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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-14328
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TRAVELERS PROPERTY CASUALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 06-1445591
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
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ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(860) 277-0111
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
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CLASS A COMMON STOCK, PAR VALUE $ .01 PER 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. \X\
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT AS OF MARCH 3, 2000 WAS APPROXIMATELY $1.91 BILLION.
AS OF MARCH 3, 2000, 57,131,376 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, 1999 ARE INCORPORATED BY REFERENCE INTO PART II
OF THIS FORM 10-K.
CERTAIN PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 2000 ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD ON APRIL 18, 2000 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, 1999
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TABLE OF CONTENTS
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FORM 10-K
ITEM NUMBER PAGE
PART I
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1. Business............................................................... 1
2. Properties............................................................. 44
3. Legal Proceedings...................................................... 44
4. Submission of Matters to a Vote of Security Holders.................... 45
PART II
5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................................... 45
6. Selected Financial Data................................................ 46
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 46
7A. Quantitative and Qualitative Disclosures About Market Risk............. 46
8. Financial Statements and Supplementary Data............................ 47
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................. 47
PART III
10. Directors and Executive Officers of the Registrant..................... 47
11. Executive Compensation................................................. 47
12. Security Ownership of Certain Beneficial Owners
and Management....................................................... 47
13. Certain Relationships and Related Transactions......................... 47
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................................... 48
Exhibit Index.......................................................... 49
Signatures............................................................. 53
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.
Citigroup owns approximately 85% of the Company's outstanding common
stock at December 31, 1999. 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 Interest Expense and Other; and (iii) certain
other information.(1) A glossary of insurance terms is included beginning on
page 35.
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(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 1998 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 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 1999, Commercial Lines generated net written
premiums of $4.4 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 National Accounts customers 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 service, such as claims settlement, loss control and risk management
information services, and are generally offered in connection with a large
deductible or self-insured program. Many of these products generate fee income
rather than net written premiums, and are not reflected in the accompanying
table.
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TOTAL NET WRITTEN PREMIUMS
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PERCENTAGE OF TOTAL
YEAR ENDED DECEMBER 31, NET WRITTEN PREMIUMS
--------------------------------------- YEAR ENDED
DECEMBER 31,
1999 1998(1)(3) 1997(2)(3) 1999
---- ---------- ---------- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
NET WRITTEN PREMIUMS BY PRODUCT
LINE:
Commercial multi-peril $1,469 $1,436 $1,037 33.3%
Workers' compensation 1,078 1,179 1,176 24.4
Commercial automobile 724 781 866 16.4
Property 507 440 507 11.5
General liability 422 539 931 9.6
Fidelity and surety 206 209 201 4.7
Other 2 30 39 0.1
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Total Commercial Lines $4,408 $4,614 $4,757 100.0%
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NET WRITTEN PREMIUMS BY MARKET:
National Accounts $489 $625 $657 11.1%
Commercial Accounts 1,816 1,800 1,986 41.2
Select Accounts 1,494 1,494 1,432 33.9
Specialty Accounts 609 695 682 13.8
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Total Commercial Lines $4,408 $4,614 $4,757 100.0%
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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.
(3) 1998 and 1997 amounts have been restated to reclassify boiler and
machinery and ocean marine business from Other to Property. There
was no impact on total net written premiums.
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
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workers' compensation products: (i) guaranteed cost insurance products, in which
policy premium charges are fixed and do not vary as a result of the insured's
loss experience, (ii) loss-sensitive insurance products, including large
deductible plans and retrospectively rated policies, in which fees or premiums
are adjusted based on actual loss experience of the insured during the policy
period, and (iii) service programs, which are generally sold to the Company's
National Accounts customers, where the Company receives fees for providing loss
prevention, risk management, and claim 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
boiler and machinery insurance, which provides coverage for loss or damage
resulting from the mechanical breakdown of boilers and machinery, and 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, and surety which 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 miscellaneous assumed reinsurance.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The Company distributes its commercial products through approximately
5,000 brokers and independent agencies located throughout the United States that
are serviced by
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approximately 80 field offices. The Company seeks to establish relationships
with well-established, independent insurance agencies and brokers. In selecting
new independent agencies and brokers to distribute the Company's products, the
Company considers each agency's or broker's profitability, financial stability,
staff experience and strategic fit with the Company's operating and marketing
plans. Once an agency or broker is appointed, the Company carefully monitors its
performance.
NATIONAL ACCOUNTS
The Company's National Accounts provides a variety of casualty products
to large companies. 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 loss-sensitive products in
connection with a large deductible or self-insured program and, to a lesser
extent, a guaranteed cost or a retrospectively rated insurance policy. Customers
are frequently national in scope and range in size from businesses with sales of
approximately $10 million per year to Fortune 2000 corporations. Through a
network of field offices, the Company's marketing and underwriting specialists
work closely with national and regional brokers to tailor insurance coverages to
meet customers needs. Workers' compensation accounted for approximately 72% of
the products sold in 1999 to National Accounts customers, based on gross written
premiums and fee income.
In December 1998, the Company announced a global strategic alliance
with Winterthur International, called Travelers/Winterthur International, which
markets a variety of commercial lines products to multinational corporations.
Travelers/Winterthur International allows the Company to better serve its
customers requiring international underwriting and insurance solutions.
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 services
approximately 30% of the total workers' compensation assigned risk market,
making it one of the largest servicing insurers in the industry. Assigned risk
plan contracts generated approximately $32 million in service fee income in 1999
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 $38 million and service fee
income of $3 million in 1999.
In addition, the Alternative Market business 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.
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COMMERCIAL ACCOUNTS
The Company's Commercial Accounts sells a broad range of property and
casualty insurance products through a large network of independent agents and
brokers. Commercial Accounts casualty products target businesses with 75 to
1,000 employees, while its property products target both large and 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 has dedicated operations that exclusively target the
construction industry, providing insurance and risk management services for
virtually all areas of construction, including general contractors, heavy
construction (including street and road) and special trade contractors, except
artisan or smaller trade contractors. The Company offers all product lines to
midsize and national customers in the construction market, including both
guaranteed cost and loss-responsive products, and wrap-up insurance programs,
with general liability, workers' compensation, commercial auto, commercial
property and inland marine coverages. The dedicated construction operations
provide specialized service and underwriting, with local market expertise and
national capability, that enable the Company to tailor specialized coverages,
have competitive pricing and control risk. This includes local underwriters who
understand their states' laws and claim climates, engineering and loss control
specialists, professional claim management and legal personnel with extensive
construction experience. Construction's products are distributed through
independent agents and brokers throughout the United States. Construction
operations contributed approximately 23% of the Commercial Accounts
premium-based business in 1999. Additionally, construction operations
service-based business contributed $5 million of service fees to the Company in
1999.
SELECT ACCOUNTS
Select Accounts serves firms typically with one to 75 employees.
Products offered by 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.
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Personnel in the Company's field offices and other points of local
service, which are located throughout the United States, work closely with
agents to ensure a strong local presence in the marketplace. The Company
utilizes a marketing and underwriting approach based on agency automation and
defined underwriting criteria. Agency automation allows agents access to the
Company's price quotation and policy issuance systems and enables agents to
provide faster and more cost-effective service to customers with supervision and
underwriting control. Agents that do not utilize the automated quotation and
policy issuance systems work with the Company's sales and marketing
representatives who have point of sale authority. The Company also offers agents
the opportunity to utilize the Company's centralized service center. In return
for a fee, the Company assumes many of the back-office functions previously
performed by the agents, such as policy changes, billing inquiries, certificate
issuance and other administrative functions. 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, midsize 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, claim-handling abilities,
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 professional liability and management liability.
Products include directors' and officers' liability insurance, errors and
omissions coverages for financial institutions, investment counselors and mutual
fund advisors, and fidelity and surety coverage for related classes. In
addition, Gulf Specialty offers professional liability coverage for
professionals such as lawyers, architects and engineers, insurance agents,
podiatrists and chiropractors medical malpractice. Gulf Specialty also writes
umbrella coverage for various industries, provides insurance products to the
entertainment and transportation industries 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
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organized around three broad customer segments: Financial Services, Construction
and Commercial Risk, and two specialized product niches: National Commercial
Surety and Professional Liability Services.
PRICING AND UNDERWRITING
Pricing levels for property and casualty insurance products by the
Company's Commercial Lines are generally developed based upon the frequency and
severity of estimated losses, the expenses of producing business and
administering claims, and a reasonable allowance for profit. The Company has a
disciplined approach to underwriting and risk management which emphasizes a
profit-oriented approach rather than a premium volume or market share-oriented
approach to underwriting. The market conditions for many Commercial Lines
products are characterized by difficult pricing and increased competition,
although indications of stronger pricing levels were evident in the last six
months of 1999.
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, 1999,
contractholder receivables and payables on unpaid losses were each approximately
$2.1 billion. Retrospectively rated policies are primarily used in workers'
compensation coverage. Although the retrospectively rated feature of the policy
substantially reduces insurance risk for the Company, it introduces credit risk
to the Company. Receivables on unpaid losses from holders of retrospectively
rated policies totaled approximately $382 million at December 31, 1999.
Collateral, primarily letters of credit and, to a lesser extent, cash collateral
or surety bonds, 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.
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The Company is also a member of and participates in the underwriting
operations of an insurance pool, which makes independent underwriting decisions
on behalf of its members. This pool insures specialized risks for exposures
related to the nuclear power industry.
The Company continually reviews its exposure to catastrophic losses and
attempts to mitigate such exposure. See "Reinsurance." The Company uses
sophisticated computer modeling techniques to assess underwriting risks and
renewal of business in catastrophe-prone areas.
GEOGRAPHIC DISTRIBUTION
The following table shows the distribution of Commercial Lines' direct
written premiums for the states that accounted for the majority of premium
volume for the year ended December 31, 1999:
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STATE % OF TOTAL
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New York 13.4%
California 8.8
Texas 6.8
Massachusetts 5.8
Florida 4.4
New Jersey 4.3
Pennsylvania 4.1
Illinois 3.9
Connecticut 3.4
North Carolina 3.2
Georgia 3.0
All Others (1) 38.9
-----
TOTAL 100.0%
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(1) No other single state accounted for 3.0% or more of the total direct
written premiums written in 1999 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 1998 direct written premiums
published by A.M. Best. In 1999, Personal Lines generated net written premiums
of approximately $3.8 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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TOTAL NET WRITTEN PREMIUMS
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PERCENTAGE OF TOTAL NET
WRITTEN PREMIUMS
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------ DECEMBER 31,
1999 1998 1997 1999
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(Dollars in millions)
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NET WRITTEN PREMIUMS BY PRODUCT
LINE:
Personal automobile $2,369 $2,328 $1,950 62.3%
Homeowners and other (1) 1,436 1,162 1,124 37.7
------ ------ ------ -----
Total Personal Lines $3,805 $3,490 $3,074 100.0%
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</TABLE>
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(1) The 1999 and 1997 premiums include adjustments associated with reinsurance
transactions, which increased homeowners premiums by $72 million and $69
million, respectively.
PRODUCT LINES
The Company writes virtually all types of property and casualty
insurance covering personal risks. Personal Lines had approximately 5.3 million,
5.1 million and 4.6 million policies in force at December 31, 1999, 1998 and
1997, 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. The Company distributes nonstandard automobile
insurance in Texas, New York, Florida, Georgia and Connecticut through
independent agents. In 2000, the Company plans to expand this product into
additional 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.
SELECTED DISTRIBUTION CHANNEL INFORMATION
The accompanying table sets forth by distribution channel net written
premiums for Personal Lines for the periods indicated. For a description of the
distribution channels referred to in the accompanying table below, see
"Principal Markets and Methods of Distribution."
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TOTAL NET WRITTEN PREMIUMS
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET
WRITTEN PREMIUMS
YEAR ENDED DECEMBER 31, YEAR ENDED
------------------------ DECEMBER 31,
1999 1998 1997 1999
---- ---- ---- ------------------------
(Dollars in millions)
NET WRITTEN PREMIUMS BY
DISTRIBUTION CHANNEL (1):
<S> <C> <C> <C> <C>
Independent agents $3,006 $2,853 $2,703 79.0%
Affinity group marketing 353 264 180 9.3
Joint marketing arrangements 221 160 119 5.8
SECURE 225 213 72 5.9
------ ------ ------ -----
Total Personal Lines $3,805 $3,490 $3,074 100.0%
====== ====== ====== =====
</TABLE>
- --------------------------
(1) The 1999 and 1997 premiums include adjustments associated with reinsurance
transactions, which increased net written premiums by $72 million and $69
million, respectively.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The Company's Personal Lines products are distributed primarily through
approximately 5,400 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 alternative distribution channels,
including sponsoring organizations such as employee and affinity groups, and
joint marketing arrangements with other insurers. In addition, in 1998, Personal
Lines began cross-marketing its products to Citibank customers, primarily credit
cardholders. (Citibank is a unit of Citigroup.) In 1999, the Company expanded
its presence on the internet. Although it is in the early stages of growth, this
new distribution channel provides a significant opportunity to reach potential
customers. Personal Lines had also been marketing products through independent
agents of Primerica Financial Services, a unit of Citigroup, under the TRAVELERS
SECURE(R) program. In the third quarter of 1999 this program was curtailed. High
loss ratios and acquisition costs, further compounded by limited ability to
raise prices to reflect loss trends, led to the curtailment of sales through
TRAVELERS SECURE(R). In the states of Florida, New Jersey and Massachusetts, the
Company operates domestic companies to enhance its competitive capability in
these highly regulated markets. The Company primarily distributes its products
through independent agents in these markets. 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.
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
11
<PAGE> 14
preferences to 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 and joint marketing arrangements with other insurers. 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. Potential customers for the Citibank
program and certain affinity group programs are directed to one of the Company's
two telemarketing centers where an authorized telemarketing sales representative
underwrites and sells new business to interested individuals.
Since 1995, the Company has had 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 to 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 efficient claims handling and high level of
automation, allow it to offer a competitively priced product. In addition, the
Company is leveraging its service, claims handling and automation experience in
the expansion of the distribution of Personal Lines products through its
alternative distribution 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
12
<PAGE> 15
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 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 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.
13
<PAGE> 16
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, 1999:
STATE % OF TOTAL
- ----- ----------
New York 21.3%
Pennsylvania 8.1
Texas 8.0
New Jersey 7.2
Massachusetts 6.2
Florida 5.9
Connecticut 5.5
Georgia 4.0
Virginia 3.9
North Carolina 3.4
California 3.2
All others (1) 23.3
-----
TOTAL 100.0%
=====
- ---------------------
(1) No other single state accounted for 3.0% or more of the total direct
written premiums written in 1999 by the Company.
CLAIM ADMINISTRATION
The Company employs 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.
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. Additional claim staffs are dedicated to each of the
Personal Lines domestic companies as well as to the Commercial Lines Specialty
Accounts businesses. 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.
14
<PAGE> 17
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 1999, the Company initiated
the dedication of claim professionals to the Company's Construction market,
piloted the use of digital and wireless technology and internet-based claim
notification and expanded its "catastrophe van" fleet. In addition, the Company
began to offer to Personal Lines and Select Accounts claimants the option of
utilizing the Contractor@Once(sm) service whereby the Company arranges for a
local, independent contractor to provide estimates. Claimants then have the
option to directly contract with the same independent contractors to make
repairs to their home or small business.
Another example of this effort is TravComp(sm), 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 generally subject to
aggregate loss limits. Although the reinsurer is liable to the Company to the
extent of the reinsurance ceded, the Company remains primarily liable as the
direct insurer on all risks reinsured. Reinsurance recoverables are reported
after allowances for uncollectible amounts. The Company also holds collateral,
including escrow funds and letters of credit, under certain reinsurance
agreements. The Company monitors the financial condition of reinsurers on an
ongoing basis, and reviews its reinsurance arrangements periodically. Reinsurers
are selected based on their financial condition, business practices and the
price of their product offerings. For additional information concerning
reinsurance, see Note 5 of Notes to Consolidated Financial Statements.
The Company utilizes a variety of reinsurance agreements to control its
exposure to large property and casualty losses. The Company utilizes the
following types of reinsurance: (i) 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)
15
<PAGE> 18
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, 1999 (in millions):
<TABLE>
<CAPTION>
REINSURANCE
REINSURER RECOVERABLE A.M. BEST RATING OF REINSURER
--------- ----------- -----------------------------
<S> <C> <C>
General Reinsurance Corporation $493 A++ highest of 15 ratings
American Re-Insurance Company 398 A++ highest of 15 ratings
Executive Risk Indemnity Inc. 153 A 3rd highest of 15 ratings
Employers Reinsurance Corporation 126 A++ highest of 15 ratings
Tokio Marine & Fire Ins. Co. Ltd, US Branch 110 A++ highest of 15 ratings
</TABLE>
As of December 31, 1999, the Company had reinsurance recoverables from
Lloyd's of $375 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 $304 million of
the Company's Lloyd's reinsurance recoverable at December 31, 1999 relates to
Equitas liabilities. The remaining recoverables of $71 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 a pool with other insurers to provide
capacity for unique and high-valued risks for exposures related to the nuclear
power industry. The Company's maximum net exposure to this type of business at
December 31, 1999 was $15 million per risk. Beginning January 1, 2000, the
Company's maximum net exposure to this type of business was reduced to $1
million per risk.
At December 31, 1999, the Company had $9.4 billion in reinsurance
recoverables. Of this amount, $2.4 billion is for mandatory 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, $2.4 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 $4.6
billion ceded to reinsurers at December 31, 1999, $871 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, 1999, $533 million of reinsurance recoverables were collateralized
by letters of credit and escrow funds.
16
<PAGE> 19
Net Retention Policy. The descriptions below relate to reinsurance
arrangements of the Company in effect at January 1, 2000. 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 with a $5 million annual
aggregate deductible. 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. Personal Lines retains the first
$5 million of umbrella policies and purchases facultative reinsurance for limits
over $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 $40 million and the second layer
provides 80% of approximately $35 million of reinsurance coverage in excess of a
$92 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 44% 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 44% 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 85% 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.
FLORIDA 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 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.
17
<PAGE> 20
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, 1999, 1998 and 1997 the combined amounts of discount for the Company were
$832 million, $781 million and $912 million, respectively.
For a reconciliation of beginning and ending property and casualty
insurance claims and claim adjustment expense reserves of the Company for each
of the last three years, see Note 6 of Notes to Consolidated Financial
Statements.
18
<PAGE> 21
The table at the end of this section sets forth the year-end reserves
from 1989 through 1999 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
1989-1995 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 1989-1999 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 1989 included $4 million for a loss
that is finally settled in 1999 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
1989-1998 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
1989-1999 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. The amounts recoverable on these retrospectively rated
policies mitigate the impact of the cumulative deficiencies or redundancies but
are not reflected in the accompanying table.
Because of these and other factors, it is difficult to develop a
meaningful extrapolation of estimated future redundancies or deficiencies in
loss reserves from the data in the accompanying table.
19
<PAGE> 22
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: $38 million, $37 million and $31 million for 1999,
1998 and 1997, respectively.
20
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(a) 1995(a)
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Reserves for Loss and Loss Adjustment
Expense Originally Estimated: $ 7,729 $ 8,022 $ 8,360 $ 8,955 $ 9,319 $ 9,712 $10,090
Cumulative amounts paid as of
One year later 2,091 2,135 1,869 2,005 1,706 1,595 1,521
Two years later 3,488 3,422 3,161 3,199 2,843 2,631 2,809
Three years later 4,415 4,351 4,041 4,063 3,610 3,798 3,903
Four years later 5,095 4,996 4,706 4,662 4,563 4,676 4,761
Five years later 5,597 5,492 5,182 5,465 5,274 5,388
Six years later 5,995 5,887 5,878 6,078 5,882
Seven years later 6,333 6,466 6,421 6,618
Eight years later 6,851 6,953 6,913
Nine years later 7,287 7,408
Ten years later 7,707
Reserves re-estimated as of
One year later 7,832 8,128 8,362 9,058 9,270 9,486 9,848
Two years later 7,929 8,197 8,637 9,139 9,234 9,310 9,785
Three years later 8,077 8,592 8,906 9,183 9,108 9,395 9,789
Four years later 8,560 9,003 9,026 9,189 9,271 9,427 9,735
Five years later 8,991 9,159 9,123 9,405 9,298 9,463
Six years later 9,189 9,295 9,367 9,440 9,349
Seven years later 9,328 9,551 9,396 9,508
Eight years later 9,592 9,586 9,477
Nine years later 9,616 9,669
Ten years later 9,706
Cumulative deficiency (redundancy) 1,977 1,647 1,117 553 30 (249) (355)
Gross liability -- end of year $14,638 $15,013 $15,213
Reinsurance recoverables 5,319 5,301 5,123
----------------------------
Net liability -- end of year $ 9,319 $ 9,712 $10,090
============================
Gross reestimated liability -- latest $14,848 $15,196 $14,867
Reestimated reinsurance
recoverables -- latest 5,499 5,733 5,132
----------------------------
Net reestimated liability -- latest $ 9,349 $ 9,463 $ 9,735
============================
Gross cumulative deficiency (redundancy) $ 210 $ 183 $ (346)
============================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996(b) 1997(b) 1998(b) 1999(b)
(Dollars in millions)
<S> <C> <C> <C> <C>
Reserves for Loss and Loss Adjustment
Expense Originally Estimated: $21,816 $21,406 $20,763 $19,983
Cumulative amounts paid as of
One year later 3,704 4,025 4,159
Two years later 6,600 6,882
Three years later 8,841
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Reserves re-estimated as of
One year later 21,345 21,083 20,521
Two years later 21,160 20,697
Three years later 20,816
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative deficiency (redundancy) (1,000) (709) (242)
Gross liability -- end of year $30,969 $30,138 $29,411 $28,854
Reinsurance recoverables 9,153 8,732 8,648 8,871
-------------------------------------
Net liability -- end of year $21,816 $21,406 $20,763 $19,983
=====================================
Gross reestimated liability -- latest $30,067 $29,480 $29,290
Reestimated reinsurance
recoverables -- latest 9,251 8,783 8,769
---------------------------
Net reestimated liability -- latest $20,816 $20,697 $20,521
===========================
Gross cumulative deficiency (redundancy) $ (902) $ (658) $ (121)
============================
</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.
21
<PAGE> 24
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
installment 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,
1999 1998 1997
<S> <C> <C> <C>
Commercial Lines:
Loss and LAE ratio 77.9% 78.5% 78.4%
Underwriting expense ratio 30.7 29.7 30.6
Combined ratio before
policyholder dividends 108.6(1) 108.2 109.0
Combined ratio 109.7 109.1 111.0
Personal Lines:
Loss and LAE ratio 70.0 66.7 63.5
Underwriting expense ratio 26.7 27.2 28.7
Combined ratio 96.7 93.9 92.2
Total Company:
Loss and LAE ratio 74.3 73.6 72.4
Underwriting expense ratio 28.8 28.6 29.9
Combined ratio before
policyholder dividends 103.1(1) 102.2 102.3
Combined ratio 103.7 102.7 103.5
</TABLE>
(1) Includes the treatment of the commutation of an asbestos liability to an
insured. Excluding the commutation, the Commercial Lines combined ratio
before policyholder dividends and the Total TAP combined ratio before
policyholder dividends were 106.1% and 101.8%, respectively.
22
<PAGE> 25
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 (3rd of 18) Aa3 (4th of 19) AA- (4th of 17)
Gulf pool (2) A+ (2nd of 15) -- -- AA (3rd of 17)
Travelers C&S of America A+ (2nd of 15) AA (3rd of 18) Aa3 (4th of 19) AA- (4th of 17)
</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
23
<PAGE> 26
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, 1999, the carrying value of the Company's investment
portfolio was $29.8 billion, of which 90.0% was invested in fixed maturity
investments and short-term investments (of which 43% was invested in federal,
state or municipal government obligations), 1.7% in mortgage loans and real
estate held for sale, 4.2% in common stocks and other equity securities and 4.1%
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 $1.5 billion, representing approximately
5.9% of the Company's fixed maturity investment portfolio as of December 31,
1999.
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, 1999, 1998
and 1997. See Note 4 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,
1999 1998 1997
(Dollars in millions)
<S> <C> <C> <C>
Average investments $30,860.8 $31,458.5 $30,197.7
Net investment income $ 2,091.8 $2,100.0 $ 2,050.8
Average yield (1) 7.2% 7.4% 7.4%
Average tax equivalent yield (1) 8.0% 8.2% 8.0%
</TABLE>
- ---------------------
(1) Excluding realized and unrealized investment gains and losses.
DERIVATIVES
See Note 12 of Notes to Consolidated Financial Statements for a
discussion of the policies and transactions related to derivatives of the
Company.
24
<PAGE> 27
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).
According to A.M. Best, there are approximately 1,100 property-casualty
organizations in the United States, comprised of approximately 2,500
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 through the use
of alternative risk management techniques such as self-insured retentions, large
deductibles, risk-purchasing groups, risk-retention groups and captives.
COMMERCIAL LINES. The insurance industry is represented in the
commercial lines marketplace by many insurance companies of varying size as well
as other entities offering risk alternatives such as self-insured retentions or
captive programs. 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 and its business is
typically written through national brokers and, to a lesser extent, regional
brokers. Insurance companies compete in this market based on price, product
offerings, claim and loss prevention services, managed care cost containment,
and risk management information systems. National Accounts also offers a large
nationwide network of localized claim service centers which provide greater
flexibility in claims adjusting and allows the Company to more quickly respond
to the needs of its customers. 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 services approximately 30% of the total workers' compensation assigned
risk market, making it one of the largest servicing insurers in the industry.
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 business has become a focused industry market 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
25
<PAGE> 28
risk management service. The Company utilizes its specialized underwriters,
engineers, and claim handlers, who have extensive experience and knowledge of
the construction industry, to work with customers, agents and brokers to compete
effectively in this market.
The Select Accounts market is highly competitive and is typically
written through independent agents and, to a lesser extent, regional brokers.
Both national and regional property-casualty insurance companies compete in the
Select Accounts market which is generally comprised of lower 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. In addition, the Company has established a centralized service
center to help agents perform many back-office functions, in return for a fee.
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,
claim-handling expertise, 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, Personal Lines 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 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
26
<PAGE> 29
practices enables it to price its products competitively in all of its
distribution channels. The personal auto insurance marketplace has continued to
be more competitive in 1999 as some personal auto carriers have reduced prices
in selected markets. This trend is expected to continue in 2000.
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 holding company, Travelers Property Casualty Corp., 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
27
<PAGE> 30
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
$1.2 billion in 2000 without prior approval of the Connecticut Insurance
Department.
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 $134 million, $176 million and $226 million in 1999, 1998
and 1997, respectively. The related combined underwriting losses for the Company
were $20 million, $19 million and $16 million in 1999, 1998 and 1997,
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 use of information. 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
28
<PAGE> 31
change in control of a nondomestic admitted insurance company in that state.
While such prenotification statutes do not authorize the state agency to
disapprove the change of control, such statutes do authorize issuance of a cease
and desist order with respect to the nondomestic admitted insurer if certain
conditions exist such as undue market concentration. Any future transactions
that would constitute a change in control of the Company would generally require
prior approval by the insurance departments of the states in which the Company's
insurance subsidiaries are domiciled or commercially domiciled and may require
preacquisition notification in those states that have adopted preacquisition
notification provisions and in which such insurance subsidiaries are admitted to
transact business.
Two subsidiaries of the Company are 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.
29
<PAGE> 32
In each of the last three years, certain of the Company's insurance
subsidiaries have been outside of the usual range for certain IRIS ratios. In
all such instances, the regulators have been satisfied upon follow-up that there
is no solvency problem. It is possible that similar events could occur this
year, and management believes that the resolution would be the same. No
regulatory action has been taken by any state insurance department or the NAIC
with respect to IRIS ratios of any of the Company's insurance subsidiaries for
the three years ended December 31, 1999.
For 1999 and 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.
The following table sets forth information regarding the premium to
surplus ratios of the Company.
SCHEDULE OF PREMIUM TO SURPLUS RATIOS (STATUTORY BASIS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Net written premiums $8,213 $8,104 $7,832
Capital and surplus 7,656 7,079 6,188
Ratio of net written premiums to capital
and surplus 1.07x 1.14x 1.27x
</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 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 adopted by the states, 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
30
<PAGE> 33
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) authorizes the relevant Insurance Commissioner to
take whatever regulatory actions considered necessary to protect the best
interest of the policyholders and creditors of the insurer which may include the
actions necessary to cause the insurer to be placed under regulatory control
(i.e., rehabilitation or liquidation) if surplus falls below 100% of the RBC
amount. The fourth action level is the Mandatory Control Level (as defined by
the NAIC) which authorizes 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, 1999, 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.
The Gramm-Leach-Bliley Act passed in November 1999 included the most
extensive consumer privacy provisions ever enacted by Congress. These
provisions, among other things, require full disclosure of the Company's privacy
policy to consumers and mandate offering the customer the ability to opt out of
having customer information disclosed to third parties. In addition, these
provisions require the federal banking regulators to adopt privacy regulations
and permit the states to adopt more extensive privacy protections through
legislation or regulation. There can be no assurance whether any such
legislation or regulation will place additional limitations on the Company's
operations or adversely affect its earnings.
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,
31
<PAGE> 34
has not yet been introduced as part of any legislation in Congress.
It is not possible to predict whether 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.
INTEREST EXPENSE AND OTHER
Interest Expense and Other 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, 1999, the Company had approximately 19,609 full-time
and 685 part-time employees. The Company believes that its employee relations
are satisfactory. None of the Company's employees is subject to collective
bargaining agreements.
SOURCE OF FUNDS
For a discussion of the Company's sources of funds and maturities of
the long-term debt of the Company, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," and Note 7 of Notes to Consolidated Financial Statements.
TAXATION
For a discussion of tax matters affecting the Company and its
operations, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and Note 8 of Notes to Consolidated
Financial Statements.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial information regarding industry segments of the Company,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Note 3 of Notes to Consolidated Financial
Statements.
RECENT TRANSACTION
On February 29, 2000, the Company announced that it had signed a letter
of intent to acquire the surety business of Reliance Group Holdings, Inc. for
$580 million.
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<PAGE> 35
EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers of the Company are indicated below. Ages
are given as of March 3, 2000.
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITIONS SINCE
- ---- --- --------- -----
<S> <C> <C> <C>
Jay S. Fishman 47 President and Chief Executive Officer 1996
Charles J. Clarke 64 Vice Chairman; Chairman - Commercial 1996
Lines
J. David Gibbs 45 President and Chief Executive Officer - 1999
Claim Services
Anil "Bob" Khanna 43 Chief Executive Officer - Personal Lines 1998
Joseph P. Kiernan 59 Chairman and Chief Executive Officer - 1996
Bond Specialty
Douglas G. Elliot 39 Chief Operating Officer - Commercial Lines 1999
Ronald E. Foley 54 Chairman and Chief Executive Officer - 1996
Risk Management
William P. Hannon 51 Chief Financial Officer 1996
James M. Michener 47 Senior Vice President, General Counsel and 1996
Secretary
Douglas K. Russell 42 Vice President and Chief Accounting 1999
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 TIGI
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. He has been employed in such
positions or other executive or management positions with the Company or its
affiliates for more than the past five years.
Mr. Gibbs has been President and Chief Executive Officer, Claim
Services, of the Company since 1998 and was Executive Vice President responsible
for the Field Services Division of the Company from 1996 through 1998. Prior to
joining the Company, Mr. Gibbs served as Senior Vice President, Product Services
and Regulation of American International
33
<PAGE> 36
Group's Domestic Brokerage Group. Mr. Gibbs had served in several positions at
American International Group since 1990.
Mr. Khanna has been Executive Vice President and 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. 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. Elliot has been Chief Operating Officer for Commercial Lines of the
Company since 1999. He has been employed in such position or other executive or
management positions with the Company or its predecessors for more than the past
five years.
Mr. Foley has been Chairman and Chief Executive Officer - Risk
Management of the Company since January 1996. He has been employed in such
positions or other executive or management positions with the Company or its
affiliates for more than the past five years.
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. Russell has been Vice President and Controller and Chief Accounting
Officer of the Company of the Company since July 1999. Mr. Russell has served in
several positions at the Company since January 1997. Prior to joining the
Company, Mr. Russell was Director of Financial Reporting of both The MetraHealth
Companies, Inc. from May 1995 to October 1995 and of United HealthCare
Corporation from October 1995 to December 1996. From 1979 to May 1995, Mr.
Russell served in several positions at Ernst & Young LLP.
34
<PAGE> 37
GLOSSARY OF INSURANCE TERMS
<TABLE>
<CAPTION>
<S> <C>
Accident year........................ The annual accounting period in which loss events occurred, regardless of
when the losses are actually reported, booked or paid.
Adjusted unassigned surplus.......... Unassigned surplus as of the most recent statutory annual report reduced
by twenty-five percent of that year's unrealized appreciation in value or
revaluation of assets or unrealized profits on investments, as defined in
such report.
Admitted insurer..................... A company licensed to transact insurance business within a state.
Alternative market................... The segment of the insurance market which has developed in response to
volatility in cost and availability of traditional commercial insurance
coverage and consists of various risk financing mechanisms, including
self insurance, captive insurance companies, risk retention groups and
residual market business.
Annuity.............................. A contract that pays a periodic 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.
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
<S> <C>
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 expenses............ See "Loss adjustment expenses."
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
<S> <C>
Claims and claim adjustment
expenses...................... 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.
Commercial multi-peril
policies ..................... Refers to policies which cover both property and third party liability
exposures.
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.
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
<S> <C>
Excess liability..................... Additional casualty coverage above a layer of insurance exposures.
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.
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
<S> <C>
IRIS ratios.......................... Financial ratios calculated by the NAIC to assist state insurance
departments in monitoring the financial condition of insurance
companies.
Large deductible policy.............. An insurance policy where the customer assumes at least $25,000 or more
of each loss.
Loss................................. An occurrence that is the basis for submission and/or payment of a
claim. Losses may be covered, limited or excluded from coverage,
depending on the terms of the policy.
Loss adjustment 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.
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 premiums less premiums
ceded to reinsurers.
</TABLE>
39
<PAGE> 42
<TABLE>
<CAPTION>
<S> <C>
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 of 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.
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
<S> <C>
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 and enacted by states 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.
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
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<PAGE> 45
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
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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
180 field offices totaling approximately 4,827,000 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 action 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 these
cases, and intends to continue doing so.
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<PAGE> 47
The trial courts have ordered partial dismissals of ten of these cases:
those pending in Tennessee, Florida, New Jersey, Illinois (both cases),
Pennsylvania, Missouri, Alabama, New York and Arizona. The trial courts in Texas
and Michigan have denied defendants' motions to dismiss. Interlocutory appeals
are pending from the trial courts' rulings in New York and Michigan. In January
2000, the Pennsylvania court denied class certification and the California court
granted all defendants' demurrers and subsequently dismissed the complaint with
prejudice.
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 exceeding 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 mostly in the ordinary course of
business operations either as a liability insurer defending third-party claims
brought against insureds or an insurer defending coverage claims brought against
it. In the opinion of the Company's management, 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:
45
<PAGE> 48
<TABLE>
<CAPTION>
1998 1999 2000
-------------------------------------------- ---------------------------------------------- ---------
1ST Q 2ND Q 3RD Q 4TH Q 1ST Q 2ND Q 3RD Q 4TH Q 1ST Q*
---------- ----------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Class A Common
Stock Price
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High $46.063 $45.625 $45.750 $35.500 $38.500 $41.375 $41.875 $38.875 $38.500
Low $39.125 $38.750 $29.625 $24.125 $28.188 $33.375 $28.750 $27.688 $29.875
Dividends per
Share of Class A Common
Stock $.10 $.10 $.10 $.10 $.125 $.125 $.125 $.125 $.14
</TABLE>
* Through March 3, 2000
At March 3, 2000, the Company had approximately 1,576 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, 2000, 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 1999 Annual Report to Stockholders (the "1999 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 1999 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 1999 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
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<PAGE> 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page
F-1 hereof. There is also incorporated by reference herein in response to this
Item the material under the caption "Selected Quarterly Financial Data
(unaudited)" on page 54 of the 1999 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 18, 2000, filed
with the Securities and Exchange Commission (the "Proxy Statement"),
incorporated herein by reference. For information on executive officers, see
Item 1, "Business -- Other Information -- Executive Officers of the Company"
herein.
ITEM 11. EXECUTIVE COMPENSATION.
See the material under the caption "Executive compensation" and "How we
have done" of the Proxy Statement, incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
See the material under the captions "About the annual meeting" and
"Stock ownership" 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> 50
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:
There were no reports on Form 8-K filed during the quarter ended
December 31, 1999; however, on February 29, 2000, the Company
filed a Current Report on Form 8-K, dated February 29, 2000,
reporting under Item 5 thereof certain information related to
Travelers Property Casualty Corp. issuing a press release
announcing that it had signed a letter of intent to acquire the
surety business of Reliance Group Holdings, Inc.
48
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
3.01 Restated Certificate of Incorporation of Travelers
Property Casualty Corp. (the "Company"), Certificate
of Designations, Powers, Preferences and Rights of
7.5% Redeemable Preferred Stock, Series Z, of the
Company, Certificate of Amendment to the Restated
Certificate of Incorporation, filed March 7, 1997,
and Certificate of Amendment to the Restated
Certificate of Incorporation, filed April 23, 1997,
incorporated by reference to Exhibit 3.01 to the
Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1997 (File
No.1-14328) (the "Company's 3/31/97 10-Q").
3.02+ By-Laws of the Company, effective January 19, 1999.
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").
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
10.01.01* 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).
10.01.02*+ Amendment to the Travelers Property Casualty Corp.
Capital Accumulation Plan (as amended through July
23, 1997).
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 April 1, 1999).
10.05.1* 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").
10.05.2* Amendment to Travelers Group Capital Accumulation
Plan (as amended through July 23, 1997),
incorporated by reference to Exhibit 10.08.2 to the
Annual Report on Form 10-K of Citigroup Inc. for the
fiscal year ended December 31, 1999 (File No.
1-9924) (the "Citigroup 12/31/99 10-K").
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.
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
10.06.4* Amendment No. 16 to the Travelers Group Stock Option
Plan, incorporated by reference to Exhibit 10.02.4
to the Citigroup 12/31/99 10-K.
10.07.1* 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.
10.07.2* Amendment to the Travelers Group 1996 Stock
Incentive Plan (as amended through July 23, 1997),
incorporated by reference to Exhibit 10.03.2 to the
Citigroup 12/31/99 10-K.
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 between Travelers 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.
12.01+ Computation of Ratio of Earnings to Fixed Charges.
13.01+ Pages 17 through 55 of the 1999 Annual Report to
Stockholders of the Company (pagination of exhibit
does not correspond to pagination in the 1999 Annual
Report to Stockholders).
21.01+ Subsidiaries of the Registrant.
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
23.01+ Consent of KPMG LLP, Independent Certified Public Accountants.
24.01+ Powers of Attorney.
27.01+ Financial Data Schedule.
</TABLE>
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the Commission upon request.
The financial statements required by Form 11-K for 1999 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 1999 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.
52
<PAGE> 55
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 10th day of
March, 2000.
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 10th day of March, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/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/ Douglas K. Russell Vice President and Chief Accounting Officer
---------------------- (Principal Accounting Officer)
Douglas K. Russell
* Director
----------------------
Kenneth J. Bialkin
* Director
----------------------
Leslie B. Disharoon
* Chairman and Director
----------------------
Robert I. Lipp
* Director
----------------------
Dudley C. Mecum
</TABLE>
53
<PAGE> 56
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Director
----------------------
Frank J. Tasco
* Director
----------------------
Sanford I. Weill
* Director
----------------------
Arthur Zankel
</TABLE>
*By: /s/ Jay S. Fishman
----------------------
Jay S. Fishman
Attorney-in-fact
54
<PAGE> 57
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES *
<TABLE>
<CAPTION>
Incorporated
by Reference from
the Company's 1999
Annual Report to
Page Stockholders at
Herein Page Indicated
<S> <C> <C>
Independent Auditors' Report F-2 55
Consolidated Statement of Income for the years ended
December 31, 1999, 1998 and 1997 34
Consolidated Balance Sheet at December 31, 1999 and 1998 35
Consolidated Statement of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997 36
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 37
Notes to Consolidated Financial Statements 38-54
Schedules:
Schedule II - Condensed Financial Information of
Registrant (Parent Company only) F-3 - F-6
Schedule III - Supplementary Insurance Information F-7 - F-9
Schedule VI - Supplementary Information Concerning
Property-Casualty Insurance Operations F-10
</TABLE>
* Schedules not listed are omitted as not applicable or not required by
Regulation S-X.
F-1
<PAGE> 58
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Travelers Property Casualty Corp.:
Under date of January 18, 2000, we reported on the consolidated balance sheets
of Travelers Property Casualty Corp. and Subsidiaries as of December 31, 1999
and 1998, 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, 1999, which are incorporated by reference in the
December 31, 1999 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 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.
As discussed in note 1 to the consolidated financial statements, in 1999 the
Company changed its methods of accounting for insurance and reinsurance
contracts that do not transfer insurance risk and its accounting for
insurance-related assessments.
/s/ KPMG LLP
Hartford, Connecticut
January 18, 2000
F-2
<PAGE> 59
SCHEDULE II
Travelers Property Casualty Corp.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions)
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the year
ended December 31,
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES
Net investment income and other $ 8 $ 14 $ 9
EXPENSES
Interest 154 163 165
Other 11 4 7
------- ------- -------
165 167 172
------- ------- -------
Loss before federal income tax benefit and equity
in net income of subsidiaries (157) (153) (163)
Federal income tax benefit 54 54 59
------- ------- -------
Loss before equity in net income of subsidiaries (103) (99) (104)
Equity in net income of subsidiaries 1,379 1,442 1,340
------- ------- -------
Net income $ 1,276 $ 1,343 $ 1,236
======= ======= =======
</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> 60
SCHEDULE II
Travelers Property Casualty Corp.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions)
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
ASSETS
<S> <C> <C>
Short-term securities $ 19 $ 154
Investment in subsidiaries at equity 10,776 11,234
Deferred federal income taxes 16 14
Other assets 4 11
-------- --------
Total assets $ 10,815 $ 11,413
======== ========
LIABILITIES
Long-term debt $ 1,777 $ 2,177
Other liabilities 97 111
-------- --------
Total liabilities 1,874 2,288
-------- --------
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 5,479
Retained earnings 4,133 3,052
Accumulated other changes in equity from nonowner sources (202) 921
Treasury stock, at cost (shares, 13,159,386 and 8,544,687) (451) (298)
Unearned compensation (22) (33)
-------- --------
Total stockholders' equity 8,941 9,125
-------- --------
Total liabilities and stockholders' equity $ 10,815 $ 11,413
======== ========
</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> 61
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 year
ended December 31,
------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 1,276 $ 1,343 $ 1,236
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net income of subsidiaries (1,379) (1,442) (1,340)
Dividends received from consolidated subsidiaries 850 540 340
Amortization expense 2 2 2
Deferred federal income tax benefit (2) 1 (2)
Federal income taxes receivable 1 2 32
Other assets 6 (6) --
Other liabilities (5) (3) 6
------- ------- -------
Net cash provided by operating activities 749 437 274
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Short-term securities, purchases, net 135 (143) (5)
Other investments, net (135) -- --
------- ------- -------
Net cash used in investing activities -- (143) (5)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repayment) of commercial paper, net -- (108) 83
Payment of long-term debt (400) -- --
Purchase of treasury stock (169) (62) (268)
Restricted stock issuance 15 33 34
Dividends to TIGI (164) (131) (98)
Dividends to minority shareholders (31) (26) (21)
------- ------- -------
Net cash used in financing activities (749) (294) (270)
------- ------- -------
Net decrease in cash -- -- (1)
Cash at beginning of period -- -- 1
------- ------- -------
Cash at end of period $ -- $ -- $ --
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 162 $ 163 $ 163
======= ======= =======
Cash received during the period for taxes $ 53 $ 57 $ 79
======= ======= =======
</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> 62
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
On each of September 1, 1999 and October 1, 1999, TAP repaid $200 million
for its 6-3/4% notes and 6-1/4% notes, respectively, which matured on those
dates.
The annual maturities of the outstanding debt are as follows: $500 million
in 2001 and $1,277 million after 2004.
F-6
<PAGE> 63
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1999
(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 ......... $ 277 $26,184 $ 2,608 $ 4,375 $ 1,689
Personal
Lines ......... 248 2,670 1,666 3,634 400
------- ------- ------- ------- -------
Total - Reportable
Segments ...... 525 28,854 4,274 8,009 2,089
Other ............ -- 149 -- -- 3
------- ------- ------- ------- -------
Consolidated ..... $ 525 $29,003 $ 4,274 $ 8,009 $ 2,092
======= ======= ======= ======= =======
</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 ......... $3,505 $ 617 $ 805 $4,408
Personal
Lines ......... 2,554 643 364 3,805
------ ------ ------ ------
Total - Reportable
Segments ...... 6,059 1,260 1,169 8,213
Other ............ -- -- 169 --
------ ------ ------ ------
Consolidated ..... $6,059 $1,260 $1,338 $8,213
====== ====== ====== ======
</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> 64
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1998
(In millions)
<TABLE>
<CAPTION>
Segment Deferred policy Claims and Unearned Premium
acquisition costs claim adjust- premiums revenue
ment expense
reserves
<S> <C> <C> <C> <C>
Commercial
Lines $ 292 $26,702 $ 2,597 $ 4,525
Personal
Lines 226 2,709 1,569 3,271
------- ------- ------- -------
Total - Reportable
Segments 518 29,411 4,166 7,796
Other -- 178 -- --
------- ------- ------- -------
Consolidated $ 518 $29,589 $ 4,166 $ 7,796
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Amortization
Net Claims of deferred Other Premiums
investment and claim policy operating written
Segment income adjustment acquisition expenses
(a) expenses costs (b)
<S> <C> <C> <C> <C> <C>
Commercial
Lines $ 1,709 $ 3,766 $ 645 $ 916 $ 4,614
Personal
Lines 389 2,181 552 372 3,490
------- ------- ------- ------- -------
Total - Reportable
Segments 2,098 5,947 1,197 1,288 8,104
Other 2 -- -- 182 --
------- ------- ------- ------- -------
Consolidated $ 2,100 $ 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-8
<PAGE> 65
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
1997
(In millions)
<TABLE>
<CAPTION>
Segment Deferred policy Claims and Unearned Premium
acquisition costs claim adjust- premiums revenue
ment expense
reserves
<S> <C> <C> <C> <C>
Commercial
Lines $ 309 $27,356 $ 2,519 $ 4,308
Personal
Lines 192 2,782 1,348 2,917
------- ------- ------- -------
Total - Reportable
Segments 501 30,138 3,867 7,225
Other -- 186 -- --
------- ------- ------- -------
Consolidated $ 501 $30,324 $ 3,867 $ 7,225
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Amortization
Net Claims of deferred Other Premiums
Segment investment and claim policy operating written
income adjustment acquisition expenses
(a) expenses costs (b)
<S> <C> <C> <C> <C> <C>
Commercial
Lines $ 1,695 $ 3,631 $ 622 $ 980 $ 4,758
Personal
Lines 353 1,853 505 366 3,074
------- ------- ------- ------- -------
Total - Reportable
Segments 2,048 5,484 1,127 1,346 7,832
Other 3 -- -- 202 --
------- ------- ------- ------- -------
Consolidated $ 2,051 $ 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-9
<PAGE> 66
SCHEDULE VI
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Information Concerning Property-Casualty Insurance Operations(1)
1997-1999
(In millions)
<TABLE>
<CAPTION>
Reserves for
unpaid Discount
Deferred claims from
Affiliation policy and claim reserves Net
with acquisition adjustment for unpaid Unearned Earned investment
registrant costs expenses claims (2) premiums premiums income
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1999 Consolidated property -
casualty operations $ 525 $28,854 $ 832 $ 4,274 $ 8,009 $ 2,089
1998 Consolidated property -
casualty operations $ 518 $29,411 $ 781 $ 4,166 $ 7,796 $ 2,098
1997 Consolidated property -
casualty operations $ 501 $30,138 $ 912 $ 3,867 $ 7,225 $ 2,048
</TABLE>
<TABLE>
<CAPTION>
Claims and
claim adjust-
ment expenses Amortization
incurred related to: of deferred Paid claims
Affiliation ------------------------ policy and claim
with Current Prior acquisition adjustment Premiums
registrant Year Year costs expenses written
------- ------- -------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1999 Consolidated property -
casualty operations $6,194 $ (242) $1,260 $6,732 $8,213
1998 Consolidated property -
casualty operations $6,057 $ (323) $1,197 $6,377 $8,104
1997 Consolidated property -
casualty operations $5,730 $ (492) $1,127 $5,648 $7,832
</TABLE>
(1) Excludes accident and health business.
(2) See "Discounting" on page 18.
F-10
<PAGE> 1
EXHIBIT 3.02
AMENDED BY-LAWS
OF
TRAVELERS PROPERTY CASUALTY CORP.
(FORMERLY NAMED TRAVELERS/AETNA PROPERTY CASUALTY CORP.)
EFFECTIVE JANUARY 19, 1999
<PAGE> 2
AMENDED BY-LAWS
OF
TRAVELERS PROPERTY CASUALTY CORP.
(FORMERLY NAMED TRAVELERS/AETNA PROPERTY CASUALTY CORP.)
(HEREINAFTER CALLED THE "COMPANY")
ARTICLE I
LOCATION
SECTION 1. The location of the registered office of the Company in
Delaware shall be in the City of Wilmington, County of New Castle, State of
Delaware.
SECTION 2. The Company shall, in addition to the registered office in
the State of Delaware, establish and maintain an office within or without the
State of Delaware or offices in such other places as the Board of Directors may
from time to time find necessary or desirable.
ARTICLE II
CORPORATE SEAL
SECTION 1. The corporate seal of the Company shall have inscribed
thereon the name of the Company and the year of its creation (1996) and the
words "Corporate Seal, Delaware."
ARTICLE III
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of the stockholders, or any special
meeting thereof, shall be held at such place as may be designated by the Board
of Directors or by the Executive Committee, or by the officer or group of
Directors calling any special meeting.
SECTION 2. Stockholders entitled to vote may vote at all meetings
either in person or by proxy in writing. All proxies shall be filed with the
Secretary of the meeting before being voted upon.
SECTION 3. A majority in amount of the aggregate voting power of the
stock issued, outstanding and entitled to vote represented by the holders in
person or by proxy shall be requisite at all meetings to constitute a quorum for
the election of Directors or for the transaction of other business except as
otherwise provided by law, by the Certificate of Incorporation of the
1
<PAGE> 3
Company or by these By-laws. If at any annual or special meeting of the
stockholders, a quorum shall fail to attend, a majority in interest attending in
person or by proxy may adjourn the meeting from time to time, not exceeding
sixty days in all, without notice other than by announcement at the meeting
(except as otherwise provided herein) until a quorum shall attend and thereupon
any business may be transacted which might have been transacted at the meeting
originally called had the same been held at the time so called. If the
adjournment is for more than 30 days, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting shall
be given to each stockholder of record entitled to vote at the meeting.
SECTION 4. The annual meeting of the stockholders shall be held on such
date and at such time as the Board of Directors or the Executive Committee may
determine by resolution. Except as otherwise set forth in the Certificate of
Incorporation of the Company, holders of the Class A common stock and the Class
B common stock shall vote together without regard to class, and every holder of
the outstanding shares of the Class A common stock shall be entitled to cast one
vote for each share of Class A common stock held by such stockholder and every
holder of the outstanding shares of the Class B common stock shall be entitled
to cast ten votes for each share of Class B common stock held by such
stockholder. All annual meetings shall be general meetings.
SECTION 5. The business to be transacted at the annual meeting shall
include the election of Directors, consideration and action upon the reports of
officers and Directors, the acts, contracts, transactions and proceedings of the
officers, Directors, Executive Committee, and all other Committees of the Board
and any other matters within the power of the Company which may be brought
before the meeting.
SECTION 6. Notice of the annual meeting shall be mailed by the
Secretary to each stockholder entitled to vote, at his or her last known post
office address, at least ten days but not more than sixty days prior to the
meeting.
SECTION 7. Special meetings of the stockholders may be called by the
Chairman of the Board, the Vice Chairman, the Chairman of the Executive
Committee, the President or the Secretary. A special meeting shall be called at
the request, in writing, of a majority of the Board of Directors or of the
Executive Committee, or by the vote of the Board of Directors or of the
Executive Committee.
SECTION 8. Notice of each special meeting, indicating briefly the
object or objects thereof, shall be mailed by the Secretary to each stockholder
entitled to vote at his or her last known post office address, at least ten days
but not more than sixty days prior to the meeting.
SECTION 9. If the entire Board of Directors becomes vacant, any
stockholder may call a special meeting in the same manner that the Chairman of
the Board may call such meeting, and Directors for the unexpired term may be
elected at said special meeting in the manner provided for their election at
annual meetings.
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ARTICLE IV
DIRECTORS
SECTION 1. The affairs, property and business of the Company shall be
managed and controlled by a Board of Directors, with the exact number of
directors to be determined from time to time by resolution adopted by
affirmative vote of a majority of the entire Board of Directors. The election
and term of directors shall be as provided in the Certificate of Incorporation
of the Company, as amended, from time to time.
SECTION 2. Vacancies in the Board of Directors shall be filled as
provided in the Certificate of Incorporation of the Company, as amended from
time to time.
SECTION 3. Stockholder proposals and stockholder nominations for the
election of directors at an annual meeting must, in order to be voted upon, be
made in writing and delivered to the Secretary of the Company at least 50 days
prior to the date of the meeting at which such nominations are proposed to be
voted upon or if less than 50 days' notice of a meeting of stockholders is
given, stockholder proposals and nominations must be delivered to the Secretary
of the Company no later than the close of business on the seventh day following
the day notice was mailed. Stockholder proposals and nominations for the
election of directors at a special meeting must be in writing and received by
the Secretary of the Company no later than the close of business on the tenth
day following the day on which notice of the meeting was mailed or public
disclosure of the date of the meeting was made, whichever occurs first. The
notice of stockholder nominations must set forth certain information with
respect to each nominee who is not an incumbent director.
ARTICLE V
POWERS OF THE DIRECTORS
SECTION 1. The Board of Directors shall have the management of the
business of the Company, and, in addition to the powers and authorities by these
By-laws expressly conferred upon them, may exercise all such powers and do all
such acts and things, as may be exercised or done by the Company, but subject,
nevertheless, to the provisions of the laws of the State of Delaware, of the
Certificate of Incorporation of the Company and of these By-laws.
SECTION 2. The Directors and members of the Executive Committee and
other committees appointed by the Board of Directors or by the Executive
Committee as such shall not receive any stated salary for their services except
where authorized by the Board of Directors, but, by resolution of the Board, a
fixed sum and reasonable expenses may be allowed for attendance at each regular
or special meeting, provided nothing herein contained shall be construed to
preclude a Director or member of a committee from serving in any other capacity
and receiving compensation therefor, but if he or she shall serve as an officer
or employee of the
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Company or of any subsidiary company, receiving a salary, he or she shall be
paid the actual expenses for attending meetings, but no other sums, except by
the express order of the Board of Directors.
SECTION 3. The Company shall indemnify, to the fullest extent
permissible under the General Corporation Law of the State of Delaware, or the
indemnification provisions of any successor statute, any person, and the heirs
and personal representatives of such person, against any and all judgments,
fines, amounts paid in settlement and costs and expenses, including attorneys'
fees, actually and reasonably incurred by or imposed upon such person in
connection with, or resulting from any claim, action, suit or proceeding (civil,
criminal, administrative or investigative) in which such person is a party or is
threatened to be made a party by reason of such person being or having been a
director, officer or employee of the Company, or of another corporation, joint
venture, trust or other organization in which such person serves as a director,
officer, employee or agent at the request of the Company, or by reason of such
person being or having been an administrator or a member of any board or
committee of this Company or of any such other organization, including, but not
limited to, any administrator, board or committee related to any employee
benefit plan.
The Company may advance expenses incurred in defending a civil or
criminal action, suit or proceeding to any such director, officer, employee or
agent upon receipt of an undertaking by or on behalf of the director, officer,
employee or agent to repay such amount, if it shall ultimately be determined
that such person is not entitled to indemnification by the Company.
The foregoing right of indemnification and advancement of expenses
shall in no way be exclusive of any other rights of indemnification to which any
such person may be entitled, under any by-law, agreement, vote of stockholders
or disinterested directors or otherwise, and shall inure to the benefit of the
heirs and personal representatives of such person.
SECTION 4. Each Director and officer and each member of any committee
designated by the Board of Directors shall, in the performance of his duties, be
fully protected in relying in good faith upon the books of account or other
records of the Company or of any of its subsidiaries, or upon reports made to
the Company or any of its subsidiaries by any officer of the Company or of a
subsidiary or by an independent certified public accountant or by an appraiser
selected with reasonable care by the Board of Directors or by any such
committee.
ARTICLE VI
MEETINGS OF THE DIRECTORS
SECTION 1. The Board of Directors shall meet as soon as convenient
after the annual meeting of stockholders at such place as may be designated by
the Board of Directors or the Executive Committee, for the purpose of
organization and the transaction of any other business which may properly come
before the meeting.
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SECTION 2. Regular meetings of the Directors may be held without notice
at such time and place as may be determined from time to time by resolution of
the Board.
SECTION 3. One-third of the total number of Directors shall constitute
a quorum except when the Board of Directors consists of one Director, then one
Director shall constitute a quorum for the transaction of business, but the
Directors present, though fewer than a quorum, may adjourn the meeting to
another day. The vote of the majority of the Directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.
SECTION 4. Special meetings of the Board may be called by the Board,
the Executive Committee, the Chairman of the Board, on one day's notice, or
other reasonable notice, to each Director, either personally, by mail or by
wire, and may be held at such time as the Board of Directors, the Executive
Committee or the officer calling said meeting may determine. Special meetings
may be called in like manner on the request in writing of three Directors. If
the Board of Directors or the Executive Committee so determine, such special
meetings may be held at some place other than at the office of the Company in
the City of Hartford.
SECTION 5. In the absence of both the Secretary and an Assistant
Secretary, the Board of Directors shall appoint a secretary to record all votes
and the minutes of its proceedings.
SECTION 6. Any action required or permitted to be taken at any meeting
of the Board of Directors or of any committee thereof may be taken without a
meeting, if a written consent to such action be signed by all of the members of
the Board of Directors or committee as the case may be, and such written consent
be filed with the minutes of the proceedings of the Board of Directors or such
committee.
SECTION 7. Unless otherwise provided by the Certificate of
Incorporation of the Company or these By-Laws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors or such committee by means of
a conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this Section 7 shall constitute presence in person at such
meeting.
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ARTICLE VII
STANDING COMMITTEES
SECTION 1. The Board of Directors may designate from their number
standing committees and may invest them with all their own powers, except as
otherwise provided in the General Corporation Law of the State of Delaware,
subject to such conditions as they may prescribe, and all committees so
appointed shall keep regular minutes of their transactions and shall cause such
minutes to be recorded in books kept for that purpose in the office of the
Company, and shall report the same to the Board of Directors at their regular
meeting.
ARTICLE VIII
EXECUTIVE COMMITTEE
SECTION 1. The Board of Directors may designate an Executive Committee
of not more than ten nor fewer than two persons from among their own number.
One-third of the members of the Executive Committee shall constitute a quorum
except when the Executive Committee consists of two, then one member shall
constitute a quorum. Any vacancy on the Executive Committee shall be filled by
the Board of Directors.
SECTION 2. The Executive Committee shall exercise all powers of the
Board of Directors between the meetings of said Board except as otherwise
provided in the General Corporation Law of the State of Delaware. No action of
the Executive Committee shall become operative unless it has the affirmative
vote of at least a majority of the members of the Executive Committee present
and voting.
SECTION 3. Regular meetings of the Executive Committee shall be held
without notice at such time and place as may be determined from time to time by
resolution of the Executive Committee. Special meetings of the Executive
Committee may be called at any time upon one day's notice, or other reasonable
notice, either personally, by mail or by wire, by the Chairman of the Board, the
Chairman of the Executive Committee, or by any two members of the Executive
Committee.
SECTION 4. In the absence of both the Secretary and an Assistant
Secretary, the Executive Committee shall appoint a secretary who shall keep
regular minutes of the actions of the said Committee and report the same to the
Board of Directors, which thereupon shall take action thereon.
SECTION 5. The Board of Directors may designate from the members of the
Executive Committee a Chairman of the Executive Committee. If the Board of
Directors should not make such designation, the Executive Committee may
designate a Chairman of the Executive Committee.
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ARTICLE IX
OFFICERS OF THE COMPANY
SECTION 1. The officers of the Company may consist of a Chairman of the
Board of Directors, a President, one or more Vice Chairmen, one or more Vice
Presidents, a Controller, a Secretary and a Treasurer. There also may be such
other officers and assistant officers as, from time to time, may be elected or
appointed by the Board of Directors or by the Executive Committee.
ARTICLE X
CHAIRMAN AND OFFICERS - HOW CHOSEN
SECTION 1. At the first meeting after the annual meeting of
stockholders, the Directors shall elect annually from among their own number a
Chairman of the Board. They may also elect one or more Vice Chairmen, a
President, one or more Vice Presidents, a Controller, a Secretary and a
Treasurer, to hold office for one year or until others are elected and qualify
in their stead or until their earlier resignation or removal.
SECTION 2. The Directors or the Executive Committee shall also elect or
appoint such other officers and assistant officers as from time to time they may
determine, and who shall hold office during the pleasure of the Board or of the
Executive Committee.
ARTICLE XI
CHAIRMAN OF THE BOARD
SECTION 1. The Chairman of the Board shall be ex-officio a member of
all standing committees, shall have the general powers and duties usually vested
in the Chairman of the Board of a corporation, and shall preside at all meetings
of the Board of Directors. He shall see that all orders and resolutions of the
Board of Directors and Executive Committee are carried into effect.
ARTICLE XII
VICE CHAIRMAN
SECTION 1. The Vice Chairman shall have general supervision and
direction over the business and policies of the Company, and over all the other
officers (other than the Chairman of the Board) of the Company and shall see
that their duties are properly performed. He or she shall have all the powers
conferred upon the President by these By-laws, except such as by the laws of the
State of Delaware can be exercised only by the President or a Vice
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President and the powers conferred upon him or her from time to time by the
Board of Directors.
SECTION 2. The Vice Chairman shall preside at all meetings of the Board
of Directors in the absence of the Chairman of the Board, unless the Board of
Directors appoints another director or officer of the Company to so preside.
SECTION 3. The Vice Chairman shall be ex-officio a member of all
standing committees, and, in the absence of the Chairman of the Board, shall
have the general powers and duties of the Chairman of the Board and of the
supervision, direction and management usually vested in the office of a chief
executive officer of a corporation.
ARTICLE XIII
PRESIDENT
SECTION 1. The President shall be the Chief Executive Officer of the
Company, and, if the President shall not also be the Chairman of the Board,
shall have general supervision and direction over the business and policies of
the Company, and over all the other officers of the Company, and shall see that
their duties are properly performed.
SECTION 2. The President shall preside at all meetings of the Board of
Directors in the absence of the Chairman of the Board and the Vice Chairman,
unless the Board of Directors appoints another director or officer of the
Company to so preside.
SECTION 3. The President shall be ex-officio a member of all standing
committees, and, in the absence of the Chairman of the Board and the Vice
Chairman, shall have the general powers and duties of the Chairman of the Board
and the Vice Chairman and of the supervision, direction and management usually
vested in the office of a president or chief executive officer of a corporation.
ARTICLE XIV
VICE PRESIDENTS
SECTION 1. Each Vice President shall have such powers and perform such
duties as may be assigned to him or her by the Board of Directors or Executive
Committee, or, subject to Section 2 of Article XVIII, by the Chairman of the
Board, or the President. The Board of Directors may add to the title of any Vice
President such distinguishing designation as may be deemed desirable, which
designation may reflect seniority, duties, or responsibilities of such Vice
President. In the absence of the President, any Vice President designated by the
Chairman of the Board may perform the duties and exercise the powers of the
President.
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ARTICLE XV
CONTROLLER
SECTION 1. The Controller shall have charge of and supervise all
accounting matters, the preparation of all accounting reports and statistics of
the Company and its subsidiaries, and shall perform the duties usually incident
to the office of the Controller. He or she shall submit such reports and records
to the Board of Directors or the Executive Committee as may be requested by
them, or by the Chairman of the Board, by the Vice Chairman or by the President.
ARTICLE XVI
SECRETARY
SECTION 1. The Secretary shall attend all sessions of the Board of
Directors and of the Executive Committee, and act as clerk thereof and record
all votes and the minutes of all proceedings in a book to be kept for that
purpose, and shall perform like duties for the Standing Committees when
required.
SECTION 2. The Secretary shall see that proper notice is given of all
meetings of the stockholders of the Company, of the Board of Directors and of
the Executive Committee. In his absence, or in case of his failure or inability
to act, an Assistant Secretary or a secretary pro-tempore shall perform his
duties and such other duties as may be prescribed by the Board of Directors.
SECTION 3. The Secretary shall keep account of certificates of stock or
other receipts and securities representing an interest in or to the capital of
the Company, transferred and registered in such form and manner and under such
regulations as the Board of Directors may prescribe.
SECTION 4. The Secretary shall keep in safe custody the contracts,
books and such corporate records as are not otherwise provided for, and the seal
of the Company. He or she shall affix the seal to any instrument requiring the
same and the seal, when so affixed, shall be attested by the signature of the
Secretary, an Assistant Secretary, Treasurer or an Assistant Treasurer.
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ARTICLE XVII
TREASURER
SECTION 1. The Treasurer shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall deposit
all money in the name of, for the account of or to the credit of the Company in
such depositories as may be designated by the Board of Directors or by the
Executive Committee, and shall keep all securities and other valuable effects in
a safe place designated by the Board of Directors or the Executive Committee.
SECTION 2. The Treasurer shall perform such other duties as the Board
of Directors or the Executive Committee may from time to time prescribe or
require.
ARTICLE XVIII
DUTIES OF OFFICERS
SECTION 1. In addition to the duties specifically enumerated in these
By-laws, all officers and assistant officers of the Company shall perform such
other duties as may be assigned to them from time to time by the Board of
Directors, the Executive Committee, or by their superior officers.
SECTION 2. The Board of Directors or Executive Committee may change the
powers or duties of any officer or assistant officer, or delegate the same to
any other officer, assistant officer or person.
SECTION 3. Every officer and assistant officer of the Company shall
from time to time report to the Board of Directors, the Executive Committee or
to his superior officers all matters within his knowledge which the interests of
the Company may require to be brought to their notice.
ARTICLE XIX
CERTIFICATES OF STOCK, SECURITIES, NOTES, RECORD DATE, ETC.
SECTION 1. Certificates of stock, or other receipts and securities
representing an interest in or to the capital of the Company, shall bear the
signature of the Chairman of the Board, the Vice Chairman, the President or any
Vice President and bear the countersignature of the Secretary or any Assistant
Secretary or the Treasurer or any Assistant Treasurer.
SECTION 2. Nothing in this Article XIX shall be construed to limit the
right of the Company, by resolution of its Board of Directors or Executive
Committee, to authorize,
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under such conditions as such Board or Committee may determine, the facsimile
signature by any properly authorized officer of any instrument or document that
said Board of Directors or Executive Committee may determine.
SECTION 3. In case any officer, transfer agent or registrar who shall
have signed or whose facsimile signature shall have been used on any
certificates of stock, notes or securities shall cease to be such officer,
transfer agent or registrar of this Company, whether because of death,
resignation or otherwise, before the same shall have been issued by this
Company, such certificates of stock, notes and securities may nevertheless be
adopted by this Company and be issued and delivered as though the person or
persons who signed the same or whose facsimile signature or signatures shall
have been used thereon had not ceased to be such officer, transfer agent or
registrar of this Company, and such adoption of said certificates of stock,
notes and securities shall be evidenced by a resolution of the Board of
Directors or Executive Committee to that effect.
SECTION 4. All transfers of the stock of the Company shall be made upon
the books of the Company by the owners of the shares in person or by their legal
representatives.
SECTION 5. Certificates of stock shall be surrendered and canceled at
the time of transfer.
SECTION 6. The Company shall be entitled to treat the holder of record
of any share or shares of stock as the holder in fact thereof, and accordingly
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the laws of
the State of Delaware.
SECTION 7. In the case of a loss or the destruction of a certificate of
stock, another may be issued in its place upon satisfactory proof of such loss
or destruction and the giving of a bond of indemnity, unless waived, approved by
the Board of Directors or by the Executive Committee.
SECTION 8. In order that the Company may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution of allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty days nor less then ten days
before the date of such meeting, nor more than sixty days prior to any other
action. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
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ARTICLE XX
CHECKS, LOANS, COMMERCIAL PAPER, CONTRACTS, ETC.
SECTION 1. Any two of the following officers who are authorized by the
Board of Directors or Executive Committee, to wit, the Chairman of the Board,
the Vice Chairman, the President, the Vice Presidents, the Secretary or the
Treasurer, not being the same person, or any of them together with an Assistant
Vice President, an Assistant Secretary or an Assistant Treasurer, shall have the
authority to sign and execute on behalf of the Company as maker, drawer,
acceptor, guarantor, endorser, assignor or otherwise, all notes, collateral
trust notes, debentures, drafts, bills of exchange, acceptances, securities and
commercial paper of all kinds.
SECTION 2. The Chairman of the Board, the Vice Chairman, the President,
any Vice President, the Secretary, the Treasurer or any other person, when such
officer or other person is authorized by the Board of Directors or Executive
Committee, shall have authority, on behalf of and for the account of the
Company, (a) to borrow money against duly executed obligations of the Company;
(b) to sell, discount or otherwise dispose of notes, collateral trust notes,
debentures, drafts, bills of exchange, acceptances, securities, obligations of
the Company and commercial paper of all kinds; (c) to sign orders for the
transfer of money to affiliated or subsidiary companies; and (d) to execute
contracts.
SECTION 3. The Board of Directors or the Executive Committee may either
in the absence of any of said officers or persons, or for any other reason,
appoint some other officer or some other person to exercise the powers and
discharge the duties of such officer or person under this Article, and the
officer or person so appointed shall have all the power and authority hereby
conferred upon the officer for whom he or she may be appointed so to act.
SECTION 4. Commercial paper, in the form of short term promissory
notes, of the Company issued by arrangement with a bank duly authorized by the
Board of Directors or Executive Committee of this Company shall be issued under
the manual signature of one of the officers of the Company and manually
co-signed on behalf of the Company by an employee of the bank approved by the
Company; provided however, that the Board of Directors or Executive Committee
may, by resolution, provide, with such protective measures as they may
prescribe, that, in lieu of the manual signature of an officer of this Company
on any such commercial paper of the company issued by an authorized bank as
aforesaid, the facsimile signature of an officer of this Company may be used
thereon, and said facsimile signature, when placed thereon, shall have the same
effect as though said commercial paper had been manually signed by an officer of
this Company.
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ARTICLE XXI
FISCAL YEAR
SECTION 1. The fiscal year of the Company shall begin the first day of
January and terminate on the thirty-first day of December in each year.
ARTICLE XXII
NOTICE
SECTION 2. Whenever under the provisions of the laws of the State of
Delaware or these By-laws notice is required to be given to any Director, member
of the Executive Committee, officer or stockholder, it shall not be construed to
mean personal notice, but such notice may be given by wire or in writing by
depositing the same in the post office or letter box in a post paid, sealed
wrapper, addressed to such Director, member of the Executive Committee, officer
or stockholder at his or her address as the same appears in the books of the
Company; and the time when the same shall be mailed shall be deemed to be the
time of the giving of such notice.
ARTICLE XXIII
WAIVER OF NOTICE
SECTION 1. Any stockholder, Director or member of the Executive
Committee may waive in writing any notice required to be given under these
By-laws.
ARTICLE XXIV
AMENDMENT OF BY-LAWS
SECTION 1. Except as otherwise provided in the Certificate of
Incorporation of the Company, the Board of Directors, at any meeting, may alter
or amend these By-laws, and any alteration or amendments so made may be repealed
by the Board of Directors or by the stockholders at any meeting duly called.
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EXHIBIT 10.01.02
AMENDMENT TO THE
TRAVELERS PROPERTY CASUALTY CORP. CAPITAL ACCUMULATION PLAN
(AS AMENDED THROUGH JULY 23, 1997)
- ------------------------------------------------------------------------------
Section 10 (e) of the Travelers Property Casualty Corp. Capital
Accumulation Plan is hereby amended to add the following sentence at the end of
such Section:
"The value of any shares allowed to be withheld or tendered
for tax withholding may not exceed the amount allowed
consistent with fixed plan accounting in accordance with
generally accepted accounting principles."
<PAGE> 1
EXHIBIT 10.04
TRAVELERS PROPERTY CASUALTY CORP.
AMENDED AND RESTATED COMPENSATION PLAN
FOR NON-EMPLOYEE DIRECTORS (THE "PLAN")
(WITH AMENDMENTS EFFECTIVE APRIL 1, 1999)
Section 1. ELIGIBILITY. Each member of the Board of Directors of
Travelers Property Casualty Corp. (the "Company") or one of its subsidiaries, if
so designated by the Board of Directors, who is not an employee of the Company
or any of its subsidiaries (an "Eligible Director") is eligible to participate
in the Plan.
Section 2. ADMINISTRATION. The Plan shall be administered, construed
and interpreted by the Board of Directors of the Company. Pursuant to such
authorization, the Board of Directors shall have the responsibility for carrying
out the terms of the Plan, including but not limited to the determination of the
annual retainer to be paid to all Eligible Directors (the "Annual Fixed Director
Compensation"). To the extent permitted under the securities laws applicable to
compensation plans including, without limitation, the requirements of Section
16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or
under the Internal Revenue Code of 1986, as amended (the "Code"), the
Nominations, Compensation, and Corporate Governance Committee of the Board of
Directors, or a subcommittee of the Nominations, Compensation and Corporate
Governance Committee, may exercise the discretion granted to the Board under the
Plan, provided that the composition of such Committee or subcommittee shall
satisfy the requirements of Rule 16b-3 under the Exchange Act, or any successor
rule or regulation. The Board of Directors may also designate a plan
administrator to manage the record keeping and other routine administrative
duties under the Plan.
Section 3. ANNUAL FIXED DIRECTOR COMPENSATION. Payment of Annual Fixed
Director Compensation shall be made quarterly, on the first business day
following the end of the quarter for which the compensation is payable, to each
Eligible Director who served as a director during at least one-half of such
quarter and who was a director on the last day of such quarter.
Each Eligible Director may elect to receive up to fifty percent (50%)
of each quarterly payment of Annual Fixed Director Compensation in cash. The
balance of each quarterly payment shall be paid in shares of Class A common
stock, par value $.01 of the Company ("Common Stock"). If an Eligible Director
does not elect to receive a percentage of his or her Annual Fixed Director
Compensation in cash, such compensation shall be paid entirely in Common Stock.
The number of shares of the Company's Common Stock to be transferred to
the Eligible Director in respect of each quarterly installment of Annual Fixed
Director Compensation shall be determined in the manner set forth in paragraph
5(a), and such shares shall not be transferred or sold by such Eligible Director
for a period of six months following the date of grant.
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Section 4. ELECTION TO DEFER.
(a) TIME OF ELECTION. As soon as practicable prior to the
beginning of a calendar year, an Eligible Director may elect to defer the Common
Stock component of Annual Fixed Director Compensation pursuant to the Plan by
directing that such Common Stock which otherwise would have been payable in
accordance with paragraph 3 above during such calendar year and succeeding
calendar years shall be credited to a deferred compensation account (the
"Director's Account"). Under a valid election, such deferred compensation shall
be payable in accordance with paragraph 5(a) below. Any person who shall become
an Eligible Director during any calendar year, and who was not an Eligible
Director of the Company prior to the beginning of such calendar year, may elect,
within thirty (30) days after his or her term begins, to defer payment of the
Common Stock component of his or her Annual Fixed Director Compensation earned
during the remainder of such calendar year and for succeeding calendar years.
The cash component of Annual Fixed Director Compensation may not be deferred.
(b) FORM AND DURATION OF ELECTION. An election to defer the
Common Stock component of Annual Fixed Director Compensation shall be made by
written notice executed by the Eligible Director and filed with the Secretary of
the Company. Such election shall continue until the Eligible Director terminates
such election by subsequent written notice filed with the Secretary of the
Company. Any such election to terminate deferral shall become effective for the
calendar quarter following receipt of the election form by the Company and shall
only be effective with respect to the Common Stock component of Annual Fixed
Director Compensation payable for services rendered as an Eligible Director
thereafter. Amounts credited to the Director's Account prior to the effective
date of termination shall not be affected by such termination and shall be
distributed only in accordance with the terms of the Plan.
(c) CHANGE OF ELECTION. An Eligible Director who has
terminated his or her election to defer the Common Stock component of Annual
Fixed Director Compensation hereunder may thereafter make another election in
accordance with paragraph 4(a) to defer such compensation for the calendar year
subsequent to the filing of such election and succeeding calendar years.
Section 5. THE DIRECTOR'S ACCOUNT. Shares of Common Stock that an
Eligible Director has elected to defer under the Plan shall be credited to the
Director's Account as follows:
(a) As of each date that a quarterly installment of the Annual
Fixed Director Compensation would otherwise be payable, there shall be credited
to the Director's Account the number of full shares of the Company's Common
Stock obtained by multiplying the percentage such Eligible Director has elected
to receive in shares of Common Stock by the total amount of Annual Fixed
Director Compensation allocable to such calendar quarter, and then by dividing
the result by the average of the closing price of the Company's Common Stock on
the Composite Tape of the New York Stock Exchange Inc. on the last ten (10)
trading days of the calendar quarter for which such Common Stock would otherwise
be payable. If the applicable percentage
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<PAGE> 3
of Annual Fixed Director Compensation for the calendar quarter is not evenly
divisible by such average closing price of the Company's Common Stock, the
balance shall be credited to the Director's Account in cash.
(b) At the end of each calendar quarter, there shall be
credited to the Director's Account an amount equal to the cash dividends that
would have been paid on the number of shares of Common Stock credited to the
Director's Account as of the dividend record date, if any, occurring during such
calendar quarter as if such shares had been shares of issued and outstanding
Common Stock on such record date, and such amount shall be treated as reinvested
in additional shares of Common Stock on the dividend payment date.
(c) Cash amounts credited to the Director's Account pursuant
to subparagraphs (a) and (b) above shall accrue interest commencing from the
date the cash amounts are credited to the Director's Account at a rate per annum
to be determined from time to time by the Company. Amounts credited to the
Director's Account shall continue to accrue interest until distributed in
accordance with the Plan. An Eligible Director may be given the opportunity make
a written election to treat the existing cash balance and interest accrued
thereon as invested in additional shares of Common Stock. The timing of the
effectiveness of such election shall be subject to the Company's discretion.
(d) An Eligible Director shall not have any interest in the
cash or Common Stock in his or her Director's Account until such cash or Common
Stock is distributed in accordance with the Plan.
Section 6. DISTRIBUTION FROM ACCOUNTS.
(a) FORM OF ELECTION. At the time an Eligible Director makes
an election to defer receipt of Annual Fixed Director Compensation pursuant to
paragraphs 5(a) or 5(c), such Director shall also file with the Secretary of the
Company a written election with respect to the distribution of the aggregate
amount of cash and shares credited to the Director's Account pursuant to such
election. An Eligible Director may elect to receive such amount in one lump-sum
payment or in a number of approximately equal annual installments (provided the
payout period does not exceed 15 years). The lump-sum payment or the first
installment shall be paid as of (i) the first business day of any calendar year
subsequent to the date the Annual Fixed Director Compensation would otherwise be
payable, as specified by the Director, (ii) the first business day of the
calendar quarter immediately following the cessation of the Eligible Director's
service as a director of the Company or (iii) the earlier of (i) or (ii), as the
Eligible Director may elect. Subsequent installments shall be paid as of the
first business day of each succeeding annual installment period until the entire
amount credited to the Director's Account shall have been paid. A cash payment
will be made with the final installment for any fraction of a share of Common
Stock credited to the Director's Account.
3
<PAGE> 4
(b) ADJUSTMENT OF METHOD OF DISTRIBUTION. An Eligible Director
participating in the Plan may, prior to the beginning of any calendar year, file
another written election with the Secretary of the Company electing to change
the date and/or method of distribution of the aggregate amount of cash and
shares of Common Stock credited to the Director's Account for services rendered
as a director commencing with such calendar year. Amounts credited to the
Director's Account prior to the effective date of such change (the "Prior
Amounts") shall not be affected by such change and shall be distributed only in
accordance with the election in effect at the time the Prior Amounts were
credited to the Director's Account; provided, however, that an Eligible Director
may elect to change the time at which Prior Amounts are to be paid, if (i) a
written election to effect such change is filed with the Secretary of the
Company before the earliest scheduled payment of the Prior Amounts and (ii) such
change would not accelerate the Eligible Director's receipt of the Prior
Amounts. Notwithstanding the foregoing, in the event an Eligible Director
suffers a severe financial hardship outside the control of such Director, as
determined by the Company, the Eligible Director may elect to advance or defer
the date of distribution of his or her Director's Account or change the method
of distribution thereof.
(c) CHANGE OF CONTROL. Notwithstanding anything to the
contrary contained herein, upon a "Change of Control" (as defined below), the
full number of shares of Common Stock and cash in each Director's Account shall
be immediately funded and be distributable on the later of the date six months
and one day following the "Change of Control" or the distribution date(s)
previously elected by an Eligible Director. For purposes of this Plan, a "Change
of Control" shall mean the occurrence of any of the following, unless such
occurrence shall have been approved or ratified by at least a two-thirds (2/3)
vote of the Continuing Directors (defined below): (i) any person within the
meaning of Sections 13(d) and 14(d) of the Exchange Act, shall have become the
beneficial owner, within the meaning of Rule 13d-3 under the Exchange Act, of
shares of stock of the Company having twenty-five percent (25%) or more of the
total number of votes that may be cast for election of the directors of the
Company; or (ii) there shall have been a change in the composition of the Board
of Directors such that at any time a majority of the Board of Directors shall
have been members of the Board for less than twenty-four (24) months, unless the
election of each new director who was not a director at the beginning of the
period was approved by a vote of at least two-thirds (2/3) of the directors then
still in office who were directors at the beginning of such period, or who were
approved as directors pursuant to the provisions of this paragraph (the
"Continuing Directors").
Section 7. DISTRIBUTION ON DEATH. If an Eligible Director should die
before all amounts credited to the Director's Account shall have been paid in
accordance with the election referred to in paragraph 6, the balance in such
Director's Account as of the date of such Director's death shall be paid
promptly following such Director's death, to the beneficiary designated in
writing by such Director. Such balance shall be paid to the estate of the
Eligible Director if (a) no such designation has been made or (b) the designated
beneficiary shall have predeceased the Director and no further beneficiary
designation has been made.
4
<PAGE> 5
Section 8. MISCELLANEOUS.
(a) The right of an Eligible Director to receive any amount in
the Director's Account shall not be transferable or assignable by such Director,
except by will or by the laws of descent and distribution, and no part of such
amount shall be subject to attachment or other legal process.
(b) Except as otherwise set forth herein, the Company shall
not be required to reserve or otherwise set aside funds or shares of Common
Stock for the payment of its obligations hereunder. The Company shall make
available as and when required a sufficient number of shares of Common Stock to
meet the requirements arising under the Plan.
(c) The establishment and maintenance of, or allocation and
credits to, the Director's Account shall not vest in the Eligible Director or
his beneficiary any right, title or interest in and to any specific assets of
the Company. An Eligible Director shall not have any dividend or voting rights
or any other rights of a stockholder (except as expressly set forth in paragraph
5(b) with respect to dividends and as provided in subparagraph (f) below) until
the shares of Common Stock credited to a Director's Account are distributed. The
rights of an Eligible Director to receive payments under this Plan shall be no
greater than the right of an unsecured general creditor of the Company.
(d) The Plan shall continue in effect until terminated by the
Board of Directors. The Board of Directors may at any time amend or terminate
the Plan; provided, however, that (i) no amendment or termination shall impair
the rights of an Eligible Director with respect to amounts then credited to the
Director's Account; (ii) the provisions of the Plan relating to eligibility, the
amount and price of securities to be awarded, the timing of and the amount of
Annual Fixed Director Compensation awards shall not be amended more than once
every six months, other than to comport with changes in the Internal Revenue
Code of 1986, as amended, the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder; and (iii) no amendment shall become
effective without approval of the stockholders of the Company if such
stockholder approval is required to enable the Plan to satisfy applicable state
or Federal statutory or regulatory requirements.
(e) Each Eligible Director participating in the Plan will
receive an annual statement indicating the amount of cash and number of shares
of Common Stock credited to the Director's Account as of the end of the
preceding calendar year.
(f) If adjustments are made to outstanding shares of Common
Stock as a result of stock dividends, stock splits, recapitalizations, mergers,
consolidations and similar transactions, an appropriate adjustment shall be made
in the number of shares of Common Stock credited to the Director's Account.
5
<PAGE> 6
(g) Shares of Common Stock that may be granted under the Plan
shall be subject to adjustment upon the occurrence of adjustments to the
outstanding Common Stock described in paragraph 8(f) hereof.
(h) The validity, construction, interpretation, administration
and effect of the Plan and of its rules and regulations, and rights relating to
the Plan, shall be determined solely in accordance with the laws of the State of
Delaware.
(i) All claims and disputes between an Eligible Director and
the Company arising out of the Plan shall be submitted to arbitration in
accordance with the then current arbitration policy of the Company. Notice of
demand for arbitration shall be given in writing to the other party and shall be
made within a reasonable time after the claim or dispute has arisen. The award
rendered by the arbitrator shall be final, and judgment may be entered upon it
in accordance with applicable law in any court having jurisdiction thereof. The
provisions of this Section 8(i) shall be specifically enforceable under
applicable law in any court having jurisdiction thereof.
(j) If any term or provision of this Plan or the application
thereof to any person or circumstances shall, to any extent, be invalid or
unenforceable, then the remainder of the Plan, or the application of such term
or provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each term and
provision hereof shall be valid and be enforced to the fullest extent permitted
by applicable law.
6
<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>
Year ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Income before federal income taxes and
cumulative effect of changes in
accounting principles $1,915 $1,837 $1,752 $ 487 $ 551
Interest 152 161 163 118 --
Portion of rentals deemed to be interest 47 49 55 45 33
------ ------ ------ ------ ------
Income available for fixed charges $2,114 $2,047 $1,970 $ 650 $ 584
====== ====== ====== ====== ======
Fixed charges:
Interest $ 152 $ 161 $ 163 $ 118 $ --
Portion of rentals deemed to be interest 47 49 55 45 33
------ ------ ------ ------ ------
Total fixed charges $ 199 $ 210 $ 218 $ 163 $ 33
====== ====== ====== ====== ======
Ratio of earnings to fixed charges 10.62x 9.75x 9.04x 3.99x 17.53x
------ ------ ------ ------ ------
</TABLE>
The ratio of earnings to fixed charges has been computed by dividing income
before income taxes and cumulative effect of changes in accounting principles
and fixed charges by the fixed charges. For purposes of this ratio, fixed
charges consist of that portion of rentals deemed representative of the
appropriate interest factor.
<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) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 10,572 $ 10,451 $ 9,911 $ 8,197 $ 4,569
Income before cumulative effect of changes in
accounting principles $ 1,409 $ 1,343 $ 1,236 $ 391 $ 419
Cumulative effect of changes in accounting principles (133) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,276 $ 1,343 $ 1,236 $ 391 $ 419
===================================================================================================================================
Total assets $ 50,257 $ 51,274 $ 50,682 $ 49,779 $24,062
Long-term debt $ 850 $ 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 $ 900 --
Stockholders' equity $ 8,941 $ 9,125 $ 7,777 $ 6,480 $ 3,601
Stockholders' equity excluding accumulated other
changes in equity from nonowner sources $ 9,143 $ 8,204 $ 7,055 $ 6,195 $ 3,321
Year-end common shares outstanding (2) 387.3 391.9 393.1 399.6 N/A
Basic Earnings per Share (3,5)
Income before cumulative effect of changes in
accounting principles $ 3.62 $ 3.43 $ 3.13 $ 1.02 $ 1.28
Cumulative effect of changes in accounting principles (0.34) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 3.28 $ 3.43 $ 3.13 $ 1.02 $ 1.28
===================================================================================================================================
Diluted Earnings per Share (4,5)
Income before cumulative effect of changes in
accounting principles $ 3.61 $ 3.42 $ 3.12 $ 1.02 $ 1.28
Cumulative effect of changes in accounting principles (0.34) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 3.27 $ 3.42 $ 3.12 $ 1.02 $ 1.28
===================================================================================================================================
Per common share data:
Cash dividends $ 0.50 $ 0.40 $ 0.30 $ 0.15 N/A
Book value $ 23.09 $ 23.28 $ 19.78 $ 16.22 N/A
Book value excluding accumulated other changes
in equity from nonowner sources $ 23.61 $ 20.93 $ 17.95 $ 15.50 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On April 2, 1996, Travelers Property Casualty Corp. (TAP) purchased from
Aetna Services, Inc. all of the outstanding capital stock of Travelers
Casualty and Surety Company (formerly the Aetna Casualty & Surety Company)
and the Standard Fire Insurance Company (collectively, Aetna P&C). 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 Initial Public Offering (IPO). As part of
this transaction, The Travelers Insurance Group Inc. (TIGI), TAP's parent,
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.
(3) Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for
the period.
(4) Diluted earnings per share 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.
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 principally 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 85% 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.
In November 1999, President Clinton signed into law the Gramm-Leach-Bliley Act
(the Act), which will become effective in most significant respects on March 11,
2000. Under the Act, bank holding companies, such as Citigroup, all of whose
depository institutions are "well capitalized" and "well managed," as defined in
Federal Reserve Regulation Y, and which obtain satisfactory Community
Reinvestment Act ratings, will have the ability to declare themselves to be
"financial holding companies" and such companies and their affiliates will have
the ability to engage in a broader spectrum of activities than those currently
permitted, including insurance underwriting and brokerage. Citigroup anticipates
that its declaration to become a financial holding company will become effective
shortly after the effective date of the Act, and that as a result, Citigroup and
its affiliates (including the Company) will be permitted to continue to operate
their insurance business as currently structured and, if they so determine, to
expand those businesses through acquisition or otherwise.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions, except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues ..................................................................... $ 10,572 $ 10,451 $ 9,911
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles .......... $ 1,409 $ 1,343 $ 1,236
Cumulative effect of changes in accounting principles ........................ (133) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (1) ............................................................... $ 1,276 $ 1,343 $ 1,236
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles ........ $ 3.62 $ 3.43 $ 3.13
Cumulative effect of changes in accounting principles ...................... (0.34) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income ................................................................. $ 3.28 $ 3.43 $ 3.13
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding ....................... 388.6 392.0 395.5
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles ........ $ 3.61 $ 3.42 $ 3.12
Cumulative effect of changes in accounting principles ...................... (0.34) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income ................................................................. $ 3.27 $ 3.42 $ 3.12
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding and common stock equivalents ............................ 390.0 392.7 395.8
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Net income includes $72 million, $93 million and $110 million of realized
investment gains in 1999, 1998 and 1997, respectively.
2
<PAGE> 3
Net income was $1.276 billion in 1999, $1.343 billion in 1998 and $1.236 billion
in 1997. Net income in 1999 included a charge of $160 million related to the
initial adoption of the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants' (AcSEC) Statement of Position 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3) and a benefit of $27 million related to the initial
adoption of AcSEC Statement of Position 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk"
(SOP 98-7). The net charge of $133 million due to the initial adoption of these
Statements of Position has been accounted for as a cumulative effect of a change
in accounting principles.
Excluding realized investment gains and the cumulative effect of changes in
accounting principles in 1999 described above, operating income was $1.337
billion or $3.43 per share (diluted) in 1999, $1.250 billion or $3.18 per share
(diluted) in 1998 and $1.126 billion or $2.85 per share (diluted) in 1997. The
increase in operating income in 1999 from 1998 was primarily due to favorable
prior-year reserve development and lower weather-related losses in Commercial
Lines, a benefit as a result of legislative actions in the states of New York
and Pennsylvania that changed the manner in which these states finance their
workers' compensation second-injury funds, an increase in income due to the
growth in Personal Lines and lower operating expenses. These factors were
partially offset by higher catastrophe losses principally due to Hurricane
Floyd, higher loss ratios in the TRAVELERS SECURE(R) program, a charge related
to curtailing the sale of TRAVELERS SECURE(R) auto and homeowners products and
lower favorable prior-year reserve development in Personal Lines and lower
Commercial Lines fee income. 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.
Revenues of $10.572 billion in 1999 increased $121 million from 1998. Revenues
of $10.451 billion in 1998 increased $540 million from 1997. The 1999 increase
was primarily attributable to growth in earned premiums in Personal Lines,
partially offset by lower earned premiums in Commercial Lines, lower realized
investment gains and lower fee income. 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.
Commercial Lines earned premiums decreased $150 million to $4.375 billion in
1999, reflecting the impact of higher ceded premiums in 1999 due to additional
reinsurance coverage, the highly competitive marketplace and the Company's
continued disciplined approach to underwriting and risk management. 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,
partially offset by continued decreases resulting from the Company's selective
underwriting and market conditions characterized by difficult pricing and
increased competition. Personal Lines earned premiums of $3.634 billion in 1999
increased $363 million from 1998. Personal Lines earned premiums of $3.271
billion in 1998 increased $354 million from 1997. These increases in earned
premiums reflected growth in independent agents business and growth in affinity
marketing and joint marketing arrangements. During the third quarter of 1999,
the Company's management decided to curtail the sale of its TRAVELERS SECURE(R)
auto and homeowners products because insured losses exceeded levels anticipated
in the pricing of the products. The TRAVELERS SECURE(R) program marketed
Personal Lines products through the independent agents of Primerica Financial
Services, a unit of Citigroup.
Net investment income was $2.092 billion in 1999, a decrease of $8 million from
1998. 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.
Fee income was $275 million in 1999, a $31 million decrease from 1998. Fee
income was $306 million in 1998, a $59 million decrease from 1997. National
Accounts within Commercial Lines is the primary source of fee income due to its
service fee business. The decrease in fee income in both 1999 and 1998 was the
result of the depopulation of involuntary pools serviced by the Company and the
Company's continued success in lowering workers' compensation losses of service
customers.
3
<PAGE> 4
Claims and expenses of $8.657 billion in 1999 increased $43 million from 1998.
This increase was primarily the result of higher claims associated with the
growth in premiums in Personal Lines, higher catastrophe losses principally due
to Hurricane Floyd, higher loss ratios in the TRAVELERS SECURE(R) program, the
TRAVELERS SECURE(R) charge and lower favorable prior-year reserve development in
Personal Lines, mostly offset by favorable prior-year reserve development and
lower weather-related losses in Commercial Lines, the benefit related to the
legislative actions in New York and Pennsylvania that changed the manner in
which these states finance their workers' compensation second-injury funds, and
a reduction in operating expenses. 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
operating expenses.
The Company's effective tax rate was 26%, 27% and 29% in 1999, 1998 and 1997,
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. Both the 1999 and 1998 effective tax rate were lower, compared to 1998
and 1997, respectively, due to a proportionately larger amount of tax-exempt
income versus pre-tax income.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------
STATUTORY:
<S> <C> <C> <C>
Loss and Loss Adjustment Expense (LAE) ratio............... 74.3% 73.6% 72.4%
Underwriting expense ratio................................. 28.8 28.6 29.9
Combined ratio before policyholder dividends............... 103.1 102.2 102.3
Combined ratio............................................. 103.7 102.7 103.5
- ----------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio......................................... 73.0% 73.5% 72.3%
Underwriting expense ratio................................. 28.3 29.1 29.6
Combined ratio before policyholder dividends............... 101.3 102.6 101.9
Combined ratio............................................. 101.9 103.1 102.6
- ----------------------------------------------------------------------------------------------
</TABLE>
For purposes of computing GAAP combined ratios, fee income is allocated as a
reduction of losses and loss adjustment expenses and other underwriting
expenses.
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
The 1999 statutory combined ratio before policyholder dividends includes the
treatment, on a statutory basis only, of a commutation of an asbestos liability
to an insured. In addition, the 1999 statutory and GAAP combined ratios before
policyholder dividends include an adjustment in Personal Lines associated with
the termination of a quota share reinsurance arrangement. Excluding these items,
the statutory and GAAP combined ratios before policyholder dividends for 1999
would have been 101.8% and 101.5%, respectively.
The improvement in the 1999 statutory and GAAP combined ratios before
policyholder dividends excluding these items compared to 1998 was due to
favorable prior-year reserve development in Commercial Lines, continued
productivity improvements and expense savings, partially offset by higher
catastrophe losses, higher loss ratios in the TRAVELERS SECURE(R) program and
the charge related to curtailing the sale of TRAVELERS SECURE(R) policies. In
addition, the 1999 GAAP combined ratio before policyholder dividends benefited
from legislative actions in the states of New York and Pennsylvania that changed
the manner in which these states finance their workers' compensation
second-injury funds.
4
<PAGE> 5
The 1997 statutory and GAAP combined ratios include an adjustment in Commercial
Lines due to a change to conform the Travelers Casualty and Surety Company
(formerly The Aetna Casualty and Surety Company) and The Standard Fire Insurance
Company (collectively, 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.
RESULTS OF OPERATIONS BY SEGMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL LINES
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues ....................................................................... $ 6,492 $ 6,699 $ 6,557
- --------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles ............ $ 1,159 $ 1,018 $ 946
Cumulative effect of changes in accounting principles .......................... (133) -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net income (1) ................................................................. $ 1,026 $ 1,018 $ 946
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Commercial Lines net income includes $82 million, $76 million and $100
million of realized investment gains in 1999, 1998 and 1997, respectively.
Net income was $1.026 billion in 1999, $1.018 billion in 1998 and $946 million
in 1997. Net income in 1999 included a charge of $160 million related to the
initial adoption of SOP 97-3 and a benefit of $27 million related to the initial
adoption of SOP 98-7. The net charge of $133 million due to the initial adoption
of these Statements of Position has been accounted for as a cumulative effect of
a change in accounting principles.
Commercial Lines operating income, which excludes realized investment gains in
all years and the cumulative effect of changes in accounting principles in 1999,
was $1.077 billion, $942 million and $846 million in 1999, 1998 and 1997,
respectively. The 1999 increase compared to 1998 included a benefit as a result
of legislative actions in the states of New York and Pennsylvania that changed
the manner in which these states finance their workers' compensation
second-injury funds. The improvement also reflected favorable prior-year reserve
development, lower weather-related losses and lower operating expenses,
partially offset by lower fee income. Operating results in 1999 reflected the
Company's long-standing insistence on maintaining discipline in the highly
competitive commercial lines marketplace and on growing business only where
market conditions warrant. During 1999, the Company began to see modest price
increases on renewal business. However, these increases varied significantly and
reinforced the fact that rates in many areas still have not improved to the
point of producing acceptable returns. The 1998 increase compared to 1997 was
due to increased after-tax net investment income, expense reductions and lower
environmental and cumulative injury incurred losses, partially offset by
increased losses from catastrophes and other weather-related events. Operating
results during this period 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 disciplined approach to underwriting and risk
management.
Revenues of $6.492 billion in 1999 decreased $207 million from 1998. Revenues of
$6.699 billion in 1998 increased $142 million from 1997. The decrease in 1999
reflected lower levels of earned premiums, net investment income and fee income,
partially offset by an increase in realized investment gains. The 1998 increase
reflected higher earned premiums and net investment income, partially offset by
declines in fee income and realized investment gains.
5
<PAGE> 6
Commercial Lines net written premiums in 1999 totaled $4.408 billion, down $206
million from 1998. This decrease continued to reflect the highly competitive
marketplace and the Company's disciplined approach to underwriting and risk
management, as well as additional reinsurance coverage in 1999. 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
disciplined approach to underwriting and risk management.
Fee income was $275 million, $306 million and $365 million in 1999, 1998 and
1997, respectively. The decreases in fee income were the result of the
depopulation of involuntary pools serviced by the Company and the Company's
continued success in lowering workers' compensation losses of service customers.
National Accounts works with national and regional brokers 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 $488 million in 1999
compared to $625 million in 1998. This decrease continued to reflect the
Company's disciplined approach to underwriting and risk management, as well as
the impact of additional reinsurance coverage in 1999. 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 disciplined approach to underwriting
and risk management.
For 1999, new business in National Accounts was significantly lower than 1998,
reflecting the Company's continued disciplined approach to the highly
competitive marketplace. The business retention ratio for 1999 was moderately
higher than 1998, primarily reflecting the loss of one large account in 1998.
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 cost containment
programs.
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 of
$1.816 billion in 1999 were $16 million above 1998 premium levels. This increase
reflected the improving rate environment and growth in specific business
markets, partially offset by the Company's continued disciplined approach to
underwriting and risk management. 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 disciplined approach to
underwriting and risk management.
For 1999, new premium business in Commercial Accounts was significantly less
than 1998, reflecting the Company's continued focus on obtaining new business
accounts only where it can maintain its selective underwriting policy. The
business retention ratio was virtually the same as 1998 reflecting the Company's
focus on the retention of existing business while maintaining its product
pricing standards and its selective underwriting policy. For 1998, new premium
business in Commercial Accounts significantly declined compared to 1997,
reflecting the Company's focus on maintaining 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.
6
<PAGE> 7
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $1.494 billion in both 1999 and 1998
and $1.432 billion in 1997. The results in 1999 compared to 1998 continued to
reflect the highly competitive marketplace and the Company's disciplined
approach to underwriting and risk management. 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 in 1998 reflected lower ceded premiums, partially offset by
the highly competitive marketplace and the Company's disciplined approach to
underwriting and risk management.
New premium business in Select Accounts was significantly lower in 1999 compared
to 1998 reflecting its selective underwriting policy in the highly competitive
marketplace. The business retention ratio remained strong in 1999 and was
virtually the same as 1998 and 1997. New premium business in Select Accounts was
moderately lower in 1998 compared to 1997 reflecting the highly competitive
marketplace and the Company's disciplined approach to underwriting and risk
management.
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. Specialty Accounts net written premiums of
$610 million in 1999 were $85 million below 1998 premium levels. This decrease
reflected the impact of additional reinsurance coverage, a highly competitive
marketplace and the Company's continued disciplined approach to underwriting and
risk management. Specialty Accounts net written premiums were $695 million in
1998 as compared to $682 million in 1997. This increase reflected strong
production in excess and surplus lines, partially offset by a highly competitive
marketplace and the Company's disciplined approach to underwriting and risk
management.
Commercial Lines claims and expenses of $4.927 billion in 1999 decreased $400
million from 1998 and increased $94 million in 1998 compared to 1997. The 1999
decrease reflected the benefit resulting from the legislative actions in the
states of New York and Pennsylvania that changed the manner in which these
states finance their workers' compensation second-injury funds. This decrease
also included favorable prior-year reserve development, lower weather-related
losses and lower operating expenses. 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 expense
reductions.
Catastrophe losses, net of tax and reinsurance, were $27 million, $25 million
and $5 million in 1999, 1998 and 1997, respectively. The 1999 catastrophe losses
were due to Hurricane Floyd in the third quarter and tornadoes in Oklahoma in
the second quarter. The 1998 catastrophe losses were primarily due to Hurricane
Georges in the third quarter and tornadoes in Nashville, Tennessee in the second
quarter. The 1997 catastrophe losses were primarily due to tornadoes in the
Midwest in the first quarter.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------
STATUTORY:
<S> <C> <C> <C>
Loss and LAE ratio.......................................... 77.9% 78.5% 78.4%
Underwriting expense ratio.................................. 30.7 29.7 30.6
Combined ratio before policyholder dividends................ 108.6 108.2 109.0
Combined ratio.............................................. 109.7 109.1 111.0
- -------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio.......................................... 75.2% 78.4% 78.3%
Underwriting expense ratio.................................. 29.8 31.1 30.4
Combined ratio before policyholder dividends................ 105.0 109.5 108.7
Combined ratio.............................................. 106.1 110.4 109.9
- -------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
For purposes of computing GAAP combined ratios, fee income is allocated as a
reduction of losses and loss adjustment expenses and other underwriting
expenses.
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
The 1999 statutory combined ratio before policyholder dividends includes the
treatment, on a statutory basis only, of the commutation of an asbestos
liability to an insured. Excluding the commutation, the statutory combined ratio
before policyholder dividends was 106.1% in 1999 compared to 108.2% in 1998. The
improvement was primarily due to favorable prior-year reserve development and
lower weather-related losses. The decrease in the 1999 GAAP combined ratio
before policyholder dividends compared to 1998 was due to favorable prior-year
reserve development, lower weather-related losses and the benefit of the New
York and Pennsylvania legislative actions, partially offset by lower fee income.
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 expense reductions and lower environmental and
cumulative injury incurred losses, partially offset by higher catastrophe and
other weather-related losses and lower fee income.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PERSONAL LINES
(in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues................................................... $4,077 $3,743 $3,341
Net income (1)............................................. $ 358 $ 437 $ 413
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Personal Lines net income includes $10 million of realized investment losses
in 1999 and $17 million and $10 million of realized investment gains in 1998
and 1997, respectively.
Net income of $358 million in 1999 decreased $79 million from 1998. Net income
of $437 million in 1998 increased $24 million from $413 million in 1997.
Personal Lines operating income, which excludes realized investment gains and
losses, was $368 million, $420 million and $403 million in 1999, 1998 and 1997,
respectively. The 1999 decrease in operating income was due to higher
catastrophe losses primarily due to Hurricane Floyd, higher loss ratios in the
TRAVELERS SECURE(R) program, the charge related to curtailing the sale of
TRAVELERS SECURE(R) auto and homeowners products and lower prior-year favorable
reserve development, partially offset by the increase in income due to the
growth in earned premiums. 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.
Revenues were $4.077 billion in 1999 compared to $3.743 billion in 1998 and
$3.341 billion in 1997. Both the 1999 and 1998 increases, compared to 1998 and
1997, respectively, reflected growth in earned premiums in all distribution
channels and higher net investment income. Personal Lines had approximately 5.3
million, 5.1 million and 4.6 million policies in force at December 31, 1999,
1998 and 1997, respectively.
8
<PAGE> 9
Personal Lines net written premiums in 1999 totaled $3.733 billion (excluding an
adjustment of $72 million due to an adjustment associated with the termination
of a quota share reinsurance arrangement), compared to $3.490 billion in 1998
and $3.005 billion (excluding an adjustment of $69 million due to an adjustment
associated with a change in the quota share reinsurance arrangement) in 1997.
The increases in 1999 and 1998 primarily reflected growth in independent agents
business and growth in affinity marketing and joint marketing arrangements.
Business retention continued to be strong. During the third quarter of 1999, the
Company's management decided to curtail the sale of TRAVELERS SECURE(R) auto and
homeowners products. The growth in premiums from the independent agent
distribution channel has been partially 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.
Personal Lines claims and expenses of $3.561 billion in 1999 increased $457
million from 1998. This increase was primarily the result of higher losses
associated with the growth in premiums and related claim volumes, higher
catastrophe losses and lower favorable prior-year reserve development. In
addition, 1999 included higher loss ratios in the TRAVELERS SECURE(R) program
and the charge related to curtailing the sale of TRAVELERS SECURE(R) auto and
homeowners products. 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.
Catastrophe losses, net of tax and reinsurance, were $79 million, $44 million
and $10 million in 1999, 1998 and 1997, respectively. Catastrophe losses in 1999
were primarily due to Hurricane Floyd in the third quarter, wind and hail storms
on the East Coast and tornadoes in the Midwest in the second quarter and a wind
and ice storm in the Midwest and Northeast in the first quarter. Catastrophe
losses in 1998 were primarily due to Hurricanes Bonnie and Georges, severe first
quarter winter storms and second and third quarter wind and hail storms.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STATUTORY:
Loss and LAE ratio....................................... 70.0% 66.7% 63.5%
Underwriting expense ratio............................... 26.7 27.2 28.7
Combined ratio........................................... 96.7 93.9 92.2
- -------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio....................................... 70.3% 66.7% 63.5%
Underwriting expense ratio............................... 26.5 26.5 28.3
Combined ratio........................................... 96.8 93.2 91.8
- -------------------------------------------------------------------------------------------------
</TABLE>
GAAP combined ratios for Personal Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
The 1999 statutory and GAAP combined ratios for Personal Lines include an
adjustment associated with the termination of a quota share reinsurance
arrangement. Excluding this adjustment, the statutory and GAAP combined ratios
for 1999 would have been 96.5% and 97.3%, respectively. The increase in the 1999
statutory and GAAP combined ratios excluding this adjustment compared to 1998
was due to higher catastrophe losses due to Hurricane Floyd, higher loss ratios
in the TRAVELERS SECURE(R) program, the TRAVELERS SECURE(R) charge and lower
favorable prior-year development in the automobile bodily injury line.
9
<PAGE> 10
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 alternative
distribution channels.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
INTEREST EXPENSE AND OTHER
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues................................................... $ 3 $ 9 $ 13
Net loss................................................... $(108) $(112) $(123)
- -------------------------------------------------------------------------------------------------
</TABLE>
The primary component of net loss for 1999, 1998 and 1997 was after-tax interest
expense of $99 million, $105 million and $106 million, respectively.
ENVIRONMENTAL CLAIMS
As a result of various state and federal legislative and regulatory efforts
aimed at environmental remediation, the insurance industry has been, and
continues to be, involved in litigation involving policy coverage and liability
issues. The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), enacted in 1980 and later modified, enables private parties as well
as federal and state governments to take action with respect to releases and
threatened releases of hazardous substances. This federal statute permits both
the recovery of response costs from certain liable parties and may require
liable parties to directly undertake their own remedial action. 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. These decisions often pertain to insurance policies that were issued
by the Company prior to the mid-1970s. The 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, 1999, approximately 22% of
the net environmental loss reserve (i.e., approximately $149 million) consists
of the case reserve for resolved claims. The balance, approximately 78% of the
net aggregate reserve (i.e., approximately $527 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 by settlement on an insured-by-insured basis as opposed to a
claim-by-claim basis. 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 as well as
extinguishes any pending coverage litigation dispute with the insured. 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.
10
<PAGE> 11
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 this 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
other coverage available, if any, including the number of years of coverage, if
any and the applicable law in each jurisdiction. Analysis of these and other
factors, including the potential for future claims, results in the establishment
of the bulk reserve.
The duration of the Company's investigation and review of such claims and the
extent of time necessary to determine an appropriate estimate, if any, of the
value of the claim to the Company, 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.
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. 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, 1999, calculated as described above, the Company had
approximately 39,000 pending environmental-related claims tendered by 968 active
policyholders. Of the total pending environmental-related claims, 28,800 claims
relate to Travelers P&C policies tendered by 413 policyholders and 10,200 claims
relate to Aetna P&C policies tendered by 646 policyholders. Approximately 91 of
these Aetna P&C policyholders are also included in the 413 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.
11
<PAGE> 12
The following table displays activity for environmental losses and loss expenses
and reserves for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
ENVIRONMENTAL LOSSES
(in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning reserves:
Direct................................................ $ 928 $ 1,193 $1,369
Ceded................................................. (96) (74) (127)
- -----------------------------------------------------------------------------------------------
Net................................................. 832 1,119 1,242
Incurred losses and loss expenses:
Direct................................................ 139 123 79
Ceded................................................. (82) (73) (14)
Losses paid:
Direct ............................................... 266 388 271
Ceded................................................. (53) (51) (67)
Other:
Direct................................................ - - 16
Ceded................................................. - - -
- -----------------------------------------------------------------------------------------------
Ending reserves:
Direct................................................ 801 928 1,193
Ceded................................................. (125) (96) (74)
- -----------------------------------------------------------------------------------------------
Net................................................. $ 676 $ 832 $1,119
===============================================================================================
</TABLE>
In the above table, "Other" represents reallocation of certain general liability
reserves to environmental reserves in 1997.
Over the past two years, the Company has experienced a substantial reduction in
the number of policyholders with pending coverage litigation disputes pertaining
to environmental claims as well as a continued reduction in the number of
policyholders with active environmental claims.
As of December 31, 1999, the number of policyholders with pending coverage
litigation disputes pertaining to environmental claims was 270, approximately
33% less than the number pending as of December 31, 1998 and approximately 50%
less than the number pending as of December 31, 1997. As of December 31, 1999,
the Company, for approximately $1.57 billion (before reinsurance), has resolved
the environmental liabilities presented by 4,953 of the 5,921 policyholders who
have tendered environmental claims to the Company. This resolution comprises 84%
of the policyholders who have tendered such claims. 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. Generally the settlement dollars paid in disputed coverage claims are
a percentage of the total coverage sought by such insureds.
The Company has direct environmental reserves (before reinsurance) of
approximately $801 million, $530 million of which relates to the following: a)
968 policyholders with unresolved environmental claims (the remaining 16% of the
5,921 policyholders who have tendered environmental claims); b) policyholders
that may tender an environmental claim in the future; and c) for the anticipated
cost of coverage litigation disputes pertaining to such environmental claims.
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.
12
<PAGE> 13
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, including whether such
claims qualify as products or non-products claims, 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, 1999, approximately 11% of the net aggregate reserve (i.e.,
approximately $94 million) is for pending asbestos claims. The balance,
approximately 89% (i.e., approximately $733 million) of the net asbestos
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
13
<PAGE> 14
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 1999,
1998 and 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ASBESTOS LOSSES
(in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning reserves:
Direct ................................ $ 1,252 $ 1,363 $ 1,443
Ceded ................................. (266) (249) (370)
- --------------------------------------------------------------------------------
Net ................................. 986 1,114 1,073
Incurred losses and loss expenses:
Direct ................................ 128 135 87
Ceded ................................. (71) (69) (18)
Losses paid:
Direct ................................ 330 246 174
Ceded ................................. (114) (52) (140)
Other:
Direct ................................ -- -- 7
Ceded ................................. -- -- (1)
- --------------------------------------------------------------------------------
Ending reserves:
Direct ................................ 1,050 1,252 1,363
Ceded ................................. (223) (266) (249)
- --------------------------------------------------------------------------------
Net ................................. $ 827 $ 986 $ 1,114
================================================================================
</TABLE>
In the above table, "Other" represents reallocation of certain reserves to
asbestos reserves in 1997.
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.
14
<PAGE> 15
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.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1999 are the Company's best
estimate of ultimate claims and claim adjustment expenses based upon known facts
and current law. However, the conditions surrounding the final resolution of
these claims continue to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations as well as changes in
legislation applicable to such claims. Because of these future unknowns,
additional liabilities may arise for amounts in excess of the current reserves.
These additional amounts, or a range of these additional amounts, cannot now be
reasonably estimated, and could result in a liability exceeding reserves by an
amount that would be material to the Company's operating results in a future
period. However, the Company believes that it is not likely that these claims
will have a material adverse effect on the Company's financial condition or
liquidity.
CUMULATIVE INJURY OTHER THAN ASBESTOS (CIOTA) CLAIMS
CIOTA claims are generally submitted to the Company under general liability
policies and often involve an allegation by a claimant against an insured that
the claimant has suffered injuries as a result of long-term or continuous
exposure to potentially harmful products or substances. Such potentially harmful
products or substances include, but are not limited to, lead paint, pesticides,
pharmaceutical products, silicone-based personal products, solvents and other
deleterious substances.
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.
15
<PAGE> 16
At December 31, 1999, approximately 21% of the net aggregate reserve (i.e.,
approximately $179 million) is for pending CIOTA claims. The balance,
approximately 79% (i.e., approximately $692 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 1999, 1998
and 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
CIOTA LOSSES
(in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning reserves:
Direct................................................. $1,346 $ 1,520 $1,560
Ceded.................................................. (392) (432) (446)
- -----------------------------------------------------------------------------------------------
Net.................................................. 954 1,088 1,114
Incurred losses and loss expenses:
Direct................................................. (36) (31) 32
Ceded.................................................. 28 29 (6)
Losses paid:
Direct ................................................ 126 143 72
Ceded.................................................. (51) (11) (20)
- -----------------------------------------------------------------------------------------------
Ending reserves:
Direct................................................. 1,184 1,346 1,520
Ceded.................................................. (313) (392) (432)
- -----------------------------------------------------------------------------------------------
Net.................................................. $ 871 $ 954 $1,088
===============================================================================================
</TABLE>
INVESTMENT PORTFOLIO
At December 31, 1999, the carrying value of the Company's investment portfolio
was $29.8 billion, representing 59% of total assets of $50.3 billion. The
average yield (excluding realized and unrealized investment gains) was 7.2%,
7.4% and 7.4% for the years ended December 31, 1999, 1998 and 1997,
respectively. The after-tax average yield (excluding realized and unrealized
investment gains) was 5.2%, 5.2% and 5.0% for the years ended December 31, 1999,
1998 and 1997, 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,
1999 totaled $25.3 billion, comprised of $23.1 billion of publicly traded fixed
maturities and $2.2 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, 1999 were Aa3 and Baa1,
respectively. Included in the fixed maturity portfolio at such date was
approximately $1.5 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.
16
<PAGE> 17
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, 1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PERCENT OF
(in millions) CARRYING VALUE TOTAL CARRYING VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
QUALITY RATING:
Aaa......................................................... $ 11,284 44.6%
Aa.......................................................... 4,728 18.7
A........................................................... 4,310 17.0
Baa......................................................... 3,484 13.8
- ------------------------------------------------------------------------------------------------------
Total investment grade...................................... 23,806 94.1
Non-investment grade........................................ 1,499 5.9
- ------------------------------------------------------------------------------------------------------
Total fixed maturity investments.............................. $ 25,305 100.0%
======================================================================================================
</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, 1999, the Company held CMOs with a market value of $2.3 billion.
Approximately 66% of CMO holdings were fully collateralized by GNMA, FNMA or
FHLMC securities at such date, and the balance was fully collateralized by
portfolios of individual mortgage loans. In addition, the Company held $1.4
billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
December 31, 1999. 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, 1999.
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, 1999
and 1998 was $29.8 billion and $31.9 billion, respectively, of which 85% and 88%
was invested in fixed maturity securities, respectively. 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.
17
<PAGE> 18
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, 1998. 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 7 and 9 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,
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, 1999 and 1998.
For long-term debt and fixed rate trust securities, the change in fair value is
determined by calculating hypothetical December 31, 1999 and 1998 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 $1.2 billion and $1.4 billion based on a 100
basis point increase in interest rates as of December 31, 1999 and 1998,
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 56% of total assets and approximately 4% of total
liabilities as of December 31, 1999 and approximately 60% of total assets and
approximately 5% of total liabilities as of December 31, 1998. 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.
18
<PAGE> 19
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, 1999 and 1998, 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, 1999 and 1998 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
In 1999, Commercial Lines began to see higher rates on renewal business.
However, these increases varied significantly by region and industry reinforcing
the fact that rates in many areas and business markets still have not improved
to the point of producing acceptable returns. This is an improvement over the
past few years where the trend in market conditions, characterized by difficult
pricing and increased competition, was evidenced by pricing declines in all
markets.
In National Accounts, where programs include risk service, such as claims
settlement, loss control and risk management information services, which is
generally offered in connection with a large deductible or self-insured program,
and risk transfer, which is typically provided through a guaranteed cost or
retrospectively rated insurance policy, pricing declines have continued. This
business continued 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. Although National Accounts
believes that pricing will continue to be very competitive in 2000, recent data
has suggested that the pricing environment may be stabilizing. However, National
Accounts will continue to reject business that is not expected to produce
acceptable returns, which is reflected in a decline in anticipated business
volumes.
Commercial Accounts began to see modest price increases on renewal business
during 1999. However, these increases varied significantly by region and
industry, reinforcing the fact that rates in many areas and business segments
still have not improved to the point of producing acceptable returns. In this
environment, Commercial Accounts continues to reject unprofitable business, as
reflected in the decline in new business.
For Select Accounts, the highly competitive marketplace and soft underwriting
cycle continued to pressure the pricing of guaranteed cost products. Premiums on
this business continued 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 continued 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. In the last six months of
1999, Select Accounts began to see small price increases on renewal business.
However, as noted above in Commercial Accounts, these increases varied
significantly by region and industry.
19
<PAGE> 20
Specialty Accounts also operated 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,
to continue using reinsurance judiciously and to increase its efforts to
cross-sell its expanding array of specialty products to existing customers of
National Accounts, Commercial Accounts, Select Accounts, Personal Lines and
various other Citigroup units where it believes it has the greatest sales and
profit opportunities.
The highly competitive marketplace and the Company's selective underwriting
criteria continued to have an adverse impact on premium and fee levels during
1999. However, the Company did begin to achieve modest price increases,
primarily in the middle market. Although the increases vary significantly by
region and industry, the Company believes that the pricing environment is
stabilizing.
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 alternative 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 as some
personal auto carriers have reduced prices in selected markets. Additionally,
auto loss costs have deteriorated slightly. These trends are expected to
continue in 2000. Personal Lines will continue to emphasize underwriting
discipline in this competitive marketplace and pursue a strategy of flat to
modest increases in auto rates. Market conditions for homeowners insurance have
remained stable, with the industry experiencing modest rate increases. Personal
Lines expects homeowners rate increases to continue in 2000. Homeowners loss
cost trends have held at modest levels.
Travelers Group 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. While some of the insurance industry's cost control methods have
been challenged in litigation, it continues to be the Company's objective to be
a low-cost provider of property and casualty insurance, with an emphasis on
claim payout and performance and enhanced productivity.
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 creates
the opportunity for realized investment gains on disposition of fixed maturity
investments.
20
<PAGE> 21
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.
Certain social, economic, political and litigation issues have led to an
increased number of legislative and regulatory proposals aimed at addressing the
cost and availability of certain types of insurance as well as the claim and
coverage obligations of insurers. While most of these provisions have failed to
become law, these initiatives may continue as legislators and regulators try to
respond to public availability, affordability and claim concerns and the
resulting laws, if any, could adversely affect the Company's ability to write
business with appropriate returns.
LIQUIDITY AND CAPITAL RESOURCES
TAP was formed in January 1996 to hold the property and casualty insurance
subsidiaries of The Travelers Insurance Group Inc. (TIGI). TAP's principal asset
is the capital stock of its insurance subsidiaries.
The liquidity requirements of the Company's business have been met primarily by
funds generated from operations, asset maturities and income received on
investments. Cash provided from these sources is used primarily for claims and
claim adjustment expense payments and operating expenses. Catastrophe claims,
the timing and amount of which are inherently unpredictable, may create
increased liquidity requirements. Additional sources of cash flow include the
sale of invested assets and financing activities. The Company believes that its
future liquidity needs will be met from all of the above sources.
Net cash flows are generally invested in marketable securities. The Company
closely monitors the duration of these investments, and investment purchases and
sales are executed with the objective of having adequate funds available to
satisfy the Company's maturing liabilities. As the Company's investment strategy
focuses on asset and liability durations, and not specific cash flows, asset
sales may be required to satisfy obligations and/or rebalance asset portfolios.
The Company's invested assets at December 31, 1999 totaled $29.8 billion, of
which 84.8% was invested in fixed maturity investments, 4.2% in common stocks
and other equity securities, 1.7% in mortgage loans and real estate and 9.3% in
short-term investments and other investments.
Cash flow needs at TAP include stockholder dividends and debt service. TAP is a
holding company and has no direct operations. Accordingly, TAP meets its cash
flow needs primarily through dividends from operating subsidiaries. In addition,
TAP 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.
Also, TAP will continue to be able to make borrowings from a syndicate of banks
under a Credit Facility in the amount of $250 million, none of which is
currently utilized. The Credit Facility expires in December 2001. Under the
Credit Facility, TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At December 31, 1999, this
requirement was exceeded by approximately $4.8 billion. In addition, the Credit
Facility places restrictions on the amount of consolidated debt TAP can incur.
If the Company had borrowings under the Credit Facility, the interest rate would
be based upon LIBOR plus a negotiated margin. TAP compensates the banks for the
Credit Facility through commitment fees. TAP also issues commercial paper
directly to investors and maintains unused credit availability under the Credit
Facility at least equal to the amount of commercial paper outstanding. At
December 31, 1999, TAP had no commercial paper outstanding.
21
<PAGE> 22
On October 1, 1999 and September 1, 1999, TAP repaid $200 million for its 6-1/4%
notes and $200 million for its 6-3/4% notes, respectively, which matured on
those dates. Long-term debt outstanding at December 31, 1999 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in millions) 1999
- --------------------------------------------------------------------------------
<S> <C>
6-3/4% Notes due 2001........................................ $ 500
6-3/4% Notes due 2006........................................ 150
7-3/4% Notes due 2026........................................ 200
- --------------------------------------------------------------------------------
Total ...................................................... $ 850
================================================================================
</TABLE>
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 2000, dividend payments to TAP from its insurance
subsidiaries are limited to $1.2 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, 1999, all of
the Company's insurance subsidiaries had adjusted capital in excess of amounts
requiring any company or regulatory action.
Management believes that the realization of the Company's recognized net
deferred tax asset of $1.6 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 of approximately $12.0 billion on average over the last three years and
has generated federal taxable income exceeding $8.0 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.
22
<PAGE> 23
Reserves for losses and loss adjustment expenses on a statutory basis were $19.9
billion, $20.7 billion and $21.4 billion at December 31, 1999, 1998 and 1997,
respectively. Both the 1999 and 1998 decreases, compared to 1998 and 1997,
respectively, included net payments of $504 million and $663 million,
respectively, for environmental and cumulative injury claims. These decreases
were also impacted by favorable prior-year reserve development combined with a
shift in business mix from longer-tail Commercial Lines business to shorter-tail
Personal Lines business.
In connection with the 1992 sale of American Re-Insurance Company (Am Re) a
reinsurance agreement was entered into 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, the Company has an 80% participation in payments on
those losses up to a maximum payment 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 January 18, 2000, January 19, 1999 and January 28, 1998, the Company, through
the Travelers Property Casualty Corp. Capital Accumulation Plan, reissued
467,207, 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. The fair market values per share of the 2000, 1999 and 1998
restricted stock awards at the grant date were $36.49, $31.88 and $43.71,
respectively. The restricted stock generally vests after a three-year period.
Except under limited circumstances, the stock cannot be sold or transferred
during the restricted period by the participant, who is required to render
service to the Company during the restricted period. Unearned compensation
expense associated with the restricted stock grant represents the market value
of 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 $22 million, $12
million and $7 million for the years ended December 31, 1999, 1998 and 1997,
respectively. At December 31, 1999, there were 5,844,149 shares available for
future grants under all existing stock incentive plans of TAP, including, but
not limited to the restricted stock plan.
On October 8, 1999, TAP's Board of Directors authorized the expenditure of up to
$200 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, 1999, TAP had repurchased $81 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 successfully implemented its Year 2000 program and achieved
compliance with respect to its business critical systems and encountered no
significant problems with its third party customers, financial institutions,
vendors and others with whom it conducts business. The Company will continue to
monitor its systems and applications throughout 2000 to ensure ongoing
compliance and while there can be no assurances that no Year 2000 related issues
may arise, as of December 31, 1999, the Company believes, based on information
currently available, that Year 2000 related events are not likely to have a
material effect on its results of operations, financial condition or liquidity.
The total pre-tax cost associated with the required modifications and
conversions was approximately $51 million and was expensed as incurred in the
period 1996 - 1999.
23
<PAGE> 24
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. The Company has received a small number of claims to date; losses for
Year 2000 insurance claims and litigation costs related to Year 2000 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 or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "may affect," and similar expressions or
future or conditional verbs such as "will," "should," "would," and "could." 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 actual amount of liabilities associated with
certain environmental and asbestos-related insurance claims. Readers are also
directed to other risks and uncertainties discussed in documents filed by the
Company with the Securities and Exchange Commission.
24
<PAGE> 25
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 8,009 $ 7,796 $ 7,225
Net investment income 2,092 2,100 2,051
Fee income 275 306 365
Realized investment gains 112 143 169
Other revenues 84 106 101
- -----------------------------------------------------------------------------------------------------------
Total revenues 10,572 10,451 9,911
- -----------------------------------------------------------------------------------------------------------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 6,059 5,947 5,484
Amortization of deferred acquisition costs 1,260 1,197 1,127
Interest expense 152 161 163
General and administrative expenses 1,186 1,309 1,385
- -----------------------------------------------------------------------------------------------------------
Total claims and expenses 8,657 8,614 8,159
- -----------------------------------------------------------------------------------------------------------
Income before federal income taxes and cumulative
effect of changes in accounting principles 1,915 1,837 1,752
- -----------------------------------------------------------------------------------------------------------
Federal income taxes:
Current expense 287 394 422
Deferred expense 219 100 94
- -----------------------------------------------------------------------------------------------------------
Total federal income taxes 506 494 516
- -----------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles 1,409 1,343 1,236
Cumulative effect of change in accounting for insurance-related
assessments, net of tax (160) -- --
Cumulative effect of change in accounting for insurance and
reinsurance contracts that do not transfer insurance risk,
net of tax 27 -- --
- -----------------------------------------------------------------------------------------------------------
Net income $ 1,276 $ 1,343 $ 1,236
===========================================================================================================
BASIC EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles $ 3.62 $ 3.43 $ 3.13
Cumulative effect of changes in accounting principles (0.34) -- --
- -----------------------------------------------------------------------------------------------------------
Net income $ 3.28 $ 3.43 $ 3.13
===========================================================================================================
DILUTED EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles $ 3.61 $ 3.42 $ 3.12
Cumulative effect of changes in accounting principles (0.34) -- --
- -----------------------------------------------------------------------------------------------------------
Net income $ 3.27 $ 3.42 $ 3.12
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 26
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In millions, except shares)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
At December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $25,711 and $26,580) $ 25,305 $ 27,977
Equity securities, at fair value (cost, $1,166 and $796) 1,261 828
Mortgage loans 464 574
Real estate held for sale 50 83
Short-term securities 1,535 1,597
Other investments 1,221 827
- ---------------------------------------------------------------------------------------------------------
Total investments 29,836 31,886
- ---------------------------------------------------------------------------------------------------------
Cash 55 62
Investment income accrued 385 409
Premium balances receivable 2,738 2,901
Reinsurance recoverables 9,424 9,153
Deferred acquisition costs 525 518
Deferred federal income taxes 1,552 1,109
Contractholder receivables 2,059 2,019
Goodwill 1,390 1,457
Other assets 2,293 1,760
- ---------------------------------------------------------------------------------------------------------
Total assets $ 50,257 $ 51,274
=========================================================================================================
LIABILITIES
Claims and claim adjustment expense reserves $ 29,003 $ 29,589
Unearned premium reserves 4,274 4,166
Contractholder payables 2,059 2,019
Long-term debt 850 1,250
Other liabilities 4,230 4,225
- ---------------------------------------------------------------------------------------------------------
Total liabilities 40,416 41,249
- ---------------------------------------------------------------------------------------------------------
TAP-obligated mandatorily redeemable securities of subsidiary
trusts holding solely junior subordinated debt securities of TAP 900 900
- ---------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock:
Class A, $.01 par value, 700 million shares authorized;
72,393,407 shares issued 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 5,479
Retained earnings 4,133 3,052
Accumulated other changes in equity from nonowner sources (202) 921
Treasury stock, at cost (shares, 13,159,386 and 8,544,687) (451) (298)
Unearned compensation (22) (33)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,941 9,125
- ---------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 50,257 $ 51,274
=========================================================================================================
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In millions, except shares)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------- -------------------------------------
SHARES (IN THOUSANDS)
-------------------------------------
For the Year Ended December 31, 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK AND
ADDITIONAL PAID-IN
CAPITAL
Balance, beginning of year $ 5,483 $ 5,477 $ 5,459 400,414 400,414 400,000
Net Capital Accumulation Plan grants -- 6 18 -- -- 414
- ---------------------------------------------------------------------------------- -------------------------------------
Balance, end of year 5,483 5,483 5,477 400,414 400,414 400,414
- ---------------------------------------------------------------------------------- -------------------------------------
RETAINED EARNINGS
Balance, beginning of year 3,052 1,866 749
Net income 1,276 1,343 1,236
Dividends (195) (157) (119)
- ----------------------------------------------------------------------------------
Balance, end of year 4,133 3,052 1,866
- ----------------------------------------------------------------------------------
ACCUMULATED OTHER
CHANGES IN EQUITY
FROM NONOWNER
SOURCES, NET OF TAX
Balance, beginning of year 921 722 285
Net unrealized gain (loss) on investment
securities, net of reclassification
adjustment (see note 9) (1,131) 200 437
Foreign currency translation
adjustments 8 (1) --
- ----------------------------------------------------------------------------------
Balance, end of year (202) 921 722
- ----------------------------------------------------------------------------------
TREASURY STOCK (at cost)
Balance, beginning of year (298) (266) (13) (8,545) (7,315) (407)
Net Capital Accumulation Plan grants 15 29 15 501 782 449
Treasury stock acquired (169) (62) (268) (5,137) (2,029) (7,359)
Other 1 1 -- 21 17 2
- ---------------------------------------------------------------------------------- -----------------------------------
Balance, end of year (451) (298) (266) (13,160) (8,545) (7,315)
- ---------------------------------------------------------------------------------- -----------------------------------
UNEARNED COMPENSATION
Balance, beginning of year (33) (22) --
Net issuance of restricted stock under
Capital Accumulation Plan (11) (29) (33)
Restricted stock amortization 22 18 11
- ----------------------------------------------------------------------------------
Balance, end of year (22) (33) (22)
- ---------------------------------------------------------------------------------- -------------------------------------
Total stockholders' equity
and shares outstanding $ 8,941 $ 9,125 $ 7,777 387,254 391,869 393,099
================================================================================== =====================================
SUMMARY OF CHANGES IN
EQUITY FROM NONOWNER
SOURCES
Net income $ 1,276 $ 1,343 $ 1,236
Other changes in equity from
nonowner sources, net of tax (1,123) 199 437
- ----------------------------------------------------------------------------------
Total changes in equity from
nonowner sources $ 153 $ 1,542 $ 1,673
==================================================================================
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,276 $ 1,343 $ 1,236
Adjustments to reconcile net income to net cash provided
by operating activities
Realized investment gains (112) (143) (169)
Cumulative effect of changes in accounting principles, net of tax 133 -- --
Depreciation and amortization 66 60 47
Deferred federal income taxes 219 100 94
Amortization of deferred policy acquisition costs 1,260 1,197 1,127
Premium balances receivable 163 (4) 79
Reinsurance recoverables (122) (60) 97
Deferred policy acquisition costs (1,266) (1,214) (1,210)
Insurance reserves (627) (341) (121)
Other (349) (220) (557)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 641 718 623
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,678 1,551 1,422
Mortgage loans 231 160 154
Proceeds from sales of investments
Fixed maturities 10,022 8,541 10,045
Equity securities 873 580 504
Mortgage loans -- 15 231
Real estate held for sale 122 33 129
Purchases of investments
Fixed maturities (10,840) (10,206) (13,421)
Equity securities (1,072) (505) (554)
Mortgage loans (42) (34) (38)
Short-term securities, (purchases) sales, net (82) (98) 872
Other investments, net (495) (244) (57)
Securities transactions in course of settlement (279) (169) 335
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 116 (376) (378)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repayment) of commercial paper, net -- (108) 83
Payment of long-term debt (400) -- --
Purchase of treasury stock (169) (62) (268)
Dividends to TIGI (164) (131) (98)
Dividends to minority shareholders (31) (26) (21)
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (764) (327) (304)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (7) 15 (59)
Cash at beginning of period 62 47 106
- --------------------------------------------------------------------------------------------------------------
Cash at end of period $ 55 $ 62 $ 47
==============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 356 $ 399 $ 677
Interest paid $ 159 $ 161 $ 163
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
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). 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
DEPOSIT ACCOUNTING: ACCOUNTING FOR INSURANCE AND REINSURANCE CONTRACTS
THAT DO NOT TRANSFER INSURANCE RISK
Effective January 1, 1999, the Company adopted the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants' (AcSEC) Statement of Position 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk" (SOP 98-7). SOP 98-7 provides guidance on how to account
for insurance and reinsurance contracts that do not transfer insurance
risk and applies to all entities and all such contracts, except for
long-duration life and health insurance contracts. The method used to
account for such contracts is referred to as deposit accounting. This SOP
does not address when deposit accounting should be applied. SOP 98-7
identifies several methods of deposit accounting for insurance and
reinsurance contracts that do not transfer insurance risk and provides
guidance on the application of each method. The effect of initially
adopting SOP 98-7 is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not permitted. As
a result of adopting SOP 98-7, the Company recorded a benefit of $27
million after tax, reflected as a cumulative catch-up adjustment. Aside
from the initial impact at adoption, this SOP is not expected to have a
significant impact on results of operations, financial condition or
liquidity. See note 5.
ACCOUNTING BY INSURANCE AND OTHER ENTERPRISES FOR INSURANCE-RELATED
ASSESSMENTS
Effective January 1, 1999, the Company adopted the AcSEC Statement of
Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund
and other insurance-related assessments, how to measure that liability,
and when an asset may be recognized for the recovery of such assessments
through premium tax offsets or policy surcharges. The effect of the
initial adoption of this SOP is to be reported as a cumulative catch-up
adjustment. Restatement of previously issued financial statements is not
permitted. As a result of adopting SOP 97-3, the Company recorded a charge
of $160 million after tax, reflected as a cumulative catch-up adjustment.
Aside from the initial impact at adoption, this SOP is not expected to
have a significant impact on results of operations, financial condition or
liquidity. In the third quarter of 1999, the Company recorded a benefit to
earnings of approximately $58 million after tax as a result of legislative
actions in the states of New York and Pennsylvania that changed the manner
in which these states finance their workers' compensation second-injury
funds, one of the types of funds covered by SOP 97-3.
29
<PAGE> 30
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE
During the third quarter of 1998, the Company adopted the 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.
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. Impaired loans were not significant at December 31, 1999 and 1998.
30
<PAGE> 31
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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, 1999
and 1998.
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.
31
<PAGE> 32
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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, based upon an evaluation of expected future cash
flows for the Company in accordance with Statement of Financial
Accounting Standards No. FAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." An
impairment would be measured by the amount the present value of the
expected future net cash flows from operating activities of the Company
(applying the discount rate(s) used to determine the fair value of the
acquired assets and assumed liabilities at the date of acquisition) is
less than the carrying amount of goodwill. Goodwill amortization expense
included in the consolidated statement of income was $40 million for each
of the years ended December 31, 1999, 1998 and 1997.
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, 1999 and 1998 are $1.5 billion
and $1.3 billion, respectively, of reserves related to workers'
compensation that have been discounted using an interest rate of 5%.
In determining claims and claim adjustment expense reserves, the Company
carries on a continuing review of its overall position, its reserving
techniques and its reinsurance. These reserves represent the estimated
ultimate cost of all incurred claims and claim adjustment expenses. Since
the reserves are based on estimates, the ultimate liability may be more
or less than such reserves. The effects of changes in such estimated
reserves are included in the results of operations in the period in which
the estimates are changed. Such changes may be material to the results of
operations and could occur in a future period.
OTHER LIABILITIES
Included in other liabilities in the consolidated balance sheet is the
Company's estimate of its liability for guaranty-fund and other
insurance-related assessments. The liability for expected state
guaranty-fund and other premium-based assessments is recognized as the
Company writes or becomes obligated to write or renew the premiums on
which the assessments are expected to be based. The liability for
loss-based assessments is recognized as the related losses are incurred.
At December 31, 1999, the Company had a liability of $308 million for
guaranty-fund and other assessments and related recoveries of $41
million. The assessments are expected to be paid over a period ranging
from one year to the life expectancy of certain workers' compensation
claimants and the recoveries are expected to occur over the same period
of time.
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.
32
<PAGE> 33
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The NAIC recently completed a process intended to codify statutory
accounting practices for certain insurance enterprises. As a result, the
NAIC issued a revised statutory Accounting Practices and Procedures
Manual - version effective January 1, 2001 (the revised Manual) that will
be effective for years beginning January 1, 2001. 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.
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," (APB 25) 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" (FAS 123). See note 14.
The Company accounts for its stock-based non-employee compensation plans
at fair value.
33
<PAGE> 34
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EARNINGS PER SHARE
Basic Earnings per Share (EPS) is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the effect of
potentially dilutive securities, principally the incremental shares
assumed issued under the Company's Capital Accumulation Plan and other
restricted stock plans. The following table is a reconciliation of the
numerators and denominators of the basic and diluted earnings per share
computation for income before accounting changes:
<TABLE>
<CAPTION>
===============================================================================================================
(for the year ended December 31, INCOME SHARES PER SHARE
in millions, except per share amounts) (NUMERATOR) (DENOMINATOR) AMOUNTS
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
Basic EPS - income before accounting changes $ 1,409 388.6 $ 3.62
Effects of dilutive securities - restricted stock - 1.4 (0.01)
---------------------------------------------------------------------------------------------------------------
Diluted EPS - income before accounting changes
and assumed conversions $ 1,409 390.0 $ 3.61
===============================================================================================================
1998
Basic EPS - income before accounting changes $ 1,343 392.0 $ 3.43
Effects of dilutive securities - restricted stock - .7 (0.01)
---------------------------------------------------------------------------------------------------------------
Diluted EPS - income before accounting changes
and assumed conversions $ 1,343 392.7 $ 3.42
===============================================================================================================
1997
Basic EPS - income before accounting changes $ 1,236 395.5 $ 3.13
Effects of dilutive securities - restricted stock - .3 (0.01)
---------------------------------------------------------------------------------------------------------------
Diluted EPS - income before accounting changes
and assumed conversions $ 1,236 395.8 $ 3.12
===============================================================================================================
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including interest
rate swaps, currency swaps, options and forward contracts, as a means of
hedging exposure to interest rate, equity price 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.
Interest rate swaps, currency swaps, options and forward contracts were
not significant at December 31, 1999 and 1998. See note 12.
34
<PAGE> 35
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ACCOUNTING STANDARDS NOT YET ADOPTED
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). In June 1999,
the FASB issued Statement of Financial Standards No. 137 "Deferral of the
Effective Date of FASB Statement No. 133" (FAS 137) which allows entities
which have not adopted FAS 133 to defer its effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. FAS 133
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 recognized asset or liability or of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends on the intended use of the derivative
and the resulting designation. Upon initial application of FAS 133,
hedging relationships must be designated anew and documented pursuant to
the provisions of this statement. The Company adopted the deferral
provisions of FAS 137, effective January 1, 2000, and has not yet
determined the impact that FAS 133 will have on its consolidated
financial statements.
NATURE OF OPERATIONS
The Company is comprised of two business segments: Commercial Lines and
Personal Lines. See note 3.
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.
35
<PAGE> 36
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
National Accounts provides a variety of casualty products to large
companies. Products are marketed through national and regional brokers.
Programs offered by National Accounts include risk service, such as
claims settlement, loss control and risk management information services,
which is generally offered in connection with a large deductible or
self-insured program, and risk transfer, which is typically provided
through 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 and transportation industries, 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,
cross-marketing arrangements with Citibank, a unit of Citigroup, and
joint marketing arrangements with other insurers. During 1999, Personal
Lines curtailed the sale of automobile and homeowners products through
the independent agents of Primerica Financial Services, a unit of
Citigroup.
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.
36
<PAGE> 37
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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. FINANCIAL SERVICES REFORM
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 85% 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.
In November 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act (the Act), which will become effective in most significant respects on
March 11, 2000. Under the Act, bank holding companies, such as Citigroup,
all of whose depository institutions are "well capitalized" and "well
managed," as defined in Federal Reserve Regulation Y, and which obtain
satisfactory Community Reinvestment Act ratings, will have the ability to
declare themselves to be "financial holding companies" and such companies
and their affiliates will have the ability to engage in a broader spectrum
of activities than those currently permitted, including insurance
underwriting and brokerage. Citigroup anticipates that its declaration to
become a financial holding company will become effective shortly after the
effective date of the Act, and that as a result, Citigroup and its
affiliates (including the Company) will be permitted to continue to operate
their insurance business as currently structured and, if they so determine,
to expand those businesses through acquisition or otherwise.
3. 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.
37
<PAGE> 38
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. 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>
1999
Revenues
Premiums $ 4,375 $ 3,634 $ 8,009
Net investment income 1,689 400 2,089
Fee income 275 - 275
Realized investment gains (losses) 127 (15) 112
Other 26 58 84
-------------------------------------------------------------------------------------------------------------------
Total revenues $ 6,492 $ 4,077 $ 10,569
===================================================================================================================
Amortization and depreciation $ 662 $ 663 $ 1,325
Federal income taxes 405 159 564
Operating income 1,077 368 1,445
Assets 42,521 7,544 50,065
-------------------------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Operating income excludes realized investment gains (losses) and the
cumulative effect of changes in accounting principles, and is reflected
net of tax.
38
<PAGE> 39
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SEGMENT INFORMATION, CONTINUED
BUSINESS SEGMENT RECONCILIATIONS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
(at and for the year ended December 31, in millions) 1999 1998 1997
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE RECONCILIATION
Total revenues for reportable segments $ 10,569 $ 10,442 $ 9,898
Other revenues (1) 3 9 13
----------------------------------------------------------------------------------------------------------------
Total consolidated revenues $ 10,572 $ 10,451 $ 9,911
================================================================================================================
INCOME RECONCILIATION, NET OF TAX
Total operating income for reportable segments $ 1,445 $ 1,362 $ 1,249
Other operating loss (2) (108) (112) (123)
Realized investment gains 72 93 110
Cumulative effect of changes in accounting principles (133) - -
----------------------------------------------------------------------------------------------------------------
Total consolidated net income $ 1,276 $ 1,343 $ 1,236
================================================================================================================
ASSET RECONCILIATION
Total assets for reportable segments $ 50,065 $ 50,965 $ 50,321
Other assets (3) 192 309 361
----------------------------------------------------------------------------------------------------------------
Total consolidated assets $ 50,257 $ 51,274 $ 50,682
================================================================================================================
</TABLE>
(1) The source of other revenues is businesses that are in run-off
and are not significant.
(2) The primary component of the other operating loss is after-tax
interest expense of $99 million, $105 million and $106 million in
1999, 1998 and 1997, respectively.
(3) 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.
39
<PAGE> 40
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities
classified as available for sale were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
AMORTIZED ----------------- FAIR
(at December 31, 1999, in millions) COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities -
CMOs and pass-through securities $ 3,826 $ 26 $ 68 $ 3,784
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,676 6 33 1,649
Obligations of states, municipalities and
political subdivisions 9,978 72 323 9,727
Debt securities issued by foreign governments 853 24 7 870
All other corporate bonds 9,185 57 150 9,092
Redeemable preferred stock 193 1 11 183
-------------------------------------------------------------------------------------------------------
Total $ 25,711 $ 186 $ 592 $ 25,305
=======================================================================================================
</TABLE>
<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
==========================================================================================================
</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.
40
<PAGE> 41
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS, CONTINUED
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
AMORTIZED FAIR
(at December 31, 1999, in millions) COST VALUE
---------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 1,217 $ 1,218
Due after 1 year through 5 years 4,850 4,850
Due after 5 years through 10 years 6,085 6,024
Due after 10 years 9,733 9,429
---------------------------------------------------------------------------------------
21,885 21,521
Mortgage-backed securities 3,826 3,784
---------------------------------------------------------------------------------------
Total $ 25,711 $ 25,305
=======================================================================================
</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, 1999 and 1998, the Company held CMOs classified as
available for sale with a fair value of $2.3 billion. Approximately 66%
and 69% of the Company's CMO holdings are fully collateralized by GNMA,
FNMA or FHLMC securities at December 31, 1999 and 1998, respectively. In
addition, the Company held $1.4 billion and $2.1 billion of GNMA, FNMA or
FHLMC mortgage-backed pass-through securities classified as available for
sale at December 31, 1999 and 1998, 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 generally 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 14.
The Company had $563 million and $1.0 billion of loaned securities
outstanding at December 31, 1999 and 1998, 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 $10.0 billion, $8.5 billion and $10.0 billion in 1999, 1998 and
1997, respectively. Gross gains of $193 million, $210 million and $172
million and gross losses of $182 million, $93 million and $94 million,
respectively, were realized on those sales.
41
<PAGE> 42
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS, CONTINUED
EQUITY SECURITIES
The cost and fair value of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
------------------ FAIR
(at December 31, 1999, in millions) COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $ 364 $ 127 $ 5 $ 486
Nonredeemable preferred stocks 802 13 40 775
------------------------------------------------------------------------------------------------------
Total $ 1,166 $ 140 $ 45 $ 1,261
======================================================================================================
(at December 31, 1998, in millions)
------------------------------------------------------------------------------------------------------
Common stocks $ 164 $ 20 $ 10 $ 174
Nonredeemable preferred stocks 632 30 8 654
------------------------------------------------------------------------------------------------------
Total $ 796 $ 50 $ 18 $ 828
======================================================================================================
</TABLE>
Proceeds from sales of equity securities were $873 million, $580 million
and $504 million in 1999, 1998 and 1997, respectively, resulting in gross
realized gains of $70 million, $74 million and $78 million and gross
realized losses of $45 million, $60 million and $55 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, 1999 and 1998.
Aggregate annual maturities on mortgage loans include $6 million which
are past maturity and $158 million, $40 million, $4 million, $31 million,
$26 million and $199 million for 2000, 2001, 2002, 2003, 2004 and 2005
and thereafter, respectively.
CONCENTRATIONS
At December 31, 1999 and 1998, the Company had concentrations of credit
risk in tax-exempt investments of the State of Texas of $1.4 billion and
in the State of New York of $1.3 billion and $1.5 billion, respectively.
The Company participates in a short-term investment pool maintained by an
affiliate. See note 14.
Included in fixed maturities are below investment grade assets totaling
$1.5 billion and $1.2 billion at December 31, 1999 and 1998,
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.
42
<PAGE> 43
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS, CONTINUED
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, limits and
other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit.
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1999 1998 1997
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross investment income:
Fixed maturities $ 1,699 $ 1,736 $ 1,695
Mortgage loans 68 90 103
Other 384 323 324
--------------------------------------------------------------------------------------------------------------
2,151 2,149 2,122
Investment expenses 59 49 71
--------------------------------------------------------------------------------------------------------------
Net investment income $ 2,092 $ 2,100 $ 2,051
==============================================================================================================
</TABLE>
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1999 1998 1997
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REALIZED
Fixed maturities $ 11 $ 117 $ 78
Equity securities 25 14 23
Mortgage loans 29 9 20
Real estate held for sale 50 1 18
Other (3) 2 30
-------------------------------------------------------------------------------------------------------------
Realized investment gains $ 112 $ 143 $ 169
=============================================================================================================
</TABLE>
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) 1999 1998 1997
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNREALIZED
Fixed maturities $ (1,803) $ 336 $ 667
Equity securities 63 (28) 37
Other - - (30)
----------------------------------------------------------------------------------------------------------------
(1,740) 308 674
Related taxes (609) 108 237
----------------------------------------------------------------------------------------------------------------
Change in unrealized gains (losses) on investment securities (1,131) 200 437
Balance, beginning of year 929 729 292
----------------------------------------------------------------------------------------------------------------
Balance, end of year $ (202) $ 929 $ 729
================================================================================================================
</TABLE>
43
<PAGE> 44
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. REINSURANCE
The Company participates in reinsurance in order to limit losses,
minimize exposure to large risks, provide additional capacity for future
growth and to effect business-sharing arrangements. In addition, the
Company assumes 100% of the workers' compensation premiums written by the
Accident Department of its affiliate, The Travelers Insurance Company
(TIC). The Company is also a member of and participates as a servicing
carrier for several pools and associations.
Reinsurance is placed on both a quota-share and excess of loss basis.
Reinsurance ceded arrangements do not discharge the Company as the
primary insurer, except for cases involving a novation.
In connection with the 1992 sale of American Re-Insurance Company (Am
Re), a reinsurance agreement was entered into 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, the Company has
an 80% participation in payments on those losses up to a maximum payment
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.
44
<PAGE> 45
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. REINSURANCE, CONTINUED
A summary of reinsurance financial data reflected within the consolidated
statement of income is presented below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WRITTEN PREMIUMS
Direct $ 9,056 $ 9,059 $ 8,862
Assumed from:
Affiliated companies 208 243 264
Non-affiliated companies 519 523 421
Ceded to:
Affiliated companies (42) (43) (54)
Non-affiliated companies (1,528) (1,678) (1,661)
-------------------------------------------------------------------------------------------------------------------
Total net written premiums $ 8,213 $ 8,104 $ 7,832
===================================================================================================================
EARNED PREMIUMS
Direct $ 8,869 $ 8,751 $ 8,250
Assumed from:
Affiliated companies 194 238 305
Non-affiliated companies 538 503 429
Ceded to:
Affiliated companies (43) (33) (50)
Non-affiliated companies (1,549) (1,663) (1,709)
-------------------------------------------------------------------------------------------------------------------
Total net earned premiums $ 8,009 $ 7,796 $ 7,225
===================================================================================================================
Percentage of amount assumed to net earned 9.1% 9.5% 10.2%
-------------------------------------------------------------------------------------------------------------------
Ceded claims incurred $ 1,500 $ 1,312 $ 1,082
-------------------------------------------------------------------------------------------------------------------
</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) 1999 1998
----------------------------------------------------------------------------------------
<S> <C> <C>
REINSURANCE RECOVERABLES
Property-casualty business:
Pools and associations $ 2,781 $ 3,070
Non-affiliated companies 5,695 5,118
Affiliated companies 799 787
Accident and health business:
Affiliated companies 149 178
----------------------------------------------------------------------------------------
Total reinsurance recoverables $ 9,424 $ 9,153
========================================================================================
</TABLE>
45
<PAGE> 46
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. REINSURANCE, CONTINUED
In 1996, Lloyd's of London (Lloyd's) restructured its operations with
respect to claims for years prior to 1993 and reinsured these into
Equitas Limited (Equitas). Amounts recoverable from unaffiliated insurers
at December 31, 1999 and 1998 include $304 million and $310 million,
respectively, recoverable from Equitas. The outcome of the restructuring
of Lloyd's is uncertain and the impact, if any, on collectibility of
amounts recoverable by the Company from Equitas 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
appropriately stated.
6. INSURANCE CLAIMS RESERVES
Claims and claim adjustment expense reserves were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
(at December 31, in millions) 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Claims and claim adjustment expense reserves:
Property-casualty $ 28,854 $ 29,411
Accident and health 149 178
-------------------------------------------------------------------------------------------------
Total $ 29,003 $ 29,589
=================================================================================================
</TABLE>
46
<PAGE> 47
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INSURANCE CLAIMS RESERVES, CONTINUED
The table below is a reconciliation of beginning and ending
property-casualty reserve balances for claims and claim adjustment
expenses.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1999 1998 1997
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Claims and claim adjustment expense
reserves at beginning of year $ 29,411 $ 30,138 $ 30,969
Less reinsurance recoverables on unpaid losses 8,648 8,732 9,153
------------------------------------------------------------------------------------------------------------------
Net balance at beginning of year 20,763 21,406 21,816
------------------------------------------------------------------------------------------------------------------
Provision for claims and claim adjustment expenses
for claims arising in the current year 6,194 6,057 5,730
Estimated claims and claim adjustment expenses for
claims arising in prior years (242) (323) (492)
------------------------------------------------------------------------------------------------------------------
Total increases 5,952 5,734 5,238
------------------------------------------------------------------------------------------------------------------
Claims and claim adjustment expense payments for claims arising in:
Current year 2,573 2,352 1,944
Prior years 4,159 4,025 3,704
------------------------------------------------------------------------------------------------------------------
Total payments 6,732 6,377 5,648
------------------------------------------------------------------------------------------------------------------
Net balance at end of year 19,983 20,763 21,406
Plus reinsurance recoverables on unpaid losses 8,871 8,648 8,732
------------------------------------------------------------------------------------------------------------------
Claims and claim adjustment expense
reserves at end of year $ 28,854 $ 29,411 $ 30,138
==================================================================================================================
</TABLE>
The decreases in the claims and claim adjustment expense reserves in
1999 and 1998, from 1998 and 1997, respectively, were primarily
attributable to net payments of $504 million and $663 million,
respectively, for environmental and cumulative injury claims.
In 1999, estimated claims and claim adjustment expenses for claims
arising in prior years included approximately $205 million primarily
relating to net favorable development in certain Personal Lines
coverages, predominantly automobile coverages, and in certain Commercial
Lines coverages, predominantly in the general liability and commercial
multi-peril lines of business. In addition, in 1999 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 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.
47
<PAGE> 48
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. INSURANCE CLAIMS RESERVES, CONTINUED
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.
The claims and claim adjustment expense reserves included $1.5 billion
and $1.8 billion for asbestos and environmental-related claims net of
reinsurance at December 31, 1999 and 1998, 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.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1999 are the Company's
best estimate of ultimate claims and claim adjustment expenses based upon
known facts and current law. However, the conditions surrounding the
final resolution of these claims continue to change. Currently, it is not
possible to predict changes in the legal and legislative environment and
their impact on the future development of asbestos and environmental
claims. Such development will be affected by future court decisions and
interpretations as well as changes in legislation applicable to such
claims. Because of these future unknowns, additional liabilities may
arise for amounts in excess of the current reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated, and could result in a liability exceeding reserves by an
amount that would be material to the Company's operating results in a
future period. However, the Company believes that it is not likely that
these claims will have a material adverse effect on the Company's
financial condition or liquidity.
48
<PAGE> 49
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. 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, 1999, this requirement was exceeded by approximately $4.8
billion. In addition, the Credit Facility places restrictions on the
amount of consolidated debt TAP can incur. At December 31, 1999, 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, 1999, 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.
On each of September 1, 1999 and October 1, 1999, TAP repaid $200 million
for its 6-3/4% note and 6-1/4% note, respectively, which matured on those
dates. Long-term debt outstanding at December 31, 1999 and 1998 was as
follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
(in millions) 1999 1998
-----------------------------------------------------------------
<S> <C> <C>
6-3/4% Notes due 1999 $ - $ 200
6-1/4% Notes due 1999 - 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
-----------------------------------------------------------------
Total $ 850 $ 1,250
=================================================================
</TABLE>
49
<PAGE> 50
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EFFECTIVE TAX RATE
Income before federal income taxes and cumulative effect
of changes in accounting principles $ 1,915 $ 1,837 $ 1,752
Statutory tax rate 35% 35% 35%
--------------------------------------------------------------------------------------------------------------------
Expected federal income taxes 670 643 613
Tax effect of:
Nontaxable investment income (168) (154) (108)
Other, net 4 5 11
--------------------------------------------------------------------------------------------------------------------
Federal income taxes $ 506 $ 494 $ 516
====================================================================================================================
Effective tax rate 26% 27% 29%
--------------------------------------------------------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current expense:
United States $ 278 $ 386 $ 413
Foreign 9 8 9
--------------------------------------------------------------------------------------------------------------------
Total 287 394 422
--------------------------------------------------------------------------------------------------------------------
Deferred expense:
United States 219 100 94
--------------------------------------------------------------------------------------------------------------------
Federal income tax expense $ 506 $ 494 $ 516
====================================================================================================================
</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) 1999 1998
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Claims and claim adjustment expense reserves $ 1,027 $ 1,154
Unearned premium reserves 222 206
Employee benefits 135 108
Insurance-related assessments 98 -
Investments 89 -
Acquisition-related reserves 45 117
Other 164 178
--------------------------------------------------------------------------------------------------
Total 1,780 1,763
--------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 184 181
Investments - 429
Other 44 44
--------------------------------------------------------------------------------------------------
Total 228 654
--------------------------------------------------------------------------------------------------
Net deferred tax asset $ 1,552 $ 1,109
===================================================================================================
</TABLE>
50
<PAGE> 51
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. FEDERAL INCOME TAXES, CONTINUED
The Company is a member of a subgroup of companies comprised of TIGI and
its non-life insurance subsidiaries. This subgroup is included in the
consolidated federal income tax return filed by 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 $1.6 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 of approximately $12.0
billion on average over the last three years and has generated federal
taxable income exceeding $8.0 billion on average each year during this
same period.
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY
MANDATORILY REDEEMABLE SECURITIES OF SUBSIDIARY TRUSTS
The Company formed statutory business trusts under the laws of the state
of Delaware, which exist 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 (Junior 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 financial structure of each of the Company's subsidiary
trusts at December 31, 1999 and 1998 was as follows:
51
<PAGE> 52
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
TRAVELERS P&C TRAVELERS P&C
CAPITAL I CAPITAL II
------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRUST SECURITIES (TAP SECURITIES)
Issuance date April 1996 May 1996
Securities issued 32,000,000 4,000,000
Liquidation preference per security $ 25 $ 25
Liquidation value (in millions) $ 800 $ 100
Coupon rate 8.08% 8.00%
Distributions payable Quarterly Quarterly
Distributions guaranteed by (1) TAP TAP
Common shares issued to parent 989,720 123,720
------------------------------------------------------------------------------------------------------
JUNIOR SUBORDINATED DEBENTURES (TAP DEBENTURES)
Amount owned (in millions) $ 825 $ 103
Coupon rate 8.08% 8.00%
Interest payable Quarterly Quarterly
Maturity date April 30, 2036 May 15, 2036
Redeemable by issuer on or after April 30, 2001 May 15, 2001
------------------------------------------------------------------------------------------------------
</TABLE>
(1) Under the arrangements, taken as a whole, payments due are fully
and unconditionally guaranteed on a subordinated basis.
Travelers P&C Capital I and Travelers P&C Capital II will use the
proceeds from any redemption of TAP Securities to redeem a like amount of
TAP Debentures.
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 Services, Inc., 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.
52
<PAGE> 53
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED
On June 23, 1997, the Company repurchased, in the aggregate, 6,600,102
shares of Class A Common Stock held by the Private Investors for a total
purchase price of approximately $241 million, representing a discount to
the then current market price. Following this transaction, Citigroup's
beneficial ownership of the Company increased to 83.4%. The repurchases
represented 20% of the holdings of each of the Private Investors.
On January 18, 2000, January 19, 1999 and January 28, 1998, the Company,
through the Travelers Property Casualty Corp. Capital Accumulation Plan
(TAP CAP), reissued 467,207, 476,431 and 763,654 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 2000, 1999 and 1998 restricted stock awards was
$36.49, $31.88 and $43.71, respectively. The restricted stock generally
vests after a three-year period. Except under limited circumstances, the
stock cannot be sold or transferred during the restricted period by the
participant, who is required to render service to the Company during the
restricted period. Unearned compensation expense associated with the
restricted stock 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 $22 million, $12
million and $7 million for the years ended December 31, 1999, 1998 and
1997, respectively. At December 31, 1999, 5,844,149 shares were available
for future grants under all existing plans of TAP, including, but not
limited to, the restricted stock plan.
On August 12, 1998, TAP's Board of Directors authorized a $150 million
repurchase program, which was completed in October of 1999. On October 6,
1999, TAP's Board of Directors authorized the expenditure of up to $200
million for the repurchase of its Class A Common Stock. The repurchases
have been 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, 1999, TAP had repurchased $81
million of its common stock pursuant to the current repurchase plan.
CLASS B
TIGI owns all of the outstanding shares of Class B Common Stock
representing 84.7% of the economic interest in TAP at December 31, 1999.
Class B holders are entitled to 10 votes per share on any matter
submitted to vote of the TAP stockholders.
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 $1.2 billion in 2000 without prior approval
of the Connecticut Insurance Department.
53
<PAGE> 54
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCKHOLDERS' EQUITY AND DIVIDEND AVAILABILITY, CONTINUED
STATUTORY NET INCOME AND SURPLUS
Statutory net income of TAP's insurance subsidiaries was $1.4 billion,
$1.4 billion and $1.1 billion for the years ended December 31, 1999, 1998
and 1997, respectively. Statutory capital and surplus of TAP's insurance
subsidiaries was $7.7 billion and $7.1 billion at December 31, 1999 and
1998, respectively.
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX
Changes in each component of Accumulated Other Changes in Equity from
Nonowner Sources were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
NET ACCUMULATED
UNREALIZED OTHER
GAINS FOREIGN CHANGES IN
(LOSSES) ON CURRENCY EQUITY FROM
(for the year ended INVESTMENT TRANSLATION NONOWNER
December 31, in millions) SECURITIES ADJUSTMENT SOURCES
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 292 $ (7) $ 285
Net unrealized gains on investment
securities, net of tax of $272 503 - 503
Less: Reclassification adjustment for gains
included in net income, net of tax of ($35) (66) - (66)
---------------------------------------------------------------------------------------------
Current period change 437 - 437
---------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 729 (7) 722
Net unrealized gains on investment
securities, net of tax of $154 285 - 285
Less: Reclassification adjustment for gains
included in net income, net of tax of ($46) (85) - (85)
Foreign currency translation adjustment,
net of tax of $0 - (1) (1)
---------------------------------------------------------------------------------------------
Current period change 200 (1) 199
---------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 929 (8) 921
Net unrealized losses on investment
securities, net of tax of ($596) (1,108) - (1,108)
Less: Reclassification adjustment for gains
included in net income, net of tax of ($13) (23) - (23)
Foreign currency translation adjustment,
net of tax of $3 - 8 8
---------------------------------------------------------------------------------------------
Current period change (1,131) 8 (1,123)
---------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ (202) $ - $ (202)
=============================================================================================
</TABLE>
54
<PAGE> 55
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by an affiliate. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by an affiliate. The Company's share of net expense for the
qualified pension and other postretirement benefit plans was $30 million,
$31 million and $26 million for 1999, 1998 and 1997, respectively.
401(k) SAVINGS PLAN
Substantially all employees of the Company are eligible to participate in
a 401(k) savings plan sponsored by Citigroup. There are no Company
matching contributions for substantially all employees.
11. LEASES
Most leasing functions for TIGI and its subsidiaries are administered by
the Company. See note 14. 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 $112 million, $106 million and $118
million in 1999, 1998 and 1997, respectively.
Future minimum annual rentals under noncancellable operating leases are
$99 million, $81 million, $56 million, $35 million, $16 million and $88
million for 2000, 2001, 2002, 2003, 2004 and 2005 and thereafter,
respectively. Future sublease rental income of approximately $47 million
will partially offset these commitments.
12. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including interest
rate swaps, interest rate futures, options and forward contracts, as a
means of hedging exposure to foreign currency, equity price changes
and/or interest rate risk on anticipated transactions or existing assets
and liabilities. 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, interest rate swaps and
currency swaps, credit risk is limited to the amount that it would cost
the Company to replace the contract. The Company is a writer of option
contracts and as such 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.
55
<PAGE> 56
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
CONTINUED
The off-balance-sheet risk of interest rate swaps, currency swaps,
options and forward contracts was not significant at December 31, 1999
and 1998.
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, 1999 and 1998, investments in fixed maturities had a fair
value, which equaled carrying value, of $25.3 billion and $28.0 billion,
respectively. The fair value of investments in fixed maturities for which
a quoted market price or dealer quote are not available was $949 million
and $1.2 billion at December 31, 1999 and 1998, respectively. The
carrying values of cash, short-term securities, mortgage loans and
investment income accrued approximated their fair values. See notes 1 and
4.
At December 31, 1999 and 1998, the carrying value of $850 million and
$1.3 billion, respectively, of long-term debt approximated its fair
value. Fair value is based upon bid price at December 31, 1999 and 1998.
At December 31, 1999, the TAP Debentures had a carrying value and a fair
value of $900 million and $814 million, respectively, and at December 31,
1998, the carrying value of $900 million approximated their fair value.
Fair value is based upon the closing price at December 31, 1999 and 1998.
The carrying values of $1.7 billion and $1.4 billion of financial
instruments classified as other assets approximated their fair values at
December 31, 1999 and 1998, respectively. The carrying values of $3.4
billion and $3.5 billion of financial instruments classified as other
liabilities at December 31, 1999 and 1998, respectively, also
approximated their fair values. Fair value is determined using various
methods including discounted cash flows, as appropriate for the various
financial instruments.
13. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
See note 12 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 and
limited liability corporations. The off-balance-sheet risks of these
financial instruments were not significant at December 31, 1999 and 1998.
56
<PAGE> 57
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. COMMITMENTS AND CONTINGENCIES, CONTINUED
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,
1999, the Company believes, based on information currently available,
that the ultimate resolution of these legal proceedings would not be
likely to have a material adverse effect on its results of operations,
financial condition or liquidity.
14. RELATED PARTY TRANSACTIONS
The Company provides certain administrative services to TIC. Settlements
for these functions between the Company and its affiliates are made
regularly. Investment advisory and management services and data
processing services are provided by affiliated companies. Charges for
these services are shared by the companies on cost allocation methods
based generally on estimated usage by department.
An affiliate maintains a short-term investment pool in which the Company
participates. The positions of each company participating in the pool are
calculated and adjusted daily. At December 31, 1999 and 1998, the pool
totaled approximately $2.6 billion and $2.3 billion, respectively. The
Company's share of the pool amounted to $1.3 billion and $1.4 billion at
December 31, 1999 and 1998, respectively, and is included in short-term
securities in the consolidated balance sheet.
57
<PAGE> 58
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED PARTY TRANSACTIONS, CONTINUED
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>
1999
Net income, as reported $ 1,276 $ 3.27
FAS 123 pro forma adjustments, after tax (37) (0.09)
----------------------------------------------------------------------------------------------
Net income, pro forma $ 1,239 $ 3.18
==============================================================================================
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
==============================================================================================
</TABLE>
The assumptions used in applying FAS 123 to account for Citigroup stock
options were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected volatility of Citigroup stock 44.1% 37.1% 31.5%
Risk-free interest rate 5.29% 4.70% 5.83%
Expected annual dividends per Citigroup share $ 0.63 $ 0.43 $ 0.31
Expected annual forfeiture rate 5% 5% 5%
=================================================================================================
</TABLE>
58
<PAGE> 59
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. RELATED PARTY TRANSACTIONS, CONTINUED
At December 31, 1999, the Company had $102 million of securities pledged
as collateral to Citibank to support a letter of credit facility for
certain of the Company's surety customers. There were no securities
pledged to Citibank at December 31, 1998.
Most leasing functions for TIGI and its subsidiaries are administered by
the Company. See note 11. The Company leases furniture and equipment from
subsidiaries of TIGI. The rental expense charged to the Company for this
furniture and equipment was $28 million, $42 million and $48 million in
1999, 1998 and 1997, 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 5.
The Company purchases annuities from affiliates to settle certain claims.
Reinsurance recoverables at December 31, 1999 and 1998 included $799
million and $787 million, respectively, related to these annuities.
15. NONCASH FINANCING AND INVESTING ACTIVITIES
There were no significant noncash financing or investing activities for
the years ended December 31, 1999, 1998 or 1997.
59
<PAGE> 60
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
1999 (in millions, except per share amounts) QUARTER QUARTER QUARTER QUARTER TOTAL
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,573 $ 2,634 $ 2,619 $ 2,746 $ 10,572
Total expenses 2,122 2,154 2,189 2,192 8,657
----------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes
and cumulative effect of changes
in accounting principles 451 480 430 554 1,915
Federal income tax expense 117 126 110 153 506
----------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes
in accounting principles 334 354 320 401 1,409
Cumulative effect of change in accounting
for insurance-related assessments, net of tax (160) - - - (160)
Cumulative effect of change in accounting
for insurance and reinsurance contracts
that do not transfer insurance risk, net of tax 27 - - - 27
----------------------------------------------------------------------------------------------------------------------------
Net income $ 201 $ 354 $ 320 $ 401 $ 1,276
============================================================================================================================
Basic Earnings per Share
Income before cumulative effect of changes
in accounting principles $ 0.85 $ 0.91 $ 0.82 $ 1.04 $ 3.62
Cumulative effect of changes in
accounting principles (0.34) - - - (0.34)
----------------------------------------------------------------------------------------------------------------------------
Net income $ 0.51 $ 0.91 $ 0.82 $ 1.04 $ 3.28
============================================================================================================================
Diluted Earnings per Share
Income before cumulative effect of changes
in accounting principles $ 0.85 $ 0.91 $ 0.82 $ 1.03 $ 3.61
Cumulative effect of changes in
accounting principles (0.34) - - - (0.34)
----------------------------------------------------------------------------------------------------------------------------
Net income $ 0.51 $ 0.91 $ 0.82 $ 1.03 $ 3.27
============================================================================================================================
Common stock price
High $ 38 1/2 $ 41 3/8 $ 41 7/8 $ 38 7/8 $ 41 7/8
Low $ 28 3/16 $ 33 3/8 $ 28 3/4 $ 27 11/16 $ 27 11/16
Close $ 35 3/4 $ 39 1/8 $ 29 1/2 $ 34 1/4 $ 34 1/4
Dividends per share of common stock $ 0.125 $ 0.125 $ 0.125 $ 0.125 $ 0.500
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE> 61
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. 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
========================================================================================================================
Basic Earnings per Share $ 0.88 $ 0.80 $ 0.80 $ 0.94 $ 3.43
Diluted Earnings per Share $ 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>
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.
61
<PAGE> 62
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, 1999 and 1998, 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,
1999. 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, 1999 and 1998, 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, 1999, in
conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, in 1999 the
Company changed its methods of accounting for insurance and reinsurance
contracts that do not transfer insurance risk and its accounting for
insurance-related assessments.
/s/ KPMG LLP
Hartford, Connecticut
January 18, 2000
62
<PAGE> 1
SUBSIDIARIES OF TRAVELERS PROPERTY CASUALTY CORP.
AS OF DECEMBER 31, 1999 EXHIBIT 21.01
<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
INDUSTRY PARTNERS California
PRATT STREET, L.P. ** Connecticut
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
TIMCO ALPHA I, LLC ** 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
COMMERCIAL INSURANCE RESOURCES, INC. Delaware
GULF INSURANCE COMPANY Missouri
ATLANTIC INSURANCE COMPANY Texas
GULF GROUP LLOYDS Texas
</TABLE>
1
<PAGE> 2
SUBSIDIARIES OF TRAVELERS PROPERTY CASUALTY CORP.
AS OF DECEMBER 31, 1999
Exhibit 21.01
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY COMPANY PLACE OF JURISDICTION
- -------------------------- ---------------------
<S> <C>
GULF INSURANCE HOLDINGS UK LIMITED England
GULF INSURANCE COMPANY U.K. LIMITED England
GULF UNDERWRITING HOLDINGS LIMITED London, England
GULF RISK SERVICES, INC. Delaware
GULF UNDERWRITERS INSURANCE COMPANY Missouri
SELECT INSURANCE COMPANY Texas
COUNTERSIGNATURE AGENCY, INC. Florida
CREST FUNDING PARTNERS LP Delaware
CRIPPLE CREEK VENTURE PARTNER II L.P. ** Colorado
CRIPPLE CREEK VENTURE PARTNER L.P. ** Colorado
EUROPEAN GREIO/TINDC REAL ESTATE INVESTMENTS LLC Delaware
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
WT EQUIPMENT PARTNERS LP ** Delaware
SALOMON BROTHERS CAPITAL STRUCTURE ARBITRAGE FUND I, L.P. ** New York
SECURE AFFINITY AGENCY, INC. Delaware
THE CHARTER OAK FIRE INSURANCE COMPANY Connecticut
THE PHOENIX INSURANCE COMPANY Connecticut
CONSTITUTION STATE SERVICE COMPANY Montana
CONSTITUTION STATE SERVICES LLC ** Delaware
PHOENIX UK INVESTMENTS, LLC Connecticut
THE TRAVELERS INDEMNITY COMPANY OF AMERICA Connecticut
THE TRAVELERS INDEMNITY COMPANY OF CONNECTICUT Connecticut
THE TRAVELERS INDEMNITY COMPANY OF ILLINOIS Illinois
</TABLE>
2
<PAGE> 3
SUBSIDIARIES OF TRAVELERS PROPERTY CASUALTY CORP.
AS OF DECEMBER 31, 1999
Exhibit 21.01
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY COMPANY PLACE OF JURISDICTION
- -------------------------- ---------------------
<S> <C>
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 Connecticut
TPC INVESTMENTS, INC. Connecticut
TRAVELERS (BERMUDA) LIMITED Bermuda
TRAVELERS CASUALTY AND SURETY COMPANY Connecticut
2677 MAIN STREET ASSOCIATES LLC Delaware
AE DEVELOPMENT GROUP, INC. Connecticut
FARMINGTON CASUALTY COMPANY Connecticut
TRAVELERS MGA, INC. Connecticut
GREENWICH STREET CAPITAL PARTNERS II, L.P. ** Delaware
PONDEROSA HOMES ** Connecticut
SSB PRIVATE SELECTIONS, LLC ** Delaware
T-W MASTER LLC Delaware
T-W SANTA CLARA LLC Delaware
TANDEM EGI/C INVESTMENTS, L.P. ** Delaware
TRAVELERS CASUALTY & SURETY COMPANY OF CANADA Canada
TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA Connecticut
</TABLE>
3
<PAGE> 4
SUBSIDIARIES OF TRAVELERS PROPERTY CASUALTY CORP.
AS OF DECEMBER 31, 1999
Exhibit 21.01
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY COMPANY PLACE OF JURISDICTION
- -------------------------- ---------------------
<S> <C>
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 TRIBECA INVESTMENTS, INC ** New York
TRIBECA INVESTMENTS, L.L.C. ** Delaware
TRIBECA DISTRESSED SECURITIES, L.L.C. ** Delaware
TRIPLE T BRENTWOOD, L.L.C. Delaware
TRAVELERS LLOYDS OF TEXAS INSURANCE COMPANY Texas
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 THE GIVEN SUBSIDIARY IS PARTIALLY OWNED BY MORE THAN ONE
SUBSIDIARY OF TRAVELERS PROPERTY CASUALTY CORP. AND/OR CITIGROUP INC.
4
<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 following registration
statements:
- - 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 18, 2000,
relating to the consolidated balance sheets of Travelers Property Casualty Corp.
and Subsidiaries as of December 31, 1999 and 1998, 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, 1999, and all related
schedules, which reports are incorporated by reference or appear in the December
31, 1999 annual report on Form 10-K of Travelers Property Casualty Corp. Our
reports refer to changes, in 1999, in the methods of accounting for insurance
and reinsurance contracts that do not transfer risk and accounting for
insurance-related assessments.
/s/ KPMG LLP
Hartford, Connecticut
March 10, 2000
<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, 1999, 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 February 18th, 2000.
/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, 1999, 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 February 29th, 2000.
/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, 1999, 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 February 18th, 2000.
/s/ Robert I. Lipp
-----------------------------
Robert I. Lipp
<PAGE> 4
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, 1999, 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 February 18th, 2000.
/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, 1999, 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 February 18th, 2000.
/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, 1999, 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 February 18th, 2000.
/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, 1999, 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 February 18th, 2000.
/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, 1999
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 25,305
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,261
<MORTGAGE> 464
<REAL-ESTATE> 50
<TOTAL-INVEST> 29,836
<CASH> 55
<RECOVER-REINSURE> 9,424
<DEFERRED-ACQUISITION> 525
<TOTAL-ASSETS> 50,257
<POLICY-LOSSES> 29,003
<UNEARNED-PREMIUMS> 4,274
<POLICY-OTHER> 2,059
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 850
900
0
<COMMON> 4
<OTHER-SE> 8,937
<TOTAL-LIABILITY-AND-EQUITY> 50,257
8,009
<INVESTMENT-INCOME> 2,092
<INVESTMENT-GAINS> 112
<OTHER-INCOME> 359
<BENEFITS> 6,059
<UNDERWRITING-AMORTIZATION> 1,260
<UNDERWRITING-OTHER> 1,338
<INCOME-PRETAX> 1,915
<INCOME-TAX> 506
<INCOME-CONTINUING> 1,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (133)
<NET-INCOME> 1,276
<EPS-BASIC> 3.28
<EPS-DILUTED> 3.27
<RESERVE-OPEN> 29,411
<PROVISION-CURRENT> 6,194
<PROVISION-PRIOR> (242)
<PAYMENTS-CURRENT> 2,573
<PAYMENTS-PRIOR> 4,159
<RESERVE-CLOSE> 28,854
<CUMULATIVE-DEFICIENCY> (121)
</TABLE>
