ITEM 1. BUSINESS.
Travelers Property Casualty Corp. is a property-casualty insurance holding company engaged, through its subsidiaries, in two business segments: Commercial Lines and Personal Lines. The Company provides a wide range of commercial and personal property and casualty insurance products and services to businesses, government units, associations and individuals. Except as the context otherwise requires, as used herein the "Company" refers to Travelers Property Casualty Corp. and its consolidated subsidiaries.
Travelers Property Casualty Corp. was formed in January 1996 to hold the property and casualty insurance subsidiaries (collectively, "Travelers P&C") of The Travelers Insurance Group Inc. ("TIGI"), an indirect wholly-owned subsidiary of Citigroup Inc. ("Citigroup"). On April 2, 1996, the Company purchased from Aetna Services, Inc. (formerly Aetna Life and Casualty Company) ("Aetna") all of the outstanding capital stock (the "Acquisition") of Aetna's property and casualty insurance subsidiaries (collectively, "Aetna P&C"), for approximately $4.2 billion in cash. For additional information about the Acquisition, the public offering and other related transactions, see Note 3 of Notes to Consolidated Financial Statements.
Citigroup owns approximately 84% of the Company's outstanding common stock at December 31, 1998. Citigroup is a diversified holding company whose businesses provide a broad range of financial services to consumer and corporate customers around the world. The periodic reports of Citigroup provide additional business and financial information concerning that company and its consolidated subsidiaries.
The principal executive offices of the Company are located at One Tower Square, Hartford, Connecticut 06183; telephone number (860) 277-0111.
This discussion of the Company's business is organized as follows: (i) a description of each of the Company's two business segments and related services; (ii) a description of Other Operations; and (iii) certain other information.(1) A glossary of insurance terms is included beginning on page 34.
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(1) Certain items in this Form 10-K, including certain matters discussed under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" (the "MD&A"), are forward-looking statements. The matters referred to in such statements could be affected by the risks and uncertainties involved in the Company's business, including the effect of economic and market conditions, the level and volatility of interest rates and currency values, the impact of current or pending legislation and regulation and the other risks and uncertainties detailed in the section under the heading "Outlook" and in the Forward Looking Statements section of the MD&A. COMMERCIAL LINES
The Company is the third largest writer of commercial lines insurance in the United States based on 1997 direct written premiums published by A.M. Best Company ("A.M. Best"). The Company's Commercial Lines offers a broad array of property and casualty insurance and insurance-related services to its customers. Commercial Lines is organized into four marketing and underwriting groups that are designed to focus on a particular client base or industry segment to provide products and services that specifically address customers' needs: National Accounts, primarily serving large national corporations; Commercial Accounts, serving mid-size businesses for casualty products and both large and mid-size businesses for property products; Select Accounts, serving small businesses; and Specialty Accounts, providing a variety of specialty coverages. The Company also has a dedicated group within Commercial Accounts that serves the construction industry. In 1998, Commercial Lines generated net written premiums of $4.6 billion.
SELECTED PRODUCT AND MARKET INFORMATION
The accompanying table sets forth by product line and market net written premiums for Commercial Lines for the periods indicated. For a description of the product lines and markets referred to in the table, see "-- Product Lines" and "-- Principal Markets and Methods of Distribution," respectively.
Many larger National Accounts customers often demand service-type products, primarily for workers' compensation coverage and to a lesser extent in general liability and commercial automobile coverages. These types of products include risk management services such as claims settlement, loss control and engineering. Many of these products generate fee income rather than net written premiums, and are not reflected in the accompanying table.
Because the Acquisition occurred on April 2, 1996, the Company's results of operations for periods prior to April 2, 1996 do not include the results of Aetna P&C. Accordingly, premium and other operational information provided for the Company's combined businesses prior to such time has been included below for informational purposes only. As used herein, unless the context otherwise requires, "combined" refers to the operations of both Travelers P&C and Aetna P&C, without regard to the date of the Acquisition.
COMBINED NET WRITTEN PREMIUMS
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(1) Effective in 1998, net written premiums by product line reflect a change to conform the Aetna P&C and Travelers P&C statutory line assignments. There was no impact on total net written premiums.
(2) 1997 includes a $142 million increase due to a change to conform the Aetna P&C method of recording certain net written premiums to the method employed by Travelers P&C.
PRODUCT LINES
The Company writes a broad range of commercial property and casualty insurance for risks of all sizes. The core products in the Company's Commercial Lines are as follows:
COMMERCIAL MULTI-PERIL provides a combination of property and liability coverage for businesses and business property for damages such as that caused by fire, wind, hail, water, theft and vandalism, and protects businesses from financial loss due to business interruption resulting from a covered loss. It also insures businesses against third-party liability from accidents occurring on their premises or arising out of their operations, such as injuries sustained from products sold.
WORKERS' COMPENSATION provides coverage for employers for specified benefits payable under state or federal law for workplace injuries to employees. There are typically four types of benefits payable under workers' compensation policies: medical benefits, disability benefits, death benefits and vocational rehabilitation benefits. The Company offers three types of workers' compensation products: (i) guaranteed cost insurance products, in which policy premiums charged are fixed and do not vary as a result of the insured's loss experience, (ii) loss
sensitive insurance products, including retrospectively rated policies, in which premiums are adjusted based on actual loss experience of the insured during the policy period, and large deductible plans, in which the customer bears the insurance risk up to its deductible amount, and (iii) service programs, which are generally sold to the Company's larger National Accounts customers, where the Company receives fees for providing loss prevention, risk management, claim administration and benefit administration services to organizations pursuant to service agreements. The Company also participates in state assigned risk pools servicing workers' compensation policies as a servicing carrier and pool participant. The Company emphasizes managed care cost containment strategies (which involve employers, employees and care providers in a cooperative effort that focuses on the injured employee's early return to work), cost-effective quality care, and customer service in this market.
COMMERCIAL AUTOMOBILE provides coverage for businesses against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insured's vehicle, and property damage to other vehicles and other property resulting from the ownership, maintenance or use of automobiles and trucks in a business.
GENERAL LIABILITY provides coverage for liability exposures including bodily injury and property damage arising from products sold and general business operations. Liability policies may also include coverage for directors' and officers' liability arising in their official capacities, employment practices liability insurance, fiduciary liability for trustees and sponsors of pension, health and welfare, and other employee benefit plans, errors and omissions insurance for employees, agents, professionals and others arising from acts or failures to act under specified circumstances, as well as medical malpractice, umbrella and excess insurance.
PROPERTY provides coverage for loss or damage to buildings, inventory and equipment from natural disasters, including hurricanes, windstorms, earthquakes, hail, explosions, severe winter weather and other events such as theft and vandalism, fires and storms and financial loss due to business interruption resulting from covered property damage. Property also includes inland marine, which provides coverage for goods in transit and unique, one-of-a-kind exposures.
FIDELITY AND SURETY provides fidelity insurance coverage which protects an insured for loss due to embezzlement or misappropriation of funds by an employee. Surety is a three-party agreement whereby the insurer agrees to pay a second party or make complete an obligation in response to the default, acts or omissions of a third party. Surety is generally provided for construction performance, legal matters such as appeals, trustees in bankruptcy and probate and other performance bonds.
OTHER coverages include boiler and machinery insurance, which provides coverage for loss or damage resulting from the mechanical breakdown of boilers and machinery, as well as miscellaneous assumed reinsurance.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The Company distributes its commercial products primarily through approximately 5,200 brokers and independent agencies located throughout the United States that are serviced by approximately 80 field offices. The Company seeks to establish relationships with well-
established, independent insurance agencies and brokers. In selecting new independent agencies and brokers to distribute the Company's products, the Company considers each agency's or broker's profitability, financial stability, staff experience and strategic fit with the Company's operating and marketing plans. Once an agency or broker is appointed, the Company carefully monitors its performance.
NATIONAL ACCOUNTS
The Company's National Accounts provides a variety of casualty products to large companies. The Company's National Accounts also includes the Company's alternative market business (the "Alternative Market"), which primarily offers workers' compensation products and services to the voluntary market including employee groups, associations and franchises and to involuntary state pools. National Accounts customers generally select products in connection with a large deductible or self-insured program, or a guaranteed cost or a retrospectively rated insurance policy. Customers are usually national in scope and range in size from businesses with sales of approximately $10 million per year to Fortune 2000 corporations. Products are marketed through national brokers and regional agents with offices throughout the United States. Workers' compensation accounted for approximately 68% of the products sold in 1998 to National Accounts customers, based on net written premiums and service fee income.
In December 1998, the Company announced a global strategic relationship with Winterthur International, called Travelers/Winterthur International, which markets a variety of commercial lines products to multinational corporations. The Company expects that Travelers/Winterthur International will allow it to participate in business requiring international underwriting and insurance services.
The Alternative Market business sells claims and policy management services to workers' compensation and automobile assigned risk plans and to self-insurance pools throughout the United States. The Company has emerged as the largest workers' compensation assigned risk plan servicing insurer in the industry with approximately 25% share of the market in 1998. Assigned risk plan contracts generated approximately $55 million in service fee income in 1998 for the Company.
The Alternative Market business also services self-insurance groups, sells excess workers' compensation coverage to these groups and markets various workers' compensation specialty programs. Self-insurance groups and these specialty programs generated net written premiums of $43 million and service fee income of $3 million in 1998. The Alternative Market business also participates in various involuntary assigned risk pools, which provide insurance coverage to individuals or other entities that otherwise are unable to purchase such coverage in the voluntary market. Participation in these pools in most states is generally in proportion to voluntary writings of related lines of business in that state.
COMMERCIAL ACCOUNTS
The Company's Commercial Accounts sells a broad range of property and casualty insurance products through a large network of independent agents and brokers. Commercial
Accounts casualty products target businesses with 75 to 1,000 employees, while its property products target both large and mid-size businesses. The Company offers a full line of products to its Commercial Accounts customers, with an emphasis on guaranteed cost products.
Commercial Accounts targets certain industries in which the Company has claims, engineering and underwriting expertise and to which the Company has established dedicated operations. Industry segments within the manufacturing sector include: advanced technology, metal products, mineral products, plastic and rubber products and wood products. Also targeted are colleges and universities, food, retail, financial, property management and the wholesale industries. The Company continues to develop new industry-targeted programs both on a national and local level. Specific industry knowledge enables the Company to select, as customers, better managed companies in an industry segment, to tailor specialized coverages for those companies, to link price to the individual exposure and to control risk. The Company uses components of this approach specifically in connection with loss control and claims management processing. Through a network of field offices, the Company's marketing and underwriting specialists, who have point of sale authority, work closely with local brokers and agents to tailor insurance coverage to individual customer needs.
Construction. The Company has established dedicated operations that exclusively target the construction industry, providing insurance and risk management services for virtually all areas of construction, including general contractors, heavy construction (including street and road) and special trade contractors, except artisan or smaller trade contractors. The Company offers all product lines to mid-size and national customers in the construction market, including both guaranteed cost and loss-responsive products, and wrap-up insurance programs, with general liability, workers' compensation, commercial auto, commercial property and inland marine coverages. The dedicated construction operations provide specialized service and underwriting, with local market expertise and national capability, that enable the Company to tailor specialized coverages, have competitive pricing and control risk. This includes local underwriters who understand their states' laws and claim climates, engineering and loss control specialists, professional claim management and legal personnel with extensive construction experience. Construction's products are distributed through independent agents and brokers throughout the United States. Construction operations contributed approximately 24% of the Commercial Accounts premium-based business in 1998. Additionally, construction operations service-based business contributed $6 million of service fees to the Company in 1998.
SELECT ACCOUNTS
Select Accounts serves firms typically with one to 75 employees. Products offered to Select Accounts are generally guaranteed cost policies, often a packaged product covering property and liability exposures. Products are sold through independent agents, who are often the same agents that sell the Company's Commercial Accounts and Personal Lines products.
Personnel in the Company's field offices and other points of local service, which are located throughout the United States, work closely with agents to ensure a strong local presence in the marketplace. The Company utilizes a marketing and underwriting approach based on agency automation and defined underwriting criteria. Agency automation allows agents access to the Company's price quotation and policy issuance systems and enables agents
to provide faster and more cost-effective service to customers with supervision and underwriting control. Agents that do not utilize the automated quotation and policy issuance systems work with the Company's sales and marketing representatives who have point of sale authority. Agents serving Select Accounts are given greater control and discretion over underwriting decisions, within predefined parameters, than brokers selling to larger accounts. Business in other classifications is subject to consultative review by in-house underwriters. The Company believes that its breadth of products, highly qualified field staff and its technology offer distinct competitive advantages.
SPECIALTY ACCOUNTS
Specialty Accounts markets products to national, mid-size and small customers, and distributes them through both wholesale brokers and retail agents and brokers throughout the United States. The Company believes that it has a competitive advantage with respect to many of these products based on its reputation for timely decision-making, underwriting and industry expertise and strong producer and customer relationships as well as its ability to cross-sell with National Accounts, Commercial Accounts and Select Accounts.
The Company has two separate marketing and underwriting groups within Specialty Accounts:
Gulf Specialty focuses on many non-traditional lines of business with a particular emphasis on the financial services market. Products include directors' and officers' liability insurance, errors and omissions coverage for bankers, investment counselors and mutual fund advisors, and fidelity and surety coverage for related classes. In addition, Gulf Specialty offers errors and omissions coverage for professionals and non-professionals such as lawyers, architects and engineers, insurance agents, podiatrists and chiropractors medical malpractice, primary and excess property, and various coverages that target the transportation industry. Gulf Specialty also writes umbrella coverage for various industries, provides insurance products to the entertainment industry and to municipalities and provides insurance products for other industry specific programs. Effective January 1, 1998, the Company's former Travelers Specialty unit was combined with Gulf Specialty, and during 1998 and 1999 the majority of renewal policies within the former Travelers Specialty unit are being written as Gulf Specialty policies.
Bond Specialty's range of products includes fidelity and surety bonds, directors' and officers' and other professional liability insurance, employment practices liability insurance, fiduciary liability insurance and other related coverages. The customer base ranges from large financial services companies and commercial entities to small businesses and individuals. Products and services are distributed primarily through agents and brokers. Bond Specialty is organized around three broad customer segments: Financial Services, Construction and Commercial Risk and one specialized product niche: National Commercial Surety.
PRICING AND UNDERWRITING
Pricing levels for property and casualty insurance products by the Company's Commercial Lines are generally developed based upon the frequency and severity of estimated losses, the expenses of producing business and administering claims, and a reasonable allowance
for profit. The Company's strategy emphasizes a profit-oriented approach rather than a premium volume or market share-oriented approach to underwriting. The market conditions for all Commercial Lines products are characterized by difficult pricing and increased competition.
A significant portion of Commercial Lines business is written with large deductible insurance policies. Under certain workers' compensation insurance contracts with deductible features, the Company is obligated to pay the claimant the full amount of the claim. The Company is subsequently reimbursed by the contractholder for the deductible amount, and is subject to credit risk until such reimbursement is made. At December 31, 1998, contractholder receivables and payables on unpaid losses were each approximately $2.0 billion. Retrospectively rated policies are primarily used in workers' compensation coverage. Although the retrospectively rated feature of the policy substantially reduces insurance risk to the Company, it introduces credit risk to the Company. Receivables on unpaid losses from holders of retrospectively rated policies totaled approximately $456 million at December 31, 1998. Collateral, primarily letters of credit and, to a lesser extent, cash collateral, is generally requested for large deductible plans and/or retrospectively rated policies that provide for deferred collection of deductibles and/or ultimate premiums. The amount of collateral requested is predicated upon the creditworthiness of the customer and the nature of the insured risks. Commercial Lines continually monitors the credit exposure on individual accounts and the adequacy of collateral.
The Company has developed an underwriting and pricing methodology that incorporates underwriting, claims, engineering, actuarial and product development disciplines for particular industries. This approach is designed to maintain high quality underwriting and pricing discipline. This approach utilizes proprietary data gathered and analyzed by the Company with respect to its Commercial Lines business over many years. The underwriters and engineers use this information to assess and evaluate risks prior to quotation. This information provides specialized knowledge about industry segments and catastrophe management and helps analyze risk based on account characteristics and pricing parameters designed to ensure that the Company does not compromise its underwriting integrity.
Select Accounts uses a process based on standard industry classification (S.I.C.) to allow agents and field marketing representatives to make underwriting and pricing decisions within predetermined classifications, because underwriting criteria and pricing tend to be more standardized for smaller businesses.
The Company is also a member of and participates in the underwriting operations of insurance and reinsurance pools and associations, several of which make independent underwriting decisions on behalf of their members. These pools insure specialized risks such as exposures related to the aviation and nuclear power industries.
The Company continually reviews its exposure to catastrophic losses and attempts to mitigate such exposure. See "Reinsurance." The Company uses sophisticated computer modeling techniques to assess underwriting risks and renewal of business in catastrophe-prone areas.
GEOGRAPHIC DISTRIBUTION
The following table shows the distribution of Commercial Lines' direct written premiums for the states that accounted for the majority of premium volume for the year ended December 31, 1998:
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(1) No other single state accounted for 3.0% or more of the total direct written premiums written in 1998 by the Company.
PERSONAL LINES
The Company is the second largest writer of personal lines insurance through independent agents and the eighth largest writer of personal lines insurance overall in the United States based on 1997 direct written premiums published by A.M. Best. In 1998, Personal Lines generated net written premiums of approximately $3.5 billion. Personal Lines primarily offers personal automobile and homeowners insurance.
SELECTED PRODUCT INFORMATION
The accompanying table sets forth by product line net written premiums for Personal Lines for the periods indicated. For a description of the product lines referred to in the accompanying table below, see "-- Product Lines."
COMBINED NET WRITTEN PREMIUMS
(1) In 1998 and 1997, $638 million and $371 million, respectively, of Personal Lines net written premiums were generated by new distribution channels.
PRODUCT LINES
The Company writes virtually all types of property and casualty insurance covering personal risks. Personal Lines had approximately 5.1 million, 4.6 million and 4.4 million policies in force at December 31, 1998, 1997 and 1996, respectively. The primary coverages in Personal Lines are personal automobile and homeowners insurance sold to individuals.
PERSONAL AUTOMOBILE provides coverage for liability to others for both bodily injury and property damage and for physical damage to an insured's own vehicle from collision and various other perils. In addition, many states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage. In 1997, the Company introduced a nonstandard automobile product in Texas, distributed through independent agents. In 1998, the Company expanded its nonstandard auto product into New York, Florida and Georgia. In 1999, the Company expanded its nonstandard auto product into Connecticut and plans to further expand this product into states where it has significant agency representation, including Pennsylvania and Virginia.
HOMEOWNERS provides protection against losses to dwellings and contents from a wide variety of perils, as well as coverage for liability arising from ownership or occupancy. The Company writes homeowners insurance for dwellings, condominiums and rental property contents. OTHER products include coverage for boats, personal articles such as jewelry, and umbrella liability protection.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
The Company's Personal Lines products are distributed primarily through approximately 5,000 independent agencies located throughout the United States, supported by a network of 13 field marketing offices and five customer service centers. Personal Lines also markets through new distribution channels, including sponsoring organizations such as employee and affinity groups, the independent agents of Primerica Financial Services ("Primerica"), a unit of Citigroup, and joint marketing arrangements with other insurers. In 1998, Personal Lines began cross-marketing its products to Citibank customers, primarily credit cardholders. (Citibank is a
unit of Citigroup.) While the Company's principal markets for Personal Lines insurance are in states along the East Coast, in the South, and Texas, Personal Lines is expanding its geographical presence across the United States. In the states of Florida, New Jersey, Massachusetts and California, the Company operates domestic companies to enhance its competitive capability in these highly regulated markets. Property-casualty licensed Primerica agents market Personal Lines products under the TRAVELERS SECURE(R) program in 39 states. At the end of 1998, approximately 14,100 Primerica agents were licensed to sell Personal Lines products through the TRAVELERS SECURE(R) program. During 1998, approximately 154,000 new automobile or homeowners policies were sold through this program. Approximately 38% of Personal Lines new business originated from new distribution channels in 1998 and represented 22% and 16% of policies in force at December 31, 1998 and 1997, respectively.
Insurance companies generally market personal automobile and homeowners insurance through one of three distribution systems: independent agents, exclusive agents or direct writing. The independent agents that distribute the Company's Personal Lines products usually represent several unrelated property and casualty companies. Exclusive agents represent one company and generally sell a number of products, including life insurance and annuities in addition to property-casualty products. In contrast, direct writing companies generally operate by mail and telephone through sales representatives. Due in part to the expense advantage that direct writers may have relative to companies using independent agents and changing customer buying preferences of buying directly from companies, the direct writing companies have gradually expanded their market share in recent years.
The Company's Personal Lines continues to distribute its products through the independent agency distribution system, recognizing the service and underwriting advantages the agent can deliver. In addition to its agency distribution system, the Company has broadened its distribution channels for Personal Lines products to include sponsoring organizations such as employee and affinity groups, joint marketing arrangements with other insurers, and sales through the independent agents of Primerica, who primarily sell life insurance products issued by affiliates of the Company as well as mutual funds and other Citigroup products. In general, the Primerica agents contact potential customers directly, and then transmit information about the customer to one of the Company's three regional telemarketing centers. An authorized telemarketing sales representative contacts the customer to underwrite, sell and ultimately process new business. In 1998, Personal Lines began marketing products directly to Citibank customers, primarily credit cardholders: potential customers are solicited by telephone after transfer from a Citibank customer service call center, through direct mail or inserts in credit card statements.
In 1995, Aetna P&C entered into a marketing agreement with GEICO to write the majority of GEICO's homeowners business, and to receive referrals from GEICO for new homeowners business. This agreement added historically profitable business and helped geographically diversify the homeowners line of business. It also provided for limits on Personal Lines' obligation to write new and renewal business in certain catastrophe-prone areas.
The Company believes that its focus on service and development of long-term relationships with individual agents gives it a competitive advantage in the Personal Lines market. The Company believes that its expense management practices, including prompt and
efficient claims handling and high level of automation, allow it to offer a competitively priced product. In addition, the Company is leveraging its service, claims handling and automation experience in the expansion of the distribution of Personal Lines products through its new channels.
PRICING AND UNDERWRITING
Pricing for personal automobile insurance is driven by changes in the frequency of claims and by inflation in the cost of automobile repairs, medical care and litigation of liability claims. As a result, the profitability of the business is largely dependent on promptly identifying and rectifying disparities between premium levels and expected claim costs, and obtaining approval of the state regulatory authorities for indicated rate increases. Premiums charged for physical damage coverage reflect insured car values and, accordingly, premium levels are somewhat related to the volume of new car sales.
Pricing in the homeowners business is also driven by changes in the frequency of claims and by inflation in building supplies, labor costs and household possessions. Most homeowners policies offer (but do not require) automatic increases in coverage to reflect growth in replacement costs and property values. In addition to the normal risks associated with any multiple peril coverage, the profitability and pricing of homeowners insurance is affected by the incidence of natural disasters, particularly hurricanes, winter storms, earthquakes and tornadoes. In order to reduce its exposure to catastrophe losses, the Company has limited the writing of new homeowners business and selectively non-renewed existing homeowners business in certain markets, tightened underwriting standards and implemented price increases in certain catastrophe-prone areas, and instituted deductibles in hurricane-prone areas, all subject to restrictions imposed by insurance regulatory authorities. In California, the Company introduced in 1996 an endorsement that reduces its exposure to catastrophic earthquake claims by increasing the deductible and limiting other policy coverages in the event of an earthquake loss. The Company uses computer modeling techniques to assess its level of exposure to loss in catastrophe-prone areas. Changes to methods of marketing and underwriting in coastal areas of Florida and New York, and in California are subject to state-imposed restrictions, the general effect of which is to make it more difficult for an insurer to reduce exposures.
Insurers writing property-casualty policies are generally unable to increase rates until some time after the costs associated with coverage have increased, primarily as a result of state insurance rate regulation laws. The pace at which an insurer can change rates in response to competition or to increased costs depends, in part, on whether the applicable rate regulation law requires prior approval of a rate increase or notification to the regulator either before or after a rate increase is imposed. In states having prior approval laws, a rate must be approved by the regulator before it may be used by the insurer. In states having "file-and-use" laws, the insurer must file the rate with the regulator, but does not need to wait for approval before using it. A "use-and-file" law requires an insurer to file rates within a certain period of time after the insurer begins using the new rate. Approximately one-half of the states, including New York and New Jersey, require prior approval of most rate increases.
Underwriting of Personal Lines new business policies is conducted primarily by independent agents. Agents underwrite Personal Lines policies under strict underwriting
guidelines established and monitored by underwriters in the Company's customer service centers. Each agent is assigned to a specific employee of the Company or team of employees responsible for working with the agent on business plan development, marketing, and overall growth and profitability. The Company uses agency level management information to analyze and understand results and to identify problems and opportunities.
Personal Lines products are also sold through alternative marketing channels. In these channels, underwriting is conducted by employees of the Company. Underwriters work with Company management on business plan development, marketing, and overall growth and profitability. Channel-specific production information is used to analyze results and identify problems and opportunities.
GEOGRAPHIC DISTRIBUTION
The following table shows the distribution of Personal Lines' direct written premiums for the states that accounted for the majority of premium volume for the year ended December 31, 1998:
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(1) No other single state accounted for 3.0% or more of the total direct written premiums written in 1998 by the Company.
CLAIM ADMINISTRATION
The Company employs approximately 8,500 claim adjusters, appraisers, investigators, staff attorneys, system specialists and training, management and support personnel in the claim department. These employees manage over 90% of the Company's claims. Approved external vendors, such as claim adjusters, appraisers, investigators and attorneys, are used only when the geographic location or unique issues raised by a claim warrant such use. To be approved, these vendors must have a proven record and have demonstrated cost-consciousness and relevant technical skills.
The Company seeks to achieve optimal levels of losses and loss adjustment expenses while maintaining its high level of service. The Company's claim department is organized to meet these goals. The organization features seven operating regions, and grants to the regions authority to address the needs of local customers, underwriters, agents and brokers across Commercial Lines and Personal Lines. In addition, technical and legal personnel have created teams around technical specialties to better support the regional operations. This structure permits the Company to maintain the economies of scale of a larger, established company while enjoying the flexibility of a smaller company that can quickly respond to the needs of its customers, underwriters, agents and brokers. The home office continues to monitor adherence to claims policies and procedures, the adequacy of case reserves, loss and expense controls and productivity and service standards.
The Company continuously reviews its claim practices in its effort to meet its service and loss and expense objectives. The Company's claim adjudication process focuses on the segmentation of claims, based on complexity of the claim, required technical specialization, and speed of process. To enhance this effort, the Company's claim handling staff and workflow design is organized around line of business specialization. In 1998, through workflow and management information improvements, the Company enhanced its claim adjudication process for auto physical damage.
Another example of this effort is the Company's introduction of TravComp, a workers' compensation claim and medical management program that assists adjusters in promptly investigating, validating or rejecting workers' compensation claims. Medical management workstations permit nurse professionals to access additional information that supports the Company's emphasis on early return to work strategies for these claims. These new technologies, together with better matching of professional skills and authority to specific claim issues, have resulted in workers' compensation cases closing faster and with lower losses and loss adjustment expenses.
Environmental, asbestos and other cumulative injury claims are separately managed by the Company's Special Liability Group. See "Environmental, Asbestos and Other Cumulative Injury Claims."
REINSURANCE
The Company reinsures a portion of the risks it underwrites in order to control its exposure to losses, stabilize earnings and protect capital resources. The Company cedes to reinsurers a portion of these risks and pays premiums based upon the risk and exposure of the policies subject to such reinsurance. Reinsurance involves credit risk and is subject to aggregate loss limits. Although the reinsurer is liable to the Company to the extent of the reinsurance ceded, the Company remains primarily liable as the direct insurer on all risks reinsured. Reinsurance recoverables are reported after allowances for uncollectible amounts. The Company also holds collateral, including escrow funds and letters of credit, under certain reinsurance agreements. The Company monitors the financial condition of reinsurers on an ongoing basis, and reviews its reinsurance arrangements periodically. Reinsurers are selected based on their financial condition, business practices and the price of their product offerings. For additional information concerning reinsurance, see Note 6 of Notes to Consolidated Financial Statements.
The Company utilizes a variety of reinsurance agreements to control its exposure to large property and casualty losses. The Company utilizes the following types of reinsurance: (i) facultative reinsurance, in which reinsurance is provided for all or a portion of the insurance provided by a single policy and each policy reinsured is separately negotiated; (ii) treaty reinsurance, in which reinsurance is provided for a specified type or category of risks; and (iii) catastrophe reinsurance, in which the Company is indemnified for an amount of loss in excess of a specified retention with respect to losses resulting from a catastrophic event.
The following presents the Company's top five reinsurers (except Lloyd's of London ("Lloyd's") which is discussed in more detail below) by reinsurance recoverable at December 31, 1998 (in millions):
As of December 31, 1998, the Company had reinsurance recoverables from Lloyd's of $398 million. In 1996, Lloyd's restructured its operations with respect to claims for years prior to 1993 and reinsured these into Equitas Limited ("Equitas"), which is currently unrated. Approximately $310 million of the Company's Lloyd's reinsurance recoverable at December 31, 1998 relates to Equitas liabilities. The remaining recoverables of $88 million are from the continuing market of Lloyd's, which is rated A (3rd highest of 15 ratings) by A.M. Best.
The impact of the Lloyd's restructuring on the collectibility of amounts recoverable by the Company from Lloyd's cannot be quantified at this time. The Company believes that it is possible that an unfavorable impact on collectibility could have a material adverse effect on the Company's operating results in a future period. However, the Company believes that it is not likely that the outcome of these matters would have a material adverse effect on the Company's financial condition or liquidity.
The Company participates in pools with other insurers to provide capacity for unique and high-valued risks such as exposures related to the aviation and nuclear power industries. The Company's maximum net exposure to this type of business at December 31, 1998 was $15 million per risk.
At December 31, 1998, the Company had $9.2 billion in reinsurance recoverables. Of this amount, $3.1 billion is for pools and associations that relate primarily to workers' compensation service business and have the obligation of the participating insurance companies on a joint and several basis supporting these cessions. Also, $2.2 billion is attributable to structured settlements relating primarily to personal injury claims for which the Company has purchased an annuity and remains contingently liable in the event of a default by the company issuing the annuity. Of the remaining $3.9 billion ceded to reinsurers at December 31, 1998,
$882 million was environmental, asbestos and other cumulative injury-related and the remainder principally reflects reinsurance in support of ongoing business. In addition, at December 31, 1998, $407 million of reinsurance recoverables were collateralized by letters of credit and escrow funds.
Net Retention Policy. The descriptions below relate to reinsurance arrangements of the Company in effect at January 1, 1999. For third-party liability, including automobile no-fault, the reinsurance agreements used by Commercial Accounts, Construction and Select Accounts limit the net retention to a maximum of $4 million per insured, per occurrence. Gulf Specialty utilizes various reinsurance mechanisms and has limited its net retention to a maximum of $3.75 million per risk for any line of business. For commercial property insurance, there is a $5 million maximum retention per risk with 100% reinsurance coverage for risks with higher limits. The reinsurance agreement in place for workers' compensation policies written by Commercial Accounts, Construction, National Accounts, Select Accounts, and some segments of Alternative Markets and Gulf Specialty covers 100% of each loss between $1 million and $10 million. For National Accounts, reinsurance arrangements are typically tiered, or layered, such that only levels of risk acceptable to the Company are retained. The reinsurance agreement in place for Personal Lines umbrella policies covers 100% of each loss between $1 million and $5 million. For personal property insurance, there is a $6 million maximum retention per risk. For directors' and officers' liability, employment practices liability and blended insurance, Bond Specialty retains up to $5 million per risk. For surety protection, Bond Specialty has reinsurance coverage for 95% of up to $50 million of liability in excess of $50 million of liability. The risk tolerance of Bond Specialty varies by line of business and by risk. Bond Specialty purchases an accident year aggregate cover attaching at a 40% loss ratio to lower its exposure to large losses or loss frequency. The first layer of the aggregate provides 96% of approximately $41.4 million and the second layer provides 80% of approximately $35.5 million of reinsurance coverage in excess of a $94.7 million retention.
Catastrophe Reinsurance. The Company utilizes reinsurance agreements with nonaffiliated reinsurers to control its exposure to losses resulting from one occurrence. For the accumulation of net property losses arising out of one occurrence, reinsurance agreements cover 40% of total losses between $250 million and $750 million. For multiple workers' compensation losses arising from a single occurrence, reinsurance agreements cover 100% of losses between $10 million and $250 million and, for workers' compensation losses caused by property perils, reinsurance agreements cover 40% of losses between $250 million and $750 million.
For the accumulation of net casualty losses arising out of one occurrence, a casualty clash agreement covers 95% of losses between $10 million and $50 million.
The Company reviews its risk and catastrophe covers at least quarterly and makes changes it deems appropriate.
REINSURANCE FUND
The Company also participates in the Florida Hurricane Catastrophe Fund ("FHCF"), which is a state-mandated catastrophe reinsurance fund that provides reimbursement to insurers for a portion of their future catastrophic hurricane losses. FHCF is primarily funded by
premiums from insurance companies that write residential property business in Florida and, if insufficient, assessments on insurance companies that write other property and casualty insurance, excluding workers' compensation. FHCF's resources are limited to these contributions and to its borrowing capacity at the time of a significant catastrophe in Florida. There can be no assurance that these resources will be sufficient to meet the obligations of FHCF.
The Company's recovery of less than contracted amounts from FHCF could have a material adverse effect on the Company's results of operations in the event of a significant catastrophe in Florida. However, the Company believes that it is not likely that the Company's recovery of less than contracted amounts from FHCF would have a material adverse effect on the Company's financial condition or liquidity.
RESERVES
Property and casualty claim reserves are established to account for the estimated ultimate costs of claims and claim adjustment expenses for claims that have been reported but not yet settled and claims that have been incurred but not reported. The Company establishes reserves by line of business, coverage and year.
The process of estimating claim reserves is imprecise due to a number of variables. These variables are affected by both internal and external events such as changes in claims handling procedures, inflation, judicial trends and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of the insured event and the time it is actually reported to the insurer. The Company continually refines reserve estimates in a regular ongoing process as experience develops and further claims are reported and settled. The Company reflects adjustments to reserves in the results of operations in the periods in which the estimates are changed. In establishing reserves, the Company takes into account estimated recoveries for reinsurance, salvage and subrogation.
The Company derives estimates for unreported claims and development on reported claims principally from actuarial analyses of historical patterns of claims development by accident year for each line of business and market segment. Similarly, the Company derives estimates of unpaid claim adjustment expenses principally from actuarial analyses of historical development patterns of the relationship of claim adjustment expenses to losses for each line of business and market segment. For a description of the Company's reserving methods for environmental and asbestos claims, see "Environmental, Asbestos and Other Cumulative Injury Claims."
Discounting. The liability for losses for certain long-term disability payments under workers' compensation insurance and workers' compensation excess insurance has been discounted using a maximum interest rate of 5%. At December 31, 1998, 1997 and 1996 the combined amounts of discount for the Company were $781 million, $912 million and $1.012 billion, respectively.
For a reconciliation of beginning and ending property and casualty insurance claims and claim adjustment expense reserves of the Company for each of the last three years, see Note 7 of Notes to Consolidated Financial Statements.
The table at the end of this section sets forth the year-end reserves from 1988 through 1998 and the subsequent changes in those reserves, presented on a historical basis for the Company. Accordingly, the original estimates, cumulative amounts paid and reestimated reserves in the table for the years 1988-1995 have not been restated to include Aetna P&C. Beginning in 1996, the table includes the reserve activity of Aetna P&C. The data in the table is presented in accordance with reporting requirements of the Securities and Exchange Commission. Care must be taken to avoid misinterpretation by those unfamiliar with such information or familiar with other data commonly reported by the insurance industry. The accompanying data is not accident year data, but rather a display of 1988-1998 year-end reserves and the subsequent changes in those reserves.
For instance, the "cumulative deficiency or redundancy" shown in the accompanying table for each year represents the aggregate amount by which original estimates of reserves as of that year-end have changed in subsequent years. Accordingly, the cumulative deficiency for a year relates only to reserves at that year-end and such amounts are not additive. Expressed another way, if the original reserves at the end of 1988 included $4 million for a loss that is finally settled in 1998 for $5 million, the $1 million deficiency (the excess of the actual settlement of $5 million over the original estimate of $4 million) would be included in the cumulative deficiencies in each of the years 1988-1997 shown in the accompanying table.
Certain factors may distort the re-estimated reserves and cumulative deficiency or redundancy shown in the accompanying table. For example, a substantial portion of the cumulative deficiencies in each of the years 1988-1998 arises from claims on policies written prior to the mid-1970s involving liability exposures such as environmental, asbestos and other cumulative injury claims. In the post-1984 period, the Company has developed more stringent underwriting standards and policy exclusions and has significantly contracted or terminated the writing of such risks. See "Environmental, Asbestos and Other Cumulative Injury Claims." General conditions and trends that have affected the development of these liabilities in the past will not necessarily recur in the future.
Other factors that affect the data in the accompanying table include the discounting of workers' compensation reserves and the use of retrospectively rated insurance policies. To the extent permitted under applicable accounting practices, workers' compensation reserves are discounted to reflect the time value of money, due to the relatively long time period over which these claims are to be paid. Apparent deficiencies will continue to occur as the discount on these workers' compensation reserves is accreted at the appropriate interest rates. Also, a portion of National Accounts business is underwritten with retrospectively rated insurance policies in which the ultimate loss experience is primarily borne by the insured. For this business, increases in loss experience result in an increase in reserves, and an offsetting increase in amounts recoverable from insureds. Likewise, decreases in loss experience result in a decrease in reserves, and an offsetting decrease in amounts recoverable from these insureds. These amounts recoverable mitigate the impact of the cumulative deficiencies or redundancies but are not reflected in the
accompanying table. This mechanism affords the Company significant financial protection against adverse development on this block of net reserves.
Because of these and other factors, it is difficult to develop meaningful extrapolation of estimated future redundancies or deficiencies in loss reserves from the data in the accompanying table.
The differences between the reserves for claims and claim adjustment expenses shown in the accompanying table, which is prepared in accordance with GAAP, and those reported in the annual statements of the Company filed with state insurance departments, which are prepared in accordance with statutory accounting practices, were: $37 million, $31 million and $14 million for 1998, 1997 and 1996, respectively.
(a) Reflects reserves of Travelers P&C, excluding Aetna P&C reserves which were acquired on April 2, 1996. Accordingly, the reserve development (net reserves for loss and loss adjustment expense recorded at the end of the year, as originally estimated, less net reserves reestimated as of subsequent years) relates only to losses recorded by Travelers P&C and does not include reserve development recorded by Aetna P&C.
(b) Includes Aetna P&C gross reserves of $16,775 million and net reserves of $11,752 million acquired on April 2, 1996 and subsequent development recorded by Aetna P&C.
STATUTORY COMBINED RATIO INFORMATION
The statutory combined ratio is an industry measurement of the results of property and casualty insurance underwriting. This ratio is the sum of the ratio of incurred losses and loss adjustment expenses to net premiums earned (the "loss and LAE ratio"), the ratio of underwriting expenses incurred to net premiums written (the "underwriting expense ratio") and, where applicable, the ratio of dividends to policyholders to net premiums earned. A combined ratio under 100% generally indicates an underwriting profit; a combined ratio over 100% generally indicates an underwriting loss. However, investment income, federal income taxes and other non-underwriting income or expenses, such as fee income, are not reflected in the statutory combined ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and service operations. Lines of business where claims are paid out over a longer period of time ("long-tail"), such as workers' compensation, also provide investment income over a longer period of time and therefore can be profitable at higher combined ratios than lines where claims are paid out over a shorter period ("short-tail"). Insurers with a high proportion of long-tail policies will generally have higher combined ratios than insurers with more short-tail business.
The ratios shown in the table below are computed based upon statutory accounting practices, not generally accepted accounting principles ("GAAP"). For information on GAAP combined ratios, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
STATUTORY COMBINED RATIOS
(1) Includes the effect of charges associated with the Acquisition and also includes statutory charges made to conform accounting policies and Company strategies in connection with the Acquisition (but not for GAAP reporting purposes due to purchase accounting). Excluding such charges, the combined ratio before policyholder dividends was 110.0%.
(2) Includes the effect of the Company's review of reserves associated with the Acquisition. The combined ratio excluding this item was 100.1%.
ENVIRONMENTAL, ASBESTOS AND OTHER CUMULATIVE INJURY CLAIMS
Environmental, asbestos and other cumulative injury claims are segregated from other claims and are handled separately by the Company's Special Liability Group, a special unit staffed by dedicated legal, claim, finance and engineering professionals. For additional information on environmental, asbestos and other cumulative injury claims, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
INSURANCE POOLS
Most of the Company's insurance subsidiaries are members of one of two separate intercompany property and casualty reinsurance pooling arrangements: the Travelers Property Casualty pool and the Gulf pool. Each of these insurance pools permits the participating companies to rely on the capacity of the entire pool rather than just on its own capital and surplus. Under the arrangements of each insurance pool, the members share substantially all insurance business that is written and allocate the combined premiums, losses and expenses. Travelers Casualty and Surety Company of America ("Travelers C&S of America") does not participate in either pool and is dedicated to the Bond Specialty business.
RATINGS
Insurance companies are rated by rating agencies to provide both industry participants and insurance consumers with meaningful information on specific insurance companies. Higher ratings generally indicate financial stability and a strong ability to pay claims. These ratings are based upon factors relevant to policyholders and are not directed toward protection of investors. Such ratings are neither a rating of securities nor a recommendation to buy, hold or sell any security and may be revised or withdrawn at any time. Ratings focus primarily on the following factors: capital resources, financial strength, demonstrated management expertise in the insurance business, credit analysis, systems development, market segment position and growth opportunities, marketing, sales conduct practices, investment operations, minimum policyholders' surplus requirements and capital sufficiency to meet projected growth, as well as access to such traditional capital as may be necessary to continue to meet standards for capital adequacy.
The following table summarizes the current claims-paying and financial strength ratings of the Company's property-casualty insurance pools and Travelers C&S of America by A. M. Best, Duff & Phelps Corp. ("Duff & Phelps"), Moody's Investor's Service Inc. ("Moody's") and Standard & Poor's Ratings Group ("Standard & Poor's"). The table also presents the position of each rating in the applicable agency's rating scale.
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(1) The Travelers Property Casualty pool consists of The Travelers Indemnity Company, Travelers Casualty and Surety Company, The Phoenix Insurance Company, The Standard Fire Insurance Company, Travelers Casualty and Surety Company of Illinois, Farmington Casualty Company, The Travelers Indemnity Company
of Connecticut, The Automobile Insurance Company of Hartford, Connecticut, The Charter Oak Fire Insurance Company, The Travelers Indemnity Company of America, The Travelers Indemnity Company of Missouri, Travelers Casualty Company of Connecticut, Travelers Commercial Insurance Company, The Travelers Indemnity Company of Illinois, Travelers Property Casualty Insurance Company, TravCo Insurance Company, The Travelers Home and Marine Insurance Company, Travelers Personal Security Insurance Company, Travelers Property Casualty Insurance Company of Illinois and Travelers Excess and Surplus Lines Company.
(2) The Gulf pool consists of Gulf Insurance Company, Gulf Insurance Company U.K. Limited, Gulf Underwriters Insurance Company, Select Insurance Company, Atlantic Insurance Company and Gulf Group Lloyds.
INVESTMENTS
Insurance company investments must comply with applicable laws and regulations which prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments.
At December 31, 1998, the carrying value of the Company's investment portfolio was $31.9 billion, of which 92.7% was invested in fixed maturity investments and short-term investments (of which 43% was invested in federal, state or municipal government obligations), 2.1% in mortgage loans and real estate held for sale, 2.6% in common stocks and other equity securities and 2.6% in other investments. The average duration of the fixed maturity portfolio, including short-term investments, was 5.4 years at such date. Non-investment grade securities totaled approximately $1.2 billion, representing approximately 4.2% of the Company's fixed maturity investment portfolio as of December 31, 1998.
The following table sets forth information regarding the investments of the Company. It reflects the average amount of investments, net investment income earned and the yield thereon for the years ended December 31, 1998, 1997 and 1996. The table includes information on the investments of Aetna P&C for periods prior to April 2, 1996 (the date of the Acquisition). See Note 5 of Notes to Consolidated Financial Statements and the discussion of Investment Portfolio in Item 7 of this Form 10-K for information regarding the investment portfolio of the Company.
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DERIVATIVES
See Note 13 of Notes to Consolidated Financial Statements for a discussion of the policies and transactions related to derivatives of the Company.
COMPETITION
The property and casualty insurance industry is highly competitive in the areas of price, service, product offerings, agent relationships and, in the case of personal property and casualty business, method of distribution (i.e., use of independent agents, exclusive agents and/or salaried employees). There are approximately 1,100 property-casualty organizations in the United States, comprised of approximately 2,400 property-casualty companies. Of those organizations, the top 200 account for approximately 90% of the consolidated industry's total net written premiums. In addition, an increasing amount of commercial risks are covered by purchaser self-insurance, large deductibles, risk-purchasing groups, risk-retention groups and captive companies.
COMMERCIAL LINES. The insurance industry is represented in the commercial lines marketplace by many insurance companies of varying size as well as self-insurance programs or captive insurers. Market competition works to set the price charged for insurance products and the level of service provided within the insurance regulatory framework. Growth is driven by a company's ability to provide insurance and services at a price that is reasonable and acceptable to the customer. In addition, the marketplace is affected by available capacity of the insurance industry as measured by policyholders' surplus. Surplus expands and contracts primarily in conjunction with profit levels generated by the industry. Growth in premium and service business is also measured by a company's ability to retain existing customers and to attract new customers.
The National Accounts market is highly competitive. Competition is based primarily on price and breadth of products and services. National Accounts business is generally written through national brokers and regional agents. The Company's Alternative Market business also competes for state contracts to provide claims and policy management services. These contracts, which generally have three-year terms, are selected by state agencies through a bid process based on the quality of service and price. The Company has emerged as the largest assigned risk plan service carrier in the industry with approximately 25% of the market in 1998.
The Commercial Accounts market is highly competitive. Commercial Accounts business has historically been written through independent agents and brokers, although some companies use direct writing. Competitors in this market are primarily national property-casualty insurance companies willing to write most classes of business using traditional products and pricing and, to a lesser extent, regional insurance companies and companies that have developed niche programs for specific industry segments. Companies compete on price, product offerings, response time in policy issuance and claim and loss prevention services. Additionally, reduced overhead and improved efficiency through automation and response time to customer needs are key to success in this market. The construction market has become a focused industry segment for several large insurance companies. Construction market business is written through agents and brokers. Insurance companies compete in this market based upon price, product offering and claim and risk management service. The Company utilizes its specialized underwriters, engineers, auditors and claim handlers, who have extensive experience and knowledge of the construction industry, to work with agents and brokers to compete effectively in this market.
The Select Accounts market is highly competitive and is typically written through independent agents and, to a lesser extent, regional brokers. Both national and regional property-
casualty insurance companies compete in the Select Accounts market which is generally comprised of low risk, "main street" business customers. Risks are underwritten and priced using standard industry practices and a combination of proprietary and standard industry product offerings. Competition in this market is primarily based on price, product offerings and response time in policy services. The Company has established a strong marketing relationship with its distribution network and has provided it with defined underwriting policies, competitive prices and efficient automated environments.
The market in which Specialty Accounts competes includes small to mid-size niche companies that target certain lines of insurance and larger, multi-line companies that focus on various segments of the Specialty Accounts market. Specialty Accounts business is generally written through wholesale brokers and retail agents and brokers throughout the United States. Gulf Specialty derives a competitive advantage through its underwriting practices, low expense levels and broad product offering base. Bond Specialty's reputation for timely decision-making, a nationwide network of local underwriting and industry experts and strong producer and customer relationships as well as its ability to offer its customers a full range of financial services products, enable it to compete effectively. Its ability to cross-sell Bond Specialty products to customers of National Accounts, Commercial Accounts, Select Accounts and through other Citigroup units provides further competitive advantages for the Company.
PERSONAL LINES. Personal lines insurance is written by hundreds of insurance companies of varying sizes. Although national companies write the majority of the business, the Company also faces competition from local or regional companies which often have a competitive advantage because of their knowledge of the local marketplace and their relationship with local agents. The Company believes that the principal competitive factors are price, service, perceived stability of the insurer and name recognition. The Company also competes for business within each of the independent agencies representing it, because these agencies also offer policies of competing independent agency companies. At the agency level, the Company believes that competition is primarily based on price and the level of service, including claims handling, as well as the level of automation and the development of long-term relationships with individual agents. The Company also competes with insurance companies that use captive agents or salaried employees to sell their products. Because these companies generally pay lower commissions than independent agency companies, they may be able to generate business at a lower cost than the Company. Due to this expense advantage, direct writing companies have gradually expanded their market share in recent years. However, in addition to its traditional independent agency distribution, Personal Lines has broadened its distribution of Personal Lines products to include marketing through the Primerica sales force, marketing to sponsoring organizations including employee and affinity groups, establishment of joint marketing arrangements with other insurers and cross-marketing to Citibank customers. The Company believes that its continued focus on expense management practices enables it to price its products competitively in all of its distribution channels. The personal auto insurance marketplace has been more competitive in 1998 as some personal auto carriers have reduced prices in selected markets. This trend is expected to continue in 1999.
REGULATION
STATE REGULATION
The Company's insurance subsidiaries are subject to regulation in the various states and jurisdictions in which they transact business. The extent of regulation varies but generally has its source in statutes that delegate regulatory, supervisory and administrative authority to a department of insurance in each state. The regulation, supervision and administration relate, among other things, to the standards of solvency that must be met and maintained, the licensing of insurers and their agents, the nature of and limitations on investments, premium rates, restrictions on the size of risks that may be insured under a single policy, reserves and provisions for unearned premiums, losses and other obligations, deposits of securities for the benefit of policyholders, approval of policy forms and the regulation of market conduct including the use of credit information in underwriting as well as other underwriting and claims practices. In addition, many states have enacted variations of competitive rate-making laws which allow insurers to set certain premium rates for certain classes of insurance without having to obtain the prior approval of the state insurance department. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of companies and other matters.
At the present time, the Company's insurance subsidiaries are collectively licensed to transact insurance business in all states, the District of Columbia, Guam, Puerto Rico, Bermuda, and the U.S. Virgin Islands, as well as Canada and the United Kingdom.
Although the Company is not regulated as an insurance company, it is the owner of the capital stock of its insurance subsidiaries and as such is subject to state insurance holding company statutes, as well as certain other laws, of each of the states of domicile of its insurance subsidiaries. All holding company statutes, as well as certain other laws, require disclosure and, in some instances, prior approval of material transactions between an insurance company and an affiliate. The holding company statutes, as well as certain other laws, also require, among other things, prior approval of an acquisition of control of a domestic insurer and the payment of extraordinary dividends or distributions.
The Company's principal insurance subsidiaries are domiciled in the State of Connecticut. The insurance holding company law of Connecticut requires notice to, and approval by, the state insurance commissioner for the declaration or payment of any dividend, which together with other distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer's surplus or (ii) the insurer's net income for the twelve-month period ending the preceding December 31st, in each case determined in accordance with statutory accounting practices. Such declaration or payment is further limited by adjusted unassigned funds (surplus), as determined in accordance with statutory accounting practices. The insurance holding company laws of other states in which the Company's insurance subsidiaries are domiciled generally contain similar (although in certain instances somewhat more restrictive) limitations on the payment of dividends. Dividend payments to the Company from its insurance subsidiaries are limited to $1.0 billion in 1999 without prior approval of the Connecticut Insurance Department.
Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by certain insureds as a result of the insolvency of other insurers. Depending upon state law, insurers can be assessed an amount that is generally equal to between 1% and 2% of premiums written for the relevant lines of insurance in that state each year to pay the claims of an insolvent insurer. Most of these payments are recoverable through premium rates, premium tax credits or policy surcharges. Significant increases in assessments could limit the ability of the Company's insurance subsidiaries to recover such assessments through tax credits. In addition, there have been some legislative efforts to limit or repeal the tax offset provisions, which efforts, to date, have been generally unsuccessful. These assessments may increase or decrease in the future depending upon the rate of insolvencies of insurance companies.
The Company's insurance subsidiaries are also required to participate in various involuntary assigned risk pools, principally involving workers' compensation and automobile insurance, which provide various insurance coverages to individuals or other entities that otherwise are unable to purchase such coverage in the voluntary market. Participation in these pools in most states is generally in proportion to voluntary writings of related lines of business in that state. Combined earned premiums related to such pools and assigned risks for the Company were $176 million, $226 million and $379 million in 1998, 1997 and 1996, respectively. The related combined underwriting losses for the Company were $19 million, $16 million and $39 million in 1998, 1997 and 1996, respectively.
Proposed legislation and regulatory changes have been introduced in the states from time to time that would modify certain laws and regulations affecting the financial services industry, including the provisions governing relationships among insurance companies and agents, investment banks and commercial banks. The potential impact of such legislation on the Company's businesses cannot be predicted at this time.
INSURANCE REGULATIONS CONCERNING CHANGE OF CONTROL
Many state insurance regulatory laws intended primarily for the protection of policyholders contain provisions that require advance approval by state agencies of any change in control of an insurance company that is domiciled (or, in some cases, having such substantial business that it is deemed to be commercially domiciled) in that state. The Company owns, directly or indirectly, all of the shares of stock of certain property and casualty insurance companies domiciled in the States of California, Connecticut, Florida, Illinois, Massachusetts, Missouri, New Jersey and Texas. "Control" is generally presumed to exist through the ownership of 10% or more of the voting securities of a domestic insurance company or of any company that controls a domestic insurance company. Any purchaser of shares of Common Stock representing 10% or more of the voting power of the Company will be presumed to have acquired control of the Company's domestic insurance subsidiaries unless, following application by such purchaser in each insurance subsidiary's state of domicile, the relevant Insurance Commissioner determines otherwise. In addition, many state insurance regulatory laws contain provisions that require prenotification to state agencies of a change in control of a nondomestic admitted insurance company in that state. While such prenotification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize issuance of a cease and desist order with respect to the nondomestic admitted insurer if certain conditions exist such as undue market concentration. Any future
transactions that would constitute a change in control of the Company would generally require prior approval by the insurance departments of the states in which the Company's insurance subsidiaries are domiciled or commercially domiciled and may require preacquisition notification in those states that have adopted preacquisition notification provisions and in which such insurance subsidiaries are admitted to transact business.
A subsidiary of the Company is domiciled in the United Kingdom. Insurers in the United Kingdom are subject to certain change of control restrictions in the Insurance Companies Act of 1982 which require the approval of The Department of Trade and Industry if any person is to become a "controller" (which is defined as a person entitled to exercise control of 15% or more of the voting power) of an authorized insurance company.
Certain other insurance subsidiaries of the Company are domiciled in, or authorized to conduct insurance business in Canada. Authorized insurers in Canada are subject to certain change of control restrictions in Section 407 of the Insurance Companies Act, which requires the approval of the Minister of Finance if any person acquires a "significant interest" (beneficial ownership, directly or through one or more entities controlled by such person, of 10% of the outstanding shares of such Company) in an authorized insurance company.
Such requirements may deter, delay or prevent certain transactions affecting the control of or the ownership of common stock, including transactions that could be advantageous to the stockholders of the Company.
INSURANCE REGULATORY INFORMATION SYSTEM
The NAIC Insurance Regulatory Information System ("IRIS") was developed to help state regulators identify companies that may require special attention. The IRIS system consists of a statistical phase and an analytical phase whereby financial examiners review annual statements and financial ratios. The statistical phase consists of 12 key financial ratios that are generated from the NAIC database annually; each ratio has an established "usual range" of results. These ratios assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies.
A ratio result falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. An insurance company may fall out of the usual range for one or more ratios because of specific transactions that are in themselves immaterial. Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. In normal years, 15% of the companies included in the IRIS system are expected by the NAIC to be outside the usual range on four or more ratios.
In each of the last three years, certain of the Company's insurance subsidiaries have been outside of the usual range for certain IRIS ratios. In all such instances, the regulators have been satisfied upon follow-up that there is no solvency problem. It is possible that similar events could occur this year, and management believes that the resolution would be the same. No
regulatory action has been taken by any state insurance department or the NAIC with respect to IRIS ratios of any of the Company's insurance subsidiaries for the three years ended December 31, 1998.
For 1998, Travelers Indemnity, the lead company for the Travelers Property Casualty pool, had no values outside the usual range for all IRIS ratios. For 1997, Travelers Indemnity was outside the usual range for the liabilities to liquid assets ratio. Travelers Indemnity is also the ultimate parent of 19 insurance companies and several other non-insurance entities. As a result, this ratio is distorted because all of the liabilities are included in the calculation while Travelers Indemnity's significant investment in affiliates, which increased in 1997, is excluded from liquid assets. For 1996, both the two-year overall operating ratio and the two-year reserve development to surplus ratios were outside the usual range for Travelers Casualty and Surety Company ("Travelers Casualty") and The Standard Fire Insurance Company ("Standard Fire") because of actions taken during 1996 and 1995 to strengthen reserves for environmental and asbestos-related claims. Both Travelers Casualty and Standard Fire have been members of the Travelers Property Casualty pool since January 1, 1997. In addition, in 1996, the change in writings ratio produced an unusual value for Standard Fire and the estimated current reserve deficiency to surplus ratio was outside the usual range for Travelers C&S of America, both as a result of a decision in 1995 to combine the Aetna P&C's two intercompany pooling arrangements (one for Personal Lines and one for Commercial Lines) into one pool. If these two ratios were recalculated to have all items reflect the new agreement, the ratios would not produce unusual values. Concurrent with the change in the intercompany pooling arrangements, capital was reallocated among Aetna P&C insurers, which resulted in an unusual value in the change in surplus ratio for Standard Fire.
The following table sets forth information regarding the premium to surplus ratios of the Company. For informational purposes only, the table includes Aetna P&C for all periods presented.
SCHEDULE OF PREMIUM TO SURPLUS RATIOS (STATUTORY BASIS)
RISK-BASED CAPITAL (RBC) REQUIREMENTS
In order to enhance the regulation of insurer solvency, the NAIC has adopted a formula and model law to implement RBC requirements for most property and casualty insurance companies, which is designed to assess minimum capital requirements and to raise the level of protection that statutory surplus provides for policyholder obligations. The RBC formula for property and casualty insurance companies measures four major areas of risk facing property and casualty insurers: (i) underwriting, which encompasses the risk of adverse loss developments and inadequate pricing; (ii) declines in asset values arising from credit risk; (iii) declines in asset
values arising from investment risks; and (iv) off-balance sheet risk arising from adverse experience from non-controlled assets, guarantees for affiliates or other contingent liabilities and reserve and premium growth. Pursuant to the law, insurers having less statutory surplus than that required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy.
The RBC law provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the level of surplus to RBC falls. The first level, the Company Action Level (as defined by the NAIC), requires an insurer to submit a plan of corrective actions to the regulator if surplus falls below 200% of the RBC amount. The Regulatory Action Level (as defined by the NAIC) requires an insurer to submit a plan containing corrective actions and permits the relevant Insurance Commissioner to perform an examination or other analysis and issue a corrective order if surplus falls below 150% of the RBC amount. The Authorized Control Level (as defined by the NAIC) allows the relevant Insurance Commissioner to rehabilitate or liquidate an insurer in addition to the aforementioned actions if surplus falls below 100% of the RBC amount. The fourth action level is the Mandatory Control Level (as defined by the NAIC) which requires the relevant Insurance Commissioner to rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC amount.
The formulas have not been designed to differentiate among adequately capitalized companies which operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank such companies. At December 31, 1998, all of the Company's property-casualty insurance companies had adjusted capital in excess of amounts requiring company or regulatory action at any of the four levels.
FEDERAL REGULATION
Citigroup is a bank holding company subject to the provisions of the Bank Holding Company Act of 1956 (the "BHCA"). For a discussion of the BHCA and its application to the Company, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 2 of Notes to Consolidated Financial Statements.
Although the federal government does not directly regulate the business of insurance, other than flood insurance, federal initiatives often have an impact on the insurance industry. Legislation has been introduced in Congress during the past several sessions that, if enacted, would result in substantially greater federal regulation of the insurance business. Current and proposed federal measures that may affect the property and casualty industry may include: possible changes to the tax laws governing property and casualty insurance companies; proposals regarding natural disaster protection, tort reform (including limits to product liability lawsuits) and the use of credit history; and the enforcement of territorial underwriting in Personal Lines. In addition, proposed legislation has been introduced in Congress from time to time that would modify certain laws and regulations affecting the financial services industry, including the provisions regarding affiliations among insurance companies, investment banks and commercial banks.
President Clinton's recent budget proposal (the "Budget Proposal") contains a number of tax provisions that could adversely impact the Company, including a provision relating to tax-exempt interest obligations. The Budget Proposal, which is in its early stages of consideration, has not yet been introduced as part of any legislation in Congress but has engendered considerable opposition from the public and members of Congress.
It is not possible to predict whether the Budget Proposal or any of the proposed legislation discussed above will be enacted, what form such legislation might take when enacted, or the potential effects of such legislation on the Company and its competitors.
OTHER OPERATIONS
Other Operations consists primarily of financing costs associated with the Acquisition.
OTHER INFORMATION
GENERAL BUSINESS FACTORS
In the judgment of the Company, no material part of the business of the Company and its subsidiaries is dependent upon a single customer or group of customers, the loss of any one of which would have a materially adverse effect on the Company, and no one customer or group of affiliated customers accounts for as much as 10% of the Company's consolidated revenues.
At December 31, 1998, the Company had approximately 20,000 full-time and 670 part-time employees. The Company believes that its employee relations are satisfactory. None of the Company's employees is subject to collective bargaining agreements.
SOURCE OF FUNDS
For a discussion of the Company's sources of funds and maturities of the long-term debt of the Company, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," and Note 8 of Notes to Consolidated Financial Statements.
TAXATION
For a discussion of tax matters affecting the Company and its operations, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 9 of Notes to Consolidated Financial Statements.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
For financial information regarding industry segments of the Company, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 4 of Notes to Consolidated Financial Statements.
EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers of the Company are indicated below. Ages are given as of March 3, 1999.
Mr. Fishman was named President and Chief Executive Officer of the Company in October 1998. Since January 1998 he has also served as Chief Executive Officer of Commercial Lines, and from October 1996 through October 1998 he also served as President of Commercial Lines. From October 1996 through January 1998, he also served as Chief Operating Officer of Commercial Lines. Mr. Fishman was Vice Chairman of the Company from January 1996 through October 1998, and from January 1996 through January 1998 he was the Chief Administrative Officer of the Company. Mr. Fishman has also served as Vice Chairman of The Travelers Insurance Group Inc. since September 1995, and has been Chief Financial Officer and Chief Administrative Officer of that Company since December 1993 and June 1996, respectively. Mr. Fishman was a Senior Vice President of Travelers Group from October 1991 through October 1998, and Treasurer of Travelers Group from 1991 to December 1993. From 1989 to 1991, he held various other positions with Travelers Group and its subsidiaries.
Mr. Clarke was named Vice Chairman of the Company in January 1998. He has been Chairman of Commercial Lines since 1990, and served as Chief Executive Officer of Commercial Lines from January 1996 through January 1998. From 1990 to January 1996, Mr. Clarke was Chairman of Commercial Lines of Travelers P&C. Prior thereto, Mr. Clarke was Senior Vice President of the National Accounts and the Reinsurance business units of Travelers P&C. Mr. Clarke has served in several positions at Travelers P&C since 1958.
Mr. Gibbs was named President and Chief Executive Officer - Claim Services in January 1999, and served as Executive Vice President - Claim Services from December 1996 through January 1999. Prior to joining the Company, Mr. Gibbs was Senior Vice President of Product
Services and Regulation at American International Group ("AIG"). From 1990 to 1996, Mr. Gibbs held various positions with AIG.
Mr. Kiernan has been Chairman and Chief Executive Officer - Bond Specialty of the Company since March 1996. From 1989 to March 1996, Mr. Kiernan was Vice President of Aetna's bond business and has worked in the bond business lines at Aetna since 1963. From June 1995 to March 1996, Mr. Kiernan was Vice President of Standard Commercial Accounts of Aetna.
Mr. Khanna has been Chief Executive Officer - Personal Lines of the Company since October 1998. He was, from 1986 to 1998, a Senior Vice President of Citibank, N.A. From 1982 until 1986, he was Engagement Manager at McKinsey & Co.
Mr. Foley has been Chairman and Chief Executive Officer - Risk Management of the Company since January 1996. Mr. Foley served as Chairman of Personal Lines of Travelers P&C from 1994 until his present appointment and from 1987 to 1991, and served as Chief Financial Officer of The Travelers Corporation from 1991 through 1993.
Mr. Hannon has been Chief Financial Officer of the Company since January 1996. Prior to joining the Company, Mr. Hannon served as Deputy Managing Partner of the Financial Services practice of KPMG LLP, which he joined in 1969, and also served as a member of the firm's Securities and Exchange Commission reviewing partner's committee.
Mr. Michener has been Senior Vice President, General Counsel and Secretary of the Company since July 1996. Prior to joining the Company, Mr. Michener was General Counsel of The MetraHealth Companies, Inc. from January 1995 to October 1995 and Deputy General Counsel of United HealthCare Corporation from October 1995 to May 1996. From August 1977 to December 1994, Mr. Michener served in several positions at TIGI.
Mr. Shugrue has been Vice President and Controller of the Company since October 1996 and Chief Accounting Officer of the Company since November 1996. Mr. Shugrue has served in several positions at TIGI since 1983.
GLOSSARY OF INSURANCE TERMS
Accident year........................ The annual accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.
Adjusted unassigned surplus.......... Unassigned surplus as of the most recent statutory annual report reduced by twenty-five percent of that year's unrealized appreciation in value or revaluation of assets or unrealized profits on investments, as defined in such report.
Admitted insurer..................... A company licensed to transact insurance business within a state.
Alternative market................... The segment of the insurance market which has developed in response to volatility in cost and availability of traditional commercial insurance coverage and consists of various risk financing mechanisms, including self insurance, captive insurance companies, risk retention groups and residual market business.
Annuity.............................. A contract that pays a periodic income benefit for the life of a person (the annuitant), the lives of two or more persons or for a specified period of time.
Assigned risk pools.................. Reinsurance pools which cover risks for those unable to purchase insurance in the voluntary market because the risk is too great or rate inadequacy has reduced the supply of insurance. The costs of the risks associated with these pools are charged back to insurance carriers in proportion to their direct writings.
Assumed reinsurance.................. Insurance risks acquired from a ceding company.
Assumption reinsurance............... A transaction whereby the ceding company transfers its entire obligation under the policy to the reinsurer, who becomes directly liable to the policyholder in all respects, including collecting premiums and paying benefits. See "Reinsurance."
Attachment point..................... The amount of losses above which excess of loss reinsurance becomes operative.
Broker............................... One who negotiates contracts of insurance or reinsurance on behalf of an insured party, receiving a commission from the insurer or reinsurer for placement and other services rendered.
Capacity............................. The percentage of surplus, or the dollar amount of exposure, that an insurer or reinsurer is willing or able to place at risk. Capacity may apply to a single risk, a program, a line of business or an entire book of business. Capacity may be constrained by legal restrictions, corporate restrictions or indirect restrictions.
Captive company...................... An insurance company formed to insure the risks of its parent entity or entities.
Case reserves........................ Loss reserves, established with respect to specific, individual reported claims.
Casualty insurance................... Insurance which is primarily concerned with the losses caused by injuries to third persons (i.e., not the insured) and the legal liability imposed on the insured resulting therefrom. It includes, but is not limited to, employers' liability, workers' compensation, public liability, automobile liability, personal liability and aviation liability insurance. It excludes certain types of losses that by law or custom are considered as being exclusively within the scope of other types of insurance, such as fire or marine.
Catastrophe.......................... A severe loss, usually involving risks such as fire, earthquake, windstorm, explosion and other similar events.
Catastrophe loss..................... Loss and directly identified loss adjustment expenses from catastrophes.
Catastrophe reinsurance.............. A form of excess of loss property reinsurance which, subject to a specified limit, indemnifies the ceding company for the amount of loss in excess of a specified retention with respect to an accumulation of losses resulting from a catastrophic event. The actual reinsurance document is called a "catastrophe cover."
Cede; ceding company................. When an insurer reinsures its liability with another insurer (a "cession"), it "cedes" business and is referred to as the "ceding company."
Ceded reinsurance.................... Insurance risks transferred to another company as reinsurance. See "Reinsurance."
Claim................................ Request by an insured for indemnification by an insurance company for loss incurred from an insured peril.
Claim adjustment expense............. See "Loss adjustment expense."
Claims and claim adjustment expense....................... See "Loss and loss adjustment expenses."
Claims and claim adjustment expense reserves.............. See "Loss reserves."
Clash agreement...................... An excess of loss agreement with a retention higher than the limits on any one reinsured policy. The agreement is thus only exposed to loss when two or more policies (perhaps from different lines of business) are involved in a common occurrence in an amount greater than the clash agreement retention. Also known as contingency cover.
Combined ratio....................... The sum of the loss and LAE ratio, the underwriting expense ratio and, where applicable, the ratio of dividends to policyholders to net premiums earned. A combined ratio under 100% generally indicates an underwriting profit. A combined ratio over 100% generally indicates an underwriting loss.
Commercial lines..................... The various kinds of property and casualty insurance that are written for businesses.
Commutation agreement................ An agreement between a reinsurer and a ceding company whereby the reinsurer pays an agreed upon amount in exchange for a complete discharge of all obligations, including future obligations, between the parties for reinsurance losses incurred.
Deductible........................... The amount of loss that an insured retains.
Deferred acquisition costs........... Primarily commissions and premium taxes, which vary with and are primarily related to the production of new business, are deferred and amortized to achieve a matching of revenues and expenses when reported in financial statements prepared in accordance with GAAP.
Direct written premiums.............. The amounts charged by a primary insurer to insureds in exchange for coverages provided in accordance with the terms of an insurance contract.
Earned premiums or premiums earned........................ That portion of property-casualty premiums written that applies to the expired portion of the policy term. Earned premiums are recognized as revenues under both SAP and GAAP.
Excess liability..................... Additional casualty coverage above a layer of insurance exposures.
Excess of loss reinsurance........... Reinsurance that indemnifies the reinsured against all or a specified portion of losses under a specified dollar amount or "retention."
Expense ratio........................ See "Underwriting expense ratio."
Extra contractual obligations........ Amounts incurred by an insurer, beyond those that would have been incurred as specified in the insurance agreement with an insured, due to monetary awards required by a court of law against the insurer for its negligence to or bad faith in dealing with its insured.
Facultative reinsurance.............. The reinsurance of all or a portion of the insurance provided by a single policy. Each policy reinsured is separately negotiated.
Fidelity and surety programs.......... Insurance which guarantees performance of an obligation or indemnifies for loss due to embezzlement or wrongful abstraction of money, securities or other property.
Guaranteed cost products............. An insurance policy where the premiums charged will not be adjusted for actual loss experience during the covered period.
Guaranty fund........................ State-regulated mechanism which is financed by assessing insurers doing business in those states. Should insolvencies occur, these funds are available to meet some or all of the insolvent insurer's obligations to policyholders.
Incurred but not reported ("IBNR") reserves............. Reserves for estimated losses and LAE that have been incurred but not yet reported to the insurer.
Indemnity reinsurance................ A transaction whereby the reinsurer agrees to indemnify the ceding company against all or part of the loss that the latter may sustain under the policies it issued that are being reinsured. The ceding company remains primarily liable as the direct insurer on all risks ceded. See "Reinsurance."
Inland marine........................ A broad type of insurance generally covering articles that may be transported from one place to another, as well as bridges, tunnels and other instrumentalities of transportation. It includes goods in transit (generally other than transoceanic) and may include policies for movable objects such as personal effects, personal property, jewelry, furs, fine art and others.
IRIS ratios.......................... Financial ratios calculated by the NAIC to assist state insurance departments in monitoring the financial condition of insurance companies.
Large deductible policy.............. An insurance policy where the customer assumes at least $25,000 or more of each loss.
Loss................................. An occurrence that is the basis for submission and/or payment of a claim. Losses may be covered, limited or excluded from coverage, depending on the terms of the policy.
Loss adjustment expenses ("LAE")....................... The expenses of settling claims, including legal and other fees and the portion of general expenses allocated to claim settlement costs.
Loss and LAE ratio................... For SAP it is the ratio of incurred losses and loss adjustment expenses to net earned premiums. For GAAP it is the ratio of incurred losses and loss adjustment expenses reduced by an allocation of fee income to net earned premiums.
Loss reserves........................ Liabilities established by insurers and reinsurers to reflect the estimated cost of claims incurred that the insurer or reinsurer will ultimately be required to pay in respect of insurance or reinsurance it has written. Reserves are established for losses and for LAE, and consist of case reserves and IBNR reserves.
Losses and loss adjustment expenses...................... The sum of losses incurred and loss adjustment expenses.
Losses incurred...................... The total losses sustained by an insurance company under a policy or policies, whether paid or unpaid. Incurred losses include a provision for IBNR.
Multi-peril policies................. Refers to policies which cover both property and third party liability exposures.
National Association of Insurance Commissioners ("NAIC")...................... An organization of the insurance commissioners or directors of all 50 states and the District of Columbia organized to promote consistency of regulatory practice and statutory accounting standards throughout the United States.
Net written premiums................. Direct written premiums plus assumed reinsurance less premiums ceded to reinsurers.
Non-admitted coverage................ Insurance coverage written in a given state by an insurer not licensed in that state.
Novation............................. A transaction in which the original direct insurer's obligations are completely extinguished, resulting in no further exposure to loss arising on the business novated.
Personal lines....................... Types of property and casualty insurance written for individuals or families, rather than for businesses.
Pool................................. An organization of insurers or reinsurers through which particular types of risks are underwritten with premiums, losses and expenses being shared in agreed-upon percentages.
Premiums............................. The amount charged during the year on policies and contracts issued, renewed or reinsured by an insurance company.
Producer............................. Contractual entity which directs insureds to the insurer for coverage. See "Broker."
Property insurance................... Insurance that provides coverage to a person with an insurable interest in tangible property for that person's property loss, damage or loss of use.
Quota share reinsurance.............. Reinsurance wherein the insurer cedes an agreed-upon fixed percentage of liabilities, premiums and losses for each policy covered on a pro rata basis.
Rate of renewal/retention ratio......................... Current period renewal accounts or policies as a percentage of total accounts or policies available for renewal.
Rates................................ Amounts charged per unit of insurance.
Reinsurance.......................... The practice whereby one insurer, called the reinsurer, in consideration of a premium paid to such insurer, agrees to indemnify another insurer, called the ceding company, for part or all of the liability assumed by the ceding company under one or more policies or contracts of insurance which it has issued.
Reinsurance agreement................ A contract specifying the terms of a reinsurance transaction.
Residual market (involuntary business)..................... Insurance market which provides coverage for risks unable to purchase insurance in the voluntary market either because the risk is too great or rate inadequacy has reduced the supply of insurance. Residual markets are frequently created by state legislation either because of lack of available coverage such as property coverage in a windstorm prone area or protection of the accident victim as in the case of workers' compensation. The costs of the residual market are usually charged back to the direct insurance carriers in proportion to the carriers' voluntary market shares for the type of coverage involved.
Retention............................ The amount of exposure an insurance company retains on any one risk or group of risks.
Retrospective premiums............... Premiums related to retrospectively rated policies.
Retrospective rating................. A plan or method which permits adjustment of the final premium or commission on the basis of actual loss experience, subject to certain minimum and maximum limits.
Risk-based capital ("RBC")........... A measure adopted by the NAIC for assessing the minimum statutory capital and surplus requirements of insurers.
Risk retention....................... The amount or portion of a risk an insurer retains for its own account after ceded reinsurance. Losses above the stated retention level are collectible from the reinsurer. The retention level may be stated as a percentage or dollar amount.
Salvage.............................. The amount of money an insurer recovers through the sale of property transferred to the insurer as a result of a loss payment.
Second injury fund................... The employer of an injured, impaired worker is responsible only for the workers' compensation benefit for the most recent injury; the second injury fund would cover the cost of any additional benefits for aggravation of a prior condition. The cost is shared by the insurance industry, funded through assessments to insurance companies based on either premiums or losses.
Self-insured retentions.............. That portion of the risk retained by a person for its own account.
Servicing carrier.................... An insurance company that provides, for a fee, various services including policy issuance, claims adjusting and customer service for insureds in a reinsurance pool.
Standard policy forms................ Self-contained pre-printed policy language used when a large number of insureds face similar loss exposures.
Statutory accounting practices ("SAP")....................... The rules and procedures prescribed or permitted by United States state insurance regulatory authorities for recording transactions and preparing financial statements. Statutory accounting practices generally reflect a modified going concern basis of accounting.
Statutory surplus.................... As determined under SAP, the amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets. Admitted assets are assets of an insurer prescribed or permitted by a state to be recognized on the statutory balance sheet. Statutory surplus is also referred to as "surplus" or "surplus as regards policyholders" for statutory accounting purposes.
Structured settlements............... Periodic payments to an injured person or survivor for a determined number of years or for life, typically in settlement of a claim under a liability policy, usually funded through the purchase of an annuity.
Subrogation.......................... A principle of law incorporated in insurance policies, which enables an insurance company, after paying a loss to its insured, to recover the amount of the loss from another who is legally liable for it.
Third party liability................ A liability owed to a claimant (or "third party") who is not one of the two parties to the insurance contract. Insured liability claims are referred to as third party claims.
Treaty reinsurance................... The reinsurance of a specified type or category of risks defined in a reinsurance agreement (a "treaty") between a primary insurer or other reinsured and a reinsurer. Typically, in treaty reinsurance, the primary insurer or reinsured is obligated to offer and the reinsurer is obligated to accept a specified portion of all such type or category of risks originally written by the primary insurer or reinsured.
Umbrella coverage.................... A form of insurance protection against losses in excess of amounts covered by other liability insurance policies or amounts not covered by the usual liability policies.
Unassigned funds (surplus)........... The undistributed and unappropriated amount of statutory surplus.
Underwriter.......................... An employee of an insurance company who examines, accepts or rejects risks and classifies accepted risks in order to charge an appropriate premium for each accepted risk. The underwriter is expected to select business that will produce an average risk of loss no greater than that anticipated for the class of business.
Underwriting......................... The insurer's or reinsurer's process of reviewing applications for insurance coverage, and the decision whether to accept all or part of the coverage and determination of the applicable premiums; also refers to the acceptance of such coverage.
Underwriting expense ratio........... For SAP it is the ratio of underwriting expenses incurred to net written premiums. For GAAP it is the ratio of underwriting expenses incurred reduced by an allocation of fee income to net written premiums.
Underwriting gain or underwriting loss............. The pre-tax profit or loss experienced by a property and casualty insurance company after deducting loss and loss adjustment expenses and operating expenses from net earned premiums. This profit or loss calculation includes reinsurance assumed and ceded but excludes investment income.
Unearned premium..................... The portion of premiums written that is allocable to the unexpired portion of the policy term.
Voluntary market..................... The market in which a person seeking insurance obtains coverage without the assistance of residual market mechanisms.
Wholesale broker..................... An independent or exclusive agent that represents both admitted and non admitted insurers in market areas which include standard, non-standard, specialty and excess and surplus lines of insurance. The wholesaler does not deal directly with the insurance consumer. The wholesaler deals with the retail agent or broker.
Workers' compensation................ A system (established under state and federal laws) under which employers provide insurance for benefit payments to their employees for work-related injuries, deaths and diseases, regardless of fault.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's executive offices are located in Hartford, Connecticut. The Company rents from an affiliate of Citigroup approximately 1,030,000 square feet of office space in Hartford, Connecticut, under a ten-year lease that expires on April 1, 2006 and, subject to certain conditions, is renewable by the Company for additional five-year terms. Under certain circumstances, the Company may be required to purchase the leased premises. In addition, the Company leases 199 field offices totaling approximately 4,920,000 square feet throughout the United States under leases or subleases with third parties. The Company also rents from Aetna approximately 373,000 square feet of office space at CityPlace, located in Hartford, Connecticut, under an eight-year sublease that expires in 2004.
The Company believes its properties are adequate and suitable for its business as presently conducted and are adequately maintained. For further information concerning leases, see Note 12 of Notes to Consolidated Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or its subsidiaries is a party or to which any of their property is subject.
Beginning in January 1997, sixteen purported class actions and one multi-party suit were commenced in various courts against certain subsidiaries of the Company, dozens of other insurers and the National Council on Compensation Insurance ("NCCI"). The allegations in the actions are substantially similar. The plaintiffs generally allege that the defendants conspired to collect excessive or improper premiums on certain loss-sensitive workers' compensation insurance policies in violation of state insurance laws, antitrust laws, and state unfair trade practices laws. Plaintiffs seek unspecified monetary damages. Actions have been commenced in the following jurisdictions: Georgia (El Chico Restaurants, Inc. v. The Aetna Casualty and Surety Company, et al. and FFE Transportation Services, Inc. et al. v. NCCI, et al.); Tennessee (El Chico Restaurants, Inc. v. The Aetna Casualty and Surety Company, et al.); Florida (Bristol Hotel Management Corp., et al. v. The Aetna Casualty and Surety Company, et al.); New Jersey (Foodarama Supermarkets, Inc., et al. v. The Aetna Casualty and Surety Company, et al.); Illinois (Hill-Behan Lumber Co v. Hartford Insurance Co. et al. and CR/PL Management Co., et al. v. Allianz Insurance Company Group, et al.); Pennsylvania (Foodarama Supermarkets, Inc. v. The Aetna Casualty and Surety Company, et al.); Missouri (Hill-Behan Lumber Corp., et al. v. Hartford Insurance Co., et al.); California (Dal-Tile Corp., et al. v. NCCI, et al.); Texas (Sandwich Chef of Texas, Inc., et al. v. Reliance National Insurance Company, et al.); Alabama (Alumax Inc., et al. v. Allianz Insurance Company, et al.); Michigan (American Association of Retired Persons, et al. v. National Surety Corp., et al.); Kentucky (Payless Cashways, Inc., et al. v. National Surety Corp., et al.); New York (Burnham Service Corp. v. NCCI, et al.); and Arizona (Albany International Corp. v. American National Fire Insurance Company, et al.). The Company has vigorously defended all of the above-mentioned cases, and intends to continue doing so.
In February 1998, the Georgia state court dismissed the El Chico Restaurants lawsuit. Plaintiffs in that case have appealed. In April 1998, the plaintiffs in the Hill-Behan Lumber
lawsuit in Illinois voluntarily dismissed that case with prejudice. In August 1998, the Florida federal court dismissed the Bristol Hotel Management case and plaintiffs have appealed. In November 1998, the state court in California granted the Company's motion to dismiss the Dal-Tile Corp. case and granted plaintiffs leave to replead. In December 1998, the Pennsylvania state court in Foodarama Supermarkets granted objections to certain allegations of the complaint. In January 1999, the Arizona federal court dismissed in part the Albany International Corp. action; the Tennessee court in El Chico Restaurants granted defendants' motions to dismiss; and the Illinois state court dismissed in part the pending complaint in CR/PL Management. The Company is awaiting decisions on motions to dismiss filed in Missouri, New Jersey, Michigan, and Kentucky.
In the ordinary course of business, certain of the Company's subsidiaries receive claims asserting alleged injuries and damages from asbestos and other hazardous waste and toxic substances. The conditions surrounding the final resolution of these claims continue to change. Currently, it is not possible to predict legal and legislative changes and their impact on the future development of asbestos and environmental claims. Such development will be affected by future court decisions and interpretations as well as changes in legislation applicable to such claims. Because of these future unknowns, additional liabilities may arise for amounts in excess of current reserves. The magnitude of these additional amounts, or a range of these additional amounts, cannot now be reasonably estimated, and could result in a liability exceeding reserves by an amount that would be material to the Company's operating results in a future period. However, the Company believes that it is not likely that these claims will have a material adverse effect on the Company's financial condition or liquidity.
The Company is involved in numerous other lawsuits (other than environmental and asbestos claims) arising, from the most part, in the ordinary course of business operations either as a liability insurer defending third-party claims brought against its insureds or an insurer defending coverage claims brought against it. Although there can be no assurances, the Company believes, based on information currently available, that the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on the Company's results of operations, financial condition or liquidity.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock is listed on the NYSE under the symbol "TAP." There is no established public trading market for the Company's Class B Common Stock. The high and low sale prices, as reported on the consolidated transaction reporting system, for the Class A Common Stock for the periods indicated, and the dividends per share, are set forth on the following page:
- ---------------------------- * Through March 3, 1999
At March 3, 1999, the Company had approximately 1,259 holders of record of its Class A Common Stock. This figure does not represent the actual number of beneficial owners of common stock because shares are frequently held in "street name" by securities dealers and others for the benefit of individual owners who may vote the shares. At March 3, 1999, TIGI was the sole holder of record of the Company's Class B Common Stock.
For information on dividend restrictions in certain long-term loan and credit agreements of the Company and its subsidiaries, as well as restrictions on the ability of certain of the Company's subsidiaries to transfer funds to the Company in the form of cash dividends or otherwise, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
See "Five-Year Summary of Selected Financial Data" on page 17 of the Company's 1998 Annual Report to Stockholders (the "1998 Annual Report"), included as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 18 of the 1998 Annual Report, included as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 18 of the 1998 Annual Report, included as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page hereof. There is also incorporated by reference herein in response to this Item the material under the caption "Selected Quarterly Financial Data (unaudited)" on page 58 of the 1998 Annual Report, which material is included as part of Exhibit 13 to this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information on the directors of the Company, see the material under the caption "Election of Directors," in the definitive Proxy Statement for the Company's Annual Meeting of Stockholders to be held on April 20, 1999, filed with the Securities and Exchange Commission (the "Proxy Statement"), incorporated herein by reference. For information on executive officers, see Item 1, "Business -- Other Information -- Executive Officers of the Company" herein. For information on compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, see the material under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement, incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
See the material under the caption "Executive Compensation" of the Proxy Statement, incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the material under the captions "Voting Rights," "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" of the Proxy Statement, incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the material under the captions "Election of Directors" and "Executive Compensation" of the Proxy Statement, incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated Financial Statements and Schedules on page hereof.
(2) Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedules on page hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1998.
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 3.01 Restated Certificate of Incorporation of Travelers Property Casualty Corp. (the "Company"), Certificate of Designations, Powers, Preferences and Rights of 7.5% Redeemable Preferred Stock, Series Z, of the Company, Certificate of Amendment to the Restated Certificate of Incorporation, filed March 7, 1997, and Certificate of Amendment to the Restated Certificate of Incorporation, filed April 23, 1997, incorporated by reference to Exhibit 3.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997 (File No.1-14328) (the "Company's 3/31/97 10-Q").
3.02 Restated By-Laws of the Company, effective April 23, 1997, incorporated by reference to Exhibit 3.02 to the Company's 3/31/97 10-Q.
4.01 Intercompany Agreement, dated as of April 2, 1996, between Travelers Group Inc. and the Company, incorporated by reference to Exhibit 4.1 to the Company's Form S-1.
4.02.1 Shareholders Agreement, dated as of April 2, 1996, by and among the Company, The Travelers Insurance Group Inc., Aetna Life and Casualty Company (now known as Aetna Services, Inc.), J.P. Morgan Capital Corporation, The Trident Partnership, L.P. and Fund American Enterprises Holdings, Inc., incorporated by reference to Exhibit 4.2 to the Company's Form S-1.
4.02.2 Amendment to Shareholders Agreement, dated June 20, 1997, by and among the Company, Aetna Services, Inc., J.P. Morgan Capital Corporation, The Trident Partnership, L.P. and Fund American Enterprises Holdings, Inc., incorporated by reference to Exhibit 4.02.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-14328) (the "Company's 1997 10-K").
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ----------------------
10.01* Travelers Property Casualty Corp. Capital Accumulation Plan (as amended through July 23, 1997), incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 (File No. 1-14328).
10.02* Travelers Property Casualty Corp. 1996 Executive Option Plan (as amended through March 7, 1997), incorporated by reference to Exhibit 10.03 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (File No. 1-14328) (the "Company's 1996 10-K").
10.03* Travelers Property Casualty Corp. Executive Performance Compensation Plan (as amended through March 7, 1997), incorporated by reference to Exhibit 10.04 to the Company's 1996 10-K.
10.04* Travelers Property Casualty Corp. 1996 Deferred Compensation Plan for Non-Employee Directors (as amended through September 25, 1996), incorporated by reference to Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996 (File No. 1-14328).
10.05* Travelers Group Capital Accumulation Plan (as amended through July 23, 1997), incorporated by reference to Exhibit 10.02 to the Quarterly Report on Form 10-Q of Travelers Group Inc. for the fiscal quarter ended September 30, 1997 (File No. 1-9924) (the "TRV 9/30/97 10-Q").
10.06.1* Travelers Group Stock Option Plan (as amended and restated as of April 24, 1996), incorporated by reference to Exhibit 10.02.1 to the Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended December 31, 1996 (File No. 1-9924) (the "TRV 1996 10-K").
10.06.2* Amendment No. 14 to the Travelers Group Stock Option Plan, incorporated by reference to Exhibit 10.01 to the Quarterly Report on Form 10-Q of Travelers Group Inc. for the fiscal quarter ended September 30, 1996 (File No. 1-9924).
10.06.3* Amendment No. 15 to the Travelers Group Stock Option Plan, incorporated by reference to Exhibit 10.04 to the TRV 9/30/97 10-Q.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ----------------------
10.07* Travelers Group 1996 Stock Incentive Plan (as amended through July 23, 1997), incorporated by reference to Exhibit 10.03 to the TRV 9/30/97 10-Q.
10.08* Travelers Group Inc. Retirement Benefit Equalization Plan (as amended and restated as of January 2, 1996), incorporated by reference to Exhibit 10.04 to Citigroup Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 1-9934) (the "Citigroup 1998 10-K").
10.09 TAPC Tax Allocation Agreement, effective as of January 1, 1996 among Travelers Group Inc., The Travelers Insurance Group Inc. and the Company, incorporated by reference to Exhibit 10.9 to the Company's Form S-1.
10.10 Lease for office space at CityPlace, dated March 28, 1996, by and between Aetna Life and Casualty Company and The Travelers Indemnity Company, incorporated by reference to Exhibit 10.10 to the Company's Form S-1.
10.11 Lease for office space in Hartford, Connecticut, dated as of April 2, 1996, by and between The Travelers Insurance Company and The Travelers Indemnity Company, incorporated by reference to Exhibit 10.14 to the Company's 1996 10-K.
10.12* Letter Agreement, dated November 17, 1996, between the Company and Stanton F. Long, incorporated by reference to Exhibit 10.15 to the Company's 1996 10-K.
10.13* The Travelers Insurance Deferred Compensation Plan (formerly The Travelers Corporation TESIP Restoration and Non-Qualified Savings Plan) (as amended December 10, 1998), incorporated by reference to Exhibit 10.10 to the Citigroup 1998 10-K.
11.01+ Computation of Earnings Per Share.
12.01+ Computation of Ratio of Earnings to Fixed Charges.
13.01+ Pages 17 through 59 of the 1998 Annual Report to Stockholders of the Company (pagination of exhibit does not correspond to pagination in the 1998 Annual Report to Stockholders).
21.01+ Subsidiaries of the Registrant.
23.01+ Consent of KPMG LLP, Independent Certified Public Accountants.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ----------------------
24.01+ Powers of Attorney.
27.01+ Financial Data Schedule.
The total amount of securities authorized pursuant to any instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the Commission upon request.
The financial statements required by Form 11-K for 1998 for the Travelers Group 401(k) Savings Plan will be filed as an exhibit by amendment to this Form 10-K pursuant to Rule 15d-21 of the Securities Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished at a cost of $.25 per page (although no charge will be made for the 1998 Annual Report on Form 10-K) to security holders who make written request therefor to Corporate Communications, Travelers Property Casualty Corp., One Tower Square, Hartford, Connecticut 06183.
- -------------------
* Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
+ Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 19th day of March, 1999.
TRAVELERS PROPERTY CASUALTY CORP.
(Registrant)
By: /s/ Jay S. Fishman ------------------------------------ Jay S. Fishman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the 19th day of March, 1999.
SIGNATURE TITLE --------- -----
/s/ Jay S. Fishman President and Chief Executive Officer (Principal ----------------------------- Executive Officer) and Director Jay S. Fishman
/s/ William P. Hannon Chief Financial Officer - ------------------------------- (Principal Financial Officer) William P. Hannon
/s/ Thomas P. Shugrue Vice President and Chief Accounting Officer - ------------------------------- (Principal Accounting Officer) Thomas P. Shugrue
* Director - -------------------------------- Kenneth J. Bialkin
* Director - -------------------------------- Leslie B. Disharoon
* Chairman and Director - -------------------------------- Robert I. Lipp
* Director - -------------------------------- Dudley C. Mecum
SIGNATURE TITLE --------- -----
- -------------------------------- Director Roberto G. Mendoza
* Director - -------------------------------- Frank J. Tasco
* Director - -------------------------------- Sanford I. Weill
* Director - -------------------------------- Arthur Zankel
*By: /s/ Jay S. Fishman - -------------------------------- Jay S. Fishman Attorney-in-fact
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES *
* Schedules not listed are omitted as not applicable or not required by Regulation S-X.
Independent Auditors' Report
The Board of Directors and Stockholders Travelers Property Casualty Corp.:
Under date of January 25, 1999, we reported on the consolidated balance sheets of Travelers Property Casualty Corp. and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which are incorporated by reference in the December 31, 1998 annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Hartford, Connecticut January 25, 1999
SCHEDULE II
Travelers Property Casualty Corp. (Parent Company Only)
Condensed Financial Information of Registrant (In millions)
CONDENSED STATEMENT OF INCOME
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes to the condensed financial information of Registrant.
SCHEDULE II
Travelers Property Casualty Corp. (Parent Company Only)
Condensed Financial Information of Registrant (In millions)
CONDENSED BALANCE SHEET
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes to the condensed financial information of Registrant.
SCHEDULE II
Travelers Property Casualty Corp. (Parent Company Only)
Condensed Financial Information of Registrant (In millions)
CONDENSED STATEMENT OF CASH FLOWS
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes to the condensed financial information of Registrant.
SCHEDULE II
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
1. GENERAL
Travelers Property Casualty Corp. (TAP) (a direct majority-owned subsidiary of The Travelers Insurance Group Inc. (TIGI) and an indirect majority-owned subsidiary of Citigroup Inc. (formerly Travelers Group Inc.)) was organized on January 16, 1996. In April 1996, TIGI contributed The Travelers Indemnity Company and its subsidiaries to TAP. In addition, TAP purchased all of the outstanding capital stock of Travelers Casualty and Surety Company (formerly The Aetna Casualty and Surety Company) and The Standard Fire Insurance Company for a purchase price of approximately $4.2 billion in cash.
2. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of TAP and, on an equity basis, its subsidiaries and affiliates and should be read in conjunction with the Consolidated Financial Statements and notes thereto.
3. DEBT
The annual maturities of the outstanding debt are as follows: $400 million in 1999; $500 million in 2001 and $1,277 million after 2002.
4. SUPPLEMENTARY DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
In 1996, TIGI acquired approximately 328 million shares of Class B Common Stock of TAP in exchange for contributing the outstanding capital stock of The Travelers Indemnity Company and a capital contribution of approximately $1.1 billion.
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
(In millions)
(a) Net investment income for each segment is accounted for separately, except for the portion earned on the investment of stockholders' equity, which is allocated based on assigned capital.
(b) Expense allocations are determined in accordance with prescribed statutory accounting practices. These practices make a reasonable allocation of all expenses to those product lines with which they are associated.
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
(In millions)
(a) Net investment income for each segment is accounted for separately, except for the portion earned on the investment of stockholders' equity, which is allocated based on assigned capital.
(b) Expense allocations are determined in accordance with prescribed statutory accounting practices. These practices make a reasonable allocation of all expenses to those product lines with which they are associated.
SCHEDULE III
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Insurance Information
(In millions)
(a) Net investment income for each segment is accounted for separately, except for the portion earned on the investment of stockholders' equity, which is allocated based on assigned capital.
(b) Expense allocations are determined in accordance with prescribed statutory accounting practices. These practices make a reasonable allocation of all expenses to those product lines with which they are associated.
SCHEDULE VI
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Supplementary Information Concerning Property-Casualty Insurance Operations (1)
1996-1998
(In millions)
(1) Excludes accident and health business.
(2) See "Discounting" on page 17.