Travelers 2004 Annual Report Download - page 71

Claims and claim adjustment expenses decreased $2.02 billion, or 18%, in 2003 primarily due to a decline
in unfavorable prior year reserve development in 2003, which was partially offset by increased loss costs, growth
in business volume and higher catastrophe losses. Catastrophe losses, net of reinsurance, were $352 million in
2003 compared to $84 million in 2002. Unfavorable prior year reserve development included in claims and claim
adjustment expenses was $476 million for 2003, compared to $3.09 billion in 2002. Unfavorable prior year
reserve development in 2002 included $2.95 billion of asbestos incurred losses (prior to the benefit related to
recoveries under the Citigroup indemnification agreement), whereas 2003 included no asbestos-related
unfavorable prior year reserve development.
Amortization of deferred acquisition costs increased $174 million, or 10%, in 2003, reflecting higher
commission and premium taxes associated with the increases in earned premiums previously described. Interest
expense increased $9 million, or 6%, in 2003 due to certain one time costs associated with first and second
quarter refinancing activities that lowered average interest costs, and higher levels of temporary debt. General
and administrative expenses increased $217 million, or 15%, in 2003, reflecting business growth and higher
commissions that resulted from improved underwriting results.
Effective Tax Rate. The Company’s effective tax rate was 12.2%, 24.1% and (183.4)% in 2004, 2003 and
2002, respectively. The decrease in the 2004 effective rate primarily reflected the impact of an increase in
nontaxable investment income on a lower level of pretax income. The 2003 increase in the effective rate reflected
a higher level of pretax income associated with improved underwriting performance. The 2002 effective rate
reflected the impact of the 2002 asbestos charge previously discussed, as well as the impact of non-taxable
recoveries of $520 million related to the Citigroup indemnification agreement.
The GAAP combined ratios before policyholder dividends were as follows:
(for the year ended December 31, in millions) 2004 2003 2002
Loss and loss adjustment expense ratio (1) .................................... 79.4% 70.7% 90.5%
Underwriting expense ratio ................................................ 28.3 25.6 26.1
GAAP combined ratio ............................................... 107.7% 96.3% 116.6%
(1) Excludes losses recovered under the Citigroup indemnification agreement in 2002.
The GAAP combined ratio in 2004 included a 12.6 point impact from net unfavorable prior year reserve
development and a 4.0 point impact from catastrophes. The respective impacts of these factors on the 2003
combined ratio were 3.8 points and 2.8 points. Excluding these impacts from both years, the adjusted ratio of
91.1 in 2004 was 1.4 points higher than the adjusted 2003 combined ratio of 89.7. The increase in the adjusted
ratio primarily reflected the impact of the higher underwriting expense ratio of the business acquired in the
merger, as well as expenses associated with the merger.
The 20.3 point improvement in the 2003 GAAP combined ratio resulted from lower unfavorable prior year
reserve development, primarily due to having no asbestos charges in 2003, compared to asbestos charges in 2002
that added 19.2 points. The benefit from premium rate increases that exceeded loss cost trends were largely offset
by higher catastrophe losses.
Renewal Rights Purchases
During the third quarter of 2003, TPC purchased from Royal & SunAlliance USA (RSA), an unaffiliated
insurer, the renewal rights to RSA’s commercial lines national accounts, middle market and marine businesses,
and standard and preferred personal lines businesses. Also during the third quarter of 2003, TPC purchased from
Atlantic Mutual, an unaffiliated insurer, the renewal rights to the majority of Atlantic Mutual’s commercial lines
inland marine and ocean cargo businesses written by Atlantic Mutual’s Marine Division. The minimum purchase
price for both transactions, which has been paid, was $48 million. The final purchase price, which is expected to
be determined in 2005 and is currently estimated to be $66 million, is dependent on the level of business renewed
by the Company.
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