The following discussion and analysis of Travelers Property Casualty Corp. (TPC) and subsidiaries (collectively, the Company) financial condition and results of operations should be read in conjunction with the consolidated financial statements of the Company and related notes included elsewhere in this Form 10-K. These financial statements retroactively reflect TPC’s corporate reorganization for all periods presented.
the per share exercise price of the replacement options were determined so that:
Commencing in 2002, the GAAP underwriting expense ratio has been computed using net earned premiums. Previously, this ratio for GAAP purposes was computed using net written premiums. Prior periods have been restated to conform to this new presentation.
prior year reserve development of $20.2 million compared to $72.2 million in 2000. Also contributing to the 2001 decrease in operating income was a $20.9 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. Underwriting loss, excluding catastrophes, prior year reserve development and goodwill amortization decreased $13.4 million to $16.6 million in 2001. The 2001 underwriting results reflect the effects of increased loss cost trends, including increased medical costs and auto repair costs, partially offset by rate increases.
Personal Lines net written premiums in 2002 were $4.575 billion, compared to $4.108 billion in 2001. The increase in net written premiums of $467.1 million in 2002 was principally a result of renewal price increases in both the Automobile and Homeowners and Other lines of business and the full-year inclusion of Northland in 2002. Net written premiums for Northland were $111.0 million in 2002, an increase of $85.7 million over 2001 which only includes the fourth quarter of 2001. Personal Lines net written premiums in 2001 were $4.108 billion, a $295.1 million increase compared to $3.813 billion in 2000. The increase in 2001 reflects growth in target markets served by independent agents and growth in affinity group marketing and joint marketing arrangements, partially offset by continued emphasis on disciplined underwriting and risk management. Rate increases implemented in both the automobile and homeowners product lines were the primary contributors to the growth in net written premiums in 2001. The inclusion of Northland in the fourth quarter of 2001 added $25.3 million to full-year 2001 net written premiums.
The Company believes that the property and casualty insurance industry has suffered from judicial interpretations and other trends 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. As a result, the Company continues to experience an increase in the number of asbestos claims being tendered to the Company by the Company’s policyholders (which includes others seeking coverage under a policy) including claims against the Company’s policyholders by individuals who do not appear to be impaired by asbestos exposure. Factors underlying 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, bankruptcy proceedings may increase the volatility of asbestos-related losses by initially delaying the reporting of claims and later by significantly accelerating and increasing loss payments by insurers, including the Company. The Company is currently involved in coverage litigation concerning a number of policyholders who have filed for bankruptcy, including, among others, ACandS, Inc., and who have asserted that all or a portion of their asbestos-related claims are not subject to aggregate limits on coverage as described generally in the next paragraph. See “- Legal Proceedings.” Particularly during the last few months of 2001 and continuing through 2002, the trends described above both accelerated and became more visible. Accordingly, there is a high degree of uncertainty with respect to future exposure from asbestos claims.
The Company’s reserving methodology is preferable to one based on “identified claims” because the resolution of environmental exposures by the Company generally occurs by settlement on a policyholder-by-policyholder basis as opposed to a claim-by-claim basis. Generally, the settlement between the Company and the policyholder extinguishes any obligation the Company may have under any
At December 31, 2002, the Company held CMOs with a fair value of $4.120 billion. Approximately 58% of CMO holdings were fully collateralized by GNMA, FNMA or FHLMC securities at that date, and the balance was fully collateralized by portfolios of individual mortgage loans. In addition, the Company held $4.815 billion of GNMA, FNMA, FHLMC or FHA mortgage-backed pass-through securities at December 31, 2002. Virtually all of these securities are rated Aaa.
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. The Company believes that these assessments will not have a material impact on the Company’s results of operations.
In 2002, 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, reduction in investment yields and the decline in profitability from the competitive pressures of the last decade. Since the terrorist attack on September 11, 2001, 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 and more restrictive terms and conditions, for certain coverages.
Long-term debt and convertible notes outstanding at December 31, 2002 was as follows:
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 2%, 2% and 4% of total Company net written premiums for the years ended December 31, 2002, 2001 and 2000, respectively. Policyholder dividends are accrued against earnings using best available estimates of amounts to be paid. Policyholder dividends were $14.4 million, $28.3 million and $31.5 million for the years ended December 31, 2002, 2001 and 2000, respectively.
The stock option programs provide for the issuing of stock option awards at an exercise price equal to the market value of the underlying common stock on the date of the grant. Additionally, the Company replacement awards for Citigroup awards issued in conjunction with the Citigroup Distribution were at the intrinsic value of each Citigroup option and the ratio of exercise price per share to the market value per share was not reduced. Accordingly, there has been no employee compensation cost recognized in earnings for the stock option programs.
At December 31, 2002 and 2001, the Company had concentrations of credit risk in tax-exempt investments of the State of Texas of $1.386 billion and $1.187 billion, respectively, and of the State of New York of $1.269 billion and $1.027 billion, respectively.
business to which it relates is subject to premium adjustments, there is no impact on results of operations.
During May 2002, TPC fully and unconditionally guaranteed the payment of all principal, premiums, if any, and interest on certain debt obligations of its wholly-owned subsidiary TIGHI. TPC is deemed to have no independent assets or operations except for its wholly-owned subsidiary TIGHI. Consolidated financial statements of TIGHI have not
Prior to the IPO, the Company participated in Citigroup’s Capital Accumulation Plan (Citigroup CAP) that provided for the issuance of shares of Citigroup common stock in the form of restricted stock awards to eligible officers and other key employees with substantially the same terms as the Company’s 2002 CAP.
The carrying values of cash, trading securities, short-term securities, mortgage loans, investment income accrued, receivables for investment sales, payables for investment purchases and securities lending payable approximated their fair values. See notes 1 and 4.
At December 31, 2002, long-term debt had a carrying value and a fair value of $926.2 million and $971.7 million, respectively. At December 31, 2001, long-term debt had a carrying value of $379.8 million, which approximated its fair value. At December 31, 2002, the convertible junior subordinated notes payable had a carrying value and a fair value of $867.8 million and $797.9 million, respectively. The convertible notes payable had a carrying value of $49.7 million, which approximated its fair value. Fair value is based upon bid price at December 31, 2002 and 2001. At December 31, 2002 and 2001, the TIGHI Debentures had a carrying value of $900.0 million, which approximated their fair value. Fair value is based upon the closing price at December 31, 2002 and 2001.
The Company participates in reinsurance agreements with TIC, a former affiliate. See note 5.