Exhibit 99.02
Travelers Group Inc.
Index to Supplemental Condensed Consolidated Financial Statements
(Unaudited) for the Three Months Ended March 31, 1997
Supplemental Financial Statements (unaudited): Page No.
--------
Supplemental Condensed Consolidated Statement of
Income (Unaudited) -
Three Months Ended March 31, 1997 and 1996 2
Supplemental Condensed Consolidated Statement of
Financial Position -
March 31, 1997 (Unaudited) and December 31, 1996 3
Supplemental Condensed Consolidated Statement of
Changes in Stockholders' Equity
(Unaudited) - Three Months Ended March 31, 1997 4
Supplemental Condensed Consolidated Statement of Cash
Flows (Unaudited) -
Three Months Ended March 31, 1997 and 1996 5
Notes to Supplemental Condensed Consolidated
Financial Statements - (Unaudited) 6
Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
1
Travelers Group Inc. and Subsidiaries
Supplemental Condensed Consolidated Statement of Income
(Unaudited)
(In millions of dollars, except per share amounts)
Three Months Ended
March 31,
------------------------
1997 1996
- ----------------------------------------------------------------------
Revenues
Insurance premiums $2,224 $1,256
Commissions and fees 1,206 1,169
Interest and dividends 3,498 3,168
Finance related interest and other charges 306 284
Principal transactions 762 939
Asset management and administration fees 389 326
Other income 315 367
- ----------------------------------------------------------------------
Total revenues 8,700 7,509
- ----------------------------------------------------------------------
Expenses
Policyholder benefits and claims 1,905 1,271
Non-insurance compensation and benefits 1,548 1,522
Insurance underwriting, acquisition and 805 506
operating
Interest 2,378 2,234
Provision for consumer finance credit losses 72 68
Other operating 645 593
- ----------------------------------------------------------------------
Total expenses 7,353 6,194
- ----------------------------------------------------------------------
Income before income taxes and minority 1,347 1,315
interest
Provision for income taxes 483 485
Minority interest, net of income taxes 49 -
- ----------------------------------------------------------------------
Income from continuing operations 815 830
- ----------------------------------------------------------------------
Discontinued operations, net of income taxes:
Income (loss) from operations -- (34)
- ----------------------------------------------------------------------
Net income $ 815 $796
======================================================================
Net income per share of common stock
and common stock equivalents
Continuing operations $0.67 $0.69
Discontinued operations -- (0.03)
- ----------------------------------------------------------------------
Net income $0.67 $0.66
======================================================================
Weighted average number of common shares
outstanding 1,155.3 1,137.1
and common stock equivalents
======================================================================
See Notes to Supplemental Condensed Consolidated Financial Statements.
2
Travelers Group Inc. and Subsidiaries
Supplemental Condensed Consolidated Statement of Financial Position
(In millions of dollars)
March 31, December
1997 31, 1996
- --------------------------------------------------------------------------------
Assets (Unaudited)
Cash and cash equivalents
(including $1,455 and $1,446 segregated under
federal and other regulations or deposited with
clearing organizations) $ 3,209 $ 3,260
Investments and real estate held for sale:
Fixed maturities, primarily available for sale at
market value (amortized cost - $43,401 and $43,277) 43,192 43,998
Equity securities, at market (cost - $1,279 and
$1,113) 1,296 1,157
Mortgage loans 3,750 3,812
Real estate held for sale 763 459
Policy loans 1,902 1,910
Short-term and other 5,878 5,173
- --------------------------------------------------------------------------------
Total investments and real estate held for sale 56,781 56,509
- --------------------------------------------------------------------------------
Securities borrowed or purchased under agreements to
resell 112,654 97,985
Brokerage receivables 11,937 11,592
Trading securities and commodities owned, at market
value 132,292 126,568
Net consumer finance receivables 8,247 7,885
Reinsurance recoverables 10,285 10,234
Value of insurance in force and deferred policy
acquisition costs 2,646 2,563
Cost of acquired businesses in excess of net assets 3,028 3,060
Separate and variable accounts 9,353 9,023
Other receivables 5,440 4,869
Other assets 12,121 12,400
- --------------------------------------------------------------------------------
Total assets $367,993 $345,948
================================================================================
Liabilities
Investment banking and brokerage borrowings $ 12,324 $ 10,020
Short-term borrowings 2,112 1,557
Long-term debt 25,391 24,696
Securities loaned or sold under agreements to
repurchase 118,341 103,572
Brokerage payables 9,157 10,019
Trading securities and commodities sold not yet
purchased, at market value 95,399 92,032
Contractholder funds 13,666 13,621
Insurance policy and claims reserves 44,200 43,944
Separate and variable accounts 9,309 8,949
Accounts payable and other liabilities 17,435 16,802
- --------------------------------------------------------------------------------
Total liabilities 347,334 325,212
- --------------------------------------------------------------------------------
ESOP Preferred stock -- Series C (net of note
guarantee of $17 and $35) 142 129
- --------------------------------------------------------------------------------
Redeemable preferred stock -- Series I 420 420
- --------------------------------------------------------------------------------
TRV-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
junior subordinated debt securities of TRV 1,000 1,000
- --------------------------------------------------------------------------------
TAP-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
junior subordinated debt securities of TAP 900 900
- --------------------------------------------------------------------------------
Salomon Smith Barney-obligated mandatorily
redeemable preferred securities of subsidiary
trust holding solely junior subordinated debt
securities of Salomon Smith Barney 345 345
- --------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, at aggregate liquidation value 1,125 1,125
Common stock ($.01 par value; authorized shares: 1.5
billion; issued shares: 1997 - 1,384,814,892 shares
and 1996 - 1,384,707,342 shares) 14 14
Additional paid-in capital 8,023 7,806
Retained earnings 13,599 12,934
Treasury stock, at cost (1997 - 238,178,218 shares and
1996 - 243,500,547 shares) (4,288) (4,123)
Unrealized gain (loss) on investment securities (131) 469
Other, principally unearned compensation (490) (283)
- --------------------------------------------------------------------------------
Total stockholders' equity 17,852 17,942
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $367,993 $345,948
================================================================================
See Notes to Supplemental Condensed Consolidated Financial Statements.
3
Travelers Group Inc. and Subsidiaries
Supplemental Condensed Consolidated Statement of Changes in Stockholders'
Equity (Unaudited)
(In millions of dollars)
Three months ended March 31, 1997 Amount Shares
- -----------------------------------------------------------------------------
Preferred stock, at aggregate liquidation value (in thousands)
Balance, beginning of year $ 1,125 9,600
- -----------------------------------------------------------------------------
Balance, end of period $ 1,125 9,600
=============================================================================
Common stock and additional paid-in capital
Balance, beginning of year $ 7,820 1,384,707
Issuance of shares pursuant to employee benefit
plans 216
Conversion of notes -- 17
Other 1 91
- -----------------------------------------------------------------------------
Balance, end of period 8,037 1,384,815
- -----------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 12,934
Net income 815
Common dividends (113)
Preferred dividends (37)
- ----------------------------------------------------------------
Balance, end of period 13,599
- ----------------------------------------------------------------
Treasury stock, at cost
Balance, beginning of year (4,123) (243,500)
Issuance of shares pursuant to employee benefit
plans, net of shares tendered for payment of
option exercise price and withholding taxes 83 12,479
Treasury stock acquired (248) (7,157)
- -----------------------------------------------------------------------------
Balance, end of period (4,288) (238,178)
- -----------------------------------------------------------------------------
Unrealized gain (loss) on investment securities
Balance, beginning of year 469
Net change in unrealized gains and losses on
investment securities, net of tax (600)
- ----------------------------------------------------------------
Balance, end of period (131)
- ----------------------------------------------------------------
Other, principally unearned compensation
Balance, beginning of year (283)
Issuance of restricted stock, net of amortization (198)
Net translation adjustments, net of tax (7)
Other (2)
- ----------------------------------------------------------------
Balance, end of period (490)
- ----------------------------------------------------------------
Total common stockholders' equity and common
shares outstanding $16,727 1,146,637
=============================================================================
Total stockholders' equity $17,852
================================================================
See Notes to Supplemental Condensed Consolidated Financial Statements.
4
Travelers Group Inc. and Subsidiaries
Supplemental Condensed Consolidated Statement of Cash Flows (Unaudited)
(In millions of dollars)
Three Months ended March 31, 1997 1996
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $(2,633) $3,302
- --------------------------------------------------------------------------------
Cash flows from investing activities
Consumer loans originated or purchased (1,044) (609)
Consumer loans repaid or sold 666 599
Purchases of fixed maturities and equity securities (7,083) (5,456)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities 6,278 4,035
Mortgage loans 23 110
Real estate and real estate joint ventures 16 56
Proceeds from maturities of investments:
Fixed maturities 874 641
Mortgage loans 149 195
Other investments, primarily short-term, net (579) (294)
Assets securing collateralized mortgage obligations 17 128
Other, net (132) (154)
- --------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (815) (749)
- --------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (149) (132)
Issuance of preferred stock -- 250
Treasury stock acquired (248) (164)
Stock tendered for payment of withholding taxes (97) (87)
Issuance of long-term debt 2,511 1,921
Payments and redemptions of long-term debt (1,522) (1,342)
Net change in short-term borrowings (including investment
banking and brokerage borrowings) 2,860 (2,585)
Collateralized mortgage obligations (17) (134)
Contractholder fund deposits 798 802
Contractholder fund withdrawals (727) (1,085)
Other, net (12) 92
- --------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,397 (2,464)
- --------------------------------------------------------------------------------
Change in cash and cash equivalents (51) 89
Cash and cash equivalents at beginning of period 3,260 3,491
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,209 $ 3,580
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Income taxes paid $ 273 $ 377
================================================================================
Interest expense recorded for financial statement purposes did not differ
materially from the amount of interest paid.
See Notes to Supplemental Condensed Consolidated Financial Statements.
5
Travelers Group Inc. and Subsidiaries
Notes to Supplemental Condensed Consolidated Financial Statements
(Unaudited)
1. Merger with Salomon Inc.
See Note 1 of Notes to Supplemental Consolidated Financial Statements as
of December 31, 1996 and for the three years then ended included herewith
as Exhibit 99.01.
As a result of the Merger, the Company expects to record an after-tax
restructuring charge of between $400 million and $500 million primarily
for severance and costs related to excess or unused office space and other
facilities.
2. Basis of Presentation
The accompanying supplemental condensed consolidated financial statements
as of March 31, 1997 and for the three-month period ended March 31, 1997
and 1996 are unaudited and include the accounts of Travelers Group Inc.
(TRV) and its subsidiaries, including Salomon Inc. (collectively, the
Company). In the opinion of management all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation have been
reflected. The supplemental condensed consolidated financial statements,
including the notes thereto, should be read in conjunction with the
audited supplemental consolidated financial statements of Travelers Group
Inc. for the fiscal years ended December 31, 1996, 1995 and 1994, included
herewith as Exhibit 99.01.
Certain financial information that is normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles, but is not required for interim reporting purposes,
has been condensed or omitted.
The Board of Directors on October 22, 1997 declared a three-for-two split
in TRV's common stock, in the form of a 50% stock dividend, which was paid
on November 19, 1997 to stockholders of record on November 3, 1997. All
amounts presented herein have been restated to reflect the stock split.
3. Aetna P&C Acquisition - Pro Forma Results of Operations
On April 2, 1996, Travelers Property Casualty Corp. (TAP), an indirect
majority-owned subsidiary of the Company, purchased from Aetna Services,
Inc. all of the outstanding capital stock of Travelers Casualty and Surety
Company (formerly The Aetna Casualty and Surety Company) and The Standard
Fire Insurance Company (collectively, Aetna P&C) for approximately $4.2
billion in cash. This acquisition was financed in part by the issuance by
TAP of common stock resulting in a minority interest in TAP of
approximately 18%. The acquisition was accounted for under the purchase
method of accounting and, accordingly, the condensed consolidated
financial statements include the results of Aetna P&C's operations only
from the date of acquisition.
On June 23, 1997, TAP repurchased an aggregate of approximately 6.6
million shares of Class A Common Stock held by four private investors for
approximately $240.8 million. This repurchase increased TRV's ownership of
TAP to approximately 83.4%.
The following unaudited pro forma information presents the results of
operations of the Company and Aetna P&C for the three months ended March
31, 1996, with pro forma adjustments as if the acquisition and
transactions related to the funding of the acquisition had been
consummated as of the beginning of the period presented. This pro forma
information is not indicative of what would have occurred had the
acquisition and related transactions occurred on the date indicated, or of
future results of the Company.
6
Three Months Ended
March 31, 1996*
------------------
(in millions, except per share data)
Revenues $9,109
======
Income from continuing operations $ 592
======
Net income $ 558
======
Net income per common share:
Continuing operations $ 0.48
======
Net income $ 0.45
======
*Historical results of Aetna P&C for the first quarter of 1996 include
$307 million ($200 million after tax) of realized investment gains.
4. Debt
Investment banking and brokerage borrowings consisted of the following:
(millions) March 31, 1997 December 31, 1996
--------- -------------- -----------------
Commercial paper $ 4,669 $ 4,133
Bank loans and other borrowings 7,655 5,887
------- -------
$12,324 $10,020
======= =======
Short-term borrowings consisted of commercial paper outstanding as
follows:
(millions) March 31, 1997 December 31, 1996
--------- -------------- -----------------
Commercial Credit Company $2,112 $1,482
Travelers Property Casualty
Corp. -- 25
The Travelers Insurance
Company -- 50
------ ------
$2,112 $1,557
====== ======
Long-term debt, including its current portion, consisted of the following:
(millions) March 31, 1997 December 31, 1996
--------- -------------- -----------------
Travelers Group Inc. $ 1,699 $ 1,903
Commercial Credit Company 5,400 5,750
Salomon Smith Barney Holdings
Inc. 16,994 15,738
Travelers Property Casualty
Corp. 1,249 1,249
The Travelers Insurance Group
Inc. 49 56
------- -------
$25,391 $24,696
======= =======
7
5. Trading Derivatives
The following table discloses the notional amounts of derivative financial
instruments held by Salomon Smith Barney Holdings Inc. for trading
purposes as of March 31, 1997 and December 31, 1996:
March 31, 1997 December 31, 1996
----------------------------- -----------------------------
Current Market or Current Market or
Fair Value Fair Value
Notional ---------- Notional ----------
(billions) Amounts Assets Liabilities Amounts Assets Liabilities
- ----------------------------------------------------------------------------------------------
Exchange-issued products:
Futures contracts (a) $ 641.5 $ -- $ -- $ 530.9 $ -- $ --
Other exchange-issued products:
Equity contracts 13.6 .1 .3 13.1 .1 .2
Fixed income contracts 131.2 -- -- 61.2 -- --
Foreign exchange contracts .2 -- -- -- -- --
Physical commodities-related
contracts 3.9 -- -- 5.0 -- --
- ----------------------------------------------------------------------------------------------
Total exchange-issued products 790.4 .1 .3 610.2 .1 .2
- ----------------------------------------------------------------------------------------------
Over-the-counter swaps, swap
options, caps and floors:
Swaps 909.7 -- -- 842.3 -- --
Swaps options written 17.0 -- -- 10.8 -- --
Swap options purchased 28.6 -- -- 24.1 -- --
Caps and floors 123.9 -- -- 117.1 -- --
- ----------------------------------------------------------------------------------------------
Total OTC swaps, swap options,
caps and floors 1,079.2 3.6 5.8 994.3 4.2 6.6
- ----------------------------------------------------------------------------------------------
OTC foreign exchange contracts
and options:
Forward currency contracts 118.8 .8 .6 94.3 .7 .6
Options written 48.6 -- .6 37.1 -- .3
Options purchased 47.9 .7 -- 38.7 .5 --
- ----------------------------------------------------------------------------------------------
Total OTC foreign exchange
contracts and options 215.3 1.5 1.2 170.1 1.2 .9
- ----------------------------------------------------------------------------------------------
Other options and contractual
commitments:
Options and warrants on
equities and equity indices 52.3 1.2 2.0 45.8 1.1 1.8
Options and forward contracts
on fixed-income securities 284.6 .3 .3 202.8 .3 .2
Physical commodities contracts 21.6 .2 .2 22.6 .3 .3
- ----------------------------------------------------------------------------------------------
Total $2,443.4 $6.9 $9.8 $2,045.8 $7.2 $10.0
==============================================================================================
(a) Margin on futures contracts is included in brokerage receivables/payables
on the Supplemental Condensed Consolidated Statement of Financial
Condition.
8
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
Consolidated Results of Operations
Three Months Ended March 31,
----------------------------
(In millions, except per share amounts) 1997 1996
- ---------------------------------------------------------------------
Revenues $ 8,700 $ 7,509
========= =========
Income from continuing operations $ 815 $ 830
Loss from discontinued operations -- (34)
--------- ---------
Net income $ 815 $ 796
========= =========
Earnings per share:*
Continuing operations $ 0.67 $ 0.69
Discontinued operations -- (0.03)
--------- ---------
Net income $ 0.67 $ 0.66
========= =========
Weighted average number of
common shares outstanding
and common stock equivalents* 1,155.3 1,137.1
========= =========
* On October 22, 1997 the Board of Directors declared a three-for-two stock
split in the form of a 50% dividend payable on November 19, 1997 to
stockholders of record on November 3, 1997. Current and prior year
information has been restated to reflect the stock split.
Merger with Salomon Inc
On November 28, 1997, a newly formed wholly owned subsidiary of Travelers Group
Inc. merged with and into Salomon Inc (Salomon) (the Merger). Under the terms of
the Merger, approximately 188 million shares of Travelers Group Inc. common
stock were issued in exchange for all of the outstanding shares of Salomon
common stock, based on an exchange ratio of 1.695 shares of Travelers common
stock for each share of Salomon common stock, for a total value of approximately
$9 billion. Each of Salomon's series of preferred stock was exchanged for a
corresponding series of Travelers preferred stock having substantially identical
terms, except that the Travelers preferred stock issued in conjunction with the
Merger has certain voting rights. Thereafter, Smith Barney Holdings Inc. (Smith
Barney), a wholly owned subsidiary of Travelers Group, was merged with and into
Salomon to form Salomon Smith Barney Holdings Inc. (Salomon Smith Barney) which
now comprises the investment banking, proprietary trading, retail brokerage and
asset management operations of Travelers Group Inc. The merger is a tax-free
exchange and has been accounted for on a "pooling of interests" basis. As a
result of the merger the Company expects to record a restructuring charge of
between $400 million and $500 million (after-tax) primarily for severance and
costs related to excess or unused office space and other facilities.
Acquisition
On April 2, 1996, Travelers Property Casualty Corp. (TAP), an indirect
majority-owned subsidiary of Travelers Group Inc. (TRV), completed the
acquisition of the domestic property and casualty insurance subsidiaries of
Aetna Services Inc. (Aetna P&C) for approximately $4.2 billion in cash. This
acquisition was financed in part by the issuance by TAP of common stock
resulting in a minority interest in TAP of approximately 18%. The acquisition
was accounted for under the purchase method of accounting and, accordingly, the
condensed consolidated financial statements include the results of Aetna P&C's
operations only from the date of acquisition. TAP also owns The Travelers
Indemnity Company (Travelers Indemnity). Travelers Indemnity along with Aetna
P&C are the primary vehicles through which the Company engages in the property
and casualty insurance business.
9
Results of Operations
Consolidated net income for the quarter ended March 31, 1997 was $815 million,
and includes reported investment portfolio gains of $9 million after tax and
minority interest. This compares with net income from continuing operations of
$830 million in the 1996 period, which included reported investment portfolio
gains of $40 million after tax. Excluding portfolio gains and losses, net income
from continuing operations for the first quarter of 1997 was slightly above the
comparable period in 1996, primarily reflecting increased earnings in the
insurance operations, the inclusion of the post-acquisition results of
operations of Aetna P&C partially offset by a decline in income at Salomon Smith
Barney.
Discontinued operations for the quarter ended March 31, 1996 includes the
results of Basis Petroleum, Inc. (Basis). Basis was sold in May of 1997.
The following discussion presents in more detail each segment's performance.
Segment Results for the Three Months Ended March 31, 1997 and 1996
Investment Services
Three Months Ended March 31,
---------------------------------------------
1997 1996
- -------------------------------------------------------------------
(millions) Revenues Net income Revenues Net Income
- -------------------------------------------------------------------
Salomon Smith Barney(1) $4,877 $412 $4,951 $534
===================================================================
(1) Excludes results of Basis Petroleum which are classified as discontinued
operations.
Salomon Smith Barney reported net income from continuing operations of $412
million for the quarter ended March 31, 1997, a decline of 23% from the $534
million reported for the quarter ended March 31, 1996. Revenues, net of interest
expense, declined 5% to $2.708 billion in the 1997 quarter compared to $2.864
billion in the 1996 quarter.
Salomon Smith Barney Revenues
Three Months ended March 31,
----------------------------
(millions) 1997 1996
----------------------------------------------------------------------
Commissions $ 716 $ 704
Asset management and administration fees 389 326
Investment banking 484 459
Principal transactions 762 939
Interest income, net* 322 400
Other income 35 36
----------------------------------------------------------------------
Net revenues* $2,708 $2,864
======================================================================
* Net of interest expense of $2.169 billion and $2.087 billion for the
three-month period ended March 31, 1997 and 1996, respectively. Revenues
included in the condensed consolidated statement of income are before
deductions for interest expense.
Commission revenues increased to $716 million in the 1997 quarter from $704
million in the 1996 quarter. This increase is a result of strong activity in
listed and over-the-counter securities, offset by declines in listed option and
mutual fund commissions.
10
Investment banking revenues increased 5% to $484 million in the 1997 quarter
compared to $459 million in the 1996 quarter. This increase was primarily the
result of strong debt underwriting.
Principal transaction revenues decreased 19% to $762 million in the 1997 quarter
from $939 million in the 1996 quarter. This is a result of a decline in fixed
income proprietary trading revenues and physical commodities trading revenues,
partially offset by an increase in equity customer and proprietary trading
revenues.
Asset management and administration fees increased 19% to $389 million in the
1997 quarter compared to $326 million in the 1996 quarter. This reflects broad
growth in all recurring fee-based products. At March 31, 1997, internally
managed assets were $136.3 billion and total fee-based assets under management
were $183.3 billion compared to $117.1 billion and $154.7 billion, respectively,
at March 31, 1996.
Net interest and dividends decreased 20% to $322 million for the 1997 quarter
from $400 million in the 1996 quarter due to a lower level of net interest
earning assets.
Compensation and benefits expense, as a percentage of net revenues, for the 1997
quarter was 55% compared to 51% in the 1996 quarter and non-compensation expense
as a percentage of net revenues was 20% in the 1997 quarter compared to 18% in
the 1996 quarter. Salomon Smith Barney continues to maintain its focus on
controlling fixed expenses.
Assets Under Management
At March 31,
----------------------
(billions) 1997 1996
---------------------------------------------------------------
Salomon Smith Barney $136.3 $117.1
Travelers Life and Annuity (1) 21.4 21.6
---------------------------------------------------------------
Total Assets Under Management (2) $157.7 $138.7
===============================================================
(1) Part of the Life Insurance Services segment.
(2) Excludes assets under management at RCM Capital Management of $24.9
billion in 1996 (sold in June 1996).
Consumer Finance Services
Three Months Ended March 31,
-------------------------------------------
(millions) 1997 1996
- ---------------------------------------------------------------------
Revenues Net income Revenues Net income
- ---------------------------------------------------------------------
Consumer Finance $377 $47 $348 $56
Services
=====================================================================
Earnings in the first quarter of 1997 were lower than the comparable period in
1996, as expected -- reflecting a higher provision for loan losses in the 1997
quarter and favorable insurance experience in the 1996 quarter.
11
Consumer finance receivables, net of unearned finance charges grew $375.5
million during the first quarter of 1997, which represents an annualized growth
rate of 19%. This growth occurred primarily in real estate loans generated
through the Company's 857 branch office network and through Primerica Financial
Services (PFS).
Total net receivables were a record $8.447 billion at March 31, 1997, a 16%
increase from the prior year. The average yield, at 14.65%, was lower than the
1996 quarter's yield of 15.43%, mainly because of a shift in the portfolio mix
toward lower-risk / lower margin real estate loans. Sales of real estate-secured
($.M.A.R.T.SM) loans sold exclusively through PFS continued at record levels
during the quarter. Travelers Bank credit card outstandings were $972 million,
up from $907 million at year-end 1996, as a result of strong credit card
originations.
Delinquencies in excess of 60 days were 2.25% as of March 31, 1997 -- lower than
the 2.38% at the end of 1996 and slightly higher than the 2.21% at the end of
the first quarter of 1996. The charge-off rate remained relatively flat at
2.95%, compared to the 1996 fourth quarter, but was higher than the comparable
1996 period's rate of 2.87%. This continues to reflect a high level of personal
bankruptcies throughout the credit industry. Reserves as a percentage of net
receivables remained at 2.97%, unchanged from year-end 1996 but up from 2.88% in
the 1996 first quarter.
As of, or for, the
Three Months Ended
March 31,
--------------------------
1997 1996
--------------------------
Allowance for credit losses as % of net
outstandings 2.97% 2.88%
Charge-off rate for the period 2.95% 2.87%
60 + days past due on a contractual basis as
a % of gross consumer finance receivables at
quarter end 2.25% 2.21%
Life Insurance Services
Three Months Ended March 31,
------------------------------------------
1997 1996
------------------------------------------
(millions) Revenues Net income Revenues Net income
- ---------------------------------------------------------------------------
Travelers Life and Annuity(1) $618 $105 $577 $ 86
Primerica Financial Services(2) 375 79 355 71
- ---------------------------------------------------------------------------
Total Life Insurance Services $993 $184 $932 $157
===========================================================================
(1) Net income includes $4 million and $3 million, respectively, of reported
investment portfolio gains.
(2) Net income includes $1 million and $6 million, respectively, of reported
investment portfolio gains.
12
Travelers Life and Annuity
Travelers Life and Annuity consists of annuity, life and health products
marketed by The Travelers Insurance Company (TIC) under the Travelers name.
Among the range of products offered are fixed and variable deferred annuities,
payout annuities and term, universal and variable life and long-term care
insurance to individuals and small businesses. It also provides group pension
products, including guaranteed investment contracts, and group annuities to
employer-sponsored retirement and savings plans. These products are primarily
marketed through The Copeland Companies (Copeland), an indirect wholly owned
subsidiary of TIC, Smith Barney Financial Consultants and a nationwide network
of independent agents. The majority of the annuity business and a substantial
portion of the life business written by Travelers Life and Annuity is accounted
for as investment contracts, with the result that the premium deposits collected
are not included in revenues.
Earnings before portfolio gains increased 22% to $101 million in the first
quarter of 1997, from $83 million in the comparable 1996 period. Improved
earnings were largely driven by strong investment income, reflecting
repositioning of the investment portfolio over the past year. Earnings growth
attributable to strong sales of recently introduced products -- including less
capital-intensive variable life insurance and annuities -- was partially offset
by the gradual decline in the amount of higher margin business written several
years ago.
Deferred annuity policyholder account balances and benefit reserves at March 31,
1997 were $13.5 billion compared to $11.7 billion at March 31, 1996. Net written
premiums and deposits were $573.8 million in the first quarter of 1997, up 18%
from $487.7 million in the 1996 first quarter. Strong sales through Copeland,
Smith Barney and a nationwide network of independent agents, reflect the
company's ongoing effort to build market share by strengthening relationships in
key distribution channels. Future sales may also benefit from Moody's recently
announced upgrade of The Travelers Insurance Company's financial strength rating
to Aa3.
Payout and group annuity net premiums and deposits (excluding those of
affiliates) totaled $647.2 million in the first quarter of 1997, up 35% from
$478.9 million in the first quarter of 1996, reflecting significantly higher
sales of variable rate guaranteed investment contracts. Policyholder account
balances and reserves declined to $11.1 billion at March 31, 1997, down from
$11.7 billion at March 31, 1996, but up $0.2 billion from year-end 1996,
reflecting the run-off of low margin guaranteed investment contracts written in
prior years offset by the strong sales of new variable rate guaranteed
investment contracts.
Face amount of individual life insurance issued during the first quarter of 1997
was $1.5 billion, even with the first quarter of 1996, bringing total life
insurance in force to $50.5 billion at March 31, 1997. Direct written premiums
and deposits (excluding single premium policies) for individual life insurance
were $73.1 million, up 5% in the first quarter of 1997 as compared to $69.9
million in the first quarter of 1996.
Net written premiums for the growing long-term care insurance line were $43.9
million in the first quarter of 1997, compared to $27.7 million in the first
quarter of 1996 as a result of record sales during the quarter, which improved
55% over the 1996 period.
Primerica Financial Services
Earnings before portfolio gains for the first quarter of 1997 increased 20% to
$78 million from $65 million in the 1996 first quarter, reflecting significantly
higher sales of mutual funds and consumer loans as well as continued growth in
life insurance in force and favorable mortality experience.
13
Face amount of new term life insurance sales was $12.0 billion in the first
quarter of 1997, relatively even with the $12.3 billion in the comparable 1996
quarter but lower than the $13.1 billion in the fourth quarter of 1996. Life
insurance in force reached $361.5 billion at March 31, 1997, up from $350.4
billion at March 31, 1996, and continued to reflect good policy persistency.
Sales of mutual funds (at net asset value) were $722 million for the first
quarter of 1997, a 27% increase over first quarter 1996 sales of $567 million,
reflecting strong customer demand in the U.S. and Canada. Nearly 32% of U.S.
sales were from the Smith Barney products, predominantly The Concert SeriesSM,
which PFS first introduced to its market in March 1996. Net receivables from
$.M.A.R.T.SM and $.A.F.E.SM consumer loans continued to advance to $1.696
billion at the end of the first quarter of 1997, up 11% from $1.524 billion at
the end of the 1996 fourth quarter and up 34% from $1.268 billion at the end of
the 1996 first quarter. Earnings and assets relating to these consumer loans are
included in the Consumer Finance segment. The PFS SecureSM home and auto
insurance products -- issued through TAP -- continue to experience growth in
applications and policies, and as of March 31, 1997, had been introduced in 37
states and was sold through 7,094 agents licensed to sell the product.
Property & Casualty Insurance Services
Three Months Ended March 31,
---------------------------------
(millions) 1997 1996
- --------------------------------------------------------------------
Net Net
Revenues income Revenues income
(loss) (loss)
- --------------------------------------------------------------------
Commercial(1)(2) $1,624 $201 $ 805 $ 94
Personal(1)(3) 805 105 373 22
Financing costs and other(1) 2 (33) -- --
Minority interest -- (49) -- --
- --------------------------------------------------------------------
Total Property & Casualty
Insurance Services $2,431 $224 $1,178 $116
====================================================================
(1) Before minority interest.
(2) Net income includes $8 million and $21 million, respectively, of reported
investment portfolio gains.
(3) Net income includes $3 million of reported investment portfolio losses in
1997.
Segment earnings exclude the property and casualty operations of Aetna P&C prior
to its acquisition on April 2, 1996. Certain production statistics related to
Aetna P&C operations are provided for comparative purposes for periods prior to
April 2, 1996 and are not reflected in such prior period revenues or operating
results.
For purposes of computing GAAP combined ratios, fee income is now allocated as a
reduction of losses and loss adjustment expenses and other underwriting
expenses. Previously fee income was included with premiums for purposes of
computing GAAP combined ratios. The 1996 GAAP combined ratios have been restated
to conform to the current year's presentation.
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
14
Commercial Lines
Earnings before portfolio gains/losses increased 166% to $193 million in the
first quarter of 1997 from $73 million in the first quarter of 1996, primarily
reflecting the post-acquisition results of operations of Aetna P&C and the
benefits of expense reduction initiatives associated with the integration of the
two companies.
Catastrophe losses, after taxes and reinsurance, in the first quarter of 1997
were $4.9 million (primarily related to tornadoes in the Midwest), compared to
catastrophe losses of $6.0 million in the comparable 1996 period.
Commercial Lines net written premiums for the first quarter of 1997 totaled
$1.338 billion, up $698 million from $640 million for the first quarter of 1996,
reflecting the acquisition of Aetna P&C, offset in part by the highly
competitive conditions in the marketplace and the Company's continuing focus on
profitability. In addition, the first quarter of 1997 net written premiums
included $142 million due to a change to conform Aetna P&C's and Travelers
Indemnity and its subsidiaries (Travelers P&C's) methods of recording certain
net written premiums. Previously, Aetna P&C had recorded written premiums when
the premiums were billed. The Company conformed the Aetna P&C method to the
Travelers P&C method of recording written premiums when the policies are
written. The effect of this change on the condensed consolidated financial
statements was not significant. The Commercial Lines marketplace continues to be
highly competitive, although the broader industry and product line expertise of
the combined company contributed to solid performance in the specialty and small
accounts market segments.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Commercial Lines net written premiums for
the first quarter of 1997 totaled $1.338 billion, compared to $1.253 billion for
the first quarter of 1996. This increase in net written premiums was due to the
conforming change outlined above, offset somewhat by the highly competitive
conditions in the marketplace and the Company's continuing focus on writing
profitable business.
Fee income for the first quarter of 1997 was $97 million, a $4 million increase
from the first quarter of 1996. This increase was the result of the acquisition
of Aetna P&C, mostly offset by the depopulation of involuntary pools as the loss
experience of workers' compensation improved and insureds moved to voluntary
markets, the Company's selective renewal activity to address the competitive
pricing environment and its continued success in lowering workers' compensation
losses of customers.
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 covers
primarily workers' compensation products and services to voluntary and
involuntary pools. National accounts net written premiums of $221.6 million for
the first quarter of 1997 increased $25.7 million from the first quarter of
1996. On a combined total basis including Aetna P&C (for periods prior to April
2, 1996 for comparative purposes only), National Accounts net written premiums
were $221.6 million for the first quarter of 1997 compared to $274.3 million for
the first quarter of 1996. This decrease reflected the competitive marketplace.
National Accounts new business and business retention ratio were significantly
higher in the first quarter of 1997 compared to the first quarter of 1996,
reflecting an unusually low level of new business as well as an unusually low
retention ratio in the first quarter of 1996.
15
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. Commercial Accounts net written premiums were $560.5 million
in the 1997 first quarter compared to $201.6 million in the 1996 first quarter.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Commercial Accounts net written premiums
were $560.5 million in the 1997 first quarter compared to $440.9 million in the
1996 first quarter. This increase reflected an increase of $127.0 million due to
the change to conform Aetna P&C's with Travelers P&C's methods of recording
certain net written premiums and the continued growth in programs designed to
leverage underwriting experience in specific industries, partially offset by the
competitive marketplace. For the first quarter of 1997, new premium business in
Commercial Accounts has significantly improved compared to the first quarter of
1996, reflecting the acquisition of Aetna P&C and continued growth in programs
designed to leverage underwriting experience in specific industries. The
Commercial Accounts business retention ratio in the first quarter of 1997 has
moderately improved compared to the 1996 first quarter. 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 agents.
Select Accounts net written premiums were $363.7 million in the first quarter of
1997 compared to $140.9 million in the first quarter of 1996. On a combined
total basis including Aetna P&C (for periods prior to April 2, 1996 for
comparative purposes only), Select Accounts net written premiums of $363.7
million for the first quarter of 1997 were $1.7 million above the first quarter
of 1996 premium levels. This increase reflects an increase of $15.0 million due
to the change to conform Aetna P&C's with Travelers P&C's methods of recording
certain net written premiums, mostly offset by the competitive marketplace. New
premium business in Select Accounts was moderately higher in the 1997 first
quarter compared to the 1996 first quarter, which reflected an increase due to
the acquisition of Aetna P&C, partially offset by the competitive marketplace.
The Select Accounts business retention ratio was moderately higher in the 1997
first quarter compared to the 1996 first quarter, reflecting the broader
industry and product line expertise of the combined company.
Specialty Accounts markets products to national, midsize and small customers and
distributes them through both wholesale brokers and retail agents and brokers
throughout the United States. Specialty Accounts net written premiums were
$192.6 million in the 1997 first quarter compared to $101.6 million in the 1996
first quarter. On a combined total basis including Aetna P&C (for periods prior
to April 2, 1996 for comparative purposes only), Specialty Accounts net written
premiums were $192.6 million in the 1997 first quarter compared to $175.5
million in the 1996 first quarter. The growth is primarily attributable to
increased writings of its excess and surplus lines business.
The statutory combined ratio for Commercial Lines in the first quarter of 1997
was 109.1% compared to 108.5% in the first quarter of 1996. The GAAP combined
ratio for Commercial Lines in the first quarter of 1997 was 107.4% compared to
107.8% in the first quarter of 1996.
Personal Lines
Earnings before portfolio gains/losses increased 386% to $108 million in the
first quarter of 1997 from $22 million in the first quarter of 1996. Results for
the 1996 first quarter reflect the impact of catastrophe losses, after taxes and
reinsurance, of $18 million. The strong operating earnings reflect the
post-acquisition results of operations of Aetna P&C, the continued favorable
prior year loss reserve development in personal automobile lines and no
catastrophe losses in 1997.
Net written premiums in the 1997 first quarter were $774.9 million, compared to
$341.2 million in the first quarter of 1996. This increase primarily reflects
the acquisition of Aetna P&C. On a combined total basis including Aetna P&C (for
periods prior to April 2, 1996 for comparative purposes only),
16
Personal Lines net written premiums for the first quarter of 1997 totaled $774.9
million compared to $657.5 million for the first quarter of 1996. This increase
reflects a change in reinsurance agreements, growth in the affinity marketing
and SecureSM programs, and good retention in traditional markets.
The statutory combined ratio for Personal Lines in the first quarter of 1997 was
90.1% compared to 105.3% in the 1996 first quarter. The GAAP combined ratio for
Personal Lines in the first quarter of 1997 was 88.6% compared to 103.5% in the
1996 first quarter. The decrease in the combined ratios in 1997 was due to the
favorable prior year loss development, primarily in the automobile bodily injury
line and no catastrophe losses in 1997.
Financing Costs and Other
The primary component for the 1997 first quarter was interest expense of $26
million after tax, reflecting financing costs associated with the acquisition of
Aetna P&C.
Environmental Claims
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the volume of in-process environmental claims and the Company's experience in
resolving such claims. At March 31, 1997, approximately 12% of the net
environmental reserves (i.e., approximately $143 million) are case reserves for
resolved claims. The balance, approximately 88% of the net environmental
reserves (i.e., approximately $1.070 billion), is carried in a bulk reserve and
includes incurred but not yet reported environmental claims for which the
Company has not received any specific claims.
The following table displays activity for environmental losses and loss expenses
and reserves for the three months ended March 31, 1997 and 1996.
Environmental Losses Three Months Three Months
(millions) Ended Ended
March 31, 1997 March 31, 1996
----------------- -----------------
Beginning reserves:
Direct $ 1,369 $ 454
Ceded (127) (50)
------- -----
Net 1,242 404
Incurred losses and loss
expenses:
Direct 18 20
Ceded (1) (3)
Losses paid:
Direct 50 35
Ceded (4) (1)
Ending reserves:
Direct 1,337 439
Ceded (124) (52)
------- -----
Net $ 1,213 $ 387
======= =====
17
Asbestos Claims
At March 31, 1997, approximately 24% of the net asbestos reserves (i.e.,
approximately $252 million) are for pending asbestos claims. The balance,
approximately 76% (i.e., approximately $805 million) of the net asbestos
reserves, represents incurred but not yet reported losses.
The following table displays activity for asbestos losses and loss expenses and
reserves for the three months ended March 31, 1997 and 1996. In general, the
Company posts case reserves for pending asbestos claims within approximately 30
business days of receipt of such claims.
Asbestos Losses Three Months Three Months
(millions) Ended Ended
March 31, 1997 March 31, 1996
----------------- -----------------
Beginning reserves:
Direct $ 1,443 $ 695
Ceded (370) (293)
------- -----
Net 1,073 402
Incurred losses and loss
expenses:
Direct 20 16
Ceded (7) (5)
Losses paid:
Direct 52 24
Ceded (23) (18)
Ending reserves:
Direct 1,411 687
Ceded (354) (280)
------- -----
Net $ 1,057 $ 407
======= =====
Uncertainty Regarding Adequacy of Environmental and Asbestos Reserves
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
The reserves carried for environmental and asbestos claims at March 31, 1997 are
the Company's best estimate of ultimate claims and claim adjustment expenses
based upon known facts and current law. However, the conditions surrounding the
final resolution of these claims continues to change. Currently, it is not
possible to predict changes in the legal and legislative environment and their
impact on the future development of asbestos and environmental claims. Such
development will be affected by future court decisions and interpretations and
changes in legislation. Because of these future unknowns, additional liabilities
may arise for amounts in excess of the current reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated, and could result in a liability exceeding reserves by an amount that
would be material to the Company's operating results in a future period.
However, the Company believes that it is not likely that these claims will have
a material adverse effect on the Company's financial condition or liquidity.
Cumulative Injury Other Than Asbestos (CIOTA)
Cumulative injury other than asbestos (CIOTA) claims are generally submitted to
the Company under general liability policies and often involve an allegation by
a claimant against an insured that the claimant has suffered injuries as a
result of long-term or continuous exposure to potentially harmful
18
products or substances. Such potentially harmful products or substances include,
but are not limited to, lead paint, pesticides, pharmaceutical products,
silicone-based personal products, solvents and other deleterious substances.
At March 31, 1997, approximately 19% of the net CIOTA reserves (i.e.,
approximately $214 million) are for pending CIOTA claims. The balance,
approximately 81% (i.e., approximately $903 million) of the net CIOTA reserves,
represents incurred but not yet reported losses for which the Company has not
received any specific claims.
The following table displays activity for CIOTA losses and loss expenses and
reserves for the three months ended March 31, 1997 and 1996. In general, the
Company posts case reserves for pending CIOTA claims within approximately 30
business days of receipt of such claims.
CIOTA Losses Three Months Three Months
(millions) Ended Ended
March 31, 1997 March 31, 1996
----------------- -----------------
Beginning reserves:
Direct $ 1,560 $374
Ceded (446) --
------- ----
Net 1,114 374
Incurred losses and loss
expenses:
Direct 6 21
Ceded -- --
Losses paid:
Direct 8 8
Ceded (5) --
Ending reserves:
Direct 1,558 387
Ceded (441) --
------- ----
Net $ 1,117 $387
======= ====
Corporate and Other
Three Months Ended March 31,
--------------------------------------------
(millions) 1997 1996
- ----------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- ----------------------------------------------------------------------------
Total Corporate and Other(1) $22 $(52) $100 $(33)
============================================================================
(1) Net income (expense) includes $10 million of reported investment portfolio
gains in 1996.
Corporate expenses (before reported portfolio gains) as a percentage of
operating earnings were down in the first quarter of 1997 compared to the first
quarter of 1996. Increased interest costs associated with higher debt levels in
1997 were partially offset by lower staff expenses in the corporate segment,
including the allocation of additional expenses to other operating segments.
19
Discontinued Operations
For the quarter ended March 31, 1996 discontinued operations includes a loss
from operations of Basis of $34 million.
Liquidity and Capital Resources
TRV services its obligations primarily with dividends and other advances that it
receives from subsidiaries. The subsidiaries' dividend-paying abilities are
limited by certain covenant restrictions in credit agreements and/or by
regulatory requirements. TRV believes it will have sufficient funds to meet
current and future commitments. Each of TRV's major operating subsidiaries
finances its operations on a stand-alone basis consistent with its
capitalization and ratings.
Travelers Group Inc. (TRV)
TRV 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.
TRV, Commercial Credit Company (CCC) and The Travelers Insurance Company (TIC)
have a five-year revolving credit facility with a syndicate of banks to provide
$1.0 billion of revolving credit, to be allocated to any of TRV, CCC or TIC. The
participation of TIC in this agreement is limited to $250 million. This facility
expires in June 2001. Currently $100 million is allocated to TRV, $850 million
to CCC and $50 million to TIC. Under this facility TRV is required to maintain a
certain level of consolidated stockholders' equity (as defined in the
agreement). At March 31, 1997 this requirement was exceeded by approximately
$4.5 billion. At March 31, 1997, there were no borrowings outstanding under this
facility.
As of May 6, 1997, TRV has unused credit availability of $100 million under the
five-year revolving credit facility. TRV may borrow under this revolving credit
facility at various interest rate options (LIBOR, CD and base rate) and
compensates the banks for the facility through commitment fees.
Travelers Property Casualty Corp. (TAP)
TAP also issues commercial paper directly to investors and maintains unused
credit availability under a committed revolving credit agreement at least equal
to the amount of commercial paper outstanding.
TAP has a five-year revolving credit facility in the amount of $500 million with
a syndicate of banks that expires in December 2001. TAP may borrow under this
revolving credit facility at varous interest rate options (LIBOR or base rate)
and compensates the banks for the facility through commitment fees. Under this
facility TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At March 31, 1997, this
requirement was exceeded by approximately $3.0 billion. At March 31, 1997 there
were no borrowings outstanding under this facility.
TAP's insurance subsidiaries are subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to their parent
without prior approval of insurance regulatory authorities. Dividend payments to
TAP from its insurance subsidiaries are limited to $647 million in 1997 without
prior approval of the Connecticut Insurance Department. TAP has received $80
million of dividends from its insurance subsidiaries during the first three
months of 1997.
20
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 May 6, 1997 CCC has unused
credit availability of $3.250 billion under five-year revolving credit
facilities, including the $850 million referred to above. CCC may borrow under
its revolving credit facilities at various interest rate options (LIBOR, CD or
base rate) 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 its parent or its affiliated
companies. At March 31, 1997, CCC would have been able to remit $315 million to
its parent under its most restrictive covenants.
Salomon Smith Barney
Salomon Smith Barney's total assets were $267 billion at March 31, 1997, up from
$246 billion at December 31, 1996. Due to the nature of trading activities,
including matched book activities, it is not uncommon for asset levels to
fluctuate from period to period. Salomon Smith Barney's balance sheet is highly
liquid, with the vast majority of its assets consisting of marketable securities
and collateralized short-term financing agreements arising from securities
transactions. The highly liquid nature of these assets provides Salomon Smith
Barney with flexibility in financing and managing its business. Salomon Smith
Barney monitors and evaluates the adequacy of its capital and borrowing base on
a daily basis in order to allow for flexibility in its funding, to maintain
liquidity, and to ensure that its capital base supports the regulatory capital
requirements of its subsidiaries.
Salomon Smith Barney and Phibro Inc. have committed uncollateralized revolving
lines of credit totaling $1.5 billion and $.5 billion, respectively, and may
borrow under their revolving credit facilities at various interest rate options
(LIBOR, CD or base rate) and compensate the banks for the facilities through
commitment fees. In addition, Salomon Brothers Inc, a wholly owned subsidiary of
Salomon Smith Barney, has a $2.1 billion committed secured standby bank credit
facility for financing securities positions which enables it to borrow on a
secured basis using a variety of financial instruments as collateral and Salomon
Brothers International Limited, A wholly owned subsidiary of Salomon Smith
Barney, has a committed securities repurchase facility in the amount of $1
billion. At March 31, 1997 there were no outstanding borrowings under these
facilities. Salomon Smith Barney also has substantial borrowing arrangements
consisting of facilities that it has been advised are available, but where no
contractual lending obligation exists. These arrangements are reviewed on an
ongoing basis to ensure flexibility in meeting short-term requirements.
Unsecured term debt is a significant component of the Salomon Smith Barney's
long-term capital. Term debt totaled $17.0 billion at March 31, 1997, compared
with $15.7 billion at December 31, 1996.
Salomon Smith Barney's borrowing relationships are with a broad range of banks,
financial institutions and other firms from which it draws funds. The volume of
borrowings generally fluctuates in response to changes in the level of
securities inventories, customer balances, the amount of reverse repurchase
transactions outstanding (i.e., purchases of securities under agreements to
resell the same security) and securities borrowed transactions. As these
activities increase, borrowings generally increase to fund the additional
activities. Availability of financing can vary depending upon market conditions,
credit ratings, and the overall availability of credit to the securities
industry. Salomon Smith Barney seeks to expand and diversify its funding mix as
well as its creditor sources. Concentration levels for these sources,
particularly for short-term lenders, are closely monitored both in terms of
single investor limits and daily maturities.
21
Salomon Smith Barney monitors liquidity by tracking asset levels, collateral and
funding availability to maintain flexibility to meet its financial commitments.
As a policy, Salomon Smith Barney attempts to maintain sufficient capital and
funding sources in order to have the capacity to finance itself on a fully
collateralized basis in the event that its access to unsecured financing is
impaired. Its liquidity management process includes a contingency funding plan
designed to ensure adequate liquidity even if access to unsecured funding
sources is severely restricted or unavailable. This plan is reviewed
periodically to keep the funding options current and in line with market
conditions. The management of this plan includes an analysis which is utilized
to determine the ability to withstand varying levels of stress, which could
impact its liquidation horizons and required margins. In addition, Salomon Smith
Barney monitors its leverage and capital ratios on a daily basis. The net assets
(total assets less securities purchased under agreements to resell) to equity
ratio at both March 31, 1997 and December 31, 1996 was 20.7x.
The Travelers Insurance Company (TIC)
At March 31, 1997, TIC had $22.9 billion of life and annuity product deposit
funds and reserves. Of that total, $12.4 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $10.5 billion is for life and
annuity products that are subject to discretionary withdrawal by the
contractholder. Included in the amount that is subject to discretionary
withdrawal is $1.6 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $5.3 billion of the life
insurance and individual annuity liabilities, which are subject to discretionary
withdrawal and have an average surrender charge of 5.4%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$3.5 billion of liabilities is surrenderable without charge. More than 18% of
these relate to individual life products. These risks would have to be
underwritten again if transferred to another carrier, which is considered a
significant deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding policy
loans and related accrued interest prior to payout.
TIC issues commercial paper to investors and maintains unused committed
revolving credit facilities at least equal to the amount of commercial paper
outstanding. TIC may borrow under this revolving credit facility at various rate
options (LIBOR, CD or base rate) and compensates the banks for the facility
through commitment fees. Currently, TIC has unused credit availability of $50
million under the five-year revolving credit facility referred to above.
TIC 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 $507 million of statutory surplus is
available in 1997 for such dividends without Department approval, of which $100
million has been paid during the first quarter of 1997.
22