<PAGE> 1
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period
from................................to............................
-----------------
Commission file number 33-33691
-----------------
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.)
One Tower Square, Hartford, Connecticut 06183
(Address of principal executive offices) (Zip Code)
</TABLE>
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 the date hereof 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 The
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 I(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE> 2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
Table of Contents
<TABLE>
<CAPTION>
Form 10-K
Item Number PART I Page
- ----------- ------ ----
<S> <C> <C>
1. Business...................................................................... 1
A. General............................................................ 1
B. Business by Product Line
Life Insurance Services.......................................... 2
Discontinued Operations.......................................... 3
Insurance Regulations............................................ 4
2. Properties.................................................................... 5
3. Legal Proceedings............................................................. 5
4. Submission of Matters to a Vote of Security Holders........................... 5
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................................... 5
6. Selected Financial Data....................................................... 5
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 6
8. Financial Statements and Supplementary Data................................... 11
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................... 43
PART III
10. Directors and Executive Officers of the Registrant............................ 43
11. Executive Compensation........................................................ 43
12. Security Ownership of Certain Beneficial Owners and Management................ 43
13. Certain Relationships and Related Transactions................................ 43
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 44
</TABLE>
<PAGE> 3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
PART I
Item 1. Business.
GENERAL
The Travelers Insurance Company and Subsidiares (the Company) is a wholly owned
subsidiary of The Travelers Insurance Group Inc. (TIGI). TIGI is an indirect
wholly owned subsidiary of Travelers Group Inc. (Travelers Group), a financial
services holding company engaged, through its subsidiaries, principally in four
business segments: (i) Investment Services; (ii) Consumer Finance Services;
(iii) Property & Casualty Insurance Services; and (iv) Life Insurance Services
(through the Company). The periodic reports of Travelers Group provide
additional business and financial information concerning that company and its
consolidated subsidiaries. The Company was incorporated in 1863. With $43.0
billion of assets at December 31, 1996, the Company believes that it is one of
the largest stock life insurance groups in the United States as measured by
assets.
The Company operates through two major business units within its Life Insurance
Services Segment:
- - TRAVELERS LIFE AND ANNUITY offers fixed and variable deferred annuities,
payout annuities and term, universal and variable life and long-term care
insurance to individuals and small businesses. It also provides group
pension products, including guaranteed investment contracts and group
annuities for employer-sponsored retirement and savings plans. These
products are primarily marketed through The Copeland Companies (Copeland),
an indirect wholly owned subsidiary of the Company, the Financial
Consultants of Smith Barney Inc., an affiliate of the Company, and a core
group of approximately 500 independent agencies. The Company's Corporate
and Other Segment was absorbed into Travelers Life and Annuity during
the second quarter of 1996.
- - PRIMERICA LIFE INSURANCE offers individual life products, primarily term
insurance, to consumers through a nationwide sales force of more than
86,000 full and part-time independent representatives.
The consolidated financial statements include the accounts of the Company and
its insurance and non-insurance subsidiaries on a fully consolidated basis.
The primary insurance subsidiaries of the Company are: The Travelers Life and
Annuity Company (TLAC), and Primerica Life Insurance Company (Primerica Life)
and its subsidiary, National Benefit Life Insurance Company (NBL).
As discussed in Note 4 of the Notes to Consolidated Financial Statements, in
January 1995 the group life insurance and related businesses of the Company were
sold to Metropolitan Life Insurance Company (MetLife) and also in January 1995,
the group medical component was exchanged for a 42% interest in The MetraHealth
Companies, Inc. (MetraHealth). The Company's interest in MetraHealth was sold on
October 2, 1995 and through that date had been accounted for on the equity
method. The Company's discontinued operations reflect the results of the medical
insurance business not transferred, the equity interest in the earnings of
MetraHealth through October 2, 1995 (date of sale) and the gains from the sales
of these businesses. 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.
1
<PAGE> 4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
In September 1995, Travelers Group 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 Group and was the
indirect owner of the business of Transport Life Insurance Company (Transport
Life). Immediately prior to this distribution, the Company distributed Transport
Life, an indirect wholly owned subsidiary of the Company, to TIGI, as a return
of capital.
BUSINESS BY PRODUCT LINE
Life Insurance Services
TRAVELERS LIFE AND ANNUITY offers fixed and variable deferred annuities, payout
annuities and term, universal and variable life and long-term care insurance to
individuals and small businesses. It also provides group pension products,
including guaranteed investment contracts and group annuities for
employer-sponsored retirement and savings plans. These products are primarily
marketed through Copeland, the Financial Consultants of Smith Barney Inc., and a
core group of approximately 500 independent agencies. The Company's Corporate
and Other Segment was absorbed into Travelers Life and Annuity during the second
quarter of 1996.
Individual fixed and variable annuities are used for individual and small
business retirement funding purposes. Variable annuities permit policyholders to
direct retirement funds into a number of separate accounts, which offer
differing investment options. Individual payout annuities are used for providing
structured settlements of certain indemnity claims and making other payments to
policyholders over a period of time.
Individual life and long-term care insurance provide protection against
financial loss due to death or illness. Life insurance is also used to meet
estate, business planning and retirement needs. Long-term care insurance
provides income and asset protection against the high costs of care associated
with home health, assisted living and nursing home care. Travelers Life and
Annuity ceased writing disability income insurance in the first quarter of 1995.
Group pension products, including guaranteed investment contracts, which provide
a guaranteed return on investment and group annuities, 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.
Group pension products and group 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.
The Company 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.
Travelers Life and Annuity views market specialization and distribution
diversification as critical components of growth and profitability. It has
updated its individual product portfolio to include a range of competitively
priced fixed and variable annuity, term, universal and variable life and
long-term care insurance products for its customers.
2
<PAGE> 5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
Individual products are primarily marketed through Copeland, Smith Barney
Financial Consultants and a core group of approximately 500 independent
agencies. Copeland is a captive sales organization of personal retirement
planning specialists focused primarily on the qualified periodic deferred
annuity marketplace, and accounted for approximately 39% of total individual
deferred annuity production in 1996 and 1995. Smith Barney's Financial
Consultants distribute Travelers Life and Annuity's non-qualified deferred
annuities and individual life and long-term care products. Smith Barney's share
of Travelers Life and Annuity's total individual deferred annuity production
increased from 33% in 1995 to 38% in 1996. The core group of over 500
professional life insurance agencies sold the majority of the individual life
and long-term care business in 1996 and 1995 and accounted for 23% and 27%,
respectively, of individual annuity premiums and deposits.
The Company has also begun expanding the sale of its individual and long-term
care products through other distribution networks. To accomplish this, the
Company has entered into strategic alliances with a select number of established
producers. In 1996, the Company acquired Travelers Net Plus, a long-term care
specialty distributor. The Company also formed Tower Mark, a joint venture
focused on recruiting and supporting agencies serving the high-end estate
planning market sector.
In January 1996, the Company began operating Tower Square Securities, Inc.
(Tower Square Securities), formerly Travelers Equity Sales Inc., as an
alternative distribution channel of the Company's variable products. Tower
Square Securities is an introducing broker-dealer offering a full line of
brokerage services. Tower Square Securities facilitates the sale of individual
variable life and annuity insurance products by the independent agents of the
Company.
PRIMERICA LIFE and its subsidiaries, Primerica Life Insurance Company of Canada
and NBL, primarily offer individual term life insurance through a sales force
composed of more than 86,000 independent agents. 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. 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 the Northern
Mariana Islands.
Discontinued Operations
As discussed in Note 4 of Notes to Consolidated Financial Statements, in January
1995, the group life insurance and related businesses of the Company were sold
to MetLife and also in January 1995, the group medical component was exchanged
for a 42% interest in MetraHealth. The Company's interest in MetraHealth was
sold on October 2, 1995 and through that date had been accounted for on the
equity method. The Company's discontinued operations reflect the results of the
medical insurance business not transferred, the equity interest in the earnings
of MetraHealth through October 2, 1995 (date of sale) and the gains from the
sales of these businesses. All of the businesses sold to MetLife or contributed
to MetraHealth were included in the Company's MCEBO segment in 1994. MCEBO
marketed group life and health insurance, managed health care programs and
administrative services associated with employee benefit plans.
3
<PAGE> 6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
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. 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 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.
At December 31, 1996, 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 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 $507 million in 1997 without prior approval of the Connecticut
Insurance Department.
4
<PAGE> 7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
Item 2. Properties.
The Company's executive offices are located in Hartford, Connecticut. The
Company owns buildings containing approximately 1.5 million square feet of
office space located in Hartford, Connecticut serving as the home office for the
Company and Travelers Property Casualty Corp. (TAP), formerly Travelers/Aetna
Property Casualty Corp. TAP leases approximately 1.03 million square feet of
such office space at One Tower Square, Hartford, Connecticut under a ten-year
lease that expires on April 1, 2006 and, subject to certain conditions, is
renewable by TAP for additional five-year terms. As of December 31, 1996,
leasehold interests of the Company included approximately 606,000 square
feet of office space in 24 field offices throughout the United States.
The Company also owns a building in Norcross, Georgia. An affiliate's
information systems department occupies the entire building which is
approximately 147,000 square feet of space.
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 in the
normal course of business. Although there can be no assurances, as of December
31, 1996, 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 I(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, 1996. All shares are held by TIGI, and
there exists no established public trading market for the common equity of the
Company. The Company paid a dividend to its parent of $500 million in 1996, and
no dividends were paid in 1995. See Note 7 of Notes to Consolidated Financial
Statements for dividend restrictions.
Item 6. Selected Financial Data.
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
5
<PAGE> 8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
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 I(2)(a) of Form 10-K.
RESULTS OF OPERATIONS
CONSOLIDATED OVERVIEW:
<TABLE>
<CAPTION>
For the year ended December 31, 1996 1995
- ------------------------------- ------ ------
(in millions)
- -------------
<S> <C> <C>
Revenues (1) $3,629 $3,647
------ ------
Income from continuing operations 633 547
Income from discontinued operations 26 203
------ ------
Net income (1) $ 659 $ 750
====== ======
</TABLE>
(1) In September 1995, Travelers Group 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
Group and was the indirect owner of the business of Transport Life
Insurance Company (Transport Life). Immediately prior to this
distribution, the Company distributed Transport Life, an indirect
wholly owned subsidiary of the Company, to its parent, as a return of
capital. Revenues, benefits and expenses and net income of Transport
Life in 1995 amounted to $196 million, $170 million and $17 million,
respectively.
The results of operations represent the Company, a wholly owned subsidiary of
The Travelers Insurance Group Inc. (TIGI). TIGI is an indirect wholly owned
subsidiary of Travelers Group Inc. (Travelers Group), a financial services
holding company engaged, through its subsidiaries, principally in four business
segments: (i) Investment Services; (ii) Consumer Finance Services; (iii)
Property & Casualty Insurance Services; and (iv) Life Insurance Services
(through the Company). The periodic reports of Travelers Group provide
additional business and financial information concerning that company and its
consolidated subsidiaries. With $43.0 billion of assets at December 31, 1996,
the Company believes that it is one of the largest stock life insurance groups
in the United States as measured by assets.
RESULTS OF OPERATIONS:
Revenues of $3.629 billion increased $178 million from 1995, excluding Transport
Life. This increase is primarily driven by increases in investment income of
$102 million and a $77 million increase in other income. The growth in
investment income reflects repositioning of the investment portfolio over the
past year, as well as a higher capital base from the reinvestment of the
proceeds from the sale of The MetraHealth Insurance Company (MetraHealth). The
growth in other income is attributable to increased revenues from separate
accounts and other investment contracts and from the revenues of non-insurance
subsidiaries contributed to the Company from TIGI during 1996.
6
<PAGE> 9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
Benefits and expenses of $2.654 billion in 1996 increased $14 million from 1995,
excluding Transport Life. This increase was largely driven by general and
administrative expenses from non-insurance subsidiaries contributed to the
Company from TIGI during 1996. These increases were partially offset by lower
interest credited to contractholders in 1996.
Income from continuing operations for the years ended December 31, 1996 and 1995
was $633 million and $530 million, excluding Transport Life, respectively.
Included in income from continuing operations are net after-tax portfolio gains
of $42 million in 1996 and $71 million in 1995, excluding Transport Life.
Excluding these items, income from continuing operations for the year ended
December 31, 1996 increased 29% to $591 million, reflecting improved performance
at both business units.
7
<PAGE> 10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
LIFE INSURANCE SERVICES
TRAVELERS LIFE AND ANNUITY:
<TABLE>
<CAPTION>
For the years ended December 31, 1996 1995
- -------------------------------- ------ ------
(in millions)
- -------------
<S> <C> <C>
Revenues (1) $2,361 $2,410
------ ------
Net income (1) (2) $ 385 $ 317
------ ------
</TABLE>
(1) Revenues, benefits and expenses and net income of Transport Life in
1995 amounted to $196 million, $170 million and $17 million,
respectively.
(2) Net income includes $29 million and $49 million of reported investment
portfolio gains in 1996 and 1995, respectively.
Travelers Life and Annuity consists of annuity, life and health products
marketed by the Company under the Travelers name and the individual accident and
health operations of Transport Life (through September 29, 1995 - the date of
spin-off). Among the range of products offered are fixed and variable deferred
annuities, payout annuities, and individual universal and term life and
long-term care insurance to individuals and small businesses and group pension
products, including guaranteed investment contracts and group annuities for
employer-sponsored retirement and savings plans. These products are primarily
marketed through The Copeland Companies (Copeland), an indirect wholly owned
subsidiary of the Company, Smith Barney Financial Consultants and a core of
approximately 500 independent agencies. The majority of the annuity business and
a substantial portion of the life business written by Travelers Life and Annuity
is accounted for as investment contracts, with the result that the premium
deposits collected are not included in revenues.
Earnings before portfolio gains increased 33% to $356 million in 1996, compared
to $268 million in 1995. Improved earnings during 1996 were largely driven by
strong investment income, reflecting repositioning of the investment portfolio
over the past year. In addition, earnings benefited from the reinvestment of the
proceeds from the sale of the Company's interest in MetraHealth in the 1995
fourth quarter, partially offset by the loss of earnings from Transport Life,
which was spun off to Travelers Group stockholders in September 1995. Earnings
growth attributable to strong sales of recently introduced products, including
less capital-intensive variable life insurance and annuities, was partially
offset by the gradual decline in the amount of higher margin business written
several years ago.
Improved sales through Copeland, Smith Barney Financial Consultants, and a
nationwide network of independent agents reflect the ongoing effort to build
market share by strengthening relationships in key distribution channels. Future
sales should also benefit from Standard & Poor's recently announced upgrading of
the Company's claims-paying ability to AA- (Excellent).
8
<PAGE> 11
Deferred annuity policyholder account balances and benefit reserves grew to
$13.2 billion at year-end 1996, up from $11.3 billion at year-end 1995. Net
written premiums and deposits, which benefited in 1996 from a continuation of
the strong fourth quarter 1995 Smith Barney Inc. marketing initiative, were
$1.991 billion in 1996 compared to $1.649 billion in 1995 (excluding Transport
Life).
Payout and group annuity account balances and reserves declined to $10.9 billion
at year-end 1996, compared to $12.0 billion at year-end 1995, reflecting run-off
of low margin guaranteed investment contracts written in prior years. Net
written premiums and deposits (excluding those of affiliates) rose to $1.201
billion in 1996 from $1.085 billion in 1995.
Net written premiums and deposits for individual life insurance rose 17% in 1996
to $291.4 million from $249.3 million in 1995 (excluding Transport Life, which
was spun off in September 1995). Life insurance in-force was $50.4 billion at
December 31, 1996, up from $49.2 billion at year-end 1995.
Net written premiums for the growing Long Term Care insurance line reached
$127.7 million for 1996 compared to $88.2 million in 1995.
OUTLOOK:
Travelers Life and Annuity should benefit from 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. Travelers Life and Annuity is well-positioned to take
advantage of 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 the
three established distribution channels.
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 reform of restrictions on entry into the insurance business, will
likely accelerate this trend. Also, the annuities business is interest
sensitive, and swings in interest rates could influence sales and retention of
in-force policies. In order to strengthen its competitive position, Travelers
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 and maintenance of an efficient cost structure.
PRIMERICA LIFE INSURANCE:
<TABLE>
<CAPTION>
For the years ended December 31, 1996 1995
- --------------------------------- ------ ------
(in millions)
- -------------
<S> <C> <C>
Revenues $1,268 $1,237
------ ------
Net income (1) $ 248 $ 230
------ ------
</TABLE>
(1) 1996 and 1995 net income includes $13 million and $20 million,
respectively, of reported investment portfolio gains.
9
<PAGE> 12
Earnings before portfolio gains for 1996 increased 12% to $235 million from $210
million in 1995, reflecting continued strong retention in life insurance in
force and improving life insurance margins.
New term life insurance sales were $52.0 billion in face amount for 1996,
compared to $53.0 billion in 1995. The number of policies issued was 247,600 in
1996, compared to 266,600 in 1995, consistent with the industry-wide downturn in
new life insurance sales for these periods. Life insurance in force at year-end
1996 reached $359.9 billion, up from $348.2 billion at year-end 1995, and
continued to reflect good policy persistency.
OUTLOOK:
Over the last few years, programs including sales and product training were
begun that are designed to maintain high compliance standards, increase the
number of producing agents and customer contacts and, ultimately, increase
production levels. Insurance in force is continuing to grow and the number of
producing agents is stable. A continuation of these trends could positively
influence future operations.
DISCONTINUED OPERATIONS:
In January 1995, the group life and related businesses of the Company were sold
to Metropolitan Life Insurance Company (MetLife) for $350 million and the
Company realized an after-tax gain of $20 million. Also in January 1995, the
group medical component was exchanged for a 42% interest in MetraHealth. The
Company's interest in MetraHealth was sold on October 2, 1995 for $708 million
(with a realized after-tax gain of $111 million), and through that date has been
accounted for on the equity method. The Company's discontinued operations
reflect the results of the medical insurance business not transferred, the
equity interest in the earnings of MetraHealth through October 2, 1995 (date of
sale) and the gains from the sales of these businesses. In August 1996, the
Company received the final contingent payment related to the sale of
MetraHealth. In conjunction with this payment, certain reserves associated with
the group medical insurance business and exit costs related to the discontinued
operations were reevaluated resulting in a final after-tax gain of $26 million.
Revenues from the discontinued operations including proceeds from the sale of
the businesses for the years ended December 31, 1996 and 1995 amounted to $86
million and $1.2 billion, respectively.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 125 (FAS 125), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". FAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are based
on consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered
and derecognizes liabilities when extinguished. FAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The requirements of FAS 125 are effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and are to be applied
prospectively. However, in December 1996 the FASB issued FAS 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125," which
delays until January 1, 1998 the effective date for certain provisions. The
adoption of the provisions of this statement effective January 1, 1997 will not
have a material impact on results of operations, financial condition or
liquidity and the Company is currently evaluating the impact of the provisions
whose effective date has been delayed until January 1, 1998.
10
<PAGE> 13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report 12
Consolidated Financial Statements:
Consolidated Statements of Income and Retained Earnings
for the years ended December 31, 1996, 1995 and 1994 13
Consolidated Balance Sheets - December 31, 1996 and 1995 14
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 15
Notes to Consolidated Financial Statements 16-42
</TABLE>
11
<PAGE> 14
Independent Auditors' Report
The Board of Directors and Shareholder
The Travelers Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Travelers
Insurance Company and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income and retained earnings and cash flows
for each of the years in the three-year period ended December 31, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 17, 1997
12
<PAGE> 15
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $1,379 $1,496 $ 1,492
Net investment income 1,887 1,824 1,702
Realized investment gains 65 106 13
Other 298 221 199
- ---------------------------------------------------------------------------------------------------
Total revenues 3,629 3,647 3,406
- ---------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,163 1,185 1,216
Interest credited to contractholders 830 967 961
Amortization of deferred acquisition costs and
value of insurance in force 281 290 281
Other operating expenses 380 368 351
- ---------------------------------------------------------------------------------------------------
Total benefits and expenses 2,654 2,810 2,809
- ---------------------------------------------------------------------------------------------------
Income from continuing operations before
federal income taxes 975 837 597
- ---------------------------------------------------------------------------------------------------
Federal income taxes:
Current expense (benefit) 284 233 (96)
Deferred 58 57 307
- ---------------------------------------------------------------------------------------------------
Total federal income taxes 342 290 211
- ---------------------------------------------------------------------------------------------------
Income from continuing operations 633 547 386
Discontinued operations, net of income taxes
Income from operations (net of taxes of $0, $18 and $83) -- 72 150
Gain on disposition (net of taxes of $14, $68 and $18) 26 131 9
- ---------------------------------------------------------------------------------------------------
Income from discontinued operations 26 203 159
- ---------------------------------------------------------------------------------------------------
Net income 659 750 545
Retained earnings beginning of year 2,312 1,562 1,017
Dividends to parent 500 -- --
- ---------------------------------------------------------------------------------------------------
Retained earnings end of year $2,471 $2,312 $ 1,562
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(at December 31, in millions) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $18,515; $18,187) $18,846 $18,842
Equity securities, at fair value (cost, $325; $182) 332 224
Mortgage loans 2,883 3,626
Real estate held for sale, net of accumulated depreciation of $0; $9 297 293
Policy loans 1,910 1,888
Short-term securities 891 1,554
Other investments 1,235 874
- -------------------------------------------------------------------------------------------------------
Total investments 26,394 27,301
- -------------------------------------------------------------------------------------------------------
Cash 74 73
Investment income accrued 343 338
Premium balances receivable 105 107
Reinsurance recoverables 3,858 4,107
Deferred acquisition costs and value of insurance in force 2,133 1,962
Separate and variable accounts 9,023 6,949
Other assets 1,043 1,464
- -------------------------------------------------------------------------------------------------------
Total assets $42,973 $42,301
- -------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $13,693 $14,525
Future policy benefits 11,450 11,783
Policy and contract claims 536 571
Separate and variable accounts 8,948 6,916
Commercial paper 50 73
Deferred federal income taxes 57 32
Other liabilities 1,911 2,173
- -------------------------------------------------------------------------------------------------------
Total liabilities 36,645 36,073
- -------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million
shares authorized, issued and outstanding 100 100
Additional paid-in capital 3,170 3,134
Retained earnings 2,471 2,312
Unrealized investment gains, net of taxes 587 682
- -------------------------------------------------------------------------------------------------------
Total shareholder's equity 6,328 6,228
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $42,973 $42,301
- -------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(for the year ended December 31, in millions) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 1,387 $ 1,346 $ 1,394
Net investment income received 1,910 1,855 1,719
Other revenues received (expense paid) 131 90 (2)
Benefits and claims paid (1,060) (846) (1,115)
Interest credited to contractholders (820) (960) (868)
Operating expenses paid (343) (615) (536)
Income taxes paid (328) (63) (27)
Other (70) (137) (81)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 807 670 484
Net cash provided by (used in) discontinued operations (350) (596) 233
- ----------------------------------------------------------------------------------------------------------
Net cash provided by operations 457 74 717
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 1,928 1,974 2,528
Mortgage loans 917 680 1,266
Proceeds from sales of investments
Fixed maturities 9,101 6,773 1,316
Equity securities 479 379 357
Mortgage loans 178 704 546
Real estate held for sale 210 253 728
Purchases of investments
Fixed maturities (11,556) (10,748) (4,594)
Equity securities (594) (305) (340)
Mortgage loans (470) (144) (102)
Policy loans, net (23) (325) (193)
Short-term securities, (purchases) sales, net 498 291 (367)
Other investments, (purchases) sales, net (137) (267) (299)
Securities transactions in course of settlement (52) 258 24
Net cash provided by (used in) investing activities of
discontinued operations 348 1,425 (261)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 827 948 609
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (redemption) of short-term debt, net (23) (1) 73
Contractholder fund deposits 2,493 2,705 1,951
Contractholder fund withdrawals (3,262) (3,755) (3,357)
Dividends to parent company (500) -- --
Return of capital to parent company -- -- (23)
Net cash provided by financing activities
of discontinued operations -- -- 84
Other 9 -- (2)
- ----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,283) (1,051) (1,274)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ 1 $ (29) $ 52
- ----------------------------------------------------------------------------------------------------------
Cash at December 31 $ 74 $ 73 $ 102
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 18
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The Travelers Insurance Company and Subsidiaries (the Company) is a
wholly owned subsidiary of The Travelers Insurance Group Inc. (TIGI).
TIGI is an indirect wholly owned subsidiary of Travelers Group Inc.
(Travelers Group), a financial services holding company engaged, through
its subsidiaries, principally in four business segments: (i) Investment
Services; (ii) Consumer Finance Services; (iii) Property & Casualty
Insurance Services; and (iv) Life Insurance Services (through the
Company). The periodic reports of Travelers Group provide additional
business and financial information concerning that company and its
consolidated subsidiaries.
The Company principally operates through two major business units within
its Life Insurance Services segment:
- TRAVELERS LIFE AND ANNUITY offers fixed and variable deferred
annuities, payout annuities and term, universal and variable life and
long-term care insurance to individuals and small businesses. It also
provides group pension products, including guaranteed investment
contracts and group annuities for employer-sponsored retirement and
savings plans. These products are primarily marketed through The
Copeland Companies (Copeland), an indirect, wholly owned subsidiary
of the Company, the Financial Consultants of Smith Barney Inc., an
affiliate of the Company, and a core group of approximately 500
independent agencies. The Company's Corporate and Other Segment was
absorbed into Travelers Life and Annuity during the second quarter
of 1996.
- PRIMERICA LIFE INSURANCE offers individual life products, primarily
term insurance, to consumers through a nationwide sales force of more
than 86,000 full and part-time independent representatives.
The Company sold group life and health insurance through its Managed Care
and Employee Benefits Operations segment (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 non-insurance subsidiaries on a fully
consolidated basis. The primary insurance subsidiaries of the Company
are: The Travelers Life and Annuity Company (TLAC), and Primerica Life
Insurance Company (Primerica Life) and its subsidiary National Benefit
Life Insurance Company (NBL).
As discussed in Note 4 of Notes to Consolidated Financial Statements, in
January 1995 the group life insurance and related businesses of the
Company were sold to Metropolitan Life Insurance Company (MetLife) and
also in January 1995, the group medical component was exchanged for a 42%
interest in The MetraHealth Companies, Inc. (MetraHealth). The Company's
interest in MetraHealth was sold on October 2, 1995 and through that date
had been accounted for on the equity method. The Company's discontinued
operations reflect the results of the medical insurance business not
transferred, the equity interest in the earnings of MetraHealth through
October 2, 1995 (date of sale) and the gains from the sales of these
businesses. All of the businesses sold to MetLife or contributed to
MetraHealth were included in the Company's MCEBO segment in 1994. MCEBO
marketed group life and health insurance, managed health care programs
and administrative services associated with employee benefit plans.
16
<PAGE> 19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
In September 1995, Travelers Group 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 Group
and was the indirect owner of the business of Transport Life Insurance
Company (Transport Life). Immediately prior to this distribution, the
Company distributed Transport Life, an indirect wholly owned subsidiary
of the Company, to TIGI, as a return of capital.
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
1996 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.
Equity securities, which include common and nonredeemable preferred
stocks, are classified as "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. A mortgage loan is
considered impaired when it is probable that the Company will be unable
to collect principal and interest amounts due. 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. In estimating fair value, the Company uses
interest rates reflecting the higher returns required in the current real
estate financing market. Impaired loans were insignificant at December
31, 1996 and 1995.
Real estate held for sale is carried at the lower of cost or fair value
less estimated costs to sell. Fair value of foreclosed properties is
established at time of foreclosure by internal analysis or external
appraisers, 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, 1996 and 1995.
Short-term securities, consisting primarily of money market instruments
and other debt issues purchased with a maturity of less than one year,
are carried at amortized cost which approximates market.
17
<PAGE> 20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Accrual of income, included in other assets, 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.
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures contracts, equity options, forward contracts and interest rate
swaps and caps, as a means of hedging exposure to interest rate, equity
price and foreign currency risk. Hedge accounting is used to account for
derivatives. To qualify for hedge accounting the changes in value of the
derivative must be expected to substantially offset the changes in value
of the hedged item. Hedges are monitored to ensure that there is a high
correlation between the derivative instruments and the hedged investment.
Gains and losses arising from financial futures contracts are used to
adjust the basis of hedged investments and are recognized in net
investment income over the life of the investment.
Forward contracts, equity options, and interest rate swaps and caps were
not significant at December 31, 1996 and 1995. Information concerning
derivative financial instruments is included in Note 8.
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. 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.
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, including term
insurance and guaranteed renewable health contracts, including long-term
care, are amortized in relation to 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 20-year period is employed for annuities.
Deferred acquisition costs are reviewed periodically for recoverability
to determine if any adjustment is required.
18
<PAGE> 21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
The value of insurance in force is an asset recorded at the time of
acquisition of an insurance company. It represents the actuarially
determined present value of anticipated profits to be realized from life
insurance, annuities and health contracts at the date of acquisition
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%. Traditional life
insurance and guaranteed renewable health policies are amortized in
relation to 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 primarily
carried at market value. 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.
Goodwill
Goodwill represents the cost of acquired businesses in excess of net
assets and is being amortized on a straight-line basis principally over a
40-year period. The carrying amount is regularly reviewed for indication
of impairment in value, which in the view of management, would be other
than temporary. Impairments would be recognized in operating results if a
permanent diminution in value is deemed to have occurred.
Contractholder Funds
Contractholder funds represent receipts from the issuance of universal
life, pension investment and certain deferred annuity contracts.
Contractholder Fund balances are increased by such receipts and credited
interest and reduced by withdrawals, mortality charges and administrative
expenses charged to the contractholders. Interest rates credited to
contractholder funds range from 3.5% to 8.6%.
19
<PAGE> 22
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Future Policy Benefits
Benefit reserves represent liabilities for future insurance policy
benefits. Benefit reserves for life insurance and annuities 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. The assumptions vary by plan, age at
issue, year of issue and duration. Appropriate recognition has been given
to experience rating and reinsurance.
Permitted Statutory Accounting Practices
The Company, whose insurance subsidiaries are 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 certain 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
and revenues of non-insurance subsidiaries.
Interest Credited to Contractholders
Interest credited to contractholders represents amounts earned by
universal life, pension investment and certain deferred annuity contracts
in accordance with contract provisions.
20
<PAGE> 23
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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.
Future Application of Accounting Standards
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125 (FAS 125),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". FAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. These standards are based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered and derecognizes liabilities when extinguished. FAS
125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. The requirements of FAS 125 are effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and are to be applied prospectively.
However, in December 1996 the FASB issued FAS 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125," which
delays until January 1, 1998 the effective date for certain provisions.
The adoption of the provisions of this statement effective January 1,
1997 will not have a material impact on results of operations, financial
condition or liquidity and the Company is currently evaluating the impact
of the provisions whose effective date has been delayed until January 1,
1998.
3. CHANGES IN ACCOUNTING PRINCIPLES
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes accounting standards for the impairment of
long-lived assets and certain identifiable intangibles to be disposed.
This statement requires a write down to fair value when long-lived assets
to be held and used are impaired. The statement also requires that
long-lived assets to be disposed (e.g., real estate held for sale) 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 standard did
not have a material impact on the Company's results of operations,
financial condition, or liquidity.
Accounting for Stock-Based Compensation
The Company participates in a stock option plan sponsored by Travelers
Group that provides for the granting of stock options in Travelers Group
common stock to officers and key employees. The Company applies
Accounting Principles Board Opinion No. 25 (APB 25) and related
interpretations in accounting for stock options. Since stock options are
issued at fair market value on the date of award, no compensation cost
has been recognized for these awards. In October 1995, the Financial
Accounting Standards Board issued
21
<PAGE> 24
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. CHANGES IN ACCOUNTING PRINCIPLES, Continued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). This statement provides an
alternative to APB 25 whereby fair values may be ascribed to options
using a valuation model and amortized to compensation cost over the
vesting period of the options. Had the Company applied FAS 123 in
accounting for stock options, net income would have been reduced by $2.8
million and $1.3 million in 1996 and 1995, respectively.
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 results of
operations, financial condition, or liquidity.
4. DISPOSITIONS AND DISCONTINUED OPERATIONS
In December 1994, the Company and its affiliates sold their group dental
insurance business to MetLife for $52 million and recognized a gain of $9
million net of taxes. 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 recognized in the
first quarter of 1995 a gain of $20 million net of taxes. 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 joint venture by contributing their
group medical businesses to MetraHealth, in exchange for shares of common
stock of MetraHealth. No gain was recognized as a result of this
transaction. Upon formation of the joint venture, the Company owned 42%
of the outstanding capital stock of MetraHealth, TIGI owned 8% 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 participation of the Company and TIGI,
and MetLife in the MetraHealth venture to 48.25% each. 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.
On October 2, 1995, the Company and its affiliates completed the sale of
their ownership in MetraHealth to United HealthCare Corporation and
through that date had accounted for its interest in MetraHealth on the
equity method. Gross proceeds to the Company in 1995 were $708 million in
cash recognizing a gain of $111 million after-tax. During 1996 the
Company received a contingency payment based on MetraHealth's 1995
results. In conjunction with this payment, certain reserves associated
with the group medical business and exit costs related to the
discontinued operations were reevaluated resulting in a final after-tax
gain of $26 million.
22
<PAGE> 25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. DISPOSITIONS AND DISCONTINUED OPERATIONS, Continued
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's MCEBO segment in 1994. The Company's
discontinued operations in 1996 and 1995 reflect the results of the
medical insurance business not transferred, the equity interest in the
earnings of MetraHealth through October 2, 1995 (date of sale) and the
gains from sales of these businesses. Revenues from discontinued
operations for the years ended December 31, 1996, 1995 and 1994 amounted
to $85.6 million, $1.2 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, 1996 and 1995. The
assets and liabilities of the discontinued operations consist primarily
of investments and insurance-related assets and liabilities. At December
31, 1996, these assets and liabilities each amounted to $180 million. At
December 31, 1995, these assets and liabilities each amounted to $1.8
billion.
In September 1995, Travelers Group 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 Group
and was the indirect owner of the business of Transport Life. Immediately
prior to this distribution, the Company distributed Transport, an
indirect, wholly owned subsidiary of the Company, to TIGI, as a return of
capital, 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.
5. COMMERCIAL PAPER AND LINES OF CREDIT
The Company issues commercial paper directly to investors and had $50
million outstanding at December 31, 1996. The Company maintains unused
credit availability under bank lines of credit at least equal to the
amount of the outstanding commercial paper. Interest expense related to
the commercial paper was not significant in 1996.
Travelers Group, Commercial Credit Company (CCC) (an indirect wholly
owned subsidiary of Travelers Group) 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 Group, 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 2001. At December 31, 1996, $100 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, 1996, the
Company was in compliance with these provisions. There were no amounts
outstanding under this agreement at December 31, 1996 and 1995.
23
<PAGE> 26
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 yearly
renewable term coinsurance and modified coinsurance. The Company remains
primarily liable as the direct insurer on all risks reinsured. Since June
1994, the Company is reinsuring its life insurance risks via first dollar
quota share treaties on an 80%/20% basis. Maximum retention of $1.5
million is generally reached on policies in excess of $7.5 million. For
other plans of insurance 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, Travelers
Property Casualty Corp. (TAP).
A summary of reinsurance financial data reflected within the consolidated
statement of operations and retained earnings is presented below (in
millions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Written Premiums:
Direct $ 1,982 $ 2,166 $ 2,153
Assumed from:
Non-affiliated companies 5 -- --
Ceded to:
Affiliated companies (284) (374) (358)
Non-affiliated companies (309) (302) (306)
- -------------------------------------------------------------------------------
Total net written premiums $ 1,394 $ 1,490 $ 1,489
- -------------------------------------------------------------------------------
Earned Premiums:
Direct $ 1,897 $ 2,067 $ 2,301
Assumed from:
Non-affiliated companies 5 -- --
Ceded to:
Affiliated companies (219) (283) (384)
Non-affiliated companies (315) (298) (305)
- -------------------------------------------------------------------------------
Total net earned premiums $ 1,368 $ 1,486 $ 1,612
- -------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 27
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>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Reinsurance Recoverables:
Life and accident and health business:
Non-affiliated companies $1,497 $1,744
Property-casualty business:
Affiliated companies 2,361 2,363
- --------------------------------------------------------------------------------
Total Reinsurance Recoverables $3,858 $4,107
================================================================================
</TABLE>
Total reinsurance recoverables at December 31, 1996 and 1995 include $720
million and $929 million, respectively, 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 increase of $36 million in additional paid-in capital during 1996 is
due primarily to contributions of non-insurance subsidiaries from TIGI.
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
The Company's statutory net income, which includes all insurance
subsidiaries, was $656 million, $235 million and $100 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
The Company's statutory capital and surplus was $3,442 million and
$3,197 million at December 31, 1996 and 1995, respectively.
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 $507 million is available in 1997 for dividend payments by the
Company without prior approval of the Connecticut Insurance Department.
In addition, under a revolving credit facility, the Company is required
to maintain certain minimum equity and risk based capital levels. The
Company is in compliance with these covenants at December 31, 1996.
25
<PAGE> 28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures, equity options, forward contracts and interest rate swaps as a
means of hedging exposure to foreign currency, equity price changes
and/or interest rate risk on anticipated transactions or existing assets
and liabilities. 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 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 of
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. Financial futures contracts and purchased listed option
contracts have little credit risk since organized exchanges are the
counterparties.
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.
The Company uses exchange traded financial futures contracts to manage
its exposure to changes in interest rates which arise from the sale of
certain insurance and investment products, or the need to reinvest
proceeds from the sale or maturity of investments. To hedge against
adverse changes in interest rates, the Company enters long or short
positions in financial futures contracts which offset asset price changes
resulting from changes in market interest rates until an investment is
purchased or a product is sold.
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, 1996 and 1995, the Company held financial futures
contracts with notional amounts of $169 million and $68 million,
respectively, and a deferred gain of $1 million and a deferred loss of
$.2 million, respectively. Total gains from financial futures of $2
million were deferred at December 31, 1996. These deferred gains, which
relate to anticipated investment purchases and investment product sales
expected to occur by the end of the second quarter of 1997, are reported
as other liabilities. At December 31, 1996 and 1995, the Company's
futures contracts had no fair value because these contracts are marked to
market and settled in cash daily.
The off-balance sheet risks of equity options, forward contracts, and
interest rate swaps were not significant at December 31, 1996 and 1995.
26
<PAGE> 29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS, Continued
The Company purchased a 5-year interest rate cap, with a notional amount
of $200 million, from Travelers Group 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 specific
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, 1996.
Financial Instruments with Off-Balance Sheet Risk
In the normal course of business, the Company issues fixed and variable
rate loan commitments and has unfunded commitments to partnerships. The
off-balance sheet risk of these financial instruments was not significant
at December 31, 1996 and 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, 1996 and 1995, investments in fixed maturities had a
carrying value and a fair value of $18.8 billion. See Note 15.
At December 31, 1996, mortgage loans had a carrying value of $2.9
billion, which approximated fair value, compared with a carrying value of
$3.6 billion, which approximated fair value at December 31, 1995. In
estimating fair value, the Company used interest rates reflecting the
higher returns required in the current real estate financing market.
The carrying values of $154 million and $647 million of financial
instruments classified as other assets approximated their fair values at
December 31, 1996 and 1995, respectively. The carrying values of $825
million and $1.3 billion of financial instruments classified as other
liabilities also approximated their fair values at December 31, 1996 and
1995, respectively. Fair value is determined using various methods
including discounted cash flows, as appropriate for the various financial
instruments.
At December 31, 1996, contractholder funds with defined maturities had a
carrying value of $1.7 billion and a fair value of $1.7 billion, compared
with a carrying value of $2.4 billion and a fair value of $2.5 billion at
December 31, 1995. 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
$9.1 billion and a fair value of $8.8 billion at December 31, 1996,
compared with a carrying value of $9.3 billion and a fair value of $9.0
billion at December 31, 1995. 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 $1.1 billion and $1.1 billion,
respectively, at December 31, 1996, compared with a carrying value and a
fair value of $1.5 billion and $1.6 billion, respectively, at December
31, 1995. The liabilities of separate accounts providing a guaranteed
return had a carrying value and a fair value of $1.0 billion and $.9
billion, respectively, at December 31, 1996, compared with a carrying
value and a fair value of $1.5 billion and $1.4 billion, respectively, at
December 31, 1995.
27
<PAGE> 30
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 cash, short-term securities, investment income
accrued and commercial paper approximated their fair values.
The carrying value of policy loans, which have no defined maturities, is
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
in the normal course of business. Although there can be no assurances, as
of December 31, 1996, 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.
10. BENEFIT PLANS
Pension Plans
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by Travelers Group covering the majority of
Travelers Group'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.
The Company also participates in a nonqualified, noncontributory defined
benefit pension plan sponsored by an affiliate covering the majority of
the Company's U.S. employees. Contributions are based on benefits paid.
The Company's share of net pension expense was not significant for 1996,
1995 and 1994.
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 1996, 1995 and 1994.
28
<PAGE> 31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. BENEFIT PLANS, Continued
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. Retirees may elect certain prepaid health care benefit
plans. Life insurance benefits are generally set at a fixed amount.
Beginning January 1, 1996, these plans were amended to restrict benefit
eligibility to retirees and certain retiree-eligible employees. The cost
recognized by the Company for these benefits represents its allocated
share of the total costs of the plan, net of retiree contributions. The
Company's share of the total cost of the plan for 1996, 1995 and 1994 was
not significant.
401(K) Savings Plan
Under the savings, investment and stock ownership plan available to
substantially all employees of TIGI, 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 through
December 31, 1995. Effective January 1, 1996, the match remained at 50%
of an employee's first 5% contribution with a maximum of $1,000.
Effective January 1, 1997, employee contributions will be matched with
Travelers Group stock options. The Company's matching obligation was not
significant in 1996, 1995 and 1994.
11. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and
expenses, for certain subsidiaries and affiliates of TIGI 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.
An affiliate maintains 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, 1996 and 1995, the pool
totaled approximately $2.9 billion and $2.2 billion, respectively. The
Company's share of the pool amounted to $196 million and $1.4 billion at
December 31, 1996 and 1995, respectively, and is included in short-term
securities in the consolidated balance sheet.
The Company sells structured settlement annuities to TAP in connection
with the settlement of certain policyholder obligations. Such deposits
were $40 million, $38 million and $39 million for 1996, 1995 and 1994,
respectively.
29
<PAGE> 32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. RELATED PARTY TRANSACTIONS, Continued
The Company markets deferred annuity products and life and health
insurance through its affiliate, Smith Barney Inc. Premiums and deposits
related to these products were $820 million, $583 million and $161
million in 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, the Company had an investment of $22
million and $24 million, respectively, in bonds of its affiliate, CCC.
This is included in fixed maturities in the consolidated balance sheet.
The Company had an investment of $648 million and $445 million in common
stock of Travelers Group at December 31, 1996 and 1995, respectively.
This investment is carried at fair value.
12. LEASES
Most leasing functions for TIGI and its subsidiaries are administered by
TAP. In 1996, TAP assumed the obligations for several leases. Rent
expense related to all leases are shared by the companies on a cost
allocation method based generally on estimated usage by department. Rent
expense was $24 million, $22 million and $23 million in 1996, 1995 and
1994, respectively.
<TABLE>
<CAPTION>
-----------------------------------------------------------
Minimum operating
(in millions) rental payments
-----------------------------------------------------------
<S> <C>
Year ending December 31,
1997 $ 57
1998 49
1999 41
2000 39
2001 42
Thereafter 362
-----------------------------------------------------------
$590
-----------------------------------------------------------
</TABLE>
The Company is reimbursed by affiliates of TIGI for utilization of space
and equipment. Future sublease rental income of approximately $92 million
will partially offset these commitments. Minimum future capital lease
payments are not significant.
30
<PAGE> 33
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
-------------------------------------------------------------------------------------
Effective tax rate
<S> <C> <C> <C>
Income before federal income taxes $975 $837 $597
Statutory tax rate 35% 35% 35%
-------------------------------------------------------------------------------------
Expected federal income taxes $341 $293 $209
Tax effect of:
Nontaxable investment income (3) (4) (4)
Other, net 4 1 6
-------------------------------------------------------------------------------------
Federal income taxes (benefit) $342 $290 $211
-------------------------------------------------------------------------------------
Effective tax rate 35% 35% 35%
-------------------------------------------------------------------------------------
Composition of federal income taxes
Current:
United States $263 $220 $(108)
Foreign 21 13 12
-------------------------------------------------------------------------------------
Total 284 233 (96)
-------------------------------------------------------------------------------------
Deferred:
United States 57 52 302
Foreign 1 5 5
-------------------------------------------------------------------------------------
Total 58 57 307
-------------------------------------------------------------------------------------
Federal income taxes $342 $290 $211
-------------------------------------------------------------------------------------
</TABLE>
Tax benefits allocated directly to shareholder's equity for the years
ended December 31, 1996 and 1995 were $8 million and $7 million,
respectively.
31
<PAGE> 34
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. FEDERAL INCOME TAXES, Continued
The net deferred tax liabilities at December 31, 1996 and 1995 were
comprised of the tax effects of temporary differences related to the
following assets and liabilities:
<TABLE>
<CAPTION>
(in millions) 1996 1995
---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Benefit, reinsurance and other reserves $ 510 $ 447
Contractholder funds 32 54
Operating lease reserves 71 56
Other employee benefits 104 74
Other 121 208
---------------------------------------------------------------------------------------
Total 838 839
---------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs and value of insurance in force 571 538
Investments, Net 131 152
Other 93 81
---------------------------------------------------------------------------------------
Total 795 771
---------------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 43 68
Valuation allowance for deferred tax assets (100) (100)
---------------------------------------------------------------------------------------
Net deferred tax (liability) asset after valuation allowance $ (57) $ (32)
---------------------------------------------------------------------------------------
</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.
32
<PAGE> 35
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 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 1996. The initial recognition of any benefit
produced by the reversal of the valuation allowance will be recognized by
reducing goodwill.
At December 31, 1996, 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) 1996 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross investment income
Fixed maturities $1,328 $1,191 $1,082
Mortgage loans 331 419 511
Policy loans 156 163 110
Real estate held for sale 94 111 174
Other 77 97 52
-------------------------------------------------------------------------------------------
1,986 1,981 1,929
-------------------------------------------------------------------------------------------
Investment expenses 99 157 227
-------------------------------------------------------------------------------------------
Net investment income $1,887 $1,824 $1,702
-------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE> 36
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) 1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized
Fixed maturities $(63) $(43) $(3)
Equity securities 47 36 18
Mortgage loans 49 47 -
Real estate held for sale 33 18 -
Other (1) 48 (2)
-----------------------------------------------------------------------------------------
Realized investment gains $ 65 $106 $13
----------------------------------------------------------------------------------------
</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) 1996 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized
Fixed maturities $(323) $1,974 $(1,319)
Equity securities (35) 46 (25)
Other 220 200 165
-------------------------------------------------------------------------------------------
(138) 2,220 (1,179)
Related taxes (43) 778 (412)
-------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) (95) 1,442 (767)
Balance beginning of year 682 (760) 7
-------------------------------------------------------------------------------------------
Balance end of year $ 587 $ 682 $ (760)
--------------------------------------------------------------------------------------------
</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 $9.1 billion and $6.8 billion in 1996 and 1995, respectively. Gross
gains of $107 million and $80 million and gross losses of $175 million
and $124 million in 1996 and 1995, respectively, were realized on those
sales.
34
<PAGE> 37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
The amortized cost and fair value of investments in fixed maturities were
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
December 31, 1996
---------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
(in millions) cost gains losses value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities -
CMOs and pass through
securities $ 3,755 $ 69 $23 $ 3,801
U.S. Treasury securities
and obligations of U.S.
Government and
government agencies
and authorities 1,188 50 4 1,234
Obligations of states,
municipalities and
political subdivisions 76 1 1 76
Debt securities issued by
foreign governments 565 24 3 586
All other corporate bonds 12,925 259 41 13,143
Redeemable preferred stock 6 - - 6
---------------------------------------------------------------------------------------------
Total $18,515 $403 $72 $18,846
---------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 38
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
December 31, 1995
-----------------------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
(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>
The amortized cost and fair value of fixed maturities at December 31,
1996, 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 Fair
(in millions) cost value
-------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 971 $ 975
Due after 1 year through 5 years 4,970 5,043
Due after 5 years through 10 years 4,871 4,946
Due after 10 years 3,949 4,083
-------------------------------------------------------------------------------------------
14,761 15,047
Mortgage-backed securities 3,754 3,799
-------------------------------------------------------------------------------------------
Total $18,515 $18,846
-------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE> 39
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
The Company makes 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,
including planned amortization class (PAC) tranches. Prepayment protected
tranches are preferred because they provide stable cash flows in a
variety of interest rate 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, 1996 and 1995, the Company held CMOs, classified as
available for sale with a fair value of $1.9 billion and $2.3 billion,
respectively. Approximately 88% and 89% of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31,
1996 and 1995. In addition, the Company held $843.5 million and $917
million of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at
December 31, 1996 and 1995, respectively. Virtually all of these
securities are rated AAA. The Company also held $1.4 billion and $1.3
billion of securities that are backed primarily by credit card or car
loan receivables at December 31, 1996 and 1995, respectively.
Equity Securities
The cost and fair values of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
December 31, 1996
---------------------------------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
(in millions) Cost gains losses value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stocks $211 $38 $30 $219
Nonredeemable preferred stocks 114 2 3 113
---------------------------------------------------------------------------------------
Total $325 $40 $33 $332
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
December 31, 1995
---------------------------------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
(in millions) Cost gains losses value
---------------------------------------------------------------------------------------
Common stocks $138 $48 $5 $181
Nonredeemable preferred stocks 44 2 3 43
--------------------------------------------------------------------------------------
Total $182 $50 $8 $224
--------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 40
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 $479 million and $379
million in 1996 and 1995, respectively. Gross gains of $64 million and
$27 million and gross losses of $11 million and $2 million in 1996 and
1995, respectively, were realized on those sales.
Real estate held for sale and mortgage loans
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest
rates below market.
At December 31, 1996 and 1995, the Company's real estate held for sale
and mortgage loan portfolios consisted of the following (in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------------
<S> <C> <C>
Current mortgage loans $2,832 $3,385
Underperforming mortgage loans 51 241
----------------------------------------------------------------------------
Total 2,883 3,626
----------------------------------------------------------------------------
Real estate held for sale 297 293
----------------------------------------------------------------------------
Total $3,180 $3,919
----------------------------------------------------------------------------
</TABLE>
Aggregate annual maturities on mortgage loans at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------
(in millions)
----------------------------------------------------
<S> <C>
Past maturity $ 78
1997 299
1998 349
1999 293
2000 364
2001 224
Thereafter 1,276
----------------------------------------------------
Total $2,883
----------------------------------------------------
</TABLE>
38
<PAGE> 41
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Concentrations
At December 31, 1996 and 1995, 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 an
affiliate. See Note 11.
Included in fixed maturities are below investment grade assets totaling
$1.1 billion and $1.0 billion at December 31, 1996 and 1995,
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 concentrations of investments, primarily
fixed maturities, in the following industries:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Banking $1,959 $1,226
Finance 1,823 1,491
Electric utilities 1,093 1,023
Oil and gas 652 861
---------------------------------------------------------------------------------------------------
</TABLE>
Below investment grade assets included in the totals above, were as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Banking $ 1 $ 8
Finance 65 56
Electric utilities 49 26
Oil and gas 58 66
---------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995, concentrations of mortgage loans were for
properties located in highly populated areas in the states listed below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) 1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C>
California $ 643 $ 736
New York 297 400
---------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 42
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. INVESTMENTS AND INVESTMENT GAINS (LOSSES), Continued
Other mortgage loan investments are relatively evenly dispersed
throughout the United States, with no holdings in any state exceeding
$258 million and $332 million at December 31, 1996 and 1995,
respectively.
Concentrations of mortgage loans by property type at December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
(in millions) 1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C>
Office $1,195 $1,513
Agricultural 677 556
Retail 307 426
Apartment 284 580
----------------------------------------------------------------------------------------------
</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.
Non-Income Producing Investments
Investments included in the consolidated balance sheets that were
non-income producing for the preceding 12 months were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
(in millions) 1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans $ 7 $18
Real estate 37 65
Fixed maturities - 4
----------------------------------------------------------------------------------------
Total $44 $87
----------------------------------------------------------------------------------------
</TABLE>
Restructured Investments
The Company had mortgage loans and debt securities which were
restructured at below market terms totaling approximately $18 million and
$67 million at December 31, 1996 and 1995, 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 $5 million
in 1996 and $16 million in 1995. Interest on these assets, included in
net investment income, aggregated $2 million and $8 million in 1996 and
1995, respectively.
40
<PAGE> 43
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. DEPOSIT FUNDS AND RESERVES
At December 31, 1996, the Company had $21.9 billion of life and annuity
deposit funds and reserves. Of that total, $11.6 billion is not subject
to discretionary withdrawal based on contract terms. The remaining $10.3
billion is for life and annuity products that are subject to
discretionary withdrawal by the contractholder. Included in the amount
that is subject to discretionary withdrawal is $1.7 billion of
liabilities that are surrenderable with market value adjustments. Also
included are an additional $5.4 billion of the life insurance and
individual annuity liabilities which are subject to discretionary
withdrawals, and have an average surrender charge of 5.0%. In the payout
phase, these funds are credited at significantly reduced interest rates.
The remaining $3.2 billion of liabilities are surrenderable without
charge. More than 11% of these relate to individual life products. These
risks would have to be underwritten again if transferred to another
carrier, which is considered a significant deterrent against withdrawal
by long-term policyholders. Insurance liabilities that are surrendered or
withdrawn are reduced by outstanding policy loans and related accrued
interest prior to payout.
17. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
The following table reconciles net income to net cash provided by
operating activities:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income from continuing operations $ 633 $ 547 $ 386
Adjustments to reconcile net income to
net cash provided by operating activities
Realized gains (65) (106) (13)
Deferred federal income taxes 58 57 307
Amortization of deferred policy acquisition
costs and value of insurance in force 281 290 281
Additions to deferred policy acquisition costs (350) (454) (435)
Investment income accrued 2 (9) (47)
Premium balances receivable (6) (8) 5
Insurance reserves and accrued expenses (1) 291 212
Other 255 62 (212)
----------------------------------------------------------------------------------------
Net cash provided by
operating activities 807 670 484
Net cash provided by (used in)
discontinued operations (350) (596) 233
----------------------------------------------------------------------------------------
Net cash provided by
operations $ 457 $ 74 $ 717
----------------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 44
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 return of capital of
Transport to TIGI (see Note 4); c) the acquisition of real estate through
foreclosures of mortgage loans amounting to $117 million, $97 million and
$229 million in 1996, 1995 and 1994, respectively; d) the acceptance of
purchase money mortgages for sales of real estate aggregating $23
million, $27 million and $96 million in 1996, 1995 and 1994,
respectively; and e) the 1994 exchange of $23 million of the Company's
investment in Travelers Group common stock for $35 million of Travelers
Group nonredeemable preferred stock.
42
<PAGE> 45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 1996
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 I(2)(c) of Form 10-K.
Item 11. Executive Compensation.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 13. Certain Relationships and Related Transactions.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
43
<PAGE> 46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 1996
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed
(1) Financial Statements. See index on page 11 of this report.
(2) Financial Statement Schedules. See index on page 47 of this report.
(3) Exhibits. See Exhibit Index on page 45.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1996.
44
<PAGE> 47
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Filing Method
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Articles of incorporation and By-Laws
3. 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 fiscal 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. Lease for office space in Hartford, Connecticut dated as of April 2, 1996, by and
between the Company and The Travelers Indemnity Company, incorporated by reference
to Exhibit 10.14 to the Annual Report on Form 10-K of Travelers Property Casualty
Corp. for the fiscal year ended December 31, 1996 (File No. 1-14328).
21. Subsidiaries of the Registrant
Omitted pursuant to General Instruction I(2)(b) of Form 10-K.
27. Financial Data Schedule Electronic
</TABLE>
45
<PAGE> 48
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 26th day of March,
1997.
THE TRAVELERS INSURANCE COMPANY
(Registrant)
By: /s/ Ian R. Stuart
------------------
Ian R. Stuart
Senior Vice President and
Chief Financial Officer and Chief Accounting 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 26th day of March, 1997.
<TABLE>
<CAPTION>
Signature Capacity
- --------- --------
<S> <C>
/s/ Michael A. Carpenter Director and Chairman of the Board and President and Chief Executive Officer
- ---------------------------------- (Principal Executive Officer)
(Michael A. Carpenter)
/s/ Ian R. Stuart Director and Senior Vice President and Chief Financial Officer
- ---------------------------------- (Principal Financial Officer and Principal Accounting Officer)
(Ian R. Stuart)
/s/ Katherine M. Sullivan Director and Senior Vice President and General Counsel
- -----------------------------------
(Katherine M. Sullivan)
/s/ Marc P. Weill Director and Senior Vice President and
- ---------------------------------- Chief Investment Officer
(Marc P. Weill)
/s/ Robert I. Lipp Director
- ----------------------------------
(Robert I. Lipp)
/s/ Jay S. Benet Director and Senior Vice President
- ----------------------------------
(Jay S. Benet)
/s/ George C. Kokulis Director and Senior Vice President
- ----------------------------------
(George C. Kokulis)
</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.
46
<PAGE> 49
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 1996
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
The Travelers Insurance Company and Subsidiaries
Independent Auditors' Reports *
Consolidated Statements of Income
and Retained Earnings *
Consolidated Balance Sheets *
Consolidated Statements of Cash Flows *
Notes to Consolidated Financial Statements *
Independent Auditors' Reports 48
Schedule I -Summary of Investments - Other than Investments
in Related Parties 1996 49
Schedule III -Supplementary Insurance Information 1994-1996 50-52
Schedule IV -Reinsurance 1994-1996 53
All other schedules are inapplicable for this filing.
* See index on page 11
47
<PAGE> 50
Independent Auditors' Report
The Board of Directors and Shareholder
The Travelers Insurance Company and Subsidiaries:
Under date of January 17, 1997, we reported on the consolidated balance sheets
of The Travelers Insurance Company and Subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income and retained earnings
and cash flows for each of the years in the three-year period ended December 31,
1996, which are included 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 as listed in the accompanying index.
These 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.
/s/ KPMG PEAT MARWICK LLP
Hartford, Connecticut
January 17, 1997
48
<PAGE> 51
SCHEDULE I
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(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 $ 4,205 $ 4,300 $ 4,300
States, municipalities and political subdivisions 145 144 144
Foreign governments 565 586 586
Public utilities 1,839 1,857 1,857
Convertible bonds and bonds with warrants attached 142 152 152
All other corporate bonds (2) 11,592 11,779 11,779
------- ------- -------
Total bonds 18,488 18,818 18,818
Redeemable preferred stocks 6 6 6
------- ------- -------
Total fixed maturities 18,494 18,824 18,824
------- ------- -------
Equity securities:
Common stocks
Banks, trust and insurance companies 23 24 24
Industrial, miscellaneous and all other 189 195 195
------- ------- -------
Total common stocks 212 219 219
Nonredeemable preferred stocks 113 113 113
------- ------- -------
Total equity securities 325 $ 332 332
------- ------- -------
Mortgage loans 2,883 2,883
------- -------
Real estate held for sale 297 297
------- -------
Policy loans 1,910 1,910
------- -------
Short-term securities 891 891
------- -------
Other investments (3) (4) 574 587
------- -------
Total investments $25,374 $25,724
======= =======
</TABLE>
(1) Determined in accordance with methods described in Notes 2 and 15 on pages
16 and 34 of the Notes to the Consolidated Financial Statements.
(2) Excludes $22 million cost and $22 million fair value of Commercial Credit
Company bonds. See Note 11 on page 29 of the Notes to the Consolidated
Financial Statements.
(3) Includes equity of $134 million in real estate joint ventures.
(4) Excludes $83 million cost and $648 million fair value of Travelers Group
Inc. common stock. See Note 11 on page 29 of the Notes to the Consolidated
Financial Statements.
(See Accompanying Independent Auditors' Report)
49
<PAGE> 52
SCHEDULE III
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
Supplementary Insurance Information
1996
(in millions)
<TABLE>
<CAPTION>
Deferred policy Future policy Other Premium Net
acquisition costs benefits, policy revenue investment
and value of losses, claims claims & income
insurance & loss expenses benefits
Life Insurance Services in force (a) payable
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Travelers Life and
Annuity $ 644 $21,838 $387 $ 349 $1,712
Primerica
Life 1,489 2,377 133 1,030 175
------ ------- ---- ------ ------
Total Continuing
Operations 2,133 24,215 520 $1,379 $1,887
====== ======
Discontinued
Operations - 928 16
------ ------- ----
Consolidated $2,133 $25,143 $536
====== ======= ====
</TABLE>
<TABLE>
<CAPTION>
Amortization
of deferred
Benefits, policy Other Premiums
claims & acquisition operating written
losses costs and value expenses
(b) of insurance
Life Insurance Services in force
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Life and
Annuity $1,464 $ 83 $224 $ 349
Primerica
Life 529 198 156 1,045
Total Continuing
Operations $1,993 $281 $380 $1,394
====== ==== ==== ======
Discontinued
Operations
Consolidated
</TABLE>
(a) Includes contractholder funds.
(b) Includes interest credited to contractholders.
(See Accompanying Independent Auditors' Report)
50
<PAGE> 53
SCHEDULE III
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
Supplementary Insurance Information
1995
(in millions)
<TABLE>
<CAPTION>
Deferred policy Future policy Other Premium Net
acquisition costs benefits, policy revenue investment
and value of losses, claims claims & income
insurance & loss expenses benefits
Life Insurance Services in force (a) payable
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Travelers Life and
Annuity $ 538 $22,784 $373 $ 481 $1,663
Primerica
Life 1,424 2,201 123 1,015 161
------ ------- ---- ------ ------
Total Continuing
Operations 1,962 24,985 496 $1,496 $1,824
====== ======
Discontinued
Operations - 1,323 75
------ ------- ----
Consolidated $1,962 $26,308 $571
====== ======= ====
</TABLE>
<TABLE>
<CAPTION>
Amortization
of deferred
Benefits, policy Other Premiums
claims & acquisition operating written
losses costs and value expenses
(b) of insurance
Life Insurance Services in force
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Life and
Annuity $1,622 $ 89 $ 218 $ 475
Primerica
Life 530 201 150 1,015
------ ---- ---- ------
Total Continuing
Operations $2,152 $290 $368 $1,490
====== ==== ==== ======
Discontinued
Operations
Consolidated
</TABLE>
(a) Includes contractholder funds.
(b) Includes interest credited to contractholders.
(See Accompanying Independent Auditors' Report)
51
<PAGE> 54
SCHEDULE III
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
Supplementary Insurance Information
1994
(in millions)
<TABLE>
<CAPTION>
Deferred policy Future policy Other Premium Net
acquisition costs benefits, policy revenue investment
and value of losses, claims claims & income
insurance & loss expenses benefits
Life Insurance Services in force (a) payable
Travelers Life and
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Travelers Life and
Annuity $ 624 $ 22,711 $ 332 $ 527 $ 1,559
Primerica
Life 1,274 1,990 126 965 143
------------- --------- ---------- --------- ---------
Total Continuing
Operations 1,898 24,701 458 $ 1,492 $ 1,702
========= =========
Discontinued
Operations 41 3,133 764
------------- --------- ----------
Consolidated $ 1,939 $ 27,834 $ 1,222
============= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Amortization
of deferred
Benefits, policy Other Premiums
claims & acquisition operating written
losses costs and value expenses
(b) of insurance
Life Insurance Services in force
Travelers Life and
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Life and
Annuity $ 1,649 $ 89 $ 217 $ 524
Primerica
Life 528 192 134 965
-------- ----------- --------- -----------
Total Continuing
Operations $ 2,177 $ 281 $ 351 $ 1,489
======== =========== ========= ===========
Discontinued
Operations
Consolidated
</TABLE>
(a) Includes contractholder funds.
(b) Includes interest credited to contractholders.
(See Accompanying Independent Auditors' Report)
52
<PAGE> 55
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
1996
----
<S> <C> <C> <C> <C> <C>
Life insurance in force $418,041 $160,447 $ 79 $257,673 1.0%
Premiums
Life insurance $ 1,481 $ 294 $ 5 $ 1,192 --
Accident and health insurance 208 21 -- 187 --
Property-casualty 219 219 -- -- --
-------- -------- ------ --------
Total premiums $ 1,908 $ 534 $ 5 $ 1,379 --
======== ======== ====== ========
<CAPTION>
1995
----
<S> <C> <C> <C> <C> <C>
Life insurance in force $439,982 $175,877 $ 68 $264,173 1.0%
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 --
======== ======== ====== ========
<CAPTION>
1994
----
<S> <C> <C> <C> <C> <C>
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 --
======== ======== ====== ========
</TABLE>
(See Accompanying Independent Auditors' Report)
53
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary of Financial Information extracted from The
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
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 26,394
<CASH> 74
<RECOVER-REINSURE> 3,858
<DEFERRED-ACQUISITION> 2,133
<TOTAL-ASSETS> 42,973
<POLICY-LOSSES> 11,450
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 536
<POLICY-HOLDER-FUNDS> 22,641
<NOTES-PAYABLE> 0
0
0
<COMMON> 100
<OTHER-SE> 6,228
<TOTAL-LIABILITY-AND-EQUITY> 42,973
1,379
<INVESTMENT-INCOME> 1,887
<INVESTMENT-GAINS> 65
<OTHER-INCOME> 298
<BENEFITS> 1,163
<UNDERWRITING-AMORTIZATION> 281
<UNDERWRITING-OTHER> 1,210
<INCOME-PRETAX> 975
<INCOME-TAX> 342
<INCOME-CONTINUING> 633
<DISCONTINUED> 26
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 659
<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>
