Travelers 2004 Annual Report Download - page 72

Commercial Insurance Resources, Inc.
On August 1, 2002, Commercial Insurance Resources, Inc. (CIRI), a subsidiary of the Company and the
holding company for the Gulf Insurance Group (Gulf), completed a transaction with a group of outside investors
and senior employees of Gulf. Capital investments made by the investors and employees included 9.7 million
shares of mandatorily convertible preferred stock for a purchase price of $8.83 per share, $50 million of
convertible notes and 0.4 million common shares for a purchase price of $8.83 per share, representing a 24%
ownership interest of CIRI, on a fully diluted basis. The dividend rate on the preferred stock was 6.0%. The
interest rate on the notes was 6.0% payable on an interest-only basis. The notes would have matured on
December 31, 2032. Trident II, L.P., Marsh & McLennan Capital Professionals Fund, L.P., Marsh & McLennan
Employees’ Securities Company, L.P. and Trident Gulf Holding, LLC (collectively Trident) invested $125
million, and a group of approximately 75 senior employees of Gulf invested $14 million. Fifty percent of the
Gulf senior employees’ investment was financed by CIRI. This financing was collateralized by the CIRI
securities purchased and was forgivable if Trident achieved certain investment returns. The applicable
agreements provided for registration rights and transfer rights and restrictions and other matters customarily
addressed in agreements with minority investors.
On May 28, 2004, The Travelers Indemnity Company (Indemnity), a subsidiary of the Company, completed
its purchase of all of the outstanding shares (8,970,000 shares) of the mandatorily convertible preferred stock
held by Trident at a purchase price of $8.83 per share and the convertible notes held by Trident for $46 million.
By June 30, 2004, Indemnity completed its purchase from employees of $7 million of the mandatorily
convertible preferred stock at a purchase price of $8.83 per share, convertible notes with an aggregate principal
amount of $4 million, and common equity of $3 million at a purchase price of $8.83 per share. The notes that
were previously issued to employees to finance 50% of their investment in CIRI were assumed by Indemnity as
part of the agreement to purchase the employees’ investments in CIRI. The excess of the cost to repurchase the
minority interest over the minority interest carrying value on the consolidated balance sheet was recorded as a
charge to additional paid-in capital during the second quarter.
RESULTS OF OPERATIONS BY SEGMENT
“Operating income” in the following discussion represents net income excluding the after-tax impact of net
realized investment gains (losses).
Commercial
Results of the Company’s Commercial segment were as follows:
(for the year ended December 31, in millions) 2004 2003 2002
Revenues:
Earned premiums ................................................. $ 8,667 $6,552 $5,831
Net investment income ............................................. 1,708 1,324 1,307
Fee income ...................................................... 680 545 446
Recoveries from former affiliate ..................................... —— 520
Other revenues ................................................... 55 33 28
Total revenues ................................................... $11,110 $8,454 $8,132
Total claims and expenses ............................................. $10,064 $7,131 $9,124
Operating income (loss) ............................................... $ 862 $1,061 $ (310)
Loss and loss adjustment expense ratio (1) ................................. 80.0% 75.4% 109.3%
Underwriting expense ratio ............................................. 28.2 24.9 25.5
GAAP combined ratio ............................................ 108.2% 100.3% 134.8%
(1) Excludes losses recovered under the Citigroup indemnification agreement in 2002.
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