Notes to financial statements
Note 17: Segment Information
We have seven reportable segments in our insurance operations, consisting of Commercial Lines, Specialty Commercial, Personal Insurance, International Underwriting, Reinsurance, Property-liability Investment Operations, and Life Insurance. The insurance operations are managed separately because each targets different customers and requires different marketing strategies. We also have an Asset Management segment, consisting of our majority ownership in The John Nuveen Company.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate performance based on underwriting results for our property-liability insurance segments, investment income and realized gains for our investment operations, and on pretax operating results for the life insurance and asset management segments. Property-liability underwriting assets are reviewed in total by management for purposes of decision making. We do not allocate assets to these specific underwriting segments. Assets are specifically identified for our life insurance and asset management segments.
Geographic Areas - The following summary presents financial data of our continuing operations based on their location.
(In thousands)
Year ended December 31
1998
1997
1996
Revenues
U.S.
$8,820,153
$8,544,996
$8,314,641
Non-U.S.
803,026
686,541
793,760
Total revenues
$9,623,179
$9,231,537
$9,108,401
Segment Information - The summary on the next page presents revenues and pretax income from continuing operations for our reportable segments. Amounts for 1997 and 1996 were reclassified to be consistent with the 1998 presentation. The revenues of our life insurance and asset management segments include their respective investment income and realized investment gains. The table also presents identifiable assets for our property-liability underwriting operation in total, and our life insurance and asset management segments. Included in the table are life insurance segment revenues of $47 million, $65 million and $76 million for the years ended Dec. 31, 1998, 1997 and 1996, respectively, related to structured settlement annuities sold primarily to our Commercial Lines segment.
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The $291.6 million merger-related charge is recorded in the following captions of the "Income (Loss) from Continuing Operations Before Income Taxes" section of the foregoing segment table: $142.4 in property-liability insurance-other; $14.1 million in property-liability insurance - realized gains; $9.4 million in life insurance; and $125.7 million in parent company, other operations and consolidating eliminations.
The $250 million provision to strengthen loss reserves is recorded as follows: $196.7 million in commercial lines; $35.1 million in personal insurance; and $18.2 million in specialty commercial.
Also included in the life insurance caption is a $41.0 million charge to writedown the carrying value of deferred policy acquisition costs (DPAC). The writedown relates to universal life-type and investment-type contracts which are subject to the guidance in SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments." According to SFAS No. 97, amortization of DPAC is to be based on the present value of estimated gross profits expected to be realized over the life of the contract. Estimates of expected gross profits used as a basis for amortization shall be evaluated regularly and the total amortization to date should be adjusted if actual experience or other evidence suggests that earlier estimates should be revised.
The $41.0 million DPAC charge had three components. First, the persistency of certain in-force business, particularly universal life and flexible premium annuities, sold through some USF&G distribution channels, had begun to deteriorate after the USF&G merger announcement. To mitigate this, management decided, in the second quarter, to increase credited rates on certain universal life business. This change lowered the estimated future profits on this business, which, as required under SFAS No. 97, triggered $19.1 million in accelerated DPAC amortization. Second, the low interest rate environment during the first half of 1998 led to assumption changes as to the future "spread" on certain interest sensitive products, lowering gross profit expectations and triggering a $15.6 million DPAC charge. The remaining $6.3 million charge resulted from a change in annuitization assumptions for certain tax-sheltered annuity products.
Late in the fourth quarter of 1998, we recorded a pretax restructuring charge of $34.3 million ($22.3 million, or $0.09, net of tax benefit). The majority of the charge, $26.5 million, related to the anticipated termination of approximately 520 employees in the following operations: Claims, Commercial Lines, Information Systems, Medical Services and Professional Markets. The remaining charge of $7.9 million related to costs to be incurred to exit lease contracts. As of Dec. 31, 1998, no employees had been terminated under the restructuring plan. Actions to take place under this fourth quarter 1998 plan are expected to be completed by the end of 1999. The charge is included in the property-liability insurance - other caption in the foregoing segment table.