<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- --- OF 1934
For the fiscal year ended December 31, 1995
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 33-33691
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THE TRAVELERS INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Connecticut 06-0566090
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
One Tower Square, Hartford, Connecticut 06183
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 277-0111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/.
As of March 28, 1996 there were 40,000,000 shares of the registrant's common
stock, $2.50 par value, issued and outstanding, all of which were owned by
Travelers Insurance Group Inc., an indirect wholly owned subsidiary of
Travelers Group Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction J(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
<PAGE> 2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
Table of Contents
<TABLE>
<CAPTION>
Form 10-K
Item Number PART I Page
<S> <C>
1. Business................................................................. 1
A. General................................................... 1
B. Business by Product Line
Life and Annuity........................................ 3
Corporate and Other Operations.......................... 4
Discontinued Operations................................. 4
2. Properties........................................................... 6
3. Legal Proceedings.................................................... 6
4. Submission of Matters to a Vote of Security Holders.................. 6
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................................. 6
6. Selected Financial Data.............................................. 6
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 7
8. Financial Statements and Supplementary Data.......................... 13
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 51
PART III
10. Directors and Executive Officers of the Registrant................... 51
11. Executive Compensation............................................... 51
12. Security Ownership of Certain Beneficial Owners and Management....... 51
13. Certain Relationships and Related Transactions....................... 51
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 52
</TABLE>
<PAGE> 3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
PART I
Item 1. Business.
GENERAL
The Travelers Insurance Company and its subsidiaries (the Company) write
principally individual life insurance, annuities, long-term care insurance, and
investment products for employer-sponsored retirement and savings plans. The
Company was incorporated in 1863. With $42.3 billion of assets at December 31,
1995, the Company believes that it is one of the largest stock life insurance
groups in the United States as measured by assets.
The Company principally operates through one major business segment: Life and
Annuity, which offers individual life, long-term care, annuities and investment
products to individuals and small businesses, and investment products to
employer-sponsored retirement and savings plans. The Company's Corporate and
Other Operations segment manages the investment portfolio of the Company.
On January 3, 1995, the Company and its affiliates completed the sale of their
group life and related businesses to Metropolitan Life Insurance Company
(MetLife). The Company agreed to cede to MetLife 100% of its risks in the
businesses sold on an indemnity reinsurance basis, effective January 1, 1995.
Also on January 3, 1995, the Company and MetLife, including certain of their
affiliates, each contributed their medical businesses to The MetraHealth
Companies, Inc. (MetraHealth), a newly formed joint venture, in exchange for
common stock of MetraHealth.
On October 2, 1995, the Company and its parent, The Travelers Insurance Group
Inc. (TIGI), sold their interests in MetraHealth to United HealthCare
Corporation (United). The Company and TIGI owned 41.1% and 7.15%, respectively,
of MetraHealth's common stock, and received a total of $831 million in
connection with the transaction. This amount includes a dividend paid by
MetraHealth and amounts paid by a subsidiary of MetLife for the sale to MetLife
of the Company's and TIGI's share of certain additional amounts payable under
the merger agreement based on 1996 and 1997 earnings. The Company and TIGI are
also entitled to receive up to an additional $169 million based on "Company
Earnings" (as defined in the merger agreement) for 1995. The Company's share of
the proceeds was $708 million, and it is entitled to receive up to an additional
$144 million, based on 1995 Company Earnings. The Company realized an after-tax
gain of $111 million which was recognized in the fourth quarter of 1995.
As discussed in Note 4 of Notes to Consolidated Financial Statements, all of the
businesses sold to MetLife or contributed to MetraHealth were included in the
Company's Managed Care and Employee Benefits Operations (MCEBO) segment in 1994.
MCEBO marketed group life and health insurance, managed health care programs and
administrative services associated with employee benefit plans. In 1995, the
Company's results reflect the medical insurance business not yet transferred,
plus its equity interest in the earnings of MetraHealth through the date of
sale. These operations have been accounted for as discontinued operations.
In December 1992, Primerica Corporation (Primerica) acquired approximately 27%
of the common stock of the Company's then parent, The Travelers Corporation (the
27% Acquisition). The 27% Acquisition was accounted for as a purchase.
1
<PAGE> 4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
Effective December 31, 1993, Primerica acquired the approximately 73% of The
Travelers Corporation common stock that it did not already own, and The
Travelers Corporation was merged into Primerica, which was ultimately renamed
Travelers Group Inc. (Travelers). This was effected through the exchange of
.80423 shares of Travelers common stock for each share of The Travelers
Corporation common stock (the Merger). All subsidiaries of The Travelers
Corporation were contributed to TIGI, an indirect wholly owned subsidiary of
Travelers. In conjunction with the Merger, Travelers contributed Travelers
Insurance Holdings Inc. (formerly Primerica Insurance Holdings, Inc.) and its
subsidiaries (TIHI) to TIGI, which in turn contributed TIHI to the Company.
Through its subsidiaries, TIHI principally offers individual life insurance. The
Company realized an increase to shareholder's equity of $2.1 billion at December
31, 1993 related to the contribution of this subsidiary. TIHI is included in the
Life and Annuity segment. TIHI is an intermediate holding company whose primary
subsidiaries are Primerica Life Insurance Company (Primerica Life) and its
subsidiary National Benefit Life Insurance Company (NBL).
In September 1995, Travelers made a pro rata distribution to its stockholders of
shares of Class A Common Stock of Transport Holdings Inc., which at the time was
a wholly owned subsidiary of Travelers and was the indirect owner of the
business of Transport Life Insurance Company (Transport). Immediately prior to
this distribution, the Company distributed Transport, an indirect wholly owned
subsidiary of the Company, to its parent, as a dividend.
The consolidated financial statements and the accompanying notes included in
this Annual Report on Form 10-K reflect the historical operations of the Company
for the year ended December 31, 1993. The results of operations of TIHI are not
included for the year ended December 31, 1993. The Company's consolidated
balance sheet and related data at December 31, 1995 and 1994 include TIHI on a
fully consolidated basis. The assets and liabilities of the Company (except
TIHI) were reflected in the consolidated balance sheet at December 31, 1993 on a
fully consolidated basis at management's then best estimate of their fair
values. Evaluation and appraisal of assets and liabilities, including
investments, the value of insurance in force, other insurance assets and
liabilities and related deferred income taxes, was completed during 1994.
The 27% Acquisition and the Merger were accounted for as a "step acquisition".
The step acquisition method of purchase accounting requires that the Company's
assets and liabilities be recorded at the fair values determined at each
acquisition date (i.e., 27% of values at December 31, 1992 as carried forward
and 73% of values at December 31, 1993). The excess of the 27% share of assigned
value of identifiable net assets over cost at December 31, 1992, which was
allocated to the Company through the "pushdown" basis of accounting, was
approximately $56 million and is being amortized over ten years on a
straight-line basis. The excess of the purchase price of the common stock over
the estimated fair value of the 73% of net assets acquired at December 31, 1993,
which was allocated to the Company through the "pushdown" basis of accounting,
was approximately $340 million and is being amortized over 40 years on a
straight-line basis. Under purchase accounting, the total purchase price is
allocated to the Company's assets and liabilities based on their relative fair
values.
The Company is an indirect wholly owned subsidiary of Travelers, a financial
services holding company engaged, through its subsidiaries, principally in four
business segments: (i) Investment Services; (ii) Consumer Finance Services;
(iii) Life Insurance Services (through the Company); and (iv) Property &
Casualty Insurance Services. The periodic reports of Travelers provide
additional business and financial information concerning that company and its
consolidated subsidiaries.
2
<PAGE> 5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
BUSINESS BY PRODUCT LINE
Life and Annuity
Life and Annuity offers individual life insurance, annuities and long-term care
insurance to individuals and small businesses. It also provides group pension
deposit products, including guaranteed investment contracts, and annuities to
employer-sponsored retirement and savings plans. The Company views market
specialization as a critical component of profitability and has updated its
individual product portfolio with a range of competitively priced term,
universal and variable life insurance, long-term care insurance and fixed and
variable annuity products for its customers.
TIHI became a subsidiary of the Company on December 31, 1993, in connection with
the Merger. It is an intermediate holding company whose primary subsidiaries
include Primerica Life and its subsidiary NBL. Primerica Life offers individual
term life insurance. NBL provides statutory disability benefits in New York, as
well as direct response student term life insurance nationwide. Primerica Life
and its subsidiaries together are licensed to sell and market term life
insurance in all 50 states, the District of Columbia, Canada, Puerto Rico, Guam,
the U.S. Virgin Islands and Northern Mariana Islands. The Primerica Life sales
force, composed of approximately 100,000 independent agents, primarily markets
term life insurance and certain other products of affiliates of the Company.
Because the great majority of the domestic licensed sales force works on a part
time basis, a substantial portion of the sales force is inactive from time to
time.
Individual life and long-term care insurance provide protection against
financial loss due to death, illness or disability. Life insurance is also used
to meet estate, business planning and retirement needs.
Individual accumulation fixed and variable annuities, group annuities and
pension plan products are used for retirement funding purposes. Variable
annuities permit policyholders to choose to direct deposits into a number of
separate accounts, which have differing investment options. Individual payout
annuities are used for structuring settlements of certain indemnity claims and
making other payments to policyholders over a period of time.
Guaranteed investment contracts, which provide a guaranteed return on
investment, continue to be a popular investment choice for employer-sponsored
retirement and savings plans. Annuities purchased by employer-sponsored plans
fulfill retirement obligations to individual employees.
Life and Annuity is licensed to sell and market its individual products in all
50 states, the District of Columbia, Puerto Rico, Guam, the Bahamas and the U.S.
and British Virgin Islands.
Individual products are primarily marketed through three distribution channels:
independent agents, The Copeland Companies (Copeland) and the financial
consultants of Smith Barney Inc. (Smith Barney). Both Copeland and Smith Barney
are affiliates of the Company. In June 1994, Smith Barney began distributing the
Company's individual products, primarily variable annuities. Smith Barney
accounted for 33% of total 1995 individual annuity premiums and deposits, as
compared with 12% in 1994, and, by the fourth quarter of 1995, accounted for
over 40% of the Company's total individual annuity premiums and deposits. This
growth has decreased the share of annuities sold through other channels.
Copeland, a captive sales organization of personal retirement planning
specialists, accounted for 40% of individual annuity premiums and deposits in
1995, as compared to 49% in 1994. The independent agents, including a core group
of over 500 professional life insurance general agencies, sell the majority of
the individual life insurance, and in 1995 and 1994, sold 27% and 39%,
respectively, of individual annuity premiums and deposits.
3
<PAGE> 6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
Group pension products and annuities are marketed by the Company's salaried
staff directly to plan sponsors and are also placed through independent
consultants and investment advisers. The major factors affecting the pricing of
these contracts are the economics of the capital markets, primarily the interest
rate environment, the availability of appropriate investments and surplus
required to support this business. The pricing of products and services also
reflects charges for expenses, mortality, profit and other relevant financial
factors such as credit risk.
In January 1996, the Company began operating Tower Square Securities, Inc.
(Tower Square Securities) formerly Travelers Equity Sales Inc., a subsidiary of
TIGI, as an additional distributor of the Company's products. Tower Square
Securities is a full-line broker-dealer that distributes mutual funds, general
securities and variable insurance products, written by both the Company and
non-affiliated companies, primarily through independent agents who are
registered representatives of Tower Square Securities.
Corporate and Other Operations
The Corporate and Other Operations segment manages the investment portfolio of
the Company.
Discontinued Operations
On January 3, 1995, the Company and its affiliates completed the sale of its
group life and related businesses to MetLife. The Company agreed to cede to
MetLife 100% of its risks in the businesses sold on an indemnity reinsurance
basis, effective January 1, 1995. Also on January 3, 1995, the Company and
MetLife, including certain of their affiliates, each contributed its medical
businesses to MetraHealth, a newly formed joint venture, in exchange for common
stock of MetraHealth.
On October 2, 1995, the Company and TIGI, sold their interests in MetraHealth to
United. The Company and TIGI collectively owned 48.25% of MetraHealth's common
stock, and received a total of $831 million in connection with the transaction.
This amount includes a dividend paid by MetraHealth and amounts paid by a
subsidiary of MetLife for the sale to MetLife of the Company's and TIGI's share
of certain additional amounts payable under the merger agreement based on 1996
and 1997 earnings. The Company and TIGI are also entitled to receive up to an
additional $169 million, based on "Company Earnings" (as defined in the merger
agreement) for 1995. The Company's share of the proceeds was $708 million, and
it is entitled to receive up to an additional $144 million, based on 1995
Company Earnings. The Company realized an after-tax gain of $111 million which
was recognized in the fourth quarter of 1995.
As discussed in Note 4 of Notes to Consolidated Financial Statements, all of the
businesses sold to MetLife or contributed to MetraHealth were included in the
MCEBO segment in 1994. MCEBO marketed group life and health insurance, managed
health care programs and administrative services associated with employee
benefit plans. In 1995, the Company's results reflect the medical insurance
business not yet transferred, plus its equity interest in the earnings of
MetraHealth through the date of sale. These operations have been accounted for
as discontinued operations.
Insurance Regulations
The National Association of Insurance Commissioners (the NAIC) risk-based
capital (RBC) requirements are used as early warning tools by the NAIC and
states to identify companies that merit further regulatory action.
4
<PAGE> 7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
For this purpose, an insurer's surplus is measured in relation to its specific
asset and liability profiles. A company's risk-based capital is calculated by
applying factors to various asset, premium and reserve items, where the factor
is higher for those items with greater underlying risk and lower for less risky
items.
The formula for life insurers calculates baseline life risk-based capital (LRBC)
as a mathematical combination of amounts for the following four categories of
risk: asset risk (i.e., the risk of asset default), insurance risk (i.e., the
risk of adverse mortality and morbidity experience), interest rate risk (i.e.,
the risk of loss due to changes in interest rates) and business risk (i.e.,
normal business and management risk). Fifty percent of the baseline LRBC
calculation is defined as Authorized Control Level RBC. The insurer's ratio of
adjusted capital to Authorized Control Level RBC (the RBC ratio) can then be
calculated from data contained in the annual statement. Adjusted capital is
defined as the sum of statutory capital, statutory surplus, asset valuation
reserve, voluntary investment reserves and one-half of the policyholder dividend
liability.
Within certain ratio ranges, regulators have increasing authority to take action
as the RBC ratio decreases. There are four levels of regulatory action. The
first of these levels is the "company action level." The RBC ratio for this
level is less than 200% but greater than 150%. Insurers within this level must
submit a comprehensive plan (an RBC plan) to the commissioner. The next level is
the "regulatory action level." The RBC ratio for this level is less than 150%
but greater than 100%. An insurer within this level must submit an RBC plan, is
subject to an examination of assets, liabilities and operations by the
commissioner, and is subject to provisions of any corrective order subsequently
issued by the commissioner. The third level is the "authorized control level."
The RBC ratio for this level is less than 100% but greater than 70%. At this
level, the commissioner takes action as described under "regulatory action
level" and may cause the insurer to be placed under regulatory control if such
action is deemed to be in the best interests of policyholders. The fourth level
is the "mandatory control level." The RBC ratio for this level is less than 70%,
and the commissioner takes actions necessary to place the insurer under
regulatory control.
The RBC formula has not been designed to differentiate among adequately
capitalized companies which operate with higher levels of capital. Therefore, it
is inappropriate and ineffective to use the formulas to rate or to rank such
companies. At December 31, 1995, the Company and its insurance subsidiaries all
had adjusted capital in excess of amounts requiring any regulatory action at any
of the four levels.
The Travelers Insurance Company is domiciled in the State of Connecticut. The
insurance holding company law of Connecticut requires notice to, and approval
by, the Connecticut Insurance Department for the declaration or payment of any
dividend, which together with other distributions made within the preceding
twelve months, exceeds the greater of (i) 10% of the insurer's surplus or (ii)
the insurer's net gain from operations for the twelve-month period ending on the
preceding December 31st, in each case determined in accordance with statutory
accounting practices. Such declaration or payment is further limited by adjusted
unassigned funds (surplus), as determined in accordance with statutory
accounting practices. The insurance holding company laws of other states in
which the Company's insurance subsidiaries are domiciled generally contain
similar (although in certain instances somewhat more restrictive) limitations on
the payment of dividends. Dividend payments from the Company to its parent are
limited to $506 million in 1996 without prior approval of the Connecticut
Insurance Department.
Dividend payments to the Company from its insurance subsidiaries are subject to
similar restrictions and are limited to $16 million in 1996.
5
<PAGE> 8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
Item 2. Properties.
The Company owns buildings containing approximately 1,426,000 square feet of
office space located in Hartford, Connecticut and vicinity, serving as the home
office of TIGI.
The Company also owns a building in Norcross, Georgia. TIGI's information
systems department occupies the entire building which is approximately 147,000
square feet of space.
In addition, as of December 31, 1995, the Company, including TIHI, leases a
total of approximately 4,950,000 square feet of office space at 247 locations
throughout the United States.
Management believes that these facilities are suitable and adequate for the
Company's current needs. The Company is reimbursed by affiliates for their use
of this space on a cost allocation method based generally on estimated usage by
department.
The foregoing discussion does not include information on investment properties.
Item 3. Legal Proceedings.
The Company is a defendant or co-defendant in various litigation matters.
Although there can be no assurances, as of December 31, 1995, the Company
believes, based on information currently available, that the ultimate resolution
of these legal proceedings would not be likely to have a material adverse effect
on its results of operations, financial condition or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company has 40,000,000 authorized shares of common stock, all of which are
issued and outstanding as of December 31, 1995. All shares are held by The
Travelers Insurance Group Inc., and there exists no established public trading
market for the common equity of the Company. The Company paid no dividends to
its parent in 1995 and 1994. See Note 7 of Notes to Consolidated Financial
Statements for dividend restrictions.
Item 6. Selected Financial Data.
Omitted pursuant to General Instruction J(2)(a) of Form 10-K.
6
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THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction J(2)(a) of Form 10-K.
RESULTS OF OPERATIONS
CONSOLIDATED OVERVIEW:
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For the year ended December 31, 1995 1994
- ------------------------------- ---- ----
(in millions)
<S> <C> <C>
Revenues $3,647 $3,406
====== ======
Income from continuing operations 547 386
Income from discontinued operations 203 159
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Net income $ 750 $ 545
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The Company principally operates through one major business segment: Life and
Annuity, which offers individual life, long-term care, annuities and investment
products to individuals and small businesses, and investment products to
employer-sponsored retirement and savings plans. The Company's Corporate and
Other Operations segment manages the investment portfolio of the Company.
On January 3, 1995, the Company and its affiliates completed the sale of its
group life and related businesses to Metropolitan Life Insurance Company
(MetLife). The Company agreed to cede to MetLife 100% of its risks in the
businesses sold on an indemnity reinsurance basis, effective January 1, 1995.
Also, on January 3, 1995, the Company and MetLife, and certain of their
affiliates, contributed their medical businesses to The MetraHealth Companies,
Inc. (MetraHealth), a newly formed joint venture, in exchange for shares of
common stock of MetraHealth. The Company's total contribution to MetraHealth
amounted to approximately $336 million at carrying value. The Company and its
affiliates and MetLife and its affiliates are equal partners in the joint
venture. The Company's interest in MetraHealth was accounted for on the equity
method. See Note 4 of Notes to Consolidated Financial Statements.
On October 2, 1995, the Company and its parent, The Travelers Insurance Group
Inc. (TIGI), sold their interests in MetraHealth to United HealthCare
Corporation (United). The Company and TIGI owned 41.1% and 7.15%, respectively,
of MetraHealth's common stock, and received a total of $831 million in
connection with the transaction. This amount includes a dividend paid by
MetraHealth and amounts paid by a subsidiary of MetLife for the sale to MetLife
of the Company's and TIGI's share of certain additional amounts payable under
the merger agreement based on 1996 and 1997 earnings. The Company and TIGI are
also entitled to receive up to an additional $169 million, based on "Company
Earnings" (as defined in the merger agreement) for 1995. The Company's share of
the proceeds was $708 million, and it is entitled to receive up to an additional
$144 million based on 1995 Company Earnings. The sale generated an after-tax
gain of $111 million which was recognized in the fourth quarter of 1995.
7
<PAGE> 10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
Substantially all of the businesses sold to MetLife or contributed to
MetraHealth were included in the Company's Managed Care and Employee Benefits
Operations (MCEBO), which marketed group health insurance, managed health care
programs and administrative services associated with employee benefit plans.
These operations have been accounted for as discontinued operations.
In December 1992, Primerica Corporation (Primerica) acquired approximately 27%
of the common stock of the Company's then parent, The Travelers Corporation (the
27% Acquisition). The Acquisition was accounted for as a purchase.
Effective December 31, 1993, Primerica acquired the approximately 73% of The
Travelers Corporation common stock which it did not already own, and The
Travelers Corporation was merged into Primerica, which was ultimately renamed
Travelers Group Inc. This was effected through the exchange of .80423 shares of
Travelers common stock for each share of The Travelers Corporation common stock
(the Merger). All subsidiaries of The Travelers Corporation were contributed to
TIGI, an indirect subsidiary of Travelers. In conjunction with the Merger,
Travelers contributed Travelers Insurance Holdings Inc. (formerly Primerica
Insurance Holdings, Inc.) and its subsidiaries (TIHI) to TIGI, which in turn
contributed TIHI to the Company.
TIHI is an intermediate holding company whose primary subsidiaries are Primerica
Life Insurance Company (Primerica Life) and its subsidiary National Benefit Life
Insurance Company (NBL). Through its subsidiaries, TIHI principally offers
individual life insurance. The Company realized an increase to shareholder's
equity of $2.1 billion at December 31, 1993 related to the contribution of this
subsidiary. TIHI is included in Life and Annuity.
In September 1995, Travelers made a pro rata distribution to Travelers'
stockholders of shares of Class A Common Stock of Transport Holdings Inc., which
at the time was a wholly owned subsidiary of Travelers and was the indirect
owner of the business of Transport. Immediately prior to this distribution, the
Company dividended Transport, a wholly owned subsidiary of the Company, to its
parent. The results of Transport through September 1995 are included in income
from continuing operations.
The consolidated financial statements and the accompanying notes included in
this Annual Report on Form 10-K reflect the historical operations of the Company
for the year ended December 31, 1993. The results of operations of TIHI are not
included for the year ended December 31, 1993. The Company's consolidated
balance sheet and related data at December 31, 1995 and 1994 include TIHI on a
fully consolidated basis. The assets and liabilities of the Company (except
TIHI) were reflected in the consolidated balance sheet at December 31, 1993 on a
fully consolidated basis at management's then best estimate of their fair
values. Evaluation and appraisal of assets and liabilities, including
investments, the value of insurance in force, other insurance assets and
liabilities and related deferred income taxes, was completed during 1994.
The 27% Acquisition and the Merger were accounted for as a "step acquisition",
and the purchase accounting adjustments were "pushed down" to the subsidiaries
of TIGI, including the Company. The consolidated balance sheet and related data
at December 31, 1993 reflect adjustments of assets and liabilities of the
Company to their fair values determined at each acquisition date (i.e., 27% of
values at December 31, 1992 as carried forward and 73% of values at December 31,
1993).
8
<PAGE> 11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
Revenues of $3.647 billion in 1995 increased $241 million from 1994. This
increase in revenues in 1995 compared to 1994 is primarily attributable to a
$122 million increase in net investment income and a $93 million increase in
realized investment gains. The 1995 increase in net investment income is due to
the reinvestment of proceeds from sales of underperforming real estate during
1995 and 1994, and the reinvestment of proceeds from the 1995 sale of
MetraHealth.
Benefits and expenses of $2.810 billion in 1995 were level with 1994's benefits
and expenses of $2.809 billion.
Net income for 1995 was $750 million, an increase of $205 million when compared
to 1994. This increase in 1995 is the result of the increases in net investment
income and realized investment gains as well as an increase in income from
discontinued operations, primarily resulting from the gain on the sale of
MetraHealth.
At December 31, 1995 and 1994, the Company had real estate held for sale and
mortgage loan investments totaling $3.9 billion and $5.3 billion, respectively.
The Company is continuing its strategy to dispose of these real estate assets
and some of the mortgage loans and to reinvest the proceeds to obtain current
market yields. Underperforming assets include delinquent mortgage loans, loans
in the process of foreclosure, foreclosed loans and loans modified at interest
rates below market. In 1995 and 1994, the Company had sales of real estate held
for sale and mortgage loans of approximately $874 million and $1.258 billion,
respectively.
Other revenues include mortality, surrender and administrative charges on
universal life and investment contracts, administrative fees on employee benefit
and other contracts and revenues of noninsurance subsidiaries.
Separate accounts and variable deferred annuities primarily represent funds for
which investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contractholders. Deposits, net investment
income and realized investment gains and losses for all separate accounts and
variable deferred annuities are excluded from revenue.
A net deferred tax asset valuation allowance of $100 million has been
established to reduce the deferred tax asset on investment losses to the amount
that, based upon available evidence, is more likely than not to be realized.
Reversal of the valuation allowance is contingent upon the recognition of future
capital gains in the Company's consolidated life insurance company federal
income tax return through 1998, and the consolidated federal income tax return
of Travelers Group commencing in 1999, or a change in circumstances which
causes the recognition of the benefits to become more likely than not. There was
no change in the valuation allowance during 1995.
9
<PAGE> 12
LIFE AND ANNUITY:
<TABLE>
<CAPTION>
For the year ended December 31, 1995 1994
- ------------------------------- ---- ----
(in millions)
<S> <C> <C>
Revenues $3,638 $3,404
====== ======
Net income $ 554 $ 390
====== ======
</TABLE>
Life and Annuity net income increased to $554 million in 1995 from $390 million
in 1994. Higher realized investment gains, higher net investment income - helped
by the reinvestment of proceeds from sales of underperforming real estate during
the year as well as from the sale of MetraHealth - and improved productivity,
propelled 1995's net income increase compared with 1994.
For individual annuities, net written premiums and deposits in 1995 were $1.713
billion, up 31% from $1.309 billion in 1994. Total policyholder account balances
and benefit reserves which aggregated $12.7 billion at December 31, 1995
compared with $10.9 billion at December 31, 1994 reflected this growth in
production.
Sales continue to be aided by the success of Vintage, the variable annuity
product distributed exclusively by Smith Barney Financial Consultants, which was
launched in June 1994, and now accounts for more than 40% of all individual
annuity production at the Company. Vintage Life and Travelers Target Market
Maturity, the first of several new products planned for Smith Barney, were
introduced in September 1995. Annuity sales were also helped in part by rating
agency upgrades for claims paying ability that occurred during the year,
including in April 1995, A.M. Best's upgrade of the Company to an "A" rating.
This rating is not a recommendation to buy, sell or hold securities, and it may
be revised or withdrawn at any time.
In the group annuity business, net written premiums and deposits for the year
were $1.014 billion compared with $763 million last year (excluding intercompany
items). A management decision not to renew low margin guaranteed investment
contracts written in prior years contributed to a reduction in policyholder
account balances and benefit reserves to $10.6 billion at December 31, 1995,
from $12.1 billion at December 31, 1994. Scheduled maturities for guaranteed
investment contracts (GICs) for 1996, 1997, 1998, 1999 and 2000 are $1.3
billion, $367 million, $344 million, $123 million and $91 million, respectively.
At December 31, 1995, the interest rates credited on GICs had a weighted average
of 6.12%.
During 1995, Life and Annuity (excluding Primerica Life Insurance Company
discussed below) issued $6.2 billion of face amount of individual life
insurance, down from $9.2 billion during 1994, bringing total life insurance in
force to $49.2 billion at year-end 1995, up from $48.4 billion at year-end 1994
(excluding Transport). The reduction in face amount issued reflects a
de-emphasis on sales of certain lower-margin life insurance products. Net
written premiums and deposits for individual life insurance, excluding
Transport, were $269 million in 1995 compared to $282 million in 1994,
reflecting the purchase of additional reinsurance coverage in 1995.
Net written premiums for individual accident and health products, excluding
Transport, increased to $118 million in 1995, up 23% from $96 million in 1994.
These increases reflect strong growth in long-term care insurance.
Primerica Life Insurance Company, a subsidiary of TIHI, issued 266,600 term life
insurance policies totalling $53.0 billion in face amount during 1995, compared
to 299,400 term life insurance policies totaling $57.4 billion in face amount
during 1994. Life insurance in force at year-end 1995 reached $348.2 billion, up
from $335.0 billion at year-end 1994, and continued to reflect good policy
persistency (i.e., the percentage of policies that continue in force).
10
<PAGE> 13
In September 1995, Travelers made a pro rata distribution to its stockholders
of shares of Class A Common Stock of Transport Holdings Inc., which at the
time was a wholly owned subsidiary of Travelers and was the indirect owner of
the business of Transport. Immediately prior to this distribution, the Company
distributed Transport, an indirect wholly owned subsidiary of the Company, to
its parent.
DISCONTINUED OPERATIONS:
On January 3, 1995, the Company and its affiliates completed the sale of its
group life and related businesses to MetLife. The Company agreed to cede to
MetLife 100% of its risks in the businesses sold on an indemnity reinsurance
basis, effective January 1, 1995. Also on January 3, 1995, the Company and
MetLife, including certain of their affiliates, each contributed their medical
businesses to MetraHealth, a newly formed joint venture, in exchange for common
stock of MetraHealth.
On October 2, 1995, the Company and its parent, TIGI, sold their interests in
MetraHealth to United. The Company and TIGI collectively owned 48.25% of
MetraHealth's common stock, and received a total of $831 million in connection
with the transaction. This amount includes a dividend paid by MetraHealth and
amounts paid by a subsidiary of MetLife for the sale to MetLife of the Company
and TIGI's share of certain additional amounts payable under the merger
agreement based on 1996 and 1997 earnings. The Company and TIGI are also
entitled to receive up to an additional $169 million, based on "Company
Earnings" (as defined in the merger agreement) for 1995. The Company's share of
the proceeds was $708 million, and it is entitled to receive up to an additional
$144 million, based on 1995 Company Earnings. The sale generated an after-tax
gain of $111 million which was recognized in the fourth quarter of 1995.
As discussed in Note 4 of Notes to Condensed Consolidated Financial Statements,
all of the businesses sold to MetLife or contributed to MetraHealth were
included in MCEBO. MCEBO marketed group life and health insurance, managed
health care programs and administrative services associated with employee
benefit plans. In 1995, the Company's results reflect the medical insurance
business not yet transferred, plus its equity interest in the earnings of
MetraHealth. These operations have been accounted for as discontinued
operations.
CORPORATE AND OTHER OPERATIONS:
<TABLE>
<CAPTION>
For the year ended December 31, 1995 1994
(in millions) ---- ----
<S> <C> <C>
Net income (loss) $(7) $(4)
==== ====
</TABLE>
OUTLOOK:
Life and Annuity should benefit from the growth in the aging population who are
becoming more focused on the need to accumulate adequate savings for retirement,
to protect these savings and to plan for the transfer of wealth to the next
generation. Life and Annuity is well-positioned to benefit from the favorable
long-term demographic trends through its strong financial position, widespread
brand name recognition and broad array of competitive life, annuity and
long-term care insurance products sold through three established distribution
channels. These include independent agents, Copeland and Smith Barney financial
consultants.
11
<PAGE> 14
However, competition in both product pricing and customer service is
intensifying. While there has been some consolidation within the industry, other
financial services organizations are increasingly involved in the sale and/or
distribution of insurance products. Deregulation of the banking industry,
including possible reform of restrictions on entry into the insurance business,
will likely accelerate this trend. In order to strengthen its competitive
position, Life and Annuity expects to maintain a current product portfolio,
further diversify its distribution channels, and retain its healthy financial
position through strong sales growth in a cost-efficient manner.
In addition, during the past year significant tax reform discussions have
occurred. Some of the proposed discussions could reduce or eliminate the need
for tax deferral features and thus the need for products that are currently in
Life and Annuity's portfolio. New legislation could also create the need for new
products or increase the demand for some existing products. At this time it is
not clear what the eventual outcome of this national debate will be or what
impact, if any, it may have on Life and Annuity's sales and business retention.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121, "Accounting for Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. This
statement requires the write down to fair value when long-lived assets to be
held and used are impaired. It also requires long-lived assets to be disposed of
(e.g., real estate held for sale) to be carried at the lower of cost or fair
value less cost to sell and does not allow such assets to be depreciated. The
adoption of this statement, effective January 1, 1996, did not have a material
effect on results of operations, financial condition or liquidity.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). This statement addresses alternative accounting
treatments for stock-based compensation, such as stock options and restricted
stock. FAS 123 permits either expensing the value of stock-based compensation
over the period earned or disclosing in the financial statement footnotes the
pro forma impact to net income as if the value of stock-based compensation
awards had been expensed. The value of awards would be measured at the grant
date based upon estimated fair value, using option pricing models. The
requirements of this statement will be effective for 1996 financial statements,
although earlier adoption is permissible if an entity elects to expense the cost
of stock-based compensation. The Company, along with affiliated companies,
participates in stock option and incentive plans sponsored by Travelers. The
Company is currently evaluating the disclosure requirements and expense
recognition alternatives addressed by this statement.
12
<PAGE> 15
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Reports 14-15
Consolidated Financial Statements:
Consolidated Statement of Operations and Retained Earnings
for the years ended December 31, 1995, 1994 and 1993 16
Consolidated Balance Sheet - December 31, 1995 and 1994 17
Consolidated Statement of Cash Flow
for the years ended December 31, 1995, 1994 and 1993 18
Notes to Consolidated Financial Statements 19-48
Glossary of Insurance Terms 49-50
</TABLE>
13
<PAGE> 16
Independent Auditors' Report
The Board of Directors and Shareholder of
The Travelers Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheet of The Travelers
Insurance Company and Subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations and retained earnings and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Travelers
Insurance Company and Subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in note 3 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in 1994.
/s/KPMG Peat Marwick LLP
------------------------
Hartford, Connecticut
January 16, 1996
14
<PAGE> 17
Report of Independent Accountants
To the Board of Directors and Shareholder of
The Travelers Insurance Company and Subsidiaries:
We have audited the consolidated statements of operations and retained earnings
and cash flows of The Travelers Insurance Company and Subsidiaries for the year
ended December 31, 1993. These consolidated financial statements are the
responsibility of Company management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of The Travelers Insurance Company and Subsidiaries for the year
ended December 31, 1993 in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
Hartford, Connecticut
January 24, 1994
15
<PAGE> 18
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1995 1994 | 1993
- ---------------------------------------------------------------------------------------------|-------
<S> <C> <C> | <C>
REVENUES |
Premiums $1,496 $1,492 | $ 330
Net investment income 1,824 1,702 | 1,730
Realized investment gains (losses) 106 13 | (39)
Other 221 199 | 153
- ---------------------------------------------------------------------------------------------|-------
3,647 3,406 | 2,174
- ---------------------------------------------------------------------------------------------|-------
|
BENEFITS AND EXPENSES |
Current and future insurance benefits 1,185 1,216 | 792
Interest credited to contractholders 967 961 | 1,200
Amortization of deferred acquisition costs and |
value of insurance in force 290 281 | 56
Other operating expenses 368 351 | 211
- ---------------------------------------------------------------------------------------------|-------
2,810 2,809 | 2,259
- ---------------------------------------------------------------------------------------------|-------
|
Income (loss) from continuing operations before |
federal income taxes 837 597 | (85)
- ---------------------------------------------------------------------------------------------|-------
|
Federal income taxes: |
Current 233 (96) | (58)
Deferred 57 307 | (48)
- ---------------------------------------------------------------------------------------------|-------
290 211 | (106)
- ---------------------------------------------------------------------------------------------|-------
|
Income from continuing operations 547 386 | 21
|
Discontinued operations, net of income taxes |
Income from operations (net of taxes of $18, $83 and $48) 72 150 | 120
Gain on disposition (net of taxes of $68, $18 and $0) 131 9 | -
- ---------------------------------------------------------------------------------------------|-------
Income from discontinued operations 203 159 | 120
- ---------------------------------------------------------------------------------------------|-------
|
Net income 750 545 | 141
Retained earnings beginning of year 1,562 1,017 | 888
Dividend to parent - - | (14)
Preference stock tax benefit allocated by parent - - | 2
- ---------------------------------------------------------------------------------------------|-------
Retained earnings end of year $2,312 $1,562 | $1,017
- -----------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(at December 31, in millions) 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at market (cost, $18,187; $18,579) $18,842 $17,260
Equity securities, at market (cost, $182; $173) 224 169
Mortgage loans 3,626 4,938
Real estate held for sale, net of accumulated depreciation of $9; $9 293 383
Policy loans 1,888 1,581
Short-term securities 1,554 2,279
Other investments 874 885
- -------------------------------------------------------------------------------------------------------------
Total investments 27,301 27,495
- -------------------------------------------------------------------------------------------------------------
Cash 73 102
Investment income accrued 338 362
Premium balances receivable 107 215
Reinsurance recoverables 4,107 2,915
Deferred acquisition costs and value of insurance in force 1,962 1,939
Deferred federal income taxes - 950
Separate and variable accounts 6,949 5,160
Other assets 1,464 1,397
- -------------------------------------------------------------------------------------------------------------
Total assets $42,301 $40,535
- -------------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $14,525 $16,354
Future policy benefits 11,783 11,480
Policy and contract claims 571 1,222
Separate and variable accounts 6,916 5,128
Short-term debt 73 74
Deferred federal income taxes 32 -
Other liabilities 2,173 1,923
- -------------------------------------------------------------------------------------------------------------
Total liabilities 36,073 36,181
- -------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million
shares authorized, issued and outstanding 100 100
Additional paid-in capital 3,134 3,452
Retained earnings 2,312 1,562
Unrealized investment gains (losses), net of taxes 682 (760)
- -------------------------------------------------------------------------------------------------------------
Total shareholder's equity 6,228 4,354
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $42,301 $40,535
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1995 1994 | 1993
- -------------------------------------------------------------------------------------------------|----------
<S> <C> <C> | <C>
CASH FLOWS FROM OPERATING ACTIVITIES |
Premiums collected $ 1,346 $ 1,394 | $ 551
Net investment income received 1,855 1,719 | 1,638
Other revenues received 90 (2) | 2
Benefits and claims paid (846) (1,115) | (960)
Interest credited to contractholders (960) (868) | (1,097)
Operating expenses paid (615) (536) | (231)
Income taxes (paid) refunded (63) (27) | 25
Trading account investments, (purchases) sales, net - - | (1,585)
Other (137) (81) | 308
- -------------------------------------------------------------------------------------------------|----------
Net cash provided by (used in) operating activities 670 484 | (1,349)
Net cash provided by (used in) discontinued operations (596) 233 | (23)
- -------------------------------------------------------------------------------------------------|-----------
Net cash provided by (used in) operations 74 717 | (1,372)
- -------------------------------------------------------------------------------------------------|-----------
CASH FLOWS FROM INVESTING ACTIVITIES |
Investment repayments |
Fixed maturities 1,974 2,528 | 2,369
Mortgage loans 680 1,266 | 1,103
Proceeds from investments sold |
Fixed maturities 6,773 1,316 | 99
Equity securities 379 357 | 75
Mortgage loans 704 546 | 290
Real estate held for sale 253 728 | 949
Investments in |
Fixed maturities (10,748) (4,594) | (2,968)
Equity securities (305) (340) | (51)
Mortgage loans (144) (102) | (246)
Policy loans, net (325) (193) | (2)
Short-term securities, (purchases) sales, net 291 (367) | 850
Other investments, (purchases) sales, net (267) (299) | 41
Securities transactions in course of settlement 258 24 | (7)
Net cash provided by (used in) investing activities of |
discontinued operations 1,425 (261) | 113
- -------------------------------------------------------------------------------------------------|----------
Net cash provided by investing activities 948 609 | 2,615
- -------------------------------------------------------------------------------------------------|----------
CASH FLOWS FROM FINANCING ACTIVITIES |
Issuance (redemption) of short-term debt, net (1) 73 | -
Contractholder fund deposits 2,705 1,951 | 2,884
Contractholder fund withdrawals (3,755) (3,357) | (4,264)
Dividends to parent company - - | (14)
Return of capital to parent company - (23) | -
Net cash provided by financing activities |
of discontinued operations - 84 | 121
Other - (2) | 6
- -------------------------------------------------------------------------------------------------|----------
Net cash used in financing activities (1,051) (1,274) | (1,267)
- -------------------------------------------------------------------------------------------------|----------
Net increase (decrease) in cash $ (29) $ 52 | $ (24)
- ------------------------------------------------------------------------------------------------------------
Cash at December 31 $ 73 $ 102 $ 50
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Travelers Insurance Company is a wholly owned subsidiary of The
Travelers Insurance Group Inc. (TIGI), which is an indirect, wholly owned
subsidiary of Travelers Group Inc. (Travelers).
The Travelers Insurance Company and its subsidiaries (the Company)
principally operates through one major business segment: Life and
Annuity, which offers individual life, long-term care, annuities and
investment products to individuals and small businesses, and investment
products to employer-sponsored retirement and savings plans. The
Company's Corporate and Other Operations segment manages the investment
portfolio of the Company.
Individual products are primarily marketed through independent agents and
through two of the Company's affiliates, The Copeland Companies and the
financial consultants of Smith Barney, Inc. (Smith Barney). Group pension
products and annuities are marketed by the Company's salaried staff
directly to plan sponsors and are also placed through independent
consultants and investment advisers.
The Company sold group life and health insurance through its Managed Care
and Employee Benefits Operations (MCEBO) through 1994. See note 4.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the
accompanying financial statements follow.
Basis of presentation
The consolidated financial statements include the accounts of the
Company and its insurance and noninsurance subsidiaries. Significant
intercompany transactions have been eliminated.
In December 1992, Primerica Corporation (Primerica) acquired
approximately 27% of the common stock of the Company's then parent, The
Travelers Corporation (the 27% Acquisition). The 27% Acquisition was
accounted for as a purchase. Effective December 31, 1993, Primerica
acquired the approximately 73% of The Travelers Corporation common stock
which it did not already own, and The Travelers Corporation was merged
into Primerica, which was renamed Travelers Group Inc. This was effected
through the exchange of .80423 shares of Travelers common stock for each
share of The Travelers Corporation common stock (the Merger). All
subsidiaries of The Travelers Corporation were contributed to TIGI. In
conjunction with the Merger, Travelers contributed Travelers Insurance
Holdings Inc. (formerly Primerica Insurance Holdings, Inc.) and its
subsidiaries (TIHI) to TIGI, which in turn contributed TIHI to the
Company.
TIHI is an intermediate holding company whose primary subsidiaries are
Primerica Life Insurance Company and its subsidiary National Benefit
Life Insurance Company, which primarily offers individual life
insurance. Through September 1995 it also sold specialty accident and
health insurance through its subsidiary Transport Life Insurance Company
(see note 4).
19
<PAGE> 22
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
The consolidated financial statements and the accompanying notes reflect
the historical operations of the Company for the year ended December 31,
1993. The results of operations of TIHI and its subsidiaries are not
included in the 1993 financial statements.
The 27% Acquisition and the Merger were accounted for as a "step
acquisition", and the purchase accounting adjustments were "pushed down"
as of December 31, 1993 to the subsidiaries of TIGI, including the
Company, and reflect adjustments of assets and liabilities of the Company
(except TIHI) to their fair values determined at each acquisition date
(i.e., 27% of values at December 31, 1992 as carried forward and 73% of
the values at December 31, 1993). These assets and liabilities were
recorded at December 31, 1993 based upon management's then best estimate
of their fair values at the respective dates. Evaluation and appraisal of
assets and liabilities, including investments, the value of insurance in
force, other insurance assets and liabilities and related deferred
federal income taxes was completed during 1994. The excess of the 27%
share of assigned value of identifiable net assets over cost at December
31, 1992, which was allocated to the Company through "pushdown"
accounting, was approximately $56 million and is being amortized over ten
years on a straight-line basis. The excess of the purchase price of the
common stock over the fair value of the 73% of net assets acquired at
December 31, 1993, which was allocated to the Company through "pushdown"
accounting, was approximately $340 million and is being amortized over 40
years on a straight-line basis.
The consolidated statements of operations and retained earnings and of
cash flows and the related accompanying notes for the years ended
December 31, 1995 and 1994, which are presented on a purchase accounting
basis, are separated from the corresponding 1993 information, which is
presented on a historical accounting basis, to indicate the difference in
valuation bases.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and benefits
and expenses during the reporting period. Actual results could differ
from those estimates.
As more fully described in note 4, all of the operations comprising MCEBO
are presented as a discontinued operation and, accordingly, prior year
amounts have been restated.
Certain prior year amounts have been reclassified to conform with the
1995 presentation.
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities are valued based upon quoted market prices, or if quoted
market prices are not available, discounted expected cash flows using
market rates commensurate with the credit quality and maturity of the
investment. Fixed maturities are classified as "available for sale" and
are reported at fair value, with unrealized investment gains and losses,
net of income taxes, charged or credited directly to shareholder's
equity.
20
<PAGE> 23
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Equity securities, which include common and nonredeemable preferred
stocks, are available for sale and carried at fair value based primarily
on quoted market prices. Changes in fair values of equity securities are
charged or credited directly to shareholder's equity, net of income
taxes.
Mortgage loans are carried at amortized cost. For mortgage loans that are
determined to be impaired, a reserve is established for the difference
between the amortized cost and fair market value of the underlying
collateral. Impaired loans were insignificant at December 31, 1995.
Real estate held for sale is carried at the lower of cost or fair value
less estimated costs to sell. Fair value was established at time of
foreclosure by appraisers, either internal or external, using discounted
cash flow analyses and other acceptable techniques. Thereafter, an
allowance for losses on real estate held for sale is established if the
carrying value of the property exceeds its current fair value less
estimated costs to sell. There was no such allowance at December 31,
1995.
Accrual of income is suspended on fixed maturities or mortgage loans that
are in default, or on which it is likely that future payments will not be
made as scheduled. Interest income on investments in default is
recognized only as payment is received.
Gains or losses arising from futures contracts used to hedge investments
are treated as basis adjustments and are recognized in income over the
life of the hedged investments.
Gains and losses arising from forward contracts used to hedge foreign
investments in the Company's U.S. portfolios are a component of realized
investment gains and losses. Gains and losses arising from forward
contracts used to hedge investments in Canadian operations are reflected
directly in shareholder's equity, net of income taxes.
Interest rate swaps are used to manage interest rate risk in the
investment portfolio and are marked to market with unrealized gains and
losses recorded as a component of shareholder's equity, net of income
taxes. Rate differentials on interest rate swap agreements are accrued
between settlement dates and are recognized as an adjustment to interest
income from the related investment.
Investment Gains and Losses
Realized investment gains and losses are included as a component of
pretax revenues based upon specific identification of the investments
sold on the trade date and, prior to the Merger, included adjustments to
investment valuation reserves. These adjustments reflected changes
considered to be other than temporary in the net realizable value of
investments. Also included are gains and losses arising from the
remeasurement of the local currency value of foreign investments to U.S.
dollars, the functional currency of the Company. The foreign exchange
effects of Canadian operations are included in unrealized gains and
losses.
21
<PAGE> 24
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Policy Loans
Policy loans are carried at the amount of the unpaid balances that are
not in excess of the net cash surrender values of the related insurance
policies. The carrying value of policy loans, which have no defined
maturities, is considered to be fair value.
Deferred Acquisition Costs and Value of Insurance in Force
Costs of acquiring individual life insurance, annuities and health
business, principally commissions and certain expenses related to policy
issuance, underwriting and marketing, all of which vary with and are
primarily related to the production of new business, are deferred.
Acquisition costs relating to traditional life insurance and guaranteed
renewable health contracts, including long-term care, are amortized over
the period of anticipated premiums; universal life in relation to
estimated gross profits; and annuity contracts employing a level yield
method. For life insurance, a 10- to 25-year amortization period is
used; for guaranteed renewable health, a 10- to 20-year period, and a
10- to 15-year period is employed for annuities. Deferred acquisition
costs are reviewed periodically for recoverability to determine if any
adjustment is required.
The value of insurance in force represents the actuarially determined
present value of anticipated profits to be realized from life insurance,
annuities and health contracts at the date of the Merger using the same
assumptions that were used for computing related liabilities where
appropriate. The value of insurance in force was the actuarially
determined present value of the projected future profits discounted at
interest rates ranging from 14% to 18% for the business acquired. The
value of the business in force is amortized over the contract period
using current interest crediting rates to accrete interest and using
amortization methods based on the specified products. Traditional life
insurance and guaranteed renewable health policies are amortized over
the period of anticipated premiums; universal life is amortized in
relation to estimated gross profits; and annuity contracts are amortized
employing a level yield method. The value of insurance in force is
reviewed periodically for recoverability to determine if any adjustment
is required.
Separate and Variable Accounts
Separate and variable accounts primarily represent funds for which
investment income and investment gains and losses accrue directly to,
and investment risk is borne by, the contractholders. Each account has
specific investment objectives. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company. The assets of these accounts are carried at
market value. Certain other separate accounts provide guaranteed levels
of return or benefits and the assets of these accounts are carried at
amortized cost. Amounts assessed to the contractholders for management
services are included in revenues. Deposits, net investment income and
realized investment gains and losses for these accounts are excluded
from revenues, and related liability increases are excluded from
benefits and expenses.
22
<PAGE> 25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Goodwill
The excess of the 27% share of assigned value of identifiable assets
over cost at December 31, 1992 allocated to the Company as a result of
the 27% Acquisition amounted to approximately $56 million and is being
amortized over 10 years on a straight-line basis. Goodwill resulting
from the excess of the purchase price over the fair value of the 73% of
net assets acquired related to the Merger amounted to approximately $340
million at December 31, 1993 and is being amortized over 40 years on a
straight-line basis. TIHI has goodwill of $239 million.
Contractholder Funds
Contractholder funds represent receipts from the issuance of universal
life, pension investment and certain individual annuity contracts. Such
receipts are considered deposits on investment contracts that do not
have substantial mortality or morbidity risk. Account balances are also
increased by interest credited and reduced by withdrawals, mortality
charges and administrative expenses charged to the contractholders.
Calculations of contractholder account balances for investment contracts
reflect lapse, withdrawal and interest rate assumptions based on
contract provisions, the Company's experience and industry standards.
Interest rates credited to contractholder funds range from 3.8% to 8.6%.
Contractholder funds also include other funds that policyholders leave
on deposit with the Company.
Future Policy Benefits
Benefit reserves represent liabilities for future insurance policy
benefits. Benefit reserves for life insurance, annuities, and accident
and health policies have been computed based upon mortality, morbidity,
persistency and interest assumptions applicable to these coverages,
which range from 2.5% to 10.0%, including adverse deviation. These
assumptions consider Company experience and industry standards and may
be revised if it is determined that the future experience will differ
substantially from that previously assumed. The assumptions vary by
plan, age at issue, year of issue and duration. Appropriate recognition
has been given to experience rating and reinsurance.
Operating Lease Obligations
At December 31, 1993, operating lease obligations were recorded at the
value assigned at the acquisition dates and included in the consolidated
balance sheet as a component of other liabilities. This liability is
being amortized over the respective lease periods.
23
<PAGE> 26
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Permitted Statutory Accounting Practices
The Company, domiciled principally in Connecticut and Massachusetts,
prepares statutory financial statements in accordance with the accounting
practices prescribed or permitted by the insurance departments of those
states. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners as
well as state laws, regulations, and general administrative rules.
Permitted statutory accounting practices encompass all accounting
practices not so prescribed. The impact of any permitted accounting
practices on statutory surplus of the Company is not material.
Premiums
Premiums are recognized as revenues when due. Reserves are established
for the portion of premiums that will be earned in future periods and for
deferred profits on limited-payment policies that are being recognized in
income over the policy term.
Other Revenues
Other revenues include surrender, mortality and administrative charges
and fees as earned on investment, universal life and other insurance
contracts. Other revenues also include gains and losses on dispositions
of assets and operations other than realized investment gains and losses,
revenues of noninsurance subsidiaries, and the pretax operating results
of real estate joint ventures.
Interest Credited to Contractholders
Interest credited to contractholders represents amounts earned by
universal life, pension investment and certain individual annuity
contracts in accordance with contract provisions.
Federal Income Taxes
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income
taxes arise from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and
liabilities. The deferred federal income tax asset is recognized to the
extent that future realization of the tax benefit is more likely than
not, with a valuation allowance for the portion that is not likely to be
recognized.
24
<PAGE> 27
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Accounting Standards not yet Adopted
Statement of Financial Accounting Standards No. 121, "Accounting for
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to
be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. This statement requires the write down to
fair value when long-lived assets to be held and used are impaired. It
also requires long-lived assets to be disposed of (e.g., real estate held
for sale) to be carried at the lower of cost or fair value less cost to
sell and does not allow such assets to be depreciated. The adoption of
this statement, effective January 1, 1996, did not have a material effect
on the Company's results of operations, financial condition or liquidity.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). This statement addresses alternative
accounting treatments for stock-based compensation, such as stock options
and restricted stock. FAS 123 permits either expensing the value of
stock-based compensation over the period earned or disclosing in the
financial statement footnotes the pro forma impact to net income as if
the value of stock-based compensation awards had been expensed. The value
of awards would be measured at the grant date based upon estimated fair
value, using option pricing models. The requirements of this statement
will be effective for 1996 financial statements, although earlier
adoption is permissible if an entity elects to expense the cost of
stock-based compensation. The Company, along with affiliated companies,
participates in stock option and incentive plans sponsored by Travelers.
The Company is currently evaluating the disclosures requirements and
expense recognition alternatives addressed by this statement.
3. CHANGES IN ACCOUNTING PRINCIPLES
Accounting by Creditors for Impairment of a Loan
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of
a Loan," and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures," which describe how impaired loans should be measured
when determining the amount of a loan loss accrual. These statements
amended existing guidance on the measurement of restructured loans in a
troubled debt restructuring involving a modification of terms. Their
adoption did not have a material impact on the Company's financial
condition, results of operations or liquidity.
25
<PAGE> 28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. CHANGES IN ACCOUNTING PRINCIPLES, Continued
Accounting for Certain Debt and Equity Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (FAS 115), which addresses accounting and
reporting for investments in equity securities that have a readily
determinable fair value and for all debt securities. Investment
securities have been classified as "available for sale" and are reported
at fair value, with unrealized gains and losses, net of income taxes,
charged or credited directly to shareholder's equity. Previously,
securities classified as available for sale were carried at the lower of
aggregate cost or market value. Initial adoption of this standard
resulted in an increase of approximately $232 million (net of taxes) to
net unrealized gains which is included in shareholder's equity.
This increase included an unrealized gain of $133 million (net of income
taxes) on TIHI's investment in the common stock of Travelers. See note
15.
4. ACQUISITIONS AND DISPOSITIONS
In December 1994, the Company and its affiliates sold their group dental
insurance business to Metropolitan Life Insurance Company (MetLife) and
realized a gain on the sale of $9 million (aftertax). On January 3, 1995,
the Company and its affiliates completed the sale of their group life and
related non-medical group insurance businesses to MetLife for $350
million and realized a gain on the sale of $20 million (aftertax). In
connection with the sale, the Company ceded 100% of its risks in the
group life and related businesses to MetLife on an indemnity reinsurance
basis, effective January 1, 1995. In connection with the reinsurance
transaction, the Company transferred assets with a fair market value of
approximately $1.5 billion to MetLife, equal to the statutory reserves
and other liabilities transferred.
On January 3, 1995, the Company and MetLife and certain of their
affiliates formed The MetraHealth Companies, Inc. (MetraHealth) joint
venture by contributing their group medical businesses to MetraHealth, in
exchange for shares of common stock of MetraHealth. No gain was
recognized upon the formation of the joint venture. Upon formation of the
joint venture, the Company owned 42.6% of the outstanding capital stock
of MetraHealth, TIGI owned 7.4% and the other 50% was owned by MetLife
and its affiliates. In March 1995, MetraHealth acquired HealthSpring,
Inc. for common stock of MetraHealth, resulting in a reduction in the
ownership interests of the Company to 41.10%, TIGI to 7.15%, and MetLife
to 48.25%.
In connection with the formation of the joint venture, the transfer of
the fee-based medical business (Administrative Services Only) and other
noninsurance business to MetraHealth was completed on January 3, 1995. As
the medical insurance business of the Company came due for renewal, the
risks were transferred to MetraHealth and the related operating results
for this medical insurance business were reported by the Company in 1995
as part of discontinued operations.
26
<PAGE> 29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. ACQUISITIONS AND DISPOSITIONS, continued
On October 2, 1995, the Company and its affiliates completed the sale of
their ownership in MetraHealth to United HealthCare Corporation. Gross
proceeds to the Company were $708 million in cash, and could increase by
up to $144 million if a contingency payment based on 1995 results is
made. The gain to the Company, not including the contingency payment,
was $111 million (aftertax) and was recognized in the fourth quarter of
1995.
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's MCEBO segment in 1994. In 1995 the Company's
results reflect the medical insurance business not yet transferred, plus
its equity interest in the earnings of MetraHealth through the date of
the sale. These operations have been accounted for as a discontinued
operation. Revenues from discontinued operations for the years ended
December 31, 1995, 1994 and 1993 amounted to $1.2 billion, $3.3 billion
and $3.3 billion, respectively. The assets and liabilities of the
discontinued operations have not been segregated in the consolidated
balance sheet as of December 31, 1995 and 1994. The assets and
liabilities of the discontinued operations consist primarily of
investments and insurance-related assets and liabilities. At December
31, 1995, these assets and liabilities each amounted to $1.8 billion. At
December 31, 1994, these assets and liabilities amounted to $3.4 billion
and $3.2 billion, respectively.
In September 1995, Travelers made a pro rata distribution to its
stockholders of shares of Class A Common Stock of Transport Holdings
Inc., which at the time was a wholly owned subsidiary of Travelers and
was the indirect owner of the business of Transport Life Insurance
Company (Transport). Immediately prior to this distribution, the Company
dividended Transport, an indirect, wholly owned subsidiary of the
Company, to its parent, resulting in a reduction in additional paid-in
capital of $334 million. The results of Transport through September 1995
are included in income from continuing operations.
On December 31, 1993, in conjunction with the Merger, Travelers
contributed TIHI to TIGI, which TIGI then contributed to the Company at
a carrying value of $2.1 billion. Through its subsidiaries, TIHI
primarily offers individual life insurance and, until the dividend of
Transport, specialty accident and health insurance.
5. COMMERCIAL PAPER AND LINES OF CREDIT
The Company issues commercial paper directly to investors and had $73
million outstanding at December 31, 1995. The Company maintains unused
credit availability under bank lines of credit at least equal to the
amount of the outstanding commercial paper.
Travelers, Commercial Credit Company (CCC) (an indirect wholly owned
subsidiary of Travelers) and the Company have an agreement with a
syndicate of banks to provide $1.0 billion of revolving credit, to be
allocated to any of Travelers, CCC or the Company. The Company's
participation in this agreement is limited to $250 million. The
revolving credit facility consists of a five-year revolving credit
facility which expires in 1999. At December 31, 1995, $125 million was
allocated to the Company. Under this facility the Company is required to
maintain certain minimum equity and risk-based capital levels. At
December 31, 1995, the Company was in compliance with these provisions.
27
<PAGE> 30
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. REINSURANCE
The Company participates in reinsurance in order to limit losses,
minimize exposure to large risks, provide additional capacity for future
growth and to effect business-sharing arrangements. Reinsurance is
accomplished through various plans of reinsurance, primarily
coinsurance, modified coinsurance and yearly renewable term. The Company
remains primarily liable as the direct insurer on all risks reinsured.
It is the policy of the Company to obtain reinsurance for amounts above
certain retention limits on individual life policies which vary with age
and underwriting classification. Generally, the maximum retention on an
ordinary life risk is $1.5 million. The Company writes workers'
compensation business through its Accident Department. This business is
ceded 100% to an affiliate, The Travelers Indemnity Company.
A summary of reinsurance financial data reflected within the
consolidated statement of operations and retained earnings is presented
below (in millions):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
1995 1994 | 1993
-------------------------------------------------------------------------------|---------
<S> <C> <C> | <C>
Written Premiums: |
Direct $2,166 $2,153 | $ 854
|
Assumed from: |
Non-affiliated companies - - | 13
|
Ceded to: |
Affiliated companies (374) (358) | (480)
Non-affiliated companies (302) (306) | (57)
-------------------------------------------------------------------------------|---------
Total net written premiums $1,490 $1,489 | $ 330
===============================================================================|=========
|
Earned Premiums: |
Direct $2,067 $2,301 | $ 850
|
Assumed from: |
Non-affiliated companies - - | 13
|
|
Ceded to: |
Affiliated companies (283) (384) | (480)
Non-affiliated companies (298) (305) | (58)
-------------------------------------------------------------------------------|---------
Total net earned premiums $1,486 $1,612 | $ 325
=========================================================================================
</TABLE>
28
<PAGE> 31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. REINSURANCE, Continued
Reinsurance recoverables at December 31 include amounts recoverable on
unpaid and paid losses and were as follows (in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1995 1994
----------------------------------------------------------------------------
<S> <C> <C>
Reinsurance Recoverables:
Life and accident and health business:
Non-affiliated companies $1,744 $ 661
Affiliated companies - 3
Property-casualty business:
Affiliated companies 2,363 2,251
----------------------------------------------------------------------------
Total Reinsurance Recoverables $4,107 $2,915
============================================================================
</TABLE>
Total reinsurance recoverable at December 31, 1995 includes $929 million
recoverable from MetLife in connection with the sale of the Company's
group life and related businesses. See note 4.
7. SHAREHOLDER'S EQUITY
Additional Paid-In Capital
The decrease of $318 million in additional paid-in capital during 1995 is
due primarily to the dividend of Transport to the Company's parent (see
note 4).
The increase of $273 million in additional paid-in capital during 1994 is
due primarily to the finalization of the evaluations and appraisals used
to assign fair values to assets and liabilities under purchase
accounting.
The increase of $1.7 billion in additional paid-in capital during 1993
arose from a contribution of $400 million from The Travelers Corporation
and the contribution of TIHI (see notes 2 and 4). This was partially
offset by the impact of the initial evaluations and appraisals used to
assign fair values to assets and liabilities under purchase accounting.
Unrealized Investment Gains (Losses)
An analysis of the change in unrealized gains and losses on investments
is shown in note 15.
Shareholder's Equity and Dividend Availability
Statutory net income, including TIHI, was $235 million and $100 million
for the years ended December 31, 1995 and 1994, respectively. Statutory
net loss, excluding TIHI, was $648 million for the year ended December
31, 1993.
Statutory capital and surplus was $3.2 billion and $2.1 billion at
December 31, 1995 and 1994, respectively.
29
<PAGE> 32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. SHAREHOLDER'S EQUITY, Continued
The Company is currently subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to its parent
without prior approval of insurance regulatory authorities. Statutory
surplus of $506 million is available in 1996 for dividend payments by the
Company without prior approval of the Connecticut Insurance Department.
Dividend payments to the Company from its insurance subsidiaries are
subject to similar restrictions and are limited to $16 million in 1996.
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments with Off-Balance Sheet Risk
The Company uses derivative financial instruments, including financial
futures, interest rate swaps and forward contracts, as a means of hedging
exposure to foreign currency and/or interest rate risk on anticipated
transactions or existing assets and liabilities. Also, in the normal
course of business, the Company has fixed and variable rate loan
commitments and unfunded commitments to partnerships. The Company does
not hold or issue derivative instruments for trading purposes.
These derivative financial instruments have off-balance-sheet risk.
Financial instruments with off-balance-sheet risk involve, to varying
degrees, elements of credit and market risk in excess of the amount
recognized in the consolidated balance sheet. The contract or notional
amounts of these instruments reflect the extent of involvement the
Company has in a particular class of financial instrument. However, the
maximum loss or cash flow associated with these instruments can be less
than these amounts. For forward contracts and interest rate swaps, credit
risk is limited to the amounts calculated to be due the Company on such
contracts. For unfunded commitments to partnerships, credit exposure is
the amount of the unfunded commitments. For fixed and variable rate loan
commitments, credit exposure is represented by the contractual amount of
these instruments.
The Company monitors creditworthiness of counterparties to these
financial instruments by using criteria of acceptable risk that are
consistent with on-balance-sheet financial instruments. The controls
include credit approvals, limits and other monitoring procedures. Some
transactions include the use of collateral to minimize credit risk and
lower the effective cost to the borrower.
The Company uses exchange traded financial futures contracts to manage
its exposure to changes in interest rates which arises from the sale of
certain insurance and investment products. To hedge against adverse
changes in interest rates, the Company enters short positions in
financial futures contracts which offset asset price changes resulting
from changes in market interest rates until an investment is purchased.
30
<PAGE> 33
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
Continued
Futures contracts have little credit risk since organized exchanges are
the counterparties. Margin payments are required to enter a futures
contract and contract gains or losses are settled daily in cash. The
contract amount of futures contracts represents the extent of the
Company's involvement, but not future cash requirements, as open
positions are typically closed out prior to the delivery date of the
contract. At December 31, 1995, the Company's futures contracts have no
fair value because these contracts are marked to market and settled in
cash.
The Company may occasionally enter into interest rate swaps in connection
with other financial instruments to provide greater risk diversification
and better match an asset with a corresponding liability. Under interest
rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating rate
interest amounts calculated by reference to an agreed notional principal
amount. Generally, no cash is exchanged at the outset of the contract and
no principal payments are made by either party. A single net payment is
usually made by one counterparty at each due date. Swap agreements are
not exchange traded so they are subject to the risk of default by the
counterparty. In all cases, counterparties under these agreements are
major financial institutions with the risk of non-performance considered
remote.
The off-balance-sheet risks of interest rate swaps, financial futures
contracts, forward contracts, fixed and variable rate loan commitments
and unfunded commitments to partnerships were not significant at December
31, 1995 and 1994.
Derivative Financial Instruments without Off-Balance Sheet Risk
The Company purchased a 5-year interest rate cap, with a notional amount
of $200 million, from Travelers Group Inc. in 1995 to hedge against
losses that could result from increasing interest rates. This instrument,
which does not have off-balance sheet risk, gives the Company the right
to receive payments if interest rates exceed specific levels at specified
dates. The premium of $2 million paid for this instrument is being
amortized over its life. The interest rate cap asset is reported at fair
value which is $1 million at December 31, 1995.
Fair Value of Certain Financial Instruments
The Company uses various financial instruments in the normal course of
its business. Fair values of financial instruments which are considered
insurance contracts are not required to be disclosed and are not included
in the amounts discussed.
At December 31, 1995, investments in fixed maturities had a carrying
value and a fair value of $18.8 billion, compared with a carrying value
and a fair value of $17.3 billion at December 31, 1994. See note 15.
At December 31, 1995, mortgage loans had a carrying value of $3.6
billion, which approximated fair value, compared with a carrying value of
$4.9 billion, which approximated fair value at December 31, 1994. In
estimating fair value, the Company used interest rates reflecting the
higher returns required in the real estate financing market.
31
<PAGE> 34
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS,
Continued
The carrying values of $647 million and $417 million of financial
instruments classified as other assets approximated their fair values at
December 31, 1995 and 1994, respectively. The carrying values of $1.3
billion and $1.2 billion of financial instruments classified as other
liabilities also approximated their fair values at December 31, 1995 and
1994, respectively. Fair value is determined using various methods
including discounted cash flows, as appropriate for the various financial
instruments.
At December 31, 1995, contractholder funds with defined maturities had a
carrying value of $2.4 billion and a fair value of $2.5 billion, compared
with a carrying value of $4.2 billion and a fair value of $4.0 billion at
December 31, 1994. The fair value of these contracts is determined by
discounting expected cash flows at an interest rate commensurate with the
Company's credit risk and the expected timing of cash flows.
Contractholder funds without defined maturities had a carrying value of
$9.3 billion and a fair value of $9.0 billion at December 31, 1995,
compared with a carrying value of $9.1 billion and a fair value of $8.8
billion at December 31, 1994. These contracts generally are valued at
surrender value.
The assets of separate accounts providing a guaranteed return had a
carrying value and a fair value of $1.5 billion and $1.6 billion,
respectively, at December 31, 1995, compared with a carrying value and a
fair value of $1.5 billion and $1.4 billion, respectively, at December
31, 1994. The liabilities of separate accounts providing a guaranteed
return had a carrying value and a fair value of $1.5 billion and $1.4
billion, respectively, at December 31, 1995, compared with a carrying
value and a fair value of $1.5 billion and $1.3 billion, respectively, at
December 31, 1994.
The carrying values of cash, short-term securities and investment income
accrued approximated their fair values.
The carrying value of policy loans, which have no defined maturities, was
considered to be fair value.
9. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance-Sheet Risk
See note 8 for a discussion of financial instruments with
off-balance-sheet risk.
Litigation
The Company is a defendant or codefendant in various litigation matters.
Although there can be no assurances, as of December 31, 1995, the Company
believes, based on information currently available, that the ultimate
resolution of these legal proceedings would not be likely to have a
material adverse effect on its results of operations, financial condition
or liquidity.
32
<PAGE> 35
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. BENEFIT PLANS
Pension Plans
The Company participates in qualified and nonqualified, noncontributory
defined benefit pension plans sponsored by an affiliate covering the
majority of the Company's U.S. employees. Benefits for the qualified plan
are based on an account balance formula. Under this formula, each
employee's accrued benefit can be expressed as an account that is
credited with amounts based upon the employee's pay, length of service
and a specified interest rate, all subject to a minimum benefit level.
This plan is funded in accordance with the Employee Retirement Income
Security Act of 1974 and the Internal Revenue Code. For the nonqualified
plan, contributions are based on benefits paid.
Certain subsidiaries of TIHI participate in a noncontributory defined
benefit plan sponsored by their ultimate parent, Travelers.
The Company's share of net pension expense was not significant for 1995,
1994 and 1993.
Through plans sponsored by TIGI, the Company also provides defined
contribution pension plans for certain agents. Company contributions are
primarily a function of production. The expense for these plans was not
significant in 1995, 1994 and 1993.
Other Benefit Plans
In addition to pension benefits, the Company provides certain health care
and life insurance benefits for retired employees through a plan
sponsored by TIGI. This plan does not include employees of TIHI. Covered
employees may become eligible for these benefits if they reach retirement
age while working for the Company. These retirees may elect certain
prepaid health care benefit plans. Life insurance benefits generally are
set at a fixed amount. The cost recognized by the Company for these
benefits represents its allocated share of the total costs of the plan,
net of employee contributions. The Company's share of the total cost of
the plan for 1995, 1994 and 1993 was not significant.
The Merger resulted in a change in control of The Travelers Corporation
as defined in the applicable plans, and provisions of some employee
benefit plans secured existing compensation and benefit entitlements
earned prior to the change in control, and provided a salary and benefit
continuation floor for employees whose employment was affected. These
merger-related costs were assumed by TIGI.
Savings, Investment and Stock Ownership Plan
Under the savings, investment and stock ownership plan available to
substantially all employees of TIGI (except TIHI), the Company matches a
portion of employee contributions. Effective April 1, 1993, the match
decreased from 100% to 50% of an employee's first 5% contribution and a
variable match based on the profitability of TIGI and its subsidiaries
was added. The Company's matching obligation was not significant in 1995,
1994 and 1993.
33
<PAGE> 36
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and
expenses, for certain subsidiaries and affiliates of TIGI (excluding
TIHI) are handled by the Company. Settlements for these payments between
the Company and its affiliates are made regularly. The Company provides
various employee benefits coverages to employees of certain subsidiaries
of TIGI. The premiums for these coverages were charged in accordance with
cost allocation procedures based upon salaries or census. In addition,
investment advisory and management services, data processing services and
claims processing services are shared with affiliated companies. Charges
for these services are shared by the companies on cost allocation methods
based generally on estimated usage by department.
TIGI and its subsidiaries maintain a short-term investment pool in which
the Company participates. The position of each company participating in
the pool is calculated and adjusted daily. At December 31, 1995 and 1994,
the pool totaled approximately $2.2 billion and $1.5 billion,
respectively. The Company's share of the pool amounted to $1.4 billion
and $1.1 billion at December 31, 1995 and 1994, respectively, and is
included in short-term securities in the consolidated balance sheet.
The Company sells structured settlement annuities to its affiliates, The
Travelers Indemnity Company and its subsidiaries. Such deposits were $38
million, $39 million and $50 million for 1995, 1994 and 1993,
respectively.
The Company markets individual annuity products through The Copeland
Companies, a subsidiary of TIGI. Deposits related to these products were
$684 million, $635 million and $581 million in 1995, 1994 and 1993,
respectively.
The Company markets variable annuity products and life and accident and
health insurance through its affiliate, Smith Barney. Premiums and
deposits related to these products were $580 million and $161 million in
1995 and 1994, respectively.
The Company leases new furniture and equipment from a noninsurance
subsidiary of TIGI. The rental expense charged to the Company for this
furniture and equipment was not significant in 1995, 1994 and 1993.
At December 31, 1995 and 1994, TIC had an investment of $24 million and
$23 million, respectively, in bonds of its affiliate, Commercial Credit
Company. This is included in fixed maturities in the consolidated balance
sheet.
TIHI had an investment of $445 million and $231 million in common stock
of Travelers at December 31, 1995 and 1994, respectively. This is carried
at fair value. At December 31, 1994, Transport had an investment of $35
million in nonredeemable preferred stock of Travelers which was carried
at fair value. TIHI had notes receivable from Travelers of $30 million at
December 31, 1994, which were carried at cost. The notes were paid during
1995. These assets are included in other investments in the consolidated
balance sheet.
34
<PAGE> 37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. LEASES
The Company has entered into various operating and capital lease
agreements for office space and data processing and certain other
equipment. Rental expense under operating leases was $22 million, $23
million and $26 million, in 1995, 1994 and 1993, respectively. Future net
minimum rental and lease payments are estimated as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Minimum operating Sublease
(in millions) rental payments rental income
--------------------------------------------------------------------------------------
<S> <C> <C>
Year ending December 31,
1996 $103 $26
1997 88 19
1998 77 10
1999 71 6
2000 64 6
Thereafter 310 28
--------------------------------------------------------------------------------------
$713 $95
--------------------------------------------------------------------------------------
</TABLE>
The Company is reimbursed by affiliates of TIGI for utilization of space
and equipment.
35
<PAGE> 38
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
(in millions) 1995 1994 | 1993
----------------------------------------------------------------------------|---------
<S> <C> <C> | <C>
Effective tax rate |
|
Income before federal income taxes $837 $ 597 | $ (85)
Statutory tax rate 35% 35% | 35%
----------------------------------------------------------------------------|---------
|
Expected federal income taxes $293 $ 209 | $ (30)
Tax effect of: |
Nontaxable investment income (4) (4) | (1)
Adjustments to benefit and other reserves - - | (50)
Adjustment to deferred tax asset for |
enacted change in tax rates from |
34% to 35% - - | (18)
Other, net 1 6 | (7)
----------------------------------------------------------------------------|---------
Federal income taxes (benefit) $290 $ 211 | $(106)
----------------------------------------------------------------------------|---------
|
Effective tax rate 35% 35% | 125%
----------------------------------------------------------------------------|---------
|
Composition of federal income taxes |
Current: |
United States $220 $(108) | $ (61)
Foreign 13 12 | 3
----------------------------------------------------------------------------|---------
Total 233 (96) | (58)
----------------------------------------------------------------------------|---------
|
Deferred: |
United States 52 302 | (48)
Foreign 5 5 | -
----------------------------------------------------------------------------|-----------
Total 57 307 | (48)
----------------------------------------------------------------------------|-----------
Federal income taxes $290 $ 211 | $ (106)
----------------------------------------------------------------------------------------
</TABLE>
Tax benefits allocated directly to shareholder's equity for the years
ended December 31, 1995 and 1994 were $7 million and $2 million,
respectively.
36
<PAGE> 39
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES, Continued
The net deferred tax liability at December 31, 1995 and the net deferred
tax asset at December 31, 1994 were comprised of the tax effects of
temporary differences related to the following assets and liabilities:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
(in millions) 1995 1994
--------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Benefit, reinsurance and other reserves $ 447 $ 453
Contractholder funds 54 158
Investments - 690
Other employee benefits 83 87
Other 264 257
--------------------------------------------------------------------------------------------
Total 848 1,645
--------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs and value of insurance in force 538 529
Investments 152 -
Prepaid pension expense 9 5
Other 81 61
--------------------------------------------------------------------------------------------
Total 780 595
--------------------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 68 1,050
Valuation allowance for deferred tax assets (100) (100)
--------------------------------------------------------------------------------------------
Net deferred tax (liability) asset after valuation allowance $ (32) $ 950
--------------------------------------------------------------------------------------------
</TABLE>
Starting in 1994 and continuing for at least five years, the Company and
its life insurance subsidiaries will file a consolidated federal income
tax return. Federal income taxes are allocated to each member of the
consolidated return on a separate return basis adjusted for credits and
other amounts required by the consolidation process. Any resulting
liability will be paid currently to the Company. Any credits for losses
will be paid by the Company to the extent that such credits are for tax
benefits that have been utilized in the consolidated federal income tax
return.
37
<PAGE> 40
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES, Continued
A net deferred tax asset valuation allowance of $100 million has been
established to reduce the deferred tax asset on investment losses to the
amount that, based upon available evidence, is more likely than not to be
realized. Reversal of the valuation allowance is contingent upon the
recognition of future capital gains in the Company's consolidated life
insurance company federal income tax return through 1998, and the
consolidated federal income tax return of Travelers commencing in 1999,
or a change in circumstances which causes the recognition of the benefits
to become more likely than not. There was no change in the valuation
allowance during 1995. The initial recognition of any benefit produced by
the reversal of the valuation allowance will be recognized by reducing
goodwill.
At December 31, 1995, the Company has no ordinary or capital loss
carryforwards.
The "policyholders surplus account", which arose under prior tax law, is
generally that portion of the gain from operations that has not been
subjected to tax, plus certain deductions. The balance of this account,
which, under provisions of the Tax Reform Act of 1984, will not increase
after 1983, is estimated to be $932 million. This amount has not been
subjected to current income taxes but, under certain conditions that
management considers to be remote, may become subject to income taxes in
future years. At current rates, the maximum amount of such tax (for which
no provision has been made in the financial statements) would be
approximately $326 million.
14. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1995 1994 | 1993
--------------------------------------------------------------------------------|-----------
<S> <C> <C> | <C>
Gross investment income |
Fixed maturities $1,191 $1,082 | $1,069
Mortgage loans 419 511 | 655
Policy loans 163 110 | 104
Real estate held for sale 111 174 | 371
Other 97 52 | 8
--------------------------------------------------------------------------------|-----------
1,981 1,929 | 2,207
--------------------------------------------------------------------------------|-----------
|
Investment expenses 157 227 | 477
--------------------------------------------------------------------------------|-----------
Net investment income $1,824 $1,702 | $1,730
--------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 41
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1995 1994 | 1993
-------------------------------------------------------------------------------|----------
<S> <C> <C> | <C>
Realized |
Fixed maturities $(43) $(3) | $ 159
Equity securities 36 18 | 12
Mortgage loans 47 - | (35)
Real estate held for sale 18 - | (212)
Other 48 (2) | 37
-------------------------------------------------------------------------------|----------
Realized investment gains (losses) $106 $13 | $ (39)
------------------------------------------------------------------------------------------
</TABLE>
Changes in net unrealized investment gains (losses) that are included as
a separate component of shareholder's equity were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1995 1994 | 1993
---------------------------------------------------------------------------------|----------
<S> <C> <C> | <C>
Unrealized |
Fixed maturities $1,974 $(1,319) | $(235)
Equity securities 46 (25) | (17)
Other 200 165 | 28
---------------------------------------------------------------------------------|----------
2,220 (1,179) | (224)
Related taxes 778 (412) | (83)
---------------------------------------------------------------------------------|----------
Change in unrealized investment gains (losses) 1,442 (767) | (141)
Contribution of TIHI - - | 5
Balance beginning of year (760) 7 | 143
--------------------------------------------------------------------------------------------
Balance end of year $ 682 $ (760) $ 7
--------------------------------------------------------------------------------------------
</TABLE>
The initial adoption of FAS 115 resulted in an increase of approximately
$232 million (net of taxes) to net unrealized gains in 1994.
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale
were $6.8 billion and $1.3 billion in 1995 and 1994, respectively. Gross
gains of $80 million and $14 million and gross losses of $124 million and
$26 million in 1995 and 1994, respectively, were realized on those sales.
Prior to December 31, 1993, fixed maturities that were intended to be
held to maturity were recorded at amortized cost and classified as held
for investment. Sales from the amortized cost portfolios have been made
periodically. Such sales were $99 million in 1993, resulting in gross
realized gains of $6 million and gross realized losses of $1 million.
39
<PAGE> 42
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Prior to December 31, 1993, the carrying values of the trading portfolio
fixed maturities were adjusted to market value as it was likely they
would be sold prior to maturity. Sales of trading portfolio fixed
maturities were $4.0 billion in 1993. Gross gains of $139 million and
gross losses of $2 million were realized on those sales.
The amortized cost and market value of investments in fixed maturities
were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
December 31, 1995
-------------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
(in millions) cost gains losses value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities -
CMOs and pass through
securities $ 4,174 $103 $15 $ 4,262
U.S. Treasury securities
and obligations of U.S.
Government and
government agencies
and authorities 1,327 116 - 1,443
Obligations of states,
municipalities and
political subdivisions 91 2 - 93
Debt securities issued by
foreign governments 311 17 - 328
All other corporate bonds 12,283 442 10 12,715
Redeemable preferred stock 1 - - 1
-------------------------------------------------------------------------------------------------
Total $18,187 $680 $25 $18,842
-------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 43
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
December 31, 1994
-------------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
(in millions) cost gains losses value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities -
CMOs and pass through
securities $ 3,779 $ 3 $ 304 $ 3,478
U.S. Treasury securities
and obligations of U.S.
Government and
government agencies
and authorities 3,080 3 306 2,777
Obligations of states,
municipalities and
political subdivisions 87 - 7 80
Debt securities issued by
foreign governments 398 - 26 372
All other corporate bonds 11,225 14 696 10,543
Redeemable preferred stock 10 - - 10
-------------------------------------------------------------------------------------------------
Total $18,579 $20 $1,339 $17,260
-------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and market value of fixed maturities at December 31,
1995, by contractual maturity, are shown below. Actual maturities will
differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Maturity Amortized Market
(in millions) cost value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 788 $ 792
Due after 1 year through 5 years 5,053 5,156
Due after 5 years through 10 years 5,176 5,416
Due after 10 years 2,996 3,216
-----------------------------------------------------------------------------------------------
14,013 14,580
Mortgage-backed securities 4,174 4,262
-----------------------------------------------------------------------------------------------
Total $18,187 $18,842
-----------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 44
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
The Company makes significant investments in collateralized mortgage
obligations (CMOs). CMOs typically have high credit quality, offer good
liquidity, and provide a significant advantage in yield and total return
compared to U.S. Treasury securities. The Company's investment strategy
is to purchase CMO tranches which are protected against prepayment risk,
primarily planned amortization class (PAC) tranches. Prepayment protected
tranches are preferred because they provide stable cash flows in a
variety of scenarios. The Company does invest in other types of CMO
tranches if a careful assessment indicates a favorable risk/return
tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 1995 and 1994, the Company held CMOs with a market value
of $2.3 billion and $2.2 billion, respectively. Approximately 89% of the
Company's CMO holdings are fully collateralized by GNMA, FNMA or FHLMC
securities at December 31, 1995 and 1994. In addition, the Company held
$917 million and $1.3 billion of GNMA, FNMA or FHLMC mortgage-backed
securities at December 31, 1995 and 1994, respectively. Virtually all of
these securities are rated AAA. The Company also held $1.3 billion and
$927 million of securities that are backed primarily by credit card or
car loan receivables at December 31, 1995 and 1994, respectively.
Equity Securities
The cost and market values of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
December 31, 1995
-------------------------------------------------------------------------------------------------
Gross Gross
unrealized unrealized Market
(in millions) Cost gains losses value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $138 $48 $5 $181
Nonredeemable preferred stocks 44 2 3 43
-------------------------------------------------------------------------------------------------
Total $182 $50 $8 $224
-------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
December 31, 1994
---------------------------------------------------------------------------------------------------
Gross Gross
unrealized unrealized Market
(in millions) Cost gains losses value
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $ 133 $ 19 $ 21 $ 131
Nonredeemable preferred stocks 40 - 2 38
---------------------------------------------------------------------------------------------------
Total $ 173 $ 19 $ 23 $ 169
---------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE> 45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Proceeds from sales of equity securities were $379 million and $357
million in 1995 and 1994, respectively. Gross gains of $27 million and
$24 million and gross losses of $2 million and $6 million in 1995 and
1994, respectively, were realized on those sales.
Mortgage loans and real estate held for sale
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest
rates below market. The Company continues its strategy, adopted in
conjunction with the Merger, to dispose of these real estate assets and
some of the mortgage loans and to reinvest the proceeds to obtain current
market yields.
At December 31, 1995 and 1994, the Company's mortgage loan and real
estate held for sale portfolios consisted of the following (in millions):
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
1995 1994
---------------------------------------------------------------------------------
<S> <C> <C>
Current mortgage loans $ 3,385 $ 4,467
Underperforming mortgage loans 241 471
---------------------------------------------------------------------------------
Total 3,626 4,938
---------------------------------------------------------------------------------
Real estate held for sale 293 383
---------------------------------------------------------------------------------
Total $ 3,919 $ 5,321
---------------------------------------------------------------------------------
</TABLE>
Aggregate annual maturities on mortgage loans at December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------
(in millions)
-------------------------------------------------------
<S> <C>
Past maturity $ 189
1996 462
1997 398
1998 589
1999 339
2000 382
Thereafter 1,267
-------------------------------------------------------
Total $ 3,626
-------------------------------------------------------
</TABLE>
43
<PAGE> 46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Concentrations
At December 31, 1995 and 1994, the Company had no concentration of credit
risk in a single investee exceeding 10% of consolidated shareholder's
equity.
The Company participates in a short-term investment pool maintained by
TIGI and its subsidiaries. See note 11.
Included in fixed maturities are below investment grade assets totaling
$1.0 billion and $922 million at December 31, 1995 and 1994,
respectively. The Company defines its below investment grade assets as
those securities rated "Ba1" or below by external rating agencies, or the
equivalent by internal analysts when a public rating does not exist. Such
assets include publicly traded below investment grade bonds and certain
other privately issued bonds that are classified as below investment
grade loans.
The Company also had significant concentrations of investments, primarily
fixed maturities, in the following industries:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Finance $ 1,491 $ 1,241
Banking 1,226 953
Electric utilities 1,023 1,222
Oil and gas 861 859
---------------------------------------------------------------------------------------------------
</TABLE>
Below investment grade assets included in the totals above, were as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Finance $ 56 $ 75
Banking 8 21
Electric utilities 26 32
Oil and gas 66 33
---------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995 and 1994, significant concentrations of mortgage
loans were for properties located in highly populated areas in the states
listed below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
California $ 736 $ 929
New York 400 558
---------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 47
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Other mortgage loan investments are fairly evenly dispersed throughout
the United States, with no holdings in any state exceeding $332 million
and $432 million at December 31, 1995 and 1994, respectively.
Concentrations of mortgage loans by property type at December 31, 1995
and 1994 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Office $ 1,513 $ 2,065
Apartment 580 1,029
Agricultural 556 540
Retail 426 606
---------------------------------------------------------------------------------------------------
</TABLE>
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, limits and
other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit. The Company's underwriting standards with respect
to new mortgage loans generally require loan to value ratios of 75% or
less at the time of mortgage origination.
Investment Valuation Reserves
There were no investment valuation reserves at December 31, 1995 and
1994. Investment valuation reserve activity during 1994 and 1993 was as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1994 | 1993
--------------------------------------------------------------------------------------|------------
<S> <C> | <C>
Beginning of year $ 67 | $ 1,417
Increase - | 195
Impairments, net of gains/recoveries - | (602)
FAS 115/Purchase accounting adjustment (67) | (943)
---------------------------------------------------------------------------------------------------
End of year $ - $ 67
---------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1993, investment valuation reserves were comprised of $67
million for securities. Increases in the investment valuation reserves
were reflected as realized investment losses.
45
<PAGE> 48
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Nonincome Producing
Investments included in the consolidated balance sheets that were
nonincome producing for the preceding 12 months were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1995 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans $ 65 $ 127
Real estate 18 73
Fixed maturities 4 6
---------------------------------------------------------------------------------------------------
Total $ 87 $ 206
---------------------------------------------------------------------------------------------------
</TABLE>
Restructured Investments
The Company had mortgage loans and debt securities which were
restructured at below market terms totaling approximately $67 million and
$259 million at December 31, 1995 and 1994, respectively. The new terms
typically defer a portion of contract interest payments to varying future
periods. The accrual of interest is suspended on all restructured assets,
and interest income is reported only as payment is received. Gross
interest income on restructured assets that would have been recorded in
accordance with the original terms of such loans amounted to $16 million
in 1995 and $52 million in 1994. Interest on these assets, included in
net investment income, aggregated $8 million and $17 million in 1995 and
1994, respectively.
16. LIFE AND ANNUITY DEPOSIT FUNDS AND RESERVES
At December 31, 1995, the Company had $22.4 billion of life and annuity
deposit funds and reserves. Of that total, $11.4 billion were not subject
to discretionary withdrawal based on contract terms and related market
conditions. The remaining $11.0 billion were for life and annuity
products that were subject to discretionary withdrawal by the
contractholders. Included in the amount that were subject to
discretionary withdrawal were $1.5 billion of liabilities that are
surrenderable with market value adjustments. An additional $5.8 billion
of the life insurance and individual annuity liabilities are subject to
discretionary withdrawals with an average surrender charge of 5.2%.
Another $870 million of liabilities are surrenderable at book value over
5 to 10 years. In the payout phase, these funds are credited at
significantly reduced interest rates. The remaining $2.8 billion of
liabilities are surrenderable without charge. Approximately 25% of these
liabilities relate to individual life products. These risks would have to
be underwritten again if transferred to another carrier, which is
considered a significant deterrent for long-term policyholders. Insurance
liabilities that are surrendered or withdrawn from the Company are
reduced by outstanding policy loans and related accrued interest prior to
payout.
46
<PAGE> 49
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES
The following table reconciles net income to net cash provided by (used
in) operating activities:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1995 1994 | 1993
---------------------------------------------------------------------------------------|-----------
<S> <C> <C> | <C>
Net income from continuing operations $ 547 $ 386 | $ 21
Reconciling adjustments |
Realized (gains) losses (106) (13) | 39
Deferred federal income taxes 57 307 | (48)
Amortization of deferred policy acquisition |
costs and value of insurance in force 290 281 | 56
Additions to deferred policy acquisition costs (454) (435) | 51
Trading account investments, |
(purchases) sales, net - - | (1,585)
Investment income accrued (9) (47) | 3
Premium balances receivable (8) 5 | (5)
Insurance reserves and accrued expenses 291 212 | 166
Restructuring reserves - - | (79)
Other, including investment valuation reserves |
in 1993 62 (212) | 32
---------------------------------------------------------------------------------------|-----------
Net cash provided by (used in) |
operating activities 670 484 | (1,349)
Net cash provided by (used in) |
discontinued operations (596) 233 | (23)
---------------------------------------------------------------------------------------|-----------
Net cash provided by (used in) |
operations $ 74 $ 717 | $ (1,372)
---------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 50
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
18. NONCASH INVESTING AND FINANCING ACTIVITIES
Significant noncash investing and financing activities include: a) the
1995 transfer of assets with a fair market value of approximately $1.5
billion and statutory reserves and other liabilities of approximately
$1.5 billion to MetLife (see note 4); b) the 1995 dividend of Transport
Life Insurance Company to the Company's parent (see note 4); c) the
acquisition of real estate through foreclosures of mortgage loans
amounting to $97 million, $229 million and $563 million in 1995, 1994 and
1993, respectively; d) the acceptance of purchase money mortgages for
sales of real estate aggregating $27 million, $96 million and $190
million in 1995, 1994 and 1993, respectively; e) the 1994 exchange of $23
million of TIHI's investment in Travelers common stock for $35 million of
Travelers nonredeemable preferred stock; f) the 1993 contribution of TIHI
by Travelers (see note 4); g) the 1993 contribution of $400 million of
bond investments by The Travelers Corporation (see note 7); h) increases
in investment valuation reserves in 1993 for real estate held for sale
(see note 15); and i) the 1993 transfer of $352 million of mortgage loans
and bonds from the Company's general account to two separate accounts.
48
<PAGE> 51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
GLOSSARY OF INSURANCE TERMS
ANNUITY - A contract that pays a periodic income benefit for the life of
a person (the annuitant), the lives of two or more persons or for a specified
period of time.
ASSUMPTION REINSURANCE - A transaction whereby the ceding company
transfers its entire obligation under the policy to the reinsurer, who becomes
directly liable to the policyholder in all respects, including collecting
premiums and paying benefits. See "reinsurance."
CEDE; CEDING COMPANY - When an insurer reinsures its liability with
another insurer (a "cession"), it "cedes" business and is referred to as the
"ceding company."
CLAIM - Request by an insured for indemnification by an insurance company
for loss incurred from an insured peril.
CONTRACTHOLDER FUNDS - Receipts from the issuance of universal life,
pension investment and certain individual annuity contracts. Such receipts are
considered deposits on investment contracts that do not have substantial
mortality or morbidity risks.
DEFERRED ACQUISITION COSTS - Commissions and other selling expenses,
which vary with and are primarily related to the production of new business, are
deferred and amortized to achieve a matching of revenues and expenses when
reported in financial statements prepared in accordance with GAAP.
DEFINED BENEFIT PLANS - Type of pension plan under which benefits are
fixed in advance by formula, and contributions vary.
DEPOSITS AND OTHER CONSIDERATIONS - Consist of cash value deposits and
charges for mortality risk and expenses associated with universal life
insurance, annuities and group pensions.
EXPERIENCE RATED CONTRACTS - Insurance contracts in which future rates
and/or commissions are compiled from past experience, that is, total premiums
earned and losses incurred. This can be applied by certain risk classifications
or to an individual risk.
GENERAL ACCOUNT - All of an insurer's assets other than those allocated
to separate accounts.
GUARANTEED INVESTMENT CONTRACTS (GICs) - Group contracts sold to pension
plans, profit sharing plans and funding agreements that guarantee a stated
interest rate for a specified period of time.
INDEMNITY REINSURANCE - A transaction whereby the reinsurer agrees to
indemnify the ceding company against all or part of the loss that the latter may
sustain under the policies it issued that are being reinsured. The ceding
company remains primarily liable as the direct insurer on all risks ceded. See
"reinsurance."
INSURANCE - Mechanism for contractually shifting burdens of a number of
risks by pooling them.
49
<PAGE> 52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
GLOSSARY OF INSURANCE TERMS, Continued
LIFE CONTINGENCIES - Contingencies affecting the duration of life of an
individual or a group of individuals.
LONG-TERM CARE - Coverage for extended stays in a nursing home or home
health services.
MORBIDITY - The rate at which people become diseased, mentally or
physically, or physically impaired.
MORTALITY - The rate at which people die.
POLICY LOAN - A loan made by an insurance company to a policyholder on
the security of the cash value of the policy. Policy loans offset benefits
payable to policyholders.
REINSURANCE - The practice whereby one insurer, called the reinsurer, in
consideration of a premium paid to such insurer, agrees to indemnify another
insurer, called the ceding company, for part or all of the liability assumed by
the ceding company under one or more policies or contracts of insurance which it
has issued.
RETENTION - The amount of exposure an insurance company retains on any
one risk or group of risks.
SEPARATE ACCOUNTS - Funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
contractholders. The assets of these separate accounts are legally segregated
and not subject to claims that arise out of any other business of the insurance
company.
STATUTORY ACCOUNTING PRACTICES - The rules and procedures prescribed or
permitted by United States state insurance regulatory authorities for recording
transactions and preparing financial statements. Statutory accounting practices
generally reflect a modified going concern basis of accounting.
STATUTORY CAPITAL AND SURPLUS - As determined under statutory accounting
practices, the amount remaining after all liabilities, including loss reserves,
are subtracted from all admitted assets. Admitted assets are assets of an
insurer prescribed or permitted by a state to be taken into account in
determining the insurer's financial condition for statutory purposes. Statutory
surplus is also referred to as "surplus" or "surplus as regards policyholders"
for statutory accounting purposes.
STRUCTURED SETTLEMENTS - Periodic payments to an injured person or
survivor for a determined number of years or for life, typically in settlement
of a claim under a liability policy.
SURRENDER VALUE - The amount of money, usually the legal reserve under
the policy, less sometimes a surrender charge, which an insurance company will
pay to a policyholder who cancels a policy. This value may be used as collateral
for a loan.
UNDERWRITING - The insurer's or reinsurer's process of reviewing
applications for insurance coverage, and the decision whether to accept all or
part of the coverage and determination of the applicable premiums; also refers
to the acceptance of such coverage.
50
<PAGE> 53
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 1995
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
Item 11. Executive Compensation.
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
Item 13. Certain Relationships and Related Transactions.
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
51
<PAGE> 54
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 1995
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed
(1) Financial Statements. See index on page 13 of this report.
(2) Financial Statement Schedules. See index on page 54 of this report.
(3) Exhibits. See Exhibit Index on page 62.
(b) Reports on Form 8-K:
On October 12, 1995, the Company filed a Current Report on Form 8-K, dated
October 2, 1995, reporting under Item 2 thereof the disposition of its interest
in The MetraHealth Companies, Inc. (MetraHealth) through the merger of
MetraHealth and an acquisition subsidiary of United HealthCare Corporation.
No other reports on Form 8-K were filed during the fourth quarter of 1995.
52
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on the 28th day of March,
1996.
THE TRAVELERS INSURANCE COMPANY
(Registrant)
By: /s/Jay S. Fishman
-----------------
Jay S. Fishman
Vice Chairman and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on the 28th day of March, 1996.
<TABLE>
<CAPTION>
Signature Capacity
- --------- --------
<S> <C>
/s/Robert I. Lipp Director and Chairman of the Board
- -----------------------------
(Robert I. Lipp)
/s/Jay S. Fishman Director and Vice Chairman and Chief Financial Officer
- ----------------------------- (Principal Financial Officer)
(Jay S. Fishman)
/s/Michael A. Carpenter Director and President and Chief Executive Officer
- ----------------------------- (Principal Executive Officer)
(Michael A. Carpenter)
/s/Donald T. DeCarlo Director
- -----------------------------
(Donald T. DeCarlo)
/s/Irwin R. Ettinger Director
- -----------------------------
(Irwin R. Ettinger)
/s/Charles O. Prince, III Director
- -----------------------------
(Charles O. Prince, III)
/s/Marc P. Weill Director
- -----------------------------
(Marc P. Weill)
/s/Christine B. Mead Vice President and Controller
- ----------------------------- (Principal Accounting Officer)
(Christine B. Mead)
</TABLE>
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities pursuant to
Section 12 of the Act: NONE
No Annual Report to Security Holders covering the registrant's last fiscal year
or proxy material with respect to any meeting of security holders has been sent,
or will be sent, to security holders.
53
<PAGE> 56
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 1995
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
<S> <C>
The Travelers Insurance Company and Subsidiaries
Consolidated Statement of Operations and Retained Earnings *
Consolidated Balance Sheet *
Consolidated Statement of Cash Flows *
Notes to Consolidated Financial Statements *
Independent Auditors' Reports *
Reports of Independent Accountants 55-56
Schedule I -Summary of Investments - Other than Investments in Related Parties 1995 57
Schedule III -Supplementary Insurance Information 1993-1995 58-60
Schedule IV -Reinsurance 1993-1995 61
</TABLE>
All other schedules are inapplicable for this filing.
* See index on page 13
54
<PAGE> 57
Independent Auditors' Report
The Board of Directors and Shareholder of
The Travelers Insurance Company and Subsidiaries:
Under date of January 16, 1996, we reported on the consolidated balance sheet of
The Travelers Insurance Company and Subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of operations and retained
earnings and cash flows for each of the years in the two-year period ended
December 31, 1995, as contained in this Form 10-K. In connection with our audits
of the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedules appearing on pages 57, 58,
59, 60 and 61 in this Form 10-K. These consolidated financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statement schedules
based on our audits.
In our opinion, such consolidated financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in note 3 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," in 1994.
/s/ KPMG PEAT MARWICK LLP
-------------------------
Hartford, Connecticut
January 16, 1996
55
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
The Travelers Insurance Company and Subsidiaries:
In connection with our audit of the consolidated statements of operations and
retained earnings and cash flows of The Travelers Insurance Company and
Subsidiaries (the "Company") for the year ended December 31, 1993, which
financial statements are included in this Form 10-K, we have also audited those
portions of the financial statements schedules listed in the index on page 54 of
this Form 10-K which pertain to the operations of the Company for the year ended
December 31, 1993.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
Hartford, Connecticut
January 24, 1994
56
<PAGE> 59
SCHEDULE I
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET (1)
- ------------------ ------- ------- -------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government and government agencies and
authorities $ 4,691 $ 4,891 $ 4,891
States, municipalities and political subdivisions 91 93 93
Foreign governments 311 328 328
Public utilities 2,041 2,098 2,098
Convertible bonds and bonds with warrants attached 151 163 163
All other corporate bonds (2) 10,877 11,244 11,244
------- ------- -------
Total bonds 18,162 18,817 18,817
Redeemable preferred stocks 1 1 1
------- ------- -------
Total fixed maturities 18,163 18,818 18,818
------- ------- -------
Equity securities:
Common stocks
Banks, trust and insurance companies 3 6 6
Industrial, miscellaneous and all other 135 175 175
------- ------- -------
Total common stocks 138 181 181
Nonredeemable preferred stocks 44 43 43
------- ------- -------
Total equity securities 182 224 224
------- ------- -------
Mortgage loans (3) 3,626 3,626
------- -------
Real estate held for sale 293 293
------- -------
Policy loans 1,888 1,888
------- -------
Short-term securities 1,554 1,554
------- -------
Other investments (4) (5) 444 429
------- -------
Total investments $26,150 $26,832
======= =======
</TABLE>
(1) Determined in accordance with methods described in notes 2 and 15 on pages
19 and 39 of the notes to the consolidated financial statements.
(2) Excludes $24 million cost and $24 million fair value of Commercial Credit
Company bonds. See note 11 on page 34 of the notes to the consolidated
financial statements.
(3) Includes $18 million loaned to unconsolidated affiliates and real estate
joint ventures accounted for by the equity method.
(4) Includes equity of $162 million in real estate joint ventures.
(5) Excludes $87 million cost and $445 million fair value of Travelers Group
Inc. common stock and preferred stock. See note 11 on page 34 of the notes
to the consolidated financial statements.
57
<PAGE> 60
SCHEDULE III
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
Supplementary Insurance Information
1995
(in millions)
<TABLE>
<CAPTION>
Amortization
of deferred
Deferred policy Future policy Other Premium Net Benefits, policy Other Premiums
acquisition costs benefits, policy revenue investment claims & acquisition operating written
and value of losses, claims claims & income losses costs and value expenses
insurance & loss expenses benefits (b) (c) of insurance (d)
Segment in force (a) payable in force
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life and
Annuity $1,962 $22,490 $496 $1,496 $1,824 $2,152 $290 $348 $1,490
Corporate
and Other
Operations - 2,495 - - - - - 20 -
------ ------- ---- ------ ------ ------ ---- ---- ------
Total Continuing
Operations 1,962 24,985 496 $1,496 $1,824 $2,152 $290 $368 $1,490
====== ====== ====== ==== ==== ======
Discontinued
Operations - 1,323 75
------ ------- ----
Consolidated $1,962 $26,308 $571
====== ======= ====
</TABLE>
(a) Includes contractholder funds.
(b) Net investment income for each segment is accounted for separately, except
for the portion earned on the investment of shareholder's equity which is
allocated based on assigned capital.
(c) Includes interest credited to contractholders.
(d) Expense allocations are determined in accordance with the guidelines and
principles published in Regulation 33 from the Insurance Department of the
State of New York. This regulation makes a reasonable allocation of all
expenses to those product lines with which they are associated.
58
<PAGE> 61
SCHEDULE III
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
Supplementary Insurance Information
1994
(in millions)
<TABLE>
<CAPTION>
Amortization
of deferred
Deferred policy Future policy Other Premium Net Benefits, policy Other Premiums
acquisition costs benefits, policy revenue investment claims & acquisition operating written
and value of losses, claims claims & income losses costs and value expenses
insurance & loss expenses benefits (b) (c) of insurance (d)
Segment in force (a) payable in force
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life and
Annuity $1,898 $22,374 $ 458 $1,492 $1,702 $2,177 $281 $345 $1,489
Corporate
and Other
Operations - 2,327 - - - - - 6 -
------ ------- ------ ------ ------ ------ ---- ---- ------
Total Continuing
Operations 1,898 24,701 458 $1,492 $1,702 $2,177 $281 $351 $1,489
====== ====== ====== ==== ==== ======
Discontinued
Operations 41 3,133 764
------ ------- ------
Consolidated $1,939 $27,834 $1,222
====== ======= ======
</TABLE>
(a) Includes contractholder funds.
(b) Net investment income for each segment is accounted for separately, except
for the portion earned on the investment of shareholder's equity which is
allocated based on assigned capital.
(c) Includes interest credited to contractholders.
(d) Expense allocations are determined in accordance with the guidelines and
principles published in Regulation 33 from the Insurance Department of the
State of New York. This regulation makes a reasonable allocation of all
expenses to those product lines with which they are associated.
59
<PAGE> 62
SCHEDULE III
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
Supplementary Insurance Information
1993
(in millions)
<TABLE>
<CAPTION>
Amortization
of deferred
Deferred policy Future policy Other Premium Net Benefits, policy Other Premiums
acquisition costs benefits, policy revenue investment claims & acquisition operating written
and value of losses, claims claims & income losses costs and value expenses
insurance & loss expenses benefits (b) (c) of insurance (d)
Segment in force (a) payable in force
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Life and
Annuity $1,748 $23,841 $ 418 $330 $1,727 $1,992 $56 $203 $330
Corporate
and Other
Operations - 2,291 - - 3 - - 8 -
------ ------- ------ ---- ------ ------ --- ---- ----
Total Continuing
Operations 1,748 26,132 418 $330 $1,730 $1,992 $56 $211 $330
==== ====== ====== === ==== ====
Discontinued
Operations 46 2,981 856
------ ------- ------
Consolidated $1,794 $29,113 $1,274
====== ======= ======
</TABLE>
(a) Includes contractholder funds.
(b) Net investment income for each segment is accounted for separately, except
for the portion earned on the investment of shareholder's equity which is
allocated based on assigned capital.
(c) Includes interest credited to contractholders.
(d) Expense allocations are determined in accordance with the guidelines and
principles published in Regulation 33 from the Insurance Department of the
State of New York. This regulation makes a reasonable allocation of all
expenses to those product lines with which they are associated.
60
<PAGE> 63
SCHEDULE IV
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
Reinsurance
(in millions)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Gross other from other Net assumed
amount companies companies amount to net
------ --------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1995
----
Life insurance in force $439,982 $175,877 $ 68 $264,173 -
Premiums
Life insurance $ 1,452 $ 267 $ - $ 1,185 -
Accident and health insurance 341 30 - 311 -
Property-casualty 283 283 - - -
-------- -------- ------ --------
Total premiums $ 2,076 $ 580 $ - $ 1,496 -
======== ======== ====== ========
1994
----
Life insurance in force $523,750 $105,396 $4,205 $422,559 1.0%
Premiums
Life insurance $ 1,395 $ 264 $ - $ 1,131 -
Accident and health insurance 401 40 - 361 -
Property-casualty 358 358 - - -
-------- -------- ------ --------
Total premiums $ 2,154 $ 662 $ - $ 1,492 -
======== ======== ====== ========
1993
----
Life insurance in force $498,731 $ 92,603 $5,032 $411,160 1.2%
- ------------------------------------------------------------------------------------------
Premiums
Life insurance $ 265 $ 23 $ - $ 242 -
Accident and health insurance 145 70 13 88 14.8%
Property-casualty 444 444 - - -
-------- -------- ------ --------
Total premiums $ 854 $ 537 $ 13 $ 330 3.9%
======== ======== ====== ========
</TABLE>
61
<PAGE> 64
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 1995
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Filing Method
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
2. Agreement and Plan of Merger dated June 25, 1995, by and among
United HealthCare Corporation (United), Montana Acquisition
Inc., The MetraHealth Companies, Inc. (MetraHealth), The
Travelers Insurance Group Inc., The Travelers Insurance
Company (the Company), MetLife HealthCare Holdings, Inc. and
Metropolitan Life Insurance Company, incorporated by reference
to Exhibit 2 to the Registration Statement on Form S-2, as
amended (File No. 33-58677), of the Company and The Travelers
Life and Annuity Company.
3. Articles of Incorporation and By-laws
a. Charter of The Travelers Insurance Company (the "Company"),
as effective October 19, 1994, incorporated by reference to
Exhibit 3.01 to the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 1994 (File No.
33-33691) (the "Company's September 30, 1994 10-Q").
b. By-laws of the Company as effective October 20, 1994,
incorporated by reference to Exhibit 3.02 to the Company's
September 30, 1994 10-Q.
10. Material Contracts
a. Master Agreement, dated as of September 1, 1994, between
the Company and Metropolitan Life Insurance Company
("MetLife"), incorporated by reference to Exhibit 10.03 to
the Company's September 30, 1994 10-Q.
</TABLE>
62
<PAGE> 65
EXHIBIT INDEX, Continued
<TABLE>
<CAPTION>
Exhibit
No. Description Filing Method
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
b. Group Life Insurance and Related Businesses Acquisition
Agreement, dated as of September 1, 1994, among MetLife,
the Company, The Travelers Indemnity Company of Rhode
Island and The Travelers Insurance Company of Illinois,
incorporated by reference to Exhibit 10.04 to the
Company's September 30, 1994 10-Q.
21. Subsidiaries of the Registrant
Omitted pursuant to General Instruction J(2)(b) of Form
10-K.
27. Financial Data Schedule Electronic
</TABLE>
63
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1995 FINANCIAL STATEMENTS OF THE TRAVELERS INSURANCE COMPANY AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000733076
<NAME> THE TRAVELERS INSURANCE COMPANY
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 18,842
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 224
<MORTGAGE> 3,626
<REAL-ESTATE> 293
<TOTAL-INVEST> 27,301
<CASH> 73
<RECOVER-REINSURE> 4,107
<DEFERRED-ACQUISITION> 1,962
<TOTAL-ASSETS> 42,301
<POLICY-LOSSES> 11,783
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 571
<POLICY-HOLDER-FUNDS> 14,525
<NOTES-PAYABLE> 0
0
0
<COMMON> 100
<OTHER-SE> 6,128
<TOTAL-LIABILITY-AND-EQUITY> 42,301
1,496
<INVESTMENT-INCOME> 1,824
<INVESTMENT-GAINS> 106
<OTHER-INCOME> 221
<BENEFITS> 1,185
<UNDERWRITING-AMORTIZATION> 290
<UNDERWRITING-OTHER> 368
<INCOME-PRETAX> 837
<INCOME-TAX> 290
<INCOME-CONTINUING> 547
<DISCONTINUED> 203
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 750
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
