The Results of Operations reflect the consolidated results of operations of Travelers Property Casualty Corp. (TPC) and its subsidiaries (the Company). The Company provides a wide range of commercial and personal property and casualty insurance products and services to businesses, government units, associations and individuals, primarily in the United States.
Net income was $1.480 billion in 2000, $1.276 billion in 1999 and $1.343 billion in 1998. Net income in 1999 included a charge of $160 million related to the initial adoption of the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants' (AcSEC) Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" (SOP 97-3) and a benefit of $27 million related to the initial adoption of AcSEC Statement of Position 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk" (SOP 98-7). The net charge of $133 million due to the initial adoption of these Statements of Position has been accounted for as a cumulative effect of a change in accounting principles.
The Company's effective tax rate was 27%, 26% and 27% in 2000, 1999 and 1998, respectively. These rates differed from the statutory tax rate in those years primarily due to non-taxable investment income.
The improvement in the 2000 GAAP combined ratio before policyholder dividends, excluding the Reliance Surety adjustment, compared to the 1999 GAAP combined ratio before policyholder dividends, excluding the effects of a quota share termination, was primarily due to a decrease in the underwriting expense ratio related to a disproportionately smaller increase in expenses associated with the growth in premiums, partially offset by an increase in the loss and loss adjustment expense ratio primarily due to increased loss cost trends and lower favorable prior-year reserve development, partially offset by lower catastrophe losses.
(1) Commercial Lines net income includes $31 million, $82 million and $76 million of realized investment gains in 2000, 1999 and 1998, respectively.
Revenues of $6.835 billion in 2000 increased $343 million from 1999. The increase in 2000 reflected higher earned premiums, higher fee income and higher net investment income, partially offset by a decrease in realized investment gains. The increase in earned premiums was primarily due to rate increases, and the ongoing business associated with the Reliance Surety acquisition and the new business associated with the acquisition of the renewal rights for the Reliance Middle Market and Frontier businesses. The increase in fee income in 2000 was primarily due to the shift of business mix from premium-based products to fee-based products and rate increases. Revenues of $6.492 billion in 1999 decreased $207 million from 1998. The decrease in 1999 reflected lower levels of earned premiums, lower net investment income and lower fee income, partially offset by an increase in realized investment
For 2000, new business in Select Accounts was moderately higher than 1999, while for 1999 new business was significantly lower than 1998. These changes reflect the unusually low new business in 1999 resulting from the Company's selective underwriting policy in the highly competitive marketplace. The business retention ratio for 2000 was moderately lower than 1999, reflecting an increase in lost
business due to the renewal price increases in 2000. The business retention ratio in 1999 was virtually the same as 1998.
prior-year reserve development and lower weather-related losses. The decrease in the 1999 GAAP combined ratio before policyholder dividends compared to 1998 was due to favorable prior-year reserve development, lower weather-related losses and the benefit of the New York and Pennsylvania legislative actions, partially offset by lower fee income.
Net income in 2000 was $360 million compared to $358 million in 1999. Net income of $358 million in 1999 decreased $79 million from 1998. Personal Lines operating income, which excludes realized investment gains and losses, was $360 million, $368 million and $420 million in 2000, 1999 and 1998, respectively. The decrease in operating income in 2000 was primarily due to increased loss cost trends and lower favorable prior-year reserve development, partially offset by the 1999 charge related to curtailing the sale of TRAVELERS SECURE(R) products, higher net investment income and lower catastrophe losses. The 1999 decrease in operating income was due to higher catastrophe losses primarily due to Hurricane Floyd, higher loss ratios in the TRAVELERS SECURE(R) program, the charge related to curtailing the sale of TRAVELERS SECURE(R) products and lower favorable prior-year reserve development, partially offset by the increase in income due to the growth in earned premiums.
The Company has been, and continues to be, involved in litigation involving insurance coverage issues pertaining to environmental claims. The Company believes that certain court decisions have interpreted the insurance coverage to be broader than the original intent of the insurers and insureds. These decisions often pertain to insurance policies that were issued by the Company prior to the mid-1970s. These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction. Environmental claims when submitted rarely indicate the monetary amount being sought by the claimant from the insured and the Company does not keep track of the monetary amount being sought in those few claims which indicate such a monetary amount.
cumulative injury claims. Provisions of these agreements also include appropriate indemnities and hold harmless provisions to protect the Company. The Company's general purpose in executing such agreements is to reduce its potential environmental exposure and eliminate both the risks presented by coverage litigation with the insured and the cost of such litigation.
The property and casualty insurance industry does not have a standard method of calculating claim activity for environmental losses. Generally for Superfund remediation-type environmental claims, the Company establishes a claim file for each insured on a per site, per claimant basis. If there is more than one claimant such as a federal and a state agency, this method will result in two claims being set up for a policyholder at that one site. The Company adheres to this method of calculating claim activity on all environmental-related claims, whether such claims are tendered on primary, excess or umbrella policies.
limitations. For example, if one hundred claimants file a lawsuit against five policyholders alleging bodily injury and property damage as a result of the discharge of wastes or pollutants, five claims for the bodily injury claims and five for the property damage claims would be established.
As of December 31, 2000, the Company, for approximately $1.78 billion (before reinsurance), has resolved the environmental liabilities presented by 5,286 of the 6,073 policyholders who have tendered environmental claims to the Company. This resolution comprises 87% of the policyholders who have tendered such claims. The Company generally has been successful in resolving its coverage litigation disputes and continues to reduce its potential exposure through favorable settlements with certain insureds. Generally, the settlement dollars paid in disputed coverage claims are a percentage of the total coverage sought by such insureds.
The Company has direct environmental reserves (before reinsurance) of approximately $669 million, $390 million of which relates to 787 policyholders with unresolved environmental claims (the remaining 13% of the 6,073 policyholders who have tendered environmental claims); policyholders that may tender an environmental claim in the future; and for the anticipated cost of coverage litigation disputes pertaining to such environmental claims. Based upon the Company's reserving methodology and the experience of its historical resolution of environmental exposures, it believes that the environmental reserves are appropriate.
Various classes of asbestos defendants, such as major product manufacturers, installers of asbestos, peripheral and regional product defendants as well as premises owners, continue to tender asbestos-related claims to the industry. Because each insured presents different liability and coverage issues, including whether such claims qualify as products/completed operations or non-products/operations claims, the Company evaluates those issues on an insured-by-insured basis. From a coverage standpoint, one general distinction between a products/completed operations and a non-products/operations claim is that a products/completed operations claim is typically subject to a policy aggregate limitation and a non-products/operations claim is not typically subject to such a limitation in a pre-1985 general liability policy. The Company's evaluations have not resulted in any meaningful data from which an average asbestos defense or indemnity payment may be determined.
At December 31, 2000, approximately 83% (approximately $670 million) of the net asbestos reserve, represents incurred but not reported losses for which the Company has not received any specific claims. The balance, approximately 17% of the net aggregate reserve (approximately $136 million) is for pending asbestos claims.
In general, the Company posts case reserves for pending asbestos claims within approximately thirty (30) business days of receipt of such claims. The following table displays activity for asbestos losses and loss expenses and reserves for the years ended December 31:
As a result of these processes and procedures, the reserves carried for environmental and asbestos claims at December 31, 2000 are the Company's best estimate of ultimate claims and claim adjustment expenses based upon known facts and current law. However, the uncertainties surrounding the final resolution of these claims continue. These include, without limitation, any impact from the bankruptcy protection sought by various asbestos producers, a further increase or decrease in asbestos and environmental claims which cannot now be anticipated as well as the role of any umbrella or excess policies issued by the Company for such claims, the resolution or adjudication of certain disputes pertaining to asbestos non-products/operations claims in a manner inconsistent with the Company's previous assessment of such claims as well as unanticipated developments pertaining to the Company's ability to recover reinsurance for environmental and asbestos claims.
CIOTA claims are generally submitted to the Company under general liability policies and often involve an allegation by a claimant against an insured that the claimant has suffered injuries as a result of long-term or continuous exposure to potentially harmful products or substances. Such potentially harmful products or substances include, but are not limited to, lead paint, pesticides, pharmaceutical products, silicone-based personal products, solvents and other deleterious substances.
obligations of other insurers to respond to the claim, the applicable law in each jurisdiction, and the role, if any, of non-CIOTA claims or potential non-CIOTA claims in any resolution process.
At December 31, 2000, approximately 83% (approximately $667 million) of the net CIOTA reserve, represents incurred but not reported losses for which the Company has not received any specific claims. The balance, approximately 17% of the net aggregate reserve (approximately $132 million) is for pending CIOTA claims.
A variety of factors continue to affect the property and casualty insurance market and the Company's core business outlook, including a firming of pricing in the commercial lines marketplace as evidenced by price increases, a continuing highly competitive personal lines marketplace, inflationary pressures on loss cost trends including medical inflation and increasing auto loss costs, rising reinsurance costs and litigation.
In 2000, the trend of higher rates continued in Commercial Lines. Prices generally rose throughout the year, although some of the increases varied significantly by region and business segment. These increases were necessary to offset the impact of rising loss cost trends and the decline in profitability from the competitive pressures of the last several years.
In National Accounts, where programs include risk management services, such as claims settlement, loss control and risk management information services, which are generally offered in connection with a large deductible or self-insured program, and risk transfer, which is typically provided through a guaranteed cost or retrospectively rated insurance policy, pricing began to stabilize during 2000. National Accounts has benefited from higher rates on both new and renewal business as evidenced by the improving profit margins earned on this business. National Accounts believes that pricing will continue to firm in 2001. However, National Accounts will continue to reject business that is not expected to produce acceptable returns.
Commercial Accounts achieved double-digit price increases on renewal business during 2000, improving the overall profit margin in this business. In addition, these increases were necessary to offset the impacts of rising loss cost inflation, medical inflation and reinsurance costs. Commercial Accounts will continue to seek significant rate increases in 2001, as pricing in certain areas and business segments still has not improved to the point of producing acceptable returns.
Specialty Accounts achieved significant growth in 2000, with the acquisition of Reliance Surety cementing a leadership position in the surety bond marketplace by broadening product and service capabilities. The Company's focus in this market is to sustain its emphasis on products with the most opportunities for acceptable profitability and to increase its efforts to cross-sell its expanding array of specialty products to existing customers of National Accounts, Commercial Accounts, Select Accounts and various other Citigroup units.
The Company was able to achieve growth in its premium and fee levels during 2000 as a result of the Reliance Surety acquisition, the acquisition of the renewal rights for the Reliance Middle Market and Frontier businesses and the continuation of rate increases. The rate increases are expected to continue into
2001, although the deteriorating loss cost trends and increased costs of reinsurance will offset some of the positive impact. The Company will continue to adhere to strict underwriting guidelines and to reject business that is not expected to produce acceptable returns.
The personal auto insurance marketplace remains highly competitive as some personal auto carriers have been reluctant to increase prices despite increases in loss cost trends due to inflationary pressures. These trends are expected to continue into 2001. Personal Lines will continue to emphasize underwriting discipline in this competitive marketplace and continue to pursue its strategy of increases in auto rates to offset increases in loss cost trends. Market conditions for homeowners insurance have remained stable, with the industry experiencing modest rate increases. Personal Lines expects homeowners rate increases to continue in 2001. Homeowners loss cost trends continue to increase at modest levels, reflecting inflationary pressures and the increased frequency of weather-related losses.
As a result of the Merger, the Company has developed and made investments in various cross-selling opportunities to Citigroup's customers including selling Personal Lines products through referrals from the call centers servicing Citibank's credit card operations. The Company continues to focus its efforts and investments in those opportunities with the greatest sales and profit potential.
With respect to globalization, Citigroup recently announced the formation of CitiInsurance, the international arm of Citigroup insurance activities. This new Citigroup unit was formed to capitalize on the strength of the Citigroup branch franchise and the extensive distribution strength of the Citigroup consumer business around the world. This unit will build on the progress already made in Southeast Asia during 2000 with the strategic alliance with Fubon Group, a diversified financial services company based
As required by various state laws and regulations, the Company's insurance subsidiaries are subject to assessments from state-administered guaranty associations, second injury funds and similar associations. Management believes that such assessments will not have a material impact on the Company's results of operations.
Certain social, economic, political and litigation issues have led to an increased number of legislative and regulatory proposals aimed at addressing the cost and availability of certain types of insurance as well as the claim and coverage obligations of insurers. While most of these provisions have failed to become law, these initiatives may continue as legislators and regulators try to respond to public availability, affordability and claim concerns and the resulting laws, if any, could adversely affect the Company's ability to write business with appropriate returns.
See Note 1 of Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Travelers Property Casualty Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations, changes in stockholder's equity and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In millions, except shares)
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Travelers Property Casualty Corp. (TPC) (a direct subsidiary of The Travelers Insurance Group Inc. (TIGI) and an indirect subsidiary of Citigroup Inc. (Citigroup)) and its subsidiaries (collectively, the Company). Significant intercompany transactions and balances have been eliminated.
During April 2000, TIGI completed a cash tender offer to purchase all of the outstanding shares of Class A Common Stock of TPC at a price of $41.95 per share. See note 9.
Effective January 1, 1999, the Company adopted the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants' (AcSEC) Statement of Position 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk" (SOP 98-7). SOP 98-7 provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk and applies to all entities and all such contracts, except for long-duration life and health insurance contracts. The method used to account for such contracts is referred to as deposit accounting. This SOP does not address when deposit accounting should be applied. SOP 98-7 identifies several methods of deposit accounting for insurance and reinsurance contracts that do not transfer insurance risk and provides guidance on the application of each method. The effect of initially adopting SOP 98-7 is to be reported as a cumulative catch-up adjustment. Restatement of previously issued financial statements is not permitted. As a result of adopting SOP 98-7, the Company recorded a benefit of $27 million after tax, reflected as a cumulative catch-up adjustment. This SOP is not expected to have a significant impact on results of operations, financial condition or liquidity. See note 5.
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Fixed maturities include bonds, notes and redeemable preferred stocks. Fixed maturities are valued based upon quoted market prices or dealer quotes, or if quoted market prices or dealer quotes are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. Also included in fixed maturities are loan-backed and structured securities, which are amortized using the retrospective method. The effective yield used to determine amortization is calculated based upon actual historical and projected future cash flows, which are obtained from a widely-accepted securities data provider. Fixed maturities, including instruments subject to securities lending agreements (see note 4), are classified as "available for sale" and are reported at fair value, with unrealized investment gains and losses, net of income taxes, charged or credited directly to stockholder's equity.
Mortgage loans are carried at amortized cost. A mortgage loan is considered impaired when it is probable that the Company will be unable to collect principal and interest amounts due. For mortgage loans that are determined to be impaired, a reserve is established for the difference between the amortized cost and fair market value of the underlying collateral. In estimating fair value, the Company uses interest rates reflecting the returns required in the current real estate financing market. Impaired loans were not significant at December 31, 2000 and 1999.
Real estate held for sale is carried at the lower of cost or fair value less estimated costs to sell. Fair value is established at the time of acquisition by internal analysis or external appraisers, using discounted cash flow analyses and other acceptable techniques. Thereafter, an allowance for losses on real estate held for sale is established if the carrying value of the property exceeds its current fair value less estimated costs to sell. There was no such allowance at December 31, 2000 and 1999.
Short-term securities, consisting primarily of money market instruments and other debt issues purchased with a maturity of less than one year, are carried at amortized cost, which approximates market.
Goodwill is generally amortized on a straight-line basis over a 40-year period. TIGI's purchase of the outstanding shares of Class A Common Stock of TPC (see note 1, basis of presentation) generated goodwill of approximately $1.0 billion, which is being amortized on a straight-line basis over a 36-year period. The Company's acquisition of the surety business of Reliance Group Holdings, Inc. (Reliance Surety) (see note 2) included an intangible asset of approximately $450 million, which is being amortized on a straight-line basis over a 15-year period. The carrying amount of these assets is regularly reviewed for indicators of other-than-temporary impairments in value. Impairments would be recognized in operating results if a permanent diminution in value is deemed to have occurred, based upon an evaluation of expected future cash flows for the Company in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." An impairment would be measured by the amount the present value of the expected future net cash flows from operating activities of the Company (applying the discount rate(s) used to determine the fair value of the acquired assets and assumed liabilities at the date of acquisition) is less than the carrying amount of goodwill. Amortization expense included in the consolidated statement of income was $80 million, $40 million and $40 million for the years ended December 31, 2000, 1999 and 1998, respectively.
In determining claims and claim adjustment expense reserves, the Company carries on a continuing review of its overall position, its reserving techniques and its reinsurance. These reserves represent the estimated ultimate cost of all incurred claims and claim adjustment expenses. Since the reserves are based on estimates, the ultimate liability may be more or less than such reserves. The effects of changes in such estimated reserves are included in the results of operations in the period in which the estimates are changed. Such changes may be material to the results of operations and could occur in a future period.
PERMITTED STATUTORY ACCOUNTING PRACTICES The Company's insurance subsidiaries, domiciled principally in Connecticut, prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the insurance departments of the states of domicile. Prescribed statutory accounting practices include certain publications of the National Association of Insurance Commissioners (NAIC) as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The impact of any permitted accounting practices on statutory surplus of the Company is not material.
The NAIC recently completed a process intended to codify statutory accounting practices for certain insurance enterprises. As a result, the NAIC issued a revised statutory Accounting Practices and Procedures Manual - version effective January 1, 2001 (the revised Manual) that will be effective for years beginning January 1, 2001. The State of Connecticut requires that, effective January 1, 2001, insurance companies domiciled in Connecticut prepare their statutory basis financial statements in accordance with the revised Manual subject to any deviations prescribed or permitted by the Connecticut insurance commissioner. Other states have addressed compliance with the revised Manual in a similar manner. The Company has estimated that the impact of this change will be an increase to statutory capital and surplus of its insurance subsidiaries of approximately $350 million.
PREMIUMS AND UNEARNED PREMIUM RESERVES Premiums are recognized as revenues pro rata over the policy period. Unearned premium reserves represent the unexpired portion of policy premiums. Accrued retrospective premiums are included in premium balances receivable.
FEE INCOME Fee income includes servicing fees from carriers and revenues from large deductible policies and service contracts and are recognized pro rata over the contract or policy periods.
OTHER REVENUES Other revenues include revenues from premium installment charges, which are recognized as collected, revenues of noninsurance subsidiaries other than fee income and gains and losses on dispositions of assets and operations other than realized investment gains and losses.
DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments, including interest rate swaps, currency swaps, options, forward contracts and financial futures, as a means of hedging exposure to interest rate, equity price change and foreign currency risk. The Company's insurance subsidiaries do not hold or issue derivative instruments for trading purposes. Where applicable, hedge accounting is used to account for derivatives. To qualify for hedge accounting, the changes in value of the derivative must be expected to substantially offset the changes in value of the hedged item. Hedges are monitored to ensure that there is a high correlation between the derivative instruments and the hedged investment. Derivatives that do not qualify for hedge accounting are marked to market with the changes in market value reflected in the consolidated statement of income.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Deferral of the Effective Date of FASB Statement No. 133," which allows entities which have not yet adopted FAS 133 to defer its effective date to all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Financial Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133," which amends the accounting and reporting standards of FAS 133. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a recognized asset or liability or of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Upon initial application of FAS 133, hedging relationships must be designated anew and documented pursuant to the provisions of this statement. The Company will adopt FAS 133, as amended, as of January 1, 2001.
The Company has determined that the cumulative effect of FAS 133, as amended, will not be significant. The Company does, however, anticipate a significant and continuing increase in the complexity of the accounting and the recordkeeping requirements for hedging activities and for insurance-related contracts and may make changes to its risk management strategies. The Company does not expect that FAS 133, as amended, will have a significant impact on results of operations, financial condition or liquidity in future periods.
Commercial Lines is divided into four marketing groups that are designed to focus on a particular client base or industry segment to provide products and services that specifically address customers' needs: National Accounts, Commercial Accounts, Select Accounts and Specialty Accounts.
Commercial Accounts serves mid-sized businesses for casualty products and both large and mid-sized businesses for property products. Commercial Accounts sells a broad range of property and casualty insurance products, with an emphasis on guaranteed cost products, through a large network of independent agents and brokers. Within Commercial Accounts the Company has dedicated operations that exclusively target the construction industry, providing insurance and risk management services for virtually all areas of construction. The dedicated construction operations reflect the Company's focus on industry specialization.
Specialty Accounts markets products to national, mid-sized and small customers. The principal products of Specialty Accounts include professional liability insurance, directors' and officers' liability insurance, fiduciary liability insurance, employment practices liability insurance, product liability, fidelity and surety bonds, commercial umbrella and excess liability, excess property insurance and coverages relating to the entertainment and transportation industries, excess and surplus lines coverages and other industry specific programs. Its products are distributed through both wholesale brokers and retail agents and brokers.
PERSONAL LINES Personal Lines writes virtually all types of property and casualty insurance covering personal risks. The primary coverages in Personal Lines are personal automobile and homeowners insurance sold to individuals. These products are distributed through independent agents, sponsoring organizations such as employee and affinity groups, cross-marketing arrangements with Citibank N.A., a unit of Citigroup, and joint marketing arrangements with other insurers. During 1999, Personal Lines curtailed the sale of automobile and homeowners products through the independent agents of Primerica Financial Services, a unit of Citigroup.
Personal automobile policies provide coverage for liability to others for both bodily injury and property damage, and for physical damage to an insured's own vehicle from collision and various other perils. In addition, many states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage.
In the third quarter of 2000, the Company purchased the renewal rights to a portion of Reliance Group Holdings, Inc.'s commercial lines middle-market book of business. The Company also acquired the renewal rights to Frontier Insurance Group, Inc.'s environmental, excess and surplus lines casualty businesses and certain classes of surety business. The final purchase price for each of these transactions is dependent on the level of business renewed by the Company.
(2) The primary component of the other operating loss is after-tax interest expense of $87 million, $99 million and $105 million in 2000, 1999 and 1998, respectively.
(3) Reinsurance recoverables of businesses that are in run-off is the primary component of other assets.
The Company generally does not accumulate revenues by product; therefore, it would be impracticable to provide revenues from external customers for each product.
Revenues from internal customers, foreign revenues and foreign assets are not significant. The Company does not have revenue from transactions with a single customer amounting to 10 percent or more of its revenues.
At December 31, 2000 and 1999, the Company held CMOs classified as available for sale with a fair value of $2.8 billion and $2.3 billion, respectively. Approximately 59% and 66% of the Company's CMO holdings are fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 2000 and 1999, respectively. In addition, the Company held $1.5 billion and $1.4 billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities classified as available for sale at December 31, 2000 and 1999, respectively. Virtually all of these securities are rated Aaa.
Proceeds from sales of equity securities were $2.4 billion, $873 million and $580 million in 2000, 1999 and 1998, respectively, resulting in gross realized gains of $154 million, $70 million and $74 million and gross realized losses of $94 million, $45 million and $60 million, respectively.
At December 31, 2000 and 1999, the Company had concentrations of credit risk in tax-exempt investments of the State of Texas of $1.3 billion and $1.4 billion, respectively, and in the State of New York of $1.3 billion for both years.
The Company participates in a short-term investment pool maintained by an affiliate. See note 14.
In 1996, Lloyd's of London (Lloyd's) restructured its operations with respect to claims for years prior to 1993 and reinsured these into Equitas Limited (Equitas). Amounts recoverable from unaffiliated insurers at December 31, 2000 and 1999 include $295 million and $304 million, respectively, recoverable from Equitas. The outcome of the restructuring of Lloyd's is uncertain and the impact, if any, on collectibility of amounts recoverable by the Company from Equitas cannot be quantified at this time. The Company believes that it is possible that an unfavorable impact on collectibility could have a material adverse effect on the Company's results of operations in a future period. However, the Company believes that it is not likely that the outcome could have a material adverse effect on the Company's financial condition or liquidity.
In 1998, estimated claims and claim adjustment expenses for claims arising in prior years included approximately $176 million primarily relating to net favorable development in certain Personal Lines coverages, predominantly automobile coverages. In addition, in 1998 Commercial Lines experienced favorable loss development on loss sensitive policies in the workers' compensation line; however, since the business to which it relates is subject to premium adjustments, there was no impact on results of operations.
For environmental claims, the Company estimates its financial exposure and establishes reserves based upon an analysis of its historical claim experience and the facts of the individual underlying environmental exposure of each policyholder. The unique facts are evaluated individually and collectively. Due consideration is given to the many variables presented by each policyholder.
TPC has a revolving credit facility in the amount of $250 million with a syndicate of banks (the Credit Facility). Under this facility, which expires in December 2001, TPC is required to maintain a certain level of consolidated stockholder's equity (as defined in the agreement). At December 31, 2000, this requirement was exceeded by approximately $5.6 billion. In addition, the Credit Facility places restrictions on the amount of consolidated debt TPC can incur. At December 31, 2000, there were no borrowings outstanding under this facility. If TPC had borrowings under this facility, the interest rate would be based upon LIBOR plus a negotiated margin. TPC compensates the banks for the Credit Facility through commitment fees. TPC also issues commercial paper directly to investors and maintains unused credit availability under the Credit Facility at least equal to the amount of commercial paper outstanding. At December 31, 2000, TPC had no commercial paper outstanding. TPC also currently has available to it a $200 million line of credit for working capital and other general corporate purposes from a subsidiary of Citigroup. The lender has no obligation to make any loan to TPC under this line of credit.
In the opinion of the Company's management, the realization of the recognized net deferred tax asset of $1.1 billion is more likely than not based on existing carryback ability and expectations as to future taxable income. Citigroup has reported pre-tax financial statement income of approximately $17.0 billion on average over the last three years and has generated federal taxable income exceeding $10.0 billion on average each year during this same period.
The Company formed statutory business trusts under the laws of the state of Delaware, which exist for the exclusive purposes of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust Securities in Junior Subordinated Deferrable Interest Debentures (Junior Subordinated Debentures) of its parent; and (iii) engaging in only those activities necessary or incidental thereto. These Junior Subordinated Debentures and the related income effects are eliminated in the consolidated financial statements. The financial structure of each of the Company's subsidiary trusts at December 31, 2000 and 1999 was as follows:
On June 29, 2000, the Company restated its certificate of incorporation and reclassified the Class A Common Stock to Common Stock, which had the effect of retiring all treasury stock. At December 31, 2000, TPC's common stock outstanding consists of 1,000 shares of Common Stock, which are 100% owned by TIGI.
On January 18, 2000, January 19, 1999 and January 28, 1998, the Company, through the Travelers Property Casualty Corp. Capital Accumulation Plan (TPC CAP), reissued 467,207, 476,431 and 763,654 shares of treasury stock, respectively, in the form of restricted Class A Common Stock to participating officers and other key employees. The fair market value per share of the 2000, 1999 and 1998 restricted stock awards was $36.49, $31.88 and $43.71, respectively. The restricted stock generally vested after a three-year period. Except under limited circumstances, the stock could not be sold or transferred during the restricted period by the participant, who was required to render service to the Company during the restricted period. Unearned compensation expense associated with the restricted stock grants represented the market value of the Company's common stock at the date of grant and was recognized as a charge to income ratably over the vesting period. The after-tax compensation cost charged to earnings for these restricted stock awards was $6 million, $22 million and $12 million for the years ended December 31, 2000, 1999 and 1998, respectively. In connection with the cash tender offer completed by TIGI in 2000, all of the restricted Class A Common Stock under TPC CAP were terminated and significantly all were replaced with Citigroup common stock in the form of restricted common stock. See Note 14 for a discussion of Citigroup restricted common stock awards.
On August 12, 1998, TPC Board of Directors authorized a $150 million repurchase program, which was completed in October of 1999. On October 6, 1999, TPC Board of Directors authorized the expenditure of up to $200 million for the repurchase of its Class A Common Stock. The repurchases were made from time to time in the open market or through negotiated transactions and were used primarily for the issuance of stock for employee benefit plans. At April 19, 2000, TPC had repurchased $159 million of its common stock pursuant to this final repurchase plan. In connection with the cash tender offer completed by TIGI in 2000, all treasury stock was effectively retired.
TPC's insurance subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior approval of insurance regulatory authorities. A maximum of $1.2 billion is available by the end of the year 2001 for such dividends without prior approval of the Connecticut Insurance Department.
Statutory net income of TPC's insurance subsidiaries was $1.4 billion for each of the years ended December 31, 2000, 1999 and 1998. Statutory capital and surplus of TPC's insurance subsidiaries was $6.9 billion and $7.7 billion at December 31, 2000 and 1999, respectively. Effective January 1, 2001, the Company will prepare its statutory basis financial statements in accordance with the revised Manual subject to any deviations prescribed or permitted by its domiciliary insurance commissioner (see note 1, Summary of Significant Accounting Policies, Permitted Statutory Accounting Practices). The Company has estimated that the impact of this change will be an increase to statutory capital and surplus of its insurance subsidiaries of approximately $350 million.
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX
Substantially all employees of the Company are eligible to participate in a 401(k) savings plan sponsored by Citigroup. There are no Company matching contributions for substantially all employees.
12. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
At December 31, 2000 and 1999, the carrying value of $850 million of long-term debt approximated its fair value. Fair value is based upon bid price at December 31, 2000 and 1999. At December 31, 2000, the TPC Debentures had a carrying value of $900 million, which approximated their fair value. At December 31, 1999, the TPC Debentures had a carrying value and a fair value of $900 million and $814 million, respectively. Fair value is based upon the closing price at December 31, 2000 and 1999.
The carrying values of $1.8 billion and $1.7 billion of financial instruments classified as other assets approximated their fair values at December 31, 2000 and 1999, respectively. The carrying values of $4.1 billion and $3.4 billion of financial instruments classified as other liabilities at December 31, 2000 and 1999, respectively, also approximated their fair values. Fair value is determined using various methods including discounted cash flows, as appropriate for the various financial instruments.
The Company participates in the Citigroup Capital Accumulation Plan. For the 2000 and 1999 restricted stock awards, participating officers and other key employees received 50% of their restricted stock award in the form of Citigroup common stock. In connection with the cash tender offer completed by TIGI in 2000, all restricted Class A Common Stock under TPC CAP were terminated and substantially all were replaced with Citigroup common stock in the form of restricted common stock, and 100% of the 2001 restricted stock awards granted on January 16, 2001 were also in the form of Citigroup common stock. Similar to TPC CAP these restricted stock awards generally vest after a three-year period and, except under limited circumstances, the stock can not be sold or transferred during the restricted period by the participant, who is required to render service to the Company during the restricted period. Unearned compensation expense associated with the Citigroup restricted common stock grants, which represents the market value of Citigroup's common stock at the date of grant, and the remaining unamortized portion of the previous TPC CAP shares, is included with other assets in the consolidated balance sheet and is recognized as a charge to income ratably over the vesting period. The after-tax compensation cost charged to earnings for these restricted stock awards was $19 million, $3 million and $0 million for the years ended December 31, 2000, 1999 and 1998, respectively.
Most leasing functions for TIGI and its subsidiaries are administered by the Company. See note 11. The Company leases furniture and equipment from subsidiaries of TIGI. The rental expense charged to the Company for this furniture and equipment was $18 million, $28 million and $42 million in 2000, 1999 and 1998, respectively.
In the ordinary course of business, the Company purchases and sells securities through affiliated broker-dealers. These transactions are conducted on an arm's-length basis.