<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-14328
TRAVELERS PROPERTY CASUALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1445591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(Address of principal executive offices) (Zip Code)
(860) 277-0111
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
AS OF JULY 31, 2000, THERE WERE 1,000 OUTSTANDING SHARES OF COMMON STOCK, PAR
VALUE $0.01 PER SHARE, OF THE REGISTRANT, ALL OF WHICH WERE OWNED BY THE
TRAVELERS INSURANCE GROUP INC., AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CITIGROUP
INC.
REDUCED DISCLOSURE FORMAT
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1) (a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
<PAGE> 2
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements: Page No.
<S> <C>
Condensed Consolidated Statement of Income (Unaudited) -
Three and Six Months Ended June 30, 2000 and 1999 3
Condensed Consolidated Balance Sheet - June 30, 2000 (Unaudited)
and December 31, 1999 4
Condensed Consolidated Statement of Changes in
Stockholder's Equity (Unaudited) -
Six Months Ended June 30, 2000 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
</TABLE>
Part II - Other Information
<TABLE>
<S> <C>
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Exhibit Index 27
Signatures 28
</TABLE>
2
<PAGE> 3
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 2,041 $ 2,006 $ 4,030 $ 3,971
Net investment income 554 510 1,102 1,013
Fee income 83 67 155 134
Realized investment gains (losses) 5 31 (54) 47
Other revenues 23 20 42 42
------------------------------------------------------------------------------------------------------------
Total revenues 2,706 2,634 5,275 5,207
------------------------------------------------------------------------------------------------------------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 1,569 1,501 3,065 2,960
Amortization of deferred acquisition costs 310 310 610 625
Interest expense 33 40 67 80
General and administrative expenses 296 303 591 611
------------------------------------------------------------------------------------------------------------
Total claims and expenses 2,208 2,154 4,333 4,276
------------------------------------------------------------------------------------------------------------
Income before federal income taxes and cumulative
effect of changes in accounting principles 498 480 942 931
Federal income taxes 133 126 246 243
------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 365 354 696 688
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 $ 365 $ 354 $ 696 $ 555
============================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except shares)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $25,280 and $25,711) $ 25,151 $ 25,305
Equity securities, at fair value (cost, $1,155 and $1,166) 1,145 1,261
Mortgage loans 391 464
Real estate held for sale 48 50
Short-term securities 1,955 1,535
Other investments 1,698 1,221
-----------------------------------------------------------------------------------------------------------
Total investments 30,388 29,836
-----------------------------------------------------------------------------------------------------------
Cash 161 55
Investment income accrued 374 385
Premium balances receivable 2,861 2,738
Reinsurance recoverables 9,509 9,424
Deferred acquisition costs 573 525
Deferred federal income taxes 1,421 1,552
Contractholder receivables 2,079 2,059
Goodwill 2,349 1,390
Other assets 2,798 2,293
-----------------------------------------------------------------------------------------------------------
Total assets $ 52,513 $ 50,257
===========================================================================================================
LIABILITIES
Claims and claim adjustment expense reserves $ 28,777 $ 29,003
Unearned premium reserves 4,543 4,274
Contractholder payables 2,079 2,059
Long-term debt 850 850
Other liabilities 4,801 4,230
-----------------------------------------------------------------------------------------------------------
Total liabilities 41,050 40,416
-----------------------------------------------------------------------------------------------------------
TAP - obligated mandatorily redeemable securities of subsidiary trusts
holding solely junior subordinated debt securities of TAP 900 900
-----------------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Common Stock, $.01 par value, 1,000 shares authorized;
1,000 and 0 shares issued and outstanding -- --
Class A Common Stock, $.01 par value, 700 million shares authorized;
0 and 72,393,407 shares issued -- 1
Class B Common Stock, $.01 par value, 700 million shares authorized;
0 and 328,020,170 shares issued and outstanding -- 3
Additional paid-in capital 5,934 5,479
Retained earnings 4,721 4,133
Accumulated other changes in equity from nonowner sources (92) (202)
Treasury stock, at cost (shares, 0 and 13,159,386) -- (451)
Unearned compensation -- (22)
-----------------------------------------------------------------------------------------------------------
Total stockholder's equity 10,563 8,941
-----------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 52,513 $ 50,257
===========================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDER'S EQUITY (Unaudited)
(in millions, except shares)
For the Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
DOLLARS SHARES
------- ----------------------------------------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL COMMON CLASS A CLASS B
------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 5,483 - 72,393,407 328,020,170
TIGI tender offer-related transactions 971 - - -
Conversion of Class B shares to Class A shares - - 328,020,170 (328,020,170)
Capital Accumulation Plan (CAP) grant 1 - - -
Authorized and unissued shares related to TIGI's tender offer - - (385,197,223) -
Treasury stock retired (521) - (15,215,354) -
Share reclassification - 1,000 (1,000) -
--------------------------------------------------------------------------- ----------------------------------------
Balance, end of period 5,934 1,000 - -
--------------------------------------------------------------------------- ----------------------------------------
RETAINED EARNINGS
Balance, beginning of period 4,133
Net income 696
Dividends (108)
---------------------------------------------------------------------------
Balance, end of period 4,721
---------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES IN EQUITY
FROM NONOWNER SOURCES, NET OF TAX
Balance, beginning of period (202)
Net unrealized gain on securities 111
Foreign currency translation adjustments (1)
---------------------------------------------------------------------------
Balance, end of period (92)
---------------------------------------------------------------------------
TREASURY STOCK (AT COST)
Balance, beginning of period (451) - (13,159,386) -
Treasury stock acquired (77) - (2,301,000) -
Net CAP grants 7 - 245,032 -
Treasury stock retired 521 - 15,215,354 -
--------------------------------------------------------------------------- ----------------------------------------
Balance, end of period - - - -
--------------------------------------------------------------------------- ----------------------------------------
UNEARNED COMPENSATION
Balance, beginning of period (22)
Net issuance of restricted stock under CAP (16)
Restricted stock amortization 7
CAP grants converted to Citigroup CAP grants 31
---------------------------------------------------------------------------
Balance, end of period -
--------------------------------------------------------------------------- ----------------------------------------
Total stockholder's equity and shares outstanding $ 10,563 1,000 - -
=========================================================================== ========================================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
INCREASE (DECREASE) IN CASH
(in millions)
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 2000 1999
---------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 421 $ 183
---------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 880 895
Mortgage loans 176 47
Proceeds from sales of investments
Fixed maturities 6,789 4,608
Equity securities 1,397 377
Real estate held for sale 19 5
Purchase of investments
Fixed maturities (7,197) (5,252)
Equity securities (1,510) (478)
Mortgage loans (32) (6)
Short-term securities, net (480) (155)
Other investments, net (468) (312)
Business acquisitions (278) --
Securities transactions in course of settlement 574 214
---------------------------------------------------------------------------
Net cash used in investing activities (130) (57)
---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (77) (49)
Dividend to TIGI (100) (82)
Dividend to minority shareholders (8) (16)
---------------------------------------------------------------------------
Net cash used in financing activities (185) (147)
---------------------------------------------------------------------------
Net increase (decrease) in cash 106 (21)
Cash at beginning of period 55 62
---------------------------------------------------------------------------
Cash at end of period $ 161 $ 41
===========================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 174 $ 218
Interest paid $ 66 $ 80
===========================================================================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. General
The interim condensed consolidated financial statements include the
accounts of Travelers Property Casualty Corp. (TAP) (a direct subsidiary of
The Travelers Insurance Group Inc. (TIGI) and an indirect subsidiary of
Citigroup Inc. (Citigroup)) and its subsidiaries (collectively, the
Company), are prepared in conformity with generally accepted accounting
principles (GAAP) and are unaudited. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation have been reflected. The accompanying condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the
Company's Annual Report to Stockholders for the year ended December 31,
1999.
During April 2000, TIGI completed a cash tender offer to purchase all of
the outstanding shares of Class A Common Stock of TAP at a price of $41.95
per share. TIGI also established a wholly-owned subsidiary of TIGI which
effected a merger pursuant to which TAP became a wholly-owned subsidiary of
TIGI. Upon the merger of the new subsidiary into TAP, all previously
outstanding shares of Class A Common Stock of TAP became authorized and
unissued shares and the 1,000 shares of Common Stock of the new subsidiary
(held by TIGI) were exchanged for 1,000 shares of Class A Common Stock of
TAP. On June 29, 2000, the Company restated its certificate of
incorporation and reclassified the Class A Common Stock to Common Stock,
which had the effect of retiring all treasury stock. At June 30, 2000,
TAP's common stock outstanding consists of 1,000 shares of Common Stock,
which are 100% owned by TIGI. These transactions also generated goodwill of
approximately $1.0 billion, which TIGI allocated to TAP. The goodwill is
being amortized over 36 years.
Certain financial information that is normally included in annual financial
statements prepared in accordance with GAAP, but that is not required for
interim reporting purposes, has been condensed or omitted.
2. Changes in Accounting Principles and Accounting Standards not yet Adopted
Accounting changes for the six months ended June 30, 1999 refer to the
adoption of Statement of Position (SOP) 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments" and SOP 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," which resulted in a charge of $160 million after
tax and a benefit of $27 million after tax, respectively.
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 Accounting Standards No. 137, "Deferral
of the Effective Date of FASB Statement No. 133" (FAS 137), which allows
entities which have not yet adopted FAS 133 to defer its effective date to
all fiscal quarters of all fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133," which amends the
accounting and reporting standards of FAS 133. 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
7
<PAGE> 8
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
2. Changes in Accounting Principles and Accounting Standards not yet Adopted,
Continued
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.
3. Segment Information
<TABLE>
<CAPTION>
TOTAL
COMMERCIAL PERSONAL REPORTABLE
(at and for the three months ended June 30, in millions) LINES LINES SEGMENTS
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000
Revenues
Premiums $ 1,121 $ 920 $ 2,041
Net investment income 438 114 552
Fee income 83 - 83
Realized investment gains (losses) 12 (7) 5
Other 5 18 23
-------------------------------------------------------------------------------------------------
Total revenues $ 1,659 $ 1,045 $ 2,704
=================================================================================================
Operating income (1) $ 292 $ 93 $ 385
Assets 44,427 7,809 52,236
-------------------------------------------------------------------------------------------------
1999
Revenues
Premiums $ 1,101 $ 905 $ 2,006
Net investment income 410 99 509
Fee income 67 - 67
Realized investment gains (losses) 34 (3) 31
Other 6 15 21
-------------------------------------------------------------------------------------------------
Total revenues $ 1,618 $ 1,016 $ 2,634
=================================================================================================
Operating income (1) $ 257 $ 103 $ 360
Assets 43,710 7,555 51,265
-------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating income excludes realized investment gains (losses) and is
reflected net of tax.
8
<PAGE> 9
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
3. Segment Information, Continued
<TABLE>
<CAPTION>
TOTAL
COMMERCIAL PERSONAL REPORTABLE
(at and for the six months ended June 30, in millions) LINES LINES SEGMENTS
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000
Revenues
Premiums $ 2,200 $ 1,830 $ 4,030
Net investment income 874 227 1,101
Fee income 155 - 155
Realized investment losses (36) (18) (54)
Other 8 34 42
---------------------------------------------------------------------------------------------
Total revenues $ 3,201 $ 2,073 $ 5,274
=============================================================================================
Operating income (1) $ 591 $ 189 $ 780
Assets 44,427 7,809 52,236
---------------------------------------------------------------------------------------------
1999
Revenues
Premiums $ 2,174 $ 1,797 $ 3,971
Net investment income 823 189 1,012
Fee income 134 - 134
Realized investment gains (losses) 52 (5) 47
Other 14 29 43
---------------------------------------------------------------------------------------------
Total revenues $ 3,197 $ 2,010 $ 5,207
=============================================================================================
Operating income (1) $ 502 $ 212 $ 714
Assets 43,710 7,555 51,265
---------------------------------------------------------------------------------------------
</TABLE>
(1)Operating income excludes realized investment gains (losses) and the
cumulative effect of changes in accounting principles, and is reflected
net of tax.
BUSINESS SEGMENT RECONCILIATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(in millions) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME RECONCILIATION, NET OF TAX
Total operating income for reportable segments $ 385 $ 360 $ 780 $ 714
Other operating loss (1) (24) (27) (50) (57)
Realized investment gains (losses) 4 21 (34) 31
Cumulative effect of changes in accounting for:
Insurance-related assessments - - - (160)
Insurance and reinsurance contracts that do not
transfer insurance risk - - - 27
----------------------------------------------------------------------------------------------------------
Total consolidated net income $ 365 $ 354 $ 696 $ 555
==========================================================================================================
</TABLE>
(1) The primary component of the other operating loss is after-tax interest
expense of $22 million and $26 million for the three months ended June
30, 2000 and 1999, respectively, and $44 million and $52 million for
the six months ended June 30, 2000 and 1999, respectively.
9
<PAGE> 10
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
4. Changes in Equity from Nonowner Sources
The Company's total changes in equity from nonowner sources are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(in millions) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 365 $ 354 $ 696 $ 555
Net unrealized gain (loss) on securities (61) (502) 111 (737)
Foreign currency translation adjustments (1) (1) (1) 1
---------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 303 $(149) $ 806 $(181)
=============================================================================================
</TABLE>
5. Capital and Debt
TAP has a five-year revolving credit facility in the amount of $250 million
with a syndicate of banks (the Credit Facility). Under the Credit Facility,
which expires in December 2001, TAP is required to maintain a certain level
of consolidated stockholders' equity (as defined in the agreement). At June
30, 2000, this requirement was exceeded by approximately $6.1 billion. In
addition, the Credit Facility places restrictions on the amount of
consolidated debt TAP can incur. At June 30, 2000, there were no borrowings
outstanding under the Credit Facility. If TAP had borrowings under the
Credit Facility, the interest rate would be based upon LIBOR plus a
negotiated margin. TAP compensates the banks for the Credit Facility
through commitment fees. TAP also issues commercial paper directly to
investors and maintains unused credit availability under the Credit
Facility at least equal to the amount of commercial paper outstanding. At
June 30, 2000, TAP had no commercial paper outstanding. TAP also currently
has available a $200 million line of credit for working capital and other
general corporate purposes from a subsidiary of Citigroup. The lender has
no obligation to make any loan to TAP under this line of credit.
TAP's insurance subsidiaries are subject to various regulatory restrictions
that limit the maximum amount of dividends available to be paid to their
parent without prior approval of insurance regulatory authorities. Dividend
payments to TAP from its insurance subsidiaries are limited to $1.2 billion
in 2000 without prior approval of the Connecticut Insurance Department. TAP
received $350 million of dividends from its insurance subsidiaries during
the first six months of 2000.
6. Commitments and Contingencies
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). The outcome of the restructuring of Lloyd's remains
uncertain and the impact, if any, on collectibility of amounts recoverable
by the Company from Equitas cannot be quantified at this time. In the
opinion of the Company's management, 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, in the opinion
of the Company's management, 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, in the opinion
of the Company's management, the net receivable from reinsurance contracts
is properly stated.
10
<PAGE> 11
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Commitments and Contingencies, Continued
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are
not used to estimate such reserves.
The reserves carried for environmental and asbestos claims at June 30, 2000
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, in the opinion of the
Company's management, it is not likely that these claims will have a
material adverse effect on the Company's financial condition or liquidity.
In the ordinary course of business, the Company is a defendant or
codefendant in various litigation matters other than those described above.
Although there can be no assurances, in the opinion of the Company's
management, based on information currently available, the ultimate
resolution of these legal proceedings would not be likely to have a
material adverse effect on the results of the Company's operations,
financial condition or liquidity.
7. Acquisition of the Reliance Group Holdings, Inc. Surety Business
On May 31, 2000, the Company completed its previously announced acquisition
of the surety business of Reliance Group Holdings, Inc. (Reliance Surety)
for $580 million. Accordingly, the results of operations and the assets and
liabilities acquired from Reliance Surety are included in the financial
statements beginning June 1, 2000. This acquisition was accounted for as a
purchase.
11
<PAGE> 12
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction H (2) (a) of Form 10-Q.
The Results of Operations reflect the consolidated results of operations of
Travelers Property Casualty Corp. (TAP) and its subsidiaries (the Company). The
Company provides a wide range of commercial and personal property and casualty
insurance products and services to businesses, associations and individuals
throughout the United States.
During April 2000, TIGI completed a cash tender offer to purchase all of the
outstanding shares of Class A Common Stock of TAP at a price of $41.95 per
share. TIGI also established a wholly-owned subsidiary of TIGI which effected a
merger pursuant to which TAP became a wholly-owned subsidiary of TIGI. Upon the
merger of the new subsidiary into TAP, all previously outstanding shares of
Class A Common Stock of TAP became authorized and unissued shares and the 1,000
shares of Common Stock of the new subsidiary (held by TIGI) were exchanged for
1,000 shares of Class A Common Stock of TAP. On June 29, 2000, the Company
restated its certificate of incorporation and reclassified the Class A Common
Stock to Common Stock, which had the effect of retiring all treasury stock. At
June 30, 2000, TAP's common stock outstanding consists of 1,000 shares of Common
Stock, which are 100% owned by TIGI. These transactions also generated goodwill
of approximately $1.0 billion, which TIGI allocated to TAP. The goodwill is
being amortized over 36 years.
On May 31, 2000, the Company completed its previously announced acquisition of
the surety business of Reliance Group Holdings, Inc. (Reliance Surety) for $580
million. Accordingly, the results of operations and the assets and liabilities
acquired from Reliance Surety are included in the financial statements beginning
June 1, 2000. This acquisition was accounted for as a purchase.
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS OF OPERATIONS THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(in millions) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues............................................................. $ 2,706 $ 2,634 $ 5,275 $ 5,207
------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles.. $ 365 $ 354 $ 696 $ 688
Cumulative effect of changes in accounting principles................ - - - (133)
------------------------------------------------------------------------------------------------------------------
Net income (1)....................................................... $ 365 $ 354 $ 696 $ 555
------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income includes $4 million and $21 million of realized investment gains
in the three months ended June 30, 2000 and 1999, respectively, $34 million
of realized investment losses in the six months ended June 30, 2000 and $31
million of realized investment gains in the six months ended June 30, 1999.
12
<PAGE> 13
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND
1999
Operating earnings, which exclude realized investment gains, were $361 million
in the second quarter of 2000, an increase of $28 million from $333 million in
the second quarter of 1999. The increase in operating earnings was primarily the
result of increased net investment income, Commercial Lines rate increases
achieved in prior quarters, lower catastrophe losses, increased fee income and a
benefit resulting from legislative action in the state of South Carolina that
changed the manner in which it finances its workers' compensation second-injury
funds, partially offset by increased loss trends and lower favorable prior-year
reserve development.
Revenues of $2.706 billion in the second quarter of 2000 increased $72 million
from $2.634 billion in the second quarter of 1999. This increase was primarily
attributable to a $44 million increase in net investment income, a $35 million
increase in earned premiums, and a $16 million increase in fee income, partially
offset by a $26 million decrease in realized investment gains. The increase in
earned premiums was primarily due to increased production in Personal Lines and
the acquisition of the Reliance Surety business in the second quarter of 2000.
Net investment income was $554 million in the second quarter of 2000, an
increase of $44 million from the second quarter of 1999, reflecting a higher
yield on invested assets in the second quarter of 2000.
Fee income in the second quarter of 2000 was $83 million, a $16 million increase
from the second quarter of 1999. National Accounts within Commercial Lines is
the primary source of fee income due to its service business. This increase in
fee income was primarily due to the shift in business mix from premium-based
products to fee-based products.
Claims and expenses of $2.208 billion in the second quarter of 2000 increased
$54 million from the second quarter of 1999. The increase was primarily the
result of increased claims related to the growth in premiums, increased loss
trends and lower favorable prior-year reserve development, partially offset by
lower catastrophe losses, the benefit of the South Carolina legislative action,
a reduction in general and administrative expenses and a decrease in interest
expense due to debt repayments.
The Company's effective federal tax rate was 27% in the second quarter of 2000
compared to 26% in the second quarter of 1999. These rates were lower than the
statutory tax rate in both periods primarily due to non-taxable investment
income.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and loss adjustment expense (LAE) ratio.......... 74.6% 72.5%
Underwriting expense ratio............................ 28.2 28.2
Combined ratio before policyholder dividends.......... 102.8 100.7
Combined ratio........................................ 103.2 101.1
--------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio.................................... 74.6% 72.3%
Underwriting expense ratio............................ 25.1 28.6
Combined ratio before policyholder dividends.......... 99.7 100.9
Combined ratio........................................ 100.1 101.3
--------------------------------------------------------------------------------
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
13
<PAGE> 14
The 2000 second quarter statutory and GAAP combined ratios include an adjustment
in Commercial Lines due to a reinsurance transaction associated with the
acquisition of the Reliance Surety business. Excluding this adjustment, the
statutory and GAAP combined ratios before policyholder dividends for the second
quarter of 2000 would have been 102.0% and 101.3%, respectively.
The increase in the second quarter of 2000 statutory and GAAP combined ratios
before policyholder dividends, excluding the above adjustment, compared to the
second quarter of 1999 was due to increased loss trends and lower favorable
prior-year reserve development, offset in part by Commercial Lines rate
increases, lower catastrophe losses, continued expense reductions in Commercial
Lines and higher fee income.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999
Net income was $696 million in the first six months of 2000 compared to $555
million in the first six months of 1999. 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 losses and the cumulative effect of
changes in accounting principles in the first six months of 1999 described
above, operating income was $730 million for the six months ended June 30, 2000
compared to $657 million for the six months ended June 30, 1999. The increase in
operating income in the six months ended June 30, 2000 compared to the six
months ended June 30, 1999 was due to increased net investment income,
Commercial Lines rate increases achieved in prior quarters, and continued
expense reductions, partially offset by increased loss trends, lower favorable
prior-year reserve development in Personal Lines and higher catastrophe losses.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio................................... 73.7% 72.2%
Underwriting expense ratio........................... 27.9 28.1
Combined ratio before policyholder dividends......... 101.6 100.3
Combined ratio....................................... 102.1 100.8
--------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................... 73.6% 72.0%
Underwriting expense ratio........................... 26.3 28.4
Combined ratio before policyholder dividends......... 99.9 100.4
Combined ratio....................................... 100.4 100.9
--------------------------------------------------------------------------------
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
14
<PAGE> 15
The first six months of 2000 statutory and GAAP combined ratios include an
adjustment in Commercial Lines due to a reinsurance transaction associated with
the acquisition of the Reliance Surety business. Excluding this adjustment, the
statutory and GAAP combined ratios before policyholder dividends for the first
six months of 2000 would have been 101.2% and 100.7%, respectively. The first
six months of 1999 statutory and GAAP combined ratios before policyholder
dividends include an adjustment in Personal Lines associated with the
termination of a quota share reinsurance arrangement. Excluding this adjustment,
the statutory and GAAP combined ratios before policyholder dividends for the
first six months of 1999 would have been 100.1% and 100.9%, respectively.
The increase in the first six months of 2000 statutory combined ratio before
policyholder dividends, excluding the related adjustment above, compared to the
first six months of 1999 statutory combined ratio before policyholder dividends,
excluding the related adjustment above, was due to increased loss trends, lower
favorable prior-year reserve development in Personal Lines and higher
catastrophe losses, offset in part by Commercial Lines rate increases and
continued expense reductions in Commercial Lines. The decrease in the first six
months of 2000 GAAP combined ratio before policyholder dividends, excluding the
related adjustment above, compared to the first six months of 1999 GAAP combined
ratio before policyholder dividends, excluding the related adjustment above, was
due to Commercial Lines rate increases and continued expense reductions in
Commercial Lines, partially offset by increased loss trends, higher catastrophe
losses and lower favorable prior-year reserve development in Personal Lines.
The other consolidated operating trends for the six months ended June 30, 2000
and 1999 are substantially the same as noted above for the quarters then ended.
SEGMENT RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
COMMERCIAL LINES
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
(in millions)
Revenues.............................................. $ 1,659 $ 1,618
Net income (1)........................................ $ 300 $ 279
================================================================================
</TABLE>
(1) Commercial Lines net income includes $8 million and $22 million of realized
investment gains in the three months ended June 30, 2000 and 1999,
respectively.
Commercial Lines operating income, which excludes realized investment gains, was
$292 million in the second quarter of 2000 compared to $257 million in the
second quarter of 1999. This increase was due to rate increases achieved in
prior quarters, higher net investment income, lower catastrophe losses, higher
fee income, a benefit resulting from legislative action in the state of South
Carolina that changed the manner in which it finances its workers' compensation
second-injury funds and continued expense reductions, partially offset by
increased loss trends and lower favorable prior-year reserve development. The
Company continues to maintain its discipline in the competitive commercial lines
marketplace and to grow business only where market conditions warrant.
Revenues were $1.659 billion in the second quarter of 2000 compared to $1.618
billion in the second quarter of 1999. This increase reflected higher net
investment income, higher fee income and higher earned premiums, partially
offset by lower realized investment gains.
Commercial Lines net written premiums in the second quarter of 2000 totaled
$1.102 billion (excluding an adjustment of $131 million due to a reinsurance
transaction associated with the acquisition of the Reliance Surety business), up
$7 million from $1.095 billion in the second quarter of 1999. This increase was
primarily due to the impact of the ongoing business associated with the Reliance
Surety acquisition which closed in the second quarter.
15
<PAGE> 16
Fee income in the second quarter of 2000 was $83 million compared to $67 million
in the second quarter of 1999. The $16 million increase in fee income was
primarily due to the shift of business mix from premium-based products to
fee-based products.
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 $58 million in the second
quarter of 2000 compared to $101 million in the second quarter of 1999. The $43
million decrease was primarily due to the shift of business mix from
premium-based products to fee-based products and a decrease in the Company's
level of involuntary pool participation.
National Accounts new business was significantly lower in the second quarter of
2000 than in the second quarter of 1999, reflecting the Company's continued
disciplined approach to underwriting and risk management. National Accounts
business retention ratio was significantly lower in the second quarter of 2000
than in the second quarter of 1999, reflecting the loss of several large
accounts in 2000.
Commercial Accounts serves mid-sized businesses for casualty products and both
large and mid-sized businesses for property products through a network of
independent agents and brokers. Commercial Accounts net written premiums were
$458 million in the second quarter of 2000 compared to $440 million in the
second quarter of 1999. The increase reflected the continued favorable pricing
on renewal business and an increase in new business premiums.
Commercial Accounts new business in the second quarter of 2000 was moderately
higher than in the second quarter of 1999, reflecting the increased market
activity resulting from the pricing environment. Commercial Accounts business
retention ratio was significantly lower in the second quarter of 2000 than in
the second quarter of 1999, reflecting an increase in lost business due to the
renewal price increases in 2000. Commercial Accounts continues to focus on
maintaining its product pricing standards and its selective underwriting policy
in the renewal of accounts.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $407 million in the second quarter of
2000 compared to $394 million in the second quarter of 1999. The increase in
Select Accounts net written premiums primarily reflected price increases on
renewal business and an increase in new business premiums. This increase was
partially offset by the Company's continued disciplined approach to underwriting
and risk management.
New business in Select Accounts was significantly higher in the second quarter
of 2000 compared to the second quarter of 1999. New business was low in the
second quarter of 1999 reflecting the Company's selective underwriting policy in
the highly competitive marketplace. Select Accounts business retention ratio was
moderately lower in the second quarter of 2000 than in the second quarter of
1999, reflecting a small increase in lost business due to renewal price
increases in 2000.
Specialty Accounts markets products to national, mid-sized and small customers
and distributes them through both wholesale brokers and retail agents and
brokers throughout the United States. Specialty Accounts net written premiums
were $179 million in the second quarter of 2000 (excluding an adjustment of $131
million due to a reinsurance transaction associated with the acquisition of the
Reliance Surety business) compared to $160 million in the second quarter of
1999. This increase was primarily due to the impact of the ongoing business
associated with the Reliance Surety acquisition.
Commercial Lines claims and expenses of $1.252 billion in the second quarter of
2000 were up from $1.244 billion in the second quarter of 1999. The increase
over the second quarter of 1999 was due to increased loss trends and lower
favorable prior-year reserve development, partially offset by lower catastrophe
losses, continued expense reductions and the South Carolina legislative action.
16
<PAGE> 17
There were no catastrophe losses in the second quarter of 2000. Catastrophe
losses, net of taxes and reinsurance, were $10 million in the second quarter of
1999. The 1999 catastrophe losses were due to tornadoes in Oklahoma.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio................................... 76.3% 75.1%
Underwriting expense ratio........................... 30.3 30.5
Combined ratio before policyholder dividends......... 106.6 105.6
Combined ratio....................................... 107.4 106.3
--------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................... 76.3% 74.8%
Underwriting expense ratio........................... 24.8 31.4
Combined ratio before policyholder dividends......... 101.1 106.2
Combined ratio....................................... 101.9 106.9
--------------------------------------------------------------------------------
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
The second quarter of 2000 statutory and GAAP combined ratios include an
adjustment due to a reinsurance transaction associated with the acquisition of
the Reliance Surety business. Excluding this adjustment, the statutory and GAAP
combined ratios before policyholder dividends for the second quarter of 2000
would have been 105.4% and 104.0%, respectively. The improvement in the second
quarter of 2000 statutory and GAAP combined ratios before policyholder
dividends, excluding this adjustment, compared to the second quarter of 1999 was
due to rate increases achieved in previous quarters, lower catastrophe losses,
the benefit of the South Carolina legislative action, higher fee income and
continued expense reductions, partially offset by increased loss trends and
lower favorable prior-year reserve development.
PERSONAL LINES
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues............................................... $1,045 $1,016
Net income (1)......................................... $ 89 $ 102
================================================================================
</TABLE>
(1) Personal Lines net income includes $4 million and $1 million of realized
investment losses in the three months ended June 30, 2000 and 1999,
respectively.
Personal Lines operating income, which excludes realized investment losses, was
$93 million in the second quarter of 2000 compared to $103 million in the second
quarter of 1999. The 2000 decrease reflects increased loss trends and lower
favorable prior-year reserve development, offset in part by higher net
investment income and lower catastrophe losses.
Revenues were $1.045 billion in the second quarter of 2000 compared to $1.016
billion in the second quarter of 1999. This increase primarily reflected higher
net investment income and an increase in earned premiums.
17
<PAGE> 18
Net written premiums in the second quarter of 2000 were $983 million compared to
$951 million in the second quarter of 1999. This increase reflected growth in
target markets served by independent agents and growth in affinity group
marketing and joint marketing arrangements, offset in part by planned reductions
in the TRAVELERS SECURE(R) auto and homeowners business and continued emphasis
on disciplined underwriting and risk management. The business retention ratio
in the second quarter of 2000 was virtually the same as that in the second
quarter of 1999.
Personal Lines claims and expenses of $918 million in the second quarter of 2000
increased $50 million from the second quarter of 1999. This increase was
primarily the result of higher losses associated with the growth in premiums and
related claim volumes, increased loss trends and lower favorable prior-year
reserve development, partially offset by lower catastrophe losses.
Catastrophe losses, net of taxes and reinsurance, were $17 million in the second
quarter of 2000, compared to $23 million in the second quarter of 1999. The 2000
catastrophe losses were due to Texas, Midwest and Northeast wind and hailstorms.
The 1999 catastrophe losses were due to wind and hailstorms on the East Coast
and tornadoes in the Midwest.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio................................. 72.6% 69.3%
Underwriting expense ratio......................... 25.5 25.5
Combined ratio..................................... 98.1 94.8
--------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................. 72.4% 69.3%
Underwriting expense ratio......................... 25.6 25.4
Combined ratio..................................... 98.0 94.7
--------------------------------------------------------------------------------
</TABLE>
GAAP combined ratios for Personal Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
The increase in the second quarter of 2000 statutory and GAAP combined ratios
compared to the second quarter of 1999 was primarily due to increased loss
trends and lower favorable prior-year reserve development, offset in part by
lower catastrophe losses.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues............................................. $ 2 $ -
Net loss............................................. $ (24) $ (27)
================================================================================
</TABLE>
The primary component of net loss for the second quarter of 2000 and 1999 was
after-tax interest expense of $21 million and $26 million, respectively.
Interest expense decreased in the second quarter of 2000 compared to the second
quarter of 1999 due to debt repayments of $200 million in September 1999 and
$200 million in October 1999.
18
<PAGE> 19
SEGMENT RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
COMMERCIAL LINES
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 1999
------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues................................................................ $ 3,201 $ 3,197
Income before cumulative effect of changes in accounting principles..... $ 568 $ 536
Cumulative effect of changes in accounting principles................... - (133)
Net income (1) ........................................................ $ 568 $ 403
======================================================================================================
</TABLE>
(1) Commercial Lines net income includes $23 million of realized investment
losses in the six months ended June 30, 2000 and $34 million of realized
investment gains in the six months ended June 30, 1999.
Net income was $568 million in the first six months of 2000 compared to $403
million in the first six months of 1999. Net income in 1999 included a charge in
the first quarter of $160 million related to the adoption of SOP 97-3 and a
benefit of $27 million related to the adoption of SOP 98-7. The net charge of
$133 million due to the adoption of these Statements of Position has been
accounted for as a cumulative effect of a change in accounting principles.
Commercial Lines operating income, which excludes realized investment gains and
losses and the cumulative effect of changes in accounting principles in the
first quarter of 1999 described above, was $591 million in the six months ended
June 30, 2000, compared to $502 million in the six months ended June 30, 1999.
The increase was due to higher net investment income, rate increases achieved in
prior quarters, higher fee income, lower catastrophe losses, the benefit
resulting from legislative action in the state of South Carolina that changed
the manner in which it finances its workers' compensation second-injury funds
and continued expense reductions, partially offset by increased loss trends.
Revenues were $3.201 billion in the first six months of 2000 compared to $3.197
billion in the first six months of 1999. This increase reflected higher net
investment income, higher fee income and higher earned premiums, partially
offset by realized investment losses in the first six months of 2000 compared to
realized investment gains in the first six months of 1999.
Commercial Lines net written premiums in the first six months of 2000 totaled
$2.249 billion (excluding an adjustment of $131 million due to a reinsurance
transaction associated with the acquisition of the Reliance Surety business), up
$40 million from $2.209 billion in the first six months of 1999, reflecting the
impact of the ongoing business associated with the Reliance Surety acquisition
which closed in the second quarter, the impact of continued favorable pricing on
renewal business and an increase in new business premiums.
Fee income in the first six months of 2000 was $155 million, a $21 million
increase from the first six months of 1999. This increase was primarily due to
the shift of business mix from premium-based products to fee-based products.
National Accounts net written premiums were $150 million in the first six months
of 2000 compared to $251 million in the first six months of 1999. This decrease
reflected the shift of business mix from premium-based products to fee-based
products and a decrease in the Company's level of involuntary pool
participation. National Accounts new business in the first six months of 2000
was significantly higher compared to the first six months of 1999, reflecting
the acquisition of several large accounts in 2000. National Accounts business
retention ratio was moderately lower in the first six months of 2000 compared to
the first six months of 1999, reflecting the loss of several large accounts in
2000.
19
<PAGE> 20
Commercial Accounts net written premiums were $945 million in the first six
months of 2000 compared to $884 million in the first six months of 1999. This
increase reflected the continued favorable pricing on renewal business and an
increase in new business premiums. New business in Commercial Accounts was
significantly higher in the first six months of 2000 than in the first six
months of 1999, reflecting the increased market activity resulting from the
pricing environment. The Commercial Accounts business retention ratio in the
first six months of 2000 was moderately lower than the first six months of 1999,
reflecting an increase in lost business due to the renewal price increases in
2000. Commercial Accounts continues to focus on maintaining its product pricing
standards and its selective underwriting policy in the renewal of accounts.
Select Accounts net written premiums of $794 million in the first six months of
2000 increased $28 million from $766 million in the first six months of 1999.
The increase in Select Accounts net written premiums primarily reflected price
increases on renewal business and an increase in new business premiums. This
increase was partially offset by the Company's continued disciplined approach to
underwriting and risk management. New business in Select Accounts was
significantly higher in the first six months of 2000 compared to the first six
months of 1999. New business was unusually low in the first six months of 1999
reflecting the Company's selective underwriting policy in the highly competitive
marketplace. Select Accounts business retention ratio in the first half of 2000
was virtually the same as that in the first half of 1999.
Specialty Accounts net written premiums were $360 million (excluding an
adjustment of $131 million due to a reinsurance transaction associated with the
acquisition of the Reliance Surety business) in the first six months of 2000
compared to $308 million in the first six months of 1999. This increase
primarily reflected the impact of the ongoing business associated with the
Reliance Surety acquisition, the impact of reinsurance activity and an increase
in new business premiums.
Commercial Lines claims and expenses of $2.437 billion in the first six months
of 2000 decreased $44 million from the first six months of 1999. This decrease
reflected the benefit resulting from legislative action in the state of South
Carolina that changed the manner in which it finances its workers' compensation
second-injury funds, lower catastrophe losses and continued expense reductions,
partially offset by increased loss trends.
There were no catastrophe losses in the first six months of 2000. Catastrophe
losses, net of taxes and reinsurance, were $10 million in the first six months
of 1999. The 1999 catastrophe losses were due to tornadoes in Oklahoma in the
second quarter.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio................................... 74.9% 75.7%
Underwriting expense ratio........................... 29.1 29.5
Combined ratio before policyholder dividends......... 104.0 105.2
Combined ratio....................................... 104.8 106.1
--------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................... 74.8% 75.3%
Underwriting expense ratio........................... 26.0 31.3
Combined ratio before policyholder dividends......... 100.8 106.6
Combined ratio....................................... 101.6 107.5
--------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
The first six months of 2000 statutory and GAAP combined ratios include an
adjustment due to a reinsurance transaction associated with the acquisition of
the Reliance Surety business. Excluding this adjustment, the statutory and GAAP
combined ratios before policyholder dividends for the first six months of 2000
would have been 103.4% and 102.3%, respectively. The improvement in the first
six months of 2000 statutory and GAAP combined ratios before policyholder
dividends, excluding this adjustment, compared to the first six months of 1999
was due to rate increases achieved in previous quarters, lower catastrophe
losses, the benefit of the South Carolina legislative action, higher fee income
and continued expense reductions, partially offset by increased loss trends.
PERSONAL LINES
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues............................................ $ 2,073 $ 2,010
Net income (1)...................................... $ 178 $ 209
================================================================================
</TABLE>
(1) Personal Lines net income includes $11 million and $3 million of realized
investment losses in the six months ended June 30, 2000 and 1999,
respectively.
Personal Lines operating income, which excludes realized investment losses, was
$189 million in the first six months of 2000 compared to $212 million in the
first six months of 1999. The decrease in operating income in the 2000 period
was primarily due to increased loss trends, higher catastrophe losses and lower
favorable prior-year reserve development, offset in part by higher net
investment income.
Net written premiums in the first six months of 2000 were $1.873 billion
compared to $1.863 billion in the first six months of 1999 (excluding an
adjustment of $72 million in 1999 due to a change in the quota share reinsurance
arrangement). This increase primarily reflects growth in target markets served
by independent agents and growth in affinity group marketing and joint marketing
arrangements, partially offset by the planned reductions in the TRAVELERS
SECURE(R) auto and homeowners business, a mandated rate decrease in New Jersey
and continued emphasis on disciplined underwriting and risk management. The
business retention ratio in the first half of 2000 was virtually the same as
that in the first half of 1999.
Personal Lines claims and expenses of $1.819 billion in the first six months of
2000 increased $112 million from the first six months of 1999. This increase was
primarily the result of higher losses associated with the growth in premiums and
related claim volumes, increased loss trends, higher catastrophe losses and
lower favorable prior-year reserve development.
Catastrophe losses, after taxes and reinsurance, were $48 million in the first
half of 2000 compared to $31 million in the first half of 1999. The 2000
catastrophe losses were due to Texas, Midwest and Northeast wind and hailstorms
in the second quarter and hailstorms in Louisiana and Texas in the first
quarter. The 1999 catastrophe losses were due to wind and hailstorms on the East
Coast and tornadoes in the Midwest in the second quarter and a wind and ice
storm in the Midwest and the Northeast in the first quarter.
21
<PAGE> 22
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio................................... 72.4% 68.0%
Underwriting expense ratio........................... 26.2 26.5
Combined ratio....................................... 98.6 94.5
--------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................... 72.2% 68.0%
Underwriting expense ratio........................... 26.6 25.1
Combined ratio....................................... 98.8 93.1
--------------------------------------------------------------------------------
</TABLE>
The first six months of 1999 statutory and GAAP combined ratios for Personal
Lines include an adjustment associated with the termination of a quota share
reinsurance arrangement. Excluding this adjustment, both the statutory and GAAP
combined ratios for the first six months of 1999 would have been 94.1%. The
increase in the first six months of 2000 statutory and GAAP combined ratios
compared to the first six months of 1999 statutory and GAAP combined ratios,
excluding this adjustment, was due to increased loss trends, higher catastrophe
losses and lower favorable prior-year reserve development.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues.................................................. $ 1 $ -
Net loss.................................................. $ (50) $ (57)
================================================================================
</TABLE>
The primary component of net loss for the six months ended June 30, 2000 and
1999 was interest expense of $43 million and $52 million after tax,
respectively. Interest expense decreased in the first six months of 2000
compared to the first six months of 1999 due to debt repayments of $200 million
in September 1999 and $200 million in October 1999.
ENVIRONMENTAL CLAIMS
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At June 30, 2000, approximately 24% of the
net aggregate reserve (i.e., approximately $149 million) consists of case
reserve for resolved claims. The balance, approximately 76% of the net aggregate
reserve (i.e., approximately $474 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.
22
<PAGE> 23
The following table displays activity for environmental losses and loss expenses
and reserves for the six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Environmental Losses
Six Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning reserves:
Direct............................................... $ 801 $ 928
Ceded................................................ (125) (96)
--------------------------------------------------------------------------------
Net................................................ 676 832
Incurred losses and loss expenses:
Direct............................................... 31 80
Ceded................................................ - (52)
Losses paid:
Direct .............................................. 102 110
Ceded................................................ (18) (22)
--------------------------------------------------------------------------------
Ending reserves:
Direct............................................... 730 898
Ceded................................................ (107) (126)
--------------------------------------------------------------------------------
Net................................................ $ 623 $ 772
================================================================================
</TABLE>
ASBESTOS CLAIMS
At June 30, 2000, approximately 13% of the net aggregate reserve (i.e.,
approximately $106 million) is for pending asbestos claims. The balance,
approximately 87% of the net aggregate reserve (i.e., approximately $714
million), represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending asbestos claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for asbestos losses and loss expenses and reserves for the six
months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Asbestos Losses
Six Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning reserves:
Direct............................................. $ 1,050 $ 1,252
Ceded.............................................. (223) (266)
--------------------------------------------------------------------------------
Net.............................................. 827 986
Incurred losses and loss expenses:
Direct............................................. 44 68
Ceded.............................................. (18) (38)
Losses paid:
Direct ............................................ 94 144
Ceded.............................................. (61) (85)
--------------------------------------------------------------------------------
Ending reserves:
Direct............................................. 1,000 1,176
Ceded.............................................. (180) (219)
--------------------------------------------------------------------------------
Net.............................................. $ 820 $ 957
================================================================================
</TABLE>
23
<PAGE> 24
UNCERTAINTY REGARDING ADEQUACY OF ENVIRONMENTAL AND ASBESTOS RESERVES
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
The reserves carried for environmental and asbestos claims at June 30, 2000 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, in the opinion of the Company's
management, it is not likely that these claims will have a material adverse
effect on the Company's financial condition or liquidity.
CUMULATIVE INJURY OTHER THAN ASBESTOS (CIOTA) CLAIMS
CIOTA claims are generally submitted to the Company under general liability
policies and often involve an allegation by a claimant against an insured that
the claimant has suffered injuries as a result of long-term or continuous
exposure to potentially harmful products or substances. Such potentially harmful
products or substances include, but are not limited to, lead paint, pesticides,
pharmaceutical products, silicone-based personal products, solvents and other
deleterious substances.
At June 30, 2000, approximately 21% of the net aggregate reserve (i.e.,
approximately $174 million) is for pending CIOTA claims. The balance,
approximately 79% of the net aggregate reserve (i.e., approximately $674
million), represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending CIOTA claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for CIOTA losses and loss expenses and reserves for the six
months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
CIOTA Losses
Six Months Ended June 30, 2000 1999
--------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning reserves:
Direct............................................ $ 1,184 $ 1,346
Ceded............................................. (313) (392)
--------------------------------------------------------------------------------
Net............................................. 871 954
Incurred losses and loss expenses:
Direct............................................ 6 (23)
Ceded............................................. 4 20
Losses paid:
Direct............................................ 33 51
Ceded............................................. - (26)
--------------------------------------------------------------------------------
Ending reserves:
Direct............................................ 1,157 1,272
Ceded............................................. (309) (346)
--------------------------------------------------------------------------------
Net............................................. $ 848 $ 926
================================================================================
</TABLE>
24
<PAGE> 25
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 2 of Notes to Condensed Consolidated Financial Statements for a
discussion of recently issued accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "may affect," and similar expressions or future or conditional verbs
such as "will," "should," "would," and "could." These forward-looking statements
involve risks and uncertainties including, but not limited to, the following:
the resolution of legal proceedings and related matters; 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.
25
<PAGE> 26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning sixteen purported class actions and one multi-party
suit, with substantially the same allegations, commenced in various courts
against certain subsidiaries of the Company, dozens of other insurers and the
National Council on Compensation Insurance ("NCCI"), see the description that
appears in the second and third paragraphs under the caption "Legal Proceedings"
beginning on page 44 of the Annual Report on Form 10-K of the Company for the
year ended December 31, 1999 (File No. 1-14328), which description is included
as Exhibit 99.01 to this Form 10-Q and incorporated by reference herein, and in
the first paragraph under the captions "Legal Proceedings" beginning on page 22
of the Quarterly Report on Form 10-Q of the Company for the quarterly period
ended March 31, 2000 (File No. 1-14328) which description is included as Exhibit
99.02 to this Form 10-Q and incorporated by reference herein. In April 2000,
plaintiffs appealed the California trial court's order dismissing all claims
with prejudice.
For information concerning a consolidated putative class action captioned In Re
Travelers Property Casualty Corp. Shareholders Litigation, see the description
that appears in the second, third, fourth and fifth paragraphs under the caption
"Legal Proceedings" beginning on page 22 of the Quarterly Report on Form 10-Q of
the Company for the quarterly period ended March 31, 2000 (File No. 1-14328),
which description is included as Exhibit 99.02 to this Form 10-Q and
incorporated by reference herein. In June 2000, the parties completed
confirmatory discovery with respect to the settlement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
See Exhibit Index.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the second quarter ended June
30, 2000.
26
<PAGE> 27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
3.01+ Restated Certificate of Incorporation of Travelers Property
Casualty Corp. (the "Company") filed June 29, 2000.
3.02 By-Laws of the Company, effective January 19, 1999, incorporated
by reference to Exhibit 3.02 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (File No.
1-14328).
12.01+ Computation of Ratio of Earnings to Fixed Charges.
27.01+ Financial Data Schedule.
99.01+ The second and third paragraphs under the caption "Legal
Proceedings" beginning on page 44 of the Annual Report on Form
10-K of the Company for the year ended December 31, 1999 (File No.
1-14328).
99.02+ The first, second, third, fourth and fifth paragraphs under the
caption "Legal Proceedings" beginning on page 22 of the Quarterly
Report on Form 10-Q of the Company for the quarterly period ended
March 31, 2000 (File No. 1-14328).
</TABLE>
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the Securities and Exchange Commission
upon request.
---------------------------
+ Filed herewith.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
TRAVELERS PROPERTY CASUALTY CORP.
Date: August 11, 2000 By /s/ William P. Hannon
-------------------------------------
William P. Hannon
Chief Financial Officer
(Principal Financial Officer)
Date: August 11, 2000 By /s/ Douglas K. Russell
-------------------------------------
Douglas K. Russell
Chief Accounting Officer
(Principal Accounting Officer)
</TABLE>
28
