Exhibit 99.04
Travelers Group Inc.
Index to Supplemental Condensed Consolidated Financial Statements
(unaudited) For the Three Months and Nine Months Ended September 30, 1997
Supplemental Financial Statements (unaudited): Page No.
--------
Supplemental Condensed Consolidated Statement of Income
(Unaudited) - Three and Nine Months Ended September 30,
1997 and 1996 2
Supplemental Condensed Consolidated Statement of Financial
Position - September 30, 1997 (Unaudited) and December
31, 1996 3
Supplemental Condensed Consolidated Statement of Changes in
Stockholders' Equity (Unaudited) - Nine Months Ended
September 30, 1997 4
Supplemental Condensed Consolidated Statement of Cash Flows
(Unaudited) - Nine Months Ended September 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 11
1
Travelers Group Inc. and Subsidiaries
Supplemental Condensed Consolidated Statement of Income (Unaudited)
(In millions of dollars, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------
Revenues
Insurance premiums $ 2,226 $ 2,197 $ 6,670 $ 5,513
Commissions and fees 1,389 1,058 3,767 3,438
Interest and dividends 4,274 3,366 11,819 9,831
Finance related interest and other charges 372 292 999 863
Principal transactions 790 564 2,261 2,364
Asset management and administration fees 448 353 1,236 1,021
Other income 462 266 1,093 823
- ---------------------------------------------------------------------------------------------
Total revenues 9,961 8,096 27,845 23,853
- ---------------------------------------------------------------------------------------------
Expenses
Policyholder benefits and claims 1,898 1,947 5,709 5,537
Non-insurance compensation and benefits 1,703 1,343 4,762 4,368
Insurance underwriting, acquisition and operating 820 799 2,424 2,166
Interest 3,080 2,228 8,250 6,603
Provision for consumer finance credit losses 63 60 208 188
Other operating 715 608 2,014 1,851
- ---------------------------------------------------------------------------------------------
Total expenses 8,279 6,985 23,367 20,713
- ---------------------------------------------------------------------------------------------
Gain (loss) on sale of subsidiaries and affiliates -- 48 -- 445
- ---------------------------------------------------------------------------------------------
Income before income taxes and minority interest 1,682 1,159 4,478 3,585
Provision for income taxes 598 414 1,598 1,180
Minority interest, net of income taxes 55 44 153 --
- ---------------------------------------------------------------------------------------------
Income from continuing operations 1,029 701 2,727 2,405
- ---------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes:
Income (loss) from operations -- (28) -- (69)
Gain on disposition -- 31 -- 31
- ---------------------------------------------------------------------------------------------
Net income $ 1,029 $ 704 $ 2,727 $ 2,367
=============================================================================================
Net income per share of common stock
and common stock equivalents
Continuing operations $ 0.86 $ 0.58 $ 2.27 $ 2.01
Discontinued operations -- -- -- (0.04)
- ---------------------------------------------------------------------------------------------
Net income $ 0.86 $ 0.58 $ 2.27 $ 1.97
=============================================================================================
Weighted average number of common shares outstanding
and common stock equivalents 1,153.1 1,137.2 1,153.7 1,135.2
=============================================================================================
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)
September 30, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------
Assets (Unaudited)
Cash and cash equivalents
(including $1,718 and $1,446 segregated under federal and other regulations or deposited
with clearing organizations) $ 3,294 $ 3,260
Investments and real estate held for sale:
Fixed maturities, primarily available for sale at market value (amortized cost -
$46,376 and $43,277) 47,874 43,998
Equity securities, at market (cost - $1,492 and $1,113) 1,609 1,157
Mortgage loans 3,662 3,812
Real estate held for sale 491 459
Policy loans 1,875 1,910
Short-term and other 4,159 5,173
- ------------------------------------------------------------------------------------------------------------------------------
Total investments and real estate held for sale 59,670 56,509
- ------------------------------------------------------------------------------------------------------------------------------
Securities borrowed or purchased under agreements to resell 122,216 97,985
Brokerage receivables 14,399 11,592
Trading securities and commodities owned, at market value 151,741 126,568
Net consumer finance receivables 10,401 7,885
Reinsurance recoverables 9,838 10,234
Value of insurance in force and deferred policy acquisition costs 2,752 2,563
Cost of acquired businesses in excess of net assets 3,487 3,060
Separate and variable accounts 10,997 9,023
Other receivables 5,145 4,869
Other assets 10,724 12,400
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 404,664 $ 345,948
==============================================================================================================================
Liabilities
Investment banking and brokerage borrowings $ 11,161 $ 10,020
Short-term borrowings 3,284 1,557
Long-term debt 29,006 24,696
Securities loaned or sold under agreements to repurchase 149,107 103,572
Brokerage payables 13,291 10,019
Trading securities and commodities sold not yet purchased, at market value 87,398 92,032
Contractholder funds 14,590 13,621
Insurance policy and claims reserves 44,004 43,944
Separate and variable accounts 10,987 8,949
Accounts payable and other liabilities 18,760 16,802
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 381,588 325,212
- ------------------------------------------------------------------------------------------------------------------------------
ESOP Preferred stock -- Series C (net of note guarantee of $17 and $35) 137 129
- ------------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock -- Series I 420 420
- ------------------------------------------------------------------------------------------------------------------------------
TRV-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debt securities of TRV 1,000 1,000
- ------------------------------------------------------------------------------------------------------------------------------
TAP-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debt securities of TAP 900 900
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Smith Barney-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debt securities of Salomon Smith Barney 345 345
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, at aggregate liquidation value 1,250 1,125
Common stock ($.01 par value; authorized shares: 1.5 billion;
issued shares: 1997 - 1,385,530,017 shares and 1996 - 1,384,707,342 shares) 14 14
Additional paid-in capital 8,342 7,806
Retained earnings 15,218 12,934
Treasury stock, at cost (1997 - 243,575,170 shares and 1996 - 243,500,547 shares) (5,042) (4,123)
Unrealized gain (loss) on investment securities 930 469
Other, principally unearned compensation (438) (283)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 20,274 17,942
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 404,664 $ 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)
Nine months ended September 30, 1997 Amount Shares
- -------------------------------------------------------------------------------------------------------
Preferred stock, at aggregate liquidation value (in thousands)
Balance, beginning of year $ 1,125 9,600
Redemption of preferred stock (675) (8,700)
Issuance of preferred stock 800 3,200
- -------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,250 4,100
=======================================================================================================
Common stock and additional paid-in capital
Balance, beginning of year $ 7,820 1,384,707
Issuance of shares pursuant to employee benefit plans 543
Exercise of common stock warrants 10 806
Conversion of notes -- 17
Cost of issuance of preferred stock (17)
- -------------------------------------------------------------------------------------------------------
Balance, end of period 8,356 1,385,530
- -------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 12,934
Net income 2,727
Common dividends (339)
Preferred dividends (104)
- ------------------------------------------------------------------------------------------
Balance, end of period 15,218
- ------------------------------------------------------------------------------------------
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 (54) 23,129
Treasury stock acquired (865) (23,204)
- -------------------------------------------------------------------------------------------------------
Balance, end of period (5,042) (243,575)
- -------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on investment securities
Balance, beginning of year 469
Net change in unrealized gains and losses on investment securities, net of tax 461
- ------------------------------------------------------------------------------------------
Balance, end of period 930
- ------------------------------------------------------------------------------------------
Other, principally unearned compensation
Balance, beginning of year (283)
Issuance of restricted stock, net of amortization (147)
Net translation adjustments, net of tax (6)
Other (2)
- ------------------------------------------------------------------------------------------
Balance, end of period (438)
- ------------------------------------------------------------------------------------------
Total common stockholders' equity and common shares outstanding $ 19,024 1,141,955
=======================================================================================================
Total stockholders' equity $ 20,274
==========================================================================================
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)
Nine Months ended September 30, 1997 1996
- -------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ (1,359) $ 4,086
- -------------------------------------------------------------------------------
Cash flows from investing activities
Consumer loans originated or purchased (3,552) (2,453)
Consumer loans repaid or sold 2,233 1,898
Purchases of fixed maturities and equity securities (19,516) (23,764)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities 14,330 19,785
Mortgage loans 312 201
Real estate and real estate joint ventures 387 180
Proceeds from maturities of investments:
Fixed maturities 2,572 2,483
Mortgage loans 507 570
Other investments, primarily short-term, net (553) (117)
Assets securing collaterialized mortgage obligations 131 456
Business acquisition (1,618) (4,160)
Business divestments 365 82
Other, net (498) (144)
- -------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (4,900) (4,983)
- -------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (443) (395)
Subsidiary's sale of Class A common stock -- 1,453
Issuance of preferred stock 783 250
Redemption of preferred stock (675) (112)
Issuance of redeemable preferred stock of subsidiaries -- 1,245
Treasury stock acquired (865) (481)
Stock tendered for payment of withholding taxes (280) (146)
Issuance of long-term debt 8,149 4,504
Payments and redemptions of long-term debt (3,577) (3,176)
Net change in short-term borrowings (including investment
banking and brokerage borrowings) 2,862 (1,194)
Collateralized mortgage obligations (129) (380)
Contractholder fund deposits 2,450 1,329
Contractholder fund withdrawals (1,991) (2,194)
Other, net 9 (42)
- -------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,293 661
- -------------------------------------------------------------------------------
Change in cash and cash equivalents 34 (236)
Cash and cash equivalents at beginning of period 3,260 3,491
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,294 $ 3,255
- -------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Income taxes paid $ 1,093 $ 1,302
===============================================================================
Supplemental disclosure of business acquisitions:
Assets and liabilities of business acquired:
Invested assets $ -- $ 13,969
Net consumer finance receivables 1,156 --
Reinsurance recoverables and other assets 482 10,386
Insurance policy and claim reserves -- (18,302)
Other liabilities (20) (1,893)
- -------------------------------------------------------------------------------
Cash payment related to business acquisition $ 1,618 $ 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 September 30, 1997 and for the three-month and nine-month periods
ended September 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
Nine Months Ended
September 30, 1996*
-------------------
(in millions, except per share data)
Revenues $25,453
=======
Income from continuing operations $ 2,167
=======
Net income $ 2,129
=======
Net income per common share:
Continuing operations $ 1.80
=======
Net income $ 1.76
=======
* 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) September 30, 1997 December 31, 1996
---------- ------------------ -----------------
Commercial paper $ 5,409 $ 4,133
Bank loans and other borrowings 5,752 5,887
------- -------
$11,161 $10,020
======= =======
Investment banking and brokerage borrowings are short term in nature and
include commercial paper and bank loans and other borrowings used to
finance Salomon Smith Barney's operations, including the securities
settlement process. Outstanding bank borrowings include both U.S. dollar
and non-U.S. dollar denominated loans. The non-U.S. dollar loans are
denominated in multiple currencies including Japanese yen, German mark and
U.K. sterling. All commercial paper outstanding at September 30, 1997 and
December 31 1996 was U.S. dollar denominated.
7
Short-term borrowings consisted of commercial paper outstanding as
follows:
(millions) September 30, 1997 December 31, 1996
---------- ------------------ -----------------
Commercial Credit Company $3,157 $1,482
Travelers Property Casualty Corp. 127 25
The Travelers Insurance Company -- 50
====== ======
$3,284 $1,557
====== ======
Long-term debt, including its current portion, consisted of the following:
(millions) September 30, 1997 December 31, 1996
---------- ------------------ -----------------
Travelers Group Inc. $ 1,696 $ 1,903
Commercial Credit Company 6,300 5,750
Salomon Smith Barney Holdings Inc. 19,717 15,738
Travelers Property Casualty Corp. 1,249 1,249
The Travelers Insurance Group Inc. 44 56
------- -------
$29,006 $24,696
======= =======
TRV, Commercial Credit Company (CCC), TAP and The Travelers Insurance
Company (TIC) issue commercial paper directly to investors. Each maintains
unused credit availability under its respective bank lines of credit at
least equal to the amount of its outstanding commercial paper. Each may
borrow under its revolving credit facilities at various interest rate
options (LIBOR, CD, base rate or money market) and compensates the banks
for the facilities through commitment fees.
TRV, CCC and 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, $500 million is allocated to TRV, $450 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 September 30, 1997, this requirement was exceeded by approximately $5.3
billion. At September 30, 1997, there were no borrowings outstanding under
this facility.
CCC also has committed and available revolving credit facilities on a
stand-alone basis of $4.4 billion, of which $3.4 billion expires in 2002
and $1.0 billion expires in 1998.
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 September 30, 1997, CCC would have been able to
remit $562 million to its parent under its most restrictive covenants.
Smith Barney has a $1.250 billion revolving credit agreement with a bank
syndicate that extends through May 2000, and has a $750 million, 364-day
revolving credit agreement that extends through May 1998. Smith Barney 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. At September 30, 1997, there were no
borrowings outstanding under either facility.
Salomon Brothers Inc (SBI), an indirect wholly owned subsidiary of Salomon
Smith Barney, has a $2.1 billion committed secured standby bank credit
facility for financing securities positions. The facility contains certain
restrictive covenants that require, among other things, that SBI maintain
minimum levels of excess net capital and net worth, as defined. SBI's
excess net capital exceeded the minimum required under the facility by
$587 million and SBI's net worth exceeded the minimum amount required by
$496 million at December 31, 1996. In 1996, Salomon Brothers International
Limited (SBIL), an indirect wholly owned subsidiary of Salomon Smith
Barney,
8
entered into a $1.0 billion committed securities repurchase facility. The
facility is subject to restrictive covenants including a requirement that
SBIL maintain minimum levels of tangible net worth and excess financial
resources, as defined. At December 31, 1996, SBIL was in compliance with
all covenants related to this facility. In 1996, Phibro entered into a
$500 million unsecured committed revolving line of credit. This facility
requires Phibro to maintain minimum levels of capital and net working
capital as defined. Phibro exceeded these minimums at December 31, 1996.
At September 30, 1997, there were no outstanding borrowings under any of
these facilities.
TAP has a five-year revolving credit facility in the amount of $500
million with a syndicate of banks that expires in December 2001. Under
this facility TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At September 30, 1997,
this requirement was exceeded by approximately $3.1 billion. At September
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 $245 million of dividends from its
insurance subsidiaries during the first nine months of 1997.
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 $300 million has been paid during the first nine months
of 1997.
5. Stockholders' Equity
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.
In September 1997, the Company sold in a public offering 4.0 million
depositary shares, each representing one-fifth of a share of 6.231%
Cumulative Preferred Stock, Series H (Series H Preferred Stock), at an
offering price of $50 per depositary share for an aggregate principal
amount of $200 million. The Series H Preferred Stock has cumulative
dividends payable quarterly commencing November 1, 1997 and a liquidation
preference equivalent to $50 per depositary share plus accrued and
accumulated unpaid dividends. On or after September 8, 2007, the Company
may redeem the Series H 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 October 1997, the Company sold in a public offering 4.0 million
depositary shares, each representing one-fifth of a share of 5.864%
Cumulative Preferred Stock, Series M (Series M Preferred Stock), at an
offering price of $50 per depositary share for an aggregate principal
amount of $200 million. The Series M Preferred
9
Stock has cumulative dividends payable quarterly commencing November 1,
1997 and a liquidation preference equivalent to $50 per depositary share
plus accrued and accumulated unpaid dividends. On or after October 8,
2007, the Company may redeem the Series M 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 October 17, 1997, Berkshire Hathaway, Inc. converted 140,000 shares
($140 million) of Series I cumulative convertible preferred stock into 6.2
million shares of common stock.
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) at $50 per share ($25 per depositary share).
The aggregate amount of Series D Preferred Stock outstanding on the
redemption date was $375 million.
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) at $250 per share ($25 per
depositary share) plus accrued and unpaid dividends to the redemption
date. The aggregate amount of Series A Preferred Stock outstanding on the
redemption date was $300 million.
6. 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 September 30, 1997 and December 31, 1996:
September 30, 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) $ 653.3 $ -- $ -- $ 530.9 $ -- $ --
Other exchange-issued products:
Equity contracts 17.1 .2 .6 13.1 .1 .2
Fixed income contracts 86.8 -- -- 61.2 -- --
Physical commodities-related contracts 4.1 -- -- 5.0 -- --
- --------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 761.3 .2 .6 610.2 .1 .2
- --------------------------------------------------------------------------------------------------------------------------
Over-the-counter swaps, swap options, caps and floors:
Swaps 1,212.7 842.3
Swaps options written 24.8 10.8
Swap options purchased 38.4 24.1
Caps and floors 144.3 117.1
- --------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors 1,420.2 4.7 6.1 994.3 4.2 6.6
- --------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts 125.9 .8 1.0 94.3 .7 .6
Options written 41.1 -- .5 37.1 -- .3
Options purchased 43.6 .5 -- 38.7 .5 --
- --------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 210.6 1.3 1.5 170.1 1.2 .9
- --------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices 61.7 2.2 2.7 45.8 1.1 1.8
Options and forward contracts on fixed-income securities 332.6 .4 .2 202.8 .3 .2
Physical commodities contracts 16.0 .3 .2 22.6 .3 .3
- --------------------------------------------------------------------------------------------------------------------------
Total $ 2,802.4 $ 9.1 $ 11.3 $ 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.
10
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
Consolidated Results of Operations
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------
(In millions, except per share amounts) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------
Revenues $ 9,961 $ 8,096 $ 27,845 $ 23,853
========== ========== ========== ==========
Income from continuing operations $ 1,029 $ 701 $ 2,727 $ 2,405
Income (loss) from discontinued operations -- 3 -- (38)
---------- ---------- ---------- ----------
Net income $ 1,029 $ 704 $ 2,727 $ 2,367
========== ========== ========== ==========
Earnings per share*:
Continuing operations $ 0.86 $ 0.58 $ 2.27 $ 2.01
Discontinued operations -- -- -- (0.04)
---------- ---------- ---------- ----------
Net income $ 0.86 $ 0.58 $ 2.27 $ 1.97
========== ========== ========== ==========
Weighted average number of
common shares outstanding
and common stock equivalents* 1,153.1 1,137.2 1,153.7 1,135.2
========== ========== ========== ==========
* On October 22, 1997 the Board of Directors declared a three-for-two stock
split in the form of a 50% stock dividend 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.
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 - Aetna P&C
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.
11
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 income from continuing operations for the quarter ended September
30, 1997 was $1.029 billion, and includes reported investment portfolio gains of
$82 million after tax and minority interest. This compares with income from
continuing operations of $701 million in the 1996 period, which included
portfolio losses of $15 million after tax and minority interest.
Excluding reported investment portfolio gains/losses, net income for the third
quarter of 1997 was 32% above the comparable period in 1996, primarily
reflecting improved performance at Salomon Smith Barney and increased earnings
from the insurance operations.
Income from continuing operations for the nine months ended September 30, 1997
was $2.727 billion, compared to $2.367 billion in the 1996 period. Included in
the 1997 nine-month period are portfolio gains of $97 million after tax and
minority interest, compared to $33 million after tax and minority interest of
portfolio losses in the 1996 nine-month period. Also included in the 1996
nine-month period are gains of $389 million after tax and minority interest 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 after tax and
minority interest. Excluding these items, net income for the first nine months
of 1997 was 13% above the comparable period in 1996.
Discontinued operations for the third quarter and nine months of 1996 include a
gain of $31 million resulting from the contingency payment received in 1996 from
the 1995 sale of The MetraHealth Companies, Inc. (MetraHealth). Also included in
discontinued operations were losses of $28 million after tax and $69 million
after tax for the three and nine months ended September 30, 1996, respectively,
related to Basis Petroleum, Inc. (Basis). Basis was sold in May of 1997.
The effective income tax rate for the nine months ended September 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 September 30, 1997 and 1996
Investment Services
Three Months Ended September 30,
----------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(millions) Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Salomon Smith Barney (1) $5,874 $509 $4,363 $349
================================================================================
(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 $509
million for the three months ended September 30, 1997, an increase of 46% from
the $349 million reported for the three months ended September 30, 1996.
Revenues, net of interest expense, increased 29% to $3.033 billion in the 1997
quarter compared to $2.333 billion in the 1996 quarter.
12
Salomon Smith Barney Revenues
Three Months Ended September 30,
--------------------------------
(millions) 1997 1996
--------------------------------------------------------------------------
Commissions $ 783 $ 574
Asset management and administration fees 448 353
Investment banking 597 476
Principal transactions 790 564
Interest income, net* 366 340
Other income 49 26
--------------------------------------------------------------------------
Net revenues* $3,033 $2,333
==========================================================================
* Net of interest expense of $2.841 billion and $2.030 billion in 1997 and
1996, respectively. Revenues included in the condensed consolidated
statement of income are before deductions for interest expense.
Commission revenues increased 36% to $783 million in the 1997 quarter up from
the $574 million reported in the 1996 quarter, reflecting strong increases in
listed and over-the-counter securities, as well as mutual fund commissions.
Investment banking revenues increased 25% to $597 million in the 1997 quarter
compared to $476 million in the 1996 quarter as a result of higher underwriting
and advisory fees.
Principal transaction revenues increased 40% to $790 million in the 1997 quarter
compared to $564 million in the 1996 quarter. This increase is the result of
strong results from fixed income proprietary and customer trading revenues as
well as increased results from equity proprietary trading. Equity revenues in
the 1997 quarter included a loss on a risk arbitrage position in British
Telecommunications PLC and MCI Communications Corporation which has largely been
liquidated, and which was partially offset by a gain on the sale of Valero
Energy common stock received earlier this year in connection with the sale of
Basis Petroleum, Inc.
Asset management and administration fees increased 27% to $448 million in the
1997 quarter compared to $353 million in the 1996 quarter. This reflects broad
growth in all recurring fee-based products. At September 30, 1997, internally
managed assets were $155.7 billion and total fee-based assets under management
were $214.1 billion compared to $122.1 billion and $163.4 billion, respectively,
at September 30, 1996.
Net interest and dividends increased 8% to $366 million for the 1997 quarter
from $340 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 declined to 54% from 55% in the 1996 quarter and non-compensation
expense as a percentage of net revenues was 19% in the 1997 quarter compared to
22% in the 1996 quarter. The Company continues to maintain its focus on
controlling fixed expenses.
13
Assets Under Management
At September 30,
-----------------------
(billions) 1997 1996
-----------------------------------------------------------------------------
Salomon Smith Barney $155.7 $122.1
Travelers Life and Annuity (1) 22.9 21.4
-----------------------------------------------------------------------------
Total Assets Under Management $178.6 $143.5
=============================================================================
(1) Part of the Life Insurance Services segment.
Consumer Finance Services
Three Months Ended September 30,
--------------------------------------------------
(millions) 1997 1996
- --------------------------------------------------------------------------------
Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Consumer Finance Services $448 $66 $351 $54
================================================================================
Consumer finance earnings increased 21% to $66 million in the third quarter of
1997, from $54 million in the third quarter of 1996, reflecting strong
receivables growth in all major products, largely as a result of investments
made over the last year in marketing, training and systems enhancements. Net
receivables reached a record $10.7 billion versus $7.7 billion a year ago. This
increase reflects strong internal growth as well as the July 31, 1997
acquisition of Security Pacific Financial Services, which contributed
approximately $1.2 billion in receivables. The Security Pacific acquisition did
not have a material impact on earnings during the third quarter, but is expected
to be accretive beginning in the final quarter of 1997. Integration of the new
unit has proceeded rapidly, with the conversion to the Company's proprietary
systems and the closing of approximately 100 of Security Pacific's original 297
branch offices. As of September 30, 1997, the Company had 1,057 branches, making
it the third largest domestic branch network in the consumer finance industry.
Net receivables increased $1.6 billion, or 18%, during the third quarter of
1997, which included the addition of receivables from Security Pacific as well
as internal growth driven primarily by real estate loans generated through the
Company's branch network and through the sales efforts of Primerica Financial
Services (PFS) representatives.
The average yield, at 14.57%, was lower than the 1996 quarter's yield of 15.17%,
mainly because of a shift in the portfolio mix toward lower risk/lower margin
real estate loans. Sales of real estate-secured ($.M.A.R.T.SM) loans sold
exclusively through PFS continued at record levels during the quarter. Travelers
Bank credit card outstandings were $1.163 billion at September 30, 1997, up from
$832 million at September 30, 1996, as a result of strong credit card
originations.
Delinquencies in excess of 60 days were 2.17% at the end of the third quarter of
1997 compared to 2.14% at the end of the second quarter of 1997 and 2.31% a year
ago. The charge-off rate was 2.50% during the third quarter of 1997, lower than
the 2.82% rate during the second quarter of 1997 and the 2.91% rate during the
third quarter of 1996. Loan losses reflect a short-term benefit related to the
Security Pacific acquisition, largely from the transition of that portfolio to
the Company's charge-off policies. The acquisition also helped to increase the
reserves as a percentage of net receivables to 3.05% at September 30, 1997, up
from 2.91% in the second quarter of 1997 and 2.92% a year ago.
14
As of, or for, the
Three Months Ended September 30,
--------------------------------
1997 1996
--------------------------------
Allowance for credit losses as a % of
net outstandings 3.05% 2.92%
Charge-off rate for the period 2.50% 2.91%
60 + days past due on a contractual
basis as a % of gross consumer
finance receivables at quarter end 2.17% 2.31%
Life Insurance Services
Three Months Ended September 30,
--------------------------------------------
1997 1996
--------------------------------------------
(millions) Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Travelers Life and Annuity (1) (2) $ 716 $ 150 $ 573 $ 78
Primerica Financial Services (3) 385 87 349 68
- --------------------------------------------------------------------------------
Total Life Insurance Services $1,101 $ 237 $ 922 $ 146
================================================================================
(1) Net income includes $43 million of reported investment portfolio gains in
1997 and $13 million of reported investment portfolio losses in 1996.
(2) Excludes results of MetraHealth which are classified as discontinued
operations.
(3) Net income in 1997 includes $2 million of reported investment portfolio
gains.
Travelers Life and Annuity
Travelers Life and Annuity consists of annuity, life and long-term care products
marketed by The Travelers Insurance Company (TIC) and its wholly owned
subsidiary The Travelers Life and Annuity Company (TLAC) 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 reported investment portfolio gains/losses increased 17% to $107
million in the third quarter of 1997 from $91 million in the comparable 1996
period. Higher earnings were largely driven by strong investment income as well
as growth in annuity account balances and long term care insurance. The positive
earnings momentum attributable to strong sales of recently introduced products
- -- including less capital-intensive variable life insurance and annuities --
continues to be 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 September
30, 1997 were $15.6 billion compared to $12.6 billion at September 30, 1996. Net
written premiums and deposits were $574.3 million in the third quarter of 1997,
up 20% from $477.7 million in the third quarter of 1996. Significant sales
through Copeland, Smith Barney and a nationwide network of independent agents
15
reflect the Company's ongoing effort to build market share by strengthening
relationships in key distribution channels.
Payout and group annuity net premiums and deposits (excluding those of
affiliates) totaled $350.5 million in the third quarter of 1997, up 14% from
$308.8 million in the third quarter of 1996, reflecting the strong sales of new
variable rate guaranteed investment contracts. Policyholder account balances and
reserves totaled $11.7 billion at September 30, 1997, slightly ahead of the
September 30, 1996 balances of $11.2 billion.
Direct written premiums and deposits (excluding single premium policies) for
individual life insurance were $71.6 million in the third quarter of 1997,
marginally ahead of the $70.8 million in the third quarter of 1996. Face amount
of individual life insurance issued during the third quarter of 1997 was $1.5
billion, compared to $1.7 billion in the third quarter of 1996, bringing total
life insurance in force to $50.9 billion at September 30, 1997.
Net written premiums for the growing long-term care insurance line were $43.7
million in the third quarter of 1997, compared to $34.4 million in the third
quarter of 1996.
Future sales across all lines of business are expected to benefit from A.M. Best
Company's recent upgrade of The Travelers Insurance Company's rating to A+
(Superior), which rating may be revised or withdrawn at anytime.
Primerica Financial Services
Earnings (before reported investment portfolio gains/losses) for the third
quarter of 1997 increased 25% to $85 million from $68 million in the third
quarter of 1996 reflecting healthy sales of mutual funds, variable annuities and
consumer loans, continued strength in life insurance in force as well as
favorable mortality experience and well disciplined expense management.
Face amount of new term life insurance sales was $13.1 billion in the third
quarter of 1997, compared to $12.6 billion in the third quarter of 1996. Life
insurance in force reached $368.1 billion at September 30, 1997, up from $357.2
billion at September 30, 1996, and continued to reflect good policy persistency
and stable sales levels.
Sales of mutual funds (at net asset value) were $635.9 million for the third
quarter of 1997, a 14% increase over third quarter 1996 sales of $557.3 million.
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 $2.071 billion at the end of the third quarter of 1997, up 9%
from $1.901 billion at the end of the 1997 second quarter and up 48% from $1.404
billion at the end of the 1996 third 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 the number of policies issued
during the third quarter of 1997 grew to 25,941, compared to 10,516 in the third
quarter of 1996. As of September 30, 1997, this product had been introduced in
37 states and was sold through nearly 8,000 agents licensed to sell the product.
16
Property & Casualty Insurance Services
Three Months Ended September 30,
----------------------------------
(millions) 1997 1996
- ----------------------------------------------------------------------------------
Net Net
income income
Revenues (loss) Revenues (loss)
- ----------------------------------------------------------------------------------
Commercial Lines (1) (2) $1,651 $ 255 $1,669 $ 203
Personal Lines (1) (3) 853 101 781 72
Financing costs and other (1) 3 (29) 2 (28)
Minority interest -- (55) -- (44)
- ----------------------------------------------------------------------------------
Total Property & Casualty Insurance Services $2,507 $ 272 $2,452 $ 203
==================================================================================
(1) Before minority interest.
(2) Net income includes $31 million of reported investment portfolio gains in
1997.
(3) Net income includes $6 million and $1 million of reported investment
portfolio gains in 1997 and 1996, respectively.
Commercial Lines
Earnings before reported investment portfolio gains/losses increased 10% to $224
million in the third quarter of 1997 from $203 million in the third quarter of
1996, primarily reflecting strong net investment income, expense savings and
lower catastrophe losses. Catastrophe losses were insignificant in the third
quarter of 1997 compared to $16.2 million (after taxes and reinsurance) in the
third quarter of 1996.
Commercial Lines net written premiums for the third quarter of 1997 totaled
$1.176 billion, down $41 million from $1.217 billion in the third quarter of
1996, reflecting highly competitive conditions in the marketplace and the
Company's continuing selective underwriting.
Fee income for the third quarter of 1997 was $90.4 million compared to $100.6
million in the third 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, and the Company's continued success in
lowering workers' compensation losses of service customers, partially 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 $151.1 million for
the third quarter of 1997 decreased $89.5 million from the third quarter of
1996. This decrease was primarily due to a decrease in the Company's level of
involuntary pool participation as well as National Accounts writing less
premium-based product versus service fee-based product and the competitive
marketplace. National Accounts new business was moderately higher and the
business retention ratio was significantly higher in the third quarter of 1997
when compared to the third quarter of 1996. Both the amount of new business and
the business retention ratio were unusually low in the third quarter of 1996.
Premiums from involuntary pools are not included in the amount of new business
or the business retention ratio.
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. Commercial Accounts net written premiums were $502.3 million
in the third quarter of 1997
17
compared to $450.6 million in the third quarter of 1996. For the third quarter
of 1997, new premium business in Commercial Accounts was significantly higher
than in the third quarter of 1996, reflecting continued growth through programs
designed to leverage underwriting experience in specific industries. The
Commercial Accounts business retention ratio was also significantly higher in
the third quarter of 1997 than in the third quarter of 1996. 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 $353.9 million in the third quarter of
1997, compared to $345.3 million in the third quarter of 1996. New premium
business in Select Accounts was virtually the same in the third quarter of 1997
as in the third quarter of 1996. The Select Accounts business retention ratio
was moderately higher in the third quarter of 1997 than in the third quarter of
1996. Select Accounts continues to benefit from the broader industry and product
line expertise of the combined company, partially offset by the competitive
marketplace.
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
$169.1 million in the third quarter of 1997 compared to $180.0 million in the
third quarter of 1996. This decrease primarily reflects lower directors' and
officers' liability insurance writings due to the termination of an exclusive
arrangement with a managing general agent.
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the third quarter of 1997 was 109.2%, compared to 109.0% in the third
quarter of 1996. The GAAP combined ratio (before policyholder dividends) for
Commercial Lines in the third quarter of 1997 was 108.0%, compared to 108.5% in
the third quarter of 1996. 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.
For purposes of computing GAAP combined ratios, fee income is now reflected 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.
Personal Lines
Earnings before reported investment portfolio gains/losses increased 35% to $95
million in the third quarter of 1997 from $71 million in the third quarter of
1996. Results for the third quarter of 1996 reflect the impact of catastrophe
losses, after taxes and reinsurance, of $19.5 million. The strong operating
earnings reflect no catastrophe losses in 1997 and the continued favorable prior
year reserve development in personal automobile lines.
Net written premiums in the third quarter of 1997 were $774.8 million, compared
to $667.7 million in the third quarter of 1996. This increase reflects growth in
target markets served by independent agents and growth in the affinity marketing
and TRAVELERS SECURE(R) programs, partially offset by reductions due to
catastrophe management strategies. Business retention continued to be strong.
The statutory combined ratio for Personal Lines in the third quarter of 1997 was
93.0%, compared to 102.5% in the third quarter of 1996. The GAAP combined ratio
for Personal Lines in the third quarter of 1997 was 93.2%, compared to 100.9% in
the third quarter of 1996. The decrease in the combined ratios in 1997 was due
to lower catastrophe losses and the favorable prior year reserve development in
personal automobile lines. The GAAP combined ratio for Personal Lines differs
from the statutory
18
combined ratio primarily due to the deferral and amortization of certain
expenses for GAAP reporting purposes only.
Financing Costs and Other
The primary component of net income (loss) in the third quarter of 1997 was
interest expense of $27 million after tax, compared to $26 million after tax in
the third quarter of 1996, reflecting financing costs associated with the
acquisition of Aetna P&C.
Corporate and Other
Three Months Ended September 30,
------------------------------------------------
(millions) 1997 1996
- --------------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- --------------------------------------------------------------------------------
Total Corporate and Other $31 $(55) $8 $(51)
================================================================================
(1) Net income (expense) includes $6 million of reported investment portfolio
gains in 1997 and $3 million of reported investment portfolio losses in
1996.
Net corporate expenses (before reported investment portfolio gains/losses)
increased in the third quarter of 1997 compared to the third quarter of 1996,
however, corporate expenses as a percentage of operating earnings were lower
than a year ago.
Discontinued Operations
For the quarter ended September 30, 1996, discontinued operations had net income
of $3 million, which includes a loss from operations of Basis of $28 million and
a gain of $31 million resulting from the contingency payment received in 1996
from the 1995 sale of Metrahealth.
Segment Results for the Nine Months Ended September 30, 1997 and 1996
The overall operating trends for the nine months ended September 30, 1997 and
1996 were substantially the same as those of the third quarter periods except as
noted below.
Investment Services
Nine Months Ended September 30,
-------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(millions) Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Salomon Smith Barney (1) $16,061 $1,373 $14,106 $1,411
================================================================================
(1) Excludes results of Basis Petroleum which are classified as discontinued
operations.
19
Salomon Smith Barney Revenues
Nine Months Ended September 30,
----------------------------------
(millions) 1997 1996
- --------------------------------------------------------------------------------
Commissions $2,185 $1,939
Asset management and administration fees 1,236 1,021
Investment banking 1,556 1,483
Principal transactions 2,261 2,364
Interest income, net* 1,118 1,142
Other income 117 99
- --------------------------------------------------------------------------------
Net revenues* $8,473 $8,048
================================================================================
* Net of interest expense of $7.588 billion and $6.058 billion in 1997 and
1996, respectively. Revenues included in the condensed consolidated
statement of income are before deductions for interest expense.
For the nine months ended September 30, 1997 Salomon Smith Barney reported net
income from continuing operations of $1.373 billion, a decrease of 3% from the
$1.411 billion reported for the nine months ended September 30, 1996. Revenues,
net of interest expense, increased 5% to $8.473 billion in the 1997 period
compared to $8.048 billion in the 1996 period.
Commission revenues were $2.185 billion in the 1997 period compared to $1.939
billion in the 1996 period. Investment banking revenues increased to $1.556
billion in the 1997 period compared to $1.483 billion in the 1996 period as a
result of higher underwriting and advisory fees. Principal transactions revenues
declined to $2.261 billion in the 1997 period compared to $2.364 billion in the
1996 period. This year-to-year decrease was primarily due to lower revenues from
fixed income proprietary trading and physical commodities trading, partially
offset by improved results from equity proprietary trading. Asset management and
administration fees increased 21% to $1.236 billion in the 1997 period compared
to $1.021 billion in the 1996 period. Net interest and dividends declined to
$1.118 billion in the 1997 period compared to $1.142 billion in the 1996 period.
Compensation and benefits expense, as a percentage of net revenues, for the 1997
period was 54% compared to 52% in the 1996 period and non-compensation expense
as a percentage of net revenues was 20% in the 1997 period compared to 19% in
the 1996 period.
Consumer Finance Services
Nine Months Ended September 30,
-------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
(millions) Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Consumer Finance Services (1) $1,205 $167 $1,047 $171
================================================================================
(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).
During the first nine months of 1997 the average yield, at 14.55%, was lower
than the 15.33% in the first nine months of 1996, mainly because of a shift in
the portfolio mix toward lower risk/lower margin real estate loans. The
charge-off rate at 2.74% for the first nine months of 1997 was lower than the
comparable 1996 period's rate of 2.90%.
20
Life Insurance Services
Nine Months Ended September 30,
-------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------
(millions) Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------------
Travelers Life and Annuity (1) (2) $2,000 $370 $1,699 $241
Primerica Financial Services (3) 1,135 247 1,058 209
- --------------------------------------------------------------------------------------
Total Life Insurance Services $3,135 $617 $2,757 $450
======================================================================================
(1) Net income includes $57 million of reported investment portfolio gains in
1997 and $22 million of reported investment portfolio losses in 1996.
(2) Excludes results of MetraHealth which are classified as discontinued
operations.
(3) Net income includes $2 million and $6 million of reported investment
portfolio gains in 1997 and 1996, respectively, and in 1996 a portion of
the gain ($4 million) from the disposition of RCM.
Travelers Life and Annuity
Deferred annuity net written premiums and deposits were $1.776 billion in the
first nine months of 1997, up 20% from $1.475 billion in the first nine months
of 1996.
Payout and group annuity net premiums and deposits (excluding those of
affiliates) totaled $1.630 billion in the first nine months of 1997, up 63% from
$997.7 million in the first nine months of 1996.
Face amount of individual life insurance issued during the first nine months of
1997 was $4.5 billion, compared to $4.9 billion in the first nine months of
1996. Direct written premiums and deposits (excluding single premium policies)
for individual life insurance were $211.3 million in the first nine months of
1997, relatively even with the first nine months of 1996.
Net written premiums for the growing long-term care insurance line were $129.5
million in the first nine months of 1997, compared to $92.9 million in the first
nine months of 1996.
Primerica Financial Services
Face amount of new term life insurance sales was $39.2 billion in the first nine
months of 1997, compared to $38.9 billion in the first nine months of 1996.
Sales of mutual funds (at net asset value) were $2.027 billion for the first
nine months of 1997, a 15% increase over the comparable 1996 period sales of
$1.761 billion.
21
Property & Casualty Insurance Services
Nine Months Ended September 30,
----------------------------------------
(millions) 1997 1996
- ---------------------------------------------------------------------------------------
Net Net
income income
Revenues (loss) Revenues (loss)
- ---------------------------------------------------------------------------------------
Commercial Lines (1) (2) $4,887 $ 666 $3,919 $ 60
Personal Lines (1) (3) 2,473 303 1,904 145
Financing costs and other (1) 9 (93) 9 (58)
Minority interest -- (153) -- --
- ---------------------------------------------------------------------------------------
Total Property & Casualty Insurance Services $7,369 $ 723 $5,832 $ 147
=======================================================================================
(1) Before minority interest.
(2) Net income in 1997 includes $39 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 $1 million and $4 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.
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); $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; $14 million after tax and minority interest
($27 million before tax and minority interest) charge related to premium
collection issues; $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
Travelers Indemnity related to the restructuring plan for the acquisition.
Commercial Lines
Commercial Lines net written premiums for the first nine months of 1997 totaled
$3.656 billion, up $699 million from $2.957 billion for the first nine 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 nine months compared to only the second and third quarter of 1996 and a
$142 million increase due to a change to conform the Aetna P&C method with the
Travelers Indemnity and its subsidiaries (Travelers P&C) method of recording
certain net written premiums within Commercial Lines. This increase was offset
in part by the highly competitive conditions in the marketplace and the
Company's selective underwriting focus.
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 nine months of 1997 totaled $3.656 billion, compared to $3.562 billion
for the first nine months of 1996. This increase was
22
primarily attributable to the change to conform the Aetna P&C method with the
Travelers P&C method of recording net written premiums, partially offset by the
competitive marketplace.
Fee income for the first nine months of 1997 was $278.8 million compared to
$294.3 million in the first nine months of 1996.
National Accounts net written premiums of $522.4 million for the first nine
months of 1997 decreased $93.7 million from the first nine 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
$522.4 million for the first nine months of 1997 compared to $686.9 million for
the first nine months of 1996. National Accounts new business in the first nine
months of 1997 was moderately higher than in the first nine months of 1996.
National Accounts business retention ratio was significantly higher in the first
nine months of 1997 than in the first nine months of 1996, reflecting an
unusually low retention ratio in the first and third quarters of 1996.
Commercial Accounts net written premiums were $1.516 billion in the first nine
months of 1997 compared to $1.033 billion in the first nine 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 $1.516
billion in the first nine months of 1997 compared to $1.272 billion in the first
nine 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 nine months of 1997, new premium business
in Commercial Accounts has significantly improved compared to the first nine
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 nine months of 1997 has significantly improved
compared to the first nine months of 1996.
Select Accounts net written premiums were $1.087 billion in the first nine
months of 1997 compared to $854.8 million in the first nine 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 $1.087
billion for the first nine months of 1997 were $11 million above the first nine
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, partially offset by a decrease due to the
competitive marketplace. New premium business in Select Accounts was moderately
higher in the first nine months of 1997 than in the first nine 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 nine months of 1997 than in
the first nine months of 1996, reflecting the broader industry and product line
expertise of the combined company.
Specialty Accounts net written premiums were $530.1 million in the first nine
months of 1997 compared to $453.3 million in the first nine 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 $530.1
million in the first nine months of 1997 compared to $527.2 million in the first
nine months of 1996. The growth is primarily attributable to increased writings
of its excess and surplus lines business partially offset by lower directors'
and officers' liability insurance writings due to the termination of an
exclusive arrangement with a managing general agent.
Catastrophe losses, net of taxes and reinsurance, were $5.1 million and $22.6
million in the first nine months of 1997 and 1996, respectively. The 1997
catastrophe losses were primarily due to tornadoes
23
in the Midwest in the first quarter. The 1996 catastrophe losses were primarily
due to winter storms in the first quarter and Hurricane Fran in the third
quarter.
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the first nine months of 1997 was 109.3%, compared to 131.9% in the
first nine months of 1996. The GAAP combined ratio (before policyholder
dividends) for Commercial Lines in the first nine months of 1997 was 108.3%,
compared to 131.4% in the first nine months of 1996.
The decreases in the first nine months of 1997 statutory and GAAP combined
ratios for Commercial Lines compared to the first nine 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 nine months ended September 30, 1996 would have been
109.9% and 110.4%, respectively. The decrease in the first nine months of 1997
statutory and GAAP combined ratios compared to the first nine 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
nine months compared to only the second and third quarters 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 nine months of 1997 were $2.295 billion,
compared to $1.685 billion in the first nine 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 nine months of 1997
totaled $2.295 billion compared to $2.001 billion for the first nine months of
1996.
The statutory combined ratio for Personal Lines in the first nine months of 1997
was 91.9%, compared to 102.1% in the first nine months of 1996. The GAAP
combined ratio for Personal Lines in the first nine months of 1997 was 91.3%,
compared to 101.9% in the first nine 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 nine months of 1997 was
interest expense of $79 million after tax, compared to $51 million after tax in
the first nine 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 September 30, 1997, approximately 15% of the net
environmental reserve (i.e., approximately $173 million) is case reserves for
resolved claims. The balance, approximately 85% of the net environmental reserve
(i.e., approximately $990 million), 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.
24
The following table displays activity for environmental lossesd and loss
expenses and reserves for the nine months ended September 30, 1997 and 1996.
Environmental Losses Nine Months Ended Nine Months Ended
(millions) September 30, 1997 September 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 55 82
Ceded (1) (31)
Losses paid:
Direct 181 113
Ceded (48) (20)
Ending reserves:
Direct 1,243 1,361
Ceded (80) (85)
------ ------
Net $1,163 $1,276
------ ------
Asbestos Claims
At September 30, 1997, approximately 26% of the net asbestos reserve (i.e.,
approximately $274 million) is for pending asbestos claims. The balance,
approximately 74% (i.e., approximately $790 million) of the net asbestos
reserve, represents incurred but not yet reported losses.
The following table displays activity for asbestos losses and loss expenses and
reserves for the nine months ended September 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.
25
Asbestos Losses Nine Months Ended Nine Months Ended
(millions) September 30, 1997 September 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 60 83
Ceded (15) (8)
Losses paid:
Direct 114 135
Ceded (60) (58)
Ending reserves:
Direct 1,389 1,419
Ceded (325) (359)
------ ------
Net $1,064 $1,060
====== ======
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 September 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 September 30, 1997, approximately 19% of the net CIOTA reserve (i.e.,
approximately $204 million) is for pending CIOTA claims. The balance,
approximately 81% (i.e., approximately $893 million) of the net CIOTA reserve,
represents incurred but not yet reported losses for which the Company has not
received any specific claims.
26
The following table displays activity for CIOTA losses and loss expenses and
reserves for the nine months ended September 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.
CIOTA Losses Nine Months Ended Nine Months Ended
(millions) September 30, 1997 September 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 26 557
Ceded (6) (155)
Losses paid:
Direct 51 53
Ceded (14) (7)
Ending reserves:
Direct 1,535 1,587
Ceded (438) (441)
------ ------
Net $1,097 $1,146
====== ======
Corporate and Other
Nine Months Ended September 30,
----------------------------------------------------
(millions) 1997 1996
- ----------------------------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- ----------------------------------------------------------------------------------------------
Net expenses (1) - $(153) - $(158)
Net gain (loss) on sale of subsidiaries
and affiliates - - - 384
- ----------------------------------------------------------------------------------------------
Total Corporate and Other $75 $(153) $111 $ 226
==============================================================================================
(1) Net income (expense) includes $6 million of reported investment portfolio
gains in 1997 and $8 million of reported investment portfolio losses in
1996.
Net corporate expenses (before reported investment portfolio gains/losses) were
down in the first nine months of 1997 compared to the first nine months of 1996,
reflecting higher income from corporate investments and lower borrowing costs.
Discontinued Operations
For the nine months ended September 30, 1996, discontinued operations had a net
loss of $38 million, which includes a loss from operations of Basis of $69
million and a gain of $31 million resulting from the contingency payment
received in 1996 from the 1995 sale of Metrahealth.
27
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 $500 million is allocated to TRV, $450 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 September 30, 1997, this requirement was exceeded by
approximately $5.3 billion. At September 30, 1997, there were no borrowings
outstanding under this facility.
Currently, TRV has unused credit availability of $500 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.
In September 1997, the Company sold in a public offering 4.0 million depositary
shares, each representing one-fifth of a share of 6.231% Cumulative Preferred
Stock, Series H (Series H Preferred Stock), at an offering price of $50 per
depositary share for an aggregate principal amount of $200 million. The Series H
Preferred Stock has cumulative dividends payable quarterly commencing November
1, 1997 and a liquidation preference equivalent to $50 per depositary share plus
accrued and accumulated unpaid dividends. On or after September 8, 2007, the
Company may redeem the Series H 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.
28
In October 1997, the Company sold in a public offering 4.0 million depositary
shares, each representing one-fifth of a share of 5.864% Cumulative Preferred
Stock, Series M (Series M Preferred Stock), at an offering price of $50 per
depositary share for an aggregate principal amount of $200 million. The Series M
Preferred Stock has cumulative dividends payable quarterly commencing November
1, 1997 and a liquidation preference equivalent to $50 per depositary share plus
accrued and accumulated unpaid dividends. On or after October 8, 2007, the
Company may redeem the Series M 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 October 17, 1997, Berkshire Hathaway, Inc. converted 140,000 shares ($140
million) of Series I cumulative convertible preferred stock into 6.2 million
shares of common stock.
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) at $50 per share ($25 per depositary share). The aggregate
amount of Series D Preferred Stock outstanding on the redemption date was $375
million.
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) at $250 per share ($25 per depositary share) plus
accrued and unpaid dividends to the redemption date. The aggregate amount of
Series A Preferred Stock outstanding on the redemption date was $300 million.
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 commitment fees. Under this
facility TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At September 30, 1997, this
requirement was exceeded by approximately $3.1 billion. At September 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 $245
million of dividends from its insurance subsidiaries during the first nine
months of 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 $3.850 billion under five-year revolving credit facilities,
(including the $450 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, base rate or money market) 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 September 30, 1997, CCC would have been able to remit $562 million
to its parent under its most restrictive covenants.
29
Salomon Smith Barney
Salomon Smith Barney's total assets were $297 billion at September 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
facilities 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 September 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.
Unsecured term debt is a significant component of Salomon Smith Barney's
long-term capital. Term debt totaled $19.7 billion at September 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. 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 September 30, 1997 and December 31, 1996 was 22.8x and 20.7x,
respectively.
30
The Travelers Insurance Company (TIC)
At September 30, 1997, TIC had $23.5 billion of life and annuity product deposit
funds and reserves. Of that total, $12.8 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $10.7 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 $1.8 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $5.1 billion of 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
$3.8 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 $300
million has been paid during the first nine months of 1997.
31