Exhibit 99.03
Travelers Group Inc.
Index to Supplemental Condensed Consolidated Financial Statements (unaudited)
For the Three Months and Six Months Ended June 30, 1997
Supplemental Financial Statements (unaudited): Page No.
Supplemental Condensed Consolidated Statement of Income
(Unaudited) - Three and Six Months Ended June 30, 1997
and 1996 2
Supplemental Condensed Consolidated Statement of Financial
Position - June 30, 1997 (Unaudited) and December 31, 1996 3
Supplemental Condensed Consolidated Statement of Changes in
Stockholders' Equity (Unaudited) - Six Months Ended
June 30, 1997 4
Supplemental Condensed Consolidated Statement of Cash Flows
(Unaudited) - Six Months Ended June 30, 1997 and 1996 5
Notes to Supplemental Condensed Consolidated Financial
Statements - (Unaudited) 6
Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
1
Travelers Group Inc. and Subsidiaries
Supplemental Condensed Consolidated Statement of Income (Unaudited)
(In millions of dollars, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
Revenues
Insurance premiums $ 2,220 $ 2,060 $ 4,444 $ 3,316
Commissions and fees 1,172 1,211 2,378 2,380
Interest and dividends 4,047 3,297 7,545 6,465
Finance related interest and other charges 321 287 627 571
Principal transactions 709 861 1,471 1,800
Asset management and administration fees 399 342 788 668
Other income 316 190 631 557
- ---------------------------------------------------------------------------------------
Total revenues 9,184 8,248 17,884 15,757
- ---------------------------------------------------------------------------------------
Expenses
Policyholder benefits and claims 1,906 2,319 3,811 3,590
Non-insurance compensation and benefits 1,511 1,503 3,059 3,025
Insurance underwriting, acquisition and
operating 799 861 1,604 1,367
Interest 2,792 2,141 5,170 4,375
Provision for consumer finance credit losses 73 60 145 128
Other operating 654 650 1,299 1,243
- ---------------------------------------------------------------------------------------
Total expenses 7,735 7,534 15,088 13,728
- ---------------------------------------------------------------------------------------
Gain (loss) on sale of subsidiaries and
affiliates - 397 - 397
- ---------------------------------------------------------------------------------------
Income before income taxes and minority
interest 1,449 1,111 2,796 2,426
Provision for income taxes 517 281 1,000 766
Minority interest, net of income taxes 49 (44) 98 (44)
- ---------------------------------------------------------------------------------------
Income from continuing operations 883 874 1,698 1,704
- ---------------------------------------------------------------------------------------
Discontinued operations, net of income taxes:
Income (loss) from operations - (7) - (41)
=======================================================================================
Net income $ 883 $ 867 $ 1,698 $ 1,663
=======================================================================================
Net income per share of common stock
and common stock equivalents
Continuing operations $ 0.74 $ 0.74 $ 1.41 $ 1.43
Discontinued operations - (0.01) - (0.04)
- ---------------------------------------------------------------------------------------
Net income $ 0.74 $0.73 $ 1.41 $ 1.39
=======================================================================================
Weighted average number of common shares
outstanding 1,151.3 1,130.6 1,153.0 1,133.8
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)
June 30, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------
(Unaudited)
Assets
Cash and cash equivalents
(including $1,475 and $1,446 segregated under federal and
other regulations or deposited with clearing organizations) $ 3,970 $ 3,260
Investments and real estate held for sale:
Fixed maturities, primarily available for sale at market
value (amortized cost - $45,292 and $43,277) 45,981 43,998
Equity securities, at market (cost - $1,324 and $1,113) 1,377 1,157
Mortgage loans 3,748 3,812
Real estate held for sale 502 459
Policy loans 1,873 1,910
Short-term and other 5,135 5,173
- ----------------------------------------------------------------------------------------------
Total investments and real estate held for sale 58,616 56,509
- ----------------------------------------------------------------------------------------------
Securities borrowed or purchased under agreements to resell 119,279 97,985
Brokerage receivables 14,362 11,592
Trading securities and commodities owned, at market value 148,753 126,568
Net consumer finance receivables 8,834 7,885
Reinsurance recoverables 9,876 10,234
Value of insurance in force and deferred policy acquisition
costs 2,698 2,563
Cost of acquired businesses in excess of net assets 3,115 3,060
Separate and variable accounts 9,830 9,023
Other receivables 5,108 4,869
Other assets 11,126 12,400
- ----------------------------------------------------------------------------------------------
Total assets $ 395,567 $ 345,948
==============================================================================================
Liabilities
Investment banking and brokerage borrowings $ 12,286 $ 10,020
Short-term borrowings 2,812 1,557
Long-term debt 27,203 24,696
Securities loaned or sold under agreements to repurchase 135,696 103,572
Brokerage payables 12,150 10,019
Trading securities and commodities sold not yet purchased, at
market value 96,930 92,032
Contractholder funds 14,601 13,621
Insurance policy and claims reserves 43,940 43,944
Separate and variable accounts 9,818 8,949
Accounts payable and other liabilities 18,000 16,802
- ----------------------------------------------------------------------------------------------
Total liabilities 373,436 325,212
- ----------------------------------------------------------------------------------------------
ESOP Preferred stock -- Series C (net of note guarantee of
$17 and $35) 140 129
- ----------------------------------------------------------------------------------------------
Redeemable preferred stock -- Series I 420 420
- ----------------------------------------------------------------------------------------------
TRV-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debt
securities of TRV 1,000 1,000
- ----------------------------------------------------------------------------------------------
TAP-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debt
securities of TAP 900 900
- ----------------------------------------------------------------------------------------------
Salomon Smith Barney-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
junior subordinated debt securities of Salomon Smith Barney 345 345
- ----------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, at aggregate liquidation value 1,525 1,125
Common stock ($.01 par value; authorized shares: 1.5 billion;
issued shares: 1997 - 1,385,225,067 shares and 1996 -
1,384,707,342 shares) 14 14
Additional paid-in capital 8,151 7,806
Retained earnings 14,335 12,934
Treasury stock, at cost (1997 - 243,779,981 shares and 1996 -
243,500,547 shares) (4,727) (4,123)
Unrealized gain (loss) on investment securities 436 469
Other, principally unearned compensation (408) (283)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity 19,326 17,942
- ----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 395,567 $ 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)
Six months ended June 30, 1997 Amount Shares
- -----------------------------------------------------------------------------------
(in thousands)
Preferred stock, at aggregate liquidation value
Balance, beginning of year $ 1,125 9,600
Issuance of preferred stock 400 1,600
- -----------------------------------------------------------------------------------
Balance, end of period $ 1,525 11,200
===================================================================================
Common stock and additional paid-in capital
Balance, beginning of year $ 7,820 1,384,707
Issuance of shares pursuant to employee benefit plans 348
Exercise of common stock warrants 6 501
Conversion of notes -- 17
Cost of issuance of preferred stock (9)
- -----------------------------------------------------------------------------------
Balance, end of period 8,165 1,385,225
- -----------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 12,934
Net income 1,698
Common dividends (227)
Preferred dividends (70)
- ---------------------------------------------------------------------
Balance, end of period 14,335
- ---------------------------------------------------------------------
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 (1) 17,149
Treasury stock acquired (603) (17,429)
- -----------------------------------------------------------------------------------
Balance, end of period (4,727) (243,780)
- -----------------------------------------------------------------------------------
Unrealized gain (loss) on investment securities
Balance, beginning of year 469
Net change in unrealized gains and losses on investment
securities, net of tax (33)
- ---------------------------------------------------------------------
Balance, end of period 436
- ---------------------------------------------------------------------
Other, principally unearned compensation
Balance, beginning of year (283)
Issuance of restricted stock, net of amortization (118)
Net translation adjustments, net of tax (7)
- ---------------------------------------------------------------------
Balance, end of period (408)
- ---------------------------------------------------------------------
Total common stockholders' equity and common shares
outstanding $ 17,801 1,141,445
===================================================================================
Total stockholders' equity $ 19,326
=====================================================================
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)
Six Months ended June 30, 1997 1996
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ (2,845) $ 3,698
- --------------------------------------------------------------------------------
Cash flows from investing activities
Consumer loans originated or purchased (2,236) (1,468)
Consumer loans repaid or sold 1,391 1,266
Purchases of fixed maturities and equity securities (12,819) (15,216)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities 9,895 12,584
Mortgage loans 105 133
Real estate and real estate joint ventures 25 86
Proceeds from maturities of investments:
Fixed maturities 1,571 1,748
Mortgage loans 316 417
Other investments, primarily short-term, net (632) (537)
Assets securing collateralized mortgage obligations 63 351
Business acquisition -- (4,160)
Business divestment 365 --
Other, net (416) (84)
- --------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (2,372) (4,880)
- --------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (297) (260)
Subsidiary's sale of Class A common stock -- 1,453
Issuance of preferred stock 391 250
Issuance of redeemable preferred stock of subsidiaries -- 900
Treasury stock acquired (603) (366)
Stock tendered for payment of withholding taxes (156) (106)
Issuance of long-term debt 4,596 3,971
Payments and redemptions of long-term debt (1,934) (2,329)
Net change in short-term borrowings (including investment
banking and brokerage borrowings) 3,525 (1,586)
Collateralized mortgage obligations (63) (284)
Contractholder fund deposits 1,772 899
Contractholder fund withdrawals (1,310) (1,469)
Other, net 6 66
- --------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,927 1,139
- --------------------------------------------------------------------------------
Change in cash and cash equivalents 710 (43)
Cash and cash equivalents at beginning of period 3,260 3,491
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,970 $ 3,448
- --------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Income taxes paid $ 713 $ 1,018
================================================================================
Supplemental disclosure of business acquisitions:
Assets and liabilities of business acquired:
Invested assets $ 13,969
Net consumer finance receivables --
Reinsurance recoverables and other assets 10,386
Insurance policy and claim reserves (18,302)
Other liabilities (1,893)
================================================================================
Cash payment related to business acquisition $ 4,160
================================================================================
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 June 30, 1997 and for the three-month and six-month periods ended
June 30, 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 nine months ended
September 30, 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
Six Months Ended
June 30, 1996*
------------------
(in millions, except per share data)
Revenues $17,357
-------
Income from continuing operations $ 1,466
-------
Net income $ 1,425
-------
Net income per common share:
Continuing operations $ 1.22
-------
Net income $ 1.18
-------
* Historical results of Aetna P&C for the first quarter of 1996
include $307 million ($200 million after tax) of realized investment
gains.
In the second quarter of 1996 TAP recorded charges related to the
acquisition and integration of Aetna P&C. These charges resulted primarily
from anticipated costs of the acquisition and the application of Travelers
strategies, policies and practices to Aetna P&C reserves and include: $221
million after tax and minority interest ($414 million before tax and
minority interest) in reserve increases, net of reinsurance, related
primarily to cumulative injury claims other than asbestos (CIOTA); a $45
million after tax and minority interest ($84 million before tax and
minority interest) provision for an additional asbestos liability related
to an existing settlement agreement with a policyholder of Aetna P&C; a
$14 million after tax and minority interest ($27 million before tax and
minority interest) charge related to premium collection issues; a $22
million after tax and minority interest ($41 million before tax and
minority interest) provision for uncollectibility of reinsurance
recoverables; and a $19 million after tax and minority interest ($35
million before tax and minority interest) provision for lease and
severance costs of The Travelers Indemnity Company related to the
restructuring plan for the acquisition. In addition, in the second quarter
of 1996 the Company recognized a gain of $363 million (before and after
tax) from the issuance of shares of Class A Common Stock by TAP and such
gain is not reflected in the pro forma financial information above.
4. Debt
Investment banking and brokerage borrowings consisted of the following:
(millions) June 30, 1997 December 31, 1996
--------- ------------- -----------------
Commercial paper $ 5,237 $ 4,133
Bank loans and other borrowings 7,049 5,887
-------- -------
$ 12,286 $10,020
======== =======
Short-term borrowings consisted of commercial paper outstanding as
follows:
(millions) June 30, 1997 December 31, 1996
--------- ------------- -----------------
Commercial Credit Company $2,812 $ 1,482
Travelers Property Casualty Corp. - 25
The Travelers Insurance Company - 50
====== =======
$2,812 $ 1,557
====== =======
7
Long-term debt, including its current portion, consisted of the following:
(millions) June 30, 1997 December 31, 1996
--------- ------------- -----------------
Travelers Group Inc. $ 1,699 $ 1,903
Commercial Credit Company 5,400 5,750
Salomon Smith Barney Holdings Inc. 18,806 15,738
Travelers Property Casualty Corp. 1,249 1,249
The Travelers Insurance Group Inc. 49 56
------- -------
$27,203 $24,696
======= =======
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 June 30, 1997 and December 31, 1996:
June 30, 1997 December 31, 1996
------------------------------ ----------------------------
Current Market Current Market
or or
Fair Value Fair Value
Notional -------------------- Notional -------------------
(billions) Amounts Assets Liabilities Amounts Assets Liabilities
- ----------------------------------------------------------------------------------------------------
Exchange-issued products:
Futures contracts (a) $ 572.8 $ -- $ -- $ 530.9 $ -- $ --
Other exchange-issued products:
Equity contracts 15.9 .2 .5 13.1 .1 .2
Fixed income contracts 93.7 -- -- 61.2 -- --
Foreign exchange contracts .1 -- -- -- -- --
Commodities-related contracts 4.1 -- -- 5.0 -- --
- ----------------------------------------------------------------------------------------------------
Total exchange-issued products 686.6 .2 .5 610.2 .1 .2
- ----------------------------------------------------------------------------------------------------
Over-the-counter swaps, swap options,
caps and floors:
Swaps 1,054.2 842.3
Swaps options written 17.6 10.8
Swap options purchased 31.7 24.1
Caps and floors 143.7 117.1
- ----------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps
and floors 1,247.2 3.8 6.4 994.3 4.2 6.6
- ----------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and
options:
Forward currency contracts 116.3 .8 .6 94.3 .7 .6
Options written 42.5 -- .4 37.1 -- .3
Options purchased 45.7 .7 -- 38.7 .5 --
- ----------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts
and options 204.5 1.5 1.0 170.1 1.2 .9
- ----------------------------------------------------------------------------------------------------
Other options and contractual
commitments:
Options and warrants on equities
and equity indices 57.6 1.8 2.5 45.8 1.1 1.8
Options and forward contracts on
fixed-income securities 270.6 .3 .1 202.8 .3 .2
Physical commodities contracts 17.3 .2 .2 22.6 .3 .3
- ----------------------------------------------------------------------------------------------------
Total $2,483.8 $ 7.8 $ 10.7 $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 Six Months Ended
June 30 June 30
- ----------------------------------------------------------------------------------------
(In millions, except per share amounts) 1997 1996 1997 1996
---------- ---------- ---------- ----------
Revenues $ 9,184 $ 8,248 $ 17,884 $ 15,757
========== ========== ========== ==========
Income from continuing operations $ 883 $ 874 $ 1,698 $ 1,704
Loss from discontinued operations -- (7) -- (41)
---------- ---------- ---------- ----------
Net income $ 883 $ 867 $ 1,698 $ 1,663
========== ========== ========== ==========
Earnings per share*:
Continuing operations $ 0.74 $ 0.74 $ 1.41 $ 1.43
Discontinued operations -- (0.01) -- (0.04)
---------- ---------- ---------- ----------
Net income $ 0.74 $ 0.73 $ 1.41 $ 1.39
========== ========== ========== ==========
Weighted average number of
common shares outstanding
and common stock equivalents* 1,151.3 1,130.6 1,153.0 1,133.8
========== ========== ========== ==========
* On October 22, 1997 the Board of Directors declared a three-for-two stock
split in the form of a 50% stock 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 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
9
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.
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%.
Results of Operations
Consolidated net income for the quarter ended June 30, 1997 was $883 million,
and includes reported investment portfolio gains of $6 million after tax and
minority interest. This compares with net income from continuing operations of
$874 million in the 1996 period, which included portfolio losses of $59 million,
as well as gains of $389 million from sales of stock of subsidiaries and
affiliates, and charges related to the acquisition of Aetna P&C in April 1996,
amounting to $321 million.
Excluding these items, net income for the second quarter of 1997 was slightly
above the comparable period in 1996, primarily reflecting increased earnings in
the insurance operations offset by a decline in earnings at Salomon Smith
Barney.
Income from continuing operations for the six months ended June 30, 1997 was
$1.698 billion, compared to $1.704 billion in the 1996 period. Included in the
1997 six-month period are portfolio gains of $15 million compared to $19 million
in portfolio losses in the 1996 six-month period and the other special items
discussed above. Excluding these items, net income for the first six months of
1997 was slightly above the comparable period in 1996.
Discontinued operations for the second quarter and six months of 1996 include
the results of Basis Petroleum, Inc. (Basis). Basis was sold in May of 1997.
The effective income tax rate for the three months and six months ended June 30,
1996 is below the statutory rate of 35% due primarily to the nontaxability of
the $363 million gain recognized from the sale of shares of Class A Common Stock
by TAP.
The following discussion presents in more detail each segment's performance.
Segment Results for the Three Months Ended June 30, 1997 and 1996
Investment Services
Three Months Ended June 30,
---------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
(millions) Revenues Net income Revenues Net income
- -----------------------------------------------------------------------------
Salomon Smith Barney (1) $5,310 $452 $4,792 $528
=============================================================================
(1) Excludes results of Basis Petroleum which are classified as discontinued
operations.
Salomon Smith Barney
Salomon Smith Barney reported net income from continuing operations of $452
million for the quarter ended June 30, 1997, a decline from the $528 million
reported for the quarter ended June 30, 1996. Revenues, net of interest expense,
declined to $2.732 billion in the 1997 quarter compared to $2.851 billion in the
1996 quarter.
10
Salomon Smith Barney Revenues
Three Months Ended June 30,
---------------------------
(millions) 1997 1996
- -------------------------------------------------------------------------
Commissions $ 686 $ 661
Asset management and administration fees 399 342
Investment banking 475 548
Principal transactions 709 861
Interest income, net* 430 402
Other income 33 37
- -------------------------------------------------------------------------
Net revenues* $2,732 $2,851
=========================================================================
* Net of interest expense of $2.578 billion and $1.941 billion in 1997 and
1996, respectively. Revenues included in the condensed consolidated
statement of income are before deductions for interest expense.
Commission revenues were $686 million in the 1997 quarter up slightly from the
$661 million reported in the 1996 quarter, as an increase in listed securities
was offset by declines in mutual funds and over-the-counter securities
commissions.
Investment banking revenues declined to $475 million in the 1997 quarter
compared to $548 million in the 1996 quarter, primarily as a result of a decline
in equity underwritings. This decline was offset to an extent by increases in
advisory and debt underwriting fees.
Principal transaction revenues decreased to $709 million in the 1997 quarter
compared to $861 million in the 1996 quarter. This decrease is the result of
lower revenues from fixed income and equity proprietary and customer trading,
partially offset by an increase in physical commodities trading revenues.
Asset management and administration fees increased 17% to $399 million in the
1997 quarter compared to $342 million in the 1996 quarter. This reflects broad
growth in all recurring fee-based products. At June 30, 1997, internally managed
assets were $147.5 billion and total fee-based assets under management were
$200.6 billion compared to $118.9 billion and $158.6 billion, respectively, at
June 30, 1996.
Net interest and dividends increased 7% to $430 million for the 1997 quarter
from $402 million in the 1996 quarter, primarily due to increased margin lending
to clients and higher levels of interest-earning net assets.
Compensation and benefits expense, as a percentage of net revenues, for the 1997
quarter was 53% 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 19% in
the 1996 quarter. Salomon Smith Barney continues to maintain its focus on
controlling fixed expenses.
11
Assets Under Management
At June 30,
-----------------------
(billions) 1997 1996
- --------------------------------------------------------------
Salomon Smith Barney $147.5 $118.9
Travelers Life and Annuity (1) 22.2 21.1
- --------------------------------------------------------------
Total Assets Under Management $169.7 $140.0
==============================================================
(1) Part of the Life Insurance Services segment.
Consumer Finance Services
Three Months Ended June 30,
--------------------------------------------
(millions) 1997 1996
- ---------------------------------------------------------------------------
Revenues Net income Revenues Net income
- ---------------------------------------------------------------------------
Consumer Finance Services(1) $380 $54 $348 $61
===========================================================================
(1) Net income in 1996 includes a portion of the gain ($1 million) from the
disposition of RCM Capital Management, a California Limited Partnership
(RCM).
Earnings in the second quarter of 1997 were lower than the comparable period in
1996, as expected -- reflecting a higher provision for loan losses in the 1997
period.
Consumer finance receivables, net of unearned finance charges, grew $595 million
during the second quarter of 1997, which represents an annualized growth rate of
28%. This growth was driven primarily by real estate loans generated through the
Company's 855 branch office network and through the sales efforts of Primerica
Financial Services (PFS).
Total net receivables were a record $9.041 billion at June 30, 1997, a 21%
increase from the prior year. The average yield, at 14.42%, was lower than the
1996 quarter's yield of 15.40%, mainly because of a shift in the portfolio mix
toward lower risk/lower margin real estate loans. Sales of real estate-secured
($.M.A.R.T.SM) loans sold exclusively through PFS continued at record levels
during the quarter. Travelers Bank credit card outstandings were $1.166 billion,
up from $972 million at March 31, 1997, as a result of strong credit card
originations.
Delinquencies in excess of 60 days were 2.14% as of June 30, 1997 -- lower than
the 2.25% at March 31, 1997 and the 2.18% at the end of the second quarter of
1996. The charge-off rate was 2.82% during the second quarter of 1997, lower
than the 1997 first quarter of 2.95% and the comparable 1996 period's rate of
2.92%. Reserves as a percentage of net receivables were 2.91% at June 30, 1997,
down from 2.97% at the end of the 1997 first quarter and 2.92% at the end of the
1996 second quarter.
12
As of, or for, the
Three Months Ended June 30,
------------------------------
1997 1996
------------------------------
Allowance for credit losses
as a % of net outstandings 2.91% 2.92%
Charge-off rate for the period 2.82% 2.92%
60 + days past due on a
contractual basis as a % of gross
consumer finance receivables at
quarter end 2.14% 2.18%
On July 31, 1997, Commercial Credit Company (CCC) acquired Security Pacific
Financial Services from BankAmerica Corporation for a purchase price of
approximately $1.6 billion. The purchase included approximately $1.2 billion of
net consumer finance receivables and approximately $70 million of other net
assets.
Life Insurance Services
Three Months Ended June 30,
---------------------------------------------
1997 1996
---------------------------------------------
(millions) Revenues Net income Revenues Net income
- -------------------------------------------------------------------------------
Travelers Life and Annuity (1) $ 666 $ 115 $ 549 $ 78
Primerica Financial Services (2) 375 81 354 70
- -------------------------------------------------------------------------------
Total Life Insurance Services $1,041 $ 196 $ 903 $ 148
===============================================================================
(1) Net income includes $10 million of reported investment portfolio gains in
1997 and $12 million of reported investment portfolio losses in 1996.
(2) Net income in 1997 includes $1 million of reported investment portfolio
losses. Net income in 1996 includes a portion of the gain ($4 million)
from the disposition of RCM.
Travelers Life and Annuity
Travelers Life and Annuity consists of annuity, life and long-term care 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. Travelers Life and Annuity 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 17% to $105 million in the second
quarter of 1997, from $90 million in the comparable 1996 period. Improved
earnings were largely driven by strong investment income, reflecting an
improvement in fixed income yields over the past year, as well as very
attractive yields on equity partnerships. Earnings growth attributable to strong
sales of recently introduced
13
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 June 30,
1997 were $14.7 billion compared to $12.2 billion at June 30, 1996. Net written
premiums and deposits were $627.7 million in the second quarter of 1997, up 23%
from $509.5 million in the 1996 second 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 A.M. Best
Company's recently announced upgrade of The Travelers Insurance Company's rating
to A+ (Superior), which rating may be revised or withdrawn at anytime.
Payout and group annuity net premiums and deposits (excluding those of
affiliates) totaled $632.0 million in the second quarter of 1997, up more than
200% from $210.0 million in the second quarter of 1996, primarily as a result of
the $355 million growth in sales of one year variable rate guaranteed investment
contracts. Policyholder account balances and reserves totaled $11.5 billion at
June 30, 1997, marginally ahead of the June 30, 1996 balances but up $700
million from year-end 1996, reflecting the strong sales of new variable rate
guaranteed investment contracts.
Direct written premiums and deposits (excluding single premium policies) for
individual life insurance were $68.5 million in the second quarter of 1997, a
slight decrease from $69.8 million in the second quarter of 1996. Face amount of
individual life insurance issued during the second quarter of 1997 was $1.5
billion, compared with $1.7 billion in the second quarter of 1996, bringing
total life insurance in force to $50.7 billion at June 30, 1997.
Net written premiums for the growing long-term care insurance line were $43.3
million in the second quarter of 1997, compared to $30.8 million in the second
quarter of 1996, largely as a result of strong sales during the quarter, which
improved 29% over the 1996 period.
Primerica Financial Services
Earnings (before portfolio gains and the 1996 disposition of RCM) for the second
quarter of 1997 increased 24% to $82 million from $66 million in the second
quarter of 1996, reflecting favorable mortality experience as well as continued
strength in life insurance in force and sales of mutual funds and consumer
loans.
Face amount of new term life insurance sales was $14.1 billion in the second
quarter of 1997, compared to $14.0 billion in the comparable 1996 quarter. Life
insurance in force reached $365.4 billion at June 30, 1997, up from $354.8
billion at June 30, 1996, and continued to reflect good policy persistency.
Sales of mutual funds (at net asset value) were $669.4 million for the second
quarter of 1997, a 5% increase over second quarter 1996 sales of $636.7 million,
reflecting strong customer demand in the U.S. and Canada. More than 33% 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, reaching $1.901
billion at the end of the second quarter of 1997, up 12% from $1.696 billion at
the end of the 1997 first quarter and up 43% from $1.326 billion at the end of
the 1996 second quarter. Earnings and assets relating to these consumer loans
are included in the Consumer Finance segment. The TRAVELERS SECURE(R) home and
auto insurance products -- issued through TAP -- continue to experience growth
in applications and policies, and as of June 30, 1997, had been introduced in 37
states and were sold through nearly 8,000 agents licensed to sell the product.
14
Property & Casualty Insurance Services
Three Months Ended June 30,
----------------------------------------
(millions) 1997 1996
- --------------------------------------------------------------------------------
Net Net
income income
Revenues (loss) Revenues (loss)
- --------------------------------------------------------------------------------
Commercial Lines(1) (2) $1,612 $209 $1,445 $(237)
Personal Lines(1) (3) 815 97 750 51
Financing costs and other (1) 4 (30) 7 (30)
Minority interest - (49) - 44
================================================================================
Total Property & Casualty Insurance
Services $2,431 $227 $2,202 $(172)
================================================================================
(1) Before minority interest.
(2) Net income includes $32 million of reported investment portfolio losses in
1996 and $383 million of charges in 1996 related to the acquisition and
integration of Aetna P&C.
(3) Net income includes $4 million and $6 million of reported investment
portfolio losses in 1997 and 1996, respectively, and $8 million of charges
in 1996 related to the acquisition and integration of Aetna P&C.
As previously indicated, in the second quarter of 1996 TAP recorded charges
related to the acquisition and integration of Aetna P&C. These charges resulted
primarily from anticipated costs of the acquisition and the application of
Travelers strategies, policies and practices to Aetna P&C reserves and include:
$221 million after tax and minority interest ($414 million before tax and
minority interest) in reserve increases, net of reinsurance, related primarily
to cumulative injury claims other than asbestos (CIOTA); $81 million after tax
and minority interest ($152 million before tax and minority interest) in
provisions for reinsurance recoverables and other receivables; and a $19 million
after tax and minority interest ($35 million before tax and minority interest)
provision for lease and severance costs of Travelers Indemnity related to the
restructuring plan for the acquisition.
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.
Commercial Lines
Earnings before portfolio gains/losses and acquisition-related charges increased
17% to $209 million in the second quarter of 1997 from $178 million in the
second quarter of 1996, primarily reflecting strong net investment income and
expense savings. Catastrophe losses were insignificant in both periods.
Commercial Lines net written premiums for the second quarter of 1997 totaled
$1.141 billion, up 4% from $1.100 billion in the second quarter of 1996
(excluding an adjustment associated with a reinsurance transaction in 1996).
This increase reflects continued growth in programs designed to leverage
underwriting experience in specific industries, and was offset in part by the
highly competitive conditions in the marketplace and the Company's continuing
focus on writing profitable business.
Fee income for the second quarter of 1997 was $91.4 million compared to $100.6
million in the second quarter of 1996. This decrease was due to 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 service customers,
slightly offset by National Accounts writing more service fee-based product
versus premium-based product.
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 $149.7 million for
the second quarter of 1997 decreased $29.9 million from the second quarter of
1996 (excluding an adjustment associated with a reinsurance transaction). This
decrease was due to National Accounts writing less premium-based product versus
service fee-based product and the competitive marketplace. For the second
quarter of 1997, National Accounts new business was significantly lower than the
second quarter of 1996. This decrease primarily reflects the addition of one
large account in the second quarter of 1996 and the competitive marketplace.
National Accounts business retention ratio was virtually the same in the second
quarter of 1997 and 1996.
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. Commercial Accounts net written premiums were $453.0 million
in the second quarter of 1997 compared to $380.5 million in the second quarter
of 1996. For the second quarter of 1997, new premium business in Commercial
Accounts was significantly higher compared to the second quarter of 1996,
reflecting continued growth through programs designed to leverage underwriting
experience in specific industries. The Commercial Accounts business retention
ratio was significantly higher in the second quarter of 1997 compared to the
1996 second 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 $369.6 million in the second quarter
of 1997 compared to $368.6 million in the second quarter of 1996. New premium
business in Select Accounts was moderately higher in the second quarter of 1997
compared to the second quarter of 1996. The Select Accounts business retention
ratio was moderately higher in the second quarter of 1997 compared to the second
quarter of 1996. These increases reflect 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
$168.4 million in the second quarter of 1997 compared to $171.7 million in the
second quarter of 1996.
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the second quarter of 1997 was 109.7% compared to 171.1% in the second
quarter of 1996. The GAAP combined ratio (before policyholder dividends) for
Commercial Lines in the second quarter of 1997 was 110.0% compared to 171.1% in
the second quarter of 1996.
The decreases in the second quarter of 1997 statutory and GAAP combined ratios
for Commercial Lines were primarily attributable to the 1996 charges related to
the acquisition and integration of Aetna P&C. Excluding these amounts the
statutory and GAAP combined ratios for the second quarter of 1996 would have
been 111.5% and 114.3%, respectively. The decrease in the second quarter of 1996
statutory and GAAP combined ratios compared to the second quarter of 1996
statutory and GAAP combined ratios excluding acquisition-related charges was due
to slightly lower losses and loss adjustment expenses in the second quarter of
1997 compared to the second quarter of 1996 as well as expense reductions in
1997.
16
The GAAP combined ratio for Commercial Lines differs from the statutory combined
ratio primarily due to the deferral and amortization of certain expenses for
GAAP reporting purposes only. In addition, the purchase accounting adjustments
recorded for GAAP in connection with the Aetna P&C acquisition resulted in a
statutory charge in 1996.
Personal Lines
Earnings before portfolio gains/losses increased 57% to $101 million in the
second quarter of 1997 from $65 million in the second quarter of 1996. Results
for the second quarter of 1997 reflect the impact of catastrophe losses, after
taxes and reinsurance, of $4.5 million compared to $14.0 million in the 1996
period. The strong operating earnings reflect a low level of catastrophe losses
during the quarter, lower expenses and the continued favorable prior year
reserve development in personal automobile lines.
Net written premiums in the second quarter of 1997 were $744.9 million, compared
to $675.8 million in the second quarter of 1996. This increase reflects lower
ceded premiums due to a change in a reinsurance arrangement in January 1997,
growth in target markets served by independent agents and growth in the affinity
marketing and TRAVELERS SECURE(R) programs.
Business retention continued to be strong.
The statutory combined ratio for Personal Lines in the second quarter of 1997
was 92.8% compared to 100.1% in the second quarter of 1996. The GAAP combined
ratio for Personal Lines in the second quarter of 1997 was 92.1% compared to
102.1% in the second quarter of 1996. The decrease in the combined ratios in
1997 was due to the favorable prior year reserve development in personal
automobile lines, lower catastrophe losses and expense reductions.
Financing Costs and Other
The primary component of net income (loss) in the second quarter of 1997 was
interest expense of $26 million after tax, compared to $25 million after tax in
the second quarter of 1996, reflecting financing costs associated with the
acquisition of Aetna P&C.
Corporate and Other
Three Months Ended June 30,
-------------------------------------------
(millions) 1997 1996
- --------------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- --------------------------------------------------------------------------------
Net expenses (1) - $(46) - $(75)
Net gain (loss) on sale of
subsidiaries and affiliates - - - 384
- --------------------------------------------------------------------------------
Total Corporate and Other $22 $(46) $3 $309
================================================================================
(1) Net income (expense) includes $15 million of reported investment portfolio
losses in 1996.
Net corporate expenses (before reported portfolio losses) were down in the
second quarter of 1997 compared to the second quarter of 1996, reflecting higher
income from corporate investments and lower borrowing costs.
17
Discontinued Operations
For the quarter ended June 30, 1996, discontinued operations had a loss from
operations of Basis of $7 million.
Segment Results for the Six Months Ended June 30, 1997 and 1996
The overall operating trends for the six months ended June 30, 1997 and 1996
were substantially the same as those of the second quarter periods except as
noted below.
Investment Services
Six Months Ended June 30,
----------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------
(millions) Revenues Net income Revenues Net income
- -----------------------------------------------------------------------------
Salomon Smith Barney (1) $10,187 $864 $9,743 $1,062
=============================================================================
(1) Excludes results of Basis Petroleum which are classified as discontinued
operations.
Salomon Smith Barney Revenues
Six Months Ended June 30,
-------------------------
(millions) 1997 1996
- --------------------------------------------------------------------------------
Commissions $1,402 $1,365
Asset management and administration fees 788 668
Investment banking 959 1,007
Principal transactions 1,471 1,800
Interest income, net* 752 802
Other income 68 73
- --------------------------------------------------------------------------------
Net revenues* $5,440 $5,715
================================================================================
* Net of interest expense of $4.747 billion and $4.028 billion in 1997 and
1996, respectively. Revenues included in the condensed consolidated
statement of income are before deductions for interest expense.
For the six months ended June 30, 1997 Salomon Smith Barney reported net income
from continuing operations of $864 million, a decline from the $1.062 billion
reported for the six months ended June 30, 1996. Revenues, net of interest
expense, declined to $5.440 billion in the 1997 period compared to $5.715
billion in the 1996 period. Commission revenues were $1.402 billion in the 1997
period compared to $1.365 billion in the 1996 period. Investment banking
revenues declined to $959 million in the 1997 period compared to $1.007 billion
in the 1996 period. Principal transaction revenues declined to $1.471 billion in
the 1997 period compared to $1.800 billion in the 1996 period as a result of
lower fixed income proprietary trading revenues and revenues from physical
commodities trading, partially offset by an increase in equity proprietary
trading revenues. Asset management and administration fees increased 18% to $788
million in the 1997 period compared to $668 million in the 1996 period. Net
interest and dividends declined to $752 million in the 1997 period compared to
$802 million in the 1996 period.
Compensation and benefits expense, as a percentage of net revenues, for the 1997
period was 54% compared to 51% in the 1996 period and non-compensation expense
as a percentage of net revenues was 20% in the 1997 period compared to 18% in
the 1996 period.
18
Consumer Finance Services
Six Months Ended June 30,
----------------------------------------------
(millions) 1997 1996
- ----------------------------------------------------------------------------
Revenues Net income Revenues Net income
- ----------------------------------------------------------------------------
Consumer Finance Services(1) $757 $101 $696 $117
============================================================================
(1) Net income in 1996 includes a portion of the gain ($1 million) from the
disposition of RCM.
During the first six months of 1997 the average yield, at 14.53%, was lower than
the 15.41% in the first six months of 1996, mainly because of a shift in the
portfolio mix toward lower risk/lower margin real estate loans. The charge-off
rate remained relatively flat at 2.88% for the first six months of 1997,
compared to the comparable 1996 period's rate of 2.89%.
Life Insurance Services
Six Months Ended June 30,
---------------------------------------------
1997 1996
---------------------------------------------
(millions) Revenues Net income Revenues Net income
- -------------------------------------------------------------------------------
Travelers Life and Annuity(1) $1,284 $220 $1,126 $163
Primerica Financial Services(2) 750 160 709 141
- -------------------------------------------------------------------------------
Total Life Insurance Services $2,034 $380 $1,835 $304
===============================================================================
(1) Net income includes $14 million of reported investment portfolio gains in
1997 and $9 million of reported investment portfolio losses in 1996.
(2) Net income in 1996 includes $6 million of reported investment portfolio
gains and a portion of the gain ($4 million) from the disposition of RCM.
Travelers Life and Annuity
Deferred annuity net written premiums and deposits were $1.201 billion in the
first six months of 1997, up 20% from $997.2 million in the first six months of
1996.
Payout and group annuity net premiums and deposits (excluding those of
affiliates) totaled $1.279 billion in the first six months of 1997, up 86% from
$688.9 million in the first six months of 1996.
Face amount of individual life insurance issued during the first six months of
1997 was $3.0 billion, compared to $3.2 billion in the first six months of 1996.
Direct written premiums and deposits (excluding single premium policies) for
individual life insurance were $139.7 million in the first six months of 1997,
even with the first six months of 1996.
Net written premiums for the growing long-term care insurance line were $85.8
million in the first six months of 1997, compared to $58.5 million in the first
six months of 1996.
Primerica Financial Services
Face amount of new term life insurance sales was $26.1 billion in the first six
months of 1997, compared to $26.3 billion in the comparable 1996 period. Sales
of mutual funds (at net asset value)
19
were $1.391 billion for the first six months of 1997, a 16% increase over the
comparable 1996 period sales of $1.204 billion.
Property & Casualty Insurance Services
Six Months Ended June 30,
-------------------------------------
(millions) 1997 1996
- -----------------------------------------------------------------------------
Net Net
income income
Revenues (loss) Revenues (loss)
- -----------------------------------------------------------------------------
Commercial Lines(1) (2) $3,236 $410 $2,250 $(143)
Personal Lines(1) (3) 1,620 202 1,123 73
Financing costs and other (1) 6 (63) 7 (30)
Minority interest - (98) - 44
=============================================================================
Total Property & Casualty Insurance $4,862 $451 $3,380 $ (56)
Services
=============================================================================
(1) Before minority interest.
(2) Net income in 1997 includes $8 million of reported investment portfolio
gains. Net income in 1996 includes $11 million of reported investment
portfolio losses and $383 million of charges related to the acquisition
and integration of Aetna P&C.
(3) Net income includes $7 million and $6 million of reported investment
portfolio losses in 1997 and 1996, respectively, and $8 million of charges
in 1996 related to the acquisition and integration of Aetna P&C.
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.
Commercial Lines
Commercial Lines net written premiums for the first six months of 1997 totaled
$2.479 billion, up $739 million from $1.740 billion for the first six months of
1996 (excluding an adjustment associated with a reinsurance transaction in
1996). This premium increase reflects the inclusion in 1997 of Aetna P&C for the
entire six months compared to only the second quarter of 1996 and a $142 million
increase due to a change to conform the Aetna P&C method with Travelers
Indemnity and its subsidiaries' (Travelers P&C) method of recording certain net
written premiums within Commercial Lines. Offsetting these increases in part
were the highly competitive conditions in the marketplace and the Company's
continuing focus on writing profitable business.
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 six months of 1997 totaled $2.479 billion, compared to $2.345 billion
for the first six months of 1996. This increase was primarily attributable to
the change to conform the Aetna P&C method with the Travelers P&C method of
recording net written premiums.
Fee income for the first six months of 1997 was $188.4 million compared to
$193.7 million in the first six months of 1996.
20
National Accounts net written premiums of $371.3 million for the first six
months of 1997 decreased $4.2 million from the first six months of 1996
(excluding an adjustment associated with a reinsurance transaction in 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
$371.3 million for the first six months of 1997 compared to $446.3 million for
the first six months of 1996. National Accounts new business in the first six
months of 1997 was virtually the same as in the first six months of 1996.
National Accounts business retention ratio was significantly higher in the first
six months of 1997 compared to the first six months of 1996, reflecting an
unusually low retention ratio in the first quarter of 1996.
Commercial Accounts net written premiums were $1.014 billion in the first six
months of 1997 compared to $582.1 million in the first six months of 1996. 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 $1.014
billion in the first six months of 1997 compared to $821.4 million in the first
six months of 1996. This increase reflected $127 million due to the change to
conform the Aetna P&C method with the Travelers P&C method of recording certain
net written premiums and the continued growth through programs designed to
leverage underwriting experience in specific industries, partially offset by the
competitive marketplace. For the first six months of 1997, new premium business
in Commercial Accounts has significantly improved compared to the first six
months of 1996, reflecting continued growth in programs designed to leverage
underwriting experience in specific industries. The Commercial Accounts business
retention ratio in the first six months of 1997 has significantly improved
compared to the first six months of 1996.
Select Accounts net written premiums were $733.3 million in the first six months
of 1997 compared to $509.5 million in the first six months 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 $733.3
million for the first six months of 1997 were $2.7 million above the first six
months of 1996 premium levels. This increase reflected $15 million due to the
change to conform the Aetna P&C method with Travelers P&C method of recording
certain net written premiums, mostly offset by a decrease due to the competitive
marketplace. New premium business in Select Accounts was moderately higher in
the first six months of 1997 compared to the first six months of 1996,
reflecting an increase due to the acquisition of Aetna P&C, partially offset by
a decrease due to the competitive marketplace. The Select Accounts business
retention ratio was moderately higher in the first six months of 1997 compared
to the first six months of 1996, reflecting the broader industry and product
line expertise of the combined company.
Specialty Accounts net written premiums were $361.0 million in the first six
months of 1997 compared to $273.3 million in the first six months of 1996. 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 $361.0
million in the first six months of 1997 compared to $347.2 million in the first
six months of 1996. The growth is primarily attributable to increased writings
of its excess and surplus lines business.
Catastrophe losses, net of taxes and reinsurance, were $5.1 million and $6.4
million in the first six months of 1997 and 1996, respectively. The 1997
catastrophe losses were primarily due to tornadoes in the Midwest in the first
quarter. The 1996 catastrophe losses were primarily due to winter storms in the
first quarter.
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the first six months of 1997 was 109.3% compared to 149.2% in the first
six months of 1996. The GAAP combined ratio (before policyholder dividends) for
Commercial Lines in the first six months of 1997 was 108.5% compared to 148.6%
in the first six months of 1996.
The decreases in the first six months of 1997 statutory and GAAP combined ratios
for Commercial Lines compared to the first six months of 1996 were primarily
attributable to the 1996 charges related to the acquisition and integration of
Aetna P&C. Excluding these amounts, the statutory and GAAP combined ratios for
the six months ended June 30, 1996 would have been 110.5% and 111.8%,
respectively. The decrease in the first six months of 1997 statutory and GAAP
combined ratios compared to the first six months of 1996 statutory and GAAP
combined ratios excluding acquisition-related charges was generally due to the
inclusion in 1997 of Aetna P&C's results for the entire six months compared to
only the second quarter in 1996. Aetna P&C has historically had a higher
underwriting expense ratio, partially offset by a lower loss ratio, which
reflects the mix of business including the favorable effect of the lower loss
ratio of the Bond business.
Personal Lines
Net written premiums in the first six months of 1997 were $1.520 billion,
compared to $1.017 billion in the first six months 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), Personal Lines net written premiums for the first six months of 1997
totaled $1.520 billion compared to $1.333 billion for the first six months of
1996.
The statutory combined ratio for Personal Lines in the first six months of 1997
was 91.5% compared to 101.9% in the first six months of 1996. The GAAP combined
ratio for Personal Lines in the first six months of 1997 was 90.4% compared to
102.6% in the first six months of 1996. The decrease in the combined ratios in
1997 was due to the favorable prior year reserve development in personal
automobile lines, lower catastrophe losses and expense reductions.
Financing Costs and Other
The primary component of net income (loss) for the first six months of 1997 was
interest expense of $52 million after tax, compared to $25 million after tax in
the first six months of 1996, reflecting financing costs associated with the
acquisition of Aetna P&C in the second quarter of 1996.
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 June 30, 1997, approximately 15% of the net
environmental reserves (i.e., approximately $182 million) are case reserves for
resolved claims. The balance, approximately 85% of the net environmental
reserves (i.e., approximately $1.041 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 six months ended June 30, 1997 and 1996.
22
Environmental Losses Six Months Ended Six Months Ended
(millions) June 30, 1997 June 30, 1996
-------------------- --------------------
Beginning reserves:
Direct $ 1,369 $ 454
Ceded (127) (50)
------- -------
Net 1,242 404
Acquisition of Aetna P&C:
Direct - 938
Ceded - (24)
Incurred losses and loss expenses:
Direct 38 38
Ceded (2) (2)
Losses paid:
Direct 100 63
Ceded (45) (20)
Ending reserves:
Direct 1,307 1,367
Ceded (84) (56)
------- -------
Net $ 1,223 $ 1,311
======= =======
Asbestos Claims
At June 30, 1997, approximately 24% of the net asbestos reserves (i.e.,
approximately $257 million) are for pending asbestos claims. The balance,
approximately 76% (i.e., approximately $808 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 six months ended June 30, 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 Six Months Ended Six Months Ended
(millions) June 30, 1997 June 30, 1996
-------------------- --------------------
Beginning reserves:
Direct $1,443 $695
Ceded (370) (293)
------ ----
Net 1,073 402
Acquisition of Aetna P&C:
Direct - 776
Ceded - (116)
Incurred losses and loss expenses:
Direct 37 49
Ceded (14) 16
Losses paid:
Direct 89 65
Ceded (58) (36)
Ending reserves:
Direct 1,391 1,455
Ceded (326) (357)
------ ------
Net $1,065 $1,098
====== ======
23
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 June 30, 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 continue 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) Claims
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 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 June 30, 1997, approximately 18% of the net CIOTA reserves (i.e.,
approximately $204 million) are for pending CIOTA claims. The balance,
approximately 82% (i.e., approximately $901 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 six months ended June 30, 1997 and 1996. In general, the
Company posts case reserves for pending CIOTA claims within approximately 30
business days of receipt of such claims.
24
CIOTA Losses Six Months Ended Six Months Ended
(millions) June 30, 1997 June 30, 1996
-------------------- --------------------
Beginning reserves:
Direct $1,560 $ 374
Ceded (446) -
------ ------
Net 1,114 374
Acquisition of Aetna P&C:
Direct - 709
Ceded - (293)
Incurred losses and loss expenses:
Direct 12 544
Ceded - (160)
Losses paid:
Direct 36 36
Ceded (15) (4)
Ending reserves:
Direct 1,536 1,591
Ceded (431) (449)
------ ------
Net $1,105 $1,142
====== ======
Corporate and Other
Six Months Ended June 30,
---------------------------------------------
(millions) 1997 1996
- --------------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- --------------------------------------------------------------------------------
Net expenses (1) - $(98) - $(107)
Net gain (loss) on sale of
subsidiaries and - - - 384
affiliates
- --------------------------------------------------------------------------------
Total Corporate and Other $44 $(98) $103 $ 277
================================================================================
(1) Net income (expense) includes $5 million of reported investment portfolio
losses in 1996.
Net corporate expenses (before reported portfolio losses) were down in the first
six months of 1997 compared to the first six months of 1996 reflecting higher
income from corporate investments and lower borrowing costs.
Discontinued Operations
For the six months ended June 30, 1996, discontinued operations had a loss from
operations of Basis of $41 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
25
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 June 30, 1997 this requirement was exceeded by approximately $5.2
billion. At June 30, 1997, there were no borrowings outstanding under this
facility.
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 or base rate) and compensates the banks for the
facility through commitment fees.
In June 1997, the Company sold in a public offering 8.0 million depositary
shares, each representing one-fifth of a share of 6.365% Cumulative Preferred
Stock, Series F (Series F Preferred Stock) at an offering price of $50 per
depositary share for an aggregate principal amount of $400 million. The Series F
Preferred Stock has cumulative dividends payable quarterly commencing September
1, 1997 and a liquidation preference equivalent to $50 per depositary share plus
accrued and accumulated unpaid dividends. On or after June 16, 2007, the Company
may redeem the Series F Preferred Stock, in whole or in part, at any time at a
redemption price of $50 per depositary share plus dividends accrued and unpaid
to the redemption date.
In July 1997, the Company sold in a public offering 4.0 million depositary
shares, each representing one-fifth of a share of 6.213% Cumulative Preferred
Stock, Series G (Series G Preferred Stock) at an offering price of $50 per
depositary share for an aggregate principal amount of $200 million. The Series G
Preferred Stock has cumulative dividends payable quarterly commencing September
1, 1997 and a liquidation preference equivalent to $50 per depositary share plus
accrued and accumulated unpaid dividends. On or after July 11, 2007, the Company
may redeem the Series G Preferred Stock, in whole or in part, at any time at a
redemption price of $50 per depositary share plus dividends accrued and unpaid
to the redemption date.
On July 1, 1997 the Company redeemed all of the 7.5 million outstanding shares
(15 million depositary shares) of its 9.25% Preferred Stock, Series D (Series D
Preferred Stock). The aggregate principal amount of Series D Preferred Stock
outstanding on June 30, 1997 was $375 million. All of the outstanding shares of
the Series D Preferred Stock were redeemed at $50 per share ($25 per depositary
share).
On July 28, 1997 the Company redeemed all of the 1.2 million outstanding shares
(12 million depositary shares) of its 8.125% Cumulative Preferred Stock, Series
A (Series A Preferred Stock). The aggregate principal amount of Series A
Preferred Stock outstanding as of June 30, 1997 was $300 million. All of the
outstanding shares of the Series A Preferred Stock were redeemed at $250 per
share ($25 per depositary share), plus accrued and unpaid dividends through July
28, 1997.
26
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 various interest rate options (LIBOR or base rate)
and compensates the banks for the facility through commitments fees. Under this
facility TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At June 30, 1997, this
requirement was exceeded by approximately $3.0 billion. At June 30, 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 received $145
million of dividends from its insurance subsidiaries during the first six months
of 1997 and received an additional $100 million of dividends on July 1, 1997.
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. CCC has unused credit
availability of $4.250 billion under five-year revolving credit facilities,
(including the $850 million referred to above) and $1.0 billion under a 364-day
facility. 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 June 30, 1997, CCC would have been able to remit $313 million to
its parent under its most restrictive covenants.
Salomon Smith Barney
Salomon Smith Barney's total assets were $292 billion at June 30, 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 $2.0 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 June 30, 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.
27
Unsecured term debt is a significant component of Salomon Smith Barney's
long-term capital. Term debt totaled $18.8 billion at June 30, 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.
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. It's 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 June 30, 1997 and December 31, 1996 was 24.2x and 20.7x, respectively.
The Travelers Insurance Company (TIC)
At June 30, 1997, TIC had $23.3 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 $10.9 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 $1.7 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 4.8%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$3.9 billion of liabilities is surrenderable without charge. More than 17% 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 $200
million has been paid during the first six months of 1997.
28