulative effect
of changes in accounting principles 430 425 1,361 1,337
Federal income taxes 110 110 353 362
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 320 315 1,008 975
Cumulative effect of change in accounting for insurance-related
assessments, net of tax -- -- (160) --
Cumulative effect of change in accounting for insurance and
reinsurance contracts that do not transfer insurance risk,
net of tax -- -- 27 --
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 320 $ 315 $ 875 $ 975
====================================================================================================================================
BASIC EARNINGS PER SHARE
Income before cumulative effect of changes in
accounting principles $ 0.82 $ 0.80 $ 2.59 $ 2.49
Cumulative effect of changes in accounting principles -- -- (0.34) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.82 $ 0.80 $ 2.25 $ 2.49
====================================================================================================================================
Weighted average number of common shares outstanding 388.8 392.3 389.3 392.3
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before cumulative effect of changes in
accounting principles $ 0.82 $ 0.80 $ 2.58 $ 2.48
Cumulative effect of changes in accounting principles -- -- (0.34) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.82 $ 0.80 $ 2.24 $ 2.48
====================================================================================================================================
Weighted average number of common shares outstanding
and common stock equivalents 390.0 392.9 390.4 392.9
====================================================================================================================================
</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,
1999 1998
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $25,866 and $26,580) $ 25,823 $ 27,977
Equity securities, at fair value (cost, $1,162 and $796) 1,176 828
Mortgage loans 561 574
Real estate held for sale 107 83
Short-term securities 2,152 1,597
Other investments 1,091 827
- ------------------------------------------------------------------------------------------------------------------------------------
Total investments 30,910 31,886
- ------------------------------------------------------------------------------------------------------------------------------------
Cash 51 62
Investment income accrued 393 409
Premium balances receivable 2,843 2,901
Reinsurance recoverables 9,345 9,153
Deferred acquisition costs 530 518
Deferred federal income taxes 1,546 1,109
Contractholder receivables 2,086 2,019
Goodwill 1,426 1,457
Other assets 2,043 1,760
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 51,173 $ 51,274
===================================================================================================================================
LIABILITIES
Claims and claim adjustment expense reserves $ 29,219 $ 29,589
Unearned premium reserves 4,392 4,166
Contractholder payables 2,086 2,019
Long-term debt 1,050 1,250
Other liabilities 4,657 4,225
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 41,404 41,249
- ------------------------------------------------------------------------------------------------------------------------------------
TAP - obligated mandatorily redeemable 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 5,479
Retained earnings 3,781 3,052
Accumulated other changes in equity from nonowner sources (20) 921
Treasury stock, at cost (shares, 9,950,327 and 8,544,687) (347) (298)
Unearned compensation (28) (33)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,869 9,125
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 51,173 $ 51,274
===================================================================================================================================
</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, 1999
- -------------------------------------------------------------------------------------------------------------------------
DOLLARS SHARES
------- ------
<S> <C> <C> <C>
COMMON STOCK AND ADDITIONAL
PAID-IN CAPITAL CLASS A CLASS B
-------------- -------------
Balance, beginning and end of period $ 5,483 72,393,407 328,020,170
- ---------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of period 3,052
Net income 875
Dividends (146)
- ---------------------------------------------------------------------------
Balance, end of period 3,781
- ---------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES IN EQUITY
FROM NONOWNER SOURCES, NET OF TAX
Balance, beginning of period 921
Net unrealized loss on securities (947)
Foreign currency translation adjustments 6
- ---------------------------------------------------------------------------
Balance, end of period (20)
- ---------------------------------------------------------------------------
TREASURY STOCK (AT COST)
Balance, beginning of period (298) (8,544,687) -
Net Capital Accumulation Plan grants 17 536,860 -
Treasury stock acquired (66) (1,942,500) -
- --------------------------------------------------------------------------- -------------------------------
Balance, end of period (347) (9,950,327) -
- --------------------------------------------------------------------------- -------------------------------
UNEARNED COMPENSATION
Balance, beginning of period (33)
Net issuance of restricted stock under
Capital Accumulation Plan (12)
Restricted stock amortization 17
- ---------------------------------------------------------------------------
Balance, end of period (28)
- --------------------------------------------------------------------------- -------------------------------
Total stockholders' equity and shares outstanding $ 8,869 62,443,080 328,020,170
=========================================================================== ===============================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
INCREASE (DECREASE) IN CASH
(in millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
For the Nine Months Ended September 30, 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 389 $ 745
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,385 1,153
Mortgage loans 63 151
Proceeds from sales of investments
Fixed maturities 7,086 6,383
Equity securities 603 394
Real estate held for sale 5 33
Purchase of investments
Fixed maturities (7,694) (7,888)
Equity securities (687) (275)
Mortgage loans (40) (15)
Investment real estate (16) --
Short-term securities, net (558) (964)
Other investments, net (351) (221)
Securities transactions in course of settlement 216 770
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 12 (479)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of commercial paper, net -- (108)
Payment of long-term debt (200) --
Purchase of treasury stock (66) (12)
Dividend to TIGI (123) (98)
Dividend to minority shareholders (23) (20)
- -----------------------------------------------------------------------------------------
Net cash used in financing activities (412) (238)
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash (11) 28
Cash at beginning of period 62 47
- -----------------------------------------------------------------------------------------
Cash at end of period $ 51 $ 75
=========================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 261 $ 294
Interest paid $ 105 $ 107
=========================================================================================
</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 8)) 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, 1998. 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, 1999, the Company adopted the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants' (AcSEC) 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. The effect of initially
adopting SOP 98-7 is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not permitted. As
a result of adopting SOP 98-7, the Company recorded a benefit of $27
million after tax, reflected as a cumulative catch-up adjustment. Aside
from the initial impact at adoption, this SOP is not expected to have a
significant impact on results of operations, financial condition or
liquidity.
Effective January 1, 1999, the Company adopted the AcSEC Statement of
Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund
and other insurance-related assessments, how to measure that liability, and
when an asset may be recognized for the recovery of such assessments
through premium tax offsets or policy surcharges. The effect of the initial
adoption of this SOP is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not permitted. As
a result of adopting SOP 97-3, the Company recorded a charge of $160
million after tax, reflected as a cumulative catch-up adjustment. Aside
from the initial impact at adoption, this SOP is not expected to have a
significant impact on results of operations, financial condition or
liquidity. In September 1999, the Company recorded a benefit to earnings of
approximately $58 million after tax as a result of legislative actions in
the states of New York and Pennsylvania that changed the manner in which
these states finance their workers' compensation second-injury funds, one
of the types of funds covered by SOP 97-3.
In June 1998, the Financial Accounting Standards Board (FASB) 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
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
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. Upon initial application of FAS
133, hedging relationships must be designated anew and documented pursuant
to the provisions of this statement. FAS 133 was to be effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. However, in
June 1999 the FASB issued Statement of Financial Standards No. 137
"Deferral of the Effective Date of FASB Statement No. 133" (FAS 137) which
allows entities which have not adopted FAS 133 to defer its effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000.
The Company expects to adopt the deferral provisions of FAS 137 and has not
yet determined the impact that FAS 133 will have on its consolidated
financial statements.
3. Segment Information
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
TOTAL
(at and for the three months ended COMMERCIAL PERSONAL REPORTABLE
September 30, in millions) LINES LINES SEGMENTS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Revenues
Premiums $ 1,110 $ 916 $ 2,026
Net investment income 420 102 522
Fee income 70 -- 70
Realized investment losses (8) (9) (17)
Other 3 13 16
- ---------------------------------------------------------------------------------------
Total revenues $ 1,595 $ 1,022 $ 2,617
=======================================================================================
Operating income (1) $ 321 $ 37 $ 358
Assets 42,999 7,579 50,578
- ---------------------------------------------------------------------------------------
1998
Revenues
Premiums $ 1,139 $ 836 $ 1,975
Net investment income 412 89 501
Fee income 74 -- 74
Realized investment gains 26 7 33
Other 4 12 16
- ---------------------------------------------------------------------------------------
Total revenues $ 1,655 $ 944 $ 2,599
=======================================================================================
Operating income (1) $ 231 $ 90 $ 321
Assets 44,714 7,585 52,299
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Operating income excludes realized investment gains (losses) and is
reflected net of tax.
8
<PAGE> 9
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
3. Segment Information, Continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
TOTAL
(at and for the nine months ended COMMERCIAL PERSONAL REPORTABLE
September 30, in millions) LINES LINES SEGMENTS
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Revenues
Premiums $ 3,284 $ 2,713 $ 5,997
Net investment income 1,243 291 1,534
Fee income 204 -- 204
Realized investment gains (losses) 44 (14) 30
Other 17 42 59
- --------------------------------------------------------------------------------------
Total revenues $ 4,792 $ 3,032 $ 7,824
======================================================================================
Operating income (1) $ 823 $ 249 $ 1,072
Assets 42,999 7,579 50,578
- --------------------------------------------------------------------------------------
1998
Revenues
Premiums $ 3,367 $ 2,409 $ 5,776
Net investment income 1,248 279 1,527
Fee income 233 -- 233
Realized investment gains 90 19 109
Other 33 40 73
- --------------------------------------------------------------------------------------
Total revenues $ 4,971 $ 2,747 $ 7,718
======================================================================================
Operating income (1) $ 683 $ 306 $ 989
Assets 44,714 7,585 52,299
======================================================================================
</TABLE>
(1) Operating income excludes realized investment gains (losses) and the
cumulative effect of changes in accounting principles, and is reflected
net of tax.
BUSINESS SEGMENT RECONCILIATION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME RECONCILIATION, NET OF TAX
Total operating income for reportable segments $ 358 $ 321 $ 1,072 $ 989
Other operating loss (1) (26) (27) (83) (85)
Realized investment gains (losses) (12) 21 19 71
Cumulative effect of changes in accounting for:
Insurance-related assessments -- -- (160) --
Insurance and reinsurance contracts that do not
transfer insurance risk -- -- 27 --
- ----------------------------------------------------------------------------------------------------------------
Total consolidated net income $ 320 $ 315 $ 875 $ 975
=================================================================================================================
</TABLE>
(1) The primary component of the other operating loss is after-tax interest
expense of $25 million and $26 million for the three months ended
September 30, 1999 and 1998, respectively, and $77 million and $79
million for the nine months ended September 30, 1999 and 1998,
respectively.
9
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TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
4. Changes in Equity from Nonowner Sources
The Company's total changes in equity from nonowner sources are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 320 $ 315 $ 875 $ 975
Net unrealized gain (loss) on securities (210) 355 (947) 406
Foreign currency translation adjustments 5 -- 6 (1)
- --------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 115 $ 670 $ (66) $ 1,380
==============================================================================================================
</TABLE>
5. 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 the incremental shares assumed issued under the Company's
Capital Accumulation Plan and other restricted stock 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, 1999, INCOME SHARES PER SHARE
in millions, except per share amounts) (NUMERATOR) (DENOMINATOR) AMOUNTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS - income available to common stockholders $875 389.3 $2.25
Effects of dilutive securities - restricted stock -- 1.1 (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted EPS - income available to common
stockholders and assumed conversions $875 390.4 $2.24
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(for the nine months ended September 30, 1998, INCOME SHARES PER SHARE
in millions, except per share amounts) (NUMERATOR) (DENOMINATOR) AMOUNTS
- ------------------------------------------------------------------------------------------------------------------------------------
<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, 1999 and 1998, there was no
significant effect on EPS from dilutive securities issued.
6. Capital and Debt
TAP has a five-year revolving credit facility in the amount of $250 million
with a syndicate of banks (the Credit Facility). Under the Credit Facility,
which expires in December 2001, TAP is required to maintain a certain level
of consolidated stockholders' equity (as defined in the agreement). At
September 30, 1999, this requirement was exceeded by approximately $4.7
billion. In addition, the Credit Facility places restrictions on the amount
of consolidated debt TAP can incur. At September 30, 1999, there were no
borrowings outstanding under the Credit Facility. If TAP 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.
10
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TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
6. Capital and Debt, continued
At September 30, 1999, 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.
On September 1, 1999, TAP repaid $200 million for its 6-3/4% note which
matured on that date, thereby reducing its long-term debt outstanding to
$1.1 billion. Additionally, on October 1, 1999, TAP repaid $200 million
for its 6-1/4% note which matured on that date.
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 $1.0 billion
in 1999 without prior approval of the Connecticut Insurance Department. TAP
received $850 million of dividends from its insurance subsidiaries during
the first nine months of 1999.
7. 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.
The reserves carried for environmental and asbestos claims at September 30,
1999 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 as well as changes in
legislation applicable to such claims. Because of these future unknowns,
additional liabilities may arise for amounts in excess of the current
reserves. These additional amounts, or a range of these additional amounts,
cannot now be reasonably estimated, and could result in a liability
exceeding reserves by an amount that would be material to the Company's
operating results in a future period. However, the Company believes that it
is not likely that these claims will have a material adverse effect on the
Company's financial condition or liquidity.
In the ordinary course of business, the Company is a defendant or
codefendant in various litigation matters other than those described above.
Although there can be no assurances, the Company believes, based on
information currently available, that the ultimate resolution of these
legal proceedings would not be likely to have a material adverse effect on
its results of operations, financial condition or liquidity.
11
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TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
8. Bank Holding Company Act of 1956 Restrictions
Citigroup is a bank holding company subject to the provisions of the Bank
Holding Company Act of 1956 (the BHCA). 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 the date it became a bank holding company
(October 8, 1998) to comply with all applicable provisions.
On November 4, 1999, Congress passed the Gramm-Leach-Bliley Act (the Bill),
which President Clinton has indicated he will sign and which would become
effective in most significant respects 120 days after enactment. If
President Clinton signs the Bill into law, bank holding companies, such as
Citigroup, all of whose depository institutions are "well capitalized" and
"well managed" (as defined in the BHCA) and which obtain satisfactory
Community Reinvestment Act ratings, and their affiliates may engage in a
broader spectrum of activities than those currently permitted, including
insurance underwriting and brokerage. Citigroup and its affiliates
(including the Company) would be permitted to continue to operate their
insurance businesses as currently structured and, if they so determined, to
expand those businesses through acquisition or otherwise. They would also
have increased ability to make investments in companies engaged in
non-financial activities.
12
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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). 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.
On October 8, 1998, Citicorp merged with and into a newly formed wholly-owned
subsidiary of Travelers Group Inc. (Travelers Group) (the Merger), the indirect
owner of approximately 84% of the outstanding common stock of TAP. Following 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). 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 the date it became a bank holding
company to comply with all applicable provisions.
On November 4, 1999, Congress passed the Gramm-Leach-Bliley Act (the Bill),
which President Clinton has indicated he will sign and which would become
effective in most significant respects 120 days after enactment. If President
Clinton signs the Bill into law, bank holding companies, such as Citigroup, all
of whose depository institutions are "well capitalized" and "well managed" (as
defined in the BHCA) and which obtain satisfactory Community Reinvestment Act
ratings, and their affiliates may engage in a broader spectrum of activities
than those currently permitted, including insurance underwriting and brokerage.
Citigroup and its affiliates (including the Company) would be permitted to
continue to operate their insurance businesses as currently structured and, if
they so determined, to expand those businesses through acquisition or
otherwise. They would also have increased ability to make investments in
companies engaged in non-financial activities.
<TABLE>
<CAPTION>
===================================================================================================================================
CONSOLIDATED RESULTS OF OPERATIONS THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in millions, except per share data) 1999 1998 1999 1998
===================================================================================================================================
<S> <C> <C> <C> <C>
Revenues ............................................................ $ 2,619 $ 2,601 $ 7,826 $ 7,727
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles . $ 320 $ 315 $ 1,008 $ 975
Cumulative effect of changes in accounting principles ............... -- -- (133) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (1) ...................................................... $ 320 $ 315 $ 875 $ 975
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles $ 0.82 $ 0.80 $ 2.59 $ 2.49
Cumulative effect of changes in accounting principles ............. -- -- (0.34) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income ........................................................ $ 0.82 $ 0.80 $ 2.25 $ 2.49
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding .............. 388.8 392.3 389.3 392.3
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles $ 0.82 $ 0.80 $ 2.58 $ 2.48
Cumulative effect of changes in accounting principles ............. -- -- (0.34) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income ........................................................ $ 0.82 $ 0.80 $ 2.24 $ 2.48
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding and common stock equivalents ................ 390.0 392.9 390.4 392.9
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income includes $12 million of realized investment losses in the three
months ended September 30, 1999 and $21 million of realized investment
gains in the three months ended September 30, 1998, and $19 million and $71
million of realized investment gains in the nine months ended September 30,
1999 and 1998, respectively.
13
<PAGE> 14
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
Operating earnings, which exclude realized investment gains and losses, were
$332 million or $0.85 per share in the third quarter of 1999, an increase of $38
million or $0.10 per share from $294 million or $0.75 per share in the third
quarter of 1998. The increase in operating earnings was primarily due to a
benefit of $58 million as a result of legislative actions in the states of New
York and Pennsylvania that changed the manner in which these states finance
their workers' compensation second-injury funds and favorable prior-year reserve
development in Commercial Lines. This increase in operating earnings was
partially offset by a $33 million charge related to curtailing the sale of
TRAVELERS SECURE(R) auto and homeowners products and higher catastrophe losses
in Personal Lines due to Hurricane Floyd. The TRAVELERS SECURE(R) program
distributed Personal Lines products through the independent agents of Primerica
Financial Services, a unit of Citigroup.
Revenues of $2.619 billion in the third quarter of 1999 increased $18 million
from $2.601 billion in the third quarter of 1998. This increase was primarily
attributable to a $51 million increase in earned premiums and a $22 million
increase in net investment income, partially offset by a $50 million decrease in
realized investment gains (losses). The increase in earned premiums was
primarily due to increased production in Personal Lines.
Net investment income was $523 million in the third quarter of 1999, an increase
of $22 million from the third quarter of 1998, reflecting a higher yield.
Fee income in the third quarter of 1999 was $70 million, a $4 million decrease
from the third quarter of 1998. National Accounts within Commercial Lines is the
primary source of fee income due to its service business. This decrease in fee
income was primarily due to the depopulation of involuntary pools serviced by
the Company.
Claims and expenses of $2.189 billion in the third quarter of 1999 increased $13
million from the third quarter of 1998. The increase was primarily the result of
increased claims related to the growth in premiums in Personal Lines, higher
catastrophe losses due to Hurricane Floyd and the TRAVELERS SECURE(R) charge,
partially offset by a reduction in general and administrative expenses,
favorable prior-year reserve development in Commercial Lines and the benefit
related to the legislative actions in New York and Pennsylvania that changed the
manner in which these states finance their workers' compensation second-injury
funds.
The Company's effective federal tax rate was 26% in both the third quarter of
1999 and 1998. These rates were lower than the statutory tax rate in both
periods primarily due to non-taxable investment income.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended September 30, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and loss adjustment expense (LAE) ratio .... 80.5% 74.8%
Underwriting expense ratio ...................... 29.2 28.2
Combined ratio before policyholder dividends .... 109.7 103.0
Combined ratio .................................. 110.4 103.7
- --------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio .............................. 75.8% 74.7%
Underwriting expense ratio ...................... 25.4 27.5
Combined ratio before policyholder dividends .... 101.2 102.2
Combined ratio .................................. 101.9 102.9
- --------------------------------------------------------------------------------
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
14
<PAGE> 15
The third quarter of 1999 statutory combined ratio before policyholder dividends
includes the treatment, on a statutory basis only, of a commutation of an
asbestos liability to an insured. Excluding the commutation, the statutory
combined ratio before policyholder dividends was 104.5%. The increase in the
third quarter of 1999 statutory combined ratio before policyholder dividends
excluding the commutation compared to the third quarter of 1998 was due to
higher catastrophe losses and a charge related to curtailing the sale of
TRAVELERS SECURE(R) policies, partially offset by favorable prior-year reserve
development in Commercial Lines.
The improvement in the third quarter of 1999 GAAP combined ratio before
policyholder dividends compared to the third quarter of 1998 was due to a
benefit resulting from legislative actions by the states of New York and
Pennsylvania that changed the manner in which these states finance their
workers' compensation second-injury funds and favorable prior-year reserve
development in Commercial Lines, partially offset by higher catastrophe losses
and the charge related to curtailing the sale of TRAVELERS SECURE(R) auto and
homeowners products.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND 1998
Net income was $875 million in the first nine months of 1999 compared to $975
million in the first nine months of 1998. Net income in 1999 included a charge
of $160 million related to the initial adoption of the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants'
(AcSEC) Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" (SOP 97-3) and a benefit of $27
million related to the initial adoption of AcSEC Statement of Position 98-7,
"Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do
Not Transfer Insurance Risk" (SOP 98-7). The net charge of $133 million due to
the initial adoption of these Statements of Position has been accounted for as a
cumulative effect of a change in accounting principles.
Excluding realized investment gains and the cumulative effect of changes in
accounting principles in the first nine months of 1999 described above,
operating income was $989 million or $2.53 per share (diluted) for the nine
months ended September 30, 1999 compared to $904 million or $2.30 per share
(diluted) for the nine months ended September 30, 1998. The increase in
operating income in the nine months ended September 30, 1999 compared to the
nine months ended September 30, 1998 was due to a benefit as a result of
legislative actions in the states of New York and Pennsylvania that changed the
manner in which these states finance their workers' compensation second-injury
funds, favorable prior-year reserve development and lower operating expenses in
Commercial Lines, partially offset by higher catastrophe losses in Personal
Lines, higher loss ratios in the TRAVELERS SECURE(R) program and a charge
related to curtailing the sale of TRAVELERS SECURE(R) auto and homeowners
products.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio......................................................... 75.0% 73.7%
Underwriting expense ratio................................................. 28.5 28.7
Combined ratio before policyholder dividends............................... 103.5 102.4
Combined ratio............................................................. 104.0 103.1
- ---------------------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio......................................................... 73.3% 73.4%
Underwriting expense ratio................................................. 27.4 28.5
Combined ratio before policyholder dividends............................... 100.7 101.9
Combined ratio............................................................. 101.2 102.6
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
15
<PAGE> 16
The first nine months of 1999 statutory combined ratio before policyholder
dividends includes the treatment, on a statutory basis only, of a commutation of
an asbestos liability to an insured. In addition, the first nine months of 1999
statutory and GAAP combined ratios before policyholder dividends include an
adjustment in Personal Lines associated with the termination of a quota share
reinsurance arrangement. Excluding these items, the statutory and GAAP combined
ratios before policyholder dividends for the first nine months of 1999 would
have been 101.6% and 101.0%, respectively.
The improvement in the first nine months of 1999 statutory and GAAP combined
ratios before policyholder dividends excluding these items compared to the first
nine months of 1998 was due to favorable prior-year reserve development in
Commercial Lines, continued productivity improvements and expense savings,
partially offset by higher catastrophe losses, higher loss ratios in the
TRAVELERS SECURE(R) program and the charge related to curtailing the sale of
TRAVELERS SECURE(R) policies. In addition, the first nine months of 1999 GAAP
combined ratio before policyholder dividends benefited from legislative actions
in the states of New York and Pennsylvania that changed the manner in which
these states finance their workers' compensation second-injury funds.
The other consolidated operating trends for the nine months ended September 30,
1999 and 1998 are substantially the same as noted above for the quarters then
ended.
SEGMENT RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
COMMERCIAL LINES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(in millions)
Revenues........................................................................ $ 1,595 $ 1,655
Net income (1).................................................................. $ 315 $ 247
</TABLE>
(1) Commercial Lines net income includes $6 million of realized investment
losses in the three months ended September 30, 1999 and $16 million of
realized investment gains in the three months ended September 30, 1998.
Commercial Lines operating income, which excludes realized investment gains and
losses, was $321 million in the third quarter of 1999 compared to $231 million
in the third quarter of 1998. This increase includes a benefit of $58 million as
a result of legislative actions in the states of New York and Pennsylvania that
changed the manner in which these states finance their workers' compensation
second-injury funds. The improvement also reflects favorable prior-year reserve
development, lower weather-related losses despite catastrophe losses due to
Hurricane Floyd and continued expense savings. Operating results reflected the
Company's long-standing insistence on maintaining discipline in the highly
competitive commercial lines marketplace and on growing business only where
market conditions warrant.
Revenues were $1.595 billion in the third quarter of 1999 compared to $1.655
billion in the third quarter of 1998. This decrease primarily reflected lower
earned premiums, lower realized investment gains (losses) and lower fee income,
partially offset by higher net investment income.
Commercial Lines net written premiums in the third quarter of 1999 totaled
$1.132 billion, down $36 million from $1.168 billion in the third quarter of
1998. This decrease reflected additional reinsurance coverage, the highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management.
Fee income in the third quarter of 1999 was $70 million compared to $74 million
in the third quarter of 1998. The $4 million decrease in fee income was
primarily due to the depopulation of involuntary pools serviced by the Company.
16
<PAGE> 17
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 and to self-insurance pools
throughout the United States. National Accounts net written premiums were $149
million in the third quarter of 1999 compared to $175 million in the third
quarter of 1998. The $26 million decrease reflected the impact of additional
reinsurance coverage and the Company's continued disciplined approach to
underwriting and risk management.
National Accounts new business was significantly lower in the third quarter of
1999 than in the third quarter of 1998, reflecting the Company's continued
disciplined approach to underwriting and risk management. National Accounts
business retention ratio in the third quarter of 1999 was virtually the same as
that in the third quarter of 1998.
Commercial Accounts serves mid-sized businesses for casualty products and both
large and mid-sized businesses for property products through a network of
independent agents and brokers. Commercial Accounts net written premiums were
$470 million in the third quarter of 1999 compared to $446 million in the third
quarter of 1998. The increase reflected growth in specific business segments and
the improving rate environment.
Commercial Accounts new business in the third quarter of 1999 was marginally
lower than in the third quarter of 1998, reflecting the Company's focus on
obtaining new accounts only where it can maintain its selective underwriting
policy. Commercial Accounts business retention ratio was moderately higher in
the third quarter of 1999 than in the third quarter of 1998. Commercial Accounts
continues to focus on maintaining its product pricing standards and its
selective underwriting policy in the renewal of accounts.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $355 million in the third quarter of
1999 compared to $366 million in the third quarter of 1998, reflecting 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 third
quarter of 1999 compared to the third quarter of 1998, reflecting its selective
underwriting policy in the highly competitive marketplace. Select Accounts
business retention ratio remained strong in the third quarter of 1999 and was
virtually the same as that in the third quarter of 1998.
Specialty Accounts markets products to national, mid-sized and small customers
and distributes them through both wholesale brokers and retail agents and
brokers throughout the United States. Specialty Accounts net written premiums
were $158 million in the third quarter of 1999 compared to $181 million in the
third quarter of 1998. This decrease primarily reflected additional reinsurance
coverage, a highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management.
Commercial Lines claims and expenses of $1.164 billion in the third quarter of
1999 were down from $1.325 billion in the third quarter of 1998. This decrease
reflects the benefit as a result of the legislative actions in the states of New
York and Pennsylvania that changed the manner in which these states finance
their workers' compensation second-injury funds. It also includes favorable
prior-year reserve development, lower weather-related losses despite catastrophe
losses due to Hurricane Floyd and continued expense savings.
Catastrophe losses, net of taxes and reinsurance, were $17 million in the third
quarter of 1999 compared to $15 million in the third quarter of 1998. The 1999
catastrophe losses were primarily due to Hurricane Floyd while the 1998
catastrophe losses were primarily due to Hurricane Georges.
17
<PAGE> 18
<TABLE>
<CAPTION>
Statutory and GAAP combined ratios for Commercial Lines were as follows:
- ------------------------------------------------------------------------------
Three Months Ended September 30, 1999 1998
- ------------------------------------------------------------------------------
STATUTORY:
<S> <C> <C>
Loss and LAE ratio .............................. 83.7% 78.7%
Underwriting expense ratio ...................... 30.9 29.3
Combined ratio before policyholder dividends .... 114.6 108.0
Combined ratio .................................. 115.9 109.2
- ------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio .............................. 74.0% 78.5%
Underwriting expense ratio ...................... 22.8 29.4
Combined ratio before policyholder dividends .... 96.8 107.9
Combined ratio .................................. 98.1 109.1
- ------------------------------------------------------------------------------
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
The increase in the third quarter of 1999 statutory combined ratio before
policyholder dividends compared to the third quarter of 1998 was principally due
to the treatment, on a statutory basis only, of the commutation of an asbestos
liability to an insured. Excluding the commutation, the statutory combined ratio
before policyholder dividends was 105.1%. The improvement in the third quarter
of 1999 statutory combined ratio before policyholder dividends excluding the
commutation was primarily due to favorable prior-year reserve development and
lower weather-related losses. The improvement in the third quarter of 1999 GAAP
combined ratio before policyholder dividends compared to the third quarter of
1998 was due to favorable prior-year reserve development, the benefit of the New
York and Pennsylvania legislative actions and lower weather-related losses,
partially offset by lower fee income.
<TABLE>
<CAPTION>
PERSONAL LINES
- ------------------------------------------------------------------------------
Three Months Ended September 30, 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
(in millions)
Revenues ................................................ $ 1,022 $ 944
Net income (1) .......................................... $ 31 $ 95
</TABLE>
(1) Personal Lines net income includes $6 million of realized investment losses
in the three months ended September 30, 1999, and $5 million of realized
investment gains in the three months ended September 30, 1998.
Personal Lines operating income, which excludes realized investment gains and
losses, was $37 million in the third quarter of 1999 compared to $90 million in
the third quarter of 1998. The 1999 decrease reflects the charge related to
curtailing the sale of TRAVELERS SECURE(R) policies, higher catastrophe losses
due to Hurricane Floyd and lower favorable prior-year reserve development,
partially offset by an increase in income due to the growth in earned premiums.
The TRAVELERS SECURE(R) program distributed Personal Lines products through the
independent agents of Primerica Financial Services, a unit of Citigroup. During
this quarter, the Company decided to curtail the sale of its TRAVELERS SECURE(R)
auto and homeowners products because losses exceeded levels anticipated in the
pricing of the products.
Revenues were $1.022 billion in the third quarter of 1999 compared to $944
million in the third quarter of 1998. This increase primarily reflected an
increase in earned premiums of $80 million.
18
<PAGE> 19
Net written premiums in the third quarter of 1999 were $952 million compared to
$909 million in the third quarter of 1998. This increase reflected growth in
independent agents business and growth in affinity group marketing and joint
marketing arrangements. Business retention continued to be strong.
Personal Lines claims and expenses of $983 million in the third quarter of 1999
increased $175 million from the third quarter of 1998. This increase was
primarily the result of higher losses associated with the growth in premiums,
higher catastrophe losses due to Hurricane Floyd and lower favorable prior-year
reserve development. In addition, the third quarter of 1999 included the charge
related to curtailing the sale of TRAVELERS SECURE(R) auto and homeowners
products.
Catastrophe losses, net of taxes and reinsurance, were $48 million in the third
quarter of 1999, compared to $22 million in the third quarter of 1998. The 1999
catastrophe losses were primarily due to Hurricane Floyd. The 1998 catastrophe
losses were primarily due to Hurricanes Bonnie and Georges and windstorms in the
Midwest and Northeast.
<TABLE>
<CAPTION>
Statutory and GAAP combined ratios for Personal Lines were as follows:
===============================================================================
Three Months Ended September 30, 1999 1998
- -------------------------------------------------------------------------------
STATUTORY:
<S> <C> <C>
Loss and LAE ratio .................... 76.8% 69.5%
Underwriting expense ratio ............ 27.2 26.8
Combined ratio ........................ 104.0 96.3
- -------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio .................... 77.9% 69.5%
Underwriting expense ratio ............ 28.3 25.0
Combined ratio ........................ 106.2 94.5
===============================================================================
</TABLE>
GAAP combined ratios for Personal Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
The increase in the third quarter of 1999 statutory and GAAP combined ratios
compared to the third quarter of 1998 was primarily due to higher catastrophe
losses due to Hurricane Floyd, the TRAVELERS SECURE(R) charge and lower
favorable prior-year reserve development in the automobile bodily injury line.
<TABLE>
<CAPTION>
INTEREST EXPENSE AND OTHER
- -------------------------------------------------------------------------------
Three Months Ended September 30, 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
(in millions)
Revenues................................... $ 2 $ 2
Net loss................................... $ (26) $ (27)
- -------------------------------------------------------------------------------
</TABLE>
The primary component of net loss for the third quarter of 1999 and 1998 was
after-tax interest expense of $25 million and $26 million, respectively.
19
<PAGE> 20
<TABLE>
<CAPTION>
SEGMENT RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
COMMERCIAL LINES
- --------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1999 1998
- --------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues ........................................................ $ 4,792 $ 4,971
- --------------------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles ........................................ $ 851 $ 742
Cumulative effect of changes in accounting principles ........... (133) --
- --------------------------------------------------------------------------------------------
Net income (1) ................................................. $ 718 $ 742
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Commercial Lines net income includes $28 million and $59 million of
realized investment gains in the nine months ended September 30, 1999 and
1998, respectively.
Net income was $718 million in the first nine months of 1999 compared to $742
million in the first nine months of 1998. Net income in 1999 included a charge
in the first quarter of $160 million related to the initial adoption of SOP 97-3
and a benefit of $27 million related to the initial adoption of SOP 98-7. The
net charge of $133 million due to the initial adoption of these Statements of
Position has been accounted for as a cumulative effect of a change in accounting
principles.
Commercial Lines operating income, which excludes realized investment gains and
the cumulative effect of changes in accounting principles in the first quarter
of 1999 described above, was $823 million in the nine months ended September 30,
1999, compared to $683 million in the nine months ended September 30, 1998. The
increase in operating income in the 1999 period includes a benefit of $58
million as a result of legislative actions in the states of New York and
Pennsylvania that changed the manner in which these states finance their
workers' compensation second-injury funds. The improvement also reflects
favorable prior-year reserve development, lower weather-related losses despite
the effects of Hurricane Floyd and continued expense savings, partially offset
by lower fee income.
Revenues were $4.792 billion in the first nine months of 1999 compared to $4.971
billion in the first nine months of 1998. This decrease reflected lower levels
of earned premiums, realized investment gains, fee income, and net investment
income.
Commercial Lines net written premiums in the first nine months of 1999 totaled
$3.341 billion, down $160 million from $3.501 billion in the first nine months
of 1998, reflecting additional reinsurance coverage, the highly competitive
marketplace and the Company's continued disciplined approach to underwriting and
risk management.
Fee income in the first nine months of 1999 was $204 million, a $29 million
decrease from the first nine months of 1998. This decrease was primarily due to
the depopulation of involuntary pools serviced by the Company.
National Accounts net written premiums were $400 million in the first nine
months of 1999 compared to $484 million in the first nine months of 1998. This
decrease reflects the impact of additional reinsurance coverage and the
Company's continued disciplined approach to underwriting and risk management.
National Accounts new business in the first nine months of 1999 was
significantly lower compared to the first nine months of 1998, reflecting the
Company's continued disciplined approach to the highly competitive marketplace.
National Accounts business retention ratio was moderately higher in the first
nine months of 1999 compared to the first nine months of 1998, reflecting the
loss of one large account in the second quarter of 1998.
20
<PAGE> 21
Commercial Accounts net written premiums were $1.354 billion in the first nine
months of 1999 compared to $1.349 billion in the first nine months of 1998. This
slight increase reflected the improving rate environment and growth in specific
business segments, partially offset by the Company's continued disciplined
approach to underwriting and risk management. For the first nine months of 1999,
new premium business in Commercial Accounts significantly declined compared to
the first nine months of 1998, reflecting the Company's focus on obtaining new
business accounts only where it can maintain its selective underwriting policy.
The Commercial Accounts business retention ratio in the first nine months of
1999 remained virtually the same compared to the first nine months of 1998.
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 $1.121 billion in the first nine months
of 1999 decreased $17 million from $1.138 billion in the first nine months of
1998. The decrease in Select Accounts net written premiums reflected the highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management. New premium business in Select Accounts was
significantly lower in the first nine months of 1999 compared to the first nine
months of 1998, reflecting its selective underwriting policy in the highly
competitive marketplace. Select Accounts business retention ratio remained
strong in the first nine months of 1999 and was virtually the same as that in
the first nine months of 1998.
Specialty Accounts net written premiums were $466 million in the first nine
months of 1999 compared to $530 million in the first nine months of 1998. This
decrease primarily reflects the impact of additional reinsurance coverage, a
highly competitive marketplace and the Company's continued disciplined approach
to underwriting and risk management.
Commercial Lines claims and expenses of $3.645 billion in the first nine months
of 1999 decreased $323 million from the first nine months of 1998. This decrease
reflects the benefit resulting from the legislative actions in the states of New
York and Pennsylvania that changed the manner in which these states finance
their workers' compensation second-injury funds. It also includes favorable
prior-year reserve development, lower weather-related losses despite the effects
of Hurricane Floyd and continued expense savings.
Catastrophe losses, net of taxes and reinsurance, were $27 million in the first
nine months of 1999 compared to $25 million in the first nine months of 1998.
The 1999 catastrophe losses were primarily due to Hurricane Floyd in the third
quarter and tornadoes in Oklahoma in the second quarter, while the 1998
catastrophe losses were due to Hurricane Georges in the third quarter and
tornadoes in Nashville, Tennessee in the second quarter.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1999 1998
- --------------------------------------------------------------------------------------------------------------
STATUTORY:
<S> <C> <C>
Loss and LAE ratio......................................................... 78.4% 78.6%
Underwriting expense ratio................................................. 30.0 29.5
Combined ratio before policyholder dividends............................... 108.4 108.1
Combined ratio............................................................. 109.4 109.3
- --------------------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio......................................................... 74.9% 78.2%
Underwriting expense ratio................................................. 28.4 30.3
Combined ratio before policyholder dividends............................... 103.3 108.5
Combined ratio............................................................. 104.3 109.7
- --------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
The first nine months of 1999 statutory combined ratio before policyholder
dividends reflects the treatment, on a statutory basis only, of the commutation
of an asbestos liability to an insured. Excluding the commutation, the statutory
combined ratio before policyholder dividends was 105.2% in the first nine months
of 1999 compared to 108.1% in the first nine months of 1998. The improvement was
primarily due to favorable prior-year reserve development and lower
weather-related losses. The improvement in the first nine months of 1999 GAAP
combined ratio before policyholder dividends compared to the first nine months
of 1998 was primarily due to favorable prior-year reserve development, lower
weather-related losses and the benefit of the New York and Pennsylvania
legislative actions, partially offset by lower fee income.
PERSONAL LINES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1999 1998
- --------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues........................................................................ $ 3,032 $ 2,747
Net income (1).................................................................. $ 240 $ 318
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Personal Lines net income includes $9 million of realized investment losses
in the nine months ended September 30, 1999 and $12 million of realized
investment gains in the nine months ended September 30, 1998.
Personal Lines operating income, which excludes realized investment gains and
losses, was $249 million in the first nine months of 1999 compared to $306
million in the first nine months of 1998. The decrease in operating income in
the 1999 period was primarily due to higher catastrophe losses due to Hurricane
Floyd, higher loss ratios in the TRAVELERS SECURE(R) program, the charge related
to curtailing the sale of TRAVELERS SECURE(R) auto and homeowners products and
lower prior-year favorable reserve development, partially offset by the increase
in income due to the growth in earned premiums.
Net written premiums in the first nine months of 1999 were $2.814 billion
(excluding an adjustment of $72 million due to a change in the quota share
reinsurance arrangement), compared to $2.589 billion in the first nine months of
1998. This increase primarily reflects growth in independent agents business and
growth in affinity group marketing and joint marketing arrangements. Business
retention continued to be strong. During this period, the Company decided to
curtail the sale of its TRAVELERS SECURE(R) auto and homeowners products.
Personal Lines claims and expenses of $2.690 billion in the first nine months of
1999 increased $407 million from the first nine months of 1998. This increase
was primarily the result of higher losses associated with the growth in
premiums, higher catastrophe losses and lower favorable prior-year reserve
development. In addition, the first nine months of 1999 included higher loss
ratios in the TRAVELERS SECURE(R) program and the charge related to curtailing
the sale of TRAVELERS SECURE(R) auto and homeowners products.
Catastrophe losses, after taxes and reinsurance, were $79 million in the first
nine months of 1999 compared to $44 million in the first nine months of 1998.
The 1999 catastrophe losses were primarily due to Hurricane Floyd in the third
quarter, wind and hail storms on the East Coast and tornadoes in the Midwest in
the second quarter and a wind and ice storm in the Midwest and Northeast in the
first quarter. 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.
22
<PAGE> 23
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1999 1998
- ------------------------------------------------------------------------------------------------------
STATUTORY:
<S> <C> <C>
Loss and LAE ratio......................................................... 70.9% 66.7%
Underwriting expense ratio................................................. 26.7 27.5
Combined ratio............................................................. 97.6 94.2
- ------------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio......................................................... 71.3% 66.7%
Underwriting expense ratio................................................. 26.2 26.1
Combined ratio............................................................. 97.5 92.8
- ------------------------------------------------------------------------------------------------------
</TABLE>
The first nine months of 1999 statutory and GAAP combined ratios for Personal
Lines include an adjustment associated with the termination of a quota share
reinsurance arrangement. Excluding this adjustment, the statutory and GAAP
combined ratios for the first nine months of 1999 would have been 97.3% and
98.1%, respectively. The increase in the first nine months of 1999 statutory and
GAAP combined ratios excluding this adjustment compared to the first nine months
of 1998 was due to higher catastrophe losses due to Hurricane Floyd, higher loss
ratios in the TRAVELERS SECURE(R) program, the TRAVELERS SECURE(R) charge and
lower favorable prior-year reserve development in the automobile bodily injury
line, partially offset by productivity improvements.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1999 1998
- ---------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues................................................................... $ 2 $ 9
Net income (loss).......................................................... $ (83) $ (85)
- ---------------------------------------------------------------------------------------------------
</TABLE>
The primary component of net income (loss) for the nine months ended September
30, 1999 and 1998 was after-tax interest expense of $77 million and $79 million,
respectively.
23
<PAGE> 24
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, 1999, approximately 17% of
the net aggregate reserve (i.e., approximately $119 million) consists of case
reserve for resolved claims. The balance, approximately 83% of the net aggregate
reserve (i.e., approximately $587 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, 1999 and 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Environmental Losses
Nine Months Ended September 30, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
(in millions)
Beginning reserves:
<S> <C> <C>
Direct....................................................................... $ 928 $ 1,193
Ceded........................................................................ (96) (74)
- -------------------------------------------------------------------------------------------------------------------
Net........................................................................ 832 1,119
Incurred losses and loss expenses:
Direct....................................................................... 109 96
Ceded........................................................................ (66) (57)
Losses paid:
Direct ...................................................................... 192 292
Ceded........................................................................ (23) (44)
- -------------------------------------------------------------------------------------------------------------------
Ending reserves:
Direct....................................................................... 845 997
Ceded........................................................................ (139) (87)
- -------------------------------------------------------------------------------------------------------------------
Net........................................................................ $ 706 $ 910
===================================================================================================================
</TABLE>
24
<PAGE> 25
ASBESTOS CLAIMS
At September 30, 1999, approximately 13% of the net aggregate reserve (i.e.,
approximately $108 million) is for pending asbestos claims. The balance,
approximately 87% (i.e., approximately $729 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, 1999 and 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Asbestos Losses
Nine Months Ended September 30, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
(in millions)
Beginning reserves:
<S> <C> <C>
Direct....................................................................... $ 1,252 $ 1,363
Ceded........................................................................ (266) (249)
- -------------------------------------------------------------------------------------------------------------------
Net........................................................................ 986 1,114
Incurred losses and loss expenses:
Direct....................................................................... 90 119
Ceded........................................................................ (47) (69)
Losses paid:
Direct ...................................................................... 279 193
Ceded........................................................................ (87) (49)
- -------------------------------------------------------------------------------------------------------------------
Ending reserves:
Direct....................................................................... 1,063 1,289
Ceded........................................................................ (226) (269)
- -------------------------------------------------------------------------------------------------------------------
Net........................................................................ $ 837 $ 1,020
===================================================================================================================
</TABLE>
25
<PAGE> 26
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, 1999
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 as
well as changes in legislation applicable to such claims. Because of these
future unknowns, additional liabilities may arise for amounts in excess of the
current reserves. These additional amounts, or a range of these additional
amounts, cannot now be reasonably estimated, and could result in a liability
exceeding reserves by an amount that would be material to the Company's
operating results in a future period. However, the Company believes that it is
not likely that these claims will have a material adverse effect on the
Company's financial condition or liquidity.
CUMULATIVE INJURY OTHER THAN ASBESTOS (CIOTA) CLAIMS
CIOTA claims are generally submitted to the Company under general liability
policies and often involve an allegation by a claimant against an insured that
the claimant has suffered injuries as a result of long-term or continuous
exposure to potentially harmful products or substances. Such potentially harmful
products or substances include, but are not limited to, lead paint, pesticides,
pharmaceutical products, silicone-based personal products, solvents and other
deleterious substances.
At September 30, 1999, approximately 22% of the net aggregate reserve (i.e.,
approximately $194 million) is for pending CIOTA claims. The balance,
approximately 78% (i.e., approximately $701 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, 1999 and 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
CIOTA Losses
Nine Months Ended September 30, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(in millions)
Beginning reserves:
<S> <C> <C>
Direct....................................................................... $ 1,346 $ 1,520
Ceded........................................................................ (392) (432)
- ---------------------------------------------------------------------------------------------------------------------
Net........................................................................ 954 1,088
Incurred losses and loss expenses:
Direct....................................................................... (29) (15)
Ceded........................................................................ 24 22
Losses paid:
Direct....................................................................... 105 52
Ceded........................................................................ (51) (5)
- ---------------------------------------------------------------------------------------------------------------------
Ending reserves:
Direct....................................................................... 1,212 1,453
Ceded........................................................................ (317) (405)
- ---------------------------------------------------------------------------------------------------------------------
Net........................................................................ $ 895 $ 1,048
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
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.
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, 1999 totaled $30.9 billion, of
which 83.5% was invested in fixed maturity investments, 3.8% in common stocks
and other equity securities, 2.2% in mortgage loans and real estate held for
sale and 10.5% in short-term and other investments. The average duration of the
fixed maturity portfolio, including short-term investments, was 5.4 years at
such date. Included in fixed maturity investments are non-investment grade
securities totaling $1.3 billion, representing 5.0% of the Company's fixed
maturity investments as of September 30, 1999. The following table reflects the
average yield (annualized) of the investment portfolio excluding unrealized and
realized investment gains and losses:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
Average Yield (Annualized) 1999 1998 1999 1998
-------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Before tax 7.00% 6.77% 6.87% 6.95%
After tax 5.10% 4.93% 5.01% 5.02%
</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. 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, none of which is
currently utilized. The Credit Facility expires in December 2001. Under the
Credit Facility, TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At September 30, 1999, this
requirement was exceeded by approximately $4.7 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, 1999, TAP had no commercial paper outstanding.
On September 1, 1999, TAP repaid $200 million for its 6 3/4% note which matured
on that date, thereby reducing its long-term debt outstanding to $1.1 billion.
Additionally, on October 1, 1999, TAP repaid $200 million for its 6 1/4% note
which matured on that date.
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 $1.0 billion in 1999 without
prior approval of the Connecticut Insurance Department. TAP has received $850
million of dividends from its insurance subsidiaries during the first nine
months of 1999.
27
<PAGE> 28
On January 19, 1999 and January 28, 1998, the Company, through the Travelers
Property Casualty Corp. Capital Accumulation Plan, reissued 476,189 and 763,654
shares, respectively, of treasury stock in the form of restricted Class A Common
Stock to participating officers and other key employees. The fair market values
per share of the 1999 and 1998 restricted stock awards at the grant date were
$31.88 and $43.71, 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. The compensation cost charged
to earnings for these restricted Class A Common Stock awards, as well as
previous awards, was $17 million and $14 million for the nine months ended
September 30, 1999 and 1998, respectively. At September 30, 1999, there were
5,844,149 shares available for future grants under all existing plans of TAP,
including, but not limited to the 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, evaluating and implementing changes to computer programs
necessary to address the Year 2000 issue. This issue involves the ability of
computer systems that have time sensitive programs to 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 has achieved compliance with respect to its business critical
systems in accordance with its Year 2000 plan and has completed the process of
certification to validate compliance. An ongoing re-certification process will
continue through the fourth quarter of 1999 to ensure all business critical
systems and products remain compliant.
The total pre-tax cost associated with the required modifications and
conversions is expected to be approximately $52 million and is being expensed as
incurred in the period 1996 through 1999. As of September 30, 1999, the Company
has incurred approximately $49 million to date on these efforts. The Company
also has third party customers, financial institutions, vendors and others with
whom it conducts business and has confirmed their plans to address and resolve
Year 2000 issues on a timely basis. While it is likely that these efforts by
third party vendors and customers 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 periods.
In addition, the Company has developed business resumption contingency plans to
address perceived risks associated with the Year 2000 effort. These plans
address the possibility of internal systems failures and the possibility of
failure of systems or processes outside the Company's control. These business
resumption contingency plans would enable business critical units to function on
January 1, 2000 in the event of an unexpected failure. Preparations for the
management of the date change will continue through 1999.
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 or claim coverage for their potential liability to third parties. The
Company has taken certain initiatives to mitigate this potential risk, including
addressing Year 2000 issues, where applicable, in the underwriting of insurance
policies. Losses for Year 2000 insurance claims and litigation costs related to
such claims are not reasonably estimable at this time.
28
<PAGE> 29
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 or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "may affect," and similar expressions or
future or conditional verbs such as "will," "should," "would," and "could."
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 Merger; customer
responsiveness to both new products and distribution channels; the actual amount
of liabilities associated with certain environmental and asbestos-related
insurance claims; 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.
29
<PAGE> 30
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 the Company, dozens of other insurers and the
National Council on Compensation Insurance ("NCCI"), see the description that
appears in the second paragraph under the caption "Legal Proceedings" beginning
on page 43 of the Annual Report on Form 10-K of TAP for the year ended December
31, 1998 (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 November 1999, the Michigan Court of Appeals agreed to hear
defendants' appeal of the lower court's June 1999 order, which denied
defendants' motion to dismiss the complaint.
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,
1999.
30
<PAGE> 31
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.01 Restated Certificate of Incorporation of Travelers Property
Casualty Corp. (the "Company"), Certificate of Designations,
Powers, Preferences and Rights of 7.5% Redeemable Preferred Stock,
Series Z, of the Company, Certificate of Amendment to the Restated
Certificate of Incorporation, filed March 7, 1997, and Certificate
of Amendment to the Restated Certificate of Incorporation, filed
April 23, 1997, incorporated by reference to Exhibit 3.01 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997 (File No. 1-14328) (the "Company's 3/31/97
10-Q").
3.02 Restated By-Laws of the Company, effective April 23, 1997,
incorporated by reference to Exhibit 3.02 to the Company's
3/31/97 10-Q.
12.01+ Computation of Ratio of Earnings to Fixed Charges.
27.01+ Financial Data Schedule.
99.01+ The second paragraph under the caption "Legal Proceedings"
beginning on page 43 of the Annual Report on Form 10-K of the
Company for the year ended December 31, 1998 (File No. 1-14328).
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the Securities and Exchange Commission
upon request.
- --------------------
+ Filed herewith.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRAVELERS PROPERTY CASUALTY CORP.
Date: November 11, 1999 By /s/ William P. Hannon
--------------------------------------
William P. Hannon
Chief Financial Officer
(Principal Financial Officer)
Date: November 11, 1999 By /s/ Douglas K. Russell
------------------------------------
Douglas K. Russell
Chief Accounting Officer
(Principal Accounting Officer)
32
<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,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before federal income taxes and cumulative effect of
changes in accounting principles $ 430 $ 425 $ 1,361 $ 1,337
Interest 38 40 118 121
Portion of rentals deemed to be interest 9 10 32 34
------- -------- -------- --------
Earnings available for fixed charges $ 477 $ 475 $ 1,511 $ 1,492
======= ======== ======== ========
Fixed charges:
Interest $ 38 $ 40 $ 118 $ 121
Portion of rentals deemed to be interest 9 10 32 34
------- -------- -------- --------
Total fixed charges $ 47 $ 50 $ 150 $ 155
======= ======== ======== ========
Ratio of earnings to fixed charges 10.15x 9.50x 10.07x 9.63x
======= ======== ======== ========
</TABLE>
The ratio of earnings to fixed charges is computed by dividing income before
federal income taxes and cumulative effect of changes in accounting principles
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,
1999 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-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 25,823
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,176
<MORTGAGE> 561
<REAL-ESTATE> 107
<TOTAL-INVEST> 30,910
<CASH> 51
<RECOVER-REINSURE> 9,345
<DEFERRED-ACQUISITION> 530
<TOTAL-ASSETS> 51,173
<POLICY-LOSSES> 29,219
<UNEARNED-PREMIUMS> 4,392
<POLICY-OTHER> 2,086
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,050
900
0
<COMMON> 4
<OTHER-SE> 8,865
<TOTAL-LIABILITY-AND-EQUITY> 51,173
2,026
<INVESTMENT-INCOME> 523
<INVESTMENT-GAINS> (17)
<OTHER-INCOME> 87
<BENEFITS> 1,591
<UNDERWRITING-AMORTIZATION> 326
<UNDERWRITING-OTHER> 272
<INCOME-PRETAX> 430
<INCOME-TAX> 110
<INCOME-CONTINUING> 320
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 320
<EPS-BASIC> 0.82
<EPS-DILUTED> 0.82
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
Exhibit 99.01
TAP's Form 10-K
December 31, 1998
Page 43
Beginning in January 1997, sixteen purported class actions and one
multi-party suit were commenced in various courts against certain subsidiaries
of the Company, dozens of other insurers and the National Council on
Compensation Insurance ("NCCI"). The allegations in the actions are
substantially similar. 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. Actions have been commenced in the following
jurisdictions: Georgia (El Chico Restaurants, Inc. v. The Aetna Casualty and
Surety Company, et al. and FFE Transportation Services, Inc. et al. v. NCCI, et
al.); Tennessee (El Chico Restaurants, Inc. v. The Aetna Casualty and Surety
Company, et al.); Florida (Bristol Hotel Management Corp., et al. v. The Aetna
Casualty and Surety Company, et al.); New Jersey (Foodarama Supermarkets, Inc.,
et al. v. The Aetna Casualty and Surety Company, et al.); Illinois (Hill-Behan
Lumber Co v. Hartford Insurance Co. et al. and CR/PL Management Co., et al. v.
Allianz Insurance Company Group, et al.); Pennsylvania (Foodarama Supermarkets,
Inc. v. The Aetna Casualty and Surety Company, et al.); Missouri (Hill-Behan
Lumber Corp., et al. v. Hartford Insurance Co., et al.); California (Dal-Tile
Corp., et al. v. NCCI, et al.); Texas (Sandwich Chef of Texas, Inc., et al. v.
Reliance National Insurance Company, et al.); Alabama (Alumax Inc., et al. v.
Allianz Insurance Company, et al.); Michigan (American Association of Retired
Persons, et al. v. National Surety Corp., et al.); Kentucky (Payless Cashways,
Inc., et al. v. National Surety Corp., et al.); New York (Burnham Service Corp.
v. NCCI, et al.); and Arizona (Albany International Corp. v. American National
Fire Insurance Company, et al.). The Company has vigorously defended all of the
above-mentioned cases, and intends to continue doing so.
