Exhibit 13.01
The Travelers Inc. and Subsidiaries
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In millions of dollars, except per share amounts)
Year Ended December 31, (1) 1993 1992 1991 1990 1989
- ----------------------- ------ ------ ------ ------ ------
Total revenues (2) $6,797 $5,125 $6,608 $6,194 $5,695
After-tax gains from sale
of subsidiaries and affiliates $8 $135 $43 $10 -
Income before cumulative effect of
changes in accounting principles $951 $756 $479 $373 $289
Net income (3) $916 $728 $479 $373 $289
Net income per common share
before cumulative effect of
changes in accounting principles (4) $3.88 $3.34 $2.14 $1.64 $1.44
Net income per common share (4) $3.74 $3.22 $2.14 $1.64 $1.43
Dividends per common share (4) $0.490 $0.363 $0.225 $0.180 $0.145
Ratio of earnings to fixed charges 2.79x 2.63x 1.85x 1.56x 1.49x
December 31, (1)
- ------------
Total assets (5) $101,360 $24,151 $21,561 $19,689 $17,955
Long-term debt $6,991 $3,951 $4,327 $3,456 $3,008
Stockholders' equity $9,326 $4,229 $3,280 $2,859 $2,603
Book value per common share (4) $26.06 $17.70 $15.10 $13.20 $11.76
(1) The Travelers Inc. (the Company) was formerly Primerica Corporation
(Primerica). Data relating to results of operations excludes the
amounts of The Travelers Insurance Group Inc. except that results for
1993 include the Company's equity in earnings relating to the 27%
purchase, and data relating to financial position excludes amounts for
old Travelers for the years prior to 1993 (see Note 1 of Notes to
Consolidated Financial Statements).
(2) Revenues for 1989 through 1991 include those of Fingerhut Companies,
Inc. (Fingerhut), which had been carried as a consolidated subsidiary
(see Note 3 of Notes to Consolidated Financial Statements).
(3) See Note 2 of Notes to Consolidated Financial Statement for information
regarding changes in accounting principles in 1992 and 1993.
(4) The Company's Board of Directors declared stock splits in the form of
stock dividends (three-for-two in January 1993 and four-for-three in
July 1993), which combined yield the equivalent of a two-for-one stock
split. Prior years' information has been restated to reflect the stock
splits.
(5) Assets and liabilities for 1992 have been reclassified to conform with
the 1993 presentation for the adoption, effective January 1, 1993, of
Statement of Financial Accounting Standards No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts."
1
The Travelers Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
Consolidated Results of Operations
Year Ended December 31,
------------------------
(In millions, except per share amounts) 1993 1992 1991
-------------------------------------------------------------------------
Revenues $6,797 $5,125 $6,608
===== ===== =====
Income before cumulative effect of changes
in accounting principles $951 $756 $479
=== === ===
Net income $916 $728 $479
=== === ===
Earnings per share *
Before cumulative effect of changes in
accounting principles $3.88 $3.34 $2.14
==== ==== ====
Net income $3.74 $3.22 $2.14
==== ==== ====
Weighted average number of common shares
outstanding and common stock equivalents * 237.8 222.8 226.5
===== ===== =====
-------------------------------------------------------------------------
* Adjusted for 1993 stock splits yielding the equivalent of a two-for-one
split.
The Travelers Merger
On December 31, 1993, Primerica Corporation (Primerica) acquired the
approximately 73% it did not already own of The Travelers Corporation (old
Travelers), one of the largest multi-line insurance companies in the United
States. The acquisition was effected by means of a merger of old Travelers
into Primerica and, concurrently with the merger, Primerica changed its name to
The Travelers Inc. which together with its subsidiaries, is hereinafter
referred to as the Company. The old Travelers businesses acquired are
hereinafter referred to as old Travelers or The Travelers Insurance Group. As
consideration for the merger, the Company issued .80423 shares of its common
stock for each old Travelers common share then outstanding. The total purchase
price of $3.4 billion is comprised of $3.3 billion, representing the fair value
of the approximately 86 million newly issued common shares, plus the premium
over book value related to the two issues of old Travelers Preference Stock
exchanged in the merger and certain other acquisition costs.
The acquisition has been accounted for as a purchase, and accordingly, the
results of operations for periods prior to December 31, 1993 do not include
those of old Travelers other than for the equity in earnings for 1993 relating
to the 27% previously owned. The discussion of results of operations which
follows relates only to Primerica and its subsidiaries, whereas the discussion
relating to financial position at December 31, 1993 reflects the consolidation
of old Travelers. The old Travelers assets acquired and liabilities assumed
are reflected in the Consolidated Statement of Financial Position at December
31, 1993 at management's best estimate of their fair value. Evaluation and
appraisal of the net assets is continuing, and allocation of the purchase price
may be adjusted. The excess of the purchase price over the estimated fair
value of the net assets of approximately $975 million will be amortized on a
straight-line basis over 40 years.
The Shearson Acquisition
On July 31, 1993, the Company acquired the domestic retail brokerage and asset
management businesses (the Shearson Businesses) of Shearson Lehman Brothers
Holdings Inc. (SLB), an American Express Company (American Express) subsidiary,
for approximately $2.1 billion representing $1.6 billion for the net assets
acquired plus approximately $500 million of cash required to be segregated for
customers under commodities regulations. The businesses acquired were combined
with the operations of Smith Barney, Harris Upham & Co., Incorporated, and the
combined firm has been named Smith Barney Shearson Inc. which is a subsidiary
of Smith Barney Shearson Holdings Inc. (SBS). Payment for the net assets
consisted of approximately $900 million in cash, $125 million in the form of
convertible preferred stock of the Company, $25 million in the form of warrants
to purchase common stock and the balance in notes to the seller. In addition,
the Company has agreed to pay American Express additional amounts that are
contingent upon the new unit's performance. Evaluation and appraisal of the
net assets is continuing, and allocation of the purchase price may be adjusted.
2
Results of Operations
The Company's earnings in 1993 reflect a substantial increase in the
contribution of SBS, which had a record earnings year, and Consumer Finance
Services, which continued to post record results.
Income before the cumulative effect of changes in accounting principles for
1993 includes:
- - Reported investment portfolio gains of $109 million;
- - a $65 million provision for one-time expenses related to the acquisition of
the Shearson Businesses; and
- - a gain of $8 million from the sale of stock of subsidiaries and affiliates.
Income before the cumulative effect of changes in accounting principles for
1992 includes:
- - Reported investment portfolio gains of $28 million;
- - a gain of $55 million from the sale of Fingerhut Companies, Inc.
(Fingerhut) common stock;
- - a gain of $52 million from the sale of the entire ownership interest in
Margaretten & Company, Inc. (Margaretten);
- - a gain of $19 million from the sale of the common stock investment in
Musicland Stores Corporation (Musicland);
- - a gain of $16 million from the exchange of 50% of Commercial Insurance
Resources, Inc., the parent of Gulf Insurance Company (Gulf), and the
exchange of certain Transport Life Insurance Company (Transport) businesses
for old Travelers common stock;
- - a net gain of $3 million from the divestment of securities of the Company's
affiliates, Inter-Regional Financial Group, Inc. (IFG) and PennCorp
Financial Group, Inc.; and
- - a loss of $10 million on the sale of the Voyager group of companies
(Voyager).
Included in net income for 1993 is an after-tax charge of $18 million resulting
from the adoption of Statement of Financial Accounting Standards No. 112 (FAS
112), "Employers' Accounting for Postemployment Benefits," and an after-tax
charge of $17 million resulting from the adoption of Statement of Financial
Accounting Standards No. 106 (FAS 106), "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Included in net income for 1992
is an after-tax charge of $28 million resulting from the adoption of Statement
of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income
Taxes."
Excluding these items, earnings for 1993 increased by $306 million, or 52%,
over the 1992 period, reflecting primarily increased operating earnings from
the combined SBS unit, earnings from the 27% investment in old Travelers and
improved performance at Consumer Finance Services.
The most significant factors in 1992's earnings growth over 1991 were increases
in the contributions of Smith Barney and Consumer Finance Services as well as
reduced corporate treasury expense from lower debt and interest rate levels.
The most significant factors in 1991's earnings growth over 1990 also were
increases in the contributions of Smith Barney and Consumer Finance Services
and the benefit to corporate treasury expense of declining interest rates. Net
income for 1991 includes after-tax gains of $43 million from sales of Fingerhut
common stock. Also reflected in 1991 are after-tax net investment portfolio
gains of $20 million in the fourth quarter and an after-tax repositioning
provision of $20 million at Primerica Financial Services; an after-tax charge
of $35 million related to specialty life and health operations, and an after-
tax charge of $16 million related to real estate lease commitments.
Revenues for 1991 include $1,428 million from Fingerhut, the operations of
which were included with those of the Company on a consolidated basis through
December 31, 1991.
The following discussion presents in more detail each segment's performance.
3
Investment Services
Year Ended December 31,
------------------------------------------------------
1993 1992 1991
------------------------------------------------------
Net Net Net
($ in millions) Revenues income Revenues income Revenues income
---------------------------------------------------------------------------
Smith Barney $3,371 $306 $1,677 $157 $1,635 $139
Shearson (1)
Mutual funds and 153 30 140 31 128 28
asset management
Margaretten - - 5 3 127 17
---------------------------------------------------------------------------
Total Investment
Services $3,524 $336 $1,822 $191 $1,890 $184
===========================================================================
(1) Net income for 1993 includes a $65 after-tax provision for merger related
costs.
The Company's Investment Services segment includes SBS - investment banking and
securities brokerage; American Capital Management & Research, Inc. (American
Capital) - mutual funds; a limited partnership interest in RCM Capital
Management (RCM) - asset management; and through its date of sale on February
5, 1992, Margaretten - mortgage banking.
SBS's earnings increased significantly to $371 million in 1993, which includes
five months' results from the Shearson Businesses, before a provision for
merger related costs of $65 million. This compares to $157 million reported by
Smith Barney alone in the prior year. Net revenues for 1993 of the merged firm
increased more than 113% over the prior year. The growth in 1992 as compared
to 1991 reflects record levels of performance in almost all areas.
Smith Barney Shearson Revenues
Year Ended December 31,
---------------------------------
($ in millions) 1993 1992 1991
-----------------------------------------------------------------
Commissions $1,252 $ 509 $ 476
Investment banking 667 433 346
Principal trading 549 298 318
Asset management fees 319 73 59
Interest income, net* 207 101 101
Other income 100 35 24
-----------------------------------------------------------------
Net revenues* $3,094 $1,449 $1,324
=================================================================
* Net of interest expense of $277, $228 and $311 in 1993, 1992 and 1991,
respectively. Revenues included in the consolidated statement of income are
before deductions for interest expense.
Total assets under management for the Investment Services segment were $116
billion at December 31, 1993, compared to $54 billion in the prior year.
Assets under management at SBS were $75 billion at December 31, 1993 (which
reflects $55 billion acquired in the Shearson Acquisition), compared to $16
billion in the prior year. Assets under management at American Capital and RCM
were $41 billion at December 31, 1993, compared to $38 billion in the prior
year, an 8% increase.
4
Net income from the Company's mutual funds and asset management operations
decreased slightly in 1993 from the prior year due primarily to increased
volume-related marketing expenses and the effect of the 1993 tax rate change on
deferred tax liabilities at December 31, 1992 of $2.4 million. American
Capital's mutual fund sales (at net asset value) increased to $3,061 million
from $2,212 million.
American Capital's net income improved in 1992 compared to 1991 primarily due
to higher management fees resulting from an increase in assets under
management. RCM reported higher net income in 1992 as average assets under
management rose to $23 billion in 1992 from $20 billion in 1991.
Outlook - SBS's business is significantly affected by the levels of activity in
the securities markets, which in turn are affected by the level and trend of
interest rates, the general state of the economy and the national and worldwide
political environments, among other factors. An increasing interest rate
environment could have some adverse impact on SBS's businesses, including
commissions (which are linked in part to the economic attractiveness of
securities relative to time deposits) and investment banking (which is affected
by the relative benefit to corporations and public entities of issuing public
debt and/or equity versus other avenues for raising capital). Such effects,
however, could be at least partially offset by a strengthening U.S. economy
that would include growth in the business sector -- accompanied by an increase
in the demand for capital -- and an increase in the capacity of individuals to
invest. SBS will continue to concentrate on building its asset management
business, which tends to provide a more predictable and steady income stream
than its other businesses. In addition, SBS will also benefit in 1994 from a
full year's contribution from the Shearson businesses, which in 1993
contributed for five months following their acquisition. SBS continues to
maintain tight expense controls that management believes will help the firm
weather a downturn in market conditions, should it occur.
Results of RCM and American Capital may also be affected by the interest rate
environment. An increasing interest rate environment could have an adverse
impact on management fees and commissions. Management fees are substantially
based on assets under management which could decline in a rising interest rate
environment due to a potential decline in the value of the underlying
securities of the funds and increased redemptions and lower sales as investors
find time deposits more attractive. Decreased sales would also reduce
commission income. A strengthening U.S. economy could partially offset these
effects due to an increase in the capacity of individuals to invest. In
addition, American Capital's results will be affected by sales of Common
Sense(R) Trust mutual funds, which are related to market conditions and, to some
extent, insurance production at PFS (see further discussion under Insurance
Services).
Asset Quality - Total Investment Services' assets at December 31, 1993 were
approximately $32 billion. Of this, SBS's assets represented approximately
$31.6 billion, consisting primarily of highly liquid marketable securities and
collateralized receivables. About 43% of SBS's assets were related to
customer financing transactions where U.S. Government and mortgage-backed
securities are bought, lent, sold and borrowed in generally offsetting amounts
to generate net interest income and to facilitate trading. Another 19%
represented inventories of securities primarily needed to meet customer demand.
A significant portion of the remainder of SBS's assets represented receivables
from brokers, dealers and customers that relate to securities transactions in
the process of being settled. The carrying values of the majority of SBS's
securities are adjusted daily to reflect current prices. See Notes 2, 6, 7 and
8 of Notes to Consolidated Financial Statements for a further description of
these assets.
At December 31, 1993 there were no "bridge" loans at SBS and exposure to high-
yield positions was immaterial. At December 31, 1993 SBS's assets to equity
ratio was 14.8 to 1, which management believes is a conservative leverage level
for a securities broker and one that allows for future growth.
SBS's assets are financed through a number of sources including long and short-
term credit facilities, the customer financing transactions described above and
payables to brokers, dealers and customers.
5
Consumer Finance Services
Year Ended December 31,
-------------------------------------------------------
1993 1992 1991
-------------------------------------------------------
Net Net Net
($ in millions) Revenues income Revenues income Revenues income
- -----------------------------------------------------------------------------
Consumer Finance
Services(1) $1,193 $232 $1,158 $198 $1,150 $175
=============================================================================
(1) Net income includes $23 and $4 of reported investment portfolio gains in
1993 and 1992, respectively.
Consumer Finance earnings before reported investment portfolio gains increased
8% in 1993 over the prior year. The increase primarily reflects a significant
decline in loan losses and a 3% increase in average receivables outstanding.
The increase in net income and revenues in 1992 compared to 1991 reflects an
increase in average receivables outstanding (offset by slightly lower yields),
improved operating efficiencies and some benefit from lower funding costs.
Year-end receivables increased in 1993 by $554 million to end the year at
$6.342 billion. The 1993 increase occurred across-the-board in real estate
loans, personal loans and credit cards and also reflects the reacquisition of
the remainder of a portfolio of loans collateralized by manufactured housing
units amounting to $135 million at year end. While average receivables
increased in 1992, year-end receivables declined reflecting an increase in
early payoffs of real estate loan outstandings. This was partially offset by
an increase in credit card outstandings. Seventy-three branch offices were
added during 1993, bringing the total to 768 at year end.
Consumer Finance borrows from the corporate treasury operations of Commercial
Credit Company (CCC), a major holding company subsidiary of the Company that
raises funds externally. For fixed rate loan products Consumer Finance is
charged agreed-upon rates that have generally been set within a narrow range
and have approximated 8% over the last three years. For variable rate loan
products Consumer Finance is charged prime-based rates. CCC's actual cost of
funds may be higher or lower than rates charged to Consumer Finance, with the
difference reflected in Corporate and Other.
The average yield on receivables outstanding decreased to 15.83% in 1993 from
16.31% in the prior year and 16.69% in 1991, due to lower yields on fixed rate
second mortgages and the adjustable rate real estate-secured loan product
introduced at the end of 1992. Lower yields on loans outstanding, partially
offset by decreased cost of funds to Consumer Finance on variable rate loans,
have resulted in a decline in net interest margins to 8.44% in 1993 from 8.66%
in 1992.
The allowance for losses as a percentage of net receivables was reduced to
2.64% at year-end 1993 from 2.91% at year-end 1992 due to the improved credit
quality of the loan portfolio. The increase in the allowance in 1992 from
2.86% at year-end 1991 reflected the impact of the recessionary economic
environment.
6
As of, and for, the
Year Ended December 31,
-----------------------
1993 1992 1991
-----------------------
Allowance for losses as % of net
consumer finance receivables at year end 2.64% 2.91% 2.86%
Charge-off rate for the year 2.36% 2.84% 2.72%
60 + days past due on a contractual basis as % of
gross consumer finance receivables at year end 2.21% 2.55% 2.80%
Accounts 60+ days past due include accounts in the process of foreclosure for
all periods presented.
The Company's wholly owned subsidiary, American Health and Life Insurance
Company (AHL), provides credit life and health insurance to Consumer Finance
customers. Premiums earned were $88 million in 1993, $90 million in 1992 and
$86 million in 1991.
Outlook - Consumer Finance is affected by the interest rate environment and
general economic conditions. In a rising interest rate environment, real
estate loan liquidations may decline compared to the last two years, when
potential customers refinanced their first mortgages instead of turning to the
second mortgage market, or proceeds from the refinancing of first mortgages
were used to pay off existing second mortgages. Lower loan liquidations would
benefit the level of receivables outstanding. In addition, a rising interest
rate environment could also reduce the downward pressure experienced during the
last several years on the interest rates charged on new real estate-secured
receivables, as well as credit cards, which are substantially based on the
prime rate. However, significantly higher rates could result in an increase in
the interest rates charged to Consumer Finance on the funds it borrows from CCC
to reflect the Company's overall higher cost of funds. This impact could be at
least partially offset by the benefits of a strengthening U.S. economy, which
typically would include an increase in consumer borrowing demand.
Asset Quality - Consumer Finance assets totaled approximately $7 billion at
December 31, 1993, of which $6 billion, or 86%, represented the net consumer
finance receivables (after accrued interest and the allowance for credit
losses). These receivables were predominantly residential real estate-secured
loans and personal loans. Receivable quality depends on the likelihood of
repayment. The Company seeks to reduce its risks by focusing on individual
lending, making a greater number of smaller-sized loans than would be practical
in commercial markets, and maintaining disciplined control over the
underwriting process. The Company has a geographically diverse portfolio as
described in Note 9 of Notes to Consolidated Financial Statements. The Company
believes that its loss reserves on the consumer finance receivables are
appropriate given current circumstances.
Of the remaining Consumer Finance assets, approximately $598 million were
investments of AHL and its affiliates, including $352 million of fixed-income
securities and $204 million of short-term investments.
7
Insurance Services
Year Ended December 31,
-------------------------------------------------------
1993 1992 1991
-------------------------------------------------------
Net Net Net
($ in millions) Revenues income Revenues income Revenues income
----------------------------------------------------------------------------
Primerica Financial
Services (1) $1,266 $223 $1,158 $197 $1,160 $175
Transport Life(2) 319 42 347 36 419 29
Gulf Property and
Casualty (3) 315 45 316 54 257 22
Minority Interest -
Gulf - (22) - - - -
----------------------------------------------------------------------------
Total Insurance
Services $1,900 $288 $1,821 $287 $1,836 $226
==============================================================================
(1) Net income includes $45 and $10 of reported investment portfolio gains in
1993 and 1992, respectively.
(2) Net income includes $17 and $6 of reported investment portfolio gains in
1993 and 1992, respectively.
(3) Net income includes $15 and $6 of reported investment portfolio gains in
1993 and 1992, respectively, and $19 in 1992 from the sale of Musicland
common stock.
Results of operations of the Insurance Services segment include only the
results of Primerica Financial Services (PFS), the specialty life and health
operations of Transport, and the property and casualty operations of Gulf.
Information relating to financial position at December 31, 1993 also includes
The Travelers Insurance Group.
Sales of individual term life insurance at PFS trended up in 1993. PFS issued
260,300 policies totaling $48 billion in face amount of life insurance during
1993, an increase from 252,500 policies totaling $46 billion in face amount of
life insurance during 1992, but still below the 289,700 policies totaling $51
billion issued in 1991. The increase in policies issued has contributed to an
increase in insurance in force, which was $309 billion at December 31, 1993,
compared to $302 billion at December 31, 1992 and $309 billion at December 31,
1991.
PFS continued to experience growth in sales of other financial products,
primarily mutual funds through a joint venture with American Capital, and the
$.M.A.R.T. (second mortgage loans) and S.A.F.E. (personal loans) products of
Consumer Finance. Sales of mutual funds were $1.3 billion in 1993 compared to
$1.1 billion in 1992 and $788 million in 1991. Assets under management in
PFS's proprietary Common Sense(R) Trust family of funds reached $3.1 billion at
year end, up 19% over 1992. PFS has traditionally offered mutual funds to
customers as a way to invest the savings obtained through the purchase of
relatively low-cost term life insurance as compared to traditional whole life
insurance. $.M.A.R.T. and S.A.F.E. loan receivables, which are reflected in
the assets of Consumer Finance, were $765 million at December 31, 1993 compared
to $487 million at December 31, 1992 and $411 million at December 31, 1991.
The dramatic growth in 1993 reflects the introduction at the end of 1992 of an
adjustable rate real estate loan product which accounted for $246 million of
the increase.
During 1993 investment income at PFS declined slightly from the prior year as
proceeds from sales of investments were reinvested at lower yields.
Results of Transport before reported net investment portfolio gains in 1993 of
$17 million and $6 million in 1992 decreased slightly, reflecting the sale of
two employee benefits businesses to old Travelers effective January 1, 1993.
The results of Transport's ongoing businesses, primarily supplementary accident
8
and health coverages and long-term care insurance, improved slightly over 1992.
Results for 1992 were comparable with results for 1991 before portfolio gains.
Transport was formerly reported with Voyager as part of Specialty Life and
Health.
Earnings from Gulf increased slightly compared to 1992, before old Travelers'
50% minority interest, reported net investment portfolio gains of $15 million
and $6 million in 1993 and 1992, respectively, and a $19 million gain in 1992
from the sale of Musicland. Gulf's results reflect ongoing growth in its high-
margin specialty businesses offset by relatively high local storm losses in the
regional business in 1993. Notwithstanding a $2 million after-tax provision
for losses from Hurricane Andrew in the third quarter of 1992, Gulf's 1992
earnings improved over 1991, also as a result of the growth of the specialty
business. Gulf's 1993 combined ratio improved to 95.9%, from 97.6% in 1992 and
101.9% in 1991. (However, for the fourth quarter of 1993 the combined ratio
increased to 97.8%, principally as a result of higher storm-related claims.)
Gulf writes traditional and specialty insurance lines.
In May 1993, the Company completed the sale of Voyager. The exclusion of
Voyager and Transport's former employee benefits businesses has resulted in a
decline compared to the 1992 period in insurance-related revenue and expense
categories included in the Consolidated Statement of Income.
Outlook - PFS
PFS has undergone substantial changes since 1990 that have adversely impacted
its results, following the rapid growth during the 1980s. Over the last few
years, programs were begun that are designed to increase the number of
producing agents, customer contacts and, ultimately, increase production
levels. While the full impact of these programs has not yet been realized,
enhanced customer service and increased customer contacts have contributed to
improved persistency (i.e., the percentage of policies that continue). Also,
the decline in the level of insurance in force has stopped, and the number of
producing agents has stabilized. A continuation of these trends could
positively impact future operations. PFS continues to expand into certain
markets not previously tapped by the sales force and further expand the cross-
selling with other Company subsidiaries of products such as $.M.A.R.T. and
S.A.F.E. loans and Common Sense(R) Trust mutual funds.
Outlook - The Travelers Insurance Group
A variety of factors continue to affect the property-casualty market including
inflation in the cost of medical care, litigation and losses from involuntary
markets. The Travelers Insurance Group attempts to avoid exposure to high
hazard liability risks through careful underwriting, extensive use of
retrospective rating and reliance on financially secure reinsurance programs.
In addition, the absence of needed rate relief, rising medical costs and the
need for legislative reform in workers' compensation continue to have an
adverse effect on profitability, particularly in business written on a
guaranteed cost basis. The Travelers Insurance Group's response to these
unfavorable trends is to underwrite more state-specific business, increase its
use of deductibles and loss sensitive rating plans and aggressively market
self-insurance programs.
On December 13, 1993 the United States Supreme Court issued its decision in a
case entitled John Hancock v. Harris Trust. The court ruled that John Hancock
----------------------------
was subject to the fiduciary standards of the Employee Retirement Income
Security Act of 1974, as amended, with respect to the nonguaranteed benefit
portion of the pension contract under review. Industry efforts to obtain
regulatory or legislative relief from this decision are ongoing. The outcome
and potential impacts to the Company are uncertain at this time.
In the property market, the extraordinarily high level of catastrophe losses in
recent periods has led to the contraction of the reinsurance market and
corresponding price increases for reinsurance protection. These items have
contributed to overall higher prices for commercial property policies and may
result in the reduced availability of commercial insurance in some markets.
9
In an effort to reduce its exposure to catastrophic hurricane losses, The
Travelers Insurance Group has stopped writing new homeowners policies in
coastal areas of New York and Connecticut, and in certain counties in South
Florida, reduced agent commissions on homeowners insurance in certain markets,
and purchased higher amounts of catastrophe reinsurance.
Recently, The Travelers Insurance Group has experienced growth in environmental
claims primarily from smaller companies with lower coverage limits and has been
named as a defendant in coverage cases brought by other insurers against their
policyholders and the policyholders' other carriers.
The Travelers Insurance Group's environmental loss and loss expense reserves at
December 31, 1993 were $333 million, net of reinsurance of $11 million.
Approximately 12% of the net environmental loss reserves (i.e., approximately
$40 million) are case reserves for resolved claims. The remainder of the
reserve is for claims in which coverage is in dispute and unreported
environmental losses. The Travelers Insurance Group does not post case
reserves for environmental claims in which there is a coverage dispute.
In the area of asbestos claims, the industry has suffered from judicial
interpretations that have attempted to maximize insurance availability from
both a coverage and liability standpoint far beyond the intentions of the
contracting parties. These policies generally were issued prior to the 1980s.
As a result of recent developments in asbestos litigation, various classes of
asbestos defendants, e.g., major product manufacturers, peripheral and regional
product defendants as well as premises owners, are tendering asbestos-related
claims to the industry. During 1993, the insurance industry witnessed a growth
in claims against insureds brought primarily by independent labor union workers
who allege exposure to asbestos while working on site at various companies.
Since each insured presents different liability and coverage issues, The
Travelers Insurance Group evaluates those issues on an insured-by-insured
basis.
The Travelers Insurance Group's asbestos loss and loss expense reserves at
December 31, 1993 were $323 million, net of reinsurance of $451 million.
Approximately 80% of the net asbestos reserves at December 31, 1993 represented
incurred but not reported losses.
For both environmental and asbestos-related claims, The Travelers Insurance
Group carries on a continuing review of its overall position, its reserving
techniques and reinsurance recoverable. In each of these areas of exposure,
The Travelers Insurance Group has endeavored to litigate individual cases and
settle claims on favorable terms. Given the vagaries of court coverage
decisions, plaintiffs' expanded theories of liability, the risks inherent in
major litigation and other uncertainties, it is not presently possible to
quantify the ultimate exposure represented by these claims. As a result, The
Travelers Insurance Group expects that future earnings may be adversely
affected by environmental and asbestos claims, although the amounts cannot be
reasonably estimated. However, it is not likely these claims will have a
material adverse effect on The Travelers Insurance Group's financial condition.
Outlook - Industry
Changes in the general interest rate environment affect the return received by
the insurance subsidiaries on newly invested and reinvested funds. While a
rising interest rate environment enhances the returns available, it reduces the
market value of existing fixed maturity investments and the availability of
gains on disposition.
As required by various state laws and regulations, the Company's insurance
subsidiaries are required to participate in state-administered guarantee
associations established for the benefit of the policyholders of insolvent
insurance companies. Management believes that payments to such associations
will not have a material impact on financial condition or results of
operations.
10
Certain social, economic and political issues have led to an increased number
of legislative and regulatory proposals aimed at addressing the cost and
availability of certain types of insurance. Some of these proposals include
provisions that would adversely affect the Company's ability to write business
with appropriate returns by restricting its underwriting and pricing
flexibility, mandating rate roll-backs, or dictating conditions under which it
can conduct business in a given state. While most of these provisions have
failed to become law, these initiatives may well continue as legislators and
regulators try to respond to public availability and affordability concerns.
Several legislative proposals regarding health care reforms have recently been
promulgated. It is not possible to determine which, if any, of these proposals
may be adopted or what effect, if any, such legislation may have on the
Company.
The National Association of Insurance Commissioners (NAIC) adopted risk-based
capital (RBC) requirements for life insurance companies in 1992, effective with
reporting for 1993, and for property-casualty companies in December 1993,
effective with reporting for 1994. The RBC requirements are to be used as
early warning tools by the NAIC and states to identify companies that merit
further regulatory action. The formulas have not been designed to
differentiate among adequately capitalized companies which operate with levels
of capital higher than RBC requirements. Therefore, it is inappropriate and
ineffective to use the formulas to rate or to rank such companies. At December
31, 1993, all of the Company's life and property-casualty companies had
adjusted capital in excess of amounts requiring any regulatory action.
Asset Quality - The investment portfolio of the Insurance Services segment
totaled approximately $41 billion, representing 67% of total Insurance
Services' assets of approximately $61 billion. Because the primary purpose of
the investment portfolio is to fund future policyholder benefits and claims
payments, and in order to provide for economies of scale and tight control, it
is managed centrally, employing a conservative investment philosophy. The
segment's investment portfolio supports both the life and property-casualty
insurance operations. In conjunction with the Travelers merger, the fixed
maturity investment portfolio of The Travelers Insurance Group was classified
between "available for sale" and "held for investment" and is carried at values
assigned at the acquisition date. The Insurance Segment's fixed maturity
portfolio totaled $28 billion, comprised of $22 billion of publicly traded
fixed maturities and $6 billion of private fixed maturities. The weighted
average quality ratings of the segment's publicly traded fixed maturity
portfolio and private fixed maturity portfolio at December 31, 1993 were Aa2
and Baa1, respectively. Included in the fixed maturity portfolio was
approximately $1.2 billion of below investment grade securities. Investments
in venture capital investments, highly leveraged transactions and specialized
lendings were not material in the aggregate.
The Insurance Services segment makes significant investments in collateralized
mortgage obligations (CMOs). CMOs typically have high credit quality, offer
good liquidity, and provide a significant advantage in yield and total return
compared to corporate debt securities of similar credit quality. The
investment strategy of the Insurance Services segment is to purchase CMO
tranches that are most protected against prepayment risk, typically planned
amortization class (PAC) or targeted amortization class (TAC) tranches.
Prepayment protected tranches are preferred because they provide stable cash
flows in a variety of scenarios. The segment does invest in other types of CMO
tranches if a careful assessment indicates a favorable risk/return tradeoff;
however, it does not purchase residual interests in CMOs.
At December 31, 1993, the segment held CMOs with a market value of $3.5
billion. Approximately 89% of CMO holdings are fully collateralized by GNMA,
FNMA or FHLMC securities, and the balance are fully collateralized by
portfolios of individual mortgage loans. Approximately 99% of CMO holdings are
in PAC and similar bonds and approximately 1% are in interest-only tranches.
In addition, the segment held $2.1 billion of GNMA, FNMA or FHLMC mortgage-
backed securities at December 31, 1993.
11
The segment also held $1.0 billion of securities that are backed primarily by
credit card or car loan receivables at December 31, 1993. Virtually all of
these securities are rated AAA.
At December 31, 1993, real estate and mortgage loan investments totaled $8.4
billion. Most of these investments are included in the investment portfolio of
The Travelers Insurance Group and are reflected at estimated fair value at the
date of the merger, December 31, 1993. Ongoing operating results of the
segment will be affected by lower investment income from underperforming
mortgage loan and real estate assets, which include delinquent mortgage loans,
loans in the process of foreclosure, foreclosed loans and loans modified at
interest rates below market. The Company has adopted a strategy to accelerate
the disposition of The Travelers Insurance Group mortgage loan and real estate
assets and to reinvest the proceeds to obtain current market yields.
At December 31, 1993, mortgage loan and real estate portfolios consisted of the
following (in millions):
Current mortgage loans $6,096
Underperforming mortgage loans 1,269
-----
Total mortgage loans $7,365
-----
Foreclosed real estate $ 914
Purchased real estate 135
-----
Total real estate $1,049
-----
Total mortgage loans and real estate $8,414
=====
Included in underperforming mortgage loans above are $826 million of mortgages
restructured at below market terms, of which $820 million are current under the
new terms. The new terms typically defer a portion of contract interest
payments to varying future periods. The accrual of interest is suspended on
all restructured loans, and interest income is reported only as payment is
received.
For further information relating to investments see Note 5 of Notes to
Consolidated Financial Statements.
Corporate and Other
Year Ended December 31,
--------------------------------------------------------
1993 1992 1991
--------------------------------------------------------
Net Net Net
income income income
($ in millions) Revenues (expense) Revenues (expense) Revenues (expense)
- --------------------------------------------------------------------------------
Net expenses(1) $(65) $(62) $(177)
Equity in income of old
Travelers in 1993 and
Fingerhut in 1992 and
1991 152 26 28
Net gain on sale of stock
of subsidiaries and
affiliates 8 116 43
- --------------------------------------------------------------------------------
Total Corporate and Other $180 $95 $324 $ 80 $1,732 $(106)
================================================================================
(1) Includes $3 and $2 of reported investment portfolio gains in 1993 and
1992, respectively.
12
The Corporate and Other segment consists of unallocated expenses and earnings
primarily related to interest, corporate administration and certain corporate
investments.
The increase in net expenses in 1993 resulted from lower income from
miscellaneous investments and interest expense on borrowings to finance the
acquisition of the Shearson Businesses, offset by lower interest rates. Net
expenses before investment portfolio gains, includes after-tax income of $9
million, $12 million and an after-tax loss of $35 million in 1993, 1992 and
1991, respectively, related to Voyager, which had previously been presented as
part of Insurance Services. Corporate and Other revenues include $260 million
and $283 million in 1992 and 1991, respectively, related to Voyager.
The equity in income of old Travelers includes $13 million from the Company's
share of its realized portfolio gains and a tax benefit of $11 million for the
cumulative effect of the recently enacted tax rate increase through December
31, 1992.
The decrease in net expenses in 1992 compared to 1991 reflects lower debt
levels and interest rates in 1992, as well as after-tax charges in 1991 of $35
million to restructure and exit most auto-related lines at Voyager, and $16
million related to costs for certain real estate lease commitments.
Liquidity and Capital Resources
The Travelers Inc. (the Parent) services its obligations (i.e., debt service
and dividends) primarily with dividends and other advances that it receives
from subsidiaries. The subsidiaries' dividend paying ability is limited by
certain covenant restrictions in bank and/or credit agreements and/or by
regulatory requirements. The Parent believes it will have sufficient funds to
meet current and future commitments. Each of the Company's major operating
subsidiaries finances its operations on a stand-alone basis consistent with its
capitalization and ratings.
The Parent
The Parent issues commercial paper directly to investors and maintains unused
credit availability under committed revolving credit agreements at least equal
to the amount of commercial paper outstanding. As of December 31, 1993, the
Parent had unused credit availability of $725 million of which up to $275
million may be accessed by either the Parent or The Travelers Insurance
Company, an indirect subsidiary. The Parent may borrow under its revolving
credit facilities at various interest rate options and compensates the banks
for the facilities through commitment fees.
During 1993, the Parent completed the following debt offerings and, as of
February 28, 1994, had $800 million available for debt offerings under its
shelf registration statement:
- 5 3/4% Notes due April 15, 1998 . . . . . . . $250 million
- 6 1/8% Notes due June 15, 2000 . . . . . . . $200 million
In April 1993 the Parent sold 9,333,333 shares of newly issued common stock.
See Note 14 of Notes to Consolidated Financial Statements for a description of
this sale. In June 1993 the Parent sold 1,000,000 shares of newly issued
common stock to a senior executive of the Company. In total these transactions
generated net proceeds of $329 million.
During 1993, $137 million of principal amount of the Parent's 5 1/2% Eurodollar
Convertible Subordinated Debentures due 2002 was converted into 4,103,458
shares of the Parent's common stock.
Commercial Credit Company (CCC)
CCC also issues commercial paper directly to investors and maintains unused
credit availability under committed revolving credit agreements at least equal
to the amount of commercial paper outstanding. As of December 31, 1993, CCC
13
had unused credit availability of $2.295 billion. CCC may borrow under its
revolving credit facilities at various interest rate options and compensates
the banks for the facilities through commitment fees.
During 1993, CCC completed the following debt offerings and, as of February 28,
1994, had $850 million available for debt offerings under its shelf
registration statement:
- 5.70% Notes due March 1, 1998 . . . . . . . $100 million
- 6 1/8 Notes due March 1, 2000 . . . . . . . $100 million
- 6.00% Notes due April 15, 2000 . . . . . . $150 million
- 5 1/2% Notes due May 15, 1998 . . . . . . . $100 million
- 6.00% Notes due June 15, 2000 . . . . . . . $100 million
- 5 3/4% Notes due July 15, 2000 . . . . . . $200 million
- 5.9% Notes due September 1, 2003 . . . . . $200 million
CCC is limited by covenants in its revolving credit agreements as to the amount
of dividends and advances that may be made to the Parent or its affiliated
companies. At December 31, 1993, CCC would have been able to remit $150
million to the Parent under its most restrictive covenants or regulatory
requirements.
Smith Barney Shearson Holdings Inc. (SBS)
SBS funds its operations through the use of its equity, long-term borrowings,
commercial paper, collateralized and uncollateralized bank borrowings (both
committed and uncommitted), internally generated funds, repurchase
transactions, and securities lending arrangements. The volume of SBS's
borrowings generally fluctuates in response to changes in the amount of reverse
repurchase transactions outstanding, the level of securities inventories,
customer balances and securities borrowing transactions. SBS has a commitment
from a bank syndicate for an $825 million revolving credit facility, which
consists of a 364-day revolving credit facility in the amount of $200 million
and a 3-year revolving credit facility in the amount of $625 million, both of
which were fully utilized at December 31, 1993. SBS also had unused committed
and available short-term lines of credit amounting to $260 million. In
addition, SBS has substantial borrowing arrangements consisting of facilities
that it has been advised are available, but where no contractual lending
obligation exists.
SBS also issues commercial paper directly to investors. As a policy, SBS
maintains sufficient borrowing power of unencumbered securities to cover
unsecured borrowings and unsecured letters of credit. In addition, SBS
monitors its leverage and capital ratios on a daily basis.
During 1993 and in January 1994, SBS completed the following debt offerings
and, as of February 28, 1994, had $400 million available for debt offerings
under its shelf registration statement:
- 5 3/8% Notes due June 1, 1996 . . . . . . . $150 million
- 6 5/8% Notes due June 1, 2000 . . . . . . . $150 million
- 5 5/8% Notes due November 15, 1998 . . . . $150 million
- 5 1/2% Notes due January 15, 1999 . . . . $200 million
SBS is limited by covenants in its revolving credit facility as to the amount
of dividends that may be paid to the Parent. At December 31, 1993, SBS would
have been able to remit approximately $392 million to the Parent under its most
restrictive covenants.
The Travelers Insurance Group
At December 31, 1993, The Travelers Insurance Group had $25.0 billion of life
and annuity product deposit funds and reserves. Of that total, $12.1 billion
are not subject to discretionary withdrawal based on contract terms. The
remaining $12.9 billion are for life and annuity products that are subject to
discretionary withdrawal by the contractholder. Included in the amount that is
14
subject to discretionary withdrawal are $3.0 billion of liabilities that are
surrenderable with market value adjustments. An additional $5.8 billion of the
life insurance and individual annuity liabilities are subject to discretionary
withdrawals, with an average surrender charge of 5.7%. Another $1.6 billion of
liabilities are surrenderable at book value over 5 to 10 years. In the payout
phase, these funds are credited at significantly reduced interest rates.
The remaining $2.5 billion of liabilities are surrenderable without charge.
More than half of these relate to individual life products. These risks would
have to be underwritten again if transferred to another carrier, which is
considered a significant deterrent against withdrawal by long-term
policyholders. Insurance liabilities that are surrendered or withdrawn from
The Travelers Insurance Group are reduced by outstanding policy loans and
related accrued interest prior to payout.
Scheduled maturities of guaranteed investment contracts (GICs) in 1994, 1995,
1996, 1997 and 1998 are $1.5 billion, $1.3 billion, $1.0 billion, $268 million
and $207 million, respectively. At December 31, 1993, the contract interest
rates credited on GICs ranged from 3.4% to 17.4%, with a weighted average rate
of 8.0%.
The Travelers Insurance Company (TIC), a direct subsidiary of The Travelers
Insurance Group Inc., issues commercial paper to investors and maintains unused
committed, revolving credit facilities at least equal to the amount of
commercial paper outstanding. As of December 31, 1993, TIC has unused credit
availability of $275 million, all of which may be accessed by either TIC or the
Parent.
As part of the process of accreditation by the NAIC, state insurance regulators
have been recommending the adoption of new statutory standards for the payment
of dividends by insurance companies without prior approval. As part of this
effort, the Connecticut General Assembly passed legislation in 1992 which is
effective for dividends paid on and after December 1, 1993. Under the amended
legislation, statutory surplus of The Travelers Insurance Group would not be
available in 1994 for dividends to the Parent without prior approval.
Recent Accounting Standards
FAS 114
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan," describes how impaired loans should be measured when
determining the amount of a loan loss accrual. The Statement also amends
existing guidance on the measurement of restructured loans in a troubled debt
restructuring involving a modification of terms. The Company has not yet
determined the impact, if any, this statement will have on its financial
statements. The Statement has an effective date of January 1, 1995.
FAS 115
Effective January 1, 1994, the Company will adopt Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which addresses accounting and reporting for investments in
equity securities that have a readily determinable fair value and for all debt
securities. Those investments are to be classified in one of three categories.
Debt securities that the Company has the positive intent and ability to hold to
maturity are to be classified as "held for investment" and are to be reported
at amortized cost. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as "trading securities"
and are to be reported at fair value, with unrealized gains and losses included
in earnings. Securities that are neither to be held to maturity nor to be sold
in the near term are classified as "available for sale" and are to be reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a net amount in a separate component of stockholders' equity. At
December 31, 1993 the market value of fixed maturities exceeded the cost by
$353 million.
Interpretation 39
Financial Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts" (Interpretation 39) must be adopted by
the Company for its 1994 first quarter financial statements. The general
15
principle of Interpretation 39 states that amounts due from and due to another
party may not be offset in the balance sheet unless a right of setoff exists
and the parties intend to exercise the right of setoff. The Company currently
maintains master netting arrangements and other contracts where amounts due
from customers are offset against amounts due to those customers.
Implementation of Interpretation 39 is not expected to have a material impact
on the Company's financial position; however, assets and liabilities will be
increased by like amounts.
16
The Travelers Inc. and Subsidiaries
Consolidated Statement of Income
(In millions of dollars, except per share amounts)
Year Ended December 31, 1993 1992 1991
- -----------------------------------------------------------------------------
Revenues
Commissions and fees $1,957 $ 973 $ 944
Insurance premiums 1,480 1,694 1,783
Finance related interest and other charges 954 953 958
Interest and dividends 718 605 688
Principal transactions 549 298 318
Asset management fees 385 131 125
Equity in income of old Travelers 164 - -
Other income 590 471 1,792
- -----------------------------------------------------------------------------
Total revenues 6,797 5,125 6,608
- -----------------------------------------------------------------------------
Expenses
Non-insurance compensation and benefits 2,057 1,069 1,201
Policyholder benefits and claims 833 907 936
Insurance underwriting, acquisition and operating 506 674 860
Interest 707 674 876
Provision for credit losses 134 165 165
Other operating 1,050 636 1,842
- -----------------------------------------------------------------------------
Total expenses 5,287 4,125 5,880
- -----------------------------------------------------------------------------
Gain on sale of stock of subsidiaries and affiliates 13 188 63
- -----------------------------------------------------------------------------
Income before income taxes, minority interest and
cumulative effect of changes in accounting
principles 1,523 1,188 791
Provision for income taxes 550 432 287
- -----------------------------------------------------------------------------
Income before minority interest and cumulative
effect of changes in accounting principles 973 756 504
Minority interest, net of income taxes (22) - (25)
Cumulative effect of changes in accounting
principles, net of income taxes (35) (28) -
- -----------------------------------------------------------------------------
Net income $ 916 $ 728 $ 479
=============================================================================
Net income per share of common stock
and common stock equivalents:
Before cumulative effect of changes in accounting
principles $ 3.88 $ 3.34 $ 2.14
Cumulative effect of changes in accounting
principles (0.14) (0.12) -.
- -----------------------------------------------------------------------------
Net income per share of common stock
and common stock equivalents $ 3.74 $ 3.22 $ 2.14
=============================================================================
Weighted average number of common shares
outstanding and common stock equivalents 237.8 222.8 226.5
=============================================================================
See Notes to Consolidated Financial Statements
17
The Travelers Inc. and Subsidiaries
Consolidated Statement of Financial Position
(In millions of dollars, except per share amounts)
December 31, 1993 1992
- -------------------------------------------------------------------------
Assets
Cash and cash equivalents
(including $914 and $187 segregated under
federal and other brokerage regulations) $ 2,444 $ 272
Investments:
Fixed maturities:
Available for sale (market $28,438 and
$2,426) 28,109 2,305
Held for investment (market $201 and $94) 177 91
Equity securities, at market (cost $513 and
$196) 555 209
Mortgage loans 7,365 300
Real estate held for sale 1,049 -
Policy loans 1,367 170
Short-term and other 2,659 271
- ------------------------------------------------------------------------
Total investments 41,281 3,346
- ------------------------------------------------------------------------
Securities borrowed or purchased under agreements
to resell 13,353 3,480
Brokerage receivables 8,167 1,650
Trading securities owned, at market value 5,863 3,785
Net consumer finance receivables 6,216 5,655
Reinsurance recoverables 4,999 637
Value of insurance in force and deferred policy
acquisition costs 1,996 1,348
Cost of acquired businesses in excess of net assets 2,162 1,322
Separate and variable accounts 4,665 -
Other receivables 2,310 494
Other assets 7,904 2,162
- ------------------------------------------------------------------------
Total assets $101,360 $24,151
========================================================================
Liabilities
Investment banking and brokerage borrowings $ 3,454 $ 595
Short-term borrowings 2,535 2,633
Long-term debt 6,991 3,951
Securities loaned or sold under agreements to
repurchase 10,144 3,895
Brokerage payables 7,012 901
Trading securities sold not yet purchased, at
market value 3,835 2,432
Contractholder funds 17,980 -
Insurance policy and claims reserves 26,651 3,003
Separate and variable accounts 4,642 -
Accounts payable and other liabilities 8,680 2,512
- ------------------------------------------------------------------------
Total liabilities 91,924 19,922
- ------------------------------------------------------------------------
ESOP Preferred stock - Series C 235 -
Guaranteed ESOP obligation (125) -
- ------------------------------------------------------------------------
110 -
- ------------------------------------------------------------------------
Stockholders' equity
Preferred stock ($1.00 par value; authorized
shares: 30 million), at aggregate
liquidation value 800 300
Common stock ($.01 par value; authorized
shares: 500 million issued shares:
1993 - 368,287,709 shares and 1992 -
253,524,014 shares) 4 3
Additional paid-in capital 6,566 2,147
Retained earnings 3,140 2,363
Treasury stock, at cost (1993 - 41,155,405
shares, 1992 - 31,572,048 shares) (1,121) (540)
Unearned compensation and other, net (63) (44)
- ------------------------------------------------------------------------
Total stockholders' equity 9,326 4,229
- ------------------------------------------------------------------------
Total liabilities and stockholders' equity $101,360 $24,151
========================================================================
See Notes to Consolidated Financial Statements
18
The Travelers Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(In millions of dollars, except per share amounts)
Amounts Shares (in thousands)
--------------------------- -------------------------------
Year ended December 31, 1993 1992 1991 1993 1992 1991
- ---------------------------------------------------------------------------------------- -------------------------------
Preferred Stock at aggregate liquidation value
Balance, beginning of year $ 300 $ - $ - 1,200 - -
Issuance of preferred stock 500 300 - 10,000 1,200 -
- ------------------------------------------------------------------------------------- -------------------------------
Balance, end of year 800 300 - 11,200 1,200 -
===================================================================================== ===============================
Common Stock and Additional Paid-In Capital
Balance, beginning of year 2,150 2,128 2,090 253,524 253,524 253,524
Issuance of common stock 329 - - 10,333 - -
Travelers Merger:
Common stock issued to third party stockholders 3,265 - - 85,911 - -
Common stock issued to subsidiaries of the Company 595 - - 18,519 - -
Premium related to preferred stock, options and other 67 - -
Conversion of debentures 17 11 -
Issuance of common stock warrants 25 - -
Cost of issuance of preferred stock - (10) -
Issuance of shares pursuant to employee benefit plans 122 21 38
- ------------------------------------------------------------------------------------- -------------------------------
Balance, end of year 6,570 2,150 2,128 368,287 253,524 253,524
- ------------------------------------------------------------------------------------- -------------------------------
Retained Earnings
Balance, beginning of year 2,363 1,720 1,289
Net income 916 728 479
Common dividends (113) (78) (48)
Preferred dividends (26) (7) -
- -------------------------------------------------------------------------------------
Balance, end of year 3,140 2,363 1,720
- -------------------------------------------------------------------------------------
Treasury Stock (at cost)
Balance, beginning of year (540) (538) (494) (31,572) (36,278) (33,830)
Conversion of debentures 81 65 - 4,104 4,356 5
Issuance of shares pursuant to employee benefit plans, net
of shares tendered for payment of option exercise price
and withholding taxes (10) 54 43 6,175 6,583 3,471
Treasury stock acquired (58) (122) (89) (1,478) (6,307) (6,096)
Common stock issued to subsidiaries of the Company (595) - - (18,519) - -
Other 1 1 2 135 74 172
- ------------------------------------------------------------------------------------- -------------------------------
Balance, end of year (1,121) (540) (538) (41,155) (31,572) (36,278)
- ------------------------------------------------------------------------------------- -------------------------------
Unearned Compensation and other, net
Balance, beginning of year (44) (30) (26)
Net issuance of restricted stock (103) (64) (38)
Restricted stock amortization 64 48 32
Net appreciation of equity securities 22 7 1
Translation adjustments, net (2) (5) 1
- -------------------------------------------------------------------------------------
Balance, end of year (63) (44) (30)
- -------------------------------------------------------------------------------------
Total common stockholders' equity and common shares
outstanding $8,526 $3,929 $3,280 327,132 221,952 217,246
===================================================================================== ==============================
Total stockholders' equity $9,326 $4,229 $3,280
=====================================================================================
See Notes to Consolidated Financial Statements
19
The Travelers Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(In millions of dollars)
Year ended December 31, 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Income before income taxes, minority interest and cumulative effect of changes in
accounting principles $ 1,523 $ 1,188 $ 791
Adjustments to reconcile income before income taxes, minority interest and
cumulative effect of changes in accounting principles to net cash provided by
(used in) operating activities:
Amortization of deferred policy acquisition costs and value of insurance in force 286 423 570
Additions to deferred policy acquisition costs (369) (574) (626)
Depreciation and amortization 125 97 120
Provision for credit losses 134 165 165
Undistributed equity earnings (116) - -
Changes in:
Trading securities, net (1,082) (156) 338
Securities borrowed, loaned and repurchase agreements, net (1,591) 62 306
Brokerage receivables net of brokerage payables 863 (252) (908)
Insurance policy and claims reserves 251 29 64
Other, net 713 (190) 33
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operations 737 792 853
Income taxes paid (403) (332) (266)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 334 460 587
- ----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Loans originated or purchased (2,673) (2,067) (2,570)
Loans repaid or sold 2,108 2,020 1,783
Purchases of investments (2,948) (2,094) (1,701)
Proceeds from sales of investments 2,213 1,018 1,279
Proceeds from maturities of investments 237 1,025 330
Payment for purchase of SLB net assets, net of cash acquired (1,296) - -
Payment for net clearing assets transferred (536) - -
Cash acquired in connection with The Travelers Merger 586 - -
Business acquisitions - (550) (8)
Business divestments 120 571 154
Other, net (274) (90) (86)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (2,463) (167) (819)
- ----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Issuance of preferred stock - series A - 290 -
Dividends paid (139) (85) (48)
Issuance of common stock 329 - -
Treasury stock acquired (58) (122) (89)
Issuance of long-term debt 2,733 674 1,306
Payments and redemptions of long-term debt (448) (972) (441)
Net change in short-term borrowings (including investment banking and brokerage
borrowings) 1,934 17 (461)
Other, net (50) (138) (14)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,301 (336) 253
- ----------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 2,172 (43) 21
Cash and cash equivalents at beginning of period 272 315 294
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,444 $ 272 $ 315
- ----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 674 $ 669 $ 905
Value of assets exchanged for shares of old Travelers $ - $ 173 $ -
================================================================================================================
See Notes to Consolidated Financial Statements
20
The Travelers Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In millions of dollars, except per share amounts)
1. Business Acquisitions
----------------------
The Travelers Acquisition
In December 1992, Primerica Corporation (Primerica), the predecessor to The
Travelers Inc., acquired approximately 27% of the common stock of The
Travelers Corporation (old Travelers) in a series of related transactions
(the Acquisition). Primerica and certain of its subsidiaries paid $550 in
cash and issued to old Travelers 50% of the equity of Commercial Insurance
Resources, Inc. (the parent of Gulf Insurance Company), and transferred to
old Travelers 100% of the preferred provider organization and third party
administrator networks of Transport Life Insurance Company (a wholly owned
subsidiary of Primerica). The Acquisition was accounted for as a purchase
with an effective accounting date of December 31, 1992, and at December 31,
1992, the investment of $723 is reflected in the Consolidated Statement of
Financial Position in "Other Assets." During 1993 this investment was
accounted for on the equity method. The excess of Primerica's share of
assigned value of identifiable net assets over cost amounted to $109 and is
being amortized over 10 years. For the year ended December 31, 1993, old
Travelers, on a historical basis, reported revenues of $10,284 and net income
of $288.
The Travelers Merger
On December 31, 1993, Primerica acquired the approximately 73% of old
Travelers common stock it did not already own (the Merger). Old Travelers
was merged into Primerica, and concurrently, Primerica changed its name to
The Travelers Inc. which, together with its subsidiaries, is hereinafter
referred to as the Company. The old Travelers businesses acquired are
hereinafter referred to as old Travelers or The Travelers Insurance Group.
As consideration for the Merger, the Company issued .80423 shares of its
common stock for each old Travelers common share then outstanding. The
total purchase price of $3,396 is comprised of $3,265, representing the fair
value of the approximately 86 million newly issued common shares, plus the
premium over book value related to the two issues of old Travelers
preference stock exchanged in the Merger (see Note 14) and certain other
acquisition costs.
The assets and liabilities of old Travelers are reflected in the
Consolidated Statement of Financial Position at December 31, 1993 on a fully
consolidated basis at management's best estimate of their fair values, based
on currently available information. Evaluation and appraisal of assets and
liabilities, including investments, the value of insurance in force,
reinsurance recoverable, other insurance assets and liabilities and related
deferred income tax amounts is continuing, and allocation of the purchase
price may be adjusted. The excess of the purchase price over the estimated
fair value of net assets is approximately $975 and will be amortized over 40
years.
The Acquisition and the Merger are being accounted for as a step
acquisition. The step acquisition method of purchase accounting requires
that the old Travelers' assets and liabilities be recorded at the fair
values determined at each acquisition date (i.e., 27% of values at December
31, 1992 as carried forward and 73% of values at December 31, 1993). The
merger has been accounted for as a purchase, and accordingly, the results of
operations for periods prior to December 31, 1993 do not include those of
old Travelers other than for the equity in earnings relating to the 27%
previously owned.
21
Notes to Consolidated Financial Statements (continued)
The Shearson Acquisition
On July 31, 1993, the Company acquired the domestic retail brokerage and
asset management businesses (the Shearson Businesses) of Shearson Lehman
Brothers Holdings Inc. (SLB), a subsidiary of American Express Company
(American Express), for approximately $2,100, representing $1,600 for the
net assets acquired plus approximately $500 of cash required to be
segregated for customers under commodities regulations. The businesses
acquired were combined with the operations of Smith Barney, Harris Upham &
Co.Incorporated, and the combined firm has been named Smith Barney Shearson
Inc. which is a subsidiary of Smith Barney Shearson Holdings Inc. (SBS).
Following the transaction, SLB was renamed Lehman Brothers Holdings Inc.
(LBI). The acquisition was accounted for under the purchase method of
accounting, and the consolidated financial statements include the results of
the Shearson Businesses from the date of acquisition. Payment for the net
assets consisted of approximately $900 in cash, $125 in the form of
convertible preferred stock of the Company, $25 in the form of warrants to
purchase common stock of the Company and the balance in notes to LBI. In
addition, SBS has agreed to pay American Express additional amounts that are
contingent upon the new unit's performance. Evaluation and appraisal of
assets and liabilities, including the value of identifiable intangible
assets and liabilities assumed, is continuing, and allocation of the
purchase price may be adjusted. As a result of the acquisition of the
Shearson Businesses, the Company recorded a provision in the third quarter
of 1993 of $65 after-tax relating primarily to the elimination of duplicate
facilities, severance and other personnel-related costs. This provision is
not reflected in the pro forma information below.
The unaudited pro forma condensed results of operations presented below
assume all of the above transactions had occurred at the beginning of each
of the periods presented:
Pro Forma 1993 1992
------------------------------------------------------------
Revenues $18,585 $17,481
====== ======
Income (loss) before cumulative effect
of changes in accounting principles $1,281 $(22)
===== ====
Net income $1,246 $120
===== ===
Net income (loss) per share:
Before cumulative effect of changes in
accounting principles $3.67 $(0.33)
==== ======
Net income $3.56 $0.12
==== ====
The unaudited pro forma condensed financial information is not necessarily
indicative either of the results of operations that would have occurred had
these transactions been consummated at the beginning of the periods
presented or of future operations of the combined companies.
In conjunction with the acquisition of the Shearson Businesses, SBS entered
into a securities clearing agreement with LBI (the Clearing Agreement)
effective August 2, 1993, pursuant to which SBS has agreed to carry and
clear, on a fully disclosed basis, all customer accounts introduced by LBI
and, on a correspondent basis, LBI's proprietary accounts. LBI transferred
at cost approximately $8,600 of assets and $7,787 of liabilities to SBS in
connection with the Clearing Agreement. Payment for these net assets of
$813 consisted of approximately $536 in cash and the remainder in notes to
LBI. The Clearing Agreement is in effect until December 31, 1994, and may be
extended for up to five months at LBI's option. Upon termination of the
Clearing Agreement the net assets or liabilities related to the Clearing
Agreement will be transferred to LBI.
22
Notes to Consolidated Financial Statements (continued)
Supplemental Information to the Consolidated Statement of Cash Flows
Relating to Acquisitions
Noncash investing and financing transactions relating to the above
transactions that are not reflected in the Consolidated Statement of Cash
Flows are listed below.
For the Year Ended December 31, 1993 Travelers Shearson
----------------------------------------------------------------
Fair value of assets acquired,
excluding cash acquired $40,395 $4,811
Liabilities assumed (37,642) (2,779)
Issuance of notes - (586)
Equity securities issued (3,339) (150)
----------------------------------------------------------------
Cash payment (acquired) $ (586) $1,296
================================================================
2. Summary of Significant Accounting Policies
------------------------------------------
Changes in accounting principles
FAS 106. Effective January 1, 1993, the Company implemented Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (FAS 106). As required the
Company changed its method of accounting for retiree benefit plans effective
January 1, 1993, to accrue the Company's share of the costs of
postretirement benefits over the service period rendered by employees.
Previously these benefits were charged to expense when paid. The Company
elected to recognize immediately the liability for postretirement benefits
as the cumulative effect of a change in accounting principle. This resulted
in a noncash after-tax charge to net income of $17 ($25 pre-tax) or $0.07
per share. See Note 17 for additional information relating to FAS 106.
FAS 112. In the fourth quarter of 1993, the Company implemented Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" (FAS 112), with retroactive application to January
1, 1993. FAS 112 establishes accounting standards for employers who provide
benefits to former or inactive employees after employment, but before
retirement. These benefits include, but are not limited to, salary
continuation, supplemental unemployment, severance, disability-related
(including workers' compensation), job training and counseling, and
continuation of benefits such as health care and life insurance coverage.
The statement requires employers to recognize the cost of the obligation to
provide these benefits on an accrual basis, and employers must implement FAS
112 by recognizing a cumulative effect of a change in accounting principle.
This resulted in a noncash after-tax charge to net income of $18 ($29 pre-
tax) or $0.07 per share. See Note 17 for additional information relating to
FAS 112.
FAS 113. In the first quarter of 1993, the Company implemented Statement of
Financial Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" (FAS 113). FAS
113 requires the reporting of reinsurance receivables and prepaid
reinsurance premiums as assets and precludes the immediate recognition of
gains for all reinsurance contracts unless the liability to the policyholder
has been extinguished. Implementation of FAS 113 did not have an impact on
the Company's earnings; however, assets and liabilities increased by like
amounts. Assets and liabilities within the Consolidated Statement of
Financial Position were increased by $754 as of December 31, 1992. See Note
12 for additional reinsurance disclosures.
Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of The Travelers Inc. and its subsidiaries. Data relating to
results of operations excludes the amounts of The Travelers Insurance Group
23
Notes to Consolidated Financial Statements (continued)
except that results for 1993 include the Company's equity in earnings
relating to the 27% purchase, and data relating to financial position
excludes amounts for old Travelers for years prior to 1993. Unconsolidated
entities in which the Company has at least a 20% interest are accounted for
on the equity method. The minority interest in 1993 represents the old
Travelers' interest in Gulf Insurance Company (Gulf) and in 1991 the
publicly held interest in Fingerhut Companies, Inc. (Fingerhut) (see Note
3). Significant intercompany transactions and balances have been
eliminated.
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
Cash and cash equivalents include cash on hand, cash and securities
segregated under federal and brokerage regulations and short-term highly
liquid investments with maturities of three months or less when purchased,
other than those held for sale in the ordinary course of business. These
short-term investments are carried at cost plus accrued interest, which
approximates market value.
Investments are owned principally by the insurance subsidiaries. Fixed
maturities include bonds, notes and redeemable preferred stocks. In
recognition of the Company's growing need to maintain flexibility to respond
to such matters as changes in interest rates, prepayment risks or the yield
curve, fixed maturities have been classified as follows: "held for
investment" represents securities that the Company has both the ability and
the intent to hold until maturity and are carried at amortized cost; all
other fixed maturity securities have been classified as "available for sale"
and are carried at the lower of aggregate cost or market value. Equity
securities include common and non-redeemable preferred stocks and are
carried at market values that are based primarily on quoted market prices.
Changes in market values of equity securities are reflected as unrealized
appreciation (depreciation) in stockholders' equity, net of applicable
income taxes. Mortgage loans and policy loans are carried at unpaid
balances, net of allowance for losses. Short-term investments are carried
at cost, which approximates market. Realized gains and losses on sales of
investments are included in other income on a specific identification basis.
At December 31, 1993, fixed maturities amounting to $25,604, mortgage loans
amounting to $7,051, real estate held for sale amounting to $1,049 and
policy loans amounting to $1,212 owned by The Travelers Insurance Group are
carried at the values assigned at the acquisition dates (see Note 1).
Accrual of income is suspended on fixed maturities or mortgage loans that
are in default, or on which it is likely that future interest payments will
not be made as scheduled. Interest income on investments in default is
recognized only as payment is received.
The cost of acquired businesses in excess of net assets is being amortized
on a straight-line basis principally over a 40-year period.
Income taxes. The Company and its wholly owned domestic non-life insurance
subsidiaries file a consolidated federal income tax return. All but one of
the life insurance subsidiaries are included in their own consolidated
federal income tax return. Deferred income taxes result from temporary
differences between the tax basis of assets and liabilities and their
recorded amounts for financial reporting purposes.
Income taxes are not provided for on the Company's life insurance
subsidiaries' retained earnings designated as "policyholders' surplus"
because such taxes will become payable only to the extent such retained
earnings are distributed as a dividend or exceed limits prescribed by
federal law. Distributions are not contemplated from this portion of the
life insurance companies' retained earnings, which aggregated $971 (with a
tax effect of $340) at December 31, 1993.
Income taxes have been provided for in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (FAS 109), which was adopted effective January 1, 1992. Prior years'
24
Notes to Consolidated Financial Statements (continued)
financial statements have not been restated to apply the provisions of FAS
109. Taxes for years prior to January 1, 1992 have been provided in
accordance with Accounting Principles Board Opinion No. 11, "Accounting for
Income Taxes."
Earnings per common share is computed after recognition of preferred stock
dividend requirements and is based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect of
common stock warrants and stock options, the incremental shares assumed
issued under the Capital Accumulation Plan, the assumed conversion of the
4 1/2% Eurodollar Convertible Subordinated Debentures (through the date of
their conversion) and of the 5 3/4% Convertible Subordinated Notes. Fully
diluted earnings per common share, assuming conversion of all outstanding
convertible notes and debentures, the maximum dilutive effect of common
stock equivalents and the 5.5% convertible preferred stock, has not been
presented because the effects are not material. The fully diluted earnings
per common share computation for the years ended December 31, 1993, 1992 and
1991 would entail adding the number of shares issuable on conversion of the
other debentures (2.0, 4.1 and 6.0 million shares, respectively), the
additional common stock equivalents (0.4, 1.1 and 3.8 million shares
respectively) and the assumed conversion of the 5.5% convertible preferred
stock (1.4 million shares in 1993), to the number of shares included in the
earnings per common share calculation (resulting in a total of 241.6, 228.0
and 236.3 million shares, respectively) and eliminating the after-tax
interest expense related to the conversion of other debentures ($3.1, $7.0
and $8.3, respectively) and the elimination of the 5.5% convertible
preferred stock dividends ($2.9 in 1993).
The Company's Board of Directors declared stock splits in the form of stock
dividends (three-for-two in January 1993 and four-for-three in July 1993),
which combined yield the equivalent of a two-for-one stock split. Prior
years' information has been restated to reflect the stock splits.
Financial Instruments - Off-Balance-Sheet Risk. The Company uses financial
instruments having off-balance-sheet risk in the normal course of business
in order to reduce exposure to fluctuations in interest rates and market
prices. Included in the Notes to Consolidated Financial Statements are
various disclosures relating to financial instruments having off-balance
sheet risk. These disclosures indicate the magnitude of the Company's
involvement in such activities, and reflect the instruments at their face,
contract or notional amounts, and are not intended to represent the much
smaller credit risk of such instruments.
Financial Instruments - Disclosures About Fair Value. Included in the Notes
to Consolidated Financial Statements are various disclosures relating to the
methods and assumptions used to estimate fair value of each material type of
financial instrument. The carrying value of short-term financial
instruments approximates fair value because of the relatively short period
of time between the origination of the instruments and their expected
realization. The carrying value of receivables and payables arising in the
ordinary course of business approximates fair market value. The fair value
assumptions were based upon subjective estimates of market conditions and
perceived risks of the financial instruments at a certain point in time.
Disclosed fair values for financial instruments do not reflect any premium
or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. Potential
taxes and other expenses that would be incurred in an actual sale or
settlement are not reflected in amounts disclosed.
Accounting standards not yet adopted
FAS 114. Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan," describes how impaired loans should
be measured when determining the amount of a loan loss accrual. The
statement also amends existing guidance on the measurement of restructured
loans in a troubled debt restructuring involving a modification of terms.
The Company has not yet determined the impact, if any, this statement will
have on its financial statements. The statement has an effective date of
January 1, 1995.
25
Notes to Consolidated Financial Statements (continued)
FAS 115. Effective January 1, 1994, the Company will adopt Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" which addresses accounting and reporting for
investments in equity securities that have a readily determinable fair value
and for all debt securities. Those investments are to be classified in one
of three categories. Debt securities that the Company has the positive
intent and ability to hold to maturity are to be classified as "held to
maturity" and are to be reported at amortized cost. Securities that are
bought and held principally for the purpose of selling them in the near term
are classified as "trading securities" and are to be reported at fair value,
with unrealized gains and losses included in earnings. Securities that are
neither to be held to maturity nor to be sold in the near term are
classified as "available for sale" and are to be reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
net amount in a separate component of stockholders' equity. At December 31,
1993 the market value of fixed maturities exceeded the cost by $353.
Interpretation 39. Financial Accounting Standards Board Interpretation No.
39, "Offsetting of Amounts Related to Certain Contracts" (Interpretation
39), must be adopted by the Company for its 1994 first quarter financial
statements. The general principle of Interpretation 39 states that amounts
due from and due to another party may not be offset in the balance sheet
unless a right of setoff exists and the parties intend to exercise the right
of setoff. The Company currently maintains master netting arrangements and
other contracts where amounts due from customers are offset against amounts
due to those customers. Implementation of Interpretation 39 is not expected
to have a material impact on the Company's financial position; however,
assets and liabilities will be increased by like amounts.
INVESTMENT SERVICES
Commissions related to security transactions, underwriting revenues and
related expenses are recognized in income on the trade date.
Management and investment advisory fees are recorded as income for the
period in which the services are performed.
Securities borrowed and securities loaned are recorded at the amount of cash
collateral advanced or received. With respect to securities loaned, the
Company receives collateral in the form of cash or financial instruments in
an amount in excess of the market value of securities loaned. The Company
monitors the market value of securities borrowed and loaned on a daily basis
with additional collateral obtained as necessary.
Repurchase and resale agreements are treated as collateralized financing
transactions and are carried at the amounts at which the securities will be
subsequently reacquired or resold, including accrued interest, as specified
in the respective agreements. The Company's policy is to take possession of
securities purchased under agreements to resell. The market value of
securities to be repurchased and resold is monitored, and additional
collateral is requested where appropriate to protect against credit
exposure.
Trading securities are carried at market value. Included in income are
realized and unrealized gains and losses on trading securities and
proprietary futures, forward and option contracts.
Other assets include the value of management advisory contracts, which is
being amortized on the straight-line method over periods not exceeding 30
years.
INSURANCE SERVICES
Premiums from long-duration contracts, principally life insurance, are
earned when due. Premiums from short-duration insurance contracts are
earned over the related contract period. Short-duration contracts include
26
Notes to Consolidated Financial Statements (continued)
primarily property and casualty, credit life and accident and health
policies, including estimated ultimate premiums on retrospectively rated and
reporting-form policies. Benefits and expenses are associated with premiums
by means of the provision for future policy benefits, unearned premiums and
the deferral and amortization of policy acquisition costs.
Value of insurance in force represents the actuarially determined present
value of anticipated profits to be realized from life and accident and
health business on insurance in force at the date of the Company's
acquisition of its insurance subsidiaries using the same assumptions that
were used for computing related liabilities where appropriate. The value of
insurance in force acquired prior to December 31, 1993 is amortized over the
premium paying periods in relation to anticipated premiums. The value of
insurance in force relating to The Travelers Insurance Group merger was the
actuarially determined present value of the projected future profits
discounted at interest rates ranging from 14% to 18% for the business
acquired. The value of the business in force is amortized over the contract
period using current interest crediting rates to accrete interest and using
amortization methods based on the specified products. Traditional life
insurance and annuities are amortized over the period of anticipated
premiums; universal life in relation to estimated gross profits; and certain
annuity contracts employing a level yield method. The value of insurance in
force related to The Travelers Insurance Group merger is $363 with the
remainder relating to prior acquisitions. The value of insurance in force
is reviewed periodically to determine if any adjustment is required.
Deferred policy acquisition costs for the life business represent the costs
of acquiring new business, principally commissions, certain underwriting and
agency expenses and the cost of issuing policies. Deferred policy
acquisition costs for traditional life business are amortized over the
premium-paying periods of the related policies, in proportion to the ratio
of the annual premium revenue to the total anticipated premium revenue.
Deferred policy acquisition costs of other business lines are generally
amortized over the life of the insurance contract or at a constant rate
based upon the present value of estimated gross profits expected to be
realized. For certain property and casualty lines, acquisition costs, such
as commissions, premium taxes and certain other underwriting and agency
expenses, have been deferred to the extent recoverable from future earned
premiums and are amortized ratably over the terms of the related policies.
Deferred policy acquisition costs are reviewed to determine if they are
recoverable from future income, including investment income, and, if not
recoverable, are charged to expense.
Separate and variable accounts primarily represent funds for which
investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contractholders. Each account has specific
investment objectives. The assets of each account are legally segregated
and are not subject to claims that arise out of any other business of the
Company. The assets of these accounts are carried at market value. Certain
other separate accounts provide guaranteed levels of return or benefits, and
the assets of these accounts are carried at amortized cost. At December 31,
1993, the balances of all separate accounts are recorded at the values
assigned at the acquisition dates. Amounts assessed to the contractholders
for management services are included in revenues. Deposits, net investment
income and realized investment gains and losses for these accounts are
excluded from revenues, and related liability increases are excluded from
benefits and expenses.
Other assets include receivables related to retrospectively rated policies
on property-casualty business, net of allowance for estimated uncollectible
amounts.
Insurance policy and claims reserves represent liabilities for future
insurance policy benefits. Insurance reserves for traditional life
insurance, annuities, and accident and health policies have been computed
based upon mortality, morbidity, persistency and interest assumptions
applicable to these coverages, which range from 2.5% to 13%, including
adverse deviation. These assumptions consider company experience and
industry standards and may be revised if it is determined that future
experience will differ substantially from that previously assumed. The
27
Notes to Consolidated Financial Statements (continued)
insurance reserves acquired in The Travelers Insurance Group merger are
recorded at the values assigned at the acquisition dates. Property-casualty
reserves include (1) unearned premiums representing the unexpired portion of
policy premiums, and (2) estimated provisions for both reported and
unreported claims incurred and related expenses. The reserves are regularly
adjusted based on experience. Included in the insurance policy and claims
reserves in the Consolidated Statement of Financial Position at December 31,
1993 are $803 of property-casualty loss reserves related to workers'
compensation that have been discounted using an interest rate of 5%.
In determining benefit and loss reserves, the Company carries on a
continuing review of its overall position, its reserving techniques and
reinsurance. Reserves for property and casualty insurance losses represent
the estimated ultimate unpaid cost of all incurred property and casualty
claims. Since the reserves are based on estimates, the ultimate liability
may be more or less than such reserves. The effects of changes in such
estimated reserves are included in the results of operations in the period
in which the estimates are changed.
Contractholder funds represent receipts from the issuance of universal life,
pension investment and certain individual annuity contracts. Such receipts
are considered deposits on investment contracts that do not have substantial
mortality or morbidity risk. Account balances are increased by interest
credited and reduced by withdrawals, mortality charges and administrative
expenses charged to the contractholders. Calculations of contractholder
account balances for investment contracts reflect lapse, withdrawal and
interest rate assumptions based on contract provisions, the Company's
experience and industry standards. Contractholder funds also include other
funds that policyholders leave on deposit with the Company. Balances at
December 31, 1993 have been recorded at the values assigned at the
acquisition dates using interest rate assumptions ranging from 4% to 9.5%.
CONSUMER FINANCE SERVICES
Finance related interest and other charges are recognized as income using
the constant yield method. Allowances for losses are established by direct
charges to income in amounts sufficient to maintain the allowance at a level
management determines to be adequate to cover losses in the portfolio. The
allowance fluctuates based upon continual review of the loan portfolio and
current economic conditions. For financial reporting purposes, finance
receivables are considered delinquent when they are more than 60 days
contractually past due. Income stops accruing on finance receivables when
they are 90 days contractually past due. If payments are made on a finance
receivable that is not accruing income, and the receivable is no longer 90
days contractually past due, the accrual of income resumes. Finance
receivables are charged against the allowance for losses when considered
uncollectible. Personal loans are considered uncollectible when payments
are six months contractually past due and six months past due on a recency
of payment basis. Loans that are twelve months contractually past due
regardless of recency of payment are charged off. Recoveries on losses
previously charged to the allowance are credited to the allowance at the
time of recovery. Consideration of whether to proceed with foreclosure on
loans secured by real estate begins when a loan is 60 days past due on a
contractual basis. Real estate credit losses are recognized when the title
to the property is obtained.
Fees received and direct costs incurred for the origination of loans are
deferred and amortized over the contractual lives of the loans as part of
interest income. The remaining unamortized balances are reflected in
interest income at the time that the loans are paid in full, renewed or
charged off.
28
Notes to Consolidated Financial Statements (continued)
3. Sales of Stock of Subsidiaries and Affiliates
---------------------------------------------
During 1992 gains on sale of stock of affiliates totaled $188 pre-tax and
consisted principally of the sale of Margaretten & Company, Inc. ($83 pre-
tax) and the sale of a substantial portion of the Company's investment in
Fingerhut ($87 pre-tax). Fingerhut's results of operations were included
with those of the Company on a consolidated basis through December 31, 1991.
During 1992 the remaining investment in Fingerhut was accounted for as an
equity investment, with the Company's share of earnings reflected in "Other
Income." In 1993 the Company sold its remaining interest in Fingerhut.
4. Business Segment Information
----------------------------
The Company is a diversified financial services company engaged in
investment services, life and property and casualty insurance services and
consumer finance. Data relating to results of operations excludes the
amounts of old Travelers except that Corporate and Other results for 1993
include the equity earnings relating to the 27% purchase in December 1992
(see Note 1). Data relating to identifiable assets excludes amounts for old
Travelers for years prior to 1993. The following table presents certain
information regarding these industry segments:
Revenues 1993 1992 1991
---- ---- ----
Investment Services $ 3,524 $ 1,822 $ 1,890
Insurance Services 1,900 1,821 1,836
Consumer Finance Services 1,193 1,158 1,150
Corporate and Other* 180 324 1,732
------ ------ ------
$ 6,797 $ 5,125 $ 6,608
====== ====== ======
Income before income taxes, minority
interest and cumulative effect of
changes in accounting principles
Investment Services $ 592 $ 321 $ 296
Insurance Services 493 436 345
Consumer Finance Services 360 305 271
Corporate and Other 78 126 (121)
----- ----- ------
$1,523 $1,188 $ 791
===== ===== ======
Income before cumulative effect of changes
in accounting principles
Investment Services $ 336 $ 191 $ 184
Insurance Services (after minority
interest of $22 in 1993) 288 287 226
Consumer Finance Services 232 198 175
Corporate and Other (after minority
interest of $25 in 1991) 95 80 (106)
----- ----- ------
$ 951 $ 756 $ 479
===== ===== ======
Identifiable assets
Investment Services $ 31,864 $10,439 $ 9,291
Insurance Services 60,684 5,612 4,571
Consumer Finance Services 7,155 6,495 6,480
Corporate and Other 1,657 1,605 1,219
------- ------ ------
$101,360 $24,151 $21,561
======= ====== ======
* Included in 1991 are Fingerhut's revenues of $1,428.
29
Notes to Consolidated Financial Statements (continued)
The Investment Services segment consists of investment banking, securities
brokerage, asset management and other financial services provided through
SBS and its subsidiaries, mutual fund management and distribution services
provided through American Capital, investment management services provided
by RCM Capital Management, and mortgage banking through Margaretten through
its date of sale (see Note 3).
The Insurance Services segment includes individual and group life insurance,
accident and health insurance, annuities and investment products, which are
offered primarily through The Travelers Insurance Company and its subsidiary
and affiliated life insurance companies. Such affiliated companies now
include Primerica Financial Services (PFS) and its affiliate, Primerica Life
Insurance Company which primarily issues individual term life insurance, and
Transport Life Insurance Company. PFS and its affiliates are also engaged
in sales of mutual funds and loan products. This segment also provides
property-casualty insurance, including workers' compensation, liability,
automobile, property and multiple-peril to businesses and other institutions
and automobile and homeowners insurance to individuals. Property and
casualty insurance policies are issued primarily by The Travelers Indemnity
Company and its subsidiary and affiliated property-casualty insurance
companies, which now include Gulf Insurance Company.
The Consumer Finance Services segment includes consumer lending (including
secured and unsecured personal loans, real estate-secured loans and consumer
financing) and credit cards. Also included in this segment are
credit-related insurance services provided through American Health and Life
Insurance Company (AHL).
Corporate and Other consists of corporate staff and treasury operations,
certain corporate income and expenses that have not been allocated to the
operating subsidiaries, including gains and losses from the sale of stock of
subsidiaries and affiliates, and the results of Fingerhut for 1992 and 1991.
During 1993 this segment also included the Company's approximately 27%
interest in old Travelers.
Capital expenditures for property, plant and equipment and related
depreciation expense are not material to any of the business segments.
Intersegment sales and international operations are not significant.
For gains and special charges included in each segment, see Management's
Discussion and Analysis of Financial Condition and Results of Operations.
5. Investments
-----------
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if quoted market prices are not available,
discounted expected cash flows using market rates commensurate with the
credit quality and maturity of the investment.
30
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated market values of investments in fixed
maturities were as follows:
Available for Sale Held for Investment
---------------------------------------- -------------------------------------
Amortized Gross Unrealized Market Amortized Gross Unrealized Market
------------------ ------------------
December 31, 1993 Cost Gains Losses Value Cost Gains Losses Value
----------------- ---------------------------------------- -------------------------------------
Mortgage-backed
securities-principally
obligations of U.S.
Government agencies $ 5,754 $ 26 $ (27) $ 5,753 $118 $22 $ - $ 140
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies 4,556 82 (11) 4,627 20 - - 20
Obligations of states and
political subdivisions 3,062 38 (1) 3,099 7 1 - 8
Debt securities issued by
foreign governments 535 8 - 543 6 - - 6
Corporate securities 14,202 249 (35) 14,416 26 1 - 27
---------------------------------------- -------------------------------------
Totals $28,109 $403 $ (74) $28,438 $177 $24 $- $201
======================================== =====================================
Available for Sale Held for Investment
---------------------------------------- -------------------------------------
Amortized Gross Unrealized Market Amortized Gross Unrealized Market
------------------ ------------------
December 31, 1992 Cost Gains Losses Value Cost Gains Losses Value
----------------- ---------------------------------------- -------------------------------------
Mortgage-backed
securities-principally
obligations of U.S.
Government agencies $ 614 $ 37 $ - $ 651 $1 $- $- $1
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies 1,066 50 (1) 1,115 28 1 - 29
Obligations of states and
political subdivisions 127 4 - 131 8 1 - 9
Debt securities issued by
foreign governments 39 3 - 42 9 - - 9
Corporate securities 459 29 (1) 487 45 1 - 46
---------------------------------------- -------------------------------------
Totals $2,305 $123 $ (2) $2,426 $91 $3 $- $94
======================================== =====================================
31
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated market value at December 31, 1993 by
contractual maturity are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
--------- ---------
Due in one year or less $ 1,201 $ 1,206
Due after one year through five years 7,240 7,271
Due after five years through ten years 8,142 8,270
Due after ten years 5,831 5,999
------ ------
22,414 22,746
Mortgage-backed securities 5,872 5,893
------ ------
$28,286 $28,639
====== ======
Realized gains and losses on fixed maturities for the year ended December
31, excluding the Company's 27% share of The Travelers Insurance Group,
were as follows:
1993 1992 1991
---- ---- ----
Realized gains
Pre-tax $168 $61 $54
--- -- --
After-tax 109 40 36
--- -- --
Realized losses
Pre-tax $ 2 $ 1 $10
-- -- --
After-tax 1 - 6
-- -- --
At December 31, 1993, the Company had concentrations of corporate
securities in the following industries:
Finance $2,234
Electric utilities $1,850
Banking* $1,607
* Includes $515 of primarily short-term investments and cash equivalents
issued by foreign banks.
At December 31, 1993, significant concentrations of mortgage loans and
real estate were for properties located in highly populated areas in the
states listed below:
Mortgage Loans Real Estate
-------------- -----------
California $1,471 $33
New York $836 $90
Texas $600 $192
Florida $583 $111
Illinois $517 $88
Other mortgage loan and real estate investments are dispersed throughout
the United States, with no combined holdings in any other state exceeding
$400.
32
Notes to Consolidated Financial Statements (continued)
Aggregate annual maturities on mortgage loans are as follows:
Past maturity $ 464
1994 888
1995 1,192
1996 907
1997 728
1998 934
Thereafter 2,252
------
$7,365
======
6. Securities Borrowed, Loaned and Subject to Repurchase Agreements
----------------------------------------------------------------
Securities borrowed or purchased under agreements to resell, at their
respective carrying values, consisted of the following at December 31:
1993 1992
------ -----
Resale agreements (by counterparty)
Brokers and dealers $ 2,340 $1,401
Banks 555 226
Municipalities 217 157
Investment advisors 394 56
Corporations 226 50
Other 549 20
------ -----
Total resale agreements 4,281 1,910
Deposits paid for securities
borrowed 9,072 1,570
------ -----
$13,353 $3,480
====== =====
Securities loaned or sold under agreements to repurchase, at their
respective carrying values, consisted of the following at December 31:
1993 1992
--------- --------
Repurchase agreements (by
counterparty)
Brokers and dealers $ 1,904 $ 798
Banks 1,600 1,552
Corporations 517 126
Municipalities 301 407
Trusts 232 135
Other 721 423
------ ------
Total repurchase
agreements 5,275 3,441
Deposits received for
securities loaned 4,869 454
------ ------
$10,144 $3,895
====== =====
The resale and repurchase agreements represent customer financing
transactions used to generate net interest income and facilitate trading
activity. These instruments are short-term in nature (usually 30 days or
less) and are collateralized principally by U.S. Government and mortgage-
backed securities. The carrying amounts of these instruments approximate
fair value because of the relatively short period of time between the
origination of the instruments and their expected realization.
33
Notes to Consolidated Financial Statements (continued)
7. Brokerage Receivables and Brokerage Payables
--------------------------------------------
The Company has receivables and payables for financial instruments
purchased from and sold to brokers and dealers and customers. The Company
is exposed to risk of loss from the inability of brokers and dealers or
customers to pay for purchases or to deliver the financial instrument
sold, in which case the Company would have to sell or purchase the
financial instruments at prevailing market prices.
The Company seeks to protect itself from the risks associated with
customer activities by requiring customers to maintain margin collateral
in compliance with regulatory and internal guidelines. Margin levels are
monitored daily, and customers are required to deposit additional
collateral as required. Where customers cannot meet collateral
requirements, the Company will liquidate sufficient underlying financial
instruments to bring the customer into compliance with the required margin
level.
Exposure to credit risk is impacted by market volatility, which may impair
the ability of clients to satisfy their obligations to the Company.
Credit limits are established and closely monitored for customers and
brokers and dealers engaged in forward and futures and other transactions
deemed to be credit-sensitive.
Brokerage receivables and brokerage payables, which arise in the normal
course of business, consisted of the following at December 31:
1993 1992
----- -----
Receivables from brokers and dealers $1,063 $ 269
Receivables from customers 7,104 1,381
----- -----
Total brokerage receivables $8,167 $1,650
===== =====
Payables to brokers and dealers $1,841 $ 125
Payables to customers 5,171 776
----- -----
Total brokerage payables $7,012 $ 901
===== =====
Included in payables to brokers and dealers as of December 31, 1993 is
approximately $966 of payables due LBI in connection with LBI's proprietary
transactions.
34
Notes to Consolidated Financial Statements (continued)
8. Trading Securities
------------------
Trading securities at market value consisted of the following at December 31:
1993 1992
-------------------------------- ---------------------------------
Securities Securities
Sold Sold
Securities Not Yet Securities Not Yet
Owned Purchased Owned Purchased
-------------- -------------- --------------- --------------
Obligations of U.S. Government and
agencies $2,233 $3,258 $1,930 $2,017
State and municipal obligations 839 42 548 8
Corporate debt and collateralized
mortgage obligations 2,214 198 789 70
Corporate convertibles, equities
and options 577 337 518 337
----- ----- ----- -----
$5,863 $3,835 $3,785 $2,432
===== ===== ===== =====
Carrying values are based on quoted market prices or dealer quotes. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities. Securities sold not yet purchased
must be acquired in the marketplace at prevailing prices. Accordingly,
these transactions may result in market risk since the ultimate purchase
price may exceed the amount recognized in the financial statements.
9. Consumer Finance Receivables
----------------------------
Consumer finance receivables, net of unearned finance charges of $613 and
$535 at December 31, 1993 and 1992, respectively, consisted of the
following:
1993 1992
----- -----
Real estate-secured loans $2,706 $2,608
Personal loans 2,495 2,379
Credit cards 697 538
Sales finance and other 444 263
------ ------
Consumer finance receivables 6,342 5,788
Accrued interest receivable 42 36
Allowance for credit losses (168) (169)
----- -----
Net consumer finance receivables $6,216 $5,655
===== =====
35
Notes to Consolidated Financial Statements (continued)
An analysis of the allowance for credit losses on consumer finance
receivables at December 31, was as follows:
1993 1992 1991
----- ----- -----
Balance, January 1 $ 169 $ 167 $ 136
Provision for credit losses 134 165 165
Amounts written off (163) (184) (175)
Recovery of amounts previously written off 23 21 21
Allowance on receivables purchased 5 - 20
----- ----- -----
Balance, December 31 $ 168 $ 169 $ 167
===== ===== =====
Net outstandings $6,342 $5,788 $5,825
===== ===== =====
Ratio of allowance for credit losses to net
outstandings 2.64% 2.91% 2.86%
==== ==== ====
Contractual maturities of receivables before deducting unearned finance
charges and excluding accrued interest were as follows:
Receivables
Outstanding Due
December 31, Due Due Due Due After
1993 1994 1995 1996 1997 1997
---------- ------ ------ ------ ------ ------
Real estate-secured
loans $2,770 $ 176 $ 181 $ 193 $ 198 $2,022
Personal loans 2,953 954 822 609 331 237
Credit cards 695 114 96 80 67 338
Sales finance and other 537 218 121 63 37 98
----- ----- ----- ----- ----- -----
Total $6,955 $1,462 $1,220 $ 945 $ 633 $2,695
===== ===== ===== ===== ===== =====
Percentage 100% 21% 18% 14% 9% 38%
===== ===== ===== ===== ===== =====
Contractual terms average 12 years on real estate-secured loans and 4 years
on other personal loans. Experience has shown that a substantial amount of
the receivables will be renewed or repaid prior to contractual maturity
dates. Accordingly, the foregoing tabulation should not be regarded as a
forecast of future cash collections.
The Company has a geographically diverse consumer finance loan portfolio.
At December 31, the distribution by state was as follows:
1993 1992
-------- ------
Ohio 13% 14%
North Carolina 10% 9%
South Carolina 7% 6%
Maryland 6% 7%
Pennsylvania 6% 6%
California 5% 6%
Texas 5% 5%
All other states* 48% 47%
---- ----
Total 100% 100%
==== ====
* None of the remaining states individually accounts for more than 4% of
total consumer finance receivables.
The estimated fair value of the consumer finance receivables portfolio
depends on the methodology selected to value such portfolio (i.e., entry
value versus exit value). Entry value is determined by comparing the
portfolio yields to the yield at which new loans are being originated.
Under the entry value methodology, the estimated fair value of the
receivables portfolio at December 31, 1993 is approximately $40 to $55 above
36
Notes to Consolidated Financial Statements (continued)
the recorded carrying values. Exit value represents a valuation of the
portfolio based upon sales of comparable portfolios which takes into account
the value of customer relationships and the current level of funding costs.
Under the exit value methodology, the estimated fair value of the
receivables portfolio at December 31, 1993 is approximately $550 to $650
above the recorded carrying value.
10. Debt
----
Short-term borrowings consisted of the following at December 31:
1993 1992
---- ----
The Travelers Inc.
Commercial paper $ 329 $ 71
----- -----
Commercial Credit Company
Commercial paper 2,206 2,387
Medium-term floating rate notes - 100
------ -----
2,206 2,487
----- -----
Other Subsidiaries - 75
------ -----
$2,535 $2,633
===== =====
The Travelers Inc. (the Parent) issues commercial paper directly to
investors, as does its subsidiary, Commercial Credit Company (CCC). Each
maintains unused credit availability under its respective bank lines of
credit at least equal to the amount of its outstanding commercial paper.
Each may borrow under its revolving credit facilities at various interest
rate options and compensates the banks for the facilities through commitment
fees. The Parent and CCC have agreements with certain banks whereby the
Parent, with the consent of CCC, may assign certain revolving credit
amounts (swing facilities) to CCC for specific periods of time. The Parent
and The Travelers Insurance Company (TIC) have an agreement with certain
banks whereby both the Parent and TIC may access a revolving credit
facility.
At December 31, 1993, the Parent had committed and available revolving
credit facilities of $725, up to $275 of which may be accessed by either the
Parent or TIC. In January 1994, an additional $200 was assigned to CCC
reducing the Parent's revolving credit facilities to $525, of which $75
expire in 1994 and $450 expire in 1995.
At December 31, 1993, CCC had committed and available revolving credit
facilities of $2,295 which was increased to $2,495 in January 1994 through
additional amounts assigned under the swing facilities. Also, in February
1994, a $1,825 revolving credit facility, which would have matured in August
1994, was replaced with two new revolving credit facilities totaling $2,000.
With these new facilities, CCC has revolving credit facilities totaling
$2,670, of which $250 expires in 1994, $920 expires in 1995 and $1,500
expires in 1997.
The carrying value of short-term borrowings approximates fair value.
Long-term debt, including its current portion, and final maturity dates were
as follows at December 31:
37
Notes to Consolidated Financial Statements (continued)
1993 1992
---- ----
The Travelers Inc.
8.6% Notes due 1994 $ 93 $ 93
8 3/8% Notes due 1996 100 100
7 5/8% Notes due 1997 * 185 -
5 3/4% Notes due 1998 250 -
7 3/4% Notes due 1999 100 100
6 1/8% Notes due 2000 200 -
9 1/2% Senior Notes due 2002 * 300 -
8 5/8% Debentures due 2007 100 100
Other indebtedness, 5 7/8% - 8 7/8% due
1996 - 2007 13 48
ESOP note guarantee * 125 -
5 1/2% Eurodollar Convertible Subordinated
Debentures - 137
Debt premium (discount) 38 (60)
----- ----
1,504 518
----- ----
Commercial Credit Company
8.29% to 12.85% Medium-Term Notes due
1994-1995 55 77
9 1/8% Notes due 1993 - 100
9.15% Notes due 1993 - 100
8% Notes due 1994 100 100
12.7% Notes due 1994 15 15
6.95% Notes due 1994 200 200
8.45% Notes due 1994 100 100
9 7/8% Notes due 1995 150 150
9.2% Notes due 1995 100 100
6.25% Notes due 1995 100 100
7.7% Notes due 1995 150 150
8.1% Notes due 1995 150 150
8 3/8% Notes due 1995 150 150
6.375% Notes due 1996 200 200
7.375% Notes due 1996 150 150
8% Notes due 1996 100 100
6.75% Notes due 1997 200 200
8 1/8% Notes due 1997 150 150
5.70% Notes due 1998 100 -
5 1/2% Notes due 1998 100 -
8 1/2% Notes due 1998 100 100
6.70% Notes due 1999 150 150
10% Notes due 1999 100 100
9.6% Notes due 1999 100 100
6.00% Notes due 2000 100 -
5 3/4% Notes due 2000 200 -
6 1/8% Notes due 2000. 100 -
6.00% Notes due 2000 150 -
5.9% Notes due 2003 200 -
10% Notes due 2008 150 150
10% Debentures due 2009 100 100
38
Notes to Consolidated Financial Statements (continued)
8.7% Debentures due 2009 150 150
8.7% Debentures due 2010 100 100
----- -----
3,970 3,242
----- -----
Smith Barney Shearson
Revolving credit facility 825 191
5 3/8% Notes due 1996 150 -
5 5/8% Notes due 1998 150 -
6 5/8% Notes due 2000 150 -
Capital Note - with LBI due 1995 100 -
----- -----
1,375 191
----- -----
The Travelers Insurance Group
12% GNMA/FNMA - collateralized obligations 132 -
Other indebtedness 10 -
----- -----
142 -
----- -----
$6,991 $3,951
===== =====
*Assumed in connection with the Company's acquisition of old Travelers.
The Company has guaranteed the loan obligation of its Employee Stock
Ownership Plan (ESOP) (see Note 14). The minimum principal payments on the
ESOP loan obligation to be made in 1994, 1995, 1996 and 1997 are $28, $30,
$32 and $35, respectively.
Debt discount or premium is being amortized to interest expense using the
effective interest method over the remaining maturities of the related debt
obligations.
SBS has a commitment from a bank syndicate for an $825 revolving credit
facility which consists of a 364-day revolving credit facility in the amount
of $200 and a 3-year revolving credit facility in the amount of $625, both
of which had been fully utilized at December 31, 1993.
Aggregate annual maturities on long-term debt obligations excluding
principal payments on the ESOP loan obligation and the 12% GNMA/FNMA
collateralized obligations, are as follows:
1994 $753
1995 $910
1996 $1,325
1997 $535
1998 $700
The fair value of the Company's long-term debt is estimated based on the
quoted market price for the same or similar issues or on current rates
offered to the Company for debt of the same remaining maturities. At
December 31, 1993 the carrying value and the fair value of the Company's
long-term debt were as follows:
39
Notes to Consolidated Financial Statements (continued)
Carrying Fair
Value Value
-------- ------
The Travelers Inc. $1,504 $1,568
Commercial Credit 3,970 4,234
Smith Barney Shearson 1,375 1,380
The Travelers Insurance Group 142 142
----- -----
$6,991 $7,324
===== =====
Investment Banking and Brokerage Borrowings
Investment banking and brokerage borrowings consisted of the following at
December 31:
1993 1992
---- ----
Commercial paper $1,401 $ -
Secured borrowings 105 301
Unsecured borrowings 693 294
Notes to LBI 1,255 -
----- ----
$3,454 $595
===== ===
Investment banking and brokerage borrowings are short-term and include
commercial paper, secured and unsecured bank loans used to finance
operations, including the securities settlement process, and notes issued
to LBI in connection with the Shearson Businesses acquired. The secured
and unsecured bank loans bear interest at fluctuating rates based primarily
on the federal funds interest rate. Notes payable to LBI consist of a $586
variable rate note due January 1994 (and subsequently paid) issued as
partial payment for the businesses acquired, and a $669 non-interest
bearing note (the Clearing Note) outstanding in connection with LBI's
activities under the Clearing Agreement. The Clearing Note, which matures
upon termination of the Clearing Agreement (see Note 1), fluctuates daily
based on LBI's borrowing activities. In 1993, SBS put in place a $1,500
commercial paper program that consists of both discounted and interest
bearing paper. At December 31, 1993 SBS had unused committed and available
short-term lines of credit amounting to $260. In addition, SBS has
substantial borrowing arrangements consisting of facilities that it has
been advised are available, but where no contractual lending obligation
exist.
At December 31, 1993, the market value of the securities pledged as
collateral for short-term brokerage borrowings was $124. At December 31,
1992, the market value of securities pledged as collateral for short-term
brokerage borrowings was $417, including $56 of customers' margin
securities.
11. Insurance Policy and Claims Reserves
------------------------------------
Insurance policy and claims reserves consisted of the following at December
31:
1993 1992
------- ------
Benefit and loss reserves $22,997 $2,326
Unearned premiums 2,307 473
Policy and contract claims 1,347 204
------ -----
$26,651 $3,003
====== =====
40
Notes to Consolidated Financial Statements (continued)
12. Reinsurance
-----------
The Company's insurance operations cede insurance in order to limit losses,
minimize exposure on large risks, provide additional capacity for future
growth, and effect business sharing arrangements. Life reinsurance is
accomplished through various plans of reinsurance, primarily coinsurance,
modified coinsurance and yearly renewable term. Property-casualty
reinsurance is placed on both a quota-share and excess basis. The property-
casualty insurance subsidiaries also participate as a servicing carrier for,
and a member of, several pools and associations. Reinsurance ceded
arrangements do not discharge the insurance subsidiaries or the Company as
the primary insurer. Reinsurance amounts included in the Consolidated
Statement of Income were as follows:
Ceded to
Gross Other Net
Amount Companies Amount
------ --------- ------
Year ended December 31, 1993
----------------------------
Premiums
Life insurance $1,178 $(284) $ 894
Accident and health insurance 385 (56) 329
Warranty, property and
casualty insurance 434 (177) 257
----- ---- -----
$1,997 $(517) $1,480
===== ==== =====
Claims $1,096 $(287) $ 809
===== ==== ======
Year ended December 31, 1992
----------------------------
Premiums
Life insurance $1,221 $(312) $ 909
Accident and health insurance 443 (39) 404
Warranty, property and
casualty insurance 562 (181) 381
----- ---- -----
$2,226 $(532) $1,694
===== ==== =====
Claims $1,056 $(271) $ 785
===== ==== =====
Year ended December 31, 1991
----------------------------
Premiums
Life insurance $1,319 $(390) $ 929
Accident and health insurance 547 (58) 489
Warranty, property and
casualty insurance 539 (174) 365
----- ---- -----
$2,405 $(622) $1,783
===== ==== =====
Claims $1,139 $(337) $ 802
===== ==== =====
41
Notes to Consolidated Financial Statements (continued)
Reinsurance Recoverables (including amounts for The Travelers Insurance
Group in 1993) at December 31 were as follows:
1993 1992
---- ----
Reinsurance Recoverables
------------------------
Life business $ 739 $539
Property and Casualty business:
Pools and associations 2,585 -
Other reinsurance 1,675 98
----- ----
Total $4,999 $637
===== ====
13. Income Taxes
------------
The provision for income taxes (before minority interests) for the year
ended December 31 was as follows:
1993 1992 1991
---- ---- ----
Current:
Federal $406 $350 $262
Foreign 3 5 3
State 75 53 27
---- ---- ----
484 408 292
---- --- ----
Deferred:
Federal 64 26 (4)
Foreign (2) (2) (1)
State 4 - -
-- ---- ----
66 24 (5)
--- ---- ----
Total $550 $432 $287
=== === ===
Deferred income taxes at December 31 related to the following (including
amounts for The Travelers Insurance Group in 1993):
1993 1992
---- ----
Deferred tax assets:
Bad debt reserves $65 $ 69
Policy reserves 1,353 35
Deferred compensation 145 39
Employee benefits 221 7
Investments 425 0
Restructuring and repositioning
charges not currently deductible 96 43
Other deferred tax assets 861 113
----- ---
Gross deferred tax assets 3,166 306
----- ---
Valuation allowance 100 -
----- ---
Deferred tax assets after valuation
allowance 3,066 306
----- ---
42
Notes to Consolidated Financial Statements (continued)
Deferred tax liabilities:
Deferred policy acquisition costs and
value of insurance in force (576) (420)
Investment management contracts (277) (131)
Other deferred tax liabilities (355) (176)
----- -----
Gross deferred tax liabilities (1,208) (727)
------- -----
Net deferred tax asset (liability) $ 1,858 $(421)
======= =====
The provision for deferred income taxes for the year ended December 31,
1991 related to the following:
Deferred policy acquisition costs and value of
insurance in force $(12)
Bad debt reserves 2
Policy reserves 14
Divested businesses and assets 11
Acquisition-related costs 13
Compensation and other benefits (26)
Restructuring and repositioning charges, not
currently deductible (23)
Other, net 16
----
Total $ (5)
====
The reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate for the year ended December 31 was as
follows:
1993 1992 1991
---- ---- ----
Federal statutory rate 35.0% 34.0% 34.0%
Limited taxability of investment income (1.6) (.8) (1.2)
State and foreign income taxes
(net of federal income tax benefit) 3.4 2.9 2.5
Amortization of cost of acquired
businesses in excess of net assets .9 1.1 1.8
Equity in income of old Travelers (2.2) - -
Other, net .6 (.9) (.9)
---- ---- ----
Effective income tax rate 36.1% 36.3% 36.2%
==== ==== ====
Tax benefits allocated directly to stockholders' equity for the years ended
December 31, 1993 and 1992 were $79 and $48, respectively.
As a result of the acquisition of old Travelers, a valuation allowance of
$100 has been established to reduce the net deferred tax asset on
investment losses to the amount that, based upon available evidence, is
more likely than not to be realized. Reversal of the valuation allowance
is contingent upon the recognition of future capital gains in the life
insurance group's consolidated federal income tax return, or a change in
circumstances which causes the recognition of the benefits to become more
likely than not. The initial recognition of any benefit produced by the
reversal of the valuation allowance will be recognized by reducing
goodwill.
43
Notes to Consolidated Financial Statements (continued)
In management's judgement, the $1,858 net deferred tax asset as of December
31, 1993 is fully recoverable against expected future years' taxable
ordinary income and capital gains. Recognition of the net deferred tax
asset is supported by expected future years' taxable income, after the
reversal of deductible temporary differences, of at least $1,000 annually.
At December 31, 1993, the Company has no ordinary or capital loss
carryforwards.
14. Preferred Stock and Stockholders' Equity
----------------------------------------
Series A
On July 28, 1992 the Company sold in a public offering 12.0 million
depositary shares, each representing 1/10th of a share of 8.125% Cumulative
Preferred Stock, Series A (Series A Preferred), at an offering price of $25
per depositary share. The Series A Preferred has cumulative dividends
payable quarterly commencing September 1, 1992 and a liquidation preference
equivalent to $25 per depositary share plus accrued and accumulated unpaid
dividends. On or after July 28, 1997, the Company may, at its option,
redeem the Series A Preferred, in whole or in part, at any time at a
redemption price of $25 per depositary share plus dividends accrued and
unpaid to the redemption date.
Series B
In connection with the acquisition of the domestic retail brokerage and
asset management businesses of SLB, the Company issued to American Express
2.5 million shares of 5.5% Convertible Preferred Stock, Series B (Series B
Preferred) of the Company. Each Series B Preferred share has cumulative
dividends payable quarterly and a liquidation preference of $50 per share
and is convertible at any time at the option of the holder at a conversion
price of $36.75 per common share. The Series B Preferred is not redeemable
prior to July 30, 1996. On or after July 30, 1996, the Series B Preferred
is redeemable at the Company's option, at a price of $51.925 per share if
redeemed prior to July 29, 1997, and at decreasing prices thereafter to $50
per share from and after July 30, 2003, plus accrued and unpaid dividends,
if any, to the redemption date. In addition, the Company issued to
American Express warrants to purchase 3,749,466 shares of common stock of
the Company at an exercise price of $39 per common share, exercisable until
July 31, 1998.
Series C
In connection with the acquisition of old Travelers, the Company converted
the old Travelers $4.53 Series A ESOP Convertible Preference Stock which
was issued to prefund old Travelers' matching obligations under its
Employee Stock Ownership Plan (ESOP) into $4.53 Series C Convertible
Preferred Stock ("Series C Preferred") of the Company with a stated value
and a liquidation preference of $53.25 per share. At December 31, 1993,
there were 4,406,431 shares of Series C Preferred outstanding. The Series
C Preferred is convertible into one share of The Travelers Inc. Common
Stock for each $66.21 of stated value of Series C Preferred, subject to
antidilution adjustments in certain circumstances. Dividends on the Series
C Preferred are cumulative and accrue in the amount of $4.53 per annum per
share. The Series C Preferred is redeemable at the option of the Company
on or after January 1, 1998 (or earlier at the option of the holder in the
event of a change in control, as defined, of the Company) at a redemption
price of $53.25 per share plus accrued and unpaid dividends thereon to the
date fixed for redemption.
44
Notes to Consolidated Financial Statements (continued)
Series D
Also in connection with the Company's acquisition of old Travelers, 7.5
million shares of 9 1/4% Series B Preference Stock of old Travelers were
converted into 7.5 million shares of 9 1/4% Series D Preferred Stock ("Series
D Preferred") of the Company with a stated value and liquidation preference
of $50 per share. The Series D Preferred is held in the form of depositary
shares, with two depositary shares representing each preferred share.
Annual dividends of $4.625 per share ($2.3125 per depository share) are
payable quarterly. Dividends are cumulative from the date of issue. The
Series D Preferred is not redeemable prior to July 1, 1997. On and after
July 1, 1997, the Series D Preferred is redeemable at the Company's option
at a price of $50 per share (equivalent to $25 per depositary share), plus
accrued and unpaid dividends, if any, to the redemption date. In the event
that dividends on the series D Preferred are in arrears in an amount equal
to at least six full quarterly dividends, holders of the stock would have
the right to elect two additional directors to the Board of Directors of
the Company.
The combined insurance subsidiaries' statutory capital and surplus at
December 31, 1993 and 1992 was $4,340 and $1,073, respectively (including
The Travelers Insurance Group in 1993), and is subject to certain
restrictions imposed by state insurance departments as to the transfer of
funds and payment of dividends. The combined insurance subsidiaries'
(excluding The Travelers Insurance Group) net income, determined in
accordance with statutory accounting practices, for the years ended
December 31, 1993, 1992 and 1991 was $204, $199 and $92, respectively.
The Company's broker-dealer subsidiaries are subject to The Uniform Net
Capital Rule of the Securities and Exchange Commission. At December 31,
1993, the aggregate net capital of such broker-dealer subsidiaries was
$957, exceeding the net capital requirement by $789.
In April 1993, the Company sold 9,333,333 shares of newly issued common
stock. The offering was made exclusively to foreign investors, and shares
were not offered in the United States or to United States persons, in
accordance with Regulation S under the Securities Act of 1933. Therefore
the shares have not been registered under such act. In June 1993, the
Company sold 1,000,000 shares of newly issued common stock to a senior
executive of the Company. In total these transactions generated net
proceeds of $329.
At December 31, 1993, 10,694,611 shares of authorized common stock were
reserved for convertible securities and warrants.
15. Incentive Plans
---------------
The Company's 1986 Stock Option Plan provides for the granting to officers
and key employees of the Company and its participating subsidiaries of non-
qualified stock options and incentive stock options. Options generally are
granted at the fair market value at the time of grant for a period not in
excess of ten years. They vest over five years, or in full upon a change
of control of the Company, and are generally exercisable only if the
optionee is employed by the Company. The plan also permits an employee
exercising an option to be granted new options (reload options) in an
amount equal to the number of common shares used to satisfy the exercise
price and the withholding taxes due upon exercise. The maximum number of
shares that may be granted under this plan is 73,008,140, of which
35,000,000 were reserved for the granting of reload options; at December
31, 1993, 30,313,391 shares were available for grant, of which 16,306,258
45
Notes to Consolidated Financial Statements (continued)
were available for reload option grants. The Company also has other option
plans.
Information with respect to stock options granted under the Company's
various option plans is as follows:
Number of Price
Shares Per Share
---------- ------------
Balance, at January 1, 1991 23,098,912 $ 4.19-32.03
Granted 5,774,814 11.38-17.32
Expired or canceled (1,015,550) 9.74-18.16
Exercised (6,677,068) 4.19-17.87
----------- -----------
Balance, at December 31, 1991 21,181,108 $ 6.07-32.03
Granted 11,924,090 18.50-24.94
Expired or canceled (518,956) 9.74-21.88
Exercised (13,279,940) 6.07-21.49
----------- -----------
Balance, at December 31, 1992 19,306,302 $ 7.82-32.03
----------- -----------
Granted 9,593,308 24.19-49.50
Expired or canceled (679,064) 9.74-44.63
Exercised (9,898,567) 8.00-37.41
---------- -----------
Balance, at December 31, 1993 18,321,979 $ 7.81-49.50
========== ===========
Currently exercisable,
December 31, 1993 3,170,334 $ 7.81-39.47
========== ===========
In addition to the stock options listed in the table, at the time of the
Merger, 7,193,486 options to purchase old Travelers common stock were
outstanding. Of this amount, 2,205,204 options were forfeited or redeemed
for cash, and the remaining 4,988,282 options, at a weighted average price
of $33.92, were converted into options to receive 4,011,726 shares of the
Company's common stock, at a weighted average price of $42.18.
The Company, through its Capital Accumulation Plan (the Plan) and other
restricted stock programs, has issued a total of 11,676,248 shares of the
Company's common stock in the form of restricted stock to participating
officers and other key employees. The restricted stock generally vests
after a two-year period. The Nominations and Compensation Committee of the
Board of Directors that administers the Plan has determined that the
restricted period for awards made with respect to the 1994 Plan year will
generally be three years. Except under limited circumstances, during this
period the stock cannot be sold or transferred by the participant, who is
required to render service to the Company during the restriction period. At
the discretion of the Committee, participants may elect to receive part of
their awards in restricted stock and part in stock options. Unearned
compensation expense associated with the restricted stock grants represents
the market value of the Company's common stock at the date of grant and is
recognized as a charge to income ratably over the vesting period.
46
Notes to Consolidated Financial Statements (continued)
16. Employee Benefit Plans
----------------------
The Company and its subsidiaries have noncontributory defined benefit
pension plans covering the majority of their U.S. employees. Benefits for
the Company's principal plans are based on an account balance formula. Under
this formula, each employee's accrued benefit can be expressed as an account
that is credited with amounts based upon the employee's pay, length of
service and a specified interest rate, all subject to a minimum benefit
level. These plans are funded in accordance with the Employee Retirement
Income Security Act of 1974 and the Internal Revenue Code. Certain non-U.S.
employees of the Company are covered by noncontributory defined benefit
plans. These plans are funded based upon local laws.
The following is a summary of the components of pension expense included in
the Consolidated Statement of Income for the Company's significant defined
benefit plans for the year ended December 31:
1993 1992 1991
---- ---- ----
Service cost-benefits earned during the period $34 $17 $17
Interest cost on projected benefit obligation 36 26 25
Actual return on plan assets (59) (28) (58)
Net amortization and deferral 11 (10) 20
--- --- ---
Net periodic pension cost $22 $ 5 $ 4
=== === ===
The following table sets forth the funded status of the Company's
significant defined benefit plans (including those of old Travelers in 1993
only) at December 31:
1993 1992
---- ----
Actuarial present value of benefit obligation:
Vested benefits $2,223 $298
Non-vested benefits 40 9
------ ----
Accumulated benefit obligation 2,263 307
Effect of future salary increases 79 17
------ ----
Projected benefit obligation 2,342 324
Plan assets at fair value 2,434 377
----- ----
Plan assets in excess of projected benefit
obligation 92 53
Unrecognized transition asset (3) (6)
Unrecognized prior service benefit (36) (17)
Unrecognized net loss (gain) 2 (24)
------ ----
Prepaid pension expense recognized in the
Statement of Financial Position $ 55 $ 6
====== ====
The projected benefit obligation at December 31, 1993 was determined using a
weighted average discount rate of 7.5% and assumed rates of compensation
increase of between 2% and 9%. The projected benefit obligation at December
31, 1992 was determined using a discount rate of 8.5% and an assumed rate of
compensation increase of 5.5%. The expected long-term rate of return used
in determining pension expense was 9.75% for 1993 and 10.0% for both 1992
and 1991.
Plan assets associated with the plans of old Travelers are held primarily in
various separate accounts and the general account of The Travelers Insurance
Company, a subsidiary of the Company, and certain investment trusts. These
47
Notes to Consolidated Financial Statements (continued)
accounts invest in stocks, bonds, mortgage loans and real estate. Plan
assets for the Company's other significant pension plans are invested
primarily in U.S. Government securities, corporate bonds and stocks.
The Company has defined contribution plans for certain subsidiaries
including various savings and stock ownership plans. The employer cost of
these plans was $12, $6 and $17 for 1993, 1992 and 1991, respectively.
17. Postretirement and Postemployment Benefits
------------------------------------------
The Company provides postretirement health care, life insurance and survival
income benefits to certain eligible retirees. These benefits relate
primarily to former unionized employees of predecessor companies, certain
employees of SBS and former employees of old Travelers. Other retirees are
generally responsible for most or all of the cost of these benefits (while
retaining the benefits of group coverage and pricing).
As required by FAS 106, the Company changed its method of accounting for
retiree benefit plans effective January 1, 1993, to accrue the Company's
share of the costs of postretirement benefits over the service period
rendered by an employee. Previously these benefits were charged to expense
when paid.
The Company elected to recognize immediately the liability for
postretirement benefits as the cumulative effect of a change in accounting
principle. This change resulted in a noncash after-tax charge to net income
of $17 in the first quarter of 1993.
The Company generally funds its share of the cost of postretirement benefits
on a pay-as-you-go basis. However, the Company has made contributions to a
survivor income plan, the assets of which are currently invested in a major
insurance company's general long-term investment portfolio. Payments and
net periodic postretirement benefit cost for 1993 were not material.
The following table sets forth the funded status of the Company's
postretirement benefit plans (including those of old Travelers) at December
31, 1993:
Accumulated postretirement benefit obligation
Retirees $418
Other fully eligible plan participants 33
Other active plan participants 53
----
504
Plan assets at fair value 3
-----
Accumulated postretirement benefit obligation in excess
of plan assets 501
Unrecognized net loss (18)
Unrecognized prior service cost (6)
----
Accrued postretirement benefit liability $ 477
====
For measurement purposes, the annual rate of increase in the per capita
cost of covered health care benefits ranged from 16.8% in 1993, decreasing
gradually to 6.0% by the year 2000 and remaining at that level thereafter.
The health care cost trend rate assumption affects the amounts reported.
48
Notes to Consolidated Financial Statements (continued)
To illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1993 by approximately $32. The
impact on net periodic postretirement benefit cost of such an increase
would not be material.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%. For certain plans associated
with SBS and old Travelers, assumed rates of compensation increase ranging
from 2% to 9% were used. For other plans, no assumptions have been made
for rate of compensation increases, since active employees are responsible
for the full cost of these benefits upon retirement.
In accordance with the Company's early adoption of FAS 112, the Company
changed its method of accounting for postemployment benefits effective
January 1, 1993 to accrue the cost of postemployment benefits over the
service period rendered by an employee. Previously these benefits were
charged to expense when paid. For the Company these benefits are
principally disability-related benefits and severance.
Adoption of FAS 112 resulted in the recognition of a noncash after-tax
charge to net income of $18 in 1993 for the cumulative effect of a change
in accounting principle. The Company continues to fund benefits on a "pay-
as-you-go" basis. Payments and annual expense for providing postemployment
benefits in 1993 were not material.
18. Lease Commitments
------------------
Rentals
Rental expense (principally for offices and computer equipment) was $182,
$114 and $137 for the years ended December 31, 1993, 1992 and 1991,
respectively.
At December 31, 1993, future minimum annual rentals under noncancellable
operating leases (including those of The Travelers Insurance Group) were as
follows:
1994 $398
1995 325
1996 245
1997 167
1998 92
Thereafter 121
-----
$1,348
=====
Future sublease rental income of approximately $19 will partially offset
these commitments.
The Company and certain of SBS's subsidiaries together have an option to
purchase the buildings presently leased for SBS's executive offices and New
York City operations at the expiration of the lease term.
49
Notes to Consolidated Financial Statements (continued)
19. Other Financial Instruments
---------------------------
The Company monitors creditworthiness of counterparties to financial
instruments by using criteria of acceptable risk that are consistent with
on-balance sheet financial instruments. The controls generally include
credit approvals, limits and other monitoring procedures. Transactions may
also include the use of collateral to minimize credit risk and lower the
effective cost to the borrower.
Forward and Futures Contracts
Forward and futures contracts are contracts for the delayed delivery of
securities in which the seller agrees to make delivery of a specified
instrument at a specified price or yield. Risks arise from the possible
inability of counterparties to meet the terms of their contracts and from
movements in market values and interest rates. Credit risk is reduced to
the extent that a clearing organization acts as a counterparty to the
transaction.
Forward and futures contracts used in trading activities are carried at
market value. Realized and unrealized gains and losses are included in
trading account profits.
At December 31, 1993 and 1992, SBS had outstanding forward and futures
contracts as follows:
1993 1992
---- ----
Purchase Sell Purchase Sell
-------- ---- -------- ----
Financial $8,203 $9,103 $4,095 $4,529
Foreign currency 4,654 4,499 732 734
------ ------ ------ ------
and other
$12,857 $13,602 $ 4,827 $5,263
====== ====== ====== =====
Financial forward contracts relate primarily to mortgage-backed securities
transactions. SBS also has outstanding commitments, amounting to $796 for
1993 and $673 for 1992, to underwrite variable rate municipal securities at
future dates subject to certain conditions being met by the issuers.
Financial Guarantees
At December 31, 1993, The Travelers Insurance Group had outstanding
financial guarantees of $3,016, of which $2,598 represents its participation
in the Municipal Bond Insurance Association's guarantee of municipal bond
obligations. The bonds are generally rated A or above and The Travelers
Insurance Group's participation has been reinsured.
Credit Cards
The Company provides credit card services through its subsidiaries,
Primerica Bank and Primerica Bank USA. These services are provided to
individuals and to affinity groups nationwide. At December 31, 1993 and
1992 total credit lines available to credit cardholders were $3,916 and
$3,056, of which $697 and $538 were utilized, respectively.
50
Notes to Consolidated Financial Statements (continued)
Other Commitments
At December 31, 1993, SBS had borrowed securities having a market value of
$1,225 against which it had pledged securities having market values of
$1,279. In addition, SBS had obtained letters of credit aggregating $154,
of which $116 was used to satisfy various collateral and deposit
requirements principally with clearing organizations.
At December 31, 1992, SBS had borrowed securities having a market value of
$763 against which it had pledged securities having market values of $508
and letters of credit totaling $267. The letters of credit were partially
collateralized with securities owned by SBS having a market value of $90.
In addition, SBS had obtained letters of credit aggregating $179, of which
$131 was used to satisfy various collateral and deposit requirements
principally with clearing organizations. These agreements were partially
collateralized by securities with a market value of $37, including $34 of
customers' margin securities.
SBS and its broker-dealer subsidiary have each provided a portion of a
residual value guarantee in connection with the lease of the buildings
occupied by SBS's executive offices and New York operations. The amount of
the guarantee is dependent upon the final build-out costs with a maximum of
$485.
The Travelers Insurance Group may use financial instruments from time to
time with exposure to similar kinds of off-balance sheet risk. These
instruments include forward contracts, financial futures contracts, unfunded
commitments to partnerships, transfers of receivables with recourse and
interest rate swaps. The off-balance sheet risks of these financial
instruments were not considered significant at December 31, 1993.
20. Contingencies
-------------
A subsidiary of The Travelers Insurance Group is in litigation with certain
underwriters at Lloyd's in New York state court to enforce reinsurance
contracts with respect to recoveries for certain asbestos claims. In
January 1994 the court stayed litigation of this matter in favor of
arbitration of the contract issues raised by old Travelers under the
applicable treaties and an agreement with the Lloyd's market on coverage for
asbestos-related claims.
Certain of the Company's subsidiaries are involved in litigation with
respect to claims arising with regard to insurance, which is taken into
account in establishing benefit reserves. On insurance contracts written
many years ago, old Travelers continues to receive claims asserting alleged
injuries and damages from asbestos and other hazardous and toxic substances.
In relation to these claims, the Company carries on a continuing review of
its overall position, its reserving techniques and reinsurance recoverable.
In each of these areas of exposure, the Company has endeavored to litigate
individual cases and settle claims on favorable terms. Given the vagaries
of court coverage decisions, plaintiff's expanded theories of liability, the
risks inherent in major litigation and other uncertainties, it is not
presently possible to quantify the ultimate exposure represented by these
claims. As a result, the Company expects that future earnings may be
adversely affected by environmental and asbestos claims, although the
amounts cannot be reasonably estimated. However, it is not likely these
claims will have a material adverse effect on the Company's financial
condition.
51
Notes to Consolidated Financial Statements (continued)
In the ordinary course of business the Company and/or its subsidiaries are
defendants or co-defendants in various litigation matters. Although there
can be no assurances, the Company believes, based on information currently
available, that the ultimate resolution of these legal proceedings (other
than environmental and asbestos claims) would not be likely to have, but may
have, a material adverse effect on the results of operations.
52
Notes to Consolidated Financial Statements (continued)
21. Quarterly Financial Data (unaudited)
------------------------------------
1993 1992
------------------------------------------- -------------------------------------------
First Second Third Fourth Total First Second Third Fourth Total
----------------------------------------------------------------------------------------
Total revenues $1,302 $1,284 $2,016 $2,195 $6,797 $1,335 $1,276 $1,245 $1,269 $5,125
Total expenses 974 987 1,576 1,750 5,287 1,061 1,044 994 1,026 4,125
Gain on sales of stock of
subsidiaries and affiliates 6 - 7 - 13 78 - - 110 188
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes, and minority
interest and cumulative effect of
changes in accounting principle 334 297 447 445 1,523 352 232 251 353 1,188
Provision for income taxes 119 106 182 143 550 132 82 86 132 432
Minority interest, net of income taxes (8) (4) (6) (4) (22) - - - - -
----- ----- ----- ------ ----- ----- ----- ----- ----- -----
Net income before cumulative effect of
changes in accounting principles 207 187 259 298 951 220 150 165 221 756
Cumulative effect of changes in
accounting principles (35) - - - (35) (28) - - - (28)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income restated (1) $ 172 $ 187 $ 259 $ 298 $ 916 $ 192 $ 150 $ 165 $ 221 $ 728
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Earnings per share of common stock:
Net income $ 0.89 $ 0.76 $ 1.03 $ 1.19 $ 3.88 $ 0.98 $ 0.68 $ 0.73 $ 0.97 $ 3.34
Cumulative effect of changes in
accounting principles (0.15) -. -. -. (0.14) (0.13) -. -. -. (0.12)
------- ------- ------- ------- ------- ------- ------- ------ ------- -------
Net income as restated (1) $ 0.74 $ 0.76 $ 1.03 $ 1.19 $ 3.74 $ 0.85 $ 0.68 $ 0.73 $ 0.97 $ 3.22
======= ======= ======= ======= ======= ======= ======= ====== ======= =======
Common stock price
High $ 37.313 $ 39.469 $ 49.500 $ 48.625 $ 49.500 $ 21.313 $ 20.875 $ 22.250 $ 24.938 $ 24.938
Low $ 24.313 $ 31.219 $ 37.594 $ 38.000 $ 24.313 $ 18.812 $ 17.875 $ 19.063 $ 20.750 $ 17.875
Close $ 34.594 $ 39.469 $ 47.750 $ 38.875 $ 38.875 $ 20.125 $ 19.187 $ 21.875 $ 24.188 $ 24.188
Dividends per share of common stock $ .120 $ .120 $ .125 $ .125 $ .490 $ .063 $ .100 $ .100 $ .100 $ .363
<FN>
Due to changes in the number of average shares outstanding, quarterly earnings per share of common stock do not add to the
totals for the years. The above information has been restated to reflect the stock splits as discussed in Note 2.
(1) Previously reported quarterly results for the first quarter of 1993 have been restated to reflect the Statement of
Financial Accounting Standards (FAS 112) "Accounting For Postemployment Benefits," with retroactive application to
January 1, 1993. This had the effect of reducing first quarter 1993 net income by $18.
53
Independent Auditors' Report
KPMG Peat Marwick
Certified Public Accountants
345 Park Avenue
New York, New York 10154
The Board of Directors and Stockholders
The Travelers Inc.:
We have audited the accompanying consolidated statements of financial position
of The Travelers Inc. (formerly Primerica Corporation) and subsidiaries as of
December 31, 1993 and 1992, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the
three year period ended December 31, 1993. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Travelers Inc.
and subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its methods of accounting for postretirement benefits other than
pensions and accounting for postemployment benefits in 1993, and its method of
accounting for income taxes in 1992.
KPMG Peat Marwick
January 24, 1994
/s/ KPMG Peat Marwick
54