Travelers 2001 Annual Report Download - page 67

The St. Paul Companies 2001 Annual Report 65
to write non-Economy business through their own insurance
subsidiaries. Any business written on our policy forms during this
transition period is then fully ceded to Metropolitan under the
Reinsurance Agreement. We recognized no gain or loss on the
inception of the Reinsurance Agreement and will not incur any net
revenues or expenses related to the Reinsurance Agreement. All
economic risk of post-sale activities related to the Reinsurance
Agreement has been transferred to Metropolitan. We anticipate that
Metropolitan will pay all claims incurred related to this Reinsurance
Agreement. In the event that Metropolitan is unable to honor their
obligations to us, we will pay these amounts.
As part of the sale to Metropolitan, we guaranteed the adequacy of
Economy’s loss and loss expense reserves. Under that guarantee,
we will pay for any deficiencies in those reserves and will share in
any redundancies that develop by Sept. 30, 2002. We remain liable
for claims on non-Economy policies that result from losses occurring
prior to closing. By agreement, Metropolitan will adjust those claims
and share in redundancies in related reserves that may develop. As
of Dec. 31, 2001, we have estimated that we will owe Metropolitan
$7 million on these guarantees, and have included that amount in
discontinued operations. We have no other contingent liabilities
related to the sale.
As a result of the sale, approximately 1,600 standard personal
insurance employees of The St. Paul effectively transferred to
Metropolitan on Oct. 1, 1999.
We received gross proceeds on the sale of $597 million, less the
payment of the reinsurance premium of $325 million, for net
proceeds of $272 million. We recognized, in discontinued operations,
a pretax gain on disposal of $130 million, after adjusting for a
$26 million pension and postretirement curtailment gain and
disposition costs of $32 million. The gain on disposal combined with
a $128 million pretax gain on discontinued operations (subsequent
to our decision to sell), resulting in a total pretax gain of
$258 million. Included in the pretax gain on discontinued operations
was a $145 million reduction in loss and loss adjustment expense
reserves. In the third quarter of 1999, based on favorable trends
noted in the standard personal insurance reserve analysis, and
considering the pending sale and its economic consequences, we
concluded that this reserve reduction was appropriate.
The $26 million pretax curtailment gain represented the impact of
a reduced number of employees in the pension and post-retirement
plans due to the sale of the standard personal insurance business.
The $32 million pretax disposition costs netted against the gain
represented costs directly associated with the decision to dispose
of the standard personal insurance segment and included $14 million
of employee-related costs, $8 million of occupancy-related costs,
$7 million of transaction costs, $2 million of record separation costs
and $1 million of equipment charges. The employee-related costs
related to the expected termination of 385 employees due to the
sale of the personal insurance segment. Approximately 350
employees were terminated related to this action. In 2000, we
reduced the employee-related reserve by $3 million due to a number
of voluntary terminations, which reduced the expected severance
to be paid. In 2001, we reduced the occupancy-related reserve by
$2 million due to a lease buyout.
The following presents a rollforward of 2001 activity related to this charge.
Reserve Reserve
Pretax at Dec. 31, at Dec. 31,
Charge 2000 Payments Adjustments 2001
(In millions)
Charges to earnings:
Employee-related $14 $— $— $— $—
Occupancy-related 8 7 (3) (2) 2
Transaction costs 7 — — — —
Record separation costs 2 — — — —
Equipment charges 1 — — — —
Total $32 $ 7 $(3) $(2) $2
Nonstandard Auto Business — In December 1999, we decided to
sell our nonstandard auto business marketed under the Victoria
Financial and Titan Auto brands. On Jan. 4, 2000, we announced an
agreement to sell this business to The Prudential Insurance
Company of America (“Prudential”) for $200 million in cash, subject
to certain adjustments based on the balance sheet as of the closing
date. As a result, the nonstandard auto business results of
operations were accounted for as discontinued operations for the
year ended Dec. 31, 1999. Included in “Discontinued operations—
gain (loss) on disposal, net of tax” in our 1999 statement of
operations was an estimated loss on the sale of approximately
$83 million, which included the estimated results of operations
through the disposal date. All prior period results of nonstandard
auto have been reclassified to discontinued operations.
On May 1, 2000, we closed on the sale of our nonstandard auto
business to Prudential, receiving total cash consideration of
approximately $175 million (net of a $25 million dividend paid to
our property-liability operations prior to closing).
The following table summarizes our discontinued operations,
including our life insurance business, our standard personal
insurance business, our nonstandard auto business and our
insurance brokerage business, Minet (sold in 1997), for the three-
year period ended Dec. 31, 2001.