<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 MARCH 31, 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)
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<S> <C>
DELAWARE 06-1445591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(Address of principal executive offices) (Zip Code)
(860) 277-0111
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
AS OF APRIL 30, 2000, THERE WERE 1,000 OUTSTANDING SHARES OF CLASS A 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
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Item 1. Financial Statements: Page No.
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Condensed Consolidated Statement of Income (Unaudited) -
Three Months Ended March 31, 2000 and 1999 3
Condensed Consolidated Balance Sheet - March 31, 2000 (Unaudited)
and December 31, 1999 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Unaudited) -
Three Months Ended March 31, 2000 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Three Months Ended March 31, 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
Part II - Other Information
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 23
Exhibit Index 24
Signatures 25
</TABLE>
2
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TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 2000 1999
------- -------
<S> <C> <C>
REVENUES
Premiums $ 1,989 $ 1,965
Net investment income 548 503
Fee income 72 67
Realized investment gains (losses) (59) 16
Other revenues 19 22
------- -------
Total revenues 2,569 2,573
------- -------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 1,496 1,459
Amortization of deferred acquisition costs 300 315
Interest expense 34 40
General and administrative expenses 295 308
------- -------
Total claims and expenses 2,125 2,122
------- -------
Income before federal income taxes and cumulative effect
of changes in accounting principles 444 451
Federal income taxes 113 117
------- -------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 331 334
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 $ 331 $ 201
======= =======
BASIC EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles $ 0.86 $ 0.85
Cumulative effect of changes in accounting principles -- (0.34)
------- -------
Net income $ 0.86 $ 0.51
======= =======
Weighted average number of common shares outstanding 384.5 389.6
------- -------
DILUTED EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles $ 0.86 $ 0.85
Cumulative effect of changes in accounting principles -- (0.34)
------- -------
Net income $ 0.86 $ 0.51
======= =======
Weighted average number of common shares outstanding
and common stock equivalents 385.4 390.5
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
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TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except shares)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED)
----------- -------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $25,597 and $25,711) $ 25,524 $ 25,305
Equity securities, at fair value (cost, $1,159 and $1,166) 1,185 1,261
Mortgage loans 488 464
Real estate held for sale 47 50
Short-term securities 2,279 1,535
Other investments 1,403 1,221
-------- --------
Total investments 30,926 29,836
-------- --------
Cash 118 55
Investment income accrued 398 385
Premium balances receivable 2,766 2,738
Reinsurance recoverables 9,438 9,424
Deferred acquisition costs 527 525
Deferred federal income taxes 1,429 1,552
Contractholder receivables 2,085 2,059
Goodwill 1,380 1,390
Other assets 2,587 2,293
-------- --------
Total assets $ 51,654 $ 50,257
======== ========
LIABILITIES
Claims and claim adjustment expense reserves $ 28,846 $ 29,003
Unearned premium reserves 4,374 4,274
Contractholder payables 2,085 2,059
Long-term debt 850 850
Other liabilities 5,291 4,230
-------- --------
Total liabilities 41,446 40,416
-------- --------
TAP - obligated mandatorily redeemable securities of subsidiary trusts
holding solely junior subordinated debt securities of TAP 900 900
-------- --------
STOCKHOLDERS' EQUITY
Common stock:
Class A, $.01 par value, 700 million shares authorized;
72,393,407 shares issued 1 1
Class B, $.01 par value, 700 million shares authorized;
328,020,170 shares issued and outstanding 3 3
Additional paid-in capital 5,480 5,479
Retained earnings 4,410 4,133
Accumulated other changes in equity from nonowner sources (30) (202)
Treasury stock, at cost (shares, 15,268,774 and 13,159,386) (523) (451)
Unearned compensation (33) (22)
-------- --------
Total stockholders' equity 9,308 8,941
-------- --------
Total liabilities and stockholders' equity $ 51,654 $ 50,257
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(in millions, except shares)
For the Three Months Ended March 31, 2000
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<CAPTION>
DOLLARS SHARES
------- ---------------------------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL CLASS A CLASS B
---------- -----------
<S> <C> <C> <C>
Balance, beginning of period $ 5,483 72,393,407 328,020,170
Net Capital Accumulation Plan grants 1
---------
Balance, end of period 5,484
---------
RETAINED EARNINGS
Balance, beginning of period 4,133
Net income 331
Dividends (54)
---------
Balance, end of period 4,410
---------
ACCUMULATED OTHER CHANGES IN EQUITY
FROM NONOWNER SOURCES, NET OF TAX
Balance, beginning of period (202)
Net unrealized gain on securities 172
---------
Balance, end of period (30)
---------
TREASURY STOCK (AT COST)
Balance, beginning of period (451) (13,159,386) --
Net Capital Accumulation Plan grants 5 173,928 --
Treasury stock acquired (77) (2,301,000) --
Other -- 17,684 --
--------- ----------- -----------
Balance, end of period (523) (15,268,774) --
--------- ----------- -----------
UNEARNED COMPENSATION
Balance, beginning of period (22)
Net issuance of restricted stock under
Capital Accumulation Plan (16)
Restricted stock amortization 5
---------
Balance, end of period (33)
--------- ----------- -----------
Total stockholders' equity and shares outstanding $ 9,308 57,124,633 328,020,170
========= =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
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TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
INCREASE (DECREASE) IN CASH
(in millions)
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<CAPTION>
For the Three Months Ended March 31, 2000 1999
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<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 277 $ 129
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 469 345
Mortgage loans 3 45
Proceeds from sales of investments
Fixed maturities 4,370 1,833
Equity securities 861 148
Real estate held for sale 19 5
Purchase of investments
Fixed maturities (4,741) (2,061)
Equity securities (876) (210)
Mortgage loans (27) (1)
Short-term securities, net (734) (275)
Other investments, net (221) (186)
Securities transactions in course of settlement 794 295
------- -------
Net cash used in investing activities (83) (62)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (77) (29)
Dividend to TIGI (46) (41)
Dividend to minority shareholders (8) (8)
------- -------
Net cash used in financing activities (131) (78)
------- -------
Net increase (decrease) in cash 63 (11)
Cash at beginning of period 55 62
------- -------
Cash at end of period $ 118 $ 51
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 16 $ 14
Interest paid $ 26 $ 25
======= =======
</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 the
outstanding shares of Class A Common Stock of TAP at a price of $41.95 per
share. After giving effect to the purchase of the shares tendered
(approximately 52 million shares) and together with the 328,020,170 shares
of TAP's Class B Common Stock, which were converted by TIGI into an equal
number of shares of Class A Common Stock, TIGI beneficially owned
approximately 99% of the outstanding shares of TAP's Class A Common Stock.
TIGI also established a wholly-owned subsidiary of TIGI (Merger Sub) which
effected a merger pursuant to which TAP became a wholly-owned subsidiary of
TIGI, and all remaining shares of Class A Common Stock of TAP (other than
the shares owned by Citigroup and its subsidiaries) were converted into the
right to receive $41.95 per share in cash. In connection with the merger,
all previously outstanding shares of Class A Common Stock of TAP became
treasury shares and the 1,000 shares of Common Stock of Merger Sub (held by
TIGI) were exchanged for 1,000 shares of Class A Common Stock of TAP.
Accordingly, as of the date hereof, TAP has outstanding 1,000 shares of
Class A Common Stock (held by TIGI) and no shares of Class B Common Stock.
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 in the first quarter of 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. 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
7
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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
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
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<CAPTION>
TOTAL
COMMERCIAL PERSONAL REPORTABLE
(at and for the quarter ended March 31, in millions) LINES LINES SEGMENTS
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000
Revenues
Premiums $ 1,079 $ 910 $ 1,989
Net investment income 436 113 549
Fee income 72 -- 72
Realized investment losses (48) (11) (59)
Other 3 16 19
----------------------------------------------------------------------------------------------
Total revenues $ 1,542 $ 1,028 $ 2,570
==============================================================================================
Operating income (1) $ 299 $ 96 $ 395
Assets 43,728 7,714 51,442
----------------------------------------------------------------------------------------------
1999
Revenues
Premiums $ 1,073 $ 892 $ 1,965
Net investment income 413 90 503
Fee income 67 -- 67
Realized investment gains (losses) 18 (2) 16
Other 8 14 22
----------------------------------------------------------------------------------------------
Total revenues $ 1,579 $ 994 $ 2,573
==============================================================================================
Operating income (1) $ 245 $ 109 $ 354
Assets 44,130 7,564 51,694
==============================================================================================
</TABLE>
(1) Operating income excludes realized investment gains (losses) and the
cumulative effect of changes in accounting principles, 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
BUSINESS SEGMENT RECONCILIATION
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<CAPTION>
(for the quarter ended March 31, in millions) 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
INCOME RECONCILIATION, NET OF TAX
Total operating income for reportable segments $ 395 $ 354
Other operating loss (1) (26) (30)
Realized investment gains (losses) (38) 10
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 $ 331 $ 201
================================================================================================
</TABLE>
(1) The primary component of the other operating loss is after-tax
interest expense of $22 million and $26 million for 2000 and 1999,
respectively.
4. Changes in Equity from Nonowner Sources
The Company's total changes in equity from nonowner sources are as follows:
(for the three months ended March 31, in millions) 2000 1999
------------------------------------------------------------------------
Net income $ 331 $ 201
Net unrealized gain (loss) on securities 172 (235)
Foreign currency translation adjustments -- 2
------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 503 $ (32)
========================================================================
5. Earnings per Share (EPS)
Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the effect of potentially dilutive securities,
principally the incremental shares assumed issued under the Company's
Capital Accumulation Plan and other restricted stock plans. For the three
months ended March 31, 2000 and 1999, there was no significant effect on
EPS from dilutive securities issued.
9
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TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
6. Capital and Debt
TAP has a five-year revolving credit facility in the amount of $250 million
with a syndicate of banks (the Credit Facility). Under the Credit Facility,
which expires in December 2001, TAP is required to maintain a certain level
of consolidated stockholders' equity (as defined in the agreement). At
March 31, 2000, this requirement was exceeded by approximately $4.9
billion. In addition, the Credit Facility places restrictions on the amount
of consolidated debt TAP can incur. At March 31, 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
March 31, 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 $200 million of dividends from its insurance subsidiaries during
the first three months of 2000.
7. 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 is 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, the Company
believes that the net receivable from reinsurance contracts is properly
stated.
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are
not used to estimate such reserves.
The reserves carried for environmental and asbestos claims at March 31,
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.
10
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TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
7. Commitments and Contingencies, Continued
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.
8. Acquisition of the Reliance Group Holdings, Inc. Surety Business
On April 10, 2000, the Company signed a definitive agreement with Reliance
Group Holdings, Inc. (Reliance) for the $580 million purchase of the surety
business of Reliance. The purchase has been approved by the Boards of
Directors of Reliance, the Company and Citigroup, and is subject to
approval by various regulatory authorities and to customary closing
conditions. The transaction is expected to close by the end of the second
quarter.
11
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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, The Travelers Insurance Group Inc. (TIGI) completed a cash
tender offer to purchase all the outstanding shares of Class A Common Stock of
TAP at a price of $41.95 per share. After giving effect to the purchase of the
shares tendered (approximately 52 million shares) and together with the
328,020,170 shares of TAP's Class B Common Stock, which were converted by TIGI
into an equal number of shares of Class A Common Stock, TIGI beneficially owned
approximately 99% of the outstanding shares of TAP's Class A Common Stock. TIGI
also established a wholly-owned subsidiary of TIGI (Merger Sub) which effected a
merger pursuant to which TAP became a wholly-owned subsidiary of TIGI, and all
remaining shares of Class A Common Stock of TAP (other than the shares owned by
Citigroup and its subsidiaries) were converted into the right to receive $41.95
per share in cash. In connection with the merger, all previously outstanding
shares of Class A Common Stock of TAP became treasury shares and the 1,000
shares of Common Stock of Merger Sub (held by TIGI) were exchanged for 1,000
shares of Class A Common Stock of TAP. Accordingly, as of the date hereof, TAP
has outstanding 1,000 shares of Class A Common Stock (held by TIGI) and no
shares of Class B Common Stock.
On April 10, 2000, the Company signed a definitive agreement with Reliance Group
Holdings, Inc. (Reliance) for the $580 million purchase of the surety business
of Reliance. The purchase has been approved by the Boards of Directors of
Reliance, the Company and Citigroup, and is subject to approval by various
regulatory authorities and to customary closing conditions. The transaction is
expected to close by the end of the second quarter.
12
<PAGE> 13
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
(in millions, except per share data) 2000 1999
=================================================================================================
<S> <C> <C>
Revenues.................................................................. $ 2,569 $ 2,573
- -------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles....... $ 331 $ 334
Cumulative effect of changes in accounting principles..................... - (133)
- -------------------------------------------------------------------------------------------------
Net income (1)............................................................ $ 331 $ 201
- -------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles..... $ 0.86 $ 0.85
Cumulative effect of changes in accounting principles................... - (0.34)
- -------------------------------------------------------------------------------------------------
Net income.............................................................. $ 0.86 $ 0.51
- -------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding ................... 384.5 389.6
- -------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles..... $ 0.86 $ 0.85
Cumulative effect of changes in accounting principles................... - (0.34)
- -------------------------------------------------------------------------------------------------
Net income.............................................................. $ 0.86 $ 0.51
- -------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding and common stock equivalents...................... 385.4 390.5
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income includes $38 million of realized investment losses in the three
months ended March 31, 2000 and $10 million of realized investment gains in
the three months ended March 31, 1999.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND
1999
Net income was $331 million in the first quarter of 2000 compared to $201
million in the first quarter of 1999. Net income in 1999 included a charge of
$160 million related to the 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 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 adoption
of these Statements of Position has been accounted for as a cumulative effect of
a change in accounting principles.
Operating earnings, which exclude realized investment gains and losses and the
cumulative effect of changes in accounting principles in the first quarter of
1999 described above, were $369 million or $0.96 per share in the first quarter
of 2000, an increase of $45 million or $0.13 per share from $324 million or
$0.83 per share in the first 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, higher favorable prior-year reserve
development in Commercial Lines and continued expense reductions, partially
offset by higher catastrophe losses in Personal Lines.
Revenues of $2.569 billion in the first quarter of 2000 decreased $4 million
from $2.573 billion in the first quarter of 1999. This decrease was primarily
attributable to realized investment losses in the first quarter of 2000 compared
to realized investment gains in the first quarter of 1999, mostly offset by an
increase in net investment income, an increase in earned premiums due to
increased production in Personal Lines, and a slight increase in fee income.
13
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Net investment income was $548 million in the first quarter of 2000, an increase
of $45 million from the first quarter of 1999, reflecting a higher yield on
invested assets in the first quarter of 2000, partially offset by an increase in
tax-exempt securities.
Fee income in the first quarter of 2000 was $72 million, a $5 million increase
from the first quarter of 1999. National Accounts within Commercial Lines is the
primary source of fee income due to its service business. The increase in fee
income was primarily due to the shift of business mix from premium-based
products to fee-based products.
Claims and expenses of $2.125 billion in the first quarter of 2000 increased $3
million from the first quarter of 1999. The increase was primarily the result of
increased claims related to the growth in premiums, offset by a reduction in
general and administrative expenses, favorable prior-year reserve development in
Commercial Lines and a decrease in interest expense due to debt repayments.
The Company's effective federal tax rate was 25% in the first quarter of 2000
compared to 26% in the first quarter of 1999, excluding the cumulative effect of
changes in accounting principles in the first quarter of 1999. These rates were
lower than the statutory tax rate in both periods primarily due to non-taxable
investment income. The rate in the first quarter of 2000 was less than the rate
in the first quarter of 1999 primarily 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>
Three Months Ended March 31, 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and loss adjustment expense (LAE) ratio....... 72.8% 71.9%
Underwriting expense ratio......................... 27.5 28.0
Combined ratio before policyholder dividends....... 100.3 99.9
Combined ratio..................................... 100.8 100.4
- --------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................. 72.6% 71.7%
Underwriting expense ratio......................... 27.5 28.2
Combined ratio before policyholder dividends....... 100.1 99.9
Combined ratio..................................... 100.6 100.4
- --------------------------------------------------------------------------------
</TABLE>
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 first quarter statutory and GAAP combined ratios 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 quarter of 1999 would have been
99.6% and 100.9%, respectively. The increase in the first quarter of 2000
statutory combined ratio before policyholder dividends compared to the first
quarter of 1999 statutory combined ratio before policyholder dividends excluding
the above adjustment was due to higher catastrophe losses and lower favorable
prior-year reserve development in Personal Lines, offset in part by lower
weather-related losses and higher favorable prior-year reserve development in
Commercial Lines. The decrease in the first quarter of 2000 GAAP combined ratio
before policyholder dividends compared to the first quarter of 1999 GAAP
combined ratio before policyholder dividends excluding the above adjustment was
due to lower weather-related losses, higher favorable prior-year reserve
development and continued expense reductions in Commercial Lines, partially
offset by higher catastrophe losses and lower favorable prior-year reserve
development in Personal Lines.
14
<PAGE> 15
SEGMENT RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
COMMERCIAL LINES
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 1999
- --------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues............................................................. $ 1,542 $ 1,579
- --------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles.. $ 268 $ 257
Cumulative effect of changes in accounting principles................ - (133)
- --------------------------------------------------------------------------------------------
Net income (1)....................................................... $ 268 $ 124
============================================================================================
</TABLE>
(1) Commercial Lines net income includes $31 million of realized investment
losses in the three months ended March 31, 2000 and $12 million of realized
investment gains in the three months ended March 31, 1999.
Net income was $268 million in the first quarter of 2000 compared to $124
million in 1999. Net income in 1999 included a charge 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
(losses) and the cumulative effect of changes in accounting principles in the
first quarter of 1999 described above, was $299 million in the first quarter of
2000 compared to $245 million in the first quarter of 1999. This increase was
due to higher net investment income, rate increases achieved in prior quarters,
increased favorable prior-year reserve development, lower weather-related losses
and continued expense reductions. The Company continues to maintain its
discipline in the competitive commercial lines marketplace and to grow business
only where market conditions warrant.
Revenues were $1.542 billion in the first quarter of 2000 compared to $1.579
billion in the first quarter of 1999. This decrease primarily reflected realized
investment losses in the first quarter of 2000 compared to realized investment
gains in the first quarter of 1999, partially offset by higher net investment
income, earned premiums, and fee income.
Commercial Lines net written premiums in the first quarter of 2000 totaled
$1.147 billion, up $33 million from $1.114 billion in the first quarter of 1999.
This increase reflected the impact of continued favorable pricing on renewal
business and an increase in new business premiums.
Fee income in the first quarter of 2000 was $72 million compared to $67 million
in the first quarter of 1999. The $5 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 $92 million in the first
quarter of 2000 compared to $150 million in the first quarter of 1999. The $58
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.
15
<PAGE> 16
National Accounts new business was significantly higher in the first quarter of
2000 than in the first quarter of 1999, reflecting the acquisition of several
large accounts in 2000. National Accounts business retention ratio in the first
quarter of 2000 was virtually the same as that in the first quarter of 1999.
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
$487 million in the first quarter of 2000 compared to $444 million in the first
quarter of 1999. The $43 million increase reflected the favorable pricing on
renewal business and an increase in new business premiums, while still
maintaining its disciplined approach to underwriting and risk management.
Commercial Accounts new business in the first quarter of 2000 was significantly
higher than in the first quarter of 1999, reflecting the increased market
activity resulting from the pricing environment. Commercial Accounts business
retention ratio in the first quarter of 2000 was virtually the same as that in
the first quarter of 1999. 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 $387 million in the first quarter of
2000 compared to $372 million in the first quarter of 1999. The increase in
Select Accounts net written premiums primarily reflected modest 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 moderately higher in the first quarter of
2000 compared to the first quarter of 1999. New business was unusually low in
the first quarter of 1999 reflecting its selective underwriting policy in the
highly competitive marketplace. Select Accounts business retention ratio was
moderately lower in the first quarter of 2000 than in the first quarter of 1999,
reflecting a small increase in lost business due to the 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 $181 million in the first quarter of 2000 compared to $148 million in the
first quarter of 1999. This increase primarily reflected the impact of
reinsurance ceded activity and an increase in new business premiums.
Commercial Lines claims and expenses of $1.185 billion in the first quarter of
2000 were down from $1.237 billion in the first quarter of 1999. This decrease
was due to higher favorable prior-year reserve development, lower
weather-related losses and continued expense reductions in operations.
There were no catastrophe losses in both the first quarter of 2000 and 1999.
16
<PAGE> 17
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio................................... 73.5% 76.2%
Underwriting expense ratio........................... 27.9 28.5
Combined ratio before policyholder dividends......... 101.4 104.7
Combined ratio....................................... 102.3 105.7
- --------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................... 73.2% 75.8%
Underwriting expense ratio........................... 27.3 31.1
Combined ratio before policyholder dividends......... 100.5 106.9
Combined ratio....................................... 101.4 107.9
- --------------------------------------------------------------------------------
</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 decrease in the first quarter of 2000 statutory and GAAP combined ratios
before policyholder dividends compared to the first quarter of 1999 statutory
and GAAP combined ratios before policyholder dividends was due to higher
favorable prior-year reserve development, lower weather-related losses and
continued expense reductions.
PERSONAL LINES
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 1999
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues................................................... $1,028 $ 994
Net income (1)............................................. $ 89 $ 107
- --------------------------------------------------------------------------------
</TABLE>
(1) Personal Lines net income includes $7 million and $2 million of realized
investment losses in the three months ended March 31, 2000 and 1999,
respectively.
Personal Lines operating income, which excludes realized investment gains and
losses, was $96 million in the first quarter of 2000 compared to $109 million in
the first quarter of 1999. The 2000 decrease is a result of higher catastrophe
losses and lower favorable prior-year reserve development, offset in part by
higher net investment income.
Revenues were $1.028 billion in the first quarter of 2000 compared to $994
million in the first quarter of 1999. This increase primarily reflected higher
net investment income and an increase in earned premiums.
Net written premiums in the first quarter of 2000 were $890 million compared to
$912 million (excluding $72 million due to an adjustment associated with the
termination of a quota share reinsurance arrangement) in the first quarter of
1999. This decrease reflected planned reductions in the TRAVELERS SECURE(R) auto
and homeowner business, a mandated rate decrease in New Jersey and continued
emphasis on disciplined underwriting and risk management, offset in part by
growth in affinity group marketing.
Personal Lines claims and expenses of $901 million in the first quarter of 2000
increased $62 million from the first quarter of 1999. This increase was
primarily the result of higher losses associated with the growth in earned
premiums and related claim volumes, higher catastrophe losses and lower
favorable prior-year reserve development.
17
<PAGE> 18
Catastrophe losses, net of taxes and reinsurance, were $30 million in the first
quarter of 2000 compared to $8 million in the first quarter of 1999. The 2000
catastrophe losses were due to hailstorms in Louisiana and Texas. The 1999
catastrophe losses were due to a wind and ice storm in the Midwest and the
Northeast.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
STATUTORY:
Loss and LAE ratio..................................... 72.1% 66.6%
Underwriting expense ratio............................. 27.0 27.4
Combined ratio......................................... 99.1 94.0
- --------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio..................................... 71.9% 66.6%
Underwriting expense ratio............................. 27.7 24.8
Combined ratio......................................... 99.6 91.4
- --------------------------------------------------------------------------------
</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 first quarter statutory and GAAP combined ratios for Personal Lines
include an adjustment associated with the termination of a quota share
reinsurance arrangement. Excluding this adjustment, the statutory and GAAP
combined ratios for the first quarter of 1999 would have been 93.2% and 93.4%,
respectively. The increase in the first quarter of 2000 statutory and GAAP
combined ratios compared to the first quarter of 1999 excluding the above
adjustment, was primarily due to higher catastrophe losses and lower favorable
prior-year reserve development.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 1999
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Revenues................................................... $ (1) $ 0
Net loss................................................... $ (26) $ (30)
- --------------------------------------------------------------------------------
</TABLE>
The primary component of net loss for the first quarter of 2000 and 1999 was
after-tax interest expense of $22 million and $26 million, respectively.
Interest expense decreased in the first quarter of 2000 compared to the first
quarter 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 March 31, 2000, approximately 21% of the
net aggregate reserve (i.e., approximately $136 million) consists of case
reserve for resolved claims. The balance, approximately 79% of the net aggregate
reserve (i.e., approximately $500 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.
18
<PAGE> 19
The following table displays activity for environmental losses and loss expenses
and reserves for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Environmental Losses
Three Months Ended March 31, 2000 1999
- --------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Beginning reserves:
Direct ...................................... $ 801 $ 928
Ceded ....................................... (125) (96)
- --------------------------------------------------------------------------------
Net ....................................... 676 832
Incurred losses and loss expenses:
Direct ...................................... 16 26
Ceded ....................................... -- (12)
Losses paid:
Direct ...................................... 63 69
Ceded ....................................... (7) (21)
- --------------------------------------------------------------------------------
Ending reserves:
Direct ...................................... 754 885
Ceded ....................................... (118) (87)
- --------------------------------------------------------------------------------
Net ....................................... $ 636 $ 798
================================================================================
</TABLE>
ASBESTOS CLAIMS
At March 31, 2000, approximately 13% of the net aggregate reserve (i.e.,
approximately $107 million) is for pending asbestos claims. The balance,
approximately 87% (i.e., approximately $724 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending asbestos claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for asbestos losses and loss expenses and reserves for the
three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Asbestos Losses
Three Months Ended March 31, 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 .................................. 25 54
Ceded ................................... (12) (39)
Losses paid:
Direct .................................. 37 58
Ceded ................................... (28) (79)
- --------------------------------------------------------------------------------
Ending reserves:
Direct .................................. 1,038 1,248
Ceded ................................... (207) (226)
- --------------------------------------------------------------------------------
Net ................................... $ 831 $ 1,022
================================================================================
</TABLE>
19
<PAGE> 20
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 March 31, 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 March 31, 2000, approximately 20% of the net aggregate reserve (i.e.,
approximately $174 million) is for pending CIOTA claims. The balance,
approximately 80% (i.e., approximately $688 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending CIOTA claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for CIOTA losses and loss expenses and reserves for the three
months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
CIOTA Losses
Three Months Ended March 31, 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 .................................. 3 (16)
Ceded ................................... 2 15
Losses paid:
Direct .................................. 14 32
Ceded ................................... -- (26)
Ending reserves:
Direct .................................. 1,173 1,298
Ceded ................................... (311) (351)
- --------------------------------------------------------------------------------
Net ................................... $ 862 $ 947
================================================================================
</TABLE>
20
<PAGE> 21
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.
21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning sixteen purported class actions and one multi-party
suit, with substantially the same allegations, commenced in various courts
against certain subsidiaries of the Company, dozens of other insurers and the
National Council on Compensation Insurance ("NCCI"), see the description that
appears in the second paragraph under the caption "Legal Proceedings" beginning
on page 44 of the Annual Report on Form 10-K of TAP 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. In February 2000, the
Alabama court granted the defendants' motion for partial dismissal, while the
Michigan court denied a similar motion. In March 2000, the appellate courts in
Texas and Michigan dismissed the defendants' interlocutory appeals, and
plaintiffs sought leave to dismiss their class claims in New York. In April
2000, plaintiffs appealed the New York trial court's dismissal of all claims
with prejudice.
On March 21, 2000, Citigroup Inc. and TAP announced that they had entered into a
Merger Agreement (the "Merger Agreement"), pursuant to which TIGI, a wholly
owned subsidiary of Citigroup, purchased the publicly held shares of TAP in a
Tender Offer (the "Tender Offer"). The Tender Offer was followed by a merger
pursuant to which TAP became a wholly owned subsidiary of TIGI (the "Merger").
Following the announcement of the Tender Offer, certain putative stockholders of
TAP filed thirteen lawsuits in the Delaware Chancery Court for New Castle County
against Citigroup, TAP and TAP's board of directors, captioned Civil Action No.
17902, Vogel v. Travelers, et al., filed March 21, 2000; Civil Action No. 17903,
Susser v. Travelers, et al., filed March 21, 2000; Civil Action No. 17905, Leone
v. Travelers, et al., filed March 21, 2000; Civil Action No. 17906, Schore v.
Travelers, et al., filed March 21, 2000; Civil Action No. 17907, Crandon Capital
Partners v. Lipp, et al., filed March 21, 2000; Civil Action No. 17908, Ronconi
v. Bialkin, et al., filed March 21, 2000; Civil Action No. 17909, Wycher v.
Bialkin, et al., filed March 21, 2000; Civil Action No. 17910, Geo-Centers, Inc.
v. Bialkin, et al., filed March 21, 2000; Civil Action No. 17911, Welch v.
Travelers, et al., filed March 21, 2000; Civil Action No. 17919, Rodman
Insurance Agency, Inc. v. Travelers, et al., filed March 23, 2000; Civil Action
No. 17920, Lewis v. Travelers, et al., filed March 23, 2000; Civil Action No.
17929, Settos v. Travelers, et al., filed March 29, 2000; and Civil Action No.
17956, Wolgin v. Travelers, et al., filed March 31, 2000. All of the cases were
ultimately consolidated by Court Order on April 6, 2000, under Civil Action No.
17902 NC, In Re Travelers Property Casualty Corp. Shareholders Litigation (the
"Action"). The complaint in the Action alleges, among other things, that the
consideration to be paid in the Tender Offer was inadequate and that various
duties had been violated by Citigroup, TAP or the Special Committee of TAP's
directors appointed to evaluate the transaction. The complaint in the Action
seeks, among other things, to rescind the Merger, to obtain compensatory damages
in an unspecified amount and to obtain an award of plaintiffs attorneys' fees
and other litigation expenses.
22
<PAGE> 23
Subsequent to the filing of the complaint in the Action, the Tender Offer and
Merger closed and the parties have entered into a Memorandum of Understanding
(the "Memorandum") to settle the Action, which grants a full release of the
defendants and certain related or affiliated persons and extinguishes all claims
by or on behalf of any member of the class in the Action relating to the
transactions contemplated by the Merger Agreement, including the Tender Offer
and the Merger. The Memorandum also provides for the payment of up to $4,400,000
in attorneys fees to counsel for the plaintiffs.
The parties are currently engaged in confirmatory discovery with respect to the
settlement. Following the completion of discovery, the parties will prepare
definitive settlement documents, including, among other things, a stipulation of
settlement and notice to stockholders, which will be submitted to and reviewed
by the Court. The Court will subsequently hold a settlement hearing to consider
approval of the settlement. There can be no assurance that such approval will be
obtained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
See Exhibit Index.
(b) REPORTS ON FORM 8-K:
On February 29, 2000, TAP filed a Current Report on Form 8-K, dated
February 29, 2000, reporting under Item 5 thereof the issuance of a
press release announcing that it had signed a letter of intent to
acquire the surety business of Reliance Group Holdings, Inc.
On March 21, 2000, TAP filed a Current Report on Form 8-K, dated March
21, 2000, reporting under Item 5 thereof the issuance of a press
release announcing that TAP's Board of Directors approved a cash
tender offer by Citigroup for all the publicly-held shares of the
Company's Class A Common Stock at a price of $41.50 per share.
No other reports on Form 8-K were filed during the first quarter of
2000.
23
<PAGE> 24
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, 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).
3.03 (+) Certificate of Ownership and Merger of TAP Merger Sub Inc. with
and into Travelers Property Casualty Corp. dated April 20, 2000.
12.01(+) Computation of Ratio of Earnings to Fixed Charges.
27.01(+) Financial Data Schedule.
99.01(+) The second paragraph under the caption "Legal Proceedings"
beginning on page 44 of the Annual Report on Form 10-K of the
Company for the year ended December 31, 1999 (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.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRAVELERS PROPERTY CASUALTY CORP.
Date: May 12, 2000 By /s/ William P. Hannon
-----------------------------------
William P. Hannon
Chief Financial Officer
(Principal Financial Officer)
Date: May 12, 2000 By /s/ Douglas K. Russell
-----------------------------------
Douglas K. Russell
Chief Accounting Officer
(Principal Accounting Officer)
25
<PAGE> 1
Exhibit 3.03
CERTIFICATE OF OWNERSHIP AND MERGER
OF
TAP MERGER SUB INC.
WITH AND INTO
TRAVELERS PROPERTY CASUALTY CORP.
----------------------------------
Pursuant to Section 253 of the General
Corporation Law of the State of Delaware
----------------------------------
TAP Merger Sub Inc. (the "Company"), pursuant to Section 253 of the
General Corporation Law of the State of Delaware (the "DGCL"), hereby certifies
as follows:
FIRST: That the name and state of incorporation of each of the
constituent corporations to the merger are as follows:
<TABLE>
<CAPTION>
Name State of Incorporation
---- ----------------------
<S> <C>
TAP Merger Sub Inc. Delaware
Travelers Property Casualty Corp. Delaware
</TABLE>
SECOND: That the Company owns more than 90% of the outstanding
shares of each of the Class A common stock, par value $.01 per share, and the
Class B common stock, par value $.01 per share, of Travelers Property Casualty
Corp., which are the only outstanding classes of capital stock of Travelers
Property Casualty Corp.;
THIRD: That the directors of the Company, by written consent dated
April 20, 2000, pursuant to Section 141(f) of the DGCL, duly adopted resolutions
authorizing the merger of the Company with and into Travelers Property Casualty
Corp. pursuant to Section 253 of the DGCL (the "Merger"). A true copy of such
resolutions is annexed hereto as Exhibit A. Such resolutions have not been
modified or rescinded and are in full force and effect on the date hereof.
FOURTH: That the stockholders of the Company, by written consent
dated April 20, 2000, pursuant to Section 228 of the DGCL, have approved the
merger of the Company with and into Travelers Property Casualty Corp. pursuant
to Section 253 of the DGCL.
<PAGE> 2
FIFTH: That the Company will be merged with and into Travelers
Property Casualty Corp., with Travelers Property Casualty Corp. as the
corporation surviving the Merger.
SIXTH: That in accordance with Section 103(d) of the DGCL, the
Merger shall be effective upon the filing of this Certificate of Ownership and
Merger with the Secretary of State of the State of Delaware.
2
<PAGE> 3
IN WITNESS WHEREOF, TAP Merger Sub Inc. has caused this Certificate
of Ownership and Merger to be executed in its corporate name this 20th day of
April, 2000.
TAP MERGER SUB INC.
By: /s/ James M. Michener
-------------------------------
Name: James M. Michener
Title: Secretary
<PAGE> 1
Exhibit 12.01
Travelers Property Casualty Corp. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In millions of dollars, except for ratio)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Income before federal income taxes and cumulative
effect of changes in accounting principles $ 444 $ 451
Interest 34 40
Portion of rentals deemed to be interest 12 11
------ -----
Earnings available for fixed charges $ 490 $ 502
====== =====
Fixed charges:
Interest $ 34 $ 40
Portion of rentals deemed to be interest 12 11
------ -----
Total fixed charges $ 46 $ 51
====== =====
Ratio of earnings to fixed charges 10.65x 9.84x
====== =====
</TABLE>
The ratio of earnings to fixed charges is computed by dividing income before
federal income taxes and cumulative effect of changes in accounting principles
and fixed charges by the fixed charges. For purposes of this ratio, fixed
charges consist of that portion of rentals deemed representative of the
appropriate interest factor.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TRAVELERS PROPERTY CASUALTY CORP.'S FINANCIAL STATEMENTS AS OF MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 25,524
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,185
<MORTGAGE> 488
<REAL-ESTATE> 47
<TOTAL-INVEST> 30,926
<CASH> 118
<RECOVER-REINSURE> 9,438
<DEFERRED-ACQUISITION> 527
<TOTAL-ASSETS> 51,654
<POLICY-LOSSES> 28,846
<UNEARNED-PREMIUMS> 4,374
<POLICY-OTHER> 2,085
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 850
900
0
<COMMON> 4
<OTHER-SE> 9,304
<TOTAL-LIABILITY-AND-EQUITY> 51,654
1,989
<INVESTMENT-INCOME> 548
<INVESTMENT-GAINS> (59)
<OTHER-INCOME> 91
<BENEFITS> 1,496
<UNDERWRITING-AMORTIZATION> 300
<UNDERWRITING-OTHER> 329
<INCOME-PRETAX> 444
<INCOME-TAX> 113
<INCOME-CONTINUING> 331
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 331
<EPS-BASIC> 0.86
<EPS-DILUTED> 0.86
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
Exhibit 99.01
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.