Travelers 2002 Annual Report Download - page 26

income in future periods as the invested assets related to these
reserves decline.
TRANSFER OF ONGOING REINSURANCE OPERATIONS TO
PLATINUM UNDERWRITERS HOLDINGS, LTD.
On November 1, 2002, we completed the transfer of our continu-
ing reinsurance business (previously operating under the name
“St. Paul Re”) and certain related assets, including renewal rights, to
Platinum Underwriters Holdings, Ltd. (“Platinum”), a newly formed
Bermuda company that underwrites property and casualty reinsur-
ance on a worldwide basis. The following description of the transac-
tion is qualified in its entirety by the terms of the Formation and
Separation Agreement between us and Platinum dated as of
October 28, 2002 and filed as an exhibit to Platinum’s Registration
Statement No. 333-86906 on Form S-1.
As part of this transaction, we contributed $122 million of cash to
Platinum and transferred $349 million in assets relating to the insur-
ance reserves that we also transferred. In exchange, we acquired six
million common shares, representing a 14% equity ownership interest
in Platinum, and a ten-year option to buy up to six million additional
common shares at an exercise price of $27 per share, which repre-
sents 120% of the initial public offering price of Platinum’s shares.
In conjunction with the transfer of our continuing reinsurance busi-
ness to Platinum, we entered into various agreements with Platinum
and its subsidiaries, including quota share reinsurance agreements by
which Platinum reinsured substantially all of the reinsurance contracts
entered into by St. Paul Re on or after January 1, 2002. This transfer
(based on September 30, 2002 balances) included $125 million of
unearned premium reserves (net of ceding commissions), $200 million
of existing loss and loss adjustment expense reserves and $24 million
of other reinsurance-related liabilities. The transfer of unearned pre-
mium reserves to Platinum was accounted for as prospective reinsur-
ance, while the transfer of existing loss and loss adjustment expense
reserves was accounted for as retroactive reinsurance.
As noted above, the transfer of reserves to Platinum at the incep-
tion of the quota share reinsurance agreements was based on the
September 30, 2002 balances. We intend to transfer additional insur-
ance reserves to Platinum to reflect business activity between
September 30, 2002 and the November 2, 2002 inception date of the
quota share reinsurance agreements. Our insurance reserves at
December 31, 2002 included our estimate of additional amounts due
to Platinum for this activity, which totaled $54 million. We expect that
this amount, which is subject to adjustment under the provisions of
the reinsurance agreements, will be agreed to and settled upon in the
first half of 2003. This adjustment, if any, is not expected to be mate-
rial to our results of operations.
For business underwritten in the United States and the United
Kingdom, until October 31, 2003, Platinum has the right to underwrite
specified reinsurance business on our behalf in cases where Platinum
is unable to underwrite that business because it has yet to obtain nec-
essary regulatory licenses or approval to do so, or Platinum has not
yet been approved as a reinsurer by the ceding company. We entered
into this agreement solely as a means to accommodate Platinum
through a transition period. Any business written by Platinum on our
policy forms during this transition period is being fully ceded to
Platinum under the quota share reinsurance agreements.
The transaction resulted in a pretax gain of $29 million and an
after-tax loss of $54 million.The after-tax loss was driven by the write-
off of approximately $73 million in deferred tax assets associated with
previously incurred losses related to St. Paul Re’s United Kingdom-
based operations, as well as approximately $10 million in taxes asso-
ciated with the pretax gain.
Our investment in Platinum is included in “Other investments.” The
income from our 14% proportionate equity ownership in Platinum is
included in our statement of operations as a component of “Net invest-
ment income” from the date of closing. Our warrants to purchase addi-
tional Platinum shares are carried at their market value ($61 million at
December 31, 2002), with changes in their fair value recorded as other
realized gains or losses in our statement of operations.
24
REVISIONS TO BUSINESS SEGMENT REPORTING STRUCTURE
In the fourth quarter of 2002, we revised our property-liability busi-
ness segment reporting structure to reflect the manner in which those
businesses are currently managed, particularly in recognition of cer-
tain operations being separately managed as runoff operations. As of
December 31, 2002, our property-liability underwriting operations
consist of four segments constituting our ongoing operations, and
three segments comprising our runoff operations. The composition of
those respective segments is described in greater detail in the analy-
sis of their results on pages 35 through 44 of this discussion. We
retained the concept of a “specialty commercial” business center,
which is an operation possessing dedicated underwriting, claims and
risk control services requiring specialized expertise and focusing
exclusively on the customers it serves. Eleven of those business cen-
ters comprise our Specialty Commercial reportable segment. None of
those business centers alone met the quantitative threshold to qualify
as a separate reportable segment; therefore they were combined
based on the applicable aggregation criteria. All data for 2001 and
2000 included in this report were restated to be consistent with the
new reporting structure in 2002. The following is a summary of
changes made to our segments at the end of 2002.
• In our Specialty Commercial segment, all international specialty
business that had either been included in respective business
centers, or had been included in the separate International
Specialty business center, was reclassified to the newly formed
International & Lloyd’s segment (for ongoing operations) or our
Other segment (for international operations considered to be in
runoff).
• All international Health Care business, previously included in the
Health Care segment, was reclassified to the newly formed Other
segment.
• The International & Lloyd’s segment was formed, comprised of
our ongoing operations at Lloyd’s, ongoing specialty commercial
business underwritten outside the United States (currently con-
sisting of operations in the United Kingdom, Canada and the
Republic of Ireland), and Global Accounts. All operations in this
segment are under common management.
• The new runoff segment Other was formed, comprised of the
results of all of our international and Lloyd’s business considered
to be in runoff (including our involvement in insuring the Lloyd’s
Central Fund), as well as those of Unionamerica, the U.K.-based
underwriting entity acquired in the MMI transaction.
• Our Catastrophe Risk business center, previously included in the
Specialty Commercial segment in its entirety, was split into two,
with Personal Catastrophe Risk remaining in the Specialty
Commercial segment and Commercial Catastrophe Risk moving
to the Commercial Lines segment as part of the Property
Solutions business center.
CONSOLIDATED REVENUES
The following table summarizes the sources of our consolidated
revenues from continuing operations for the last three years.
Years Ended December 31 2002 2001 2000
(In millions)
Revenues:
Property-liability insurance premiums earned $7,390 $7,296 $ 5,592
Net investment income 1,169 1,217 1,262
Realized investment gains (losses) (165) (94) 632
Asset management 397 374 370
Other 127 126 90
Total revenues $8,918 $8,919 $ 7,946
Change from prior year 0% 12%
Earned premiums in 2002 were $94 million higher than in 2001, as
the positive impacts of significant price increases in 2001 and 2002
and new business in many of our ongoing operations were largely off-
set by our withdrawal from several lines of business and the transfer
of our ongoing reinsurance operations to Platinum. Earned premiums