Travelers 2002 Annual Report Download - page 72

The original estimated losses in 2001 and the adjustments
recorded in 2002 impacted our statements of operations as follows.
The tax expense or benefit was calculated at the statutory rate of 35%.
Years Ended December 31 2002 2001
(In millions)
Premiums earned $— $83
Insurance losses and loss adjustment expenses 13 (1,115)
Operating and administrative expenses —91
Income (loss) from continuing operations, before income taxes 13 (941)
Income tax expense (benefit) 5(329)
Income (loss) from continuing operations $8 $(612)
The estimated net pretax impacts of the original losses recorded
in 2001 and the adjustments recorded in 2002 were distributed
among our property-liability business segments as follows.
Net estimate
Original 2002 at Dec. 31,
2001 Losses Adjustments 2002
(In millions)
Specialty Commercial $ 52 $8 $60
Commercial Lines 139 (30) 109
Surety & Construction 2 —2
International & Lloyd’s 95 (22) 73
Health Care 5 —5
Reinsurance 556 24 580
Other 92 799
Total Property-Liability Insurance $ 941 $(13) $ 928
Through December 31, 2002, we paid a total of $307 million in net
losses related to the terrorist attack since it occurred, including
$242 million during the year ended December 31, 2002.
The Terrorism Risk Insurance Act of 2002 was signed into law in
November 2002. This temporary legislation remains in effect until
December 31, 2005, and requires insurers to offer coverage for cer-
tain types of terrorist acts in their commercial property and liability
insurance policies, and establishes a federal program to reimburse
insurers for a portion of losses so insured.
5. DECEMBER 2001 STRATEGIC REVIEW
In October 2001, we announced that we were undertaking a thor-
ough 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. The following summarizes the actions taken
in 2002 as a result of the strategic review.
• We exited, 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 accor-
dance with regulatory requirements. We offered reporting
endorsements to our insureds as or to the extent required.
• We substantially narrowed the product offerings and geographic
presence of our reinsurance operation, and in the fourth quarter
of 2002, we completed the transfer of our remaining ongoing
reinsurance operations, including substantially all of the reinsur-
ance business under contracts incepting during 2002, to
Platinum. See Note 2 for a discussion of that transaction.
• At Lloyd’s, we exited all of our casualty insurance and reinsur-
ance business, in addition to U.S. surplus lines and certain non-
marine reinsurance lines. We continue to underwrite aviation,
marine, property and personal insurance - including kidnap and
ransom, accident and health, creditor and other personal spe-
cialty products.
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• We also exited those countries where we were not likely to
achieve competitive scale, and sold certain of these international
operations. We continue to underwrite business through our
offices in Canada, the United Kingdom and Ireland, and we con-
tinue to underwrite surety business in Mexico through our sub-
sidiary, Afianzadora Insurgentes.
• We reduced corporate overhead expenses, primarily through
staff reductions.
In connection with these actions in the fourth quarter of 2001, 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, in the
fourth quarter of 2001, we recorded $62 million pretax restructuring
charge related to the termination of employees and other costs to exit
these businesses. See Note 18 for a discussion of this charge.
None of the exited operations we consider to be in runoff qualify
as a “discontinued operation” for accounting purposes. For the year
ended December 2002, our runoff segments collectively accounted
for $1.16 billion or 17% of our reported net written premiums,
$1.92 billion, or 26% of our reported net earned premiums, and gen-
erated underwriting losses of $409 million (an amount that does not
include investment income from the assets maintained to support
these operations).
6. ACQUISITIONS & DIVESTITURES
ACQUISITIONS
Professional and Financial Risk Practice (“ProFin”) Business — In
December 2002, we purchased the right to seek renewal of the finan-
cial and professional services business previously underwritten by
Royal & SunAlliance (“RSA”), without assuming past liabilities. This
business represents approximately $125 million in expiring premium.
The nominal cost of the acquisition was recorded as an intangible
asset (characterized as renewal rights) and will be amortized on an
accelerated basis over four years.
London Guarantee — In late March 2002, we completed our
acquisition of London Guarantee Insurance Company (“London
Guarantee,” now operating under the name “St. Paul Guarantee”), a
Canadian specialty property-liability insurance company focused on
providing surety products and management liability, bond, and profes-
sional indemnity products. The total cost of the acquisition was
approximately $80 million.The preliminary allocation of this purchase
price resulted in $20 million of goodwill and $37 million of other intan-
gible assets. We recorded $13 million of the goodwill and $26 million
of the intangible assets (characterized as present value of future prof-
its) in our Surety & Construction segment, with the remaining $7 mil-
lion of goodwill and $11 million of the intangible assets in our
International and Lloyd’s segment.The intangible asset is being amor-
tized on an accelerated basis over eight years. The acquisition was
funded through internally generated funds.
St. Paul Guarantee’s assets and liabilities were included in our
consolidated balance sheet beginning June 30, 2002, and the results
of their operations since the acquisition date were included in our con-
solidated statements of operations for the twelve months ended
December 31, 2002. St. Paul Guarantee produced net written premi-
ums of $57 million and an underwriting loss of $6 million since the
acquisition date. In the fourth quarter we made a purchase account-
ing adjustment related to our deferred tax assumptions, which
decreased goodwill by $2 million.