Exhibit 13.01
The Travelers Inc. and Subsidiaries
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In millions of dollars, except per share amounts)
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Year Ended December 31, (1)
-----------------------
Total revenues (2) $ 18,465 $ 6,797 $ 5,125 $ 6,608 $ 6,194
After-tax gains from sale
of subsidiaries and affiliates $ 88 $ 8 $ 135 $ 43 $ 10
Income before cumulative effect of
changes in accounting principles $ 1,326 $ 951 $ 756 $ 479 $ 373
Net Income (3) $ 1,326 $ 916 $ 728 $ 479 $ 373
Return on average common equity (4) 15.6% 18.4% 20.6% 15.7% 13.7%
December 31, (1)
-------------
Total assets $115,297 $101,290 $24,151 $ 21,561 $19,689
Long-term debt $ 7,075 $ 6,991 $ 3,951 $ 4,327 $ 3,456
Stockholders' equity (5) $ 8,640 9,326 $ 4,229 $ 3,280 $ 2,859
Per common share data:
---------------------
Income before cumulative effect of
changes in accounting principles $ 3.86 $ 3.88 $ 3.34 $ 2.14 $ 1.64
Net income $ 3.86 $ 3.74 $ 3.22 $ 2.14 $ 1.64
Dividends per common share $ 0.575 $ 0.490 $ 0.363 $ 0.225 $ 0.180
Book value per common share $ 24.77 $ 26.06 $ 17.70 $ 15.10 $ 13.20
Other data:
-----------
Average number of common shares
and equivalents (millions) 322.0 237.8 222.8 226.5 231.8
Year-end common shares
outstanding (millions) 316.5 327.1 222.0 217.2 216.5
Number of full-time employees 52,000 60,000 16,000 15,800 23,600
(1) The Travelers Inc. (the Company) was formerly Primerica
Corporation. Results of operations prior to 1994
exclude the amounts of The Travelers Insurance Group
Inc. except that results for 1993 include the Company's
equity in earnings relating to the 27% interest
purchased in December 1992. Results of operations
include amounts related to the Shearson Businesses from
July 31, 1993, the date of acquisition. Data relating
to financial position for the years prior to 1993
exclude amounts for The Travelers Insurance Group Inc.
and the Shearson Businesses. (see Note 1 of Notes to
Consolidated Financial Statements).
(2) Revenues for 1991 and 1990 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 Statements
for information regarding changes in accounting
principles in 1993 and 1992.
(4) The return on average common stockholders' equity is
calculated using income before cumulative effect of
changes in accounting principles.
(5) Stockholders' equity at December 31, 1994 reflects $1.3
billion of net unrealized losses on investment
securities pursuant to the adoption of FAS No. 115 in
1994 (See Note 2 of Notes to Consolidated Financial
Statements).
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) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
Revenues $18,465 $6,797 $5,125
====== ===== =====
Income before cumulative effect of changes in accounting principles $ 1,326 $951 $756
====== === ===
Net income $ 1,326 $916 $728
====== === ===
Earnings per share
Income before cumulative effect of changes in accounting principles $3.86 $3.88 $3.34
==== ==== ====
Net income $3.86 $3.74 $3.22
==== ==== ====
Weighted average number of common shares outstanding and
common stock equivalents (millions) 322.0 237.8 222.8
===== ===== =====
--------------------------------------------------------------------------------------------------------------
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. 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 related to the
27% previously owned. (See Note 1 of Notes to Consolidated Financial
Statements.)
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., an American Express Company (American
Express) subsidiary. The businesses acquired were combined with the
operations of Smith Barney, Harris Upham & Co. Incorporated, and the
combined firm has been named Smith Barney Inc. which is a subsidiary of
Smith Barney Holdings Inc. (Smith Barney). 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. (See Note 1 of Notes to
Consolidated Financial Statements.)
Results of Operations
Results of operations for 1994 reflect the full year impact of both the
Travelers Merger and the Shearson Acquisition. Results of operations
for 1993 include earnings from the Shearson Businesses for five months
and reflect the equity in the earnings relating to the Company's 27%
interest in old Travelers. Included in income before cumulative effect
of changes in accounting principles for the years ended December 31,
1994, 1993 and 1992 are net after-tax gains of $5 million, $52 million
and $163 million, respectively, as follows:
1994
----
- $39 million gain on the sale of American Capital Management &
Research Inc. to Van Kampen Merritt Companies in December for $430
million;
- $21 million gain on the sale of Smith Barney's interest in HG Asia
Holdings Ltd. for $55 million;
- $19 million gain on the sale of Bankers and Shippers Insurance
Company, a subsidiary of The Travelers Indemnity Company, to
Integon Corporation in October for $142 million;
- $9 million gain on the sale of the group dental insurance business
of The Travelers Insurance Company (TIC) to Metropolitan Life
Insurance Company (in conjunction with the sale of the group life
business completed in January 1995) for $52 million; and
- $83 million of reported investment portfolio losses.
1993
----
- a $65 million provision for one-time expenses related to the
acquisition of the Shearson Businesses;
- $8 million gain on the sale of stock of subsidiaries and
affiliates; and
- $109 million of reported investment portfolio gains.
1992
----
- $116 million gain on the sale of stock of subsidiaries and
affiliates; and
- reported investment portfolio gains of $47 million, including $19
million from the sale of the common stock investment in Musicland
Stores Corporation (Musicland).
Excluding these items, income before cumulative effect of changes in
accounting principles for 1994 increased $422 million to $1.321
billion, or 47%, over 1993, reflecting primarily an earnings increase
at Consumer Finance due to an increase in receivables outstanding, an
increase in Primerica Financial Services' earnings as a result of
improvements in life sales and persistency as well as increases in
$.M.A.R.T. and S.A.F.E. Loans; and the inclusion of the earnings from
the additional 73% investment in The Travelers Insurance Group.
On the same basis, income before cumulative effect of changes in
accounting principles for 1993 increased by $306 million, or 52%, over
1992, reflecting primarily increased operating earnings from the
combined Smith Barney 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.
Included in net income for 1993 is an after-tax charge of $18 million
resulting from the adoption of Statement of Financial Accounting
Standards (FAS) No. 112, "Employers' Accounting for Postemployment
Benefits," and an after-tax charge of $17 million resulting from the
adoption of FAS No. 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 FAS No.
109, "Accounting for Income Taxes."
The following discussion presents in more detail each segment's
operating performance and net income before the effects of changes in
accounting principles, which were not material to any of the business
segments.
Investment Services
Year Ended December 31,
------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
--------------------------------------------------------------------------------------------------------------
Smith Barney (1) $5,534 $390 $3,371 $306 $1,677 $157
Mutual funds and asset management
and other 156 32 153 30 145 34
--------------------------------------------------------------------------------------------------------------
Total Investment Services $5,690 $422 $3,524 $336 $1,822 $191
==============================================================================================================
(1) Net income for 1994 includes a $21 after-tax gain from the sale of
the interest in HG Asia and net income for 1993 includes a $65
after-tax provision for merger-related costs.
2
The Company's Investment Services segment includes Smith Barney -
investment banking and securities brokerage; a limited partnership
interest in RCM Capital Management (RCM) - asset management; and
American Capital Management & Research, Inc. (American Capital) -
mutual funds, through its date of sale in December 1994.
Smith Barney
A difficult operating environment in the securities markets combined
with the effect of increased expenses related to the acquisition of the
Shearson Businesses contributed to a slight decline in Smith Barney's
earnings when compared to 1993, excluding the $21 million gain in 1994
and the $65 million provision in 1993 referenced above.
Smith Barney Revenues
Year Ended December 31,
-----------------------------------------------------------
(millions) 1994 1993 1992
-----------------------------------------------------------
Commissions $1,964 $1,252 $509
Investment banking 680 667 433
Principal trading 900 549 298
Asset management fees 725 319 73
Interest income, net* 314 207 101
Other income 181 100 35
-----------------------------------------------------------
Net revenues* $4,764 $3,094 $1,449
===========================================================
* Net of interest expense of $770, $277 and $228 in 1994, 1993 and
1992, respectively. Revenues included in the consolidated statement of
income are before deductions for interest expense.
The securities industry experienced a widespread slowdown in activity,
revenues and profitability in 1994 compared to 1993. While Smith
Barney was significantly affected by this industry-wide slowdown, the
inclusion of the Shearson Businesses for the full year in 1994 versus
five months in 1993 resulted in substantial increases in revenues from
commissions, principal trading, asset management fees and net interest
income. Investment banking revenues rose slightly over 1993, in the
face of a poor environment for stock and bond issuances and lower new
issue volume in the securities markets generally during 1994,
reflecting the increased commitment of the firm to this area.
Expenses also increased substantially due to the inclusion of the
Shearson Businesses for the full year 1994. Employee compensation and
benefits were $2.953 billion in 1994 and $1.810 billion in 1993,
reflecting additional production-related financial consultant
compensation, as well as increased staffing levels resulting from the
acquisition of the Shearson Businesses. Communications, occupancy and
equipment expenses in 1994 were $574 million as compared to $323
million in 1993, reflecting higher office rental and related expenses
resulting from the acquisition of the Shearson Businesses. Excluding
interest and the provision in 1993 for merger-related costs, total
expenses increased to $4.118 billion in 1994 from $2.448 in 1993. In
addition to the general staffing and occupancy costs resulting from the
acquisition, Smith Barney has made major investments in the systems,
infrastructure, research, trading and investment banking resources and
staffing needed to service a much greater number of financial
consultants. The investment spending in research, capital markets and
investment banking has essentially leveled off during 1994 while the
upgrade of systems and infrastructure is continuing at a reduced pace.
Smith Barney's return on equity declined from 26.7% for 1993, excluding
the $65 million merger-related provision, to 16.4% for 1994 excluding
the $21 million gain on HG Asia, on a higher equity base, and is still
among the highest of its industry peer group.
3
Mutual Funds and Asset Management
Performance in this segment was essentially flat year-over-year.
American Capital's mutual fund sales (at net asset value) were $2.698
billion in 1994, $3.061 billion in 1993 and $2.212 billion in 1992.
Assets Under Management (excluding American Capital)
At December 31,
---------------------
(billions) 1994 1993
-----------------------------------------------------------
Smith Barney $ 74.1 $ 74.8
RCM Capital Management 22.4 24.5
Travelers Life and Annuities (1) 19.2 21.7
-----------------------------------------------------------
Total Assets Under Management $115.7 $121.0
===========================================================
(1) Part of the Life Insurance Services segment.
Outlook - Smith Barney'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. Continuance of the increasing interest rate
environment could have further adverse impact on Smith Barney'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. A decline in interest rates from present
levels could favorably impact Smith Barney's business. Smith Barney
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. Notwithstanding the investment spending referred
to above, which is now essentially completed, Smith Barney is
maintaining tight expense controls that management believes will help
the firm weather periodic downturns in market conditions.
Asset Quality - Total Investment Services' assets at December 31, 1994
were approximately $45.6 billion, consisting primarily of highly liquid
marketable securities and collateralized receivables. About 56% of
these assets were related to collateralized financing transactions
where U.S. Government and mortgage-backed securities are bought,
borrowed, sold and lent in generally offsetting amounts. Another 15%
represented inventories of securities primarily needed to meet customer
demand. A significant portion of the remainder of the 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 Smith Barney's securities
inventories 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. See Note 19 of Notes to Consolidated
Financial Statements for a description of Smith Barney's activities in
derivative financial instruments which are used primarily to facilitate
customer transactions.
At December 31, 1994 there were no "bridge" loans at Smith Barney and
exposure to high-yield positions was not material. Smith Barney's
assets to equity ratio at December 31, 1994 was 19.7 to 1, which
management believes is a conservative leverage level for a securities
broker and one that allows for future growth.
Smith Barney's assets are financed through a number of sources
including long and short-term credit facilities, the financing
transactions described above and payables to brokers, dealers and
customers.
4
Consumer Finance Services
Year Ended December 31,
------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
--------------------------------------------------------------------------------------------------------
Consumer Finance Services(1) $1,239 $227 $1,193 $232 $1,158 $198
========================================================================================================
(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 1994 over the prior year. The increase primarily
reflects an 11% increase in average receivables outstanding and an
improvement in net interest margins. The increase in net income and
revenues in 1993 compared to 1992 reflects a 3% increase in average
receivables outstanding and a significant decline in loan losses.
Receivables increased in 1994 by $543 million to end the year at $6.885
billion. The increase occurred across-the-board and was highlighted by
a 15% increase in personal loans. Sixty branch offices were added,
bringing the total to 828 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 approximated 8% in 1992 and 1993 and 7.2%
in 1994. For variable rate loan products Consumer Finance is charged
rates based on prevailing short term 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 15.41% in
1994 from 15.83% in the prior year and 16.31% in 1992, due to lower
yields on fixed rate second mortgages and the adjustable rate real
estate-secured loan product introduced at the end of 1992. Decreased
cost of funds has resulted in an improvement in net interest margins to
8.76% in 1994 from 8.44% in 1993 and 8.66% in 1992.
The allowance for losses as a percentage of net receivables was 2.64%
at year-end 1994 and 1993 compared to 2.91% at year-end 1992 reflecting
the improved credit quality of the loan portfolio.
As of, and for, the
Year Ended December 31,
----------------------------
1994 1993 1992
----------------------------
Allowance for losses as % of net
consumer finance receivables at
year end 2.64% 2.64% 2.91%
Charge-off rate for the year 2.08% 2.36% 2.84%
60 + days past due on a contractual
basis as % of gross consumer finance
receivables at year end 1.88% 2.21% 2.55%
Subsidiaries of the Company provide credit life, health and property
insurance to Consumer Finance customers. Premiums earned were $115
million in 1994, $88 million in 1993 and $90 million in 1992. The
increase in 1994 premiums is the result of the increase in receivables
and expanded availability of certain products in additional states, as
well as the reinsurance by the Company in 1994 of business previously
insured by non-affiliated companies.
5
Outlook - Consumer Finance is affected by the interest rate environment
and general economic conditions. In a rising interest rate
environment, net 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.
Asset Quality - Consumer Finance assets totaled approximately $7.7
billion at December 31, 1994, of which $6.7 billion, or 87%,
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 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 $555 million
were investments of insurance subsidiaries, including $463 million of
fixed-income securities and $61 million of short-term investments with
a weighted average quality rating of Aa2.
Life Insurance Services
Year Ended December 31,
--------------------------------------------------------------------------------
1994 1993 1992
----------------------------------------------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
----------------------------------------------------------------------------------------------------------------
Primerica Financial Services(1) $1,290 $210 $1,266 $223 $1,158 $197
Travelers Life and Annuities(2) 2,198 211 319 42 347 36
Managed Care and Employee Benefits(3) 3,522 169 - - - -
----------------------------------------------------------------------------------------------------------------
Total Insurance Services $7,010 $590 $1,585 $265 $1,505 $233
================================================================================================================
(1) Net income includes $7, $45 and $10 of reported investment
portfolio gains in 1994, 1993 and 1992, respectively.
(2) Net income includes $1, $17 and $6 of reported investment
portfolio gains in 1994, 1993 and 1992, respectively.
(3) Net income includes $9 gain from the sale of the group dental
insurance business in 1994.
The Life Insurance Services segment includes the results of Primerica
Financial Services (PFS) for all periods presented and, for 1994 only,
the results of the Travelers Life and Annuities and the Managed Care
and Employee Benefits segments of old Travelers which were acquired on
December 31, 1993. The 1993 and 1992 amounts reflected for Travelers
Life and Annuities represent the businesses of Primerica now included
in this segment. Certain 1993 production statistics related to old
Travelers' businesses are included for comparison purposes only and are
not reflected in 1993 revenues or operating results.
Primerica Financial Services
Before reported portfolio gains and a 1993 after-tax charge of $11
million for the cumulative effect of a tax rate increase through
December 31, 1992, PFS's 1994 earnings increased 7% over the prior
year. The increase was a
6
result of improved life insurance sales and persistency (i.e. the
percentage of policies that continue in force) as well as increases in
sales of other financial products, primarily mutual funds and the loan
products of the Consumer Finance segment.
Sales of individual term life insurance continued an upward trend in
1994. PFS issued 299,400 policies totaling $57.4 billion in face
amount during 1994, an increase from 260,300 policies totaling $49.3
billion in face amount in 1993 and 252,500 policies totaling $47.3
billion in face amount in 1992. The increase in face amount issued has
contributed to an increase in insurance in force, which was $335
billion at December 31, 1994, compared to $317 billion at December 31,
1993.
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 $1.32 billion in 1994 compared to $1.27 billion in 1993 and $1.07
billion in 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 $1.107 billion at
December 31, 1994 compared to $765 million at December 31, 1993 and
$487 million at December 31, 1992.
Travelers Life and Annuities
Travelers Life and Annuities consists of annuity, life and health
products marketed under the Travelers name (the Financial Services
individual business and the Asset Management & Pension Services group
annuity business of old Travelers) and the individual accident and
health operations of Transport Life Insurance Company. Among the range
of individual products are fixed and variable annuities; term,
universal and whole life insurance; and accident and health coverages.
These products are primarily marketed through 450 core independent
agents, The Copeland Companies (Copeland), a wholly owned subsidiary of
The Travelers Insurance Group Inc. (Travelers Insurance), and Smith
Barney financial consultants.
During 1994, $9.2 billion of face amount of individual life insurance
was issued bringing total life insurance in force to $49 billion.
Individual life insurance net premiums and deposits totaled $287
million in 1994 compared to $279 million in 1993.
Individual annuity production was strong during 1994 compared to 1993
primarily reflecting increased sales of variable annuities. In late
June a variable annuity product was introduced for distribution by
Smith Barney financial consultants and is expected to contribute to
annuity production in future periods. Sales of this product amounted
to $158 million in 1994. Net written premiums and deposits for
individual annuities during 1994 totaled $1.309 billion compared to
$1.023 billion in 1993 bringing total policyholder account balances and
benefit reserves to $10.9 billion at the end of 1994. Annuity sales
activity has been helped by the ratings upgrades that accompanied the
merger of Primerica and old Travelers.
In the group annuity business, net written premiums and deposits for
1994 were $1.284 billion and were down significantly from $2.092
billion in 1993. The decline reflects the Company's more selective
approach to issuance of guaranteed investment contracts and a decision
in the third quarter of 1993 to no longer market index funds and was
partially offset by a non-recurring transfer in-house of old Travelers
pension plan assets amounting to $512 million which were previously
managed externally. Policyholder account balances and benefit reserves
totaled $12.2 billion at year-end 1994 down from $13.6 billion at
year-end 1993.
Net written premiums for individual accident and health products,
primarily long-term care and supplementary products, totaled $334
million in 1994, about even with the 1993 period.
7
Managed Care and Employee Benefits
Managed Care and Employee Benefits consists of the old Travelers
businesses that market group accident and health and life insurance,
managed health care programs, and administrative services associated
with employee benefit plans to customers ranging from large
multinational corporations to small local employers.
As discussed in Note 3 of Notes to Consolidated Financial Statements,
the group life and related businesses have been sold to Metropolitan
Life Insurance Company and in January 1995, the group medical component
was exchanged for a 50% interest in The MetraHealth Companies, Inc.
Total group life insurance in force amounted to $144.1 billion at
year-end 1994, down from $149.9 billion at year- end 1993. Face amount
of group life insurance issued during 1994 was $11.4 billion versus
$13.6 billion in 1993. Net written premiums, deposits and equivalents
totaled $592 million for 1994 compared to $665 million in 1993.
In the group health business, net written premiums, deposits and
equivalents were $9.2 billion in 1994 compared to $9.7 billion in 1993.
Equivalents represent benefits under administration, which together
with deposits are estimates of premiums that fee-based customers would
have been charged under a fully insured arrangement and do not
represent actual revenues. Total lives covered by medical plans
declined to 5.0 million at December 31, 1994 from 5.9 million at
year-end 1993, although participation in the managed care component
rose 21%. These declines reflect the Company's emphasis on increasing
margins to improve profitability; improvements in underwriting designed
to reduce financial risk rather than emphasize growth; and
uncertainties during the period relating to proposed healthcare
legislation.
Property & Casualty Insurance Services
Year Ended December 31,
-------------------------------------------------------------------
(millions) 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
Net Net Net
Revenues Income Revenues Income Revenues Income
-----------------------------------------------------------------------------------------------------------------
Commercial (1) $3,058 $146 $315 $45 $316 $54
Minority Interest - Gulf - - - (22) - -
Personal (2) 1,480 103 - - - -
-----------------------------------------------------------------------------------------------------------------
Total Property & Casualty Insurance
Services $4,538 $249 $315 $23 $316 $54
=================================================================================================================
(1) Net income includes $73 of reported investment portfolio losses
in 1994 and $15 and $6 of reported investment portfolio gains in
1993 and 1992, respectively, and $19 in 1992 from the sale of
Musicland common stock.
(2) Net income in 1994 includes $18 of reported investment portfolio
losses and a $19 gain from the sale of Bankers and Shippers
Insurance Company.
The Property & Casualty Insurance Services segment consists of the
business lines of old Travelers as well as Gulf Insurance Group (Gulf).
Segment operating results for 1993 include only the 50% of Gulf then
owned by old Primerica and 1992 includes Gulf only. Certain 1993
production statistics related to old Travelers' businesses are included
for comparison purposes only and are not reflected in 1993 revenues or
operating results.
Commercial Lines
Commercial Lines net written premiums for 1994 totaled $2.391 billion
compared to $2.499 billion in 1993. Equivalents for 1994 totaled
$2.978 billion compared to $2.757 billion in 1993. Equivalents, which
are associated largely with national accounts, represent estimates of
premiums that customers would have been charged under a fully insured
arrangement and do not represent revenues.
8
A significant component of Commercial Lines is the National Accounts
division (National), which provides insurance coverages and services,
primarily workers' compensation, to large corporations. National
premium volume of $437 million in 1994 declined $141 million or 24%
from 1993. National equivalents of $1.996 billion for the year ended
December 31, 1994 were $64 million above the same period of 1993. For
the year ended December 31, 1994 new business, including both premiums
and equivalents, was $325 million compared to $407 million in 1993.
Renewed business, including both premiums and equivalents, was $1.997
billion in 1994 compared to $1.983 billion in 1993, reflecting efforts
to help customers control their loss costs, which has helped build a
better than 88% customer retention ratio. The shift to fee-based
service products from insurance products continued in 1994.
Premiums assumed from industry assigned pools of $129 million for the
year ended December 31, 1994 were $24 million less than the 1993
levels. Equivalents associated with Travelers acting as a servicing
carrier of these industry involuntary pools totaled $648 million in
1994, a decrease of $15 million from 1993. The decrease in premiums
and equivalents relative to the prior year is due to the depopulation
of involuntary workers' compensation pools and the formation of
alternative involuntary workers' compensation funding mechanisms in
which Travelers has no obligation to participate.
Commercial Lines Agency Marketing (Agency) business serves small and
mid-sized businesses through brokers and approximately 2,500
independent agents. Agency net written premiums of $1.526 billion for
the year ended December 31, 1994 were $30 million below 1993 premium
levels. Agency equivalents grew to $334 million, $172 million above
1993 levels. New business volume in the old Travelers mid-size
segment, which is a strategic point of business emphasis, was up $80
million or 26% from the same period in 1993; while the old Travelers
small business segment increased by $18 million, or 19%. The retention
for this mid-size business is slightly higher than 1993 levels while
this small business ratio declined by 2% reflecting soft market
conditions and tighter underwriting. Agency continues to focus on the
retention of existing business and maximization of product pricing
while maintaining its selective underwriting policy.
Specialty Lines premiums of $299 million for the year ended December
31, 1994 were $87 million higher than for the year ended December 31,
1993. This increase is primarily attributable to an increase in
property, primary liability and specialty auto writings, and assumed
reinsurance.
Catastrophe losses, net of tax and reinsurance, were $30 million and
$21 million for the years ended December 31, 1994 and 1993,
respectively. The increase in catastrophe losses was due to winter
storms in the first quarter of 1994.
The 1994 full year combined ratio was 124.7% and includes reserve
increases for environmental claims and a reduction of ceded reinsurance
balances amounting to $225 million that were charged against income on
a statutory basis (but not for GAAP reporting due to purchase
accounting adjustments related to the acquisition of old Travelers).
The 1993 full year combined ratio of old Travelers and Gulf combined
was 125.3% and includes $325 million of special reserve strengthening
for environmental and asbestos-related claims recorded by old Travelers
in the third quarter of 1993. The combined ratios excluding such
special charges were 114.2% for 1994 and 111.2% for old Travelers and
Gulf combined for 1993. The 1994 ratio also includes the impact of
winter storm losses in Agency in the first quarter of 1994, partly
offset by favorable loss development in certain workers' compensation
lines and residual markets. In addition, the combined ratio has been,
and will continue to be, affected by the shift to fee-for-service
products, which reduces premiums and losses while expenses remain in
insurance results.
Personal Lines
Net written premiums for 1994 were $1.433 billion compared to $1.361
billion in 1993. Included in 1994 are after-tax catastrophe losses of
$26 million net of reinsurance compared to $13 million in 1993. The
combined ratio for Personal Lines for the full year 1994 was 100.4%
compared to 104.4% in 1993. This improvement is primarily attributable
to improved underwriting results due to lower operating expenses,
favorable loss reserve development in 1994 on prior years' business in
the automobile line of business and a favorable resolution in 1994 of
the New Jersey Market Transition Facility deficit.
9
On October 18, 1994, The Travelers Indemnity Company, a subsidiary of
The Travelers Insurance Group Inc., consummated the sale of its
subsidiary, Bankers and Shippers Insurance Company (B&S), to Integon
Corporation for $142 million in cash, and recognized an after-tax gain
of $19 million on the sale. B&S primarily writes non- standard
personal automobile insurance.
Outlook - PFS
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. Enhanced customer service and
increased customer contacts have contributed to improved sales and
persistency (i.e., the percentage of policies that continue in force).
Insurance in force has begun to grow and the number of producing agents
has stabilized. A continuation of these trends could positively impact
future operations. PFS continues to expand cross-selling with other
Company subsidiaries of products such as loans and mutual funds.
Outlook - Travelers Life and Annuities
The insurance industry is extremely competitive on both price and
service and no single issuer is dominant. Consolidations are occurring
in the life insurance industry and other financial services
organizations are becoming involved in the sale and/or distribution of
life insurance products. This increases the pressure on the Company to
remain current as to market trends. Also, the annuities business is
interest sensitive and swings in interest rates could impact sales and
retention of in force policies.
On January 18, 1995, the U.S. Supreme Court in Nationsbank of North
--------------------
Carolina, NA. et. al. v. Variable Annuity Life Insurance Co., et. al.
---------------------------------------------------------------------
ruled unanimously that national banks may sell annuities. At this
time, it is not clear what impact, if any, this will have on the
Company's annuity sales. Currently, the Company's methods of
distribution of annuities are primarily through Copeland, independent
insurance agents and financial consultants of Smith Barney.
Outlook - MetraHealth
Upon formation of MetraHealth, the joint venture created by the
combination of the medical businesses of TIC and its affiliates and
Metropolitan Life Insurance Company (MetLife), the Company owned 50% of
Metrahealth's common stock. The Company's interest in MetraHealth will
be accounted for on the equity method. See Note 3 of Notes to
Consolidated Financial Statements.
MetraHealth will provide group health insurance, health maintenance
organizations, managed care and ancillary services throughout the
United States, in Puerto Rico and in the U.S. Virgin Islands. The
range of services provided by these products includes programs to
maintain health and wellness, as well as to promote patient education
and to manage health care through networks of providers of
medical/surgical, mental health and pharmaceutical services.
MetraHealth network products rely on contractual arrangements between
it and providers of health care to deliver services to covered
individuals at negotiated reimbursement levels as well as to
participate in utilization and quality management programs.
As of December 31, 1994, the businesses acquired by MetraHealth
included health maintenance organizations in 29 network areas, with
approximately 400,000 members; point-of-service operations in 72
network areas, with approximately 1.7 million members; and preferred
provider organizations in 90 network areas, with approximately 2.8
million members. Covered lives using the managed care networks and
covered by indemnity products, in the aggregate at December 31, 1994,
were approximately 11.3 million. MetraHealth expects some decline in
covered lives during 1995.
In March 1995, MetraHealth acquired HealthSpring, Inc. for common stock
of Metrahealth. HealthSpring builds and manages primary care physician
practices and serves approximately 32,000 patients through seven sites
in Pennsylvania, Ohio and Illinois. This acquisition resulted in a
reduction in the participation of the Company and MetLife in the
MetraHealth venture to 48.25% each.
10
Outlook - Property & Casualty
A variety of factors continue to affect the property-casualty market
including inflation in the cost of medical care and litigation and
losses from involuntary markets.
In most lines, pricing did not improve during the past year. For
Agency, the duration of the current downturn in the underwriting cycle
continues to pressure the pricing of guaranteed cost products. In the
small account market, which primarily buys guaranteed cost products,
price increases have not exceeded loss cost inflation for several
years. The focus is to retain existing profitable business and obtain
new accounts where the Company can maintain its selective underwriting
policy. The Company continues to adhere to strict guidelines to
maintain high quality underwriting, which could affect future premium
levels. National business is less affected by pricing; however, the
pricing of large account business continues to be very competitive.
Customer retention levels remained high in 1994 as a result of
Travelers Indemnity's continued delivery of quality service, primarily
claims management focused on loss cost reduction.
In Personal Lines, increasing loss costs in 1994 resulted in pressure
on current underwriting margins. Personal Lines management strategy
includes underwriting more state-specific business, a reduction of
exposure to catastrophe losses and control of operating expenses to
improve competitiveness and profitability.
In an effort to reduce its exposure to catastrophic hurricane losses,
Travelers Insurance 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.
Environmental Claims
As a result of various state and federal regulatory efforts aimed at
environmental remediation (particularly "Superfund"), the insurance
industry has been, and continues to be, involved in extensive
litigation involving policy coverage and liability issues. The
possible reauthorization of Superfund in 1995 may have some effect on
the resolution of these issues, but it is not possible at the present
time to determine what the potential impact, if any, will be. In
addition to the regulatory pressures, certain court decisions have
expanded insurance coverage beyond the original intent of the insurer
and insured, frequently involving policies that were issued prior to
the mid-1970s. The results of court decisions affecting the industry's
coverage positions continue to be inconsistent. Accordingly, the
ultimate responsibility and liability for environmental remediation
costs remain uncertain.
Travelers Insurance is part of the industry segment affected by these
issues and continues to receive claims alleging liability exposures
arising out of insureds' alleged disposition of toxic substances. The
review of environmental claims includes an assessment of the probable
liability, available coverage, judicial interpretations and historic
value of similar claims. In addition, the unique facts presented in
each claim are evaluated individually and collectively. Due
consideration is given to the many variables presented in each claim,
such as: the nature of the alleged activities of the insured at each
site; the allegations of environmental damage at each site; the number
of sites; the total number of potentially responsible parties at each
site; the nature of environmental harm and the corresponding remedy at
a site; the nature of government enforcement activities at each site;
the ownership and general use of each site; the willingness and ability
of other potentially responsible parties to contribute to the cost of
the required remediation at each site; the overall nature of the
insurance relationship between Travelers Insurance and the insured; the
identification of other insurers; the potential coverage available, if
any; the number of years of coverage, if any; the obligation to provide
a defense to insureds, if any, and the applicable law in each
jurisdiction. Analysis of these and other factors on a case-by-case
basis results in the ultimate reserve assessment.
The following table displays activity for environmental losses and loss
expenses and reserves for 1994. Approximately 14% of the net
environmental loss reserve (i.e. approximately $65 million) is case
reserve for resolved claims. Travelers Insurance does not post
individual case reserves for environmental claims in which there is a
coverage dispute until the dispute is resolved. Until then, the
estimated amounts for disputed coverage claims are carried in a bulk
reserve, together with unreported environmental losses.
11
Environmental Losses
--------------------
(millions) 1994
----
Beginning reserves:
Direct $504*
Ceded (13)
----
Net 491
Incurred losses and loss expenses:
Direct 54
Ceded (5)
Losses paid:
Direct 76
Ceded (7)
----
Ending reserves:
Direct 482
Ceded (11)
----
Net $ 471
====
* Includes $155 relating to the purchase accounting allocation for the
acquisition of old Travelers. Amounts prior to 1994 relate to Gulf
only and are not material.
The industry does not have a standard method of calculating claim
activity for environmental losses. Generally, for environmental
claims, Travelers Insurance establishes a claim file for each insured
on a per site, per claimant basis, if there is more than one claimant,
e.g. a federal and a state agency. This method will result in two
claims being set up for a policyholder at that one site. Travelers
Insurance adheres to its method of calculating claim activity on all
environmental-related claims, whether such claims are tendered on
primary, excess or umbrella policies.
As of December 31, 1994, Travelers Insurance had approximately 8,200
pending environmental-related claims and had resolved over 17,200 such
claims since 1986. Approximately 70% of the pending claims in
inventory represent Federal or state EPA-type claims tendered by
approximately 725 insureds. The balance represents bodily injury
claims alleging injury due to the discharge of insureds' waste or
pollutants.
To date, Travelers Insurance generally has been successful in its
coverage litigation and continues to reduce its potential exposure
through favorable settlements with certain insureds. These settlement
agreements with certain insureds are based on the variables presented
in each piece of coverage litigation. Generally the settlement dollars
paid in disputed coverage claims are a percentage of the total coverage
sought by such insureds. In addition, with respect to many of the
environmental claims there is a "buy-back" of future environmental
liability risks by Travelers Insurance, together with appropriate
indemnities and hold harmless provisions to protect Travelers
Insurance.
Asbestos Claims
In the area of asbestos, the industry has suffered from judicial
interpretations that have attempted to maximize insurance availability
from both a coverage and liability standpoint far beyond the intent of
the contracting parties. These policies generally were issued prior to
the 1980s. Originally the cases involved mainly plant workers and
traditional asbestos manufacturers and distributors. However, in the
mid-1980s, a new group of plaintiffs, whose exposure to asbestos was
less direct and whose injuries were often speculative, began to file
lawsuits in increasing numbers against the traditional defendants as
well as peripheral defendants who had produced products that may have
contained small amounts of some form of encapsulated asbestos. These
claims continue to arise and on an individual basis generally involve
smaller companies with smaller limits of potential coverage.
12
Also, there has emerged a group of non-product claims by plaintiffs,
mostly independent labor union workers, against companies, alleging
exposure to asbestos while working at these companies' premises. In
addition, various insurers, including Travelers Insurance, remain
defendants in a widely publicized action brought in Philadelphia
regarding potential consolidation and resolution of future asbestos
bodily injury claims. The cumulative effect of these judicial actions
on Travelers Insurance and its insureds currently is uncertain.
Also, 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.
Since each insured presents different liability and coverage issues,
Travelers Insurance evaluates those issues on an insured-by-insured
basis.
Travelers Insurance's evaluations have not resulted in any meaningful
average asbestos defense or indemnity payment. The varying defense and
indemnity payments made by Travelers Insurance on behalf of its
insureds have also precluded the Company from deriving any meaningful
data by which it can predict whether its defense and indemnity payments
for asbestos claims (on average or in the aggregate) will remain the
same or change in the future.
The following table displays activity for asbestos losses and loss
expenses and reserves for 1994. Approximately 85% of the net asbestos
reserves at December 31, 1994 represented incurred but not reported
losses.
Asbestos Losses
---------------
(millions) 1994
----
Beginning reserves:
Direct $775
Ceded (381)*
-----
Net 394
Incurred losses and loss expenses:
Direct 67
Ceded (16)
Losses paid:
Direct 140
Ceded (78)
----
Ending reserves:
Direct 702
Ceded (319)
-----
Net $383
====
* After reflecting a reduction of $70 relating to the purchase
accounting allocation for the acquisition of old Travelers. Amounts
prior to 1994 relate to Gulf only and are not material .
The largest reinsurer of Travelers Insurance asbestos risks is Lloyd's
of London (Lloyds). Lloyds is currently undergoing restructuring to
seek to obtain additional capital and to segregate claims for years
before 1986. The ultimate effect of this restructuring on reinsurance
recoverable from Lloyds is not yet known. The Company does not believe
that any uncollectible amounts of reinsurance recoverables would be
material to its results of operations, financial condition or
liquidity.
In relation to these asbestos and environmental-related claims,
Travelers Insurance carries on a continuing review of its overall
position, its reserving techniques and reinsurance recoverable. In
each of these areas of exposure, Travelers Insurance has endeavored to
litigate individual cases and settle claims on favorable terms. Given
the
13
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 or range of exposure represented by these claims to the
Company's financial condition, results of operations or liquidity. The
Company believes that it is reasonably possible that the outcome of the
uncertainties regarding environmental and asbestos claims could result
in a liability exceeding the reserves by an amount that would be
material to operating results in a future period. However, it is not
likely these claims will have a material adverse affect on the
Company's financial condition or liquidity.
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 such payments will not have a material impact on the Company's
results of operations, financial condition or liquidity.
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. While most of
these provisions have failed to become law, these initiatives may
continue as legislators and regulators try to respond to public
availability and affordability concerns and the resulting laws, if any,
could adversely affect the Company's ability to write business with
appropriate returns.
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,
1994 and 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 which includes both Life and Property & Casualty totaled
approximately $38.5 billion, representing 63% 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, management employs a conservative
investment philosophy. The investment portfolio supports both the life
and property-casualty insurance operations. The insurance segment's
fixed maturity portfolio totaled $27 billion, comprised of $21 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, 1994 were Aa3 and Baa1, respectively.
Included in the fixed maturity portfolio was approximately $1.4 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). Such CMOs typically have
high credit quality, offer good liquidity, and provide a significant
advantage in yield and total return compared to treasury securities.
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) 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.
14
At December 31, 1994, the segment held CMOs with a market value of $2.9
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. In
addition, the segment held $1.9 billion of GNMA, FNMA or FHLMC
mortgage-backed securities at December 31, 1994. Virtually all of
these securities are rated AAA.
The segment also held $1.0 billion of securities that are backed
primarily by credit card or car loan receivables at December 31, 1994.
At December 31, 1994, real estate and mortgage loan investments totaled
$5.8 billion. Most of these investments are included in the investment
portfolio of The Travelers Insurance Group. The Company is continuing
its strategy to dispose of these real estate assets and some of the
mortgage loans and to reinvest the proceeds to obtain current market
yields.
At December 31, mortgage loan and real estate portfolios consisted of
the following:
(millions) 1994 1993
---- ----
Current mortgage loans $4,905 $6,096
Underperforming mortgage loans 511 1,269
----- -----
Total mortgage loans 5,416 7,365
----- -----
Real estate held for sale 418 1,049
----- -----
Total mortgage loans and real estate $5,834 $8,414
===== =====
Included in underperforming mortgage loans above are $270 million of
mortgages restructured at below market terms, of which $265 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. Of the total real estate held
for sale $383 million is under- performing.
For further information relating to investments, see Note 5 of Notes to
Consolidated Financial Statements.
Corporate and Other
Year Ended December 31,
--------------------------------------------------------------------------
1994 1993 1992
--------------------------------------------------------------------------
Net Net Net
Income Income Income
(millions) Revenues (Expense) Revenues (Expense) Revenues (Expense)
-------------------------------------------------------------------------------------------------------------
Net expenses(1) $(201) $(65) $(62)
Equity in income of old
Travelers in 1993 and
Fingerhut in 1992 - 152 26
Net gain on sale of stock of
subsidiaries and affiliates 39 8 116
-------------------------------------------------------------------------------------------------------------
Total Corporate and Other $(12) $(162) $180 $95 $324 $ 80
=============================================================================================================
(1) Includes $3 and $2 of reported investment portfolio gains in 1993
and 1992, respectively.
15
Corporate and Other consists of corporate staff and treasury
operations, certain corporate income and expenses that have not been
allocated to the operating subsidiaries and certain intersegment
eliminations.
The increase in net expenses in 1994 is primarily attributable to the
assumption of old Travelers corporate debt and certain corporate
expenses, the full year impact of financing the Shearson Acquisition
and a rise in commercial paper borrowing costs of approximately 117
basis points.
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.
The equity in income of old Travelers in 1993 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 a tax rate increase through
December 31, 1992.
Liquidity and Capital Resources
The Travelers Inc. (the Parent) services its obligations primarily with
dividends and other advances that it receives from subsidiaries. The
subsidiaries' dividend paying ability is limited by certain covenant
restrictions in 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. During
1994 the Parent, CCC and TIC entered into an agreement with a syndicate
of banks to provide $1.5 billion of revolving credit, to be allocated
to any of the Parent, CCC or TIC. The participation of TIC in this
agreement is limited to $300 million. The revolving credit facility
consists of a 364-day revolving credit facility in the amount of $300
million and a 5-year revolving credit facility in the amount of $1.2
billion. At December 31, 1994, $650 million was allocated to CCC and
$200 million to TIC. Under this facility the Company is required to
maintain a certain level of consolidated stockholders' equity (as
defined in the agreement). At December 31, 1994, the Company exceeded
this requirement by approximately $2.7 billion.
As of December 31, 1994, the Parent had unused credit availability of
$650 million consisting of $520 million under the 5-year revolving
credit facility and $130 million under the 364-day revolving credit
facility. The Parent may borrow under its revolving credit facilities
at various interest rate options and compensates the banks for the
facilities through commitment fees.
As of March 3, 1995, the Parent had $800 million available for debt
offerings under its shelf registration statements.
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, 1994, CCC had unused credit availability of $3.01 billion
consisting of $2.280 billion under 5-year revolving credit facilities
and $730 million under 364-day revolving credit facilities. CCC may
borrow under its revolving credit facilities at various interest rate
options and compensates the banks for the facilities through commitment
fees.
16
During 1994 and through March 3, 1995, CCC completed the following debt
offerings leaving $950 million available for debt offerings under its
shelf registration statement:
- 7 7/8% Notes due July 15, 2004 $200 million
- 8 1/4% Notes due November 1, 2001 $300 million
- 7 7/8% Notes due February 1, 2025 $200 million
- 7 3/4% Notes due March 1, 2005 $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, 1994, CCC would have been
able to remit $270 million to the Parent under its most restrictive
covenants or regulatory requirements.
Smith Barney Holdings Inc. (Smith Barney)
Smith Barney funds its day to day operations through the use of
commercial paper, collateralized and uncollateralized bank borrowings
(both committed and uncommitted), internally generated funds,
repurchase transactions, and securities lending arrangements. The
volume of Smith Barney'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. In May of 1994, Smith Barney renegotiated its
three-year revolving credit agreement (the "Agreement") with a bank
syndicate. The amendment to the Agreement extended the term by one
year until May 1997 and increased the amount of the facility from $625
million to $1 billion. As of December 31, 1994, $400 million was
borrowed under the Agreement. In addition, in May 1994, Smith Barney
entered into a $750 million, 364-day revolving credit agreement with a
bank syndicate. As of December 31, 1994, there were no borrowings
outstanding under this facility. Smith Barney also has substantial
borrowing arrangements consisting of facilities that it has been
advised are available, but where no contractual lending obligation
exists.
Smith Barney, through its subsidiary Smith Barney Inc., issues
commercial paper directly to investors. As a policy, Smith Barney
maintains sufficient borrowing power of unencumbered securities to
cover unsecured borrowings and unsecured letters of credit. In
addition, Smith Barney monitors its leverage and capital ratios on a
daily basis.
During 1994 and through March 3, 1995 Smith Barney completed the
following debt offerings leaving $600 million available for debt
offerings under its shelf registration statement:
- 5 1/2% Notes due January 15, 1999 . . . $200 million
- 6% Notes due March 15, 1997 . . . . . . $200 million
- 7 7/8% Notes due October 1, 1999 . . . . $150 million
- 7.4% Notes due November 17, 1996
(Medium-Term Notes) . . . . . . . . . . $ 50 million
- 7.98% Notes due March 1, 2000 . . . . . $200 million
Smith Barney 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, 1994, Smith Barney would have been able to remit
approximately $500 million to the Parent under its most restrictive
covenants.
The Travelers Insurance Group
At December 31, 1994, The Travelers Insurance Group had $23.3 billion
of life and annuity product deposit funds and reserves. Of that total,
$11.6 billion are not subject to discretionary withdrawal based on
contract terms. The remaining $11.7 billion are for life and annuity
products that are subject to discretionary withdrawal by the
contractholder. Included in the amount subject to discretionary
withdrawal are $1.9 billion of liabilities that are surrenderable with
market value adjustments. An additional $5.7 billion of the life
insurance and individual annuity liabilities are subject to
discretionary withdrawals, with an average surrender charge of 5.5%.
Another $1.4 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 $2.6 billion of
liabilities are surrenderable without charge. Approximately 30% 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
17
policyholders. Insurance liabilities 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 1995,
1996, 1997, 1998 and 1999 are $1.4 billion, $1.0 billion, $279 million,
$256 million and $200 million, respectively. At December 31, 1994, the
interest rates credited on GICs had a weighted average rate of 5.96%.
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, 1994, TIC has unused credit availability of $200 million consisting
of $160 million under the 5-year revolving credit facility and $40
million under the 364-day revolving credit facility.
Under Connecticut law the statutory capital and surplus of The
Travelers Insurance Group, which amounted to $4.2 billion at December
31, 1994, is not available in 1995 for dividends to its Parent without
prior approval of the Connecticut Insurance Department.
Deferred Income Taxes
The Company has a net deferred tax asset which relates to temporary
differences that are expected to reverse as net ordinary deductions,
except for a deferred tax asset of $723 million which relates to the
unrealized loss on fixed maturity investments. Management has the
intent and the ability not to realize the unrealized loss except to the
extent of offsetting capital gains. The Company will have to generate
approximately $4.6 billion of taxable income, before the reversal of
the temporary differences, primarily over the next 10 to 15 years, to
realize the remainder of the deferred tax asset, exclusive of the
unrealized loss on fixed maturity investments. Management expects to
realize the remainder of the deferred tax asset based upon its
expectation of future taxable income, after the reversal of these
deductible temporary differences, of at least $1 billion annually.
Accounting Standards Not Yet Adopted
FAS 114 and FAS 118
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures," describe how impaired
loans should be measured when determining the amount of a loan loss
accrual. These Statements also amend existing guidance on the
measurement of restructured loans in a troubled debt restructuring
involving a modification of terms. The adoption of these Statements
effective January 1, 1995 will not have a material effect on the
Company's results of operations or financial position.
18
The Travelers Inc. and Subsidiaries
Consolidated Statement of Income
(In millions of dollars, except per share amounts)
Year Ended December 31, 1994 1993 1992
----------------------------------------------------------------------
Revenues
Insurance premiums $7,590 $1,480 $1,694
Commissions and fees 2,691 1,957 973
Interest and dividends 3,637 718 605
Finance related interest and
other charges 1,030 954 953
Principal transactions 900 549 298
Asset management fees 795 385 131
Equity in income of old Travelers - 164 -
Other income 1,822 590 471
----------------------------------------------------------------------
Total revenues 18,465 6,797 5,125
----------------------------------------------------------------------
Expenses
Policyholder benefits and claims 7,797 833 907
Non-insurance compensation and
benefits 3,241 2,057 1,069
Insurance underwriting,
acquisition and operating 2,572 506 674
Interest 1,284 707 674
Provision for credit losses 152 134 165
Other operating 1,524 1,050 636
----------------------------------------------------------------------
Total expenses 16,570 5,287 4,125
----------------------------------------------------------------------
Gain on sale of subsidiaries
and affiliates 254 13 188
----------------------------------------------------------------------
Income before income taxes,
minority interest and
cumulative effect of changes
in accounting principles 2,149 1,523 1,188
Provision for income taxes 823 550 432
----------------------------------------------------------------------
Income before minority
interest and cumulative
effect of changes in
accounting principles 1,326 973 756
Minority interest, net of
income taxes - (22) -
Cumulative effect of changes
in accounting principles,
net of income taxes - (35) (28)
----------------------------------------------------------------------
Net income $1,326 $ 916 $ 728
======================================================================
Net income per share of common
stock and common stock
equivalents:
Before cumulative effect of
changes in accounting principles $ 3.86 $ 3.88 $ 3.34
Cumulative effect of changes in
accounting principles - (0.14) (0.12)
----------------------------------------------------------------------
Net income per share of common
stock and common stock
equivalents $ 3.86 $ 3.74 $ 3.22
======================================================================
Weighted average number of
common shares outstanding
and common stock equivalents
(in millions) 322.0 237.8 222.8
======================================================================
See Notes to Consolidated Financial Statements.
20
The Travelers Inc. and Subsidiaries
Consolidated Statement of Financial Position
(In millions of dollars)
December 31, 1994 1993
--------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents
(including $816 and $914 segregated under federal and
other brokerage regulations) $ 1,227 $ 1,526
Investments:
Fixed maturities:
Available for sale, at market value in 1994 and amortized cost in 1993 27,192 28,109
Held to maturity, at amortized cost 96 177
Equity securities, at market value 510 555
Mortgage loans 5,416 7,365
Real estate held for sale 418 1,049
Policy loans 1,581 1,367
Short-term and other 3,907 3,577
--------------------------------------------------------------------------------------------------------------------
Total investments 39,120 42,199
--------------------------------------------------------------------------------------------------------------------
Securities borrowed or purchased under agreements to resell 25,655 13,353
Brokerage receivables 8,238 8,167
Trading securities owned, at market value 6,945 5,863
Net consumer finance receivables 6,746 6,216
Reinsurance recoverables 5,026 4,929
Value of insurance in force and deferred policy acquisition costs 2,163 1,996
Cost of acquired businesses in excess of net assets 2,045 2,162
Separate and variable accounts 5,162 4,665
Other receivables 4,018 4,624
Other assets 8,952 5,590
--------------------------------------------------------------------------------------------------------------------
Total assets $115,297 $101,290
====================================================================================================================
Liabilities
Investment banking and brokerage borrowings $ 4,374 $ 3,454
Short-term borrowings 2,480 2,535
Long-term debt 7,075 6,991
Securities loaned or sold under agreements to repurchase 21,620 10,144
Brokerage payables 7,807 7,012
Trading securities sold not yet purchased, at market value 4,345 3,835
Contractholder funds 16,392 17,980
Insurance policy and claims reserves 27,084 26,806
Separate and variable accounts 5,127 4,642
Accounts payable and other liabilities 10,215 8,455
--------------------------------------------------------------------------------------------------------------------
Total liabilities 106,519 91,854
--------------------------------------------------------------------------------------------------------------------
ESOP Preferred stock - Series C 235 235
Guaranteed ESOP obligation (97) (125)
--------------------------------------------------------------------------------------------------------------------
138 110
--------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million),
at aggregate liquidation value 800 800
Common stock ($.01 par value; authorized shares: 500 million
issued shares: 1994 - 368,195,609 and 1993 - 368,287,709) 4 4
Additional paid-in capital 6,655 6,566
Retained earnings 4,199 3,140
Treasury stock, at cost (1994 - 51,684,618 shares and 1993 - 41,155,405 shares) (1,553) (1,121)
Unrealized gain (loss) on investment securities and other, net (1,465) (63)
--------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,640 9,326
--------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $115,297 $101,290
====================================================================================================================
See Notes to Consolidated Financial Statements.
21
The Travelers Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(In millions of dollars)
Amounts Shares (in thousands)
------------------------ -----------------------------
Year Ended December 31, 1994 1993 1992 1994 1993 1992
------------------------ -----------------------------
Preferred Stock at aggregate liquidation value
Balance, beginning of year $ 800 $ 300 $ - 11,200 1,200 -
Issuance of preferred stock 500 300 10,000 1,200
----------------------------------------------------------------------------------- -----------------------------
Balance, end of year 800 800 300 11,200 11,200 1,200
=================================================================================== =============================
Common Stock and Additional Paid-In Capital
Balance, beginning of year 6,570 2,150 2,128 368,287 253,524 253,524
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 85 122 21
Other 4 (91)
----------------------------------------------------------------------------------- -----------------------------
Balance, end of year 6,659 6,570 2,150 368,196 368,287 253,524
----------------------------------------------------------------------------------- -----------------------------
Retained Earnings
Balance, beginning of year 3,140 2,363 1,720
Net income 1,326 916 728
Common dividends (181) (113) (78)
Preferred dividends (86) (26) (7)
------------------------------------------------------------------------------------
Balance, end of year 4,199 3,140 2,363
------------------------------------------------------------------------------------
Treasury Stock (at cost)
Balance, beginning of year (1,121) (540) (538) (41,155) (31,572) (36,278)
Conversion of debentures 81 65 4,104 4,356
Issuance of shares pursuant to employee benefit
plans, net of shares tendered for payment of option
exercise price and withholding taxes 111 (10) 54 5,318 6,175 6,583
Treasury stock acquired (543) (58) (122) (15,876) (1,478) (6,307)
Common stock issued to subsidiaries of the Company (595) (18,519)
Other 1 1 28 135 74
----------------------------------------------------------------------------------- -----------------------------
Balance, end of year (1,553) (1,121) (540) (51,685) (41,155) (31,572)
------------------------------------------------------------------------------------ ------------------------------
Unrealized Gain (Loss) on Investment Securities
and Other
Balance, beginning of year (63) (44) (30)
Net change in unrealized gains and losses on
investment securities (1,349) 22 7
Net issuance of restricted stock (190) (103) (64)
Restricted stock amortization 136 64 48
Translation adjustments, net 1 (2) (5)
------------------------------------------------------------------------------------
Balance, end of year (1,465) (63) (44)
------------------------------------------------------------------------------------
Total common stockholders' equity and common
shares outstanding $7,840 $8,526 $3,929 316,511 327,132 221,952
=================================================================================== =============================
Total stockholders' equity $8,640 $9,326 $4,229
===================================================================================
See Notes to Consolidated Financial Statements.
22
The Travelers Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(In millions of dollars)
Year Ended December 31, 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Income before income taxes, minority interest and cumulative effect of
changes in accounting principles $2,149 $ 1,523 $1,188
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 818 286 423
Additions to deferred policy acquisition costs (1,005) (369) (574)
Depreciation and amortization 349 125 97
Provision for credit losses 152 134 165
Undistributed equity earnings - (116) -
Changes in:
Trading securities, net (572) (1,082) (156)
Securities borrowed, loaned and repurchase agreements, net (826) (1,591) 62
Brokerage receivables net of brokerage payables 724 863 (252)
Insurance policy and claims reserves 278 251 29
Other, net (1,171) 522 (190)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 896 546 792
Income taxes paid (378) (403) (332)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 518 143 460
---------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Consumer loans originated or purchased (2,789) (2,673) (2,067)
Consumer loans repaid or sold 2,094 2,108 2,020
Purchases of fixed maturities and equity securities (9,231) (2,794) (2,014)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities 4,219 2,485 1,658
Mortgage loans 415 5 8
Real estate and real estate joint ventures 955 - -
Proceeds from maturities of investments:
Fixed maturities 3,576 231 312
Mortgage loans 1,372 6 3
Other investments, primarily short-term, net (598) (631) (18)
Payment for purchase of the Shearson Businesses (69) (1,296) -
Payment for net clearing assets transferred - (536) -
Cash acquired in connection with The Travelers Merger - 59 -
Business acquisitions - - (550)
Business divestments 679 120 571
Other, net (284) (274) (90)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 339 (3,190) (167)
---------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Issuance of preferred stock - series A - - 290
Dividends paid (267) (139) (85)
Issuance of common stock - 329 -
Treasury stock acquired (543) (58) (122)
Issuance of long-term debt 1,150 2,733 674
Payments and redemptions of long-term debt (1,033) (448) (972)
Net change in short-term borrowings (including investment banking and brokerage borrowings) 865 1,934 17
Contractholder fund deposits 2,205 - -
Contractholder fund withdrawals (3,529) - -
Other, net (4) (50) (138)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,156) 4,301 (336)
---------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (299) 1,254 (43)
Cash and cash equivalents at beginning of period 1,526 272 315
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,227 $ 1,526 $ 272
---------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $1,227 $ 674 $ 669
Value of assets exchanged for shares of old Travelers $ - $ - $ 173
=====================================================================================================================
See Notes to Consolidated Financial Statements.
23
The Travelers Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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) (the
Acquisition). During 1993 this investment was accounted for on the
equity method.
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 $3.398 billion is
comprised of $3.265 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 (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 then best estimate of
their fair values. 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 was completed during
1994. The excess of the purchase price over the estimated fair
value of net assets was $917 million and is being 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.
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. (LBI), a subsidiary of
American Express Company (American Express), 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 Inc. which is a subsidiary of Smith Barney Holdings Inc.
(Smith Barney). 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 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 of the Company and the balance
in notes to LBI. In addition, Smith Barney has agreed to pay
American Express additional amounts that are contingent upon the
new unit's performance, consisting of up to $50 million per year
for three years based on Smith Barney's revenues and 10% of Smith
Barney's after tax profits in excess of $250 million per year over
a five year period. Additional consideration paid during 1994
amounted to $69 million and Smith Barney expects to pay
approximately $50 million in the first quarter of 1995. The
contingent consideration will be accounted for prospectively, as
24
Notes to Consolidated Financial Statements (continued)
additional purchase price, which will result in amortization over
periods of up to 20 years. Evaluation and appraisal of assets and
liabilities, including the value of identifiable intangible assets
and liabilities assumed, was completed during 1994. As a result of
the acquisition of the Shearson Businesses, the Company recorded a
provision in the third quarter of 1993 of $65 million after-tax
relating primarily to the elimination of duplicate facilities,
severance and other personnel-related costs.
In conjunction with the acquisition of the Shearson Businesses,
Smith Barney entered into a securities clearing agreement with LBI
(the Clearing Agreement) effective August 2, 1993, pursuant to
which Smith Barney 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 $8.6 billion of assets and $7.787 billion of
liabilities to Smith Barney in connection with the Clearing
Agreement. Payment for these net assets of $813 million consisted
of approximately $536 million in cash and the remainder in notes to
LBI. The Clearing Agreement is terminating in early 1995, and
assets and liabilities related to the Clearing Agreement are being
transferred to LBI in exchange for cash equal to the net assets.
At December 31, 1994, $11.855 billion of assets and $10.428 billion
of liabilities related to the Clearing Agreement are included in
the Consolidated Statement of Financial Position.
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 for the year ended December 31, 1993 are listed
below.
(millions) Travelers Shearson
--------- ---------
Fair value of assets acquired, $40,922 $4,811
excluding cash acquired
Liabilities assumed (37,642) (2,779)
Issuance of notes - (586)
Equity securities issued (3,339) (150)
------- ------
Cash payment (acquired) $ (59) $1,296
======= ======
2. Summary of Significant Accounting Policies
------------------------------------------
Changes in Accounting Principles
FAS 115. Effective January 1, 1994, the Company adopted Statement
of Financial Accounting Standards (FAS) 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.
Debt securities that the Company has the positive intent and
ability to hold to maturity have been classified as "held to
maturity" and have been reported at amortized cost. Investment
securities that are not classified as "held to maturity" have been
classified as "available for sale" and are reported at fair value,
with unrealized gains and losses, net of income taxes, charged or
credited directly to stockholders' equity. Previously, securities
classified as available for sale were carried at the lower of
aggregate cost or market value. Initial adoption of this standard
resulted in a net increase of $214 million (net of taxes) to net
unrealized gains on investment securities which is included in
stockholders' equity.
FAS 106. In 1993, the Company adopted FAS 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 for
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
25
Notes to Consolidated Financial Statements (continued)
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 million ($25 million pre-tax) or $0.07 per
share. See Note 17 for additional information relating to FAS 106.
FAS 112. In 1993, the Company adopted FAS 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. For the Company
these benefits are principally disability-related benefits and
severance. 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 million ($29 million
pre-tax) or $0.07 per share.
FAS 113. In the first quarter of 1993, the Company adopted FAS No.
113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts". 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. Adoption of FAS 113 did not have an impact on
the Company's earnings; however, assets and liabilities increased
by like amounts. See Note 12 for additional reinsurance
disclosures.
Interpretations 39 and 41. Effective January 1, 1994, the Company
adopted Financial Accounting Standards Board Interpretation No. 39,
"Offsetting of Amounts Related to Certain Contracts"
(Interpretation 39). 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. In December 1994,
the Financial Accounting Standards Board issued Interpretation No.
41 "Offsetting of Amounts Related to Certain Repurchase and Reverse
Repurchase Agreements" (Interpretation 41). This Interpretation
modifies Interpretation 39 to permit offsetting in the statement of
financial position of payables and receivables that represent
repurchase agreements and reverse repurchase agreements that meet
certain conditions. Implementation of Interpretations 39 and 41
did not have a material impact on the Company's financial position.
Accounting Policies
Principles of Consolidation. The consolidated financial statements
include the accounts of The Travelers Inc. and its subsidiaries.
Results of operations prior to 1994 exclude the amounts of The
Travelers Insurance Group except that results for 1993 include the
Company's equity in earnings related to the 27% purchase.
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). 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. Equity securities include common and non-redeemable
preferred stocks. Fixed maturities classified as "held to
maturity" represent securities that the Company has both the
ability and the
26
Notes to Consolidated Financial Statements (continued)
intent to hold until maturity and are carried at amortized cost.
Fixed maturity securities classified as "available for sale" and
equity securities are carried at market values that are based
primarily on quoted market prices. The difference between
amortized cost and market values of such securities net of
applicable income taxes is reflected as a component of
stockholders' equity. Real estate held for sale is carried at the
lower of cost or fair value. Fair values are established by
appraisers, both internal and external, using discounted cash flow
analyses and other acceptable techniques. Mortgage loans are
carried at amortized cost. Policy loans are carried at unpaid
balances which do not exceed the net cash surrender value of the
related insurance policies. Short-term investments are carried at
cost, which approximates market. Realized gains and losses on
sales of investments and unrealized losses considered to be other
than temporary, determined on a specific identification basis, are
included in other income.
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 have been provided for in accordance with the
provisions of FAS No. 109, "Accounting for Income Taxes" (FAS 109),
which was adopted effective January 1, 1992. 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 million (subject to a tax
effect of $340 million) at December 31, 1994.
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 and the incremental shares assumed issued under the
Capital Accumulation Plan and other restricted stock plans. Fully
diluted earnings per common share, assuming conversion of all
outstanding convertible notes and debentures, the maximum dilutive
effect of common stock equivalents and conversion of 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, 1994, 1993 and
1992 would entail adding the number of shares issuable on
conversion of the other debentures (zero and 2 million and 4
million shares, respectively), the additional common stock
equivalents (2 million, zero and 1 million shares respectively) and
the assumed conversion of the 5.5% convertible preferred stock (3
million, 2 million, and zero shares, respectively) to the number of
shares included in the earnings per common share calculation
(resulting in a total of 327 million, and 242 million and 228
million shares, respectively) and eliminating the after-tax
interest expense related to the conversion of other debentures
(zero, $3 million and $7 million, respectively) and the elimination
of the 5.5% convertible preferred stock dividends ($7 million, $3
million, and zero, respectively).
Financial Instruments - Disclosures. 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. The Notes to Consolidated Financial
Statements also include various disclosures
27
Notes to Consolidated Financial Statements (continued)
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.
Derivative Financial Instruments. Information concerning
derivative financial instruments and the accounting policies
related thereto is included in Note 19 of Notes to Consolidated
Financial Statements.
Accounting Standards Not Yet Adopted
FAS 114 and FAS 118. FAS No. 114, "Accounting by Creditors for
Impairment of a Loan," and FAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures,"
describe how impaired loans should be measured when determining the
amount of a loan loss accrual. These Statements also amend
existing guidance on the measurement of restructured loans in a
troubled debt restructuring involving a modification of terms. The
adoption of these statements, effective January 1, 1995, will not
have a material effect on results of operations or financial
position.
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
ranging from twelve to thirty years.
28
Notes to Consolidated Financial Statements (continued)
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 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 is amortized
over the period of anticipated premiums; universal life in relation
to estimated gross profits; and annuity contracts employing a
level yield method. The value of insurance in force is reviewed
periodically for recoverability 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 receivables 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
29
Notes to Consolidated Financial Statements (continued)
from 2.5% to 12%, 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. 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, 1994 and 1993 are
$793 million and $803 million, respectively, 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-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 (ranging from 3.4% to 8%) 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.
Permitted Statutory Accounting Practices. The Travelers Insurance
Group Inc. and its subsidiaries, domiciled principally in
Connecticut and Massachusetts, prepare statutory financial
statements in accordance with the accounting practices prescribed
or permitted by the insurance departments of those states.
Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners
as well as state laws, regulations, and general administrative
rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed. The impact of any
permitted accounting practices on statutory surplus is not
material.
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.
30
Notes to Consolidated Financial Statements (continued)
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.
3. Sales of Subsidiaries and Affiliates
------------------------------------
During 1994, gains on sale of subsidiaries and affiliates totaled
$254 million pre-tax and consisted of the sale in December of
American Capital Management & Research Inc. (American Capital)
($162 million), the sale in November of Smith Barney's investment
in HG Asia Holdings Ltd. ($34 million), the sale in October of
Bankers and Shippers Insurance Company ($30 million), and the sale
in December of the group dental insurance business of The Travelers
Insurance Company (TIC) ($28 million).
During 1992, gains on sale of stock of subsidiaries and affiliates
totaled $188 million pre-tax and consisted principally of the sale
of Margaretten & Company, Inc. ($83 million) and the sale of a
substantial portion of the Company's investment in Fingerhut
Companies, Inc. (Fingerhut) ($87 million 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.
On January 3, 1995, the Company completed the sale of its group
life and related businesses to Metropolitan Life Insurance Company
(MetLife), and completed the formation of The MetraHealth
Companies, Inc. (MetraHealth), a joint venture of the medical
businesses of TIC and MetLife.
The Company sold its group life business as well as related non-
medical group insurance businesses to MetLife for $350 million.
The assets transferred included customer lists, books and records,
and furniture and equipment. In connection with the sale, TIC
ceded 100% of its risks in the group life and related businesses to
MetLife on an indemnity reinsurance basis, effective January 1,
1995. In connection with the reinsurance transaction, TIC
transferred assets with a fair market value of approximately $1.5
billion to MetLife, equal to the statutory reserves and other
liabilities transferred.
On January 3, 1995, TIC and MetLife, and certain of their
affiliates formed the MetraHealth joint venture by contributing
their medical businesses to MetraHealth, in exchange for shares of
common stock of MetraHealth. The assets transferred included cash,
fixed assets, customer lists, books and records, certain trademarks
and other assets used exclusively or primarily in the medical
businesses. TIC also contributed all of the capital stock of its
wholly owned subsidiary, The Travelers Employee Benefits Company,
to MetraHealth. The total contribution amounted to $448 million at
carrying value on the date of contribution. No gain was recognized
upon the formation of the joint venture. Upon formation of the
joint venture TIC and its affiliates owned 50% of the outstanding
capital stock of MetraHealth, and the other 50% was owned by
MetLife and its affiliates.
In connection with the formation of the joint venture, the transfer
of the fee based medical business (Administrative Services Only)
and other noninsurance business to MetraHealth was completed on
January 3, 1995. As the medical insurance business of The
Travelers Insurance Group comes due for renewal, and after
obtaining regulatory approvals, the risks will be transferred to
MetraHealth. In the interim the related operating results for this
medical insurance business will be reported by The Travelers
Insurance Group.
All of the businesses sold to MetLife or contributed to MetraHealth
were included in the Company's Managed Care and Employee Benefits
Operations (MCEBO). Revenues and net income from MCEBO for the
year ended 1994 amounted to $3.522 billion and $169 million,
respectively. Beginning in 1995 the
31
Notes to Consolidated Financial Statements (continued)
Company's results will reflect the medical insurance business not
yet transferred, plus its equity interest in the earnings of
MetraHealth.
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 prior to 1994 exclude the amounts of old Travelers
except that Corporate and Other results for 1993 include the equity
earnings relating to the 27% purchase of old Travelers in December
1992 (see Note 1). Data relating to identifiable assets in 1992
exclude amounts for old Travelers. The following table presents
certain information regarding these industry segments:
(millions) 1994 1993 1992
---- ---- ----
Revenues
Investment Services $5,690 $3,524 $1,822
Life Insurance Services 7,010 1,585 1,505
Property & Casualty Insurance Services 4,538 315 316
Consumer Finance Services 1,239 1,193 1,158
Corporate and Other (12) 180 324
------ ----- -----
$18,465 $6,797 $5,125
====== ===== =====
Income before income taxes, minority
interest and cumulative effect of
changes in accounting principles
Investment Services $ 732 $ 592 $ 321
Life Insurance Services 926 428 356
Property & Casualty Insurance Services 307 65 80
Consumer Finance Services 356 360 305
Corporate and Other (172) 78 126
----- ----- -----
$ 2,149 $1,523 $1,188
===== ===== =====
Income before cumulative effect of changes
in accounting principles
Investment Services $ 422 $ 336 $ 191
Life Insurance Services 590 265 233
Property & Casualty Insurance Services
(after minority interest of $22 in 1993) 249 23 54
Consumer Finance Services 227 232 198
Corporate and Other (162) 95 80
------ ----- -----
$1,326 $ 951 $ 756
====== ===== =====
Identifiable assets
Investment Services $ 45,618 $ 31,864 $10,439
Life Insurance Services 38,473 40,300 4,727
Property & Casualty Insurance Services 22,663 20,515 885
Consumer Finance Services 7,729 7,155 6,495
Corporate and Other 814 1,456 1,605
-------- -------- ------
$115,297 $101,290 $24,151
======= ======= ======
32
Notes to Consolidated Financial Statements (continued)
The Investment Services segment consists of investment banking,
securities brokerage, asset management and other financial services
provided through Smith Barney and its subsidiaries, investment
management services provided by RCM Capital Management and mutual
fund management and distribution services provided through American
Capital (sold in December 1994, see Note 3).
The Life 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 Primerica Financial Services (PFS).
The Property & Casualty Insurance Services segment 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-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, the
Company's approximately 27% interest in old Travelers during 1993
and the results of Fingerhut for 1992.
Cumulative effect of changes in accounting principles, and 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 these are not available,
discounted expected cash flows using market rates commensurate with
the credit quality and maturity of the investment.
33
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 to Maturity
--------------------------------------------- ---------------------------------------------
Amortized Gross Unrealized Market Amortized Gross Unrealized Market
--------------------- ---------------------
December 31, 1994 Cost Gains Losses Value Cost Gains Losses Value
----------------- --------------------------------------------- ---------------------------------------------
(millions)
Mortgage-backed
securities-principally
obligations of U.S.
Government agencies $ 5,227 $ 3 $(401) $ 4,829 $84 $12 $ - $ 96
U.S. Treasury
securities
and obligations of
U.S. Government
corporations
and agencies 4,652 4 (426) 4,230 - - - -
Obligations of states
and political
subdivisions 4,093 5 (369) 3,729 6 - - 6
Debt securities issued
by foreign governments 562 1 (32) 531 - - - -
Corporate securities 14,724 22 (873) 13,873 6 - - 6
--------------------------------------------- ---------------------------------------------
Totals $29,258 $35 $(2,101) $27,192 $96 $12 $ - $108
============================================= =============================================
Available for Sale Held to Maturity
--------------------------------------------- ---------------------------------------------
Amortized Gross Unrealized Market Amortized Gross Unrealized Market
--------------------- ---------------------
December 31, 1993 Cost Gains Losses Value Cost Gains Losses Value
----------------- --------------------------------------------- ---------------------------------------------
(millions)
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
============================================= =============================================
34
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated market value at December 31, 1994 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
(millions) Amortized Market
Cost Value
-------- --------
Due in one year or less $ 1,508 $ 1,484
Due after one year through five years 6,977 6,643
Due after five years through ten years 8,342 7,758
Due after ten years 7,216 6,490
------ ------
24,043 22,375
Mortgage-backed securities 5,311 4,925
------ ------
$29,354 $27,300
====== ======
Realized gains and losses on fixed maturities for the years ended
December 31, were as follows:
(millions) 1994 1993 1992
---- ---- ----
Realized gains
Pre-tax $ 52 $168 $ 61
--- --- ---
After-tax $ 34 $109 $ 40
--- --- ---
Realized losses
Pre-tax $201 $ 2 $ 1
--- --- ---
After-tax $131 $ 1 $ -
--- --- ----
Net realized gains on equity securities and other investments, after-tax,
amounted to $18 million, $14 million and $25 million for the years ended
December 31, 1994, 1993 and 1992, respectively. Net unrealized gains
(losses) on equity securities at December 31, 1994 and 1993 were $(6)
million and $42 million, respectively.
The Company had industry concentrations of corporate bonds and fixed
income securities at December 31 as follows:
(millions) 1994 1993
------ ------
Finance $2,040 $2,234
Banking* $1,718 $1,607
Electric utilities $1,676 $1,850
* Includes $547 million in 1994 and $515 million in 1993 of primarily
short-term investments and cash equivalents issued by foreign banks.
At December 31, 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
------------------------- -------------------------
(millions) 1994 1993 1994 1993
---- ---- ---- ----
California $1,246 $1,471 $ 11 $ 33
New York $ 589 $ 836 $129 $ 90
Texas $ 395 $ 600 $ 79 $ 192
Florida $ 435 $ 583 $ 15 $ 111
Illinois $ 375 $ 517 $ 48 $ 88
35
Notes to Consolidated Financial Statements (continued)
Other mortgage loan and real estate investments are dispersed throughout
the United States, with no combined holdings in any other state exceeding
$400 million.
Aggregate annual maturities on mortgage loans are as follows:
(millions)
Past maturity $ 219
1995 734
1996 508
1997 590
1998 671
1999 640
Thereafter 2,054
------
$5,416
======
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:
(millions) 1994 1993
------- -------
Resale agreements (by
counterparty)
Brokers and dealers $ 3,703 $ 2,340
Commercial banks,
foreign banks
and savings and loans 2,799 555
Other 1,804 1,386
------- -------
Total resale agreements 8,306 4,281
Deposits paid for
securities borrowed 17,349 9,072
------- -------
$25,655 $13,353
======= =======
36
Notes to Consolidated Financial Statements (continued)
Securities loaned or sold under agreements to repurchase, at their
respective carrying values, consisted of the following at December 31:
(millions) 1994 1993
-------- -------
Repurchase agreements (by
counterparty)
Brokers and dealers $ 4,910 $ 1,904
Commercial banks, foreign
banks and
savings and loans 2,852 1,600
Municipalities 3,023 301
Corporations 1,145 517
Other 2,692 953
------ ------
Total repurchase agreements 14,622 5,275
Deposits received for
securities loaned 6,998 4,869
------ ------
$21,620 $10,144
====== ======
The resale and repurchase agreements represent collateralized 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.
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 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.
37
Notes to Consolidated Financial Statements (continued)
Brokerage receivables and brokerage payables, which arise in the normal
course of business, consisted of the following at December 31:
(millions) 1994 1993
---- -----
Receivables from brokers and dealers $ 736 $1,063
Receivables from customers 7,502 7,104
----- -----
Total brokerage receivables $8,238 $8,167
===== =====
Payables to brokers and dealers $1,159 $1,841
Payables to customers 6,648 5,171
----- -----
Total brokerage payables $7,807 $7,012
===== =====
Included in payables to brokers and dealers as of December 31, 1994 and
1993 is approximately $338 million and $966 million, respectively, of
payables due LBI in connection with LBI's proprietary transactions.
8. Trading Securities
------------------
Trading securities at market value consisted of the following at
December 31:
1994 1993
---------------------------------- ----------------------------------
Securities Securities
Sold Sold
Securities Not Yet Securities Not Yet
(millions) Owned Purchased Owned Purchased
-------------- ---------------- ------------- -----------------
Obligations of U.S. Government and
agencies $3,670 $3,658 $2,233 $3,258
State and municipal obligations 978 16 839 42
Corporate debt and collateralized
mortgage obligations 1,688 424 2,214 198
Corporate convertibles, equities
and other securities 609 247 577 337
----- ----- ----- -----
$6,945 $4,345 $5,863 $3,835
===== ===== ===== =====
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.
38
Notes to Consolidated Financial Statements (continued)
9. Consumer Finance Receivables
----------------------------
Consumer finance receivables, net of unearned finance charges of $674
million and $613 million at December 31, 1994 and 1993, respectively,
consisted of the following:
(millions) 1994 1993
---- -----
Real estate-secured loans $2,845 $2,706
Personal loans 2,875 2,495
Credit cards 712 697
Sales finance and other 453 444
----- ------
Consumer finance receivables 6,885 6,342
Accrued interest receivable 43 42
Allowance for credit losses (182) (168)
----- ------
Net consumer finance receivables $6,746 $6,216
===== ======
An analysis of the allowance for credit losses on consumer finance
receivables at December 31, was as follows:
(millions) 1994 1993 1992
---- ----- ----
Balance, January 1 $168 $ 169 $ 167
Provision for credit losses 152 134 165
Amounts written off (163) (163) (184)
Recovery of amounts previously written off 25 23 21
Allowance on receivables purchased - 5 -
----- ------ ------
Balance, December 31 $ 182 $ 168 $ 169
===== ===== =====
Net outstandings $6,885 $6,342 $5,788
===== ===== =====
Ratio of allowance for credit losses
to net outstandings 2.64% 2.64% 2.91%
==== ==== ====
Contractual maturities of receivables before deducting unearned finance
charges and excluding accrued interest were as follows:
Receivables
Outstanding Due
(millions) December 31, Due Due Due Due After
1994 1995 1996 1997 1998 1998
----------- ------ ------ ------ ------ ------
Real estate-secured loans $2,908 $ 185 $ 191 $ 200 $ 206 $2,126
Personal loans 3,400 1,046 931 717 414 292
Credit cards 711 62 57 52 47 493
Sales finance and other 540 245 133 67 36 59
----- ----- ----- ----- ----- -----
Total $7,559 $1,538 $1,312 $1,036 $ 703 $2,970
===== ===== ===== ===== ===== =====
Percentage 100% 20% 18% 14% 9% 39%
===== ===== ===== ===== ===== =====
Contractual terms average 12 years on real estate-secured loans and 4
years on 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.
39
Notes to Consolidated Financial Statements (continued)
The Company has a geographically diverse consumer finance loan
portfolio. At December 31, the distribution by state was as follows:
1994 1993
---- ------
Ohio 13% 13%
North Carolina 10% 10%
South Carolina 7% 7%
Pennsylvania 6% 6%
Maryland 5% 6%
California 5% 5%
Texas 5% 5%
All other states* 49% 48%
---- ----
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., exit
value versus entry value). 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, 1994 is approximately
$618 million above the recorded carrying 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, 1994
is approximately equal to the aggregate carrying value due to the
increase in variable rate receivables whose rates are periodically reset
and the fact that the average yield on fixed rate receivables is
approximately equal to that on new fixed rate loans made at year end
1994. Fair values included in Note 20 are based on the exit value
methodology.
10. Debt
----
Investment banking and brokerage borrowings consisted of the following
at December 31:
(millions) 1994 1993
---- ----
Commercial paper $2,455 $1,401
Secured borrowings 185 105
Unsecured borrowings 1,141 693
Notes to LBI 593 1,255
----- -----
$4,374 $3,454
===== =====
Weighted average interest rate
at end of period, excluding
non-interest bearing balances 5.8% 3.3%
===== ====
Investment banking and brokerage borrowings are short-term and include
commercial paper, secured and unsecured bank loans used to finance Smith
Barney's operations, including the securities settlement process, and
notes issued to LBI inconnection 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 at December 31, 1994 represent a 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. Notes payable to LBI at December 31, 1993 also
included a $586 million variable rate note which was issued as partial
payment for the businesses acquired and was repaid in January 1994. In
1993, Smith Barney put in place a commercial paper program that consists
of both discounted and interest
40
Notes to Consolidated Financial Statements (continued)
bearing paper and is currently authorized up to $2.5 billion. Smith
Barney also has substantial borrowing arrangements consisting of
facilities that it has been advised are available, but where no
contractual lending obligation exists.
At December 31, 1994 and 1993, the market value of the securities
pledged as collateral for short-term brokerage borrowings was $229
million and $124 million, respectively, including $163 million of
customer margin securities at December 31, 1994.
At December 31, short-term borrowings consisted of commercial paper
outstanding with weighted average interest rates as follows:
(millions) 1994 1993
-------------------------- ----------------------------
Outstanding Interest Rate Outstanding Interest Rate
----------- ------------- ----------- -------------
The Travelers Inc. $ 101 5.83% $329 3.43%
Commercial Credit Company 2,305 5.89% 2,206 3.34%
The Travelers Insurance Company 74 6.02% -
----- -----
$2,480 $2,535
===== =====
The Travelers Inc. (the Parent), Commercial Credit Company (CCC) and The
Travelers Insurance Company (TIC) issue commercial paper directly to
investors. 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.
In 1994 the Parent, CCC and TIC entered into an agreement with a
syndicate of banks to provide $1.5 billion of revolving credit, to be
allocated to any of the Parent, CCC or TIC. The participation of TIC in
this agreement is limited to $300 million. The revolving credit
facility consists of a 364-day revolving credit facility in the amount
of $300 million and a 5-year revolving credit facility in the amount of
$1.2 billion. At December 31, 1994, $650 million was allocated to the
Parent, $650 million was allocated to CCC and $200 million was allocated
to TIC. Under this facility the Company is required to maintain a
certain level of consolidated stockholders' equity (as defined in the
agreement). At December 31, 1994, the Company exceeded this requirement
by approximately $2.7 billion.
At December 31, 1994, CCC also had committed and available revolving
credit facilities on a stand alone basis of $2.360 billion, of which
$600 million expires in 1995 and $1.760 billion expires in 1999.
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, 1994, CCC would have been able to
remit $270 million to the Parent under its most restrictive covenants or
regulatory requirements.
The carrying value of short-term borrowings approximates fair value.
41
Notes to Consolidated Financial Statements (continued)
Long-term debt, including its current portion, and final maturity dates
were as follows at December 31:
(millions) 1994 1993
---- ----
The Travelers Inc.
8.6% Notes due 1994 $ - $ 93
8 3/8% Notes due 1996 100 100
7 5/8% Notes due 1997 185 185
5 3/4% Notes due 1998 250 250
7 3/4% Notes due 1999 100 100
6 1/8% Notes due 2000 200 200
9 1/2% Senior Notes due 2002 300 300
8 5/8% Debentures due 2007 100 100
Other indebtedness, 5 7/8% - 8 7/8%
due 1996 - 2007 13 13
ESOP note guarantee 97 125
Debt premium (discount), net 32 38
----- -----
1,377 1,504
----- -----
Commercial Credit Company
8.29% to 12.85% Medium-Term Notes
due 1994-1995 10 55
8% Notes due 1994 - 100
12.7% Notes due 1994 - 15
6.95% Notes due 1994 - 200
8.45% Notes due 1994 - 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 100 100
5 1/2% Notes due 1998 100 100
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 100 100
5 3/4% Notes due 2000 200 200
6 1/8% Notes due 2000 100 100
6.00% Notes due 2000 150 150
8.25% Notes due 2001 300 -
5.9% Notes due 2003 200 200
42
Notes to Consolidated Financial Statements (continued)
7.875% Notes due 2004 200 -
10% Notes due 2008 150 150
10% Debentures due 2009 100 100
8.7% Debentures due 2009 150 150
8.7% Debentures due 2010 100 100
----- -----
4,010 3,970
----- -----
Smith Barney
Revolving credit facility 400 825
7.4% Medium-Term Notes due 1996 50 -
5 3/8% Notes due 1996 150 150
6.0% Notes due 1997 200 -
5 5/8% Notes due 1998 150 150
5 1/2% Notes due 1999 200 -
7 7/8% Notes due 1999 150 -
6 5/8% Notes due 2000 150 150
Capital Note with LBI due 1995 150 100
----- -----
1,600 1,375
----- -----
The Travelers Insurance Group
12% GNMA/FNMA - collateralized obligations 88 132
Other indebtedness - 10
----- -----
88 142
----- -----
$7,075 $6,991
===== =====
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 1995, 1996 and 1997 are $30
million, $32 million and $35 million, 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.
In May 1994, Smith Barney renegotiated its three-year revolving credit
agreement (the "Agreement") with a bank syndicate. The amendment to the
Agreement extended the term by one year until May 1997 and increased the
amount of the facility from $625 million to $1.0 billion. As of
December 31, 1994, $400 million was borrowed under the Agreement. In
addition, in May 1994, Smith Barney entered into a $750 million, 364-day
revolving credit agreement with a bank syndicate. As of December 31,
1994, there were no borrowings outstanding under this new facility.
Smith Barney 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, 1994, Smith Barney would have been able to remit approximately $500
million to the Parent under its most restrictive covenants.
43
Notes to Consolidated Financial Statements (continued)
Aggregate annual maturities for the next five years on long-term debt
obligations excluding principal payments on the ESOP loan obligation and
the 12% GNMA/FNMA collateralized obligations, are as follows:
(millions)
1995 $960
1996 $750
1997 $1,135
1998 $700
1999 $800
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, 1994 the carrying value and the fair value of the Company's
long-term debt were:
(millions) Carrying Fair
Value Value
-------- ------
The Travelers Inc. $1,377 $1,314
Commercial Credit 4,010 3,926
Smith Barney 1,600 1,531
The Travelers Insurance Group 88 96
----- -----
$7,075 $6,867
===== =====
11. Insurance Policy and Claims Reserves
------------------------------------
Insurance policy and claims reserves consisted of the following at
December 31:
(millions) 1994 1993
---- ----
Benefit and loss reserves:
Property-casualty $13,872 $13,805
Accident and health 1,029 857
Life and annuity 8,603 8,490
Unearned premiums 2,276 2,307
Policy and contract claims 1,304 1,347
------ ------
$27,084 $26,806
====== ======
44
Notes to Consolidated Financial Statements (continued)
The table below is a reconciliation of beginning and ending property-
casualty reserve balances for loss and loss adjustment expenses (LAE)
for the years ended December 31, 1994, 1993 and 1992. Loss provisions
and payments for 1993 and 1992 reflect only the activity of Gulf
Insurance Company.
(millions) 1994 1993 1992
---- ---- ----
Losses and LAE at beginning of year $13,805 $ 313 $ 296
Less reinsurance recoverables on unpaid losses 3,615 85 74
------ ------- -------
Net balance at beginning of year 10,190 228 222
------ ------- -------
Provision for losses and LAE for claims arising in the
current year 3,201 185 185
Estimated losses and LAE for claims arising
in prior years (248) (6)
Increase for purchase of old Travelers 9,938
-------- ------ --------
Total increases 2,953 10,123 179
------ ------ ------
Losses and LAE payments for claims arising in:
Current year 989 67 80
Prior years 1,903 94 93
------ ------- -------
Total payments 2,892 161 173
------ ------- -------
Net balances at end of year 10,251 10,190 228
Plus reinsurance recoverables on unpaid losses 3,621 3,615 85
------ ------ -------
Losses and LAE at end of year $13,872 $13,805 $ 313
------ ------ -------
In 1994, estimated losses and LAE for claims arising in prior years
includes favorable loss development in Personal Lines automobile and
homeowners coverage of $100 million, offset by unfavorable development
of $100 million for Commercial Lines asbestos and environmental claims
from 1985 and prior. In addition, in 1994 Commercial Lines experienced
favorable prior year loss development in workers' compensation, other
liability and commercial automobile product lines in its National
business for post-1985 accident years. This favorable development
amounted to $261 million, however, since the business to which it
relates is subject to retrospective rating premium adjustments, the net
impact on results of operations is minimal.
The increase for purchase of old Travelers includes a purchase
accounting adjustment of $225 million. The adjustment reflects
appellate court decisions that resolved issues concerning obligations of
insurers for environmental claims under liability policies in certain
jurisdictions, and the measurement of amounts recoverable for asbestos
claims from reinsurers based upon commutation of reinsurers' liabilities
at a discount. The $225 million was included in other liabilities at
December 31, 1993.
The property-casualty loss and LAE reserves include $854 million and
$885 million for asbestos and environmental related claims net of
reinsurance at December 31, 1994 and 1993, respectively. Travelers
Insurance carries on a continuing review of its overall position, its
reserving techniques and reinsurance recoverable. However, the industry
does not have a standard method of calculating claim activity for
environmental and asbestos losses. In each of these areas of exposure,
Travelers Insurance 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 or range of
exposure represented by these claims to the Company's financial
condition, results of operations or liquidity. The Company believes
that it is reasonably possible that the outcome of the uncertainties
regarding environmental and asbestos claims
45
Notes to Consolidated Financial Statements (continued)
could result in a liability exceeding the reserves by an amount that
would be material to operating results in a future period. However, it
is not likely these claims will have a material adverse effect on the
Company's financial condition or liquidity.
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:
Ceded to
(millions) Gross Other Net
Amount Companies Amount
------ --------- ------
Year ended December 31, 1994
----------------------------
Premiums
Life insurance $1,878 $(295) $1,583
Accident and health insurance 2,591 (107) 2,484
Property-casualty insurance 5,052 (1,529) 3,523
----- ------ -----
$9,521 $(1,931) $7,590
===== ====== =====
Claims $8,126 $(1,357) $6,769
===== ====== =====
Year ended December 31, 1993
----------------------------
Premiums
Life insurance $1,178 $(284) $ 894
Accident and health insurance 385 (56) 329
Property-casualty insurance 434 (177) 257
----- ---- -----
$1,997 $(517) $1,480
===== ==== =====
Claims $1,096 $(287) $ 809
===== ==== ======
46
Notes to Consolidated Financial Statements (continued)
Ceded to
Gross Other Net
(millions) Amount Companies Amount
------ --------- ------
Year ended December 31, 1992
----------------------------
Premiums
Life insurance $1,221 $(312) $ 909
Accident and health insurance 443 (39) 404
Property-casualty insurance 562 (181) 381
----- ---- -----
$2,226 $(532) $1,694
===== ==== =====
Claims $1,056 $(271) $ 785
===== ==== =====
Reinsurance recoverables at December 31 include amounts recoverable on
unpaid losses, paid losses and unearned premiums and were as follows:
(millions) 1994 1993
---- ----
Reinsurance Recoverables
------------------------
Life business $ 758 $ 739
Property and Casualty business:
Pools and associations 2,524 2,585
Other reinsurance 1,744 1,605
----- -----
Total $5,026 $4,929
===== =====
13. Income Taxes
------------
The provision for income taxes (before minority interest) for the years
ended December 31 was as follows:
(millions) 1994 1993 1992
---- ---- ----
Current:
Federal $378 $406 $350
Foreign 22 3 5
State 80 75 53
--- --- ---
480 484 408
--- --- ---
Deferred:
Federal 334 64 26
Foreign 1 (2) (2)
State 8 4 -
---- --- ---
343 66 24
---- --- ---
Total $823 $550 $432
=== === ===
47
Notes to Consolidated Financial Statements (continued)
Deferred income taxes at December 31 related to the following:
(millions) 1994 1993
---- ----
Deferred tax assets:
Differences in computing policy reserves $1,288 $1,353
Deferred compensation 214 145
Employee benefits 213 221
Investments 1,074 432
Other deferred tax assets 765 1,015
----- -----
Gross deferred tax assets 3,554 3,166
----- -----
Valuation allowance 100 100
----- -----
Deferred tax assets after valuation allowance 3,454 3,066
----- -----
Deferred tax liabilities:
Deferred policy acquisition costs and
value of insurance in force (608) (576)
Investment management contracts (244) (277)
Other deferred tax liabilities (273) (355)
------- -------
Gross deferred tax liabilities (1,125) (1,208)
------- -------
Net deferred tax asset $ 2,329 $ 1,858
======= =======
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:
1994 1993 1992
---- ---- ----
Federal statutory rate 35.0% 35.0% 34.0%
Limited taxability of investment income (3.5) (1.6) (.8)
State and foreign income taxes
(net of federal income tax benefit) 2.7 3.4 2.9
Sale of subsidiaries 2.9 - (.3)
Equity in income of old Travelers - (2.2) -
Other, net 1.2 1.5 .5
---- ---- ----
Effective income tax rate 38.3% 36.1% 36.3%
==== ==== ====
Tax benefits allocated directly to stockholders' equity for the years
ended December 31, 1994 and 1993 were $35 million and $79 million,
respectively.
As a result of the acquisition of old Travelers, a valuation allowance
of $100 million was established in 1993 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. The $100 million
valuation allowance is sufficient to cover any capital losses on
investments that may exceed the capital gains able to be generated in
the life insurance group's consolidated federal income tax return based
upon management's best estimate of the character of the reversing
temporary differences. Reversal of the valuation allowance is
contingent upon the recognition of future capital gains or a change in
circumstances which causes
48
Notes to Consolidated Financial Statements (continued)
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.
The net deferred tax asset, after the valuation allowance of $100
million, relates to temporary differences that are expected to reverse
as net ordinary deductions, except for a deferred tax asset of $723
million which relates to the unrealized loss on fixed maturity
investments. Management has the intent and the ability not to realize
the unrealized loss except to the extent of offsetting capital gains.
The Company will have to generate approximately $4.6 billion of taxable
income, before the reversal of the temporary differences, primarily over
the next 10-15 years, to realize the remainder of the deferred tax
asset, exclusive of the unrealized loss on fixed maturity investments.
Management expects to realize the remainder of the deferred tax asset
based upon its expectation of future taxable income, after the reversal
of these deductible temporary differences, of at least $1 billion
annually. The Company has reported pre-tax financial statement income
exceeding $1.6 billion, on average, over the last three years and has
incurred taxable income of approximately $1 billion, on average, over
the same period of time. At December 31, 1994, the Company has no
ordinary or capital loss carryforwards.
14. Preferred Stock and Stockholders' Equity
----------------------------------------
Preferred Stock
The following table sets forth the Company's preferred stock outstanding
at December 31, 1994 and 1993:
Liquidation
Number Preference Carrying
of Shares Per Share Value
--------- ---------- --------
(millions)
Series A 1,200,000 $250 $300
Series B 2,500,000 $50 125
Series D 7,500,000 $50 375
---------- ---
11,200,000 $800
========== ===
Series C 4,406,431 $53.25 $235
========== ===
Series A
In July 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 Shearson Acquisition 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
49
Notes to Consolidated Financial Statements (continued)
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. Both the Series B Preferred and the warrant are publicly
traded.
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. 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.
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.
Stockholders' Equity
The combined insurance subsidiaries' statutory capital and surplus at
December 31, 1994 and 1993 was $4.342 billion and $4.340 billion,
respectively, 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' (including The
Travelers Insurance Group for 1994 only) net income, determined in
accordance with statutory accounting practices, for the years ended
December 31, 1994, 1993 and 1992 was $228 million, $204 million and $199
million, respectively.
Under Connecticut law, the statutory capital and surplus of The
Travelers Insurance Group Inc., which amounted to $4.218 billion at
December 31, 1994 is not available in 1995 for dividends to its Parent
without prior approval of the Connecticut Insurance Department.
The Company's broker-dealer subsidiaries are subject to The Uniform Net
Capital Rule of the Securities and Exchange Commission. At December 31,
1994, the aggregate net capital of such broker-dealer subsidiaries was
$1.313 billion, exceeding the net capital requirement by $1.119 billion.
See Note 10 for additional restrictions on stockholders' equity.
50
Notes to Consolidated Financial Statements (continued)
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 million.
At December 31, 1994, 10,694,740 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-qualifiedstock 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, 1994, 26,265,245 shares were
available for grant, of which 15,011,009 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, 1992 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
Converted upon the Merger 4,011,726 15.54-62.02
Expired or canceled (679,064) 9.74-44.63
Exercised (9,898,567) 8.00-37.41
----------- -----------
Balance, at December 31, 1993 22,333,705 $ 7.82-62.02
----------- -----------
Granted 6,132,850 31.00-42.88
Expired or canceled (1,387,428) 9.74-62.02
Exercised (2,905,346) 7.81-40.13
----------- -----------
Balance at December 31, 1994 24,173,781 $ 9.74-62.02
----------- -----------
Currently exercisable,
December 31, 1994 8,449,283 $ 9.74-62.02
=========== ===========
51
Notes to Consolidated Financial Statements (continued)
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 15,464,592 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.
16. Pension 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 years ended December 31:
(millions) 1994 1993 1992
---- ---- ----
Service cost $105 $34 $17
Interest cost 173 36 26
Actual return on plan assets (66) (59) (28)
Net amortization and deferral (161) 11 (10)
---- --- ---
Net periodic pension cost $51 $22 $ 5
==== === ===
52
Notes to Consolidated Financial Statements (continued)
The following table sets forth the funded status of the Company's
significant defined benefit plans at December 31:
(millions) 1994 1993
---- ----
Actuarial present value of benefit obligation:
Vested benefits $2,091 $2,223
Non-vested benefits 49 40
------ ------
Accumulated benefit obligation 2,140 2,263
Effect of future salary increases 46 79
----- -----
Projected benefit obligation 2,186 2,342
Plan assets at fair value 2,335 2,434
----- -----
Plan assets in excess of projected
benefit obligation 149 92
Unrecognized transition asset (3) (3)
Unrecognized prior service cost (benefit) 2 (36)
Unrecognized net (gain) loss (145) 2
----- ------
Prepaid pension cost
recognized in the Statement of
Financial Position $ 3 $ 55
==== =====
Actuarial Assumptions:
Weighted average discount rate 8.75% 7.5%
Weighted average rate of compensation
increase 4.5% 4.5%
Expected long-term rate of return on
plan assets 9.5% 9.75%
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 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.
17. Postretirement 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 SmithBarney 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 million in 1993.
53
Notes to Consolidated Financial Statements (continued)
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 investment
portfolio.
Payments and net periodic postretirement benefit cost for 1993 were not
material. The following is a summary of the components of net periodic
postretirement benefit cost for the year ended December 31, 1994:
(millions)
Service cost $ 3
Interest cost 33
Actual return on plan assets -
Net amortization and deferral -
---
Net periodic postretirement benefit cost $ 36
===
The following table sets forth the funded status of the Company's
postretirement benefit plans at December 31:
(millions)
1994 1993
---- ----
Accumulated postretirement benefit obligation
Retirees $363 $418
Other fully eligible plan participants 32 33
Other active plan participants 18 53
--- ----
413 504
Plan assets at fair value 4 3
--- -----
Accumulated postretirement benefit obligation
in excess of plan assets 409 501
Unrecognized net gain (loss) 79 (18)
Unrecognized prior service cost (5) (6)
--- ---
Accrued postretirement benefit liability $483 $477
=== ===
For measurement purposes, the annual rate of increase in the per capita
cost of covered health care benefits ranged from 16% in 1995, decreasing
gradually to 5.5% by the year 2003 and remaining at that level
thereafter. The health care cost trend rate assumption affects the
amounts reported. 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, 1994 by
approximately $14 million. The impact on net periodic postretirement
benefit cost of such an increase would not be material.
The weighted average discount rates used in determining the accumulated
postretirement benefit obligation were 8.75% and 7.5% at December 31,
1994 and 1993, respectively. For certain plans associated with Smith
Barney and old Travelers, the weighted average assumed rate of
compensation increase was approximately 3.5% for both 1994 and 1993.
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.
54
Notes to Consolidated Financial Statements (continued)
18. Lease Commitments
------------------
Rentals
Rental expense (principally for offices and computer equipment) was $403
million, $182 million and $114 million for the years ended December 31,
1994, 1993 and 1992, respectively.
At December 31, 1994, future minimum annual rentals under noncancellable
operating leases were as follows:
(millions)
1995 $ 323
1996 277
1997 221
1998 155
1999 127
Thereafter 138
-----
$1,241
=====
Future sublease rental income of approximately $31 million will
partially offset these commitments.
The Company and certain of Smith Barney's subsidiaries together have an
option to purchase the buildings presently leased for Smith Barney's
executive offices and New York City operations at the expiration of the
lease term.
19. Derivative Financial Instruments
--------------------------------
The Company uses derivative financial instruments in the normal course
of business for end user and, in the case of Smith Barney, trading
purposes. Derivatives are financial instruments, which include
forwards, futures, options and swaps, whose value is based upon an
underlying asset, index or reference rate. A derivative contract may be
traded on an exchange or over-the-counter (OTC). Exchange-traded
derivatives are standardized and include futures and certain option
contracts listed on exchanges. OTC derivative contracts are
individually negotiated between contracting parties and include
forwards, swaps, and certain options including interest rate caps,
floors and swaptions. Derivatives are subject to various risks similar
to those related to the underlying financial instruments, including
market, credit and liquidity risk. The risks of derivatives should not
be viewed in isolation but rather should be considered on an aggregate
basis along with risks related to the Company's non-derivative trading
and other activities. The Company manages derivative and non-derivative
risks on an aggregate basis as part of its firm-wide risk management
policies.
Forwards represent commitments to exchange currencies or to purchase or
sell other financial instruments at specified prices on specified future
dates. Futures contracts are similar to forwards, however, major
exchanges act as intermediaries and require daily cash settlement and
collateral deposits. As a writer of certain option contracts, Smith
Barney receives a fee to become obligated to buy or sell financial
instruments at a specified price for a period of time at the holder's
option. As a writer of interest rate options, Smith Barney receives a
fee to become obligated to pay the holder at specified future dates the
amount, if any, by which specified market interest rates exceed or fall
below specified reference rates applied to a notional amount. In the
case of swaptions, Smith Barney is obligated to enter into an interest
rate swap at specified terms or cancel an existing swap, at the holder's
option. Purchased options give Smith Barney the right, but not the
obligation, to buy or sell financial instruments at a specified price
for a period of time. Interest rate swaps require the exchange of
periodic cash payments based on a notional principal amount and
55
Notes to Consolidated Financial Statements (continued)
agreed-upon fixed or floating rates. Generally, no cash is exchanged at
the outset of the contract and no principal payments are made by either
party.
Market Risk. Market risk is the potential for changes in the value of
derivative financial instruments due to market changes, including
interest and foreign exchange rate movements and fluctuations in
commodity or security prices. Market risk is directly impacted by the
volatility and liquidity in the markets in which the related underlying
assets are traded.
Credit Risk. Credit risk is the possibility that a loss may occur due
to the failure of a counterparty to perform according to the terms of a
contract. At any point in time, the credit risk for derivative
contracts is limited to the unrealized gains for each counterparty to
the extent not offset under any master netting agreements or collateral
arrangements. There is no credit risk associated with written options
as the counterparty pays a cash premium up front. Credit risk is reduced
to the extent that an exchange or clearing organization acts as a
counterparty to the transaction. For significant transactions, the
Company's credit review process includes an evaluation of the
counterparty's creditworthiness, periodic review of credit standing and
obtaining collateral and various credit enhancements in certain
circumstances. Smith Barney establishes credit limits for its trading
derivative counterparties by product type, taking into account the
perceived risk associated with each product. The usage and resultant
exposure from these credit limits are then monitored regularly by
management.
Liquidity Risk. Liquidity risk is the possibility that the Company may
not be able to rapidly adjust the size of its derivative positions in
times of high volatility and financial stress at a reasonable cost. The
liquidity of derivative products is highly related to the liquidity of
the underlying cash instrument. As with non-derivative financial
instruments, the Company's valuation policies for derivatives include
consideration of liquidity factors.
Trading Activity
All derivatives used for trading purposes relate to Smith Barney, and
are primarily used to facilitate customer transactions. Smith Barney
also uses derivatives to limit its net exposure to loss from market risk
related to derivative and non-derivative inventory positions. On a
limited basis, Smith Barney also began structuring derivative
instruments in 1994, primarily OTC foreign currency options and interest
rate options and swaps, as part of its proprietary trading activities.
The level of this activity may expand in the future. To the extent that
activities are related to servicing customer business, the objective is
to minimize market risk as much as possible.
Smith Barney's derivative contracts are generally short-term, with a
weighted average maturity of approximately three months at December 31,
1994 and 1993. The notional or contractual amounts of these instruments
do not represent the exposure to possible loss or future cash payments,
but rather reflect the extent of the Company's involvement in these
instruments. At December 31, 1994 and 1993, Smith Barney had
outstanding trading derivatives with notional values as follows:
56
Notes to Consolidated Financial Statements (continued)
Contract or Notional Amount Contract or Notional Amount
(millions) 1994 1993
----------------------------- ----------------------------
Purchase Sell Purchase Sell
-------- ---- -------- ----
"To be announced" mortgage-backed
securities $15,016 $15,747 $7,402 $7,499
Forward and futures contracts:
Foreign currency forwards 5,136 6,076 4,237 4,110
Foreign currency futures 865 6 701 854
Financial futures 50 2,661 100 750
Precious metals and other commodities 339 357 417 389
------ ------ ------ ------
$21,406 $24,847 $12,857 $13,602
====== ====== ====== ======
(millions) Purchased Written Purchased Written
--------- ------- --------- -------
Options:
Foreign currency $1,353 $1,340 $ - $ -
Financial futures 50 2,150 - -
Interest rate caps, floors and
swaptions - 725 - -
Other securities and commodities 34 22 127 74
----- ----- ------ -----
$1,437 $4,237 $ 127 $ 74
===== ===== ====== =====
(millions) Open Contracts Open Contracts
-------------- --------------
Interest rate swaps
$135 $ -
=== ===
"To be Announced" Mortgage-Backed Securities. Smith Barney trades
---------------------------------------------
mortgage-backed "to be announced" mortgage pools ("TBAs") to facilitate
customer transactions and as hedges of proprietary inventory positions.
At December 31, 1994, over $13.2 billion each of purchase and sale
positions represent offsetting purchases and sales of the same security,
and over 95% of the contract values were for settlement within 60 days.
Net revenue from TBAs in 1994 was a loss of $10 million.
Foreign Currency Contracts. In its role as a market intermediary, Smith
----------------------------
Barney acts as a principal in foreign currency forward and options
contracts, primarily to facilitate customer transactions. These
transactions expose the firm to foreign exchange rate risk, which is
generally hedged by entering into foreign currency forward, futures and
options
57
Notes to Consolidated Financial Statements (continued)
contracts with inverse market risk profiles. At December 31, 1994,
approximately 87% of the contract values of foreign currency derivative
instruments were for settlement within 90 days, and related primarily to
major European currencies and the Japanese yen. Written foreign
currency options consist of $733 million and $607 million of put and
call contracts, respectively, at December 31, 1994. Net revenues from
foreign currency contracts in aggregate were $19 million in 1994.
Financial Futures and Options on Financial Futures Contracts. Smith
------------------------------------------------------------
Barney trades financial futures contracts and options on financial
futures, primarily to hedge other proprietary inventory positions.
Written financial futures options consist of $1.075 billion of put
contracts and $1.075 billion of call contracts written on the same
underlying futures contracts. Net revenues from these transactions were
$9 million in 1994.
Precious Metals Contracts. Forward precious metals contracts are
-------------------------
entered into to facilitate customer transactions, and are transacted in
the "Loco London" Bullion Market, which is used globally for hedging and
trading purposes. Smith Barney may use precious metals futures as
hedges of its forward inventory to reduce market risk. Net revenues
from precious metals contracts were $2 million in 1994.
Interest Rate Products. Smith Barney enters into interest rate swaps,
-----------------------
caps, floors and swaptions as part of its proprietary trading strategy,
which it hedges with financialfutures and options on financial futures.
Net revenues from interest rate swap products were $3 million in 1994.
Trading derivative instruments are carried at market value, primarily
based on quoted market prices, with changes in market value reported in
principal transactions revenues in the Statement of Income. The trading
gains and losses on these derivative financial instruments, should not
be viewed on an individual basis, but rather as a component of the
Company's overall trading results, as these instruments are frequently
hedges of, or hedged by, other on-or off-balance-sheet financial
instruments.
The fair value of Smith Barney's trading derivative instruments as
recorded in the Statement of Financial Position at December 31, 1994 and
the average fair value for the year based on month end balances are
presented below.
58
Notes to Consolidated Financial Statements (continued)
Ending Fair Value Average Fair Value
------------------------ -----------------------
(millions) Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
"To be announced" mortgage-backed
securities $29 $28 $54 $54
Forward and futures contracts:
Foreign currency forwards 92 98 87 92
Foreign currency futures 2 3 4 3
Financial futures 7 2 3 2
Precious metals and other commodities 1 2 3 3
Options:
Foreign currency 5 8 7 8
Financial futures 2 6 1 1
Interest rate caps, floors and swaptions - 5 - 5
Other securities and commodities 1 1 3 5
Interest rate swaps 1 - 1 -
--- --- --- ---
$140 $153 $163 $173
=== === === ===
End User Activity
In the normal course of business the Company also employs certain
derivative financialinstruments as an end user to manage various risks.
At December 31, 1994 the notional and fair values of end user
derivatives were as follows. Fair values were determined by reference
to quoted market prices or, for interest rate swaps, estimated based
upon the payments either party would have to make to terminate the swap.
Notional Value Fair Value
---------------------- -----------------------
(millions) Open Contracts Asset Liability
-------------- ----- ---------
Interest rate swaps:
Pay a fixed rate, receive a floating rate $712
Pay a floating rate, receive a fixed rate 70
---
$782 $ 43 $ 6
=== === ===
Purchase Sell
-------- ----
Foreign currency forwards $47 $183 15 7
Financial futures 13 - - -
---- ----- --- ---
$60 $183 $ 15 $ 7
=== ==== === ===
59
Notes to Consolidated Financial Statements (continued)
Certain of the Company's subsidiaries employ swap contracts to manage
interest rate risk related to variable rate obligations, limiting the
Company s net exposure to interest rate movements to an acceptable
level. Under these swaps the Company has fixed $590 million of its short
term or variable rate obligations at an average rate of 5.94%. The
swaps are accounted for as hedges of the related liabilities and
unrealized gains and losses are not recorded in the Statement of
Financial Position. Periodic receipts or payments are accrued as
adjustments to expense. In addition, Travelers Insurance Group utilizes
swaps to manage the differing interest rate risk profiles of its
insurance liabilities and related fixed income investment portfolio.
These swaps are marked to market and recorded as other assets with
changes in value recorded as an adjustment to stockholders' equity where
unrealized gains and losses on the related debt securities are recorded.
Travelers Insurance Group employs forwards to hedge its exposure to
foreign exchange rate risk related to the net investment in foreign
branches and foreign currency denominated investments. These forwards
are marked to market and recorded as other assets or liabilities in the
Statement of Financial Position. Changes in value related to forwards
hedging the net investment in foreign subsidiaries are recorded as an
adjustment to stockholders' equity where related translation adjustments
are recorded. Changes in value related to forwards hedging foreign
investments in U.S. portfolios, amounting to a net loss of $3 million in
1994, are recorded as other income where the related translation
adjustments to the underlying investments are recorded.
Travelers Insurance Group hedges expected cash flows related to certain
customer deposits and investment maturities, redemptions and sales
against adverse changes in market interest rates with financial futures
contracts. These contracts are marked to market and recorded as other
assets or liabilities in the Statement of Financial Position. Realized
gains or losses are recorded as an adjustment to the cost basis of the
related asset when acquired.
20. Fair Value of Financial Instruments
-----------------------------------
The following table summarizes the fair value and carrying amount of the
Company's financial instruments at December 31, 1994 and 1993.
Contractholder funds amounts exclude certain insurance contracts not
covered by FAS 107 "Disclosure About Fair Value of Financial
Instruments." 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 as disclosed further in various
Notes to the Consolidated Financial Statements. 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.
60
Notes to Consolidated Financial Statements (continued)
1994 1993
------------------------------ -----------------------------
(millions) Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
Assets:
Investments $39,120 $39,092 $42,199 $42,223
Securities borrowed or purchased
under agreements to resell 25,655 25,655 13,353 13,353
Trading securities owned 6,945 6,945 5,863 5,863
Net consumer finance receivables 6,746 7,364 6,216 6,831
Separate accounts
with guaranteed returns 1,483 1,379 1,508 1,593
Derivatives:
Trading 142 142 95 95
End user 15 58 7 7
Liabilities:
Long-term debt 7,075 6,867 6,991 7,324
Securities loaned or sold under
agreements to repurchase 21,620 21,620 10,144 10,144
Trading securities sold
not yet purchased 4,345 4,345 3,835 3,835
Contractholder funds:
With defined maturities 4,219 4,047 5,022 5,046
Without defined maturities 9,159 8,875 12,894 12,733
Separate accounts
with guaranteed returns 1,465 1,331 1,506 1,674
Derivatives:
Trading 153 153 98 98
End User 8 13 2 20
21. Commitments
-----------
Financial Guarantees
At December 31, 1994 and 1993 The Travelers Insurance Group had
outstanding financial guarantees of $2.236 billion and $3.016 billion,
respectively, of which $2.086 billion and $2.598 billion, respectively,
represented its participation in the Municipal Bond Insurance
Association's guarantee of municipal bond obligations. The bonds
guaranteed are generally rated A or above and The Travelers Insurance
Group's participation has been reinsured.
61
Notes to Consolidated Financial Statements (continued)
Credit Cards
The Company provides bank and private label credit card services through
CCC and its subsidiaries. These services are provided to individuals
and to affinity groups nationwide. At December 31, 1994 and 1993 total
credit lines available to credit cardholders were $5.423 billion and
$4.263 billion, of which $820 million and $790 million were utilized,
respectively.
Other Commitments
At December 31, 1994, and 1993 Smith Barney had borrowed securities
having a market value of $1.505 billion and $1.225 billion,
respectively, against which it had pledged securities having a market
value of $1.589 billion and $1.279 billion, respectively. In addition,
Smith Barney had obtained letters of credit aggregating $192 million and
$154 million at December 31, 1994 and 1993, respectively, of which $147
million and $116 million, respectively, was used to satisfy various
collateral and deposit requirements principally with clearing
organizations. Smith Barney also trades certain fixed income securities
on a "when issued" basis. At December 31, 1994 Smith Barney had
commitments to purchase $309 million and to sell $1.122 billion of
certain fixed income securities when issued. At December 31, 1993,
Smith Barney had commitments to sell $9 million of such securities when
issued.
Smith Barney 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 Smith Barney's executive offices and New York
operations. The amount of the guarantee is dependent upon the final
build-out costs with a maximum of $625 million.
The Travelers Insurance Group makes unfunded commitments to partnerships
and transfers receivables to third parties with recourse from time to
time. The off-balance sheet risks of these financial instruments were
not considered significant at December 31, 1994 or 1993.
22. Contingencies
-------------
A subsidiary of The Travelers Insurance Group is in litigation with
certain underwriters at Lloyds of London (Lloyd's) in New York state
court to enforce reinsurance contracts with respect to recoveries for
certain asbestos claims. The dispute involves the ability of old
Travelers to aggregate asbestos products claims with asbestos premises
claims under a market agreement between Lloyd's and old Travelers or
under the applicable reinsurance treaties. In January 1994 the court
stayed litigation of this matter in favor of arbitration of the contract
issues raised by old Travelers.
With respect to environmental and asbestos claims, see Note 11.
In the ordinary course of business the Company and/or its subsidiaries
are defendants or co-defendants in various litigation matters, other
than environmental and asbestos claims. Although there can be no
assurances, the Company believes, based on information currently
available, that the ultimate resolution of these legal proceedings would
not be likely to have a material adverse effect on its results of
operations, financial condition or liquidity.
62
Notes to Consolidated Financial Statements (continued)
23. Quarterly Financial Data (unaudited)
------------------------------------
1994
----------------------------------------------------
(in millions except per share amounts) First Second Third Fourth Total
----------------------------------------------------
Total revenues $4,769 $4,601 $4,714 $4,381 $18,465
Total expenses 4,231 4,111 4,212 4,016 16,570
Gain on sales of stock of
subsidiaries and affiliates - - - 254 254
----- ----- ----- ----- -----
Income before income taxes, and minority
interest and cumulative effect of changes
in accounting principles 538 490 502 619 2,149
Provision for income taxes 198 170 170 285 823
Minority interest, net of income taxes - - - - -
----- ----- ----- ----- -----
Net income before cumulative effect of changes
in accounting principles 340 320 332 334 1,326
Cumulative effect of changes in
accounting principles - - - - -
----- ----- ----- ----- -----
Net income $ 340 $ 320 $ 332 $ 334 $1,326
===== ===== ===== ===== =====
Earnings per share of common stock:
Net income before cumulative effect
of changes in accounting principles $ 0.98 $ 0.93 $ 0.97 $ 0.99 $ 3.86
Cumulative effect of changes in
accounting principles -. -. -. -. -.
------- ------- ------- ------- -------
Net income $ 0.98 $ 0.93 $ 0.97 $ 0.99 $ 3.86
======= ======= ======= ======= =======
Common stock price
High $ 42.875 $ 36.375 $ 36.875 $ 35.000 $42.875
Low $ 34.500 $ 32.000 $ 31.000 $ 31.000 $31.000
Close $ 35.250 $ 32.250 $ 32.875 $ 32.375 $32.375
Dividends per share of common stock $ .125 $ .150 $ .150 $ .150 $ .575
1993
----------------------------------------------------
(in millions except per share amounts) First Second Third Fourth Total
----------------------------------------------------
Total revenues $1,302 $1,284 $2,016 $2,195 $6,797
Total expenses 974 987 1,576 1,750 5,287
Gain on sales of stock of
subsidiaries and affiliates 6 - 7 - 13
----- ----- ----- ----- -----
Income before income taxes, and minority
interest and cumulative effect of changes
in accounting principle 334 297 447 445 1,523
Provision for income taxes 119 106 182 143 550
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
Cumulative effect of changes in
accounting principles
(35) - - - (35)
----- ----- ----- ----- -----
Net income $ 172 $ 187 $ 259 $ 298 $ 916
===== ===== ===== ===== =====
Earnings per share of common stock:
Net income before cumulative effect
of changes in accounting principles $ 0.89 $ 0.76 $ 1.03 $ 1.19 $ 3.88
Cumulative effect of changes in
accounting principles (0.15) -. -. -. (0.14)
------- ------- ------- ------- -------
Net income $ 0.74 $ 0.76 $ 1.03 $ 1.19 $ 3.74
======= ======= ======= ======= =======
Common stock price
High $ 37.313 $ 39.469 $ 49.500 $ 48.625 $49.500
Low $ 24.313 $ 31.219 $ 37.594 $ 38.000 $24.313
Close $ 34.594 $ 39.469 $ 47.750 $ 38.875 $38.875
Dividends per share of common stock $ .120 $ .120 $ .125 $ .125 $ .490
Fourth quarter 1994 gain on sales of stock of subsidiaries and affiliates amounted to $88 million after-tax. Fourth quarter
1994 results also include $88 million of after-tax portfolio losses.
Results of operations prior to 1994 exclude the amounts of The Travelers Insurance Group Inc. except that results for 1993
include the Company's equity in earnings relating to the 27% interest purchased in December 1992. Results of operations
include amounts related to the Shearson Business from July 31, 1993, the date of acquisition.
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.
63
Independent Auditors' Report
The Board of Directors and Stockholders
The Travelers Inc.:
We have audited the accompanying consolidated statements of financial
position of The Travelers Inc. and subsidiaries as of December 31, 1994 and
1993, 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, 1994. 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, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt
and equity securities in 1994. Also, 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.
/s/ KPMG Peat Marwick LLP
New York, New York
January 17, 1995