10-Q 1 y54750e10-q.txt FORM 10-Q 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 SEPTEMBER 30, 2001 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 OCTOBER 31, 2001, THERE WERE 1,000 OUTSTANDING SHARES OF CLASS A 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. TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES TABLE OF CONTENTS

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

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

See notes to condensed consolidated financial statements 4 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (Unaudited) (in millions, except shares)

See notes to condensed consolidated financial statements 5 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 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. (TPC) (a direct subsidiary of The Travelers Insurance Group Inc. (TIGI) and an indirect subsidiary of Citigroup Inc. (Citigroup)) and its subsidiaries (collectively, the Company), are prepared in conformity with accounting principles generally accepted in the United States of America (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 Form 10-K for the year ended December 31, 2000. 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 for Derivative Instruments and Hedging Activities 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. The Company uses derivative financial instruments, including interest rate swaps, equity swaps, options, financial futures and forward contracts, as a means of hedging exposure to interest rate, equity price change and foreign currency risk. The Company's insurance subsidiaries do not hold or issue derivatives for trading purposes. To qualify as a hedge, the hedge relationship is designated and formally documented at inception detailing the particular risk management objective and strategy for the hedge, which includes the item and risk that is being hedged, the derivative that is being used, as well as how effectiveness is being assessed. A derivative has to be highly effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. 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. During the first nine months of 2001, the Company did not utilize fair value hedges. 7 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 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 September 30, 2001, the Company does not expect to include any realized investment gains or losses in earnings over the next twelve months for these cash flow hedges. To the extent these derivatives are not effective, changes in their fair values 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 net investment hedges in which derivatives hedge the foreign currency exposure of a net investment in a foreign operation, the accounting treatment will similarly depend on the effectiveness of the hedge. The effective portion of the change in fair value of the derivative, including any forward premium or discount, is reflected in the accumulated other changes in equity from nonowner sources as part of the foreign currency translation adjustment. For the nine months ended September 30, 2001, the amount included in the foreign currency translation adjustment in equity from nonowner sources was a $1 million loss. The ineffective portion is reflected in realized investment gains (losses). Derivatives that are either hedging instruments that are not designated or do not qualify as hedges under the new rules are also carried at fair value with changes in value reflected in realized investment gains (losses). The effectiveness of these hedging relationships is evaluated on a retrospective and prospective basis using quantitative measures of correlation. If a hedge relationship is found to be ineffective, it no longer qualifies as a hedge, and any excess gains or losses attributable to such ineffectiveness as well as subsequent changes in fair value are recognized in realized investment gains (losses). During the first nine months of 2001, there was no hedge ineffectiveness that was recognized in realized investment gains (losses). 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 first nine months of 2001, there were no such discontinued forecasted transactions. 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 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 condensed 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 stockholder'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 $8 million after tax, reflected in realized investment gains (losses). Recognition of Interest Income and Impairment on Purchased and Retained Interests in Securitized Financial Assets Effective April 1, 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. Business Combinations, Goodwill and Other Intangible Assets In July 2001, the FASB issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other Intangible Assets" (FAS 142). These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life created by business combinations accounted for using the purchase method of accounting. Instead, goodwill and intangible assets deemed to have an indefinite useful life 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. The Company will apply the new rules on accounting for goodwill and other intangible assets in the first quarter of 2002 and for purchase business combinations consummated after June 30, 2001. Upon adoption, the Company will stop amortizing goodwill. Based on the current levels of goodwill, this would reduce general and administrative expenses and increase net income by approximately $66 million in 2002. In addition, the Company is in the process of evaluating certain intangible assets to determine whether they are deemed to have an indefinite useful life. During 2002, the Company will perform the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on results of operations, financial condition or liquidity. 9 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 Asset Retirement Obligations In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). FAS 143 changes the measurement of an asset retirement obligation from a cost-accumulation approach to a fair value approach, where the fair value (discounted value) of an asset retirement obligation is recognized as a liability in the period in which it is incurred and accretion expense is recognized using the credit-adjusted risk-free interest rate in effect when the liability was initially recognized. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently amortized into expense. The pre-FAS 143 prescribed practice of reporting a retirement obligation as a contra-asset will no longer be allowed. The Company is in the process of assessing the impact of this new standard that will take effect on January 1, 2003. Impairment or Disposal of Long-Lived Assets In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144 establishes a single accounting model for long-lived assets to be disposed of by sale. A long-lived asset classified as held for sale is to be measured at the lower of its carrying amount or fair value less cost to sell and depreciation (amortization) is to cease. Impairment is recognized only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value of the asset. Long-lived assets to be abandoned, exchanged for a similar productive asset, or distributed to owners in a spin-off are considered held and used until disposed of. Accordingly, discontinued operations are no longer to be measured on a net realizable value basis, and future operating losses are no longer recognized before they occur. The Company will adopt FAS 144 effective January 1, 2002. The provisions of the new standard are generally to be applied prospectively and are not expected to significantly affect the Company's results of operations, financial condition or liquidity. 3. Segment Information

(1) Operating income (loss) excludes realized investment gains and is reflected net of tax. 10 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), the restructuring charge and the cumulative effect of the 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 $19 million and $21 million for the three months ended September 30, 2001 and 2000, respectively, and $61 million and $65 million for the nine months ended September 30, 2001 and 2000, respectively. 11 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 TPC 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, TPC is required to maintain a certain level of consolidated stockholder's equity (as defined in the agreement). At September 30, 2001, this requirement was exceeded by approximately $5.6 billion. In addition, the Credit Facility places restrictions on the amount of consolidated debt TPC can incur. At September 30, 2001, there were no borrowings outstanding under the Credit Facility. If TPC had borrowings under the Credit Facility, the interest rate would be based upon LIBOR plus a negotiated margin. TPC compensates the banks for the Credit Facility through commitment fees. TPC also issues commercial paper directly to investors and maintains unused credit availability under the Credit Facility at least equal to the amount of commercial paper outstanding. At September 30, 2001, TPC had $212 million of commercial paper outstanding. TPC 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 TPC under this line of credit. On April 13, 2001, TPC entered into a $500 million line of credit agreement (the line of credit) with Citicorp Banking Corporation, an affiliate. The line of credit expires in April 2002 and has an interest rate based upon LIBOR plus a negotiated margin. On April 16, 2001, TPC borrowed $275 million on the line of credit, which is the amount outstanding at September 30, 2001. 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. TPC's insurance subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to their parent without prior approval of insurance regulatory authorities. A maximum of $1.2 billion is available by the end of the year 2001 for such dividends without prior approval of the Connecticut Insurance Department. TPC received $650 million of dividends from its insurance subsidiaries during the first nine months of 2001. Effective January 1, 2001, the Company began preparing its statutory basis financial statements in accordance with the National Association of Insurance Commissioners (NAIC) revised statutory Accounting Practices and Procedures Manual - version effective January 1, 2001, subject to any deviations prescribed or permitted by its domicilary insurance commissioner. The impact of this change was an increase to the statutory capital and surplus of the Company's insurance subsidiaries of approximately $350 million. 12 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), Continued 6. Terrorist Attack on September 11th In the third quarter of 2001, the Company recorded a charge of $490 million representing the estimated provision 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. Since the reserves and related reinsurance recoverables are based on estimates, the ultimate net liability may be more or less than such amounts. 7. 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 is 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, the Company believes that the net receivable from reinsurance contracts is properly stated. 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 September 30, 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, any impact from the bankruptcy protection sought by various asbestos producers, a further increase or decrease in asbestos and environmental claims which cannot now be anticipated as well as the role of any umbrella or excess policies issued by the Company for such claims, the resolution or adjudication of certain disputes pertaining to asbestos non-products/operations claims in a manner inconsistent with the Company's previous assessment of such claims as well as unanticipated developments pertaining to the Company's ability to recover reinsurance for environmental and asbestos claims. 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 legislation applicable to such claims. Because of these future unknowns, and the uncertainties set forth above, 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. 13 TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited), Continued 8. Acquisitions 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 GAAP net book value of $356 million, was contributed to the Company. 14 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. (TPC) and its subsidiaries (the Company). The Company provides a wide range of commercial and personal property and casualty insurance products and services to businesses, government units, associations and individuals, primarily in the United States. On May 31, 2000, the Company completed its 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. In the third quarter of 2000, the Company purchased the renewal rights to a portion of Reliance Group Holdings, Inc.'s commercial lines middle-market book of business (Reliance Middle Market). The Company also acquired the renewal rights to Frontier Insurance Group, Inc.'s (Frontier) environmental, excess and surplus lines casualty businesses and certain classes of surety business. 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 GAAP net book value of $356 million, was contributed to the Company.

Net income (loss) was $(52) million and $807 million in the 2001 third quarter and nine months, respectively, compared to $405 million and $1.101 billion in the comparable periods of 2000. Net income (loss) in the 2001 third quarter and nine months included $64 million and $222 million, respectively, of realized investment gains compared to $22 million of realized investment gains and $12 million of realized investment losses in the comparable periods of 2000. Net income for the 2001 nine months also included $2 million of restructuring charges related primarily to the downsizing of direct marketing activities and associated telemarketing operations in Personal Lines. Also included in the 2001 nine months 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) in the 2001 second quarter. Also included in net income in the 2001 nine months was 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) in the 2001 first quarter. 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. 15 Operating income (loss), which excludes realized investment gains and losses, restructuring charges and the cumulative effect of the changes in accounting principles described above, was $(116) million and $584 million in the 2001 third quarter and nine months, respectively, compared to $383 million and $1.113 billion in the comparable periods of 2000. The decreases in operating earnings in the 2001 periods primarily reflect 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, primarily due to inflationary pressures, and lower net investment income, partly offset by the benefit of Commercial Lines rate increases. Revenues of $3.004 billion and $9.044 billion in the 2001 third quarter and nine months, respectively, increased $140 million and $905 million from the comparable periods of 2000. The increases were primarily attributable to increases in earned premiums of $120 million and $613 million from the comparable periods of 2000 and $98 million and $340 million of realized investment gains in the 2001 third quarter and nine months compared to $36 million of realized investment gains and $18 million of realized investment losses in the 2000 third quarter and nine months. This was partially offset by a $52 million and $108 million decrease in net investment income from the comparable periods of 2000, which largely reflects the increase in dividends to the Company's parent, lower fixed income interest rates and lower returns from private equity investments. The increase in earned premiums in 2001 was primarily due to Commercial Lines rate increases and the impact of the Reliance Surety acquisition and the acquisition of the renewal rights for the Reliance Middle Market and Frontier businesses. Claims and expenses were $3.145 billion and $7.991 billion in the 2001 third quarter and nine months, respectively, compared to $2.301 billion and $6.634 billion in the 2000 third quarter and nine months. The increase in claims and expenses was primarily the result of higher catastrophe losses, principally in the third quarter of 2001 associated with the terrorist attack on September 11th, increased loss cost trends, and increased claims and operating expenses related to the growth in premiums, including the impact of the Reliance Surety acquisition and the acquisition of the renewal rights for the Reliance Middle Market and Frontier businesses. The Company's effective federal tax (benefit) rate was (63.0)% and 23.7% in the 2001 third quarter and nine months, respectively, compared to 28% and 26.8% in the comparable periods of 2000. These rates differed from the statutory tax rate primarily due to non-taxable investment income. The decrease in the effective tax rate from 2000 was primarily due to the losses associated with the terrorist attack on September 11th, which changed the mix of taxable and nontaxable income or loss. 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. 16 The 2001 third quarter and nine month statutory and GAAP combined ratios include the impact of the terrorist attack on September 11th. Excluding the impact of this event, the statutory combined ratios before policyholder dividends for the third quarter and nine month period would have been 97.9% and 99.6%, respectively, and the GAAP combined ratios before policyholder dividends for the third quarter and nine month period would have been 96.6% and 98.8%, respectively. The 2000 nine month statutory and GAAP combined ratios include the impact on Commercial Lines of a reinsurance transaction associated with the acquisition of the Reliance Surety business. Excluding this transaction, the statutory and GAAP combined ratios before policyholder dividends for the 2000 nine month period would have been 101.9% and 99.8%, respectively. The decrease in the 2001 third quarter and nine month statutory and GAAP combined ratios before policyholder dividends, excluding the impact of the terrorist attack on September 11th, compared to the 2000 third quarter and nine month statutory and GAAP combined ratios before policyholder dividends, excluding the impact of the reinsurance transaction, was primarily due to premium growth related to rate increases in Commercial Lines, and the impact of the increase in Commercial Lines Specialty business, primarily associated with the Reliance Surety acquisition, which generally has a lower loss and LAE ratio partially offset by a higher underwriting expense ratio. Partially offsetting these items was the effect of increased loss cost trends in both Commercial Lines and Personal Lines. SEGMENT RESULTS COMMERCIAL LINES

Net income (loss) was $(74) million and $679 million in the 2001 third quarter and nine months, respectively, compared to $349 million and $917 million in the 2000 comparable periods. Commercial Lines net income (loss) included $58 million and $206 million of realized investment gains in the 2001 third quarter and nine months, respectively, compared to $18 million of realized investment gains and $5 million of realized investment losses in the 2000 comparable periods. Included in net income in the 2001 nine month period was a charge of $1 million related to the initial adoption of EITF 99-20 in the second quarter. Also included in the 2001 nine month period was $3 million benefit in the 2001 first quarter related to the initial adoption of FAS 133. Both of these items have been accounted for as a cumulative effect of changes in accounting principles. 17 Commercial Lines operating income (loss), which excludes realized investment gains and losses and the cumulative effect of changes in accounting principles, was $(132) million and $471 million in the 2001 third quarter and nine months, respectively, compared to $331 million and $922 million in the 2000 comparable periods. The decrease in operating income for the 2001 periods primarily reflect the impact of catastrophe losses of $448 million associated with the terrorist attack on September 11th. The decrease in operating earnings in the 2001 periods also reflects increased loss cost trends, primarily due to inflationary pressures, and lower net investment income, partially offset by the benefit of rate increases and higher favorable prior year reserve development. Results for the third quarter of 2000 also reflect a benefit of $43 million resulting from legislative action in the state of New York that changed the manner in which New York finances its workers' compensation second-injury funds. Revenues in the 2001 third quarter and nine months totaled $1.878 billion and $5.731 billion, respectively, compared to $1.798 billion and $4.999 billion in the comparable periods of 2000. The increases were primarily attributable to a $46 million and $447 million increase in earned premiums from the comparable periods of 2000 and $89 million and $315 million of realized investment gains in the 2001 third quarter and nine months compared to $29 million of realized investment gains and $7 million of realized investment losses in the 2000 third quarter and nine months, respectively. This was partially offset by a $36 million and $77 million decrease in net investment income from the comparable periods of 2000, which largely reflects the increase in dividends to the Company's parent, lower fixed income interest rates and lower returns from private equity investments. The increase in earned premiums was primarily due to rate increases and the impact of the Reliance Surety acquisition and the acquisition of the renewal rights for the Reliance Middle Market and Frontier businesses. Net written premiums by market were as follows:

Commercial Lines net written premiums in the 2001 third quarter and nine months totaled $1.358 billion and $4.179 billion, respectively, compared to $1.351 billion and $3.731 billion in the comparable periods of 2000. The 2001 increase reflected the impact of the improving rate environment as evidenced by the continued favorable pricing on new and renewal business. The increase in National Accounts net written premiums for the nine month period is 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, while the decrease in the third quarter reflects the loss of a large account in the quarter due to repricing. The decrease in Commercial Accounts net written premiums for the 2001 third quarter compared to the 2000 comparable period was due primarily to the issuance of short-term renewal policies during the 2000 third quarter for acquired Reliance Middle Market business. Also contributing to the increase in net written premiums in the 2001 nine months was the impact of the acquisition of the renewal rights for the Reliance Middle Market business in Commercial Accounts and the impact on Specialty Accounts of the Reliance Surety acquisition and the acquisition of the renewal rights for the Frontier business. Included in Specialty Accounts net written premiums in the 2000 nine month period is an increase of $131 million due to a reinsurance transaction associated with the acquisition of the Reliance Surety business. 18 New business in National Accounts for the 2001 third quarter was significantly higher than the 2000 third quarter and marginally higher for the 2001 nine month period compared to the 2000 comparable period, reflecting the repopulation of the involuntary pools. National Accounts business retention ratio for the 2001 third quarter and nine months was significantly lower than the 2000 comparable periods reflecting the loss of a large account in the third quarter of 2001. New business in Commercial Accounts for the 2001 third quarter and nine months was significantly lower than the 2000 comparable periods, reflecting the continued focus on selective underwriting. Commercial Accounts business retention ratio for the 2001 third quarter was moderately lower than the 2000 third quarter and significantly lower for the 2001 nine month period compared to the 2000 comparable period, reflecting the continued disciplined approach to achieving acceptable levels of account profitability. For the 2001 third quarter, new business in Select Accounts was moderately lower than the 2000 third quarter, and marginally higher for the 2001 nine month period compared to the 2000 comparable period, reflecting selective underwriting. Select Accounts business retention ratio for the 2001 third quarter was marginally higher than the 2000 third quarter and marginally lower for the 2001 nine month period compared to the 2000 nine month period. Commercial Lines claims and expenses for the 2001 third quarter and nine months were $2.045 billion and $4.851 billion, respectively, compared to $1.311 billion and $3.748 billion in the 2000 comparable periods. The 2001 increase was primarily due to higher catastrophe losses primarily associated with the terrorist attack on September 11th, increased loss cost trends, primarily due to inflation, higher losses and operating expenses associated with the growth in premium and claims volume and partly offset by higher favorable prior year reserve development. Catastrophe losses, net of taxes and reinsurance, were $448 million and $468 million in the 2001 third quarter and nine months, respectively. There were no catastrophe losses in the first three quarters of 2000. Catastrophe losses in 2001 were primarily due to the Seattle earthquake in the first quarter, Tropical Storm Allison in the second quarter and the terrorist attack on September 11th in the third quarter. 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 2001 third quarter and nine month statutory and GAAP combined ratios include the impact of the terrorist attack on September 11th. Excluding the impact of this event, the statutory combined ratios before policyholder dividends for the third quarter and nine month period would have been 97.2% and 99.0%, respectively, and the GAAP combined ratios before policyholder dividends for the third quarter and nine month period would have been 95.1% and 97.6%, respectively. 19 The 2000 nine month statutory and GAAP combined ratios include the impact of a reinsurance transaction associated with the acquisition of the Reliance Surety business. Excluding this transaction, the statutory and GAAP combined ratios before policyholder dividends for the 2000 nine month period would have been 103.5% and 100.0%, respectively. The decrease in the 2001 third quarter and nine month statutory and GAAP combined ratios before policyholder dividends, excluding the impact of the terrorist attack on September 11th, compared to the 2000 third quarter and nine month statutory and GAAP combined ratios before policyholder dividends, excluding the impact of the reinsurance transaction, was primarily due to premium growth related to rate increases, the impact of the business associated with the Reliance Surety acquisition, the purchase of the renewal rights for the Reliance Middle Market and Frontier businesses and higher favorable prior year reserve development, partially offset by increased loss cost trends and catastrophe losses due to the Seattle earthquake in the first quarter of 2001 and Tropical Storm Allison in the 2001 second quarter. PERSONAL LINES

Net income was $40 million and $195 million in the 2001 third quarter and nine months, respectively, compared to $81 million and $259 million in the comparable prior year periods. Personal Lines net income included $6 million and $16 million of realized investment gains in the 2001 third quarter and nine months, respectively, compared to $4 million of realized investment gains and $7 million of realized investment losses in the 2000 comparable periods. Net income for the 2001 nine months also included $2 million of restructuring charges related primarily to the downsizing of direct marketing activities and associated telemarketing operations in Personal Lines. Also included in Personal Lines net income in the 2001 nine months was a $1 million benefit related to the initial adoption of FAS 133 in the 2001 first quarter, which has been accounted for as a cumulative effect of a change in accounting principle. Personal Lines operating income, which excludes realized investment gains and losses, restructuring charges and the cumulative effect of the change in accounting principle, was $34 million and $180 million for the 2001 third quarter and nine months, respectively, compared to $77 million and $266 million in the 2000 comparable periods. The decrease in operating earnings in the 2001 periods primarily reflect the impact of catastrophe losses of $42 million associated with the terrorist attack on September 11th. The decrease in operating earnings in the 2001 periods also reflects the effects of increased loss cost trends, primarily due to inflationary pressures, lower favorable prior year reserve development and lower net investment income. 20 Revenues during the 2001 third quarter and nine months were $1.126 billion and $3.317 billion, respectively, compared to $1.065 billion and $3.138 billion in the 2000 comparable periods. The increases were primarily attributable to a $74 million and $166 million increase in earned premiums from the comparable periods of 2000 and $9 million and $25 million of realized investment gains in the 2001 third quarter and nine months compared to $7 million of realized investment gains and $11 million of realized investment losses in the 2000 third quarter and nine months, respectively. This was partially offset by a $15 million and $25 million decrease in net investment income from the comparable periods of 2000, which largely reflects the increase in dividends to the Company's parent and lower fixed income interest rates. The increase in earned premiums was attributable to all distribution channels except TRAVELERS SECURE(R) . Net written premiums by product line:

Personal Lines net written premiums for the 2001 third quarter and nine months were $1.076 billion and $3.074 billion, respectively, compared to $993 million and $2.866 billion in the 2000 comparable periods. The increase in the 2001 third quarter and nine months 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. The business retention ratio in 2001 is comparable to the 2000 ratio. Personal Lines claims and expenses for the 2001 third quarter and nine months were $1.073 billion and $3.042 billion, respectively, compared to $950 million and $2.769 billion in the 2000 comparable periods. The increase in claims and expenses for the 2001 third quarter reflect higher catastrophe losses associated with the terrorist attack on September 11th. The increase also reflects the impact of increased loss cost trends and lower favorable prior year reserve development. Catastrophe losses, net of taxes and reinsurance, were $42 million and $84 million in the 2001 third quarter and nine months, compared to $2 million and $50 million in the 2000 comparable periods. 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. The 2000 catastrophe losses were due to wind and hailstorms in Texas, the midwest and the northeast in the second quarter and hailstorms in Louisiana and Texas in the first quarter. 21 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 2001 third quarter and nine month statutory and GAAP combined ratios include the impact of the terrorist attack on September 11th. Excluding the impact of this event, the statutory combined ratios for the third quarter and nine month period would have been 98.9% and 100.2%, respectively, and the GAAP combined ratios for the third quarter and nine month period would have been 98.7% and 100.5%, respectively. The 2001 third quarter statutory and GAAP combined ratios, excluding the impact of the terrorist attack on September 11th, and the 2000 third quarter statutory and GAAP combined ratios, continue to reflect the impact of increased loss cost trends and lower unfavorable development. The increase in the 2001 nine month statutory and GAAP combined ratios, excluding the impact of the terrorist attack on September 11th, compared to the 2000 nine month statutory and GAAP combined ratios reflects increased loss cost trends and lower favorable prior year reserve development, partially offset by the growth in premiums due to rate increases. 22 INTEREST EXPENSE AND OTHER

The primary component of net loss was after-tax interest expense of $19 million and $61 million in the 2001 third quarter and nine months, respectively, and $21 million and $65 million in the 2000 comparable periods. 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 September 30, 2001, approximately 78% of the net aggregate reserve (approximately $339 million), is carried in a bulk reserve and includes unresolved as well as incurred but not reported environmental claims for which the Company has not received any specific claims. The balance, approximately 22% of the net environmental loss reserve (approximately $93 million), consists of case reserves for resolved claims. The following table displays activity for environmental losses and loss expenses and reserves:

23 ASBESTOS CLAIMS At September 30, 2001, approximately 82% (approximately $659 million) of the net asbestos reserve, represents incurred but not reported losses for which the Company has not received any specific claims. The balance, approximately 18% of the net aggregate reserve (approximately $149 million), is for pending asbestos claims. In general, the Company posts case reserves for pending asbestos claims within approximately thirty business days of receipt of such claims. The following table displays activity for asbestos losses and loss expenses and reserves:

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 September 30, 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, any impact from the bankruptcy protection sought by various asbestos producers, a further increase or decrease in asbestos and environmental claims which cannot now be anticipated as well as the role of any umbrella or excess policies issued by the Company for such claims, the resolution or adjudication of certain disputes pertaining to asbestos non-products/operations claims in a manner inconsistent with the Company's previous assessment of such claims as well as unanticipated developments pertaining to the Company's ability to recover reinsurance for environmental and asbestos claims. 24 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 legislation applicable to such claims. Because of these future unknowns, and the uncertainties set forth above, 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 September 30, 2001, approximately 82% (approximately $615 million) of the net CIOTA reserve, represents incurred but not reported losses for which the Company has not received any specific claims. The balance, approximately 18% of the net aggregate reserve (approximately $134 million), is for pending CIOTA claims. The following table displays activity for CIOTA losses and loss expenses and reserves:

FUTURE APPLICATION OF ACCOUNTING STANDARDS See Note 1 of Notes to Consolidated Financial Statements for a discussion of recently issued accounting pronouncements. 25 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 words or phrases such as "believe," "expect," "anticipate," "intend," "estimate," "may increase," "may fluctuate," 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, changes in general economic conditions, the impact of the terrorist attack on September 11th, prevailing inflation and interest rates, realized gains from sales of investments; the effects of competitors' pricing policies, and of changes in laws and regulations on competition; the resolution of legal proceedings and related matters; and the actual amount of liabilities associated with certain environmental and asbestos-related insurance claims. 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 descriptions that appear in the second and third paragraphs under the caption "Legal Proceedings" on pages 17 and 18 of the Annual Report on Form 10-K of the Company for the year ended December 31, 2000 (File No. 1-14328), and in the second paragraph under the caption "Legal Proceedings" on page 22 of the Quarterly Report on Form 10-Q of the Company for the quarterly period ended March 31, 2001 (File No. 1-14328) and the paragraph under the caption "Legal Proceedings" on page 25 of the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2001 (File No. 1-14328), which descriptions are included as Exhibits 99.01, 99.02 and 99.03, respectively, to this Form 10-Q and incorporated by reference herein. In August 2001, the Texas trial court granted plaintiffs' motion for class certification. In October 2001, the appellate court agreed to hear defendants' appeal from this ruling, and the Michigan trial court denied plaintiff's motion for class certification. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS:

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. (b) REPORTS ON FORM 8-K: There were no reports on Form 8-K filed during the quarter ended September 30, 2001. 27 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: November 13, 2001 By /s/ Christine B. Mead --------------------------------- Christine B. Mead Chief Financial Officer (Principal Financial Officer) Date: November 13, 2001 By /s/ Douglas K. Russell --------------------------------- Douglas K. Russell Chief Accounting Officer (Principal Accounting Officer) 28

TRAVELERS PROPERTY CASUALTY CORP 10-Q