<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, 1998
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.
Yes [X] No [ ]
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 Citigroup
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
TABLE OF CONTENTS
<TABLE>
<CAPTION>
FORM 10-K
ITEM NUMBER PART I PAGE
- ----------- ------ ----
<S> <C>
1. Business................................................................. 2
A. General............................................................... 2
B. Business by Segment
Travelers Life and Annuity......................................... 2
Primerica Life .................................................... 4
C. Insurance Regulations................................................. 4
2. Properties............................................................... 6
3. Legal Proceedings........................................................ 6
4. Submission of Matters to a Vote of Security Holders...................... 7
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.... 7
6. Selected Financial Data.................................................. 7
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 7
7A. Quantitative and Qualitative Disclosures About Market Risk............... 13
8. Financial Statements and Supplementary Data.............................. 16
9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 54
PART III
10. Directors and Executive Officers of the Registrant....................... 54
11. Executive Compensation................................................... 54
12. Security Ownership of Certain Beneficial Owners and Management........... 54
13. Certain Relationships and Related Transactions........................... 54
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 55
Exhibit Index............................................................ 56
Signatures............................................................... 57
Index to Financial Statements and Financial Statement Schedules.......... 58
</TABLE>
<PAGE> 3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS.
GENERAL
The Travelers Insurance Company (TIC) and, collectively with its subsidiaries
(the Company) is a wholly owned subsidiary of The Travelers Insurance Group Inc.
(TIGI). TIGI is an indirect wholly owned subsidiary of Citigroup Inc.
(Citigroup), a diversified holding company whose businesses provide a broad
range of financial services to consumer and corporate customers around the
world. Citigroup's activities are conducted through Global Consumer, Global
Corporate and Investment Bank, Asset Management and Investment Activities. The
periodic reports of Citigroup provide additional business and financial
information concerning that company and its consolidated subsidiaries. The
Company was incorporated in 1863. With $56.5 billion of assets and $439.8
billion of life insurance in force at December 31, 1998, 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 business segments:
- - 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. These products are primarily
marketed through The Copeland Companies (Copeland), an indirect wholly owned
subsidiary of TIC, the Financial Consultants of Salomon Smith Barney, an
affiliate of the Company, and a nationwide network of independent agents. In
1998, Travelers Life and Annuity products were also introduced into the
Primerica Financial Services (Primerica) and Citibank distribution networks.
Travelers Life and Annuity also provides group pension products, including
guaranteed investment contracts, and group annuities to employer-sponsored
retirement and savings plans through direct sales and various intermediaries.
- - 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 licensed Personal Financial Analysts.
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) included in the Travelers Life and Annuity segment and Primerica
Life Insurance Company (Primerica Life) and its subsidiary, National Benefit
Life Insurance Company (NBL), included in the Primerica Life Insurance segment.
BUSINESS BY SEGMENT
Travelers Life and Annuity
Travelers Life and Annuity, through TIC and TLAC, 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 to employer-sponsored retirement and savings plans.
2
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THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Individual fixed and variable annuities are primarily used for 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 fixed and variable rate 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.
TIC 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.
Individual products are primarily marketed through Copeland, Salomon Smith
Barney Financial Consultants and a nationwide network of independent agents.
During 1998, these individual products were introduced into the Primerica and
Citibank distribution networks. 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 was 37% in 1998. Salomon Smith Barney Financial
Consultants' distribute Travelers Life and Annuity's non-qualified deferred
annuities and individual life and long-term care products, and accounted for 34%
of total individual deferred annuity production in 1998. The nationwide network
of independent agents sold the majority of the individual life and long-term
care business in 1998 and accounted for 19% of individual deferred annuity
premiums and deposits. Strong sales during the last six months of 1998 by
Primerica accounted for 7% of total individual deferred annuity premiums and
deposits.
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.
3
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THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Primerica Life
Primerica Life and its subsidiaries, Primerica Life Insurance Company of Canada
and NBL, are the insurance operations of Primerica. Their primary product is
individual term life insurance marketed through a sales force composed of
approximately 80,000 personal financial analysts. 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.
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, 1998.
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. RBC requirements are used as minimum capital requirements
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.
4
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THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
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, 1998, the Company and its insurance subsidiaries all had
adjusted capital in excess of amounts requiring any regulatory action at any of
the four levels.
The Company is domiciled in the State of Connecticut. The insurance holding
company law of Connecticut requires notice to, and approval by, the Connecticut
Insurance Department for the declaration or payment of any dividend which,
together with other distributions made within the preceding twelve months,
exceeds the greater of (i) 10% of the insurer's surplus or (ii) the insurer's
net gain from operations for the twelve-month period ending on the preceding
December 31st, in each case determined in accordance with statutory accounting
practices. Such declaration or payment is further limited by adjusted unassigned
funds (surplus), as determined in accordance with statutory accounting
practices. The insurance holding company laws of other states in which the
Company's insurance subsidiaries are domiciled generally contain similar
(although in certain instances somewhat more restrictive) limitations on the
payment of dividends. Dividend payments from the Company to its parent are
limited to $504 million in 1999 without prior approval of the Connecticut
Insurance Department.
5
<PAGE> 7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
ITEM 2. PROPERTIES.
The Company's executive offices are located in Hartford, Connecticut. The
Company owns buildings containing approximately 1.4 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, 1998, leasehold interests of the Company included approximately 560,000
square feet of office space in 20 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.
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 or to which any of their property is subject.
In March 1997, a purported class action entitled Patterman v. The Travelers,
Inc. et al. 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 October 1997, 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. The plaintiffs appealed the
transfer order, and in December 1998 the Court of Appeals of the State of
Georgia reversed the lower court's decision. Later in December 1998, defendants
petitioned the Georgia Supreme Court to hear the appeal from the decision of the
Court of Appeals. Pending appeal, proceedings in the trial court have been
stayed. Defendants intend 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, 1998, 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.
6
<PAGE> 8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company has 40,000,000 authorized shares of common stock, all of which are
issued and outstanding as of December 31, 1998. 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 $110 million in 1998, and
$500 million in 1997. See Note 5 of Notes to Consolidated Financial Statements
for certain information regarding dividend restrictions.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction I(2)(a) of Form 10-K.
CONSOLIDATED OVERVIEW
($ in millions)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997
-------------------------------- ----- ----
<S> <C> <C>
Revenues $4,514 $4,173
====== ======
Net income (1) $ 902 $ 839
====== ======
</TABLE>
(1)Net income includes after-tax portfolio gains of $97 million in 1998 and $129
million in 1997, respectively. Included in 1998 is an after-tax restructuring
charge of $10 million. Excluding these items, income from continuing
operations for the year ended December 31, 1998 increased 15% to $815
million, reflecting increased business volume and an increase in investment
income.
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THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
TRAVELERS LIFE AND ANNUITY
($ in millions)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997
-------------------------------- ---- ----
<S> <C> <C>
Revenues $3,160 $2,859
====== ======
Net income (1) $ 588 $ 548
====== ======
</TABLE>
(1)Net income includes after-tax investment portfolio gains of $95 million and
$121 million in 1998 and 1997, respectively. Included in 1998 is an after-tax
restructuring charge of $8 million.
Travelers Life and Annuity consists of annuity, life and long-term care products
marketed by TIC and 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.
Business income before portfolio gains and restructuring charges increased 17%
to $501 million in 1998, compared to $427 million in 1997. The improved earnings
during 1998 reflects double-digit business volume growth in individual and group
annuity account balances and life and long-term care insurance premiums. Net
investment income increased despite a decline in investment yields during 1998.
The decline in investment yields resulted primarily from participation in
partnership investment interests that were negatively impacted by volatile
marketplace conditions. This decline in yields was substantially offset by
earnings on an increased capital base created by business volume growth.
Business income was also impacted by a favorable reserve settlement in the
runoff group life and health business.
The successful initiative of cross selling Travelers Life and Annuity products
through the Primerica Financial Services, Citibank, Copeland, and Salomon Smith
Barney distribution channels, along with improved sales through a nationwide
network of independent agents, reflect ongoing efforts to build market share by
strengthening relationships in key distribution channels.
Significant deferred annuities sales, combined with favorable market
appreciation from variable annuities, drove account balances to $19.8 billion at
year-end 1998, up 23% from $16.1 billion at year-end 1997. Net written premiums
and deposits increased 35% in 1998 to $3.43 billion, from $2.55 billion in 1997.
The strong sales reflect the marketing initiatives at Salomon Smith Barney,
Copeland's successful penetration of the small company segment of the 401(k)
market, and a new product introduced into the Primerica distribution channel.
8
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THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Payout and group annuity account balances and benefit reserves reached $13.8
billion at year-end 1998, up 16% from $11.9 billion at year-end 1997. The
revitalization of the payout and group annuities business reflects strong sales
of new payout annuities and guaranteed investment contracts. Net written
premiums and deposits (excluding those of affiliates) rose to $4.12 billion in
1998 from $2.42 billion in 1997. During 1998, the Company commenced a program to
write up to $2 billion of Guaranteed Investment Contracts in European Medium
Term Notes. As of December 31, 1998 $300 million had been issued pursuant to
this program.
Direct periodic premiums for individual life insurance of $321.5 million were up
11% from $290.4 million in 1997. Life insurance in force was $56.1 billion at
December 31, 1998, up from $51.6 billion at year-end 1997.
Net written premiums for the growing long-term care insurance line reached $213
million for 1998 compared to $184 million in 1997. This growth reflects strong
sales through three distribution channels, Travelers Net Plus, a wholly owned
subsidiary, the Financial Consultants of Salomon Smith Barney, and independent
agencies.
OUTLOOK
Travelers Life and Annuity should benefit from growth in the aging population
who are becoming more focused on the need to accumulate adequate savings for
retirement, to protect these savings and to plan for the transfer of wealth to
the next generation. Travelers Life and Annuity is well-positioned to take
advantage of the favorable long-term demographic trends through its strong
financial position, widespread brand name recognition and broad array of
competitive life, annuity and long-term care insurance products sold through
established distribution channels.
However, competition in both product pricing and customer service is
intensifying. There has been some consolidation within the insurance industry
and other financial services organizations are increasingly involved in the sale
and/or distribution of insurance products. Also, the annuities business is
interest rate sensitive, and swings in interest rates could influence sales and
retention of in force policies. In order to strengthen its competitive position,
Travelers Life and Annuity expects to maintain a current product portfolio,
further diversify its distribution channels, and retain its healthy financial
position through strong sales growth and maintenance of an efficient cost
structure.
9
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THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PRIMERICA LIFE INSURANCE
($ in millions)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997
-------------------------------- ---- ----
<S> <C> <C>
Revenues $1,354 $1,314
====== ======
Net income (1) $ 314 $ 291
====== ======
</TABLE>
(1)Net income includes after-tax investment portfolio gains of $2 million and
$8 million in 1998 and 1997, respectively. Included in 1998 is an after-tax
restructuring charge of $2 million.
Business income before portfolio gains and restructuring charges was $314
million in 1998 compared to $283 million in 1997. The 11% improvement in 1998
reflects growth in life insurance in force, favorable mortality experience and
disciplined expense management.
EARNED PREMIUMS, NET OF REINSURANCE
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
($ in millions) 1998 1997
---- ----
<S> <C> <C>
Individual term life $987 $967
Other 70 68
------ ------
$1,057 $1,035
------ ------
</TABLE>
Total face amount of issued term life insurance was $57.4 billion in 1998
compared to $52.6 billion in 1997. The number of policies issued was 223,600 in
1998 compared to 228,900 in 1997. The average face value (in thousands) per
policy issued was $223 in 1998 compared to $200 in 1997 which reflects the
greater application of the Financial Needs Analysis (FNA) - the diagnostic tool
that enhances the ability of the Personal Financial Analysts to address client
needs. Life insurance in force at year-end 1998 reached $383.7 billion, up from
$369.9 billion at year-end 1997, 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. Additionally, increased effort has been made to provide all
Primerica Life Insurance customers full access to all Primerica marketed lines.
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.
10
<PAGE> 12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
COMPANY OUTLOOK
President Clinton's recent budget proposal (the "Budget Proposal") contains a
number of tax provisions that could impact the Company, including a provision to
recapture previously deferred policyholder surplus account balances as taxable
income. 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. The Company does
not expect this Budget Proposal to have a material impact on its financial
condition or liquidity. See Note 11.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Consolidated Financial Statements for Future Applications
of Accounting Standards.
MERGER
On October 8, 1998, Citicorp merged with and into a newly formed, wholly owned
subsidiary of Travelers Group Inc. (Travelers Group) (the Merger) and
subsequently, Travelers Group changed its name to Citigroup Inc.
Upon consummation of the Merger, Citigroup became a bank holding company subject
to the provisions of the Bank Holding Company Act of 1956 (the BHCA). The BHCA
precludes a bank holding company and its affiliates from engaging in certain
activities, generally including insurance underwriting. Under the BHCA in its
current form, Citigroup has two years from the date it became a bank holding
company to comply with all applicable provisions (the BHCA Compliance Period).
The BHCA Compliance Period may be extended, at the discretion of the Federal
Reserve Board, for three additional one-year periods so long as the extension is
not deemed to be detrimental to the public interest. At this time, the Company
believes that its compliance with applicable laws following the Merger will not
have a material adverse effect on the Company's financial condition or results
of operations.
There is pending Federal Legislation that would, if enacted, amend the BHCA to
authorize a bank holding company to own certain insurance underwriters. There is
no assurance that such legislation will be enacted. Before the expiration of the
BHCA Compliance Period, each of the Company and Citigroup will evaluate its
alternatives in order to comply with whatever laws are then applicable.
11
<PAGE> 13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
YEAR 2000
The Company is highly dependent on computer systems and system applications for
conducting its ongoing business functions. In 1996, the Company began the
process of identifying, assessing and implementing changes to computer programs
necessary to address the Year 2000 issue and developed a comprehensive plan to
address the issue. This issue involves the ability of computer systems that have
time sensitive programs to recognize properly the Year 2000. The inability to do
so could result in major failures or miscalculations that would disrupt the
Company's ability to meet its customer and other obligations on a timely basis.
The Company has achieved substantial compliance with respect to its business
critical systems in accordance with its Year 2000 plan and is in the process of
certification to validate compliance. The Company anticipates completing the
certification process by June 30, 1999. An ongoing re-certification process will
be put in place for third and fourth quarter 1999 to ensure all systems and
products remain compliant.
The total pre-tax cost associated with the required modifications and
conversions is expected to be between $25 million and $35 million and is being
expensed as incurred in the period 1996 through 1999. The Company has incurred
approximately $22 million to date on these efforts. The Company also has third
party customers, financial institutions, vendors and others with which it
conducts business and has confirmed their plans to address and resolve Year 2000
issues on a timely basis. While it is likely that these efforts by third party
vendors and customers will be successful, it is possible that a series of
failures by third parties could have a material adverse effect on the Company's
results of operations in future periods.
In addition, the Company is developing contingency plans to address perceived
risks associated with the Year 2000 effort. These include business resumption
plans to address the possibility of internal systems failures and the
possibility of failure of systems or processes outside the Company's control. As
of year-end 1998, the Company has completed initial business resumption
contingency plans which would enable business critical units to function
beginning January 1, 2000 in the event of an unexpected failure. Business
resumption contingency plans are expected to be finalized by June 30, 1999.
Preparations for the management of the date change will continue through 1999.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," and similar expressions. These forward-looking statements involve
risks and uncertainties including, but not limited to, the resolution of legal
proceedings, the conduct of the Company's business following the Merger and the
ability of the Company and third party vendors to modify computer systems for
the Year 2000 data conversion in a timely manner.
12
<PAGE> 14
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 1998.
MARKET RISK SENSITIVE INSTRUMENTS ENTERED INTO FOR PURPOSES OTHER THAN TRADING
The primary market risk to the Company's investment portfolio is interest rate
risk associated with investments. The Company's exposure to equity price risk
and foreign exchange risk is not significant. The Company has no direct
commodity risk.
The interest rate risk taken in the investment portfolio is managed relative to
the duration of the liabilities. The portfolio is differentiated by business
unit, with each unit's portfolio structured to meet its particular needs.
Potential liquidity needs of the business are also key factors in managing the
investment portfolio. The portfolio duration relative to the liabilities'
duration is primarily managed through cash market transactions. For additional
information regarding the Company's investment portfolio see Note 13 of Notes to
Consolidated Financial Statements in Item 8 of this Form 10-K.
There were no significant changes in the Company's primary market risk exposures
or in how those exposures are managed compared to the year ended December 31,
1997. The Company does not anticipate significant changes in the Company's
primary market risk exposures or in how those exposures are managed in future
reporting periods based upon what is known or expected to be in effect in future
reporting periods.
Sensitivity Analysis
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near term" means a period of time going forward up to one year from the
date of the financial statements. Actual results may differ from the
hypothetical change in market rates assumed in this disclosure, especially since
this sensitivity analysis does not reflect the results of any actions that would
be taken by the Company to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, interest-bearing non-redeemable preferred stock,
mortgage loans, short-term securities, cash, investment income accrued, policy
loans, contractholder funds, guaranteed separate account assets and liabilities
and derivative financial instruments. In addition, certain non-financial
instrument liabilities have been included in the sensitivity analysis model.
These non-financial instruments include future policy benefits and policy and
contract claims. The primary market risk to the Company's market sensitive
instruments is interest rate risk. The sensitivity analysis model uses a 100
basis point change in interest rates to measure the hypothetical change in fair
value of financial instruments and the non-financial instruments included in the
model.
13
<PAGE> 15
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and reset
features. Portfolio durations are calculated on a market value weighted basis,
including accrued investment income, using trade date holdings as of December
31, 1998. The sensitivity analysis model used by the Company produces a loss in
fair value of interest rate sensitive invested assets of approximately $1.3
billion based on a 100 basis point increase in interest rates as of December 31,
1998.
Liability durations are determined consistently with the determination of
liability fair values. Where fair values are determined by discounting expected
cash flows, the duration is the percentage change in the fair value for a 100
basis point change in the discount rate. Where liability fair values are set
equal to surrender values, option-adjusted duration techniques are used to
calculate changes in fair values. The sensitivity analysis model used by the
Company produces a decrease in fair value of interest rate sensitive insurance
policy and claims reserves of approximately $.9 billion based on a 100 basis
point increase in interest rates as of December 31, 1998.
Based on the sensitivity analysis model used by the Company, the net loss in
fair value of market sensitive instruments, including non-financial instrument
liabilities, as a result of a 100 basis point increase in interest rates as of
December 31, 1998 is not material.
MARKET RISK SENSITIVE INSTRUMENTS ENTERED INTO FOR TRADING PURPOSES
The Company maintains a trading portfolio consisting of carrying values of
$1,186 million of common stocks and convertible bonds and $873 million of
liabilities resulting from common stocks sold not yet purchased (referred to as
short sales) as of December 31, 1998. The primary market risk to the trading
portfolio is equity risk. Assets are reported as trading securities owned and
liabilities are reported as trading securities sold not yet purchased.
The common stocks are paired with short sales, with both positions in companies
involved in a merger. The convertible bonds are also hedged by short sales of
the common stocks of companies issuing the convertible bonds. These positions
are established and maintained so that general changes in equity markets and
interest rates will not materially impact the value of the portfolio.
14
<PAGE> 16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Tabular presentation
The table below provides information about the trading portfolio's financial
instruments that are primarily exposed to equity price risk. This table presents
the fair values of these instruments by trading portfolio type, as designated
internally by the Company, as of December 31, 1998. Fair values are based upon
quoted market prices.
<TABLE>
<CAPTION>
Fair value
Assets ($ in millions)
-----------
<S> <C>
Trading securities owned
Convertible bond arbitrage $ 754
Merger arbitrage 427
Other 5
------
$1,186
======
Liabilities
Trading securities sold not yet
purchased
Convertible bond arbitrage $ 521
Merger arbitrage 352
------
$ 873
======
</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.
15
<PAGE> 17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................................... 17
Consolidated Financial Statements:
Consolidated Statements of Income for
the years ended December 31, 1998, 1997 and 1996............................ 18
Consolidated Balance Sheets - December 31, 1998 and 1997.................... 19
Consolidated Statements of Changes in Retained Earnings
and Accumulated Other Changes in Non-Owner Sources.......................... 20
Consolidated Statements of Cash Flows for
the years ended December 31, 1998, 1997 and 1996............................ 21
Notes to Consolidated Financial Statements.................................. 22-53
</TABLE>
16
<PAGE> 18
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, 1998 and 1997, and the
related consolidated statements of income, changes in retained earnings and
accumulated other changes in equity from non-owner sources and cash flows for
each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
January 25, 1999
17
<PAGE> 19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $1,740 $1,583 $1,387
Net investment income 2,185 2,037 1,950
Realized investment gains 149 199 65
Other revenues 440 354 284
- ------------------------------------------------------------------------------------------------
Total Revenues 4,514 4,173 3,686
- ------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 1,475 1,341 1,187
Interest credited to contractholders 876 829 863
Amortization of deferred acquisition costs and value of 311 293 281
insurance in force
General and administrative expenses 469 427 380
- ------------------------------------------------------------------------------------------------
Total Benefits and Expenses 3,131 2,890 2,711
- ------------------------------------------------------------------------------------------------
Income from continuing operations before federal income 1,383 1,283 975
taxes
- ------------------------------------------------------------------------------------------------
Federal income taxes:
Current expense 442 434 284
Deferred 39 10 58
- ------------------------------------------------------------------------------------------------
Total Federal Income Taxes 481 444 342
- ------------------------------------------------------------------------------------------------
Income from continuing operations 902 839 633
Discontinued operations, net of income taxes
Gain on disposition (net of taxes of $0, $0 and $14) - - 26
- ------------------------------------------------------------------------------------------------
Income from Discontinued Operations - - 26
================================================================================================
Net income $ 902 $ 839 $ 659
================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE> 20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $23,893 $21,511
$22,973, $20,682)
Equity securities, at fair value (cost, $474, $480) 518 512
Mortgage loans 2,606 2,869
Real estate held for sale 143 134
Policy loans 1,857 1,872
Short-term securities 1,098 1,102
Trading securities, at market value 1,186 800
Other invested assets 2,251 1,702
- ---------------------------------------------------------------------------------------------
Total Investments 33,552 30,502
- ---------------------------------------------------------------------------------------------
Cash 65 58
Investment income accrued 393 338
Premium balances receivable 99 106
Reinsurance recoverables 3,387 3,753
Deferred acquisition costs and value of insurance in force 2,567 2,312
Separate and variable accounts 15,313 11,319
Other assets 1,172 1,052
- ---------------------------------------------------------------------------------------------
Total Assets $56,548 $49,440
- ---------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $16,739 $14,913
Future policy benefits and claims 12,326 12,361
Separate and variable accounts 15,305 11,309
Deferred federal income taxes 422 409
Trading securities sold not yet purchased, at market value 873 462
Other liabilities 2,783 2,661
- ---------------------------------------------------------------------------------------------
Total Liabilities 48,448 42,115
- ---------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized, 100 100
issued and outstanding
Additional paid-in capital 3,800 3,187
Retained earnings 3,602 2,810
Accumulated other changes in equity from non-owner sources 598 535
Unrealized gain on Citigroup Inc. stock, net of tax - 693
- ---------------------------------------------------------------------------------------------
Total Shareholder's Equity 8,100 7,325
- ---------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $56,548 $49,440
=============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE> 21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS AND ACCUMULATED
OTHER CHANGES IN EQUITY FROM NON-OWNER SOURCES
($ IN MILLIONS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
STATEMENTS OF CHANGES IN RETAINED 1998 1997 1996
EARNINGS
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $2,810 $2,471 $2,312
Net income 902 839 659
Dividends to parent 110 500 500
- --------------------------------------------------------------------------
Balance, end of year $3,602 $2,810 $2,471
==========================================================================
- --------------------------------------------------------------------------
STATEMENTS OF ACCUMULATED OTHER CHANGES
IN EQUITY FROM NON-OWNER SOURCES
- --------------------------------------------------------------------------
Balance, beginning of year $ 535 $ 223 $ 449
Unrealized gains (losses), net of tax 62 313 (226)
Foreign currency translation, net of 1 (1) -
tax
- --------------------------------------------------------------------------
Balance, end of year $ 598 $ 535 $ 223
==========================================================================
- --------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NON-OWNER SOURCES
- --------------------------------------------------------------------------
Net Income $ 902 $ 839 $ 659
Other changes in equity from
non-owner sources 63 312 (226)
- --------------------------------------------------------------------------
Total changes in equity from
non-owner sources $ 965 $1,151 $ 433
==========================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE> 22
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, 1998 1997 1996
---- ---- ----
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $1,763 $1,519 $1,387
Net investment income received 2,021 2,059 1,910
Other revenues received 255 180 131
Benefits and claims paid (1,127) (1,230) (1,060)
Interest credited to contractholders (918) (853) (820)
Operating expenses paid (587) (445) (343)
Income taxes paid (506) (368) (328)
Trading account investments, (purchases) sales, net (38) (54) -
Other 12 18 (70)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 875 826 807
Net cash used in discontinued operations - - (350)
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by Operations 875 826 457
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 2,608 2,259 1,928
Mortgage loans 722 663 917
Proceeds from sales of investments
Fixed maturities 13,390 7,592 9,101
Equity securities 212 341 479
Mortgage loans - 207 178
Real estate held for sale 53 169 210
Purchases of investments
Fixed maturities (18,072) (11,143) (11,556)
Equity securities (194) (483) (594)
Mortgage loans (457) (771) (470)
Policy loans, net 15 38 (23)
Short-term securities, (purchases) sales, net (495) (2) 498
Other investments, purchases, net (550) (260) (137)
Securities transactions in course of settlement 192 311 (52)
Net cash provided by investing activities of - - 348
discontinued operations
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Investing Activities (2,576) (1,079) 827
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of commercial paper, net - (50) (23)
Contractholder fund deposits 4,383 3,544 2,493
Contractholder fund withdrawals (2,565) (2,757) (3,262)
Dividends to parent company (110) (500) (500)
Other - - 9
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Financing Activities 1,708 237 (1,283)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 7 (16) 1
- ---------------------------------------------------------------------------------------------------
Cash at December 31, $ 65 $ 58 $ 74
===================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE> 23
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 (TIC) and, collectively with its subsidiaries
(the Company) is a wholly owned subsidiary of The Travelers Insurance Group
Inc. (TIGI), an indirect wholly owned subsidiary of Citigroup Inc.
(Citigroup), formerly Travelers Group Inc. The consolidated financial
statements include the accounts of TIC 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). 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 a final contingent payment was
made during 1996. The Company's discontinued operations reflect the results
of the gain from the contingent payment in 1996.
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 1998
presentation.
22
<PAGE> 24
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING CHANGES
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). This
statement 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. Effective January 1, 1998, the Company adopted
the collateral provisions of FAS 125 which were not effective until 1998 in
accordance with Statement of Financial Accounting Standards No. 127,
"Deferral of the Effective Date of Certain Provisions of SFAS 125". The
adoption of the collateral provisions of FAS 125 created additional assets
and liabilities on the Company's consolidated statement of financial position
related to the recognition of securities provided and received as collateral.
There was no impact on the Company's results of operations from the adoption
of the collateral provisions of FAS 125.
Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted 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 required to be reported
in an annual financial statement that is displayed with the same prominence
as other financial statements. This statement stipulates that comprehensive
income reflect the change in equity of an enterprise during a period from
transactions and other events and circumstances from non-owner sources.
Comprehensive income thus represents the sum of net income and other
changes in equity from non-owner sources. The accumulated balance of other
changes in equity from non-owner sources is required to be displayed
separately from retained earnings and additional paid-in capital in the
consolidated balance sheet. The adoption of FAS 130 resulted primarily in the
Company reporting unrealized gains and losses on investments in debt and
equity securities in changes in equity from non-owner sources. See Note 5.
23
<PAGE> 25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Disclosures About Segments of an Enterprise and Related Information
During 1998, the Company adopted 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. This statement supersedes Statement of Financial
Accounting Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise". 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 decisionmaker in deciding how to allocate resources and in assessing
performance. As a result of the adoption of FAS 131, the Company has two
reportable operating segments, Travelers Life and Annuity and Primerica Life
Insurance. See Note 17.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use
During the third quarter of 1998, the Company adopted (effective January 1,
1998) the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants' Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use and for determining when
specific costs should be capitalized or expensed. The adoption of SOP 98-1
did not have a material impact on the Company's financial condition,
statement of operations or liquidity.
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.
The effective yield used to determine amortization is calculated based upon
actual historical and projected future cash flows, which are obtained from a
widely-accepted securities data provider. 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, 1998 and 1997.
24
<PAGE> 26
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, 1998 and 1997.
Trading securities and related liabilities are normally held for periods less
than six months. These investments are marked to market with the change
recognized in net investment income during the current period.
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 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, options, forward contracts and interest rate swaps and
caps, as a means of hedging exposure to interest rate 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.
Payments to be received or made under interest rate swaps are accrued and
recognized in net investment income. Swaps are carried at fair value with
unrealized gains and losses, net of taxes, charged or credited directly to
shareholder's equity.
Forward contracts, and options, and interest rate caps were not significant
at December 31, 1998 and 1997. 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 pre-tax
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.
25
<PAGE> 27
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
POLICY LOANS
Policy loans are carried at the amount of the unpaid balances that are not in
excess of the net cash surrender values of the related insurance policies.
The carrying value of policy loans, which have no defined maturities, is
considered to be fair value.
DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE
Costs of acquiring individual life insurance, annuities and 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
15 to 20 year amortization period is used; for long-term care business, a 10
to 20 year period is used, and a 7 to 20 year period is employed for
annuities. Deferred acquisition costs are reviewed periodically for
recoverability to determine if any adjustment is required.
The value of insurance in force 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.
26
<PAGE> 28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal life,
corporate owned life insurance, 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 9.1%.
FUTURE POLICY BENEFITS
Benefit reserves represent liabilities for future insurance policy benefits.
Benefit reserves for life insurance and annuities have been computed based
upon mortality, morbidity, persistency and interest assumptions applicable to
these coverages, which range from 2.5% to 10.0%, including adverse deviation.
These assumptions consider Company experience and industry standards. The
assumptions vary by plan, age at issue, year of issue and duration.
Appropriate recognition has been given to experience rating and reinsurance.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company, whose insurance subsidiaries are domiciled principally in
Connecticut and Massachusetts, prepares statutory financial statements in
accordance with the accounting practices prescribed or permitted by the
insurance departments of the states of domicile. Prescribed statutory
accounting practices include certain publications of the National Association
of Insurance Commissioners (NAIC) 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.
The NAIC recently completed a process intended to codify statutory accounting
practices for certain insurance enterprises. As a result of this process, the
NAIC will issue a revised statutory Accounting Practices and Procedures
Manual version effective January 1, 2001 (the revised Manual) that will be
effective January 1, 2001 for the calendar year 2001 statutory financial
statements. It is expected that the State of Connecticut will require that,
effective January 1, 2001, insurance companies domiciled in Connecticut
prepare their statutory basis financial statements in accordance with the
revised Manual subject to any deviations prescribed or permitted by the
Connecticut insurance commissioner. The Company has not yet determined the
impact that this change will have on the statutory capital and surplus of its
insurance subsidiaries.
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 earned on investment, universal life and other insurance contracts.
Other revenues also include gains and losses on dispositions of assets other
than realized investment gains and losses and revenues of non-insurance
subsidiaries.
27
<PAGE> 29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, corporate owned life insurance, 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 plans to implement SOP 97-3 in the first quarter of 1999 and expects
there to be no material impact on the Company's financial condition, results
of operations or liquidity.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends
on the intended use of the derivative and the resulting designation. FAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Upon initial application of FAS 133, hedging relationships must be
designated anew and documented pursuant to the provisions of this statement.
The Company has not yet determined the impact that FAS 133 will have on its
consolidated financial statements.
28
<PAGE> 30
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 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.
On October 2, 1995, the Company and its affiliates completed the sale of
their ownership in MetraHealth to United HealthCare Corporation. 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.
3. COMMERCIAL PAPER AND LINES OF CREDIT
TIC issues commercial paper directly to investors. No commercial paper was
outstanding at December 31, 1998 or 1997. TIC maintains unused credit
availability under bank lines of credit at least equal to the amount of the
outstanding commercial paper. No interest was paid in 1998 and interest
expense was not significant in 1997.
Citigroup, Commercial Credit Company (CCC) (an indirect wholly owned
subsidiary of Citigroup) and TIC have an agreement with a syndicate of banks
to provide $1.0 billion of revolving credit, to be allocated to any of
Citigroup, CCC or TIC. TIC's participation in this agreement is limited to
$250 million. The agreement consists of a five-year revolving credit facility
that expires in 2001. At December 31, 1998, $700 million was allocated to
Citigroup, $300 million was allocated to CCC and $0 was allocated to TIC.
Under this facility TIC is required to maintain certain minimum equity and
risk-based capital levels. At December 31, 1998, TIC was in compliance with
these provisions. There were no amounts outstanding under this agreement at
December 31, 1998 and 1997. If TIC had borrowings outstanding on this
facility, the interest rate would be based upon LIBOR plus a negotiated
margin.
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.
Beginning in 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 $1.5 million.
The Company writes workers' compensation business through its Accident
Department. This business is ceded 100% to an affiliate, The Travelers
Indemnity Company.
29
<PAGE> 31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A summary of reinsurance financial data reflected within the consolidated
statements of income and balance sheets is presented below ($ in millions):
<TABLE>
<CAPTION>
WRITTEN PREMIUMS 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Direct $2,310 $2,148 $1,982
Assumed from:
Non-affiliated companies - 1 5
Ceded to:
Affiliated companies (242) (280) (284)
Non-affiliated companies (317) (273) (309)
----------------------------------------------------------------------
Total Net Written Premiums $1,751 $1,596 $1,394
======================================================================
</TABLE>
<TABLE>
<CAPTION>
EARNED PREMIUMS 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Direct $1,949 $2,170 $1,897
Assumed from:
Non-affiliated companies - 1 5
Ceded to:
Affiliated companies (251) (321) (219)
Non-affiliated companies (308) (291) (315)
----------------------------------------------------------------------
Total Net Earned Premiums $1,390 $1,559 $1,368
======================================================================
</TABLE>
Reinsurance recoverables at December 31, 1998 and 1997 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
<TABLE>
<CAPTION>
REINSURANCE RECOVERABLES 1998 1997
-----------------------------------------------------------
<S> <C> <C>
Life and Accident and Health Business:
Non-affiliated companies $1,297 $1,362
Property-Casualty Business:
Affiliated companies 2,090 2,391
-----------------------------------------------------------
Total Reinsurance Recoverables $3,387 $3,753
===========================================================
</TABLE>
Total reinsurance recoverables at December 31, 1998 and 1997 include $640
million and $697 million, respectively, from MetLife in connection with the
sale of the Company's group life and related businesses.
30
<PAGE> 32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. SHAREHOLDER'S EQUITY
Additional Paid-In Capital
Additional paid-in capital increased during 1998 primarily due to the
conversion of Citigroup common stock to Citigroup preferred stock. This
increase in stockholder's equity was offset by a decrease in unrealized
investment gains due to the same transaction. See Note 13.
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 $702 million, $754 million and $656 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
The Company's statutory capital and surplus was $4.95 billion and $4.12
billion at December 31, 1998 and 1997, 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 $504 million is available in 1999 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, 1998 and 1997.
31
<PAGE> 33
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCUMULATED OTHER CHANGES IN EQUITY FROM NON-OWNER SOURCES, NET OF TAX
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NET UNREALIZED FOREIGN CURRENCY ACCUMULATED OTHER
GAIN ON TRANSLATION CHANGES IN EQUITY FROM
INVESTMENT ADJUSTMENTS NON-OWNER SOURCES
(for the year ended December 31, $ in millions) SECURITIES
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Balance, beginning of year $545 $(10) $535
Current-year change 62 1 63
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $607 $(9) $598
==========================================================================================================================
1997
Balance, beginning of year $232 $(9) $223
Current-year change 313 (1) 312
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $545 $(10) $535
==========================================================================================================================
1996
Balance, beginning of year $458 $(9) $449
Current-year change (226) - (226)
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $232 $(9) $223
==========================================================================================================================
</TABLE>
TAX EFFECTS ALLOCATED TO EACH COMPONENT OF OTHER CHANGES IN EQUITY FROM
NON-OWNER SOURCES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Pre-tax Tax expense After-tax
(for the year ended December 31, $ in millions) amount (benefit) amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Unrealized gain on investment securities:
Unrealized holding gains arising during year $ 244 $ 85 $ 159
Less: reclassification adjustment for gains
realized in net income 149 52 97
- ---------------------------------------------------------------------------------------------------------
Net unrealized gain on investment securities 95 33 62
Foreign currency translation adjustments 3 2 1
- ---------------------------------------------------------------------------------------------------------
Other changes in equity from non-owner sources $ 98 $ 35 $ 63
=========================================================================================================
1997
Unrealized gain on investment securities:
Unrealized holding gains arising during year $ 681 $ 239 $ 442
Less: reclassification adjustment for gains
realized in net income 199 70 129
- ---------------------------------------------------------------------------------------------------------
Net unrealized gain on investment securities 482 169 313
Foreign currency translation adjustments (1) - (1)
- ---------------------------------------------------------------------------------------------------------
Other changes in equity from non-owner sources $ 481 $ 169 $ 312
=========================================================================================================
1996
Unrealized gain on investment securities:
Unrealized holding losses arising during year $(283) $ (99) $(184)
Less: reclassification adjustment for gains
realized in net income 65 23 42
- ---------------------------------------------------------------------------------------------------------
Net unrealized loss on investment securities (348) (122) (226)
Foreign currency translation adjustments - - -
- ---------------------------------------------------------------------------------------------------------
Other changes in equity from non-owner sources $(348) $(122) $(226)
=========================================================================================================
</TABLE>
32
<PAGE> 34
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, interest rate swaps, options and forward contracts as a means of
hedging exposure to interest rate and foreign currency 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 interest rate swaps, options and forward
contracts, credit risk is limited to the amount that it would cost the
Company to replace the contracts. Financial futures contracts have little
credit risk since organized exchanges are the counterparties. The Company is
a writer of option contracts and as such has no credit risk since the
counterparty has no performance obligation after it has paid a cash premium.
The Company monitors creditworthiness of counterparties to these financial
instruments by using criteria of acceptable risk that are consistent with
on-balance sheet financial instruments. The controls include credit
approvals, limits and other monitoring procedures.
The Company uses exchange traded financial futures contracts to manage its
exposure to changes in interest rates which arise from the sale of certain
insurance and investment products, or the need to reinvest proceeds from the
sale or maturity of investments. To hedge against adverse changes in interest
rates, the Company enters long or short positions in financial futures
contracts which offset asset price changes resulting from changes in market
interest rates until an investment is purchased or a product is sold.
Margin payments are required to enter a futures contract and contract gains
or losses are settled daily in cash. The contract amount of futures contracts
represents the extent of the Company's involvement, but not future cash
requirements, as open positions are typically closed out prior to the
delivery date of the contract.
At December 31, 1998 and 1997, the Company held financial futures contracts
with notional amounts of $459 million and $625 million, respectively. These
financial futures had a deferred gain of $3.3 million and a deferred loss of
$.1 million in 1998 and a deferred gain of $.7 million, and a deferred loss
of $4.1 million in 1997. Total gains of $1.5 million and losses of $5.8
million from financial futures were deferred at December 31, 1998 and 1997,
respectively, relating to anticipated investment purchases and investment
product sales, and are reported as other liabilities. At December 31, 1998
and 1997, the Company's futures contracts had no fair value because these
contracts were marked to market and settled in cash daily.
33
<PAGE> 35
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company enters into interest rate swaps in connection with other
financial instruments to provide greater risk diversification and better
match an asset with a corresponding liability. Under interest rate swaps, the
Company agrees with other parties to exchange, at specific intervals, the
difference between fixed-rate and floating-rate interest amounts calculated
by reference to an agreed notional principal amount. The Company also enters
into basis swaps in which both legs of the swap are floating with each based
on a different index. Generally, no cash is exchanged at the outset of the
contract and no principal payments are made by either party. A single net
payment is usually made by one counterparty at each due date. Swap agreements
are not exchange traded and are subject to the risk of default by the
counterparty.
At December 31, 1998 and 1997, the Company held interest rate swap contracts
with notional amounts of $1,077.9 million and $234.7 million, respectively.
The fair value of these financial instruments was $5.6 million (gain
position) and $19.6 million (loss position) at December 31, 1998 and was $.3
million (gain position) and $2.5 million (loss position) at December 31,
1997. The fair values were determined using the discounted cash flow method.
The off-balance sheet risks of options and forward contracts were not
significant at December 31, 1998 and 1997.
The Company purchased a 5-year interest rate cap, with a notional amount of
$200 million, from Travelers Group Inc. in 1995 to hedge against losses that
could result from increasing interest rates. This instrument, which does not
have off-balance sheet risk, gave the Company the right to receive payments
if interest rates exceeded specific levels at specific dates. The premium of
$2 million paid for this instrument was being amortized over its life. The
interest rate cap asset was terminated in 1998. The fair value at December
31, 1997 was $0.
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, 1998 and 1997.
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, 1998 and 1997, investments in fixed maturities had a carrying
value and a fair value of $23.9 billion and $21.5 billion, respectively. See
Notes 1 and 13.
At December 31, 1998 mortgage loans had a carrying value of $2.6 billion and
a fair value of $2.8 billion and in 1997 had a carrying value of $2.9 billion
and a fair value of $3.0 billion. In estimating fair value, the Company used
interest rates reflecting the current real estate financing market.
34
<PAGE> 36
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The carrying values of $144 million and $143 million of financial instruments
classified as other assets approximated their fair values at December 31,
1998 and 1997, respectively. The carrying values of $2.3 billion and $2.0
billion of financial instruments classified as other liabilities also
approximated their fair values at December 31, 1998 and 1997, respectively.
Fair value is determined using various methods, including discounted cash
flows, as appropriate for the various financial instruments.
At December 31, 1998, contractholder funds with defined maturities had a
carrying value and a fair value of $3.3 billion, compared with a carrying
value and a fair value of $2.3 billion at December 31, 1997. 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 $10.4 billion and a fair value of $10.2 billion at December
31, 1998, compared with a carrying value of $9.7 billion and a fair value of
$9.5 billion at December 31, 1997. 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 $235 million at December 31, 1998, compared with a
carrying value and a fair value of $260 million at December 31, 1997. 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, 1998, compared with a carrying value and a fair value of $209
million and $206 million, respectively, at December 31, 1997.
The carrying values of cash, trading securities and trading securities sold
not yet purchased are carried at fair value. The carrying values of
short-term securities and investment income accrued 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.
35
<PAGE> 37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Litigation
In March 1997, a purported class action entitled Patterman v. The Travelers,
Inc. et al. 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 October 1997,
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.
The plaintiffs appealed the transfer order, and in December 1998 the Court of
Appeals of the State of Georgia reversed the lower court's decision. Later in
December 1998, defendants petitioned the Georgia Supreme Court to hear the
appeal from the decision of the Court of Appeals. Pending appeal, proceedings
in the trial court have been stayed. Defendants intend 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, 1998, 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 Citigroup. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by TIGI. The Company's share of net expense for the qualified
pension and other postretirement benefit plans was not significant for 1998,
1997 and 1996. 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 1998, 1997 and 1996.
401(k) Savings Plan
Substantially all of the Company's employees are eligible to participate in a
401(k) savings plan sponsored by Citigroup. 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 1998, 1997 and 1996.
36
<PAGE> 38
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, 1998 and 1997, the
pool totaled approximately $2.3 billion and $2.6 billion, respectively. The
Company's share of the pool amounted to $793 million and $725 million at
December 31, 1998 and 1997, respectively, and is included in short-term
securities in the consolidated balance sheet.
Included in short-term investments is a 90 day variable rate note receivable
from Citigroup issued on August 28, 1998 and renewed on November 25, 1998.
The rate is based upon the AA financial commercial paper rate plus 14 basis
points. The rate at December 31, 1998 is 5.47%. The balance at December 31,
1998 is $500 million. Interest accrued at December 31, 1998 was $2.2 million.
Interest earned during 1998 was $9.4 million. Citigroup repaid this note on
February 25, 1999.
The Company sells structured settlement annuities to the insurance
subsidiaries of TAP in connection with the settlement of certain policyholder
obligations. Such premiums and deposits were $104 million, $88 million, and
$40 million for 1998, 1997 and 1996, respectively. Reserves and
contractholder funds related to these annuities amounted to $787 million and
$795 million in 1998 and 1997, respectively.
The Company markets deferred annuity products and life and health insurance
through its affiliate, Salomon Smith Barney Inc. (SSB). Premiums and
deposits related to these products were $1.3 billion, $1.0 billion, and
$820 million in 1998, 1997 and 1996, respectively.
During the year the Company lent out $78.5 million par of debentures to SSB
for $84.8 million in cash collateral. Loaned debentures totaling $37.6
million with cash collateral of $39.7 million remained outstanding at
December 31, 1998.
The Company sold $27.4 million par of 6.125% U.S. Treasury bonds to SSB for
$31.1 million.
37
<PAGE> 39
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company purchased $36 million par of 6.56% Chase Commercial Mortgage
Securities Corp. bonds from SSB for $35.9 million.
Primerica Life has entered into a General Agency Agreement with Primerica
Financial Service, Inc. (Primerica), that provides that Primerica will be
Primerica Life's general agent for marketing all insurance of Primerica Life.
In consideration of such services, Primerica Life agreed to pay Primerica
marketing fees of no less than $10 million based upon U.S. gross direct
premiums received by Primerica Life. In 1998 the fees paid by Primerica Life
were $12.5 million.
In 1998 Primerica became a distributor of products for Travelers Life and
Annuity. During the year Primerica sold $256 million of deferred annuities.
Included in other invested assets is a $987 million investment in Citigroup
preferred stock at December 31, 1998, carried at cost. Also, included in
other invested assets is a $1.15 billion investment in common stock of
Citigroup at December 31, 1997, carried at fair value.
The Company participates in a stock option plan sponsored by Citigroup that
provides for the granting of stock options in Citigroup common stock to
officers and key employees. To further encourage employee stock ownership,
during 1997 Citigroup introduced the WealthBuilder stock option program.
Under this program, all employees meeting certain requirements have been
granted Citigroup stock options.
The Company applies APB 25 and related interpretations in accounting for
stock options. Since stock options under the Citigroup plans are issued at
fair market value on the date of award, no compensation cost has been
recognized for these awards. FAS 123 provides an alternative to APB 25
whereby fair values may be ascribed to options using a valuation model and
amortized to compensation cost over the vesting period of the options.
Had the Company applied FAS 123 in accounting for Citigroup stock options,
net income would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
YEAR ENDING DECEMBER 31, 1998 1997 1996
($ IN MILLIONS)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $902 $839 $659
FAS 123 pro forma adjustments, after tax (13) (9) (3)
-----------------------------------------------------------------------------------------------------
Net income, pro forma $889 $830 $656
</TABLE>
The Company had an interest rate cap agreement with Citigroup. See Note 6.
38
<PAGE> 40
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 $18 million, $15
million, and $24 million in 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
---------------------------------------------------
YEAR ENDING DECEMBER 31, MINIMUM OPERATING
($ in millions) RENTAL PAYMENTS
---------------------------------------------------
<S> <C>
1999 $ 47
2000 50
2001 54
2002 44
2003 42
Thereafter 296
---------------------------------------------------
Total Rental Payments $533
===================================================
</TABLE>
Future sublease rental income of approximately $86 million will partially
offset these commitments. Also, the Company will be reimbursed for 50% of the
rental expense for a particular lease totaling $207 million, by an affiliate.
Minimum future capital lease payments are not significant.
The Company is reimbursed for use of furniture and equipment through cost
sharing agreements by its affiliates.
39
<PAGE> 41
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. FEDERAL INCOME TAXES
($ in millions)
EFFECTIVE TAX RATE
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Before Federal Income Taxes $1,383 $1,283 $ 975
Statutory Tax Rate 35% 35% 35%
----------------------------------------------------------------------------------
Expected Federal Income Taxes 484 449 341
Tax Effect of:
Non-taxable investment income (5) (4) (3)
Other, net 2 (1) 4
----------------------------------------------------------------------------------
Federal Income Taxes $ 481 $ 444 $ 342
==================================================================================
Effective Tax Rate 35% 35% 35%
----------------------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 418 $ 410 $ 263
Foreign 24 24 21
---------------------------------------------------------------------------------
Total 442 434 284
---------------------------------------------------------------------------------
Deferred:
United States 40 10 57
Foreign (1) - 1
---------------------------------------------------------------------------------
Total 39 10 58
----------------------------------------------------------------------------------
Federal Income Taxes $ 481 $ 444 $ 342
=================================================================================
</TABLE>
Additional tax benefits attributable to employee stock plans allocated
directly to shareholder's equity for the years ended December 31, 1998, 1997
and 1996 were $17 million, $17 million and $8 million, respectively.
40
<PAGE> 42
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 1998 and 1997 were comprised
of the tax effects of temporary differences related to the following assets
and liabilities:
<TABLE>
<CAPTION>
($ in millions) 1998 1997
---- ----
<S> <C> <C>
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 616 $ 561
Operating lease reserves 76 80
Other employee benefits 103 102
Other 135 127
----------------------------------------------------------------------------------
Total 930 870
----------------------------------------------------------------------------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of 673 608
insurance in force
Investments, net 489 484
Other 90 87
----------------------------------------------------------------------------------
Total 1,252 1,179
----------------------------------------------------------------------------------
Net Deferred Tax Liability Before Valuation (322) (309)
Allowance
Valuation Allowance for Deferred Tax Assets (100) (100)
----------------------------------------------------------------------------------
Net Deferred Tax Liability After Valuation Allowance $ (422) $ (409)
----------------------------------------------------------------------------------
</TABLE>
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.
The $100 million valuation allowance is sufficient to cover any capital
losses on investments that may exceed the capital gains able to be generated
in the life insurance group's consolidated federal income tax return based
upon management's best estimate of the character of the reversing temporary
differences. Reversal of the valuation allowance is contingent upon the
recognition of future capital gains or a change in circumstances that causes
the recognition of the benefits to become more likely than not. There was no
change in the valuation allowance during 1998. The initial recognition of any
benefit produced by the reversal of the valuation allowance will be
recognized by reducing goodwill.
At December 31, 1998, the Company had no ordinary or capital loss
carryforwards.
41
<PAGE> 43
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 is
approximately $932 million. Income taxes are not provided for on this amount
because under current U.S. tax rules such taxes will become payable only to
the extent such amounts are distributed as a dividend to exceed limits
prescribed by federal law. Distributions are not contemplated from this
account. At current rates the maximum amount of such tax would be
approximately $326 million.
12. NET INVESTMENT INCOME
<TABLE>
<CAPTION>
----------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
($ in millions)
----------------------------------------------------------------------
<S> <C> <C> <C>
GROSS INVESTMENT INCOME
Fixed maturities $1,598 $1,460 $1,387
Mortgage loans 295 291 334
Policy loans 131 137 156
Other, including trading 226 238 171
----------------------------------------------------------------------
2,250 2,126 2,048
----------------------------------------------------------------------
Investment expenses 65 89 98
----------------------------------------------------------------------
Net investment income $2,185 $2,037 $1,950
----------------------------------------------------------------------
</TABLE>
13. INVESTMENTS AND INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for the periods were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
($ in millions)
----------------------------------------------------------------------
<S> <C> <C> <C>
REALIZED INVESTMENT GAINS
Fixed maturities $111 $71 $(63)
Equity securities 6 (9) 47
Mortgage loans 21 59 49
Real estate held for sale 16 67 33
Other (5) 11 (1)
----------------------------------------------------------------------
Total Realized Investment Gains $149 $199 $65
----------------------------------------------------------------------
</TABLE>
42
<PAGE> 44
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Changes in net unrealized investment gains (losses) that are reported as
accumulated other changes in equity from non-owner sources or unrealized
gains on Citigroup stock in shareholder's equity were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
------- ------- -------
($ in millions)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNREALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $ 91 $ 446 $ (323)
Equity securities 13 25 (35)
Other (169) 520 220
-------------------------------------------------------------------------------------------------
Total Unrealized Investment Gains (Losses) (65) 991 (138)
-------------------------------------------------------------------------------------------------
Related taxes (20) 350 (43)
-------------------------------------------------------------------------------------------------
Change in unrealized investment gains (45) 641 (95)
(losses)
Transferred to paid in capital, net of tax (585) -- --
Balance beginning of year 1,228 587 682
-------------------------------------------------------------------------------------------------
Balance End of Year $ 598 $ 1,228 $ 587
-------------------------------------------------------------------------------------------------
</TABLE>
Included in Other in 1998 is the unrealized loss on Citigroup common stock of
$167 million prior to the conversion to preferred stock. Also included in
Other were unrealized gains of $506 million and $203 million, which were
reported in 1997 and 1996, respectively, related to appreciation of Citigroup
common stock.
Fixed Maturities
Proceeds from sales of fixed maturities classified as available for sale were
$13.4 billion, $7.6 billion and $9.1 billion in 1998, 1997 and 1996,
respectively. Gross gains of $314 million, $170 million and $107 million and
gross losses of $203 million, $99 million and $175 million in 1998, 1997 and
1996, 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 $4.8 billion and
$5.1 billion at December 31, 1998 and 1997, respectively.
43
<PAGE> 45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of investments in fixed maturities were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 GROSS GROSS
($ 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 $ 4,717 $ 147 $ 11 $ 4,853
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 1,563 186 3 1,746
Obligations of states, municipalities and
political subdivisions 239 18 -- 257
Debt securities issued by foreign governments 634 41 3 672
All other corporate bonds 13,025 532 57 13,500
Other debt securities 2,709 106 38 2,777
Redeemable preferred stock 86 3 1 88
- ---------------------------------------------------------------------------------------------------------
Total Available For Sale $22,973 $ 1,033 $ 113 $23,893
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 GROSS GROSS
($ 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 11,787 459 17 12,229
Other debt securities 2,761 88 7 2,842
Redeemable preferred stock 12 1 -- 13
- --------------------------------------------------------------------------------------------------------------
Total Available For Sale $20,682 $ 860 $ 31 $21,511
- --------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE> 46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1998, by
contractual maturity, are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
($ in millions) AMORTIZED FAIR
COST VALUE
- -----------------------------------------------------------------
<S> <C> <C>
MATURITY:
Due in one year or less $ 1,296 $ 1,305
Due after 1 year through 5 years 6,253 6,412
Due after 5 years through 10 years 5,096 5,310
Due after 10 years 5,611 6,013
- -----------------------------------------------------------------
18,256 19,040
- -----------------------------------------------------------------
Mortgage-backed securities 4,717 4,853
- -----------------------------------------------------------------
Total Maturity $22,973 $23,893
- -----------------------------------------------------------------
</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, 1998 and 1997, the Company held CMOs classified as available for
sale with a fair value of $3.4 billion and $2.1 billion, respectively.
Approximately 54% and 72%, respectively, of the Company's CMO holdings are fully
collateralized by GNMA, FNMA or FHLMC securities at December 31, 1998 and 1997.
In addition, the Company held $1.4 billion and $1.9 billion of GNMA, FNMA or
FHLMC mortgage-backed pass-through securities at December 31, 1998 and 1997,
respectively. Virtually all of these securities are rated AAA.
45
<PAGE> 47
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Equity Securities
The cost and fair values of investments in equity securities were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
EQUITY SECURITIES: GROSS UNREALIZED GROSS UNREALIZED FAIR
($ in millions) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Common stocks $129 $ 44 $ 3 $170
Non-redeemable preferred stocks 345 10 7 348
- ------------------------------------------------------------------------------------------------
Total Equity Securities $474 $ 54 $ 10 $518
- ------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
Common stocks $179 $ 34 $ 11 $202
Non-redeemable preferred stocks 301 13 4 310
- ------------------------------------------------------------------------------------------------
Total Equity Securities $480 $ 47 $ 15 $512
- ------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of equity securities were $212 million, $341 million
and $479 million in 1998, 1997 and 1996, respectively. Gross gains of $30
million, $53 million and $64 million and gross losses of $24 million, $62
million and $11 million in 1998, 1997 and 1996, respectively, were realized
on those sales.
Mortgage Loans and Real Estate Held For Sale
At December 31, 1998 and 1997, the Company's mortgage loan and real estate
held for sale portfolios consisted of the following ($ in millions):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Current Mortgage Loans $2,370 $2,866
Underperforming Mortgage Loans 236 3
- ------------------------------------------------------------------------------------
Total Mortgage Loans 2,606 2,869
- ------------------------------------------------------------------------------------
Real Estate Held For Sale - Foreclosed 112 117
Real Estate Held For Sale - Investment 31 17
- ------------------------------------------------------------------------------------
Total Real Estate 143 134
- ------------------------------------------------------------------------------------
Total Mortgage Loans and Real Estate Held for Sale $2,749 $3,003
====================================================================================
</TABLE>
Underperforming mortgage loans include delinquent mortgage loans, loans in the
process of foreclosure, foreclosed loans and loans modified at interest rates
below market.
46
<PAGE> 48
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Aggregate annual maturities on mortgage loans at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
YEAR ENDING DECEMBER 31,
($ in millions)
- -----------------------------------------------------------------------
<S> <C>
Past Maturity $ 186
1999 188
2000 196
2001 260
2002 118
2003 206
Thereafter 1,452
- -----------------------------------------------------------------------
Total $2,606
=======================================================================
</TABLE>
Joint Venture
In October 1997, the Company and Tishman Speyer Properties (Tishman), a
worldwide real estate owner, developer and manager, formed a real estate
joint venture with an initial equity commitment of $792 million. The
Company and certain of its affiliates originally committed $420 million in
real estate equity and $100 million in cash while Tishman originally
committed $272 million in properties and cash. Both companies are serving
as general partners for the venture and Tishman is primarily responsible
for the venture's real estate acquisition and development efforts. The
Company's carrying value of this investment was $252.4 million and $204.8
million at December 31, 1998 and 1997, respectively.
Trading Securities
Trading securities of the Company are held in a subsidiary that is a
broker/dealer, Tribeca Investments L.L.C.
<TABLE>
<CAPTION>
($ in millions)
- -------------------------------------------------------------------------------------
TRADING SECURITIES OWNED 1998 1997
------ ------
<S> <C> <C>
Convertible bond arbitrage $ 754 $ 370
Merger arbitrage 427 352
Other 5 78
- -------------------------------------------------------------------------------------
Total $1,186 $ 800
- -------------------------------------------------------------------------------------
TRADING SECURITIES SOLD NOT YET PURCHASED
Convertible bond arbitrage $ 521 $ 249
Merger arbitrage 352 213
- -------------------------------------------------------------------------------------
Total $ 873 $ 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.
47
<PAGE> 49
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Concentrations
At December 31, 1998 and 1997, the Company had no concentration of credit
risk in a single investee exceeding 10% of consolidated shareholder's
equity.
The Company maintains a short-term investment pool for its insurance
affiliates in which the Company also participates. See Note 9.
Included in fixed maturities are below investment grade assets totaling
$2.1 billion and $1.4 billion at December 31, 1998 and 1997, respectively.
The Company defines its below investment grade assets as those securities
rated "Ba1" or below by external rating agencies, or the equivalent by
internal analysts when a public rating does not exist. Such assets include
publicly traded below investment grade bonds and certain other privately
issued bonds that are classified as below investment grade.
The Company had concentrations of investments, primarily fixed maturities,
in the following industries:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
($ in millions) 1998 1997
-----------------------------------------------------------------------
<S> <C> <C>
Banking $2,131 $2,215
Electric Utilities 1,513 1,377
Finance 1,346 1,556
Asset-Backed Credit Cards 1,013 778
-----------------------------------------------------------------------
</TABLE>
Below investment grade assets included in the preceding table were not
significant.
At December 31, 1998 and 1997, concentrations of mortgage loans of $751
million and $794 million, respectively, were for properties located in
highly populated areas in the state of California.
Other mortgage loan investments are relatively evenly dispersed throughout
the United States, with no significant holdings in any one state.
Significant concentrations of mortgage loans by property type at December
31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
($ in millions) 1998 1997
------------------------------------------------------------------------
<S> <C> <C>
Office $1,185 $1,382
Agricultural 887 771
------------------------------------------------------------------------
</TABLE>
48
<PAGE> 50
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 at December 31, 1998 and 1997. The balances of the
restructured investments were insignificant. 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 was insignificant in 1998 and in 1997.
Interest on these assets, included in net investment income was
insignificant in 1998 and 1997.
14. DEPOSIT FUNDS AND RESERVES
At December 31, 1998, the Company had $25.7 billion of life and annuity
deposit funds and reserves. Of that total, $13.8 billion is not subject to
discretionary withdrawal based on contract terms. The remaining $11.9
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 $2.4 billion of liabilities that are
surrenderable with market value adjustments. Also included are an
additional $5.1 billion of life insurance and individual annuity
liabilities which are subject to discretionary withdrawals, and have an
average surrender charge of 4.7%. In the payout phase, these funds are
credited at significantly reduced interest rates. The remaining $4.4
billion of liabilities are surrenderable without charge. More than 14.2% of
these relate to individual life products. These risks would have to be
underwritten again if transferred to another carrier, which is considered a
significant deterrent against withdrawal by long-term policyholders.
Insurance liabilities that are surrendered or withdrawn are reduced by
outstanding policy loans and related accrued interest prior to payout.
49
<PAGE> 51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
---- ---- ----
($ in millions)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income From Continuing Operations $902 $839 $633
Adjustments to reconcile net income to net cash provided by
operating activities:
Realized gains (149) (199) (65)
Deferred federal income taxes 39 10 58
Amortization of deferred policy acquisition costs and
value of insurance in force 311 293 281
Additions to deferred policy acquisition costs (566) (471) (350)
Investment income accrued (55) 14 2
Premium balances receivable 7 3 (6)
Insurance reserves and accrued expenses 335 131 (1)
Other 51 206 255
--------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 875 826 807
Net cash used in discontinued operations - - (350)
Net cash provided by operations $875 $826 $457
--------------------------------------------------------------------------------------------------------------
</TABLE>
16. NON-CASH INVESTING AND FINANCING ACTIVITIES
Significant non-cash investing and financing activities include the
transfer of Citigroup common stock to Citigroup preferred stock valued at
$987 million in 1998 and the conversion of $119 million of real estate held
for sale to other invested assets as a joint venture in 1997.
50
<PAGE> 52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
17. OPERATING SEGMENTS
The Company has two reportable business segments that are separately managed due
to differences in products, services, marketing strategy and resource
management. The business of each segment is maintained and reported through
separate legal entities within the Company. The management groups of each
segment report separately to the common ultimate parent, Citigroup Inc.
The TRAVELERS LIFE AND ANNUITY business segment consolidates primarily the
business of Travelers Insurance Company and The Travelers Life and Annuity
Company. The Travelers Life and Annuity business segment 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 PRIMERICA LIFE business segment consolidates primarily the business of
Primerica Life Insurance Company and National Benefit Life Insurance Company.
The Primerica Life business segment offers individual life products, primarily
term insurance, to customers through a nationwide sales force of approximately
80,000 full and part-time licensed Personal Financial Analysts.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1), except that management
also includes receipts on long-duration contracts (universal life-type and
investment contracts) as deposits along with premiums in measuring business
volume.
BUSINESS SEGMENT INFORMATION:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TRAVELERS LIFE AND PRIMERICA LIFE
1998 ($ IN MILLIONS) ANNUITY INSURANCE TOTAL
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Volume:
Premiums $ 683 $ 1,057 $ 1,740
Deposits 7,693 -- 7,693
------- ------- -------
Total business volume $ 8,376 $ 1,057 $ 9,433
Net investment income 1,965 220 2,185
Interest credited to contractholders 876 -- 876
Amortization of deferred acquisition costs and value of
insurance in force 115 196 311
Federal income taxes on Operating Income 260 170 430
Operating Income (excludes realized gains or losses and
the related FIT) $ 493 $ 312 $ 805
Segment Assets $49,646 $ 6,902 $56,548
</TABLE>
51
<PAGE> 53
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TRAVELERS LIFE AND PRIMERICA LIFE
1997 ($ IN MILLIONS) ANNUITY INSURANCE TOTAL
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Volume
Premiums $ 548 $ 1,035 $ 1,583
Deposits 5,276 -- 5,276
------- ------- -------
Total business volume $ 5,824 $ 1,035 $ 6,859
Net investment income 1,836 201 2,037
Interest credited to contractholders 829 -- 829
Amortization of deferred acquisition costs and value of
insurance in force 96 197 293
Federal income taxes on Operating Income 221 153 374
Operating Income (excludes realized gains or losses and
the related FIT) $ 427 $ 283 $ 710
Segment Assets $42,330 $ 7,110 $49,440
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
TRAVELERS LIFE AND PRIMERICA LIFE
1996 ($ IN MILLIONS) ANNUITY INSURANCE TOTAL
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Volume:
Premiums $ 357 $ 1,030 $ 1,387
Deposits 3,502 -- 3,502
------- ------- -------
Total business volume $ 3,859 $ 1,030 $ 4,889
Net investment income 1,775 175 1,950
Interest credited to contractholders 863 -- 863
Amortization of deferred acquisition costs and value of
insurance in force 83 198 281
Federal income taxes on Operating Income 189 130 319
Operating Income (excludes realized gains or losses and
the related FIT) $ 356 $ 235 $ 591
Segment Assets $37,564 $ 5,409 $42,973
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of investments in equity method investees and total expenditures for
additions to long-lived assets other than financial instruments, long-term
customer relationships of a financial institution, mortgage and other servicing
rights, deferred policy acquisition costs, and deferred tax assets, were not
material.
52
<PAGE> 54
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
BUSINESS SEGMENT RECONCILIATION:
($ in millions)
<TABLE>
<CAPTION>
REVENUES 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total business volume $ 9,433 $ 6,859 $ 4,889
Net investment income 2,185 2,037 1,950
Realized investment gains 149 199 65
Other revenues 440 354 284
Elimination of deposits (7,693) (5,276) (3,502)
- -------------------------------------------------------------------------------
Total revenues $ 4,514 $ 4,173 $ 3,686
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total operating income of business segments $805 $710 $591
Realized investment gains net of tax 97 129 42
- --------------------------------------------------------------------------------
Income from continuing operations $902 $839 $633
================================================================================
</TABLE>
<TABLE>
<CAPTION>
ASSETS 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets of business segments $56,548 $49,440 $42,973
================================================================================
</TABLE>
<TABLE>
<CAPTION>
REVENUE BY PRODUCTS 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Annuities $ 4,198 $ 3,303 $ 2,635
Group and Payout Annuities 5,326 3,737 2,194
Individual Life & Health Insurance 2,270 2,102 1,956
Other (a) 413 307 403
Elimination of deposits (7,693) (5,276) (3,502)
- --------------------------------------------------------------------------------
Total Revenue $ 4,514 $ 4,173 $ 3,686
================================================================================
</TABLE>
(a) Other represents revenue attributable to unallocated capital and run-off
business.
The Company's revenue was derived almost entirely from U.S. domestic business.
Revenue attributable to foreign countries was insignificant.
The Company had no transactions with a single customer representing 10% or more
of its revenue.
53
<PAGE> 55
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.
54
<PAGE> 56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed:
(1) Financial Statements. See index on page 16 of this report.
(2) Financial Statement Schedules. See index on page 58 of this report.
(3) Exhibits. See Exhibit Index on page 56.
(b) Reports on Form 8-K:
None
55
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <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
</TABLE>
+ Filed herewith.
56
<PAGE> 58
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 17th day of March,
1999.
THE TRAVELERS INSURANCE COMPANY
(Registrant)
By: /s/ Jay S. Benet
------------------------------------------
Jay S. Benet
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 17th day of March, 1999.
SIGNATURE CAPACITY
/s/ Michael A. Carpenter Director and Chairman of the Board
- -----------------------------
(Michael A. Carpenter)
/s/ John Eric Daniels Director, President and Chief Executive Officer
- ----------------------------- (Principal Executive Officer)
(John Eric Daniels)
/s/ Jay S. Benet Director and Chief Financial Officer
- ----------------------------- (Principal Financial Officer and Principal
(Jay S. Benet) 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/ 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.
57
<PAGE> 59
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 Changes in Retained Earnings and Accumulated
Other Changes in Non-Owner Sources *
Consolidated Statements of Cash Flows *
Notes to Consolidated Financial Statements *
Independent Auditors' Report 59
Schedule I - Summary of Investments - Other than Investments in Related Parties 1998 60
Schedule III - Supplementary Insurance Information 1996-1998 61
Schedule IV - Reinsurance 1996-1998 62
</TABLE>
All other schedules are inapplicable for this filing.
* See index on page 16
58
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company and Subsidiaries:
Under date of January 25, 1999, we reported on the consolidated balance sheets
of The Travelers Insurance Company and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in retained
earnings and accumulated other changes in equity from non-owner sources and cash
flows for each of the years in the three-year period ended December 31, 1998,
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 LLP
Hartford, Connecticut
January 25, 1999
59
<PAGE> 61
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
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 $ 4,653 $ 4,944 $ 4,944
States, municipalities and political subdivisions 239 257 257
Foreign governments 634 672 672
Public utilities 1,767 1,848 1,848
Convertible bonds and bonds with warrants attached 195 208 208
All other corporate bonds (2) 15,372 15,710 15,710
- --------------------------------------------------------------------------------------------------------------------------
Total Bonds 22,860 23,639 23,639
Redeemable preferred stocks 113 115 115
- --------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 22,973 23,754 23,754
- --------------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Banks, trust and insurance companies 68 74 74
Industrial, miscellaneous and all other 61 96 96
- --------------------------------------------------------------------------------------------------------------------------
Total Common Stocks 129 170 170
Nonredeemable preferred stocks 345 348 348
- --------------------------------------------------------------------------------------------------------------------------
Total equity securities 474 518 518
Mortgage Loans 2,606 2,606
Real Estate Held For Sale 143 143
Policy Loans 1,857 1,857
Short-Term Securities 1,098 1,098
Other Investments (3) (4) 1,950 1,950
- --------------------------------------------------------------------------------------------------------------------------
Total Investments $31,101 $31,926
===========================================================================================================================
</TABLE>
(1) Determined in accordance with methods described in Notes 1 and 13 of
the Notes to the Consolidated Financial Statements.
(2) Excludes $139 million fair value of investment in affiliated
partnership interests.
(3) Includes equity of $250 million in real estate joint ventures.
(4) Excludes $987 million fair value of Citigroup Inc. preferred stock and
$500 million Citigroup Inc. loan. See Note 9 of Notes to the
Consolidated Financial Statements.
60
<PAGE> 62
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
($ in millions)
1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
DEFERRED POLICY FUTURE POLICY
ACQUISITION COSTS BENEFITS, OTHER POLICY
AND VALUE OF LOSSES, CLAIMS CLAIMS AND
INSURANCE IN AND LOSS BENEFITS PREMIUM
FORCE EXPENSES (1) PAYABLE REVENUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Life and Annuity $ 986 $26,068 $ 232 $ 683
Primerica Life 1,581 2,619 146 1,057
- --------------------------------------------------------------------------------------------------------------------------------
Total Continuing Operations $ 2,567 $28,687 $ 378 $ 1,740
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
AMORTIZATION OF
DEFERRED POLICY
NET BENEFITS, ACQUISITION COSTS OTHER
INVESTMENT CLAIMS AND AND VALUE OF OPERATING PREMIUMS
INCOME LOSSES (2) INSURANCE IN FORCE EXPENSES WRITTEN
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Travelers Life and Annuity $ 1,965 $ 1,867 $ 115 $ 279 $ 683
Primerica Life 220 484 196 190 1,068
- -------------------------------------------------------------------------------------------------------------------------------
Total Continuing Operations $ 2,185 $ 2,351 $ 311 $ 469 $ 1,751
===============================================================================================================================
</TABLE>
1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
DEFERRED POLICY FUTURE POLICY
ACQUISITION COSTS BENEFITS, OTHER POLICY
AND VALUE OF LOSSES, CLAIMS CLAIMS AND
INSURANCE IN AND LOSS BENEFITS PREMIUM
FORCE EXPENSES (1) PAYABLE REVENUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Life and Annuity $ 783 $24,976 $ 232 $ 548
Primerica Life 1,529 2,506 146 1,035
- -------------------------------------------------------------------------------------------------------------------------------
Total Continuing Operations $ 2,312 $27,482 $ 378 $ 1,583
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
AMORTIZATION OF
DEFERRED POLICY
NET BENEFITS, ACQUISITION COSTS OTHER
INVESTMENT CLAIMS AND AND VALUE OF OPERATING PREMIUMS
INCOME LOSSES (2) INSURANCE IN FORCE EXPENSES WRITTEN
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Travelers Life and Annuity $ 1,836 $ 1,672 $ 96 $ 257 $ 545
Primerica Life 201 498 197 170 1,051
- -------------------------------------------------------------------------------------------------------------------------------
Total Continuing Operations $ 2,037 $ 2,170 $ 293 $ 427 $ 1,596
===============================================================================================================================
</TABLE>
1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
DEFERRED POLICY FUTURE POLICY
ACQUISITION COSTS BENEFITS, OTHER POLICY
AND VALUE OF LOSSES, CLAIMS CLAIMS AND
INSURANCE IN AND LOSS BENEFITS PREMIUM
FORCE EXPENSES (1) PAYABLE REVENUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Life and Annuity $ 644 $22,646 $ 387 $ 357
Primerica Life 1,489 2,377 133 1,030
- -------------------------------------------------------------------------------------------------------------------------------
Total Continuing Operations $ 2,133 $25,023 $ 520 $ 1,387
===============================================================================================================================
Discontinued Operations -- 928 16
- ----------------------------------------------------------------------------------------------------
Consolidated $ 2,133 $25,951 $ 536
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
AMORTIZATION OF
DEFERRED POLICY
NET BENEFITS, ACQUISITION COSTS OTHER
INVESTMENT CLAIMS AND AND VALUE OF OPERATING PREMIUMS
INCOME LOSSES (2) INSURANCE IN FORCE EXPENSES WRITTEN
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Travelers Life and Annuity $ 1,775 $ 1,521 $ 83 $ 224 $ 349
Primerica Life 175 529 198 156 1,045
- -------------------------------------------------------------------------------------------------------------------------------
Total Continuing Operations $ 1,950 $ 2,050 $ 281 $ 380 $ 1,394
===============================================================================================================================
Discontinued Operations
- ---------------------------------
Consolidated
=================================
</TABLE>
(1) Includes contractholder funds.
(2) Includes interest credited to contractholders.
<PAGE> 63
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
($ in millions)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CEDED TO ASSUMED PERCENTAGE OF
GROSS OTHER FROM OTHER NET AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
- ------------------------------------------------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C> <C>
Life Insurance In Force $439,784 $201,294 $ 105 $238,595 --
Premiums:
Life insurance $ 1,784 $ 304 $ -- $ 1,480 --
Accident and health insurance 277 17 -- 260 --
Property casualty 238 238 -- -- --
-------- -------- -------- -------- --------
Total Premiums $ 2,299 $ 559 $ -- $ 1,740 --
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997
<S> <C> <C> <C> <C> <C>
Life Insurance In Force $421,513 $175,762 $ 72 $245,823 --
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 --
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996
<S> <C> <C> <C> <C> <C>
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 --
======== ======== ======== ======== ========
</TABLE>
62
<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> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 23,893
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 518
<MORTGAGE> 2,606
<REAL-ESTATE> 143
<TOTAL-INVEST> 33,552
<CASH> 65
<RECOVER-REINSURE> 3,387
<DEFERRED-ACQUISITION> 2,567
<TOTAL-ASSETS> 56,548
<POLICY-LOSSES> 12,326
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 32,044
<NOTES-PAYABLE> 0
0
0
<COMMON> 100
<OTHER-SE> 8,000
<TOTAL-LIABILITY-AND-EQUITY> 56,548
1,740
<INVESTMENT-INCOME> 2,185
<INVESTMENT-GAINS> 149
<OTHER-INCOME> 440
<BENEFITS> 2,351
<UNDERWRITING-AMORTIZATION> 311
<UNDERWRITING-OTHER> 469
<INCOME-PRETAX> 1,383
<INCOME-TAX> 481
<INCOME-CONTINUING> 902
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 902
<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>
