10-Q 1 e10-q.txt FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-14328 TRAVELERS PROPERTY CASUALTY CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06-1445591 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183 (Address of principal executive offices) (Zip Code) (860) 277-0111 (Registrant's telephone number, including area code) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO AS OF JULY 31, 2000, THERE WERE 1,000 OUTSTANDING SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF THE REGISTRANT, ALL OF WHICH WERE OWNED BY THE TRAVELERS INSURANCE GROUP INC., AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CITIGROUP INC. REDUCED DISCLOSURE FORMAT THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. 2 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES TABLE OF CONTENTS Part I - Financial Information

Part II - Other Information Item 1. Legal Proceedings 26 Item 6. Exhibits and Reports on Form 8-K 26 Exhibit Index 27 Signatures 28

2 3 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) (in millions)

See notes to condensed consolidated financial statements. 3 4 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (in millions, except shares)

See notes to condensed consolidated financial statements. 4 5 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (Unaudited) (in millions, except shares) For the Six Months Ended June 30, 2000

See notes to condensed consolidated financial statements. 5 6 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) INCREASE (DECREASE) IN CASH (in millions)

See notes to condensed consolidated financial statements. 6 7 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) 1. General The interim condensed consolidated financial statements include the accounts of Travelers Property Casualty Corp. (TAP) (a direct subsidiary of The Travelers Insurance Group Inc. (TIGI) and an indirect subsidiary of Citigroup Inc. (Citigroup)) and its subsidiaries (collectively, the Company), are prepared in conformity with generally accepted accounting principles (GAAP) and are unaudited. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation have been reflected. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report to Stockholders for the year ended December 31, 1999. During April 2000, TIGI completed a cash tender offer to purchase all of the outstanding shares of Class A Common Stock of TAP at a price of $41.95 per share. TIGI also established a wholly-owned subsidiary of TIGI which effected a merger pursuant to which TAP became a wholly-owned subsidiary of TIGI. Upon the merger of the new subsidiary into TAP, all previously outstanding shares of Class A Common Stock of TAP became authorized and unissued shares and the 1,000 shares of Common Stock of the new subsidiary (held by TIGI) were exchanged for 1,000 shares of Class A Common Stock of TAP. 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 June 30, 2000, TAP's common stock outstanding consists of 1,000 shares of Common Stock, which are 100% owned by TIGI. These transactions also generated goodwill of approximately $1.0 billion, which TIGI allocated to TAP. The goodwill is being amortized over 36 years. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been condensed or omitted. 2. Changes in Accounting Principles and Accounting Standards not yet Adopted Accounting changes for the six months ended June 30, 1999 refer to the adoption of Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" and SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk," which resulted in a charge of $160 million after tax and a benefit of $27 million after tax, respectively. Accounting for Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (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" (FAS 137), 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 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 7 8 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), Continued 2. Changes in Accounting Principles and Accounting Standards not yet Adopted, Continued 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 adopted the deferral provisions of FAS 137, effective January 1, 2000, and has not yet determined the impact that FAS 133 will have on its consolidated financial statements. 3. Segment Information

(1) Operating income excludes realized investment gains (losses) and is reflected net of tax. 8 9 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), Continued 3. Segment Information, Continued

(1)Operating income excludes realized investment gains (losses) and the cumulative effect of changes in accounting principles, and is reflected net of tax. BUSINESS SEGMENT RECONCILIATION

(1) The primary component of the other operating loss is after-tax interest expense of $22 million and $26 million for the three months ended June 30, 2000 and 1999, respectively, and $44 million and $52 million for the six months ended June 30, 2000 and 1999, respectively. 9 10 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), Continued 4. Changes in Equity from Nonowner Sources The Company's total changes in equity from nonowner sources are as follows:

5. Capital and Debt TAP has a five-year revolving credit facility in the amount of $250 million with a syndicate of banks (the Credit Facility). Under the Credit Facility, which expires in December 2001, TAP is required to maintain a certain level of consolidated stockholders' equity (as defined in the agreement). At June 30, 2000, this requirement was exceeded by approximately $6.1 billion. In addition, the Credit Facility places restrictions on the amount of consolidated debt TAP can incur. At June 30, 2000, there were no borrowings outstanding under the Credit Facility. If TAP had borrowings under the Credit Facility, the interest rate would be based upon LIBOR plus a negotiated margin. TAP compensates the banks for the Credit Facility through commitment fees. TAP 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 June 30, 2000, TAP had no commercial paper outstanding. TAP also currently has available 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 TAP under this line of credit. TAP'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. Dividend payments to TAP from its insurance subsidiaries are limited to $1.2 billion in 2000 without prior approval of the Connecticut Insurance Department. TAP received $350 million of dividends from its insurance subsidiaries during the first six months of 2000. 6. Commitments and Contingencies 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). The outcome of the restructuring of Lloyd's remains uncertain and the impact, if any, on collectibility of amounts recoverable by the Company from Equitas cannot be quantified at this time. In the opinion of the Company's management, 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. The Company carries an allowance for uncollectible reinsurance which is not allocated to any specific proceedings or disputes, whether for financial impairments or coverage defenses. Including this allowance, in the opinion of the Company's management, the net receivable from reinsurance contracts is properly stated. 10 11 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited), Continued 6. Commitments and Contingencies, Continued It is difficult to estimate the reserves for environmental and asbestos-related claims due to the vagaries of court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties. Conventional actuarial techniques are not used to estimate such reserves. The reserves carried for environmental and asbestos claims at June 30, 2000 are the Company's best estimate of ultimate claims and claim adjustment expenses based upon known facts and current law. However, the conditions surrounding the final resolution of these claims continue to change. Currently, it is 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 legislation applicable to such claims. Because of these future unknowns, additional liabilities may arise for amounts in excess of the current reserves. These additional amounts, or a range of these additional amounts, cannot now be reasonably estimated, and could result in a liability exceeding reserves by an amount that would be material to the Company's operating results in a future period. However, in the opinion of the Company's management, it is not likely that these claims will have a material adverse effect on the Company's financial condition or liquidity. In the ordinary course of business, the Company is a defendant or codefendant in various litigation matters other than those described above. Although there can be no assurances, in the opinion of the Company's management, based on information currently available, the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on the results of the Company's operations, financial condition or liquidity. 7. Acquisition of the Reliance Group Holdings, Inc. Surety Business On May 31, 2000, the Company completed its previously announced acquisition of the surety business of Reliance Group Holdings, Inc. (Reliance Surety) for $580 million. Accordingly, the results of operations and the assets and liabilities acquired from Reliance Surety are included in the financial statements beginning June 1, 2000. This acquisition was accounted for as a purchase. 11 12 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's narrative analysis of the results of operations is presented in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations, pursuant to General Instruction H (2) (a) of Form 10-Q. The Results of Operations reflect the consolidated results of operations of Travelers Property Casualty Corp. (TAP) and its subsidiaries (the Company). The Company provides a wide range of commercial and personal property and casualty insurance products and services to businesses, associations and individuals throughout the United States. During April 2000, TIGI completed a cash tender offer to purchase all of the outstanding shares of Class A Common Stock of TAP at a price of $41.95 per share. TIGI also established a wholly-owned subsidiary of TIGI which effected a merger pursuant to which TAP became a wholly-owned subsidiary of TIGI. Upon the merger of the new subsidiary into TAP, all previously outstanding shares of Class A Common Stock of TAP became authorized and unissued shares and the 1,000 shares of Common Stock of the new subsidiary (held by TIGI) were exchanged for 1,000 shares of Class A Common Stock of TAP. 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 June 30, 2000, TAP's common stock outstanding consists of 1,000 shares of Common Stock, which are 100% owned by TIGI. These transactions also generated goodwill of approximately $1.0 billion, which TIGI allocated to TAP. The goodwill is being amortized over 36 years. On May 31, 2000, the Company completed its previously announced acquisition of the surety business of Reliance Group Holdings, Inc. (Reliance Surety) for $580 million. Accordingly, the results of operations and the assets and liabilities acquired from Reliance Surety are included in the financial statements beginning June 1, 2000. This acquisition was accounted for as a purchase.

(1) Net income includes $4 million and $21 million of realized investment gains in the three months ended June 30, 2000 and 1999, respectively, $34 million of realized investment losses in the six months ended June 30, 2000 and $31 million of realized investment gains in the six months ended June 30, 1999. 12 13 CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 Operating earnings, which exclude realized investment gains, were $361 million in the second quarter of 2000, an increase of $28 million from $333 million in the second quarter of 1999. The increase in operating earnings was primarily the result of increased net investment income, Commercial Lines rate increases achieved in prior quarters, lower catastrophe losses, increased fee income and a benefit resulting from legislative action in the state of South Carolina that changed the manner in which it finances its workers' compensation second-injury funds, partially offset by increased loss trends and lower favorable prior-year reserve development. Revenues of $2.706 billion in the second quarter of 2000 increased $72 million from $2.634 billion in the second quarter of 1999. This increase was primarily attributable to a $44 million increase in net investment income, a $35 million increase in earned premiums, and a $16 million increase in fee income, partially offset by a $26 million decrease in realized investment gains. The increase in earned premiums was primarily due to increased production in Personal Lines and the acquisition of the Reliance Surety business in the second quarter of 2000. Net investment income was $554 million in the second quarter of 2000, an increase of $44 million from the second quarter of 1999, reflecting a higher yield on invested assets in the second quarter of 2000. Fee income in the second quarter of 2000 was $83 million, a $16 million increase from the second quarter of 1999. National Accounts within Commercial Lines is the primary source of fee income due to its service business. This increase in fee income was primarily due to the shift in business mix from premium-based products to fee-based products. Claims and expenses of $2.208 billion in the second quarter of 2000 increased $54 million from the second quarter of 1999. The increase was primarily the result of increased claims related to the growth in premiums, increased loss trends and lower favorable prior-year reserve development, partially offset by lower catastrophe losses, the benefit of the South Carolina legislative action, a reduction in general and administrative expenses and a decrease in interest expense due to debt repayments. The Company's effective federal tax rate was 27% in the second quarter of 2000 compared to 26% in the second quarter of 1999. These rates were lower than the statutory tax rate in both periods primarily due to non-taxable investment income. The statutory and GAAP combined ratios were as follows:

GAAP combined ratios differ from statutory combined ratios primarily due to the deferral and amortization of certain expenses for GAAP reporting purposes only. 13 14 The 2000 second quarter statutory and GAAP combined ratios include an adjustment in Commercial Lines due to a reinsurance transaction associated with the acquisition of the Reliance Surety business. Excluding this adjustment, the statutory and GAAP combined ratios before policyholder dividends for the second quarter of 2000 would have been 102.0% and 101.3%, respectively. The increase in the second quarter of 2000 statutory and GAAP combined ratios before policyholder dividends, excluding the above adjustment, compared to the second quarter of 1999 was due to increased loss trends and lower favorable prior-year reserve development, offset in part by Commercial Lines rate increases, lower catastrophe losses, continued expense reductions in Commercial Lines and higher fee income. CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Net income was $696 million in the first six months of 2000 compared to $555 million in the first six months of 1999. 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. Excluding realized investment gains and losses and the cumulative effect of changes in accounting principles in the first six months of 1999 described above, operating income was $730 million for the six months ended June 30, 2000 compared to $657 million for the six months ended June 30, 1999. The increase in operating income in the six months ended June 30, 2000 compared to the six months ended June 30, 1999 was due to increased net investment income, Commercial Lines rate increases achieved in prior quarters, and continued expense reductions, partially offset by increased loss trends, lower favorable prior-year reserve development in Personal Lines and higher catastrophe losses. The statutory and GAAP combined ratios were as follows:

GAAP combined ratios differ from statutory combined ratios primarily due to the deferral and amortization of certain expenses for GAAP reporting purposes only. 14 15 The first six months of 2000 statutory and GAAP combined ratios include an adjustment in Commercial Lines due to a reinsurance transaction associated with the acquisition of the Reliance Surety business. Excluding this adjustment, the statutory and GAAP combined ratios before policyholder dividends for the first six months of 2000 would have been 101.2% and 100.7%, respectively. The first six months of 1999 statutory and GAAP combined ratios before policyholder dividends include an adjustment in Personal Lines associated with the termination of a quota share reinsurance arrangement. Excluding this adjustment, the statutory and GAAP combined ratios before policyholder dividends for the first six months of 1999 would have been 100.1% and 100.9%, respectively. The increase in the first six months of 2000 statutory combined ratio before policyholder dividends, excluding the related adjustment above, compared to the first six months of 1999 statutory combined ratio before policyholder dividends, excluding the related adjustment above, was due to increased loss trends, lower favorable prior-year reserve development in Personal Lines and higher catastrophe losses, offset in part by Commercial Lines rate increases and continued expense reductions in Commercial Lines. The decrease in the first six months of 2000 GAAP combined ratio before policyholder dividends, excluding the related adjustment above, compared to the first six months of 1999 GAAP combined ratio before policyholder dividends, excluding the related adjustment above, was due to Commercial Lines rate increases and continued expense reductions in Commercial Lines, partially offset by increased loss trends, higher catastrophe losses and lower favorable prior-year reserve development in Personal Lines. The other consolidated operating trends for the six months ended June 30, 2000 and 1999 are substantially the same as noted above for the quarters then ended. SEGMENT RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999 COMMERCIAL LINES

(1) Commercial Lines net income includes $8 million and $22 million of realized investment gains in the three months ended June 30, 2000 and 1999, respectively. Commercial Lines operating income, which excludes realized investment gains, was $292 million in the second quarter of 2000 compared to $257 million in the second quarter of 1999. This increase was due to rate increases achieved in prior quarters, higher net investment income, lower catastrophe losses, higher fee income, a benefit resulting from legislative action in the state of South Carolina that changed the manner in which it finances its workers' compensation second-injury funds and continued expense reductions, partially offset by increased loss trends and lower favorable prior-year reserve development. The Company continues to maintain its discipline in the competitive commercial lines marketplace and to grow business only where market conditions warrant. Revenues were $1.659 billion in the second quarter of 2000 compared to $1.618 billion in the second quarter of 1999. This increase reflected higher net investment income, higher fee income and higher earned premiums, partially offset by lower realized investment gains. Commercial Lines net written premiums in the second quarter of 2000 totaled $1.102 billion (excluding an adjustment of $131 million due to a reinsurance transaction associated with the acquisition of the Reliance Surety business), up $7 million from $1.095 billion in the second quarter of 1999. This increase was primarily due to the impact of the ongoing business associated with the Reliance Surety acquisition which closed in the second quarter. 15 16 Fee income in the second quarter of 2000 was $83 million compared to $67 million in the second quarter of 1999. The $16 million increase in fee income was primarily due to the shift of business mix from premium-based products to fee-based products. 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 alternative 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 $58 million in the second quarter of 2000 compared to $101 million in the second quarter of 1999. The $43 million decrease was primarily due to the shift of business mix from premium-based products to fee-based products and a decrease in the Company's level of involuntary pool participation. National Accounts new business was significantly lower in the second quarter of 2000 than in the second quarter of 1999, reflecting the Company's continued disciplined approach to underwriting and risk management. National Accounts business retention ratio was significantly lower in the second quarter of 2000 than in the second quarter of 1999, reflecting the loss of several large accounts in 2000. Commercial Accounts serves mid-sized businesses for casualty products and both large and mid-sized businesses for property products through a network of independent agents and brokers. Commercial Accounts net written premiums were $458 million in the second quarter of 2000 compared to $440 million in the second quarter of 1999. The increase reflected the continued favorable pricing on renewal business and an increase in new business premiums. Commercial Accounts new business in the second quarter of 2000 was moderately higher than in the second quarter of 1999, reflecting the increased market activity resulting from the pricing environment. Commercial Accounts business retention ratio was significantly lower in the second quarter of 2000 than in the second quarter of 1999, reflecting an increase in lost business due to the renewal price increases in 2000. Commercial Accounts continues to focus on maintaining its product pricing standards and its selective underwriting policy in the renewal of accounts. Select Accounts serves small businesses through a network of independent agents. Select Accounts net written premiums were $407 million in the second quarter of 2000 compared to $394 million in the second quarter of 1999. The increase in Select Accounts net written premiums primarily reflected price increases on renewal business and an increase in new business premiums. This increase was partially offset by the Company's continued disciplined approach to underwriting and risk management. New business in Select Accounts was significantly higher in the second quarter of 2000 compared to the second quarter of 1999. New business was low in the second quarter of 1999 reflecting the Company's selective underwriting policy in the highly competitive marketplace. Select Accounts business retention ratio was moderately lower in the second quarter of 2000 than in the second quarter of 1999, reflecting a small increase in lost business due to renewal price increases in 2000. Specialty Accounts 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. Specialty Accounts net written premiums were $179 million in the second quarter of 2000 (excluding an adjustment of $131 million due to a reinsurance transaction associated with the acquisition of the Reliance Surety business) compared to $160 million in the second quarter of 1999. This increase was primarily due to the impact of the ongoing business associated with the Reliance Surety acquisition. Commercial Lines claims and expenses of $1.252 billion in the second quarter of 2000 were up from $1.244 billion in the second quarter of 1999. The increase over the second quarter of 1999 was due to increased loss trends and lower favorable prior-year reserve development, partially offset by lower catastrophe losses, continued expense reductions and the South Carolina legislative action. 16 17 There were no catastrophe losses in the second quarter of 2000. Catastrophe losses, net of taxes and reinsurance, were $10 million in the second quarter of 1999. The 1999 catastrophe losses were due to tornadoes in Oklahoma. Statutory and GAAP combined ratios for Commercial Lines were as follows:

GAAP combined ratios for Commercial Lines differ from statutory combined ratios primarily due to the deferral and amortization of certain expenses for GAAP reporting purposes only. The second quarter of 2000 statutory and GAAP combined ratios include an adjustment due to a reinsurance transaction associated with the acquisition of the Reliance Surety business. Excluding this adjustment, the statutory and GAAP combined ratios before policyholder dividends for the second quarter of 2000 would have been 105.4% and 104.0%, respectively. The improvement in the second quarter of 2000 statutory and GAAP combined ratios before policyholder dividends, excluding this adjustment, compared to the second quarter of 1999 was due to rate increases achieved in previous quarters, lower catastrophe losses, the benefit of the South Carolina legislative action, higher fee income and continued expense reductions, partially offset by increased loss trends and lower favorable prior-year reserve development. PERSONAL LINES

(1) Personal Lines net income includes $4 million and $1 million of realized investment losses in the three months ended June 30, 2000 and 1999, respectively. Personal Lines operating income, which excludes realized investment losses, was $93 million in the second quarter of 2000 compared to $103 million in the second quarter of 1999. The 2000 decrease reflects increased loss trends and lower favorable prior-year reserve development, offset in part by higher net investment income and lower catastrophe losses. Revenues were $1.045 billion in the second quarter of 2000 compared to $1.016 billion in the second quarter of 1999. This increase primarily reflected higher net investment income and an increase in earned premiums. 17 18 Net written premiums in the second quarter of 2000 were $983 million compared to $951 million in the second quarter of 1999. This increase reflected growth in target markets served by independent agents and growth in affinity group marketing and joint marketing arrangements, offset in part by planned reductions in the TRAVELERS SECURE(R) auto and homeowners business and continued emphasis on disciplined underwriting and risk management. The business retention ratio in the second quarter of 2000 was virtually the same as that in the second quarter of 1999. Personal Lines claims and expenses of $918 million in the second quarter of 2000 increased $50 million from the second quarter of 1999. This increase was primarily the result of higher losses associated with the growth in premiums and related claim volumes, increased loss trends and lower favorable prior-year reserve development, partially offset by lower catastrophe losses. Catastrophe losses, net of taxes and reinsurance, were $17 million in the second quarter of 2000, compared to $23 million in the second quarter of 1999. The 2000 catastrophe losses were due to Texas, Midwest and Northeast wind and hailstorms. The 1999 catastrophe losses were due to wind and hailstorms on the East Coast and tornadoes in the Midwest. Statutory and GAAP combined ratios for Personal Lines were as follows:

GAAP combined ratios for Personal Lines differ from statutory combined ratios primarily due to the deferral and amortization of certain expenses for GAAP reporting purposes only. The increase in the second quarter of 2000 statutory and GAAP combined ratios compared to the second quarter of 1999 was primarily due to increased loss trends and lower favorable prior-year reserve development, offset in part by lower catastrophe losses. INTEREST EXPENSE AND OTHER

The primary component of net loss for the second quarter of 2000 and 1999 was after-tax interest expense of $21 million and $26 million, respectively. Interest expense decreased in the second quarter of 2000 compared to the second quarter of 1999 due to debt repayments of $200 million in September 1999 and $200 million in October 1999. 18 19 SEGMENT RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 COMMERCIAL LINES

(1) Commercial Lines net income includes $23 million of realized investment losses in the six months ended June 30, 2000 and $34 million of realized investment gains in the six months ended June 30, 1999. Net income was $568 million in the first six months of 2000 compared to $403 million in the first six months of 1999. Net income in 1999 included a charge in the first quarter of $160 million related to the adoption of SOP 97-3 and a benefit of $27 million related to the adoption of SOP 98-7. The net charge of $133 million due to the adoption of these Statements of Position has been accounted for as a cumulative effect of a change in accounting principles. Commercial Lines operating income, which excludes realized investment gains and losses and the cumulative effect of changes in accounting principles in the first quarter of 1999 described above, was $591 million in the six months ended June 30, 2000, compared to $502 million in the six months ended June 30, 1999. The increase was due to higher net investment income, rate increases achieved in prior quarters, higher fee income, lower catastrophe losses, the benefit resulting from legislative action in the state of South Carolina that changed the manner in which it finances its workers' compensation second-injury funds and continued expense reductions, partially offset by increased loss trends. Revenues were $3.201 billion in the first six months of 2000 compared to $3.197 billion in the first six months of 1999. This increase reflected higher net investment income, higher fee income and higher earned premiums, partially offset by realized investment losses in the first six months of 2000 compared to realized investment gains in the first six months of 1999. Commercial Lines net written premiums in the first six months of 2000 totaled $2.249 billion (excluding an adjustment of $131 million due to a reinsurance transaction associated with the acquisition of the Reliance Surety business), up $40 million from $2.209 billion in the first six months of 1999, reflecting the impact of the ongoing business associated with the Reliance Surety acquisition which closed in the second quarter, the impact of continued favorable pricing on renewal business and an increase in new business premiums. Fee income in the first six months of 2000 was $155 million, a $21 million increase from the first six months of 1999. This increase was primarily due to the shift of business mix from premium-based products to fee-based products. National Accounts net written premiums were $150 million in the first six months of 2000 compared to $251 million in the first six months of 1999. This decrease reflected the shift of business mix from premium-based products to fee-based products and a decrease in the Company's level of involuntary pool participation. National Accounts new business in the first six months of 2000 was significantly higher compared to the first six months of 1999, reflecting the acquisition of several large accounts in 2000. National Accounts business retention ratio was moderately lower in the first six months of 2000 compared to the first six months of 1999, reflecting the loss of several large accounts in 2000. 19 20 Commercial Accounts net written premiums were $945 million in the first six months of 2000 compared to $884 million in the first six months of 1999. This increase reflected the continued favorable pricing on renewal business and an increase in new business premiums. New business in Commercial Accounts was significantly higher in the first six months of 2000 than in the first six months of 1999, reflecting the increased market activity resulting from the pricing environment. The Commercial Accounts business retention ratio in the first six months of 2000 was moderately lower than the first six months of 1999, reflecting an increase in lost business due to the renewal price increases in 2000. Commercial Accounts continues to focus on maintaining its product pricing standards and its selective underwriting policy in the renewal of accounts. Select Accounts net written premiums of $794 million in the first six months of 2000 increased $28 million from $766 million in the first six months of 1999. The increase in Select Accounts net written premiums primarily reflected price increases on renewal business and an increase in new business premiums. This increase was partially offset by the Company's continued disciplined approach to underwriting and risk management. New business in Select Accounts was significantly higher in the first six months of 2000 compared to the first six months of 1999. New business was unusually low in the first six months of 1999 reflecting the Company's selective underwriting policy in the highly competitive marketplace. Select Accounts business retention ratio in the first half of 2000 was virtually the same as that in the first half of 1999. Specialty Accounts net written premiums were $360 million (excluding an adjustment of $131 million due to a reinsurance transaction associated with the acquisition of the Reliance Surety business) in the first six months of 2000 compared to $308 million in the first six months of 1999. This increase primarily reflected the impact of the ongoing business associated with the Reliance Surety acquisition, the impact of reinsurance activity and an increase in new business premiums. Commercial Lines claims and expenses of $2.437 billion in the first six months of 2000 decreased $44 million from the first six months of 1999. This decrease reflected the benefit resulting from legislative action in the state of South Carolina that changed the manner in which it finances its workers' compensation second-injury funds, lower catastrophe losses and continued expense reductions, partially offset by increased loss trends. There were no catastrophe losses in the first six months of 2000. Catastrophe losses, net of taxes and reinsurance, were $10 million in the first six months of 1999. The 1999 catastrophe losses were due to tornadoes in Oklahoma in the second quarter. Statutory and GAAP combined ratios for Commercial Lines were as follows:

20 21 The first six months of 2000 statutory and GAAP combined ratios include an adjustment due to a reinsurance transaction associated with the acquisition of the Reliance Surety business. Excluding this adjustment, the statutory and GAAP combined ratios before policyholder dividends for the first six months of 2000 would have been 103.4% and 102.3%, respectively. The improvement in the first six months of 2000 statutory and GAAP combined ratios before policyholder dividends, excluding this adjustment, compared to the first six months of 1999 was due to rate increases achieved in previous quarters, lower catastrophe losses, the benefit of the South Carolina legislative action, higher fee income and continued expense reductions, partially offset by increased loss trends. PERSONAL LINES

(1) Personal Lines net income includes $11 million and $3 million of realized investment losses in the six months ended June 30, 2000 and 1999, respectively. Personal Lines operating income, which excludes realized investment losses, was $189 million in the first six months of 2000 compared to $212 million in the first six months of 1999. The decrease in operating income in the 2000 period was primarily due to increased loss trends, higher catastrophe losses and lower favorable prior-year reserve development, offset in part by higher net investment income. Net written premiums in the first six months of 2000 were $1.873 billion compared to $1.863 billion in the first six months of 1999 (excluding an adjustment of $72 million in 1999 due to a change in the quota share reinsurance arrangement). This increase primarily reflects growth in target markets served by independent agents and growth in affinity group marketing and joint marketing arrangements, partially offset by the 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 the first half of 2000 was virtually the same as that in the first half of 1999. Personal Lines claims and expenses of $1.819 billion in the first six months of 2000 increased $112 million from the first six months of 1999. This increase was primarily the result of higher losses associated with the growth in premiums and related claim volumes, increased loss trends, higher catastrophe losses and lower favorable prior-year reserve development. Catastrophe losses, after taxes and reinsurance, were $48 million in the first half of 2000 compared to $31 million in the first half of 1999. The 2000 catastrophe losses were due to Texas, Midwest and Northeast wind and hailstorms in the second quarter and hailstorms in Louisiana and Texas in the first quarter. The 1999 catastrophe losses were due to 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 the Northeast in the first quarter. 21 22 Statutory and GAAP combined ratios for Personal Lines were as follows:

The first six months of 1999 statutory and GAAP combined ratios for Personal Lines include an adjustment associated with the termination of a quota share reinsurance arrangement. Excluding this adjustment, both the statutory and GAAP combined ratios for the first six months of 1999 would have been 94.1%. The increase in the first six months of 2000 statutory and GAAP combined ratios compared to the first six months of 1999 statutory and GAAP combined ratios, excluding this adjustment, was due to increased loss trends, higher catastrophe losses and lower favorable prior-year reserve development. INTEREST EXPENSE AND OTHER

The primary component of net loss for the six months ended June 30, 2000 and 1999 was interest expense of $43 million and $52 million after tax, respectively. Interest expense decreased in the first six months of 2000 compared to the first six months of 1999 due to debt repayments of $200 million in September 1999 and $200 million in October 1999. ENVIRONMENTAL CLAIMS The Company's reserves for environmental claims are not established on a claim-by-claim basis. An aggregate bulk reserve is carried for all of the Company's environmental claims that are in the dispute process, 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 such claims. At June 30, 2000, approximately 24% of the net aggregate reserve (i.e., approximately $149 million) consists of case reserve for resolved claims. The balance, approximately 76% of the net aggregate reserve (i.e., approximately $474 million), is carried in a bulk reserve and includes incurred but not reported environmental claims for which the Company has not received any specific claims. 22 23 The following table displays activity for environmental losses and loss expenses and reserves for the six months ended June 30, 2000 and 1999.

ASBESTOS CLAIMS At June 30, 2000, approximately 13% of the net aggregate reserve (i.e., approximately $106 million) is for pending asbestos claims. The balance, approximately 87% of the net aggregate reserve (i.e., approximately $714 million), represents incurred but not reported losses for which the Company has not received any specific claims. In general, the Company posts case reserves for pending asbestos claims within approximately 30 business days of receipt of such claims. The following table displays activity for asbestos losses and loss expenses and reserves for the six months ended June 30, 2000 and 1999.

23 24 UNCERTAINTY REGARDING ADEQUACY OF ENVIRONMENTAL AND ASBESTOS RESERVES It is difficult to estimate the reserves for environmental and asbestos-related claims due to the vagaries of court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties. Conventional actuarial techniques are not used to estimate such reserves. The reserves carried for environmental and asbestos claims at June 30, 2000 are the Company's best estimate of ultimate claims and claim adjustment expenses based upon known facts and current law. However, the conditions surrounding the final resolution of these claims continue to change. Currently, it is 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 legislation applicable to such claims. Because of these future unknowns, additional liabilities may arise for amounts in excess of the current reserves. These additional amounts, or a range of these additional amounts, cannot now be reasonably estimated, and could result in a liability exceeding reserves by an amount that would be material to the Company's operating results in a future period. However, in the opinion of the Company's management, it is not likely that these claims will have a material adverse effect on the Company's financial condition or liquidity. CUMULATIVE INJURY OTHER THAN ASBESTOS (CIOTA) 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. At June 30, 2000, approximately 21% of the net aggregate reserve (i.e., approximately $174 million) is for pending CIOTA claims. The balance, approximately 79% of the net aggregate reserve (i.e., approximately $674 million), represents incurred but not reported losses for which the Company has not received any specific claims. In general, the Company posts case reserves for pending CIOTA claims within approximately 30 business days of receipt of such claims. The following table displays activity for CIOTA losses and loss expenses and reserves for the six months ended June 30, 2000 and 1999.

24 25 FUTURE APPLICATION OF ACCOUNTING STANDARDS See Note 2 of Notes to Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements. FORWARD-LOOKING STATEMENTS Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Company's actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by the words "believe," "expect," "anticipate," "intend," "estimate," "may affect," and similar expressions or future or conditional verbs such as "will," "should," "would," and "could." These forward-looking statements involve risks and uncertainties including, but not limited to, the following: the resolution of legal proceedings and related matters; customer responsiveness to both new products and distribution channels; and the actual amount of liabilities associated with certain environmental and asbestos-related insurance claims. Readers are also directed to other risks and uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission. 25 26 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. For information concerning sixteen purported class actions and one multi-party suit, with substantially the same allegations, commenced in various courts against certain subsidiaries of the Company, dozens of other insurers and the National Council on Compensation Insurance ("NCCI"), see the description that appears in the second and third paragraphs under the caption "Legal Proceedings" beginning on page 44 of the Annual Report on Form 10-K of the Company for the year ended December 31, 1999 (File No. 1-14328), which description is included as Exhibit 99.01 to this Form 10-Q and incorporated by reference herein, and in the first paragraph under the captions "Legal Proceedings" beginning on page 22 of the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2000 (File No. 1-14328) which description is included as Exhibit 99.02 to this Form 10-Q and incorporated by reference herein. In April 2000, plaintiffs appealed the California trial court's order dismissing all claims with prejudice. For information concerning a consolidated putative class action captioned In Re Travelers Property Casualty Corp. Shareholders Litigation, see the description that appears in the second, third, fourth and fifth paragraphs under the caption "Legal Proceedings" beginning on page 22 of the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2000 (File No. 1-14328), which description is included as Exhibit 99.02 to this Form 10-Q and incorporated by reference herein. In June 2000, the parties completed confirmatory discovery with respect to the settlement. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS: See Exhibit Index. (b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed during the second quarter ended June 30, 2000. 26 27 EXHIBIT INDEX

The total amount of securities authorized pursuant to any instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the Securities and Exchange Commission upon request. --------------------------- + Filed herewith. 27 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRAVELERS PROPERTY CASUALTY CORP. Date: August 11, 2000 By /s/ William P. Hannon ------------------------------------- William P. Hannon Chief Financial Officer (Principal Financial Officer) Date: August 11, 2000 By /s/ Douglas K. Russell ------------------------------------- Douglas K. Russell Chief Accounting Officer (Principal Accounting Officer)

TRAVELERS PROPERTY CASUALTY CORP 10-Q