Policies written in last 20 years include and Environmental exclusion. At the
time these policies were written, no person realized the long-term detrimental
effects of what were, at the time, not known to be hazardous materials. Almost
all old-line property and casualty companies have had to recognize their
exposure to these types of claims.) -Successfully develop new distribution
channels for personal lines products. Key Rating Upgrade In December of 1998,
the A.M. Best Company upgrades Travelers to A+. A++ is the highest possible
rating. As a result, Travelers is now well positioned to take advantage of what
we see as significant changes taking place in today's Property and Casualty
industry. Capitalizing on Market trends Personal lines agents are generally
attempting to consolidate their writings to one or two companies within each
agency. Due to favorable pricing, Travelers was able to invest in book transfers
where an agent moves their entire book of business from another carrier to
travelers. This helped to provide a 13.5% increase in revenue for personal lines
to $3.5 billion. Commercial lines revenue was flat despite 4-5% decreases in
industry premium levels each year since 1996. Operating income increased 11% in
1998 due to lower catastrophic losses and improved operating expense ratios.
Opportunities within Citigroup Citigroup owns travelers Insurance 84%.
Management feels f=this creates exciting opportunities for Travelers with
Citigroup's cross selling of complimentary products. Other Growth Opportunities
Travelers formed and Alliance with Winterthur, a Swiss owned insurance company
that allows Travelers to provide insurance in Europe, Asia and Latin America for
their domestic commercial clients. Key Differences Travelers is positioning
themselves as a low cost provider while Reliance is trying to improve operations
through innovation and creating market niches. No mention of the cost structure
in the Reliance letter to the shareholders. Both companies had successful 1998,
in actuality; the entire property and casualty industry faired pretty well in
1998 due in part tot the relatively low level of catastrophic losses. -Insider
information.
One of the problems that were identified by Reliance management in 1999
was an expense problem at Reliance National and $50m in annualized cost savings
were identified and implemented in the second and third quarter of 1999 at
Reliance. Both companies mentioned the challenging property and casualty
environment. Third Quarter of 1999 results- Travelers Earnings were solid
despite height level of catastrophic losses, achieved due to lower expenses and
Increased personal lines agents. Travelers experienced a slight increase in
Combined ration from 102.5 in 1998 to 103 through the first three quarters of
1999. Third Quarter Results - Reliance The good news is the company is showing a
$15m loss through for the third quarter of 1999. The bad news is that what is
not included in that number is an adjustment to loss reserves in excess of
$330m, on a pre tax basis that resulted in an after tax charge of close to
$147.7m, taken in the second quarter of 1999. Further, during the third quarter
A.M. Best placed Reliance Group Holdings under review with negative
implications. (As previously mentioned, Reliance's current Best rating is A-,
any drop below that would have significant detrimental effects. A- is generally
considered the minimum acceptable rating for insurance companies by most
national insurance agencies and many commercial insurance buyers.) The pre tax
reserve adjustment is a good showcase for the problems facing the auditors when
auditing an insurance company. An insurance company collects premiums today to
cover losses expected to happen at some point in the future. This future date
could be next year or twenty years from now. During that time, state laws can
change and common law can actually change the exposure of the insurance company
from when they actually wrote the policy. Estimated losses are based on the best
guess of the actuaries and management. Some industry experts believe the entire
property and Casualty industry is under reserved by as much as 15%. The results
even without that loss adjustment were not positive for Reliance. Saul Steinberg
states in the third quarter press release that these results do not reflect the
profitability of the core business. While the combined ratio in the third
quarter was in excess of 110, without the run off business this would have been
102. Run off business is lines of business that Reliance has decided to get out
of but it takes some time to eliminate the risks associated with this business.
Another item clouding the financial condition of Reliance group is was the
potential loss surrounding what is referred to as Unicover.
