EXHIBIT 13.01
Travelers Group Inc. and Subsidiaries
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In millions of dollars, except per share amounts)
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
Year Ended December 31, (1)
- -----------------------
Total revenues (2) $ 16,583 $ 14,943 $ 6,797 $ 5,125 $ 6,608
======= ======== ======== ======= ======
Income from continuing operations $ 1,628 $ 1,157 $ 951 $ 756 $ 479
Discontinued operations 206 169 - - -
Cumulative effect of accounting changes(3) - - (35) (28) -
-------- -------- -------- -------- ------
Net income $ 1,834 $ 1,326 $ 916 $ 728 $ 479
======== ======== ======== ======== ======
Return on average common equity (4) 18.3% 15.6% 18.4% 20.6% 15.7%
At December 31, (1)
- ----------------
Total assets $ 114,475 $ 115,297 $ 101,290 $24,151 $ 21,561
Long-term debt $ 9,190 $ 7,075 $ 6,991 $ 3,951 $ 4,327
Stockholders' equity (5) $ 11,710 $ 8,640 $ 9,326 $ 4,229 $ 3,280
Per common share data:
- ---------------------
Income from continuing operations $ 4.86 $ 3.34 $ 3.88 $ 3.34 $ 2.14
Discontinued operations 0.65 0.52 - - -
Cumulative effect of accounting changes - - (0.14) (0.12) -
-------- --------- -------- ------- --------
Net income $ 5.51 $ 3.86 $ 3.74 $ 3.22 $ 2.14
======== ======== ======== ======= =======
Cash dividends per common share $ 0.800 $ 0.575 $ 0.490 $ 0.363 $ 0.225
Book value per common share $ 34.50 $ 24.77 $ 26.06 $ 17.70 $ 15.10
Book value per common share, excluding
FAS 115 adjustment $ 32.11 $ 28.94
Other data:
- -----------
Average number of common shares
and equivalents (millions) 317.4 322.0 237.8 222.8 226.5
Year-end common shares
outstanding (millions) 316.2 316.5 327.1 222.0 217.2
Number of full-time employees 47,600 52,000 60,000 16,000 15,800
(1) 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.
(2) As more fully described in Note 3 of Notes to Consolidated Financial
Statements, all of the operations comprising Managed Care and
Employee Benefits Operations (MCEBO) are presented as a discontinued
operation and, accordingly, prior year amounts have been restated.
Revenues for 1991 include those of Fingerhut Companies, Inc.
(Fingerhut), which had been carried as a consolidated subsidiary.
(3) See Note 1 of Notes to Consolidated Financial Statements for
information regarding accounting changes in 1993. Included in net
income for 1993 is an after-tax charge of $17 million resulting from
the adoption of Statement of Financial Accounting Standards No. 106,
and an after-tax charge of $18 million resulting from the adoption of
Statement of Financial Accounting Standards No. 112. Included in net
income for 1992 is an after-tax charge of $28 million resulting from
the adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
(4) The return on average common stockholders' equity is calculated using
income before the cumulative effect of accounting changes after
deducting preferred stock dividend requirements.
(5) Stockholders' equity at December 31, 1995 and 1994 reflects $756
million of net unrealized gains on investment securities and $1.3
billion of net unrealized losses on investment securities,
respectively, pursuant to the adoption of FAS No. 115 in 1994
(see Note 1 of Notes to Consolidated Financial Statements).
21
Travelers Group 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) 1995 1994 1993
- ----------------------------------------------------------------------------
Revenues $16,583 $14,943 $6,797
====== ====== =====
Income from continuing operations $1,628 $ 1,157 $ 951
Income from discontinued operations 206 169 -
Cumulative effect of accounting changes - - (35)
------- ------ -----
Net income $1,834 $1,326 $ 916
======= ====== =====
Earnings per share:
Continuing operations $ 4.86 $ 3.34 $ 3.88
Discontinued operations 0.65 0.52 -
Cumulative effect of accounting changes - - (0.14)
------ ------ ------
Net income $ 5.51 $ 3.86 $ 3.74
====== ====== ======
Weighted average number of common shares
outstanding and
common stock equivalents (millions) 317.4 322.0 237.8
====== ====== ======
Overview
Consolidated results of operations include the accounts of Travelers Group
Inc. (formerly The Travelers Inc.) and its subsidiaries (the Company). In
December 1992, the Company acquired approximately 27% of the common stock
of The Travelers Corporation (old Travelers). During 1993 this investment
was accounted for on the equity method. On December 31, 1993, the Company
acquired the approximately 73% of old Travelers common stock it did not
already own (the Merger) through the merger of old Travelers into the
Company. 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% interest previously owned. The old Travelers
businesses acquired are hereinafter referred to as old Travelers or The
Travelers Insurance Group Inc. (TIGI). On July 31, 1993, the Company
acquired the domestic retail brokerage and asset management businesses (the
Shearson Businesses) of Shearson Lehman Brothers Holdings Inc. The
Shearson Businesses were combined with the operations of Smith Barney
Holdings Inc. (Smith Barney). Results of operations include the results of
the Shearson Businesses from the date of acquisition. (See Note 1 of Notes
to Consolidated Financial Statements.)
Results of Operations
Income from continuing operations for the year ended December 31, 1995 was
$1.628 billion compared to $1.157 billion in 1994 and $951 million in 1993.
Results of operations for 1995 and 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 from continuing operations
for the years ended December 31, 1995, 1994 and 1993 are net after-tax
gains (losses) of $74 million, $(4) million and $52 million, respectively,
as follows:
1995
- ----
- - a $13 million provision for loss on disposition of an affiliate; and
- - $87 million of reported investment portfolio gains.
1994
- ----
- - $39 million gain on the sale of American Capital Management & Research
Inc.;
- - $21 million gain on the sale of Smith Barney's interest in HG Asia
Holdings Ltd. (HG Asia);
- - $19 million gain on the sale of Bankers and Shippers Insurance
Company, a subsidiary of The Travelers Indemnity Company; 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.
Excluding these items, income from continuing operations for 1995 increased
$393 million to $1.554 billion, or 34%, over 1994, reflecting improved
performance at all operating units, particularly at Smith Barney.
On the same basis, income from continuing operations for 1994 increased by
$262 million, or 29%, 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 insurance sales and policy persistency, as well as
increases in $.M.A.R.T. and $.A.F.E. loans; and the inclusion of the
earnings from the additional 73% investment in old Travelers.
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."
The following discussion presents in more detail each segment's operating
performance and net income before accounting changes, the effect of which
was not material to any of the business segments.
2
Investment Services
Year Ended December 31,
-----------------------------------------------------
1995 1994 1993
-----------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
- ------------------------------------------------------------------------------
Smith Barney (1) $6,808 $599 $5,534 $390 $3,371 $306
Mutual funds and asset
management - - 156 32 153 30
- ------------------------------------------------------------------------------
Total Investment
Services $6,808 $599 $5,690 $422 $3,524 $336
- ------------------------------------------------------------------------------
(1) Net income for 1994 includes a $21 million after-tax gain from the sale
of the interest in HG Asia and net income for 1993 includes a $65
million after-tax provision for merger-related costs.
Mutual funds and asset management included in 1994 and 1993, the limited
partnership interest in RCM Capital Management (RCM) and the operations of
American Capital Management & Research, Inc. (American Capital) through its
date of sale in December 1994. RCM is reported as part of Corporate and
Other in 1995.
Smith Barney
Significant strength in the financial markets during 1995 contributed to
Smith Barney's record earnings for the year. Excluding the $21 million
gain in 1994, Smith Barney's 1995 earnings increased 63% over the prior
year. A difficult operating environment in the securities markets during
1994, combined with the effect of increased expenses in 1994 related to the
acquisition of the Shearson Businesses, contributed to a slight decline in
Smith Barney's 1994 earnings when compared to 1993, excluding the $21
million gain in 1994 and the $65 million provision in 1993.
Smith Barney Revenues
Year Ended December 31,
------------------------------------------------------
(millions) 1995 1994 1993
------------------------------------------------------
Commissions $2,008 $1,800 $1,108
Investment banking 847 680 667
Principal trading 1,016 900 549
Asset management fees 1,052 941 489
Interest income, net* 377 329 211
Other income 134 114 70
------------------------------------------------------
Net revenues* $5,434 $4,764 $3,094
------------------------------------------------------
* Net of interest expense of $1,374 million, $770 million and $277
million in 1995, 1994 and 1993, respectively. Revenues included in
the consolidated statement of income are before deductions for
interest expense.
Revenues, net of interest expense, increased 14% compared to 1994,
reflecting increases in all categories. Commission revenues increased by
12% to $2.008 billion in 1995 compared to $1.800 billion in 1994. The
increase reflects higher activity in listed and over-the-counter securities
and options markets, offset by declines in futures and mutual funds.
Investment banking revenues increased 25% to a record $847 million in 1995
compared to $680 million in 1994, reflecting strong volume in equity, unit
trust, high yield and high grade corporate debt
3
underwritings, as well as merger and acquisition fees. Smith Barney's
market share in a number of categories, particularly equity IPOs, continued
to advance during the year. Principal trading revenues increased 13% to
$1.016 billion in 1995 compared to $900 million in 1994, with particularly
strong results in equities and taxable fixed income offset by a decline in
municipal trading. Asset management fees were $1.052 billion in 1995
compared to $941 million in 1994. At December 31, 1995, Smith Barney had
assets under management of $96.2 billion, up from $78.0 billion a year ago.
The increase in asset management revenues also reflects fees associated
with bringing in-house all the administrative functions for proprietary
mutual funds and money funds during the latter part of 1995. Net interest
income was $377 million in 1995, up from $329 million in 1994, as a result
of higher levels of interest-earning net assets.
Total expenses, excluding interest, increased 7% to $4.406 billion in 1995
as compared to $4.118 billion in 1994. This increase was driven by higher
production-related Financial Consultant compensation and other employee
compensation and benefits expense, which increased 8% to $3.193 billion in
the 1995 period, as compared to $2.953 billion in 1994. Expenses other
than interest and employee compensation and benefits were $1.213 billion in
the 1995 period compared to $1.165 billion in 1994. However, the number of
non-production employees and the level of fixed expenses continued the
downward trend that began in the fourth quarter of 1994.
Smith Barney's return on equity was 24.7% for 1995 compared to 16.4% for
1994, excluding the $21 million gain on HG Asia, and continues to be among
the highest of its industry peer group.
Assets Under Management
At December 31,
---------------
(billions) 1995 1994
------------------------------------------------------
Smith Barney $ 96.2 $ 78.0
Travelers Life and Annuity (1) 22.1 19.2
------------------------------------------------------
Total Assets Under Management (2) $118.3 $97.2
------------------------------------------------------
(1) Part of the Life Insurance Services segment.
(2) Excludes assets under management at RCM Capital Management of $26.2
billion in 1995 and $22.5 billion in 1994.
Outlook - Smith Barney's business is significantly affected by the levels
of activity in the securities markets, which in turn are influenced by the
level and trend of interest rates, the general state of the economy and the
national and worldwide political environments, among other factors. An
increase in interest rates could have an 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). These factors, however, could be at least partially
offset by a strengthening U.S. economy that might include growth in the
business sector -- accompanied by a rise 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 influence 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. Smith Barney is continuing to
maintain tight expense controls that management believes will help the firm
withstand periodic downturns in market conditions.
Asset Quality - Total Investment Services' assets at December 31, 1995 were
approximately $41.0 billion, consisting primarily of highly liquid
marketable securities and collateralized receivables. About 48% 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 22% represented inventories
of securities primarily needed to meet customer demand. A significant
portion of the remainder of the assets represented receivables from
4
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 1, 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 it uses primarily to
facilitate customer transactions.
At December 31, 1995 there were no "bridge" loans held by Smith Barney, and
exposure to high-yield positions was not material. Smith Barney's assets
to equity ratio at December 31, 1995 was 16.6 to 1, which management
believes is a conservative leverage level for a securities broker and one
that enhances the prospects 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.
Consumer Finance Services
Year Ended December 31,
----------------------------------------------------
1995 1994 1993
----------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenue Income
- ------------------------------------------------------------------------------------
Consumer Finance Services(1) $1,354 $246 $1,239 $227 $1,193 $232
(1) Net income includes $23 million of reported investment portfolio gains
in 1993.
Consumer Finance net income in 1995 increased by 9% over the prior year.
The increase primarily reflects a 7% increase in average receivables
outstanding. The rise in average receivables outstanding was highlighted
by an 11% increase in personal loan average receivables outstanding, which
is the highest margin product line. Receivables growth has been at a
somewhat slower pace than in 1994, and was adversely affected by increasing
first mortgage refinancings in the latter part of 1995. Proceeds of such
refinancings are sometimes used by the borrowers to pay off second
mortgages in the consumer finance portfolio. Earnings before reported
investment portfolio gains increased 8% in 1994 over 1993, reflecting both
an 11% increase in average receivables outstanding and an improvement in
net interest margins.
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 generally have been set
within a narrow range and approximated 8% in 1993; and 7.0% in 1994 and
1995. 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 rose to 15.64% in 1995
compared with 15.41% in 1994, and net interest margins rose to 8.79% in
1995 from 8.76% in 1994, as a result of improved yields, offset by higher
funding costs. The average yield on receivables outstanding decreased to
15.41% in 1994 from 15.83% in 1993, due to lower yields on fixed rate
second mortgages and the adjustable rate real estate-secured loan product
introduced at the end of 1992. Lower cost of funds resulted in an
improvement in net interest margins to 8.76% in 1994 from 8.44% in 1993.
Delinquencies in excess of 60 days rose to 2.14% at December 31, 1995,
versus historically low levels of 1.88% in 1994, and 2.21% in 1993.
Correspondingly, the charge-off rate, which had been at record low levels
in 1994, moved higher in 1995 -- reaching 2.28% versus 2.08% in 1994 and
2.36% in 1993. This increase in delinquencies and charge-offs, which to
some extent reflects industry trends associated with personal bankruptcies,
is expected to continue during 1996.
5
The allowance for credit losses as a percentage of net outstandings was
2.66% at year-end 1995, compared to 2.64% at year-end 1994 and 1993.
The total number of offices at year-end 1995 stood at 850, up from 828 at
year-end 1994. During 1995, Commercial Credit added 50 branches. This
increase was offset by consolidating 28 branches during the fourth quarter
in anticipation of a new structure designed to better serve the company's
growing business of underwriting second mortgage ($.M.A.R.T.) loans for
Primerica Financial Services (PFS).
As of, and for, the
Year Ended December 31,
-------------------------
1995 1994 1993
-------------------------
Allowance for credit losses as a %
of net outstandings 2.66% 2.64% 2.64%
Charge-off rate for the year 2.28% 2.08% 2.36%
60 + days past due on a contractual
basis as a % of gross consumer
finance reivables at year-end 2.14% 1.88% 2.21%
Insurance subsidiaries of the Company provide credit life, health and
property insurance to Consumer Finance customers. Premiums earned were
$139 million in 1995, $115 million in 1994, and $88 million in 1993. The
increase in premiums year-over-year is the result of growth in receivables
and expanded availability of certain products in additional states, as well
as the assumption through reinsurance by affiliates of the Company in 1994
of business previously insured by non-affiliated companies.
Outlook - Consumer Finance is affected by the interest rate environment and
general economic conditions. Although the declining interest rate
environment, should it continue, is not expected to have a material effect
on Consumer Finance yields, it has resulted in modest downward pressure on
interest rates charged on new receivables secured by real estate. For the
Company overall, however, these trends would be offset by the lower costs
of funds in such an environment. The low mortgage rate environment has
had, and may continue to have, some adverse impact on Consumer Finance
second mortgage loan volume and liquidations, as potential customers
refinance their first mortgages instead of turning to the second mortgage
market, or use proceeds from the refinancings of first mortgages to pay
down existing second mortgages. Continued lower interest rates could
result in a reduction of the interest rates that CCC charges Consumer
Finance on borrowed funds.
Asset Quality - Consumer Finance assets totaled approximately $8.1 billion
at December 31, 1995, of which $7.1 billion, or 87%, represented the net
consumer finance receivables (including 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. If the
charge-off and delinquency rates continue to increase, the Company would
anticipate increasing the loss reserves.
Of the remaining Consumer Finance assets, approximately $690 million were
investments of insurance subsidiaries, including $591 million of fixed
income securities and $59 million of short-term investments with a weighted
average quality rating of A1.
6
Life Insurance Services
Year Ended December 31,
----------------------------------------------------
1995 1994 1993
---------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenue Income
---------------------------------------------------------------------------
Primerica Financial
Services(1) $1,356 $251 $1,290 $210 $1,266 $223
Travelers Life and
Annuity(2) 2,502 330 2,198 211 319 42
---------------------------------------------------------------------------
Total Life Insurance
Services $3,858 $581 $3,488 $421 $1,585 $265
---------------------------------------------------------------------------
(1) Net income includes $20 million, $7 million and $45 million of
reported investment portfolio gains in 1995, 1994 and 1993, respectively.
(2) Net income includes $48 million, $1 million and $17 million of
reported investment portfolio gains in 1995, 1994 and 1993, respectively.
Travelers Life and Annuity includes the results of Transport Life Insurance
Company through September 29, 1995 (date of spin-off) and, for 1995 and
1994 only, the results of the Travelers Life and Annuity segment of old
Travelers which was acquired on December 31, 1993. Certain 1993 production
statistics related to old Travelers' businesses are included for comparison
purposes only in the following discussion and are not reflected in 1993
revenues or operating results.
The Managed Care and Employee Benefits Operations of old Travelers was
previously included in the Life Insurance Services segment. This business
marketed 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, this business is being accounted for as a
discontinued operation and, accordingly, 1994 amounts have been restated.
Primerica Financial Services
Earnings before portfolio gains for 1995 increased 14% over 1994,
reflecting continued growth in life insurance in force, improving life
insurance margins as well as favorable mortality results. 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 8% over the prior year. The increase was a 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 loan products of the
Consumer Finance segment.
New term life insurance sales were $53.0 billion in face amount for 1995,
compared to $57.4 billion in 1994, and $49.3 billion in 1993. The number
of policies issued was 266,600 in 1995, compared to 299,400 in 1994, and
260,300 in 1993. Life insurance in force at year-end 1995 reached $348.2
billion, up from $335.0 billion at year-end 1994, and continued to reflect
good policy persistency.
PFS has traditionally offered mutual funds to customers as a means to
invest the relative savings realized through the purchase of term life
insurance as compared to traditional whole life insurance. Sales of mutual
funds were $1.551 billion in 1995 compared to $1.622 billion in 1994 and
$1.473 billion in 1993 (including $253 million, $300 million and $207
million, respectively, of sales in Canada). Loan receivables from the
$.M.A.R.T. (second mortgage loans) and $.A.F.E. (personal loans) products
of Consumer Finance, which are reflected in the assets of Consumer Finance,
continued to advance during the year and were $1.258 billion at December
31, 1995 compared to $1.107 billion at December 31, 1994, and $765 million
at December 31, 1993. PFS's SECURE property and casualty insurance product
(automobile and homeowners insurance) -- issued through The Travelers
Indemnity Company and rolled out in 1995 in 14 states -- continues to
experience healthy growth in applications.
7
Outlook - Over the last few years, programs including sales and product
training were begun that are designed to maintain high compliance
standards, increase the number of producing agents and customer contacts
and, ultimately, increase production levels. Additionally increased effort
has been made to provide all PFS customers full access to all PFS marketed
lines. Insurance in force is continuing to grow and the number of
producing agents has stabilized. A continuation of these trends could
positively influence future operations. PFS continues to expand cross-
selling with other Company subsidiaries of products such as loans, mutual
funds and, most recently, property and casualty insurance (automobile and
homeowners).
Travelers Life and Annuity
Travelers Life and Annuity 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 (Transport Life) (through the date of
spin-off). Among the range of individual products are fixed and variable
annuities; term, universal and whole life insurance; and long-term care and
other accident and health coverages. These products are primarily marketed
through a core group of over 500 independent agencies, the Copeland
Companies (Copeland), an indirect wholly-owned subsidiary of TIGI, and
Smith Barney Financial Consultants. Vintage Life and Travelers Target
Maturity, the first of several new products planned for Smith Barney, were
introduced in September 1995.
Earnings before portfolio gains increased 34% to $282 million in 1995,
compared to $210 million in 1994. Higher investment margins and improved
productivity accounted for the earnings growth. Investment margins
continue to be helped by the reinvestment of proceeds from sales over the
past year of underperforming real estate. Results for 1995 also include
investment income attributable to the reinvestment in the fourth quarter of
the proceeds from the sale of the Company's interest in The MetraHealth
Companies Inc. (see Note 3 of Notes to Consolidated Financial Statements),
but exclude Transport Life earnings subsequent to the date of spin-off.
Results for 1993 include only the operations of Transport Life.
For individual annuities, net written premiums and deposits were $1.713
billion in 1995, up 31% from $1.309 billion in 1994. Total individual
annuity policyholder account balances and benefit reserves at year-end 1995
were $12.7 billion compared to $10.9 billion at year-end 1994. Sales
continue to be strengthened by the success of Vintage, the variable annuity
product distributed exclusively by Smith Barney Financial Consultants,
which was launched in June 1994 and now accounts for more than 40% of all
individual annuity production. Annuity sales were also helped in part by
rating agency upgrades for claims paying ability that occurred during the
year, including, in April 1995, A.M. Best's upgrade of The Travelers
Insurance Company to an "A" rating. This rating is not a recommendation to
buy, sell or hold securities, and it may be revised or withdrawn at any
time.
In the group annuity business, net written premiums and deposits were
$1.021 billion in 1995, compared to $772 million in 1994, excluding
deposits of $200 million and $512 million, respectively, related to the
transfer in-house of old Travelers pension fund assets previously managed
externally. A management decision not to renew low margin guaranteed
investment contracts written in prior years accounted for a reduction in
group annuity policyholder account balances and benefit reserves to $10.6
billion at year-end 1995, down from $12.2 billion at year-end 1994.
Face amount of individual life insurance issued, excluding Transport Life,
during 1995 was $6.2 billion, down from $9.2 billion in 1994, bringing
total life insurance in force to $49.2 billion at year-end 1995. The
reduction in face amount issued reflects a de-emphasis on sales of certain
lower-margin life insurance products. Net written premiums and deposits
for individual life insurance, excluding Transport Life, were $269 million
in 1995, compared to $282 million in 1994. The year-over-year decline
reflects the purchase of additional reinsurance coverage in 1995.
Net written premiums for health-related lines, excluding Transport Life,
were $133 million in 1995, up 19% from $111 million in 1994. This increase
reflects strong growth in long-term care insurance.
Outlook - Travelers Life and Annuity should benefit from growth in the
aging population who are becoming more focused on the need to accumulate
adequate savings for retirement, to protect these savings and to plan for
the
8
transfer of wealth to the next generation. Travelers Life and Annuity is
well-positioned to take advantage of the favorable long-term demographic
trends through its strong financial position, widespread brand name
recognition and broad array of competitive life, annuity and long-term care
insurance products sold through three established distribution channels.
These include independent agents, Copeland, and Smith Barney Financial
Consultants.
However, competition in both product pricing and customer service is
intensifying. While there has been some consolidation within the industry,
other financial services organizations are increasingly involved in the
sale and/or distribution of insurance products. Deregulation of the
banking industry, including possible reform of restrictions on entry into
the insurance business, will likely accelerate this trend. Also, the
annuities business is interest sensitive, and swings in interest rates
could influence sales and retention of in force policies. In order to
strengthen its competitive position, Travelers Life and Annuity expects to
maintain a current product portfolio, further diversify its distribution
channels, and retain its healthy financial position through strong sales
growth and maintenance of an efficient cost structure.
In addition, during the past year significant tax reform discussions have
occurred. Some of the proposed discussions could reduce or eliminate the
need for tax deferral features and thus the need for products that are
currently in Travelers Life and Annuity's portfolio. New legislation could
also create the need for new products or increase the demand for some
existing products. At this time it is not clear what the eventual outcome
of this national debate will be or what impact, if any, it may have on
Travelers Life and Annuity's sales and business retention.
Property & Casualty Insurance Services
Year Ended December 31,
---------------------------------------------------
(millions) 1995 1994 1993
- -------------------------------------------------------------------------------
Net Net Net
Revenue Income Revenues Income Revenues Income
-------------------------------------------------------------------------------
Commercial (1) $3,063 $343 $3,058 $146 $315 $45
Minority Interest - Gulf - - - - - (22)
Personal (2) 1,482 110 1,480 103 - -
-------------------------------------------------------------------------------
Total Property & Casualty
Insurance Services $4,545 $453 $4,538 $249 $315 $23
===============================================================================
(1) Net income includes $36 million of reported investment
portfolio gains in 1995 and $73 million of reported investment
portfolio losses in 1994 and $15 million of reported investment
portfolio gains in 1993.
(2) Net income includes $6 million of reported investment portfolio
gains in 1995 and $18 million of reported investment portfolio
losses in 1994 and also in 1994 a $19 million gain from the
sale of Bankers and Shippers Insurance Company.
The Property & Casualty Insurance Services segment consists of the property
and casualty 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 the Company. Certain 1993 production statistics related
to old Travelers' businesses are included for comparison purposes only in
the following discussion and are not reflected in 1993 revenues or
operating results.
On November 28, 1995, TIGI, an indirect wholly-owned subsidiary of the
Company, entered into an agreement with Aetna Life and Casualty Company
(Aetna) to purchase Aetna's domestic property and casualty insurance
operations for approximately $4.0 billion in cash, subject to certain
adjustments. The agreement, which is subject to various regulatory
approvals, provides for the purchase, by TIGI or a subsidiary, of all of
the outstanding capital stock of The Aetna Casualty and Surety Company and
The Standard Fire Insurance Company. The transaction is expected to be
completed around the end of the first quarter of 1996. (See Liquidity and
Capital Resources.)
9
Commercial Lines
Earnings before portfolio gains/losses increased 40% to $307 million in
1995 compared to $219 million in 1994. The improvement relative to 1994
primarily resulted from an increase in net investment income and improved
loss trends in the workers' compensation line.
Commercial Lines net written premiums were $2.309 billion in 1995, compared
to $2.391 billion in 1994 and $2.499 billion in 1993. Premium equivalents
for 1995 were $2.821 billion compared to $2.990 billion in 1994 and $2.757
billion in 1993. Premium 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
actual premium revenues.
A significant component of Commercial Lines is National Accounts, which
works with national brokers and regional agents providing insurance
coverages and services, primarily workers' compensation, mainly to large
corporations. National Accounts also includes the alternative market
business which primarily covers workers' compensation products and
services. National Accounts' net written premiums for 1995 were $703
million compared to $835 million in 1994. National Account premium
equivalents of $2.780 billion for 1995 were $179 million below 1994. The
1995 decline reflects selective renewal activity in response to the
competitive pricing environment as well as continued success in lowering
workers' compensation losses of customers (which reduces premiums and
equivalents). The decrease in premium equivalents in 1995 compared to 1994
primarily reflects a depopulation of involuntary pools as the loss
experience of workers' compensation improved and insureds moved to
voluntary markets. For 1995, new premium and equivalent business was $444
million compared to $325 million for 1994. Retention ratios dropped to 84%
in 1995 from 88% in 1994, reflecting selective renewal activity in response
to the competitive pricing environment.
Commercial Accounts serves mid-sized businesses through a network of
independent agencies and brokers. Commercial Accounts' net written
premiums were $730 million in 1995 compared to $791 million in 1994,
reflecting continued softness in the guaranteed cost products of Commercial
Accounts business and was partly offset by continued growth in
industry-specific programs and in retrospectively rated policies and other
loss-responsive products. Commercial Account premium equivalents grew to
$41 million in 1995, $10 million above the 1994 level. This increase
reflects a shift from guaranteed cost products to fee-for-service business.
For 1995, new premium and equivalent business in Commercial Accounts was
$470 million compared to $381 million in 1994. The Commercial Accounts
business retention ratio was 73% in 1995 compared to 79% in 1994.
Commercial Accounts continues to focus on the retention of existing
business while maintaining its product pricing standards and its selective
underwriting policy.
Select Accounts serves small businesses through a network of independent
agencies. Select Accounts net written premiums of $542 million for 1995
were $76 million above 1994 premium levels, due primarily to an increase in
new business. New premium business in Select Accounts was $131 million in
1995 compared to $112 million in 1994. The Select Accounts business
retention ratio was 75% in 1995 compared to 73% in 1994.
Specialty Accounts net written premiums of $334 million in 1995 increased
12% compared to $299 million in 1994. This growth is primarily
attributable to an increase in the writing of assumed reinsurance business.
Catastrophe losses, net of tax and reinsurance, were $7 million in 1995
compared to $30 million in 1994. The 1994 catastrophe losses were due to
winter storms in the first quarter of 1994. Effective April 1, 1995, the
threshold of losses incurred to qualify a specific event as a catastrophe
was increased.
The 1995 and 1994 full year statutory combined ratios were 105.0% and
124.7%, respectively. The 1994 statutory combined ratio included a
statutory charge of $225 million for reserve increases for environmental
claims and for a reduction of ceded reinsurance balances. The 1993 full
year statutory combined ratio of old Travelers and Gulf combined was 125.3%
and included $325 million of reserve strengthening predominantly for
asbestos and environmental liabilities recorded by old Travelers in the
third quarter of 1993. The 1994 and 1993 statutory combined ratios
excluding these reserve charges were 114.2% for 1994 and 111.2% for old
Travelers and Gulf
10
combined for 1993. The improvement in the 1995 statutory combined ratio
compared to the adjusted 1994 statutory combined ratio was due to the first
quarter 1994 catastrophe losses and favorable loss development in certain
workers' compensation lines and residual markets in 1995.
Personal Lines
Expense reduction initiatives and strong net investment income contributed
to a small improvement in earnings in 1995. In addition, 1994 benefitted
from a one-time contribution of $9 million, which resulted from the
favorable resolution of the New Jersey Market Transition Facility (MTF)
deficit as well as earnings from Bankers and Shippers Insurance Company
(which was sold in October 1994). Earnings continue to reflect strong
performance in the agency network in targeted markets and aggressive
expense reduction initiatives. This was partially offset by start-up costs
of the SECURE program - a PFS sales initiative whereby automobile and
homeowners insurance is being marketed in selected states by the PFS sales
force.
Net written premiums for 1995 were $1.298 billion, compared to $1.433
billion in 1994. The 1995 decline of $135 million compared to 1994 was
attributable to the sale of Bankers and Shippers in October 1994. However,
excluding Bankers and Shippers business, net written premiums for 1995 were
up approximately 8% from 1994, reflecting reduced reinsurance ceded and
targeted growth in sales through independent agents.
Catastrophe losses, net of taxes and reinsurance, were $12 million in 1995,
compared to $26 million in 1994. The increase in catastrophe losses in
1994 was due to severe winter storms in the Northeast during the first
quarter. Effective April 1, 1995, the threshold of losses incurred to
qualify a specific event as a catastrophe was increased.
The statutory combined ratio for Personal Lines for the full year 1995 was
104.4% compared to 100.4% in 1994. The lower ratio in 1994 was due to the
benefit of favorable loss reserve development and the favorable resolution
of the MTF deficit.
Outlook - Property & Casualty
A variety of factors continue to affect the property and casualty insurance
market, including inflation in the cost of medical care and litigation and
losses from involuntary markets.
In most of Commercial Lines, pricing did not improve in 1995. For
Commercial Accounts and Select Accounts, the duration of the current
downturn in the underwriting cycle continues to place pressure on the
pricing of guaranteed cost products, as 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 Accounts business, although primarily
fee-for-service, continues to be very competitive on price.
In Personal Lines, inflation in the cost of automobile repairs, medical
care and litigation of liability claims in 1995 resulted in pressure on
current underwriting margins. Personal Lines management strategy includes
the control of operating expenses to improve competitiveness and
profitability, growth in sales through independent agents in target markets
and other distribution channels and a reduction of exposure to catastrophe
losses.
In an effort to reduce its exposure to catastrophic hurricane losses, the
Company has reduced agent commissions on homeowners insurance in certain
markets, strengthened underwriting standards and implemented price
increases in certain hurricane - prone areas, subject to restrictions
imposed by insurance regulatory authorities.
Environmental Claims
TIGI 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 historical 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
11
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 TIGI 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 1995 and 1994. At December 31, 1995,
approximately 24% of the net environmental loss reserve (i.e.,
approximately $95 million) is case reserve for resolved claims. TIGI does
not post 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.
Environmental Losses(1)
--------------------
(millions) 1995 1994
---- ----
Beginning reserves:
Direct $482 $504
Ceded (11) (13)
---- ----
Net 471 491
Incurred losses and loss expenses:
Direct 117 54
Ceded (61) (5)
Losses paid:
Direct 145 76
Ceded (22) (7)
--- ----
Ending reserves:
Direct 454 482
Ceded (50) (11)
---- ----
Net $ 404 $ 471
==== ====
(1) 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, TIGI
establishes a claim file for each insured on a per site, per claimant
basis. If there is more than one claimant, such as a federal and a state
agency, this method will result in two claims being set up for a
policyholder at that one site. TIGI 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, 1995, TIGI had approximately 10,500 pending
environmental-related claims and had resolved more than 20,600 such claims
since 1986. Approximately 65% of the pending environmental-related claims
in inventory represented federal or state EPA-type claims tendered by
approximately 700 insureds. The balance represented bodily injury claims
alleging injury due to the discharge of insureds' waste or pollutants.
To date, TIGI generally has been successful in resolving 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 settlement of many of the
environmental claims, there is a "buy-back" from the insured, of the future
environmental liability risks under the policy by TIGI, together with
appropriate indemnities and hold harmless provisions to protect TIGI.
12
In 1995, Congress considered the "Superfund Reform Act of 1995" and certain
other proposals, which seek to effect improvements in remediation of
hazardous waste sites listed on the National Priorities List (NPL), and to
achieve certain other reforms of Superfund. It is not possible to predict
whether proposed legislation will be enacted, what form such legislation
might take when enacted, or the potential effects such legislation may have
on the Company and its competitors.
Asbestos Claims
In the area of asbestos claims, the Company believes that the property and
casualty insurance 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.
Also, there has emerged a group of non-product claims by plaintiffs, mostly
independent labor union workers, mainly against companies alleging exposure
to asbestos while working at these companies' premises. In addition,
various insurers, including TIGI, remain defendants in an action brought in
Philadelphia regarding potential consolidation and resolution of future
asbestos bodily injury claims. The cumulative effect of these claims and
judicial actions on TIGI and its insureds currently is uncertain.
In addition, various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as
premises owners, are tendering asbestos-related claims to the industry.
Because each insured presents different liability and coverage issues, TIGI
evaluates those issues on an insured-by-insured basis.
TIGI's evaluations have not resulted in any meaningful data from which an
average asbestos defense or indemnity payment may be determined. The
varying defense and indemnity payments made by TIGI on behalf of its
insureds also have precluded TIGI 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 1995 and 1994. At December 31, 1995, approximately 82% of
the net asbestos reserves represented incurred but not reported losses.
Asbestos Losses(1)
---------------
(millions) 1995 1994
---- ----
Beginning reserves:
Direct $702 $775
Ceded (319) (381)
----- -----
Net 383 394
Incurred losses and loss expenses:
Direct 109 67
Ceded (66) (16)
Losses paid:
Direct 116 140
Ceded (92) (78)
----- ----
Ending reserves:
Direct 695 702
Ceded ( 293) (319)
----- ----
Net $402 $383
==== ====
(1) Amounts prior to 1994 relate to Gulf only and are not material.
13
The largest reinsurer of TIGI's asbestos risks is Lloyd's of London
(Lloyd's). Lloyd's is currently undergoing a restructuring to solidify its
capital base and to segregate claims for years before 1993. The ultimate
effect of this restructuring on reinsurance recoverable from Lloyd's 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, TIGI
carries on a continuing review of its overall position, its reserving
techniques and reinsurance recoverables. In each of these areas of
exposure, TIGI 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
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.
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. A decline in interest rates reduces
the returns available on investment of funds but could create the
opportunity for realized investment gains on disposition of fixed maturity
investments.
As required by various state laws and regulations, the Company's insurance
subsidiaries are required to participate in state-administered guaranty
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 that
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, 1995 and 1994, all of the Company's life
and property & casualty companies had adjusted capital in excess of amounts
that would require regulatory action.
Asset Quality - The investment portfolio of the Insurance Services segment
which includes both Life Insurance and Property & Casualty Insurance
totaled approximately $40 billion, representing 65% of total Insurance
Services' assets of approximately $62 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 segment's fixed maturity portfolio totaled $30 billion, comprised of
$24 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, 1995 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.
14
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 U.S. treasury securities.
The investment strategy of the Insurance Services segment is to purchase
CMO tranches that are protected against prepayment risk, primarily 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.
At December 31, 1995, the segment held CMOs with a market value of $3.7
billion. Approximately 89% of CMO holdings are fully collateralized by
GNMA, FNMA or FHLMC securities, and the balances are fully collateralized
by portfolios of individual mortgage loans. In addition, the segment held
$2.1 billion of GNMA, FNMA or FHLMC mortgage-backed securities. Virtually
all of these securities are rated AAA. The segment also held $1.6 billion
of securities that are backed primarily by credit card or car loan
receivables.
At December 31, 1995, real estate and mortgage loan investments totaled
$4.4 billion. Most of these investments are included in the investment
portfolio of TIGI. 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) 1995 1994
---- ----
Current mortgage loans $3,796 $4,905
Underperforming mortgage loans 252 511
----- -----
Total mortgage loans 4,048 5,416
----- -----
Real estate held for sale 321 418
----- -----
Total mortgage loans and real estate $4,369 $5,834
===== =====
Included in underperforming mortgage loans above are $55 million of
mortgages restructured at below market terms, all of which 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, $232
million is underperforming.
For further information relating to investments, see Note 5 of Notes to
Consolidated Financial Statements.
15
Corporate and Other
Year Ended December 31,
-------------------------------------------------------------
1995 1994 1993
-------------------------------------------------------------
Net Net Net
Income Income Income
(millions) Revenues (Expense) Revenues (Expense) Revenues (Expense)
----------------------------------------------------------------------------------
Net expenses(1) $(238) $(201) $(65)
Equity in income of
old Travelers in 1993 - - 152
Net gain (loss) on
sale of stock of
subsidiaries and
affiliates (13) 39 8
----------------------------------------------------------------------------------
Total Corporate and
Other $ 18 $(251) $(12) $(162) $180 $ 95
----------------------------------------------------------------------------------
(1) Includes $23 million of reported investment portfolio losses in 1995
and $3 million of reported investment portfolio gains in 1993.
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 (before reported portfolio losses) in 1995
over 1994 is primarily attributable to increased interest costs borne at
the corporate level resulting from higher average short-term borrowing
rates in 1995 when compared to 1994 as well as a shift in debt mix to
higher levels of senior long-term debt over the course of 1995.
The increase in net expenses in 1994 over 1993 is primarily attributable to
the assumption of old Travelers corporate debt and certain corporate
expenses, the full year impact of financing the acquisition of the Shearson
Businesses, and a rise in commercial paper 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.
Discontinued Operations
Year Ended
December 31,
----------------------
(millions) 1995 1994
----------------------------------------------------------
Net Income Net Income
----------------------------------------------------------
Operations $ 76 $ 160
Gain on disposition 130 9
----------------------------------------------------------
Total discontinued operations $206 $169
----------------------------------------------------------
As discussed in Note 3 of Notes to Consolidated Financial Statements, all
of the businesses sold to Metropolitan Life Insurance Company (MetLife) or
contributed to The MetraHealth Companies Inc. (MetraHealth) were included
in the Company's Managed Care and Employee Benefits Operations (MCEBO)
segment in 1994. In 1995, the
16
Company's results reflect the medical business not yet transferred, plus
its equity interest in the earnings of MetraHealth. These operations have
been accounted for as a discontinued operation.
Gain on disposition in 1995 represents a gain of $20 million from the sale
in January of the Company's group life insurance business to MetLife, and a
gain of $110 million (not including a contingency payment based on 1995
results which could be received by the Company in 1996) from the sale in
October of the Company's interest in MetraHealth to United HealthCare
Corporation. Gain on disposition in 1994 represents the gain from the sale
in December of the group dental insurance business to MetLife.
Liquidity and Capital Resources
Travelers Group Inc. (the Parent) services its obligations primarily with
dividends and other funds 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.
On January 24, 1996, the Company announced that its Board of Directors will
recommend shareholder approval, at the Company's Annual Meeting on April
24, 1996, of an increase in the Company's common share authorization to 1.5
billion shares. Contingent upon shareholder approval in April of that
increase in authorized shares, the Board of Directors has declared a
3-for-2 split in the Company's common stock, in the form of a 50% stock
dividend, payable on May 24, 1996 to shareholders of record on May 6,
1996.
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. The Parent, CCC
and TIC have an agreement with a syndicate of banks to provide $1.0 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 $250 million. The
revolving credit facility consists of a five-year revolving credit facility
which expires in 1999. At December 31, 1995, $400 million was allocated to
the Parent, $475 million was allocated to CCC, and $125 million to TIC. At
December 31, 1995 there were no borrowings outstanding under this facility.
Under this facility the Company is required to maintain a certain level of
consolidated stockholders' equity (as defined in the agreement), and the
Company exceeded this requirement by approximately $3.2 billion at December
31, 1995.
As of December 31, 1995, the Parent had unused credit availability of $400
million under the five-year revolving credit facility. In addition to the
five-year revolving credit facility, the Parent on January 17, 1996 entered
into a 364-day revolving credit and bid loan agreement with a bank to
provide $1.0 billion of revolving credit. The Parent may borrow under its
revolving credit facilities at various interest rate options and
compensates the banks for the facilities through commitment fees.
During 1995 and through March 5, 1996 the Parent completed the following
long-term debt offerings, leaving $1.0 billion available for debt offerings
under its shelf registration statements:
- 7 7/8% Notes due May 15, 2025 ........... $200 million
- 6 7/8% Notes due June 1, 2025 ........... $150 million
- 6 5/8% Notes due September 15, 2005 ..... $150 million
- 6 1/4% Notes due December 1, 2005 ....... $100 million
- 7% Notes due December 1, 2025 ........... $100 million
In December 1995, the Parent through a private placement, issued $100
million of 6 1/4% Notes due December 1, 2005, and $100 million of 7% Notes
due December 1, 2025 (the Debt Securities). In the first quarter of 1996,
Travelers Group Inc. filed a registration statement with respect to an
offer to exchange the Debt Securities for notes
17
(the Exchange Notes) substantially identical in all material respects
(including principal amount, interest rate and maturity) to the terms of
the Debt Securities, except that the Exchange Notes will be registered
under the Securities Act of 1993 and therefore will be freely transferable
by holders.
Pending Acquisition
The Company expects that a subsidiary, Travelers/Aetna Property Casualty
Corp. (TAP), will own both the property and casualty operations purchased
from Aetna and the Company's existing property and casualty operations.
The Company expects to capitalize TAP initially by contributing
approximately $1.1 billion from a combination of cash on hand and
borrowings by the Company. The Company may provide additional funds in the
form of temporary capital in order to finance the transaction. In
addition, it is anticipated that TAP will finance the acquisition with an
aggregate of $525 million in equity securities issued to a small group of
private investors, and borrowings under a five-year revolving credit
facility in the amount of up to $2.65 billion provided by a syndicate of
banks led by Citibank, N.A., Chemical Bank and Morgan Guaranty Trust
Company. It is anticipated that subsequent to the acquisition, TAP will
raise additional capital through private and/or public debt and equity
offerings with the proceeds from such offerings being used principally to
repay the borrowings under the five-year revolving credit facility.
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,
1995, CCC had unused credit availability of $1.975 billion under five-year
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.
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, 1995, CCC would have been able to
remit $225 million to the Parent under its most restrictive covenants or
regulatory requirements.
During 1995 and through March 5, 1996 CCC completed the following long-term
debt offerings, leaving $950 million available for debt offerings under its
shelf registration statement:
- 7 7/8% Notes due February 1, 2025 ..... $200 million
- 7 3/4% Notes due March 1, 2005 ........ $200 million
- 7 3/8% Notes due March 15, 2002 ....... $200 million
- 7 3/8% Notes due April 15, 2005 ....... $200 million
- 6 7/8% Notes due May 1, 2002 .......... $200 million
- 6 3/4% Notes due May 15, 2000 ......... $200 million
- 6 5/8% Notes due June 1, 2015 ......... $200 million
- 6 1/2% Notes due June 1, 2005 ......... $200 million
- 6 3/8% Notes due September 15, 2002 ... $200 million
- 6 1/8% Notes due December 1, 2005 ..... $200 million
- 5 7/8% Notes due January 15, 2003 ..... $200 million
- 5.55% Notes due February 15, 2001 ..... $200 million
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. Smith Barney has
a $1.0 billion revolving credit agreement with a bank syndicate that
extends through May 1998, and has a $750 million, 364-day revolving credit
agreement with a bank syndicate that extends through May 1996. As of
December 31, 1995, there were no borrowings outstanding under either
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.
18
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
uncollateralized borrowings and uncollateralized letters of credit. In
addition, Smith Barney monitors its leverage and capital ratios on a daily
basis.
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,
1995, Smith Barney would have been able to remit approximately $452 million
to the Parent under its most restrictive covenants.
During 1995 and through March 5, 1996 Smith Barney completed the following
long-term debt offerings leaving $725 million available for debt offerings
under its shelf registration statement:
- 7.98% Notes due March 1, 2000 ....... $200 million
- 7 1/2% Notes due May 1, 2002 ........ $150 million
- 7% Notes due May 15, 2000 ........... $150 million
- 6 7/8% Notes due June 15, 2005 ...... $175 million
- 6 1/2% Notes due October 15, 2002 ... $150 million
- 5 7/8% Notes due February 1, 2001 ... $250 million
Securities Borrowed, Loaned and Subject to Repurchase Agreements
Smith Barney engages in "matched book" transactions in government and
mortgage-backed securities as well as "conduit" transactions in corporate
equity and debt securities. These transactions are similar in nature. A
"matched book" transaction involves a security purchased under an agreement
to resell (i.e., reverse repurchase transaction) and simultaneously sold
under an agreement to repurchase (i.e., repurchase transaction). A
"conduit" transaction involves the borrowing of a security from a
counterparty and the simultaneous lending of the security to another
counterparty. These transactions are reported gross in the Consolidated
Statement of Financial Position and typically yield relatively small
interest spreads, generally ranging from 10 to 30 basis points. The
interest spread results from the net of interest received on the reverse
repurchase or security borrowed transaction and the interest paid on the
corresponding repurchase or security loaned transaction. Interest rates
charged or credited in these activities are usually based on current
Federal Funds rates but can fluctuate based on security availability and
other market conditions. The size of balance sheet positions resulting
from these activities can vary significantly, depending primarily on levels
of activity in the bond markets, but would have a relatively smaller impact
on net income.
The Travelers Insurance Group Inc. (TIGI)
At December 31, 1995, TIGI had $20.4 billion of life and annuity product
deposit funds and reserves. Of that total, $9.6 billion are not subject to
discretionary withdrawal based on contract terms. The remaining $10.8
billion are for life and annuity products that are subject to discretionary
withdrawal by the contractholder. Included in the latter amount are $1.5
billion of liabilities that are surrenderable with market value
adjustments. An additional $5.6 billion of the life insurance and
individual annuity liabilities are subject to discretionary withdrawals,
with an average surrender charge of 5.2%, and $900 million 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 $2.8 billion of liabilities are surrenderable without charge.
Approximately 25% of these relate to individual life products. These risks
would have to be underwritten again if transferred to another carrier,
which is considered a significant deterrent against withdrawal by long-term
policyholders. Insurance liabilities surrendered or withdrawn from TIGI
are reduced by outstanding policy loans and related accrued interest prior
to payout.
Scheduled maturities of guaranteed investment contracts (GICs) in 1996,
1997, 1998, 1999 and 2000 are $1.3 billion, $367 million, $344 million,
$123 million and $91 million, respectively. At December 31, 1995, the
interest rates credited on GICs had a weighted average rate of 6.12%.
The Travelers Insurance Company (TIC), a direct subsidiary of TIGI issues
commercial paper to investors and maintains unused committed, revolving
credit facilities at least equal to the amount of commercial paper
outstanding.
19
As of December 31, 1995, TIC has unused credit availability of $125 million
under the five-year revolving credit facility.
The Travelers Insurance Group Inc. is subject to various regulatory
restrictions that limit the maximum amount of dividends available to its
Parent without prior approval of the Connecticut Insurance Department. A
maximum of $580 million of statutory surplus is available in 1996 for such
dividends without Department approval.
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. The
Company will have to generate approximately $3.1 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.
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.
Future Application of Accounting Standards
FAS 121. In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" (FAS 121). This statement establishes accounting standards for the
impairment of long-lived assets and certain identifiable intangibles to be
disposed of. This statement requires a write down to fair value when
long-lived assets to be held and used are impaired. The statement also
requires long-lived assets to be disposed of (e.g., real estate held for
sale) to be carried at the lower of cost or fair value less cost to sell,
and does not allow such assets to be depreciated. The adoption of this
statement effective January 1, 1996 will not have a material effect on
results of operations, financial condition or liquidity.
FAS 123. In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). This statement addresses alternative
accounting treatments for stock-based compensation, such as stock options
and restricted stock. FAS 123 permits either expensing the value of
stock-based compensation over the period earned, or disclosing in the
financial statement footnotes the pro forma impact to net income as if the
value of stock-based compensation awards had been expensed. The value of
awards would be measured at the grant date based upon estimated fair value,
using established option pricing models. The requirements of this
statement will be effective for 1996 financial statements, although earlier
adoption is permissible if an entity elects to expense the cost of
stock-based compensation. The Company is currently evaluating the
disclosure requirements and expense recognition alternatives addressed by
this statement.
20
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Income
(In millions of dollars, except per share amounts)
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
Revenues
Insurance premiums $4,977 $5,144 $1,480
Commissions and fees 2,874 2,526 1,813
Interest and dividends 4,355 3,401 722
Finance related interest and other charges 1,119 1,030 954
Principal transactions 1,016 900 549
Asset management fees 1,052 1,010 555
Equity in income of old Travelers - - 164
Other income 1,190 932 560
- ---------------------------------------------------------------------------------------------------
Total revenues 16,583 14,943 6,797
- ---------------------------------------------------------------------------------------------------
Expenses
Policyholder benefits and claims 5,017 5,227 833
Non-insurance compensation and benefits 3,442 3,241 2,057
Insurance underwriting, acquisition and operating 1,912 1,867 506
Interest 1,956 1,284 707
Provision for credit losses 171 152 134
Other operating 1,544 1,524 1,050
- ---------------------------------------------------------------------------------------------------
Total expenses 14,042 13,295 5,287
- ---------------------------------------------------------------------------------------------------
Gain (loss) on sale of subsidiaries and affiliates (20) 226 13
- ---------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 2,521 1,874 1,523
Provision for income taxes 893 717 550
Minority interest, net of income taxes - - (22)
- ---------------------------------------------------------------------------------------------------
Income from continuing operations 1,628 1,157 951
- ---------------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes:
Income from operations (net of taxes of $17 and $87) 76 160 -
Gain on disposition (net of taxes of $66 and $19) 130 9 -
- ---------------------------------------------------------------------------------------------------
Income from discontinued operations 206 169 -
- ---------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes 1,834 1,326 951
Cumulative effect of accounting changes
(net of taxes of $19) - - (35)
- ---------------------------------------------------------------------------------------------------
Net income $1,834 $1,326 $ 916
===================================================================================================
Net income per share of common stock
and common stock equivalents:
Continuing operations $ 4.86 $ 3.34 $ 3.88
Discontinued operations 0.65 0.52 -
Cumulative effect of accounting changes - - (0.14)
- ---------------------------------------------------------------------------------------------------
Net income per share of common stock
and common stock equivalents $ 5.51 $ 3.86 $ 3.74
===================================================================================================
Weighted average number of common shares outstanding
and common stock equivalents (in millions) 317.4 322.0 237.8
===================================================================================================
See Notes to Consolidated Financial Statements.
22
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Financial Position
(In millions of dollars)
December 31, 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents
(including $1,072 and $816 segregated under federal and other brokerage regulations) $ 1,866 $ 1,227
Investments:
Fixed maturities, primarily available for sale at market value 30,712 27,288
Equity securities, at market value 856 510
Mortgage loans 4,048 5,416
Real estate held for sale 321 418
Policy loans 1,888 1,581
Short-term and other 3,140 3,752
- -------------------------------------------------------------------------------------------------------------------
Total investments 40,965 38,965
- --------------------------------------------------------------------------------------------------------------------
Securities borrowed or purchased under agreements to resell 19,601 25,655
Brokerage receivables 6,559 8,238
Trading securities owned, at market value 8,984 6,945
Net consumer finance receivables 7,092 6,746
Reinsurance recoverables 6,461 5,026
Value of insurance in force and deferred policy acquisition costs 2,172 2,163
Cost of acquired businesses in excess of net assets 1,928 2,045
Separate and variable accounts 6,949 5,162
Other receivables 3,564 4,018
Other assets 8,334 9,107
- --------------------------------------------------------------------------------------------------------------------
Total assets $114,475 $115,297
====================================================================================================================
Liabilities
Investment banking and brokerage borrowings $ 2,955 $ 4,374
Short-term borrowings 1,468 2,480
Long-term debt 9,190 7,075
Securities loaned or sold under agreements to repurchase 20,619 22,083
Brokerage payables 4,403 7,807
Trading securities sold not yet purchased, at market value 4,563 4,345
Contractholder funds 14,535 16,392
Insurance policy and claims reserves 26,920 27,084
Separate and variable accounts 6,916 5,127
Accounts payable and other liabilities 11,028 9,752
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 102,597 106,519
- --------------------------------------------------------------------------------------------------------------------
ESOP Preferred stock - Series C 235 235
Guaranteed ESOP obligation (67) (97)
- --------------------------------------------------------------------------------------------------------------------
168 138
- --------------------------------------------------------------------------------------------------------------------
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: 1995 - 368,171,649 and 1994 - 368,195,609) 4 4
Additional paid-in capital 6,785 6,655
Retained earnings 5,503 4,199
Treasury stock, at cost (1995 - 51,924,410 shares and 1994 - 51,684,618 shares) (1,835) (1,553)
Unrealized gain (loss) on investment securities and other, net 453 (1,465)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,710 8,640
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $114,475 $115,297
====================================================================================================================
See Notes to Consolidated Financial Statements.
23
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(In millions of dollars)
Amounts Shares (in thousands)
----------------------- ---------------------------
Year Ended December 31, 1995 1994 1993 1995 1994 1993
------------------------ ---------------------------
Preferred stock at aggregate liquidation value
Balance, beginning of year $ 800 $ 800 $ 300 11,200 11,200 1,200
Issuance of preferred stock 500 10,000
- ----------------------------------------------------------------------------------- -----------------------------
Balance, end of year 800 800 800 11,200 11,200 11,200
=================================================================================== =============================
Common stock and additional paid-in capital
Balance, beginning of year 6,659 6,570 2,150 368,196 368,287 253,524
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
Issuance of common stock warrants 25
Issuance of shares pursuant to employee benefit plans 130 85 122
Other 4 (24) (91)
- ----------------------------------------------------------------------------------- -------------------------------
Balance, end of year 6,789 6,659 6,570 368,172 368,196 368,287
- ----------------------------------------------------------------------------------- -------------------------------
Retained earnings
Balance, beginning of year 4,199 3,140 2,363
Net income 1,834 1,326 916
Common dividends (255) (181) (113)
Preferred dividends (86) (86) (26)
Distribution of Transport Holdings Inc. shares (189)
- -----------------------------------------------------------------------------------
Balance, end of year 5,503 4,199 3,140
- -----------------------------------------------------------------------------------
Treasury stock (at cost)
Balance, beginning of year (1,553) (1,121) (540) (51,685) (41,155) (31,572)
Conversion of debentures 81 4,104
Issuance of shares pursuant to employee benefit plans,
net of shares tendered for payment of option exercise
price and withholding taxes 136 111 (10) 8,964 5,318 6,175
Treasury stock acquired (418) (543) (58) (9,204) (15,876) (1,478)
Common stock issued to subsidiaries of the Company (595) (18,519)
Other 1 28 135
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year (1,835) (1,553) (1,121) (51,925) (51,685) (41,155)
- ------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on investment securities and other
Balance, beginning of year (1,465) (63) (44)
Net change in unrealized gains and (losses) on
investment securities, net of tax 2,075 (1,349) 22
Net issuance of restricted stock (221) (190) (103)
Restricted stock amortization 175 136 64
Adjustment for minimum pension liability, net of tax (114)
Net translation adjustments, net of tax 3 1 (2)
- -----------------------------------------------------------------------------------
Balance, end of year 453 (1,465) (63)
- -----------------------------------------------------------------------------------
Total common stockholders' equity and common
shares outstanding 10,910 7,840 8,526 316,247 316,511 327,132
=================================================================================== ===============================
Total stockholders' equity $11,710 $8,640 $9,326
===================================================================================
See Notes to Consolidated Financial Statements.
24
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(In millions of dollars)
Year Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Income from continuing operations before income taxes, minority interest and
cumulative effect of accounting changes $2,521 $1,874 $ 1,523
Adjustments to reconcile income from continuing operations before income taxes,
minority interest and cumulative effect of accounting changes to net cash
provided by (used in) operating activities:
Amortization of deferred policy acquisition costs and value of insurance in force 803 812 286
Additions to deferred policy acquisition costs (858) (994) (369)
Depreciation and amortization 304 330 125
Provision for credit losses 171 152 134
Undistributed equity earnings - - (116)
Changes in:
Trading securities, net (1,821) (572) (1,082)
Securities borrowed, loaned and repurchase agreements, net 4,590 (363) (1,591)
Brokerage receivables net of brokerage payables (1,725) 724 863
Insurance policy and claims reserves 686 350 251
Other, net (508) (1,740) 522
Net cash flows provided by (used in) operating activities of discontinued operations (415) 323 -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 3,748 896 546
Income taxes paid (563) (378) (403)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,185 518 143
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Consumer loans originated or purchased (2,748) (2,789) (2,673)
Consumer loans repaid or sold 2,245 2,094 2,108
Purchases of fixed maturities and equity securities (18,123) (9,057) (2,794)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities 12,864 4,149 2,485
Mortgage loans 739 402 5
Real estate and real estate joint ventures 256 955 -
Proceeds from maturities of investments:
Fixed maturities 2,723 3,319 231
Mortgage loans 693 1,301 6
Other investments, primarily short-term, net (408) (58) (631)
Payment for purchase of the Shearson Businesses (76) (69) (1,296)
Payment for net clearing assets transferred - - (536)
Cash acquired in connection with The Travelers Merger - - 59
Business divestments - 679 120
Other, net (236) (284) (274)
Net cash flows provided by (used in) investing activities of discontinued operations 1,623 (303) -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (448) 339 (3,190)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (341) (267) (139)
Issuance of common stock - - 329
Treasury stock acquired (418) (543) (58)
Issuance of long-term debt 3,525 1,150 2,733
Payments and redemptions of long-term debt (1,375) (1,033) (448)
Net change in short-term borrowings (including investment banking and brokerage borrowings) (2,431) 865 1,934
Contractholder fund deposits 2,707 1,958 -
Contractholder fund withdrawals (3,755) (3,358) -
Other, net (10) (12) (50)
Net cash flows provided by financing activities of discontinued operations - 84 -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,098) (1,156) 4,301
- ---------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 639 (299) 1,254
Cash and cash equivalents at beginning of period 1,227 1,526 272
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,866 $1,227 $ 1,526
- ---------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $1,930 $1,227 $ 674
=====================================================================================================================
See Notes to Consolidated Financial Statements.
25
Travelers Group Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
Principles of Consolidation. The consolidated financial statements include
the accounts of Travelers Group Inc. (formerly The Travelers Inc.) and
its subsidiaries (the Company). In December 1992, the Company 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. On December 31, 1993, the Company acquired the
approximately 73% of old Travelers common stock it did not already own (the
Merger) through the merger of old Travelers into the Company. The
Acquisition and the Merger were accounted for as a step acquisition and
accordingly, old Travelers' assets and liabilities were recorded at 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 was 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%
interest previously owned. The old Travelers businesses acquired are
hereinafter referred to as old Travelers or The Travelers Insurance Group
Inc. (TIGI). 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). The acquisition was accounted for as a
purchase, and the consolidated financial statements include the results
of the Shearson Businesses from the date of acquisition.
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
As more fully described in Note 3, all of the operations comprising Managed
Care and Employee Benefits Operations (MCEBO), are presented as a
discontinued operation and, accordingly, prior year amounts have been
restated.
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
Accounting Changes
FAS 114 and FAS 118. Effective January 1, 1995, the Company adopted
Statement of Financial Accounting Standards (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,"
which describe how impaired loans should be measured when determining the
amount of a loan loss accrual. These statements amended existing
guidance on the measurement of restructured loans in a troubled debt
restructuring involving a modification of terms. The adoption of these
standards did not have a material impact on the Company's financial
condition, results of operations or liquidity.
FAS 115. Effective January 1, 1994, the Company adopted 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
26
Notes to Consolidated Financial Statements (continued)
the Company has the positive intent and ability to
hold to maturity are classified as "held to maturity" and are reported at
amortized cost. Investment securities that are not classified as "held to
maturity" are 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
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 required
employers to recognize the cost of the obligation to provide these
benefits on an accrual basis, and implementation 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.
Accounting Policies
Cash and cash equivalents include cash on hand, cash 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 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 less
estimated costs to sell. Fair values are established by appraisers, both
internal and external, using discounted cash flow analyses and other
acceptable techniques. Thereafter, an allowance for losses on real estate
held for sale is established if the carrying value of the property exceeds
its current fair value less estimated costs to sell. There was no such
allowance at December 31, 1995. Mortgage loans are carried at amortized
cost. For mortgage loans that are determined to be impaired, a reserve is
established for the difference between the amortized cost and fair market
value of the underlying collateral. Impaired loans were insignificant at
December 31, 1995. Policy loans are carried at unpaid balances which do
not exceed the net cash surrender value of the related insurance policies.
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with a maturity of less than one year, 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.
27
Notes to Consolidated Financial Statements (continued)
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). 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, 1995.
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 preferred stock, notes,
debentures and the maximum dilutive effect of common stock equivalents, has
not been presented because the effects are not material. The fully diluted
earnings per common share computation for the years ended December 31,
1995, 1994 and 1993 would entail adding the number of shares issuable on
conversion of the other debentures (2 million shares in 1993 only), the
additional common stock equivalents (6 million and 2 million and zero
shares, respectively) and the assumed conversion of the convertible
preferred stock (7 million and 3 million and 2 million shares,
respectively) to the number of shares included in the earnings per common
share calculation (resulting in a total of 330 million and 327 million and
242 million shares, respectively) and eliminating the after-tax interest
expense related to the conversion of other debentures ($3 million in 1993
only) and the elimination of the convertible preferred stock dividends ($21
million and $7 million and $3 million, 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
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.
28
Notes to Consolidated Financial Statements (continued)
Future Application of Accounting Standards
FAS 121. In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" (FAS 121). This statement establishes accounting standards for the
impairment of long-lived assets and certain identifiable intangibles to be
disposed of. This statement requires a write down to fair value when
long-lived assets to be held and used are impaired. The statement also
requires long-lived assets to be disposed of (e.g. real estate held for
sale) to be carried at the lower of cost or fair value less cost to sell,
and does not allow such assets to be depreciated. The adoption of this
statement effective January 1, 1996 will not have a material effect on
results of operations, financial condition or liquidity.
FAS 123. In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). This statement addresses alternative
accounting treatments for stock-based compensation, such as stock
options and restricted stock. FAS 123 permits either expensing the value
of stock-based compensation over the period earned, or disclosing in the
financial statement footnotes the pro forma impact to net income as if the
value of stock-based compensation awards had been expensed. The value
of awards would be measured at the grant date based upon estimated fair
value, using established option pricing models. The requirements of this
statement will be effective for 1996 financial statements, although earlier
adoption is permissible if an entity elects to expense the cost of
stock-based compensation. The Company is currently evaluating the
disclosure requirements and expense recognition alternatives addressed by
this statement.
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 advanced or received. With respect to securities loaned, the Company
receives cash collateral 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 twenty years.
29
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
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 TIGI 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 (commissions and premium taxes) 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. 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 from 2.5% to 10%, 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
30
Notes to Consolidated Financial Statements (continued)
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, 1995 and 1994 are $778 million and $793 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 deposits received and interest credited and are 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 3.8% to 8.6%) 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. The impact of any accounting practices not so
prescribed ("Permitted Statutory 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.
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.
31
Notes to Consolidated Financial Statements (continued)
2. Business Acquisitions
----------------------
The Travelers Merger
As consideration for the acquisition of the approximately 73% of old
Travelers common stock it did not already own, as discussed in Note 1, 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 excess of the purchase price over the estimated fair value of net
assets was $917 million and is being amortized over 40 years.
The Shearson Acquisition
As discussed in Note 1 the businesses which were acquired 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) were combined with the operations
of Smith Barney Holdings Inc. (Smith Barney). 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 1995 and 1994 amounted
to $76 million and $69 million, respectively. The contingent consideration
is being accounted for prospectively, as additional purchase price,
which will result in amortization over periods of up to 20 years. In
conjunction with this acquisition Smith Barney entered into a securities
clearing agreement with LBI (the Clearing Agreement), pursuant to which
Smith Barney 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. The Clearing Agreement terminated in the first
quarter of 1995, and assets and liabilities related to the Clearing
Agreement were 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 were 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, excluding cash acquired $40,922 $4,811
Liabilities assumed (37,642) (2,779)
Issuance of notes - (586)
Equity securities issued (3,339) (150)
---------------------------------------------------------------------------------
Cash payment (acquired) $ (59) $1,296
=================================================================================
Pending Acquisition
On November 28, 1995, TIGI entered into an agreement with Aetna Life and
Casualty Company (Aetna) to purchase Aetna's domestic property and
casualty insurance operations for approximately $4.0 billion in cash,
subject to certain adjustments. The agreement, which is subject to various
regulatory approvals, provides for the purchase by TIGI or a subsidiary of
all of the outstanding capital stock of The Aetna Casualty and Surety
Company and The Standard Fire Insurance Company. The transaction is
expected to be completed around the end of the first quarter of 1996.
The Company expects that a subsidiary, Travelers/Aetna Property Casualty
Corp. (TAP), will own both the property and casualty operations purchased
from Aetna and the Company's existing property and casualty
32
Notes to Consolidated Financial Statements (continued)
operations. The Company expects to capitalize TAP initially by
contributing approximately $1.1 billion from a combination of cash on hand
and borrowings by the Company. The Company may provide additional funds in
the form of temporary capital in order to finance the transaction. In
addition, it is anticipated that TAP will finance the acquisition with an
aggregate of $525 million in equity securities issued to a small group of
private investors, and borrowings under a five-year revolving credit
facility in the amount of up to $2.65 billion provided by a syndicate of
banks led by Citibank, N.A., Chemical Bank and Morgan Guaranty Trust
Company. It is anticipated that subsequent to the acquisition, TAP will
raise additional capital through private and/or public debt and equity
offerings with the proceeds from such offerings being used principally to
repay the borrowings under the five-year revolving credit facility.
3. Disposition of Subsidiaries and Discontinued Operations
--------------------------------------------------------
During 1994, gains on sale of subsidiaries and affiliates totaled $226
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), and the sale in October of Bankers and Shippers Insurance Company
($30 million).
Transport Spin-off
On September 29, 1995, the Company made a pro rata distribution to the
Company's stockholders of shares of Class A Common Stock, $.01 par value
per share, of Transport Holdings Inc. (Holdings), which at the time was a
wholly owned subsidiary of the Company, and the indirect owner of Transport
Life Insurance Company. Each Travelers Group Inc. common stockholder
received one Holdings share for every 200 shares of Travelers Group Inc.,
resulting in approximately 1.6 million shares of Holdings outstanding.
Pursuant to the transaction the Company retained approximately $44 million
of cumulative preferred stock and $8 million of subordinated convertible
notes of Holdings and received approximately $105 million in cash
dividends. The results of Holdings through September 29, 1995, the spin-
off date, are included in income from continuing operations.
Discontinued Operations
In December 1994, the Company sold its group dental insurance business to
Metropolitan Life Insurance Company (MetLife) for $52 million and
recognized an after-tax gain of $9 million ($28 million pre-tax), and on
January 3, 1995 the Company sold its group life business as well as its
related non-medical group insurance businesses to MetLife for $350 million
and recognized in the first quarter of 1995 an after-tax gain of $20
million ($31 million pre-tax). In connection with the sale, The Travelers
Insurance Company (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 Companies, Inc. (MetraHealth) joint venture by
contributing their medical businesses to MetraHealth, in exchange for
shares of common stock of MetraHealth. 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
March 1995, MetraHealth acquired HealthSpring, Inc. for common stock of
MetraHealth, resulting in a reduction in the participation of the Company
and MetLife in the MetraHealth venture to 48.25% each.
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 TIC and its affiliates comes due for
renewal, the risks are
33
Notes to Consolidated Financial Statements (continued)
transferred to MetraHealth. In the interim the related operating results
for this medical insurance business are being reported by the Company.
On October 2, 1995, the Company completed the sale of its ownership in
MetraHealth to United HealthCare Corporation. Gross proceeds to the
Company were $831 million in cash, and could increase as much as $169
million if a contingency payment based on 1995 results is made. The gain
to the Company, not including the contingency payment, was $110 million
after-tax ($166 million pre-tax) and was recognized in the fourth quarter
of 1995.
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's Managed Care and Employee Benefits Operations
(MCEBO) segment in 1994. In 1995 the Company's results reflect the medical
insurance business not yet transferred, plus its equity interest in the
earnings of MetraHealth through the date of sale. These operations have
been accounted for as a discontinued operation. Revenues from
discontinued operations for the years ended December 31, 1995 and 1994
amounted to $1.040 billion and $3.522 billion, respectively. The assets
and liabilities of the discontinued operations have not been segregated in
the Consolidated Statement of Financial Position as of December 31, 1995
and December 31, 1994. The assets and liabilities of the discontinued
operations consist primarily of investments, insurance-related assets and
liabilities and the equity interest in MetraHealth through the date of
sale. At December 31, 1995 such assets amounted to $1.8 billion and
liabilities amounted to $1.8 billion. At December 31, 1994 such assets
amounted to $3.5 billion and liabilities amounted to $3.2 billion.
34
Notes to Consolidated Financial Statements (continued)
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). The following table
presents certain information regarding these industry segments:
(millions) 1995 1994 1993
---- ---- ----
Revenues
Investment Services $ 6,808 $ 5,690 $3,524
Life Insurance Services 3,858 3,488 1,585
Property & Casualty Insurance Services 4,545 4,538 315
Consumer Finance Services 1,354 1,239 1,193
Corporate and Other 18 (12) 180
------ ------ -----
$16,583 $14,943 $6,797
====== ====== =====
Income from continuing operations
before income taxes, minority
interest and cumulative effect of
accounting changes
Investment Services $1,028 $ 732 $ 592
Life Insurance Services 893 651 428
Property & Casualty Insurance Services 595 307 65
Consumer Finance Services 378 356 360
Corporate and Other (373) (172) 78
----- ----- -----
$2,521 $ 1,874 $1,523
===== ===== =====
Income from continuing operations before
cumulative effect of accounting changes
Investment Services $ 599 $ 422 $ 336
Life Insurance Services 581 421 265
Property & Casualty Insurance Services
(after minority interest of $22 in 1993) 453 249 23
Consumer Finance Services 246 227 232
Corporate and Other (251) (162) 95
------- -------- -----
$ 1,628 $ 1,157 $ 951
====== ======= =====
Identifiable assets
Investment Services $ 40,976 $ 45,618 $ 31,864
Life Insurance Services 37,912 33,151 35,071
Property & Casualty Insurance Services 24,206 22,663 20,515
Consumer Finance Services 8,196 7,729 7,155
Corporate and Other 3,185 6,136 6,685
-------- -------- --------
$114,475 $115,297 $101,290
======= ======= =======
The Investment Services segment consists of investment banking, securities
brokerage, asset management and other financial services provided
through Smith Barney and its subsidiaries for all years presented, and in
1994 and 1993 only, the investment management services provided by RCM
Capital Management and mutual fund
35
Notes to Consolidated Financial Statements (continued)
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, The Travelers Life and Annuity 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) and its affiliate.
Corporate and Other consists of corporate staff and treasury operations,
certain corporate income and expenses that have not been allocated to the
operating subsidiaries, including gains and losses from the sale of stock of
subsidiaries and affiliates and the Company's approximately 27%
interest in old Travelers during 1993. RCM Capital Management, the remaining
component of what were the Mutual Funds and Asset Management operations in
1994 and prior, is reported as part of Corporate and Other in 1995.
Cumulative effect of accounting changes, 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 "Results of
Operations" discussion in 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.
36
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated market values of investments in fixed
maturities were as follows:
Gross
Amortized Unrealized Market
--------------------
December 31, 1995 Cost Gains Losses Value
- ----------------- -------------------------------------------
(millions)
Available for sale:
Mortgage-backed securities-principally $ 5,936 $ 169 $(20) $ 6,085
obligations of U.S. Government agencies
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies 2,653 195 - 2,848
Obligations of states and political subdivisions 3,993 110 (11) 4,092
Debt securities issued by foreign governments 433 20 - 453
Corporate securities 16,569 619 (22) 17,166
----------------------------------------
$29,584 $1,113 $(53) $30,644
========================================
Held to maturity, principally mortgage-backed
securities $ 68 $ 11 $ - $ 79
========================================
Gross
Amortized Unrealized Market
--------------------
December 31, 1994 Cost Gains Losses Value
- ----------------- -------------------------------------------
(millions)
Available for sale:
Mortgage-backed securities-principally
obligations of U.S. Government agencies $ 5,227 $ 3 $(401) $ 4,829
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
Debt securities issued by foreign governments 562 1 (32) 531
Corporate securities 14,724 22 (873) 13,873
------------------------------------------
$29,258 $35 $(2,101) $27,192
==========================================
Held to maturity, principally mortgage-backed
securities $ 96 $12 $ - $ 108
==========================================
37
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated market value at December 31, 1995 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 $ 1,400 $ 1,406
Due after one year through five years 7,246 7,400
Due after five years through ten years 7,869 8,236
Due after ten years 7,133 7,517
------ ------
23,648 24,559
Mortgage-backed securities 6,004 6,164
------ ------
$29,652 $30,723
====== ======
Realized gains and losses on fixed maturities for the years ended December
31, were as follows:
(millions) 1995 1994 1993
---- ---- ----
Realized gains
Pre-tax $157 $ 52 $168
---- --- ---
After-tax $102 $ 34 $109
---- --- ---
Realized losses
Pre-tax $244 $201 $ 2
---- --- ---
After-tax $159 $131 $ 1
---- --- ---
Net realized gains on equity securities and other investments, after-tax,
amounted to $155 million, $18 million and $14 million for the years ended
December 31, 1995, 1994 and 1993, respectively. Net unrealized gains
(losses) on equity securities at December 31, 1995 and 1994 were $97 million
and $(6) million, respectively.
The Company had industry concentrations of corporate bonds and short-term
investments at December 31 as follows:
(millions) 1995 1994
---- ------
Finance $2,342 $2,040
Banking $2,138 $1,718
Electric utilities $1,582 $1,680
Oil and gas $1,362 $1,163
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) 1995 1994 1995 1994
---- ---- ---- ----
California $1,121 $1,246 $ 51 $ 11
New York $ 429 $ 589 $ 49 $129
Florida $ 323 $ 435 $ 17 $ 15
Texas $ 300 $ 395 $ 56 $ 79
Illinois $ 203 $ 375 $ 58 $ 48
38
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 $200
million.
Aggregate annual maturities on mortgage loans are as follows:
(millions)
Past maturity $ 209
1996 421
1997 432
1998 643
1999 356
2000 402
Thereafter 1,585
------
$4,048
======
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) 1995 1994
--------- ---------
Resale agreements $ 12,087 $ 8,306
Deposits paid for securities borrowed 7,514 17,349
------ -------
$19,601 $25,655
====== ======
Securities loaned or sold under agreements to repurchase, at their
respective carrying values, consisted of the following at December 31:
(millions) 1995 1994
-------- ---------
Repurchase agreements $ 17,183 $14,622
Deposits received for securities loaned 3,436 7,461
------ ------
$20,619 $22,083
====== ======
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.
Deposits paid for securities borrowed ("securities borrowed") and deposits
received for securities loaned ("securities loaned") are recorded at the
amount of cash advanced or received. Securities borrowed transactions
require the Company to deposit cash with the lender. With respect to
securities loaned, the Company receives cash collateral in an amount
generally in excess of the market value of securities loaned. The Company
monitors the market value of securities borrowed and securities loaned
daily, and additional collateral is obtained as necessary.
39
Notes to Consolidated Financial Statements (continued)
Substantially all of the Company's securities borrowed contracts are
with other brokers and dealers, commercial banks and institutional
clients. Substantially all of the Company's securities loaned contracts
are with other brokers and dealers.
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.
Brokerage receivables and brokerage payables, which arise in the normal
course of business, consisted of the following at December 31:
(millions) 1995 1994
---- -----
Receivables from customers $6,048 $7,502
Receivables from brokers and dealers 511 736
----- -----
Total brokerage receivables $6,559 $8,238
===== =====
Payables to customers $4,176 $6,648
Payables to brokers and dealers 227 1,159
----- -----
Total brokerage payables $4,403 $7,807
===== =====
Included in payables to brokers and dealers at December 31, 1994 is
approximately $338 million of payables due LBI in connection with LBI's
proprietary transactions.
40
Notes to Consolidated Financial Statements (continued)
8. Trading Securities
------------------
Trading securities at market value consisted of the following at
December 31:
1995 1994
------------------------- -------------------------
Securities Securities
Sold Sold
Securities Not Yet Securities Not Yet
Owned Purchased Owned Purchased
(millions) ---------- ------------ ---------- -----------
Obligations of U.S.
Government and
agencies $4,224 $3,493 $3,670 $3,658
Corporate debt 2,019 385 1,688 424
State and municipal
obligations 698 10 978 16
Commercial paper and
other short-term
debt 815 1 211 1
Corporate convertibles,
equities and other
securities 1,228 674 398 246
----- ------ ------ -----
$8,984 $4,563 $6,945 $4,345
===== ===== ===== =====
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 ultimately be acquired in the marketplace at the then
prevailing prices. Accordingly, these transactions may result in market
risk since the ultimate purchase price may exceed the amount recognized
in the financial statements.
9. Consumer Finance Receivables
----------------------------
Consumer finance receivables, net of unearned finance charges of $690
million and $674 million at December 31, 1995 and 1994, respectively,
consisted of the following:
(millions) 1995 1994
---- -----
Personal loans $3,051 $2,875
Real estate-secured loans 2,957 2,845
Credit cards 762 712
Sales finance and other 468 453
----- ------
Consumer finance receivables 7,238 6,885
Accrued interest receivable 47 43
Allowance for credit losses (193) (182)
----- ------
Net consumer finance receivables $7,092 $6,746
===== ======
41
Notes to Consolidated Financial Statements (continued)
An analysis of the allowance for credit losses on consumer finance
receivables at December 31, was as follows:
(millions) 1995 1994 1993
---- ---- -----
Balance, January 1 $ 182 $ 168 $ 169
Provision for credit losses 171 152 134
Amounts written off (188) (163) (163)
Recovery of amounts previously
written off 27 25 23
Allowance on receivables purchased 1 - 5
----- ----- -----
Balance, December 31 $ 193 $ 182 $ 168
===== ===== =====
Net outstandings $7,238 $6,885 $6,342
===== ===== =====
Allowance for credit losses as
a % of net outstandings 2.66% 2.64% 2.64%
===== ==== ====
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
1995 1996 1997 1998 1999 1999
----------- ------ ------ ------ ------ ------
Personal loans $3,598 $1,108 $ 990 $ 762 $ 441 $ 297
Real estate-
secured loans 3,021 192 199 210 219 2,201
Credit cards 761 56 53 49 45 558
Sales finance
and other 548 264 138 66 33 47
----- ----- ----- ----- ----- -----
$7,928 $1,620 $1,380 $1,087 $ 738 $3,103
===== ===== ===== ===== ===== =====
Percentage 100% 21% 17% 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.
The Company has a geographically diverse consumer finance loan
portfolio. At December 31, the distribution by state was as follows:
1995 1994
---- ----
Ohio 12% 13%
North Carolina 10% 10%
Pennsylvania 7% 6%
South Carolina 6% 7%
California 5% 5%
Texas 5% 5%
Maryland 5% 5%
Tennessee 5% 4%
All other states* 45% 45%
---- ----
100% 100%
==== ====
* None of the remaining states individually accounts for more than 5% 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
42
Notes to Consolidated Financial Statements (continued)
at December 31, 1995 is approximately $653 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, 1995 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 1995. 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) 1995 1994
---- ----
Commercial paper $2,401 $2,455
Uncollateralized borrowings 399 1,141
Collateralized borrowings 155 185
Notes to LBI - 593
----- -----
$2,955 $4,374
===== =====
Weighted average interest rate
at end of period, excluding
non-interest bearing balances 5.9% 5.8%
===== =====
Investment banking and brokerage borrowings are short-term and include
commercial paper, collateralized and uncollateralized borrowings used to
finance Smith Barney's operations, including the securities settlement
process. The collateralized and uncollateralized borrowings bear
interest at fluctuating rates based primarily on the Federal Funds
interest rate. Notes payable to LBI at December 31, 1994 represented a
non-interest bearing note outstanding in connection with LBI's
activities under the Clearing Agreement. Smith Barney has in place a
$2.5 billion commercial paper program that consists of both discounted
and interest bearing paper. 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, 1995 and 1994, the market value of the securities
pledged as collateral for short-term brokerage borrowings was $171
million and $229 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) 1995 1994
----------------------------- ----------------------------
Outstanding Interest Rate Outstanding Interest Rate
------------- -------------- ------------- --------------
Travelers Group Inc. $ - - $ 101 5.83%
Commercial Credit
Company 1,394 5.86% 2,305 5.89%
The Travelers
Insurance Company 74 5.84% 74 6.02%
----- ------
$1,468 $2,480
===== =====
43
Notes to Consolidated Financial Statements (continued)
Travelers Group 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.
The Parent, CCC and TIC have an agreement with a syndicate of banks to
provide $1.0 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 $250 million. The revolving credit facility consists of
five-year revolving credit facility which expires in 1999. At December
31, 1995, $400 million was allocated to the Parent, $475 million was
allocated to CCC, and $125 million was allocated to TIC. At December
31, 1995 there were no borrowings outstanding under this facility.
Under this facility, the Company is required to maintain a certain level
of consolidated stockholders' equity (as defined in the agreement). At
December 31, 1995, this requirement was exceeded by approximately $3.2
billion.
At December 31, 1995, CCC also had a committed and available revolving
credit facility on a stand-alone basis of $1.5 billion, which 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, 1995, CCC would have been able to
remit $225 million to the Parent under its most restrictive covenants or
regulatory requirements.
The carrying value of short-term borrowings approximates fair value.
Long-term debt, including its current portion, and final maturity dates
were as follows at December 31:
(millions) 1995 1994
---- ----
Travelers Group Inc.
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
6 5/8% Notes due 2005 150 -
6 1/4% Notes due 2005 100 -
8 5/8% Debentures due 2007 100 100
7 7/8% Notes due 2025 200 -
7% Notes dues 2025 100 -
6 7/8 Notes due 2025 150 -
6% Industrial Revenue Bonds due 2007 13 13
ESOP note guarantee 67 97
Debt premium (discount), net 27 32
----- -----
2,042 1,377
----- -----
Commercial Credit Company
8.29% to 12.85% Medium-Term Notes due 1995 - 10
9 7/8% Notes due 1995 - 150
44
Notes to Consolidated Financial Statements (continued)
9.2% Notes due 1995 - 100
6 1/4% Notes due 1995 - 100
7.7% Notes due 1995 - 150
8.1% Notes due 1995 - 150
8 3/8% Notes due 1995 - 150
6 3/8% Notes due 1996 200 200
7 3/8% Notes due 1996 150 150
8% Notes due 1996 100 100
6 3/4% 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% Notes due 2000 100 100
5 3/4% Notes due 2000 200 200
6 1/8% Notes due 2000 100 100
6% Notes due 2000 150 150
6 3/4% Notes due 2000 200 -
8 1/4% Notes due 2001 300 300
6 3/8% Notes due 2002 200 -
6 7/8% Notes due 2002 200 -
7 3/8% Notes due 2002 200 -
5.9% Notes due 2003 200 200
7 7/8% Notes due 2004 200 200
6 1/8% Notes due 2005 200 -
6 1/2% Notes due 2005 200 -
7 3/8% Notes due 2005 200 -
7 3/4% Notes due 2005 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
6 5/8% Notes due 2015 200 -
7 7/8% Notes due 2025 200 -
------ ------
5,200 4,010
----- -----
Smith Barney Holdings Inc.
7.4% Medium-Term Notes due 1996 50 50
5 3/8% Notes due 1996 150 150
6% Notes due 1997 200 200
5 5/8% Notes due 1998 150 150
5 1/2% Notes due 1999 200 200
7 7/8% Notes due 1999 150 150
6 5/8% Notes due 2000 150 150
7% Notes due 2000 150 -
7.98% Notes due 2000 200 -
45
Notes to Consolidated Financial Statements (continued)
6 1/2% Notes due 2002 150 -
7 1/2% Notes due 2002 150 -
6 7/8% Notes due 2005 175 -
Revolving credit facility - 400
Capital Note with LBI due 1995 - 150
------ -----
1,875 1,600
----- -----
The Travelers Insurance Group Inc.
12% GNMA/FNMA - collateralized obligations 73 88
------ ------
$9,190 $7,075
===== =====
In December 1995, Travelers Group Inc., through a private placement,
issued $100 million of 6 1/4% Notes due December 1, 2005, and $100 million
of 7% Notes due December 1, 2025 (the Debt Securities). In the first
quarter of 1996, Travelers Group Inc. filed a registration statement
with respect to an offer to exchange the Debt Securities for notes (the
Exchange Notes) substantially identical in all material respects
(including principal amount, interest rate and maturity) to the terms of
the Debt Securities, except that the Exchange Notes will be registered
under the Securities Act of 1993 and therefore will be freely
transferable by holders.
Smith Barney has a $1.0 billion revolving credit agreement with a bank
syndicate that extends through May 1998, and has a $750 million, 364-day
revolving credit agreement with a bank syndicate that extends through
May 1996. As of December 31, 1995, there were no borrowings outstanding
under either 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, 1995, Smith Barney would have been able to remit approximately $452
million to the Parent under its most restrictive covenants.
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)
1996 $750
1997 $735
1998 $700
1999 $800
2000 $1,450
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, 1995 the carrying value and the fair value of the Company's
long-term debt were:
(millions) Carrying Fair
Value Value
-------- ------
Travelers Group Inc. $2,042 $2,137
Commercial Credit Company 5,200 5,332
Smith Barney Holdings Inc. 1,875 1,929
The Travelers Insurance Group Inc. 73 80
----- -----
$9,190 $9,478
===== =====
46
Notes to Consolidated Financial Statements (continued)
11. Insurance Policy and Claims Reserves
------------------------------------
Insurance policy and claims reserves consisted of the following at
December 31:
(millions) 1995 1994
---- ----
Benefit and loss reserves:
Property-casualty $14,715 $13,872
Accident and health 754 1,029
Life and annuity 8,663 8,603
Unearned premiums 2,166 2,276
Policy and contract claims 622 1,304
------ ------
$26,920 $27,084
====== ======
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:
(millions) 1995 1994 1993
---- ---- ----
Losses and LAE at beginning of year $13,872 $13,805 $ 313
Less reinsurance recoverables
on unpaid losses 3,621 3,615 85
------ ----- -------
Net balance at beginning of year 10,251 10,190 228
------ ------ -------
Provision for losses and LAE for
claims arising in the
current year 2,898 3,201 185
Estimated losses and LAE for claims
arising in prior years (227) (248) -
Increase for purchase of old Travelers - - 9,938
------ ------ ------
Total increases 2,671 2,953 10,123
------ ------ ------
Losses and LAE payments for claims
arising in:
Current year 887 989 67
Prior years 1,933 1,903 94
------ ------ -------
Total payments 2,820 2,892 161
------ ------ -------
Net balances at end of year 10,102 10,251 10,190
Plus reinsurance recoverables
on unpaid losses 4,613 3,621 3,615
----- ------ ------
Losses and LAE at end of year $14,715 $13,872 $13,805
------ ------ ------
In 1995, estimated claims and claim adjustment expenses for claims
arising in prior years included favorable loss development in certain
workers' compensation, general liability and commercial auto lines of
approximately $150 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. In addition, in 1995
estimated claims and claim adjustment expenses for claims arising in
prior years included favorable loss development in Personal Lines
automobile coverage of approximately $60 million.
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
47
Notes to Consolidated Financial Statements (continued)
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 property-casualty loss and LAE reserves include $806 million and
$854 million for asbestos and environmental related claims net of
reinsurance at December 31, 1995 and 1994, respectively. TIGI carries
on a continuing review of its overall position, its reserving techniques
and reinsurance recoverables. 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, TIGI 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 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.
The Company has a geographic exposure to catastrophic losses in certain
North Atlantic states and in South Florida. Catastrophes can be caused
by various events including hurricanes, windstorms, earthquakes, hail,
explosions, severe winter weather and fires, and the incidence and
severity of catastrophes are inherently unpredictable. The extent of
losses from a catastrophe is a function of both the total amount of
insured exposure in the area affected by the event and the severity of
the event. Most catastrophes are restricted to small geographic areas;
however, hurricanes and earthquakes may produce significant damage in
large, heavily populated areas. The Company generally seeks to reduce
its exposure to catastrophe through individual risk selection and the
purchase of catastrophe reinsurance.
12. Reinsurance
-----------
The Company's insurance operations cede insurance in order to limit
losses, minimize exposure to 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.
48
Notes to Consolidated Financial Statements (continued)
Reinsurance amounts included in the Consolidated Statement of Income were:
Ceded to
(millions) Gross Other Net
Amount Companies Amount
------ --------- ------
Year ended December 31, 1995
- ----------------------------
Premiums
Life insurance $1,497 $ (272) $1,225
Accident and health insurance 499 (87) 412
Property-casualty insurance 4,752 (1,412) 3,340
----- ------ -----
$6,748 $(1,771) $4,977
===== ====== =====
Ceded claims incurred $5,806 $(1,726) $4,080
===== ====== =====
Year ended December 31, 1994
- ----------------------------
Premiums
Life insurance $1,484 $ (288) $1,196
Accident and health insurance 514 (89) 425
Property-casualty insurance 5,052 (1,529) 3,523
------- ------ -----
$7,050 $(1,906) $5,144
====== ====== =====
Ceded claims incurred $5,725 $(1,328) $4,397
====== ====== =====
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
===== ==== =====
Ceded claims incurred $1,096 $(287) $ 809
===== ==== =====
Reinsurance recoverables, net of valuation allowance, at December 31
include amounts recoverable on unpaid and paid losses and were as
follows:
(millions) 1995 1994
---- ----
Reinsurance Recoverables
- ------------------------
Life business $1,804 $ 758
Property and Casualty business:
Pools and associations 2,775 2,524
Other reinsurance 1,882 1,744
----- -----
$6,461 $5,026
===== =====
Included in Life business reinsurance recoverables at December 31, 1995
is approximately $929 million of receivables from MetLife in connection
with the sale of the group life business.
49
Notes to Consolidated Financial Statements (continued)
13. Income Taxes
------------
The provision for income taxes attributable to income from continuing
operations (before minority interest) for the years ended December 31
was as follows:
(millions) 1995 1994 1993
---- ---- ----
Current:
Federal $745 $271 $406
Foreign 19 22 3
State 110 80 75
--- --- ---
874 373 484
--- --- ---
Deferred:
Federal 24 335 64
Foreign 2 1 (2)
State (7) 8 4
--- ---- ---
19 344 66
--- ---- ---
$893 $717 $550
=== === ===
Deferred income taxes at December 31 related to the following:
(millions) 1995 1994
---- ----
Deferred tax assets:
Differences in computing policy
reserves $1,161 $1,288
Deferred compensation 295 214
Employee benefits 266 213
Investments - 1,074
Other deferred tax assets 760 765
----- -----
Gross deferred tax assets 2,482 3,554
----- -----
Valuation allowance 100 100
----- -----
Deferred tax assets after valuation
allowance 2,382 3,454
----- -----
Deferred tax liabilities:
Deferred policy acquisition costs and
value of insurance in force (610) (608)
Investment management contracts (249) (244)
Investments (90) -
Other deferred tax liabilities (344) (273)
------- -------
Gross deferred tax liabilities (1,293) (1,125)
------- -------
Net deferred tax asset $ 1,089 $ 2,329
====== =======
50
Notes to Consolidated Financial Statements (continued)
The reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate applicable to income from continuing
operations for the years ended December 31 was as follows:
1995 1994 1993
---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
Limited taxability of investment income (3.1) (3.5) (1.6)
State and foreign income taxes
(net of federal income tax benefit) 2.7 2.7 3.4
Sale of subsidiaries - 2.9 -
Equity in income of old Travelers - - (2.2)
Other, net 0.8 1.2 1.5
---- ---- ----
Effective income tax rate 35.4% 38.3% 36.1%
==== ==== ====
Tax benefits allocated directly to stockholders' equity for the years
ended December 31, 1995 and 1994 were $82 million and $35 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 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. The Company will have to generate
approximately $3.1 billion of taxable income, before the reversal of
these temporary differences, primarily over the next 10-15 years, to
realize the remainder of the deferred tax asset. 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 from continuing
operations exceeding $2 billion, on average, over the last three years
and has incurred taxable income of approximately $1.2 billion, on
average, over the same period of time. At December 31, 1995, the
Company has no ordinary or capital loss carryforwards.
51
Notes to Consolidated Financial Statements (continued)
14. Preferred Stock and Stockholders' Equity
----------------------------------------
Preferred Stock
The following table sets forth the Company's preferred stock outstanding
at December 31, 1995 and 1994:
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 and a liquidation preference
equivalent to $25 per depositary share plus accrued and accumulated
unpaid dividends. On or after July 28, 1997, the Company may, at its
option, redeem the Series A Preferred, in whole or in part, at any time
at a redemption price of $25 per depositary share plus dividends accrued
and unpaid to the redemption date.
Series B
In connection with the acquisition of the Shearson Businesses the
Company issued to American Express 2.5 million shares of 5.5%
Convertible Preferred Stock, Series B (Series B Preferred) of the
Company. Each Series B Preferred share has cumulative dividends payable
quarterly and a liquidation preference of $50 per share and is
convertible at any time at the option of the holder at a conversion
price of $36.75 per common share. The Series B Preferred is not
redeemable prior to July 30, 1996. On or after July 30, 1996, the
Series B Preferred is redeemable at the Company's option, at a price of
$51.925 per share if redeemed prior to July 29, 1997, and at decreasing
prices thereafter to $50 per share from and after July 30, 2003, plus
accrued and unpaid dividends, if any, to the redemption date. In
addition, the Company issued to American Express warrants to purchase
3,749,466 shares of common stock of the Company at an exercise price of
$39 per common share, exercisable until July 31, 1998. At December 31,
1995 warrants to purchase 3,749,266 shares of common stock of the
Company were outstanding. Both the Series B Preferred and the warrants
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 Travelers Group 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
52
Notes to Consolidated Financial Statements (continued)
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. In January 1996, 411,075 shares were
redeemed.
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 depositary 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.
Stockholders' Equity
The combined insurance subsidiaries' statutory capital and surplus at
December 31, 1995 and 1994 was $5.873 billion and $4.342 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 Inc. for 1995 and 1994 only) net income,
determined in accordance with statutory accounting practices, for the
years ended December 31, 1995, 1994 and 1993 was $745 million, $228
million and $204 million, respectively.
The Travelers Insurance Group Inc. is subject to various regulatory
restrictions that limit the maximum amount of dividends available to its
Parent without prior approval of the Connecticut Insurance Department.
A maximum of $580 million of statutory surplus is available in 1996 for
such dividends without Department approval.
Smith Barney's broker-dealer subsidiaries are subject to the Uniform Net
Capital Rule of the Securities and Exchange Commission. At December 31,
1995, the aggregate net capital of such broker-dealer subsidiaries was
$1.138 billion, exceeding the net capital requirement by $1.007 billion.
See Note 10 for additional restrictions on stockholders' equity.
At December 31, 1995, 10,694,540 shares of authorized common stock were
reserved for convertible securities and warrants.
15. Incentive Plans
---------------
The Company's 1986 Stock Option Plan provides for the granting to
officers and key employees of the Company and its participating
subsidiaries of non-qualified stock options and incentive stock options.
Options generally are granted at the fair market value at the time of
grant for a period not in excess of ten years. They vest over five
years, or in full upon a change of control of the Company, and are
generally exercisable only if the optionee is employed by the Company.
The plan also permits an employee exercising an option to be granted new
options (reload options) in an amount equal to the number of common
shares used to satisfy the exercise price and the withholding taxes due
upon exercise. The maximum number of shares that may be granted under
this plan is 73,008,140, of which 35,000,000 were reserved for the
granting of reload options; at December 31, 1995, 15,983,911 shares were
available for grant, of which 7,673,145 were available for reload option
grants. The Company also has other option plans.
53
Notes to Consolidated Financial Statements (continued)
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 December 31, 1992 19,306,302 $ 7.81-32.03
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 $ 7.81-62.02
----------- -----------
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 $ 7.81-62.02
----------- -----------
Granted 12,119,705 32.38-63.50
Expired or canceled (1,517,335) 7.81-62.02
Exercised (10,908,441) 9.74-52.22
----------- -----------
Balance at December 31, 1995 23,867,710 $ 9.74-63.50
----------- -----------
Currently exercisable,
December 31, 1995 4,922,430 $ 9.74-62.02
=========== ===========
At the time of the Merger, options to purchase 7,193,486 shares of old
Travelers common stock were outstanding. Of this amount, options for
2,205,204 shares were forfeited or redeemed for cash, and the remaining
options to purchase 4,988,282 shares, 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, issues 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 three-year
period. 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 restricted 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. At December 31, 1995, 10,690,799 shares were available for
future grant under these plans.
54
Notes to Consolidated Financial Statements (continued)
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) 1995 1994 1993
---- ---- ----
Service cost $ 81 $ 105 $ 34
Interest cost 195 173 36
Actual return on plan assets (388) (66) (59)
Net amortization and deferral 165 (161) 11
---- ---- ---
Net periodic pension cost $ 53 $ 51 $ 22
==== ==== ===
The following table sets forth the funded status of the Company's
significant defined benefit plans at December 31:
(millions) 1995 1994
---- ----
Actuarial present value of benefit
obligation:
Vested benefits $2,713 $2,091
Non-vested benefits 52 49
------ ------
Accumulated benefit obligation 2,765 2,140
Effect of future salary increases 37 46
------ ------
Projected benefit obligation 2,802 2,186
Plan assets at fair value 2,638 2,335
------ ------
Projected benefit obligation in excess of
or (less than) plan assets 164 (149)
Unrecognized transition asset 2 3
Unrecognized prior service benefit (cost) 14 (2)
Unrecognized net gain (loss) (228) 145
Adjustment to recognize minimum liability 175 -
------ ------
Accrued pension liability (prepaid
pension cost) $ 127 $ (3)
===== ======
Actuarial assumptions:
Weighted average discount rate 7.25% 8.75%
Weighted average rate of
compensation increase 4.5% 4.5%
Expected long-term rate of return on
plan assets 9.25% 9.5%
55
Notes to Consolidated Financial Statements (continued)
Plan assets are held in various separate accounts and the general
account of The Travelers Insurance Company, a subsidiary of the Company,
and certain investment trusts. These accounts and trusts invest in
stocks, U.S. Government bonds, corporate bonds, mortgage loans and real
estate.
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 Smith Barney 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.
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 years ended December 31:
(millions)
1995 1994
---- ----
Service cost $ 2 $ 3
Interest cost 34 33
Net amortization and deferral (1) -
--- ---
Net periodic postretirement benefit cost $ 35 $ 36
--- ===
56
Notes to Consolidated Financial Statements (continued)
The following table sets forth the funded status of the Company's
postretirement benefit plans at December 31:
(millions)
1995 1994
---- ----
Accumulated postretirement benefit obligation:
Retirees $396 $363
Other fully eligible plan participants 40 32
Other active plan participants 13 18
--- ---
449 413
Plan assets at fair value 4 4
--- ---
Accumulated postretirement benefit obligation
in excess of plan assets 445 409
Unrecognized net gain 37 79
Unrecognized prior service benefit (cost) 6 (5)
--- ---
Accrued postretirement benefit liability $488 $483
=== ===
For measurement purposes, the annual rate of increase in the per capita
cost of covered health care benefits ranged from 14% in 1996, 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, 1995 by
approximately $16 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 7.25% and 8.75% at December 31,
1995 and 1994, 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 1995 and 1994.
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.
18. Lease Commitments
------------------
Rentals
Rental expense (principally for offices and computer equipment) was $319
million, $403 million and $182 million for the years ended December 31,
1995, 1994 and 1993, respectively.
Future minimum annual rentals under noncancellable operating leases are
as follows:
(millions)
1996 $ 315
1997 282
1998 206
1999 172
2000 104
Thereafter 145
-----
$1,224
=====
Future sublease rental income of approximately $68 million will
partially offset these commitments.
57
Notes to Consolidated Financial Statements (continued)
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 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 influenced 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. The Company's exposure to the credit risk associated with
counterparty non-performance is limited to the net replacement cost of
OTC contracts (including options held) in a gain position. Options
written do not give rise to counterparty credit risk since they obligate
the Company (not its counterparty) to perform. Exchange traded
financial instruments such as futures and certain options generally do
not give rise to significant counterparty exposure due to the margin
requirements of the individual exchanges. 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
58
Notes to Consolidated Financial Statements (continued)
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 correlated 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
Smith Barney trades both derivative and cash financial instruments.
While trading activities are primarily generated by client order flow,
Smith Barney also takes proprietary positions in interest rate, foreign
exchange, debt, equity and commodity instruments based on expectations
of future market movements and conditions. Smith Barney's trading
strategies rely on the joint management of its client-driven and
proprietary transactions, along with the hedging and financing of these
positions.
The following is a summary of principal trading revenues by product
category for the years ended December 31:
(millions) 1995 1994 1993
---- ---- ----
Equities $ 459 $392 $266
Taxable fixed-income 305 239 147
Municipals 216 248 125
Foreign exchange, and other
derivative financial
instruments 36 21 11
------ ---- ----
$1,016 $900 $549
===== === ===
The revenue amounts presented include gains and losses from cash
instruments and related derivatives, including swaps, forwards, futures
and options.
Equity revenues include realized and unrealized gains and losses on
market making and trading primarily in over-the-counter, listed and
convertible securities and options.
Taxable fixed-income revenues include realized and unrealized gains and
losses on market making and trading primarily in U.S. Government and
agencies obligations, mortgage and asset backed securities and corporate
debt and preferred securities net of hedges in financial futures,
options on financial futures and forward contracts.
Municipal revenues include realized and unrealized gains and losses in
market making and trading municipal and tax-exempt securities. Included
in the category are gains and losses relating to the Company's municipal
bond arbitrage operation which utilizes municipal bond index futures.
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. To the
extent that activities are related to servicing customer business, the
objective is to minimize market risk as much as possible.
59
Notes to Consolidated Financial Statements (continued)
Smith Barney's derivative contracts are generally short-term, with a
weighted average maturity of approximately seven months at December 31,
1995 and three months at December 31, 1994. 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, Smith
Barney had outstanding trading derivatives with notional values as
follows:
Contract or Contract or
Notional Amount Notional Amount
1995 1994
-------------------- ------------------
(millions) Purchase Sell Purchase Sell
-------- ---- -------- ----
"To be announced"
mortgage-backed
securities $6,907 $7,479 $15,016 $15,747
Forward and futures
contracts:
Foreign currency
forwards 6,127 7,568 5,136 6,076
Foreign currency
futures 1,458 11 865 6
Financial futures 2,889 493 50 2,661
Interest rate and other - 297 - -
Precious metals and
other 474 473 339 357
------ ------ ------ ------
$17,855 $16,321 $21,406 $24,847
====== ====== ====== ======
(millions) Held Written Held Written
---- ------- ---- -------
Options:
Foreign currency $ 3,266 $ 3,502 $1,353 $1,340
Exchange-traded 2,201 62 50 2,150
Interest rate caps,
floors and swaptions 550 1,197 - 725
OTC debt and equity 210 207 34 22
------ ------ ----- -----
$ 6,227 $ 4,968 $1,437 $4,237
====== ====== ===== =====
(millions) Open Contracts Open Contracts
-------------- --------------
Interest rate swaps $2,305 $135
===== ===
"To be Announced" Mortgage-Backed Securities. Smith Barney trades
---------------------------------------------
mortgage-backed "to be announced" mortgage pools ("TBAs") to facilitate
customer transactions and to hedge proprietary inventory positions. At
December 31, 1995, over $5.7 billion and 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.
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 contracts with inverse market risk profiles. At December 31,
1995 and 1994, approximately 83% and 87% respectively of the contract
values of foreign currency derivative instruments were for settlement
60
Notes to Consolidated Financial Statements (continued)
within 90 days, and related primarily to major European currencies and
the Japanese yen. Written foreign currency options consist of $1.799
billion and $1.703 billion of put and call contracts, respectively at
December 31, 1995 and $733 million and $607 million of put and call
contracts, respectively, at December 31, 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.
Precious Metals Contracts. Forward precious metals contracts are
-------------------------
entered into to facilitate customer transactions, and are transacted in
the 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.
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 financial futures and options on financial futures.
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/off-balance sheet financial
instruments.
The fair value of Smith Barney's trading derivative instruments as
recorded in the Statement of Financial Position and the average fair
value for each year based on month-end balances are as follows:
61
Notes to Consolidated Financial Statements (continued)
Fair Value Average Fair Value
at Year Ended
December 31, 1995 December 31, 1995
----------------- --------------------
(millions)
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
"To be announced"
mortgage-backed $45 $38 $40 $39
securities
Forward contracts:
Foreign currency 156 101 273 242
Interest rate and other 7 - 3 1
Precious metals 5 5 12 12
Options:
Foreign currency 39 48 73 74
Exchange-traded 9 6 11 10
Interest rate caps, floors
and swaptions 62 39 40 27
OTC debt and equity 66 13 34 13
Interest rate and other
swaps 37 90 34 59
---- ---- ---- ----
$426 $340 $520 $477
=== === === ===
Fair Value Average Fair Value
at Year Ended
December 31, 1994 December 31, 1994
------------------- --------------------
(millions)
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
"To be announced"
mortgage-backed
securities $29 $28 $54 $54
Forward contracts:
Foreign currency 92 98 87 92
Precious metals 1 1 3 3
Options:
Foreign currency 5 8 7 8
Exchange-traded 2 6 1 1
Interest rate caps, floors
and swaptions - 5 - 5
1 1 3 5
OTC debt and equity 2 - 1 -
--- --- --- ---
Interest rate and other
swaps $132 $147 $156 $168
=== === === ===
62
Notes to Consolidated Financial Statements (continued)
The fair values do not include receivables or payables related to
exchange traded futures contracts. Futures contracts are settled in
cash daily and therefore the receivable or payable is limited to one
day's price move.
End User Activity
In the normal course of business the Company also employs certain
derivative financial instruments as an end user to manage various risks.
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. The notional and fair values
of end user derivatives were as follows:
At December 31, 1995 Notional Value Fair Value
-------------------- -------------- -----------
(millions) Open Contracts Asset Liability
-------------- ----- ---------
Interest rate swaps:
Pay a fixed rate, receive a
floating rate $511
Pay a floating rate,
receive a fixed rate 70
---
$581 $ 3 $ 3
=== == ===
Purchase Sell
-------- ----
Foreign currency forwards $ 56 $150 $ 4 5
Financial futures 256 64 - -
----- ----- --- ---
$312 $214 $ 4 $ 5
==== ==== == ===
At December 31, 1994 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
== === === ===
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 at December 31, 1995 and 1994 has
fixed $475 million and $590 million of its short-term or variable rate
obligations at an average rate of 5.21% and 5.94%, respectively. 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, TIGI utilizes swaps to manage the
differing interest rate and or currency 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
63
Notes to Consolidated Financial Statements (continued)
value recorded as an adjustment to stockholders' equity where unrealized
gains and losses on the related debt securities are recorded.
TIGI 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 are recorded as other income where the related translation
adjustments to the underlying investments are recorded and such amounts
were not significant in 1995 or 1994.
TIGI 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 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, 1995 and 1994.
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.
64
Notes to Consolidated Financial Statements (continued)
1995 1994
--------------------------- ---------------------------
(millions) Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
Assets:
Investments $40,965 $40,976 $38,965 $38,937
Securities borrowed or
purchased under
agreements to resell 19,601 19,601 25,655 25,655
Trading securities owned 8,984 8,984 6,945 6,945
Net consumer finance
receivables 7,092 7,745 6,746 7,364
Separate accounts
with guaranteed
returns 1,527 1,591 1,483 1,379
Derivatives:
Trading 426 426 132 132
End user 4 7 15 58
Liabilities:
Long-term debt 9,190 9,478 7,075 6,867
Securities loaned or
sold under agreements to
repurchase 20,619 20,619 22,083 22,083
Trading securities
sold not yet purchased 4,563 4,563 4,345 4,345
Contractholder funds:
With defined
maturities 2,449 2,460 4,219 4,047
Without defined
maturities 9,282 9,016 9,159 8,875
Separate accounts
with guaranteed
returns 1,475 1,408 1,465 1,331
Derivative
Trading 340 340 147 147
End user 5 8 7 13
21. Commitments
-----------
Financial Guarantees
At December 31, 1995 and 1994 TIGI had outstanding financial guarantees
of $1.730 billion and $2.236 billion, respectively, of which $1.603
billion and $2.086 billion, respectively, represented its participation
in municipal bond guarantee pools. The bonds guaranteed are generally
rated A or above and TIGI's participation has been reinsured.
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, 1995 and 1994 total
credit lines available to credit cardholders were $5.870 billion and
$5.423 billion, of which $870 million and $820 million were utilized,
respectively.
65
Notes to Consolidated Financial Statements (continued)
Other Commitments
At December 31, 1995, and 1994 Smith Barney had borrowed securities
having a market value of $451 million and $1.505 billion, respectively,
against which it had pledged securities having a market value of $459
million and $1.589 billion, respectively. In addition, Smith Barney had
obtained letters of credit aggregating $119 million and $192 million at
December 31, 1995 and 1994, respectively, of which $112 million and $147
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, both to facilitate customer transactions and to
hedge proprietary inventory positions. At December 31, 1995, Smith
Barney had commitments to purchase $369 million and to sell $324 million
of such securities when-issued. At December 31, 1994 Smith Barney had
commitments to purchase $309 million and to sell $1.122 billion of such
securities when-issued.
Smith Barney has entered into purchase agreements with various municipal
issuers, whereby Smith Barney has purchased securities for forward
delivery. These securities have been sold to the public for the same
forward delivery dates. The total value of these commitments at
December 31, 1995 is $475 million.
Smith Barney had outstanding commitments to underwrite variable rate
municipal securities totaling $800 million and $853 million at December
31, 1995 and 1994, respectively; conditions of the offerings include
bond insurance and liquidity support facilities.
Smith Barney has entered into forward repurchase and forward reverse
repurchase agreements totaling $1.2 billion and $625 million,
respectively, at December 31, 1995. These commitments represent forward
financing trades with agreed upon rates and principal.
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 $605 million.
TIGI 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 significant
at December 31, 1995 or 1994.
22. Contingencies
-------------
A subsidiary of the Company is in arbitration with certain underwriters
at Lloyd's 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 claims under a market agreement between Lloyd's and old
Travelers or under the applicable reinsurance treaties. The Company
believes that the outcome of the arbitration is not likely to have a
material adverse effect on its results of operations, financial
condition or liquidity.
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.
66
Notes to Consolidated Financial Statements (continued)
23. Selected Quarterly Financial Data (unaudited)
---------------------------------------------
1995 1994
---------------------------------------------------------------------------------------------
(In millions, except per First Second Third Fourth Total First Second Third Fourth Total
share amounts) ---------------------------------------------------------------------------------------------
Total revenues $3,960 $4,172 $4,290 $4,161 $16,583 $3,855 $3,725 $3,850 $3,513 $14,943
Total expenses 3,490 3,590 3,583 3,379 14,042 3,367 3,288 3,410 3,230 13,295
Gain (loss) on sales of stock of
subsidiaries and affiliates - - - (20) (20) - - - 226 226
------ ------ ------ ------ ------ ------- ------ ------ ------ ------
Income from continuing operations
before income taxes 470 582 707 762 2,521 488 437 440 509 1,874
Provision for income taxes 165 205 251 272 893 181 151 148 237 717
------ ------ ------ ------ ------ ------- ------ ------ ------ ------
Income from continuing operations 305 377 456 490 1,628 307 286 292 272 1,157
Discontinued operations net of
income taxes 35 29 25 117 206 33 34 40 62 169
------ ------ ------ ------ ------ ------- ------ ------ ------ ------
Net income $ 340 $ 406 $ 481 $ 607 $ 1,834 $ 340 $ 320 $ 332 $ 334 $ 1,326
====== ====== ====== ====== ====== ======= ====== ====== ====== ======
Earnings per share of common stock:
Continuing operations $ 0.90 $ 1.12 $ 1.37 $ 1.47 $ 4.86 $ 0.88 $ 0.82 $ 0.85 $ 0.79 $ 3.34
Discontinued operations 0.11 0.10 0.08 0.37 0.65 0.10 0.11 0.12 0.20 0.52
------ ------ ------ ------ ------ ------- ------ ------ ------ ------
Net income $ 1.01 $ 1.22 $ 1.45 $ 1.84 $ 5.51 $ 0.98 $ 0.93 $ 0.97 $ 0.99 $ 3.86
====== ====== ====== ====== ====== ======= ====== ====== ====== ======
Common stock price
High $39.875 $45.000 $53.375 $63.875 $63.875 $ 43.125 $ 37.125 $ 37.125 $ 35.000 $43.125
Low $32.375 $37.875 $44.000 $48.875 $32.375 $ 34.375 $ 31.750 $ 31.000 $ 30.375 $30.375
Close $38.625 $43.750 $53.125 $62.625 $62.625 $ 35.250 $ 32.250 $ 32.875 $ 32.375 $32.375
Dividends per share of
common stock $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.80 $ 0.125 $ 0.150 $ 0.150 $ 0.150 $ 0.575
As more fully described in Note 3, all of the operations comprising Managed
Care and Employee Benefits Operations (MCEBO), are presented as a
discontinued operation and, accordingly, prior year amounts have been
restated. Included in 1995 discontinued operations is an after-tax gain of
$20 million from the sale in January of the Company's group life insurance
business and an after-tax gain of $110 million (not including a contingency
payment based on 1995 results which could be received by the Company in
1996) from the sale in October of the Company's interest in MetraHealth.
Included in 1994 discontinued operations is an after-tax gain of $9 million
from the sale in December of the group dental insurance business.
Fourth quarter 1994 gain on sales of stock of subsidiaries and affiliates
included in continuing operations amounted to $79 million after-tax.
Fourth quarter 1994 results also include $88 million of after-tax portfolio
losses.
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.
67
Independent Auditors' Report
KPMG Peat Marwick LLP - LOGO
The Board of Directors and Stockholders
Travelers Group Inc.:
We have audited the accompanying consolidated statements of financial
position of Travelers Group Inc. (formerly The Travelers Inc.) and
subsidiaries as of December 31, 1995 and 1994, 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, 1995. 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
Travelers Group Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt
and equity securities in 1994 and its methods of accounting for
postretirement benefits other than pensions and accounting for
postemployment benefits in 1993.
/s/ KPMG Peat Marwick LLP
New York, New York
January 16, 1996
68