Travelers 2001 Annual Report Download - page 52

The St. Paul Companies 2001 Annual Report50
2
September 11, 2001 Terrorist Attack
On September 11, 2001, terrorists hijacked four commercial
passenger jets in the United States. Two of the jets were flown into
the World Trade Center towers in New York, N.Y., causing their
collapse. The third jet was flown into the Pentagon building in
Washington, D.C., causing severe damage, and the fourth jet crashed
in rural Pennsylvania. This terrorist attack caused significant loss of
life and resulted in unprecedented losses for the property-liability
insurance industry.
Our estimated gross pretax losses and loss adjustment expenses
incurred as a result of the terrorist attack totaled $2.3 billion. The
estimated net pretax operating loss of $941 million from that event
included an estimated benefit of $1.2 billion from cessions made
under various reinsurance agreements, a $47 million provision for
uncollectible reinsurance, a net $83 million benefit from additional
and reinstatement premiums, and a $91 million reduction in
contingent commission expenses in our Reinsurance segment.
Our estimated losses were based on a variety of actuarial
techniques, coverage interpretation and claims estimation
methodologies, and included an estimate of losses incurred but not
reported, as well as estimated costs related to the settlement of
claims. Our estimate of losses is also based on our belief that
property-liability insurance losses from the terrorist attack will total
between $30 billion and $35 billion for the insurance industry. Our
estimate of industry losses is subject to significant uncertainties
and may change over time as additional information becomes
available. A material increase in our estimate of industry losses
would likely cause us to make a corresponding material increase to
our provision for losses related to the attack.
Our estimated after-tax loss of $612 million ($941 million pretax) is
recorded in our 2001 statement of operations in the following line
items. The tax benefit has been calculated at the statutory rate of 35%.
(In millions)
Premiums earned $83
Insurance losses and loss adjustment expenses (1,115)
Operating and administrative expenses 91
Loss from continuing operations, before income taxes (941)
Income tax benefit 329
Loss from continuing operations $(612)
The estimated net pretax loss of $941 million was distributed among
our property-liability business segments as follows.
(In millions)
Specialty Commercial $89
Commercial Lines Group 108
Surety & Construction 2
Health Care 5
Lloyd’s & Other 181
Total Primary Insurance 385
Reinsurance 556
Total Property-Liability Insurance $ 941
3
December 2001 Strategic Review
In October 2001, we announced that we were undertaking a
thorough review of each of our business operations under the
direction of our new chief executive officer. On completion of that
review in December 2001, we announced a series of actions
designed to improve our profitability, summarized as follows.
• We will exit, on a global basis, all business underwritten in our
Health Care segment through ceasing to write new business and
the non-renewal of business upon policy expiration, in
accordance with regulatory requirements.
• We will narrow the product offerings and geographic presence of
our reinsurance operation. We will no longer underwrite aviation
or bond and credit reinsurance, or offer certain financial risk and
capital markets reinsurance products. We will also substantially
reduce the North American business we underwrite in London.
Our reinsurance operation will focus on several areas, including
property catastrophe reinsurance, excess-of-loss casualty
reinsurance, and marine and traditional finite reinsurance.
• At Lloyd’s, we will exit most of our casualty insurance and
reinsurance business, in addition to U.S. surplus lines and certain
non-marine reinsurance lines. We will continue to underwrite
aviation, marine, financial and professional services, property
insurance, kidnap and ransom, accident and health, creditor and
other personal specialty products.
• We will also exit those countries where we are not likely to
achieve competitive scale, and are pursuing the sale of certain
of these international operations. We will continue to underwrite
business through our offices in Canada, the United Kingdom and
Ireland, and we will continue to underwrite surety business in
Mexico through our subsidiary, Afianzadora Insurgentes.
• We will reduce corporate overhead expenses, primarily through
staff reductions.
The following table presents the premiums earned and underwriting
results for 2001, 2000 and 1999 for the businesses to be exited
under these actions.
2001 2000 1999
(In millions)
Premiums earned $ 1,609 $ 1,277 $ 857
Underwriting results (1,515) (433) (241)
In connection with these actions, we wrote off $73 million of
goodwill related to businesses to be exited, of which $56 million
related to our Health Care segment and $10 million related to our
operations at Lloyd’s. The remaining goodwill written off was related
to our operations in Spain and Australia. In addition, we recorded
a $62 million pretax restructuring charge related to the termination
of employees and other costs to exit these businesses. See Note 16
for a discussion of this charge.