<PAGE> 1
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, 1997
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)
CONNECTICUT 06-0566090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(Address of principal executive offices) (Zip Code)
(860) 277-0111
(Registrant's telephone number, including area code)
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, 1997
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER PART I PAGE
- ----------- ------ ----
1. Business................................................................ 2
A. General.............................................................. 2
B. Business by Product Line
Life Insurance Services........................................... 3
Insurance Regulations............................................. 4
2. Properties.............................................................. 6
3. Legal Proceedings....................................................... 7
4. Submission of Matters to a Vote of Security Holders..................... 7
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters... 8
6. Selected Financial Data................................................. 8
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 8
7A. Quantitative and Qualitative Disclosures About Market Risk.............. 12
8. Financial Statements and Supplementary Data............................. 13
9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 44
PART III
10. Directors and Executive Officers of the Registrant...................... 44
11. Executive Compensation.................................................. 44
12. Security Ownership of Certain Beneficial Owners and Management.......... 44
13. Certain Relationships and Related Transactions.......................... 44
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 45
Exhibit Index........................................................... 46
Signatures.............................................................. 47
Index to Financial Statements and Financial Statement Schedules......... 48
1
<PAGE> 3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PART I
ITEM 1. BUSINESS.
GENERAL
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 diversified
financial services holding company engaged, through its subsidiaries,
principally in four business segments: (i) Investment Services, including Asset
Management; (ii) Consumer Finance Services; (iii) Property & Casualty Insurance
Services; and (iv) Life Insurance Services (primarily 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 $50.0 billion of assets and $422 billion
of life insurance in force at December 31, 1997, the Company believes that it is
one of the largest stock life insurance groups in the United States as measured
by these criteria.
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 Salomon Smith Barney,
an affiliate of the Company, and a nationwide network of independent agents.
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 approximately
80,000 full and part-time independent agents.
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 2 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 was 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 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.
2
<PAGE> 4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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. 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. 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.
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 capital
required to support this business. The pricing of products and services also
reflects charges for expenses, mortality 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.
3
<PAGE> 5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Individual products are primarily marketed through Copeland, the Financial
Consultants of Salomon Smith Barney and a nationwide network of independent
agents. Copeland is a captive sales organization of personal retirement planning
specialists focused primarily on the qualified periodic deferred annuity
marketplace. Copeland's share of total individual deferred annuity production
increased from 39% in 1996 to 41% in 1997. Salomon Smith Barney's Financial
Consultants distribute Travelers Life and Annuity's non-qualified deferred
annuities and individual life and long-term care products, and accounted for 38%
of total individual deferred annuity production in 1997 and 1996. The nationwide
network of independent agents sold the majority of the individual life and
long-term care business in 1997 and 1996 and accounted for 21% and 23%,
respectively, of individual deferred annuity premiums and deposits.
The Company is expanding the sale of its individual and long-term care products
through other distribution channels. These include Travelers Net Plus, a
long-term care specialty distributor, marketing primarily through targeted
direct mailings, and Donald F. Smith & Associates, a regional provider of
tax-sheltered annuity programs in the healthcare marketplace acquired by
Copeland in March 1997.
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 approximately 80,000 independent agents. A great majority of the
domestic licensed sales force works on a part-time basis. NBL provides statutory
disability benefits and insurance, primarily 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.
Insurance Regulations
The National Association of Insurance Commissioners (NAIC) has developed a set
of financial relationships or "tests" called the Insurance Regulatory
Information System (IRIS) that were designed for early identification of
companies that may require special attention by insurance regulatory
authorities. These tests were developed primarily to assist state insurance
departments in executing their statutory mandate to oversee the financial
condition of insurance companies. Insurance companies submit data on an annual
basis to the NAIC, which in turn analyzes the data using ratios covering twelve
categories of financial data with defined "usual ranges" for each category.
Falling outside the usual range of IRIS ratios is not considered a failing
result; rather, unusual values are viewed as part of the regulatory early
monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges of four or more of the ratios. In normal years,
15% of the companies included in the IRIS system are expected by the NAIC to be
outside the usual range of four or more ratios.
4
<PAGE> 6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
In each of the last three years, IRIS ratios for TLAC have fallen outside of the
usual range due to growth in business volume. In each instance, the regulators
have been satisfied upon follow-up that there is no solvency problem. It is
possible that similar events could occur this year, and management believes that
resolution would be the same. No regulatory action has been taken by any state
insurance department or the NAIC with respect to IRIS ratios of the Company or
any of its insurance subsidiaries for the three years ended December 31, 1997.
In order to enhance the regulation of insurer solvency, the NAIC adopted a
formula and model law to implement Risk-Based Capital (RBC) requirements for
life and annuity insurance companies, which is designed to assess minimum
capital requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. 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 relevant 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, 1997, the Company and its insurance subsidiaries all had
adjusted capital in excess of amounts requiring any regulatory action at any of
the four levels.
5
<PAGE> 7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 $551 million in 1998 without prior approval of the Connecticut
Insurance Department.
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). 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. As of December
31, 1997, leasehold interests of the Company included approximately 656,000
square feet of office space in 16 field offices throughout the United States.
The Company also leases approximately 575,000 square feet of office space at
Connecticut River Plaza, Hartford, Connecticut, under a 25-year lease that
expires in 2010. The Company currently subleases approximately 457,000 square
feet to third-party tenants.
The Company also owns a building in Norcross, Georgia. An affiliate's
information systems department occupies the entire building, which has
approximately 147,000 square feet of space. The Company is reimbursed by
affiliates for their use of this space on a cost allocation method based
generally on estimated usage by department.
Management believes that these facilities are suitable and adequate for the
Company's current needs.
The foregoing discussion does not include information on investment properties.
6
<PAGE> 8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
ITEM 3. LEGAL PROCEEDINGS.
This section describes the major pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Company or its
subsidiaries is a party to which any of their property is subject.
In March 1997, a purported class action entitled Patterman v. The Travelers,
Inc. was commenced in the Superior Court of Richmond County, Georgia, alleging,
among other things, violations of the Georgia RICO statute and other state laws
by an affiliate of the Company, Primerica Financial Services, Inc. and certain
of its affiliates. Plaintiffs seek unspecified compensatory and punitive damages
and other relief. In April 1997, the lawsuit was removed to the U.S. District
Court for the Southern District of Georgia, and in October 1997, the lawsuit was
remanded to the Superior Court of Richmond County. Later in October 1997, the
defendants answered the complaint, denied liability and asserted numerous
affirmative defenses. In February 1998, the Superior Court of Richmond County
transferred the lawsuit to the Superior Court of Gwinnett County, Georgia, and
certified the transfer order for immediate appellate review. Also in February
1998, plaintiffs served an application for appellate review of the transfer
order; defendants subsequently opposed that application; and later in February
1998, the Court of Appeals of the State of Georgia granted plaintiffs'
application for appellate review. Pending appeal proceedings in the trial court
have been stayed. The Travelers, Inc. intends to vigorously contest the
litigation.
The Company is also a defendant or co-defendant in various other litigation
matters in the normal course of business. Although there can be no assurances,
as of December 31, 1997, 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.
7
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THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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, 1997. 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 1997, and
$500 million in 1996. See Note 5 of Notes to Consolidated Financial Statements
for certain information regarding dividend restrictions.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction I(2)(a) of Form 10-K.
CONSOLIDATED OVERVIEW
($ in millions)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- -------------------------------- ---- ----
<S> <C> <C>
Revenues $4,173 $3,686
====== ======
Income from continuing operations $ 839 $ 633
Income from discontinued operations -- 26
------ ------
Net income $ 839 $ 659
====== ======
</TABLE>
RESULTS OF OPERATIONS
Income from continuing operations for the years ended December 31, 1997 and 1996
was $839 million and $633 million, respectively. Included in income from
continuing operations are net after-tax portfolio gains of $129 million in 1997
and $42 million in 1996. Excluding these items, income from continuing
operations for the year ended December 31, 1997 increased 20% to $710 million,
reflecting improved business volume performance at both business units and an
increase in investment income. The growth in investment income reflects
favorable earnings from risk arbitrage investments.
8
<PAGE> 10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
DISCONTINUED OPERATIONS
In January 1995, the group life and related businesses of the Company were sold
to Metropolitan Life Insurance Company (MetLife). 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. 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 $26 million.
LIFE INSURANCE SERVICES
TRAVELERS LIFE & ANNUITY
($ in millions)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- -------------------------------- ---- ----
<S> <C> <C>
Revenues $2,859 $2,418
====== ======
Net income (1) $ 548 $ 385
====== ======
</TABLE>
(1) Net income includes $121 million and $29 million of reported investment
portfolio gains in 1997 and 1996, respectively.
Travelers Life and Annuity consists of annuity, life and long-term care products
marketed by the Company and its wholly owned subsidiary Travelers Life and
Annuity Company (TLAC). 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. 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 20% to $427 million in 1997, compared
to $356 million in 1996. The improved earnings during 1997 were largely driven
by strong investment income, as well as by double-digit growth in individual and
group annuity account balances and long-term care insurance premiums. Positive
earnings momentum attributable to strong sales growth of less capital-intensive
products, including variable annuities, continues to be partially offset by a
gradual decline in the amount of high margin business written in prior years.
Improved sales through Copeland, the Financial Consultants of Salomon Smith
Barney, 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 four major rating agency
upgrades of the Company over twelve months, culminating in Duff & Phelps'
upgrade of the Company to AA (Excellent) in November 1997. Such ratings are
neither a rating of securities nor a recommendation to buy, hold or sell any
security and may be revised or withdrawn at any time.
9
<PAGE> 11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Significant deferred annuities sales, combined with favorable market returns
from variable annuities, drove account balances to $16.1 billion at year-end
1997, up 22% from $13.2 billion at year-end 1996. Net written premiums and
deposits increased 28% in 1997 to $2.55 billion, from $1.99 billion in 1996. The
strong sales reflect a fourth quarter marketing initiative at Salomon Smith
Barney, as well as Copeland's successful penetration of the small company
segment of the 401(k) market.
Payout and group annuity account balances and reserves reached $11.9 billion at
year-end 1997, up 10% from $10.9 billion at year-end 1996. The 1997
revitalization of the payout and group annuities business reflects a doubling of
sales of new payout annuities and guaranteed investment contracts. Net written
premiums and deposits (excluding those of affiliates) rose to $2.42 billion in
1997 from $1.24 billion in 1996.
Direct periodic premiums and deposits for individual life insurance of $290.4
million were marginally ahead of the $285.3 million in 1996. Life insurance
in-force was $51.6 billion at December 31, 1997, up from $50.4 billion at
year-end 1996.
Net written premiums for the growing long-term care insurance line reached
$183.8 million for 1997 compared to $127.7 million in 1996. This growth reflects
increased sales through three distribution channels, Travelers Net Plus, the
Financial Consultants of Salomon Smith Barney, and independent agencies.
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
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.
President Clinton's recent budget proposal (the "Budget Proposal") contains a
number of tax provisions that could adversely impact the Company, including
provisions relating to variable annuities. The Budget Proposal, which is in its
early stages of consideration, has not yet been introduced as part of any
legislation in Congress but has engendered considerable opposition from the
public and members of Congress.
It is not possible to predict whether the Budget Proposal discussed above will
be enacted, what form such legislation might take when enacted, or the potential
effects of such legislation on the Company and its competitors.
10
<PAGE> 12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Certain statements made throughout this Form 10-K, including certain matters
discussed under the heading "Outlook" in this Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations", and in the
penultimate paragraph before that heading, are forward-looking statements. The
matters referred to in such forward-looking statements could be affected by the
risks and uncertainties involved in the Company's business, including the effect
of economic and market conditions, the level and volatility of interest rates
and currency values, the impact of current or pending legislation and regulation
and the other risks and uncertainties detailed throughout this Form 10-K.
PRIMERICA LIFE INSURANCE
($ in millions)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- -------------------------------- ---- ----
<S> <C> <C>
Revenues $1,314 $1,268
====== ======
Net income (1) $ 291 $ 248
====== ======
</TABLE>
(1) 1997 and 1996 net income includes $8 million and $13 million, respectively,
of reported investment portfolio gains.
Earnings before portfolio gains for 1997 increased 20% to $283 million from $235
million in 1996. Results for 1997 principally reflect continued growth in life
insurance in force, as well as favorable mortality experience and disciplined
expense management.
New term life insurance sales were $52.6 billion in face amount for 1997,
compared to $52.0 billion in 1996. The number of policies issued decreased to
228,900 in 1997, compared to 247,600 in 1996, consistent with the industry-wide
downturn in new life insurance sales for these periods. Life insurance in force
at year-end 1997 reached $369.9 billion, up from $359.9 billion at year-end
1996, 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.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Consolidated Financial Statements for Future Applications
of Accounting Standards.
11
<PAGE> 13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
YEAR 2000
In 1996, the Company began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue. This issue involves the ability of computer systems that have
time-sensitive programs to properly recognize the year 2000. The inability to do
so could result in major failures or miscalculations. The Company has a
comprehensive plan in progress to address its internal year 2000 issue with
modifications to existing programs and conversions to new programs to bring all
of its critical business systems into year 2000 compliance by year-end 1998. The
total cost associated with the required modifications and conversions, which are
expensed as incurred, is not expected to have a material effect on the Company's
financial position, results of operations or liquidity. The Company also has
third party customers, financial institutions, vendors and others with which it
conducts business and has confirmed their plans to address year 2000 issues.
While the Company has been advised that these efforts by third party vendors and
customers will be successfully completed in a timely manner, it is possible that
a series of failures by third parties could have a material adverse effect on
the Company's results of operations in future years.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
12
<PAGE> 14
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report........................................... 14
Consolidated Financial Statements:
Consolidated Statements of Income and Retained Earnings for
the years ended December 31, 1997, 1996 and 1995.................... 15
Consolidated Balance Sheets - December 31, 1997 and 1996............ 16
Consolidated Statements of Cash Flows for
the years ended December 31, 1997, 1996 and 1995.................... 17
Notes to Consolidated Financial Statements.......................... 18-43
13
<PAGE> 15
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
January 26, 1998
14
<PAGE> 16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
($ IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
REVENUES
Premiums $1,583 $1,387 $1,504
Net investment income 2,037 1,950 1,884
Realized investment gains 199 65 106
Other revenues 354 284 204
- -------------------------------------------------------------------------------------------
Total Revenues $4,173 $3,686 $3,698
- -------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,341 1,187 1,206
Interest credited to contractholders 829 863 997
Amortization of deferred acquisition costs and value of
insurance in force 293 281 290
General and administrative expenses 427 380 368
- -------------------------------------------------------------------------------------------
Total Benefits and Expenses 2,890 2,711 2,861
- -------------------------------------------------------------------------------------------
Income from continuing operations before federal income taxes 1,283 975 837
- -------------------------------------------------------------------------------------------
Federal income taxes:
Current expense 434 284 233
Deferred 10 58 57
- -------------------------------------------------------------------------------------------
Total Federal Income Taxes 444 342 290
- -------------------------------------------------------------------------------------------
Income from continuing operations 839 633 547
- -------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes
Income from operations (net of taxes of $0, $0 and $18) -- -- 72
Gain on disposition (net of taxes of $0, $14 and $68) -- 26 131
- -------------------------------------------------------------------------------------------
Income from Discontinued Operations -- 26 203
- -------------------------------------------------------------------------------------------
Net income 839 659 750
Retained earnings beginning of year 2,471 2,312 1,562
Dividends to parent 500 500 --
- -------------------------------------------------------------------------------------------
Retained Earnings End of Year $2,810 $2,471 $2,312
===========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE> 17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost,
$20,682; $19,284) $21,511 $19,637
Equity securities, at fair value (cost, $480; $330) 512 338
Mortgage loans 2,869 2,920
Real estate held for sale 134 297
Trading securities, at market value 800 --
Policy loans 1,872 1,910
Short-term securities 1,102 902
Other invested assets 1,702 1,253
- ----------------------------------------------------------------------------------
Total Investments $30,502 $27,257
- ----------------------------------------------------------------------------------
Cash 58 74
Investment income accrued 338 355
Premium balances receivable 106 105
Reinsurance recoverables 4,339 3,858
Deferred acquisition costs and value of insurance in force 2,312 2,133
Separate and variable accounts 11,319 8,127
Other assets 1,052 1,064
- ----------------------------------------------------------------------------------
Total Assets $50,026 $42,973
- ----------------------------------------------------------------------------------
LIABILITIES
Contractholder funds 14,913 14,189
Future policy benefits 12,569 11,762
Policy and contract claims 378 536
Trading securities sold not yet purchased, at market value 462 --
Separate and variable accounts 11,309 8,115
Commercial paper -- 50
Deferred federal income taxes 409 57
Other liabilities 2,661 1,936
- ----------------------------------------------------------------------------------
Total Liabilities $42,701 $36,645
- ----------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized,
issued and outstanding 100 100
Additional paid-in capital 3,187 3,170
Retained earnings 2,810 2,471
Unrealized investment gains, net of taxes 1,228 587
- ----------------------------------------------------------------------------------
Total Shareholder's Equity $ 7,325 $ 6,328
- ----------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $50,026 $42,973
==================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE> 18
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 1,519 $ 1,387 $ 1,346
Net investment income received 2,059 1,910 1,855
Other revenues received 180 131 90
Benefits and claims paid (1,230) (1,060) (846)
Interest credited to contractholders (853) (820) (960)
Operating expenses paid (445) (343) (615)
Income taxes paid (368) (328) (63)
Trading account investments, (purchases) sales, net (54) -- --
Other 18 (70) (137)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 826 807 670
Net cash used in discontinued operations -- (350) (596)
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operations $ 826 $ 457 $ 74
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 2,259 1,928 1,974
Mortgage loans 663 917 680
Proceeds from sales of investments
Fixed maturities 7,592 9,101 6,773
Equity securities 341 479 379
Mortgage loans 207 178 704
Real estate held for sale 169 210 253
Purchases of investments
Fixed maturities (11,143) (11,556) (10,748)
Equity securities (483) (594) (305)
Mortgage loans (771) (470) (144)
Policy loans, net 38 (23) (325)
Short-term securities, (purchases) sales, net (2) 498 291
Other investments, (purchases) sales, net (260) (137) (267)
Securities transactions in course of settlement 311 (52) 258
Net cash provided by investing activities of discontinued operations -- 348 1,425
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (used in) Investing Activities $ (1,079) $ 827 $ 948
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of commercial paper, net (50) (23) (1)
Contractholder fund deposits 3,544 2,493 2,705
Contractholder fund withdrawals (2,757) (3,262) (3,755)
Dividends to parent company (500) (500) --
Other -- 9 --
- ----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (used in) Financing Activities $ 237 $ (1,283) $ (1,051)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ (16) $ 1 $ (29)
- ----------------------------------------------------------------------------------------------------------------------
Cash at December 31, $ 58 $ 74 $ 73
======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE> 19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the accompanying
financial statements follow.
Basis of Presentation
The Travelers Insurance Company and Subsidiaries (the Company) is a wholly
owned subsidiary of The Travelers Insurance Group Inc. (TIGI), an indirect
wholly owned subsidiary of Travelers Group Inc. (Travelers Group). 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).
- 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 Salomon Smith Barney, an affiliate of the Company, and a
nationwide network of independent agents. 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 approximately
80,000 full and part-time independent agents.
As discussed in Note 2 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). 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 was 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 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.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
18
<PAGE> 20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Accounting Changes
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In February, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (FAS 132). FAS 132
supersedes the disclosure requirements in FASB Statements No. 87, "Employers'
Accounting for Pensions," No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefits Pension Plans and Termination of Benefits,"
and No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." FAS 132 addresses disclosure only and does not address measurement
or recognition. In addition to other disclosure changes, FAS 132 allows
employers to disclose total contributions to multi-employer plans without
disaggregating the amounts attributable to pensions and other postretirement
benefits. This statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Effective December 31,
1997, the Company adopted FAS 132. The adoption of this standard did not have
any impact on results of operations, financial condition or liquidity.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (FAS 125). FAS 125
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are
based on an approach that focuses on control. Under this 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 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 Statement of
Financial Accounting Standards No. 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. Application of FAS 125 prior
to the effective date or retroactively is not permitted. The adoption of the
provisions of FAS 125 effective January 1, 1997 did not have a material
impact on results of operations, financial condition or liquidity. The
adoption of the provisions of FAS 127 effective January, 1998 are
not expected to have a material impact on the results of operations,
financial condition or liquidity.
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 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 financial
condition, results of operations or liquidity.
19
<PAGE> 21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans as well as transactions in which an entity issues
its equity instruments to acquire goods or services from non-employees. This
statement defines a fair value-based method of accounting for employee stock
options or similar equity instruments, and encourages all entities to adopt
this method of accounting for all employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Entities electing to remain with the accounting method
prescribed in APB 25 must make pro-forma disclosures of net income and
earnings per share, as if the fair value-based method of accounting defined
by FAS 123 had been applied. FAS 123 is applicable to fiscal years beginning
after December 15, 1995. The Company has elected to continue to account for
its stock-based employee compensation plans using the accounting method
prescribed by APB 25 and has included in the notes to consolidated financial
statements the pro-forma disclosures required by FAS 123. See Note 9. The
Company has adopted FAS 123 for its stock-based non-employee compensation
plans.
Accounting Policies
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks. Fair
values of investments in fixed maturities are based on quoted market prices
or dealer quotes or, if these are not available, discounted expected cash
flows using market rates commensurate with the credit quality and maturity of
the investment. Also included in fixed maturities are loan-backed and
structured securities, which are amortized using the retrospective method.
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, 1997 and 1996.
Real estate held for sale is carried at the lower of cost or fair value less
estimated cost to sell. Fair value of foreclosed properties is established at
the time of foreclosure by internal analysis or external appraisers, using
discounted cash flow analyses and other accepted 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, 1997 and 1996.
20
<PAGE> 22
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Trading securities are carried at market value. Realized and unrealized gains
and losses on trading securities are included in investment income.
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.
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, 1997 and 1996. Information concerning derivative
financial instruments is included in Note 6.
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 long-term care
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 long-term care insurance, 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 long-term care business, a
10- to 20-year period is used, 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.
21
<PAGE> 23
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 that 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 9.45%.
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.
22
<PAGE> 24
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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 December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund and
other insurance-related assessments, how to measure that liability, and when
an asset may be recognized for the recovery of such assessments through
premium tax offsets or policy surcharges. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998, and the effect
of initial adoption is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not allowed. The
Company has not yet determined when it will implement this SOP and does not
anticipate any material impact on the Company's financial condition, results
of operations or liquidity.
23
<PAGE> 25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. All items
that are required to be recognized under accounting standards as components
of comprehensive income are to be reported in a financial statement that is
displayed with the same prominence as other financial statements. FAS 130
stipulates that comprehensive income reflect the change in equity of an
enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income will thus
represent the sum of net income and other comprehensive income, although FAS
130 does not require the use of the terms comprehensive income or other
comprehensive income. The accumulated balance of other comprehensive income
shall be displayed separately from retained earnings and additional paid-in
capital in the statement of financial position. FAS 130 is effective for
fiscal years beginning after December 15, 1997. The Company anticipates that
the adoption of FAS 130 will result primarily in reporting unrealized gains
and losses on investments in debt and equity securities in comprehensive
income.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (FAS 131). FAS 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that selected information about those operating
segments be reported in interim financial statements. FAS 131 supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise" (FAS 14). FAS 131 requires that all
public enterprises report financial and descriptive information about its
reportable operating segments. Operating segments are defined as components
of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. FAS 131 is effective for
fiscal years beginning after December 15, 1997. The Company is currently
determining the impact of the adoption of FAS 131.
2. DISPOSITIONS AND DISCONTINUED OPERATIONS
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.
24
<PAGE> 26
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, an after-tax
gain of $111 million was recognized. 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.
All of the businesses sold to MetLife or contributed to MetraHealth were
included in the Company's Managed Care and Employee Benefit Operations
(MCEBO) segment prior to 1995. 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 were insignificant for the year ended
December 31, 1996 and $1.2 billion for the year ended December 31, 1995.
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.
3. COMMERCIAL PAPER AND LINES OF CREDIT
The Company issues commercial paper directly to investors. No commercial
paper was outstanding at December 31, 1997 and $50 million was 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 1997 or 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 that
expires in 2001. At December 31, 1997, $50 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, 1997, the
Company was in compliance with these provisions. There were no amounts
outstanding under this agreement at December 31, 1997 and 1996. If the
Company had borrowings on this facility, the interest rate would be based
upon LIBOR plus a negotiated margin.
25
<PAGE> 27
\ THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. 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. During 1997, new universal life business was
reinsured under an 80%/20% quota share reinsurance program and new term life
business was reinsured under a 90%/10% quota share reinsurance program.
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 limits vary with age and underwriting
classification. Generally, the maximum retention on an ordinary life risk is
$1.5 million.
The Company writes workers' compensation business through its Accident
Department. This business is ceded 100% to an affiliate, The Travelers
Indemnity Company.
A summary of reinsurance financial data reflected within the consolidated
statement of operations and retained earnings is presented below ($ in
millions):
<TABLE>
<CAPTION>
---------------------------------------------------------------------
WRITTEN PREMIUMS 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Direct $2,148 $1,982 $2,166
Assumed from:
Non-affiliated companies 1 5 --
Ceded to:
Affiliated companies (280) (284) (374)
Non-affiliated companies (273) (309) (302)
---------------------------------------------------------------------
Total Net Written Premiums $1,596 $1,394 $1,490
=====================================================================
<CAPTION>
---------------------------------------------------------------------
EARNED PREMIUMS 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Direct $2,170 $1,897 $2,067
Assumed from:
Non-affiliated companies 1 5 --
Ceded to:
Affiliated companies (321) (219) (283)
Non-affiliated companies (291) (315) (298)
---------------------------------------------------------------------
Total Net Earned Premiums $1,559 $1,368 $1,486
=====================================================================
</TABLE>
26
<PAGE> 28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reinsurance recoverables at December 31, 1997 and 1996 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------
REINSURANCE RECOVERABLES 1997 1996
----------------------------------------------------------
<S> <C> <C>
Life and Accident and Health
Business:
Non-affiliated companies $1,362 $1,497
Property-Casualty Business:
Affiliated companies 2,977 2,361
----------------------------------------------------------
Total Reinsurance Recoverables $4,339 $3,858
==========================================================
</TABLE>
Total reinsurance recoverables at December 31, 1997 and 1996 include $697
million and $720 million, respectively, from MetLife in connection with the
sale of the Company's group life and related businesses. See Note 2.
5. SHAREHOLDER'S EQUITY
Additional Paid-In Capital
The increase of $17 million in additional paid-in capital during 1997 is due
to tax benefits related to exercising Travelers Group stock options by the
Company's employees.
Unrealized Investment Gains (Losses)
An analysis of the change in unrealized gains and losses on investments is
shown in Note 13.
Shareholder's Equity and Dividend Availability
The Company's statutory net income, which includes all insurance
subsidiaries, was $754 million, $656 million, and $235 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company's statutory capital and surplus was $4.12 billion and $3.44
billion at December 31, 1997 and 1996, 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 $551 million is available in 1998 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, 1997 and 1996.
27
<PAGE> 29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. 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 to 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, 1997 and 1996, the Company held financial futures contracts
with notional amounts of $625 million and $169 million, respectively, and a
deferred gain of $.7 million and a deferred loss of $4.1 million and a
deferred gain of $1.2 million, and a deferred loss of $.1 million,
respectively. Total losses of $5.8 million and gains of $2.0 million from
financial futures were deferred at December 31, 1997 and 1996, respectively,
relating to anticipated investment purchases and investment product sales,
and are reported as other liabilities. At December 31, 1997 and 1996, the
Company's futures contracts had no fair value because these contracts were
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, 1997 and 1996.
28
<PAGE> 30
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 $0 and $1 million
at December 31, 1997 and 1996, respectively.
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, 1997 and 1996.
Fair Value of Certain Financial Instruments
The Company uses various financial instruments in the normal course of its
business. Fair values of financial instruments that are considered insurance
contracts are not required to be disclosed and are not included in the
amounts discussed.
At December 31, 1997 and 1996, investments in fixed maturities had a carrying
value and a fair value of $21.5 billion and $19.6 billion, respectively. See
Notes 1 and 13.
At December 31, 1997 and 1996, mortgage loans had a carrying value of $2.9
billion, which approximated fair value. 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 $143 million and $174 million of financial instruments
classified as other assets approximated their fair values at December 31,
1997 and 1996, respectively. The carrying values of $2.0 billion and $850
million of financial instruments classified as other liabilities also
approximated their fair values at December 31, 1997 and 1996, respectively.
Fair value is determined using various methods, including discounted cash
flows, as appropriate for the various financial instruments.
At December 31, 1997, contractholder funds with defined maturities had a
carrying value of $2.3 billion and a fair value of $2.3 billion, compared
with a carrying value of $1.4 billion and a fair value of $1.5 billion at
December 31, 1996. 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 $9.7 billion and a
fair value of $9.5 billion at December 31, 1997, compared with a carrying
value of $9.1 billion and a fair value of $8.8 billion at December 31, 1996.
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 $260 million and $260 million, respectively, at
December 31, 1997, compared with a carrying value and a fair value of $217
million and $217 million, respectively, at December 31, 1996. The liabilities
of separate accounts providing a guaranteed return had a carrying value and a
fair value of $209 million and $206 million, respectively, at December 31,
1997, compared with a carrying value and a fair value of $208 million and
$204 million, respectively, at December 31, 1996.
29
<PAGE> 31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The carrying values of cash, short-term securities, trading securities,
investment income accrued, trading securities sold not purchased, and
commercial paper approximated their fair values.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
7. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
See Note 6 for a discussion of financial instruments with off-balance sheet
risk.
Litigation
In March 1997, a purported class action entitled Patterman v. The Travelers,
Inc. was commenced in the Superior Court of Richmond County, Georgia,
alleging, among other things, violations of the Georgia RICO statute and
other state laws by an affiliate of the Company, Primerica Financial
Services, Inc. and certain of its affiliates. Plaintiffs seek unspecified
compensatory and punitive damages and other relief. In April 1997, the
lawsuit was removed to the U.S. District Court for the Southern District of
Georgia, and in October 1997, the lawsuit was remanded to the Superior Court
of Richmond County. Later in October 1997, the defendants answered the
complaint, denied liability and asserted numerous affirmative defenses. In
February 1998, the Superior Court of Richmond County transferred the lawsuit
to the Superior Court of Gwinnett County, Georgia, and certified the transfer
order for immediate appellate review. Also in February 1998, plaintiffs
served an application for appellate review of the transfer order; defendants
subsequently opposed that application; and later in February 1998, the Court
of Appeals of the State of Georgia granted plaintiffs' application for
appellate review. Pending appeal proceedings in the trial court have been
stayed. The Company intends to vigorously contest the litigation.
The Company is also a defendant or co-defendant in various other litigation
matters in the normal course of business. Although there can be no
assurances, as of December 31, 1997, 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.
8. BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by an affiliate. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by an affiliate. The Company's share of net expense for the
qualified pension and other postretirement benefit plans was not significant
for 1997, 1996 and 1995. Beginning January 1, 1996, the Company's other
postretirement benefit plans were amended to restrict benefit eligibility to
retirees and certain retiree-eligible employees. Previously, covered
employees could become eligible for postretirement benefits if they reached
retirement age while working for the Company.
30
<PAGE> 32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 1997, 1996 and 1995.
401(k) Savings Plan
Substantially all of the Company's employees are eligible to participate in a
401(k) savings plan sponsored by Travelers Group. Prior to January 1, 1996,
the Company made matching contributions to the 401(k) savings plan on behalf
of participants in the amount of 50% of the first 5% of pre-tax contributions
made by the employee, plus an additional variable matching contribution based
on the profitability of TIGI and its subsidiaries. During 1996, the Company
made matching contributions in an amount equal to the lesser of 100% of the
pre-tax contributions made by the employee or $1,000. Effective January 1,
1997, the Company discontinued matching contributions for the majority of its
employees. The Company's expenses in connection with the 401(k) savings plan
were not significant in 1997, 1996 and 1995.
9. RELATED PARTY TRANSACTIONS
The principal banking functions, including payment of salaries and expenses,
for certain subsidiaries and affiliates of TIGI are handled by two companies.
The Travelers Insurance Company (Life Department) handles banking functions
for the life and annuity operations of Travelers Life and Annuity and some of
its non-insurance affiliates. The Travelers Indemnity Company handles banking
functions for the property-casualty operations, including most of its
property-casualty insurance and non-insurance affiliates. Settlements between
companies are made at least monthly. 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.
The Company maintains a short-term investment pool in which its insurance
affiliates participate. The position of each company participating in the
pool is calculated and adjusted daily. At December 31, 1997 and 1996, the
pool totaled approximately $2.6 billion and $2.9 billion, respectively. The
Company's share of the pool amounted to $725 million and $196 million at
December 31, 1997 and 1996, respectively, and is included in short-term
securities in the consolidated balance sheet.
The Company sells structured settlement annuities to The Travelers Indemnity
Company in connection with the settlement of certain policyholder
obligations. Such deposits were $88 million, $40 million, and $38 million for
1997, 1996 and 1995, respectively.
The Company markets deferred annuity products and life and health insurance
through its affiliate, Salomon Smith Barney. Premiums and deposits related to
these products were $1.0 billion, $820 million, and $583 million in 1997,
1996 and 1995, respectively.
At December 31, 1996, the Company had an investment of $22 million in bonds
of its affiliate, CCC. This was included in fixed maturities in the
consolidated balance sheet.
31
<PAGE> 33
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company had an investment of $1.15 billion and $648 million in common
stock of Travelers Group at December 31, 1997 and 1996, respectively. This
investment is carried at fair value.
The Company participates in a stock option plan sponsored by Travelers Group
that provides for the granting of stock options in Travelers Group common
stock to officers and key employees. To further encourage employee stock
ownership, during 1997 Travelers Group introduced the WealthBuilder stock
option program. Under this program all employees meeting certain requirements
have been granted Travelers Group stock options.
The Company applies APB 25 and related interpretations in accounting for
stock options. Since stock options under the Travelers Group plans are issued
at fair market value on the date of award, no compensation cost has been
recognized for these awards. FAS 123 provides an alternative to APB 25
whereby fair values may be ascribed to options using a valuation model and
amortized to compensation cost over the vesting period of the options.
Had the Company applied FAS 123 in accounting for Travelers Group stock
options, net income would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
YEAR ENDING DECEMBER 31, 1997 1996 1995
($ IN MILLIONS)
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $839 $659 $750
-----------------------------------------------------------------------
FAS 123 pro forma adjustments, (9) (3) (1)
after tax
-----------------------------------------------------------------------
Net income, pro forma $830 $656 $749
</TABLE>
The Company has an interest rate cap agreement with Travelers Group. See Note
6.
10. 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 $15 million, $24
million, and $22 million in 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
--------------------------------------------------
YEAR ENDING DECEMBER 31, MINIMUM OPERATING
($ in millions) RENTAL PAYMENTS
--------------------------------------------------
<S> <C>
1998 $ 49
1999 44
2000 43
2001 45
2002 43
Thereafter 337
--------------------------------------------------
Total Rental Payments $561
==================================================
</TABLE>
32
<PAGE> 34
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Future sublease rental income of approximately $73 million will partially
offset these commitments. Also, the Company will be reimbursed for 50% of the
rental expense for a particular lease totaling $218 million, by an affiliate.
Minimum future capital lease payments are not significant.
The Company is reimbursed for use of furniture and equipment through cost
sharing agreements by its affiliates.
11. FEDERAL INCOME TAXES
<TABLE>
<CAPTION>
EFFECTIVE TAX RATE
---------------------------------------------------------------------
For The Year Ended December 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
Income Before Federal Income Taxes $1,283 $ 975 $ 837
Statutory Tax Rate 35% 35% 35%
---------------------------------------------------------------------
Expected Federal Income Taxes 449 341 293
Tax Effect of:
Non-taxable investment income (4) (3) (4)
Other, net (1) 4 1
=====================================================================
Federal Income Taxes $ 444 $ 342 $ 290
=====================================================================
Effective Tax Rate 35% 35% 35%
---------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 410 $ 263 $ 220
Foreign 24 21 13
---------------------------------------------------------------------
Total 434 284 233
---------------------------------------------------------------------
Deferred:
United States 10 57 52
Foreign -- 1 5
---------------------------------------------------------------------
Total 10 58 57
---------------------------------------------------------------------
Federal Income Taxes $ 444 $ 342 $ 290
=====================================================================
</TABLE>
Tax benefits allocated directly to shareholder's equity for the years ended
December 31, 1997, 1996 and 1995 were $17 million, $8 million and $7 million,
respectively.
33
<PAGE> 35
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 1997 and 1996 were comprised
of the tax effects of temporary differences related to the following assets
and liabilities:
<TABLE>
<CAPTION>
($ in millions) 1997 1996
------- -------
<S> <C> <C>
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 550 $ 510
Contractholder funds 11 32
Operating lease reserves 68 71
Other employee benefits 102 104
Other 139 121
- -----------------------------------------------------------------------------------
Total 870 838
- -----------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of 608 571
insurance in force
Investments, net 484 131
Other 87 93
- -----------------------------------------------------------------------------------
Total 1,179 795
- -----------------------------------------------------------------------------------
Net Deferred Tax (Liability) Asset Before Valuation Allowance (309) 43
Valuation Allowance for Deferred Tax Assets (100) (100)
- -----------------------------------------------------------------------------------
Net Deferred Tax Liability After Valuation Allowance $ (409) $ (57)
- -----------------------------------------------------------------------------------
</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
group 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.
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 if
life/non-life consolidation is elected in 1999, 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 1997.
The initial recognition of any benefit produced by the reversal of the
valuation allowance will be recognized by reducing goodwill.
At December 31, 1997, the Company had 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
$326 million.
34
<PAGE> 36
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
GROSS INVESTMENT INCOME
Fixed maturities $1,460 $1,387 $1,248
Mortgage loans 291 334 419
Policy loans 137 156 166
Real estate held for sale 88 94 111
Other, including trading 150 77 97
securities
---------------------------------------------------------------------
2,126 2,048 2,041
---------------------------------------------------------------------
Investment expenses 89 98 157
---------------------------------------------------------------------
Net investment income $2,037 $1,950 $1,884
---------------------------------------------------------------------
</TABLE>
13. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
---------------------------------------------------------------------
<S> <C> <C> <C>
REALIZED INVESTMENT GAINS
Fixed maturities $71 $(63) $(43)
Equity securities (9) 47 36
Mortgage loans 59 49 47
Real estate held for sale 67 33 18
Other 11 (1) 48
---------------------------------------------------------------------
Total Realized Investment Gains $199 $65 $106
---------------------------------------------------------------------
</TABLE>
35
<PAGE> 37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Changes in net unrealized investment gains (losses) that are included as a
separate component of shareholder's equity were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
-------------------------------------------------------------------------
<S> <C> <C> <C>
UNREALIZED INVESTMENT GAINS
Fixed maturities $ 446 $ (323) $1,974
Equity securities 25 (35) 46
Other 520 220 200
-------------------------------------------------------------------------
Total Realized Investment Gains 991 (138) 2,220
-------------------------------------------------------------------------
Related taxes 350 (43) 778
-------------------------------------------------------------------------
Change in unrealized investment gains
(losses) 641 (95) 1,442
Balance beginning of year 587 682 (760)
-------------------------------------------------------------------------
Balance End of Year $1,228 $ 587 $ 682
-------------------------------------------------------------------------
</TABLE>
Included in Other are gains of $506 million, $203 million and $214 million
for 1997, 1996 and 1995, respectively, related to appreciation of Travelers
Group stock.
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale were
$7.6 billion, $10.2 billion and $6.8 billion in 1997, 1996 and 1995,
respectively. Gross gains of $170 million, $107 million and $80 million and
gross losses of $99 million, $175 million and $124 million in 1997, 1996 and
1995, respectively, were realized on those sales.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted expected
cash flows using market rates commensurate with the credit quality and
maturity of the investment. The fair value of investments for which a quoted
market price or dealer quote are not available amounted to $5.1 billion and
$4.6 billion at December 31, 1997 and 1996, respectively.
36
<PAGE> 38
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of investments in fixed maturities were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
DECEMBER 31, 1997 GROSS GROSS
($ in millions) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 3,842 $ 124 $ 2 $ 3,964
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,580 149 1 1,728
Obligations of states, municipalities
and political subdivisions 78 8 -- 86
Debt securities issued by
foreign governments 622 31 4 649
All other corporate bonds 14,548 547 24 15,071
Redeemable preferred stock 12 1 -- 13
- ---------------------------------------------------------------------------------------
Total Available For Sale $20,682 860 31 $21,511
- ---------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1996 GROSS GROSS
($ in millions) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 3,821 $ 71 $ 23 $ 3,869
U.S. Treasury securities and obligations
of U.S. Government and government
agencies and authorities 1,329 56 4 1,381
Obligations of states, municipalities and
political subdivisions 89 1 1 89
Debt securities issued by foreign
governments 618 26 3 641
All other corporate bonds 13,421 273 43 13,651
Redeemable preferred stock 6 -- -- 6
- ----------------------------------------------------------------------------------------
Total Available For Sale $19,284 $ 427 $ 74 $19,637
- ----------------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 39
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1997,
by contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
----------------------------------------------------------
($ in millions) AMORTIZED FAIR
COST VALUE
----------------------------------------------------------
<S> <C> <C>
MATURITY:
Due in one year or less $ 1,184 $ 1,191
Due after 1 year through 5 years 5,200 5,335
Due after 5 years through 10 years 5,332 5,515
Due after 10 years 5,124 5,506
---------------------------------------------------------
16,840 17,547
---------------------------------------------------------
Mortgage-backed securities 3,842 3,964
---------------------------------------------------------
Total Maturity $20,682 $21,511
---------------------------------------------------------
</TABLE>
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, 1997 and 1996, the Company held CMOs classified as available
for sale with a fair value of $2.1 billion and $2.0 billion, respectively.
Approximately 72% and 88%, respectively, of the Company's CMO holdings are
fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 1997
and 1996. In addition, the Company held $1.9 billion and $1.9 billion of
GNMA, FNMA or FHLMC mortgage-backed pass-through securities at December 31,
1997 and 1996, respectively. Virtually all of these securities are rated AAA.
38
<PAGE> 40
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Equity Securities
The cost and fair values of investments in equity securities were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
EQUITY SECURITIES:
GROSS GROSS
($ in millions) UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Common stocks $179 $ 34 $ 11 $202
Non-redeemable preferred stocks 301 13 4 310
-----------------------------------------------------------------------------
Total Equity Securities $480 $ 47 $ 15 $512
-----------------------------------------------------------------------------
DECEMBER 31, 1996
Common stocks $212 $ 39 $ 30 $221
Non-redeemable preferred stocks 118 2 3 117
-----------------------------------------------------------------------------
Total Equity Securities $330 $ 41 $ 33 $338
-----------------------------------------------------------------------------
</TABLE>
Proceeds from sales of equity securities were $341 million, $487 million and
$379 million in 1997, 1996 and 1995, respectively. Gross gains of $53
million, $64 million and $27 million and gross losses of $62 million, $11
million and $2 million in 1997, 1996 and 1995, respectively, were realized on
those sales.
Mortgage Loans and Real Estate Held For Sale
Underperforming assets include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest rates
below market.
At December 31, 1997 and 1996, the Company's mortgage loan and real estate
held for sale portfolios consisted of the following ($ in millions):
<TABLE>
<CAPTION>
----------------------------------------------------------
1997 1996
----------------------------------------------------------
<S> <C> <C>
Current Mortgage Loans $2,866 $2,869
Underperforming Mortgage Loans 3 51
----------------------------------------------------------
Total 2,869 2,920
----------------------------------------------------------
Real Estate Held For Sale 134 297
----------------------------------------------------------
Total $3,003 $3,217
----------------------------------------------------------
</TABLE>
39
<PAGE> 41
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------
YEAR ENDING DECEMBER 31,
($ in millions)
------------------------------------------------
<S> <C>
Past Maturity $ 54
1998 243
1999 252
2000 321
2001 393
2002 121
Thereafter 1,485
------------------------------------------------
Total $2,869
================================================
</TABLE>
Joint Venture
In October 1997, the Company and Tishman Speyer Properties (Tishman), a
worldwide real estate owner, developer and manager, formed a joint real
estate venture with an initial equity commitment of $792 million. The Company
and certain of its affiliates committed $420 million in real estate equity
and $100 million in cash while Tishman committed $272 million in properties
and cash. Both companies are serving as asset managers for the venture and
Tishman is primarily responsible for the venture's real estate acquisition
and development efforts.
Trading Securities
Trading securities are held in a special purpose subsidiary, Tribeca
Investments LLC.
<TABLE>
<CAPTION>
-----------------------------------------------------
TRADING SECURITIES OWNED 1997
<S> <C>
Merger arbitrage $352
Convertible bond arbitrage 370
Other 78
-----------------------------------------------------
Total $800
-----------------------------------------------------
TRADING SECURITIES SOLD NOT YET PURCHASED
Merger arbitrage $213
Convertible bond arbitrage 249
-----------------------------------------------------
Total $462
-----------------------------------------------------
</TABLE>
The Company's trading portfolio investments and related liabilities are
normally held for periods less than six months. Therefore, expected future
cash flows for these assets and liabilities are expected to be realized in
less than one year.
40
<PAGE> 42
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Concentrations
At December 31, 1997 and 1996, 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 9.
Included in fixed maturities are below investment grade assets totaling $1.4
billion and $1.1 billion at December 31, 1997 and 1996, respectively. The
Company defines its below investment grade assets as those securities rated
"Ba1" or below by external rating agencies, or the equivalent by internal
analysts when a public rating does not exist. Such assets include publicly
traded below investment grade bonds and certain other privately issued bonds
that are classified as below investment grade loans.
The Company had concentrations of investments, primarily fixed maturities, in
the following industries:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
Banking $2,215 $1,959
Finance 1,556 1,823
Electric Utilities 1,377 1,093
Asset-Backed Credit Cards 778 688
-------------------------------------------------
</TABLE>
Below investment grade assets included in the preceding table were not
significant.
At December 31, 1997 and 1996, concentrations of mortgage loans were for
properties located in highly populated areas in the states listed below:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
California $794 $643
New York 310 297
-------------------------------------------------
</TABLE>
Other mortgage loan investments are relatively evenly dispersed throughout
the United States, with no holdings in any state exceeding $284 million and
$258 million at December 31, 1997 and 1996, respectively.
Concentrations of mortgage loans by property type at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------
($ in millions) 1997 1996
-------------------------------------------------
<S> <C> <C>
Office $1,382 $1,208
Agricultural 771 693
Apartment 204 291
Hotel 201 217
-------------------------------------------------
</TABLE>
41
<PAGE> 43
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 insignificant.
Restructured Investments
The Company had mortgage loans and debt securities that were restructured at
below market terms totaling approximately $7 million and $18 million at
December 31, 1997 and 1996, 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 $.9 million in 1997 and $5 million in 1996. Interest
on these assets, included in net investment income, aggregated $.2 million
and $2 million in 1997 and 1996, respectively.
14. DEPOSIT FUNDS AND RESERVES
At December 31, 1997, the Company had $24.0 billion of life and annuity
deposit funds and reserves. Of that total, $13.0 billion is not subject to
discretionary withdrawal based on contract terms. The remaining $11.0 billion
is for life and annuity products that are subject to discretionary withdrawal
by the contractholder. Included in the amount that is subject to
discretionary withdrawal is $2.0 billion of liabilities that are
surrenderable with market value adjustments. Also included are an additional
$5.2 billion of the life insurance and individual annuity liabilities which
are subject to discretionary withdrawals, and have an average surrender
charge of 4.8%. In the payout phase, these funds are credited at
significantly reduced interest rates. The remaining $3.8 billion of
liabilities are surrenderable without charge. More than 16.8% of these relate
to individual life products. These risks would have to be underwritten again
if transferred to another carrier, which is considered a significant
deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding
policy loans and related accrued interest prior to payout.
42
<PAGE> 44
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995
($ in millions)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income From Continuing Operations $ 839 $ 633 $ 547
Adjustments to reconcile net income to
net cash provided by operating activities:
Realized gains (199) (65) (106)
Deferred federal income taxes 10 58 57
Amortization of deferred policy
acquisition costs and value of
insurance in force 293 281 290
Additions to deferred policy
acquisition costs (471) (350) (454)
Investment income accrued 14 2 (9)
Premium balances receivable 3 (6) (8)
Insurance reserves and accrued expenses 131 (1) 291
Other 206 255 62
- --------------------------------------------------------------------------------
Net cash provided by operating activities 826 807 670
Net cash used in discontinued operations -- (350) (596)
Net cash provided by operations $ 826 $ 457 $ 74
- --------------------------------------------------------------------------------
</TABLE>
16. NON-CASH INVESTING AND FINANCING ACTIVITIES
Significant noncash investing and financing activities include: a) the
conversion of $119 million of real estate held for sale to other invested
assets as a joint venture in 1997; b) 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 2); c) the
1995 return of capital of Transport to TIGI (see Note 2); d) the acquisition
of real estate through foreclosures of mortgage loans amounting to $10
million, $117 million and $97 million in 1997, 1996 and 1995, respectively;
e) the acceptance of purchase money mortgages for sales of real estate
aggregating $4 million, $23 million and $27 million in 1997, 1996 and 1995,
respectively.
43
<PAGE> 45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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.
44
<PAGE> 46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed:
(1) Financial Statements. See index on page 15 of this report.
(2) Financial Statement Schedules. See index on page 51 of this report.
(3) Exhibits. See Exhibit Index on page 46.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1997.
45
<PAGE> 47
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION FILING METHOD
- ----------- ----------- -------------
<S> <C> <C>
3. Articles of Incorporation and By-Laws
a.) Charter of The Travelers Insurance Company (the "Company"), as
effective October 19, 1994, incorporated by reference to
Exhibit 3.01 to the Company's Quarterly Report on Form 10-Q for
the 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>
46
<PAGE> 48
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 24th day of March,
1998.
THE TRAVELERS INSURANCE COMPANY
(Registrant)
By: /s/ Ian R. Stuart
-----------------
Ian R. Stuart
Senior Vice President
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 24th day of March, 1998.
SIGNATURE CAPACITY
- --------- --------
/s/ Michael A. Carpenter Director, Chairman of the Board and Chief Executive
- ------------------------ Officer (Principal Executive Officer)
(Michael A. Carpenter)
/s/ Ian R. Stuart Director and Chief Financial Officer
- ----------------- (Principal Financial Officer and Principal
(Ian R. Stuart) Accounting Officer)
/s/ Katherine M. Sullivan Director
- -------------------------
(Katherine M. Sullivan)
/s/ Marc P. Weill Director
- -----------------
(Marc P. Weill)
/s/ Robert I. Lipp Director
- ------------------
(Robert I. Lipp)
/s/ Jay S. Benet Director
- ----------------
(Jay S. Benet)
/s/ George C. Kokulis Director
- ---------------------
(George C. Kokulis)
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.
47
<PAGE> 49
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
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' Report 49
Schedule I - Summary of Investments - Other than Investments in Related Parties 1997 50
Schedule III - Supplementary Insurance Information 1995-1997 51
Schedule IV - Reinsurance 1995-1997 52
</TABLE>
All other schedules are inapplicable for this filing.
* See index on page 13
48
<PAGE> 50
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company and Subsidiaries:
Under date of January 26, 1998, we reported on the consolidated balance sheets
of The Travelers Insurance Company and Subsidiaries as of December 31, 1997 and
1996, 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,
1997, 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 26, 1998
49
<PAGE> 51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
($ in millions)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
TYPE OF INVESTMENT AMOUNT SHOWN IN
COST VALUE BALANCE SHEET(1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
U.S. Government and government
agencies and authorities $ 4,543 $ 4,797 $ 4,797
States, municipalities and political
subdivisions 78 86 86
Foreign governments 622 649 649
Public utilities 1,818 1,878 1,878
Convertible bonds and bonds with
warrants attached 141 155 155
All other corporate bonds(2) 13,450 13,854 13,854
- -----------------------------------------------------------------------------------
Total Bonds 20,652 21,419 21,419
Redeemable preferred stocks 12 13 13
- -----------------------------------------------------------------------------------
Total Fixed Maturities 20,664 21,432 21,432
- -----------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Banks, trust and insurance companies 55 70 70
Industrial, miscellaneous and all other 124 132 132
- -----------------------------------------------------------------------------------
Total Common Stocks 179 202 202
Nonredeemable preferred stocks 301 310 310
- -----------------------------------------------------------------------------------
Total equity securities 480 512 512
Mortgage Loans 2,869 2,869
Real Estate Held For Sale 134 134
Policy Loans 1,872 1,872
Short-Term Securities 1,102 1,102
Other Investments(3)(4) 1,350 1,348
- -----------------------------------------------------------------------------------
Total Investments $28,471 $29,269
===================================================================================
</TABLE>
(1) Determined in accordance with methods described in Notes 1 and 13 of the
Notes to the Consolidated Financial Statements.
(2) Excludes $18 million cost and $79 million fair value of Berkshire Hathaway,
Inc., 1.00% Senior Exchangeable Notes Due December 2, 2001 of bonds and
investment in Greenwich Street Capital Partners.
(3) Includes equity of $250 million in real estate joint ventures.
(4) Excludes $87 million cost and $1,154 million fair value of Travelers Group
Inc. common stock. See Note 9 of Notes to the Consolidated Financial
Statements.
(See Accompanying Independent Auditors' Report)
50
<PAGE> 52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
($ in millions)
<TABLE>
<CAPTION>
DEFERRED POLICY FUTURE POLICY AMORTIZATION OF
ACQUISITION COSTS BENEFITS, OTHER POLICY DEFERRED POLICY
AND VALUE OF LOSSES, CLAIMS CLAIMS AND NET BENEFITS, ACQUISITION COSTS
INSURANCE IN AND LOSS BENEFITS PREMIUM INVESTMENT CLAIMS AND AND VALUE OF
LIFE INSURANCE SERVICES FORCE EXPENSES(1) PAYABLE REVENUE INCOME LOSSES(2) INSURANCE IN FORCE
- -----------------------------------------------------------------------------------------------------------------------------------
1997
----
<S> <C> <C> <C> <C> <C> <C> <C>
Travelers Life & Annuity $ 783 $24,976 $ 232 $ 545 $ 1,836 $ 1,672 $ 96
Primerica Life 1,529 2,506 146 1,038 201 498 197
- -----------------------------------------------------------------------------------------------------------------------------------
Total Continuing Operations $ 2,312 $27,482 $ 378 $ 1,583 $ 2,037 $ 2,170 $ 293
===================================================================================================================================
<CAPTION>
1996
----
<S> <C> <C> <C> <C> <C> <C> <C>
Travelers Life & Annuity $ 644 $22,646 $ 387 $ 357 $ 1,775 $ 1,521 $ 83
Primerica Life 1,489 2,377 133 1,030 175 529 198
- -----------------------------------------------------------------------------------------------------------------------------------
Total Continuing Operations $ 2,133 $25,023 $ 520 $ 1,387 $ 1,950 $ 2,050 $ 281
===================================================================================================================================
Discontinued Operations -- 928 16
- -------------------------------------------------------------------------
Consolidated $ 2,133 $25,951 $ 536
=========================================================================
<CAPTION>
1995
----
<S> <C> <C> <C> <C> <C> <C> <C>
Travelers Life & Annuity $ 538 $23,591 $ 373 $ 489 $ 1,723 $ 1,673 $ 89
Primerica Life 1,424 2,201 123 1,015 161 530 201
- -----------------------------------------------------------------------------------------------------------------------------------
Total Continuing Operations $ 1,962 $25,792 $ 496 $ 1,504 $ 1,884 $ 2,203 $ 290
===================================================================================================================================
Discontinued Operations -- 1,323 75
- -------------------------------------------------------------------------
Consolidated $ 1,962 $27,115 $ 571
=========================================================================
<CAPTION>
OTHER
OPERATING PREMIUMS
LIFE INSURANCE SERVICES EXPENSES WRITTEN
- ------------------------------------------------
1997
----
<S> <C> <C>
Travelers Life & Annuity $ 257 $ 545
Primerica Life 170 1,051
- ------------------------------------------------
Total Continuing Operations $ 427 $ 1,596
================================================
<CAPTION>
1996
----
<S> <C> <C>
Travelers Life & Annuity $ 224 $ 349
Primerica Life 156 1,045
- ------------------------------------------------
Total Continuing Operations $ 380 $ 1,394
================================================
Discontinued Operations
- ---------------------------
Consolidated
===========================
<CAPTION>
1995
----
<S> <C> <C>
Travelers Life & Annuity $ 218 $ 475
Primerica Life 150 1,015
- ------------------------------------------------
Total Continuing Operations $ 368 $ 1,490
================================================
Discontinued Operations
- ---------------------------
Consolidated
===========================
</TABLE>
(1) Includes contractholder funds.
(2) Includes interest credited to contractholders.
(See accompanying Independent Auditors' Report)
51
<PAGE> 53
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
SCHEDULE IV
REINSURANCE
($ in millions)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
CEDED TO ASSUMED PERCENTAGE
GROSS OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
- ------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C> <C>
Life Insurance In Force $421,513 $175,762 $ 72 $245,823 1.0%
Premiums:
Life insurance $ 1,629 $ 278 $ -- $ 1,351 --
Accident and health insurance 250 18 -- 232 --
Property casualty 305 305 -- -- --
-------- -------- -------- -------- --------
Total Premiums $ 2,184 $ 601 $ -- $ 1,583 --
======== ======== ======== ======== ========
<CAPTION>
1996
<S> <C> <C> <C> <C> <C>
Life Insurance In Force $418,041 $160,447 $ 79 $257,673 1.0%
Premiums:
Life insurance $ 1,489 $ 294 $ 5 $ 1,200 --
Accident and health insurance 208 21 -- 187 --
Property casualty 219 219 -- -- --
-------- -------- -------- -------- --------
Total Premiums $ 1,916 $ 534 $ 5 $ 1,387 --
======== ======== ======== ======== ========
<CAPTION>
1995
<S> <C> <C> <C> <C> <C>
Life Insurance In Force $439,982 $175,877 $ 68 $264,173 1.0%
Premiums:
Life insurance $ 1,460 $ 267 $ -- $ 1,193 --
Accident and health insurance 341 30 -- 311 --
Property casualty 283 283 -- -- --
-------- -------- -------- -------- --------
Total Premiums $ 2,084 $ 580 $ -- $ 1,504 --
======== ======== ======== ======== ========
</TABLE>
(See Accompanying Independent Auditors' Report)
52
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 21,511
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 512
<MORTGAGE> 2,869
<REAL-ESTATE> 134
<TOTAL-INVEST> 30,502
<CASH> 58
<RECOVER-REINSURE> 4,339
<DEFERRED-ACQUISITION> 2,312
<TOTAL-ASSETS> 50,026
<POLICY-LOSSES> 12,569
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 378
<POLICY-HOLDER-FUNDS> 26,222
<NOTES-PAYABLE> 0
0
0
<COMMON> 100
<OTHER-SE> 7,225
<TOTAL-LIABILITY-AND-EQUITY> 50,026
1,583
<INVESTMENT-INCOME> 2,037
<INVESTMENT-GAINS> 199
<OTHER-INCOME> 354
<BENEFITS> 2,170
<UNDERWRITING-AMORTIZATION> 293
<UNDERWRITING-OTHER> 427
<INCOME-PRETAX> 1,283
<INCOME-TAX> 444
<INCOME-CONTINUING> 839
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 839
<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>
