UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
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Commission file number-1-9924
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Citigroup Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1568099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
399 Park Avenue, New York, New York 10040
(Address of principal executive offices) (Zip Code)
(212) 559-1000
(Registrant's telephone number, including area code)
Travelers Group Inc.
388 Greenwich Street, New York, NY 10013
(Former name and address)
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Common stock outstanding as of October 31, 1998: 2,271,966,743
Travelers Group Inc.
TABLE OF CONTENTS
On October 8, 1998, Citicorp merged with and into a newly formed, wholly owned
subsidiary of Travelers Group Inc. (TRV) in a transaction accounted for under
the pooling of interests method. Generally accepted accounting principles do not
permit giving effect to a consummated business combination accounted for by the
pooling of interests method in financial statements that do not include a period
subsequent to the date of consummation. The accompanying unaudited condensed
consolidated financial statements as of September 30, 1998 and December 31, 1997
and for the three-month and nine-month periods ended September 30, 1998 and 1997
include only the accounts and results of TRV and its subsidiaries (collectively,
the Company). On October 8, 1998, TRV changed its name to Citigroup Inc.
(Citigroup). The pooling of interests method of accounting requires the
restatement of all periods presented as if TRV and Citicorp had always been
combined. Therefore, beginning in the fourth quarter of 1998, which will include
the date of consummation of the merger (October 8, 1998), financial statements
for all periods presented will be restated to include the accounts and results
of Citicorp.
Part I - Financial Information
Item 1. Financial Statements: Page No.
--------
Condensed Consolidated Statement of Income (Unaudited) -
Three and Nine Months Ended September 30, 1998 and 1997 ..................................... 3
Condensed Consolidated Statement of Financial Position -
September 30, 1998 (Unaudited) and December 31, 1997 ........................................ 4
Condensed Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) - Nine Months Ended September 30, 1998 .......................................... 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1998 and 1997 ............................................... 6
Notes to Condensed Consolidated Financial Statements (Unaudited) .............................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................................... 16
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K ....................................................... 37
Exhibit Index ..................................................................................... 38
Signatures ........................................................................................ 39
2
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Income (Unaudited)
(In millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
Revenues
Insurance premiums ...................................................... $2,423 $2,226 $ 7,158 $ 6,670
Commissions and fees .................................................... 1,332 1,389 4,198 3,767
Interest and dividends .................................................. 4,386 4,274 13,363 11,819
Finance related interest and other charges .............................. 448 372 1,276 999
Principal transactions .................................................. (1,331) 790 (236) 2,261
Asset management and administration fees ................................ 563 448 1,614 1,236
Other income ............................................................ 401 462 1,313 1,093
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
Total revenues (1) .................................................... 8,222 9,961 28,686 27,845
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
Expenses
Policyholder benefits and claims ........................................ 2,099 1,898 6,140 5,709
Non-insurance compensation and benefits ................................. 997 1,703 4,388 4,762
Insurance underwriting, acquisition and operating ....................... 756 820 2,379 2,424
Interest ................................................................ 3,295 3,080 9,805 8,250
Provision for consumer finance credit losses ............................ 85 63 263 208
Other operating ......................................................... 684 715 1,822 2,014
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
Total expenses ....................................................... 7,916 8,279 24,797 23,367
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
Income before income taxes and minority interest ........................ 306 1,682 3,889 4,478
Provision for income taxes .............................................. 54 598 1,293 1,598
Minority interest, net of income taxes .................................. 53 55 163 153
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
Net income (1) .......................................................... $199 $1,029 $ 2,433 $ 2,727
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
Basic earnings per share (1):
Net income .............................................................. $0.15 $0.90 $2.09 $2.38
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
Weighted average common shares outstanding .............................. 1,120.3 1,100.9 1,118.6 1,102.1
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
Diluted earnings per share (1):
Net income .............................................................. $0.15 $0.85 $2.02 $2.25
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
Adjusted weighted average common shares outstanding ..................... 1,166.2 1,179.8 1,168.0 1,180.5
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
- ------------------------------------------------------------------------ ------------- ------------- --- ------------- -------------
(1) See Note 2 of Notes to Condensed Consolidated Financial Statements for
pro forma Citigroup financial data.
See Notes to Condensed Consolidated Financial Statements.
3
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Financial Position
(In millions of dollars)
September 30, December 31,
1998 1997
- ------------------------------------------------------------------------------------------- ------------------- ----------------
Assets (Unaudited)
Cash and cash equivalents (including segregated cash and other deposits) ..................... $ 5,737 $ 4,033
Investments .................................................................................. 67,305 61,834
Securities borrowed or purchased under agreements to resell .................................. 94,951 109,734
Brokerage receivables ........................................................................ 23,515 15,627
Trading securities and commodities owned ..................................................... 106,695 139,732
Net consumer finance receivables ............................................................. 12,402 10,816
Reinsurance recoverables ..................................................................... 9,537 9,579
Value of insurance in force and deferred policy acquisition costs ............................ 3,009 2,812
Cost of acquired businesses in excess of net assets .......................................... 3,455 3,446
Separate and variable accounts ............................................................... 13,149 11,319
Other receivables ............................................................................ 6,080 5,733
Other assets ................................................................................. 12,211 11,890
- ------------------------------------------------------------------------------------------- ------------------- ----------------
Total assets (1) ............................................................................. $358,046 $386,555
- ------------------------------------------------------------------------------------------- ------------------- ----------------
- ------------------------------------------------------------------------------------------- ------------------- ----------------
Liabilities
Investment banking and brokerage borrowings .................................................. $ 16,128 $ 11,464
Short-term borrowings ........................................................................ 5,812 3,979
Long-term debt ............................................................................... 30,412 28,352
Securities loaned or sold under agreements to repurchase ..................................... 88,609 120,921
Brokerage payables ........................................................................... 24,264 12,763
Trading securities and commodities sold not yet purchased .................................... 71,915 96,166
Contractholder funds ......................................................................... 16,255 14,848
Insurance policy and claims reserves ......................................................... 43,926 43,782
Separate and variable accounts ............................................................... 13,138 11,309
Accounts payable and other liabilities ....................................................... 22,285 19,553
- ------------------------------------------------------------------------------------------- ------------------- ----------------
Total liabilities .......................................................................... 332,744 363,137
- ------------------------------------------------------------------------------------------- ------------------- ----------------
Redeemable preferred stock - Series I ........................................................ 280 280
- ------------------------------------------------------------------------------------------- ------------------- ----------------
TRV or subsidiary obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debt securities of -- TRV ........................ 1,200 1,000
- ------------------------------------------------------------------------------------------- ------------------- ----------------
TAP ........................ 900 900
- ------------------------------------------------------------------------------------------- ------------------- ----------------
Salomon Smith Barney ....... 745 345
- ------------------------------------------------------------------------------------------- ------------------- ----------------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate
liquidation value .......................................................................... 1,450 1,450
Common stock ($.01 par value; authorized shares: 6.0 billion;
issued shares: 1998 - 1,251,276,187 and 1997 - 1,234,204,094) .............................. 13 12
Additional paid-in capital ................................................................... 6,149 5,368
Retained earnings ............................................................................ 17,358 15,451
Treasury stock, at cost (1998 -107,609,115 shares and 1997 - 89,136,729 shares) .............. (3,756) (2,183)
Accumulated other changes in equity from nonowner sources .................................... 1,464 1,147
Unearned compensation ........................................................................ (501) (352)
- ------------------------------------------------------------------------------------------- ------------------- ----------------
Total stockholders' equity (1) ............................................................. 22,177 20,893
- ------------------------------------------------------------------------------------------- ------------------- ----------------
Total liabilities and stockholders' equity ................................................... $358,046 $386,555
- ------------------------------------------------------------------------------------------- ------------------- ----------------
- ------------------------------------------------------------------------------------------- ------------------- ----------------
(1) See Note 2 of Notes to Condensed Consolidated Financial Statements for pro
forma Citigroup financial data.
See Notes to Condensed Consolidated Financial Statements.
4
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
(In millions of dollars)
Nine Months Ended September 30, 1998 Amount Shares
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Preferred stock, at aggregate liquidation value (in thousands)
Balance, beginning of year .................................................................... $ 1,450 4,900
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Balance, end of period ........................................................................ $ 1,450 4,900
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Common stock and additional paid-in capital
Balance, beginning of year .................................................................... $ 5,380 1,234,204
Issuance of shares pursuant to employee benefit plans ......................................... 505
Conversion of Series C Preferred Stock ........................................................ 153 6,942
Exercise of warrants .......................................................................... 131 10,130
Other ......................................................................................... (7)
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Balance, end of period ........................................................................ 6,162 1,251,276
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Retained earnings
Balance, beginning of year .................................................................... 15,451
Net income .................................................................................... 2,433
Common dividends .............................................................................. (433)
Preferred dividends ........................................................................... (93)
- ---------------------------------------------------------------------------------------- ---------------------
Balance, end of period ........................................................................ 17,358
- ---------------------------------------------------------------------------------------- ---------------------
Treasury stock, at cost
Balance, beginning of year .................................................................... (2,183) (89,137)
Issuance of shares pursuant to employee benefit plans, net of shares
tendered for payment of option exercise price and withholding taxes ......................... (50) 9,973
Treasury stock acquired ....................................................................... (1,523) (28,445)
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Balance, end of period ........................................................................ (3,756) (107,609)
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Accumulated other changes in equity from nonowner sources
Balance, beginning of year .................................................................... 1,147
Net change in unrealized gains and losses on investment securities, net of tax ................ 315
Net translation adjustments, net of tax ....................................................... 2
- ---------------------------------------------------------------------------------------- ---------------------
Balance, end of period ........................................................................ 1,464
- ---------------------------------------------------------------------------------------- ---------------------
Unearned compensation
Balance, beginning of year .................................................................... (352)
Issuance of restricted stock, net of amortization ............................................. (149)
- ---------------------------------------------------------------------------------------- ---------------------
Balance, end of period ........................................................................ (501)
- ---------------------------------------------------------------------------------------- ---------------------
Total common stockholders' equity and common shares outstanding ............................... 20,727 1,143,667
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
Total stockholders' equity .................................................................... $22,177
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
- ---------------------------------------------------------------------------------------- --------------------- ---------------------
See Notes to Condensed Consolidated Financial Statements.
5
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
(In millions of dollars)
Nine Months Ended September 30, 1998 1997
- --------------------------------------------------------------------------------------------- ------------- --------------
Cash flows from operating activities
Net income ................................................................................... $ 2,433 $ 2,727
Amortization of deferred policy acquisition costs and value of insurance in force ............ 1,129 1,073
Additions to deferred policy acquisition costs ............................................... (1,330) (1,272)
Other non cash changes ....................................................................... 642 556
Changes in:
Trading securities and commodities, net .................................................. 8,786 (29,854)
Securities borrowed, loaned and repurchase agreements, net ............................... (17,529) 21,307
Brokerage receivables net of brokerage payables .......................................... 3,613 1,434
Other, net ................................................................................... 2,289 2,670
- --------------------------------------------------------------------------------------------- ------------- --------------
Net cash provided by (used in) operating activities ........................................ 33 (1,359)
- --------------------------------------------------------------------------------------------- ------------- --------------
Cash flows from investing activities
Consumer loans originated or purchased ....................................................... (4,819) (3,552)
Consumer loans repaid or sold ................................................................ 3,172 2,233
Purchases of fixed maturities and equity securities .......................................... (20,936) (19,516)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities .................................. 14,991 14,330
Mortgage loans ............................................................................. - 312
Real estate and real estate joint ventures ................................................. 85 387
Proceeds from maturities of investments:
Fixed maturities ........................................................................... 3,797 2,572
Mortgage loans ............................................................................. 773 507
Other investments, primarily short-term, net ................................................. (2,743) (553)
Business acquisition ......................................................................... - (1,618)
Proceeds from sale of Basis Petroleum ........................................................ - 365
Other, net ................................................................................... (534) (367)
- --------------------------------------------------------------------------------------------- ------------- --------------
Net cash provided by (used in) investing activities ........................................ (6,214) (4,900)
- --------------------------------------------------------------------------------------------- ------------- --------------
Cash flows from financing activities
Dividends paid ............................................................................... (526) (443)
Issuance of preferred stock .................................................................. - 783
Issuance of redeemable preferred stock of subsidiaries ....................................... 600 -
Redemption of preferred stock ................................................................ - (675)
Treasury stock acquired ...................................................................... (1,523) (865)
Stock tendered for payment of withholding taxes .............................................. (511) (280)
Issuance of long-term debt ................................................................... 6,341 8,149
Payments and redemptions of long-term debt ................................................... (4,474) (3,577)
Net change in short-term borrowings (including investment banking and brokerage
borrowings) ............................................................................... 6,497 2,862
Contractholder fund deposits ................................................................. 3,852 2,450
Contractholder fund withdrawals .............................................................. (2,450) (1,991)
Other, net ................................................................................... 79 (120)
- --------------------------------------------------------------------------------------------- ------------- --------------
Net cash provided by (used in) financing activities ........................................ 7,885 6,293
- --------------------------------------------------------------------------------------------- ------------- --------------
Change in cash and cash equivalents .......................................................... 1,704 34
Cash and cash equivalents at beginning of period ............................................. 4,033 3,260
- --------------------------------------------------------------------------------------------- ------------- --------------
Cash and cash equivalents at end of period ................................................... $ 5,737 $ 3,294
- --------------------------------------------------------------------------------------------- ------------- --------------
- --------------------------------------------------------------------------------------------- ------------- --------------
Supplemental disclosure of cash flow information:
Income taxes paid ............................................................................ $ 633 $ 1,093
- --------------------------------------------------------------------------------------------- ------------- --------------
- --------------------------------------------------------------------------------------------- ------------- --------------
Interest expense recorded for financial statement purposes did not differ
materially from the amount of interest paid.
See Notes to Condensed Consolidated Financial Statements.
6
Travelers Group Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
---------------------
On October 8, 1998, Citicorp merged (the Merger) with and into a newly
formed, wholly owned subsidiary of Travelers Group Inc. (TRV) in a
transaction accounted for under the pooling of interests method. Generally
accepted accounting principles (GAAP) do not permit giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include a period subsequent to
the date of consummation. The accompanying unaudited condensed consolidated
financial statements as of September 30, 1998 and December 31, 1997 and for
the three-month and nine-month periods ended September 30, 1998 and 1997
include only the accounts and results of TRV and its subsidiaries
(collectively, the Company). On October 8, 1998, TRV changed its name to
Citigroup Inc. (Citigroup). The pooling of interests method of accounting
requires the restatement of all periods presented as if TRV and Citicorp
had always been combined. Therefore, beginning in the fourth quarter of
1998, which will include the date of consummation of the Merger (October 8,
1998), financial statements for all periods presented will be restated to
include the accounts and results of Citicorp. In the opinion of management
all adjustments, consisting of normal recurring adjustments, necessary for
a fair presentation have been reflected. The condensed consolidated
financial statements, including the notes thereto, should be read in
conjunction with the consolidated financial statements and related notes
included in TRV's Annual Report to Stockholders for the year ended December
31, 1997.
Certain financial information that is normally included in annual financial
statements prepared in accordance with GAAP, but is not required for
interim reporting purposes, has been condensed or omitted.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
At TRV's Annual Meeting of Stockholders on April 22, 1998, shareholders
approved an amendment to the Restated Certificate of Incorporation to
increase the common stock authorized for issuance from 1.5 billion shares
to 3 billion shares. At a Special Meeting of Stockholders of TRV held on
July 22, 1998, shareholders approved another amendment to the Restated
Certificate of Incorporation to increase the common stock authorized for
issuance to 6 billion shares.
2. Recent Transactions
-------------------
Citicorp Merger
---------------
As previously discussed, on October 8, 1998, Citicorp merged with and into
a newly formed, wholly owned subsidiary of TRV and, subsequently, TRV
changed its name to Citigroup. Under the terms of the Merger, 1.13 billion
shares of Citigroup common stock were issued in exchange for all the
outstanding shares of Citicorp common stock based on an exchange ratio of
2.5 shares of Citigroup common stock for each share of Citicorp common
stock. Each share of TRV common stock automatically represents one share of
Citigroup common stock. Following the exchange, former shareholders of
Citicorp and TRV each own approximately 50% of the outstanding common stock
of Citigroup. Each outstanding share of Citicorp preferred stock was
converted into one share of a corresponding series of preferred stock of
Citigroup having substantially identical terms.
7
Upon consummation of the Merger, the Company became a bank holding company
subject to the provisions of the Bank Holding Company Act of 1956 (the
BHCA). The BHCA precludes a bank holding company and its affiliates from
engaging in certain activities, generally including insurance underwriting.
Under the BHCA in its current form, the Company has two years from October
8, 1998 to comply with all applicable provisions (the BHCA Compliance
Period). The BHCA Compliance Period may be extended, at the discretion of
the Federal Reserve Board, for three additional one-year periods so long as
the extension is not deemed to be detrimental to the public interest. At
this time, the Company believes that its compliance with applicable laws
following the Merger will not have a material adverse effect on the
Company's financial condition or results of operations. The Company will
evaluate its alternatives in order to comply with whatever laws are
applicable at the expiration of the BHCA Compliance Period and any
extensions thereof.
The following supplemental information reflects certain historical
financial data for each of TRV and Citicorp and the combined amounts for
Citigroup, including the effects of adjustments to conform the accounting
policies as if the Merger had been consummated at the date of the financial
statements.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --- ----------------------------------
(millions) 1998 1997 1998 1997
------------------------------------------------- ----------------- --------------- --- ----------------- ----------------
Revenues:
TRV .............................................. $ 8,222 $ 9,961 $28,686 $27,845
Citicorp ......................................... 9,372 8,860 28,306 25,698
------------------------------------------------- ----------------- --------------- --- ----------------- ----------------
Citigroup ........................................ $17,594 $18,821 $56,992 $53,543
------------------------------------------------- ----------------- --------------- --- ----------------- ----------------
Net income:
TRV .............................................. $ 199 $ 1,029 $ 2,433 $ 2,727
Citicorp ......................................... 530 511 2,692 2,530
Adjustments to conform accounting policies ....... - 4 5 10
------------------------------------------------- ----------------- --------------- --- ----------------- ----------------
Citigroup ........................................ $ 729 $ 1,544 $ 5,130 $ 5,267
------------------------------------------------- ----------------- --------------- --- ----------------- ----------------
Earnings per share - Citigroup:
Basic ............................................ $ 0.30 $ 0.66 $ 2.21 $ 2.25
Diluted .......................................... $ 0.30 $ 0.63 $ 2.14 $ 2.15
------------------------------------------------- ----------------- --------------- --- ----------------- ----------------
(millions) September 30, 1998 (millions) September 30, 1998
------------------------------- --------------------- --------- ------------------------------- --------------------------
Assets: Stockholders' equity:
TRV ................................. $358,046 TRV ...................................... $22,177
Citicorp ............................ 343,340 Citicorp ................................. 21,146
Adjustments to conform Adjustments to conform
accounting policies .............. (72) accounting policies ................... (233)
------------------------------- --------------------- ------------------------------- --------------------------
Citigroup ........................... $701,314 Citigroup ................................ $43,090
------------------------------- --------------------- ------------------------------- --------------------------
The Nikko Securities Co., Ltd.
------------------------------
In August 1998, The Nikko Securities Co., Ltd. (Nikko), Salomon Smith
Barney Holdings Inc. (Salomon Smith Barney) and TRV signed an agreement to
form a global strategic alliance. The agreement calls for the formation of
a joint venture, called Nikko Salomon Smith Barney Limited, which will
provide investment banking, sales, trading and research services for
corporate and institutional clients in Japan and other foreign
jurisdictions. Nikko Salomon Smith Barney will combine the Japanese
institutional and corporate business of Salomon Smith Barney with Nikko's
domestic and international institutional and corporate business. Nikko's
retail business and other activities, including asset management, will
continue under the management of Nikko. Nikko Salomon Smith Barney will be
owned 51% by Nikko and 49% by Salomon Smith Barney. It is anticipated that
the joint venture will be operational in the first quarter of 1999, subject
to applicable regulatory approvals.
8
In addition, in August 1998 TRV purchased 9.5% of Nikko's outstanding
common stock plus bonds convertible into an additional 15.5% common equity
interest in Nikko on a fully diluted basis for a purchase price of $1.5
billion.
3. Merger with Salomon
-------------------
On November 28, 1997, a newly formed, wholly owned subsidiary of TRV merged
with and into Salomon Inc (Salomon) (the Salomon Merger). Thereafter, Smith
Barney Holdings Inc., a wholly owned subsidiary of TRV, was merged with and
into Salomon to form Salomon Smith Barney, which is the primary vehicle
through which the Company engages in investment banking, proprietary
trading, retail brokerage and asset management. The Salomon Merger was
accounted for as a pooling of interests and constituted a tax-free
exchange. As a result of the Salomon Merger, Salomon Smith Barney recorded
a restructuring charge of $838 million ($496 million after tax) in the
fourth quarter of 1997. The material components of the restructuring
reserve were as follows:
Charges and Credits Restructuring Reserve Balance
Original Restructuring through at
(millions) Reserve September 30, 1998 September 30, 1998
------------------------------------ ------------------------- ------------------------ --------------------------------
Seven World Trade Center lease ............. $610 ($324)* $286
Other facilities ........................... 53 (21) 32
------------------------------------ ----------------------- -------------------------- --------------------------------
Total facilities ....................... 663 (345) 318
Severance .................................. 161 (137) 24
Other ...................................... 14 (3) 11
------------------------------------ ----------------------- -------------------------- --------------------------------
$838 ($485)* $353**
------------------------------------ ----------------------- -------------------------- --------------------------------
* In the second quarter of 1998, the Company recorded an adjustment of $324
million ($191 million after tax) to the restructuring reserve relating to
the Seven World Trade Center lease. This reduction in the reserve resulted
from negotiations on a sub-lease which indicated that excess space would be
disposed of on terms more favorable than had been originally estimated. A
current reassessment of space needs, including the recent merger with
Citicorp, could indicate a need for increased occupancy by the Company of
space previously considered excess, and could result in a further
adjustment to reduce the restructuring reserve.
** Reflects $129 million cash component and $224 million non-cash component.
The cash component of these costs will be funded from working capital and
will not require any incremental funding source.
All of the amounts were determined in accordance with accounting guidelines
set forth in Emerging Issues Task Force Issue No. 94-3 and represent costs
that are not associated with future revenues and are either (1) incremental
or (2) contractual with no economic benefit.
At September 30, 1998, the portion of the cash and non-cash balances of
the restructuring reserve that related to facilities were $96 million
and $222 million, respectively. Lease costs represent the difference
between contractual obligations and the estimated fair market rental
obtainable through sublease from the date that such facilities are
expected to be vacated and other costs incidental to sublease. These
contractual lease payments are estimated to be expended over the
remaining term and the remaining cash costs are expected to be paid in
1998 and 1999.
Non-cash costs of other facilities reflect the write-off of leasehold
improvements, furniture and equipment upon abandonment and represent the
remaining depreciated book value at the estimated dates of abandonment.
Depreciation of these assets will be continued during the period they are
in use.
The facilities are located primarily in the United States and generally
support multiple lines of business. The assets have not been reclassified
to a held for sale category since substantially all are subject to
abandonment and will not be realized through sale.
Severance costs, which covered approximately 1,900 employees, primarily in
the United States, are expected to be paid by the end of 1998.
9
None of the amounts included in the restructuring charge represent
operating losses or income.
4. Changes in Accounting Principles and Accounting Standards not yet Adopted
-------------------------------------------------------------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (FAS) No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS 125," which was effective for transfers and
pledges of certain financial assets and collateral made after December 31,
1997. The adoption of FAS No. 127 created additional assets and liabilities
on the Company's condensed consolidated statement of financial position
related to the recognition of securities provided and received as
collateral. At September 30, 1998, the impact of FAS No. 127 on the
Company's condensed consolidated statement of financial position was an
increase to total assets and liabilities of approximately $3.6 billion. In
addition, as a result of FAS No. 127, certain inventory positions,
primarily, "Non-U.S. government and government agency securities" have been
reclassified to receivables or payables.
Effective January 1, 1998, the Company adopted FAS No. 130, "Reporting
Comprehensive Income" (FAS No. 130). FAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. All items that are
required to be recognized under accounting standards as components of
comprehensive income are to be reported in an annual financial statement
that is displayed with the same prominence as other financial statements.
This statement stipulates that comprehensive income reflect the change in
equity of an enterprise during a period from transactions and other events
and circumstances from nonowner sources. Comprehensive income will thus
represent the sum of net income and other changes in stockholders' equity
from nonowner sources. The accumulated balance of changes in equity from
nonowner sources is required to be displayed separately from retained
earnings and additional paid-in capital in the statement of financial
position. The adoption of FAS No. 130 resulted primarily in the Company
reporting unrealized gains and losses on investments in debt and equity
securities held by the insurance subsidiaries in changes in equity from
nonowner sources. The Company's total changes in equity from nonowner
sources is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
(millions) 1998 1997 1998 1997
----------- ----------- ----------- -----------
Net income ...................................................... $ 199 $ 1,029 $2,433 $2,727
Other changes in equity from nonowner sources, net of tax ....... 201 495 317 455
----------- ----------- ----------- -----------
Total changes in equity from nonowner sources ................ $ 400 $1,524 $2,750 $3,182
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
In the 1998 third quarter, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use and for determining when
specific costs should be capitalized and when they should be expensed. The
impact of adopting SOP 98-1 was not significant.
In June 1998, the Financial Accounting Standards Board (FASB) issued FAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(FAS No. 133), which becomes effective on January 1, 2000 for calendar year
companies such as the Company. The new standard will significantly change
the accounting treatment of end-user derivative and foreign exchange
contracts by the Company and its customers. Depending on the underlying
risk management strategy, these accounting changes could affect reported
earnings, assets, liabilities, and stockholders' equity. As a result, the
Company and the customers to which it provides derivatives and foreign
exchange products may reconsider their risk management strategies, since
the new standard will not permit reflecting the results of many of those
strategies in the same manner as current accounting practice. The Company
is in the process of evaluating the potential impact of the new accounting
standard.
10
In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-7, "Deposit Accounting: Accounting for Insurance and
Reinsurance Contracts That Do Not Transfer Insurance Risk" (SOP 98-7). SOP
98-7 provides guidance on how to account for insurance and reinsurance
contracts that do not transfer insurance risk and applies to all entities
and all such contracts, except for long-duration life and health insurance
contracts. The method used to account for such contracts is referred to as
deposit accounting. SOP 98-7 does not address when deposit accounting
should be applied. SOP 98-7 identifies several methods of deposit
accounting for insurance and reinsurance contracts that do not transfer
insurance risk and provides guidance on the application of each method. SOP
98-7 is effective for financial statements for fiscal years beginning after
June 15, 1999, with earlier adoption encouraged. Restatement of previously
issued financial statements is not permitted. The effect of initially
adopting SOP 98-7 should be reported as a cumulative catch-up adjustment.
The Company does not expect the adoption of SOP 98-7 to have a material
impact on results of operations, financial condition or liquidity.
5. Earnings Per Share
------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
(in millions, except per share amounts) 1998 1997 1998 1997
------------- ------------- ------------- -------------
Net income ............................................ $199 $1,029 $2,433 $2,727
Preferred dividends ................................... (31) (33) (93) (105)
------------- ------------- ------------- -------------
Net income available to common stockholders for
basic EPS .......................................... 168 996 2,340 2,622
Effect of dilutive securities ......................... 6 10 19 30
------------- ------------- ------------- -------------
Net income available to common stockholders
for diluted EPS .................................... $174 $1,006 $2,359 $2,652
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average common shares
outstanding applicable to basic EPS ................ 1,120.3 1,100.9 1,118.6 1,102.1
Effect of dilutive securities:
Convertible securities ............................. 13.2 26.5 13.2 26.4
Employee stock plans ............................... 32.0 45.0 33.1 45.0
Warrants ........................................... .7 7.4 3.1 7.0
------------- ------------- ------------- -------------
Adjusted weighted average common shares
outstanding applicable to diluted EPS .............. 1,166.2 1,179.8 1,168.0 1,180.5
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic earnings per share .............................. $ 0.15 $ 0.90 $ 2.09 $ 2.38
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted earnings per share ............................ $ 0.15 $ 0.85 $ 2.02 $ 2.25
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
6. Debt
----
Investment banking and brokerage borrowings consisted of the following:
(millions) September 30, 1998 December 31, 1997
---------- ------------------------- -------------------------
Commercial paper ...................................... $ 11,825 $ 7,110
Other short-term borrowings ........................... 4,303 4,354
------------ -----------
$16,128 $11,464
------------ -----------
------------ -----------
Investment banking and brokerage borrowings are short-term in nature and
include commercial paper, bank borrowings and other borrowings, such as
deposit liabilities, used to finance Salomon Smith Barney's operations,
11
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, 1998 and December 31, 1997 was U.S. dollar
denominated.
Salomon Smith Barney has a $1.5 billion revolving credit agreement with a
bank syndicate that extends through May 2001, and a $3.5 billion 364-day
revolving credit agreement that extends through May 1999. Salomon 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. Under these facilities Salomon Smith
Barney is required to maintain a certain level of consolidated adjusted net
worth (as defined in the agreements). At September 30, 1998, this
requirement was exceeded by approximately $2.8 billion. At September 30,
1998, there were no borrowings outstanding under either facility.
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.
Short-term borrowings consisted of commercial paper outstanding as follows:
(millions) September 30, 1998 December 31, 1997
--------- --------------------------- -------------------------
Travelers Group Inc. ....................................... $ 682 $ -
Commercial Credit Company .................................. 5,130 3,871
Travelers Property Casualty Corp. .......................... - 108
---------- ---------
$5,812 $3,979
---------- ---------
---------- ---------
Long-term debt, including its current portion, consisted of the following:
(millions) September 30, 1998 December 31, 1997
--------- ------------------------- ------------------------
Travelers Group Inc. ....................................... $ 1,974 $ 1,695
Salomon Smith Barney Holdings Inc. ......................... 20,905 19,064
Commercial Credit Company .................................. 6,250 6,300
Travelers Property Casualty Corp. .......................... 1,250 1,249
The Travelers Insurance Group Inc. ......................... 33 44
------------ ----------
$30,412 $28,352
------------ ----------
------------ ----------
TRV, Commercial Credit Company (CCC), Travelers Property Casualty Corp.
(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 (as discussed below) 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 which expires
in June 2001 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 facility is limited to $250 million. At September 30, 1998, $700
million was allocated to TRV and $300 million was allocated to CCC. Under
this facility, the Company is required to maintain a certain level of
consolidated stockholders' equity (as defined in the agreement). At
September 30, 1998, this requirement was exceeded by approximately $10.9
billion. TRV and CCC also have $200 million in 364-day facilities which
expire in August 1999 and may be allocated to either of TRV or CCC. At
September 30, 1998, $150 million was allocated to TRV and $50 million was
allocated to CCC. In addition TRV and CCC also have a $500 million 60-day
facility which expires in November 1998 and may be allocated to either of
TRV or CCC. At September 30, 1998 all of this facility was allocated to
CCC. At September 30, 1998, there were no borrowings outstanding under any
of these facilities.
12
CCC also has committed and available revolving credit facilities on a
stand-alone basis of $4.750 billion, consisting of $3.4 billion in
five-year facilities expiring in 2002 and $1.350 billion in a 364-day
facility that expires in July 1999.
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, 1998, CCC would have been able to
remit $751 million under its most restrictive covenants.
TAP has a five-year revolving credit facility in the amount of $250 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, 1998,
this requirement was exceeded by approximately $4.0 billion. At September
30, 1998, 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 subsidiaries are limited to $805 million in 1998
without the prior approval of the Connecticut Insurance Department. TAP
received $430 million of dividends from its insurance subsidiaries during
the first nine months of 1998.
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 $551 million of statutory
surplus is available in 1998 for such dividends without the prior approval
of the Connecticut Insurance Department, of which $110 million has been
paid during the first nine months of 1998.
13
7. Trading Derivatives
-------------------
The following table discloses the notional amounts of derivative financial
instruments held by Salomon Smith Barney for trading purposes as of
September 30, 1998 and December 31, 1997:
September 30, 1998 December 31, 1997
---------------------------------- ----------------------------------
Current Market or Current Market or
Notional Fair Value Notional Fair Value
----------------------- ----------------------
(billions) Amounts Assets Liabilities Amounts Assets Liabilities
- ---------------------------------------------------------- ---------- ---------- ------------ -- ----------- ---------- -----------
Exchange-issued products:
Futures contracts (a) ................................ $977.3 $ - $ - $940.5 $ - $ -
Other exchange-issued products:
Equity contracts .................................. 11.0 0.3 0.4 10.6 0.2 0.4
Fixed income contracts ............................ 224.8 0.1 0.1 138.1 - -
Commodities contracts ............................. 1.6 - - 3.5 - -
- ---------------------------------------------------------- ---------- ---------- ------------ -- ----------- ---------- -----------
Total exchange-issued products .......................... 1,214.7 0.4 0.5 1,092.7 0.2 0.4
- ---------------------------------------------------------- ---------- ---------- ------------ -- ----------- ---------- -----------
Over-the-counter swaps, swap options, caps and floors:
Swaps ................................................ 2,096.1 1,328.3
Swaps options written ................................ 68.4 38.6
Swap options purchased ............................... 79.4 48.8
Caps and floors ...................................... 196.2 161.4
- ---------------------------------------------------------- ---------- ---------- ------------ -- ----------- ---------- -----------
Total OTC swaps, swap options, caps and floors .......... 2,440.1 9.1 9.3 1,577.1 5.8 6.7
- ---------------------------------------------------------- ---------- ---------- ------------ -- ----------- ---------- -----------
OTC foreign exchange contracts and options:
Forward currency contracts ........................... 140.1 1.2 1.1 111.3 1.0 1.0
Options written ...................................... 77.4 - 0.8 41.3 - 0.6
Options purchased .................................... 65.1 0.9 - 37.7 0.6 -
- ---------------------------------------------------------- ---------- ---------- ------------ -- ----------- ---------- -----------
Total OTC foreign exchange contracts and options ........ 282.6 2.1 1.9 190.3 1.6 1.6
- ---------------------------------------------------------- ---------- ---------- ------------ -- ----------- ---------- -----------
Other options and contractual commitments:
Options and warrants on equities and equity indices .. 53.3 3.2 3.8 54.8 1.8 2.7
Options and forward contracts on fixed-income .. 643.9 0.5 0.6 343.4 0.3 0.1
securities
Commodities contracts ................................ 9.7 0.2 0.1 14.3 0.4 0.2
- ---------------------------------------------------------- ---------- ---------- ------------ -- ----------- ---------- -----------
Total contractual commitments ........................... $4,644.3 $15.5 $16.2 $3,272.6 $10.1 $11.7
- ---------------------------------------------------------- ---------- ---------- ------------ -- ----------- ---------- -----------
(a) Margin on futures contracts is included in brokerage receivables/payables
on the Condensed Consolidated Statement of Financial Condition.
8. Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
----------------------------------------------------------------
In January 1998, Travelers Capital IV (now known as Citigroup Capital IV),
a wholly owned subsidiary trust of TRV, issued 8 million 6.850% Trust
Preferred Securities (the TRV IV Preferred Securities) with a liquidation
preference of $25 per TRV IV Preferred Security to the public and 247,440
common securities to TRV, the proceeds of which were invested by Travelers
Capital IV in $206 million of 6.850% Junior Subordinated Deferrable
Interest Debentures issued by TRV (the TRV Debentures). The $206 million of
TRV Debentures is the sole asset of Travelers Capital IV. The TRV
Debentures mature on January 22, 2038 and are redeemable by TRV in whole or
in part at any time after January 22, 2003. Travelers Capital IV will use
the proceeds from any such redemption to redeem a like amount of TRV IV
Preferred Securities and common securities. Distributions on the TRV IV
Preferred Securities and common securities are cumulative and payable
quarterly in arrears. TRV's obligations under the agreements that relate to
the TRV IV Preferred Securities, the Trust and the TRV Debentures
constitute a full and unconditional guarantee by TRV of the Trust's
obligations under the TRV IV Preferred Securities.
In January 1998, SSBH Capital I, a wholly owned subsidiary trust of Salomon
Smith Barney, issued 16 million 7.2% Trust Preferred Securities (SSBH
Capital Preferred Securities) with a liquidation preference of $25 per SSBH
Capital Preferred Security to the public and 494,880 common securities to
Salomon Smith Barney, the proceeds of which were invested by SSBH Capital I
in $412 million of 7.2% Subordinated Deferrable Interest Debentures issued
by Salomon Smith Barney (the Salomon Smith Barney Debentures). The $412
million of Salomon Smith Barney Debentures is the sole asset of SSBH
Capital I. The Salomon Smith Barney Debentures
14
mature on January 28, 2038 and are redeemable by Salomon Smith Barney in
whole or in part at any time after January 28, 2003. SSBH Capital I will
use the proceeds from any such redemption to redeem a like amount of SSBH
Capital Preferred Securities and common securities. Distributions on the
SSBH Capital Preferred Securities and common securities are cumulative and
payable quarterly in arrears. Salomon Smith Barney's obligations under the
agreements that relate to the SSBH Capital Preferred Securities, the Trust
and the Salomon Smith Barney Debentures constitute a full and unconditional
guarantee by Salomon Smith Barney of the Trust's obligations under the SSBH
Capital Preferred Securities.
9. Contingencies
-------------
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,
1998 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 Superfund and
other 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 is not likely that these claims
will have a material adverse effect on the Company's financial condition or
liquidity.
In the ordinary course of business TRV and/or its subsidiaries are also
defendants or co-defendants in various litigation matters, other than those
described above. Although there can be no assurances, the Company believes,
based on information currently available, that the ultimate resolution of
these legal proceedings would not be likely to have a material adverse
effect on the Company's results of operations, financial condition or
liquidity.
15
Item 2. 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) 1998 1997 1998 1997
- ---------------------------------------- ------------- ------------ ----------- -----------
Revenues .............................. $ 8,222 $ 9,961 $ 28,686 $ 27,845
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Net income ............................ $ 199 $ 1,029 $ 2,433 $ 2,727
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Earnings per share:
Basic .............................. $ 0.15 $ 0.90 $ 2.09 $ 2.38
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Diluted ............................ $ 0.15 $ 0.85 $ 2.02 $ 2.25
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Weighted average common shares
outstanding (Basic) ................ 1,120.3 1,100.9 1,118.6 1,102.1
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Adjusted weighted average common shares
outstanding (Diluted) ............. 1,166.2 1,179.8 1,168.0 1,180.5
------------ --------- ---------- ----------
------------ --------- ---------- ----------
Citicorp Merger
As discussed in Notes 1 and 2 of Notes to the Condensed Consolidated Financial
Statements, on October 8, 1998, Citicorp merged with and into a newly formed,
wholly owned subsidiary of Travelers Group Inc. (TRV) (the Merger) in a
transaction accounted for under the pooling of interests method. Generally
accepted accounting principles (GAAP) do not permit giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include a period subsequent to the
date of consummation. The accompanying financial data as of September 30, 1998
and 1997 and December 31, 1997 and for the three-month and nine-month periods
ended September 30, 1998 and 1997 include only the accounts and results of TRV
and its subsidiaries (collectively, the Company). On October 8, 1998, TRV
changed its name to Citigroup Inc. (Citigroup). The pooling of interests method
of accounting requires the restatement of all periods presented as if TRV and
Citicorp had always been combined. Therefore, beginning in the fourth quarter of
1998, which will include the date of consummation of the Merger (October 8,
1998), financial statements for all periods presented will be restated to
include the accounts and results of Citicorp.
Results of Operations
Consolidated net income for the quarter ended September 30, 1998 was $199
million, and includes reported investment portfolio gains of $25 million after
tax and minority interest. This compares with net income of $1.029 billion in
the 1997 period, which included reported investment portfolio gains of $82
million after tax and minority interest.
The 1998 third quarter effective tax rate is approximately 18%, reflecting the
impact of municipal bond interest at Travelers Property Casualty Corp (TAP) and
Salomon Smith Barney Holdings Inc. (Salomon Smith Barney) on a lower overall
level of earnings, plus lower state tax expense at Salomon Smith Barney.
Consolidated net income for the nine months ended September 30, 1998 was $2.433
billion, compared to $2.727 billion in the 1997 period. The 1998 nine-month
period includes portfolio gains of $140 million compared to $97 million in
portfolio gains in the 1997 period and a credit of $191 million in the second
quarter of 1998 representing a reduction in the restructuring reserve recorded
in the fourth quarter of 1997 in connection with the Salomon Inc merger (see
Note 3 of Notes to Condensed Consolidated Financial Statements).
16
The following discussion presents in more detail each segment's performance.
Segment Results for the Three Months Ended September 30, 1998 and 1997
----------------------------------------------------------------------
Investment Services
Three Months Ended September 30,
----------------------------------------------------------------------------
1998 1997
- -------------------------------------------- ---------------------------------- --- -------------------------------------
(millions) Revenues Net income Revenues Net income
- -------------------------------------------- ----------------- ---------------- --- ------------------ ------------------
Investment banking and brokerage ................ $3,691 $(395) $5,661 $449
Asset management ................................ 244 70 213 59
- -------------------------------------------- ----------------- ---------------- --- ------------------ ------------------
Salomon Smith Barney ............................ $3,935 $(325) $5,874 $508
- -------------------------------------------- ----------------- ---------------- --- ------------------ ------------------
- -------------------------------------------- ----------------- ---------------- --- ------------------ ------------------
Salomon Smith Barney reported an after tax loss of $325 million for the quarter
ended September 30, 1998. Included in this is an after-tax loss of $700 million
related to Global Arbitrage and Russian-related credit losses. Extreme
volatility in the global fixed income markets affected trading results
negatively for the quarter, while Private Client and Asset Management
performance continued at high levels. Total revenues, net of interest expense,
were $921 million in the 1998 quarter compared to $3.033 billion in the 1997
quarter.
Salomon Smith Barney Revenues
Three Months Ended
September 30,
---- -----------------------------------------
(millions) 1998 1997
- ----------------------------------------------------- ---- ----------------- ---- ------------------
Commissions ........................................... $ 797 $ 783
Investment banking .................................... 531 597
Principal transactions ................................ (1,331) 790
Asset management and administration fees .............. 563 448
Interest income, net* ................................. 325 366
Other income .......................................... 36 49
- ----------------------------------------------------- ---- ----------------- ---- ------------------
Net revenues* ......................................... $921 $3,033
- ----------------------------------------------------- ---- ----------------- ---- ------------------
- ----------------------------------------------------- ---- ----------------- ---- ------------------
* Net of interest expense of $3.014 billion and $2.841 billion for the
three-month period ended September 30, 1998 and 1997, respectively. Revenues
included in the condensed consolidated statement of income are before
deductions for interest expense.
Commission revenues in the third quarter of 1998 were relatively unchanged from
the prior year quarter. An increase in listed commissions was offset by
decreases in other commissions.
Investment banking revenues decreased to $531 million in the third quarter of
1998 compared with $597 million in the 1997 quarter. Record merger and
acquisition fees were more than offset by declines in equity, high yield, high
grade debt, and unit trust underwritings. Salomon Smith Barney held its number
one rank in municipal underwriting for the third quarter of 1998.
Principal transaction revenues decreased in the third quarter of 1998 to a loss
of $1.331 billion. Decreases in fixed income trading results include losses due
to risk reduction of U.S. fixed income arbitrage, losses in other Global
Arbitrage, and losses in the customer business. These were partially offset by
an increase in equity trading results. Fixed income trading results were
adversely impacted by significant dislocations in the global fixed income
markets, including greatly reduced liquidity and widening credit spreads.
Included in these results are Russian-related credit losses.
17
Asset management and administration fees increased 26% to a record $563 million
in the third quarter of 1998, up from $448 million in the third quarter of 1997.
This reflects broad growth in all recurring fee-based products. At September 30,
1998, internally managed assets were $183.4 billion and total assets under
fee-based management were $247.3 billion compared to $157.8 billion and $216.2
billion, respectively, at September 30, 1997.
Net interest and dividends decreased to $325 million in the third quarter of
1998, from $366 million in the third quarter of 1997 due to a decrease in the
level of net interest-earning assets.
Total non-interest expenses were $1.445 billion in the third quarter of 1998
compared to $2.203 billion in the 1997 quarter, reflecting a reduction in
compensation and benefits of $711 million, largely related to performance based
compensation accruals.
Assets Under Fee-Based Management
At September 30,
------------------- -----------------
(billions) 1998 1997
----------------------------------------------------------------------- ------------------- -----------------
Money market funds ..................................................... $ 55.1 $ 45.3
Mutual funds ........................................................... 53.5 46.4
Managed accounts ....................................................... 61.0 55.0
----------------------------------------------------------------------- ------------------- -----------------
Salomon Smith Barney Asset Management ............................... 169.6 146.7
Financial Consultant managed accounts .................................. 13.8 11.1
----------------------------------------------------------------------- ------------------- -----------------
Total internally managed accounts ................................... 183.4 157.8
Consulting Group externally managed assets ............................. 63.9 58.4
----------------------------------------------------------------------- ------------------- -----------------
Total assets under fee-based management ............................. $247.3 $216.2
----------------------------------------------------------------------- ------------------- -----------------
----------------------------------------------------------------------- ------------------- -----------------
Although included in Salomon Smith Barney's overall results, the following
highlights the revenues and operating earnings of the asset management division:
Three Months Ended September 30,
--------------------- ---------------------
(millions) 1998 1997
--------------------------------------------------------------------- --------------------- ---------------------
Revenues:
Investment advisory, administration and distribution fees ................. $217 $186
Unit Investment Trust revenues - net ...................................... 18 19
Other revenues ............................................................ 9 8
--------------------------------------------------------------------- --------------------- ---------------------
Total revenues ............................................................ $244 $213
--------------------------------------------------------------------- --------------------- ---------------------
--------------------------------------------------------------------- --------------------- ---------------------
Operating earnings ........................................................... $ 70 $ 59
--------------------------------------------------------------------- --------------------- ---------------------
--------------------------------------------------------------------- --------------------- ---------------------
The division's 19% increase in earnings reflects continued strength in mutual
funds, retail and institutional managed accounts, and its share of unit trust
revenues. The pretax profit margin from this unit was 47.8%, up from 46.2% in
the prior-year period, and among the highest in the industry.
18
At September 30, 1998, assets under fee-based management for Salomon Smith
Barney Asset Management (SSBAM) consisted of 33% in money market funds, 31% in
mutual funds and 36% in accounts managed for high net worth individuals, pension
funds, corporations and other institutions. The slight increase in money market
funds as a percentage of the total reflects investor reaction to recent market
volatility. Investment advisory, administration and distribution fees rose 16%
to $217 million in the third quarter of 1998, paralleling a 16% increase in
assets under fee-based management from the comparable period last year.
During the quarter, SSBAM completed its acquisition of the Australian asset
management business of JP Morgan, which added $4.8 billion in assets under
fee-based management. Included in this projected market growth are the rapid
changes taking place in the retirement market in Australia.
Consumer Finance Services
Three Months Ended September 30,
-------------------------------------------------------------------------
(millions) 1998 1997
--------------------------------------- ----------------- ------------------ ---------------- -------------------
Revenues Net income Revenues Net income
--------------------------------------- ----------------- ------------------ ---------------- -------------------
Consumer Finance Services ..................... $543 $84 $448 $66
--------------------------------------- ----------------- ------------------ ---------------- -------------------
--------------------------------------- ----------------- ------------------ ---------------- -------------------
Earnings in the third quarter of 1998 were $84 million compared to $66 million
in the third quarter of 1997. This excellent performance reflects continued
internal receivables growth in all major products, an improved charge-off rate,
and the integration of Security Pacific Financial Services into the Commercial
Credit branch system since July 1997.
Receivables owned reached a record of $12.67 billion, up 19% from the prior
year period, and up $1.62 billion or 15% since year-end 1997. This excludes
$255.1 million in credit card receivables securitized on March 6, 1998. Much
of the growth in real estate-secured loans resulted from the continued strong
performance of the $.M.A.R.T. loan-Registered Trademark- program, as well as
solid sales in the branch network. On a managed basis, including securitized
assets, receivables totaled $13.01 billion, an increase of $1.77 billion
since year-end 1997.
During the third quarter of 1998, the average yield on owned receivables was
14.21%, down from 14.57% in the third quarter of 1997, reflecting the shift in
the portfolio mix toward lower-risk real estate-secured loans, which have lower
margins. At September 30, 1998, the owned portfolio consisted of 48% real
estate-secured loans, 34% personal loans, 11% credit cards, and 7% sales finance
and other.
The charge-off rate on owned receivables of 2.39% in the third quarter of 1998
continued to improve from 2.50% in the third quarter of 1997 and from 2.66% in
the second quarter of 1998. Delinquencies over 60 days on owned receivables were
2.27% at September 30, 1998, down from 2.35% at year-end 1997, but up from 2.17%
at the end of the comparable quarter last year, which contained a short-term
benefit from the transition of Security Pacific's portfolio to Commercial
Credit's charge-off policies.
19
As of or for the
Three Months Ended September 30,
------------------------ ------------------
1998 1997
------------------------ ------------------
Allowance for credit losses as a % of
net outstandings ........................................ 2.87% 3.05%
Charge-off rate for the period ............................ 2.39% 2.50%
60 + days past due on a contractual
basis as a % of gross consumer
finance receivables at quarter end ...................... 2.27% 2.17%
Life Insurance Services
Three Months Ended September 30,
------------------------------ ----- ------------------------------
1998 1997
------------------------------ ----- ------------------------------
(millions) Revenues Net income Revenues Net income
- ------------------------------------------------ ------------- ---------------- ----- ------------- ----------------
Travelers Life and Annuity (1) ................... $ 721 $128 $ 716 $ 150
Primerica Financial Services (2) ................. 414 100 385 87
- ------------------------------------------------ ------------- ---------------- ----- ------------- ----------------
Total Life Insurance Services .................... $1,135 $228 $1,101 $237
- ------------------------------------------------ ------------- ---------------- ----- ------------- ----------------
- ------------------------------------------------ ------------- ---------------- ----- ------------- ----------------
(1) Net income includes $5 million and $43 million of reported investment
portfolio gains in 1998 and 1997, respectively.
(2) Net income includes $1 million and $2 million of reported investment
portfolio gains in 1998 and 1997, respectively.
Travelers Life and Annuity
Travelers Life and Annuity consists of annuity, life and long-term care products
marketed by The Travelers Insurance Company (TIC) under the Travelers name.
Among the range of products offered are fixed and variable deferred annuities,
payout annuities and term, universal and variable life and long-term care
insurance to individuals and small businesses. It also provides group pension
products, including guaranteed investment contracts, and group annuities to
employer-sponsored retirement and savings plans. These products are primarily
marketed through The Copeland Companies (Copeland), an indirect wholly owned
subsidiary of TIC, Salomon Smith Barney Financial Consultants and a nationwide
network of independent agents. The majority of the annuity business and a
substantial portion of the life business written by Travelers Life and Annuity
is accounted for as investment contracts, with the result that the premium
deposits collected are not included in revenues. Earnings before portfolio gains
increased 16% to $123 million in the third quarter of 1998, from $107 million in
the comparable 1997 period. Earnings growth for the quarter reflects strong
double-digit business volume growth in annuity account balances and life and
long term care premiums. A decline in investment income yields for the quarter,
which vary by product line, results primarily from participation in partnership
investment interests being negatively impacted by the downturn in marketplace
conditions. This decline was substantially offset by a favorable reserve
settlement in the runoff group life and health business.
In deferred annuities, significant sales through the established distribution
channels of Salomon Smith Barney Financial Consultants and Copeland were
complemented by the successful third quarter launches of the Primerica Financial
Services (PFS) and Citibank branch network cross-selling initiatives. Total
premium deposits for the third quarter of 1998 increased 52% to $872.9 million.
20
Account balances aggregated $17.5 billion at September 30, 1998, up 12% from a
year ago, but down 3% since June 30, 1998, reflecting the downturn in the market
value of the variable annuity account balances.
Payout and group annuity account balances and benefit reserves reached $13.3
billion at September 30, 1998, up 14% from a year ago. The revitalization of
this business is reflected in the 208% increase in net written premiums and
deposits (excluding the Company's employee pension plan deposits) in the third
quarter of 1998 to $1.082 billion, up from $350.5 million in the comparable 1997
period.
For individual life insurance, net premiums and deposits in the third quarter of
1998 were $78.5 million, up 13% from $69.5 million in the third quarter of 1997.
Single deposits rose to $17.1 million, and new periodic premium sales increased
73%, reflecting a 30% increase in sales at Salomon Smith Barney. Sales by
Salomon Smith Barney in the third quarter of 1998 increased to over 33% of new
periodic premium and single deposits. Life insurance in force was $54.2 billion
at September 30, 1998, up $3.3 billion from a year ago.
Earned premiums for the growing long term care insurance product line increased
26% in the third quarter of 1998 to $51.8 million, from $41.2 million in the
third quarter of 1997.
Strong sustained operating performance over the past several quarters was
recognized by Standard & Poor's in their September 1998 upgrade of TIC's
claims-paying rating to AA (Excellent). This rating is not a recommendation to
buy, sell or hold securities, and it may be revised or withdrawn at any time.
Primerica Financial Services
Earnings before portfolio gains for the third quarter of 1998 increased 17% to
$99 million from $85 million in the third quarter of 1997, reflecting continued
success at cross-selling a range of products, growth in life insurance in force,
favorable mortality experience and disciplined expense management.
Life insurance in force reached a record $380.6 billion at September 30, 1998,
up 3% from September 30, 1997, reflecting good policy persistency and stable
sales growth. New term life insurance sales during the third quarter of 1998
were $14.2 billion in face value, up 8% from $13.1 billion in the third quarter
of 1997. Although the number of policies issued declined quarter-over-quarter,
the average face amount per policy issued during the third quarter of 1998 rose
11%, reaching $223,485.
Cross-selling initiatives continued to enhance PFS's earnings. During the
third quarter of 1998, earnings related to the distribution of non-life
insurance products accounted for $22.0 million, or 22%, of PFS's operating
earnings, an increase of 28% from the prior year quarter. Sales of mutual
funds (at net asset value) were $725.0 million for the third quarter of 1998,
a 14% increase over third quarter 1997 sales of $635.9 million despite
significant market volatility in both the U.S. and Canada. During the third
quarter of 1998, Salomon Smith Barney funds accounted for 61% of PFS's U.S.
sales and 53% of PFS's total sales. Cash advanced on $.M.A.R.T.
loan-Registered Trademark- and $.A.F.E.-Registered Trademark- loan products
underwritten by Commercial Credit was $351.1 million in the third quarter of
1998, up 11% from the comparable period in 1997. The TRAVELERS
SECURE-Registered Trademark- line of property and casualty insurance products
showed strong growth, with premiums up 213% to $60.8 million and the number
of policies sold in the third quarter of 1998 up 60% to 41,483 from the
comparable 1997 period. The number of agents licensed to sell auto and
homeowners insurance jumped to almost 12,700 individuals at September 30,
1998, a 46% increase since the beginning of the year. Variable annuity
continued to show momentum, reaching net written premiums and deposits of
$171.9 million in the third quarter of 1998.
21
One of the primary factors in PFS's cross-selling success, the Financial Needs
Analysis (FNA), continues to help the company's Personal Financial Analysts
define and address their clients' needs. Nearly 404,000 FNA's were submitted in
the first nine months of 1998.
Property & Casualty Insurance Services
Three Months Ended September 30,
---------------------------- ------------------------
(millions) 1998 1997
- ---------------------------------------------------------- ---------------------------- ------------------------
Net Net
income income
Revenues (loss) Revenues (loss)
- ---------------------------------------------------------- ------------- -------------- ------------- ----------
Commercial (1) (2) ..................................... $1,655 $247 $1,651 $255
Personal (1) (3) ....................................... 944 95 853 101
Financing costs and other (1) .......................... 2 (27) 3 (29)
Minority interest ...................................... - (53) - (55)
- ---------------------------------------------------------- ------------- -------------- ------------- ----------
Total Property & Casualty Insurance Services ........... $2,601 $262 $2,507 $272
- ---------------------------------------------------------- ------------- -------------- ------------- ----------
- ---------------------------------------------------------- ------------- -------------- ------------- ----------
(1) Before minority interest.
(2) Net income includes $16 million and $31 million of reported investment
portfolio gains in 1998 and 1997, respectively
(3) Net income includes $5 million and $6 million of reported investment
portfolio gains in 1998 and 1997, respectively.
Earnings before portfolio gains and minority interest increased to $294 million
in the third quarter of 1998 from $290 million in the third quarter of 1997.
Results for the third quarter of 1998 were solid compared to the third quarter
of 1997, especially in view of the current quarter's catastrophe losses, after
taxes and reinsurance, of $36.7 million and unusually high losses from other
weather-related claims. Contributing to the increase in earnings were lower
expenses and increased production in Personal Lines.
Commercial Lines
Earnings before portfolio gains increased to $231 million in the third quarter
of 1998 from $224 million in the third quarter of 1997. The 3% increase reflects
continued expense savings and a decline in asbestos and environmental incurred
losses, partially offset by increased losses from catastrophes and other
weather-related events.
Commercial Lines net written premiums for the third quarter of 1998 totaled
$1.168 billion, compared to $1.176 billion in the third quarter of 1997. Net
written premium levels continue to be unfavorably impacted by the difficult
pricing environment and reflect TAP's disciplined approach to underwriting and
risk management.
Fee income for the third quarter of 1998 was $74.2 million, a $16.2 million
decrease from the third quarter of 1997. This decrease was the result of the
depopulation of involuntary pools as the loss experience of workers'
compensation improved and insureds moved to voluntary markets, TAP's continued
success in lowering workers' compensation losses of service customers and a
slight increase in demand in the marketplace for guaranteed cost products as
opposed to service fee-based products.
National Accounts works with national brokers and regional agents providing
insurance coverages and services, primarily workers' compensation, mainly to
large corporations. National Accounts also
22
includes the alternative market business, which sells claims and policy
management services to workers' compensation and automobile assigned risk plans,
self-insurance pools throughout the United States and to niche voluntary
markets. National Accounts net written premiums of $175.3 million for the third
quarter of 1998 increased $24.2 million from the third quarter of 1997. This
increase was primarily the result of two new large accounts written in the third
quarter of 1998, partially offset by pricing declines due to the highly
competitive marketplace and TAP's continued disciplined approach to underwriting
and risk management. National Accounts new business was significantly higher in
the third quarter of 1998 than in the third quarter of 1997, reflecting the
addition of two large accounts in the third quarter of 1998. National Accounts
business retention ratio was significantly higher in the third quarter of 1998
than in the third quarter of 1997, due to the loss of one large account in the
third quarter of 1997.
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. Commercial Accounts net written premiums were $446.0 million
in the third quarter of 1998 compared to $502.3 million in the third quarter of
1997. The decrease in net written premiums reflected continued pricing declines
due to the highly competitive marketplace and TAP's continued disciplined
approach to underwriting and risk management, partially offset by growth through
programs designed to leverage underwriting experience in specific industries.
Commercial Accounts new business in the third quarter of 1998 was significantly
lower than in the third quarter of 1997. The decrease in new business reflected
TAP's focus on maintaining its selective underwriting policy. Commercial
Accounts business retention ratio remained strong and was virtually the same in
the third quarter of 1998 and 1997.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $365.7 million in the third quarter of
1998 compared to $353.9 million in the third quarter of 1997. The increase in
Select Accounts net written premiums was due to a decrease in ceded premiums,
partially offset by the highly competitive marketplace and TAP's continued
disciplined approach to underwriting and risk management. New premium business
in Select Accounts in the third quarter of 1998 was significantly lower than in
the third quarter of 1997. The decrease in new business reflected TAP's focus on
maintaining its selective underwriting policy. Select Accounts business
retention ratio remained strong in the third quarter of 1998 and was virtually
the same as the third quarter of 1997.
Specialty Accounts markets products to national, midsize and small customers,
including individuals, and distributes them through both wholesale brokers and
retail agents and brokers throughout the United States. Specialty Accounts net
written premiums were $181.2 million in the third quarter of 1998 compared to
$169.1 million in the third quarter of 1997. This increase primarily reflects
strong production in excess and surplus lines.
Catastrophe losses, net of taxes and reinsurance, were $15 million in the third
quarter of 1998, primarily due to Hurricane Georges. There were no catastrophe
losses in the third quarter of 1997.
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the third quarter of 1998 was 108.0% compared to 109.2% in the third
quarter of 1997. The GAAP combined ratio (before policyholder dividends) for
Commercial Lines in the third quarter of 1998 was 107.9% compared to 108.0% in
the third quarter of 1997. Although the combined ratios remained relatively
flat, the loss and loss adjustment expense ratio component increased in the
third quarter of 1998 compared to the third quarter of 1997 due to higher
catastrophe and other weather-related property losses and lower fee income, and
was offset by a decrease in the underwriting expense ratio component due to
continued expense reductions.
23
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
Personal Lines
Earnings before portfolio gains were $90 million in the third quarter of 1998,
compared to $95 million in the third quarter of 1997. The 1998 results reflect
higher catastrophe losses, partially offset by an increase in production and net
investment income compared to the third quarter of 1997. Catastrophe losses, net
of taxes and reinsurance, were $21.8 million in the third quarter of 1998. There
were no catastrophe losses in the third quarter of 1997. The 1998 catastrophe
losses were primarily due to Hurricanes Bonnie and Georges and windstorms in the
Midwest and Northeast.
Net written premiums in the third quarter of 1998 grew 17% over the prior
year to $908.7 million. This increase reflects growth in target markets
served by independent agents and growth in affinity group marketing, joint
marketing arrangements and the TRAVELERS SECURE-Registered Trademark-
program. The TRAVELERS SECURE-Registered Trademark-program markets Personal
Lines products through the independent agents of PFS. The growth in
independent agent premiums has been primarily due to TAP's success in
pursuing book-of-business transfers within certain independent insurance
agencies. Many independent agencies are consolidating their business to a
smaller number of insurance carriers resulting in transfers of business to
their preferred carriers.
The statutory combined ratio for Personal Lines in the third quarter of 1998 was
96.3% compared to 93.0% in the 1997 third quarter. The GAAP combined ratio for
Personal Lines in the third quarter of 1998 was 94.5% compared to 93.2% in the
1997 third quarter. The loss and loss adjustment expense ratio component
increased in the third quarter of 1998 compared to the third quarter of 1997 due
to the higher level of catastrophe losses and a decrease in favorable prior year
reserve development in the automobile bodily injury line, and was offset by a
decrease in the underwriting expense ratio component due to benefits from
productivity improvements as premium levels increase.
GAAP combined ratios differ from statutory combined ratios for Personal Lines
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 1998 and 1997
was interest expense of $26 million after tax, reflecting financing costs
associated with the 1996 acquisition of Travelers Casualty and Surety Company
(formerly The Aetna Casualty and Surety Company) and The Standard Fire Insurance
Company (collectively, Aetna P&C).
Corporate and Other
Three Months Ended September 30,
------------------------------- ------------------------------
(millions) 1998 1997
- ----------------------------------------------------- ------------------------------- ------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- ----------------------------------------------------- --------------- --------------- -------------- ---------------
Total Corporate and Other (1) .............................. $8 $(50) $31 $(54)
- ----------------------------------------------------- --------------- --------------- -------------- ---------------
- ----------------------------------------------------- --------------- --------------- -------------- ---------------
(1) Net income (expense) includes $1 million and $6 million of reported
investment portfolio gains in 1998 and 1997, respectively.
24
Net treasury and corporate staff expenses for the third quarter of 1998 include
a reduction in incentive compensation accruals and an increase in net treasury
expense.
Segment Results for the Nine Months Ended September 30, 1998 and 1997
---------------------------------------------------------------------
The overall operating trends for the nine months ended September 30, 1998 and
1997 were substantially the same as those of the third quarter periods except as
noted below:
Investment Services
Nine Months Ended September 30,
----------------------------------------------------------------------------
1998 1997
- -------------------------------------------- ---------------------------------- --- -------------------------------------
(millions) Revenues Net income Revenues Net Income
- -------------------------------------------- ----------------- ---------------- --- ------------------ ------------------
Investment banking and brokerage (1) .............. $15,105 $ 586 $15,468 $1,221
Asset management .................................. 696 193 593 152
- -------------------------------------------- ----------------- ---------------- --- ------------------ ------------------
Salomon Smith Barney .............................. $15,801 $ 779 $16,061 $1,373
- -------------------------------------------- ----------------- ---------------- --- ------------------ ------------------
- -------------------------------------------- ----------------- ---------------- --- ------------------ ------------------
(1) Net income in 1998 includes a $191 million after-tax credit to the
restructuring charge related to the merger with Salomon Inc.
For the nine months ended September 30, 1998 Salomon Smith Barney reported
earnings (before the restructuring reserve credit) of $588 million. Total
revenues, net of interest expense, were $6.797 billion in the 1998 period
compared to $8.473 billion in the 1997 period.
Salomon Smith Barney Revenues
Nine Months Ended September 30,
--------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------- ---------------------- ---------------------
Commissions ................................................................ $2,376 $2,185
Investment banking ......................................................... 1,799 1,556
Principal transactions ..................................................... (236) 2,261
Asset management and administration fees ................................... 1,614 1,236
Interest income, net* ...................................................... 1,121 1,118
Other income ............................................................... 123 117
- --------------------------------------------------------------------- ---------------------- ---------------------
Net revenues* .............................................................. $6,797 $8,473
- --------------------------------------------------------------------- ---------------------- ---------------------
- --------------------------------------------------------------------- ---------------------- ---------------------
* Net of interest expense of $9.004 billion and $7.588 billion for the
nine-month period ended September 30, 1998 and 1997, respectively.
Revenues included in the condensed consolidated statement of income are
before deductions for interest expense.
Commission revenues increased 9% to $2.376 billion in the 1998 period from
$2.185 billion in the 1997 period. Investment banking revenues increased 16% to
$1.799 billion in the 1998 period, up from $1.556 billion in the 1997 period,
primarily due to increased merger and acquisition advisory fees. Principal
transaction revenues decreased in the 1998 period to a loss of $236 million.
Asset management and administration fees increased 31% to $1.614 billion in the
1998 period, up from $1.236 billion in the 1997 period.
25
The following highlights the revenues and operating earnings of the asset
management division:
Nine Months Ended September 30,
--------------------- --------------------
(millions) 1998 1997
---------------------------------------------------------------------- --------------------- --------------------
Revenues:
Investment advisory, administration and distribution fees ...................... $633 $527
Unit Investment Trust revenues - net ........................................... 38 35
Other revenues ................................................................. 25 31
---------------------------------------------------------------------- --------------------- --------------------
Total revenues ................................................................. $696 $593
---------------------------------------------------------------------- --------------------- --------------------
---------------------------------------------------------------------- --------------------- --------------------
Operating earnings ................................................................ $193 $152
---------------------------------------------------------------------- --------------------- --------------------
---------------------------------------------------------------------- --------------------- --------------------
The division's 27% increase in earnings reflects continued strength in mutual
funds, managed accounts, and its share of unit trust revenues, as well as the
acquisition of $5.9 billion of Common Sense-Registered Trademark- Trust
assets at year-end 1997.
Investment advisory, administration and distribution fees rose 20% to $633
million in the first nine months of 1998, compared to $527 million in the
comparable period last year.
Consumer Finance Services
Nine Months Ended September 30,
-------------------------------------------------------------------------
(millions) 1998 1997
--------------------------------------- ----------------- ------------------ ---------------- -------------------
Revenues Net income Revenues Net income
--------------------------------------- ----------------- ------------------ ---------------- -------------------
Consumer Finance Services ....................... $1,542 $213 $1,205 $167
--------------------------------------- ----------------- ------------------ ---------------- -------------------
--------------------------------------- ----------------- ------------------ ---------------- -------------------
During the first nine months of 1998, the average yield on owned receivables was
14.18%, down from 14.55% in the first nine months of 1997. The charge-off rate
on owned receivables of 2.60% in the first nine months of 1998 was improved from
the 2.74% rate in the first nine months of 1997.
Life Insurance Services
Nine Months Ended September 30,
------------------------------ ----- ------------------------------
1998 1997
------------------------------ ----- ------------------------------
(millions) Revenues Net income Revenues Net income
- ------------------------------------------------ ------------- ---------------- ----- ------------- ----------------
Travelers Life and Annuity (1) ................... $2,293 $449 $2,000 $370
Primerica Financial Services (2) ................. 1,236 298 1,135 247
- ------------------------------------------------ ------------- ---------------- ----- ------------- ----------------
Total Life Insurance Services .................... $3,529 $747 $3,135 $617
- ------------------------------------------------ ------------- ---------------- ----- ------------- ----------------
- ------------------------------------------------ ------------- ---------------- ----- ------------- ----------------
(1) Net income includes $77 million and $58 million of reported investment
portfolio gains in 1998 and 1997, respectively.
(2) Net income includes $1 million and $2 million of reported investment
portfolio gains in 1998 and 1997, respectively.
Travelers Life and Annuity
Deferred annuities, net written premium and deposits for the first nine months
of 1998 were up 39% to $2.467 billion from $1.776 billion in the first nine
months of 1997.
26
Payout and group annuity net written premiums and deposits (excluding the
Company's employee pension plan deposits) in the first nine months of 1998 were
$2.970 billion, up from $1.630 billion in the comparable 1997 period.
For individual life insurance, net written premiums and deposits in the first
nine months of 1998 were $246.4 million, up 19% from $207.3 million in the first
nine months of 1997. Single deposits were $61.4 million compared to $39.2
million in the 1997 period.
Earned premiums for the growing long-term care insurance product line increased
27% to $146.1 million in the first nine months of 1998 from $115.2 million in
the first nine months of 1997.
Primerica Financial Services
New term life insurance sales during the first nine months of 1998 were $43.0
billion in face value, up from $39.2 billion in the first nine months of 1997.
During the first nine months of 1998, earnings related to the distribution of
non-life insurance products accounted for $64.6 million, or 22%, of PFS's
operating earnings, an increase of 45% from the prior year period.
Sales of mutual funds (at net asset value) were $2.327 billion for the first
nine months of 1998, a 15% increase over the first nine months of 1997 sales of
$2.027 billion.
Cash advanced on $.M.A.R.T. loan-Registered Trademark- and
$.A.F.E.-Registered Trademark- loan products was up 14% to $1.078 billion in
the first nine months of 1998. The TRAVELERS SECURE-Registered Trademark-
line of property and casualty insurance products showed strong growth, with
premiums up almost four-fold to $154.6 million. Variable annuity sales also
climbed, reaching net written premiums and deposits of $473.4 million in the
first nine months of 1998.
Property & Casualty Insurance Services
Nine Months Ended September 30,
---------------------------- ------------------------
(millions) 1998 1997
- ---------------------------------------------------------- ---------------------------- ------------------------
Net Net
income income
Revenues (loss) Revenues (loss)
- ---------------------------------------------------------- ------------- -------------- ------------- ----------
Commercial (1) (2) .................................... $4,971 $742 $ 4,887 $666
Personal (1) (3) ...................................... 2,747 318 2,473 303
Financing costs and other (1) ......................... 9 (85) 9 (93)
Minority interest ..................................... - (163) - (153)
- ---------------------------------------------------------- ------------- -------------- ------------- ----------
Total Property & Casualty Insurance Services .......... $7,727 $812 $7,369 $723
- ---------------------------------------------------------- ------------- -------------- ------------- ----------
- ---------------------------------------------------------- ------------- -------------- ------------- ----------
(1) Before minority interest.
(2) Net income includes $59 million and $39 million of reported investment
portfolio gains in 1998 and 1997, respectively.
(3) Net income includes $12 million of reported investment portfolio gains in
1998 and $1 million of reported investment portfolio losses in 1997.
Commercial Lines
Commercial Lines net written premiums for the first nine months of 1998 totaled
$3.501 billion, compared to $3.656 billion in the first nine months of 1997. The
first nine months of 1997 net written premiums included an adjustment of $142
million due to a change to conform the Aetna P&C method
27
with The Travelers Indemnity Company and its subsidiaries (Travelers P&C)
method of recording certain net written premiums. Without this adjustment,
net written premiums were about level with the prior year.
Fee income for the first nine months of 1998 was $233.1 million, a $45.7 million
decrease from the first nine months of 1997.
National Accounts net written premiums of $483.5 million for the first nine
months of 1998 decreased $38.9 million from the first nine months of 1997.
National Accounts new business in the first nine months of 1998 was
significantly higher compared to the first nine months of 1997. New business
reflects the addition of two large accounts in the third quarter of 1998.
National Accounts business retention ratio was virtually the same in the first
nine months of 1998 compared to the first nine months of 1997. National Accounts
experienced an increase in claim service-only business as well as favorable
results from continued product development efforts, especially in workers'
compensation managed care programs.
Commercial Accounts net written premiums were $1.349 billion in the first nine
months of 1998 compared to $1.516 billion in the first nine months of 1997. The
1997 net written premiums included an adjustment of $127.0 million due to the
change to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums. Excluding this adjustment, net written
premiums decreased $40 million reflecting the highly competitive marketplace and
TAP's continued disciplined approach to underwriting and risk management. For
the first nine months of 1998, new premium business in Commercial Accounts
significantly declined compared to the first nine months of 1997, reflecting
TAP's focus on obtaining new business accounts where it can maintain its
selective underwriting policy. The Commercial Accounts business retention ratio
in the first nine months of 1998 remained strong and was virtually the same
compared to the first nine months of 1997. Commercial Accounts continues to
focus on the retention of existing business while maintaining its product
pricing standards and its selective underwriting policy.
Select Accounts net written premiums were $1.138 billion in the first nine
months of 1998 compared to $1.087 billion in the first nine months of 1997. The
1997 net written premiums included an adjustment of $15.0 million due to the
change to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums. New premium business in Select Accounts
was moderately lower in the first nine months of 1998 compared to the first nine
months of 1997, reflecting TAP's focus on maintaining its selective underwriting
policy. Select Accounts business retention ratio remained strong in the first
nine months of 1998 and was virtually the same as that in the first nine months
of 1997.
Specialty Accounts net written premiums were $529.9 million in the first nine
months of 1998 compared to $530.1 million in the first nine months of 1997.
Catastrophe losses, net of taxes and reinsurance, were $25.3 million and $5.1
million in the first nine months of 1998 and 1997, respectively. The 1998
catastrophe losses were primarily due to Hurricane Georges in the third quarter
and tornadoes in Nashville, Tennessee in the second quarter. The 1997
catastrophe losses were primarily due to tornadoes in the Midwest in the first
quarter.
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the first nine months of 1998 was 108.1% compared to 109.3% in the
first nine months of 1997. The GAAP combined ratio (before policyholder
dividends) for Commercial Lines in the first nine months of 1998 was 108.5%
compared to 108.3% in the first nine months of 1997.
28
The 1997 first nine months statutory and GAAP combined ratios for Commercial
Lines include an adjustment due to the change to conform the Aetna P&C method
with the Travelers P&C method of recording certain net written premiums.
Excluding this adjustment, the statutory and GAAP combined ratios before
policyholder dividends for the first nine months of 1997 would have been 109.9%
and 109.5%, respectively. The decrease in the first nine months of 1998
statutory and GAAP combined ratios compared to the first nine months of 1997
statutory and GAAP combined ratios excluding this adjustment was due to
continued expense reductions and a decline in asbestos and environmental
incurred losses, partially offset by higher catastrophe and other
weather-related losses and lower fee income.
Personal Lines
Total net written premiums in the first nine months of 1998 grew 16% over the
prior year to $2.589 billion, excluding a one-time adjustment in 1997 of $68.7
million due to a change in the quota share reinsurance arrangement.
Catastrophe losses, after taxes and reinsurance, were $43.5 million in the first
nine months of 1998 compared to $4.5 million in the first nine months of 1997.
The 1998 catastrophe losses were due to Hurricanes Bonnie and Georges and
windstorms in the Midwest and Northwest in the third quarter, tornadoes and wind
and hail storms in the Southeast and Midwest in the second quarter and ice
storms in northern New York and New England and windstorms on the East Coast in
the first quarter.
The statutory combined ratio for Personal Lines in the first nine months of 1998
was 94.2% compared to 91.9% in the 1997 first nine months. The GAAP combined
ratio for Personal Lines in the first nine months of 1998 was 92.8% compared to
91.3% in the first nine months of 1997.
The 1997 first nine months statutory and GAAP combined ratios for Personal Lines
include an adjustment associated with a change in the quota share reinsurance
arrangement. Excluding this adjustment, the statutory and GAAP combined ratios
for the first nine months of 1997 would have been 91.8% and 92.1%, respectively.
The increase in the first nine months of 1998 statutory and GAAP combined ratios
compared to the first nine months of 1997 statutory and GAAP combined ratios
excluding this adjustment was due to higher catastrophe losses and a decrease in
favorable prior year reserve development in the automobile bodily injury line,
partially offset by productivity improvements.
Financing Costs and Other
The primary component of net income (loss) in the first nine months of 1998 and
1997 was interest expense of $79 million after tax, reflecting financing costs
associated with the 1996 acquisition of Aetna P&C.
Environmental Claims
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At September 30, 1998, approximately 16% of
the net aggregate reserve (i.e., approximately $149 million) consists of case
reserve for resolved claims. The balance, approximately 84% of the net aggregate
reserve (i.e., approximately $761 million), is carried in a bulk reserve and
includes incurred but not reported environmental claims for which the Company
has not received any specific claims.
The following table displays activity for environmental losses and loss expenses
and reserves for the nine months ended September 30, 1998 and 1997:
29
Environmental Losses Nine Months Ended Nine Months Ended
(millions) September 30, 1998 September 30, 1997
---------------------------- -----------------------------
Beginning reserves:
Direct ................................................ $1,193 $1,369
Ceded ................................................. (74) (127)
----------- -----------
Net ................................................... 1,119 1,242
Incurred losses and loss expenses:
Direct ................................................ 96 55
Ceded ................................................. (57) (1)
Losses paid:
Direct ................................................ 292 181
Ceded ................................................. (44) (48)
Ending reserves:
Direct ................................................ 997 1,243
Ceded ................................................. (87) (80)
----------- -----------
Net.................................................... $ 910 $1,163
----------- -----------
----------- -----------
Asbestos Claims
At September 30, 1998, approximately 22% of the net aggregate reserve (i.e.,
approximately $226 million) is for pending asbestos claims. The balance,
approximately 78% (i.e., approximately $794 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending asbestos claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for asbestos losses and loss expenses and reserves for the
nine months ended September 30, 1998 and 1997:
Asbestos Losses Nine Months Ended Nine Months Ended
(millions) September 30, 1998 September 30, 1997
----------------------------- -----------------------------
Beginning reserves:
Direct .............................................. $1,363 $1,443
Ceded ............................................... (249) (370)
----------- -----------
Net ................................................. 1,114 1,073
Incurred losses and loss expenses:
Direct .............................................. 119 60
Ceded ............................................... (69) (15)
Losses paid:
Direct .............................................. 193 114
Ceded ............................................... (49) (60)
Ending reserves:
Direct .............................................. 1,289 1,389
Ceded (269) (325)
----------- -----------
Net.................................................. $1,020 $1,064
----------- -----------
----------- -----------
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
30
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, 1998
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 Superfund and other 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, 1998, approximately 18% of the net aggregate reserve (i.e.,
approximately $184 million) is for pending CIOTA claims. The balance,
approximately 82% (i.e., approximately $864 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending CIOTA claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for CIOTA losses and loss expenses and reserves for the nine
months ended September 30, 1998 and 1997:
CIOTA Losses Nine Months Ended Nine Months Ended
(millions) September 30, 1998 September 30, 1997
---------------------------- -----------------------------
Beginning reserves:
Direct ......................................... $1,520 $1,560
Ceded .......................................... (432) (446)
----------- -----------
Net ............................................ 1,088 1,114
Incurred losses and loss expenses:
Direct ......................................... (15) 26
Ceded .......................................... 22 (6)
Losses paid:
Direct ......................................... 52 51
Ceded .......................................... (5) (14)
Ending reserves:
Direct ......................................... 1,453 1,535
Ceded .......................................... (405) (438)
----------- -----------
Net............................................. $1,048 $1,097
----------- -----------
----------- -----------
31
Corporate and Other
Nine Months Ended September 30,
------------------------------- ------------------------------
(millions) 1998 1997
- ----------------------------------------------------- ------------------------------- ------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- ----------------------------------------------------- --------------- --------------- -------------- ---------------
Total Corporate and Other (1) ......................... $87 $(118) $75 $(153)
- ----------------------------------------------------- --------------- --------------- -------------- ---------------
- ----------------------------------------------------- --------------- --------------- -------------- ---------------
(1) Net income (expense) includes $1 million and $6 million of reported
investment portfolio gains in 1998 and 1997, respectively.
Net treasury and corporate staff expenses for the first nine months of 1998 were
up from the prior year period. The decline in total operating expense for the
segment reflects income from the disposition of a real estate development
property in the first quarter of 1998.
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. At September 30, 1998, $700 million was allocated to TRV
and $300 million was allocated to CCC. Under this facility, TRV is required to
maintain a certain level of consolidated stockholders' equity (as defined in the
agreement). At September 30, 1998, this requirement was exceeded by
approximately $10.9 billion. TRV and CCC also have $200 million in 364-day
facilities which expire in August 1999 and may be allocated to either of TRV or
CCC. At September 30, 1998, $150 million was allocated to TRV and $50 million
was allocated to CCC. In addition TRV and CCC also have a $500 million 60-day
facility which expires in November 1998 and may be allocated to either of TRV or
CCC. At September 30, 1998 all of this facility was allocated to CCC. At
September 30, 1998, there were no borrowings outstanding under any of these
facilities.
At September 30, 1998, TRV had unused credit availability of $700 million under
the five-year revolving credit facility and $150 million under the 364-day
facilities. TRV may borrow under these revolving credit facilities at various
interest rate options (LIBOR, CD and base rate) and compensates the banks for
the facility through commitment fees.
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. Currently CCC has unused credit
availability of $3.7 billion under five-year revolving credit facilities,
including the $300 million referred to above, and $1.4 billion in 364-day
facilities including the $50 million referred to above, and $500 million under
the 60-day facility referred to above. CCC may borrow under its
32
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, 1998, CCC would have been able to remit $751 million
to its parent under its most restrictive covenants.
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 $250 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, 1998, this
requirement was exceeded by approximately $4.0 billion. At September 30, 1998,
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 $805 million in 1998 without
prior approval of the Connecticut Insurance Department. TAP has received $430
million of dividends from its insurance subsidiaries during the first nine
months of 1998.
Salomon Smith Barney
Salomon Smith Barney's total assets were $238 billion at September 30, 1998,
compared to $277 billion at December 31, 1997. Due to the nature of trading
activities, including matched book activities, it is not uncommon for asset
levels to fluctuate from period to period. A "matched book" transaction involves
a security purchased under an agreement to resell (i.e., reverse repurchase
transaction) and simultaneously sold under an agreement to repurchase (i.e.,
repurchase transaction). 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.
Financial instruments and commodities owned and contractual commitments declined
as a result of decreased inventory positions in U.S. and Non-government and
agency securities. The decline in U.S. government and government agency
securities can, in part, be attributed to the risk reduction of the U.S. Fixed
Income Arbitrage business while the decline in Non-U.S. government and
government agency long and short securities is primarily FAS No. 127 related.
Financial instruments and commodities sold, not yet purchased and contractual
commitments decreased as a result of a decline in Non-U.S. government and
government agency securities. This decline is the result of a decrease in
inventory positions of Japanese and United Kingdom government bonds.
Salomon Smith Barney has a $1.5 billion revolving credit agreement with a bank
syndicate that extends through May 2001, and a $3.5 billion 364-day revolving
credit agreement that extends through May 1999. Salomon 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. Under these facilities Salomon Smith Barney is required to maintain a
certain level of consolidated adjusted net worth (as defined in the agreements).
At September 30, 1998, this requirement was exceeded by
33
approximately $2.8 billion. At September 30, 1998, there were no outstanding
borrowings under either facility. 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 $20.9 billion at September 30, 1998,
compared with $19.1 billion at December 31, 1997.
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 uncollateralized financing
is temporarily impaired. Its liquidity management process includes a contingency
funding plan designed to ensure adequate liquidity even if access to
uncollateralized 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.
Salomon Smith Barney's activities include trading securities that are less than
investment grade, characterized as "high yield." High yield securities include
corporate debt, convertible debt, preferred and convertible preferred equity
securities rated lower than "triple B-" by internationally recognized rating
agencies, unrated securities with market yields comparable to entities rated
below "triple B-," as well as sovereign debt issued by certain countries in
currencies other than their local currencies and which are not collateralized by
U.S. government securities. For example, high yield securities exclude the
collateralized portion of Salomon Smith Barney's holdings of "Brady Bonds," but
include such securities to the extent they are not collateralized. The trading
portfolio of high yield securities owned is carried at market or fair value and
totaled $4.9 billion at September 30, 1998, the largest high yield exposure to
one counterparty was $280 million.
As of October 1, 1998, Salomon Smith Barney had mark-to-market exposure to hedge
funds of $2.122 billion, collateralized by $2.167 billion of cash and government
securities, resulting in excess collateral of $45 million. Within these amounts,
certain hedge funds have collateral in excess of the mark-to-market deficit, and
others have deficits in excess of collateral held. The total exposure to hedge
funds with mark-to-market deficits in excess of collateral held is $48 million.
No single hedge fund had a mark-to-market deficit of more than $8 million in
excess of collateral held from that hedge fund. Mark-to-market exposure includes
those hedge funds that owe Salomon Smith Barney on foreign exchange and
derivative contracts such as swaps, swap options, and other over-the-counter
options and only the uncollateralized portion of receivables on reverse
repurchase and repurchase agreements. This exposure can change significantly as
a result of extreme market movements.
34
In addition, Salomon Smith Barney has no unsecured loans or loan commitments to
hedge funds. Salomon Smith Barney has no investments in hedge funds other than
an investment in Long-Term Capital Management, LP, made in concert with a
consortium of banks and securities firms.
The following table shows the results of Salomon Smith Barney's value at risk
(VAR) analysis, which includes substantially all of its financial assets and
liabilities, including all financial instruments and commodities owned and sold,
contractual commitments, repurchase and resale agreements, and related funding
at September 30, 1998 and December 31, 1997. The VAR relating to non-trading
instruments has been excluded from this analysis.
- --------------------------------------- -------------------- --------------------
September 30, December 31,
(millions) 1998 1998
- --------------------------------------- -------------------- --------------------
Interest rate .................................... $46 $41
Equities ......................................... 4 8
Commodities ...................................... 8 8
Currency ......................................... 18 9
Diversification benefit .......................... (24) (22)
- --------------------------------------- -------------------- --------------------
Total ............................................ $52 $44
- --------------------------------------- -------------------- --------------------
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating the above market amounts, Salomon Smith Barney used
a 95% confidence level and a one day interval. The standard deviations and
correlation assumptions are based on historical data and reflect a horizon of
one year or more and no more than five years. VAR reflects the risk profile of
Salomon Smith Barney at a point in time and is not a predictor of future
results.
The Travelers Insurance Company (TIC)
At September 30, 1998, TIC had $25.3 billion of life and annuity product deposit
funds and reserves. Of that total, $13.7 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $11.6 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 $2.2 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $5.1 billion of the life
insurance and individual annuity liabilities, which are subject to discretionary
withdrawal and have an average surrender charge of 4.8%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$4.3 billion of liabilities is surrenderable without charge. More than 15% 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.
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 $551 million of
35
statutory surplus is available in 1998 for such dividends without the prior
approval of the Connecticut Insurance Department, of which $110 million has been
paid during the first nine months of 1998.
Year 2000 Date Conversion
The Company is highly dependent on computer systems and system applications for
conducting its ongoing business functions. In 1996, the Company began the
process of identifying, assessing and implementing changes to computer programs
to address the year 2000 issue and developed a comprehensive plan to address the
issue. The issue involves the ability of computer systems that have time
sensitive programs to recognize properly the year 2000. The inability to do so
could result in major failure or miscalculations that would disrupt the
Company's ability to meet its customer and other obligations on a timely basis.
The Company is in the process of implementing necessary changes, in accordance
with its Year 2000 plan, to bring all its critical business systems into year
2000 compliance by early 1999. As part of and following, achievement of year
2000 compliance, systems have been, and will continue to be, subjected to a
certification process which validates the renovated code before it is certified
for use in production. In addition, the Company is developing contingency plans
to be used in the event of an unexpected failure, which may result from the
complex interrelationships among our clients, business partners, and other
parties upon whom it relies. These plans are expected to be in place by December
31, 1998.
The total pre-tax cost associated with the required modifications and
conversions is expected to be between $200 million and $275 million and is being
expensed as incurred in the period 1996 through 1999, and is not expected to
have a material effect on the Company's financial position, results of
operations or liquidity. The Company also has third party customers, financial
institutions, vendors and others with which it conducts business and has
communicated with them on their plans to address and resolve year 2000 issues on
a timely basis. While it is likely that these efforts by third party vendors
will be successful, it is possible that a series of failures by third parties
could have a material adverse effect on the Company's results of operations in
future years.
An additional year 2000 issue for TAP is the potential future impact of its
insurance coverages. It is possible that year 2000 related losses may emerge in
future periods. TAP has taken certain initiatives to mitigate the risks
surrounding the year 2000 issue including addressing year 2000 issues, where
applicable, in the underwriting process and modifying certain contract language.
Property and casualty indemnity losses for possible future year 2000 claims and
litigation costs to defend or deny such claims if any, are not reasonably
estimable at this time.
Future Application of Accounting Standards
See Note 4 of Notes to Condensed Consolidated Financial Statements for a
discussion of recently issued accounting pronouncements.
Forward Looking Statements
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially
from those included in the forward-looking statements. Forward-looking
statements are typically identified by the words "believe," "expect,"
"anticipate," "intend," "estimate," and similar expressions. These
forward-looking statements involve risks and uncertainties including, but not
limited to, the following: changes in general economic conditions, including
the performance of financial markets, interest rates and the level of
personal bankruptcies; the ability of the Company and third party vendors to
modify computer systems for the Year 2000 date conversion in a timely manner;
the resolution of legal proceedings and related matters; the conduct of the
Company's businesses following the Citicorp merger and the pending global
strategic alliance with The Nikko Securities Co., Ltd.; customer
responsiveness to both new products and distribution channels; and the
ability of the Company generally to achieve anticipated levels of operational
efficiencies related to recently acquired companies, as well as achieving its
other cost-savings initiatives. Readers also are directed to other risks and
uncertainties discussed in documents filed by the Company with the Securities
and Exchange Commission.
36
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On July 22, 1998, the Company filed a Current Report on Form
8-K, dated July 20, 1998, reporting under Item 5 thereof the
results of its operations for the quarter ended June 30, 1998,
and certain other selected financial data.
On August 18, 1998, the Company filed a Current Report on Form
8-K, dated August 18, 1998, filing under Items 5 and 7 thereof
certain pro forma and historical financial information related
to the pending merger with Citicorp.
On September 2, 1998, the Company filed a Current Report on
Form 8-K, dated August 31, 1998, reporting under Item 5
thereof certain results of operations of Salomon Smith Barney
Holdings Inc. during the July-August 1998 period.
No other reports on Form 8-K were filed during the third
quarter of 1998; however, on October 8, 1998, the Company
filed a Current Report on Form 8-K, dated October 8, 1998,
reporting under Item 2 thereof the consummation of the merger
with Citicorp and under Item 5 thereof certain results of its
operations for the quarter ended September 30, 1998, and
certain other selected financial data; on October 23, 1998,
the Company filed a Current Report on Form 8-K, dated October
21, 1998, reporting under Item 5 thereof its results of its
operations for the quarter ended September 30, 1998, and
certain other selected financial data; on October 26, 1998,
the Company filed a Current Report on Form 8-K, dated October
26, 1998, filing under Items 5 and 7 thereof certain
supplemental financial information relating to its merger with
Citicorp; on November 2, 1998, the Company filed a Current
Report on Form 8-K, dated October 29, 1998, reporting under
Item 7 thereof the offer and sale of the Company's Floating
Rate Senior Notes due February 3, 2000; and on November 2,
1998, the Company filed a Current Report on Form 8-K, dated
November 1, 1998, reporting under Item 5 thereof certain
information regarding the integration of its corporate
business and related executive matters.
37
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
------- ----------------------
3.01 + Restated Certificate of Incorporation of Citigroup Inc. (the "Company"), Certificate of
Amendment to the Restated Certificate of Incorporation, filed April 26, 1995, Certificate of
Amendment to the Restated Certificate of Incorporation, filed, April 24, 1996, Certificate
of Amendment to the Restated Certificate of Incorporation, filed April 23, 1997, Certificate
of Amendment to the Restated Certificate of Incorporation, filed April 22, 1998, Certificate
of Amendment to the Restated Certificate of Incorporation, filed October 8, 1998,
Certificate of Designation of 6.365% Cumulative Preferred Stock, Series F, Certificate of
Designation of 6.213% Cumulative Preferred Stock, Series G, Certificate of Designation of
6.231% Cumulative Preferred Stock, Series H, Certificate of Designation of Series I
Cumulative Convertible Preferred Stock, Certificate of Designation of 8.08% Cumulative
Preferred Stock, Series J, Certificate of Designation of 8.40% Cumulative Preferred Stock,
Series K, Certificate of Designation of 9.50% Cumulative Preferred Stock, Series L,
Certificate of Designation of 5.864% Cumulative Preferred Stock, Series M, and Certificate
of Designation of Cumulative Adjustable Rate Preferred Stock, Series Y.
3.02 + By-Laws of the Company effective October 8, 1998.
4.01+ Fourth Supplemental Indenture, dated as of November 2, 1998, between the Company and The
Bank of New York, as Trustee, under the Indenture dated as of March 15, 1987.
12.01+ Computation of Ratio of Earnings to Fixed Charges.
12.02+ Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
27.01+ Financial Data Schedule.
99.01 + Certain historical financial information from Citicorp's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries.
The Company will furnish copies of any such instrument to the SEC upon request.
- -----------------------
+ Filed herewith.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Citigroup Inc.
Date: November 12, 1998 By Heidi Miller
-----------------------------------
Heidi Miller
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1998 By Irwin Ettinger
-------------------------------------
Irwin Ettinger
Chief Accounting Officer
(Principal Accounting Officer)
Date: November 12, 1998 By Roger W. Trupin
-------------------------------------
Roger W. Trupin
Controller
39