accounting diffrences
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 [next page]