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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-14328
TRAVELERS PROPERTY CASUALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1445591
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(860) 277-0111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
CLASS A COMMON STOCK, PAR VALUE $ .01 PER SHARE NEW YORK STOCK EXCHANGE
6-3/4% NOTES DUE APRIL 15, 2001 NEW YORK STOCK EXCHANGE
8.08% TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST (AND NEW YORK STOCK EXCHANGE
REGISTRANT'S GUARANTY WITH RESPECT THERETO)
8% TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST (AND NEW YORK STOCK EXCHANGE
REGISTRANT'S GUARANTY WITH RESPECT THERETO)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT AS OF MARCH 3, 1999 WAS APPROXIMATELY $2.28 BILLION.
AS OF MARCH 3, 1999, 63,388,266 SHARES OF THE REGISTRANT'S CLASS A COMMON STOCK,
PAR VALUE $ .01 PER SHARE, AND 328,020,170 SHARES OF THE REGISTRANT'S CLASS B
COMMON STOCK, PAR VALUE $.01 PER SHARE, WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998 ARE INCORPORATED BY REFERENCE INTO PART II
OF THIS FORM 10-K.
CERTAIN PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1999 ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD ON APRIL 20, 1999 ARE INCORPORATED BY REFERENCE INTO
PART III OF THIS FORM 10-K.
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TRAVELERS PROPERTY CASUALTY CORP.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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FORM 10-K
ITEM NUMBER PAGE
PART I
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1. Business................................................................................................ 1
2. Properties.............................................................................................. 43
3. Legal Proceedings....................................................................................... 43
4. Submission of Matters to a Vote of Security Holders..................................................... 44
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters........................................................................... 44
6. Selected Financial Data................................................................................. 45
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................... 45
7A. Quantitative and Qualitative Disclosures About Market Risk.............................................. 45
8. Financial Statements and Supplementary Data............................................................. 46
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................................... 46
PART III
10. Directors and Executive Officers of the Registrant...................................................... 46
11. Executive Compensation.................................................................................. 46
12. Security Ownership of Certain Beneficial Owners
and Management........................................................................................ 46
13. Certain Relationships and Related Transactions.......................................................... 46
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................................................................... 47
Exhibit Index........................................................................................... 48
Signatures.............................................................................................. 52
Index to Consolidated Financial Statements and Schedules................................................ F-1
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PART I
ITEM 1. BUSINESS.
Travelers Property Casualty Corp. is a property-casualty insurance
holding company engaged, through its subsidiaries, in two business segments:
Commercial Lines and Personal Lines. The Company provides a wide range of
commercial and personal property and casualty insurance products and services to
businesses, government units, associations and individuals. Except as the
context otherwise requires, as used herein the "Company" refers to Travelers
Property Casualty Corp. and its consolidated subsidiaries.
Travelers Property Casualty Corp. was formed in January 1996 to hold
the property and casualty insurance subsidiaries (collectively, "Travelers P&C")
of The Travelers Insurance Group Inc. ("TIGI"), an indirect wholly-owned
subsidiary of Citigroup Inc. ("Citigroup"). On April 2, 1996, the Company
purchased from Aetna Services, Inc. (formerly Aetna Life and Casualty Company)
("Aetna") all of the outstanding capital stock (the "Acquisition") of Aetna's
property and casualty insurance subsidiaries (collectively, "Aetna P&C"), for
approximately $4.2 billion in cash. For additional information about the
Acquisition, the public offering and other related transactions, see Note 3 of
Notes to Consolidated Financial Statements.
Citigroup owns approximately 84% of the Company's outstanding common
stock at December 31, 1998. Citigroup is a diversified holding company whose
businesses provide a broad range of financial services to consumer and corporate
customers around the world. The periodic reports of Citigroup provide additional
business and financial information concerning that company and its consolidated
subsidiaries.
The principal executive offices of the Company are located at One Tower
Square, Hartford, Connecticut 06183; telephone number (860) 277-0111.
This discussion of the Company's business is organized as follows: (i)
a description of each of the Company's two business segments and related
services; (ii) a description of Other Operations; and (iii) certain other
information.(1) A glossary of insurance terms is included beginning on page 34.
- --------
(1) Certain items in this Form 10-K, including certain matters discussed under
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (the "MD&A"), are forward-looking statements. The
matters referred to in such statements could be affected by the risks and
uncertainties involved in the Company's business, including the effect of
economic and market conditions, the level and volatility of interest rates
and currency values, the impact of current or pending legislation and
regulation and the other risks and uncertainties detailed in the section
under the heading "Outlook" and in the Forward Looking Statements section
of the MD&A.
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COMMERCIAL LINES
The Company is the third largest writer of commercial lines insurance
in the United States based on 1997 direct written premiums published by A.M.
Best Company ("A.M. Best"). The Company's Commercial Lines offers a broad array
of property and casualty insurance and insurance-related services to its
customers. Commercial Lines is organized into four marketing and underwriting
groups that are designed to focus on a particular client base or industry
segment to provide products and services that specifically address customers'
needs: National Accounts, primarily serving large national corporations;
Commercial Accounts, serving mid-size businesses for casualty products and both
large and mid-size businesses for property products; Select Accounts, serving
small businesses; and Specialty Accounts, providing a variety of specialty
coverages. The Company also has a dedicated group within Commercial Accounts
that serves the construction industry. In 1998, Commercial Lines generated net
written premiums of $4.6 billion.
SELECTED PRODUCT AND MARKET INFORMATION
The accompanying table sets forth by product line and market net
written premiums for Commercial Lines for the periods indicated. For a
description of the product lines and markets referred to in the table, see "--
Product Lines" and "-- Principal Markets and Methods of Distribution,"
respectively.
Many larger National Accounts customers often demand service-type
products, primarily for workers' compensation coverage and to a lesser extent in
general liability and commercial automobile coverages. These types of products
include risk management services such as claims settlement, loss control and
engineering. Many of these products generate fee income rather than net written
premiums, and are not reflected in the accompanying table.
Because the Acquisition occurred on April 2, 1996, the Company's
results of operations for periods prior to April 2, 1996 do not include the
results of Aetna P&C. Accordingly, premium and other operational information
provided for the Company's combined businesses prior to such time has been
included below for informational purposes only. As used herein, unless the
context otherwise requires, "combined" refers to the operations of both
Travelers P&C and Aetna P&C, without regard to the date of the Acquisition.
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COMBINED NET WRITTEN PREMIUMS
<TABLE>
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PERCENTAGE OF TOTAL
YEAR ENDED DECEMBER 31, NET WRITTEN PREMIUMS
------------------------------------- YEAR ENDED
DECEMBER 31,
1998(1) 1997(2) 1996 1998
-------- -------- -------- ----------
(Dollars in millions)
NET WRITTEN PREMIUMS BY PRODUCT
LINE:
<S> <C> <C> <C> <C>
Commercial multi-peril $1,436 $1,037 $1,223 31.1%
Workers' compensation 1,179 1,176 1,223 25.6
Commercial automobile 781 866 806 16.9
General liability 539 931 836 11.7
Property 281 383 342 6.1
Fidelity and surety 209 201 215 4.5
Other 189 163 23 4.1
------ ------ ------ -----
Total Commercial Lines $4,614 $4,757 $4,668 100.0%
====== ====== ====== =====
NET WRITTEN PREMIUMS BY MARKET:
National Accounts $ 625 $ 657 $ 852 13.5%
Commercial Accounts 1,800 1,986 1,725 39.0
Select Accounts 1,494 1,432 1,412 32.4
Specialty Accounts 695 682 679 15.1
------ ------ ------ -----
Total Commercial Lines $4,614 $4,757 $4,668 100.0%
====== ====== ====== =====
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(1) Effective in 1998, net written premiums by product line
reflect a change to conform the Aetna P&C and Travelers P&C
statutory line assignments. There was no impact on total net
written premiums.
(2) 1997 includes a $142 million increase due to a change to
conform the Aetna P&C method of recording certain net written
premiums to the method employed by Travelers P&C.
PRODUCT LINES
The Company writes a broad range of commercial property and casualty
insurance for risks of all sizes. The core products in the Company's Commercial
Lines are as follows:
COMMERCIAL MULTI-PERIL provides a combination of property and liability
coverage for businesses and business property for damages such as that caused by
fire, wind, hail, water, theft and vandalism, and protects businesses from
financial loss due to business interruption resulting from a covered loss. It
also insures businesses against third-party liability from accidents occurring
on their premises or arising out of their operations, such as injuries sustained
from products sold.
WORKERS' COMPENSATION provides coverage for employers for specified
benefits payable under state or federal law for workplace injuries to employees.
There are typically four types of benefits payable under workers' compensation
policies: medical benefits, disability benefits, death benefits and vocational
rehabilitation benefits. The Company offers three types of workers' compensation
products: (i) guaranteed cost insurance products, in which policy premiums
charged are fixed and do not vary as a result of the insured's loss experience,
(ii) loss
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sensitive insurance products, including retrospectively rated policies, in which
premiums are adjusted based on actual loss experience of the insured during the
policy period, and large deductible plans, in which the customer bears the
insurance risk up to its deductible amount, and (iii) service programs, which
are generally sold to the Company's larger National Accounts customers, where
the Company receives fees for providing loss prevention, risk management, claim
administration and benefit administration services to organizations pursuant to
service agreements. The Company also participates in state assigned risk pools
servicing workers' compensation policies as a servicing carrier and pool
participant. The Company emphasizes managed care cost containment strategies
(which involve employers, employees and care providers in a cooperative effort
that focuses on the injured employee's early return to work), cost-effective
quality care, and customer service in this market.
COMMERCIAL AUTOMOBILE provides coverage for businesses against losses
incurred from personal bodily injury, bodily injury to third parties, property
damage to an insured's vehicle, and property damage to other vehicles and other
property resulting from the ownership, maintenance or use of automobiles and
trucks in a business.
GENERAL LIABILITY provides coverage for liability exposures including
bodily injury and property damage arising from products sold and general
business operations. Liability policies may also include coverage for directors'
and officers' liability arising in their official capacities, employment
practices liability insurance, fiduciary liability for trustees and sponsors of
pension, health and welfare, and other employee benefit plans, errors and
omissions insurance for employees, agents, professionals and others arising from
acts or failures to act under specified circumstances, as well as medical
malpractice, umbrella and excess insurance.
PROPERTY provides coverage for loss or damage to buildings, inventory
and equipment from natural disasters, including hurricanes, windstorms,
earthquakes, hail, explosions, severe winter weather and other events such as
theft and vandalism, fires and storms and financial loss due to business
interruption resulting from covered property damage. Property also includes
inland marine, which provides coverage for goods in transit and unique,
one-of-a-kind exposures.
FIDELITY AND SURETY provides fidelity insurance coverage which protects
an insured for loss due to embezzlement or misappropriation of funds by an
employee. Surety is a three-party agreement whereby the insurer agrees to pay a
second party or make complete an obligation in response to the default, acts or
omissions of a third party. Surety is generally provided for construction
performance, legal matters such as appeals, trustees in bankruptcy and probate
and other performance bonds.
OTHER coverages include boiler and machinery insurance, which provides
coverage for loss or damage resulting from the mechanical breakdown of boilers
and machinery, as well as miscellaneous assumed reinsurance.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The Company distributes its commercial products primarily through
approximately 5,200 brokers and independent agencies located throughout the
United States that are serviced by approximately 80 field offices. The Company
seeks to establish relationships with well-
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established, independent insurance agencies and brokers. In selecting new
independent agencies and brokers to distribute the Company's products, the
Company considers each agency's or broker's profitability, financial stability,
staff experience and strategic fit with the Company's operating and marketing
plans. Once an agency or broker is appointed, the Company carefully monitors its
performance.
NATIONAL ACCOUNTS
The Company's National Accounts provides a variety of casualty products
to large companies. The Company's National Accounts also includes the Company's
alternative market business (the "Alternative Market"), which primarily offers
workers' compensation products and services to the voluntary market including
employee groups, associations and franchises and to involuntary state pools.
National Accounts customers generally select products in connection with a large
deductible or self-insured program, or a guaranteed cost or a retrospectively
rated insurance policy. Customers are usually national in scope and range in
size from businesses with sales of approximately $10 million per year to Fortune
2000 corporations. Products are marketed through national brokers and regional
agents with offices throughout the United States. Workers' compensation
accounted for approximately 68% of the products sold in 1998 to National
Accounts customers, based on net written premiums and service fee income.
In December 1998, the Company announced a global strategic relationship
with Winterthur International, called Travelers/Winterthur International, which
markets a variety of commercial lines products to multinational corporations.
The Company expects that Travelers/Winterthur International will allow it to
participate in business requiring international underwriting and insurance
services.
The Alternative Market business sells claims and policy management
services to workers' compensation and automobile assigned risk plans and to
self-insurance pools throughout the United States. The Company has emerged as
the largest workers' compensation assigned risk plan servicing insurer in the
industry with approximately 25% share of the market in 1998. Assigned risk plan
contracts generated approximately $55 million in service fee income in 1998 for
the Company.
The Alternative Market business also services self-insurance groups,
sells excess workers' compensation coverage to these groups and markets various
workers' compensation specialty programs. Self-insurance groups and these
specialty programs generated net written premiums of $43 million and service fee
income of $3 million in 1998. The Alternative Market business also participates
in various involuntary assigned risk pools, which provide insurance coverage to
individuals or other entities that otherwise are unable to purchase such
coverage in the voluntary market. Participation in these pools in most states is
generally in proportion to voluntary writings of related lines of business in
that state.
COMMERCIAL ACCOUNTS
The Company's Commercial Accounts sells a broad range of property and
casualty insurance products through a large network of independent agents and
brokers. Commercial
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Accounts casualty products target businesses with 75 to 1,000 employees, while
its property products target both large and mid-size businesses. The Company
offers a full line of products to its Commercial Accounts customers, with an
emphasis on guaranteed cost products.
Commercial Accounts targets certain industries in which the Company has
claims, engineering and underwriting expertise and to which the Company has
established dedicated operations. Industry segments within the manufacturing
sector include: advanced technology, metal products, mineral products, plastic
and rubber products and wood products. Also targeted are colleges and
universities, food, retail, financial, property management and the wholesale
industries. The Company continues to develop new industry-targeted programs both
on a national and local level. Specific industry knowledge enables the Company
to select, as customers, better managed companies in an industry segment, to
tailor specialized coverages for those companies, to link price to the
individual exposure and to control risk. The Company uses components of this
approach specifically in connection with loss control and claims management
processing. Through a network of field offices, the Company's marketing and
underwriting specialists, who have point of sale authority, work closely with
local brokers and agents to tailor insurance coverage to individual customer
needs.
Construction. The Company has established dedicated operations that
exclusively target the construction industry, providing insurance and risk
management services for virtually all areas of construction, including general
contractors, heavy construction (including street and road) and special trade
contractors, except artisan or smaller trade contractors. The Company offers all
product lines to mid-size and national customers in the construction market,
including both guaranteed cost and loss-responsive products, and wrap-up
insurance programs, with general liability, workers' compensation, commercial
auto, commercial property and inland marine coverages. The dedicated
construction operations provide specialized service and underwriting, with local
market expertise and national capability, that enable the Company to tailor
specialized coverages, have competitive pricing and control risk. This includes
local underwriters who understand their states' laws and claim climates,
engineering and loss control specialists, professional claim management and
legal personnel with extensive construction experience. Construction's products
are distributed through independent agents and brokers throughout the United
States. Construction operations contributed approximately 24% of the Commercial
Accounts premium-based business in 1998. Additionally, construction operations
service-based business contributed $6 million of service fees to the Company in
1998.
SELECT ACCOUNTS
Select Accounts serves firms typically with one to 75 employees.
Products offered to Select Accounts are generally guaranteed cost policies,
often a packaged product covering property and liability exposures. Products are
sold through independent agents, who are often the same agents that sell the
Company's Commercial Accounts and Personal Lines products.
Personnel in the Company's field offices and other points of local
service, which are located throughout the United States, work closely with
agents to ensure a strong local presence in the marketplace. The Company
utilizes a marketing and underwriting approach based on agency automation and
defined underwriting criteria. Agency automation allows agents access to the
Company's price quotation and policy issuance systems and enables agents
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to provide faster and more cost-effective service to customers with supervision
and underwriting control. Agents that do not utilize the automated quotation and
policy issuance systems work with the Company's sales and marketing
representatives who have point of sale authority. Agents serving Select Accounts
are given greater control and discretion over underwriting decisions, within
predefined parameters, than brokers selling to larger accounts. Business in
other classifications is subject to consultative review by in-house
underwriters. The Company believes that its breadth of products, highly
qualified field staff and its technology offer distinct competitive advantages.
SPECIALTY ACCOUNTS
Specialty Accounts markets products to national, mid-size and small
customers, and distributes them through both wholesale brokers and retail agents
and brokers throughout the United States. The Company believes that it has a
competitive advantage with respect to many of these products based on its
reputation for timely decision-making, underwriting and industry expertise and
strong producer and customer relationships as well as its ability to cross-sell
with National Accounts, Commercial Accounts and Select Accounts.
The Company has two separate marketing and underwriting groups within
Specialty Accounts:
Gulf Specialty focuses on many non-traditional lines of business with a
particular emphasis on the financial services market. Products include
directors' and officers' liability insurance, errors and omissions coverage for
bankers, investment counselors and mutual fund advisors, and fidelity and surety
coverage for related classes. In addition, Gulf Specialty offers errors and
omissions coverage for professionals and non-professionals such as lawyers,
architects and engineers, insurance agents, podiatrists and chiropractors
medical malpractice, primary and excess property, and various coverages that
target the transportation industry. Gulf Specialty also writes umbrella coverage
for various industries, provides insurance products to the entertainment
industry and to municipalities and provides insurance products for other
industry specific programs. Effective January 1, 1998, the Company's former
Travelers Specialty unit was combined with Gulf Specialty, and during 1998 and
1999 the majority of renewal policies within the former Travelers Specialty unit
are being written as Gulf Specialty policies.
Bond Specialty's range of products includes fidelity and surety bonds,
directors' and officers' and other professional liability insurance, employment
practices liability insurance, fiduciary liability insurance and other related
coverages. The customer base ranges from large financial services companies and
commercial entities to small businesses and individuals. Products and services
are distributed primarily through agents and brokers. Bond Specialty is
organized around three broad customer segments: Financial Services, Construction
and Commercial Risk and one specialized product niche: National Commercial
Surety.
PRICING AND UNDERWRITING
Pricing levels for property and casualty insurance products by the
Company's Commercial Lines are generally developed based upon the frequency and
severity of estimated losses, the expenses of producing business and
administering claims, and a reasonable allowance
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for profit. The Company's strategy emphasizes a profit-oriented approach rather
than a premium volume or market share-oriented approach to underwriting. The
market conditions for all Commercial Lines products are characterized by
difficult pricing and increased competition.
A significant portion of Commercial Lines business is written with
large deductible insurance policies. Under certain workers' compensation
insurance contracts with deductible features, the Company is obligated to pay
the claimant the full amount of the claim. The Company is subsequently
reimbursed by the contractholder for the deductible amount, and is subject to
credit risk until such reimbursement is made. At December 31, 1998,
contractholder receivables and payables on unpaid losses were each approximately
$2.0 billion. Retrospectively rated policies are primarily used in workers'
compensation coverage. Although the retrospectively rated feature of the policy
substantially reduces insurance risk to the Company, it introduces credit risk
to the Company. Receivables on unpaid losses from holders of retrospectively
rated policies totaled approximately $456 million at December 31, 1998.
Collateral, primarily letters of credit and, to a lesser extent, cash
collateral, is generally requested for large deductible plans and/or
retrospectively rated policies that provide for deferred collection of
deductibles and/or ultimate premiums. The amount of collateral requested is
predicated upon the creditworthiness of the customer and the nature of the
insured risks. Commercial Lines continually monitors the credit exposure on
individual accounts and the adequacy of collateral.
The Company has developed an underwriting and pricing methodology that
incorporates underwriting, claims, engineering, actuarial and product
development disciplines for particular industries. This approach is designed to
maintain high quality underwriting and pricing discipline. This approach
utilizes proprietary data gathered and analyzed by the Company with respect to
its Commercial Lines business over many years. The underwriters and engineers
use this information to assess and evaluate risks prior to quotation. This
information provides specialized knowledge about industry segments and
catastrophe management and helps analyze risk based on account characteristics
and pricing parameters designed to ensure that the Company does not compromise
its underwriting integrity.
Select Accounts uses a process based on standard industry
classification (S.I.C.) to allow agents and field marketing representatives to
make underwriting and pricing decisions within predetermined classifications,
because underwriting criteria and pricing tend to be more standardized for
smaller businesses.
The Company is also a member of and participates in the underwriting
operations of insurance and reinsurance pools and associations, several of which
make independent underwriting decisions on behalf of their members. These pools
insure specialized risks such as exposures related to the aviation and nuclear
power industries.
The Company continually reviews its exposure to catastrophic losses and
attempts to mitigate such exposure. See "Reinsurance." The Company uses
sophisticated computer modeling techniques to assess underwriting risks and
renewal of business in catastrophe-prone areas.
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GEOGRAPHIC DISTRIBUTION
The following table shows the distribution of Commercial Lines' direct
written premiums for the states that accounted for the majority of premium
volume for the year ended December 31, 1998:
<TABLE>
<CAPTION>
STATE % OF TOTAL
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<S> <C>
New York 12.6%
California 8.8
Texas 6.8
Massachusetts 6.2
Florida 4.5
Pennsylvania 4.2
New Jersey 3.8
Illinois 3.6
Connecticut 3.5
North Carolina 3.3
All Others (1) 42.7
-----
TOTAL 100.0%
=====
</TABLE>
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(1) No other single state accounted for 3.0% or more of the total direct
written premiums written in 1998 by the Company.
PERSONAL LINES
The Company is the second largest writer of personal lines insurance
through independent agents and the eighth largest writer of personal lines
insurance overall in the United States based on 1997 direct written premiums
published by A.M. Best. In 1998, Personal Lines generated net written premiums
of approximately $3.5 billion. Personal Lines primarily offers personal
automobile and homeowners insurance.
SELECTED PRODUCT INFORMATION
The accompanying table sets forth by product line net written premiums
for Personal Lines for the periods indicated. For a description of the product
lines referred to in the accompanying table below, see "-- Product Lines."
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COMBINED NET WRITTEN PREMIUMS
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET
WRITTEN PREMIUMS
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------------------ DECEMBER 31,
1998 1997 1996 1998
-------- ------- --------- -----------
(Dollars in millions)
NET WRITTEN PREMIUMS BY PRODUCT
LINE:
<S> <C> <C> <C> <C>
Personal automobile $2,328 $1,950 $1,851 66.7%
Homeowners and other 1,162 1,124 824 33.3
------ ------ ------ -----
Total Personal Lines (1) $3,490 $3,074 $2,675 100.0%
====== ====== ====== =====
</TABLE>
(1) In 1998 and 1997, $638 million and $371 million, respectively, of
Personal Lines net written premiums were generated by new distribution
channels.
PRODUCT LINES
The Company writes virtually all types of property and casualty
insurance covering personal risks. Personal Lines had approximately 5.1 million,
4.6 million and 4.4 million policies in force at December 31, 1998, 1997 and
1996, respectively. The primary coverages in Personal Lines are personal
automobile and homeowners insurance sold to individuals.
PERSONAL AUTOMOBILE provides coverage for liability to others for both
bodily injury and property damage and for physical damage to an insured's own
vehicle from collision and various other perils. In addition, many states
require policies to provide first-party personal injury protection, frequently
referred to as no-fault coverage. In 1997, the Company introduced a nonstandard
automobile product in Texas, distributed through independent agents. In 1998,
the Company expanded its nonstandard auto product into New York, Florida and
Georgia. In 1999, the Company expanded its nonstandard auto product into
Connecticut and plans to further expand this product into states where it has
significant agency representation, including Pennsylvania and Virginia.
HOMEOWNERS provides protection against losses to dwellings and contents
from a wide variety of perils, as well as coverage for liability arising from
ownership or occupancy. The Company writes homeowners insurance for dwellings,
condominiums and rental property contents. OTHER products include coverage for
boats, personal articles such as jewelry, and umbrella liability protection.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The Company's Personal Lines products are distributed primarily through
approximately 5,000 independent agencies located throughout the United States,
supported by a network of 13 field marketing offices and five customer service
centers. Personal Lines also markets through new distribution channels,
including sponsoring organizations such as employee and affinity groups, the
independent agents of Primerica Financial Services ("Primerica"), a unit of
Citigroup, and joint marketing arrangements with other insurers. In 1998,
Personal Lines began cross-marketing its products to Citibank customers,
primarily credit cardholders. (Citibank is a
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unit of Citigroup.) While the Company's principal markets for Personal Lines
insurance are in states along the East Coast, in the South, and Texas, Personal
Lines is expanding its geographical presence across the United States. In the
states of Florida, New Jersey, Massachusetts and California, the Company
operates domestic companies to enhance its competitive capability in these
highly regulated markets. Property-casualty licensed Primerica agents market
Personal Lines products under the TRAVELERS SECURE(R) program in 39 states. At
the end of 1998, approximately 14,100 Primerica agents were licensed to sell
Personal Lines products through the TRAVELERS SECURE(R) program. During 1998,
approximately 154,000 new automobile or homeowners policies were sold through
this program. Approximately 38% of Personal Lines new business originated from
new distribution channels in 1998 and represented 22% and 16% of policies in
force at December 31, 1998 and 1997, respectively.
Insurance companies generally market personal automobile and homeowners
insurance through one of three distribution systems: independent agents,
exclusive agents or direct writing. The independent agents that distribute the
Company's Personal Lines products usually represent several unrelated property
and casualty companies. Exclusive agents represent one company and generally
sell a number of products, including life insurance and annuities in addition to
property-casualty products. In contrast, direct writing companies generally
operate by mail and telephone through sales representatives. Due in part to the
expense advantage that direct writers may have relative to companies using
independent agents and changing customer buying preferences of buying directly
from companies, the direct writing companies have gradually expanded their
market share in recent years.
The Company's Personal Lines continues to distribute its products
through the independent agency distribution system, recognizing the service and
underwriting advantages the agent can deliver. In addition to its agency
distribution system, the Company has broadened its distribution channels for
Personal Lines products to include sponsoring organizations such as employee and
affinity groups, joint marketing arrangements with other insurers, and sales
through the independent agents of Primerica, who primarily sell life insurance
products issued by affiliates of the Company as well as mutual funds and other
Citigroup products. In general, the Primerica agents contact potential customers
directly, and then transmit information about the customer to one of the
Company's three regional telemarketing centers. An authorized telemarketing
sales representative contacts the customer to underwrite, sell and ultimately
process new business. In 1998, Personal Lines began marketing products directly
to Citibank customers, primarily credit cardholders: potential customers are
solicited by telephone after transfer from a Citibank customer service call
center, through direct mail or inserts in credit card statements.
In 1995, Aetna P&C entered into a marketing agreement with GEICO to
write the majority of GEICO's homeowners business, and to receive referrals from
GEICO for new homeowners business. This agreement added historically profitable
business and helped geographically diversify the homeowners line of business. It
also provided for limits on Personal Lines' obligation to write new and renewal
business in certain catastrophe-prone areas.
The Company believes that its focus on service and development of
long-term relationships with individual agents gives it a competitive advantage
in the Personal Lines market. The Company believes that its expense management
practices, including prompt and
11
<PAGE> 14
efficient claims handling and high level of automation, allow it to offer a
competitively priced product. In addition, the Company is leveraging its
service, claims handling and automation experience in the expansion of the
distribution of Personal Lines products through its new channels.
PRICING AND UNDERWRITING
Pricing for personal automobile insurance is driven by changes in the
frequency of claims and by inflation in the cost of automobile repairs, medical
care and litigation of liability claims. As a result, the profitability of the
business is largely dependent on promptly identifying and rectifying disparities
between premium levels and expected claim costs, and obtaining approval of the
state regulatory authorities for indicated rate increases. Premiums charged for
physical damage coverage reflect insured car values and, accordingly, premium
levels are somewhat related to the volume of new car sales.
Pricing in the homeowners business is also driven by changes in the
frequency of claims and by inflation in building supplies, labor costs and
household possessions. Most homeowners policies offer (but do not require)
automatic increases in coverage to reflect growth in replacement costs and
property values. In addition to the normal risks associated with any multiple
peril coverage, the profitability and pricing of homeowners insurance is
affected by the incidence of natural disasters, particularly hurricanes, winter
storms, earthquakes and tornadoes. In order to reduce its exposure to
catastrophe losses, the Company has limited the writing of new homeowners
business and selectively non-renewed existing homeowners business in certain
markets, tightened underwriting standards and implemented price increases in
certain catastrophe-prone areas, and instituted deductibles in hurricane-prone
areas, all subject to restrictions imposed by insurance regulatory authorities.
In California, the Company introduced in 1996 an endorsement that reduces its
exposure to catastrophic earthquake claims by increasing the deductible and
limiting other policy coverages in the event of an earthquake loss. The Company
uses computer modeling techniques to assess its level of exposure to loss in
catastrophe-prone areas. Changes to methods of marketing and underwriting in
coastal areas of Florida and New York, and in California are subject to
state-imposed restrictions, the general effect of which is to make it more
difficult for an insurer to reduce exposures.
Insurers writing property-casualty policies are generally unable to
increase rates until some time after the costs associated with coverage have
increased, primarily as a result of state insurance rate regulation laws. The
pace at which an insurer can change rates in response to competition or to
increased costs depends, in part, on whether the applicable rate regulation law
requires prior approval of a rate increase or notification to the regulator
either before or after a rate increase is imposed. In states having prior
approval laws, a rate must be approved by the regulator before it may be used by
the insurer. In states having "file-and-use" laws, the insurer must file the
rate with the regulator, but does not need to wait for approval before using it.
A "use-and-file" law requires an insurer to file rates within a certain period
of time after the insurer begins using the new rate. Approximately one-half of
the states, including New York and New Jersey, require prior approval of most
rate increases.
Underwriting of Personal Lines new business policies is conducted
primarily by independent agents. Agents underwrite Personal Lines policies under
strict underwriting
12
<PAGE> 15
guidelines established and monitored by underwriters in the Company's customer
service centers. Each agent is assigned to a specific employee of the Company or
team of employees responsible for working with the agent on business plan
development, marketing, and overall growth and profitability. The Company uses
agency level management information to analyze and understand results and to
identify problems and opportunities.
Personal Lines products are also sold through alternative marketing
channels. In these channels, underwriting is conducted by employees of the
Company. Underwriters work with Company management on business plan development,
marketing, and overall growth and profitability. Channel-specific production
information is used to analyze results and identify problems and opportunities.
GEOGRAPHIC DISTRIBUTION
The following table shows the distribution of Personal Lines' direct
written premiums for the states that accounted for the majority of premium
volume for the year ended December 31, 1998:
<TABLE>
<CAPTION>
STATE % OF TOTAL
- ----- ----------
<S> <C>
New York 21.7%
Texas 9.1
New Jersey 8.6
Pennsylvania 8.3
Florida 6.2
Massachusetts 5.6
Connecticut 5.4
Virginia 3.7
Georgia 3.5
North Carolina 3.2
California 3.1
All others (1) 21.6
-----
TOTAL 100.0%
=====
</TABLE>
- ------------------
(1) No other single state accounted for 3.0% or more of the total direct
written premiums written in 1998 by the Company.
CLAIM ADMINISTRATION
The Company employs approximately 8,500 claim adjusters, appraisers,
investigators, staff attorneys, system specialists and training, management and
support personnel in the claim department. These employees manage over 90% of
the Company's claims. Approved external vendors, such as claim adjusters,
appraisers, investigators and attorneys, are used only when the geographic
location or unique issues raised by a claim warrant such use. To be approved,
these vendors must have a proven record and have demonstrated cost-consciousness
and relevant technical skills.
13
<PAGE> 16
The Company seeks to achieve optimal levels of losses and loss
adjustment expenses while maintaining its high level of service. The Company's
claim department is organized to meet these goals. The organization features
seven operating regions, and grants to the regions authority to address the
needs of local customers, underwriters, agents and brokers across Commercial
Lines and Personal Lines. In addition, technical and legal personnel have
created teams around technical specialties to better support the regional
operations. This structure permits the Company to maintain the economies of
scale of a larger, established company while enjoying the flexibility of a
smaller company that can quickly respond to the needs of its customers,
underwriters, agents and brokers. The home office continues to monitor adherence
to claims policies and procedures, the adequacy of case reserves, loss and
expense controls and productivity and service standards.
The Company continuously reviews its claim practices in its effort to
meet its service and loss and expense objectives. The Company's claim
adjudication process focuses on the segmentation of claims, based on complexity
of the claim, required technical specialization, and speed of process. To
enhance this effort, the Company's claim handling staff and workflow design is
organized around line of business specialization. In 1998, through workflow and
management information improvements, the Company enhanced its claim adjudication
process for auto physical damage.
Another example of this effort is the Company's introduction of
TravComp, a workers' compensation claim and medical management program that
assists adjusters in promptly investigating, validating or rejecting workers'
compensation claims. Medical management workstations permit nurse professionals
to access additional information that supports the Company's emphasis on early
return to work strategies for these claims. These new technologies, together
with better matching of professional skills and authority to specific claim
issues, have resulted in workers' compensation cases closing faster and with
lower losses and loss adjustment expenses.
Environmental, asbestos and other cumulative injury claims are
separately managed by the Company's Special Liability Group. See "Environmental,
Asbestos and Other Cumulative Injury Claims."
REINSURANCE
The Company reinsures a portion of the risks it underwrites in order to
control its exposure to losses, stabilize earnings and protect capital
resources. The Company cedes to reinsurers a portion of these risks and pays
premiums based upon the risk and exposure of the policies subject to such
reinsurance. Reinsurance involves credit risk and is subject to aggregate loss
limits. Although the reinsurer is liable to the Company to the extent of the
reinsurance ceded, the Company remains primarily liable as the direct insurer on
all risks reinsured. Reinsurance recoverables are reported after allowances for
uncollectible amounts. The Company also holds collateral, including escrow funds
and letters of credit, under certain reinsurance agreements. The Company
monitors the financial condition of reinsurers on an ongoing basis, and reviews
its reinsurance arrangements periodically. Reinsurers are selected based on
their financial condition, business practices and the price of their product
offerings. For additional information concerning reinsurance, see Note 6 of
Notes to Consolidated Financial Statements.
14
<PAGE> 17
The Company utilizes a variety of reinsurance agreements to control its
exposure to large property and casualty losses. The Company utilizes the
following types of reinsurance: (i) facultative reinsurance, in which
reinsurance is provided for all or a portion of the insurance provided by a
single policy and each policy reinsured is separately negotiated; (ii) treaty
reinsurance, in which reinsurance is provided for a specified type or category
of risks; and (iii) catastrophe reinsurance, in which the Company is indemnified
for an amount of loss in excess of a specified retention with respect to losses
resulting from a catastrophic event.
The following presents the Company's top five reinsurers (except
Lloyd's of London ("Lloyd's") which is discussed in more detail below) by
reinsurance recoverable at December 31, 1998 (in millions):
<TABLE>
<CAPTION>
REINSURANCE
REINSURER RECOVERABLE A.M. BEST RATING OF REINSURER
- ---------------------------------- ------------- -----------------------------
<S> <C> <C>
General Reinsurance Corporation $513 A++ highest of 15 ratings
American Re-Insurance Company 404 A+ 2nd highest of 15 ratings
Executive Risk Indemnity Inc. 167 A 3rd highest of 15 ratings
Employers Reinsurance Corporation 139 A++ highest of 15 ratings
Transatlantic Reinsurance Company 123 A++ highest of 15 ratings
</TABLE>
As of December 31, 1998, the Company had reinsurance recoverables from
Lloyd's of $398 million. In 1996, Lloyd's restructured its operations with
respect to claims for years prior to 1993 and reinsured these into Equitas
Limited ("Equitas"), which is currently unrated. Approximately $310 million of
the Company's Lloyd's reinsurance recoverable at December 31, 1998 relates to
Equitas liabilities. The remaining recoverables of $88 million are from the
continuing market of Lloyd's, which is rated A (3rd highest of 15 ratings) by
A.M. Best.
The impact of the Lloyd's restructuring on the collectibility of
amounts recoverable by the Company from Lloyd's cannot be quantified at this
time. The Company believes that it is possible that an unfavorable impact on
collectibility could have a material adverse effect on the Company's operating
results in a future period. However, the Company believes that it is not likely
that the outcome of these matters would have a material adverse effect on the
Company's financial condition or liquidity.
The Company participates in pools with other insurers to provide
capacity for unique and high-valued risks such as exposures related to the
aviation and nuclear power industries. The Company's maximum net exposure to
this type of business at December 31, 1998 was $15 million per risk.
At December 31, 1998, the Company had $9.2 billion in reinsurance
recoverables. Of this amount, $3.1 billion is for pools and associations that
relate primarily to workers' compensation service business and have the
obligation of the participating insurance companies on a joint and several basis
supporting these cessions. Also, $2.2 billion is attributable to structured
settlements relating primarily to personal injury claims for which the Company
has purchased an annuity and remains contingently liable in the event of a
default by the company issuing the annuity. Of the remaining $3.9 billion ceded
to reinsurers at December 31, 1998,
15
<PAGE> 18
$882 million was environmental, asbestos and other cumulative injury-related and
the remainder principally reflects reinsurance in support of ongoing business.
In addition, at December 31, 1998, $407 million of reinsurance recoverables were
collateralized by letters of credit and escrow funds.
Net Retention Policy. The descriptions below relate to reinsurance
arrangements of the Company in effect at January 1, 1999. For third-party
liability, including automobile no-fault, the reinsurance agreements used by
Commercial Accounts, Construction and Select Accounts limit the net retention to
a maximum of $4 million per insured, per occurrence. Gulf Specialty utilizes
various reinsurance mechanisms and has limited its net retention to a maximum of
$3.75 million per risk for any line of business. For commercial property
insurance, there is a $5 million maximum retention per risk with 100%
reinsurance coverage for risks with higher limits. The reinsurance agreement in
place for workers' compensation policies written by Commercial Accounts,
Construction, National Accounts, Select Accounts, and some segments of
Alternative Markets and Gulf Specialty covers 100% of each loss between $1
million and $10 million. For National Accounts, reinsurance arrangements are
typically tiered, or layered, such that only levels of risk acceptable to the
Company are retained. The reinsurance agreement in place for Personal Lines
umbrella policies covers 100% of each loss between $1 million and $5 million.
For personal property insurance, there is a $6 million maximum retention per
risk. For directors' and officers' liability, employment practices liability and
blended insurance, Bond Specialty retains up to $5 million per risk. For surety
protection, Bond Specialty has reinsurance coverage for 95% of up to $50 million
of liability in excess of $50 million of liability. The risk tolerance of Bond
Specialty varies by line of business and by risk. Bond Specialty purchases an
accident year aggregate cover attaching at a 40% loss ratio to lower its
exposure to large losses or loss frequency. The first layer of the aggregate
provides 96% of approximately $41.4 million and the second layer provides 80% of
approximately $35.5 million of reinsurance coverage in excess of a $94.7 million
retention.
Catastrophe Reinsurance. The Company utilizes reinsurance agreements
with nonaffiliated reinsurers to control its exposure to losses resulting from
one occurrence. For the accumulation of net property losses arising out of one
occurrence, reinsurance agreements cover 40% of total losses between $250
million and $750 million. For multiple workers' compensation losses arising from
a single occurrence, reinsurance agreements cover 100% of losses between $10
million and $250 million and, for workers' compensation losses caused by
property perils, reinsurance agreements cover 40% of losses between $250 million
and $750 million.
For the accumulation of net casualty losses arising out of one
occurrence, a casualty clash agreement covers 95% of losses between $10 million
and $50 million.
The Company reviews its risk and catastrophe covers at least quarterly
and makes changes it deems appropriate.
REINSURANCE FUND
The Company also participates in the Florida Hurricane Catastrophe Fund
("FHCF"), which is a state-mandated catastrophe reinsurance fund that provides
reimbursement to insurers for a portion of their future catastrophic hurricane
losses. FHCF is primarily funded by
16
<PAGE> 19
premiums from insurance companies that write residential property business in
Florida and, if insufficient, assessments on insurance companies that write
other property and casualty insurance, excluding workers' compensation. FHCF's
resources are limited to these contributions and to its borrowing capacity at
the time of a significant catastrophe in Florida. There can be no assurance that
these resources will be sufficient to meet the obligations of FHCF.
The Company's recovery of less than contracted amounts from FHCF could
have a material adverse effect on the Company's results of operations in the
event of a significant catastrophe in Florida. However, the Company believes
that it is not likely that the Company's recovery of less than contracted
amounts from FHCF would have a material adverse effect on the Company's
financial condition or liquidity.
RESERVES
Property and casualty claim reserves are established to account for the
estimated ultimate costs of claims and claim adjustment expenses for claims that
have been reported but not yet settled and claims that have been incurred but
not reported. The Company establishes reserves by line of business, coverage and
year.
The process of estimating claim reserves is imprecise due to a number
of variables. These variables are affected by both internal and external events
such as changes in claims handling procedures, inflation, judicial trends and
legislative changes. Many of these items are not directly quantifiable,
particularly on a prospective basis. Additionally, there may be significant
reporting lags between the occurrence of the insured event and the time it is
actually reported to the insurer. The Company continually refines reserve
estimates in a regular ongoing process as experience develops and further claims
are reported and settled. The Company reflects adjustments to reserves in the
results of operations in the periods in which the estimates are changed. In
establishing reserves, the Company takes into account estimated recoveries for
reinsurance, salvage and subrogation.
The Company derives estimates for unreported claims and development on
reported claims principally from actuarial analyses of historical patterns of
claims development by accident year for each line of business and market
segment. Similarly, the Company derives estimates of unpaid claim adjustment
expenses principally from actuarial analyses of historical development patterns
of the relationship of claim adjustment expenses to losses for each line of
business and market segment. For a description of the Company's reserving
methods for environmental and asbestos claims, see "Environmental, Asbestos and
Other Cumulative Injury Claims."
Discounting. The liability for losses for certain long-term disability
payments under workers' compensation insurance and workers' compensation excess
insurance has been discounted using a maximum interest rate of 5%. At December
31, 1998, 1997 and 1996 the combined amounts of discount for the Company were
$781 million, $912 million and $1.012 billion, respectively.
17
<PAGE> 20
For a reconciliation of beginning and ending property and casualty
insurance claims and claim adjustment expense reserves of the Company for each
of the last three years, see Note 7 of Notes to Consolidated Financial
Statements.
The table at the end of this section sets forth the year-end reserves
from 1988 through 1998 and the subsequent changes in those reserves, presented
on a historical basis for the Company. Accordingly, the original estimates,
cumulative amounts paid and reestimated reserves in the table for the years
1988-1995 have not been restated to include Aetna P&C. Beginning in 1996, the
table includes the reserve activity of Aetna P&C. The data in the table is
presented in accordance with reporting requirements of the Securities and
Exchange Commission. Care must be taken to avoid misinterpretation by those
unfamiliar with such information or familiar with other data commonly reported
by the insurance industry. The accompanying data is not accident year data, but
rather a display of 1988-1998 year-end reserves and the subsequent changes in
those reserves.
For instance, the "cumulative deficiency or redundancy" shown in the
accompanying table for each year represents the aggregate amount by which
original estimates of reserves as of that year-end have changed in subsequent
years. Accordingly, the cumulative deficiency for a year relates only to
reserves at that year-end and such amounts are not additive. Expressed another
way, if the original reserves at the end of 1988 included $4 million for a loss
that is finally settled in 1998 for $5 million, the $1 million deficiency (the
excess of the actual settlement of $5 million over the original estimate of $4
million) would be included in the cumulative deficiencies in each of the years
1988-1997 shown in the accompanying table.
Certain factors may distort the re-estimated reserves and cumulative
deficiency or redundancy shown in the accompanying table. For example, a
substantial portion of the cumulative deficiencies in each of the years
1988-1998 arises from claims on policies written prior to the mid-1970s
involving liability exposures such as environmental, asbestos and other
cumulative injury claims. In the post-1984 period, the Company has developed
more stringent underwriting standards and policy exclusions and has
significantly contracted or terminated the writing of such risks. See
"Environmental, Asbestos and Other Cumulative Injury Claims." General conditions
and trends that have affected the development of these liabilities in the past
will not necessarily recur in the future.
Other factors that affect the data in the accompanying table include
the discounting of workers' compensation reserves and the use of retrospectively
rated insurance policies. To the extent permitted under applicable accounting
practices, workers' compensation reserves are discounted to reflect the time
value of money, due to the relatively long time period over which these claims
are to be paid. Apparent deficiencies will continue to occur as the discount on
these workers' compensation reserves is accreted at the appropriate interest
rates. Also, a portion of National Accounts business is underwritten with
retrospectively rated insurance policies in which the ultimate loss experience
is primarily borne by the insured. For this business, increases in loss
experience result in an increase in reserves, and an offsetting increase in
amounts recoverable from insureds. Likewise, decreases in loss experience result
in a decrease in reserves, and an offsetting decrease in amounts recoverable
from these insureds. These amounts recoverable mitigate the impact of the
cumulative deficiencies or redundancies but are not reflected in the
18
<PAGE> 21
accompanying table. This mechanism affords the Company significant financial
protection against adverse development on this block of net reserves.
Because of these and other factors, it is difficult to develop
meaningful extrapolation of estimated future redundancies or deficiencies in
loss reserves from the data in the accompanying table.
The differences between the reserves for claims and claim adjustment
expenses shown in the accompanying table, which is prepared in accordance with
GAAP, and those reported in the annual statements of the Company filed with
state insurance departments, which are prepared in accordance with statutory
accounting practices, were: $37 million, $31 million and $14 million for 1998,
1997 and 1996, respectively.
19
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1988(a) 1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(a) 1995(a) 1996(b) 1997(b) 1998(b)
-------------------------------------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Loss and Loss
Adjustment Expense
Originally Estimated: $ 6,954 $ 7,729 $ 8,022 $ 8,360 $ 8,955 $ 9,319 $ 9,712 $10,090 $21,816 $21,406 $ 20,763
Cumulative amounts paid as of
One year later 1,828 2,091 2,135 1,869 2,005 1,706 1,595 1,521 3,704 4,025
Two years later 3,101 3,488 3,422 3,161 3,199 2,843 2,631 2,809 6,600
Three years later 4,063 4,415 4,351 4,041 4,063 3,610 3,798 3,903
Four years later 4,710 5,095 4,996 4,706 4,662 4,563 4,676
Five years later 5,227 5,597 5,492 5,182 5,465 5,274
Six years later 5,620 5,995 5,887 5,878 6,078
Seven years later 5,952 6,333 6,466 6,421
Eight years later 6,251 6,851 6,953
Nine years later 6,725 7,287
Ten years later 7,131
Reserves re-estimated as of
One year later 7,080 7,832 8,128 8,362 9,058 9,270 9,486 9,848 21,345 21,083
Two years later 7,243 7,929 8,197 8,637 9,139 9,234 9,310 9,785 21,160
Three years later 7,405 8,077 8,592 8,906 9,183 9,108 9,395 9,789
Four years later 7,585 8,560 9,003 9,026 9,189 9,271 9,427
Five years later 8,098 8,991 9,159 9,123 9,405 9,298
Six years later 8,531 9,189 9,295 9,367 9,440
Seven years later 8,715 9,328 9,551 9,396
Eight years later 8,871 9,592 9,586
Nine years later 9,163 9,616
Ten years later 9,189
Cumulative deficiency
(redundancy) 2,235 1,887 1,564 1,036 485 (21) (285) (301) (656) (323)
Gross liability -- end of year $14,638 $15,013 $15,213 $30,969 $30,138 $29,411
Reinsurance recoverables 5,319 5,301 5,123 9,153 8,732 8,648
----------------------------------------------------
Net liability -- end of year $ 9,319 $ 9,712 $10,090 $21,816 $21,406 $20,763
====================================================
Gross reestimated liability
-- latest $14,781 $15,157 $14,930 $30,430 $29,886
Reestimated reinsurance
recoverables -- latest 5,483 5,730 5,141 9,270 8,803
-------------------------------------------
Net reestimated liability
-- latest $ 9,298 $ 9,427 $ 9,789 $21,160 $21,083
===========================================
Gross cumulative deficiency
(redundancy) $ 143 $ 144 $ (283) $ (539) $ (252)
===========================================
</TABLE>
(a) Reflects reserves of Travelers P&C, excluding Aetna P&C reserves which
were acquired on April 2, 1996. Accordingly, the reserve development
(net reserves for loss and loss adjustment expense recorded at the end
of the year, as originally estimated, less net reserves reestimated as
of subsequent years) relates only to losses recorded by Travelers P&C
and does not include reserve development recorded by Aetna P&C.
(b) Includes Aetna P&C gross reserves of $16,775 million and net reserves
of $11,752 million acquired on April 2, 1996 and subsequent development
recorded by Aetna P&C.
20
<PAGE> 23
STATUTORY COMBINED RATIO INFORMATION
The statutory combined ratio is an industry measurement of the results
of property and casualty insurance underwriting. This ratio is the sum of the
ratio of incurred losses and loss adjustment expenses to net premiums earned
(the "loss and LAE ratio"), the ratio of underwriting expenses incurred to net
premiums written (the "underwriting expense ratio") and, where applicable, the
ratio of dividends to policyholders to net premiums earned. A combined ratio
under 100% generally indicates an underwriting profit; a combined ratio over
100% generally indicates an underwriting loss. However, investment income,
federal income taxes and other non-underwriting income or expenses, such as fee
income, are not reflected in the statutory combined ratio. The profitability of
property and casualty insurance companies depends on income from underwriting,
investment and service operations. Lines of business where claims are paid out
over a longer period of time ("long-tail"), such as workers' compensation, also
provide investment income over a longer period of time and therefore can be
profitable at higher combined ratios than lines where claims are paid out over a
shorter period ("short-tail"). Insurers with a high proportion of long-tail
policies will generally have higher combined ratios than insurers with more
short-tail business.
The ratios shown in the table below are computed based upon statutory
accounting practices, not generally accepted accounting principles ("GAAP"). For
information on GAAP combined ratios, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
STATUTORY COMBINED RATIOS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Commercial Lines:
Loss and LAE ratio 78.5% 78.4% 96.2%
Underwriting expense ratio 29.7 30.6 32.7
Combined ratio before
policyholder dividends 108.2 109.0 128.9 (1)
Combined ratio 109.1 111.0 129.6
Personal Lines:
Loss and LAE ratio 66.7 63.5 68.7
Underwriting expense ratio 27.2 28.7 28.9
Combined ratio 93.9 92.2 97.6 (2)
Total:
Loss and LAE ratio 73.6 72.4 85.5
Underwriting expense ratio 28.6 29.9 31.3
Combined ratio before
policyholder dividends 102.2 102.3 116.8
Combined ratio 102.7 103.5 117.2
</TABLE>
(1) Includes the effect of charges associated with the Acquisition and also
includes statutory charges made to conform accounting policies and Company
strategies in connection with the Acquisition (but not for GAAP reporting
purposes due to purchase accounting). Excluding such charges, the combined
ratio before policyholder dividends was 110.0%.
(2) Includes the effect of the Company's review of reserves associated with
the Acquisition. The combined ratio excluding this item was 100.1%.
21
<PAGE> 24
ENVIRONMENTAL, ASBESTOS AND OTHER CUMULATIVE INJURY CLAIMS
Environmental, asbestos and other cumulative injury claims are
segregated from other claims and are handled separately by the Company's Special
Liability Group, a special unit staffed by dedicated legal, claim, finance and
engineering professionals. For additional information on environmental, asbestos
and other cumulative injury claims, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
INSURANCE POOLS
Most of the Company's insurance subsidiaries are members of one of two
separate intercompany property and casualty reinsurance pooling arrangements:
the Travelers Property Casualty pool and the Gulf pool. Each of these insurance
pools permits the participating companies to rely on the capacity of the entire
pool rather than just on its own capital and surplus. Under the arrangements of
each insurance pool, the members share substantially all insurance business that
is written and allocate the combined premiums, losses and expenses. Travelers
Casualty and Surety Company of America ("Travelers C&S of America") does not
participate in either pool and is dedicated to the Bond Specialty business.
RATINGS
Insurance companies are rated by rating agencies to provide both
industry participants and insurance consumers with meaningful information on
specific insurance companies. Higher ratings generally indicate financial
stability and a strong ability to pay claims. These ratings are based upon
factors relevant to policyholders and are not directed toward protection of
investors. Such ratings are neither a rating of securities nor a recommendation
to buy, hold or sell any security and may be revised or withdrawn at any time.
Ratings focus primarily on the following factors: capital resources, financial
strength, demonstrated management expertise in the insurance business, credit
analysis, systems development, market segment position and growth opportunities,
marketing, sales conduct practices, investment operations, minimum
policyholders' surplus requirements and capital sufficiency to meet projected
growth, as well as access to such traditional capital as may be necessary to
continue to meet standards for capital adequacy.
The following table summarizes the current claims-paying and financial
strength ratings of the Company's property-casualty insurance pools and
Travelers C&S of America by A. M. Best, Duff & Phelps Corp. ("Duff & Phelps"),
Moody's Investor's Service Inc. ("Moody's") and Standard & Poor's Ratings Group
("Standard & Poor's"). The table also presents the position of each rating in
the applicable agency's rating scale.
<TABLE>
<CAPTION>
STANDARD &
A.M. BEST DUFF & PHELPS MOODY'S POOR'S
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Travelers Property Casualty pool (1) A+ (2nd of 15) AA- (4th of 18) Aa3 (4th of 19) AA- (4th of 18)
Gulf pool (2) A+ (2nd of 15) -- -- AA (3rd of 18)
Travelers C&S of America A+ (2nd of 15) AA- (4th of 18) Aa3 (4th of 19) AA- (4th of 18)
</TABLE>
- ---------------------
(1) The Travelers Property Casualty pool consists of The Travelers Indemnity
Company, Travelers Casualty and Surety Company, The Phoenix Insurance
Company, The Standard Fire Insurance Company, Travelers Casualty and
Surety Company of Illinois, Farmington Casualty Company, The Travelers
Indemnity Company
22
<PAGE> 25
of Connecticut, The Automobile Insurance Company of Hartford,
Connecticut, The Charter Oak Fire Insurance Company, The Travelers
Indemnity Company of America, The Travelers Indemnity Company of
Missouri, Travelers Casualty Company of Connecticut, Travelers
Commercial Insurance Company, The Travelers Indemnity Company of
Illinois, Travelers Property Casualty Insurance Company, TravCo
Insurance Company, The Travelers Home and Marine Insurance Company,
Travelers Personal Security Insurance Company, Travelers Property
Casualty Insurance Company of Illinois and Travelers Excess and Surplus
Lines Company.
(2) The Gulf pool consists of Gulf Insurance Company, Gulf Insurance
Company U.K. Limited, Gulf Underwriters Insurance Company, Select
Insurance Company, Atlantic Insurance Company and Gulf Group Lloyds.
INVESTMENTS
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities, mortgage
loans, real estate and certain other investments.
At December 31, 1998, the carrying value of the Company's investment
portfolio was $31.9 billion, of which 92.7% was invested in fixed maturity
investments and short-term investments (of which 43% was invested in federal,
state or municipal government obligations), 2.1% in mortgage loans and real
estate held for sale, 2.6% in common stocks and other equity securities and 2.6%
in other investments. The average duration of the fixed maturity portfolio,
including short-term investments, was 5.4 years at such date. Non-investment
grade securities totaled approximately $1.2 billion, representing approximately
4.2% of the Company's fixed maturity investment portfolio as of December 31,
1998.
The following table sets forth information regarding the investments of
the Company. It reflects the average amount of investments, net investment
income earned and the yield thereon for the years ended December 31, 1998, 1997
and 1996. The table includes information on the investments of Aetna P&C for
periods prior to April 2, 1996 (the date of the Acquisition). See Note 5 of
Notes to Consolidated Financial Statements and the discussion of Investment
Portfolio in Item 7 of this Form 10-K for information regarding the investment
portfolio of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
----------- ----------- -------------
(Dollars in millions)
<S> <C> <C> <C>
Average investments $31,458.5 $30,197.7 $28,018.7
Net investment income $ 2,100.0 $ 2,050.8 $ 1,898.6
Average yield (1) 7.4% 7.4% 7.2%
Average tax equivalent yield (1) 8.2% 8.0% 7.7%
</TABLE>
- ---------------------
(1) Excluding realized and unrealized investment gains and losses.
DERIVATIVES
See Note 13 of Notes to Consolidated Financial Statements for a
discussion of the policies and transactions related to derivatives of the
Company.
23
<PAGE> 26
COMPETITION
The property and casualty insurance industry is highly competitive in
the areas of price, service, product offerings, agent relationships and, in the
case of personal property and casualty business, method of distribution (i.e.,
use of independent agents, exclusive agents and/or salaried employees). There
are approximately 1,100 property-casualty organizations in the United States,
comprised of approximately 2,400 property-casualty companies. Of those
organizations, the top 200 account for approximately 90% of the consolidated
industry's total net written premiums. In addition, an increasing amount of
commercial risks are covered by purchaser self-insurance, large deductibles,
risk-purchasing groups, risk-retention groups and captive companies.
COMMERCIAL LINES. The insurance industry is represented in the
commercial lines marketplace by many insurance companies of varying size as well
as self-insurance programs or captive insurers. Market competition works to set
the price charged for insurance products and the level of service provided
within the insurance regulatory framework. Growth is driven by a company's
ability to provide insurance and services at a price that is reasonable and
acceptable to the customer. In addition, the marketplace is affected by
available capacity of the insurance industry as measured by policyholders'
surplus. Surplus expands and contracts primarily in conjunction with profit
levels generated by the industry. Growth in premium and service business is also
measured by a company's ability to retain existing customers and to attract new
customers.
The National Accounts market is highly competitive. Competition is
based primarily on price and breadth of products and services. National Accounts
business is generally written through national brokers and regional agents. The
Company's Alternative Market business also competes for state contracts to
provide claims and policy management services. These contracts, which generally
have three-year terms, are selected by state agencies through a bid process
based on the quality of service and price. The Company has emerged as the
largest assigned risk plan service carrier in the industry with approximately
25% of the market in 1998.
The Commercial Accounts market is highly competitive. Commercial
Accounts business has historically been written through independent agents and
brokers, although some companies use direct writing. Competitors in this market
are primarily national property-casualty insurance companies willing to write
most classes of business using traditional products and pricing and, to a lesser
extent, regional insurance companies and companies that have developed niche
programs for specific industry segments. Companies compete on price, product
offerings, response time in policy issuance and claim and loss prevention
services. Additionally, reduced overhead and improved efficiency through
automation and response time to customer needs are key to success in this
market. The construction market has become a focused industry segment for
several large insurance companies. Construction market business is written
through agents and brokers. Insurance companies compete in this market based
upon price, product offering and claim and risk management service. The Company
utilizes its specialized underwriters, engineers, auditors and claim handlers,
who have extensive experience and knowledge of the construction industry, to
work with agents and brokers to compete effectively in this market.
The Select Accounts market is highly competitive and is typically
written through independent agents and, to a lesser extent, regional brokers.
Both national and regional property-
24
<PAGE> 27
casualty insurance companies compete in the Select Accounts market which is
generally comprised of low risk, "main street" business customers. Risks are
underwritten and priced using standard industry practices and a combination of
proprietary and standard industry product offerings. Competition in this market
is primarily based on price, product offerings and response time in policy
services. The Company has established a strong marketing relationship with its
distribution network and has provided it with defined underwriting policies,
competitive prices and efficient automated environments.
The market in which Specialty Accounts competes includes small to
mid-size niche companies that target certain lines of insurance and larger,
multi-line companies that focus on various segments of the Specialty Accounts
market. Specialty Accounts business is generally written through wholesale
brokers and retail agents and brokers throughout the United States. Gulf
Specialty derives a competitive advantage through its underwriting practices,
low expense levels and broad product offering base. Bond Specialty's reputation
for timely decision-making, a nationwide network of local underwriting and
industry experts and strong producer and customer relationships as well as its
ability to offer its customers a full range of financial services products,
enable it to compete effectively. Its ability to cross-sell Bond Specialty
products to customers of National Accounts, Commercial Accounts, Select Accounts
and through other Citigroup units provides further competitive advantages for
the Company.
PERSONAL LINES. Personal lines insurance is written by hundreds of
insurance companies of varying sizes. Although national companies write the
majority of the business, the Company also faces competition from local or
regional companies which often have a competitive advantage because of their
knowledge of the local marketplace and their relationship with local agents. The
Company believes that the principal competitive factors are price, service,
perceived stability of the insurer and name recognition. The Company also
competes for business within each of the independent agencies representing it,
because these agencies also offer policies of competing independent agency
companies. At the agency level, the Company believes that competition is
primarily based on price and the level of service, including claims handling, as
well as the level of automation and the development of long-term relationships
with individual agents. The Company also competes with insurance companies that
use captive agents or salaried employees to sell their products. Because these
companies generally pay lower commissions than independent agency companies,
they may be able to generate business at a lower cost than the Company. Due to
this expense advantage, direct writing companies have gradually expanded their
market share in recent years. However, in addition to its traditional
independent agency distribution, Personal Lines has broadened its distribution
of Personal Lines products to include marketing through the Primerica sales
force, marketing to sponsoring organizations including employee and affinity
groups, establishment of joint marketing arrangements with other insurers and
cross-marketing to Citibank customers. The Company believes that its continued
focus on expense management practices enables it to price its products
competitively in all of its distribution channels. The personal auto insurance
marketplace has been more competitive in 1998 as some personal auto carriers
have reduced prices in selected markets. This trend is expected to continue in
1999.
25
<PAGE> 28
REGULATION
STATE REGULATION
The Company's insurance subsidiaries are subject to regulation in the
various states and jurisdictions in which they transact business. The extent of
regulation varies but generally has its source in statutes that delegate
regulatory, supervisory and administrative authority to a department of
insurance in each state. The regulation, supervision and administration relate,
among other things, to the standards of solvency that must be met and
maintained, the licensing of insurers and their agents, the nature of and
limitations on investments, premium rates, restrictions on the size of risks
that may be insured under a single policy, reserves and provisions for unearned
premiums, losses and other obligations, deposits of securities for the benefit
of policyholders, approval of policy forms and the regulation of market conduct
including the use of credit information in underwriting as well as other
underwriting and claims practices. In addition, many states have enacted
variations of competitive rate-making laws which allow insurers to set certain
premium rates for certain classes of insurance without having to obtain the
prior approval of the state insurance department. State insurance departments
also conduct periodic examinations of the affairs of insurance companies and
require the filing of annual and other reports relating to the financial
condition of companies and other matters.
At the present time, the Company's insurance subsidiaries are
collectively licensed to transact insurance business in all states, the District
of Columbia, Guam, Puerto Rico, Bermuda, and the U.S. Virgin Islands, as well as
Canada and the United Kingdom.
Although the Company is not regulated as an insurance company, it is
the owner of the capital stock of its insurance subsidiaries and as such is
subject to state insurance holding company statutes, as well as certain other
laws, of each of the states of domicile of its insurance subsidiaries. All
holding company statutes, as well as certain other laws, require disclosure and,
in some instances, prior approval of material transactions between an insurance
company and an affiliate. The holding company statutes, as well as certain other
laws, also require, among other things, prior approval of an acquisition of
control of a domestic insurer and the payment of extraordinary dividends or
distributions.
The Company's principal insurance subsidiaries are domiciled in the
State of Connecticut. The insurance holding company law of Connecticut requires
notice to, and approval by, the state insurance commissioner for the declaration
or payment of any dividend, which together with other distributions made within
the preceding twelve months, exceeds the greater of (i) 10% of the insurer's
surplus or (ii) the insurer's net income for the twelve-month period ending the
preceding December 31st, in each case determined in accordance with statutory
accounting practices. Such declaration or payment is further limited by adjusted
unassigned funds (surplus), as determined in accordance with statutory
accounting practices. The insurance holding company laws of other states in
which the Company's insurance subsidiaries are domiciled generally contain
similar (although in certain instances somewhat more restrictive) limitations on
the payment of dividends. Dividend payments to the Company from its insurance
subsidiaries are limited to $1.0 billion in 1999 without prior approval of the
Connecticut Insurance Department.
26
<PAGE> 29
Virtually all states require insurers licensed to do business in their
state to bear a portion of the loss suffered by certain insureds as a result of
the insolvency of other insurers. Depending upon state law, insurers can be
assessed an amount that is generally equal to between 1% and 2% of premiums
written for the relevant lines of insurance in that state each year to pay the
claims of an insolvent insurer. Most of these payments are recoverable through
premium rates, premium tax credits or policy surcharges. Significant increases
in assessments could limit the ability of the Company's insurance subsidiaries
to recover such assessments through tax credits. In addition, there have been
some legislative efforts to limit or repeal the tax offset provisions, which
efforts, to date, have been generally unsuccessful. These assessments may
increase or decrease in the future depending upon the rate of insolvencies of
insurance companies.
The Company's insurance subsidiaries are also required to participate
in various involuntary assigned risk pools, principally involving workers'
compensation and automobile insurance, which provide various insurance coverages
to individuals or other entities that otherwise are unable to purchase such
coverage in the voluntary market. Participation in these pools in most states is
generally in proportion to voluntary writings of related lines of business in
that state. Combined earned premiums related to such pools and assigned risks
for the Company were $176 million, $226 million and $379 million in 1998, 1997
and 1996, respectively. The related combined underwriting losses for the Company
were $19 million, $16 million and $39 million in 1998, 1997 and 1996,
respectively.
Proposed legislation and regulatory changes have been introduced in the
states from time to time that would modify certain laws and regulations
affecting the financial services industry, including the provisions governing
relationships among insurance companies and agents, investment banks and
commercial banks. The potential impact of such legislation on the Company's
businesses cannot be predicted at this time.
INSURANCE REGULATIONS CONCERNING CHANGE OF CONTROL
Many state insurance regulatory laws intended primarily for the
protection of policyholders contain provisions that require advance approval by
state agencies of any change in control of an insurance company that is
domiciled (or, in some cases, having such substantial business that it is deemed
to be commercially domiciled) in that state. The Company owns, directly or
indirectly, all of the shares of stock of certain property and casualty
insurance companies domiciled in the States of California, Connecticut, Florida,
Illinois, Massachusetts, Missouri, New Jersey and Texas. "Control" is generally
presumed to exist through the ownership of 10% or more of the voting securities
of a domestic insurance company or of any company that controls a domestic
insurance company. Any purchaser of shares of Common Stock representing 10% or
more of the voting power of the Company will be presumed to have acquired
control of the Company's domestic insurance subsidiaries unless, following
application by such purchaser in each insurance subsidiary's state of domicile,
the relevant Insurance Commissioner determines otherwise. In addition, many
state insurance regulatory laws contain provisions that require prenotification
to state agencies of a change in control of a nondomestic admitted insurance
company in that state. While such prenotification statutes do not authorize the
state agency to disapprove the change of control, such statutes do authorize
issuance of a cease and desist order with respect to the nondomestic admitted
insurer if certain conditions exist such as undue market concentration. Any
future
27
<PAGE> 30
transactions that would constitute a change in control of the Company would
generally require prior approval by the insurance departments of the states in
which the Company's insurance subsidiaries are domiciled or commercially
domiciled and may require preacquisition notification in those states that have
adopted preacquisition notification provisions and in which such insurance
subsidiaries are admitted to transact business.
A subsidiary of the Company is domiciled in the United Kingdom.
Insurers in the United Kingdom are subject to certain change of control
restrictions in the Insurance Companies Act of 1982 which require the approval
of The Department of Trade and Industry if any person is to become a
"controller" (which is defined as a person entitled to exercise control of 15%
or more of the voting power) of an authorized insurance company.
Certain other insurance subsidiaries of the Company are domiciled in,
or authorized to conduct insurance business in Canada. Authorized insurers in
Canada are subject to certain change of control restrictions in Section 407 of
the Insurance Companies Act, which requires the approval of the Minister of
Finance if any person acquires a "significant interest" (beneficial ownership,
directly or through one or more entities controlled by such person, of 10% of
the outstanding shares of such Company) in an authorized insurance company.
Such requirements may deter, delay or prevent certain transactions
affecting the control of or the ownership of common stock, including
transactions that could be advantageous to the stockholders of the Company.
INSURANCE REGULATORY INFORMATION SYSTEM
The NAIC Insurance Regulatory Information System ("IRIS") was developed
to help state regulators identify companies that may require special attention.
The IRIS system consists of a statistical phase and an analytical phase whereby
financial examiners review annual statements and financial ratios. The
statistical phase consists of 12 key financial ratios that are generated from
the NAIC database annually; each ratio has an established "usual range" of
results. These ratios assist state insurance departments in executing their
statutory mandate to oversee the financial condition of insurance companies.
A ratio result falling outside the usual range of IRIS ratios is not
considered a failing result; rather, unusual values are viewed as part of the
regulatory early monitoring system. Furthermore, in some years, it may not be
unusual for financially sound companies to have several ratios with results
outside the usual ranges. An insurance company may fall out of the usual range
for one or more ratios because of specific transactions that are in themselves
immaterial. Generally, an insurance company will become subject to regulatory
scrutiny if it falls outside the usual ranges of four or more of the ratios. In
normal years, 15% of the companies included in the IRIS system are expected by
the NAIC to be outside the usual range on four or more ratios.
In each of the last three years, certain of the Company's insurance
subsidiaries have been outside of the usual range for certain IRIS ratios. In
all such instances, the regulators have been satisfied upon follow-up that there
is no solvency problem. It is possible that similar events could occur this
year, and management believes that the resolution would be the same. No
28
<PAGE> 31
regulatory action has been taken by any state insurance department or the NAIC
with respect to IRIS ratios of any of the Company's insurance subsidiaries for
the three years ended December 31, 1998.
For 1998, Travelers Indemnity, the lead company for the Travelers
Property Casualty pool, had no values outside the usual range for all IRIS
ratios. For 1997, Travelers Indemnity was outside the usual range for the
liabilities to liquid assets ratio. Travelers Indemnity is also the ultimate
parent of 19 insurance companies and several other non-insurance entities. As a
result, this ratio is distorted because all of the liabilities are included in
the calculation while Travelers Indemnity's significant investment in
affiliates, which increased in 1997, is excluded from liquid assets. For 1996,
both the two-year overall operating ratio and the two-year reserve development
to surplus ratios were outside the usual range for Travelers Casualty and Surety
Company ("Travelers Casualty") and The Standard Fire Insurance Company
("Standard Fire") because of actions taken during 1996 and 1995 to strengthen
reserves for environmental and asbestos-related claims. Both Travelers Casualty
and Standard Fire have been members of the Travelers Property Casualty pool
since January 1, 1997. In addition, in 1996, the change in writings ratio
produced an unusual value for Standard Fire and the estimated current reserve
deficiency to surplus ratio was outside the usual range for Travelers C&S of
America, both as a result of a decision in 1995 to combine the Aetna P&C's two
intercompany pooling arrangements (one for Personal Lines and one for Commercial
Lines) into one pool. If these two ratios were recalculated to have all items
reflect the new agreement, the ratios would not produce unusual values.
Concurrent with the change in the intercompany pooling arrangements, capital was
reallocated among Aetna P&C insurers, which resulted in an unusual value in the
change in surplus ratio for Standard Fire.
The following table sets forth information regarding the premium to
surplus ratios of the Company. For informational purposes only, the table
includes Aetna P&C for all periods presented.
SCHEDULE OF PREMIUM TO SURPLUS RATIOS (STATUTORY BASIS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------- ------ ------
(Dollars in millions)
<S> <C> <C> <C>
Net written premiums $8,104 $7,832 $7,343
Capital and surplus 7,079 6,188 5,423
Ratio of net written premiums to capital
and surplus 1.14x 1.27x 1.35x
</TABLE>
RISK-BASED CAPITAL (RBC) REQUIREMENTS
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement RBC requirements for most property
and casualty insurance companies, which is designed to assess minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. The RBC formula for property and casualty
insurance companies measures four major areas of risk facing property and
casualty insurers: (i) underwriting, which encompasses the risk of adverse loss
developments and inadequate pricing; (ii) declines in asset values arising from
credit risk; (iii) declines in asset
29
<PAGE> 32
values arising from investment risks; and (iv) off-balance sheet risk arising
from adverse experience from non-controlled assets, guarantees for affiliates or
other contingent liabilities and reserve and premium growth. Pursuant to the
law, insurers having less statutory surplus than that required by the RBC
calculation will be subject to varying degrees of regulatory action, depending
on the level of capital inadequacy.
The RBC law provides for four levels of regulatory action. The extent
of regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the Company Action Level (as defined by the NAIC),
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing corrective
actions and permits the relevant Insurance Commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) allows the relevant Insurance Commissioner to rehabilitate or liquidate an
insurer in addition to the aforementioned actions if surplus falls below 100% of
the RBC amount. The fourth action level is the Mandatory Control Level (as
defined by the NAIC) which requires the relevant Insurance Commissioner to
rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC
amount.
The formulas have not been designed to differentiate among adequately
capitalized companies which operate with higher levels of capital. Therefore, it
is inappropriate and ineffective to use the formulas to rate or to rank such
companies. At December 31, 1998, all of the Company's property-casualty
insurance companies had adjusted capital in excess of amounts requiring company
or regulatory action at any of the four levels.
FEDERAL REGULATION
Citigroup is a bank holding company subject to the provisions of the
Bank Holding Company Act of 1956 (the "BHCA"). For a discussion of the BHCA and
its application to the Company, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and Note 2 of Notes
to Consolidated Financial Statements.
Although the federal government does not directly regulate the business
of insurance, other than flood insurance, federal initiatives often have an
impact on the insurance industry. Legislation has been introduced in Congress
during the past several sessions that, if enacted, would result in substantially
greater federal regulation of the insurance business. Current and proposed
federal measures that may affect the property and casualty industry may include:
possible changes to the tax laws governing property and casualty insurance
companies; proposals regarding natural disaster protection, tort reform
(including limits to product liability lawsuits) and the use of credit history;
and the enforcement of territorial underwriting in Personal Lines. In addition,
proposed legislation has been introduced in Congress from time to time that
would modify certain laws and regulations affecting the financial services
industry, including the provisions regarding affiliations among insurance
companies, investment banks and commercial banks.
30
<PAGE> 33
President Clinton's recent budget proposal (the "Budget Proposal")
contains a number of tax provisions that could adversely impact the Company,
including a provision relating to tax-exempt interest obligations. The Budget
Proposal, which is in its early stages of consideration, has not yet been
introduced as part of any legislation in Congress but has engendered
considerable opposition from the public and members of Congress.
It is not possible to predict whether the Budget Proposal or any of the
proposed legislation discussed above will be enacted, what form such legislation
might take when enacted, or the potential effects of such legislation on the
Company and its competitors.
OTHER OPERATIONS
Other Operations consists primarily of financing costs associated with
the Acquisition.
OTHER INFORMATION
GENERAL BUSINESS FACTORS
In the judgment of the Company, no material part of the business of the
Company and its subsidiaries is dependent upon a single customer or group of
customers, the loss of any one of which would have a materially adverse effect
on the Company, and no one customer or group of affiliated customers accounts
for as much as 10% of the Company's consolidated revenues.
At December 31, 1998, the Company had approximately 20,000 full-time
and 670 part-time employees. The Company believes that its employee relations
are satisfactory. None of the Company's employees is subject to collective
bargaining agreements.
SOURCE OF FUNDS
For a discussion of the Company's sources of funds and maturities of
the long-term debt of the Company, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," and Note 8 of Notes to Consolidated Financial Statements.
TAXATION
For a discussion of tax matters affecting the Company and its
operations, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Note 9 of Notes to Consolidated
Financial Statements.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial information regarding industry segments of the Company,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Note 4 of Notes to Consolidated Financial
Statements.
31
<PAGE> 34
EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers of the Company are indicated below. Ages
are given as of March 3, 1999.
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITIONS SINCE
- ---- --- --------- -----
<S> <C> <C> <C>
Jay S. Fishman 46 President and Chief Executive Officer 1996
Charles J. Clarke 63 Vice Chairman; Chairman - Commercial 1996
Lines
J. David Gibbs 44 President and Chief Executive Officer - 1999
Claim Services
Joseph P. Kiernan 58 Chairman and Chief Executive Officer - 1996
Bond Specialty
Anil M. Khanna 42 Chief Executive Officer - Personal Lines 1998
Ronald E. Foley 53 Chairman and Chief Executive Officer - 1996
Risk Management
William P. Hannon 50 Chief Financial Officer 1996
James M. Michener 46 Senior Vice President, General Counsel and 1996
Secretary
Thomas P. Shugrue 41 Vice President and Chief Accounting 1996
Officer
</TABLE>
Mr. Fishman was named President and Chief Executive Officer of the
Company in October 1998. Since January 1998 he has also served as Chief
Executive Officer of Commercial Lines, and from October 1996 through October
1998 he also served as President of Commercial Lines. From October 1996 through
January 1998, he also served as Chief Operating Officer of Commercial Lines. Mr.
Fishman was Vice Chairman of the Company from January 1996 through October 1998,
and from January 1996 through January 1998 he was the Chief Administrative
Officer of the Company. Mr. Fishman has also served as Vice Chairman of The
Travelers Insurance Group Inc. since September 1995, and has been Chief
Financial Officer and Chief Administrative Officer of that Company since
December 1993 and June 1996, respectively. Mr. Fishman was a Senior Vice
President of Travelers Group from October 1991 through October 1998, and
Treasurer of Travelers Group from 1991 to December 1993. From 1989 to 1991, he
held various other positions with Travelers Group and its subsidiaries.
Mr. Clarke was named Vice Chairman of the Company in January 1998. He
has been Chairman of Commercial Lines since 1990, and served as Chief Executive
Officer of Commercial Lines from January 1996 through January 1998. From 1990 to
January 1996, Mr. Clarke was Chairman of Commercial Lines of Travelers P&C.
Prior thereto, Mr. Clarke was Senior Vice President of the National Accounts and
the Reinsurance business units of Travelers P&C. Mr. Clarke has served in
several positions at Travelers P&C since 1958.
Mr. Gibbs was named President and Chief Executive Officer - Claim
Services in January 1999, and served as Executive Vice President - Claim
Services from December 1996 through January 1999. Prior to joining the Company,
Mr. Gibbs was Senior Vice President of Product
32
<PAGE> 35
Services and Regulation at American International Group ("AIG"). From 1990 to
1996, Mr. Gibbs held various positions with AIG.
Mr. Kiernan has been Chairman and Chief Executive Officer - Bond
Specialty of the Company since March 1996. From 1989 to March 1996, Mr. Kiernan
was Vice President of Aetna's bond business and has worked in the bond business
lines at Aetna since 1963. From June 1995 to March 1996, Mr. Kiernan was Vice
President of Standard Commercial Accounts of Aetna.
Mr. Khanna has been Chief Executive Officer - Personal Lines of the
Company since October 1998. He was, from 1986 to 1998, a Senior Vice President
of Citibank, N.A. From 1982 until 1986, he was Engagement Manager at McKinsey &
Co.
Mr. Foley has been Chairman and Chief Executive Officer - Risk
Management of the Company since January 1996. Mr. Foley served as Chairman of
Personal Lines of Travelers P&C from 1994 until his present appointment and from
1987 to 1991, and served as Chief Financial Officer of The Travelers Corporation
from 1991 through 1993.
Mr. Hannon has been Chief Financial Officer of the Company since
January 1996. Prior to joining the Company, Mr. Hannon served as Deputy Managing
Partner of the Financial Services practice of KPMG LLP, which he joined in 1969,
and also served as a member of the firm's Securities and Exchange Commission
reviewing partner's committee.
Mr. Michener has been Senior Vice President, General Counsel and
Secretary of the Company since July 1996. Prior to joining the Company, Mr.
Michener was General Counsel of The MetraHealth Companies, Inc. from January
1995 to October 1995 and Deputy General Counsel of United HealthCare Corporation
from October 1995 to May 1996. From August 1977 to December 1994, Mr. Michener
served in several positions at TIGI.
Mr. Shugrue has been Vice President and Controller of the Company since
October 1996 and Chief Accounting Officer of the Company since November 1996.
Mr. Shugrue has served in several positions at TIGI since 1983.
33
<PAGE> 36
GLOSSARY OF INSURANCE TERMS
Accident year........................ The annual accounting period in which
loss events occurred, regardless of
when the losses are actually reported,
booked or paid.
Adjusted unassigned surplus.......... Unassigned surplus as of the most recent
statutory annual report reduced by
twenty-five percent of that year's
unrealized appreciation in value or
revaluation of assets or unrealized
profits on investments, as defined in
such report.
Admitted insurer..................... A company licensed to transact insurance
business within a state.
Alternative market................... The segment of the insurance market
which has developed in response to
volatility in cost and availability of
traditional commercial insurance
coverage and consists of various risk
financing mechanisms, including self
insurance, captive insurance companies,
risk retention groups and residual
market business.
Annuity.............................. A contract that pays a periodic income
benefit for the life of a person (the
annuitant), the lives of two or more
persons or for a specified period of
time.
Assigned risk pools.................. Reinsurance pools which cover risks for
those unable to purchase insurance in
the voluntary market because the risk is
too great or rate inadequacy has reduced
the supply of insurance. The costs of
the risks associated with these pools
are charged back to insurance carriers
in proportion to their direct writings.
Assumed reinsurance.................. Insurance risks acquired from a ceding
company.
Assumption reinsurance............... A transaction whereby the ceding company
transfers its entire obligation under
the policy to the reinsurer, who becomes
directly liable to the policyholder in
all respects, including collecting
premiums and paying benefits. See
"Reinsurance."
Attachment point..................... The amount of losses above which excess
of loss reinsurance becomes operative.
Broker............................... One who negotiates contracts of
insurance or reinsurance on behalf of an
insured party, receiving a commission
from the insurer or reinsurer for
placement and other services rendered.
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<PAGE> 37
Capacity............................. The percentage of surplus, or the dollar
amount of exposure, that an insurer or
reinsurer is willing or able to place at
risk. Capacity may apply to a single
risk, a program, a line of business or
an entire book of business. Capacity may
be constrained by legal restrictions,
corporate restrictions or indirect
restrictions.
Captive company...................... An insurance company formed to insure
the risks of its parent entity or
entities.
Case reserves........................ Loss reserves, established with respect
to specific, individual reported claims.
Casualty insurance................... Insurance which is primarily concerned
with the losses caused by injuries to
third persons (i.e., not the insured)
and the legal liability imposed on the
insured resulting therefrom. It
includes, but is not limited to,
employers' liability, workers'
compensation, public liability,
automobile liability, personal liability
and aviation liability insurance. It
excludes certain types of losses that by
law or custom are considered as being
exclusively within the scope of other
types of insurance, such as fire or
marine.
Catastrophe.......................... A severe loss, usually involving risks
such as fire, earthquake, windstorm,
explosion and other similar events.
Catastrophe loss..................... Loss and directly identified loss
adjustment expenses from catastrophes.
Catastrophe reinsurance.............. A form of excess of loss property
reinsurance which, subject to a
specified limit, indemnifies the ceding
company for the amount of loss in excess
of a specified retention with respect to
an accumulation of losses resulting from
a catastrophic event. The actual
reinsurance document is called a
"catastrophe cover."
Cede; ceding company................. When an insurer reinsures its liability
with another insurer (a "cession"), it
"cedes" business and is referred to as
the "ceding company."
Ceded reinsurance.................... Insurance risks transferred to another
company as reinsurance. See
"Reinsurance."
Claim................................ Request by an insured for
indemnification by an insurance company
for loss incurred from an insured peril.
Claim adjustment expense............. See "Loss adjustment expense."
35
<PAGE> 38
Claims and claim adjustment
expense....................... See "Loss and loss adjustment expenses."
Claims and claim adjustment
expense reserves.............. See "Loss reserves."
Clash agreement...................... An excess of loss agreement with a
retention higher than the limits on any
one reinsured policy. The agreement is
thus only exposed to loss when two or
more policies (perhaps from different
lines of business) are involved in a
common occurrence in an amount greater
than the clash agreement retention. Also
known as contingency cover.
Combined ratio....................... The sum of the loss and LAE ratio, the
underwriting expense ratio and, where
applicable, the ratio of dividends to
policyholders to net premiums earned. A
combined ratio under 100% generally
indicates an underwriting profit. A
combined ratio over 100% generally
indicates an underwriting loss.
Commercial lines..................... The various kinds of property and
casualty insurance that are written for
businesses.
Commutation agreement................ An agreement between a reinsurer and a
ceding company whereby the reinsurer
pays an agreed upon amount in exchange
for a complete discharge of all
obligations, including future
obligations, between the parties for
reinsurance losses incurred.
Deductible........................... The amount of loss that an insured
retains.
Deferred acquisition costs........... Primarily commissions and premium taxes,
which vary with and are primarily
related to the production of new
business, are deferred and amortized to
achieve a matching of revenues and
expenses when reported in financial
statements prepared in accordance with
GAAP.
Direct written premiums.............. The amounts charged by a primary insurer
to insureds in exchange for coverages
provided in accordance with the terms of
an insurance contract.
Earned premiums or premiums
earned........................ That portion of property-casualty
premiums written that applies to the
expired portion of the policy term.
Earned premiums are recognized as
revenues under both SAP and GAAP.
Excess liability..................... Additional casualty coverage above a
layer of insurance exposures.
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<PAGE> 39
Excess of loss reinsurance........... Reinsurance that indemnifies the
reinsured against all or a specified
portion of losses under a specified
dollar amount or "retention."
Expense ratio........................ See "Underwriting expense ratio."
Extra contractual obligations........ Amounts incurred by an insurer, beyond
those that would have been incurred as
specified in the insurance agreement
with an insured, due to monetary awards
required by a court of law against the
insurer for its negligence to or bad
faith in dealing with its insured.
Facultative reinsurance.............. The reinsurance of all or a portion of
the insurance provided by a single
policy. Each policy reinsured is
separately negotiated.
Fidelity and surety programs.......... Insurance which guarantees performance
of an obligation or indemnifies for loss
due to embezzlement or wrongful
abstraction of money, securities or
other property.
Guaranteed cost products............. An insurance policy where the premiums
charged will not be adjusted for actual
loss experience during the covered
period.
Guaranty fund........................ State-regulated mechanism which is
financed by assessing insurers doing
business in those states. Should
insolvencies occur, these funds are
available to meet some or all of the
insolvent insurer's obligations to
policyholders.
Incurred but not reported
("IBNR") reserves............. Reserves for estimated losses and LAE
that have been incurred but not yet
reported to the insurer.
Indemnity reinsurance................ A transaction whereby the reinsurer
agrees to indemnify the ceding company
against all or part of the loss that the
latter may sustain under the policies it
issued that are being reinsured. The
ceding company remains primarily liable
as the direct insurer on all risks
ceded. See "Reinsurance."
Inland marine........................ A broad type of insurance generally
covering articles that may be
transported from one place to another,
as well as bridges, tunnels and other
instrumentalities of transportation. It
includes goods in transit (generally
other than transoceanic) and may include
policies for movable objects such as
personal effects, personal property,
jewelry, furs, fine art and others.
IRIS ratios.......................... Financial ratios calculated by the NAIC
to assist state insurance departments in
monitoring the financial condition of
insurance companies.
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Large deductible policy.............. An insurance policy where the customer
assumes at least $25,000 or more of each
loss.
Loss................................. An occurrence that is the basis for
submission and/or payment of a claim.
Losses may be covered, limited or
excluded from coverage, depending on the
terms of the policy.
Loss adjustment expenses
("LAE")....................... The expenses of settling claims,
including legal and other fees and the
portion of general expenses allocated to
claim settlement costs.
Loss and LAE ratio................... For SAP it is the ratio of incurred
losses and loss adjustment expenses to
net earned premiums. For GAAP it is the
ratio of incurred losses and loss
adjustment expenses reduced by an
allocation of fee income to net earned
premiums.
Loss reserves........................ Liabilities established by insurers and
reinsurers to reflect the estimated cost
of claims incurred that the insurer or
reinsurer will ultimately be required to
pay in respect of insurance or
reinsurance it has written. Reserves are
established for losses and for LAE, and
consist of case reserves and IBNR
reserves.
Losses and loss adjustment
expenses...................... The sum of losses incurred and loss
adjustment expenses.
Losses incurred...................... The total losses sustained by an
insurance company under a policy or
policies, whether paid or unpaid.
Incurred losses include a provision for
IBNR.
Multi-peril policies................. Refers to policies which cover both
property and third party liability
exposures.
National Association of
Insurance Commissioners
("NAIC")...................... An organization of the insurance
commissioners or directors of all 50
states and the District of Columbia
organized to promote consistency of
regulatory practice and statutory
accounting standards throughout the
United States.
Net written premiums................. Direct written premiums plus assumed
reinsurance less premiums ceded to
reinsurers.
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<PAGE> 41
Non-admitted coverage................ Insurance coverage written in a given
state by an insurer not licensed in that
state.
Novation............................. A transaction in which the original
direct insurer's obligations are
completely extinguished, resulting in no
further exposure to loss arising on the
business novated.
Personal lines....................... Types of property and casualty insurance
written for individuals or families,
rather than for businesses.
Pool................................. An organization of insurers or
reinsurers through which particular
types of risks are underwritten with
premiums, losses and expenses being
shared in agreed-upon percentages.
Premiums............................. The amount charged during the year on
policies and contracts issued, renewed
or reinsured by an insurance company.
Producer............................. Contractual entity which directs
insureds to the insurer for coverage.
See "Broker."
Property insurance................... Insurance that provides coverage to a
person with an insurable interest in
tangible property for that person's
property loss, damage or loss of use.
Quota share reinsurance.............. Reinsurance wherein the insurer cedes an
agreed-upon fixed percentage of
liabilities, premiums and losses for
each policy covered on a pro rata basis.
Rate of renewal/retention
ratio......................... Current period renewal accounts or
policies as a percentage of total
accounts or policies available for
renewal.
Rates................................ Amounts charged per unit of insurance.
Reinsurance.......................... The practice whereby one insurer, called
the reinsurer, in consideration of a
premium paid to such insurer, agrees to
indemnify another insurer, called the
ceding company, for part or all of the
liability assumed by the ceding company
under one or more policies or contracts
of insurance which it has issued.
Reinsurance agreement................ A contract specifying the terms of a
reinsurance transaction.
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<PAGE> 42
Residual market (involuntary
business)..................... Insurance market which provides coverage
for risks unable to purchase insurance
in the voluntary market either because
the risk is too great or rate inadequacy
has reduced the supply of insurance.
Residual markets are frequently created
by state legislation either because of
lack of available coverage such as
property coverage in a windstorm prone
area or protection of the accident
victim as in the case of workers'
compensation. The costs of the residual
market are usually charged back to the
direct insurance carriers in proportion
to the carriers' voluntary market shares
for the type of coverage involved.
Retention............................ The amount of exposure an insurance
company retains on any one risk or group
of risks.
Retrospective premiums............... Premiums related to retrospectively
rated policies.
Retrospective rating................. A plan or method which permits
adjustment of the final premium or
commission on the basis of actual loss
experience, subject to certain minimum
and maximum limits.
Risk-based capital ("RBC")........... A measure adopted by the NAIC for
assessing the minimum statutory capital
and surplus requirements of insurers.
Risk retention....................... The amount or portion of a risk an
insurer retains for its own account
after ceded reinsurance. Losses above
the stated retention level are
collectible from the reinsurer. The
retention level may be stated as a
percentage or dollar amount.
Salvage.............................. The amount of money an insurer recovers
through the sale of property transferred
to the insurer as a result of a loss
payment.
Second injury fund................... The employer of an injured, impaired
worker is responsible only for the
workers' compensation benefit for the
most recent injury; the second injury
fund would cover the cost of any
additional benefits for aggravation of a
prior condition. The cost is shared by
the insurance industry, funded through
assessments to insurance companies based
on either premiums or losses.
Self-insured retentions.............. That portion of the risk retained by a
person for its own account.
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Servicing carrier.................... An insurance company that provides, for
a fee, various services including policy
issuance, claims adjusting and customer
service for insureds in a reinsurance
pool.
Standard policy forms................ Self-contained pre-printed policy
language used when a large number of
insureds face similar loss exposures.
Statutory accounting practices
("SAP")....................... The rules and procedures prescribed or
permitted by United States state
insurance regulatory authorities for
recording transactions and preparing
financial statements. Statutory
accounting practices generally reflect a
modified going concern basis of
accounting.
Statutory surplus.................... As determined under SAP, the amount
remaining after all liabilities,
including loss reserves, are subtracted
from all admitted assets. Admitted
assets are assets of an insurer
prescribed or permitted by a state to be
recognized on the statutory balance
sheet. Statutory surplus is also
referred to as "surplus" or "surplus as
regards policyholders" for statutory
accounting purposes.
Structured settlements............... Periodic payments to an injured person
or survivor for a determined number of
years or for life, typically in
settlement of a claim under a liability
policy, usually funded through the
purchase of an annuity.
Subrogation.......................... A principle of law incorporated in
insurance policies, which enables an
insurance company, after paying a loss
to its insured, to recover the amount of
the loss from another who is legally
liable for it.
Third party liability................ A liability owed to a claimant (or
"third party") who is not one of the two
parties to the insurance contract.
Insured liability claims are referred to
as third party claims.
Treaty reinsurance................... The reinsurance of a specified type or
category of risks defined in a
reinsurance agreement (a "treaty")
between a primary insurer or other
reinsured and a reinsurer. Typically, in
treaty reinsurance, the primary insurer
or reinsured is obligated to offer and
the reinsurer is obligated to accept a
specified portion of all such type or
category of risks originally written by
the primary insurer or reinsured.
Umbrella coverage.................... A form of insurance protection against
losses in excess of amounts covered by
other liability insurance policies or
amounts not covered by the usual
liability policies.
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<PAGE> 44
Unassigned funds (surplus)........... The undistributed and unappropriated
amount of statutory surplus.
Underwriter.......................... An employee of an insurance company who
examines, accepts or rejects risks and
classifies accepted risks in order to
charge an appropriate premium for each
accepted risk. The underwriter is
expected to select business that will
produce an average risk of loss no
greater than that anticipated for the
class of business.
Underwriting......................... The insurer's or reinsurer's process of
reviewing applications for insurance
coverage, and the decision whether to
accept all or part of the coverage and
determination of the applicable
premiums; also refers to the acceptance
of such coverage.
Underwriting expense ratio........... For SAP it is the ratio of underwriting
expenses incurred to net written
premiums. For GAAP it is the ratio of
underwriting expenses incurred reduced
by an allocation of fee income to net
written premiums.
Underwriting gain or
underwriting loss............. The pre-tax profit or loss experienced
by a property and casualty insurance
company after deducting loss and loss
adjustment expenses and operating
expenses from net earned premiums. This
profit or loss calculation includes
reinsurance assumed and ceded but
excludes investment income.
Unearned premium..................... The portion of premiums written that is
allocable to the unexpired portion of
the policy term.
Voluntary market..................... The market in which a person seeking
insurance obtains coverage without the
assistance of residual market
mechanisms.
Wholesale broker..................... An independent or exclusive agent that
represents both admitted and non
admitted insurers in market areas which
include standard, non-standard,
specialty and excess and surplus lines
of insurance. The wholesaler does not
deal directly with the insurance
consumer. The wholesaler deals with the
retail agent or broker.
Workers' compensation................ A system (established under state and
federal laws) under which employers
provide insurance for benefit payments
to their employees for work-related
injuries, deaths and diseases,
regardless of fault.
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ITEM 2. PROPERTIES.
The Company's executive offices are located in Hartford, Connecticut.
The Company rents from an affiliate of Citigroup approximately 1,030,000 square
feet of office space in Hartford, Connecticut, under a ten-year lease that
expires on April 1, 2006 and, subject to certain conditions, is renewable by the
Company for additional five-year terms. Under certain circumstances, the Company
may be required to purchase the leased premises. In addition, the Company leases
199 field offices totaling approximately 4,920,000 square feet throughout the
United States under leases or subleases with third parties. The Company also
rents from Aetna approximately 373,000 square feet of office space at CityPlace,
located in Hartford, Connecticut, under an eight-year sublease that expires in
2004.
The Company believes its properties are adequate and suitable for its
business as presently conducted and are adequately maintained. For further
information concerning leases, see Note 12 of Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS.
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which the Company or
its subsidiaries is a party or to which any of their property is subject.
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.
In February 1998, the Georgia state court dismissed the El Chico
Restaurants lawsuit. Plaintiffs in that case have appealed. In April 1998, the
plaintiffs in the Hill-Behan Lumber
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<PAGE> 46
lawsuit in Illinois voluntarily dismissed that case with prejudice. In August
1998, the Florida federal court dismissed the Bristol Hotel Management case and
plaintiffs have appealed. In November 1998, the state court in California
granted the Company's motion to dismiss the Dal-Tile Corp. case and granted
plaintiffs leave to replead. In December 1998, the Pennsylvania state court in
Foodarama Supermarkets granted objections to certain allegations of the
complaint. In January 1999, the Arizona federal court dismissed in part the
Albany International Corp. action; the Tennessee court in El Chico Restaurants
granted defendants' motions to dismiss; and the Illinois state court dismissed
in part the pending complaint in CR/PL Management. The Company is awaiting
decisions on motions to dismiss filed in Missouri, New Jersey, Michigan, and
Kentucky.
In the ordinary course of business, certain of the Company's
subsidiaries receive claims asserting alleged injuries and damages from asbestos
and other hazardous waste and toxic substances. The conditions surrounding the
final resolution of these claims continue to change. Currently, it is not
possible to predict legal and legislative changes and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations as well as changes in
legislation applicable to such claims. Because of these future unknowns,
additional liabilities may arise for amounts in excess of current reserves. The
magnitude of these additional amounts, or a range of these additional amounts,
cannot now be reasonably estimated, and could result in a liability exceeding
reserves by an amount that would be material to the Company's operating results
in a future period. However, the Company believes that it is not likely that
these claims will have a material adverse effect on the Company's financial
condition or liquidity.
The Company is involved in numerous other lawsuits (other than
environmental and asbestos claims) arising, from the most part, in the ordinary
course of business operations either as a liability insurer defending
third-party claims brought against its insureds or an insurer defending coverage
claims brought against it. Although there can be no assurances, the Company
believes, based on information currently available, that the ultimate resolution
of these legal proceedings would not be likely to have a material adverse effect
on the Company's results of operations, financial condition or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock is listed on the NYSE under the
symbol "TAP." There is no established public trading market for the Company's
Class B Common Stock. The high and low sale prices, as reported on the
consolidated transaction reporting system, for the Class A Common Stock for the
periods indicated, and the dividends per share, are set forth on the following
page:
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<TABLE>
<CAPTION>
1997 1998 1999
-------------------------------------------- ---------------------------------------- ------
1ST Q 2ND Q 3RD Q 4TH Q 1ST Q 2ND Q 3RD Q 4TH Q 1ST Q*
---------- --------- ---------- ---------- -------- ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Common
Stock Price
High $39.625 $40.375 $43.563 $45.000 $46.063 $45.625 $45.750 $35.500 $38.500
Low $31.750 $31.375 $37.875 $34.875 $39.125 $38.750 $29.625 $24.125 $28.188
Dividends per
Share of Class A Common
Stock $ .075 $ .075 $ .075 $ .075 $ .10 $ .10 $ .10 $ .10 $ .125
</TABLE>
- ----------------------------
* Through March 3, 1999
At March 3, 1999, the Company had approximately 1,259 holders of record
of its Class A Common Stock. This figure does not represent the actual number of
beneficial owners of common stock because shares are frequently held in "street
name" by securities dealers and others for the benefit of individual owners who
may vote the shares. At March 3, 1999, TIGI was the sole holder of record of the
Company's Class B Common Stock.
For information on dividend restrictions in certain long-term loan and
credit agreements of the Company and its subsidiaries, as well as restrictions
on the ability of certain of the Company's subsidiaries to transfer funds to the
Company in the form of cash dividends or otherwise, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 6. SELECTED FINANCIAL DATA.
See "Five-Year Summary of Selected Financial Data" on page 17 of the
Company's 1998 Annual Report to Stockholders (the "1998 Annual Report"),
included as part of Exhibit 13 to this Form 10-K and incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 18 of the 1998 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 18 of the 1998 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
45
<PAGE> 48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page
F-1 hereof. There is also incorporated by reference herein in response to this
Item the material under the caption "Selected Quarterly Financial Data
(unaudited)" on page 58 of the 1998 Annual Report, which material is included as
part of Exhibit 13 to this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information on the directors of the Company, see the material under
the caption "Election of Directors," in the definitive Proxy Statement for the
Company's Annual Meeting of Stockholders to be held on April 20, 1999, filed
with the Securities and Exchange Commission (the "Proxy Statement"),
incorporated herein by reference. For information on executive officers, see
Item 1, "Business -- Other Information -- Executive Officers of the Company"
herein. For information on compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, see the material under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement,
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
See the material under the caption "Executive Compensation" of the
Proxy Statement, incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
See the material under the captions "Voting Rights," "Security
Ownership of Certain Beneficial Owners" and "Security Ownership of Management"
of the Proxy Statement, incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the material under the captions "Election of Directors" and
"Executive Compensation" of the Proxy Statement, incorporated herein by
reference.
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<PAGE> 49
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated Financial
Statements and Schedules on page F-1 hereof.
(2) Financial Statement Schedules. See Index to Consolidated
Financial Statements and Schedules on page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of
1998.
47
<PAGE> 50
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.01 Restated Certificate of Incorporation of Travelers
Property Casualty Corp. (the "Company"), Certificate
of Designations, Powers, Preferences and Rights of
7.5% Redeemable Preferred Stock, Series Z, of the
Company, Certificate of Amendment to the Restated
Certificate of Incorporation, filed March 7, 1997, and
Certificate of Amendment to the Restated Certificate
of Incorporation, filed April 23, 1997, incorporated
by reference to Exhibit 3.01 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997 (File No.1-14328) (the "Company's
3/31/97 10-Q").
3.02 Restated By-Laws of the Company, effective April 23,
1997, incorporated by reference to Exhibit 3.02 to the
Company's 3/31/97 10-Q.
4.01 Intercompany Agreement, dated as of April 2, 1996,
between Travelers Group Inc. and the Company,
incorporated by reference to Exhibit 4.1 to the
Company's Form S-1.
4.02.1 Shareholders Agreement, dated as of April 2, 1996, by
and among the Company, The Travelers Insurance Group
Inc., Aetna Life and Casualty Company (now known as
Aetna Services, Inc.), J.P. Morgan Capital
Corporation, The Trident Partnership, L.P. and Fund
American Enterprises Holdings, Inc., incorporated by
reference to Exhibit 4.2 to the Company's Form S-1.
4.02.2 Amendment to Shareholders Agreement, dated June 20,
1997, by and among the Company, Aetna Services, Inc.,
J.P. Morgan Capital Corporation, The Trident
Partnership, L.P. and Fund American Enterprises
Holdings, Inc., incorporated by reference to Exhibit
4.02.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 (File No.
1-14328) (the "Company's 1997 10-K").
48
<PAGE> 51
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.01* Travelers Property Casualty Corp. Capital Accumulation
Plan (as amended through July 23, 1997), incorporated
by reference to Exhibit 10.01 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1997 (File No. 1-14328).
10.02* Travelers Property Casualty Corp. 1996 Executive
Option Plan (as amended through March 7, 1997),
incorporated by reference to Exhibit 10.03 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 (File No. 1-14328) (the
"Company's 1996 10-K").
10.03* Travelers Property Casualty Corp. Executive
Performance Compensation Plan (as amended through
March 7, 1997), incorporated by reference to Exhibit
10.04 to the Company's 1996 10-K.
10.04* Travelers Property Casualty Corp. 1996 Deferred
Compensation Plan for Non-Employee Directors (as
amended through September 25, 1996), incorporated by
reference to Exhibit 10.02 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
September 30, 1996 (File No. 1-14328).
10.05* Travelers Group Capital Accumulation Plan (as amended
through July 23, 1997), incorporated by reference to
Exhibit 10.02 to the Quarterly Report on Form 10-Q of
Travelers Group Inc. for the fiscal quarter ended
September 30, 1997 (File No. 1-9924) (the "TRV 9/30/97
10-Q").
10.06.1* Travelers Group Stock Option Plan (as amended and
restated as of April 24, 1996), incorporated by
reference to Exhibit 10.02.1 to the Annual Report on
Form 10-K of Travelers Group Inc. for the fiscal year
ended December 31, 1996 (File No. 1-9924) (the "TRV
1996 10-K").
10.06.2* Amendment No. 14 to the Travelers Group Stock Option
Plan, incorporated by reference to Exhibit 10.01 to
the Quarterly Report on Form 10-Q of Travelers Group
Inc. for the fiscal quarter ended September 30, 1996
(File No. 1-9924).
10.06.3* Amendment No. 15 to the Travelers Group Stock Option
Plan, incorporated by reference to Exhibit 10.04 to
the TRV 9/30/97 10-Q.
49
<PAGE> 52
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
10.07* Travelers Group 1996 Stock Incentive Plan (as amended
through July 23, 1997), incorporated by reference to
Exhibit 10.03 to the TRV 9/30/97 10-Q.
10.08* Travelers Group Inc. Retirement Benefit Equalization
Plan (as amended and restated as of January 2, 1996),
incorporated by reference to Exhibit 10.04 to
Citigroup Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 (File No. 1-9934)
(the "Citigroup 1998 10-K").
10.09 TAPC Tax Allocation Agreement, effective as of January
1, 1996 among Travelers Group Inc., The Travelers
Insurance Group Inc. and the Company, incorporated by
reference to Exhibit 10.9 to the Company's Form S-1.
10.10 Lease for office space at CityPlace, dated March 28,
1996, by and between Aetna Life and Casualty Company
and The Travelers Indemnity Company, incorporated by
reference to Exhibit 10.10 to the Company's Form S-1.
10.11 Lease for office space in Hartford, Connecticut, dated
as of April 2, 1996, by and between The Travelers
Insurance Company and The Travelers Indemnity Company,
incorporated by reference to Exhibit 10.14 to the
Company's 1996 10-K.
10.12* Letter Agreement, dated November 17, 1996, between the
Company and Stanton F. Long, incorporated by reference
to Exhibit 10.15 to the Company's 1996 10-K.
10.13* The Travelers Insurance Deferred Compensation Plan
(formerly The Travelers Corporation TESIP Restoration
and Non-Qualified Savings Plan) (as amended December
10, 1998), incorporated by reference to Exhibit 10.10
to the Citigroup 1998 10-K.
11.01+ Computation of Earnings Per Share.
12.01+ Computation of Ratio of Earnings to Fixed Charges.
13.01+ Pages 17 through 59 of the 1998 Annual Report to
Stockholders of the Company (pagination of exhibit
does not correspond to pagination in the 1998 Annual
Report to Stockholders).
21.01+ Subsidiaries of the Registrant.
23.01+ Consent of KPMG LLP, Independent Certified Public
Accountants.
50
<PAGE> 53
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
24.01+ Powers of Attorney.
27.01+ Financial Data Schedule.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the Commission upon request.
The financial statements required by Form 11-K for 1998 for the Travelers Group
401(k) Savings Plan will be filed as an exhibit by amendment to this Form 10-K
pursuant to Rule 15d-21 of the Securities Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished at a cost of
$.25 per page (although no charge will be made for the 1998 Annual Report on
Form 10-K) to security holders who make written request therefor to Corporate
Communications, Travelers Property Casualty Corp., One Tower Square, Hartford,
Connecticut 06183.
- -------------------
* Denotes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
+ Filed herewith.
51
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 19th day of
March, 1999.
TRAVELERS PROPERTY CASUALTY CORP.
(Registrant)
By: /s/ Jay S. Fishman
------------------------------------
Jay S. Fishman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on the 19th day of March, 1999.
SIGNATURE TITLE
--------- -----
/s/ Jay S. Fishman President and Chief Executive Officer (Principal
----------------------------- Executive Officer) and Director
Jay S. Fishman
/s/ William P. Hannon Chief Financial Officer
- ------------------------------- (Principal Financial Officer)
William P. Hannon
/s/ Thomas P. Shugrue Vice President and Chief Accounting Officer
- ------------------------------- (Principal Accounting Officer)
Thomas P. Shugrue
* Director
- --------------------------------
Kenneth J. Bialkin
* Director
- --------------------------------
Leslie B. Disharoon
* Chairman and Director
- --------------------------------
Robert I. Lipp
* Director
- --------------------------------
Dudley C. Mecum
52
<PAGE> 55
SIGNATURE TITLE
--------- -----
- -------------------------------- Director
Roberto G. Mendoza
* Director
- --------------------------------
Frank J. Tasco
* Director
- --------------------------------
Sanford I. Weill
* Director
- --------------------------------
Arthur Zankel
*By: /s/ Jay S. Fishman
- --------------------------------
Jay S. Fishman
Attorney-in-fact
53
<PAGE> 56
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES *
<TABLE>
<CAPTION>
Incorporated
by Reference from
the Company's 1998
Annual Report to
Page Stockholders at
Herein Page Indicated
------ --------------
<S> <C> <C>
Independent Auditors' Report F-2 59
Consolidated Statement of Income for the years ended
December 31, 1998, 1997 and 1996 34
Consolidated Balance Sheet at December 31, 1998 and 1997 35
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 36
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 37
Notes to Consolidated Financial Statements 38-58
Schedules:
Schedule II - Condensed Financial Information of
Registrant (Parent Company only) F-3 - F-6
Schedule III - Supplementary Insurance Information F-7 - F-9
Schedule VI - Supplementary Information Concerning
Property-Casualty Insurance Operations F-10
</TABLE>
* Schedules not listed are omitted as not applicable or not required by
Regulation S-X.
F-1
<PAGE> 57
Independent Auditors' Report
The Board of Directors and Stockholders
Travelers Property Casualty Corp.:
Under date of January 25, 1999, we reported on the consolidated balance sheets
of Travelers Property Casualty Corp. and Subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which are incorporated by reference in the
December 31, 1998 annual report on Form 10-K. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related financial statement schedules as listed in the accompanying index. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
Hartford, Connecticut
January 25, 1999
F-2
<PAGE> 58
SCHEDULE II
Travelers Property Casualty Corp.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the period
For the year January 16, 1996
ended December 31, to December 31,
------------------------------ ----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Net investment income and other $ 14 $ 9 $ 2
EXPENSES
Interest 163 165 120
Other 4 7 36
--------- --------- ---------
167 172 156
--------- --------- ---------
Loss before federal income tax benefit
and equity in net income
of subsidiaries (153) (163) (154)
Federal income tax benefit 54 59 54
--------- --------- ---------
Loss before equity in net income
of subsidiaries (99) (104) (100)
Equity in net income of subsidiaries 1,442 1,340 491
--------- --------- ---------
Net income $ 1,343 $ 1,236 $ 391
========= ========= =========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-3
<PAGE> 59
SCHEDULE II
Travelers Property Casualty Corp.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions)
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Short-term securities $ 154 $ 11
Investment in subsidiaries at equity 11,234 10,122
Deferred federal income taxes 14 14
Other assets 11 8
---------- ----------
Total assets $ 11,413 $ 10,155
========== ==========
LIABILITIES
Commercial paper $ - $ 108
Long-term debt 2,177 2,177
Other liabilities 111 93
---------- ----------
Total liabilities 2,288 2,378
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock:
Class A, $.01 par value, 700 million shares authorized;
72,393,407 shares issued and outstanding 1 1
Class B, $.01 par value, 700 million shares authorized;
328,020,170 shares issued and outstanding 3 3
Additional paid-in capital 5,479 5,473
Retained earnings 3,052 1,866
Accumulated other changes in equity from nonowner sources 921 722
Treasury stock, at cost (shares, 8,544,687 and 7,314,688) (298) (266)
Unearned compensation (33) (22)
---------- -----------
Total stockholders' equity 9,125 7,777
---------- ----------
Total liabilities and stockholders' equity $ 11,413 $ 10,155
========== ==========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-4
<PAGE> 60
SCHEDULE II
Travelers Property Casualty Corp.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the period
For the year January 16, 1996
ended December 31, to December 31,
1998 1997 1996
---------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,343 $ 1,236 $ 391
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net income of subsidiaries (1,442) (1,340) (491)
Dividends received from consolidated subsidiaries 540 340 299
Amortization expense 2 2 1
Deferred federal income tax benefit 1 (2) (12)
Federal income taxes receivable 2 32 (32)
Other assets (3) - (14)
Other liabilities (6) 6 52
---------- --------- --------
Net cash provided by operating activities 437 274 194
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contribution to subsidiaries - - (710)
Short-term securities, purchases, net (143) (5) (6)
Business acquisition - - (4,160)
--------- --------- --------
Net cash used in investing activities (143) (5) (4,876)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repayment) of commercial paper, net (108) 83 25
Issuance of long-term debt - - 2,177
Borrowings on revolving line of credit - - 2,650
Payments on revolving line of credit - - (2,650)
Contributions from TIGI - - 1,138
Purchase of treasury stock (62) (268) (13)
Private offering of common stock - - 525
Initial public offering of common stock - - 928
Issuance of Series Z preferred stock - - 540
Redemptions of Series Z preferred stock - - (540)
Fees paid on behalf of subsidiaries - - (33)
Dividends on Series Z preferred stock - - (4)
Restricted stock issuance 33 34 -
Dividends to TIGI (131) (98) (49)
Dividends to minority shareholders (26) (21) (11)
--------- --------- --------
Net cash provided by (used in) financing activities (294) (270) 4,683
--------- --------- --------
Net increase (decrease) in cash - (1) 1
Cash at beginning of period - 1 -
--------- --------- --------
Cash at end of period - $ - $ 1
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 163 $ 163 $ 100
========= ========= ========
Cash received during the period for taxes $ 57 $ 79 $ 10
========= ========= ========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-5
<PAGE> 61
SCHEDULE II
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1. GENERAL
Travelers Property Casualty Corp. (TAP) (a direct majority-owned subsidiary
of The Travelers Insurance Group Inc. (TIGI) and an indirect majority-owned
subsidiary of Citigroup Inc. (formerly Travelers Group Inc.)) was organized
on January 16, 1996. In April 1996, TIGI contributed The Travelers Indemnity
Company and its subsidiaries to TAP. In addition, TAP purchased all of the
outstanding capital stock of Travelers Casualty and Surety Company (formerly
The Aetna Casualty and Surety Company) and The Standard Fire Insurance
Company for a purchase price of approximately $4.2 billion in cash.
2. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of TAP and, on an
equity basis, its subsidiaries and affiliates and should be read in
conjunction with the Consolidated Financial Statements and notes thereto.
3. DEBT
The annual maturities of the outstanding debt are as follows: $400 million
in 1999; $500 million in 2001 and $1,277 million after 2002.
4. SUPPLEMENTARY DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
In 1996, TIGI acquired approximately 328 million shares of Class B Common
Stock of TAP in exchange for contributing the outstanding capital stock of
The Travelers Indemnity Company and a capital contribution of approximately
$1.1 billion.
F-6
<PAGE> 62
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1998
(In millions)
<TABLE>
<CAPTION>
Segment Deferred policy Claims and Unearned Premium Net
acquisition costs claim adjust- premiums revenue investment
ment expense income
reserves (a)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial
Lines $ 292 $26,702 $ 2,597 $ 4,525 $ 1,709
Personal
Lines 226 2,709 1,569 3,271 389
------- ------- ------- ------- -------
Total - Reportable
Segments 518 29,411 4,166 7,796 2,098
Other -- 178 -- -- 2
------- ------- ------- ------- -------
Consolidated $ 518 $29,589 $ 4,166 $ 7,796 $ 2,100
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Amortization
Segment Claims of deferred Other Premiums
and claim policy operating written
adjustment acquisition expenses
expenses costs (b)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial
Lines $ 3,766 $ 645 $ 916 $ 4,614
Personal
Lines 2,181 552 372 3,490
------- ------- ------- -------
Total - Reportable
Segments 5,947 1,197 1,288 8,104
Other -- -- 182 --
------- ------- ------- -------
Consolidated $ 5,947 $ 1,197 $ 1,470 $ 8,104
======= ======= ======= =======
</TABLE>
(a) Net investment income for each segment is accounted for separately, except
for the portion earned on the investment of stockholders' equity, which is
allocated based on assigned capital.
(b) Expense allocations are determined in accordance with prescribed statutory
accounting practices. These practices make a reasonable allocation of all
expenses to those product lines with which they are associated.
F-7
<PAGE> 63
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1997
(In millions)
<TABLE>
<CAPTION>
Segment Deferred policy Claims and Unearned Premium Net
acquisition costs claim adjust- premiums revenue investment
ment expense income
reserves (a)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial
Lines $ 309 $27,356 $ 2,519 $ 4,308 $ 1,695
Personal
Lines 192 2,782 1,348 2,917 353
------- ------- ------- ------- -------
Total - Reportable
Segments 501 30,138 3,867 7,225 2,048
Other -- 186 -- -- 3
------- ------- ------- ------- -------
Consolidated $ 501 $30,324 $ 3,867 $ 7,225 $ 2,051
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Amortization
Segment Claims of deferred Other Premiums
and claim policy operating written
adjustment acquisition expenses
expenses costs (b)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial
Lines $ 3,631 $ 622 $ 980 $ 4,758
Personal
Lines 1,853 505 366 3,074
------- ------- ------- -------
Total - Reportable
Segments 5,484 1,127 1,346 7,832
Other -- -- 202 --
------- ------- ------- -------
Consolidated $ 5,484 $ 1,127 $ 1,548 $ 7,832
======= ======= ======= =======
</TABLE>
(a) Net investment income for each segment is accounted for separately, except
for the portion earned on the investment of stockholders' equity, which is
allocated based on assigned capital.
(b) Expense allocations are determined in accordance with prescribed statutory
accounting practices. These practices make a reasonable allocation of all
expenses to those product lines with which they are associated.
F-8
<PAGE> 64
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1996
(In millions)
<TABLE>
<CAPTION>
Segment Deferred policy Claims and Unearned Premium Net
acquisition costs claim adjust- premiums revenue investment
ment expense income
reserves (a)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial
Lines $ 253 $28,017 $ 2,303 $ 3,695 $ 1,343
Personal
Lines 173 2,952 1,251 2,323 311
------- ------- ------- ------- -------
Total - Reportable
Segments 426 30,969 3,554 6,018 1,654
Other -- 208 -- 10 2
------- ------- ------- ------- -------
Consolidated $ 426 $31,177 $ 3,554 $ 6,028 $ 1,656
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Amortization
Segment Claims of deferred Other Premiums
and claim policy operating written
adjustment acquisition expenses
expenses costs (b)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial
Lines $ 3,679 $ 533 $ 1,081 $ 3,973
Personal
Lines 1,599 373 294 2,359
------- ------- ------- -------
Total - Reportable
Segments 5,278 906 1,375 6,332
Other 4 -- 147 10
------- ------- ------- -------
Consolidated $ 5,282 $ 906 $ 1,522 $ 6,342
======= ======= ======= =======
</TABLE>
(a) Net investment income for each segment is accounted for separately, except
for the portion earned on the investment of stockholders' equity, which is
allocated based on assigned capital.
(b) Expense allocations are determined in accordance with prescribed statutory
accounting practices. These practices make a reasonable allocation of all
expenses to those product lines with which they are associated.
F-9
<PAGE> 65
SCHEDULE VI
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Information Concerning Property-Casualty Insurance Operations (1)
1996-1998
(In millions)
<TABLE>
<CAPTION>
Reserves for
unpaid Discount
Deferred claims from
Affiliation policy and claim reserves
with acquisition adjustment for unpaid Unearned Earned
registrant costs expenses claims (2) premiums premiums
- ---------- ------------ ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
1998 Consolidated property -
casualty operations $ 518 $29,411 $ 781 $ 4,166 $ 7,796
1997 Consolidated property -
casualty operations $ 501 $30,138 $ 912 $ 3,867 $ 7,225
1996 Consolidated property -
casualty operations $ 426 $30,969 $ 1,012 $ 3,554 $ 6,018
</TABLE>
<TABLE>
<CAPTION>
Claims and
claim adjust-
ment expenses Amortization
incurred related to: of deferred Paid claims
Affiliation Net -------------------- policy and claim
with investment Current Prior acquisition adjustment Premiums
registrant income year year costs expenses written
- ---------- ---------- ------- -------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
1998 Consolidated property -
casualty operations $ 2,098 $ 6,057 $ (323) $ 1,197 $ 6,377 $ 8,104
1997 Consolidated property -
casualty operations $ 2,048 $ 5,730 $ (492) $ 1,127 $ 5,648 $ 7,832
1996 Consolidated property -
casualty operations $ 1,654 $ 4,839 $ 192 $ 906 $ 5,057 $ 6,332
</TABLE>
(1) Excludes accident and health business.
(2) See "Discounting" on page 17.
F-10
<PAGE> 1
Exhibit 11.01
Travelers Property Casualty Corp.
Computation of Earnings Per Share
(In millions, except for per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Earnings:
Net income $ 1,343 $ 1,236 $ 391
Preferred dividends - series Z - - (4)
--------- --------- ----------
Income applicable to common stock $ 1,343 $ 1,236 $ 387
========= ========= =========
Average shares:
Basic 392.0 395.5 379.8
========= ======== =========
Diluted 392.7 395.8 379.8
========= ======== =========
Earnings Per Share:
Net income per common share $ 3.43 $ 3.13 $ 1.02
========= ======== =========
Net income per common share - assuming dilution $ 3.42 $ 3.12 $ 1.02
========= ======== =========
</TABLE>
Net income per common share (Basic EPS) is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Net income per common share-assuming dilution
(Diluted EPS) reflects the effect of potentially dilutive securities,
principally stock-based incentive plans. On February 3, 1998, the Staff of the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 98 (SAB
98). SAB 98 requires that FAS 128 should be used to compute earnings per share
for periods prior to an initial public offering (IPO). For purposes of computing
basic and diluted EPS for periods prior to the IPO, the 328 million shares of
common stock issued to TIGI in April 1996 were assumed to be outstanding for all
reported periods. Previously, all common stock issued within a one-year period
prior to an IPO was treated as outstanding for all reported periods. This amount
was then reduced by the dilutive effect of such issuances of stock prior to the
IPO determined by using the actual proceeds and the number of shares that could
have been repurchased using the IPO price as the repurchase price for all
periods presented. Accordingly, the Company has restated its earnings per share
for 1996 in accordance with the guidelines of SAB 98.
<PAGE> 1
Exhibit 12.01
Travelers Property Casualty Corp. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In millions of dollars, except for ratio)
<TABLE>
<CAPTION>
All Companies Consolidated
Year ended December 31,
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Income from continuing operations,
before income taxes and cumulative
effect of accounting changes $ 1,837 $ 1,752 $ 487 $ 551 $ 210
Interest 161 163 118 - -
Portion of rentals deemed to be interest 49 55 45 33 32
--------- --------- --------- --------- --------
Income available for fixed charges $ 2,047 $ 1,970 $ 650 $ 584 $ 242
========= ========= ========= ========= ========
Fixed charges:
Interest $ 161 $ 163 $ 118 $ - $ -
Portion of rentals deemed to be interest 49 55 45 33 32
--------- --------- --------- --------- --------
Total fixed charges $ 210 $ 218 $ 163 $ 33 $ 32
========= ========= ========= ========= ========
Ratio of earnings to fixed charges 9.75x 9.04x 3.99x 17.53x 7.56x
--------- --------- --------- --------- --------
</TABLE>
The ratio of earnings to fixed charges has been computed by dividing income
before income taxes and fixed charges by the fixed charges. For purposes of this
ratio, fixed charges consist of that portion of rentals deemed representative of
the appropriate interest factor.
<PAGE> 1
Exhibit 13.01
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(In millions, except per share amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
At and for the Year Ended December 31, (1) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $10,451 $ 9,911 $ 8,197 $ 4,569 $ 4,168
Net income $ 1,343 $ 1,236 $ 391 $ 419 $ 188
Total assets $51,274 $50,682 $49,779 $24,062 $22,481
Long-term debt $ 1,250 $ 1,249 $ 1,249 -- --
TAP-obligated mandatorily redeemable securities
of subsidiary trusts holding solely junior
subordinated debt securities of TAP $ 900 $ 900 $ 900 -- --
Stockholders' equity $ 9,125 $ 7,777 $ 6,480 $ 3,601 $ 2,581
Stockholders' equity excluding accumulated other
changes in equity from nonowner sources $ 8,204 $ 7,055 $ 6,195 $ 3,321 $ 3,024
Year-end common shares outstanding (2) 391.9 393.1 399.6 N/A N/A
Per common share data:
Net income (3, 5) $ 3.43 $ 3.13 $ 1.02 $ 1.28 $ 0.57
Net income-assuming dilution (4, 5) $ 3.42 $ 3.12 $ 1.02 $ 1.28 $ 0.57
Cash dividends $ 0.40 $ 0.30 $ 0.15 N/A N/A
Book value $ 23.28 $ 19.78 $ 16.22 N/A N/A
Book value excluding accumulated other changes
in equity from nonowner sources $ 20.93 $ 17.95 $ 15.50 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes amounts related to Aetna P&C from April 2, 1996, the date of the
acquisition.
(2) In April 1996, in conjunction with the acquisition of Aetna P&C, the
Company issued common stock through its IPO. See Note 3 of Notes to
consolidated financial statements.
(3) Net income per common share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period.
(4) Net income per common share-assuming dilution (diluted EPS) reflects the
effect of potentially dilutive securities, principally stock-based
incentive plans.
(5) For purposes of computing basic and diluted earnings per share for periods
prior to the IPO, the 328 million shares of common stock issued to TIGI in
April 1996 were assumed to be outstanding for all reported periods. See
Note 3 of Notes to consolidated financial statements.
1
<PAGE> 2
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Results of Operations reflect the consolidated results of operations of
Travelers Property Casualty Corp. (TAP) and its subsidiaries (the Company).
CONSOLIDATED OVERVIEW
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 (the BHCA Compliance Period).
The BHCA Compliance Period may be extended, at the discretion of the Federal
Reserve Board, for three additional one-year periods so long as the extension is
not deemed to be detrimental to the public interest.
It is not expected that the restrictions of the BHCA will impede the Company's
existing businesses in any significant respect, although the Company may be
limited in its ability to make certain acquisitions. At this time, the Company
believes that its compliance with applicable laws associated with the Merger
will not have a significant adverse effect on its financial condition or results
of operations.
There is pending federal legislation that would, if enacted, amend the BHCA to
authorize a bank holding company to own certain insurance underwriters. There is
no assurance that such legislation will be enacted. At the expiration of the
BHCA Compliance Period, the Company and Citigroup each will evaluate its
alternatives in order to comply with whatever laws are then applicable.
On April 2, 1996, TAP purchased from Aetna Services, Inc. (Aetna) all of the
outstanding capital stock of Travelers Casualty and Surety Company (formerly The
Aetna Casualty and Surety Company) and The Standard Fire Insurance Company
(collectively, Aetna P&C) for approximately $4.2 billion in cash. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the consolidated financial statements include the results of Aetna
P&C's operations only from the date of acquisition. For additional information
about the financing of the purchase price see Note 3 of Notes to Consolidated
Financial Statements.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
(in millions, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues ........................................... $10,451 $ 9,911 $ 8,197
- -------------------------------------------------------------------------------------------
Net income (1) ..................................... $ 1,343 $ 1,236 $ 391
Preferred dividends ................................ -- -- 4
- -------------------------------------------------------------------------------------------
Net income available to common stockholders ........ $ 1,343 $ 1,236 $ 387
===========================================================================================
Net income per share - assuming dilution ........... $ 3.42 $ 3.12 $ 1.02
===========================================================================================
Weighted average number of common shares outstanding
and common stock equivalents - assuming dilution ... 392.7 395.8 379.8
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Net income includes $93 million, $110 million and $12 million of realized
investment gains in 1998, 1997 and 1996, respectively.
2
<PAGE> 3
Net income was $1.343 billion in 1998, $1.236 billion in 1997 and $391 million
in 1996. Net income included $423 million of net charges related to the
acquisition and integration of Aetna P&C by the Company in 1996. The net
acquisition-related charges included, on an after-tax basis, $318 million in
reserve increases, net of reinsurance, primarily related to cumulative injury
claims other than asbestos, insurance products involving financial guarantees,
reserve strengthening, and assumed reinsurance, $55 million in an additional
asbestos liability pursuant to an existing settlement agreement with a customer
of Aetna P&C, $39 million in charges related to premium collection issues on
loss sensitive programs, specifically large deductible products, a $27 million
provision for uncollectibility of reinsurance recoverables of Aetna P&C
determined by applying the Company's normal guidelines for estimating
collectibility of such accounts, and $23 million in lease and severance costs of
The Travelers Indemnity Company (Travelers Indemnity) related to the
restructuring plan for the acquisition, partially offset by $39 million in
decreases in Personal Lines automobile reserves.
Excluding realized investment gains and the net acquisition-related charges,
operating income was $1.250 billion, $1.126 billion and $802 million in 1998,
1997 and 1996, respectively. The increase in 1998 from 1997 was primarily due to
higher net investment income, lower environmental and cumulative injury incurred
losses and expense reductions, partially offset by higher catastrophe and other
weather-related losses and the difficult pricing environment in Commercial
Lines. The increase in 1997 was due to higher net investment income, lower
catastrophe losses, favorable reserve development in personal auto lines and
expense reductions. The increase in 1997 was also due to the inclusion of the
results of operations of Aetna P&C for twelve months in 1997 and only nine
months in 1996.
Revenues of $10.451 billion in 1998 increased $540 million from 1997. Revenues
of $9.911 billion in 1997 increased $1.714 billion from 1996. The 1998 increase
was primarily attributable to growth in earned premiums, principally in Personal
Lines, and higher net investment income, partially offset by lower fee income
and lower realized investment gains. The 1997 increase was primarily
attributable to the inclusion of Aetna P&C for the entire year compared to only
nine months in 1996 and growth in Personal Lines earned premiums.
Commercial Lines earned premiums increased $217 million to $4.525 billion in
1998, reflecting lower ceded premiums in 1998 compared to 1997 as well as lower
negative premium adjustments related to retrospectively rated policies.
Commercial Lines earned premiums increased $613 million to $4.308 billion in
1997, primarily reflecting the post-acquisition results of operations for the
entire year compared to only nine months in 1996. The increases in Commercial
Lines earned premiums are net of continued decreases resulting from the
Company's selective underwriting and market conditions characterized by
difficult pricing and increased competition. Personal Lines earned premiums of
$3.271 billion in 1998 increased $354 million from 1997. Personal Lines earned
premiums of $2.917 billion in 1997 increased $594 million from $2.323 billion in
1996. These increases in earned premiums reflected growth in sales in target
markets served by independent agents and growth in affinity marketing, joint
marketing arrangements and TRAVELERS SECURE(R). The TRAVELERS SECURE(R) program
markets Personal Lines products through the independent agents of Primerica
Financial Services, a unit of Citigroup. The 1997 increase also reflects lower
ceded premiums due to a change in a reinsurance arrangement in January 1997 and
the post-acquisition results of operations for the entire year compared to only
nine months in 1996.
Net investment income was $2.100 billion in 1998, an increase of $49 million
from 1997, reflecting the higher level of invested assets in 1998, partially
offset by an increase in tax-exempt securities in 1998. Net investment income
was $2.051 billion in 1997, an increase of $395 million from 1996, reflecting
the higher level of invested assets in 1997.
Fee income was $306 million in 1998, a $59 million decrease from 1997. Fee
income was $365 million in 1997, a $27 million decrease from 1996. National
Accounts within Commercial Lines is the primary source of fee income due to its
service fee business. Fee income in both 1998 and 1997 was negatively impacted
by the depopulation of involuntary pools serviced by the Company as the loss
experience of workers' compensation improved and insureds moved to voluntary
markets and the Company's success in lowering workers' compensation losses of
service customers.
3
<PAGE> 4
Claims and expenses of $8.614 billion in 1998 increased $455 million from 1997.
This increase was primarily the result of higher catastrophe and other
weather-related losses and higher claims related to the growth in premiums in
Personal Lines, partially offset by a reduction in general and administrative
expenses. Claims and expenses of $8.159 billion in 1997 increased $449 million
from 1996. The increase was due to the post-acquisition results of operations
for the entire year compared to only nine months in 1996, partially offset by
acquisition-related expense reductions and lower catastrophe losses in 1997.
The Company's effective tax rate was 27%, 29% and 20% in 1998, 1997 and 1996,
respectively. These rates differed from the statutory tax rate in those years
primarily due to municipal bond interest not taxed for federal income tax
purposes. The 1998 effective tax rate was lower than 1997 due to a
proportionately larger amount of tax-exempt income versus pre-tax income in
1998. The 1997 effective tax rate was higher than 1996 due to a proportionately
smaller amount of tax-exempt income versus pre-tax income in 1997.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STATUTORY:
Loss and Loss Adjustment Expense (LAE) ratio............................... 73.6% 72.4% 85.5%
Underwriting expense ratio................................................. 28.6 29.9 31.3
Combined ratio before policyholder dividends............................... 102.2 102.3 116.8
Combined ratio............................................................. 102.7 103.5 117.2
- -----------------------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio......................................................... 73.5% 72.3% 83.6%
Underwriting expense ratio................................................. 29.1 29.6 33.2
Combined ratio before policyholder dividends............................... 102.6 101.9 116.8
Combined ratio............................................................. 103.1 102.6 117.4
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Beginning in 1997, for purposes of computing GAAP combined ratios, fee income is
allocated as a reduction of losses and loss adjustment expenses and other
underwriting expenses. Previously fee income was included with premiums for
purposes of computing GAAP combined ratios. The 1996 GAAP combined ratio has
been restated to conform to the current presentation.
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
In addition, certain 1996 purchase accounting adjustments recorded in connection
with the Aetna P&C acquisition resulted in a charge to statutory expenses.
The 1997 statutory and GAAP combined ratios include an adjustment in Commercial
Lines due to a change to conform the Aetna P&C method with the Travelers
Indemnity and its subsidiaries (Travelers P&C) method of recording certain net
written premiums, and an adjustment in Personal Lines associated with a change
in the quota share reinsurance arrangement. Excluding these adjustments, the
statutory and GAAP combined ratios before policyholder dividends for 1997 would
have been 102.5% and 102.7%, respectively. The decrease in the 1998 statutory
and GAAP combined ratios compared to the 1997 statutory and GAAP combined ratios
before policyholder dividends excluding these adjustments was due to continued
productivity improvements and expense reductions, partially offset by higher
catastrophe and other weather-related losses.
4
<PAGE> 5
The decrease in the 1997 statutory and GAAP combined ratios excluding the
adjustments noted above compared to 1996 was primarily attributable to charges
taken in 1996 related to the acquisition and integration of Aetna P&C. Excluding
these amounts, the statutory and GAAP combined ratios before policyholder
dividends for 1996 would have been 106.3% and 107.0%, respectively. The decrease
in the 1997 statutory and GAAP combined ratios excluding the adjustments noted
above compared to the 1996 statutory and GAAP combined ratios excluding
acquisition-related charges was due to lower catastrophe losses, favorable prior
year reserve development in personal auto lines and expense reductions,
partially offset by the inclusion in 1997 of Aetna P&C's results for the entire
year compared to only nine months in 1996. Aetna P&C historically has had a
higher underwriting expense ratio, partially offset by a lower loss and LAE
ratio, which reflected the mix of business including the favorable effect of the
lower loss and LAE ratio of the Bond Specialty business.
RESULTS OF OPERATIONS BY SEGMENT
<TABLE>
<CAPTION>
COMMERCIAL LINES
(in millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues................................................................ $ 6,699 $ 6,557 $ 5,497
Net income (1).......................................................... $ 1,018 $ 946 $ 197
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commercial Lines net income includes $76 million, $100 million and $17
million of realized investment gains in 1998, 1997 and 1996, respectively.
Net income was $1.018 billion in 1998, $946 million in 1997, and $197 million in
1996. Net income in 1996 included $453 million of after-tax charges related to
the acquisition of Aetna P&C. These acquisition-related charges included $318
million in reserve increases, net of reinsurance, principally for cumulative
injury other than asbestos, insurance products involving financial guarantees,
reserve strengthening and assumed reinsurance, a $55 million provision for an
additional asbestos liability related to an existing settlement agreement with a
customer of Aetna P&C, a $39 million charge related to premium collection issues
on loss sensitive programs, specifically large deductible products, a $22
million provision for uncollectibility of reinsurance recoverables of Aetna P&C
determined by applying the Company's normal guidelines for estimating
collectibility of such accounts, and $19 million in lease and severance costs
related to the restructuring plan for the acquisition.
Commercial Lines operating income, which excludes realized investment gains in
all years and the acquisition-related charges in 1996, was $942 million, $846
million and $633 million in 1998, 1997 and 1996, respectively. The 1998 increase
compared to 1997 was due to increased after-tax net investment income, continued
expense reductions and lower environmental and cumulative injury incurred
losses, partially offset by increased losses from catastrophes and other
weather-related events. The 1997 increase compared to 1996 was due to higher net
investment income, lower catastrophe losses, expense savings associated with the
acquisition and integration of Aetna P&C and the post-acquisition results of
operations for the entire year compared to only nine months in 1996. Operating
results also reflected market conditions characterized by difficult pricing and
increased competition. The impact of this trend in market conditions on 1998 and
1997 operating results was offset by the factors previously indicated as well as
a continued disciplined approach to underwriting and risk management.
Revenues of $6.699 billion in 1998 increased $142 million from 1997. Revenues of
$6.557 billion in 1997 increased $1.060 billion from 1996. The 1998 increase
reflected higher earned premiums and net investment income, partially offset by
declines in fee income and realized investment gains. The 1997 increase was
primarily attributed to the inclusion of Aetna P&C for the entire year compared
to only nine months in 1996.
5
<PAGE> 6
Commercial Lines net written premiums in 1998 totaled $4.614 billion, down $143
million from $4.757 billion in 1997, reflecting a $142 million adjustment in the
first quarter of 1997 to net written premiums due to the change to conform the
Aetna P&C method of recording certain net written premiums to the method
employed by Travelers P&C. Without this adjustment, net written premiums were
level with the prior year reflecting the highly competitive marketplace and the
Company's continued disciplined approach to underwriting and risk management.
Commercial Lines net written premiums totaled $4.757 billion in 1997, up $695
million from $4.062 billion in 1996 (excluding an adjustment associated with a
reinsurance transaction), reflecting the inclusion in 1997 of Aetna P&C for the
entire year compared to only nine months in 1996 and the $142 million adjustment
noted above. This increase was offset in part by the highly competitive
conditions in the marketplace and the Company's continued disciplined approach
to underwriting and risk management.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Commercial Lines net written premiums
totaled $4.757 billion in 1997, up $89 million from $4.668 billion in 1996. The
1997 increase was attributable to the change to conform the Aetna P&C method
with the Travelers P&C method of recording net written premiums, partially
offset by the highly competitive marketplace and the Company's disciplined
approach to underwriting and risk management.
Fee income was $306 million, $365 million and $392 million in 1998, 1997 and
1996, respectively. The decreases in fee income were the result of the
depopulation of involuntary pools serviced by the Company as the loss experience
of workers' compensation improved and insureds moved to voluntary markets and
the Company's continued success in lowering workers' compensation losses of
service customers.
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 $625
million in 1998 compared to $657 million in 1997. This decrease was primarily
due to a decrease in the Company's level of involuntary pool participation, the
result of pricing declines due to the highly competitive marketplace, and the
Company's continued disciplined approach to underwriting and risk management. On
a combined total basis including Aetna P&C (for periods prior to April 2, 1996
for comparative purposes only), National Accounts net written premiums of $657
million in 1997 decreased $195 million from 1996. The 1997 decrease was
primarily due to a decrease in the Company's level of involuntary pool
participation, the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management.
National Accounts new business and business retention ratio were virtually the
same in 1998 as they were in 1997. National Accounts experienced an increase in
claim service-only business as well as favorable results from continued product
development efforts, especially in workers' compensation managed care programs.
National Accounts new business in 1997 was significantly higher than in 1996
reflecting continued product development efforts, especially in workers'
compensation managed care programs. National Accounts business retention ratio
was also significantly higher in 1997 than in 1996, reflecting the Company's
continued focus on retaining profitable business.
6
<PAGE> 7
Commercial Accounts serves mid-size businesses for casualty products and both
large and mid-size businesses for property products through a network of
independent agents and brokers. Commercial Accounts net written premiums were
$1.800 billion in 1998 compared to $1.986 billion in 1997. This decrease
reflected a $127 million adjustment in the first quarter of 1997 to net written
premiums due to the change to conform the Aetna P&C method with the Travelers
P&C method of recording certain net written premiums. Excluding this adjustment,
net written premiums decreased $59 million reflecting pricing declines due to
the highly competitive marketplace and the Company's continued disciplined
approach to underwriting and risk management. On a combined total basis
including Aetna P&C (for periods prior to April 2, 1996 for comparative purposes
only), Commercial Accounts net written premiums of $1.986 billion in 1997 were
$261 million above 1996 premium levels. The increase in 1997 reflected a $127
million adjustment due to the change to conform the Aetna P&C method with the
Travelers P&C method of recording certain net written premiums and the continued
growth through programs designed to leverage underwriting experience in specific
industries, partially offset by the highly competitive marketplace and the
Company's continued disciplined approach to underwriting and risk management.
For 1998, new premium business in Commercial Accounts significantly declined
compared to 1997, reflecting the Company's focus on obtaining new accounts only
where it can maintain its selective underwriting policy. The Commercial Accounts
business retention ratio remained strong in 1998 and was virtually the same as
1997, reflecting the Company's focus on retaining profitable business. In 1997,
new business in Commercial Accounts significantly improved compared to 1996,
reflecting continued growth in programs designed to leverage underwriting
expertise in specific industries. The Commercial Accounts business retention
ratio in 1997 significantly improved compared to 1996. Commercial Accounts
continues to focus on the retention of existing profitable business while
maintaining its product pricing standards and its selective underwriting policy.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums of $1.494 billion in 1998 increased $62
million from $1.432 billion in 1997. The 1997 amount included a first quarter
increase of $15 million to net written premiums due to the change to conform the
Aetna P&C method with the Travelers P&C method of recording certain net written
premiums. Excluding this adjustment, the increase in Select Accounts net written
premiums reflected lower ceded premiums, partially offset by the highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management. On a combined total basis including Aetna P&C
(for periods prior to April 2, 1996 for comparative purposes only), Select
Accounts net written premiums of $1.432 billion for 1997 were $20 million higher
than 1996. This increase reflected a $15 million adjustment due to the change to
conform the Aetna P&C method with the Travelers P&C method of recording certain
net written premiums and the continued benefit from the broader industry and
product line expertise of the combined company, partially offset by the highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management.
New premium business in Select Accounts was moderately lower in 1998 compared to
1997 reflecting the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management. Select Accounts
business retention ratio remained strong in 1998 and was virtually the same as
1997. New premium business in Select Accounts was moderately higher in 1997 than
in 1996 reflecting an increase due to the acquisition of Aetna P&C, partially
offset by a decrease due to the competitive marketplace. The Select Accounts
business retention ratio remained strong in 1997 and was moderately higher than
in 1996, reflecting the Company's focus on retaining profitable business.
Specialty Accounts markets products to national, midsize and small customers and
distributes them through both wholesale brokers and retail agents and brokers
throughout the United States. Specialty Accounts net written premiums were $695
million in 1998 as compared to $682 million in 1997. This increase reflects
strong production in excess and surplus lines, partially offset by a highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management. On a combined total basis including Aetna P&C
(for periods prior to April 2, 1996 for comparative purposes only), Specialty
Accounts net written premiums of $682 million in 1997 were $3 million higher
than 1996. The 1997 increase compared to 1996 was due to increased writings of
its excess and surplus lines business, partially offset by lower directors' and
officers' liability insurance writings due to the termination of an exclusive
arrangement with a managing general agent.
7
<PAGE> 8
Commercial Lines claims and expenses of $5.327 billion in 1998 increased $94
million from 1997, and decreased $59 million in 1997 compared to 1996. The 1998
increase was primarily attributable to higher catastrophe and other
weather-related losses, partially offset by lower environmental and cumulative
injury incurred losses and continued expense reductions. The 1997 decrease was
primarily attributable to the net acquisition-related charges of $697 million
associated with the acquisition of Aetna P&C in 1996, expense savings in 1997
and cost efficiencies in operations and in competitive workers' compensation
managed care delivery programs, mostly offset by the inclusion in 1997 of Aetna
P&C for the entire year compared to only nine months in 1996.
Catastrophe losses, net of tax and reinsurance, were $25 million, $5 million and
$31 million in 1998, 1997 and 1996, respectively. The 1998 catastrophe losses
were primarily due to Hurricane Georges in the third quarter and tornadoes in
Nashville, Tennessee in the second quarter. The 1997 catastrophe losses were
primarily due to tornadoes in the Midwest in the first quarter. Catastrophe
losses in 1996 were primarily due to Hurricane Fran and December storms on the
West Coast.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STATUTORY:
Loss and LAE ratio................................................... 78.5% 78.4% 96.2%
Underwriting expense ratio........................................... 29.7 30.6 32.7
Combined ratio before policyholder dividends......................... 108.2 109.0 128.9
Combined ratio....................................................... 109.1 111.0 129.6
- ----------------------------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................................... 78.4% 78.3% 92.8%
Underwriting expense ratio........................................... 31.1 30.4 36.1
Combined ratio before policyholder dividends......................... 109.5 108.7 128.9
Combined ratio....................................................... 110.4 109.9 129.9
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Beginning in 1997, for purposes of computing GAAP combined ratios, fee income is
allocated as a reduction of losses and loss adjustment expenses and other
underwriting expenses. Previously fee income was included with premiums for
purposes of computing GAAP combined ratios. The 1996 GAAP combined ratio has
been restated to conform to the current presentation.
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only. In addition, certain 1996 purchase accounting
adjustments recorded in connection with the Aetna P&C acquisition resulted in a
charge to statutory expenses.
The 1997 statutory and GAAP combined ratios for Commercial Lines include an
adjustment due to a change to conform the Aetna P&C method with the Travelers
P&C method of recording certain net written premiums. Excluding this adjustment,
the statutory and GAAP combined ratios before policyholder dividends for 1997
would have been 109.5% and 109.6%, respectively. The decrease in the 1998
statutory and GAAP combined ratios before policyholder dividends compared to the
1997 statutory and GAAP combined ratios before policyholder dividends excluding
this adjustment was due to continued expense reductions and lower environmental
and cumulative injury incurred losses, partially offset by higher catastrophe
and other weather-related losses and lower fee income.
8
<PAGE> 9
The decrease in the 1997 statutory and GAAP combined ratios, excluding the
adjustment to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums, compared to 1996 were primarily
attributable to the 1996 charges related to the acquisition and integration of
Aetna P&C. Excluding these amounts, the statutory and GAAP combined ratios
before policyholder dividends for 1996 would have been 110.0% and 111.3%,
respectively. The decrease in the 1997 statutory and GAAP combined ratios,
excluding the adjustment to conform the Aetna P&C method with the Travelers P&C
method of recording certain net written premiums, compared to the 1996 statutory
and GAAP combined ratios, excluding acquisition-related charges, was due to
lower catastrophe losses and reduced expenses, partially offset by the
post-acquisition results of operations for the entire year compared to only nine
months in 1996. Aetna P&C has historically had a higher underwriting expense
ratio, partially offset by a lower loss ratio, which reflected the mix of
business including the favorable effect of the lower loss ratio of the Bond
Specialty business.
<TABLE>
<CAPTION>
PERSONAL LINES
(in millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues................................................................ $ 3,743 $ 3,341 $ 2,685
Net income (1).......................................................... $ 437 $ 413 $ 282
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Personal Lines net income includes $17 million and $10 million of realized
investment gains in 1998 and 1997, respectively, and $5 million of realized
investment losses in 1996.
Net income of $437 million in 1998 increased $24 million from $413 million in
1997, which increased $131 million from $282 million in 1996. Net income in 1996
included $30 million of net acquisition-related benefits.
Personal Lines operating income, which excludes realized investment gains and
losses in all years and the net acquisition-related benefits in 1996, was $420
million, $403 million and $257 million in 1998, 1997 and 1996, respectively. The
1998 increase was primarily due to higher net investment income and higher
profit from increased production, partially offset by higher catastrophe losses
and a decrease in favorable prior year reserve development. The 1997 increase
primarily reflected the inclusion in 1997 of Aetna P&C for the entire year
compared to only nine months in 1996, lower catastrophe losses, an increase in
favorable prior year reserve development of approximately $40 million primarily
in the automobile bodily injury line and production-related growth, partially
offset by investments in service centers and market expansions.
Revenues were $3.743 billion in 1998 compared to $3.341 billion in 1997 and
$2.685 billion in 1996. Both the 1998 and 1997 increases, compared to 1997 and
1996, respectively, reflected growth in premiums in all distribution channels
and higher net investment income. In addition, the 1997 increase compared to
1996 was partially attributable to lower ceded premiums due to a change in a
reinsurance arrangement in January 1997. Personal Lines had approximately 5.1
million, 4.6 million and 4.4 million policies in force at December 31, 1998,
1997 and 1996, respectively.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Personal Lines net written premiums in 1998
totaled $3.490 billion compared to $3.074 billion in 1997 and $2.675 billion in
1996. The increases in 1998 and 1997 primarily reflected growth in sales in
target markets served by independent agents and growth in affinity marketing,
joint marketing arrangements and TRAVELERS SECURE(R). In addition, the 1997
increase compared to 1996 was partially attributable to lower ceded premiums due
to a change in a reinsurance arrangement in January 1997. The growth in premiums
from the independent agent distribution channel has been primarily due to
pursuing transfers of books of business to the Company within certain
independent insurance agencies. Frequently, Personal Lines will pay these
agencies an incentive to cover their expenses related to the transfer and
include a competitive inducement to move the book. Many independent agencies are
consolidating their business to a smaller number of insurance carriers resulting
in transfers of business to their preferred carriers.
9
<PAGE> 10
Personal Lines claims and expenses of $3.104 billion in 1998 increased $380
million from 1997. This increase was primarily attributable to higher
production-related claims and expenses associated with the growth in premiums
and higher catastrophe losses. Claims and expenses of $2.724 billion in 1997
increased $457 million from 1996. This increase was primarily attributable to
higher production, partially offset by lower catastrophe losses and favorable
prior year reserve development in the automobile bodily injury line in 1997. The
increase also reflects the post-acquisition results of operations for the entire
year compared to only nine months in 1996.
Included in 1998 are after-tax catastrophe losses, net of reinsurance, of $44
million compared to $10 million in 1997 and $58 million in 1996. Catastrophe
losses in 1998 were primarily due to Hurricanes Bonnie and Georges, severe first
quarter winter storms and second and third quarter hail and wind storms.
Catastrophe losses in 1996 were primarily due to Hurricane Fran, severe first
quarter winter storms and second quarter hail and wind storms.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STATUTORY:
Loss and LAE ratio.................................................... 66.7% 63.5% 68.7%
Underwriting expense ratio............................................ 27.2 28.7 28.9
Combined ratio........................................................ 93.9 92.2 97.6
- ----------------------------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio.................................................... 66.7% 63.5% 68.8%
Underwriting expense ratio............................................ 26.5 28.3 28.3
Combined ratio........................................................ 93.2 91.8 97.1
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
GAAP combined ratios for Personal Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only. In addition, certain 1996 purchase accounting
adjustments recorded in connection with the Aetna P&C acquisition resulted in a
charge to statutory expenses.
The 1997 statutory and GAAP combined ratios for Personal Lines include an
adjustment associated with a change in the quota share reinsurance arrangement.
Excluding this adjustment, the 1997 statutory and GAAP combined ratios would
have been 92.1% and 92.5%, respectively. The increase in the 1998 statutory and
GAAP combined ratios compared to the 1997 statutory and GAAP combined ratios
excluding this adjustment was primarily due to higher catastrophe and other
weather-related losses and a decrease in favorable prior year reserve
development, partially offset by a decrease in the underwriting expense ratio
due to a lower commission expense ratio associated with the new distribution
channels. The 1996 statutory and GAAP combined ratios for Personal Lines
included a benefit resulting from the Company's review of reserves associated
with the acquisition of Aetna P&C. Excluding this item, the 1996 statutory and
GAAP combined ratios were 100.1% and 99.7%, respectively. The decrease in the
1997 statutory and GAAP combined ratios, excluding the adjustment associated
with a change in the quota share reinsurance arrangement, compared to the 1996
statutory and GAAP combined ratios, excluding the benefit associated with the
acquisition of Aetna P&C, was due to lower catastrophe losses and favorable
prior year reserve development, primarily in the automobile bodily injury line.
<TABLE>
<CAPTION>
OTHER REVENUES AND NET LOSS
(in millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues................................................................ $ 9 $ 13 $ 15
Net loss................................................................ $ (112) $ (123) $ (88)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The primary component of net loss for 1998, 1997 and 1996 was after-tax interest
expense of $105 million, $106 million and $77 million, respectively, reflecting
financing costs associated with the acquisition of Aetna P&C.
10
<PAGE> 11
ENVIRONMENTAL CLAIMS
As a result of various state and federal regulatory efforts aimed at
environmental remediation, the insurance industry has been, and continues to be,
involved in extensive litigation involving policy coverage and liability issues.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") was first enacted in 1980, and significantly expanded in 1984. CERCLA
enables private parties and the federal and state governments to take action
with respect to releases and threatened releases of hazardous substances and to
recover their response costs from certain liable parties or such parties may be
ordered to undertake remedial action directly. Liability under CERCLA may be
joint and several with other responsible persons. In addition to the regulatory
pressures, the Company believes that certain court decisions have expanded
insurance coverage beyond the original intent of the insurers and insureds,
frequently involving policies that were issued prior to the mid-1970s. The
results of court decisions affecting the industry's coverage positions continue
to be inconsistent. Accordingly, the ultimate responsibility and liability for
environmental remediation costs remain uncertain.
The Company continues to receive claims alleging liability exposures arising out
of insureds' alleged disposition of toxic substances. These claims when
submitted rarely indicate the monetary amount being sought by the claimant from
the insured and the Company does not keep track of the monetary amount being
sought in those few claims which indicated such a monetary amount.
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At December 31, 1998, approximately 19% of
the net environmental loss reserve (i.e., approximately $155 million) consists
of case reserve for resolved claims. The balance, approximately 81% of the net
aggregate reserve (i.e., approximately $677 million), is carried in a bulk
reserve and includes incurred but not reported environmental claims for which
the Company has not received any specific claims.
The Company's reserving methodology is preferable to one based on "identified
claims" since the resolution of environmental exposures by the Company generally
occurs on an insured-by-insured basis as opposed to a claim-by-claim basis. The
nature of the resolution is through coverage litigation, which often pertains to
more than one claim, as well as through a settlement with an insured. Generally,
the settlement between the Company and the insured extinguishes any obligation
the Company may have under any policy issued to the insured for past, present
and future environmental liabilities. This form of settlement is commonly
referred to as a "buy-back" of policies for future environmental liability.
Additional provisions of these agreements include appropriate indemnities and
hold harmless provisions to protect the Company. The Company's general purpose
in executing such agreements is to reduce its potential environmental exposure
and eliminate both the risks presented by coverage litigation with the insured
and the cost of such litigation.
The reserving methodology includes an analysis by the Company of the exposure
presented by each insured and the anticipated cost of resolution, if any, for
each insured. This analysis is completed by the Company on a quarterly basis. In
the course of its analysis, an assessment of the probable liability, available
coverage, judicial interpretations and historical value of similar exposures is
considered by the Company. In addition, due consideration is given to the many
variables presented, such as the nature of the alleged activities of the insured
at each site; the allegations of environmental damage at each site; the number
of sites; the total number of potentially responsible parties at each site; the
nature of environmental harm and the corresponding remedy at a site; the nature
of government enforcement activities at each site; the ownership and general use
of each site; the overall nature of the insurance relationship between the
Company and the insured; the identification of other insurers; the potential
coverage available, if any, including the number of years of coverage, if any;
and the applicable law in each jurisdiction. Analysis of these and other
factors, including the potential for future claims, results in the establishment
of the bulk reserve.
11
<PAGE> 12
The duration of the Company's investigation and review of such claims and the
extent of time necessary to determine an appropriate estimate, if any, of the
value of the claim to the Company, vary significantly and are dependent upon a
number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and the
Company to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, the Company cannot provide a meaningful average of the
duration of an environmental claim. However, based upon the Company's experience
in resolving such claims, the duration may vary from months to several years.
The property and casualty insurance industry does not have a standard method of
calculating claim activity for environmental losses. Generally for Superfund
remediation type environmental claims, the Company establishes a claim file for
each insured on a per site, per claimant basis. If there is more than one
claimant such as a federal and a state agency, this method will result in two
claims being set up for a policyholder at that one site. The Company adheres to
this method of calculating claim activity on all environmental-related claims,
whether such claims are tendered on primary, excess or umbrella policies. Since
the implementation of the claim system conversion in 1997, the Company's method
of establishing claims in the foregoing manner now applies to claims tendered
under the Travelers P&C and Aetna P&C policies.
In addition, the Company establishes claim files for environmental claims
brought by individual claimants who allege injury or damage as a result of the
discharge of wastes or pollutants allegedly by the policyholder. As it pertains
to such claims tendered on policies issued by Travelers P&C, the Company
establishes a claim file on a per claim, per insured, per site basis. For
example, if one hundred claimants file a lawsuit against five policyholders
alleging bodily injury and property damage as a result of the discharge of
wastes or pollutants, one thousand claims (five hundred for the bodily injury
claims and five hundred for the property damage claims) would be established.
As it pertains to environmental claims brought by individual claimants and
tendered on Aetna P&C policies, the Company establishes claim files on a per
insured, per site basis due to current claim system limitations. For example, if
one hundred claimants file a lawsuit against five policyholders alleging bodily
injury and property damage as a result of the discharge of wastes or pollutants,
five claims would be established for all the bodily injury claims and five
claims would be established for all of the property damage claims.
As of December 31, 1998, calculated as described above, the Company had
approximately 43,400 pending environmental-related claims tendered by 1,185
active policyholders. Of the total pending environmental-related claims, 31,100
claims relate to Travelers P&C policies tendered by 470 policyholders and 12,300
claims relate to Aetna P&C policies tendered by 810 policyholders. Approximately
95 of these Aetna P&C policyholders are also included in the 470 Travelers P&C
policyholders' count. The pending environmental-related claims represent federal
or state EPA-type claims as well as plaintiffs' claims alleging bodily injury
and property damage due to the discharge of waste or pollutants allegedly by the
policyholder.
12
<PAGE> 13
The following table displays activity for environmental losses and loss expenses
and reserves for 1998, 1997 and 1996.
<TABLE>
<CAPTION>
ENVIRONMENTAL LOSSES
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning reserves:
Direct............................................................ $1,193 $1,369 $ 454
Ceded............................................................. (74) (127) (50)
- --------------------------------------------------------------------------------------------------------------
Net............................................................. 1,119 1,242 404
Acquisition of Aetna P&C:
Direct............................................................ - - 968
Ceded............................................................. - - (39)
Incurred losses and loss expenses:
Direct............................................................ 123 79 114
Ceded............................................................. (73) (14) (52)
Losses paid:
Direct ........................................................... 388 271 167
Ceded............................................................. (51) (67) (14)
Other:
Direct............................................................ - 16 -
Ceded............................................................. - - -
- --------------------------------------------------------------------------------------------------------------
Ending reserves:
Direct............................................................ 928 1,193 1,369
Ceded............................................................. (96) (74) (127)
- --------------------------------------------------------------------------------------------------------------
Net............................................................. $ 832 $1,119 $1,242
==============================================================================================================
</TABLE>
In the above table, "Other" represents reallocation of certain general liability
reserves to environmental reserves in 1997.
As indicated by the preceding table, the Company experienced in 1998 an increase
in paid activity for environmental losses over the previous two years. As
anticipated, this paid activity resulted in a significant reduction in the
number of coverage litigation disputes pending at year end 1998 as well as a
further reduction in the number of policyholders with active environmental
claims.
As of December 31, 1998, the number of policyholders with pending coverage
litigation disputes pertaining to environmental claims was 404, approximately
24% less than the number pending as of December 31, 1997. The Company generally
has been successful in resolving its coverage litigation disputes and continues
to reduce its potential exposure through favorable settlements with certain
insureds. These settlement agreements with certain insureds are based on the
variables presented in each piece of coverage litigation. Generally the
settlement dollars paid in disputed coverage claims are a percentage of the
total coverage sought by such insureds. Based upon the Company's reserving
methodology and the experience of its historical resolution of environmental
exposures, it believes that the environmental reserve position is appropriate.
As of December 31, 1998, the Company, for approximately $1.44 billion, has
resolved the environmental liabilities presented by 4,475 of the 5,660
policyholders who have tendered environmental claims to the Company. This
resolution comprises 79% of the policyholders who have tendered such claims. The
Company has reserves of approximately $572 million included in its bulk reserve
relating to the remaining 1,185 policyholders (21% of the total) with unresolved
environmental claims, as well as for any other policyholder that may tender an
environmental claim in the future.
13
<PAGE> 14
ASBESTOS CLAIMS
In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. The Company continues to receive
asbestos claims alleging insureds' liability from claimants' asbestos-related
injuries. These claims, when submitted, rarely indicate the monetary amount
being sought by the claimant from the insured and the Company does not keep
track of the monetary amount being sought in those few claims that indicated
such a monetary amount. Originally the cases involved mainly plant workers and
traditional asbestos manufacturers and distributors. However, in the mid-1980s,
a new group of plaintiffs, whose exposure to asbestos was less direct and whose
injuries were often speculative, began to file lawsuits in increasing numbers
against the traditional defendants as well as peripheral defendants who had
produced products that may have contained small amounts of some form of
encapsulated asbestos. These claims continue to arise and on an individual basis
generally involve smaller companies with smaller limits of potential coverage.
Also, there has emerged a group of non-product claims by plaintiffs, mostly
independent labor union workers, mainly against companies, alleging exposure to
asbestos while working at these companies' premises. The Company continues to
receive this type of asbestos claim.
In summary, various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as premises
owners, are tendering asbestos-related claims to the industry. Because each
insured presents different liability and coverage issues, the Company evaluates
those issues on an insured-by-insured basis.
The Company's evaluations have not resulted in any meaningful data from which an
average asbestos defense or indemnity payment may be determined. The varying
defense and indemnity payments made by the Company on behalf of its insureds
have also precluded the Company from deriving any meaningful data by which it
can predict whether its defense and indemnity payments for asbestos claims (on
average or in the aggregate) will remain the same or change in the future. Based
upon the Company's experience with asbestos claims, the duration period of an
asbestos claim from the date of submission to resolution is approximately two
years.
At December 31, 1998, approximately 21% of the net aggregate reserve (i.e.,
approximately $210 million) is for pending asbestos claims. The balance,
approximately 79% (i.e., approximately $776 million) of the net asbestos
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
14
<PAGE> 15
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 1998,
1997 and 1996.
<TABLE>
<CAPTION>
ASBESTOS LOSSES
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning reserves:
Direct............................................................. $1,363 $1,443 $ 695
Ceded.............................................................. (249) (370) (293)
- --------------------------------------------------------------------------------------------------------------
Net.............................................................. 1,114 1,073 402
Acquisition of Aetna P&C:
Direct............................................................. - - 801
Ceded.............................................................. - - (121)
Incurred losses and loss expenses:
Direct............................................................. 135 87 120
Ceded.............................................................. (69) (18) (35)
Losses paid:
Direct ............................................................ 246 174 173
Ceded.............................................................. (52) (140) (79)
Other:
Direct............................................................. - 7 -
Ceded.............................................................. - (1) -
- --------------------------------------------------------------------------------------------------------------
Ending reserves:
Direct............................................................. 1,252 1,363 1,443
Ceded.............................................................. (266) (249) (370)
- --------------------------------------------------------------------------------------------------------------
Net.............................................................. $ 986 $1,114 $1,073
==============================================================================================================
</TABLE>
In the above table, "Other" represents reallocation of certain reserves to
asbestos reserves in 1997.
In 1997, the Company reached an agreement to settle the arbitration with
underwriters at Lloyd's of London (Lloyd's) and certain London companies in New
York State to enforce reinsurance contracts with respect to recoveries for
certain asbestos claims. The dispute involved the ability of the Company to
aggregate asbestos claims under a market agreement between Lloyd's and the
Company or under the applicable reinsurance treaties. This agreement had no
impact on earnings.
UNCERTAINTY REGARDING ADEQUACY OF ENVIRONMENTAL AND ASBESTOS RESERVES
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as previously discussed.
15
<PAGE> 16
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance; and applicable coverage defenses, if any. Once the gross ultimate
exposure for indemnity and allocated claim adjustment expense is determined for
a policyholder by policy year, a ceded projection is calculated based on any
applicable facultative and treaty reinsurance, and past ceded experience. In
addition, a similar review is conducted for asbestos property damage claims.
However, due to the relatively minor claim volume, these reserves have remained
relatively unchanged.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1998 are the Company's best
estimate of ultimate claims and claim adjustment expenses based upon known facts
and current law. However, the conditions surrounding the final resolution of
these claims continue to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations 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.
Due to claimants' allegations of long-term bodily injury in CIOTA claims,
numerous complex issues regarding such claims are presented. The claimants'
theories of liability must be evaluated, evidence pertaining to a causal link
between injury and exposure to a substance must be reviewed, the potential role
of other causes of injury must be analyzed, the liability of other defendants
must be explored, an assessment of a claimant's damages must be made and the law
of the jurisdiction must be applied. In addition, the Company must review the
number of policies issued by the Company to the insured and whether such
policies are triggered by the allegations, the terms and limits of liability of
such policies, the obligations of other insurers to respond to the claim, and
the applicable law in each jurisdiction.
To the extent disputes exist between the Company and a policyholder regarding
the coverage available for CIOTA claims, the Company resolves the disputes,
where feasible, through settlements with the policyholder or through coverage
litigation. Generally, the terms of a settlement agreement set forth the nature
of the Company's participation in resolving CIOTA claims, the scope of coverage
to be provided by the Company and contain the appropriate indemnities and hold
harmless provisions to protect the Company. These settlements generally
eliminate uncertainties for the Company regarding the risks extinguished,
including the risk that losses would be greater than anticipated due to evolving
theories of tort liability or unfavorable coverage determinations. The Company's
approach also has the effect of determining losses at a date earlier than would
have occurred in the absence of such settlement agreements. On the other hand,
in cases where future developments are favorable to insurers, this approach
could have the effect of resolving claims for amounts in excess of those that
would ultimately have been paid had the claims not been settled in this manner.
No inference should be drawn that because of the Company's method of dealing
with CIOTA claims, its reserves for such claims are more conservatively stated
than those of other insurers.
16
<PAGE> 17
Prior to the acquisition, Aetna P&C did not distinguish CIOTA from other general
liability claims or treat CIOTA claims as a special class of claims. In
addition, there were substantial differences in claim approach and resolution
between the Company and Aetna P&C regarding CIOTA claims. During the second
quarter of 1996, the Company completed its review of Aetna P&C's exposure to
CIOTA claims in order to determine an appropriate level of reserves using the
Company's approach as described above. Based on the results of that review, the
Company's general liability insurance reserves were increased by $360 million,
net of reinsurance ($234 million after tax).
At December 31, 1998, approximately 17% of the net aggregate reserve (i.e.,
approximately $163 million) is for pending CIOTA claims. The balance,
approximately 83% (i.e., approximately $791 million) of the net CIOTA 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 1998, 1997
and 1996.
<TABLE>
<CAPTION>
CIOTA LOSSES
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning reserves:
Direct............................................................. $1,520 $1,560 $ 374
Ceded.............................................................. (432) (446) -
- --------------------------------------------------------------------------------------------------------------
Net.............................................................. 1,088 1,114 374
Acquisition of Aetna P&C:
Direct............................................................. - - 709
Ceded.............................................................. - - (293)
Incurred losses and loss expenses:
Direct............................................................. (31) 32 565
Ceded.............................................................. 29 (6) (155)
Losses paid:
Direct ............................................................ 143 72 88
Ceded.............................................................. (11) (20) (2)
- --------------------------------------------------------------------------------------------------------------
Ending reserves:
Direct............................................................. 1,346 1,520 1,560
Ceded.............................................................. (392) (432) (446)
- --------------------------------------------------------------------------------------------------------------
Net.............................................................. $ 954 $1,088 $1,114
==============================================================================================================
</TABLE>
INVESTMENT PORTFOLIO
At December 31, 1998, the carrying value of the Company's investment portfolio
was $31.9 billion, representing 62% of total assets of $51.3 billion. The
average yield (excluding realized and unrealized investment gains) was 7.4%,
7.4% and 7.0% for the years ended December 31, 1998, 1997 and 1996,
respectively. The after-tax average yield (excluding realized and unrealized
investment gains) was 5.2%, 5.0% and 4.9% for the years ended December 31, 1998,
1997 and 1996, respectively. Because the primary purpose of the investment
portfolio is to fund future claims payments, the Company employs a conservative
investment philosophy. The Company's fixed maturity portfolio at December 31,
1998 totaled $28.0 billion, comprised of $25.9 billion of publicly traded fixed
maturities and $2.1 billion of private fixed maturities. The weighted average
quality ratings of the Company's publicly traded fixed maturity portfolio and
private fixed maturity portfolio at December 31, 1998 were Aa2 and A3,
respectively. Included in the fixed maturity portfolio at such date was
approximately $1.2 billion of below investment grade securities. The average
duration of the fixed maturity portfolio, including short-term investments, was
5.4 years at such date.
17
<PAGE> 18
The following table sets forth the Company's combined fixed maturity investment
portfolio classified by Moody's Investor's Service Inc. ratings as of December
31, 1998:
<TABLE>
<CAPTION>
PERCENT OF
(in millions) CARRYING VALUE TOTAL CARRYING VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
QUALITY RATING:
Aaa..................................................................... $ 13,220 47.2%
Aa...................................................................... 5,508 19.7
A....................................................................... 4,926 17.6
Baa..................................................................... 3,161 11.3
- --------------------------------------------------------------------------------------------------------------------------
Total investment grade.................................................. 26,815 95.8
Non-investment grade.................................................... 1,162 4.2
- --------------------------------------------------------------------------------------------------------------------------
Total fixed maturity investments........................................... $ 27,977 100.0%
==========================================================================================================================
</TABLE>
The Company makes investments in collateralized mortgage obligations (CMOs).
CMOs typically have high credit quality, offer good liquidity, and provide a
significant advantage in yield and total return compared to U.S. Treasury
securities. The Company's investment strategy is to purchase CMO tranches which
are protected against prepayment risk, including planned amortization class
tranches. Prepayment protected tranches are preferred because they provide
stable cash flows in a variety of scenarios. The Company does invest in other
types of CMO tranches if a careful assessment indicates a favorable risk/return
tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 1998, the Company held CMOs with a market value of $2.3 billion.
Approximately 69% of CMO holdings were fully collateralized by GNMA, FNMA or
FHLMC securities at such date, and the balance were fully collateralized by
portfolios of individual mortgage loans. In addition, the Company held $2.1
billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
December 31, 1998. Virtually all of these securities are rated Aaa.
DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 1998.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.
The carrying value of the Company's investment portfolio as of December 31, 1998
and 1997 was $31.9 billion and $31.0 billion, respectively, of which 88% was
invested in fixed maturity securities at both dates. The primary market risk to
the investment portfolio is interest rate risk associated with investments in
fixed maturity securities. The Company's exposure to equity price risk and
foreign exchange risk is not significant. The Company has no direct commodity
risk.
For fixed maturity securities, short-term liquidity needs and the potential
liquidity needs of the business are key factors in managing the portfolio. The
portfolio duration relative to the liabilities' duration is primarily managed
through cash market transactions. For additional information regarding the
Company's objectives and strategies pertaining to the investment portfolio, see
"Investment Portfolio" above.
18
<PAGE> 19
For the Company's investment portfolio, there were no significant changes in the
Company's primary market risk exposures or in how those exposures are managed
compared to the year ended December 31, 1997. The Company does not currently
anticipate significant changes in its primary market risk exposures or in how
those exposures are managed in future reporting periods based upon what is known
or expected to be in effect in future reporting periods.
The primary market risk for all of the Company's long-term debt and mandatorily
redeemable securities of subsidiary trusts (trust securities) is interest rate
risk at the time of refinancing. All of the Company's fixed rate debt is
non-redeemable and the fixed rate trust securities are not redeemable until
April 30, 2001 at the earliest. The Company will continue to monitor the
interest rate environment and to evaluate refinancing opportunities as the
maturity/redemption date approaches. For additional information regarding the
Company's long-term debt and trust securities see Notes 8 and 10 of Notes to
Consolidated Financial Statements and "Liquidity and Capital Resources" below.
Sensitivity Analysis
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near-term" means a period of time going forward up to one year from the
date of the consolidated financial statements. Actual results may differ from
the hypothetical change in market rates assumed in this disclosure, especially
since this sensitivity analysis does not reflect the results of any actions that
would be taken by the Company to mitigate such hypothetical losses in fair
value.
In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, interest-bearing non-redeemable preferred stocks,
mortgage loans, short-term securities, cash, investment income accrued,
commercial paper, long-term debt, fixed rate trust securities and derivative
financial instruments. The primary market risk to the Company's market sensitive
instruments is interest rate risk. The sensitivity analysis model uses a 100
basis point change in interest rates to measure the hypothetical change in fair
value of financial instruments included in the model.
For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and interest
rate reset features. Duration on tax exempt securities is adjusted for the fact
that the yield on such securities is less sensitive to changes in interest rates
compared to Treasury securities. Invested asset portfolio durations are
calculated on a market value weighted basis, including accrued investment
income, using holdings as of December 31, 1998 and 1997.
For long-term debt and fixed rate trust securities, the change in fair value is
determined by calculating hypothetical December 31, 1998 and 1997 ending prices
based on yields adjusted to reflect a 100 basis point change, comparing such
hypothetical ending prices to actual ending prices, and multiplying the
difference by the par or securities outstanding.
The sensitivity analysis model used by the Company produces a loss in fair value
of market sensitive instruments of $1.4 billion and $1.3 billion based on a 100
basis point increase in interest rates as of December 31, 1998 and 1997,
respectively. This loss value only reflects the impact of an interest rate
increase on the fair value of the Company's financial instruments, which
constitute approximately 60% of total assets and approximately 5% of total
liabilities as of December 31, 1998 and approximately 59% of total assets and
approximately 5% of total liabilities as of December 31, 1997. As a result, the
loss value excludes a significant portion of the Company's consolidated balance
sheet which would materially mitigate the impact of the loss in fair value
associated with a 100 basis point increase in interest rates.
19
<PAGE> 20
For example, certain non-financial instruments, primarily insurance accounts for
which the fixed maturity portfolio's primary purpose is to fund future claims
payments, are not reflected in the development of the above loss value. These
non-financial instruments include premium balances receivable, reinsurance
recoverables, claims and claim adjustment expense reserves and unearned premium
reserves. The Company's sensitivity model also calculates a potential loss in
fair value with the inclusion of these non-financial instruments. For
non-financial instruments, changes in fair value are determined by calculating
the present value of the estimated cash flows associated with such instruments
using risk-free rates as of December 31, 1998 and 1997, calculating the
resulting duration, then using that duration to determine the change in value
for a 100 basis point change.
Based on the sensitivity analysis model used by the Company, the loss in fair
value of market sensitive instruments, including these non-financial
instruments, as a result of a 100 basis point increase in interest rates as of
December 31, 1998 and 1997 is not material.
OUTLOOK
A variety of factors continue to affect the property and casualty insurance
market and the Company's core business outlook, including the competitive
pressures affecting pricing and profitability, inflation in the cost of medical
care and litigation.
Commercial Lines
Commercial Lines operating results for 1998 reflected the negative impact of
pricing declines in all markets. This trend in market conditions, characterized
by difficult pricing and increased competition, continued from prior years.
In National Accounts, where programs include risk transfer and risk service,
such as claims settlement, loss control and risk management services, and are
generally offered in connection with a large deductible or self-insured program,
or a guaranteed cost or retrospectively rated insurance policy, pricing declines
have continued. This business continues to reflect the negative impact of price
declines as evidenced by the decrease in premium and fee levels and, more
importantly, in the narrowing of profit margins earned on this business.
Additionally, there has been an increasing trend in this marketplace for
guaranteed cost products at what the Company believes are inadequate price
levels.
For Commercial Accounts and Select Accounts, the highly competitive marketplace
and soft underwriting cycle continue to pressure the pricing of guaranteed cost
products. Premiums on this business continue to reflect price declines, and have
not kept pace with loss cost inflation in recent years. The impact of this
negative trend in market conditions and resultant price declines has been
partially offset by a continued disciplined approach to underwriting and risk
management by the Company. The Company's focus is to retain existing profitable
business and obtain new accounts only where it can maintain its selective
underwriting policy. The Company continues to adhere to strict guidelines to
maintain high quality underwriting and to focus on its core product lines and
markets, with particular emphasis on both product and industry specialization.
Specialty Accounts also operates within a highly competitive marketplace
characterized by pressure on both price and terms. The Company's focus in this
market is to sustain its emphasis on strict adherence to underwriting standards
and to increase its efforts to cross-sell its expanding array of specialty
products to existing customers of National Accounts, Commercial Accounts and
Select Accounts where it believes it has the greatest sales and profit
opportunities.
The combination of price declines associated with the highly competitive
marketplace and the Company's selective underwriting criteria has had an adverse
impact on premium and fee levels during the past several years. If the
competitive pressures on pricing do not improve in 1999, these factors may
continue to affect premium and fee levels unfavorably. Although the Company
believes that pricing in the Commercial Lines marketplace will continue to be
very competitive in 1999, recent data has suggested that the pricing environment
may be stabilizing.
20
<PAGE> 21
Alliance with Winterthur International
In December 1998, the Company announced a global strategic relationship with
Winterthur International, which markets a variety of commercial lines products
to multinational corporations. The Company expects that Travelers/Winterthur
International will allow it to participate in business requiring international
underwriting and insurance services.
Personal Lines
Personal Lines strategy includes control of operating expenses to improve
competitiveness and profitability, growth in sales through independent agents
and continued expansion of new marketing channels to broaden distribution to a
wider customer base. Personal Lines is continuing its state by state rollout of
nonstandard auto insurance to broaden its product capabilities. These growth
strategies also provide opportunities to leverage the existing cost structure
and achieve economies of scale. In addition, Personal Lines continues to take
action to control its exposure to catastrophe losses, including limiting the
writing of new homeowners business in certain markets and implementing price
increases in certain hurricane-prone areas, subject to restrictions imposed by
insurance regulatory authorities.
The personal auto insurance marketplace has become more competitive in 1998 as
some personal auto carriers have reduced prices in selected markets. This trend
is expected to continue in 1999.
Travelers Group Inc. Merger with Citicorp
As a result of the Merger, the Company has developed and made investments in
various cross-selling opportunities to Citicorp's customers including selling
Personal Lines products through referrals from the call centers servicing
Citibank's credit card operations, selling Commercial Lines products to
Citicorp's small business clientele and distributing an array of bank products
through the independent agent distribution channel. The Company continues to
focus its efforts and investments in those opportunities with the greatest sales
and profit potential.
Property and Casualty Insurance Industry
The property and casualty insurance industry in the United States continues to
consolidate. The Company's strategic objectives are to enhance its position as a
consistently profitable market leader and to become a low-cost provider of
property and casualty insurance in the United States, as the industry
consolidates.
In relation to the Company's objective of being a low-cost provider of property
and casualty insurance, an emphasis on claim payout and performance and enhanced
productivity efforts are expected to continue.
Changes in the general interest rate environment affect the return received on
newly invested and reinvested funds. While a rising interest rate environment
enhances the returns available, it reduces the market value of existing fixed
maturity investments and the availability of gains on disposition. A decline in
interest rates reduces the return available on investment of funds but could
create the opportunity for realized investment gains on disposition of fixed
maturity investments.
As required by various state laws and regulations, TAP's insurance subsidiaries
are subject to assessments from state-administered guaranty associations, second
injury funds and similar associations. Management believes that such assessments
will not have a material impact on the Company's results of operations, except
for the effect of the cumulative catch-up adjustment associated with the
adoption of Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" (see Note 1 of Notes to
Consolidated Financial Statements), financial condition or liquidity.
Certain social, economic and political issues have led to an increased number of
legislative and regulatory proposals aimed at addressing the cost and
availability of certain types of insurance. While most of these provisions have
failed to become law, these initiatives may continue as legislators and
regulators try to respond to public availability and affordability concerns and
the resulting laws, if any, could adversely affect the Company's ability to
write business with appropriate returns.
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
TAP was formed in January 1996 to hold the property and casualty insurance
subsidiaries of The Travelers Insurance Group Inc. (TIGI). TIGI contributed to
TAP all of the outstanding shares of common stock of Travelers Indemnity on
April 1, 1996. On April 2, 1996, TAP acquired the domestic property and casualty
insurance subsidiaries of Aetna for approximately $4.2 billion. TAP is a holding
company and has no direct operations. TAP's principal asset is the capital stock
of its insurance subsidiaries. For a description of the acquisition and the
manner in which it was funded, see Note 3 of Notes to Consolidated Financial
Statements.
The liquidity requirements of the Company's business have been met primarily by
funds generated from operations, asset maturities and income received on
investments. Cash provided from these sources is used primarily for claims and
claim adjustment expense payments and operating expenses. Catastrophe claims,
the timing and amount of which are inherently unpredictable, may create
increased liquidity requirements. Additional sources of cash flow include the
sale of invested assets and financing activities. The Company believes that its
future liquidity needs will be met from all of the above sources.
Net cash flows are generally invested in marketable securities. The Company
closely monitors the duration of these investments, and investment purchases and
sales are executed with the objective of having adequate funds available to
satisfy the Company's maturing liabilities. As the Company's investment strategy
focuses on asset and liability durations, and not specific cash flows, asset
sales may be required to satisfy obligations and/or rebalance asset portfolios.
The Company's invested assets at December 31, 1998 totaled $31.9 billion and
consisted primarily of highly liquid public debt securities of $25.9 billion,
private debt securities of $2.1 billion, equity securities of $828 million,
mortgage loans and real estate of $657 million, short-term investments of $1.6
billion and other investments of $827 million.
Cash flow needs at TAP include stockholder dividends and debt service. TAP meets
its cash flow needs primarily through dividends from operating subsidiaries. In
addition, TAP has a revolving credit facility in the amount of $250 million with
a syndicate of banks (the Credit Facility). Under this facility, which expires
in December 2001, TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At December 31, 1998, this
requirement was exceeded by approximately $4.2 billion. In addition, the Credit
Facility places restrictions on the amount of consolidated debt TAP can incur.
At December 31, 1998, there were no borrowings outstanding under this facility.
If TAP had borrowings under this facility, the interest rate would be based upon
LIBOR plus a negotiated margin. TAP compensates the banks for the Credit
Facility through commitment fees. TAP also issues commercial paper directly to
investors and maintains unused credit availability under the Credit Facility at
least equal to the amount of commercial paper outstanding. At December 31, 1998,
TAP had no commercial paper outstanding. TAP also currently has available to it
a $200 million line of credit for working capital and other general corporate
purposes from a subsidiary of Citigroup. The lender has no obligation to make
any loan to TAP under this line of credit.
As more fully described in Note 3 of Notes to Consolidated Financial Statements,
on April 24, 1996 TAP sold in a public offering $500 million of 6-3/4% Notes due
April 15, 2001 and $200 million of 7-3/4% Notes due April 15, 2026, in
connection with the acquisition of Aetna P&C. During the remainder of 1996, TAP
also sold $200 million of 6-3/4% Notes due September 1, 1999, $200 million of
6-1/4% Notes due October 1, 1999 and $150 million of 6-3/4% Notes due November
15, 2006. At December 31, 1998, TAP had issued a total of $1.25 billion of, and
had $750 million available for, debt offerings under its shelf registration
statement.
22
<PAGE> 23
Because the principal operating subsidiaries of the Company are Connecticut
insurance companies, the amount of dividends that each entity may pay to the
parent company is restricted. The insurance holding company law of Connecticut
requires notice to, and approval by, the state insurance commissioner for the
declaration or payment of any dividend that together with other distributions
made within the preceding twelve months exceeds the greater of (i) 10% of the
insurer's surplus or (ii) the insurer's net income for the twelve-month period
ended the preceding December 31st, in each case determined in accordance with
statutory accounting practices. Such declaration or payment is further limited
by adjusted unassigned funds (surplus), as determined in accordance with
statutory accounting practices. The insurance holding company laws of other
states in which the Company's subsidiaries are domiciled generally contain
similar (although in certain instances somewhat more restrictive) limitations on
the payment of dividends. In 1999, dividend payments to TAP from its insurance
subsidiaries are limited to $1.0 billion without prior approval of the
Connecticut Insurance Department.
In addition, pursuant to an intercompany agreement, TAP may not pay any
dividends on its common stock without the prior written consent of Citigroup, so
long as Citigroup maintains certain minimum beneficial ownership requirements of
the common stock. That agreement also limits the Company's ability to incur
indebtedness, issue equity securities and make certain capital expenditures,
among other things, without the prior written consent of Citigroup.
The National Association of Insurance Commissioners (NAIC) adopted risk-based
capital (RBC) requirements for property-casualty companies to be used as minimum
capital requirements by the NAIC and states to identify companies that merit
further regulatory action. The formulas have not been designed to differentiate
among adequately capitalized companies that operate with levels of capital
higher than RBC requirements. Therefore, it is inappropriate and ineffective to
use the formulas to rate or to rank such companies. At December 31, 1998, all of
the Company's insurance subsidiaries had adjusted capital in excess of amounts
requiring any company or regulatory action.
The Company has a net deferred tax asset of $1.1 billion at December 31, 1998
which relates to temporary differences that are expected to reverse as net
ordinary deductions for tax purposes. Management believes that the realization
of the recognized net deferred tax asset of $1.1 billion is more likely than not
based on existing carryback ability and expectations as to future taxable
income. The Company is a member of a subgroup of companies comprised of TIGI and
its non-life insurance subsidiaries. This subgroup is included in the
consolidated federal income tax return filed by Citigroup. Citigroup has
reported pre-tax financial statement income from continuing operations exceeding
$10 billion on average over the last three years and has generated federal
taxable income exceeding $8 billion on average each year during this same
period.
Certain of the Company's loss reserves are for environmental and asbestos
claims. The Company believes that it is not likely that these claims will have a
material adverse effect on the Company's financial condition or liquidity. See
the discussion of environmental and asbestos claims above.
In connection with the 1992 sale of American Re-Insurance Company (Am Re) by
Aetna P&C, Am Re and Aetna P&C entered into a reinsurance agreement that
provides that to the extent Am Re incurred losses in 1991 and prior that were
still outstanding at January 1, 1992 in excess of $2.7 billion, Aetna P&C has an
80% participation in payments on those losses up to a maximum payment by Aetna
P&C of $500 million. This agreement has been accounted for as a deposit and a
liability has been established for the expected payout under the agreement.
On June 23, 1997, the Company repurchased, in the aggregate, 6,600,102 shares of
its Class A Common Stock held by Aetna, J.P. Morgan Capital Corporation, Fund
American Enterprise Holdings, Inc. and The Trident Partnership, L.P.
(collectively, the "Private Investors") for a total purchase price of
approximately $241 million, representing a discount to the then current market
price. The repurchases represented 20% of the holdings of each of the Private
Investors.
23
<PAGE> 24
On October 24, 1997, the Company filed a registration statement covering
14,200,207 shares of Class A Common Stock which were sold by the Private
Investors. Except for underwriting commissions, all expenses incurred in
connection with the sale were paid by the Company. The Company did not receive
any proceeds from this sale of the Class A Common Stock. The sale represented
approximately 54% of the remaining holdings of each of the Private Investors.
On January 19, 1999 and January 28, 1998, the Company, through the Travelers
Property Casualty Corp. Capital Accumulation Plan, reissued 476,431 and 763,654
shares, respectively, of treasury stock in the form of restricted Class A Common
Stock to participating officers and other key employees. Previously, on January
22, 1997, the Company issued 413,578 shares of the Company's Class A Common
Stock and reissued 502,430 shares of treasury stock in the form of restricted
Class A Common Stock to participating officers and other key employees. The fair
market values per share of the 1999, 1998 and 1997 restricted stock awards at
the grant date were $31.88, $43.71 and $37.58, respectively. The restricted
stock generally vests after a three-year period. Except under limited
circumstances, the stock cannot be sold or transferred during the restricted
period by the participant, who is required to render service to the Company
during the restricted period. Unearned compensation expense associated with the
restricted stock grant represents the market value of the Company's common stock
at the date of grant and is recognized as a charge to income ratably over the
vesting period. The after-tax compensation cost charged to earnings for these
restricted stock awards was $12 million, $7 million and zero for the years ended
December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, there were
2,320,338 shares available for future grants under TAP's restricted stock plan.
On August 12, 1998, TAP's Board of Directors authorized the expenditure of up to
$150 million for the repurchase of its Class A Common Stock. The repurchases may
be made from time to time in the open market or through negotiated transactions
and will be used primarily for the issuance of stock for employee benefit plans.
At December 31, 1998, TAP had repurchased $62 million of its common stock
pursuant to the repurchase program.
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 substantial compliance with respect to its business
critical systems in accordance with its Year 2000 plan and is in the process of
certification to validate compliance. The Company anticipates completing the
certification process by June 30, 1999. An ongoing re-certification process will
be put in place for the third and fourth quarter of 1999 to ensure all 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. The Company has incurred approximately
$42 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 is developing contingency plans to address perceived
risks associated with the Year 2000 effort. These include business resumption
plans to address the possibility of internal systems failures and the
possibility of failure of systems or processes outside the Company's control. As
of year-end 1998, the Company has completed initial business resumption
contingency plans which would enable business critical units to function January
1, 2000 in the event of an unexpected failure. Business resumption contingency
plans are expected to be finalized by June 30, 1999. Preparations for the
management of the date change will continue through 1999.
24
<PAGE> 25
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.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "may affect," and similar expressions. In particular, the
information appearing in the section under the heading "Outlook" is
forward-looking. These forward-looking statements involve risks and
uncertainties including, but not limited to, the following: 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; and the ability of the Company and third party vendors to
modify computer systems for the Year 2000 date conversion in a timely manner.
Readers are also directed to other risks and uncertainties discussed in
documents filed by the Company with the Securities and Exchange Commission.
25
<PAGE> 26
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 7,796 $ 7,225 $ 6,028
Net investment income 2,100 2,051 1,656
Fee income 306 365 392
Realized investment gains 143 169 18
Other revenues 106 101 103
- -----------------------------------------------------------------------------------------
Total revenues 10,451 9,911 8,197
- -----------------------------------------------------------------------------------------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 5,947 5,484 5,282
Amortization of deferred acquisition costs 1,197 1,127 906
Interest expense 161 163 118
General and administrative expenses 1,309 1,385 1,404
- -----------------------------------------------------------------------------------------
Total claims and expenses 8,614 8,159 7,710
- -----------------------------------------------------------------------------------------
Income before federal income taxes 1,837 1,752 487
- -----------------------------------------------------------------------------------------
Federal income taxes:
Current expense (benefit) 394 422 (100)
Deferred expense 100 94 196
- -----------------------------------------------------------------------------------------
Total federal income taxes 494 516 96
- -----------------------------------------------------------------------------------------
Net income $ 1,343 $ 1,236 $ 391
=========================================================================================
Net income per common share $ 3.43 $ 3.13 $ 1.02
Net income per common share-assuming dilution $ 3.42 $ 3.12 $ 1.02
- -----------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In millions, except shares)
<TABLE>
<CAPTION>
At December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $26,580 and $26,127) $ 27,977 $ 27,188
Equity securities, at fair value (cost, $796 and $977) 828 1,037
Mortgage loans 574 691
Real estate held for sale 83 95
Short-term securities 1,597 1,446
Other investments 827 574
- ------------------------------------------------------------------------------------------------------------
Total investments 31,886 31,031
- ------------------------------------------------------------------------------------------------------------
Cash 62 47
Investment income accrued 409 387
Premium balances receivable 2,901 2,897
Reinsurance recoverables 9,153 9,188
Deferred acquisition costs 518 501
Deferred federal income taxes 1,109 1,316
Contractholder receivables 2,019 1,923
Goodwill 1,457 1,497
Other assets 1,760 1,895
- ------------------------------------------------------------------------------------------------------------
Total assets $ 51,274 $ 50,682
============================================================================================================
LIABILITIES
Claims and claim adjustment expense reserves $ 29,589 $ 30,324
Unearned premium reserves 4,166 3,867
Contractholder payables 2,019 1,923
Commercial paper -- 108
Long-term debt 1,250 1,249
Other liabilities 4,225 4,534
- ------------------------------------------------------------------------------------------------------------
Total liabilities 41,249 42,005
- ------------------------------------------------------------------------------------------------------------
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 and outstanding 1 1
Class B, $.01 par value, 700 million shares authorized;
328,020,170 shares issued and outstanding 3 3
Additional paid-in capital 5,479 5,473
Retained earnings 3,052 1,866
Accumulated other changes in equity from nonowner sources 921 722
Treasury stock, at cost (shares, 8,544,687 and 7,314,688) (298) (266)
Unearned compensation (33) (22)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,125 7,777
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 51,274 $ 50,682
============================================================================================================
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions, except shares)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK AND
ADDITIONAL PAID-IN
CAPITAL
Balance, beginning of year $ 5,477 $ 5,459 $ 2,899
Net Capital Accumulation Plan grants 6 18 -
Capitalization of Travelers
Property Casualty Corp. - - 2,560
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year 5,483 5,477 5,459
- ------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year 1,866 749 422
Net income 1,343 $ 1,343 1,236 $ 1,236 391 $ 391
Dividends (157) (119) (64)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year 3,052 1,866 749
- ------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER
CHANGES IN EQUITY
FROM NONOWNER
SOURCES, NET OF TAX
Balance, beginning of year 722 285 280
Net unrealized gain on investment
securities, net of reclassification
adjustment (see note 10) 200 437 4
Foreign currency translation
adjustments (1) - 1
- ------------------------------------------------------------------------------------------------------------------------
Other changes in equity from
nonowner sources 199 199 437 437 5 5
- ------------------------------------------------------------------------------------------------------------------------
Total changes in equity from
nonowner sources $ 1,542 $ 1,673 $ 396
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year 921 722 285
- ------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK (at cost)
Balance, beginning of year (266) (13) -
Net Capital Accumulation Plan grants 29 15 -
Treasury stock acquired (62) (268) (13)
Other 1 - -
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year (298) (266) (13)
- ------------------------------------------------------------------------------------------------------------------------
UNEARNED COMPENSATION
Balance, beginning of year (22) - -
Net issuance of restricted stock under
Capital Accumulation Plan (29) (33) -
Restricted stock amortization 18 11 -
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year (33) (22) -
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity
and shares outstanding $ 9,125 $ 7,777 $ 6,480
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SHARES (IN THOUSANDS)
-------------------------------
For the Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK AND
ADDITIONAL PAID-IN
CAPITAL
Balance, beginning of year 400,414 400,000 100
Net Capital Accumulation Plan grants - 414 -
Capitalization of Travelers
Property Casualty Corp. - - 399,900
- --------------------------------------------------------------------------
Balance, end of year 400,414 400,414 400,000
- --------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year
Net income
Dividends
- --------------------------------------------------------------------------
Balance, end of year
- --------------------------------------------------------------------------
ACCUMULATED OTHER
CHANGES IN EQUITY
FROM NONOWNER
SOURCES, NET OF TAX
Balance, beginning of year
Net unrealized gain on investment
securities, net of reclassification
adjustment (see note 10)
Foreign currency translation
adjustments
- --------------------------------------------------------------------------
Other changes in equity from
nonowner sources
- --------------------------------------------------------------------------
Total changes in equity from
nonowner sources
- --------------------------------------------------------------------------
Balance, end of year
- --------------------------------------------------------------------------
TREASURY STOCK (at cost)
Balance, beginning of year (7,315) (407) -
Net Capital Accumulation Plan grants 782 449 -
Treasury stock acquired (2,029) (7,359) (407)
Other 17 2 -
- --------------------------------------------------------------------------
Balance, end of year (8,545) (7,315) (407)
- --------------------------------------------------------------------------
UNEARNED COMPENSATION
Balance, beginning of year
Net issuance of restricted stock under
Capital Accumulation Plan
Restricted stock amortization
- --------------------------------------------------------------------------
Balance, end of year
- --------------------------------------------------------------------------
Total stockholders' equity
and shares outstanding 391,869 393,099 399,593
==========================================================================
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,343 $ 1,236 $ 391
Adjustments to reconcile net income to net cash provided by operating activities
Realized investment gains (143) (169) (18)
Depreciation and amortization 60 47 40
Deferred federal income taxes 100 94 196
Amortization of deferred policy acquisition costs 1,197 1,127 906
Premium balances receivable (4) 79 212
Reinsurance recoverables (60) 97 (159)
Deferred policy acquisition costs (1,214) (1,210) (935)
Insurance reserves (341) (121) 691
Other (220) (557) (143)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 718 623 1,181
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,551 1,422 1,567
Mortgage loans 160 154 133
Proceeds from sales of investments
Fixed maturities 8,541 10,045 12,606
Equity securities 580 504 558
Mortgage loans 15 231 23
Real estate held for sale 33 129 16
Purchases of investments
Fixed maturities (10,206) (13,421) (15,049)
Equity securities (505) (554) (785)
Mortgage loans (34) (38) (161)
Short-term securities, (purchases) sales, net (98) 872 (1,044)
Other investments, net (244) (57) (90)
Business acquisitions -- -- (4,160)
Business divestments -- -- 1
Securities transactions in course of settlement (169) 335 571
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (376) (378) (5,814)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repayment) of commercial paper, net (108) 83 25
Issuance of long-term debt -- -- 1,249
Borrowings on revolving line of credit -- -- 2,650
Payments on revolving line of credit -- -- (2,650)
Contribution from TIGI -- -- 1,138
Purchase of treasury stock (62) (268) (13)
Private offering of common stock -- -- 525
Initial public offering of common stock -- -- 928
Issuance of mandatorily redeemable securities -- -- 900
Issuance of Series Z preferred stock -- -- 540
Redemptions of Series Z preferred stock -- -- (540)
Dividends on Series Z preferred stock -- -- (4)
Dividends to TIGI (131) (98) (49)
Dividends to minority shareholders (26) (21) (11)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (327) (304) 4,688
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 15 (59) 55
Cash at beginning of period 47 106 51
- --------------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 62 $ 47 $ 106
================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid (refunded) $ 399 $ 677 $ (208)
Interest paid $ 161 $ 163 $ 99
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 30
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Travelers
Property Casualty Corp. (TAP) (a direct majority-owned subsidiary of The
Travelers Insurance Group Inc. (TIGI) and an indirect majority-owned
subsidiary of Citigroup Inc. (Citigroup) (formerly Travelers Group Inc.,
see note 2)) and its subsidiaries (collectively, the Company). On April
2, 1996, TAP purchased from Aetna Services, Inc. (Aetna) all of the
outstanding capital stock of Travelers Casualty and Surety Company
(formerly The Aetna Casualty and Surety Company) and The Standard Fire
Insurance Company (collectively, Aetna P&C) for approximately $4.2
billion in cash. The acquisition was accounted for under the purchase
method of accounting and, accordingly, the consolidated financial
statements include the results of Aetna P&C's operations only from the
date of acquisition. Significant intercompany transactions and balances
have been eliminated.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and claims and expenses during the reporting period. Actual
results could differ from those estimates.
ACCOUNTING CHANGES
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" (FAS 132). FAS 132 supersedes the
disclosure requirements in FASB Statements No. 87, "Employers' Accounting
for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and Termination of
Benefits," and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." FAS 132 addresses disclosure only and does
not address measurement or recognition. In addition to other disclosure
changes, FAS 132 allows employers to disclose total contributions to
multiemployer plans without disaggregating the amounts attributable to
pensions and other postretirement benefits. The adoption of this standard
did not have any impact on results of operations, financial condition or
liquidity.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). FAS 131 establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires that
selected information about those operating segments be reported in
interim financial statements. This statement supersedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments
of a Business Enterprise." FAS 131 requires that all public enterprises
report financial and descriptive information about its reportable
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. The Company's
reportable operating segments did not change significantly as a result of
the adoption of FAS 131. See note 4.
30
<PAGE> 31
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REPORTING COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130).
FAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be
reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise during
a period from transactions and other events and circumstances from
nonowner sources. Comprehensive income thus represents the sum of net
income and other changes in equity from nonowner sources. The accumulated
balance of other changes in equity from nonowner sources is required to
be displayed separately from retained earnings and additional paid-in
capital in the consolidated balance sheet. The adoption of FAS 130
resulted primarily in the Company reporting unrealized gains and losses
on investments in debt and equity securities in changes in equity from
nonowner sources. See note 10.
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE
During the third quarter of 1998, the Company adopted the Accounting
Standards Executive Committee of the American Institute of Certified
Public Accountants' (AcSEC) Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use"
(SOP 98-1). SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use and for
determining when specific costs should be capitalized and when they
should be expensed. The adoption of SOP 98-1 did not have a significant
impact on results of operations, financial condition or liquidity.
EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS 128). This
statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock. FAS
128 requires restatement of all prior period EPS data presented. It
simplifies the standards for computing earnings per share previously
found in Accounting Principles Board Opinion No. 15, "Earnings per Share"
(APB 15), and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. See note 1, Accounting Policies, Earnings per
Share. FAS 128 supersedes APB 15 and related accounting interpretations.
Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the effect of potentially dilutive
securities, principally stock-based incentive plans.
31
<PAGE> 32
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES AND DEFERRAL OF THE EFFECTIVE DATE OF
CERTAIN PROVISIONS OF SFAS 125
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). This
statement establishes accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on an approach that focuses on control. Under this
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered
and derecognizes liabilities when extinguished. FAS 125 provides standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. Effective January 1, 1998, the
Company adopted Statement of Financial Accounting Standards No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125" (FAS 127), which was effective for transfers and pledges of certain
financial assets and collateral made after December 31, 1997. The adoption
of the provisions of FAS 125 and FAS 127, effective January 1, 1997 and
1998, respectively, did not have a significant impact on results of
operations, financial condition or liquidity.
ACCOUNTING POLICIES
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities are valued based upon quoted market prices or dealer
quotes, or if quoted market prices or dealer quotes are not available,
discounted expected cash flows using market rates commensurate with the
credit quality and maturity of the investment. Also included in fixed
maturities are loan-backed and structured securities, which are amortized
using the retrospective method. The effective yield used to determine
amortization is calculated based upon actual historical and projected
future cash flows, which are obtained from a widely-accepted securities
data provider. Fixed maturities are classified as "available for sale" and
are reported at fair value, with unrealized investment gains and losses,
net of income taxes, charged or credited directly to stockholders' equity.
Equity securities, which include common and nonredeemable preferred stocks,
are classified as available for sale and carried at fair value based
primarily on quoted market prices. Changes in fair values of equity
securities are charged or credited directly to stockholders' equity, net of
income taxes.
Mortgage loans are carried at amortized cost. A mortgage loan is considered
impaired when it is probable that the Company will be unable to collect
principal and interest amounts due. For mortgage loans that are determined
to be impaired, a reserve is established for the difference between the
amortized cost and fair market value of the underlying collateral. In
estimating fair value, the Company uses interest rates reflecting the
returns required in the current real estate financing market. There were no
impaired loans at December 31, 1998 and 1997.
Real estate held for sale is carried at the lower of cost or fair value
less estimated costs to sell. Fair value is established at the time of
foreclosure by internal analysis or external appraisers, using discounted
cash flow analyses and other acceptable techniques. Thereafter, an
allowance for losses on real estate held for sale is established if the
carrying value of the property exceeds its current fair value less
estimated costs to sell. There was no such allowance at December 31, 1998
and 1997.
32
<PAGE> 33
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Accrual of income is suspended on fixed maturities or mortgage loans that
are in default, or on which it is likely that future payments will not be
made as scheduled. Interest income on investments in default is recognized
only as payment is received. Investments included in the consolidated
balance sheet that were not income-producing for the preceding 12 months
were not significant.
Short-term securities, consisting primarily of money market instruments and
other debt issues purchased with a maturity of less than one year, are
carried at amortized cost, which approximates market.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pretax
revenues based upon specific identification of the investments sold on the
trade date. Other-than-temporary declines in market value of investments
are included in realized investment gains and losses.
REINSURANCE RECOVERABLES
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured business. The
Company evaluates and monitors the financial condition of its reinsurers
under voluntary reinsurance arrangements to minimize its exposure to
significant losses from reinsurer insolvencies.
DEFERRED ACQUISITION COSTS
Amounts which vary with and are primarily related to the production of new
business, primarily commissions and premium taxes, are deferred and
amortized pro rata over the contract periods in which the related premiums
are earned. Future investment income attributable to related premiums is
taken into account in measuring the recoverability of the carrying value of
this asset. Deferred acquisition costs are reviewed to determine if they
are recoverable from future income, and if not, are charged to expense. All
other acquisition expenses are charged to operations as incurred.
CONTRACTHOLDER RECEIVABLES AND PAYABLES
Under certain workers' compensation insurance contracts with deductible
features, the Company is obligated to pay the claimant for the full amount
of the claim. The Company is subsequently reimbursed by the policyholder
for the deductible amount. These amounts are included on a gross basis in
the consolidated balance sheet in contractholder payables and
contractholder receivables, respectively.
GOODWILL
Goodwill is amortized on a straight-line basis over a 40-year period. The
carrying amount is regularly reviewed for indicators of
other-than-temporary impairments in value. Impairments would be recognized
in operating results if a permanent diminution in value is deemed to have
occurred.
CLAIMS AND CLAIM ADJUSTMENT EXPENSE RESERVES
Claims and claim adjustment expense reserves represent estimated provisions
for both reported and unreported claims incurred and related expenses. The
reserves are adjusted regularly based upon experience. Included in the
claims and claim adjustment expense reserves in the consolidated balance
sheet at December 31, 1998 and 1997 are $1.3 billion and $1.5 billion,
respectively, of reserves related to workers' compensation that have been
discounted using an interest rate of 5%.
33
<PAGE> 34
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In determining claims and claim adjustment expense reserves, the Company
carries on a continuing review of its overall position, its reserving
techniques and its reinsurance. These reserves represent the estimated
ultimate cost of all incurred claims and claim adjustment expenses. Since
the reserves are based on estimates, the ultimate liability may be more or
less than such reserves. The effects of changes in such estimated reserves
are included in the results of operations in the period in which the
estimates are changed. Such changes may be material to the results of
operations and could occur in a future period.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's insurance subsidiaries, domiciled principally in Connecticut,
prepare statutory financial statements in accordance with the accounting
practices prescribed or permitted by the insurance departments of the
states of domicile. Prescribed statutory accounting practices include
certain publications of the National Association of Insurance Commissioners
(NAIC) as well as state laws, regulations, and general administrative
rules. Permitted statutory accounting practices encompass all accounting
practices not so prescribed. The impact of any permitted accounting
practices on statutory surplus of the Company is not material.
The NAIC recently completed a process intended to codify statutory
accounting practices for certain insurance enterprises. As a result of this
process, the NAIC will issue a revised statutory Accounting Practices and
Procedures Manual - version effective January 1, 2001 (the revised Manual)
that will be effective January 1, 2001 for the calendar year 2001 statutory
financial statements. It is expected that the State of Connecticut will
require that, effective January 1, 2001, insurance companies domiciled in
Connecticut prepare their statutory basis financial statements in
accordance with the revised Manual subject to any deviations prescribed or
permitted by the Connecticut insurance commissioner. The Company has not
yet determined the impact that this change will have on the statutory
capital and surplus of its insurance subsidiaries.
PREMIUMS AND UNEARNED PREMIUM RESERVES
Premiums are recognized as revenues pro rata over the policy period.
Unearned premium reserves represent the unexpired portion of policy
premiums. Accrued retrospective premiums are included in premium balances
receivable.
FEE INCOME
Fee income includes servicing fees from carriers and revenues from large
deductible policies and service contracts and are recognized pro rata over
the contract or policy periods.
OTHER REVENUES
Other revenues include revenues from premium installment charges, which are
recognized as collected, revenues of noninsurance subsidiaries other than
fee income and gains and losses on dispositions of assets and operations
other than realized investment gains and losses.
FEDERAL INCOME TAXES
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income
taxes arise from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
34
<PAGE> 35
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the
accounting method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and has included in the notes
to consolidated financial statements the pro forma disclosures required by
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." See note 15. The Company accounts for its
stock-based non-employee compensation plans at fair value.
EARNINGS PER SHARE
Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the effect of potentially dilutive securities,
principally stock-based incentive plans. The following table is a
reconciliation of the numerators and denominators of the basic and diluted
earnings per share computation for net income:
<TABLE>
---------------------------------------------------------------------------------------
(for the year ended December 31, PER SHARE
in millions, except per share amounts) INCOME(1) SHARES (2) AMOUNTS
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Basic EPS - income available to common stockholders $ 1,343 392.0 $ 3.43
Effects of dilutive securities - restricted stock -- .7 (0.01)
---------------------------------------------------------------------------------------
Diluted EPS - income available to common
stockholders and assumed conversions $ 1,343 392.7 $ 3.42
---------------------------------------------------------------------------------------
1997
Basic EPS - income available to common stockholders $ 1,236 395.5 $ 3.13
Effects of dilutive securities - restricted stock -- .3 (0.01)
---------------------------------------------------------------------------------------
Diluted EPS - income available to common
stockholders and assumed conversions $ 1,236 395.8 $ 3.12
---------------------------------------------------------------------------------------
</TABLE>
(1) Numerator
(2) Denominator
For the year ended December 31, 1996, there were no dilutive securities
issued.
For purposes of computing basic and diluted EPS for periods prior to the
Company's initial public offering in April 1996, the 328 million shares of
common stock issued to TIGI in April 1996 were assumed to be outstanding
for all reported periods. See note 3.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including interest rate
swaps, options and forward contracts, as a means of hedging exposure to
interest rate and foreign currency risk. The Company does not hold or issue
derivative instruments for trading purposes. Hedge accounting is used to
account for derivatives. To qualify for hedge accounting the changes in
value of the derivative must be expected to substantially offset the
changes in value of the hedged item. Hedges are monitored to ensure that
there is a high correlation between the derivative instruments and the
hedged investment.
35
<PAGE> 36
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Interest rate swaps are carried at market value and included in other
investments in the consolidated balance sheet. Unrealized gains and losses
are reflected in stockholders' equity, net of income taxes. Swap payments
are accrued and recognized in net investment income.
Forward contracts and options were not significant at December 31, 1998 and
1997. Information concerning derivative financial instruments is included
in note 13.
ACCOUNTING STANDARDS NOT YET ADOPTED
In October 1998, the AcSEC issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk" (SOP 98-7). SOP 98-7 provides guidance on how to
account for insurance and reinsurance contracts that do not transfer
insurance risk and applies to all entities and all such contracts, except
for long-duration life and health insurance contracts. The method used to
account for such contracts is referred to as deposit accounting. This SOP
does not address when deposit accounting should be applied. SOP 98-7
identifies several methods of deposit accounting for insurance and
reinsurance contracts that do not transfer insurance risk and provides
guidance on the application of each method. This SOP is effective for
financial statements for fiscal years beginning after June 15, 1999, with
earlier adoption encouraged. Restatement of previously issued financial
statements is not permitted. The effect of initially adopting SOP 98-7
should be reported as a cumulative catch-up adjustment. The Company does
not expect the adoption of this SOP to have a significant impact on results
of operations, financial condition or liquidity.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
consolidated balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security,
or a foreign-currency-denominated forecasted transaction. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting
designation. FAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Upon initial application of FAS 133, hedging
relationships must be designated anew and documented pursuant to the
provisions of this statement. The Company has not yet determined the impact
that FAS 133 will have on its consolidated financial statements.
In December 1997, the AcSEC issued Statement of Position 97-3, "Accounting
by Insurance and Other Enterprises for Insurance-Related Assessments" (SOP
97-3). SOP 97-3 provides guidance for determining when an entity should
recognize a liability for guaranty-fund and other insurance-related
assessments, how to measure that liability, and when an asset may be
recognized for the recovery of such assessments through premium tax offsets
or policy surcharges. This SOP is effective for financial statements for
fiscal years beginning after December 15, 1998, and the effect of initial
adoption is to be reported as a cumulative catch-up adjustment. Restatement
of previously issued financial statements is not allowed. The Company plans
to implement SOP 97-3 in the first quarter of 1999 and estimates that the
cumulative catch-up adjustment will result in a charge of approximately
$160 million after tax. 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.
36
<PAGE> 37
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
NATURE OF OPERATIONS
The Company is comprised of two business segments: Commercial Lines and
Personal Lines.
COMMERCIAL LINES
Commercial Lines offers a broad array of property and casualty insurance
and insurance-related services. Protection is afforded to customers of
Commercial Lines for the risks of property loss such as fire and windstorm,
financial loss such as business interruption from property damage,
liability claims arising from operations and workers' compensation benefits
through insurance products where risk is transferred from the customer to
Commercial Lines. Coverages include workers' compensation, general
liability, commercial multi-peril, commercial automobile, property,
fidelity and surety, professional liability, and several miscellaneous
coverages. Commercial Lines is divided into four marketing groups that are
designed to focus on a particular client base or industry segment to
provide products and services that specifically address customers' needs:
National Accounts, Commercial Accounts, Select Accounts and Specialty
Accounts.
National Accounts provides a variety of casualty products to large
companies. Products are marketed through national brokers and regional
agents. Programs offered by National Accounts include risk transfer and
risk service, such as claims settlement, loss control and risk management
services, and are generally offered in connection with a large deductible
or self-insured program, or a guaranteed cost or retrospectively rated
insurance policy. National Accounts also includes the Company's alternative
market business, which provides claims and policy management services to
workers' compensation and automobile assigned risk plans and offers
workers' compensation products and services to self-insurance pools
and associations.
Commercial Accounts serves mid-size businesses for casualty products and
both large and mid-size businesses for property products. Commercial
Accounts sells a broad range of property and casualty insurance products,
with an emphasis on guaranteed cost products, through a large network of
independent agents and brokers. Within Commercial Accounts the Company has
dedicated operations that exclusively target the construction industry,
providing insurance and risk management services for virtually all areas of
construction. The dedicated construction operations reflect the Company's
focus on industry specialization.
Select Accounts serves small businesses. Select Accounts' products are
generally guaranteed cost policies, often a packaged product covering
property and liability exposures. The products are sold through independent
agents.
Specialty Accounts markets products to national, mid-size and small
customers. The principal products of Specialty Accounts include
professional liability insurance, directors' and officers' liability
insurance, fiduciary liability insurance, employment practices liability
insurance, product liability, fidelity and surety bonds, commercial
umbrella and excess liability, excess property insurance and coverages
relating to the entertainment industry, excess and surplus lines coverages
and other industry specific programs. Its products are distributed through
both wholesale brokers and retail agents and brokers.
PERSONAL LINES
Personal Lines writes virtually all types of property and casualty
insurance covering personal risks. The primary coverages in Personal Lines
are personal automobile and homeowners insurance sold to individuals. These
products are distributed through independent agents, sponsoring
organizations such as employee and affinity groups, joint marketing
arrangements with other insurers and through the independent agents of
Primerica Financial Services, a unit of Citigroup. During 1998, Personal
Lines also began distributing products directly to customers of Citibank, a
unit of Citigroup.
37
<PAGE> 38
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Personal automobile policies provide coverage for liability to others for
both bodily injury and property damage, and for physical damage to an
insured's own vehicle from collision and various other perils. In addition,
many states require policies to provide first-party personal injury
protection, frequently referred to as no-fault coverage.
Homeowners policies are available for dwellings, condominiums, mobile homes
and rental property contents. Protection against losses to dwellings and
contents from a wide variety of perils is included in these policies, as
well as coverage for liability arising from ownership or occupancy.
CATASTROPHE EXPOSURE
The Company has a geographic exposure to catastrophe losses in certain
areas of the country. Catastrophes can be caused by various events
including hurricanes, windstorms, earthquakes, hail, severe winter weather,
explosions and fires. The incidence and severity of catastrophes are
inherently unpredictable. The extent of losses from a catastrophe is a
function of both the total amount of insured exposure in the area affected
by the event and the severity of the event. Most catastrophes are
restricted to small geographic areas; however, hurricanes and earthquakes
may produce significant damage in large, heavily populated areas. The
Company generally seeks to reduce its exposure to catastrophes through
individual risk selection and the purchase of catastrophe reinsurance.
2. TRAVELERS GROUP MERGER WITH CITICORP
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.
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
(the BHCA Compliance Period). The BHCA Compliance Period may be extended,
at the discretion of the Federal Reserve Board, for three additional
one-year periods so long as the extension is not deemed to be detrimental
to the public interest.
It is not expected that the restrictions of the BHCA will impede the
Company's existing businesses in any significant respect, although the
Company may be limited in its ability to make certain acquisitions. At this
time, the Company believes that its compliance with applicable laws
associated with the Merger will not have a significant adverse effect on
its financial condition or results of operations. At the expiration of the
BHCA Compliance Period, the Company and Citigroup each will evaluate its
alternatives in order to comply with whatever laws are then applicable.
38
<PAGE> 39
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. ACQUISITION OF SUBSIDIARIES
TRAVELERS CASUALTY AND SURETY COMPANY AND THE STANDARD FIRE INSURANCE
COMPANY
As discussed in note 1, on April 2, 1996, TAP purchased from Aetna all of
the outstanding capital stock of Aetna P&C. To finance the $4.2 billion
purchase price including transaction costs, plus capital contributions
totaling $710 million to Aetna P&C, TAP borrowed $2.7 billion from a
syndicate of banks under a five-year revolving credit facility (the Credit
Facility) and sold approximately 33 million shares of its Class A Common
Stock representing approximately 9% of its outstanding common stock (at
that time) to four private investors, including Aetna, for an aggregate of
$525 million. TIGI acquired approximately 328 million shares of Class B
Common Stock of TAP in exchange for contributing the outstanding capital
stock of The Travelers Indemnity Company and a capital contribution of
approximately $1.1 billion. In addition, Citigroup purchased from TAP $540
million of Series Z Preferred Stock of TAP. Approximately $18 million of
the purchase price was funded through the settlement of receivables from
Aetna.
On April 23, 1996, TAP sold in a public offering approximately 39 million
shares of its Class A Common Stock, representing approximately 9.75% of its
outstanding common stock, for total proceeds of $928 million. On April 24,
1996, TAP sold in a public offering $500 million of 6-3/4% Notes due April
15, 2001 and $200 million of 7-3/4% Notes due April 15, 2026. On April 26,
1996, Travelers P&C Capital I, a wholly-owned subsidiary trust of TAP,
issued $800 million of 8.08% Trust Securities in a public offering. On May
10, 1996, Travelers P&C Capital II, a wholly-owned subsidiary trust of TAP,
issued $100 million of 8.00% Trust Securities in a public offering. These
Trust Securities, which are fully and unconditionally guaranteed by TAP,
have a liquidation value of $25 per Trust Security and are mandatorily
redeemable under certain circumstances. Dividends on the Trust Securities
have been classified as interest expense in the consolidated statement of
income. The aggregate proceeds from the above offerings of $2.5 billion,
together with the proceeds from the issuance by TAP of approximately $700
million of commercial paper, were used to repay in full the borrowings
under the Credit Facility and to redeem in full TAP's Series Z Preferred
Stock.
The assets and liabilities of Aetna P&C are reflected in the consolidated
balance sheet on a fully consolidated basis at management's best estimate
of their fair values at the acquisition date. Evaluation and appraisal of
assets and liabilities included: adjustments to investments; deferred
acquisition costs; financial guarantee obligations which the Company
assumed, designated as held for sale and actively marketed; claims reserves
to conform the accounting policy regarding discounting to that historically
used by the Company; liabilities for lease and severance costs relating to
the restructuring plan for the business acquired; and other assets and
liabilities and related deferred income tax amounts. The excess of the
purchase price over the estimated fair value of net assets was
approximately $1.2 billion and is being amortized over 40 years.
During 1996, the Company recorded charges related to the acquisition and
integration of Aetna P&C. These charges resulted primarily from anticipated
costs of the acquisition and the application of the Company's strategies,
policies and practices to Aetna P&C reserves and include: $279 million
after tax ($430 million before tax) in reserve increases, net of
reinsurance, primarily related to cumulative injury claims other than
asbestos (CIOTA), insurance products involving financial guarantees, and
assumed reinsurance; a $55 million after-tax ($84 million before tax)
provision for an additional asbestos liability related to an existing
settlement agreement with a customer of Aetna P&C; a $39 million after-tax
($60 million before tax) charge related to premium collection issues on
loss sensitive programs, specifically large deductible products; a $27
million after-tax ($41 million before tax) provision for uncollectibility
of reinsurance recoverables of Aetna P&C determined by applying the
Company's normal guidelines for estimating collectibility of such accounts;
and $23 million after tax ($35 million before tax) in lease and severance
costs of The Travelers Indemnity Company related to the restructuring plan
for the acquisition.
39
<PAGE> 40
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. ACQUISITION OF SUBSIDIARIES, CONTINUED
The following unaudited pro forma information presents the results of
operations of the Company and Aetna P&C for the year ended December 31,
1996, with pro forma adjustments as if the acquisition and transactions
related to the funding of the acquisition had been consummated as of the
beginning of the period presented. This pro forma information is not
necessarily indicative of what would have occurred had the acquisition and
related transactions been made on the dates indicated, or of future results
of the Company.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(for the year ended December 31, in millions, except per share amounts) 1996*
--------------------------------------------------------------------------------
<S> <C>
Revenues $9,805
Net income 584
Net income per common share 1.46
--------------------------------------------------------------------------------
</TABLE>
* Historical results of Aetna P&C include $307 million ($200 million after
tax) of realized investment gains.
SUPPLEMENTAL INFORMATION TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
RELATING TO THE ACQUISITION OF AETNA P&C
Noncash investing and financing transactions relating to the acquisition of
Aetna P&C that are not reflected in the consolidated statement of cash
flows follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1996
--------------------------------------------------------------------------------
<S> <C>
Fair value of investments acquired $13,969
Fair value of other assets acquired 10,386
Claims and claim adjustment expense reserves assumed (16,907)
Other liabilities assumed (3,288)
--------------------------------------------------------------------------------
Cash payment related to business acquisition $ 4,160
================================================================================
</TABLE>
4. SEGMENT INFORMATION
The Company has two reportable business segments.
The Commercial Lines business segment serves businesses of all sizes,
providing a full range of primary and excess insurance and risk management
and insurance-related services. The Commercial Lines segment offers
workers' compensation, general liability, commercial multi-peril,
commercial automobile, property, fidelity and surety, professional
liability, and several miscellaneous coverages.
The Personal Lines business segment serves consumers and writes virtually
all types of property and casualty insurance covering personal risks. The
primary coverages in Personal Lines are personal automobile and homeowners
insurance.
The accounting policies used to generate the following segment data are the
same as those described in the summary of significant accounting policies
in note 1. The amount of investments in equity method investees and total
expenditures for additions to long-lived assets other than financial
instruments were not significant.
40
<PAGE> 41
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. SEGMENT INFORMATION, CONTINUED
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
TOTAL
COMMERCIAL PERSONAL REPORTABLE
(at and for the year ended December 31, in millions) LINES LINES SEGMENTS
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Revenues
Premiums $ 4,525 $ 3,271 $ 7,796
Net investment income 1,709 389 2,098
Fee income 306 - 306
Realized investment gains 117 26 143
Other 42 57 99
--------------------------------------------------------------------------------------
Total revenues $ 6,699 $ 3,743 $10,442
======================================================================================
Amortization and depreciation $ 686 $ 570 $ 1,256
Federal income taxes 354 201 555
Operating income 942 420 1,362
Assets 43,403 7,562 50,965
--------------------------------------------------------------------------------------
1997
Revenues
Premiums $ 4,308 $ 2,917 $ 7,225
Net investment income 1,695 353 2,048
Fee income 365 - 365
Realized investment gains 154 15 169
Other 35 56 91
--------------------------------------------------------------------------------------
Total revenues $ 6,557 $ 3,341 $ 9,898
======================================================================================
Amortization and depreciation $ 654 $ 519 $ 1,173
Federal income taxes 378 204 582
Operating income 846 403 1,249
Assets 43,208 7,113 50,321
--------------------------------------------------------------------------------------
1996
Revenues
Premiums $ 3,695 $ 2,323 $ 6,018
Net investment income 1,343 311 1,654
Fee income 392 - 392
Realized investment gains (losses) 26 (8) 18
Other 41 59 100
--------------------------------------------------------------------------------------
Total revenues $ 5,497 $ 2,685 $ 8,182
======================================================================================
Amortization and depreciation $ 559 $ 385 $ 944
Federal income taxes 8 136 144
Operating income 633 257 890
Assets 42,345 7,030 49,375
--------------------------------------------------------------------------------------
</TABLE>
Results of operations include amounts related to Aetna P&C from April 2,
1996, the date of the acquisition.
Operating income excludes realized investment gains (losses), restructuring
actions and merger-related charges, and is reflected net of tax.
41
<PAGE> 42
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. SEGMENT INFORMATION, CONTINUED
BUSINESS SEGMENT RECONCILIATIONS
<TABLE>
------------------------------------------------------------------------------------------
(at and for the year ended December 31, in millions) 1998 1997 1996
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE RECONCILIATION
Total revenues for reportable segments $10,442 $ 9,898 $ 8,182
Other revenues (1) 9 13 15
------------------------------------------------------------------------------------------
Total consolidated revenues $10,451 $ 9,911 $ 8,197
------------------------------------------------------------------------------------------
INCOME RECONCILIATION (2)
Total operating income for reportable segments $ 1,362 $ 1,249 $ 890
Other operating loss (3) (112) (123) (88)
Realized investment gains 93 110 12
Aetna P&C acquisition-related charges and reserve review -- -- (423)
------------------------------------------------------------------------------------------
Total consolidated net income $ 1,343 $ 1,236 $ 391
------------------------------------------------------------------------------------------
ASSET RECONCILIATION
Total assets for reportable segments $50,965 $50,321 $49,375
Other assets (4) 309 361 404
------------------------------------------------------------------------------------------
Total consolidated assets $51,274 $50,682 $49,779
------------------------------------------------------------------------------------------
</TABLE>
(1) The source of other revenues is businesses that are in run-off and are
not significant.
(2) Net of tax.
(3) The primary component of the other operating loss is after-tax
interest expense of $105 million, $106 million and $77 million for
1998, 1997 and 1996, respectively.
(4) Reinsurance recoverables of businesses that are in run-off is the
primary component of other assets.
Enterprise-Wide Disclosures
The Company generally does not accumulate revenues by product; therefore,
it would be impracticable to provide revenues from external customers for
each product.
Revenues from internal customers, foreign revenues and foreign assets are
not significant. The Company does not have revenue from transactions with a
single customer amounting to 10 percent or more of its revenues.
42
<PAGE> 43
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities
classified as available for sale were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
(at December 31, 1998, in millions) COST GAINS LOSSES VALUE
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities -
CMOs and pass-through securities $ 4,233 $ 181 $ 1 $ 4,413
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 2,002 210 -- 2,212
Obligations of states, municipalities and
political subdivisions 10,114 534 3 10,645
Debt securities issued by foreign governments 866 51 2 915
All other corporate bonds 9,202 452 26 9,628
Redeemable preferred stock 163 2 1 164
--------------------------------------------------------------------------------------
Total $26,580 $ 1,430 $ 33 $27,977
======================================================================================
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
(at December 31, 1997, in millions) COST GAINS LOSSES VALUE
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities -
CMOs and pass-through securities $ 4,625 $ 171 $ -- $ 4,796
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,965 108 1 2,072
Obligations of states, municipalities and
political subdivisions 7,599 366 2 7,963
Debt securities issued by foreign governments 638 26 1 663
All other corporate bonds 11,249 407 14 11,642
Redeemable preferred stock 51 1 -- 52
--------------------------------------------------------------------------------------
Total $26,127 $ 1,079 $ 18 $27,188
======================================================================================
</TABLE>
The amortized cost and fair value of fixed maturities by contractual
maturity follow. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
43
<PAGE> 44
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INVESTMENTS, CONTINUED
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
AMORTIZED FAIR
(at December 31, 1998, in millions) COST VALUE
---------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 925 $ 931
Due after 1 year through 5 years 5,238 5,414
Due after 5 years through 10 years 5,826 6,226
Due after 10 years 10,358 10,993
---------------------------------------------------------------------------
22,347 23,564
Mortgage-backed securities 4,233 4,413
---------------------------------------------------------------------------
Total $ 26,580 $27,977
===========================================================================
</TABLE>
The Company makes investments in collateralized mortgage obligations
(CMOs). CMOs typically have high credit quality, offer good liquidity, and
provide a significant advantage in yield and total return compared to U.S.
Treasury securities. The Company's investment strategy is to purchase CMO
tranches which are protected against prepayment risk, including planned
amortization class tranches. Prepayment protected tranches are preferred
because they provide stable cash flows in a variety of scenarios. The
Company does invest in other types of CMO tranches if a careful assessment
indicates a favorable risk/return tradeoff. The Company does not purchase
residual interests in CMOs.
At December 31, 1998 and 1997, the Company held CMOs classified as
available for sale with a fair value of $2.3 billion and $2.2 billion,
respectively. Approximately 69% and 77% of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 1998
and 1997, respectively. In addition, the Company held $2.1 billion and $2.6
billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
December 31, 1998 and 1997, respectively. Virtually all of these securities
are rated Aaa.
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
The Company receives cash collateral from the borrower, equal to at least
the market value of the loaned securities plus accrued interest, and
reinvests it in a short-term investment pool. See note 15. The Company had
$1.0 billion and $1.1 billion of loaned securities outstanding at December
31, 1998 and 1997, respectively. A liability representing the Company's
obligation to return the collateral related to these loaned securities is
included in other liabilities in the consolidated balance sheet.
Proceeds from sales of fixed maturities classified as available for sale
were $8.5 billion, $10.0 billion and $12.6 billion in 1998, 1997 and 1996,
respectively. Gross gains of $210 million, $172 million and $82 million and
gross losses of $93 million, $94 million and $177 million, respectively,
were realized on those sales.
44
<PAGE> 45
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INVESTMENTS, CONTINUED
EQUITY SECURITIES
The cost and fair value of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
GROSS UNREALIZED
---------------- FAIR
(at December 31, 1998, in millions) COST GAINS LOSSES VALUE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $ 164 $ 20 $ 10 $ 174
Nonredeemable preferred stocks 632 30 8 654
----------------------------------------------------------------------------
Total $ 796 $ 50 $ 18 $ 828
============================================================================
(at December 31, 1997, in millions)
----------------------------------------------------------------------------
Common stocks $ 202 $ 31 $ 14 $ 219
Nonredeemable preferred stocks 775 46 3 818
----------------------------------------------------------------------------
Total $ 977 $ 77 $ 17 $1,037
============================================================================
</TABLE>
Proceeds from sales of equity securities were $580 million, $504 million
and $558 million in 1998, 1997 and 1996, respectively, resulting in gross
realized gains of $74 million, $78 million and $147 million and gross
realized losses of $60 million, $55 million and $28 million, respectively.
MORTGAGE LOANS
Underperforming mortgage loans include delinquent loans, loans in the
process of foreclosure and loans modified at interest rates below market
and were not significant at December 31, 1998 and 1997.
Aggregate annual maturities on mortgage loans include $25 million which are
past maturity and $152 million, $168 million, $40 million, $5 million, $32
million and $152 million for 1999, 2000, 2001, 2002, 2003 and 2004 and
thereafter, respectively.
CONCENTRATIONS
At December 31, 1998 and 1997, the Company had concentrations of credit
risk in tax-exempt investments of the State of Texas of $1.4 billion and
$1.2 billion, respectively, and in the State of New York of $1.5 billion
and $1.2 billion, respectively.
The Company participates in a short-term investment pool maintained by an
affiliate. See note 15.
Included in fixed maturities are below investment grade assets totaling
$1.2 billion and $832 million at December 31, 1998 and 1997, respectively.
The Company defines its below investment grade assets as those securities
rated "Ba1" or lower by external rating agencies, or the equivalent by
internal analysts when a public rating does not exist. Such assets include
publicly traded below investment grade bonds and certain other privately
issued bonds that are classified as below investment grade loans.
45
<PAGE> 46
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INVESTMENTS, CONTINUED
The Company also has significant concentrations of investments in the
following industries:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
(at December 31, in millions) 1998 1997
---------------------------------------------------------------------------
<S> <C> <C>
Banking $1,631 $2,444
Financing 1,107 1,645
---------------------------------------------------------------------------
</TABLE>
Below investment grade assets included in the preceding table are not
significant.
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, limits and
other monitoring procedures. Collateral for fixed maturities often includes
pledges of assets, including stock and other assets, guarantees and letters
of credit.
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross investment income:
Fixed maturities $1,736 $1,695 $1,344
Mortgage loans 90 103 90
Other 323 324 274
-------------------------------------------------------------------------------
2,149 2,122 1,708
Investment expenses 49 71 52
-------------------------------------------------------------------------------
Net investment income $2,100 $2,051 $1,656
===============================================================================
</TABLE>
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1998 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C>
REALIZED
Fixed maturities $ 117 $ 78 $ (95)
Equity securities 14 23 119
Mortgage loans 9 20 (1)
Real estate held for sale 1 18 3
Other 2 30 (8)
--------------------------------------------------------------------------------
Realized investment gains $ 143 $ 169 $ 18
================================================================================
</TABLE>
46
<PAGE> 47
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INVESTMENTS, CONTINUED
Changes in net unrealized gains (losses) on investment securities that are
included as a separate component of accumulated other changes in equity
from nonowner sources were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1998 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C>
UNREALIZED
Fixed maturities $ 336 $ 667 $ 20
Equity securities (28) 37 (15)
Other - (30) -
--------------------------------------------------------------------------------
308 674 5
Related taxes 108 237 1
--------------------------------------------------------------------------------
Change in unrealized gains on
investment securities 200 437 4
Balance, beginning of year 729 292 288
--------------------------------------------------------------------------------
Balance, end of year $ 929 $ 729 $ 292
================================================================================
</TABLE>
6. REINSURANCE
The Company participates in reinsurance in order to limit losses, minimize
exposure to large risks, provide additional capacity for future growth and
to effect business-sharing arrangements. In addition, the Company assumes
100% of the workers' compensation premiums written by the Accident
Department of its affiliate, The Travelers Insurance Company (TIC). The
Company is also a member of and participates as a servicing carrier for
several pools and associations.
Reinsurance is placed on both a quota-share and excess of loss basis.
Reinsurance ceded arrangements do not discharge the Company as the primary
insurer, except for cases involving a novation.
In connection with the 1992 sale of American Re-Insurance Company (Am Re)
by Aetna P&C, Am Re and Aetna P&C entered into a reinsurance agreement that
provides that to the extent Am Re incurred losses in 1991 and prior that
were still outstanding at January 1, 1992 in excess of $2.7 billion, Aetna
P&C has an 80% participation in payments on those losses up to a maximum
payment by Aetna P&C of $500 million. This agreement has been accounted for
as a deposit and a liability has been established for the expected payout
under the agreement.
47
<PAGE> 48
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. REINSURANCE, CONTINUED
A summary of reinsurance financial data reflected within the consolidated
statement of income is presented below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
WRITTEN PREMIUMS
Direct $9,059 $8,862 $7,585
Assumed from:
Affiliated companies 243 264 264
Non-affiliated companies 523 421 320
Ceded to:
Affiliated companies (43) (54) (58)
Non-affiliated companies (1,678) (1,661) (1,769)
-------------------------------------------------------------------------------
Total net written premiums $8,104 $7,832 $6,342
===============================================================================
EARNED PREMIUMS
Direct $8,751 $8,250 $7,263
Assumed from:
Affiliated companies 238 305 201
Non-affiliated companies 503 429 395
Ceded to:
Affiliated companies (33) (50) (58)
Non-affiliated companies (1,663) (1,709) (1,773)
-------------------------------------------------------------------------------
Total net earned premiums $7,796 $7,225 $6,028
===============================================================================
Percentage of amount assumed to net earned 9.5% 10.2% 9.9%
-------------------------------------------------------------------------------
Ceded claims incurred $1,312 $1,082 $1,558
-------------------------------------------------------------------------------
</TABLE>
Reinsurance recoverables, net of valuation allowance, include amounts
recoverable on unpaid and paid claims and were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
(at December 31, in millions) 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C>
REINSURANCE RECOVERABLES
Property-casualty business:
Pools and associations $3,070 $3,378
Non-affiliated companies 5,118 4,829
Affiliated companies 787 795
Accident and health business:
Affiliated companies 178 186
-------------------------------------------------------------------------------
Total reinsurance recoverables $9,153 $9,188
===============================================================================
</TABLE>
48
<PAGE> 49
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. REINSURANCE, CONTINUED
Amounts recoverable from unaffiliated insurers at December 31, 1998 and
1997 include $398 million and $352 million, respectively, recoverable from
Lloyd's of London (Lloyd's). In 1997, the Company reached an agreement to
settle the arbitration with underwriters at Lloyd's and certain London
companies in New York State to enforce reinsurance contracts with respect
to recoveries for certain asbestos claims. The dispute involved the ability
of the Company to aggregate asbestos claims under a market agreement
between Lloyd's and the Company or under the applicable reinsurance
treaties. The outcome of this agreement had no impact on earnings.
In 1996, Lloyd's restructured its operations with respect to claims for
years prior to 1993. The outcome of the restructuring of Lloyd's is
uncertain and the impact, if any, on collectibility of amounts recoverable
by the Company from Lloyd's cannot be quantified at this time. The Company
believes that it is possible that an unfavorable impact on collectibility
could have a material adverse effect on the Company's results of operations
in a future period. However, the Company believes that it is not likely
that the outcome could have a material adverse effect on the Company's
financial condition or liquidity. The Company carries an allowance for
uncollectible reinsurance which is not allocated to any specific
proceedings or disputes, whether for financial impairments or coverage
defenses. Including this allowance, the Company believes that the net
receivable from reinsurance contracts is properly stated.
7. INSURANCE CLAIMS RESERVES
Claims and claim adjustment expense reserves were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(at December 31, in millions) 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C>
Claims and claim adjustment expense reserves:
Property-casualty $29,411 $30,138
Accident and health 178 186
--------------------------------------------------------------------------------
Total $29,589 $30,324
================================================================================
</TABLE>
49
<PAGE> 50
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INSURANCE CLAIMS RESERVES, CONTINUED
The table below is a reconciliation of beginning and ending
property-casualty reserve balances for claims and claim adjustment
expenses.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1998 1997 1996
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Claims and claim adjustment expense
reserves at beginning of year $30,138 $30,969 $15,213
Less reinsurance recoverables on unpaid losses 8,732 9,153 5,123
---------------------------------------------------------------------------------
Net balance at beginning of year 21,406 21,816 10,090
---------------------------------------------------------------------------------
Provision for claims and claim adjustment expenses
for claims arising in the current year 6,057 5,730 4,839
Estimated claims and claim adjustment expenses for
claims arising in prior years (323) (492) 192
Acquisitions -- -- 11,752
---------------------------------------------------------------------------------
Total increases 5,734 5,238 16,783
---------------------------------------------------------------------------------
Claims and claim adjustment expense
payments for claims arising in:
Current year 2,352 1,944 1,858
Prior years 4,025 3,704 3,199
---------------------------------------------------------------------------------
Total payments 6,377 5,648 5,057
---------------------------------------------------------------------------------
Net balance at end of year 20,763 21,406 21,816
Plus reinsurance recoverables on unpaid losses 8,648 8,732 9,153
---------------------------------------------------------------------------------
Claims and claim adjustment expense
reserves at end of year $29,411 $30,138 $30,969
=================================================================================
</TABLE>
The decrease in the claims and claim adjustment expense reserves in 1998
primarily was attributable to net payments of $663 million of
environmental, asbestos and other cumulative injury claims.
In 1998, estimated claims and claim adjustment expenses for claims arising
in prior years included approximately $176 million primarily relating to
net favorable development in certain Personal Lines coverages,
predominantly automobile coverages. In addition, in 1998 Commercial Lines
experienced favorable loss development on loss sensitive policies in the
workers' compensation line; however, since the business to which it relates
is subject to premium adjustments, there was no impact on results of
operations.
In 1997, estimated claims and claim adjustment expenses for claims arising
in prior years included $154 million of net favorable development in
certain Personal Lines coverages and Commercial Lines coverages,
predominantly automobile coverages. In addition, in 1997 Commercial Lines
experienced $122 million of favorable prior year loss development on
retrospectively rated policies in the workers' compensation line; however,
since the business to which it relates is subject to premium adjustments,
there was no impact on results of operations. Also in 1997, the Company
adopted newly prescribed statutory allocations of certain claim adjustment
expenses. The new allocations resulted in favorable prior year loss
development of $216 million offset by an increase in the current accident
year provision of the same amount.
50
<PAGE> 51
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INSURANCE CLAIMS RESERVES, CONTINUED
In 1996, estimated claims and claim adjustment expenses for claims arising
in prior years included $238 million of net favorable development in
certain Personal Lines coverages and Commercial Lines coverages. Also
included in 1996 is $430 million within Commercial Lines of
acquisition-related charges primarily for CIOTA, insurance products
involving financial guarantees, and assumed reinsurance. In addition, as a
result of the Company's review of Aetna P&C's insurance reserves,
Commercial Lines reserves were increased by $60 million and Personal Lines
reserves were decreased by $60 million.
The claims and claim adjustment expense reserves included $1.8 billion and
$2.2 billion for asbestos and environmental-related claims net of
reinsurance at December 31, 1998 and 1997, respectively.
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are
not used to estimate such reserves.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim
experience and the facts of the individual underlying claims. The unique
facts presented in each claim are evaluated individually and collectively.
Due consideration is given to the many variables presented in each claim.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and
deductibles; an analysis of each policyholder's potential liability;
jurisdictional involvement; past and projected future claim activity; past
settlement values of similar claims; allocated claim adjustment expense;
potential role of other insurance, and applicable coverage defenses, if
any. Once the gross ultimate exposure for indemnity and allocated claim
adjustment expense is determined for a policyholder by policy year, a ceded
projection is calculated based on any applicable facultative and treaty
reinsurance, and past ceded experience. In addition, a similar review is
conducted for asbestos property damage claims. However, due to the
relatively minor claim volume, these reserves have remained at a constant
level.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1998 are the Company's
best estimate of ultimate claims and claim adjustment expenses based upon
known facts and current law. However, the conditions surrounding the final
resolution of these claims continue to change. Currently, it is not
possible to predict changes in the legal and legislative environment and
their impact on the future development of asbestos and environmental
claims. Such development will be affected by future court decisions and
interpretations 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.
51
<PAGE> 52
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. DEBT
TAP has a revolving credit facility in the amount of $250 million with a
syndicate of banks (the Credit Facility). Under this facility, which
expires in December 2001, TAP is required to maintain a certain level of
consolidated stockholders' equity (as defined in the agreement). At
December 31, 1998, this requirement was exceeded by approximately $4.2
billion. In addition, the Credit Facility places restrictions on the amount
of consolidated debt TAP can incur. At December 31, 1998, there were no
borrowings outstanding under this facility. If TAP had borrowings under
this facility, the interest rate would be based upon LIBOR plus a
negotiated margin. TAP compensates the banks for the Credit Facility
through commitment fees. TAP also issues commercial paper directly to
investors and maintains unused credit availability under the Credit
Facility at least equal to the amount of commercial paper outstanding. At
December 31, 1998, TAP had no commercial paper outstanding. TAP also
currently has available to it a $200 million line of credit for working
capital and other general corporate purposes from a subsidiary of
Citigroup. The lender has no obligation to make any loan to TAP under this
line of credit.
The Company completed the following long-term debt offerings during 1996.
At December 31, 1998, $750 million is available for debt offerings under
its shelf registration statement. Long-term debt outstanding at December
31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
(in millions) 1998 1997
---------------------------------------------------------------------------
<S> <C> <C>
6-3/4% Notes due 1999 $ 200 $ 200
6-1/4% Notes due 1999 200 200
6-3/4% Notes due 2001 500 500
6-3/4% Notes due 2006 150 150
7-3/4% Notes due 2026 200 200
---------------------------------------------------------------------------
1,250 1,250
Debt discount -- (1)
---------------------------------------------------------------------------
Total $1,250 $1,249
===========================================================================
</TABLE>
52
<PAGE> 53
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1998 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C>
EFFECTIVE TAX RATE
Income before federal income taxes $1,837 $1,752 $ 487
Statutory tax rate 35% 35% 35%
--------------------------------------------------------------------------------
Expected federal income taxes 643 613 170
Tax effect of:
Nontaxable investment income (154) (108) (86)
Goodwill 14 14 12
Other, net (9) (3) -
--------------------------------------------------------------------------------
Federal income taxes $ 494 $ 516 $ 96
================================================================================
Effective tax rate 27% 29% 20%
--------------------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current expense (benefit):
United States $ 386 $ 413 $ (102)
Foreign 8 9 2
--------------------------------------------------------------------------------
Total 394 422 (100)
--------------------------------------------------------------------------------
Deferred expense:
United States 100 94 196
--------------------------------------------------------------------------------
Federal income tax expense $ 494 $ 516 $ 96
================================================================================
</TABLE>
The net deferred tax assets were comprised of the tax effects of temporary
differences related to the following assets and liabilities:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
(at December 31, in millions) 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Claims and claim adjustment expense reserves $1,154 $1,206
Acquisition-related reserves 117 146
Unearned premium reserves 206 183
Employee benefits 108 98
Other 178 211
-------------------------------------------------------------------------------
Total 1,763 1,844
-------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 181 175
Investments 429 314
Other 44 39
-------------------------------------------------------------------------------
Total 654 528
-------------------------------------------------------------------------------
Net deferred tax asset $1,109 $1,316
===============================================================================
</TABLE>
53
<PAGE> 54
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. FEDERAL INCOME TAXES, CONTINUED
The Company is a member of a subgroup of companies comprised of TIGI and
its non-life insurance subsidiaries. This subgroup is included in the
consolidated federal income tax return filed by Citigroup. TIGI allocates
federal income taxes to its subsidiaries on a separate return basis
adjusted for credits and other amounts required by the consolidation
process. Any resulting liability is paid currently to TIGI. Any credits for
losses will be paid by TIGI currently to the extent that such credits are
for tax benefits that have been utilized in the consolidated federal income
tax return. TIGI will reimburse the Company for any remaining receivable at
the end of the federal statutory carryforward period.
In the event that the consolidated return develops an alternative minimum
tax (AMT), each company with an AMT on a separate company basis will be
allocated a portion of the consolidated AMT. Settlement of the AMT will be
made in the same manner and timing as the regular tax. If the AMT is
available as a credit against the regular tax, each subsidiary remitting
the AMT may establish a receivable from TIGI. The receivable will be paid
as the credit is utilized on the consolidated return or at the end of the
federal statutory carryforward period for operating losses.
Management believes that the realization of the recognized net deferred tax
asset of $1.1 billion is more likely than not based on existing carryback
ability and expectations as to future taxable income. Citigroup has
reported pre-tax financial statement income from continuing operations
exceeding $10.0 billion on average over the last three years and has
generated federal taxable income exceeding $8.0 billion on average during
this same period.
10. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY
MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS
During 1996, the Company formed the following statutory business trusts
under the laws of the state of Delaware. Each trust exists for the
exclusive purposes of (i) issuing Trust Securities representing undivided
beneficial interests in the assets of the Trust; (ii) investing the gross
proceeds of the Trust Securities in Junior Subordinated Deferrable Interest
Debentures (Subordinated Debentures) of its parent; and (iii) engaging in
only those activities necessary or incidental thereto. These Subordinated
Debentures and the related income effects are eliminated in the
consolidated financial statements. The outstanding Trust Securities of
subsidiary trusts were as follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
LIQUIDATION INTEREST
(in millions) VALUE RATE
---------------------------------------------------------------------------
<S> <C> <C>
Travelers P&C Capital I $800 8.08%
Travelers P&C Capital II 100 8.00%
---------------------------------------------------------------------------
Total $900
===========================================================================
</TABLE>
54
<PAGE> 55
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED
In April 1996, Travelers P&C Capital I, a wholly-owned subsidiary trust of
TAP, issued 32 million 8.08% Trust Securities (TAP I 8.08% Securities) with
a liquidation preference of $25 per TAP I 8.08% Security to the public and
989,720 common securities to TAP, the proceeds of which were invested by
Travelers P&C Capital I in $825 million of 8.08% Junior Subordinated
Deferrable Interest Debentures due 2036 issued by TAP (TAP 8.08%
Debentures). The TAP 8.08% Debentures mature on April 30, 2036 and are
redeemable by TAP in whole or in part at any time after April 30, 2001.
Travelers P&C Capital I will use the proceeds from any such redemption to
redeem a like amount of TAP I 8.08% Securities and common securities.
Distributions on the TAP I 8.08% Securities and common securities are
cumulative and payable quarterly in arrears.
In May 1996, Travelers P&C Capital II, a wholly-owned subsidiary trust of
TAP, issued 4 million 8.00% Trust Securities (TAP II 8.00% Securities; and
together with the TAP I 8.08% Securities, the TAP Securities) with a
liquidation value of $25 per TAP II 8.00% Security to the public and
123,720 common securities to TAP, the proceeds of which were invested by
Travelers P&C Capital II in $103 million of 8.00% Junior Subordinated
Deferrable Interest Debentures issued by TAP (TAP 8.00% Debentures; and
together with the TAP 8.08% Debentures, TAP Debentures). The TAP 8.00%
Debentures mature on May 15, 2036 and are redeemable by TAP in whole or in
part at any time after May 15, 2001. Travelers P&C Capital II will use the
proceeds from any such redemption to redeem a like amount of TAP II 8.00%
Securities and common securities. Distributions on the TAP II 8.00%
Securities and common securities are cumulative and payable quarterly in
arrears.
TAP has guaranteed, on a subordinated basis, distributions and other
payments due on each series of TAP Securities. The obligations of TAP with
respect to the TAP Debentures, when considered together with certain
undertakings of TAP with respect to Travelers P&C Capital I and Travelers
P&C Capital II, constitute full and unconditional guarantees by TAP of
Travelers P&C Capital I's and Travelers P&C Capital II's obligations under
the respective TAP Securities. The TAP Securities are classified in the
consolidated balance sheet as "TAP-obligated mandatorily redeemable
securities of subsidiary trusts holding solely junior subordinated debt
securities of TAP" at their liquidation value of $900 million. TAP has the
right, at any time, to defer payments of interest on the TAP Debentures and
consequently the distributions on the TAP Securities and common securities
would be deferred (though such distributions would continue to accrue with
interest thereon since interest would accrue on the TAP Debentures during
any such extended interest payment period). TAP cannot pay dividends on its
common stock during such deferments. Distributions on the TAP Securities
have been classified as interest expense in the consolidated statement of
income.
COMMON STOCK
CLASS A
On April 2, 1996, TAP sold approximately 33 million shares of its Class A
Common Stock to four private investors, Aetna, J.P. Morgan Capital
Corporation, Fund American Enterprise Holdings, Inc. and The Trident
Partnership, L.P. (collectively, the Private Investors), for an aggregate
of $525 million. On April 23, 1996, TAP sold in a public offering
approximately 39 million shares of its Class A Common Stock, for net
proceeds of $928 million. On all matters submitted to vote of the TAP
stockholders, holders of Class A Common Stock are entitled to one vote per
share.
55
<PAGE> 56
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED
On June 23, 1997, the Company repurchased, in the aggregate, 6,600,102
shares of Class A Common Stock held by the Private Investors for a total
purchase price of approximately $241 million, representing a discount to
the then current market price. Following this transaction, Citigroup's
beneficial ownership of the Company increased to approximately 83.4%. The
repurchases represented 20% of the holdings of each of the Private
Investors.
On January 19, 1999, January 28, 1998 and January 22, 1997, the Company,
through the Travelers Property Casualty Corp. Capital Accumulation Plan
(TAP CAP), reissued 476,431, 763,654 and 502,430 shares of treasury stock,
respectively, in the form of restricted Class A Common Stock to
participating officers and other key employees. In addition, on January 22,
1997, the Company, through TAP CAP, issued 413,578 shares of the Company's
Class A Common Stock in the form of restricted Class A Common Stock to
participating officers and other key employees. The fair market value per
share of the 1999, 1998 and 1997 restricted stock awards was $31.88, $43.71
and $37.58, respectively. The restricted stock generally vests after a
three-year period. Except under limited circumstances, the stock cannot be
sold or transferred during the restricted period by the participant, who is
required to render service to the Company during the restricted period.
Unearned compensation expense associated with the restricted stock grants
represents the market value of the Company's common stock at the date of
grant and is recognized as a charge to income ratably over the vesting
period. The after-tax compensation cost charged to earnings for these
restricted stock awards was $12 million, $7 million and zero for the years
ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998,
2,320,338 shares were available for future grants under the Company's
restricted stock plans.
On August 12, 1998, TAP's Board of Directors authorized the expenditure of
up to $150 million for the repurchase of its Class A Common Stock. The
repurchases may be made from time to time in the open market or through
negotiated transactions and will be used primarily for the issuance of
stock for employee benefit plans. At December 31, 1998, TAP had repurchased
$62 million of its common stock pursuant to the repurchase program.
CLASS B
In exchange for contributing the outstanding capital stock of The Travelers
Indemnity Company and a capital contribution of approximately $1.1 billion,
TIGI acquired approximately 328 million shares of Class B Common Stock of
TAP. TIGI owns all of the outstanding shares of Class B Common Stock
representing approximately 84% of the economic interest in TAP at December
31, 1998. Class B holders are entitled to 10 votes per share on any matter
submitted to vote of the TAP stockholders.
PREFERRED STOCK
In connection with the financing of the acquisition of Aetna P&C, Citigroup
purchased from TAP $540 million of Series Z Preferred Stock of TAP. On
April 26, 1996 and May 10, 1996, TAP redeemed the Series Z Preferred Stock
with the proceeds of the public offering of Class A Common Stock and
various Note and Trust Securities offerings. Prior to their redemption, TAP
paid $4 million of dividends on the Series Z Preferred Stock.
56
<PAGE> 57
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED
DIVIDENDS
The Company's insurance subsidiaries are currently subject to various
regulatory restrictions that limit the maximum amount of dividends
available to be paid to their parent without prior approval of insurance
regulatory authorities. Dividend payments to TAP from its insurance
subsidiaries are limited to $1.0 billion in 1999 without prior approval of
the Connecticut Insurance Department.
STATUTORY NET INCOME AND SURPLUS
Statutory net income of TAP's insurance subsidiaries was $1.4 billion and
$1.1 billion for the years ended December 31, 1998 and 1997, respectively,
and was $120 million, which includes $285 million related to the first
quarter of Aetna P&C, for the year ended December 31, 1996.
Statutory capital and surplus of TAP's insurance subsidiaries was $7.1
billion and $6.2 billion at December 31, 1998 and 1997, respectively.
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
NET UNREALIZED FOREIGN ACCUMULATED
GAIN ON CURRENCY OTHER CHANGES
INVESTMENT TRANSLATION IN EQUITY FROM
(for the year ended December 31, in millions) SECURITIES ADJUSTMENTS NONOWNER SOURCES
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Balance, beginning of year $ 729 $ (7) $ 722
Current-year change 200 (1) 199
------------------------------------------------------------------------------------------------
Balance, end of year $ 929 $ (8) $ 921
================================================================================================
1997
Balance, beginning of year $ 292 $ (7) $ 285
Current-year change 437 - 437
------------------------------------------------------------------------------------------------
Balance, end of year $ 729 $ (7) $ 722
================================================================================================
1996
Balance, beginning of year $ 288 $ (8) $ 280
Current-year change 4 1 5
------------------------------------------------------------------------------------------------
Balance, end of year $ 292 $ (7) $ 285
================================================================================================
</TABLE>
57
<PAGE> 58
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED
TAX EFFECTS ALLOCATED TO EACH COMPONENT OF OTHER CHANGES IN EQUITY FROM
NONOWNER SOURCES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
PRE-TAX TAX EXPENSE/ AFTER-TAX
(for the year ended December 31, in millions) AMOUNT (BENEFIT) AMOUNT
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Unrealized gain on investment securities:
Unrealized holding gains arising during year $ 439 $ 154 $ 285
Less: reclassification adjustment for gains
realized in net income (131) (46) (85)
-------------------------------------------------------------------------------------
Net unrealized gain on investment securities 308 108 200
Foreign currency translation adjustments (1) -- (1)
-------------------------------------------------------------------------------------
Other changes in equity from nonowner sources $ 307 $ 108 $ 199
=====================================================================================
1997
Unrealized gain on investment securities:
Unrealized holding gains arising during year $ 775 $ 272 $ 503
Less: reclassification adjustment for gains
realized in net income (101) (35) (66)
-------------------------------------------------------------------------------------
Net unrealized gain on investment securities 674 237 437
Foreign currency translation adjustments -- -- --
-------------------------------------------------------------------------------------
Other changes in equity from nonowner sources $ 674 $ 237 $ 437
=====================================================================================
1996
Unrealized gain on investment securities:
Unrealized holding gains arising during year $ 29 $ 10 $ 19
Less: reclassification adjustment for gains
realized in net income (24) (9) (15)
-------------------------------------------------------------------------------------
Net unrealized gain on investment securities 5 1 4
Foreign currency translation adjustments 1 -- 1
-------------------------------------------------------------------------------------
Other changes in equity from nonowner sources $ 6 $ 1 $ 5
=====================================================================================
</TABLE>
11. BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by an affiliate. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by an affiliate. The Company's share of net expense for the
qualified pension and other postretirement benefit plans was $31 million,
$26 million and $19 million for 1998, 1997 and 1996, respectively.
58
<PAGE> 59
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. BENEFIT PLANS, CONTINUED
401(k) SAVINGS PLAN
Substantially all employees of the Company are eligible to participate in a
401(k) savings plan sponsored by Citigroup. Effective January 1, 1997,
there are no Company matching contributions for substantially all
employees. For 1996, the Company's matching contribution, for almost all
employees except former Aetna P&C employees, was 100% of pre-tax
contributions up to an annual maximum of $1,000. Former Aetna P&C employees
received a match equal to 100% of their pre-tax contributions up to 5% of
salary. These matching contributions were invested in Series C Preferred
Stock issued by Citigroup. On January 2, 1998, the Series C Preferred Stock
was converted into Citigroup's common stock at an exchange rate of
approximately 2.42 shares of Citigroup's common stock for each share of
Series C Preferred Stock. The Company's expense was $1 million, ($11)
million and $2 million in 1998, 1997 and 1996, respectively. The 1997
amount reflects the effect of forfeitures.
12. LEASES
Most leasing functions for TIGI and its subsidiaries are administered by
the Company. Rent expense related to these leases is shared by the
companies on a cost allocation method based generally on estimated usage by
department. Rent expense was $106 million, $118 million and $90 million in
1998, 1997 and 1996, respectively.
Future minimum annual rentals under noncancellable operating leases are $96
million, $83 million, $62 million, $40 million, $24 million and $80 million
for 1999, 2000, 2001, 2002, 2003 and 2004 and thereafter, respectively.
Future sublease rental income of approximately $59 million will partially
offset these commitments.
13. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including interest rate
swaps, options and forward contracts, as a means of hedging exposure to
interest rate and foreign currency risk. The Company does not hold or issue
derivative instruments for trading purposes. These derivative financial
instruments have off-balance-sheet risk. Financial instruments with
off-balance-sheet risk involve, to varying degrees, elements of credit and
market risk in excess of the amount recognized on the consolidated balance
sheet. The contract or notional amounts of these instruments reflect the
extent of involvement the Company has in a particular class of financial
instrument. However, the maximum loss of cash flow associated with these
instruments can be less than these amounts. For forward contracts and
interest rate swaps, credit risk is limited to the amount that it would
cost the Company to replace the contract. As a writer of option contracts,
the Company has no credit risk since the counterparty has no performance
obligation after it has paid a premium.
The Company monitors creditworthiness of counterparties to these financial
instruments by using criteria of acceptable risk that are consistent with
on-balance-sheet financial instruments. The controls include credit
approvals, limits and other monitoring procedures.
59
<PAGE> 60
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
CONTINUED
The Company may occasionally enter into interest rate swaps in connection
with other financial instruments to provide greater risk diversification
and to better match an asset with a corresponding liability. Under interest
rate swaps, the Company agrees with other parties to exchange, at specified
intervals, the difference between fixed-rate and floating-rate interest
amounts calculated by reference to an agreed upon notional principal
amount. Generally, no cash is exchanged at the outset of the contract and
no principal payments are made by either party. A single net payment is
usually made by one counterparty at each due date. Swaps are not exchange
traded so they are subject to the risk of default by the counterparty.
At December 31, 1998 and 1997, the Company held interest rate swaps with
notional amounts of $46 million and $311 million, respectively. The fair
value of these financial instruments was $1 million (gain position) at
December 31, 1998 and was $11 million (gain position) and $10 million (loss
position) at December 31, 1997. The fair values were determined using a
discounted cash flow method.
The off-balance-sheet risk of forward contracts and options was not
significant at December 31, 1998 and 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses various financial instruments in the normal course of its
business. Certain insurance contracts are excluded by Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," and, therefore, are not included in the amounts
discussed.
At December 31, 1998 and 1997, investments in fixed maturities had a fair
value, which equaled carrying value, of $28.0 billion and $27.2 billion,
respectively. The fair value of investments in fixed maturities for which a
quoted market price or dealer quote are not available was $1.2 billion and
$1.5 billion at December 31, 1998 and 1997, respectively. The carrying
values of cash, short-term securities, mortgage loans, investment income
accrued and commercial paper approximated their fair values. See notes 1
and 5.
At December 31, 1998 and 1997, the carrying value of $1.3 billion of
long-term debt approximated its fair value. Fair value is based upon bid
price at December 31, 1998 and 1997. At December 31, 1998 and 1997, the
carrying value of $900 million of TAP Trust Securities approximated their
fair value. Fair value is based upon the closing price at December 31, 1998
and 1997.
The carrying values of $1.4 billion and $1.5 billion of financial
instruments classified as other assets approximated their fair values at
December 31, 1998 and 1997, respectively. The carrying values of $3.5
billion and $3.8 billion of financial instruments classified as other
liabilities at December 31, 1998 and 1997, respectively, also approximated
their fair values. Fair value is determined using various methods including
discounted cash flows, as appropriate for the various financial
instruments.
Financial guarantees are described in note 14.
60
<PAGE> 61
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
See note 13 and the following, "Guarantees of the Securities of Other
Issuers," for a discussion of financial instruments with off-balance-sheet
risk.
In the normal course of business, the Company issues fixed and variable
rate loan commitments and has unfunded commitments to partnerships. The
off-balance-sheet risks of these financial instruments were not significant
at December 31, 1998 and 1997.
GUARANTEES OF THE SECURITIES OF OTHER ISSUERS
The Company underwrote insurance guaranteeing the securities of other
issuers, primarily corporate and industrial revenue bond issuers. The
aggregate net amount of guarantees of principal and interest for such
securities was approximately $217 million ($5.1 billion before reinsurance)
and $334 million ($5.6 billion before reinsurance) at December 31, 1998 and
1997, respectively. The scheduled maturities for these guarantees are $8
million, $9 million, $6 million, $6 million and $188 million for 1999,
2000, 2001, 2002 and 2003 and thereafter, respectively.
Included in the gross amounts are financial guarantees representing the
Company's participation in the Municipal Bond Insurance Association's
guarantee of municipal bond obligations of $4.8 billion and $5.3 billion at
December 31, 1998 and 1997, respectively. The bonds are generally rated A
or above, and the Company's participation has been reinsured.
Reserves for the financial guarantee business, which include reserves for
defaults, incurred but not reported losses and unearned premiums, totaled
$24 million and $71 million at December 31, 1998 and 1997, respectively.
It is not practicable to estimate a fair value for the Company's financial
guarantees because there is no quoted market price for such contracts, it
is not practicable to reliably estimate the timing and amount of all future
cash flows due to the unique nature of each of these contracts, and the
Company no longer writes such guarantees.
LITIGATION
In the ordinary course of business, the Company is a defendant or
codefendant in various litigation matters other than environmental and
asbestos claims. Although there can be no assurances, as of December 31,
1998, 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.
15. RELATED PARTY TRANSACTIONS
The Company provides certain administrative services to TIC. Settlements
for these functions between the Company and its affiliates are made
regularly. Investment advisory and management services and data processing
services are provided by affiliated companies. Charges for these services
are shared by the companies on cost allocation methods based generally on
estimated usage by department.
61
<PAGE> 62
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. RELATED PARTY TRANSACTIONS, CONTINUED
An affiliate maintains a short-term investment pool in which the Company
participates. The positions of each company participating in the pool are
calculated and adjusted daily. At December 31, 1998 and 1997, the pool
totaled approximately $2.3 billion and $2.6 billion, respectively. The
Company's share of the pool amounted to $1.4 billion and $1.2 billion at
December 31, 1998 and 1997, respectively, and is included in short-term
securities in the consolidated balance sheet.
The Company participates in a stock option plan sponsored by Citigroup that
provides for the granting of stock options in Citigroup common stock to
officers and key employees. To further encourage employee stock ownership,
Citigroup introduced the WealthBuilder stock option program during 1997.
Under this program all employees meeting certain requirements have been
granted Citigroup stock options.
The Company applies APB 25 and related interpretations in accounting for
stock options. Since stock options under the Citigroup plans are issued at
fair market value on the date of award, no compensation cost has been
recognized for these awards. FAS 123 provides an alternative to APB 25
whereby fair values may be ascribed to options using a valuation model and
amortized to compensation cost over the vesting period of the options.
Had the Company applied FAS 123 in accounting for Citigroup stock options,
net income and net income per share-assuming dilution would have been the
pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
(for the year ended December 31, NET INCOME
in millions, except per share amounts) NET INCOME PER SHARE
---------------------------------------------------------------------------
<S> <C> <C>
1998
Net income, as reported $1,343 $ 3.42
FAS 123 pro forma adjustments, after tax (25) (0.06)
---------------------------------------------------------------------------
Net income, pro forma $1,318 $ 3.36
===========================================================================
1997
Net income, as reported $1,236 $ 3.12
FAS 123 pro forma adjustments, after tax (16) (0.04)
---------------------------------------------------------------------------
Net income, pro forma $1,220 $ 3.08
===========================================================================
1996
Net income, as reported $ 391 $ 1.02
FAS 123 pro forma adjustments, after tax (6) (0.01)
---------------------------------------------------------------------------
Net income, pro forma $ 385 $ 1.01
===========================================================================
</TABLE>
The assumptions used in applying FAS 123 to account for Citigroup stock
options were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected volatility of Citigroup stock 37.1% 31.5% 28.4%
Risk-free interest rate 4.70% 5.83% 5.50%
Expected annual dividends per Citigroup share $ 0.65 $ 0.47 $ 0.37
Expected annual forfeiture rate 5% 5% 5%
===============================================================================
</TABLE>
Most leasing functions for TIGI and its subsidiaries are administered by
the Company. See note 12.
62
<PAGE> 63
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. RELATED PARTY TRANSACTIONS, CONTINUED
The Company leases furniture and equipment from subsidiaries of TIGI. The
rental expense charged to the Company for this furniture and equipment was
$42 million, $48 million and $44 million in 1998, 1997 and 1996,
respectively.
In the ordinary course of business, the Company purchases and sells
securities through affiliated broker-dealers. These transactions are
conducted on an arm's-length basis.
The Company participates in reinsurance agreements with TIC. See note 6.
The Company purchases annuities from affiliates to settle certain claims.
Reinsurance recoverables at December 31, 1998 and 1997 included $787
million and $795 million, respectively, related to these annuities.
16. NONCASH FINANCING AND INVESTING ACTIVITIES
Significant noncash financing activities include the transfer of
approximately 328 million shares of Class B Common Stock to TIGI in
exchange for the outstanding capital stock of The Travelers Indemnity
Company in 1996. See note 3.
Other than the acquisition of Aetna P&C, there were no significant noncash
investing activities for the years ended December 31, 1998, 1997 or 1996.
See note 3.
63
<PAGE> 64
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
1998 (in millions, except per share amounts) QUARTER QUARTER QUARTER QUARTER TOTAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,594 $ 2,532 $ 2,601 $ 2,724 $ 10,451
Total expenses 2,108 2,106 2,176 2,224 8,614
---------------------------------------------------------------------------------------------------
Income before federal income taxes 486 426 425 500 1,837
Federal income tax expense 139 113 110 132 494
---------------------------------------------------------------------------------------------------
Net income $ 347 $ 313 $ 315 $ 368 $ 1,343
===================================================================================================
Net income per common share $ 0.88 $ 0.80 $ 0.80 $ 0.94 $ 3.43
Net income per common share-
assuming dilution $ 0.88 $ 0.80 $ 0.80 $ 0.94 $ 3.42
---------------------------------------------------------------------------------------------------
Common stock price
High $46 1/16 $45 5/8 $45 3/4 $35 1/2 $46 1/16
Low $39 1/8 $38 3/4 $29 5/8 $24 1/8 $24 1/8
Close $44 $42 7/8 $31 15/16 $31 $31
Dividends per share of common stock $ 0.100 $ 0.100 $ 0.100 $ 0.100 $ 0.400
---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
1997 (in millions, except per share amounts) QUARTER QUARTER QUARTER QUARTER TOTAL
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,431 $ 2,431 $ 2,507 $ 2,542 $ 9,911
Total expenses 2,041 2,038 2,040 2,040 8,159
---------------------------------------------------------------------------------------------------
Income before federal income taxes 390 393 467 502 1,752
Federal income tax expense 117 117 140 142 516
---------------------------------------------------------------------------------------------------
Net income $ 273 $ 276 $ 327 $ 360 $ 1,236
===================================================================================================
Net income per common share $ 0.68 $ 0.69 $ 0.83 $ 0.92 $ 3.13
Net income per common share-
assuming dilution $ 0.68 $ 0.69 $ 0.83 $ 0.92 $ 3.12
---------------------------------------------------------------------------------------------------
Common stock price
High $39 5/8 $40 3/8 $43 9/16 $45 $45
Low $31 3/4 $31 3/8 $37 7/8 $34 7/8 $31 3/8
Close $31 3/4 $39 7/8 $40 1/2 $44 $44
Dividends per share of common stock $ 0.075 $ 0.075 $ 0.075 $ 0.075 $ 0.300
===================================================================================================
</TABLE>
Due to changes in the number of average shares outstanding, quarterly
earnings per share of common stock may not add to the total for the years.
64
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Travelers Property Casualty Corp.:
We have audited the accompanying consolidated balance sheets of Travelers
Property Casualty Corp. and Subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Travelers Property
Casualty Corp. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations, changes in stockholders' equity and their cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Hartford, Connecticut
January 25, 1999
65
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES OF TRAVELERS PROPERTY CASUALTY CORP.
As of December 31, 1998
<TABLE>
<CAPTION>
Name of Subsidiary Company Place of Jurisdiction
- -------------------------- ---------------------
<S> <C>
. . . The Standard Fire Insurance Company Connecticut
. . . . . . AE Properties, Inc. California
. . . . . . . . . AE Town and Country Limited Partnership Arizona
. . . . . . . . . Bayhill Associates California
. . . . . . . . . Bayhill Restaurant II Associates California
. . . . . . . . . Industry Land Development Company California
. . . . . . . . . Industry Partners * California
. . . . . . Community Rehabilitation Investment Corporation Connecticut
. . . . . . Standard Fire UK Investments, LLC Connecticut
. . . . . . The Automobile Insurance Company of Hartford, Connecticut Connecticut
. . . . . . TravCal Secure Insurance Company California
. . . . . . . . . TravCal Indemnity Company California
. . . . . . Travelers Alpha Holdings, Inc. * Connecticut
. . . . . . Travelers Personal Security Insurance Company Connecticut
. . . . . . Travelers Property Casualty Insurance Company Connecticut
. . . . . . Travelers Property Casualty Insurance Company of Illinois Illinois
. . . The Travelers Indemnity Company Connecticut
. . . . . . Black Enterprise/Greenwich Street Corporate Growth Partners L.P. Delaware
. . . . . . Commercial Insurance Resources, Inc. Delaware
. . . . . . . . . Gulf Insurance Company Missouri
. . . . . . . . . . . . Atlantic Insurance Company Texas
. . . . . . . . . . . . Gulf Group Lloyds Texas
. . . . . . . . . . . . Gulf Insurance Holdings UK Limited England
. . . . . . . . . . . . . . . Gulf Insurance Company U.K. Limited England
. . . . . . . . . . . . Gulf Risk Services, Inc. Delaware
. . . . . . . . . . . . Gulf Underwriters Insurance Company Missouri
. . . . . . . . . . . . Select Insurance Company Texas
. . . . . . Countersignature Agency, Inc. Florida
. . . . . . Cripple Creek Venture Partner L.P. * Colorado
. . . . . . First Floridian Auto and Home Insurance Company Florida
. . . . . . First Trenton Indemnity Company New Jersey
. . . . . . . . . Red Oak Insurance Company New Jersey
. . . . . . Midkiff Development Drilling Program, L.P. * Texas
. . . . . . Parrish Equipment Partners, L.P. * New York
. . . . . . Pep Pendulum Holdings, L.L.C. New York
. . . . . . Salomon Brothers Capital Structure Arbitrage Fund I, L.P. * Delaware
. . . . . . Secure Affinity Agency, Inc. Delaware
. . . . . . The Charter Oak Fire Insurance Company Connecticut
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
. . . . . . The Phoenix Insurance Company Connecticut
. . . . . . . . . Constitution State Service Company Montana
. . . . . . . . . Constitution State Services LLC * Delaware
. . . . . . . . . Phoenix UK Investments, LLC Delaware
. . . . . . . . . The Travelers Indemnity Company of America Connecticut
. . . . . . . . . The Travelers Indemnity Company of Connecticut Connecticut
. . . . . . . . . The Travelers Indemnity Company of Illinois Illinois
. . . . . . The Premier Insurance Company of Massachusetts Massachusetts
. . . . . . The Travelers Home and Marine Insurance Company Indiana
. . . . . . The Travelers Indemnity Company of Missouri Missouri
. . . . . . The Travelers Lloyds Insurance Company Texas
. . . . . . The Travelers Marine Corporation California
. . . . . . TravCo Insurance Company Indiana
. . . . . . Travelers Bond Investments, Inc. Connecticut
. . . . . . Travelers Foreign Bond Partnership Connecticut
. . . . . . Travelers General Agency of Hawaii, Inc. Hawaii
. . . . . . Travelers Medical Management Services Inc. Delaware
. . . . . . Triple T Diamond Gateway LLC Delaware
. . . TPC Investments, Inc. Connecticut
. . . Travelers (Bermuda) Limited Bermuda
. . . Travelers Casualty and Surety Company Connecticut
. . . . . . 2677 Main Street Associates LLC Delaware
. . . . . . Farmington Casualty Company Connecticut
. . . . . . . . . Heartland Insurance Services, Inc. Connecticut
. . . . . . Ponderosa Homes* Connecticut
. . . . . . T-W Master LLC Delaware
. . . . . . . . . T-W Santa Clara LLC Delaware
. . . . . . Travelers Casualty & Surety Company of Canada Canada
. . . . . . Travelers Casualty and Surety Company of America Connecticut
. . . . . . Travelers Casualty and Surety Company of Illinois Illinois
. . . . . . Travelers Casualty Company of Connecticut Connecticut
. . . . . . Travelers Casualty UK Investments, LLC Connecticut
. . . . . . Travelers Commercial Insurance Company Connecticut
. . . . . . Travelers Excess and Surplus Lines Company Connecticut
. . . . . . Travelers Lloyds of Texas Insurance Company Texas
. . . . . . Travelers Tribeca Investments, Inc. New York
. . . Travelers P&C Capital I Delaware
. . . Travelers P&C Capital II Delaware
. . . Travelers P&C Capital III Delaware
. . . Tribeca Alternative Strategies, Inc. Connecticut
</TABLE>
* Indicates that wholly owned subsidiary is partially owned by more than one
subsidiary of Citigroup Inc.
<PAGE> 1
Exhibit 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Travelers Property Casualty Corp.:
We consent to incorporation by reference in the registration statements on:
- - Form S-3 Nos. 333-2682, 333-2684, and 333-30293
- - Form S-8 Nos. 333-07073, 333-07077, 333-10143, and 333-25605
of Travelers Property Casualty Corp. of our reports dated January 25, 1999,
relating to the consolidated balance sheets of Travelers Property Casualty
Corp. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998,
and all related schedules, which reports are incorporated by reference or
included in the December 31, 1998 annual report on Form 10-K of Travelers
Property Casualty Corp.
/s/ KPMG LLP
Hartford, Connecticut
March 19, 1999
<PAGE> 1
Exhibit 24.01
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Property Casualty Corp.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Jay S. Fishman, William P. Hannon and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1998, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any of them; and I do
hereby grant unto said attorneys-in-fact and agents full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in or about the premises, as fully and to all intents and purposes as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 19,
1999.
/s/ Kenneth J. Bialkin
--------------------------
Kenneth J. Bialkin
<PAGE> 2
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Property Casualty Corp.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Jay S. Fishman, William P. Hannon and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1998, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any of them; and I do
hereby grant unto said attorneys-in-fact and agents full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in or about the premises, as fully and to all intents and purposes as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 19,
1999.
/s/ Leslie B. Disharoon
--------------------------
Leslie B. Disharoon
<PAGE> 3
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Property Casualty Corp.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Jay S. Fishman, William P. Hannon and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1998, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any of them; and I do
hereby grant unto said attorneys-in-fact and agents full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in or about the premises, as fully and to all intents and purposes as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 19,
1999.
/s/ Robert I. Lipp
--------------------------
Robert I. Lipp
<PAGE> 4
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Property Casualty Corp.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Jay S. Fishman, William P. Hannon and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1998, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any of them; and I do
hereby grant unto said attorneys-in-fact and agents full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in or about the premises, as fully and to all intents and purposes as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 19,
1999.
/s/ Dudley C. Mecum
--------------------------
Dudley C. Mecum
<PAGE> 5
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Property Casualty Corp.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Jay S. Fishman, William P. Hannon and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1998, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any of them; and I do
hereby grant unto said attorneys-in-fact and agents full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in or about the premises, as fully and to all intents and purposes as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 19,
1999.
/s/ Frank J. Tasco
--------------------------
Frank J. Tasco
<PAGE> 6
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Property Casualty Corp.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Jay S. Fishman, William P. Hannon and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1998, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any of them; and I do
hereby grant unto said attorneys-in-fact and agents full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in or about the premises, as fully and to all intents and purposes as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 16,
1999.
/s/ Sanford I. Weill
---------------------
Sanford I. Weill
<PAGE> 7
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Property Casualty Corp.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Property Casualty Corp., a Delaware corporation, do hereby constitute
and appoint Jay S. Fishman, William P. Hannon and James M. Michener, and each of
them severally, to be my true and lawful attorneys-in-fact and agents, each
acting alone with full power of substitution and re-substitution, to sign my
name to an Annual Report on Form 10-K of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1998, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including this
power of attorney), and other documents in connection therewith with the
Securities and Exchange Commission, provided that such Annual Report on Form
10-K in final form, and any amendment or amendments thereto and such other
documents, be approved by said attorneys-in-fact, or by any of them; and I do
hereby grant unto said attorneys-in-fact and agents full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in or about the premises, as fully and to all intents and purposes as I might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 19,
1999.
/s/ Arthur Zankel
---------------------
Arthur Zankel
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TRAVELERS PROPERTY CASUALTY CORP.'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 27,977
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 828
<MORTGAGE> 574
<REAL-ESTATE> 83
<TOTAL-INVEST> 31,886
<CASH> 62
<RECOVER-REINSURE> 9,153
<DEFERRED-ACQUISITION> 518
<TOTAL-ASSETS> 51,274
<POLICY-LOSSES> 29,589
<UNEARNED-PREMIUMS> 4,166
<POLICY-OTHER> 2,019
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,250
900
0
<COMMON> 4
<OTHER-SE> 9,121
<TOTAL-LIABILITY-AND-EQUITY> 51,274
7,796
<INVESTMENT-INCOME> 2,100
<INVESTMENT-GAINS> 143
<OTHER-INCOME> 412
<BENEFITS> 5,947
<UNDERWRITING-AMORTIZATION> 1,197
<UNDERWRITING-OTHER> 1,470
<INCOME-PRETAX> 1,837
<INCOME-TAX> 494
<INCOME-CONTINUING> 1,343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,343
<EPS-PRIMARY> 3.43
<EPS-DILUTED> 3.42
<RESERVE-OPEN> 30,138
<PROVISION-CURRENT> 6,057
<PROVISION-PRIOR> (323)
<PAYMENTS-CURRENT> 2,352
<PAYMENTS-PRIOR> 4,025
<RESERVE-CLOSE> 29,411
<CUMULATIVE-DEFICIENCY> (252)
</TABLE>
