<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
_____ THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 OCTOBER 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
<TABLE>
<CAPTION>
Part I - Financial Information
Item 1. Financial Statements: Page No.
--------
<S> <C>
Condensed Consolidated Statement of Income (Unaudited) -
Three and Nine Months Ended September 30, 2000 and 1999 3
Condensed Consolidated Balance Sheet - September 30, 2000 (Unaudited)
and December 31, 1999 4
Condensed Consolidated Statement of Changes in
Stockholder's Equity (Unaudited) -
Nine Months Ended September 30, 2000 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended September 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 13
Part II - Other Information
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 27
Exhibit Index 28
Signatures 29
</TABLE>
2
<PAGE> 3
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------ ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Premiums $2,194 $ 2,026 $ 6,224 $ 5,997
Net investment income 530 523 1,632 1,536
Fee income 78 70 233 204
Realized investment gains (losses) 36 (17) (18) 30
Other revenues 26 17 68 59
------ ------- ------- -------
Total revenues 2,864 2,619 8,139 7,826
------ ------- ------- -------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 1,702 1,591 4,767 4,551
Amortization of deferred acquisition costs 338 326 948 951
Interest expense 34 38 101 118
General and administrative expenses 227 234 818 845
------ ------- ------- -------
Total claims and expenses 2,301 2,189 6,634 6,465
------ ------- ------- -------
Income before federal income taxes and cumulative
effect of changes in accounting principles 563 430 1,505 1,361
Federal income taxes 158 110 404 353
------ ------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 405 320 1,101 1,008
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 $ 405 $ 320 $ 1,101 $ 875
====== ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except shares)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED)
----------- ------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $25,043 and $25,711) $25,190 $ 25,305
Equity securities, at fair value (cost, $1,089 and $1,166) 1,082 1,261
Mortgage loans 301 464
Real estate held for sale 47 50
Short-term securities 2,396 1,535
Other investments 1,754 1,221
------- --------
Total investments 30,770 29,836
------- --------
Cash 188 55
Investment income accrued 393 385
Premium balances receivable 2,948 2,738
Reinsurance recoverables 9,540 9,424
Deferred acquisition costs 601 525
Deferred federal income taxes 1,268 1,552
Contractholder receivables 2,067 2,059
Goodwill 2,332 1,390
Other assets 2,918 2,293
------- --------
Total assets $53,025 $ 50,257
======= ========
LIABILITIES
Claims and claim adjustment expense reserves $28,645 $ 29,003
Unearned premium reserves 4,807 4,274
Contractholder payables 2,067 2,059
Long-term debt 850 850
Other liabilities 4,664 4,230
------- --------
Total liabilities 41,033 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 5,072 4,133
Accumulated other changes in equity from nonowner sources 86 (202)
Treasury stock, at cost (shares, 0 and 13,159,386) -- (451)
Unearned compensation -- (22)
------- --------
Total stockholder's equity 11,092 8,941
------- --------
Total liabilities and stockholder's equity $53,025 $ 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)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 2000
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 1,101
Dividends (162)
--------
Balance, end of period 5,072
--------
ACCUMULATED OTHER CHANGES IN EQUITY
FROM NONOWNER SOURCES, NET OF TAX
Balance, beginning of period (202)
Net unrealized gain on securities 293
Foreign currency translation adjustments (5)
--------
Balance, end of period 86
--------
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 $ 11,092 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 Nine Months Ended September 30, 2000 1999
------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 572 $ 389
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,298 1,385
Mortgage loans 273 63
Proceeds from sales of investments
Fixed maturities 9,346 7,086
Equity securities 1,951 603
Real estate held for sale 19 5
Purchase of investments
Fixed maturities (9,887) (7,694)
Equity securities (1,976) (687)
Mortgage loans (40) (40)
Investment in real estate (45) (16)
Short-term securities, (purchases) sales, net (920) (558)
Other investments, net (470) (351)
Securities transactions in course of settlement 541 216
Business acquisitions (290) --
------- -------
Net cash provided by (used in) investing activities (200) 12
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt -- (200)
Purchase of treasury stock (77) (66)
Dividend to TIGI (154) (123)
Dividend to minority shareholders (8) (23)
------- -------
Net cash used in financing activities (239) (412)
------- -------
Net increase (decrease) in cash 133 (11)
Cash at beginning of period 55 62
------- -------
Cash at end of period $ 188 $ 51
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 231 $ 261
Interest paid $ 86 $ 105
======= =======
</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 September 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 nine months ended September 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 will adopt FAS 133, as amended, as of January 1,
2001.
The Company has estimated that the pro forma cumulative effect of FAS 133,
as amended, at September 30, 2000 would not be significant. For its
estimate, the Company used holdings and applied rates available at the
balance sheet date, and did not anticipate future guidance or changes in
guidance on matters not yet addressed or not yet concluded by the FASB on
implementation matters related to insurance and insurance-related
contracts. The Company anticipates a significant and continuing increase in
the complexity of the accounting and the recordkeeping requirements for
hedging activities and for insurance-related contracts and may make changes
to its risk management strategies. The Company does not expect that FAS
133, as amended, will have a significant impact on results of operations,
financial condition or liquidity in future periods.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, a replacement of FASB Statement
No. 125" (FAS 140). Provisions of FAS 140 primarily relating to transfers
of financial assets and securitizations that differ from provisions of
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (FAS 125) are effective for transfers
taking place after March 31, 2001. Special purpose entities (SPEs) used in
securitizations that are currently qualifying SPEs under FAS 125 will
continue to be treated as qualifying SPEs so long as they issue no new
beneficial interests and accept no new asset transfers after March 31,
2001, other than transfers committed to prior to that date. Under FAS 140
qualifying SPEs are not consolidated by the transferor. It is not expected
that there will be a significant effect on results of operations, financial
condition or liquidity relating to a change in consolidation status for
existing qualifying SPEs under FAS 140. FAS 140 also amends the accounting
for collateral and requires new disclosures for collateral,
securitizations, and retained interests in securitizations. These
provisions are effective for financial statements for fiscal years ending
after December 15, 2000. The accounting for collateral, as amended,
requires collateral previously recorded under FAS 125 to be derecognized in
financial statements for all years presented, and revises the criteria for
reclassifying collateral pledged to an encumbered account. The change in
accounting for collateral is not expected to have a significant effect on
results of operations, financial condition or liquidity.
8
<PAGE> 9
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
3. Segment Information
<TABLE>
<CAPTION>
TOTAL
(at and for the three months COMMERCIAL PERSONAL REPORTABLE
ended September 30, in millions) LINES LINES SEGMENTS
---------- -------- ----------
<S> <C> <C> <C>
2000
Revenues
Premiums $ 1,265 $ 929 $ 2,194
Net investment income 418 111 529
Fee income 78 -- 78
Realized investment gains 29 7 36
Other 8 18 26
-------- ------- --------
Total revenues $ 1,798 $ 1,065 $ 2,863
======== ======= ========
Operating income (1) $ 331 $ 77 $ 408
Assets 44,751 8,047 52,798
-------- ------- --------
1999
Revenues
Premiums $ 1,110 $ 916 $ 2,026
Net investment income 420 102 522
Fee income 70 -- 70
Realized investment losses (8) (9) (17)
Other 3 13 16
-------- ------- --------
Total revenues $ 1,595 $ 1,022 $ 2,617
======== ======= ========
Operating income (1) $ 321 $ 37 $ 358
Assets 42,999 7,579 50,578
-------- ------- --------
</TABLE>
(1) Operating income excludes realized investment gains (losses) and is
reflected net of tax.
9
<PAGE> 10
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
3. Segment Information, Continued
<TABLE>
<CAPTION>
TOTAL
(for the nine months ended COMMERCIAL PERSONAL REPORTABLE
September 30, in millions) LINES LINES SEGMENTS
---------- -------- ----------
<S> <C> <C> <C>
2000
Revenues
Premiums $ 3,465 $ 2,759 $ 6,224
Net investment income 1,292 338 1,630
Fee income 233 -- 233
Realized investment losses (7) (11) (18)
Other 16 52 68
------- ------- -------
Total revenues $ 4,999 $ 3,138 $ 8,137
======= ======= =======
Operating income (1) $ 922 $ 266 $ 1,188
======= ======= =======
1999
Revenues
Premiums $ 3,284 $ 2,713 $ 5,997
Net investment income 1,243 291 1,534
Fee income 204 -- 204
Realized investment gains (losses) 44 (14) 30
Other 17 42 59
------- ------- -------
Total revenues $ 4,792 $ 3,032 $ 7,824
======= ======= =======
Operating income (1) $ 823 $ 249 $ 1,072
======= ======= =======
</TABLE>
(1) Operating income excludes realized investment gains (losses) and the
cumulative effect of changes in accounting principles, and is reflected net
of tax.
BUSINESS SEGMENT RECONCILIATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in millions) 2000 1999 2000 1999
----- ----- ------- -------
<S> <C> <C> <C> <C>
INCOME RECONCILIATION, NET OF TAX
Total operating income for reportable segments $ 408 $ 358 $ 1,188 $ 1,072
Other operating loss (1) (25) (26) (75) (83)
Realized investment gains (losses) 22 (12) (12) 19
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 $ 405 $ 320 $ 1,101 $ 875
===== ===== ======= =======
</TABLE>
(1) The primary component of the other operating loss is after-tax interest
expense of $21 million and $25 million for the three months ended September
30, 2000 and 1999, respectively, and $65 million and $77 million for the
nine months ended September 30, 2000 and 1999, respectively.
10
<PAGE> 11
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
4. Changes in Equity from Nonowner Sources
The Company's total changes in equity from nonowner sources are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in millions) 2000 1999 2000 1999
----- ----- ------- -----
<S> <C> <C> <C> <C>
Net income $ 405 $ 320 $ 1,101 $ 875
Net unrealized gain (loss) on securities 182 (210) 293 (947)
Foreign currency translation adjustments (4) 5 (5) 6
----- ----- ------- -----
Total changes in equity from nonowner sources $ 583 $ 115 $ 1,389 $ (66)
===== ===== ======= =====
</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
September 30, 2000, this requirement was exceeded by approximately $6.4
billion. In addition, the Credit Facility places restrictions on the amount
of consolidated debt TAP can incur. At September 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
September 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 $525 million of dividends from its insurance subsidiaries during
the first nine months of 2000. In addition, on October 31, 2000, the
Travelers Indemnity Company, an insurance subsidiary of TAP, declared a
$275 million dividend to be paid to TAP on November 15, 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.
11
<PAGE> 12
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed 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 September 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 other 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. Acquisitions
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. In connection with the acquisition, the Company entered
into a reinsurance arrangement for pre-existing business, and the resulting
net cash outlay for this transaction was approximately $278 million. This
transaction included the acquisition of an intangible asset of
approximately $450 million, which is being amortized over 15 years.
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.
In the third quarter of 2000, the Company purchased the renewal rights to a
portion of Reliance Group Holdings, Inc.'s commercial lines middle-market
book of business. The Company also acquired the renewal rights to Frontier
Insurance Group, Inc.'s environmental, excess and surplus lines casualty
businesses and certain classes of surety business. The final purchase price
for each of these transactions is dependent on the level of business
renewed by the Company.
12
<PAGE> 13
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
September 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.
In the third quarter of 2000, the Company purchased the renewal rights to a
portion of Reliance Group Holdings, Inc.'s commercial lines middle-market book
of business (Reliance Middle Market). The Company also acquired the renewal
rights to Frontier Insurance Group, Inc.'s (Frontier) environmental, excess and
surplus lines casualty businesses and certain classes of surety business.
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS OF OPERATIONS THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in millions) 2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues .......................................................... $ 2,864 $ 2,619 $ 8,139 $ 7,826
------- ------- ------- -------
Income before cumulative effect of changes in accounting principles $ 405 $ 320 $ 1,101 $ 1,008
Cumulative effect of changes in accounting principles ............. -- -- -- (133)
------- ------- ------- -------
Net income (1) .................................................... $ 405 $ 320 $ 1,101 $ 875
------- ------- ------- -------
</TABLE>
(1) Net income includes $22 million of realized investment gains in the three
months ended September 30, 2000, $12 million of realized investment losses
in the three months ended September 30, 1999, $12 million of realized
investment losses in the nine months ended September 30, 2000 and $19
million of realized investment gains in the nine months ended September 30,
1999.
13
<PAGE> 14
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
AND 1999
Operating earnings, which exclude realized investment gains and losses, were
$383 million in the third quarter of 2000, an increase of $51 million from $332
million in the third quarter of 1999. The increase in operating earnings was
primarily the result of lower catastrophe losses, a $33 million charge taken in
the third quarter of 1999 related to curtailing the sale of TRAVELERS SECURE(R)
products, Commercial Lines rate increases achieved in prior quarters and
increased fee income, partially offset by increased loss trends and lower
favorable prior-year reserve development in both Commercial Lines and Personal
Lines.
Revenues of $2.864 billion in the third quarter of 2000 increased $245 million
from $2.619 billion in the third quarter of 1999. This increase was primarily
attributable to a $168 million increase in earned premiums and $36 million in
realized investment gains in the third quarter of 2000 compared to $17 million
in realized investment losses in the third quarter of 1999. The increase in
earned premiums was primarily due to Commercial Lines rate increases achieved in
prior quarters, the impact of the ongoing business associated with the Reliance
Surety acquisition which closed in the second quarter of 2000 and increased
production in Personal Lines.
Net investment income was $530 million in the third quarter of 2000, an increase
of $7 million from $523 million in the third quarter of 1999, reflecting a
higher yield.
Fee income in the third quarter of 2000 was $78 million, a $8 million increase
from the third 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 $2.301 billion in the third quarter of 2000 increased
$112 million from the third quarter of 1999. The increase was primarily the
result of increased loss trends, lower favorable prior-year reserve development
and increased claims related to the growth in premiums, including the impact of
the ongoing business associated with the Reliance Surety acquisition, partially
offset by lower catastrophe losses, the 1999 charge related to curtailing the
sale of TRAVELERS SECURE(R) products, reduction in general and administrative
expenses and a decrease in interest expense due to debt repayments.
The Company's effective federal tax rate was 28% in the third quarter of 2000
compared to 26% in the third 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 September 30, 2000 1999
---- ----
STATUTORY:
<S> <C> <C>
Loss and loss adjustment expense (LAE) ratio 77.4% 80.5%
Underwriting expense ratio ................. 25.9 29.2
Combined ratio before policyholder dividends 103.3 109.7
Combined ratio ............................. 103.2 110.4
GAAP:
Loss and LAE ratio ......................... 75.8% 75.8%
Underwriting expense ratio ................. 22.3 25.4
Combined ratio before policyholder dividends 98.1 101.2
Combined ratio ............................. 98.0 101.9
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
14
<PAGE> 15
The third quarter of 1999 statutory combined ratio before policyholder dividends
includes the treatment, on a statutory basis only, of a commutation of an
asbestos liability to an insured. Excluding the commutation, the statutory
combined ratio before policyholder dividends was 104.5%.
The decrease in the third quarter of 2000 statutory and GAAP combined ratios
before policyholder dividends compared to the third quarter of 1999 statutory
and GAAP combined ratios before policyholder dividends, excluding the
commutation adjustment, was due to lower catastrophe losses, the TRAVELERS
SECURE(R) charge taken in the third quarter of 1999, premium growth related to
Commercial Lines rate increases as well as the impact of the ongoing business
associated with the Reliance Surety acquisition and the purchase of renewal
rights for Reliance Middle Market and Frontier business, and higher fee income.
This was partially offset by increased loss trends, lower favorable prior-year
reserve development and a disproportionately smaller increase in expenses
associated with the growth in premiums.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
AND 1999
Net income was $1.101 billion in the first nine months of 2000 compared to $875
million in the first nine 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 nine months of 1999 described
above, operating income was $1.113 billion for the nine months ended September
30, 2000 compared to $989 million for the nine months ended September 30, 1999.
The increase in operating income in the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999 was due to Commercial Lines
rate increases, higher net investment income, lower catastrophe losses, the 1999
charge related to curtailing the sale of TRAVELERS SECURE(R) products and higher
fee income, partially offset by increased loss trends and lower favorable
prior-year reserve development.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 1999
---- ----
<S> <C> <C>
STATUTORY:
Loss and LAE ratio........................................... 75.0% 75.0%
Underwriting expense ratio................................... 27.2 28.5
Combined ratio before policyholder dividends................. 102.2 103.5
Combined ratio............................................... 102.5 104.0
GAAP:
Loss and LAE ratio........................................... 74.4% 73.3%
Underwriting expense ratio................................... 24.9 27.4
Combined ratio before policyholder dividends................. 99.3 100.7
Combined ratio............................................... 99.6 101.2
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
15
<PAGE> 16
The first nine months of 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
nine months of 2000 would have been 101.9% and 99.8%, respectively. The first
nine months of 1999 statutory combined ratio includes the treatment, on a
statutory basis only, of a commutation of an asbestos liability to an insured.
In addition, the first nine months of 1999 statutory and GAAP combined ratios
before policyholder dividends include an adjustment in Personal Lines associated
with the termination of a quota share reinsurance arrangement. Excluding these
items, the statutory and GAAP combined ratios before policyholder dividends for
the first nine months of 1999 would have been 101.6% and 101.0%, respectively.
The increase in the first nine months of 2000 statutory combined ratio before
policyholder dividends, excluding the Reliance Surety adjustment, compared to
the first nine months of 1999 statutory combined ratio before policyholder
dividends, excluding the commutation and quota share reinsurance adjustments,
was due to increased loss trends, lower favorable prior-year reserve development
and a disproportionately smaller increase in expenses associated with the growth
in premiums. This was offset in part by premium growth related to Commercial
Lines rate increases as well as the impact of the ongoing business associated
with the Reliance Surety acquisition and the purchase of renewal rights for
Reliance Middle Market and Frontier business, lower catastrophe losses and the
1999 charge related to curtailing the sale of TRAVELERS SECURE(R) products. The
decrease in the first nine months of 2000 GAAP combined ratio before
policyholder dividends, excluding the Reliance Surety adjustment, compared to
the first nine months of 1999 GAAP combined ratio before policyholder dividends,
excluding the quota share reinsurance adjustment, was due to premium growth
related to Commercial Lines rate increases as well as the impact of the ongoing
business associated with the Reliance Surety acquisition and the purchase of
renewal rights for Reliance Middle Market and Frontier business, lower
catastrophe losses and the 1999 charge related to curtailing the sale of
TRAVELERS SECURE(R) products. This was partially offset by increased loss
trends, lower favorable prior-year reserve development and a disproportionately
smaller increase in expenses associated with the growth in premiums.
The other consolidated operating trends for the nine months ended September 30,
2000 and 1999 are substantially the same as noted above for the quarters then
ended.
SEGMENT RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
COMMERCIAL LINES
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 1999
------- ------
(in millions)
<S> <C> <C>
Revenues......................................................... $ 1,798 $ 1,595
Net income (1)................................................... $ 349 $ 315
</TABLE>
(1) Commercial Lines net income includes $18 million of realized investment
gains in the three months ended September 30, 2000 and $6 million of
realized investment losses in the three months ended September 30, 1999.
Commercial Lines operating income, which excludes realized investment gains and
losses, was $331 million in the third quarter of 2000 compared to $321 million
in the third quarter of 1999. The improvement in operating income for the third
quarter of 2000 over the third quarter of 1999 reflected rate increases achieved
in previous quarters, lower catastrophe losses and higher fee income, partially
offset by increased loss trends and lower favorable prior-year reserve
development. Results for the third quarter of 2000 and 1999 reflect a benefit of
$43 million (after-tax) and $58 million (after-tax), respectively, resulting
from legislative action in the states of New York and Pennsylvania that changed
the manner in which these states finance their workers' compensation
second-injury funds. The Company continues to maintain its discipline in the
competitive commercial lines marketplace and to grow business only where market
conditions warrant.
16
<PAGE> 17
Revenues were $1.798 billion in the third quarter of 2000 compared to $1.595
billion in the third quarter of 1999. This increase reflected higher earned
premiums, realized investment gains in the third quarter of 2000 compared to
realized investment losses in the third quarter of 1999 and higher fee income.
The increase in earned premiums was primarily due to rate increases achieved in
previous quarters and the ongoing business associated with the Reliance Surety
acquisition.
Commercial Lines net written premiums in the third quarter of 2000 totaled
$1.351 billion, up $219 million from $1.132 billion in the third quarter of
1999. This increase was primarily due to the impact of the ongoing business
associated with the Reliance Surety acquisition, the new premiums associated
with the acquisition of the renewal rights for the Reliance Middle Market and
Frontier businesses and continued favorable pricing on renewal business.
Fee income in the third quarter of 2000 was $78 million compared to $70 million
in the third quarter of 1999. The $8 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 $132 million in the third
quarter of 2000 compared to $149 million in the third quarter of 1999. The $17
million decrease was primarily due to the shift of business mix from
premium-based products to fee-based products.
National Accounts new business was significantly lower in the third quarter of
2000 than in the third quarter of 1999, reflecting the Company's continued
disciplined approach to underwriting and risk management. National Accounts
business retention ratio was moderately lower in the third quarter of 2000 than
in the third 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
$563 million in the third quarter of 2000 compared to $470 million in the third
quarter of 1999. The increase was primarily due to the business associated with
the acquisition of the renewal rights for the Reliance Middle Market business
and continued favorable pricing on renewal business.
Commercial Accounts new business in the third quarter of 2000 was significantly
higher than in the third quarter of 1999, reflecting the impact of the Reliance
Middle Market business. Commercial Accounts business retention ratio was
significantly lower in the third quarter of 2000 than in the third 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 $382 million in the third quarter of
2000 compared to $355 million in the third quarter of 1999, reflecting 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 third quarter of
2000 compared to the third quarter of 1999. New business was unusually low in
the third 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 third quarter of 2000 than in the third quarter of
1999, reflecting an increase in lost business due to the renewal price increases
in 2000.
17
<PAGE> 18
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 $274 million in the third quarter of 2000 compared to $158 million in the
third quarter of 1999. This increase was primarily due to the impact of the
ongoing business associated with the Reliance Surety acquisition and the new
business associated with the acquisition of the renewal rights for Frontier
business.
Commercial Lines claims and expenses of $1.311 billion in the third quarter of
2000 were up from $1.164 billion in the third quarter of 1999. The increase was
primarily due to increased loss trends, lower favorable prior-year reserve
development and higher losses associated with the growth in premiums and related
claim volume, partially offset by lower catastrophe losses.
There were no catastrophe losses in the third quarter of 2000. Catastrophe
losses, net of taxes and reinsurance, were $17 million in the third quarter of
1999, primarily due to Hurricane Floyd.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 1999
----- -----
<S> <C> <C>
STATUTORY:
Loss and LAE ratio........................................... 77.9% 83.7%
Underwriting expense ratio................................... 25.9 30.9
Combined ratio before policyholder dividends................. 103.8 114.6
Combined ratio............................................... 103.6 115.9
GAAP:
Loss and LAE ratio........................................... 75.3% 74.0%
Underwriting expense ratio................................... 20.8 22.8
Combined ratio before policyholder dividends................. 96.1 96.8
Combined ratio............................................... 95.9 98.1
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
The third quarter of 1999 statutory combined ratio before policyholder dividends
includes the treatment, on a statutory basis only, of the commutation of an
asbestos liability to an insured. Excluding the commutation, the statutory
combined ratio before policyholder dividends was 105.1%. The improvement in the
third quarter of 2000 statutory and GAAP combined ratios before policyholder
dividends compared to the third quarter of 1999 statutory and GAAP combined
ratios before policyholder dividends, excluding the commutation, was primarily
due to premium growth related to rate increases as well as the impact of the
ongoing business associated with the Reliance Surety acquisition and the
purchase of renewal rights for Reliance Middle Market and Frontier business, and
lower catastrophe losses. This was partially offset by increased loss trends,
lower favorable prior-year reserve development and a disproportionately smaller
increase in expenses associated with the growth in premiums.
PERSONAL LINES
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 1999
------ ------
<S> <C> <C>
(in millions)
Revenues......................................................... $1,065 $1,022
Net income (1)................................................... $ 81 $ 31
</TABLE>
(1) Personal Lines net income includes $4 million of realized investment gains
in the three months ended September 30, 2000 and $6 million of realized
investment losses in the three months ended September 30, 1999.
18
<PAGE> 19
Personal Lines operating income, which excludes realized investment gains and
losses, was $77 million in the third quarter of 2000 compared to $37 million in
the third quarter of 1999. The 2000 increase reflects lower catastrophe losses,
the 1999 charge related to curtailing the sale of TRAVELERS SECURE(R) products
and higher net investment income, partially offset by increased loss trends and
lower favorable prior-year reserve development. The TRAVELERS SECURE(R) program
distributed Personal Lines products through the independent agents of Primerica
Financial Services, a unit of Citigroup. During the third quarter of 1999, the
Company decided to curtail the sale of its TRAVELERS SECURE(R) auto and
homeowners products because losses exceeded levels anticipated in the pricing of
the products.
Revenues were $1.065 billion in the third quarter of 2000 compared to $1.022
million in the third quarter of 1999. This increase reflected realized
investment gains in the third quarter of 2000 compared to realized investment
losses in the third quarter of 1999, higher earned premiums and higher net
investment income.
Net written premiums in the third quarter of 2000 were $993 million compared to
$952 million in the third 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.
Personal Lines claims and expenses of $950 million in the third quarter of 2000
decreased $33 million from the third quarter of 1999. This decrease was
primarily the result of lower catastrophe losses and the charge in the third
quarter of 1999 related to curtailing the sale of TRAVELERS SECURE(R) products,
partially offset by increased loss trends and lower prior-year reserve
development.
Catastrophe losses, net of taxes and reinsurance, were $2 million in the third
quarter of 2000, compared to $48 million in the third quarter of 1999. The 1999
catastrophe losses were primarily due to Hurricane Floyd.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 1999
----- -----
<S> <C> <C>
STATUTORY:
Loss and LAE ratio........................................... 76.7% 76.8%
Underwriting expense ratio................................... 25.8 27.2
Combined ratio............................................... 102.5 104.0
GAAP:
Loss and LAE ratio........................................... 76.4% 77.9%
Underwriting expense ratio................................... 24.3 28.3
Combined ratio............................................... 100.7 106.2
</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 decrease in the third quarter of 2000 statutory and GAAP combined ratios
compared to the third quarter of 1999 was primarily due to lower catastrophe
losses and the TRAVELERS SECURE(R) charge taken in the third quarter of 1999,
offset in part by increased loss trends and lower favorable prior-year reserve
development.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000 1999
----- -----
<S> <C> <C>
(in millions)
Revenues......................................................... $ 1 $ 2
Net loss......................................................... $ (25) $ (26)
</TABLE>
19
<PAGE> 20
The primary component of net loss for the third quarter of 2000 and 1999 was
after-tax interest expense of $22 million and $25 million, respectively.
Interest expense decreased in the third quarter of 2000 compared to the third
quarter of 1999 due to debt repayments of $200 million in September 1999 and
$200 million in October 1999.
SEGMENT RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
COMMERCIAL LINES
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 1999
------- -------
<S> <C> <C>
(in millions)
Revenues .......................................................... $ 4,999 $ 4,792
------- -------
Income before cumulative effect of changes in accounting principles $ 917 $ 851
Cumulative effect of changes in accounting principles ............. -- (133)
------- -------
Net income(1) ..................................................... $ 917 $ 718
======= =======
</TABLE>
(1) Commercial Lines net income includes $5 million of realized investment
losses in the nine months ended September 30, 2000 and $28 million of
realized investment gains in the nine months ended September 30, 1999.
Net income was $917 million in the first nine months of 2000 compared to $718
million in the first nine months of 1999. Net income in 1999 included a charge
in the first quarter of $160 million related to the initial adoption of SOP 97-3
and a benefit of $27 million related to the initial adoption of SOP 98-7. The
net charge of $133 million due to the initial adoption of these Statements of
Position has been accounted for as a cumulative effect of a change in accounting
principles.
Commercial Lines operating income, which excludes realized investment gains and
losses and the cumulative effect of changes in accounting principles in the
first quarter of 1999 described above, was $922 million in the nine months ended
September 30, 2000 compared to $823 million in the nine months ended September
30, 1999. The improvement in operating income for the first nine months of 2000
over the first nine months of 1999 reflected rate increases achieved in previous
quarters, higher net investment income, lower catastrophe losses and higher fee
income, partially offset by increased loss trends and lower favorable prior-year
reserve development.
Revenues were $4.999 billion in the first nine months of 2000 compared to $4.792
billion in the first nine months of 1999. This increase reflected higher earned
premiums, higher net investment income and higher fee income, partially offset
by realized investment losses in the first nine months of 2000 compared to
realized investment gains in the first nine months of 1999. The increase in
earned premiums was primarily due to rate increases achieved in previous
quarters and the ongoing business associated with the Reliance Surety
acquisition.
Commercial Lines net written premiums in the first nine months of 2000 totaled
$3.600 billion (excluding an adjustment of $131 million due to a reinsurance
transaction associated with the acquisition of the Reliance Surety business), up
$259 million from $3.341 billion in the first nine months of 1999. This increase
was primarily due to continued favorable pricing on renewal business, the impact
of the ongoing business associated with the Reliance Surety acquisition and the
new premiums associated with the acquisition of the renewal rights for the
Reliance Middle Market and Frontier businesses.
Fee income in the first nine months of 2000 was $233 million, a $29 million
increase from the first nine months of 1999. This increase was primarily due to
the shift of business mix from premium-based products to fee-based products.
20
<PAGE> 21
National Accounts net written premiums were $282 million in the first nine
months of 2000 compared to $400 million in the first nine months of 1999. This
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 in the first nine
months of 2000 was marginally lower than the first nine months of 1999,
reflecting the Company's continued disciplined approach to underwriting and risk
management. National Accounts business retention ratio was moderately lower in
the first nine months of 2000 compared to the first nine months of 1999,
reflecting the loss of several large accounts in 2000.
Commercial Accounts net written premiums were $1.508 billion in the first nine
months of 2000 compared to $1.354 billion in the first nine months of 1999. This
increase reflected continued favorable pricing on renewal business and the new
business associated with the acquisition of the renewal rights for the Reliance
Middle Market business. For the first nine months of 2000, new business in
Commercial Accounts was significantly higher compared to the first nine months
of 1999, reflecting the increased market activity resulting from the pricing
environment and the impact of the Reliance Middle Market business. The
Commercial Accounts business retention ratio in the first nine months of 2000
was moderately lower than the first nine 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 $1.176 billion in the first nine months
of 2000 increased $55 million from $1.121 billion in the first nine 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 nine months of 2000 compared to the first
nine months of 1999. New business was unusually low in the first nine months of
1999 reflecting the Company's selective underwriting policy in the highly
competitive marketplace. Select Accounts business retention ratio was marginally
lower in the first nine months of 2000 compared to the first nine months of
1999, reflecting an increase in lost business due to the renewal price increases
in 2000.
Specialty Accounts net written premiums were $634 million (excluding an
adjustment of $131 million due to a reinsurance transaction associated with the
acquisition of the Reliance Surety business) in the first nine months of 2000
compared to $466 million in the first nine months of 1999. This increase
primarily reflected the impact of the ongoing business associated with the
Reliance Surety acquisition, the new business associated with the acquisition of
the renewal rights for Frontier and the impact of reinsurance activity.
Commercial Lines claims and expenses of $3.748 billion in the first nine months
of 2000 increased $103 million from the first nine months of 1999. This increase
was primarily due to increased loss trends, lower favorable prior-year reserve
development and higher losses associated with the growth in premiums and related
claim volume, partially offset by lower catastrophe losses.
There were no catastrophe losses in the first nine months of 2000. Catastrophe
losses, net of taxes and reinsurance, were $27 million in the first nine months
of 1999, primarily due to Hurricane Floyd in the third quarter and tornadoes in
Oklahoma in the second quarter.
21
<PAGE> 22
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 1999
----- -----
<S> <C> <C>
STATUTORY:
Loss and LAE ratio........................................... 76.0% 78.4%
Underwriting expense ratio................................... 28.0 30.0
Combined ratio before policyholder dividends................. 104.0 108.4
Combined ratio............................................... 104.5 109.4
GAAP:
Loss and LAE ratio........................................... 75.0% 74.9%
Underwriting expense ratio................................... 24.1 28.4
Combined ratio before policyholder dividends................. 99.1 103.3
Combined ratio............................................... 99.6 104.3
</TABLE>
The first nine months of 2000 statutory and GAAP combined ratios include an
adjustment associated with the acquisition of the Reliance Surety business.
Excluding this adjustment, the statutory and GAAP combined ratios before
policyholder dividends for the first nine months of 2000 would have been 103.5%
and 100.0%, respectively. The first nine months of 1999 statutory combined ratio
reflects the treatment, on a statutory basis only, of the commutation of an
asbestos liability to an insured. Excluding the commutation, the statutory
combined ratio before policyholder dividends for the first nine months of 1999
would have been 105.2%. The improvement in the first nine months of 2000
statutory and GAAP combined ratios before policyholder dividends compared to the
first nine months of 1999, excluding the related adjustments above, was
primarily due to premium growth related to rate increases as well as the impact
of the ongoing business associated with the Reliance Surety acquisition and the
purchase of renewal rights for Reliance Middle Market and Frontier business, and
lower catastrophe losses. This was partially offset by increased loss trends,
lower favorable prior-year reserve development and a disproportionately smaller
increase in expenses associated with the growth in premiums.
PERSONAL LINES
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 1999
------ ------
<S> <C> <C>
(in millions)
Revenues......................................................... $3,138 $3,032
Net income (1)................................................... $ 259 $ 240
</TABLE>
(1) Personal Lines net income includes $7 million and $9 million of realized
investment losses in the nine months ended September 30, 2000 and September
30, 1999, respectively.
Personal Lines operating income, which excludes realized investment losses, was
$266 million in the first nine months of 2000 compared to $249 million in the
first nine months of 1999. The increase in operating income in the 2000 period
was primarily due to lower catastrophe losses, the 1999 charge related to
curtailing the sale of TRAVELERS SECURE(R) products and higher net investment
income, partially offset by increased loss trends and lower favorable prior-year
reserve development.
Net written premiums in the first nine months of 2000 were $2.866 billion
compared to $2.814 billion in the first nine 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 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 nine months of 2000 was virtually the same as in
the 1999 period.
22
<PAGE> 23
Personal Lines claims and expenses of $2.769 billion in the first nine months of
2000 increased $79 million from the first nine months of 1999. This increase was
primarily the result of increased loss trends, lower favorable prior-year
reserve development and higher losses associated with the growth in premiums and
related claim volume, partially offset by the 1999 charge related to curtailing
the sale of TRAVELERS SECURE(R) products and lower catastrophe losses.
Catastrophe losses, after taxes and reinsurance, were $50 million in the first
nine months of 2000 compared to $79 million in the first nine months 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 primarily due to Hurricane Floyd
in the third quarter, 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
Northeast in the first quarter.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 1999
---- ----
<S> <C> <C>
STATUTORY:
Loss and LAE ratio........................................... 73.8% 70.9%
Underwriting expense ratio................................... 26.1 26.7
Combined ratio............................................... 99.9 97.6
GAAP:
Loss and LAE ratio........................................... 73.6% 71.3%
Underwriting expense ratio................................... 25.8 26.2
Combined ratio............................................... 99.4 97.5
</TABLE>
The first nine months of 1999 statutory and GAAP combined ratios for Personal
Lines include an adjustment associated with the termination of a quota share
reinsurance arrangement. Excluding this adjustment, the statutory and GAAP
combined ratios for the first nine months of 1999 would have been 97.3% and
98.1%, respectively. The increase in the first nine months of 2000 statutory and
GAAP combined ratios compared to the first nine months of 1999 statutory and
GAAP combined ratios, excluding this adjustment, was due to increased loss
trends and lower favorable prior-year reserve development, offset in part by
lower catastrophe losses and the TRAVELERS SECURE(R) charge taken in the third
quarter of 1999.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 1999
------ ------
<S> <C> <C>
(in millions)
Revenues......................................................... $ 2 $ 2
Net loss......................................................... $ (75) $ (83)
</TABLE>
The primary component of net loss for the nine months ended September 30, 2000
and 1999 was after-tax interest expense of $65 million and $77 million,
respectively. Interest expense decreased in the first nine months of 2000
compared to the first nine months of 1999 due to debt repayments of $200 million
in September 1999 and $200 million in October 1999.
23
<PAGE> 24
ENVIRONMENTAL CLAIMS
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At September 30, 2000, approximately 27% of
the net aggregate reserve (i.e., approximately $159 million) consists of case
reserve for resolved claims. The balance, approximately 73% of the net aggregate
reserve (i.e., approximately $434 million), is carried in a bulk reserve and
includes incurred but not reported environmental claims for which the Company
has not received any specific claims.
The following table displays activity for environmental losses and loss expenses
and reserves for the nine months ended September 30, 2000 and 1999.
Environmental Losses
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 1999
------- -------
<S> <C> <C>
(in millions)
Beginning reserves:
Direct......................................................... $ 801 $ 928
Ceded.......................................................... (125) (96)
------- -------
Net.......................................................... 676 832
Incurred losses and loss expenses:
Direct......................................................... 64 109
Ceded.......................................................... (16) (66)
Losses paid:
Direct ........................................................ 154 192
Ceded.......................................................... (23) (23)
------- -------
Ending reserves:
Direct......................................................... 711 845
Ceded.......................................................... (118) (139)
------- -------
Net.......................................................... $ 593 $ 706
======= =======
</TABLE>
ASBESTOS CLAIMS
At September 30, 2000, approximately 15% of the net aggregate reserve (i.e.,
approximately $118 million) is for pending asbestos claims. The balance,
approximately 85% of the net aggregate reserve (i.e., approximately $688
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
nine months ended September 30, 2000 and 1999.
24
<PAGE> 25
Asbestos Losses
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 1999
------- -------
<S> <C> <C>
(in millions)
Beginning reserves:
Direct......................................................... $ 1,050 $ 1,252
Ceded.......................................................... (223) (266)
------- -------
Net.......................................................... 827 986
Incurred losses and loss expenses:
Direct......................................................... 102 90
Ceded.......................................................... (66) (47)
Losses paid:
Direct ........................................................ 162 279
Ceded.......................................................... (105) (87)
------- -------
Ending reserves:
Direct......................................................... 990 1,063
Ceded.......................................................... (184) (226)
------- -------
Net.......................................................... $ 806 $ 837
======= =======
</TABLE>
UNCERTAINTY REGARDING ADEQUACY OF ENVIRONMENTAL AND ASBESTOS RESERVES
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
The reserves carried for environmental and asbestos claims at September 30, 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 September 30, 2000, approximately 15% of the net aggregate reserve (i.e.,
approximately $124 million) is for pending CIOTA claims. The balance,
approximately 85% of the net aggregate reserve (i.e., approximately $698
million), represents incurred but not reported losses for which the Company has
not received any specific claims.
25
<PAGE> 26
In general, the Company posts case reserves for pending CIOTA claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for CIOTA losses and loss expenses and reserves for the nine
months ended September 30, 2000 and 1999.
CIOTA Losses
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 1999
------- -------
<S> <C> <C>
(in millions)
Beginning reserves:
Direct......................................................... $ 1,184 $ 1,346
Ceded.......................................................... (313) (392)
------- -------
Net.......................................................... 871 954
Incurred losses and loss expenses:
Direct......................................................... 32 (29)
Ceded.......................................................... (19) 24
Losses paid:
Direct......................................................... 102 105
Ceded.......................................................... (40) (51)
------- -------
Ending reserves:
Direct......................................................... 1,114 1,212
Ceded.......................................................... (292) (317)
------- -------
Net.......................................................... $ 822 $ 895
======= =======
</TABLE>
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.
26
<PAGE> 27
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, in the
first paragraph 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, and in the first
paragraph under the caption "Legal Proceedings" beginning on page 26 of the
Quarterly Report on Form 10-Q of the Company for the quarterly period ended June
30, 2000 (File No. 1-14328), which description is included as Exhibit 99.03 to
this Form 10-Q and incorporated by reference herein. In August 2000, the Texas
trial court denied a codefendant's summary judgment motion directed at
plaintiff's fraud claims.
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, and in the second paragraph under the caption
"Legal Proceedings" beginning on page 26 of the Quarterly Report on Form 10-Q
of the Company for the quarterly period ended June 30, 2000 (File No. 1-14328),
which description is included as Exhibit 99.03 to this Form 10-Q and
incorporated by reference herein. In August 2000, the Delaware Chancery Court
preliminarily certified the class, approved the form of hearing notice, and set
October 19, 2000 as the settlement hearing date. Thereafter, the hearing notice
was mailed to shareholders of record who held the Company's common stock at any
time between March 21, 2000 and April 20, 2000. On October 19, 2000, after oral
argument, the Delaware Chancery Court certified the class, approved the
settlement and awarded class counsel $4,400,000. Class counsel provided the
defendants with an executed release.
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 third quarter ended
September 30, 2000.
27
<PAGE> 28
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, incorporated by reference to Exhibit 3.01 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000 (File No. 1-14328).
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).
99.03+ The first and second paragraphs under the caption "Legal Proceedings"
beginning on page 26 of the Quarterly Report on Form 10-Q of the
Company for the quarterly period ended June 30, 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.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRAVELERS PROPERTY CASUALTY CORP.
Date: November 13, 2000 By /s/ Christine B. Mead
---------------------------------
Christine B. Mead
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 2000 By /s/ Douglas K. Russell
---------------------------------
Douglas K. Russell
Chief Accounting Officer
(Principal Accounting Officer)
29
