Travelers 2001 Annual Report Download - page 27

The following table summarizes results for this segment for the last
three years. Results presented for all three years exclude the impact
of the corporate reinsurance program, and results for 2001 also
exclude losses resulting from the terrorist attack. Data including
these factors is presented on page 21 of this report.
Year ended December 31 2001 2000 1999
(Dollars in millions)
Written premiums $ 1,024 $ 925 $ 852
Percentage increase over prior year 11% 9%
GAAP underwriting result $(47)$ 23 $ (49)
Loss and loss adjustment expense ratio 68.2 55.1 62.6
Underwriting expense ratio 35.8 40.0 40.2
Combined ratio 104.0 95.1 102.8
2001 vs. 2000 – The 11% increase in premium volume in 2001 was
primarily due to price increases in the Construction business center,
which averaged 18% for the year. Construction premiums totaled
$609 million in 2001, compared with $472 million in 2000. Surety
premiums of $415 million declined 8% compared with 2000, reflect-
ing the impact of tightened underwriting standards we began to
implement near the end of 1999 in anticipation of an economic
slowdown in both the United States and Mexico. As that slowdown
materialized in 2001, our tightened standards had produced a more
conservative risk profile of our commercial surety exposures. An
increase in reinsurance costs was also a factor in the decline in
Surety’s net written premiums in 2001.
Both business centers contributed to the deterioration in under-
writing results compared with 2000. The Surety underwriting profit
of $11 million declined from the comparable 2000 profit of
$34 million, reflecting an increase in losses amid the economic
downturn in the U.S. Also included in the 2001 Surety result was a
$10 million provision for losses associated with Enron Corporation’s
bankruptcy filing late in the year.
The Construction underwriting loss of $58 million in 2001 deterio-
rated from 2000’s comparable loss of $11 million, driven by adverse
loss development on prior-year business that prompted a
$24 million provision to strengthen reserves. Current accident year
loss experience in 2001 was much improved over 2000, reflecting
the impact of aggressive underwriting initiatives implemented over
the last three years. Construction’s 2000 underwriting result
included the benefit of prior-year reserve reductions totaling
$57 million, including $33 million of workers’ compensation loss
reserves. The strong improvement in the segment expense ratio
over 2000 reflected the combined effect of Construction’s written
premium growth and active management of expenses in both
business centers.
2000 vs. 1999 – Both business centers achieved written premium
growth in 2000. Surety premiums of $453 million grew 8% over
1999, and Construction premiums of $472 million were 9% higher
than the 1999 total. The increases reflected strong economic con-
ditions in both the U.S. and Mexico, which fueled growth in the
construction industry and, in turn, the demand for contract surety
products. Price increases averaging 15% in the Construction busi-
ness center were also a significant factor contributing to premium
growth in 2000. Construction’s underwriting result improved by
$78 million over 1999, due to favorable prior-year loss develop-
ment, which included the $33 million reduction in workers’
compensation reserves. Surety’s underwriting profit of $34 million
was $6 million less than the comparable 1999 profit, due to
increased claim activity on two large accounts in Mexico.
2002 Outlook – In early 2002, we expect to close on our purchase
of London Guarantee Insurance Company, a specialty property-lia-
bility insurance company focused on providing surety products, and
management liability, bond, and professional indemnity products.
London Guarantee, headquartered in Toronto, generated approxi-
mately $53 million (Canadian) in surety net written premiums in
2001. In addition, late in 2001, our Surety operation acquired the
right to seek to renew surety bond business underwritten by
Fireman’s Fund Insurance Company, without assuming any past lia-
bilities. This transaction is expected to enhance our position in 2002
as the largest surety underwriter in the U.S. by increasing our
market penetration in western states. In the current economic envi-
ronment, we will maintain a conservative underwriting profile in our
Surety and Construction operations while continuing to aggressively
seek additional price increases. The anticipated higher cost and lim-
ited availability of surety reinsurance in 2002 is expected to further
tighten underwriting standards for certain types of surety bonds and
will likely result in significant price increases for the surety customer.
The St. Paul Companies 2001 Annual Report 25