The Company currently owns six buildings in Hartford, Connecticut, which comprises its headquarters. The Company currently occupies approximately 1,471,174 square feet of office space in such buildings. The Company also owns other real property, which includes office buildings in Fall River, Massachusetts and in Irving, Texas and a data center located in Norcross, Georgia. In addition, the Company leases 134 field and claim offices totaling approximately 3,393,749 square feet throughout the United States under leases or subleases with third parties.
Total debt reduced to $2.7 billion from $3.4 billion (including mandatorily redeemable securities)
Interest expense increased $9.6 million or 6% in 2003 due to certain one time costs associated with the first and second quarter refinancing activities that lowered average interest costs and higher levels of temporary debt. Interest expense decreased $48.1 million or 23% in 2002 due to lower average interest-bearing debt levels primarily related to the repayment of debt obligations to Citigroup in the 2002 first quarter.
The 20.5 point improvement in the 2003 GAAP combined ratio before policyholder dividends resulted from lower unfavorable prior year reserve development, primarily due to having no asbestos charges in 2003 compared to asbestos charges in 2002 that added 19.2 points. The benefit from premium rate increases that exceeded loss costs trends were mostly offset by higher catastrophe losses.
Commercial Accounts primarily serves mid-sized businesses for casualty products and large, mid-sized and small businesses for property products through a network of independent agents and brokers. Commercial Accounts net written premiums, excluding Northland and Associates, increased 16% to $3.179 billion in 2003 primarily due to renewal price change increases that averaged 10% for 2003 (down from 22% in 2002), new business growth in targeted markets and strong retention across all major product lines. The lower level of renewal price changes resulted mostly from moderation in rates, primarily in the property lines. Renewal price change represents the estimated average change in premium on policies that renew, including rate and exposure changes, versus the average premium on those same policies for their prior term. New business premiums in Commercial Accounts for 2003 were $809.5 million, a 12% increase from 2002. The business retention ratio for 2003 was 81% up from 76% in 2002. Retention represents the estimated percentage of premium available for renewal which renewed in the current period. This renewal price change, new business and retention information excludes the Company’s Northland and Associates operations. Net written premiums associated with Northland and Associates declined to $546.8 million in 2003 from $824.8 million in 2002 due to the withdrawal in 2002 of business at American Equity and Associates and the $115.0 million one-time impact from the termination of certain reinsurance contracts as previously discussed. Commercial Accounts net written premiums increased $1.149 billion or 48% in 2002. The increase was significantly impacted by the inclusion in 2002 of the full-year results of Northland and Associates. Net written premiums related to Northland and Associates were $824.8 million and $167.4 million in 2002 and 2001, respectively. Excluding the impact of Northland and Associates, net written premiums increased 22% or $491.6 million for 2002, primarily driven by renewal price changes averaging 22% for 2002 and strong growth in new business. All major product lines - commercial automobile, property and general liability - contributed to the rise in renewal pricing. The one area not showing adequate rate improvement, however, was the workers’ compensation line and, accordingly, Commercial Accounts did not grow this business. New business premiums in Commercial Accounts for 2002 were $725.4 million, a 43% increase. The business retention ratio for 2002 was 76%, up from 71% for 2001.
Revenues increased $450.0 million or 9% in 2003 and $371.5 million or 8% in 2002.
Automobile net written premiums increased $210.4 million or 7% in 2003 due to higher business volumes and renewal price increases. Renewal price change increases for standard voluntary business averaged 6% in 2003, two percentage points below 2002. Renewal price change for Personal Lines products represents the estimated average change in premium on policies that renew, including rate and exposure changes, versus the average premium on those same policies for their prior term. Policies in force increased 4% in 2003. Policy retention levels for standard
Production through the Company’s independent agents in Personal Lines, which represented over 81% of Personal Lines total net written premiums in 2003, was up $423.6 million or 11% to $4.159 billion. Production through other channels, which include affinity and joint marketing arrangements, was up $82.8 million or 10% to $922.2 million. Production through the Company’s independent agents in 2002 was up $427.7 million or 13% to $3.736 billion for 2002, including the impact of Northland. Net written premiums through channels other than independent agents was up $39.4 million or 5% to $839.4 million for 2002 as the favorable impact of renewal price changes was offset in part by a reduction in policies in force due to underwriting actions taken to eliminate marginally profitable businesses.
Over the past three years, the Company has experienced a significant reduction in the number of policyholders with pending coverage litigation disputes and a continued reduction in the number of policyholders tendering for the first time an environmental remediation-type claim to the Company. While there continues to be a reduction in the number of policyholders with active environmental claims, the recent decline is not as dramatic as it had been in the past.
The following table sets forth the Company’s combined fixed maturity investment portfolio classified by Moody’s Investor’s Service Inc. ratings:
The Company’s equity investments are primarily through private equity, arbitrage and real estate partnerships, which are subject to more volatility than the Company’s fixed income investments, but historically have provided a higher return. At December 31, 2003, the carrying value of the Company’s investments in private equity, arbitrage and real estate partnerships was $2.449 billion.
While the Terrorism Act provides a Federally-funded “backstop” for commercial property casualty insurers, it also requires that insurers immediately begin offering coverage for insured losses caused by acts of terrorism. The majority of the Company’s Commercial Lines policies already included such coverage, although exclusions were added to higher-risk policyholders after September 11, 2001. For those risks considered higher-risk, such as landmark buildings or high concentrations of employees in one location, the Company will continue to either decline to offer a renewal or will offer coverage for losses caused by acts of terrorism on a limited basis, with an explicit charge for the coverage.
Select Accounts also achieved price increases on renewal business of 14%, 17% and 14% in 2003, 2002 and 2001, respectively, improving the overall profit margin in this business, more than offsetting the impact of rising loss cost and lower investment yields. 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. Select will continue to seek rate increases in 2004, but the amount of increase may continue to decline as compared to the past year. Customer retention levels increased in 2003 over 2002 and loss cost trends in Select Accounts remained stable due to the Company’s continued disciplined approach to underwriting and risk selection. The Company will continue to pursue business based on the Company’s ability to achieve acceptable returns.
In March 2002, TPC issued $892.5 million aggregate principal amount of 4.5% convertible junior subordinated notes which will mature on April 15, 2032, unless earlier redeemed, repurchased or converted. Interest is payable quarterly in arrears. See note 8 of notes to the Company’s consolidated financial statements for a further discussion.
See note 8 of the notes to the Company’s consolidated financial statements for a further discussion.
Represents agreements entered into in the ordinary course of business to lease office space, equipment and furniture.
The Company evaluates and monitors the financial condition of its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. In addition, in the ordinary course of business, the Company may become involved in coverage disputes with its reinsurers. In recent quarters, the Company has experienced an increase in the frequency of these reinsurance coverage disputes. Some of these disputes could result in lawsuits and arbitrations brought by or against the reinsurers to determine the company’s rights and obligations under the various reinsurance agreements. The Company employs dedicated specialists and aggressive strategies to manage reinsurance collections and disputes.
The effect of a particular risk factor on estimates of claim liabilities can not be isolated in most cases. For example, estimates of potential claim settlements may be impacted by the risk associated with potential court rulings, but the final settlement agreement typically does not delineate how much of the settled amount is due to this and other factors.
Prior to the Citigroup Distribution, the Company provided and purchased services to and from Citigroup affiliated companies, including facilities management, banking and financial functions, benefit coverages, data processing services and short-term investment pool management services. Charges for these shared services were allocated at cost. In connection with the Citigroup Distribution, the Company and Citigroup and its affiliates entered into a transition services agreement for the provision of certain of these services, tradename and trademark and similar agreements related to the use of trademarks, logos and tradenames and an amendment to the March 26, 2002 Intercompany Agreement with Citigroup.
Hedge funds are unregistered private investment partnerships, funds or pools that may invest and trade in many different markets, using a variety of strategies and instruments (including securities, non-securities and derivatives). The three hedge funds that were determined to be significant VIEs have a total value for all investors combined of approximately $326.2 million at December 31, 2003. The Company’s share of these funds has a carrying value of approximately $93.0 million at December 31, 2003. The Company’s involvement with these funds began in the third quarter of 2002. There are various purposes of the Company’s involvement in these funds, including but not limited to the following:
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. Such recoverables are reported net of an allowance for estimated uncollectible reinsurance recoverables and amounts due from known reinsurer insolvencies. The Company evaluates and monitors the financial condition of its reinsurers under voluntary reinsurance arrangement to minimize its exposure to significant losses from reinsurer insolvencies.
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, credit derivatives, options and forward contracts were not significant at December 31, 2003 and 2002.
In August 2002, CIRI, a subsidiary of the Company, issued $49.7 million aggregate principal amount of 6.0% convertible notes (the CIRI Notes) which will mature on December 31, 2032 unless earlier redeemed or repurchased. Interest on the CIRI Notes is payable quarterly in arrears. The CIRI Notes are convertible as a whole and not in part into shares of CIRI common stock at the option of the holders of 66-2/3% of the aggregate principal amount of the notes, in the event of an IPO or change of control of CIRI. At any time after the earlier of (a) December 31, 2010 or (b) an IPO by CIRI, the notes may be redeemed by CIRI.
In the normal course of business, the Company has unfunded commitments to partnerships, joint ventures and certain private equity investments in which it invests. These commitments were $652.3 million and $864.3 million at December 31, 2003 and 2002, respectively.
Included in revenues in the consolidated statement of income (loss) is $520.0 million from the Citigroup indemnification agreement in 2002. At December 31, 2002, other assets in the consolidated balance sheet include a $360.7 million receivable under the Citigroup indemnification agreement, which was received during the first quarter of 2003. See note 7.