The Company leases 284,225 square feet of office space in its headquarters buildings to Citigroup. The Company has agreed to exchange office space with Citigroup and, as a result, will relocate its operations from the office space at CityPlace to the six headquarters buildings and assign the lease for CityPlace to Citigroup. The exchange is anticipated to occur by the end of the first quarter of 2003, at which time the lease for office space in the headquarters buildings will terminate.
On September 1, 2001, the Company vacated the 50 Prospect Street complex in Hartford, Connecticut in order to undertake a complete renovation thereof over the next three years. Therefore, the Company leased approximately 423,000 square feet of office space in Hartford, Connecticut to temporarily house the displaced operations.
During April 2000, TPC completed a cash tender offer and merger, as a result of which the Company became TPC's wholly-owned subsidiary. In the tender offer and merger, TPC acquired all of the Company's outstanding shares of common stock that were not already owned by TPC, representing approximately 14.8% of the Company's outstanding common stock, for approximately $2.4 billion in cash financed by a loan from Citigroup.
On March 21, 2002, TPC issued 210 million shares of its common stock in an initial public offering, and on March 26, 2002, the underwriters exercised their option to purchase an additional 21 million shares of its common stock, together representing approximately 23% of TPC's common equity. Citigroup has announced that it intends to make a tax-free distribution of most of Citigroup's ownership interest in TPC, subject to, among other things, regulatory approval and receipt of a private letter ruling from the Internal Revenue Service that the distribution will be tax-free to Citigroup, its stockholders and TPC. Citigroup is under no obligation to make the distribution even if these approvals are obtained. Immediately after the distribution, Citigroup would own approximately 9.9% of TPC.
TPC provides and purchases services to and from affiliates, including facilities management, banking and financial functions, benefit coverages, data processing services, and a short-term investment pool. Charges for these shared services are allocated at cost. If the tax-free distribution by Citigroup occurs, TPC has agreed with Citigroup to negotiate in good faith the terms of a transition services agreement for the provision of these services. TPC has agreed with Citigroup that an affiliate will provide investment advisory services to TPC for a period and at fees to be mutually agreed upon.
On October 1, 2001, the Company paid $329 million to Citigroup for The Northland Company and its subsidiaries (Northland) and Associates Lloyds Insurance Company. In addition, on October 3, 2001, the capital stock of CitiCapital Insurance Company (CitiCapital) formerly known as Associates Insurance Company, with a net book value of $356 million was contributed to the Company by Citigroup. See notes 1 and 2 to the Company's consolidated financial statements.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31,
(1) Net income includes $211 million, $31 million and $72 million of realized investment gains in 2001, 2000 and 1999, respectively. Included in realized investment gains were after-tax impairment charges related to other than temporary declines in value of $95 million, $20 million and $28 million for the years ended December 31, 2001, 2000 and 1999, respectively.
Net income was $1.118 billion in 2001, $1.480 billion in 2000 and $1.276 billion in 1999. Net income for 2001 included $3 million of restructuring charges related primarily to the downsizing of direct marketing activities and associated telemarketing operations in Personal Lines. Also included in 2001 was a charge of $1 million related to the initial adoption of the FASB Emerging Issues Task Force EITF 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Interests in Securitized Financial Assets" (EITF 99-20), and a benefit of $4 million related to the initial adoption of Financial Accounting Standards Board No. 133, "Accounting for Derivative Instruments and Hedging Activity" (FAS 133). The net benefit of $3 million due to the adoption of these accounting changes has been accounted for as a cumulative effect of changes in accounting principles. 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 also been accounted for as a cumulative effect of changes in accounting principles.
Operating income, which excludes realized investment gains in all years, restructuring charges and the cumulative effect of changes in accounting principles in 2001 and 1999 described above, was $907 million in 2001, $1.449 billion in 2000 and $1.337 billion in 1999. The decrease in operating earnings in 2001 from 2000 primarily reflects the impact of catastrophe losses of $490 million associated with the terrorist attack on September 11th. Operating earnings in 2001 were also reduced by increased loss cost trends, including increased medical costs, auto repair costs and reinsurance costs, and lower net investment income, partly offset by the benefit of rate increases, higher fee income and lower interest expense. The increase in operating income in 2000 from 1999 was due to Commercial Lines rate increases, lower catastrophe losses, higher net investment income, the 1999 charge related to curtailing the sale of TRAVELERS SECURE(R) auto and homeowners products marketed through the agents of Primerica Financial Services, a unit of Citigroup, higher fee income and lower operating expenses. These factors were partially offset by increased loss cost trends, including increased medical costs and auto repair costs, lower favorable prior-year reserve development and higher interest expense. Results for 2000 and 1999 also reflected benefits resulting from legislative actions that changed the manner in which some states finance their workers' compensation second-injury funds, principally in the states of New York and Pennsylvania.
Revenues of $12.221 billion in 2001 increased $1.153 billion from 2000. Revenues of $11.068 billion in 2000 increased $496 million from 1999. The increase in revenue in 2001 from 2000 was primarily attributable to higher earned premiums, higher fee income and higher realized investment gains, partially offset by a decrease in net investment income. The increase in revenue in 2000 from 1999 was due to higher earned premiums, higher net investment income and higher fee income, partially offset by lower realized gains.
Net investment income was $2.022 billion in 2001, a decrease of $138 million from 2000. This decrease largely reflects the increase in dividends to the Company's parent, lower fixed income interest rates and lower returns from private equity investments. Net investment income was $2.160 billion in 2000, an increase of $68 million from 1999 primarily due to a higher return on investments.
Fee income was $347 million in 2001, a $35 million increase from 2000. Fee income was $312 million in 2000, a $37 million increase from 1999. National Accounts within Commercial Lines is the primary source of fee income due to its service fee business. The increase in fee income in 2001 and 2000 was primarily due to the shift of business mix from premium-based products to fee-based products and the favorable rate environment and the repopulation of the involuntary pools.
The 2000 statutory combined ratio before policyholder dividends, excluding the impact of the reinsurance transaction, was virtually the same as the 1999 statutory combined ratio before policyholder dividends, excluding the commutation and quota share reinsurance adjustments. The 2000 statutory loss and loss adjustment expense ratio component increased primarily due to increased loss cost trends and lower favorable prior-year reserve development, partially offset by lower catastrophe losses. The 2000 statutory underwriting expense ratio decreased primarily due to a disproportionately smaller increase in expenses associated with the growth in premiums.
The improvement in the 2000 GAAP combined ratio before policyholder dividends, excluding the impact of the reinsurance transaction, 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. This was 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.
Fee income was $347 million in 2001, a $35 million increase from 2000. Fee income was $312 million in 2000, a $37 million increase from 1999. National Accounts is the primary source of fee income due to its service fee business. The increase in fee income in 2001 and 2000 was primarily due to the shift of business mix from premium-based products to fee-based products, the favorable rate environment and the repopulation of involuntary pools.
Net written premiums by market for the three years ended December 31:
National Accounts works with national and regional brokers providing insurance coverages and services, primarily workers' compensation, mainly to large corporations. National Accounts also includes the residual market business, which sells claims and policy management services to workers' compensation and automobile assigned risk plans and to self-insurance pools throughout the United States. National Accounts net written premiums were $419 million in 2001 compared to $352 million in 2000. This increase was primarily due to the purchase of less reinsurance, reflecting the shift in business mix from guaranteed cost products to loss-sensitive products, combined with the repopulation of the involuntary pools. National Accounts net written premiums were $352 million in 2000 compared to $488 million in 1999. This decrease was primarily due to a decrease in the Company's level of involuntary pool participation, the result of pricing declines due to the highly competitive marketplace, and the Company's disciplined approach to underwriting and risk management.
For 2001, new business in National Accounts was marginally lower than 2000, reflecting a disciplined approach to market opportunities. The business retention ratio for 2001 was moderately lower than 2000, reflecting a focus on account profitability and an increase in lost business due to the renewal price increases in 2001. New business in National Accounts for 2000 was marginally lower than 1999, reflecting the Company's disciplined approach to underwriting and risk management. 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.
For 2001, new premium business in Commercial Accounts was moderately lower than 2000, reflecting the acquisition of the renewal rights for the Reliance Middle Market business in 2000. The business retention ratio for 2001 was significantly lower than 2000, reflecting the continued disciplined approach to achieving acceptable levels of account profitability and an increase in lost business due to the renewal price increases in 2001. New business in Commercial Accounts for 2000 was significantly higher than 1999, reflecting the impact of the acquisition of Reliance Middle Market renewal business. 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.
Bond provides a variety of fidelity and surety bonds and executive liability coverages to clients of all sizes through independent agents and brokers. Bond's net written premiums of $590 million in 2001 were $234 million above 2000, excluding an adjustment of $131 million in 2000 due to a reinsurance transaction associated with the acquisition of the Reliance Surety business, primarily due to the full-year impact of the ongoing business associated with the Reliance Surety acquisition and production growth in Bond's Executive Liability product line group, specifically its fidelity, directors' and officers' liability and blended product lines. The blended product lines combine fidelity insurance, employment practices liability insurance, directors' and officers' liability insurance, other related professional liability insurance and fiduciary liability insurance into one product with either individual or aggregate limits. The growth in these product lines is reflective of Bond's strategy to further enhance its product and customer diversification through the faster growing and larger executive liability market. Bond's net written premiums of $356 million in 2000, excluding an adjustment of $131 million due to a reinsurance transaction associated with the acquisition of the Reliance Surety business, were $149 million above 1999 due to the impact of the Reliance Surety acquisition and production growth in Bond's Executive Liability product line group, specifically its fidelity, directors' and officers' liability and blended product lines.
Gulf markets products to national, mid-sized and small customers and distributes them through both wholesale brokers and retail agents and brokers throughout the United States. Gulf's net written premiums were $608 million in 2001, compared to $517 million in 2000. This increase primarily reflected the full-year impact of the renewal rights for the Frontier business and participation in the London market. Gulf's net written premiums of $517 million in 2000 were $114 million above 1999 due to the impact of the new business associated with the acquisition of the renewal rights for the Frontier business and less use of reinsurance.
Commercial Lines claims and expenses of $6.494 billion in 2001 increased $1.323 billion from 2000 and increased $244 million in 2000 compared to 1999. The 2001 increase was primarily due to higher catastrophe losses primarily associated with the terrorist attack on September 11th, increased loss cost trends, including increased medical costs, auto repair costs and reinsurance costs, higher losses and operating expenses associated with the growth in premium and claims volume including the full-year impact of the Reliance Surety acquisition and the acquisition of the renewal rights for the Reliance Middle Market and Frontier businesses, and the acquisition of Northland and contribution of CitiCapital in October 2001, partially offset by higher favorable prior-year reserve development. The 2000 increase was primarily due to increased loss cost trends, lower favorable prior-year reserve development and higher losses associated with the growth in premium and claims volume, partially offset by lower catastrophe losses. Results for 2000 and 1999 reflected benefits resulting from legislative actions that changed the manner in which some states finance their workers' compensation second-injury funds, principally in the states of New York and Pennsylvania.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
(1) Personal Lines net income includes $3 million of realized investment gains in 2001 and $10 million of realized investment losses in 1999.
Revenues in 2001 were $4.454 billion compared to $4.232 billion in 2000. The increase was primarily attributable to a $249 million growth in earned premiums primarily due to rate increases and $6 million of realized investment gains in 2001, compared to no realized investment gains in 2000. This was partially offset by a $36 million decrease in net investment income from 2000, which largely reflects the increase in dividends and debt repayments to Citigroup and lower fixed income interest rates.
Net written premiums by product line for the three years ended December 31:
Personal Lines net written premiums in 2000 were $3.813 billion, compared to $3.733 billion in 1999 (excluding an adjustment of $72 million associated with the termination of a quota share reinsurance arrangement). The increase in 2000 reflects growth in target markets served by independent agents and growth in affinity group marketing and joint marketing arrangements, partially offset by planned reductions in the TRAVELERS SECURE(R) auto and homeowners business, a mandated rate decrease in New Jersey, and continued emphasis on disciplined underwriting and risk management. The business retention ratio in 2000 was moderately lower compared to 1999, reflecting planned reductions in the TRAVELERS SECURE(R) auto and homeowners business.
Catastrophe losses, net of taxes and reinsurance, were $86 million, $54 million and $79 million in 2001, 2000 and 1999, respectively. Catastrophe losses in 2001 were primarily due to Tropical Storm Allison and wind and hailstorms in the Midwest and Texas in the second quarter and the terrorist attack on September 11th in the third quarter. Catastrophe losses in 2000 were primarily due to Texas, Midwest and Northeast wind and hailstorms in the second quarter and hailstorms in Louisiana and Texas in the first quarter. Catastrophe losses in 1999 were primarily due to Hurricane Floyd in the third quarter, wind and hailstorms on the East Coast and tornadoes in the Midwest in the second quarter and a wind and ice storm in the Midwest and Northeast in the first quarter.
The primary component of net loss for the years ended December 31, 2001, 2000 and 1999 was after-tax interest expense of $79 million, $87 million and $99 million, respectively. The decrease in interest expense in 2001 is due to lower interest rates on refinanced debt. The decrease in interest expense in 2000 from 1999 is due to lower outstanding debt in 2000 resulting from $400 million of maturing debt which was repaid in 1999.
The Company's reserves for environmental claims are not established on a claim-by-claim basis. The Company carries an aggregate bulk reserve for all of the Company's environmental claims that are in dispute, until the dispute is resolved. This bulk reserve is established and adjusted based upon the aggregate volume of in-process environmental claims and the Company's experience in resolving those claims. At December 31, 2001, approximately 75% of the net environmental reserve (approximately $298 million), is carried in a bulk reserve and includes unresolved and incurred but not reported environmental claims for which the Company has not received any specific claims as well as for the anticipated cost of coverage litigation disputes relating to these claims. The balance, approximately 25% of the net environmental reserve (approximately $98 million) consists of case reserves for resolved claims.
The Company also compares the Company's historical direct and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations or characteristics suggested by the aggregate paid activity. The comparison includes a review of the result derived from the division of the ending direct and net reserves by last year's direct and net paid activity, also known as the survival ratio.
As of December 31, 2001, the Company has resolved the environmental liabilities presented by 5,595 of the 6,214 policyholders who have tendered environmental claims to the Company for approximately $1.88 billion (before reinsurance). This resolution comprises 90% of the policyholders who have tendered these claims. The Company generally has been successful in resolving its coverage litigation disputes and continues to reduce its potential exposure through favorable settlements with some insureds.
The Company believes that the property and casualty insurance industry has suffered from judicial interpretations that have attempted to maximize insurance availability for asbestos claims from both a coverage and liability standpoint far beyond the intent of the contracting parties. These policies generally were issued prior to 1980. The Company continues to receive asbestos claims alleging insureds' liability from claimants' asbestos-related injuries. Since the beginning of 2000, the Company has experienced an increase over prior years in the number of asbestos claims being tendered to the Company and the Company expects this trend to continue. Factors lending to these increases include more intensive advertising by lawyers seeking asbestos claimants, the increasing focus by plaintiffs on new and previously peripheral defendants and an increase in the number of entities seeking bankruptcy protection as a result of asbestos-related liabilities. In addition to contributing to the increase in claims, the bankruptcy proceedings may have the effect of significantly accelerating and increasing loss payments by insurers, including the Company. Particularly during the last few months of 2001 and continuing into 2002, these trends have both accelerated and become more visible. Accordingly, there is a high degree of uncertainty with respect to future exposure from asbestos claims.
Due to claimants' allegations of long-term bodily injury in CIOTA claims, numerous complex issues regarding these claims are presented. The claimants' theories of liability must be evaluated, the evidence pertaining to a causal link between injury and exposure to a substance must be reviewed, the potential role of other causes of injury must be analyzed, the liability of other defendants must be explored, an assessment of a claimant's damages must be made and the law of the applicable jurisdiction must be analyzed. In addition, the Company must review the number of policies it has issued to the insured and whether these policies are triggered by the allegations, the terms and limits of liability of these policies, the obligations of other insurers to respond to the claim and the role, if any, of non-CIOTA claims or potential non-CIOTA claims in any resolution process.
A variety of factors continue to affect the property and casualty insurance market and the Company's core business outlook, including improvement in 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, asbestos related developments and rising reinsurance and litigation costs.
The property and casualty insurance industry continues to be reshaped by consolidation and globalization. The Company's strategic objectives are to enhance its position as a consistently profitable market leader and a cost-effective provider of property and casualty insurance in the United States, as the industry consolidates.
Some 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 some 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.
In 2001, 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. Since the terrorist attack on September 11th, there has been greater concern over the availability, terms and conditions, and pricing of reinsurance. As a result, the primary insurance market is expected to continue to see significant rate increases for certain coverages.
In National Accounts, where programs include risk management services, such as claims settlement, loss control and risk management information services, generally offered in connection with a large deductible or self-insured program, and risk transfer, typically provided through a guaranteed cost or retrospectively rated insurance policy, pricing improved during 2001 and 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 into 2002. However, National Accounts will continue to reject business that is not expected to produce acceptable returns. Included in National Accounts is service fee income for policy and claim administration of several states' Workers' Compensation Residual Market pools. After several years of depopulation, these pools are growing significantly as the primary market is firming. Premium that the Company services for these pools grew 76% in 2001 compared to 2000 and is expected to continue to grow significantly.
Commercial Accounts achieved double-digit price increases on renewal business during 2001 and 2000, improving the overall profit margin in this business and offsetting the impacts of rising loss cost inflation, medical inflation and reinsurance costs. Commercial Accounts will continue to seek significant rate increases in 2002, as pricing in some areas and business segments still has not improved to the point of producing acceptable returns.
In Select Accounts, the trend toward increased pricing on renewal business that started in late 1999 gained momentum in 2000 and continued to improve during 2001. Prices generally rose during this time frame while customer retention remained consistent with prior periods. Price increases varied significantly by region, industry and product. However, the ability of Select Accounts to achieve future rate increases is subject to regulatory constraints in some jurisdictions. Loss cost trends in Select Accounts also worsened in 2001, especially in workers' compensation and property. The impact of these negative loss cost trends has been partially offset by the Company's continued disciplined approach to underwriting and risk selection. The Company will continue to pursue business based on its ability to achieve acceptable returns.
In Gulf, rate increases began in most lines of business in 2001 although specific increases varied significantly by region, industry and product. Improvement was most evident in the umbrella and excess and surplus lines of business, with lesser increases achieved in the professional liability lines of business. In most areas of the business, capacity has dissipated due to reinsurance constriction, which should lead to further rate increases throughout 2002. The favorable impact from rate improvement continues to be offset by rising loss costs. Gulf will reduce its exposure in products and business segments where acceptable returns have not been achieved. Gulf scaled back its assumed reinsurance business in 2001 and at the same time began to restructure its transportation and property business. The Company is currently engaged in discussions with a potential minority investor in Gulf pursuant to which such investor would acquire debt and up to 20% equity interest in Gulf. The transaction, if agreed to, would be subject to customary conditions. The Company has tentatively agreed that, if the Company proceeds, the Company would grant the investor customary "demand" and "piggyback" registration rights with respect to its investment in Gulf.
Insurers generally, including the Company, are experiencing an increase in the number of asbestos-related claims due to, among other things, more intensive advertising by lawyers seeking asbestos claimants, the increasing focus by plaintiffs on new and previously peripheral defendants and an increase in the number of entities seeking bankruptcy protection as a result of asbestos-related liabilities. In addition to contributing to the increase in claims, the bankruptcy proceedings may have the effect of significantly accelerating and increasing loss payments by insurers, including the Company. Increasingly, policyholders have been asserting that their claims for asbestos-related insurance are not subject to aggregate limits on coverage and that each individual bodily injury claim should be treated as a separate occurrence under the policy. Particularly during the last few months of 2001 and continuing into 2002, the asbestos-related trends described above have both accelerated and become more visible. In addition, these claims and the related litigation could result in liability exceeding these reserves by an amount that could be material to the Company's operating results and financial condition in future periods. Because the level of uncertainty continues to increase and in order to strengthen the ability and flexibility of the Company's parent, TPC, to advance TPC's strategic goals following its initial public offering, Citigroup has entered into an agreement under which it will provide TPC with significant financial support for asbestos claims and related litigation, in any year that the Company's insurance subsidiaries record asbestos-related income statement charges in excess of $150 million, net of any reinsurance up to a cumulative aggregate of $800 million, reduced by the tax effect of the highest applicable federal income tax rate.
Personal Lines' strategy includes control of operating expenses to improve competitiveness and profitability, growth in sales primarily through independent agents and selective expansion of additional marketing channels to broaden distribution to a wider customer base. These growth strategies also provide opportunities to leverage the existing cost structure and achieve economies of scale. In addition, Personal Lines continues to take action to control its exposure to catastrophe losses, including limiting the writing of new homeowners business in some markets, implementing price increases in certain hurricane-prone areas and non-renewing policies in some hurricane-prone areas where acceptable returns are not being achieved, subject to restrictions imposed by insurance regulatory authorities.
The personal auto insurance marketplace remains highly competitive as some personal auto carriers have been reluctant to increase prices to fully offset increases in loss cost trends due to inflationary pressures in medical costs and auto repair costs. These trends are expected to continue into 2002. 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 2002. Homeowners loss cost trends continue to increase at modest levels, reflecting inflationary pressures and the increased frequency of weather-related losses.
See Note 1 of notes to the Company's consolidated financial statements for a discussion of recently issued accounting pronouncements.
TRAVELERS INSURANCE GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (In millions, except shares)
TRAVELERS INSURANCE GROUP HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In millions)
TRAVELERS INSURANCE GROUP HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During April 2000, TPC completed a cash tender offer to purchase all of the outstanding shares of Class A Common Stock of TIGHI at a price of $41.95 per share. See note 10.
Effective January 1, 2001, the Company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (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. See note 13.
As a result of adopting FAS 133, the Company recorded a benefit of $4 million after tax, reflected as a cumulative catch-up adjustment in the consolidated statement of income and a charge of $4 million after tax, reflected as a cumulative catch-up adjustment in the accumulated other changes in equity from nonowner sources section of shareholder's equity. In addition, the Company redesignated certain investments as trading from available for sale in accordance with the transition provisions of FAS 133 resulting in a gross gain of $12 million, reflected in realized investment gains (losses).
Effective April 1, 2001, the Company adopted FASB Emerging Issues Task Force (EITF) 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" (EITF 99-20). EITF 99-20 provides new guidance on the recognition and measurement of interest income and impairment on certain investments, e.g., certain asset-backed securities. The recognition of impairment resulting from the adoption of EITF 99-20 is to be recorded as a cumulative catch-up adjustment as of the beginning of the fiscal quarter in which it is adopted. Interest income on beneficial interests falling within the scope of EITF 99-20 is to be recognized prospectively. As a result of adopting EITF 99-20, the Company recorded a charge of $1 million after tax, reflected as a cumulative catch-up adjustment. The implementation of this EITF did not have a significant impact on results of operations, financial condition or liquidity.
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 did not have a significant impact on results of operations, financial condition or liquidity.
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 shareholder's equity.
Realized investment gains and losses are included as a component of pretax revenues based upon specific identification of the investments sold on the trade date. Other-than-temporary declines in fair value of investments are included in realized investment gains and losses.
Amounts which vary with and are primarily related to the production of new business, primarily commissions and premium taxes, are deferred and amortized pro rata over the contract periods in which the related premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income, and if not, are charged to expense. Future investment income attributable to related premiums is taken into account in measuring the recoverability of the carrying value of this asset. All other acquisition expenses are charged to operations as incurred.
Prior to the adoption of FASB Statements of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other Intangible Assets" (FAS 142), which will be applied to goodwill and intangible asset amortization in the first quarter of 2002, goodwill is generally being amortized on a straight-line basis over a 40-year period. TPC's purchase of the outstanding shares of Class A Common Stock of TIGHI (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 Northland Company and its subsidiaries (see note 2) included goodwill and intangible assets of approximately $243 million, which are being amortized on a straight-line basis over a 20-year period for goodwill and periods of 15 to 20 years for the intangible assets. 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. Amortization expense included in the consolidated statement of income was $102 million, $80 million and $40 million for the years ended December 31, 2001, 2000 and 1999, respectively.
Upon adoption of FAS 141 and FAS 142, the Company will stop amortizing goodwill and intangible assets deemed to have an indefinite useful life. Instead, these assets will be subject to an annual review for impairment. Other intangible assets that are not deemed to have an indefinite useful life will continue to be amortized over their useful lives. See note 1, Summary of Significant Accounting Policies, Accounting Standards not yet adopted.
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. The reserves are also reviewed periodically by a qualified actuary employed by the Company. 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.
Included in other liabilities in the consolidated balance sheet is the Company's estimate of its liability for guaranty-fund and other insurance-related assessments. The liability for expected state guaranty-fund and other premium-based assessments is recognized as the Company writes or becomes obligated to write or renew the premiums on which the assessments are expected to be based. The liability for loss-based assessments is recognized as the related losses are incurred. At December 31, 2001 and 2000, the Company had a liability of $200 million and $223 million, respectively, for guaranty-fund and other assessments and related recoveries of $23 million and $28 million, respectively. The liability for such assessments and their related recoveries are not discounted for the time value of money. The assessments are expected to be paid over a period ranging from one year to the life expectancy of certain workers' compensation claimants and the recoveries are expected to occur over the same period of time.
Also included in other liabilities is an accrual for policyholder dividends. Certain insurance contracts, primarily workers' compensation, are participating whereby dividends are paid to policyholders in accordance with contract provisions. Net written premiums for participating dividend policies were approximately 3%, 4% and 6% of total Company net written premiums for the years ended December 31, 2001, 2000 and 1999, respectively. Policyholder dividends are accrued against earnings using best available estimates of amounts to be paid. Policyholder dividends were $28 million, $32 million and $47 million for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company's insurance subsidiaries, domiciled principally in the State of 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 are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state. Permitted statutory accounting practices include practices not prescribed by the domiciliary state, but allowed by the domiciliary state regulatory authority. The impact of any permitted accounting practices on statutory surplus of the Company is not material.
Interest rate swaps, equity swaps, options, forward contracts and financial futures were not significant at December 31, 2001 and 2000. See note 13.
ACCOUNTING BY CERTAIN ENTITIES (INCLUDING ENTITIES WITH TRADE RECEIVABLES) THAT LEND TO OR FINANCE THE ACTIVITIES OF OTHERS
Commercial Lines offers a broad array of property and casualty insurance and insurance-related services. Protection is afforded to customers of Commercial Lines for the risks of property loss such as fire and windstorm, financial loss such as business interruption from property damage, liability claims arising from operations and workers' compensation benefits through insurance products where risk is transferred from the customer to Commercial Lines. Coverages include workers' compensation, general liability, commercial multi-peril, commercial automobile, property, fidelity and surety, professional liability, and several miscellaneous coverages.
Commercial Lines is organized into five marketing and underwriting groups, each of which focuses on a particular client base or product grouping to provide products and services that specifically address customers' needs: National Accounts, Commercial Accounts, Select Accounts, Bond and Gulf.
National Accounts provides a variety of casualty products to large companies. Products are marketed through national and regional brokers. Programs offered by National Accounts 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. National Accounts also includes the Company's residual market business, which primarily offers workers' compensation products and services to the involuntary market.
Bond markets its products to national, mid-sized and small customers as well as individuals, and distributes them through both national and wholesale brokers, and retail agents and regional brokers. Bond's range of products includes fidelity and surety bonds, excess SIPC, directors' and officers' liability insurance, errors and omissions insurance, professional liability insurance, employment practices liability insurance, fiduciary liability insurance, and other related coverages.
Gulf markets products to national, mid-sized and small customers, and distributes them through both wholesale brokers and retail agents. Gulf provides a diverse product and program portfolio of specialty insurance lines, with particular emphasis on management and professional liability. Products include various types of directors' and officers' insurance, fiduciary, employment practices liability, errors and omissions coverages, and fidelity and commercial crime coverages.
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, and joint marketing arrangements with other insurers.
The Company has a geographic exposure to catastrophe losses in certain areas of the country. Catastrophes can be caused by various natural and man-made events including hurricanes, windstorms, earthquakes, hail, severe winter weather, explosions and fires. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes and earthquakes may produce significant damage in large areas, especially those that are heavily populated. The Company generally seeks to reduce its exposure to catastrophes through individual risk selection and the purchase of catastrophe reinsurance.
The Company makes investments in collateralized mortgage obligations (CMOs). CMOs typically have high credit quality, offer good liquidity, and provide a significant advantage in yield and total return compared to U.S. Treasury securities. The Company's investment strategy is to purchase CMO tranches which are protected against prepayment risk, including planned amortization class and last cash flow tranches. Prepayment protected tranches are preferred because they provide stable cash flows in a variety of scenarios. The Company does invest in other types of CMO tranches if a careful assessment indicates a favorable risk/return tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 2001 and 2000, the Company held CMOs classified as available for sale with a fair value of $3.3 billion and $2.8 billion, respectively. Approximately 54% and 59% of the Company's CMO holdings are fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 2001 and 2000, respectively. In addition, the Company held $2.3 billion and $1.5 billion of GNMA, FNMA, FHLMC or FHA mortgage-backed pass-through securities classified as available for sale at December 31, 2001 and 2000, respectively. Virtually all of these securities are rated Aaa.
Aggregate annual maturities on mortgage loans are $16 million, $36 million, $28 million, $9 million, $15 million and $170 million for 2002, 2003, 2004, 2005, 2006 and 2007 and thereafter, respectively. There are no mortgage loans which are past due.
At December 31, 2001 and 2000, the Company had concentrations of credit risk in tax-exempt investments of the State of Texas of $1.2 billion and $1.3 billion, respectively, and of the State of New York of $1.0 billion and $1.3 billion, respectively.
Included in fixed maturities are below investment grade assets totaling $1.7 billion and $1.6 billion at December 31, 2001 and 2000, respectively. The Company defines its below investment grade assets as those securities rated "Ba1" or lower by external rating agencies, or the equivalent by internal analysts when a public rating does not exist. Such assets include publicly traded below investment grade bonds and certain other privately issued bonds that are classified as below investment grade loans.
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, 2001 and 2000 include $248 million and $295 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. It is possible that an unfavorable impact on collectibility could have a material adverse effect on the Company's results of operations in a future period. However, in the opinion of the Company's management, it is not likely that the outcome could have a material adverse effect on the Company's financial condition or liquidity.
In 2001, estimated claims and claim adjustment expenses for claims arising in prior years included net favorable loss development on Commercial Lines loss sensitive policies in various lines; however, since the business to which it relates is subject to premium adjustments, there is no impact on results of operations. In addition, estimated claims and claim adjustment expenses for claims arising in prior years also included approximately $109 million of net unfavorable development, primarily related to certain Commercial Lines coverages, predominately in general liability, commercial auto liability, assumed reinsurance and specialty businesses partially offset by favorable development in commercial multi-peril and other claim adjustment expenses.
In establishing environmental reserves, the Company evaluates the exposure presented by each insured and the anticipated cost of resolution, if any, for each insured on a quarterly basis. In the course of this analysis, the Company considers the probable liability, available coverage, relevant judicial interpretations and historical value of similar exposures. In addition, the Company considers the many variables presented, such as the nature of the alleged activities of the insured at each site; the allegations of environmental harm at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between the Company and the insured, including the role of any umbrella or excess insurance the Company has issued to the insured; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims, in any resolution process; and the applicable law in each jurisdiction.
The reserves carried for environmental and asbestos claims at December 31, 2001 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, the risks inherent in major litigation, including more aggressive asbestos litigation against insurers, including the Company, any impact from the bankruptcy protection sought by various asbestos producers and other asbestos defendants, a further increase or decrease in asbestos and environmental claims which cannot now be anticipated, the role of any umbrella or excess policies issued by the Company for such claims, whether or not an asbestos claim is a product/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim, the number and outcome of direct actions against the Company and unanticipated developments pertaining to the Company's ability to recover reinsurance for environmental and asbestos claims. It is also not possible to predict changes in the legal and legislative environment and their impact on the future development of asbestos and environmental claims. Such development will be affected by future court decisions and interpretations, as well as changes in applicable legislation. In addition, particularly during the last few months of 2001 and continuing into 2002, asbestos-related trends have both accelerated and become more visible. These trends include, but are not limited to, the filing of additional claims, more aggressive litigation based on novel theories of liability and litigation against new and previously peripheral defendants, and developments in existing and pending bankruptcy proceedings.
Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the current related reserves. These additional amounts, or a range of these additional amounts, cannot now be reasonably estimated and could result in liability exceeding these reserves by an amount that could be material to the Company's operating results and financial condition in future periods.
During 2001, the Company recorded a charge of $490 million representing the estimated loss for both reported and unreported claims incurred and related claim adjustment expenses, net of reinsurance recoverables and taxes, related to the terrorist attack on September 11th. The associated reserves and related reinsurance recoverables represent the estimated ultimate net costs of all incurred claims and claim adjustment expenses related to the attack. Since the reserves and related reinsurance recoverables are based on estimates, the ultimate net liability may be more or less than such amounts.
On April 13, 2001, TIGHI entered into a $500 million line of credit agreement with Citicorp Banking Corporation, an affiliate. On April 16, 2001, TIGHI borrowed $275 million on the line of credit. Proceeds from this borrowing together with $225 million of commercial paper proceeds were used to pay the $500 million 6.75% long-term note payable which was due on April 16, 2001. On November 8, 2001, TIGHI borrowed another $225 million under the line of credit. The proceeds were used to pay off maturing commercial paper. The maturity for all $500 million borrowed under this line was extended to November 7, 2003, and the interest rate was fixed at 3.60%.
The obligations of TIGHI with respect to the TIGHI Debentures, when considered together with certain undertakings of TIGHI with respect to the subsidiary trusts, constitute full and unconditional guarantees by TIGHI of the subsidiary trusts' obligations under the respective TIGHI Securities. The TIGHI Securities are classified in the consolidated balance sheet as "TIGHI-obligated mandatory redeemable securities of subsidiary trusts holding solely junior subordinated debt securities of TIGHI" at their liquidation value of $900 million. TIGHI has the right, at any time, to defer payments of interest on the TIGHI Debentures and consequently the distributions on the TIGHI Securities and common securities would be deferred (though such distributions would continue to accrue with interest thereon since interest would accrue on the TIGHI Debentures during any such extended interest payment period). TIGHI cannot pay dividends on its common stock during such deferments. Distributions on the TIGHI Securities have been classified as interest expense in the consolidated statement of income.
On April 20, 2000, TPC completed a cash tender offer to purchase all of the outstanding shares of Class A Common Stock of TIGHI at a price of $41.95 per share. TPC also established a wholly-owned subsidiary of TPC which effected a merger pursuant to which TIGHI became a wholly-owned subsidiary of TPC. Upon the merger of the new subsidiary into TIGHI, all previously outstanding shares of Class B Common Stock were converted to shares of Class A Common Stock and all resulting outstanding shares of Class A Common Stock of TIGHI and unissued shares and the 1,000 shares of Common Stock of the new subsidiary (held by TPC) were exchanged for 1,000 shares of Class A Common Stock of TIGHI.
On January 18, 2000 and January 19, 1999, the Company, through the Travelers Insurance Group Holdings Inc. Capital Accumulation Plan (TIGHI CAP), reissued 467,207 and 476,431 substantially shares of treasury stock, respectively, in the form of restricted common stock to participating officers and other key employees. The fair market value per share of the 2000 and 1999 restricted stock awards was $36.49 and $31.88, 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 and $22 million for the years ended December 31, 2000 and 1999, respectively. In connection with the cash tender offer completed by TPC in 2000, all shares of restricted common stock under TIGHI CAP were eliminated and substantially all were replaced with restricted Citigroup common stock. See note 15 for a discussion of Citigroup restricted common stock awards.
On August 12, 1998, TIGHI Board of Directors authorized a $150 million repurchase program, which was completed in October of 1999. On October 6, 1999, TIGHI 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, TIGHI had repurchased $159 million of its common stock pursuant to this final repurchase plan. In connection with the cash tender offer completed by TPC in 2000, all treasury stock was effectively retired.
Future minimum annual rentals under noncancellable operating leases are $111 million, $85 million, $56 million, $44 million, $23 million and $112 million for 2002, 2003, 2004, 2005, 2006 and 2007 and thereafter, respectively. Future sublease rental income of approximately $18 million will partially offset these commitments.
Beginning January 1, 2001, the Company adopted FAS 133 which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognizes all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. Where applicable, hedge accounting is used to account for derivatives.
For fair value hedges, changes in the fair value of derivatives are reflected in realized investment gains (losses), together with changes in the fair value of the related hedged item. The Company did not utilize fair value hedges during the year ended December 31, 2001.
For cash flow hedges, the accounting treatment depends on the effectiveness of the hedge. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives' fair value will not be included in current earnings but are reported in accumulated other changes in equity from nonowner sources. These changes in fair value will be included in the earnings of future periods when earnings are also affected by the variability of the hedged cash flows. At December 31, 2001, the Company expects to include realized investment losses of approximately $1 million in earnings over the next twelve months for these cash flow hedges. To the extent these derivatives are not effective, changes in their fair value are immediately included in realized investment gains (losses). The Company's cash flow hedges primarily include hedges of floating rate available-for-sale securities and certain forecasted transactions up to a maximum tenure of one year. While the earnings impact of cash flow hedges are similar to the previous accounting practice, the amounts included in the accumulated other changes in equity from nonowner sources will vary depending on market conditions.
For those hedge relationships that are terminated, hedge designations removed, or forecasted transactions that are no longer expected to occur, the hedge accounting treatment described in the paragraphs above will no longer apply. For fair value hedges, any changes to the hedged item remain as part of the basis of the asset and are ultimately reflected as an element of the yield. For cash flow hedges, any changes in fair value of the end-user derivative remain in accumulated other changes in equity from nonowner sources, and are included in earnings of future periods when earnings are also affected by the variability of the hedged cash flow. If the hedged relationship was discontinued or a forecasted transaction is not expected to occur when scheduled, any changes in fair value of the end-user derivative are immediately reflected in realized investment gains (losses). During the year ended December 31, 2001, there were no such discontinued forecasted transactions.
The Company also purchases investments that have embedded derivatives, primarily convertible debt securities. These embedded derivatives are carried at fair value with changes in value reflected in realized investment gains (losses). The Company bifurcates an embedded derivative where: a) the economic characteristics and risks of the embedded instrument are not clearly and closely related to the economic characteristics and risks of the host contract, b) the entire instrument would not otherwise be remeasured at fair value, and c) a separate instrument with the same terms of the embedded instrument would meet the definition of a derivative under FAS 133. Derivatives embedded in convertible debt securities are reported on a combined basis with their host instrument and are classified as fixed maturity securities.
At December 31, 2001 and 2000, investments in fixed maturities had a fair value, which equaled carrying value, of $25.9 billion and $25.0 billion, respectively. The fair value of investments in fixed maturities for which a quoted market price or dealer quote are not available was $790 million and $874 million at December 31, 2001 and 2000, respectively.
The carrying values of cash, trading securities, short-term securities, mortgage loans and investment income accrued approximated their fair values. See notes 1 and 4.
13. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
In the normal course of business, the Company has unfunded commitments to partnerships. Such commitments were $792 million and $729 million at December 31, 2001 and 2000.
The Company provides certain administrative services to TIC. Settlements for these functions between the Company and its affiliates are made regularly. Investment advisory and management services and data processing services are provided by affiliated companies. Charges for these services are shared by the companies on cost allocation methods based generally on estimated usage by department.
An affiliate maintains a short-term investment pool in which the Company participates. The positions of each company participating in the pool are calculated and adjusted daily. At December 31, 2001 and 2000, the pool totaled approximately $5.6 billion and $4.4 billion, respectively. The Company's share of the pool amounted to $2.4 billion and $2.2 billion at December 31, 2001 and 2000, respectively, and is included in short-term securities in the consolidated balance sheet.
The Company applies APB 25 and related interpretations in accounting for stock options. Since stock options under the Citigroup plans are issued at fair market value on the date of award, no compensation cost has been recognized for these awards. FAS 123 provides an alternative to APB 25 whereby fair values may be ascribed to options using a valuation model and amortized to compensation cost over the vesting period of the options.
Had the Company applied FAS 123 in accounting for Citigroup stock options, net income would have been the pro forma amounts indicated as follows:
On October 1, 2001, the Company paid $329 million to Associates First Capital Corp., an affiliate, for The Northland Company and its subsidiaries and Associates Lloyds Insurance Company. In addition, on October 3, 2001, the capital stock of CitiCapital Insurance Company (formerly known as Associates Insurance Company), with a net book value of $356 million, was contributed to the Company. See note 2.
On October 3, 2001, the capital stock of CitiCapital Insurance Company (formerly known as Associates Insurance Company), with a net book value of $356 million, was contributed to the Company. See note 2. There were no significant noncash financing or investing activities for the years ended December 31, 2000 or 1999.