SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
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Commission file number 1-9924
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THE TRAVELERS INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1568099
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
65 East 55th Street, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 891-8900
(Registrant's telephone number, including area code)
_______________
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
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<S> <C>
Common Stock, par value $ .01 per share New York Stock Exchange and Pacific Stock Exchange
Depositary Shares, each representing 1/10th of a New York Stock Exchange
share of 8.125% Cumulative Preferred Stock, Series A
5.50% Convertible Preferred Stock, Series B New York Stock Exchange
Depositary Shares, each representing 1/2 of a New York Stock Exchange
share of 9.25% Preferred Stock, Series D
7 3/4% Notes Due June 15, 1999 New York Stock Exchange
7 5/8% Notes Due January 15, 1997 New York Stock Exchange
1998 Warrants to Purchase Common Stock New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
</TABLE>
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 _______
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 10, 1995 was approximately $11.84 billion.
As of March 10, 1995, 320,960,465 shares of the registrant's common stock,
par value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1994 are incorporated by reference into Part
II of this Form 10-K.
Certain portions of the registrant's Proxy Statement for the 1995 Annual
Meeting of Stockholders to be held on April 26, 1995 are incorporated by
reference into Part III of this Form 10-K.
<PAGE>
THE TRAVELERS INC.
Annual Report on Form 10-K
For Fiscal Year Ended December 31, 1994
______________________________
TABLE OF CONTENTS
Form 10-K
Item Number
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Part I
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1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 58
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 59
4. Submission of Matters to a Vote of Security Holders . . . . 62
Part II
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5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . 62
6. Selected Financial Data . . . . . . . . . . . . . . . . . . 63
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 63
8. Financial Statements and Supplementary Data . . . . . . . . 63
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 63
Part III
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10. Directors and Executive Officers of the Registrant . . . . . 63
11. Executive Compensation . . . . . . . . . . . . . . . . . . . 64
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . 64
13. Certain Relationships and Related Transactions . . . . . . . 64
Part IV
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14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 64
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . 66
Index to Consolidated Financial Statements and Schedules .. F-1
<PAGE>
PART I
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Item 1. BUSINESS.
THE COMPANY
The Travelers Inc. (the "Company") is a financial services
holding company engaged, through its subsidiaries, principally in
four business segments: (i) Investment Services; (ii) Consumer
Finance Services; (iii) Life Insurance Services; and (iv)
Property & Casualty Insurance Services.
On December 31, 1993, the Company acquired the
approximately 73% of the common stock of The Travelers
Corporation, a Connecticut corporation ("old Travelers"), it did
not already own, through the merger of old Travelers into the
Company (the "Merger"). The Company's results of operations for
periods prior to the Merger do not include those of old
Travelers, other than for the equity in earnings relating to the
27% previously owned. See Note 1 of Notes to Consolidated
Financial Statements.
In December 1994, the Company sold all of the capital
stock of American Capital Management & Research, Inc. ("ACMR")
owned by it to The Van Kampen Merritt Companies, Inc. ("VKM") for
a purchase price of approximately $430 million. See "Investment
Services -- Other Operations."
On January 3, 1995, the Company completed the sale of its
group life and related businesses to Metropolitan Life Insurance
Company ("MetLife"). The purchase price for the group life
business was $350 million. In connection with the sale, the
Company agreed to cede to MetLife 100% of its risks in the
businesses sold on an indemnity reinsurance basis, effective
January 1, 1995.
Also on January 3, 1995, the Company and MetLife, and
certain of their subsidiaries, contributed their medical
businesses to The MetraHealth Companies, Inc. ("MetraHealth"), a
newly formed joint venture, in exchange for shares of common
stock of MetraHealth. The Company and MetLife are equal partners
in the joint venture. The Company's total contribution to
MetraHealth amounted to approximately $448 million, at carrying
value. The Company owns approximately 48% of the outstanding
capital stock of MetraHealth, and its investment will be
accounted for on the equity method. See Note 3 of Notes to
Consolidated Financial Statements and "Other Information --
MetraHealth." All of the businesses sold to MetLife or
contributed to MetraHealth were included in the Company's Managed
Care and Employee Benefits Operations.
The periodic reports of Commercial Credit Company ("CCC"),
Smith Barney Holdings Inc. ("SB Holdings"), and The Travelers
Insurance Company ("TIC"), subsidiaries of the Company that make
filings pursuant to the Securities Exchange Act of 1934, as
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<PAGE>
amended (the "Exchange Act"), provide additional business and
financial information concerning those companies and their
consolidated subsidiaries.
The principal executive offices of the Company are located
at 65 East 55th Street, New York, New York 10022; telephone
number 212-891-8900. The Company plans to relocate its executive
offices to 388 Greenwich Street, New York, New York 10013 during
the second quarter of 1995.
This discussion of the Company's business is organized as
follows: (i) a description of each of the Company's four business
segments; (ii) combined product line information for the
property-casualty businesses; (iii) a description of the
Corporate and Other Operations segment; and (iv) certain other
information. A glossary of insurance terms is included beginning
on page 54.
INVESTMENT SERVICES
This segment includes the operations of SB Holdings and
its subsidiaries and, through 1994, the mutual fund and other
asset management activities of ACMR and the Company's interest in
RCM Capital Management, a California Limited Partnership ("RCM").
Smith Barney
SB Holdings provides investment banking, asset management,
brokerage and other financial services through its subsidiaries.
Its principal operating subsidiary is Smith Barney Inc. ("SBI"),
an investment banking, securities trading and brokerage firm that
traces its origins back to 1873. In July 1993, SB Holdings
acquired substantially all of the assets and certain of the
liabilities of the domestic retail brokerage business and the
asset management business of Shearson Lehman Brothers Holdings
Inc. and its subsidiaries ("SLB") for approximately $1.6 billion
(the "Shearson Acquisition"). Smith Barney has agreed to pay
additional amounts based upon its performance, consisting of up
to $50 million per year for three years based on revenues and 10%
of after-tax profits in excess of $250 million per year over a
five-year period. See Note 1 of Notes to Consolidated Financial
Statements. As part of the Shearson Acquisition, The Robinson-
Humphrey Company ("R-H"), a regional firm headquartered in
Atlanta, Georgia, became a subsidiary of SBI. As used herein,
unless the context otherwise requires, "Smith Barney" refers to
SB Holdings and its consolidated subsidiaries.
Smith Barney operates through approximately 475 offices
throughout the United States, and 12 offices in nine foreign
countries. With over 11,000 financial consultants, the Company
believes that Smith Barney is the second largest brokerage firm
in the United States.
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Investment Banking and Securities Brokerage
Smith Barney is an investment banking and securities
trading and brokerage firm serving United States and foreign
corporations, governments and institutional and individual
investors. Its business includes securities, options and
commodities brokerage for domestic and international
institutional and individual clients; underwriting and
distribution of securities; arranging for the private placement
of securities; assisting in mergers and acquisitions and
providing financial advisory services; market making and trading
in corporate debt and equity, United States government and agency,
mortgage-related and municipal securities and foreign exchange,
futures and forward contracts; customer financing activities;
securities lending activities; investment management and advisory
services; securities research; and other related activities.
Smith Barney's investment banking services include the
underwriting of debt and equity issues for United States and
foreign corporations and for state, local and other governmental
authorities. Frequently, Smith Barney acts as managing
underwriter in corporate and public securities offerings. Smith
Barney also acts as a private placement agent for various
clients. In this role Smith Barney helps to place securities for
clients with large institutions and other eligible investors.
Smith Barney also provides financial advice to investment banking
clients on a wide variety of transactions including securities
offerings, mergers and acquisitions and corporate restructurings.
Smith Barney executes securities brokerage transactions on
all major United States exchanges and distributes a wide variety
of financial products. It makes inter-dealer markets and trades
as principal in corporate debt and equity securities primarily of
United States corporate issuers, United States and foreign
government and agency securities, mortgage-related securities,
whole loans, municipal and other tax-exempt securities and
emerging market debt securities. The firm carries inventories of
securities to facilitate sales to customers and other dealers and
with a view to realizing trading gains. SBI is one of the
leading dealers in municipal securities and is a "Primary Dealer"
in United States government securities, as designated by the
Federal Reserve Bank of New York. Its daily trading inventory
positions in United States government and agency securities are
financed largely through the use of repurchase agreements
pursuant to which Smith Barney sells the securities and
simultaneously agrees to repurchase them at a future date. Smith
Barney also acts as an intermediary between borrowers and lenders
of short-term funds utilizing repurchase and reverse repurchase
agreements. Smith Barney uses derivative financial instruments
to facilitate customer transactions and to manage exposure to
interest rate, currency and market risk. On a limited basis,
Smith Barney also began structuring derivative financial
instruments in 1994, as part of its proprietary trading
activities. In addition, for its own account Smith Barney
engages in a limited manner in certain arbitrage activities,
which primarily seek to benefit from temporary price
discrepancies that occur with respect to related securities or to
the same security on different markets. Smith Barney also
engages in the borrowing and lending of securities. In June
1994, the Smith Barney network of financial consultants began
selling TIC individual products, primarily variable annuities.
See "Life Insurance Services -- Travelers Life and Annuities."
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Smith Barney executes transactions in large blocks of
exchange-listed stocks, usually with institutional investors, and
often acts as principal to facilitate these transactions. It
makes markets, buying and selling as principal, in common stocks,
convertible preferred stocks, warrants and other securities
traded on the NASDAQ system or otherwise in the over-the-counter
market. Smith Barney also maintains trading positions in equity
options, convertible securities, debt options, foreign exchange
and commodities instruments. It executes significant client
transactions in both listed and unlisted options and in foreign
exchange, and often acts as principal to facilitate these
transactions. Smith Barney also sells various types of
structured securities on both a principal and an agency basis.
The firm's securities trading and investment activities involve
significant risk in that the values of positions carried in its
trading and investment accounts are subject to market
fluctuations. Smith Barney engages in a variety of financial
techniques designed to manage this risk.
Customer Financing
Customers' securities transactions are executed on either
a cash or margin basis. Federal regulations prescribe the
minimum original margin that must be deposited by securities
purchasers, and exchange regulations prescribe the minimum
margins that must be maintained by customers. Smith Barney
imposes margin maintenance requirements that are equal to or
exceed those required by exchange regulations. Such requirements
are intended to reduce the risk assumed by Smith Barney that a
market decline will reduce the value of a customer's collateral
below the amount of the customer's indebtedness before the
collateral can be sold. Substantially all transactions in
commodities futures contracts are on margin subject to individual
exchange regulations. Margin, in the case of commodities futures
contracts, is primarily funded in the form of cash or United
States Treasury securities. Commodities transactions involve
substantial risk, principally because of low margin requirements
permitted by the exchanges.
Income earned on financing customers' securities
transactions provides Smith Barney with an additional source of
income. Credit losses may arise as a result of this financing
activity; however, such losses have not been material.
Asset Management
Smith Barney provides asset management services to
corporations, not-for-profit institutions, pension and profit-
sharing plans, municipalities and individual investors in equity,
fixed income and other securities, including commodities futures
contracts. The Smith Barney Consulting Group is a money
management consulting service that offers "wrap fee" and other
programs for individual as well as institutional investors.
"Wrap fee" accounts consist of customer accounts paying a single
asset-based fee for multiple services that may include brokerage,
custody and advisory services. The Smith Barney TRAK(R) program
provides investors with personalized investment management
through a broad array of investment portfolios. SBI receives a
fee, but does not have specific investment discretion, with
respect to assets invested through TRAK(R).
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Smith Barney provides asset management services to, and
sponsors, 132 separate portfolios within 50 investment companies
that invest in United States and foreign corporate debt and
equity securities, and municipal and United States and foreign
government and agency securities, including 11 taxable or tax-
exempt money market portfolios. The portfolios managed by Smith
Barney have various investment objectives, including growth,
growth and income, income and tax-exempt income. Smith Barney
also provides investment management and advisory services to four
affiliated insurance company separate accounts.
At December 31, 1994, Smith Barney had total assets under
management of approximately $74.1 billion, consisting of
approximately $28.9 billion of money market funds, $26.0 billion
of other mutual funds and closed-end funds and $19.2 billion of
other portfolio assets of institutional and individual clients.
These amounts exclude assets held in trust by the trust companies
owned directly by the Company and described under the heading
"Miscellaneous Activities" below, except for the portion of such
assets that are held in accounts actively managed by Smith
Barney. Smith Barney also sells mutual funds sponsored by other
organizations. In addition, Smith Barney's Unit Trust business
(i.e., unit investment trusts that do not involve continuing
investment management) consists of the TEST and CST series of
securities trusts and other proprietary unit trusts. The TEST
and CST securities trusts, for which Smith Barney is the sole
sponsor of the syndicate, consist of municipal and corporate
securities. A total of $2.8 billion par value of all series of
TEST and CST trusts was outstanding as of December 31, 1994. The
other proprietary unit trusts, consisting primarily of equity and
taxable bond trusts for which Smith Barney is the sole sponsor,
have a market value of approximately $1.8 billion as of December
31, 1994. Smith Barney also participates in a syndicate that
sponsors unit trusts including equity, taxable and tax-exempt
fixed income trusts.
Miscellaneous Activities
In November 1994, Smith Barney sold its interest in HG
Asia (Holdings) Limited ("HG Asia") for $55 million. HG Asia and
its subsidiaries act as brokers and dealers in securities that
are primarily traded in countries in Asia.
Certain subsidiaries of the Company are chartered as trust
companies and provide a full range of fiduciary services with a
particular emphasis on personal trust services. Another
subsidiary offers a broad range of trustee services for qualified
retirement plans, with particular emphasis on the 401(k) plan
market. Each of these trust companies is subject to the
supervision of the state banking authority where it was chartered
and uses the distribution network of SBI to market its services.
Although these trust companies are subsidiaries of the Company
and not of SB Holdings, their results are included with Smith
Barney for segment reporting purposes. Smith Barney provides
certain advisory and support services to the trust companies and
receives fees for such services.
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Other Operations
In December 1994, the Company sold all of the capital
stock of ACMR owned by it to VKM for approximately $430 million.
Following the sale, ACMR was merged into a subsidiary of VKM, and
the surviving entity was renamed VK/AC Holding, Inc. ("VK/AC
Holding"). In connection with the transaction a subsidiary of
the Company purchased common stock of VK/AC Holding, representing
approximately 4.9% of the issued and outstanding common stock.
The Company also has an option to purchase up to an additional 5%
of the common stock of VK/AC Holding, exercisable for a two-year
period beginning in December 1999. Certain subsidiaries of the
Company continue to provide services to the Common Sense(R) II
Funds.1 See "Life Insurance Services -- Primerica Financial
Services."
A subsidiary of the Company is the sole limited partner in
RCM, a limited partnership headquartered in San Francisco,
California, which provides investment management services,
principally for pension funds, other institutional clients and
high net worth individuals. Assets under management by RCM were
$22.4 billion at December 31, 1994, as compared to $24.5 billion
at December 31, 1993 and $23.8 billion at December 31, 1992.
General
Competition
The businesses included in the Investment Services segment
are highly competitive. The principal factors affecting
competition in the investment banking and securities brokerage
industry are the quality and ability of professional personnel
and the relative prices of services and products offered. In
addition to competition from other investment banking firms, both
domestic and international, and securities brokerage companies
and discount securities brokerage operations, including regional
firms in the United States, there has been increasing competition
from other sources, such as commercial banks, insurance companies
and other major companies that have entered the investment
banking and securities brokerage industry, in many cases through
acquisitions. Certain of those competitors may have greater
capital and other resources than Smith Barney. The Federal
Reserve Board has substantially removed the barrier originally
erected by the Glass-Steagall Act restricting investment banking
activities of commercial banks and their affiliates, by
permitting certain commercial banks to engage, through
affiliates, in the underwriting of and dealing in certain types
of securities, subject to certain limitations. Proposed
legislation has been introduced in Congress that would modify
certain other provisions of the Glass-Steagall Act and other laws
and regulations affecting the financial services industry. The
potential impact of such legislation on the Company's businesses
cannot be predicted at this time.
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1 Common Sense is a registered trademark of American
Capital Asset Management, Inc. ("ACAM").
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Competitors of the Company's mutual funds and asset
management groups include a large number of mutual fund
management and sales companies and asset management firms.
Competition in mutual fund sales and investment management is
based on investment performance, service to clients, and product
design.
Regulation
Certain of the Company's subsidiaries are registered as
broker-dealers and as investment advisers with the Securities and
Exchange Commission (the "Commission") and as futures commission
merchants and as a commodity pool operator with the Commodity
Futures Trading Commission ("CFTC"). SBI and R-H are members of
the New York Stock Exchange, Inc. (the "NYSE") and other
principal United States securities exchanges, as well as the
National Association of Securities Dealers, Inc. ("NASD") and the
National Futures Association ("NFA"), a not-for-profit membership
corporation which has been designated as a registered futures
association by the CFTC. SBI and R-H are registered as broker-
dealers in all 50 states, the District of Columbia and Puerto
Rico, and in addition are registered as investment advisers in
certain states that require such registration. SBI is also a
reporting dealer to the Federal Reserve Bank of New York, a
member of the principal United States futures exchanges and a
registered broker-dealer in Guam. Both SBI and R-H are subject
to extensive regulation, primarily for the benefit of their
customers, including minimum capital requirements, which are
promulgated and enforced by, among others, the Commission, the
CFTC, the NFA, the NYSE, various self-regulatory organizations of
which SBI and R-H are members and the securities administrators of
the 50 states, the District of Columbia and Puerto Rico and, in SBI's
case, Guam. The Commission and the CFTC also require certain
registered broker-dealers (including SBI) to maintain records
concerning certain financial and securities activities of affiliated
companies that may be material to the broker-dealer, and to file
certain financial and other information regarding such affiliated
companies.
In addition, the Investment Company Act of 1940 generally
prohibits registered investment companies managed by affiliates
of the Company from, among other things, entering into securities
transactions on a principal basis with affiliated broker-dealers,
including SBI, and restricts their ability to purchase securities
in underwritings in which an affiliated broker-dealer
participates as an underwriting syndicate member. Transactions
between Smith Barney and RCM are also subject to certain
limitations.
Smith Barney's operations abroad, described in this
paragraph, are conducted through various subsidiaries. Smith
Barney has representative offices in Paris, Beijing and Manama,
Bahrain. Its activities in the United Kingdom, which include
investment banking, brokerage and asset management services, are
subject to the Financial Services Act 1986, which regulates
organizations that conduct investment businesses in the United
Kingdom (including imposing capital and liquidity requirements),
and to the rules of the Securities and Futures Authority and the
Investment Management Regulatory Organisation. Smith Barney is a
member of the International Petroleum Exchange, the London Metals
Exchange and the
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London International Financial Futures and Options Exchange, and
as such is subject to the rules and regulations of those
Exchanges. In France, Smith Barney operates as a regulated
securities house, a member of the MATIF, and an authorized mutual
fund manager. Smith Barney is a licensed securities company in
Japan and, as such, its activities in Japan are subject to
Japanese law applicable to foreign securities firms. Smith
Barney is also a member of the Tokyo Stock Exchange and,
therefore, its activities in Japan are subject to the rules and
regulations of that Exchange. Smith Barney conducts securities
and commodities businesses in Singapore which are regulated by
the Monetary Authority of Singapore. Additionally, certain
subsidiaries of SB Holdings are registered as a "dealer" and
"adviser" with the Hong Kong Securities and Futures Commission,
as an "international dealer" and as an "investment dealer" with
the Ontario Securities Commission, as broker-dealers with the
Securities Board of The Netherlands and as a "B license holder"
with the Zurich Stock Exchange.
In connection with the mutual funds business, the Company
and its subsidiaries must comply with regulations of a number of
regulatory agencies and organizations, including the Commission
and the NASD. The Company is the indirect parent of investment
advisers registered and regulated under the Investment Advisers
Act of 1940, and of companies that distribute shares of mutual
funds pursuant to distribution agreements subject to regulation
under the Investment Company Act of 1940. Under those Acts, the
advisory contracts between the Company's investment adviser
subsidiaries and the mutual funds they serve, as well as the
mutual fund distribution agreements, would automatically
terminate upon an assignment of such contracts by the investment
adviser or the fund distribution company, as the case may be.
Such an assignment would be presumed to have occurred if any
party were to acquire more than 25% of the Company's voting
securities. Continuation of advisory and distribution
relationships under these circumstances could be achieved only by
obtaining consent to the assignment from the shareholders of the
mutual funds involved.
SBI and R-H are members of the Securities Investor
Protection Corporation ("SIPC"), which, in the event of
liquidation of a broker-dealer, provides protection for
customers' securities accounts held by the firm of up to $500,000
for each eligible customer, subject to a limitation of $100,000
for claims for cash balances. In addition, Smith Barney has
purchased additional coverage from a subsidiary of the Company,
Gulf Insurance Company, for eligible customers.
As registered broker-dealers, SBI and R-H are subject to
the Commission's net capital rule (Rule 15c3-1, the "Net Capital
Rule") promulgated under the Exchange Act. SBI and R-H compute
net capital under the alternative method of the Net Capital Rule
which requires the maintenance of minimum net capital, as
defined. A member of the NYSE may be required to reduce its
business if its net capital is less than 4% of aggregate debit
balances (as defined) and may also be prohibited from expanding
its business or paying cash dividends if resulting net capital
would be less than 5% of aggregate debit balances. Furthermore,
the Net Capital Rule does not permit withdrawal of equity or
subordinated capital if the resulting net capital would be less
than 5% of such debit balances.
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The Net Capital Rule also limits the ability of broker-
dealers to transfer large amounts of capital to parent companies
and other affiliates. Under the Net Capital Rule, equity capital
cannot be withdrawn from a broker-dealer without the prior
approval of the Commission when net capital after the withdrawal
would be less than 25% of its securities position "haircuts," or
deductions from capital of certain specified percentages of the
market value of securities to reflect the possibility of a market
decline prior to disposition. In addition, the Net Capital Rule
requires broker-dealers to notify the Commission and the
appropriate self-regulatory organization two business days before
a withdrawal of excess net capital if the withdrawal would exceed
the greater of $500,000 or 30% of the broker-dealer's excess net
capital, and two business days after a withdrawal that exceeds
the greater of $500,000 or 20% of excess net capital. Finally,
the Net Capital Rule authorizes the Commission to order a freeze
on the transfer of capital if a broker-dealer plans a withdrawal
of more than 30% of its excess net capital and the Commission
believes that such a withdrawal would be detrimental to the
financial integrity of the firm or would jeopardize the broker-
dealer's ability to pay its customers.
CONSUMER FINANCE SERVICES
The Company's Consumer Finance Services segment includes
consumer lending services conducted primarily under the name
"Commercial Credit," as well as credit-related insurance and
credit card services. CCC's predecessor was founded in 1912.
Consumer Finance
As of December 31, 1994, CCC maintained 828 loan offices
in 42 states, and it plans to open approximately 50 additional
offices in 1995. The Company owns two state-chartered banks
headquartered in Newark, Delaware, which generally limit their
activities to offering credit card services nationwide.
Loans to consumers by the Consumer Finance Services unit
include secured and unsecured personal loans, both fixed and
variable rate real estate-secured loans and loans to finance
consumer goods purchases. Credit card loans are discussed below.
CCC's loan offices are generally located in small to medium-sized
communities in suburban or rural areas, and are managed by
individuals who generally have considerable consumer lending
experience. The primary market for CCC's consumer loans consists
of households with an annual income of $20,000 to $50,000. The
number of loan customers (excluding credit card customers) was
approximately 1,250,000 at December 31, 1994, as compared to
approximately 1,142,000 at December 31, 1993, and approximately
1,058,000 at December 31, 1992. A CCC loan program solicits
applications for loans through the Primerica Financial Services
sales force. At December 31, 1994, the total loans outstanding
generated from this program was approximately $1.1 billion, as
compared to approximately $765
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million at December 31, 1993 and approximately $487 million at
December 31, 1992. See "Life Insurance Services -- Primerica
Financial Services."
The average amount of cash advanced per personal loan made
was approximately $4,200 in 1994 and $3,800 in each of 1993 and
1992. The average amount of cash advanced per real estate-
secured loan made was approximately $28,400 in 1994,
approximately $28,800 in 1993 and approximately $26,000 in 1992.
The average annual yield for loans in 1994 was 15.41%, as
compared to 15.83% in 1993 and 16.31% in 1992. The average
annual yield for personal loans in 1994 was 20.20%, as compared
to 20.11% in 1993 and 19.99% in 1992, and for real estate-secured
loans it was 12.20% in 1994, as compared to 13.14% in 1993 and
14.05% in 1992. The average yield for real estate-secured loans
has been affected by the introduction in 1993 of a variable rate
product and by decreases generally in prevailing market interest
rates. The Company's average net interest margin for loans was
8.76% in 1994, 8.44% in 1993 and 8.66% in 1992.
In the late 1980's, both delinquencies and charge-offs had
increased, reflecting the recessionary economic environment. CCC
took steps to combat this trend, by tightening the credit
criteria used for making new loans and placing a greater emphasis
on collection policies and practices. As a result of these
measures and recent economic trends, delinquency rates and
charge-offs have improved from 1992 through 1994. See
"Delinquent Receivables and Loss Experience," below.
Analysis of Consumer Finance Receivables
For an analysis of consumer finance receivables, net of
unearned finance charges ("Consumer Finance Receivables"), see
Note 9 of Notes to Consolidated Financial Statements.
Delinquent Receivables and Loss Experience
Due to the nature of the finance business, some customer
delinquency and loss is unavoidable. The management of the
consumer finance business attempts to control customer
delinquencies through careful evaluation of each borrower's
application and credit history at the time the loan is made or
acquired, and appropriate collection activity. An account is
considered delinquent for financial reporting purposes when a
payment is more than 60 days past due, based on the original or
extended terms of the contract. The delinquency and loss
experience on real estate-secured loans is generally more
favorable than on personal loans.
The table on the next page shows the ratio of receivables
delinquent for 60 days or more on a contractual basis (i.e., more
than 60 days past due) to gross receivables outstanding:
10
<PAGE>
Ratio of Receivables Delinquent 60 Days or More to Gross
Receivables Outstanding (1)
Real
Estate-
Personal Secured Credit Sales Total
As of December 31, Loans Loans Cards Finance Consumer
------------------ ----- ----- ----- ------- --------
1994 2.40% 1.48% 1.05% 1.79% 1.88%
1993 2.62% 2.15% 1.03% 1.54% 2.21%
1992 3.02% 2.31% 1.87% 1.48% 2.55%
__________________________
(1) The receivable balance used for these ratios is before the
deduction of unearned finance charges and excludes accrued
interest receivable. Receivables delinquent 60 days or
more include, for all periods presented, accounts in the
process of foreclosure.
The following table shows the ratio of net charge-offs to
average Consumer Finance Receivables. For all periods presented,
the ratios shown below give effect to all deferred origination
costs.
Ratio of Net Charge-Offs to Average Consumer Finance Receivables
Real
Estate-
Year Ended Personal Secured Credit Sales Total
December 31, Loans Loans Cards Finance Consumer
------------ ----- ----- ----- ------- --------
1994 3.50% 0.82% 1.83% 2.03% 2.08%
1993 4.08% 0.84% 2.56% 1.78% 2.36%
1992 5.09% 0.74% 4.01% 2.05% 2.84%
The following table sets forth information regarding the
ratio of allowance for losses to Consumer Finance Receivables.
Ratio of Allowance For Losses to Consumer Finance Receivables
As of December 31,
------------------
1994 2.64%
1993 2.64%
1992 2.91%
Credit-Related Insurance
American Health and Life Insurance Company ("AHL"), a
subsidiary of CCC, underwrites or arranges for credit-related
insurance, which is offered to customers of the consumer finance
business. AHL has an A+ (superior) rating from the A.M. Best
Company, whose ratings may be revised or withdrawn at any time.
Credit life insurance covers the declining balance of unpaid
indebtedness. Credit disability insurance provides
11
<PAGE>
monthly benefits during periods of covered disability. Credit
property insurance covers the loss of property given as security
for loans. Other insurance products offered or arranged for by
AHL include accidental death and dismemberment, auto single
interest and involuntary unemployment insurance. Most of AHL's
products are single premium, which premiums are earned over the
related contract period. See "Life Insurance Services" for
information concerning life and accident and health insurance
other than credit-related insurance.
The following table sets forth gross written insurance
premiums, net of refunds, for consumer finance customers:
Consumer Finance Insurance Premiums Written
(in millions)
Year Ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
Premiums written by AHL and its affiliates
Writings for consumer finance:
Credit life . . . . . . . . . $ 43.3 $ 36.4 $ 36.0
Credit disability and other . 69.3 49.2 $ 46.7
------ ------ ------
Total . . . . . . . . . . . $112.6 $ 85.6 $ 82.7
====== ====== ======
Premiums written by other insurance companies
Credit property and other . . $ 52.8 $ 38.7 $ 31.0
====== ====== ======
The increase in 1994 written premiums is primarily the
result of the increase in receivables and expanded availability
of certain products in additional states.
Credit Card Services
The Travelers Bank (formerly Primerica Bank), a subsidiary
of CCC, is a state-chartered bank located in Newark, Delaware,
which provides credit card services, including upper market gold
credit card services, to individuals and to affinity groups (such
as nationwide professional associations and fraternal
organizations). The Travelers Bank USA, another state-chartered
bank subsidiary of CCC, was formed in September 1989. The
Travelers Bank USA is not subject to certain regulatory
restrictions relating to growth and cross-marketing activities to
which The Travelers Bank is subject. See "Regulation" below.
These banks generally limit their activities to credit card
operations.
The table on the next page sets forth aggregate
information regarding credit cards issued by The Travelers Bank
and The Travelers Bank USA:
12
<PAGE>
Credit Cardholders and Total Outstandings
(outstandings in millions)
As of and for the year ended December 31,
-----------------------------------------
1994 1993 1992
---- ---- ----
Approximate total credit cardholders 621,000 534,000 423,000
Approximate gold credit cardholders 519,000 478,000 371,000
Total outstandings $712.5 $697.1 $538.2
Average annual yield 11.88% 11.66% 12.12%
The primary market for the banks' credit cards consists of
households with annual incomes of $40,000 and above.
The banks offer deposit-taking services (which as to The
Travelers Bank USA are limited to deposits of at least $100,000
per account). At December 31, 1994, deposits of unaffiliated entities
were $73.3 million, as compared to $56.5 million at December 31, 1993
and $22.3 million at December 31, 1992. The increase in deposits in
1993 primarily resulted from a balance transfer promotion conducted by
The Travelers Bank.
Competition
The consumer finance business competes with banks, savings
and loan associations, credit unions, credit card issuers and
other consumer finance companies. Additionally, substantial
national financial services networks have been formed by major
brokerage firms, insurance companies, retailers and bank holding
companies. Some competitors have substantial local market
positions; others are part of large, diversified organizations.
Deregulation of banking institutions has greatly expanded the
consumer lending products permitted to be offered by these
institutions, and because of their long-standing insured deposit
base, many of them are able to offer financial services on very
competitive terms. The Company believes that it is able to
compete effectively with such institutions. In particular, the
Company believes that the diversity and features of the products
it offers, personal service and cultivation of repeat and
referral business support and strengthen its competitive position
in its Consumer Finance Services businesses.
Regulation
Most consumer finance activities are subject to extensive
federal and state regulation. Personal loan, real estate-secured
loan and sales finance laws generally require licensing of the
lender, limitations on the amount, duration and charges for
various categories of loans, adequate disclosure of certain
contract terms and limitations on certain collection practices
and creditor remedies. Federal consumer credit statutes
primarily require disclosure of credit terms in consumer finance
transactions. CCC's banks, which must undergo periodic
examination, are subject to additional regulations relating to
capitalization,
13
<PAGE>
leverage, reporting, dividends and permitted asset and liability
products. These banks are also covered by the Competitive
Equality Banking Act of 1987 (the "Banking Act"), which, among
other things, prevents the Company from acquiring or forming most
types of new banks or savings and loan institutions and, with
respect to The Travelers Bank, restricts cross-marketing of
products by or of certain affiliates. CCC's banks are also
subject to the Community Reinvestment Act, which requires a bank
to provide equal credit opportunity to all persons in such bank's
delineated community. The Company believes that it complies in
all material respects with applicable regulations. See
"Insurance Services - General -- Regulation" at the end of the
description of the Property & Casualty Insurance segment for a
discussion of the regulatory factors governing the insurance
businesses of CCC.
The Real Estate Settlement Procedures Act of 1974
("RESPA") has been extended to cover real estate-secured loans
that are subordinated to other mortgage loans. Generally, RESPA
requires disclosure of certain information to customers and
regulates the receipt or payment of fees or charges for services
performed.
Proposed legislation has been introduced in Congress that
would modify certain laws and regulations affecting the financial
services industry. The potential impact of such legislation on
the Company's businesses cannot be predicted at this time.
LIFE INSURANCE SERVICES
The businesses in the Company's Life Insurance Services
segment write principally individual life insurance, annuities
and pension programs. Most of these products are offered on a
nationwide basis in the United States. For information
concerning the Company's credit-related insurance businesses, see
"Consumer Finance Services."
This segment includes the operations of The Travelers
Insurance Company ("TIC") and the Primerica Financial Services
group of companies (collectively, "PFS"), including Primerica
Life Insurance Company ("Primerica Life"). TIC was incorporated
in 1863. With $40.5 billion of assets at December 31, 1994, the
Company believes that TIC, Primerica Life and TIC's other
subsidiaries together constitute one of the largest stock life
insurance groups in the United States as measured by assets at
December 31, 1994.
Because the Company's interest in old Travelers in 1993
was accounted for on the equity method, the Company's results of
operations for periods prior to the Merger do not include the
full results of TIC's business. See Notes 1 and 4 of Notes to
Consolidated Financial Statements. For informational purposes,
the premium and other operational information provided below
includes TIC's businesses for all periods presented.
14
<PAGE>
Primerica Financial Services
Principal Markets and Methods of Distribution
The business operations of the PFS group of companies
involve the sale of insurance, mutual funds and other financial
products, and consist of an affiliated group of companies engaged
in (i) the underwriting and administration of individual term
life insurance throughout the United States and in Canada and
(ii) securities brokerage, consisting primarily of mutual fund
sales. The PFS sales force, composed of approximately 100,000
independent agents, primarily markets term life insurance and
certain other products of subsidiaries of the Company, including
certain loans offered by the Company's consumer finance
subsidiaries, and other products approved by the Company. In
1994, the PFS sales force began selling, on a test basis, certain
property-casualty insurance products of The Travelers Indemnity
Company. See "Property & Casualty Insurance Services --
Property-Casualty Personal Lines." Because the great majority of
the licensed sales force works on a part-time basis, a
substantial portion of the sales force is inactive from time to
time.
Primerica Life and its subsidiaries, Primerica Life
Insurance Company of Canada and National Benefit Life Insurance
Company ("NBL"), primarily offer individual term life insurance.
NBL provides statutory disability benefits in New York, as well
as direct response student term life insurance nationwide.
Primerica Life and its subsidiaries together are licensed to sell
and market term life insurance in all 50 states, the District of
Columbia, Canada, Puerto Rico, Guam, the U.S. Virgin Islands and
Northern Mariana Islands.
For information concerning PFS Investments Inc. ("PFS
Investments"), see "Mutual Funds and Asset Management," below.
Premium revenues, net of reinsurance, for PFS for the
years ended December 31, 1994, 1993 and 1992 were $962.4 million,
$889.9 million and $862.7 million, respectively. The increase in
premium revenues in recent years is primarily attributable to
growth in production and in the retention of in force business.
See "Insurance Services - General -- Reinsurance," at the end of
the description of the Property & Casualty Insurance Services
segment, for a discussion of reinsurance.
Life Insurance in Force
The table on the next page provides a reconciliation of
beginning and ending life insurance in force for Primerica Life
and subsidiaries, and related statistical data for 1992-1994.
15
<PAGE>
(in millions of dollars, except as noted)
Year Ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
In force beginning of year $ 317,403 $ 311,276 $ 318,793
Additions 57,389 49,300 46,867
Terminations(1) (39,820) (43,173) (54,384)
-------- -------- --------
In force end of year $ 334,972 $ 317,403 $ 311,276
======= ======= ========
The amounts in force at end of
year are before reinsurance
ceded in the following amounts $ 94,930 $ 82,293 $ 87,232
======= ======= ========
At end of year:
Number of policies in force
PFS 2,075,600 2,003,491 1,993,686
NBL other lines 396,717 406,977 413,063
Average size of policy
in force (in dollars)
PFS $ 157,739 $ 154,360 $ 151,636
NBL other lines 19,079 20,011 21,696
______________________________
(1) Includes terminations due to death, surrenders and lapses.
AIDS-related claims, net of reinsurance, as a percentage
of total net life claims paid by Primerica Life in 1994 and 1993,
were 7.1% and 6.7%, respectively. Management believes that
current pricing and reserves make adequate provision for AIDS-
related claim experience.
Mutual Funds and Asset Management
PFS Investments is a registered broker-dealer and is the
exclusive retail distributor of the Common Sense(R) Trust mutual
funds.2 Since the Company's sale of ACMR, a number of intra-
Company joint ventures, including companies that are part of PFS,
continue to provide underwriting, transfer agency and custodial
services to the Common Sense(R) Trust funds. For the years ended
December 31, 1994, 1993 and 1992, PFS Investments' total mutual
fund sales were $1,322.2 million, $1,266.4 million and $1,071.2
million, respectively, with sales of shares of the Common Sense(R)
Trust funds and the
--------------------
2 Common Sense is a registered trademark of ACAM.
16
<PAGE>
American Capital family of mutual funds collectively accounting
for approximately 74%, 75% and 81%, respectively, of total sales.
The overall increase in sales in recent years is primarily
attributable to the economic environment and expanded marketing
efforts for mutual funds. At December 31, 1994, approximately
24,000 independent agent members of the PFS sales force were also
independent registered securities representatives of PFS
Investments.
Travelers Life and Annuities
This section includes the businesses identified by old
Travelers as Financial Services and Asset Management & Pension
Services, as well as Transport Life Insurance Company and its
affiliates ("Transport"). Transport specializes in accident and
health insurance including cancer, heart/stroke and long-term
care coverage, and became a subsidiary of TIC in connection with
the Merger.
Principal Products
Travelers Life and Annuities offers individual life
insurance, annuities and accident and health insurance to
individuals and small businesses. It also provides group pension
deposit products, including guaranteed investment contracts, and
annuities to employer-sponsored retirement and savings plans.
TIC views market specialization as a critical component of
profitability and has updated its individual product portfolio
with a range of competitively priced life, long-term care and
fixed and variable annuity products for its customers.
Individual life and accident and health insurance provide
protection against financial loss due to death, illness or
disability. Life insurance is also used to meet estate, business
planning and retirement needs. Individual accumulation fixed and
variable annuities are used for retirement funding purposes.
Variable annuities allow the policyholder to choose to direct
deposits into a number of separate accounts, each of which has a
different investment strategy. Individual immediate annuities
are used for structuring settlements of certain indemnity claims
and making other payments to policyholders over a period of time.
In recent years, TIC has increased the amount of individual
variable annuities that it sells.
The table on the next page sets forth written premiums,
net of reinsurance, and deposits for the Travelers Life and
Annuities unit.
17
<PAGE>
<TABLE>
<CAPTION>
Premiums and Deposits
(in millions)
Year Ended December 31,
----------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Premiums
Individual life $ 124 $ 117 $ 109
Individual accident and health 361 344 362
Annuities
Individual single premium 21 19 22
Group single premium 21 27 28
Group fixed 50 110 86
-------- -------- --------
Total premiums 577 617 607
-------- -------- --------
Deposits
Universal life insurance 162 163 164
Annuities
Individual fixed accumulation 569 577 647
Individual variable accumulation 693 392 232
Individual immediate(1) 26 34 50
Guaranteed investment contracts(2) 347 918 502
Group separate accounts and managed funds(3) 747 772 730
Other fixed funds 119 265 223
-------- -------- --------
Total deposits 2,663 3,121 2,548
-------- -------- --------
Total premiums and deposits $ 3,240 $ 3,738 $ 3,155
======== ======== ========
</TABLE>
______________________________
(1) Represents primarily structured settlement annuities, in
which payments are currently being made to annuitants.
(2) The 1992 amount includes the adverse impact of downgrades
in TIC's financial strength ratings and general industry
conditions. The 1993 increase reflects success in
attracting guaranteed business in alternative markets.
Such business was not expected to, and did not, recur.
The 1994 decrease also reflects TIC's more selective
approach to issuing guaranteed investment contracts.
(3) The 1993 increase reflects an increase in deposits to
guaranteed separate accounts offset by a decrease in
deposits to indexed separate accounts. The 1994 decrease
results from the decision, in the third quarter of 1993,
to no longer market index funds, offset by the transfer by
the Company of certain assets of one of its employee
pension plans, which were previously managed externally.
For information about reinsurance, see "Insurance Services
- General -- Reinsurance" at the end of the description of the
Property & Casualty Insurance Services segment.
Principal Markets and Methods of Distribution
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.
Individual products are primarily marketed through three
distribution channels: independent agents, H.C. Copeland and
Associates, Inc. ("Copeland") and the financial consultants of
SBI. Both Copeland and SBI are subsidiaries of the Company. The
18
<PAGE>
independent agents, including a core group of approximately 450
professional life insurance general agencies, sell the majority
of the individual life and accident and health insurance and, in
1994, sold 39% of individual annuity premiums and deposits.
Copeland accounted for 49% of 1994's individual annuity premiums
and deposits. In June 1994, Smith Barney began distributing TIC
individual products, primarily variable annuities. Smith Barney
accounted for 12% of total 1994 individual annuity premiums and
deposits. The price of individual products is affected by long-
term assumptions as to interest, expenses and rates of mortality,
morbidity and persistency, as well as competitive and regulatory
considerations.
TIC has significantly reduced its writing of group pension
contracts by adopting a more selective approach to the issuance
of guaranteed investment contracts. Group pension products and
annuities are marketed by TIC's salaried staff directly to plan
sponsors and is also placed through independent consultants and
investment advisers. The major factors affecting the pricing of
these contracts are the economics of the capital markets,
primarily the interest rate environment, the availability of
appropriate investments and surplus required to support this
business due to risk-adjusted capital standards. The pricing of
products and services also reflects charges for expenses,
mortality, profit and other relevant financial factors such as
credit risk.
Life Insurance in Force
The following table provides a reconciliation of beginning
and ending Travelers Life and Annuities life insurance in force
and related statistical data on a statutory basis for 1992-1994.
(in millions of dollars, except as noted)
Year Ended December 31,
--------------------------------
1994 1993 1992
---- ---- ----
In force beginning of year $ 44,909 $ 39,434 $ 32,590
Additions 9,265 9,944 10,503
Terminations(1) (5,176) (4,469) (3,659)
-------- -------- --------
In force end of year $ 48,998 $ 44,909 $ 39,434
========= ========= =========
The amounts in force at end of
year are before reinsurance ceded
in the following amounts $ 6,575 $ 5,042 $ 3,933
========= ========= =========
At end of year:
Number of policies in force 606,089 619,710 623,411
Average size of policy
in force (in dollars) $ 80,843 $ 72,468 $ 63,255
______________________________
(1) Includes terminations due to death, surrenders and lapses.
19
<PAGE>
Insurance Reserves and Contractholder Funds
As life, accident and health insurance and annuity
premiums are received, TIC establishes policy benefit reserves
that reflect the present value of expected future obligations,
net of the present value of expected future net premiums. These
reserves generally reflect long-term fixed obligations to
policyholders and are based on assumptions as to interest rates,
future mortality, morbidity, persistency and expenses, with
provision for adverse deviation. Policy benefit reserves, which
give appropriate recognition to reinsurance, are established
based on factors derived from past experience.
Contractholder funds arise from the issuance of individual
life contracts that include an investment component, deferred
annuities and certain individual immediate annuity investment
contracts. Contractholder funds are equal to deposits received
and interest credited less withdrawals, mortality charges and
administrative expenses. Contractholder funds also include
receipts from the issuance of pension investment contracts.
AIDS-related claims paid by Travelers Life and Annuities
in 1994 and 1993 were 2.1% and 1.2%, respectively, as a
percentage of total life claims paid, and 1.5% and 0.7%,
respectively, as a percentage of total health claims paid.
Management believes that current pricing and reserves make
adequate provision for AIDS-related claim experience.
Competition and Regulation
For a description of competition and regulation relating
to the Company's life insurance businesses, see "Insurance
Services - General" at the end of the description of the Property
& Casualty Insurance Services segment.
PROPERTY & CASUALTY INSURANCE SERVICES
This segment includes the operations of The Travelers
Indemnity Company and its subsidiary and affiliated property-
casualty insurance companies ("Travelers Indemnity"), including
Gulf Insurance Company and its subsidiaries ("Gulf").
Because the Company's interest in old Travelers prior to
the Merger was accounted for on the equity method, the Company's
results of operations for periods prior to 1994 do not include
the full results of the businesses of Travelers Indemnity. See
Notes 1 and 4 of Notes to Consolidated Financial Statements. For
informational purposes, the premium and other operational
information provided below includes Travelers Indemnity's
businesses prior to the Merger. For additional information with
respect to the combined property and casualty insurance
businesses of the Company, see "Combined Property-Casualty
Product Line Information."
20
<PAGE>
Property-Casualty Commercial Lines
Principal Products
Property-Casualty Commercial Lines ("Commercial Lines") is
organized to serve the needs of its customer base by market:
National Accounts ("National"), Agency Marketing ("Agency"), and
Specialty Lines ("Specialty"). Each marketing and underwriting
area targets specific segments of the marketplace based upon size
of business, nature of risk and specific customer needs.
National serves large organizations, as well as employee groups,
associations and franchises, and includes the Company's residual
market business. Agency serves small and medium-sized
businesses, with a strategic emphasis on the medium-sized
businesses, and individuals with commercial exposures, through a
network of independent agents and brokers. Protection is
afforded to customers of National and Agency for the risks of
property loss such as fire and windstorm, financial loss such as
business interruption, liability claims arising from operations
and workers' compensation benefits through insurance products
where risk is transferred from the customer to Commercial Lines.
Such coverages include workers' compensation, liability,
automobile, property and multiple-peril.
Commercial Lines also provides policy, loss and benefit
administration through service agreements, and participates in
state assigned risk pools. The primary product serviced under
these agreements is workers' compensation. The Company
emphasizes cost containment strategies and customer service in
this market. It has introduced managed care coupled with
services such as toll free telephone numbers for reporting of
claims and early intervention in the care process.
Specialty is written through Gulf and Travelers Indemnity.
The principal products of Specialty include various forms of
professional liability insurance, including directors' and
officers' liability and medical malpractice insurance, product
liability, fidelity bonds, commercial umbrella and excess
insurance, excess property insurance, coverages relating to the
entertainment and transportation industries, and standard
commercial property and casualty products for specific niche
markets. Specialty also assumes various types of reinsurance on
both a proportional and a non-proportional basis.
In December 1994, Travelers Indemnity acquired from CCC
the 50% of Gulf's parent corporation that it did not already own,
making Gulf a wholly owned subsidiary of Travelers Indemnity. As
of January 1, 1995, Gulf discontinued writing regional property
and casualty commercial lines of insurance and transferred all
new and renewal business to Travelers Indemnity. This allows
Gulf to focus on its specialty lines of business.
21
<PAGE>
Premium equivalents, presented in the tables below, represent
estimates of premiums that customers would have been charged
under a fully insured arrangement. The amounts are based on
expected losses associated with non-risk bearing components of
each account, as determined in the pricing process. Premium
equivalents do not represent actual revenues.
The following tables set forth written premiums, net of
reinsurance, and premium equivalents for Commercial Lines.
<TABLE>
<CAPTION>
Premiums and Premium Equivalents
(in millions)
Year Ended December 31,
------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Net written premiums by market:
National
Net written premiums $ 566 $ 731 $ 839
Premium equivalents 2,644 2,595 2,289
-------- -------- --------
Total National 3,210 3,326 3,128
-------- -------- --------
Agency
Net written premiums 1,526 1,556 1,507
Premium equivalents 334 162 89
-------- -------- --------
Total Agency 1,860 1,718 1,596
-------- -------- --------
Specialty
Net written premiums 299 212 199
-------- -------- --------
Total net written premiums and
premium equivalents $ 5,369 $ 5,256 $ 4,923
======== ======== ========
Net written premiums by product line:
Workers' compensation $ 907 $ 1,001 $ 1,023
Multiple-peril 304 279 291
Automobile 417 443 448
Other liability 426 478 468
Property and other 337 298 315
-------- -------- --------
Total net premiums 2,391 2,499 2,545
Premium equivalents 2,978 2,757 2,378
-------- -------- --------
Total net written premiums and
premium equivalents $ 5,369 $ 5,256 $ 4,923
======== ======== ========
</TABLE>
Principal Markets and Methods of Distribution
National markets programs that involve both insurance
(i.e., risk transfer) and risk service (i.e., claim settlement,
loss control and risk management). Customers range in size from
businesses with sales of approximately $10 million per year to
Fortune 1000
22
<PAGE>
corporations. Each customer typically generates annual premiums
of at least $1 million and generally selects products under
retrospective rating plans, large self-insured retentions or some
other loss-responsive arrangement. National customers continue
to demand increased levels of risk service programs where the
ultimate cost is based on their own loss experience. Based on
premiums written and premium equivalents, National constituted
approximately 60% of Commercial Lines' business in 1994. These
large customers are usually national in scope and highly complex
in their operations.
A significant portion of Commercial Lines business is
written with retrospectively rated insurance policies in which
the ultimate cost of insurance for a given policy year is
dependent on the loss experience of the insured. This type of
policy limits the insurance risk to Commercial Lines. The
payment terms and long-term nature of the loss development
reduces insurance risk and introduces some additional credit
risk. Receivables from retrospectively rated policies totaled
approximately $1.0 billion at December 31, 1994. Collateral,
primarily letters of credit, is generally required for contracts
that provide for deferred collection of ultimate premiums. The
amount of collateral required is predicated upon the
creditworthiness of the client and the nature of the insured
risks. Commercial Lines continually monitors credit risk of
individual accounts and the adequacy of collateral.
The residual market business of Commercial Lines sells
claim and policy management services to workers' compensation
assigned risk pools throughout the country. Since 1993, these
contracts have been awarded through a formal bid process intended
to reduce the number of servicing carriers and to measure the
quality of service being provided. Contracts are awarded for a
term of three years and about one-third of the states are bid
each year. Travelers Indemnity has thus far been successful in
winning nine of 14 bids.
Agency, which made up approximately 35% of Commercial
Lines' business in 1994, sells a broad range of commercial
property-casualty products to small and medium-sized customers.
Small accounts tend to be more price-sensitive and make up
approximately 27% of Agency's business. The core products for
the small customer are package contracts covering property and
general liability exposures. The product choice for the medium-
sized customer is a retrospectively rated or a large deductible
contract covering workers' compensation. Other coverages are
sold to complement the core products. Products are distributed
primarily through independent agents (for small customers) and
brokers (for medium-sized customers) working with Travelers
Indemnity's marketing and underwriting specialists in a field
office network of 42 locations. Agency continues to selectively
streamline its distribution force as management focuses on
selected markets and producers.
Travelers Indemnity is also a member of, and therefore
participates in, the underwriting operations of insurance and
reinsurance pools and associations, several of which make
independent underwriting decisions on behalf of their members.
These pools insure specialized risks such as property exposures
of large manufacturing plants, nuclear power plants and
transporters of nuclear materials and other specialty risks.
23
<PAGE>
Specialty products are marketed to small, medium, and large
customers and are distributed primarily through wholesale brokers
and other specialty producers, including underwriting managers
for specific industry programs. The Company's Specialty business
requires specialized underwriting and generally has better
combined ratios and lower loss frequencies than traditional
lines.
The following table shows the distribution of Commercial
Lines' 1994 premiums for the states that accounted for the
majority of the premium volume.
% of
State Total
----- -----
New York 11.9%
California 8.8
Texas 7.3
Massachusetts 6.4
Illinois 4.3
Florida 4.2
Pennsylvania 3.7
New Jersey 3.6
All others(1) 49.8
-----
Total 100.0%
=====
______________________________
(1) No one of these states accounted for as much as 3.0% of
the total.
Pricing levels for property and casualty insurance products
are generally developed based upon estimated losses, the expenses
of producing business and administering claims, and a reasonable
allowance for profit. In addition, most retrospective rating
plans contain sufficient flexibility that the subjective
evaluation of a risk by the underwriter can be incorporated in
the pricing. In guaranteed cost products, however, loss cost
inflation has outpaced marketplace price changes. In addition,
current economic conditions have constrained business growth,
thereby decreasing the size of customers' workforces and
consequently reducing the insurable market.
A variety of factors continue to affect the casualty
market. The Company attempts to avoid exposure to high hazard
liability risks through careful underwriting, extensive use of
retrospective rating and reliance on financially secure
reinsurers. The workers' compensation line has improved
dramatically across the industry over the past few years,
particularly during the last two years, in part due to loss
management efforts of the insureds and providers such as
Travelers Indemnity. These trends are also reflected in the
workers' compensation book of business at Commercial Lines, where
workers' compensation combined ratios after policyholder
dividends have improved from 105.6% in 1992 to 99.8% in 1994.
The improvement is due to a variety of factors including, but not
limited to, legislative reform, economic conditions, insurer
investment, employer involvement and lower medical inflation.
This business is subject to retrospective rating premium
adjustments, and
24
<PAGE>
accordingly the net impact on results of operations of the
premium adjustment and loss reserve development is minimal. In
addition, because of the improving trends within workers'
compensation, insurers have increased their voluntary market
share, thereby reducing the size of the involuntary market.
Travelers Indemnity's service volume from the National Council on
Compensation Insurance has declined from $638 million in 1993 to
$431 million in 1994. However, its direct assignment volume has
increased from $26 million for the year ended December 31, 1993
to $217 million for the year ended December 31, 1994. Under
direct assignment, Travelers Indemnity acts as a third-party
administrator for other insurance carriers to fulfill their
involuntary pool requirement.
In the commercial property market, 1994 was another
difficult year for natural catastrophes. While the industry's
catastrophe losses were approximately $13 billion on a pre-tax
basis, Commercial Lines' catastrophe losses for 1994 totalled $33
million, pre-tax. The commercial property market capacity
remained adequate during 1994, keeping downward pressure on
pricing.
In most lines, pricing did not improve during the past
year. For Agency, the duration of the current downturn in the
underwriting cycle continues to pressure the pricing of
guaranteed cost products. In the small account market, which
primarily buys guaranteed cost products, price increases have not
exceeded loss cost inflation for several years. The focus is to
retain existing profitable business and obtain new accounts where
the Company can maintain its selective underwriting policy. The
Company continues to adhere to strict guidelines to maintain high
quality underwriting, which could affect future premium levels.
Because of its large fee-for-service component, National business
is less affected by pricing; however, the pricing of large
account business continues to be very competitive. Customer
retention levels remained high in 1994 as a result of Travelers
Indemnity's continued delivery of quality service, primarily
claims management focused on loss cost reduction.
See "Insurance Services - General -- Reinsurance" below
for information regarding reinsurance.
Hazardous Substances
The Special Liability Group ("SLG") was established in
1986 to deal exclusively with environmental exposures and other
exposures of a cumulative nature. SLG is essentially a claim
operation, segregated from other claim areas within the Company.
Its objective is to fulfill all of the Company's contractual
obligations to its policyholders in a manner that most
effectively preserves corporate assets.
Environmental Claims
As a result of various state and federal regulatory
efforts aimed at environmental remediation (particularly
"Superfund"), the insurance industry has been, and continues to
be, involved in extensive litigation involving policy coverage
and liability issues. The possible
25
<PAGE>
reauthorization of Superfund in 1995 may have some effect on the
resolution of these issues, but it is not possible at the present
time to determine what the potential impact, if any, will be. In
addition to the regulatory pressures, certain court decisions
have expanded insurance coverage beyond the original intent of
the insurer and insured, frequently involving policies that were
issued prior to the mid-1970s. The results of court decisions
affecting the industry's coverage positions continue to be
inconsistent. Accordingly, the ultimate responsibility and
liability for environmental remediation costs remain uncertain.
Certain of the Company's subsidiaries are part of the
industry segment affected by these issues and continue to receive
claims alleging liability exposures arising out of insureds'
alleged disposition of toxic substances. The review of
environmental claims includes an assessment of the probable
liability, available coverage, judicial interpretations and
historic value of similar claims. In addition, the unique facts
presented in each claim are evaluated individually and
collectively. Due consideration is given to the many variables
presented in each claim, such as: the nature of the alleged
activities of the insured at each site; the allegations of
environmental damage at each site; the number of sites; the total
number of potentially responsible parties at each site; the
nature of environmental harm and the corresponding remedy at a
site; the nature of government enforcement activities at each
site; the ownership and general use of each site; the willingness
and ability of other potentially responsible parties to
contribute to the cost of the required remediation at each site;
the contractual relationship between the Company and the insured;
the identification of other insurers; the potential coverage
available, if any; the number of years of coverage, if any; the
obligation to provide a defense to insureds, if any; and the
applicable law in each jurisdiction. Analysis of these and other
factors on a case-by-case basis results in the ultimate reserve
assessment.
Environmental loss and loss expense reserves of the
Company at December 31, 1994 were $471 million, net of
reinsurance of $11 million. Approximately 14% of the net
environmental loss reserve (i.e., approximately $65 million) is
case reserve for resolved claims. The Company does not post
individual case reserves for environmental claims in which there
is a coverage dispute until the dispute is resolved. Until then,
the estimated amounts for disputed coverage claims are carried in
a bulk reserve, together with unreported environmental losses.
The industry does not have a standard method of
calculating claim activity for environmental losses. Generally,
for environmental claims, the Company establishes a claim file
for each insured on a per site, per claimant basis. If there is
more than one claimant, e.g., a federal and a state agency. This
method will result in two claims being set up for a policyholder
at that one site. The Company adheres to its method of
calculating claim activity on all environmental-related claims,
whether such claims are tendered on primary, excess or umbrella
policies.
As of December 31, 1994, the Company had approximately
8,200 pending environmental-related claims and had resolved over
17,200 such claims since 1986.
26
<PAGE>
Approximately 70% of the pending environmental-related claims in
inventory represent active federal or state EPA-type claims
tendered by approximately 640 insureds. The balance represents
bodily injury claims alleging injury due to the discharge of
insureds' waste or pollutants.
To date, the Company generally has been successful in its
coverage litigation and continues to reduce its potential
exposure through favorable settlements with certain insureds.
These settlement agreements are based on the variables presented
in each piece of coverage litigation. Generally the settlement
dollars paid in disputed coverage claims are a percentage of the
total coverage sought by such insureds. In addition, with
respect to many of the environmental claims there is a "buy-back"
of the liability under the policy by the Company, together with
appropriate indemnities and hold harmless provisions to protect
the Company.
Asbestos Claims
In the area of asbestos claims, the property and casualty
insurance industry has suffered from judicial interpretations
that have attempted to maximize insurance availability from both
a coverage and liability standpoint far beyond the intentions of
the contracting parties. These policies generally were issued
prior to the 1980s. Originally the cases involved mainly plant
workers and traditional asbestos manufacturers and distributors.
However, in the mid-1980s, a new group of plaintiffs, whose
exposure to asbestos was less direct and whose injuries were
often speculative, began to file lawsuits in increasing numbers
against the traditional defendants as well as peripheral
defendants who had produced products that may have contained
small amounts of encapsulated asbestos. These claims continue to
arise and on an individual basis generally involve smaller
companies with smaller limits of potential coverage. There has
emerged a group of nonproduct claims by plaintiffs, mostly
independent labor union workers, mainly against companies,
alleging exposure to asbestos while working at these companies'
premises. In addition, various insurers, including Travelers
Indemnity, remain defendants in a widely publicized action
brought in Philadelphia regarding potential consolidation and
resolution of future asbestos bodily injury claims. The
cumulative effect of these claims and the judicial actions on the
Company and its insureds currently is uncertain.
Also various classes of asbestos defendants, including
major product manufacturers, peripheral and regional product
defendants as well as premises owners, continue to tender
asbestos-related claims to the industry. Since each insured
presents different liability and coverage issues, the Company
evaluates those issues on an insured-by-insured basis.
The Company's evaluations have not resulted in any
meaningful data from which an average asbestos defense or
indemnity payment may be determined. The varying defense and
indemnity payments made by the Company on behalf of its insureds
has also precluded the Company from deriving any meaningful data
by which it can predict whether its defense and indemnity
payments for asbestos claims (on average or in the aggregate)
will remain the same or change in the future.
27
<PAGE>
Asbestos loss and loss expense reserves of the Company at
December 31, 1994 were $383 million, net of reinsurance of $319
million. Approximately 85% of the net asbestos reserves at
December 31, 1994 represented incurred but not reported losses.
In relation to these asbestos and environmental-related
claims, the Company carries on a continuing review of its overall
position, its reserving techniques and reinsurance recoverable.
In each of these areas of exposure, the Company has endeavored to
litigate individual cases and settle claims on favorable terms.
Given the inconsistencies of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in
major litigation and other uncertainties, it is not presently
possible to quantify the ultimate exposure or range of exposure
represented by these claims to the Company's financial condition,
results of operations or liquidity. The Company believes that it
is reasonably possible that the outcome of the uncertainties
regarding environmental and asbestos claims could result in a
liability exceeding the reserves by an amount that would be
material to operating results in a future period. However, it is
not likely these claims will have a material adverse effect on
the Company's financial condition or liquidity.
For additional information regarding asbestos and
environmental-related claims, see the discussion in Item 7 of
this Form 10-K, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Property-Casualty Personal Lines
Principal Products
Property-Casualty Personal Lines ("Personal Lines") writes
virtually all types of property and casualty insurance covering
personal risks. The primary coverages in Personal Lines are
automobile and homeowners insurance sold to individuals, which
account for 97% of the premium volume. Automobile policies
provide coverage for liability to others for both bodily injury
and property damage, and for physical damage to an insured's own
vehicle from collision and various other perils. In addition,
many states require policies to provide first-party personal
injury protection, frequently referred to as no-fault coverage.
Homeowners policies are available for dwellings,
condominiums, mobile homes and rental property contents.
Protection against losses to dwellings and contents from a wide
variety of perils is included in these policies, as well as
coverage for liability arising from ownership or occupancy.
In October 1994, Travelers Indemnity sold Bankers and
Shippers Insurance Company to Integon Corporation for
approximately $142 million. Bankers and Shippers Insurance
Company primarily writes nonstandard private passenger automobile
insurance.
28
<PAGE>
The following table sets forth written premiums, net of
reinsurance, for Personal Lines.
Premiums
(in millions)
Year Ended December 31,
-------------------------------------
1994 1993 1992
---- ---- ----
Automobile $ 1,187(1) $ 1,202 $ 1,153
Homeowners 209 122(2) 236
Other 37 37 39
-------- -------- --------
Total premiums $ 1,433 $ 1,361 $ 1,428
======== ======== ========
______________________________
(1) The written premium decline in 1994 reflects the sale of
Bankers and Shippers Insurance Company in October 1994.
(2) The written premium decline in 1993 reflects the purchase
of additional reinsurance to reduce exposure to
catastrophe losses.
Principal Markets and Methods of Distribution
Personal Lines business is distributed through
approximately 3,000 independent agencies, supported by a network
of 15 field marketing offices and two regional service centers.
The principal markets for Personal Lines insurance are in states
along the east coast, in the south, and in the mid-west.
Personal Lines has implemented various programs over the
past five years in order to improve operating and financial
results, including expense reductions, the termination of
contracts of underperforming agents and the withdrawal from
markets where Personal Lines had a small market share or saw
little potential for long-term, profitable growth. While these
actions have reduced the overall size of the Personal Lines
business, the core automobile and homeowners insurance businesses
have begun to grow in terms of policy counts and premium volume.
In 1994, Personal Lines began writing private passenger
automobile and homeowners insurance that was marketed on a test
basis by licensed members of the PFS sales force in two states.
This program is expected to expand during 1995 to additional
states.
For 1994, Personal Lines business was concentrated in the
states shown in the table on the next page.
29
<PAGE>
% of
State Total
----- -----
New York 23.1%
Massachusetts 16.2
New Jersey 8.6
Florida 8.1
Pennsylvania 6.5
Connecticut 5.2
Virginia 4.6
Georgia 3.9
Texas 3.8
All others(1) 20.0
------
Total 100.0%
=====
______________________________
(1) No one of these states accounted for as much as 3.0% of
the total.
In addition, approximately 49% of Personal Lines'
homeowners premiums in 1994 was in New York, Florida,
Massachusetts and New Jersey.
Pricing for automobile insurance is driven by changes in
the relative frequency of claims and by inflation in the cost of
automobile repairs, medical care and litigation of liability
claims. As a result, the profitability of the business is
largely dependent on promptly identifying and rectifying
disparities between premium levels and expected claim costs, and
obtaining the indicated rate increases. Premiums charged for
physical damage coverages reflect insured car values and,
accordingly, premium levels are somewhat related to the volume of
new car sales.
In addition to the normal risks associated with any
multiple-peril coverage, the profitability and pricing of
homeowners insurance is affected by the incidence of natural
disasters, particularly tornadoes and hurricanes. Most policies
offer automatic increases in coverage to reflect growth in
replacement costs and property values.
The high level of catastrophe losses in recent periods has
led to an expansion of the reinsurance market without a
corresponding decrease in reinsurance costs. These factors have
resulted in a reduced availability of homeowners insurance and
have led to higher prices for homeowners policies in some
markets.
Several insurance companies have attempted to limit their
writings in coastal areas of the country as a result of heavy
claim losses sustained from Hurricane Andrew. Travelers
Indemnity has stopped writing new homeowners policies in certain
counties in South Florida and in coastal areas of New York and
Connecticut. In addition, Travelers Indemnity has reduced
agents' commissions on homeowners insurance in certain markets
within those states previously identified, strengthened
underwriting standards, implemented price increases, and
purchased additional reinsurance to limit its exposure to future
catastrophe losses. Changes to a company's methods of marketing
and underwriting in coastal areas of Florida and New
30
<PAGE>
York are subject to state-imposed restrictions, the general
effect of which is to retard an insurer's ability to withdraw
from such areas. While homeowners premium volume in Florida for
1994 was substantially level with 1993, gross exposure to
catastrophe loss was lower due to a decline in the number of
policies written, offset by price increases.
INSURANCE SERVICES - GENERAL
----------------------------
The following table summarizes the financial strength
ratings of the Company's life insurance companies and the claims-
paying ratings of its property-casualty insurance companies.
These ratings are not a recommendation to buy, sell or hold
securities, and they may be revised or withdrawn at any time.
Each rating should be evaluated independently of any other
rating.
<TABLE>
<CAPTION>
Moody's
A.M. Best Duff & Investor's Standard
Company Phelps Corp. Service Inc. & Poor's Corp.
------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
TIC A- (excellent) A+ (high) A2 (good) A+ (strong)
Primerica Life A- (excellent) - - AA (excellent)
Travelers Indemnity
Pool(1) A (excellent) AA- (very high) A1 (good) AA- (excellent)
Gulf Pool(2) A+ (superior) - - -
</TABLE>
______________________________
(1) The companies that participate in the pool are The
Travelers Indemnity Company, The Charter Oak Fire
Insurance Company, The Phoenix Insurance Company, The
Travelers Indemnity Company of America, The Travelers
Indemnity Company of Illinois and The Travelers Indemnity
Company of Connecticut (formerly The Travelers Indemnity
Company of Rhode Island).
(2) The Gulf pool includes Gulf Insurance Company and its
subsidiaries.
Reinsurance
Reinsurance is subject to collectibility in all cases and
to aggregate loss limits in certain cases. The Company remains
primarily liable as the direct insurer on all risks reinsured.
Reinsurance recoverables are reported after allowances for
uncollectible amounts. The Company also holds collateral
including escrow funds and letters of credit under certain
reinsurance agreements. Uncollectible reinsurance recoverables
have not had, and management does not expect that any amounts
becoming uncollectible in the future would have, a material
adverse effect on the consolidated financial position of the
Company. For additional information concerning reinsurance, see
Note 12 of Notes to Consolidated Financial Statements.
Reinsurers are selected based on their financial position
and business practices. The Company monitors the financial
condition of reinsurers on an ongoing basis, and reviews its
reinsurance arrangements periodically.
At December 31, 1994, the Company had $4.3 billion in
property-casualty reinsurance recoverable. Of this amount, $2.6
billion was ceded to pools and associations, which have the
strength of the participating insurance companies supporting
these cessions.
31
<PAGE>
The remainder is due from reinsurers. The two largest
reinsurers, Lloyd's of London and General Reinsurance
Corporation, had assumed losses from the Company at December 31,
1994 of $215 million and $142 million, respectively. Lloyd's of
London is currently undergoing restructuring to seek to obtain
additional capital and to segregate claims for years before 1986.
The ultimate effect of this restructuring on the Company's
reinsurance recoverable is not yet known. The Company does not
believe that any uncollectible amounts of reinsurance recoverables
would be material to its results of operations, financial condition
or liquidity. See Item 3, "Legal Proceedings," for additional
information regarding Lloyd's of London.
Life Insurance
The Company's policy is to obtain reinsurance on
individual life policies for amounts above certain retention
limits, which limits vary with age and underwriting
classification. During 1994, certain subsidiaries of the Company
increased the level of reinsurance on certain policies.
Retention on life insurance risks after reinsurance varies up to
a maximum of $1.5 million per insured for an ordinary life risk,
depending on the subsidiary involved, the type of policy, the
year of issue and the age of the insured. Other reinsurance
arrangements are made from time to time to cede or assume
existing blocks of business.
Property and Casualty Insurance
Currently, for third-party liability, including automobile
no-fault, the reinsurance agreements used by Commercial Lines
limit its net retention to a maximum of $5 million per insured,
per occurrence. For commercial property insurance, there is a $5
million retention per insured with 100% coverage for risks with
higher limits. For large accounts, reinsurance arrangements are
typically tiered, or layered, such that only levels of risk
acceptable to the Company are retained. The reinsurance
agreements in place for Personal Lines cover 90% of each loss
between $2 million and $6 million for all third-party liability,
including automobile no-fault.
In addition to traditional reinsurance agreements that
serve to control its exposure to loss, Travelers Indemnity acts
as a servicing carrier for many pools and associations, such as
workers' compensation pools. These transactions are reflected as
direct business on the Company's books and records. This
business is then ceded to the pools and recorded as reinsurance
ceded.
Catastrophe Reinsurance
The Company utilizes reinsurance agreements with nonaffiliated
reinsurers to control its exposure to losses resulting from one
occurrence. For the accumulation of net property losses arising out
of one occurrence, reinsurance coverage averages 75% of total losses
between $175 million and $375 million. For multiple workers'
compensation losses arising from a single occurrence, reinsurance
coverage averages 100% of losses between $10 million and $160 million
and for losses caused by property perils reinsurance coverage averages
75% of losses between $175 million and $345 million.
32
<PAGE>
For Agency-produced commercial property insurance, 25% of all
losses were reinsured in 1994, subject to an occurrence limitation
of 200% of ceded premium or an estimated $225 million. In 1995,
the quota share is 20%, with a fixed dollar occurrence limit of $225
million. For Personal Lines homeowners insurance, in 1994, 30% of
losses were reinsured up to a maximum recovery of $96 million, and for
1995, 16.25% of losses will be reinsured up to a maximum recovery
of $64 million per occurrence.
Competition and Other Factors Affecting Growth
Life Insurance
The Company's life insurance businesses compete with
national, regional and local insurance companies. Competition is
based upon price, product design and services rendered to
producers and policyholders. The insurance industry is extremely
competitive, in both price and services, and no single insurer is
dominant. Insurance companies that operate through salaried
personnel and employee agents may benefit from cost advantages,
once they have achieved sufficient size, over insurers that
utilize independent agents and brokers. The PFS sales force is
composed of independent commissioned agents, and approximately
40% of the Travelers Life and Annuities individual annuity
premiums and deposits were sold through independent agents. PFS
competes in its market segment by emphasizing the value of term
life insurance, and aggressively markets its products which often
replace existing life insurance policies underwritten by other
companies, including cash value whole life policies. In January
1995, the U.S. Supreme Court ruled that national banks may sell
annuities. It is not clear at this time whether the decision
will have a positive or negative impact upon the Company's
annuity sales.
Savings banks also compete directly in the sale of life
insurance in Connecticut, Massachusetts and New York.
Competition for the savings dollar arises from entities such as
banks, investment advisers, mutual funds and other financial
institutions.
PFS Investments is registered as a broker-dealer with the
SEC, in all 50 states, the District of Columbia, Puerto Rico, the
Virgin Islands and Guam, and is a member of the NASD. It is
subject to extensive regulation by those agencies and the
securities administrators of those jurisdictions, primarily for
the benefits of its customers, including minimum capital and
licensing requirements. PFS Investments faces competition not
only from large financial services firms offering products and
services that cross traditional business boundaries, but also
from insurance companies, including other subsidiaries of the
Company, offering life insurance products with investment
features.
33
<PAGE>
Property and Casualty Insurance
The insurance industry is represented in the commercial
lines marketplace by many insurance companies of varying size.
Companies may be small local firms, large regional firms or large
national firms, as well as self-insurance programs or captive
insurers. Market competition, regulated by state insurance
departments, works to set the price charged for insurance
products and the level of service provided. Growth is driven by
a company's ability to provide insurance and services at a price
that is reasonable and acceptable to the customer. In addition,
the marketplace is affected by available capacity of the
insurance industry as measured by policyholders' surplus.
Surplus expands and contracts primarily in conjunction with
profit levels generated by the industry. Growth in premium and
service business is also measured by a company's ability to
retain existing customers and to attract new customers.
In addition to traditional insurance services, National
offers to risk managers of large national accounts programs that
provide increased flexibility in selecting loss prevention and
claim services, and premium payment plans. This business is
highly competitive on the basis of quality of service provided
and somewhat sensitive to price competition, and is written
primarily by Travelers Indemnity and several other very large
companies. New business levels remained strong in 1994, and
retentions remained high in both traditional insurance products
and risk service programs.
The bid process for selecting servicing carriers to
administer the involuntary pools is ongoing and is intended to
reduce the number of servicing carriers while increasing the
quality of service being provided. As the number of servicing
carriers is significantly reduced, the market share of the
remaining carriers is likely to grow. The Company believes that
a successful bid strategy will allow it to maintain a significant
market presence in the face of these changes.
Overhead reductions and improved efficiency through
automation are key competitive issues for Agency business.
During the past several years, Agency management has taken
significant steps to streamline this operation and establish
efficiencies to make these products more competitive in the
marketplace. In addition, Travelers Indemnity believes that its
breadth of products, highly qualified field staff and applied
technology provide for distinct competitive advantages. The
highly competitive business for medium-sized accounts has
historically been written by companies dealing through agents and
brokers, although some direct writing companies are represented
in the field. A competitive advantage resides in local
representation and underwriting authority. With emphasis on
regional locations and resident entrepreneurs marketing the full
spectrum of Travelers Indemnity's commercial products, Travelers
Indemnity believes it has created significant opportunity for
growth in this area.
The marketplace in which Specialty competes includes small
to medium-sized niche companies that focus on certain types of
risk and larger companies or branches/divisions of
34
<PAGE>
multi-line companies that offer numerous products covering
various risks. Distribution of products is generally through
wholesale and/or retail brokers. Specialty's underwriting
responsiveness and quality are key to maintaining broker
relationships. A competitive advantage resides in the cross-
selling opportunities of Specialty products through Agency and
National underwriters, agents and brokers.
The insurance industry is represented in the personal
lines marketplace by many hundreds of insurance companies of
varying size. Although national companies write the majority of
the business, local or regional companies are effective
competitors because of their expense structure or because they
specialize in providing coverage to particular risk groups.
Personal automobile and homeowners insurance is marketed
mainly through one of two distribution systems: independent
agents or direct writing. The Company's Personal Lines unit
operates through 3,000 independent agents who usually represent
several unrelated property-casualty companies. Direct writing
companies operate either by mail or through exclusive agents or
sales representatives. Due in part to the expense advantage that
direct writers typically have relative to agency companies, the
direct writers have been able to gradually expand their market
share. Personal Lines continues to focus on the independent
agency distribution system, recognizing the service and
underwriting advantages the agent can deliver. In addition,
Personal Lines has taken advantage of complementary distribution
mechanisms, including affinity groups, mortgage lenders and the
independent agents of the PFS sales force, and plans to continue
to pursue other opportunities as they arise.
In recent years, reductions in the volume of Personal
Lines voluntary business have caused similar reductions in the
involuntary business assigned to the Company. However, this
trend has been somewhat offset by increases in the size of many
of the pools themselves. Intense regulation in the personal
automobile insurance business has caused some insurance companies
to withdraw from or reduce their writings in the personal lines
market, which has forced more individuals to obtain insurance in
the involuntary market.
Regulation
The Company's insurance subsidiaries are subject to
considerable regulation and supervision by insurance departments
or other authorities in each state or other jurisdiction in which
they transact business. The laws of the various jurisdictions
establish supervisory and regulatory agencies with broad
administrative powers. The purpose of such regulation and
supervision is primarily to provide safeguards for policyholders,
rather than to protect the interests of the insurers'
stockholders. Typically, state regulation extends to such
matters as licensing companies, regulating the type, amount and
quality of permitted investments, licensing agents, regulating
aspects of a company's relationship with its agents, requiring
triennial financial examinations, market conduct surveys, reports
on financial condition, recording complaints, restricting expenses,
commissions and new business issued, restricting use of some
underwriting criteria, regulating rates, forms and advertising,
35
<PAGE>
specifying what might constitute unfair practices, fixing maximum
interest rates on policy loans and establishing minimum reserve
requirements and minimum policy surrender values. Such powers
also extend to premium rate regulation, which varies from open
competition to limited review upon implementation, to requirements
for prior approval for rate changes. State regulation may also cover
capital and surplus and actuarial reserve maintenance, setting
solvency standards, mandating loss ratios for certain kinds of
insurance, limiting the grounds for cancellation or nonrenewal of
policies and regulating solicitation and replacement practices.
State laws also regulate transactions and dividends between an
insurance company and its parent or affiliates, and require prior
approval or notification of any change in control of an insurance
subsidiary. In addition, under insurance holding company legislation,
most states regulate affiliated groups with respect to intercorporate
transfers of assets, service arrangements and dividend payments from
insurance subsidiaries.
The insurance industry generally is exempt from federal
antitrust laws because of the application of the McCarran-
Ferguson Act. In recent years, legislation has been introduced
to modify or repeal the McCarran-Ferguson Act. The effect of any
such modification or repeal cannot currently be determined.
Virtually all states mandate participation in insurance
guaranty associations and/or insolvency funds, which assess
insurance companies in order to fund claims of policyholders of
insolvent insurance companies. Under these arrangements,
insurers are assessed their proportionate share (based on
premiums written for the relevant lines of insurance in that
state each year) of the estimated loss and loss expense of
insolvent insurers. Similarly, as a condition to writing a line
of property and casualty business, many states mandate
participation in "fair plans" and/or "assigned risk pools" that
underwrite insurance for individuals and businesses that are
otherwise unable to obtain insurance. Participation is based on
the amount of premiums written in past years by the participating
company in an individual state for the classes of insurance
involved. These plans or pools traditionally have been
unprofitable, although the effect of their performance has been
partially mitigated in certain lines of insurance by the states'
allowance of increases in rates for business voluntarily written
by plan or pool participants in such states. For workers'
compensation plans or pools the effect may be further mitigated
by the method of participation selected by insurance companies.
In addition to state insurance laws, the Company's
insurance subsidiaries are also subject to general business and
corporation laws, state securities laws, consumer protection
laws, fair credit reporting acts and other laws.
Certain variable life insurance and individual variable
annuities and their related separate accounts are subject to
regulation by the Securities and Exchange Commission.
Health care reform has been at the forefront of domestic
policy issues at the federal level and is a leading issue in many
state legislatures in 1995. Various proposals have been
introduced and a great deal of uncertainty remains regarding what
the final health reform
36
<PAGE>
package will contain or what effect it will have on the Company's
businesses, including its investment in MetraHealth. These
proposals may also affect workers' compensation and automobile
insurance. Furthermore, a number of states have passed, or are
considering, some form of health care reform. Such state
regulation primarily impacts fully insured small employer plans.
The overall impact of federal or state legislation on the
Company's businesses is impossible to predict at this time. The
Company continues to monitor political and legislative activity
that addresses the cost, availability and quality of health care.
Many jurisdictions require prior regulatory approval of
rate and rating plan changes and some impose restrictions on the
cancellation or nonrenewal of risks and the termination of agency
contracts, or have regulations that preclude immediate withdrawal
from certain lines of business. Certain lines of business, such
as commercial automobile and workers' compensation, experience
rate inadequacies in many jurisdictions. Automobile insurance is
also subject to varying regulatory requirements as to mandated
coverages and availability, such as no-fault benefits, assigned
risk pools, reinsurance facilities and joint underwriting
associations. The added expense associated with involuntary
pools in this and other areas has adversely affected
profitability.
See "Property-Casualty Commercial Lines -- Hazardous
Substances" on pages 25 through 28 for a discussion of the
effect on the Company of various state and federal regulatory
efforts aimed at environmental remediation, including proposed
amendments to the federal Superfund statute.
In December 1992, the Florida legislature created the
Residential Property and Casualty Joint Underwriting Association
("RPCJUA") to provide residential property and casualty insurance
to individuals who cannot obtain coverage in the voluntary
market. Property-casualty insurance companies in Florida,
including Travelers Indemnity, will be required to share the risk
in the RPCJUA.
In November 1993, the Florida legislature created a
Florida Hurricane Catastrophe Fund to provide reimbursement to
insurers for a portion of their future catastrophic hurricane
losses. This Hurricane Catastrophe Fund will be funded in part
by assessments on insurance companies.
Proposed legislation has been introduced in Congress that
would modify certain laws and regulations affecting the financial
services industry, including the provisions regarding
affiliations among insurance companies, investment banks and
commercial banks. The potential impact of such legislation on
the Company's businesses cannot be predicted at this time.
Recent Developments in Insurance Regulations
The National Association of Insurance Commissioners (the
"NAIC") adopted risk-based capital ("RBC") requirements for life
insurance companies in 1992, effective with
37
<PAGE>
reporting for 1993, and for property-casualty companies in
December 1993, effective with reporting for 1994. The RBC
requirements are to be used as early warning tools by the NAIC
and states to identify companies that merit further regulatory
action.
For these purposes, an insurer's surplus is measured in
relation to its specific asset and liability profiles. A
company's risk-based capital is calculated by applying factors to
various asset, premium and reserve items, where the factor is
higher for those items with greater underlying risk and lower for
less risky items.
The life formula calculates baseline life risk-based
capital ("LRBC") as a mathematical combination of amounts for the
following four categories of risk: asset risk (i.e., the risk of
asset default), insurance risk (i.e., the risk of adverse
mortality and morbidity experience), interest rate risk (i.e.,
the risk of loss due to changes in interest rates) and business
risk (i.e., normal business and management risk).
Fifty percent of the baseline LRBC calculation is defined
as Authorized Control Level RBC. The insurer's ratio of adjusted
capital to Authorized Control Level RBC (the "RBC ratio") can
then be calculated from data contained in the annual statement.
Adjusted capital is defined as the sum of statutory capital,
statutory surplus, asset valuation reserve, voluntary investment
reserves and one-half the policyholder dividend liability.
The property-casualty formula calculates baseline
property-casualty risk-based capital ("PCRBC") as a mathematical
combination of amounts for the following categories of risk:
asset risk, credit risk (i.e., the risk of nonpayment of amounts
due under reinsurance ceded and other miscellaneous receivables),
off-balance-sheet risk (i.e., the risk of loss due to adverse
experience from non-controlled assets, guarantees for affiliates,
contingent liabilities, and reserve and premium growth) and
underwriting risk (i.e., the risk associated with loss reserves
and written premiums).
Forty percent of the baseline PCRBC calculation is defined
as Authorized Control Level RBC for 1994 (this percentage will
increase to 45% for 1995 and to 50% by 1996). The PCRBC ratio is
then calculated from data contained in the annual statement.
Within certain ratio ranges, regulators have increasing
authority to take action as the RBC ratio decreases. There are
four levels of regulatory action. The first of these levels is
the "company action level." The RBC ratio for this level is less
than 200% but greater than 150%. Insurers within this level must
submit a comprehensive plan (an "RBC plan") to the commissioner.
The next level is the "regulatory action level." The RBC ratio
for this level is less than 150% but greater than 100%. An
insurer within this level must submit an RBC plan, is subject to
an examination of assets, liabilities and operations by the
commissioner, and is subject to provisions of any corrective
order subsequently issued by the commissioner. The third level
is the "authorized control level." The RBC ratio for this level
is less than 100% but greater than 70%. At this level, the
commissioner takes action as described under "regulatory action
level" and may cause the insurer to be placed under regulatory
control if
38
<PAGE>
such action is deemed to be in the best interests of
policyholders. The fourth level is the "mandatory control
level." The RBC ratio for this level is less than 70%, and the
commissioner takes actions necessary to place the insurer under
regulatory control.
The formulas have not been designed to differentiate among
adequately capitalized companies which operate with higher levels
of capital. Therefore, it is inappropriate and ineffective to
use the formulas to rate or to rank such companies. At December
31, 1994, all of the Company's life and property-casualty
insurance companies had adjusted capital in excess of amounts
requiring regulatory action at any of the four levels.
As part of the process of accreditation by the NAIC, state
insurance regulators have been recommending the adoption of new
statutory standards for the payment of dividends by insurance
companies without prior approval. As part of this effort, the
Connecticut General Assembly passed legislation to require prior
approval by the Connecticut Insurance Commissioner for any
dividend distributions during a twelve-month period that are in
excess of the greater of (i) ten percent of an insurer's surplus
limited by unassigned funds-surplus, or (ii) net gain from
operations (for life companies) or net income (for non-life
companies), in each case measured as of the preceding December
31.
Under the legislation, statutory surplus would not be
available in 1995 for dividends from The Travelers Insurance
Group Inc. (the parent of TIC and Travelers Indemnity) to The
Travelers Inc. without prior approval.
The NAIC Insurance Regulatory Information System ("IRIS")
ratios, discussed under "Combined Property-Casualty Product Line
Information" on page 49, are part of the NAIC solvency
surveillance process. They consist of approximately 12 ratios
with defined acceptable ranges. They are used as an initial
screening process for identifying companies that may be in need
of special attention. Companies that have several ratios that
fall outside of the acceptable range are selected for closer
review by the NAIC examiner team. If the examiner determines
that more attention may be warranted, one of several priority
designations is assigned, and the insurance department of the
state of domicile is then responsible for follow-up action.
Occasionally one or more of the Company's subsidiaries has
been "flagged" by the IRIS ratios. In all such instances, 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 the resolution would be
the same.
Reserving Methods
Reserves are subject to ongoing review as additional
experience and other data become available. Increases or
decreases to reserves for loss and loss adjustment expenses may
be made, which would be reflected in operating results for the
period in which such adjustments, if any, are made.
39
<PAGE>
Property-casualty loss reserves are established to account
for the estimated ultimate costs of claims and claim adjustment
expenses that have been reported but not yet settled, reopened
claims, and claims which have been incurred but not reported.
Property-casualty personal and commercial lines actuaries use a
number of generally accepted actuarial and statistical techniques
to estimate ultimate liabilities. These techniques generally
rely upon analyses of historical development patterns of various
types of accident year data. Typically, these techniques utilize
review of paid and incurred claim data and paid and incurred
expense data, closed claim data, claim counts, claim costs and
various types of pricing data. Subsequent to reviewing a variety
of tests, management selects what it believes is the best
estimate of ultimate loss and loss adjustment expense for each
line of business and market segment. These estimates are refined
over time as experience develops and further claims are reported
and settled. Any required adjustments to reserves are reflected
in the results of the periods in which such adjustments are made.
Recognition is given to recoveries for reinsurance, salvage and
subrogation.
The ultimate incurred losses and the corresponding reserve
levels carried for all accident years have an implicit provision
for inflation and other factors that result in differences in
levels of claim cost by accident year. Ultimate claim values are
based in part on analysis of historical trends in average closed
claim costs and open claim costs. Average closed claim costs
reflect actual historic inflation trends while reported losses
reflect historic trends based upon both paid losses and
adjusters' estimates. There is no precise method for evaluating
the impact of inflation. Claim settlements are also affected
by many other factors including judicial decisions, the social
environment and claims handling procedures. Frequent reviews are
therefore performed for the major property-casualty insurance
coverages, particularly those related to third party claims.
Such third party claims often involve lengthy litigation or are
otherwise settled only after a considerable passage of time and
are particularly subject to the effects of judicial trends and
changes in the social environment.
Investments
This section discusses the investment portfolios of the
businesses described in the Company's insurance services
segments.
At December 31, 1994, the investment holdings of the
companies included in the insurance services segments were
composed primarily of fixed maturities. At December 31, 1994,
approximately 94.8% in total dollar amount of the fixed
maturities portfolios of such companies had investment grade
ratings. The remaining investments are principally mortgage
loans and real estate, discussed below, policy loans and other
investments. For additional information regarding these
investment portfolios, see Note 5 of Notes to Consolidated
Financial Statements and the discussion of Asset Quality in the
Insurance Services Segment discussion in Item 7 of this Form 10-
K, "Management's Discussion and Analysis of Financial Condition
and Results of Operations." State insurance laws prescribe the
types, quality and diversity of permissible investments for
insurance companies.
40
<PAGE>
Consistent with the nature of related contract obligations, the
invested assets attributable to group insurance and individual
life, accident and health and financial services are primarily
long-term fixed income investments such as corporate debt
securities, mortgage and asset-backed securities, and mortgage
loans. A small portion of the invested assets related to these
operations is in preferred and common stocks and real estate
equity investments. The Company did not originate a significant
amount of new real estate business in 1994 and does not plan to
do so in 1995. The property-casualty fixed maturities portfolios
(principally bonds) are shifted from time to time to respond to
the changing economic outlook, insurance underwriting results and
the resultant changes in the federal income tax position of the
Company and its subsidiaries.
Cash available for investment is principally derived from
operating activities and investment income. In addition, cash
becomes available for investment from prepayment, maturity and
sale of investments. The underperforming mortgage loan and real
estate portfolios have been significantly reduced since 1992.
See "Mortgage Loans and Real Estate" below. Different investment
policies have been developed for various lines of business based
on the product requirements, the type and term of the liabilities
associated with these products, regulatory requirements and tax
treatment of the businesses in which each company is engaged.
Mortgage Loans and Real Estate
The Company is continuing its program to dispose of its
real estate investments and some of its mortgage loans and to
reinvest the proceeds to obtain current market yields. At
December 31, 1994, the mortgage loan and real estate portfolios
of the businesses included in the Company's insurance services
segments consisted of approximately $5.4 billion and $418
million, respectively. At December 31, 1993, the mortgage loan
and real estate portfolios consisted of approximately $7.4
billion and $1.0 billion, respectively. See Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," for additional information.
The Company's accelerated liquidation strategy for
foreclosed real estate and certain mortgage loans has mitigated the
negative impact that these underperforming portfolios have had on
investment income. Management anticipates that approximately
half of maturing commercial mortgage loans will be refinanced,
restructured, sold or foreclosed. Restructured loans are defined
as loans the terms of which have been changed from the original
contract generally by lowering the pay rate of interest in the
early years after modification. Loans which have pay rates of
interest after modification that are equal to or above market
rates are not included in the underperforming mortgage loan
inventory. At December 31, 1994 and 1993, approximately $511
million and $1.3 billion, or 9% and 17%, respectively, of the
mortgage loan portfolio was classified as underperforming.
Underperforming mortgage loans include delinquent loans, loans in
the process of foreclosure and loans modified at interest rates
below market.
41
<PAGE>
For information regarding the principal balance of mortgage
loans at December 31, 1994 by contractual maturity, see Note 5 of
Notes to Consolidated Financial Statements. Actual maturities
will differ from contractual maturities because borrowers may
have the right to prepay loans with or without prepayment
premiums. Unscheduled payments and sales of mortgage loans were
$1.3 billion in 1994 and $1.0 billion in 1993. The majority of
these mortgages are seven-year term loans.
Real estate management evaluates the portfolio on an
ongoing basis, assessing the probabilities of loss with respect
to a comprehensive series of future projections, including a host
of variables relating to the borrower, the property, the term of
the loan, the tenant composition, rental rates, other supply and
demand factors, and overall economic conditions.
The mortgage loan portfolio and real estate assets
included in the investment portfolios as of December 31, 1994 and
1993 are summarized by property type as set forth in the table
below. For information summarizing the geographic distribution
of the mortgage loan portfolio and real estate assets, see Note 5
of Notes to Consolidated Financial Statements.
(in millions)
Property Type: Mortgage Loans Real Estate
-------------- -------------- -----------
1994 1993 1994 1993
---- ---- ---- ----
Office $2,141 $2,875 $ 224 $ 641
Apartment 1,112 1,711 9 66
Hotel 642 782 79 77
Retail 623 938 46 137
Industrial 228 267 13 69
Other 108 116 33 41
----- ----- ----- -----
Total commercial 4,854 6,689 404 1,031
Agricultural 562 673 14 18
Residential - 3 - -
----- ----- ----- -----
Total $5,416 $7,365 $ 418 $1,049
===== ===== ===== =====
COMBINED PROPERTY-CASUALTY PRODUCT LINE INFORMATION
The following discussion of the Company's combined
property-casualty lines displays information for the insurance
operations of Property-Casualty Commercial Lines and Property-
Casualty Personal Lines on a combined basis, consolidating Gulf
and old Travelers. The operating results of old Travelers prior
to the December 31, 1993 Merger are not included in the Company's
Consolidated Financial Statements, other than for the equity in
earnings relating to the 27% previously owned.
42
<PAGE>
Combined Property-Casualty Reserves
Property-casualty loss reserves are established to account
for the estimated ultimate costs of claims and claim adjustment
expenses for claims that have been reported but not yet settled,
reopened claims and claims which have been incurred but not
reported. The process of estimating this liability is an
imprecise science subject to a number of variables. These
variables are impacted by both internal and external events such
as changes in claim handling procedures, economic inflation,
judicial trends and legislative changes. Many of these items are
not directly quantifiable, particularly on a prospective basis.
Additionally, there may be significant reporting lags between the
occurrence of the insured event and its actual reporting to the
insurer. At December 31, 1994, 1993 and 1992, $5.9 billion, $5.5
billion and $5.4 billion, respectively, of unpaid claim and claim
adjustment expenses were provided for claims which had not yet
been reported and for future development on reported claims.
Reserve estimates are continually refined in a regular ongoing
process as experience develops and further claims are reported
and settled. Adjustments to reserves are reflected in the
results of the periods in which such adjustments are made.
Estimates for reported claims are established based on
judgments by the claim department on a case by case basis. These
estimates are reviewed on a regular basis and revised as
additional facts become known.
Estimates for unreported claims, future reopened claims
and development on reported claims are principally derived from
actuarial analyses of historical patterns of claim development by
accident year for each line of business and market segment.
Similarly, estimates of unpaid claim adjustment expenses are also
principally derived from actuarial analyses of historical
development patterns of the relationship of claim adjustment
expenses to losses by accident year for each line of business and
market segment.
Refer to "Insurance Services - General -- Reserving
Methods" at page 39 for a more complete discussion of reserving
methodology.
For a reconciliation of beginning and ending reserve
liability balances for 1994, 1993 and 1992, see Note 11 of Notes
to Consolidated Financial Statements. The table on page 45
shows the development of the estimated reserves for the 10 years
prior to 1994, and includes information for old Travelers for
periods prior to the Merger.
See "Property & Casualty Insurance Services -- Property-
Casualty Commercial Lines" for a discussion of environmental and
asbestos claims and the Special Liability Group that deals with
such claims.
The differences between the reserves for losses and LAE
shown in the table on page 45, which is prepared in accordance
with generally accepted accounting principles ("GAAP"), and those
reported in the annual statements filed with state insurance
departments, which are prepared in accordance with statutory
accounting practices ("SAP"),
43
<PAGE>
were $(24) million, $32 million and $38 million for the years
1994, 1993 and 1992, respectively. Those differences are
attributable to a certain portion of the discounting of workers'
compensation reserves impacting all three years. The 1994 year
was also affected by the gross-up of assets and liabilities for
GAAP that were recorded on a net basis for SAP.
Discounting
The liability for losses for certain long-term disability
payments under workers' compensation insurance has been
discounted by $509 million at December 31, 1994 using a maximum
interest rate of 5%. The corresponding amounts of discount for
calendar years 1993 and 1992 were $610 million and $623 million,
respectively. The 1994 decrease was due to more favorable
experience trends anticipated on certain of these claims.
44
<PAGE>
<TABLE>
<CAPTION>
Analysis of Combined Property-Casualty Loss and Loss Adjustment
Expense Development (excluding accident and health business)
(in millions)
Year Ended December 31,
--------------------------------------------------------------------------------------
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Loss and LAE
Originally Estimated $4,817 $5,475 $6,658 $7,644 $8,116 $8,947 $9,239 $9,406 $9,872 $10,190 $10,251
Cumulative Amount Paid as of
----------------------------
One year later 1,655 1,753 1,839 2,376 2,146 2,430 2,418 2,136 2,206 1,903
Two years later 2,559 2,748 3,261 3,631 3,632 3,992 3,932 3,584 3,556
Three years later 3,138 3,737 4,075 4,648 4,706 5,095 4,993 4,596
Four years later 3,795 4,258 4,760 5,402 5,487 5,878 5,755
Five years later 4,119 4,732 5,303 5,978 6,080 6,481
Six years later 4,425 5,130 5,735 6,443 6,557
Seven years later 4,717 5,459 6,109 6,831
Eight years later 4,951 5,784 6,445
Nine years later 5,128 6,086
Ten years later 5,352
Reserves Reestimated as of
--------------------------
One year later 4,937 5,863 6,799 7,858 8,292 9,099 9,358 9,446 10,014 9,941
Two years later 5,261 6,135 7,078 8,051 8,497 9,220 9,470 9,756 10,116
Three years later 5,460 6,376 7,292 8,254 8,698 9,408 9,898 10,042
Four years later 5,656 6,665 7,569 8,497 8,912 9,954 10,327
Five years later 5,856 6,922 7,765 8,746 9,489 10,425
Six years later 6,097 7,136 8,021 9,334 9,974
Seven years later 6,266 7,368 8,637 9,817
Eight years later 6,464 7,951 9,079
Nine years later 6,988 8,422
Ten years later 7,383
Cumulative Deficiency (Redundancy) 2,566 2,947 2,421 2,173 1,858 1,478 1,088 636 244 (249)
Gross liability - end of year $13,805 $13,872
Reinsurance recoverable 3,615 3,621
----- -----
Net liability - end of year $10,190 $10,251
====== ======
Gross reestimated liability - latest $13,226
Reestimated reinsurance recoverable
- latest 3,285
-----
Net reestimated liability - latest $ 9,941
======
Gross cumulative deficiency (redundancy) $ (579)
=======
</TABLE>
45
<PAGE>
The net reserve balance at December 31, 1993 reflected
above includes a $225 million purchase accounting adjustment
relating to the acquisition of old Travelers. See Note 11 of
Notes to Consolidated Financial Statements.
The data in the above table is presented in accordance with
reporting requirements of the Securities and Exchange Commission.
Care must be taken to avoid misinterpretation by those unfamiliar
with such information or familiar with other data commonly
reported by the insurance industry. The above data is not
"accident year" data, but rather a display of 1984-1994 year-end
reserves and the subsequent changes in those reserves.
For instance, the "cumulative deficiency or redundancy"
shown above for each year represents the aggregate amount by
which original estimates of reserves as of that year end have
changed in subsequent years. Accordingly, the cumulative
deficiency for a year relates only to reserves at that year end
and such amounts are not additive. Expressed another way, if the
original reserves at the end of 1984 included $4 million for a loss
which is finally settled in 1994 for $5 million, the $1 million
deficiency (excess of actual settlement of $5 million over original
estimate of $4 million) would be included in the cumulative
deficiencies in each of the years 1984-1993 shown above.
A substantial portion of the cumulative deficiencies in
each of the years 1984-1992 arises from claims on policies
written prior to the mid-1970s involving liability exposures such
as asbestos. In the post-1984 period, the Company has developed
more stringent underwriting standards and policy exclusions and
significantly contracted or terminated the writing of such risks.
General conditions and trends that have affected the
development of these liabilities in the past will not necessarily
recur in the future; however, deficiencies will occur in the
future due to the discount on the workers compensation reserves,
therefore, it would be difficult to develop meaningful
extrapolation of estimated future redundancies or deficiencies in
loss reserves from the data in the table on page 45.
A significant portion of National business is underwritten
with retrospectively rated insurance policies in which the
ultimate cost of insurance for a given year is dependent on the
loss experience of the insured. This analysis does not reflect
amounts recoverable from insureds in the retrospective rating
process. Such recoverables tend to significantly mitigate the
impact of the cumulative deficiencies shown above. Retrospective
rating is particularly significant for National business for the
workers' compensation, general liability and commercial
automobile liability coverages. This mechanism affords the
Company a significant measure of financial protection against
adverse development on a large block ($3.2 billion) of net
reserves.
Combined Ratios
Combined ratios are a measure of property-casualty
underwriting results. The combined ratio is the sum of (i) the
ratio of losses, loss adjustment expenses and policyholder
dividends to earned premiums, and (ii) the ratio of other
underwriting expenses to written premiums. When the combined
ratio is under 100%, underwriting results are generally
profitable; when this ratio is over 100%, underwriting results
are generally unprofitable.
46
<PAGE>
Underwriting results do not include investment income which makes
a significant contribution to overall property-casualty
profitability. In preparing the following table, anticipated
salvage and subrogation were deducted from losses.
The following table and related discussions present
information regarding the combined ratios of Travelers Indemnity,
including Gulf and the other property-casualty insurance
operations of old Travelers and its subsidiaries.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Personal Lines
Automobile 96.0% 101.6% 104.1%
Homeowners 124.2 131.9 246.6
Total Personal Lines
Losses and loss adjustment expenses 71.0 71.2 98.1
Other underwriting expenses 29.4 33.2 33.7
------- -------- -------
Combined Personal Lines 100.4 104.4 131.8
Commercial Lines
Workers' compensation 104.9 99.1 104.9
Multiple-peril 119.9 125.6 134.9
Automobile 102.6 106.8 116.0
Other liability 245.5 227.5 144.7
Property and other 107.3 93.9 144.0
Total Commercial Lines
Losses and loss adjustment expenses 100.0 98.2 94.4
Other underwriting expenses 24.7 27.1 27.6
-------- -------- --------
Combined before policyholder dividends 124.7 125.3 122.0
Combined Commercial Lines 123.0 126.6 122.3
Total Personal and Commercial Lines
Losses and loss adjustment expenses 88.7 88.2 95.7
Other underwriting expenses 26.5 29.2 29.8
-------- -------- --------
Combined before policyholder dividends 115.2 117.4 125.5
Combined 114.2% 118.2% 125.7%
</TABLE>
The improvement in the combined ratio for Personal Lines
in 1994 compared to 1993 is primarily attributable to improved
underwriting results due to lower operating expenses and to
favorable loss reserve development in 1994 on prior years'
business. This improvement was partially offset by the increase
in catastrophe losses, which after taxes and reinsurance
increased to $26.4 million for 1994 from $13.5 million in 1993,
due to the severe winter storms in the Northeast during the first
quarter of 1994.
47
<PAGE>
Personal Lines underwriting profitability is driven
principally by results in the automobile line and is influenced
by factors such as inflation in medical, legal and auto repair
costs, accident frequencies and regulatory actions. Results have
improved in the automobile line due in part to programs
implemented by Travelers Indemnity to be more selective in
marketing and underwriting.
In 1993 and 1994, Personal Lines purchased additional
amounts of reinsurance to reduce its exposure to future
catastrophe losses. Homeowners results are heavily influenced by
the cost of reinsurance, as well as the incidence of natural
catastrophes. Personal Lines' results in 1992 were adversely
affected by Hurricane Andrew, which added 22.3 percentage points
to the total Personal Lines combined ratio. Excluding Hurricane
Andrew, the total Personal Lines combined ratio in 1992 would
have been 109.5%.
Commercial Lines underwriting profitability has
historically been cyclical, influenced by factors such as
inflation levels, changes in the interpretation of the doctrines
of tort liability, unemployment trends, legislative actions
affecting workers' compensation benefit levels, crime rates,
natural catastrophes and general business conditions. The
softening of market prices which began in 1988 has continued.
The combined ratio has been, and will continue to be, affected by
the shift to fee-for-service products, which reduces premiums and
losses while expenses remain in insurance results.
During 1994, asbestos and environmental claims continued
to negatively impact other liability lines. The combined impact
from these claims added 4.6 percentage points to the total 1994
Commercial Lines combined ratio. Asbestos claims incurred
totaled $51 million in 1994, $229 million in 1993 and $61 million
in 1992. Environmental claims incurred were $49 million in 1994,
$190 million in 1993 and $67 million in 1992. In addition,
purchase accounting adjustments amounting to $225 million for
asbestos and environmental claims were included in incurred
losses, for statutory purposes only, in 1994. This adjustment
increased the 1994 Commercial Lines combined ratio by an
additional 10.5 percentage points. In the multiple-peril and
property lines, the 1992 combined ratios were severely impacted
by Hurricane Andrew and other natural catastrophes. Hurricane
Andrew alone added 4.9 percentage points to the total Commercial
Lines combined ratio.
Travelers Indemnity has heavily invested in workers'
compensation cost containment initiatives since 1989.
Investments in early intervention, managed care, systems
technology and employer education have allowed Travelers
Indemnity to outperform the industry's workers' compensation
combined ratio results. In addition, Travelers Indemnity's
overall strategy of restricting growth in states with rate
inadequacy, its strong shift towards large self-insured and loss
responsive products, and its growth in service of assigned risk
pools have all contributed to favorable combined ratio trends.
The table on the next page and the related discussion set
forth information regarding the premium to surplus ratios of
Travelers Indemnity, including Gulf and the other property-
casualty insurance operations of old Travelers and its
subsidiaries.
48
<PAGE>
<TABLE>
<CAPTION>
Schedule of Premiums to Surplus Ratios (Statutory Basis)
(Including Accident and Health Business)
(in millions)
Year Ended December 31,
------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
A. Net written premiums $ 3,862 $ 3,902 $ 4,105
B. Capital and surplus 2,062 2,454 1,868
Ratio of premiums to capital and surplus
(A divided by B) 1.87 1.59 2.20
</TABLE>
The ratio of net written premiums to capital and surplus
is a key financial indicator of the overall strength of a
property-casualty insurance company. The usual range for this
ratio, which is used as a benchmark by the IRIS of the National
Association of Insurance Commissioners, is 3.00 to 1 or less.
The ratio deteriorated slightly in 1994 as a result of the impact
of reserve increases for environmental claims, litigation and
ceded reinsurance balances, partially offset by reductions in
written premium volume. The ratio improved in 1993 due to a
modest decline in premium volume from the continuing trend toward
self-insured service business in Commercial Lines, and due to a
significant increase in capital and surplus, largely resulting
from the assumption of old Travelers public debt by the Company.
CORPORATE AND OTHER OPERATIONS
In addition to its four business segments, the Company's
Corporate and Other segment consists of unallocated expenses and
earnings primarily related to interest, corporate administration,
and certain corporate investments. This segment has also
included the Company's 27% equity interest in old Travelers
(1993), lines of business retained from the sale in 1993 of
Voyager Group, Inc. and its affiliates ("Voyager") (1993 and
1992), and the Company's interest in Fingerhut Companies, Inc.
("Fingerhut") (1992), a direct marketing business. For
additional information regarding the inclusion of Fingerhut in
the Company's consolidated operating results, see Note 3 of Notes
to Consolidated Financial Statements.
In May 1993, the stock of Voyager was sold. Voyager sold
credit insurance on installment loans through independent
consumer finance companies and furniture and appliance retailers.
OTHER INFORMATION
General Business Factors
In the judgment of the Company, no material part of the
business of the Company and its subsidiaries is dependent upon a
single customer or group of customers, the loss of
49
<PAGE>
any one of which would have a materially adverse effect on the
Company, and no one customer or group of affiliated customers
accounts for as much as 10% of the Company's consolidated
revenues.
At January 5, 1995, the Company had approximately 52,000
full-time and 2,800 part-time employees.
Source of Funds
For a discussion of the Company's sources of funds and
maturities of the long-term debt of the Company's subsidiaries,
see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources," and Note 10 of Notes to Consolidated Financial
Statements.
Taxation
For a discussion of tax matters affecting the Company and
its operations, see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and Notes 2
and 13 of Notes to Consolidated Financial Statements.
Financial Information about Industry Segments
For financial information regarding industry segments of
the Company, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 4 of
Notes to Consolidated Financial Statements.
MetraHealth
Upon formation of MetraHealth, the joint venture created
by the combination of the medical businesses of TIC and MetLife,
the Company owned 50% of MetraHealth's common stock. The
Company's interest in MetraHealth will be accounted for on the
equity method. See Note 3 of Notes to Consolidated Financial
Statements.
MetraHealth will provide group health insurance, health
maintenance organizations, managed care and ancillary services
throughout the United States, in Puerto Rico and in the U.S.
Virgin Islands. The range of services provided by these products
includes programs to maintain health and wellness, as well as to
promote patient education and to manage health care through
networks of providers of medical/surgical, mental health and
pharmaceutical services. MetraHealth network products rely on
contractual arrangements between it and providers of health care
to deliver services to covered individuals at negotiated
reimbursement levels as well as to participate in utilization
and quality management programs.
50
<PAGE>
As of December 31, 1994, the businesses acquired by
MetraHealth included health maintenance organizations in 29
network areas, with approximately 400,000 members; point-of-
service operations in 72 network areas, with approximately 1.7
million members; and preferred provider organizations in 90
network areas, with approximately 2.8 million members. Covered
lives using the managed care networks and covered by indemnity
products, in the aggregate at December 31, 1994, were
approximately 11.3 million. MetraHealth expects some decline in
covered lives during 1995.
In March 1995, MetraHealth acquired HealthSpring, Inc. for
common stock of MetraHealth. HealthSpring builds and manages
primary care physician practices and serves approximately 32,000
patients through seven sites in Pennsylvania, Ohio and Illinois.
This acquisition resulted in a reduction in the participation of
the Company and MetLife in the MetraHealth venture to 48.25%
each.
Executive Officers of the Company
The current executive officers of the Company are
indicated on the following page. Periods of offices held include
offices with the Company's predecessor, CCC. Ages are given as
of March 10, 1995.
<TABLE>
<CAPTION>
Officer
Name Age Positions Since
---- --- --------- -------
<S> <C> <C> <C>
Sanford I. Weill 61 Chairman of the Board 1986
and Chief Executive Officer*
Robert I. Lipp 56 Vice Chairman of the Board and 1986
Group Chief Executive of the
Company; Chief Executive Officer of
The Travelers Insurance Group Inc.*
James Dimon 38 President, Chief Operating Officer and 1986
Chief Financial Officer of the Company;
Chief Operating Officer of SB Holdings*
Joseph Plumeri, II 51 Vice Chairman and Group Chief Executive 1994
of PFS
Robert F. Greenhill 58 Chairman and Chief Executive Officer of 1993
SB Holdings*
Michael A. Carpenter 47 Executive Vice President 1995
Edwin M. Cooperman 51 Executive Vice President 1991
Irwin R. Ettinger 56 Senior Vice President, and Chief 1987
Accounting Officer
Charles O. Prince, III 45 Senior Vice President, General Counsel 1986
and Secretary
Samuel V. Miller, Jr. 49 Senior Vice President 1994
</TABLE>
______________________________
* Member of the Office of the Chairman
51
<PAGE>
Mr. Weill has been a director of the Company since 1986. He
has been Chairman of the Board and Chief Executive Officer of the
Company and its predecessor, CCC, since 1986; he was also its
President from 1986 until 1991. He was President of American
Express Company from 1983 to 1985; Chairman of the Board and
Chief Executive Officer of American Express Insurance Services,
Inc. from 1984 to 1985; Chairman of the Board and Chief Executive
Officer, or a principal executive officer, of Shearson Lehman
Brothers Inc. from 1965 to 1984; Chairman of the Board of
Shearson Lehman Brothers Holdings Inc. from 1984 to 1985; and a
founding partner of Shearson's predecessor partnership from 1960
to 1965. He is Chairman of the Board of Trustees of Carnegie
Hall, and a director of the Baltimore Symphony Orchestra. Mr.
Weill is a member of the Board of Governors of New York Hospital
and is Vice Chairman of the Board of Overseers of Cornell
University Medical Center and a member of the Joint Board of New
York Hospital--Cornell University Medical College. He is a member
of Cornell University's Johnson Graduate School of Management
Advisory Board and a Board of Trustees Fellow. He has served as
Chairman of the Joint Mayoral/City Council Commission on Early
Child and Child Care Programs during the Dinkins Administration.
Mr. Lipp has been a director of the Company since 1991,
and is a Vice Chairman and Group Chief Executive of the Company.
In November 1993, he was named a member of the newly-created
Office of the Chairman of the Company. Upon completion of the
merger with old Travelers on December 31, 1993, Mr. Lipp was
named Chief Executive Officer of The Travelers Insurance Group
Inc. From 1991 to 1993, he was Chairman and Chief Executive
Officer of CCC. From April 1986 through September 1991, he was
an Executive Vice President of the Company and its corporate
predecessor. Prior to joining the Company in 1986, he was a
President and a director of Chemical New York Corporation and
Chemical Bank where he held senior executive positions for more
than five years prior thereto. Mr. Lipp is a director of The New
York City Ballet.
Mr. Dimon has been a director of the Company since
September 1991. He is President, Chief Operating Officer and
Chief Financial Officer of the Company. In November 1993, he was
named a member of the newly-created Office of the Chairman of the
Company. He was, from May 1988 to September 1991, Executive Vice
President and Chief Financial Officer of the Company, and was
Senior Executive Vice President and Chief Administrative Officer
of SBI from 1990 to 1991. He is also a director, the Chief
Operating Officer and a member of the Executive Committee of SBI
and SB Holdings. From 1986 to 1988, Mr. Dimon was Senior Vice
President and Chief Financial Officer of CCC, the Company's
predecessor. From 1982 to 1985, he was a Vice President of
American Express Company and Assistant to the President, Sanford
I. Weill. Mr. Dimon is a trustee of New York University Medical
Center and Chairman of the Board of the New York Academy of
Finance.
Mr. Plumeri became a Vice Chairman of the Company in
August 1994 and has been Group Chief Executive responsible for
the operations of the PFS group of companies since October 1994.
He joined the Company in August 1993, serving as President of SBI
52
<PAGE>
from that time through July 1994. Mr. Plumeri had worked for
Shearson Lehman Brothers Inc. or its predecessors for over 25
years, in various positions of increasing responsibility, until
SBI acquired certain businesses from SLB. At that time, Mr.
Plumeri was a Managing Partner of SLB, and from 1990 until
September 1992 he served as President of SLB's Private Client
Group.
Mr. Greenhill became a director of the Company in August
1993. In November 1993, he was named a member of the newly-
created Office of the Chairman of the Company. He became
Chairman and Chief Executive Officer of SBI in June 1993. He
also serves as Chairman and Chief Executive Officer of SB
Holdings. Mr. Greenhill was President of Morgan Stanley Group,
Inc. from January 1991 to June 1993. Mr. Greenhill joined Morgan
Stanley in 1962 and became a Partner in 1970. In 1972, he
directed Morgan Stanley's newly-formed Mergers and Acquisitions
Department. In 1980, Mr. Greenhill was named director of Morgan
Stanley's Investment Banking Division with responsibility for
domestic and international corporate finance, mergers and
acquisitions, merchant banking, capital market services and real
estate. In 1980, he also became a member of Morgan Stanley's
Management Committee which was the firm's policy-making group.
He became a Vice Chairman of Morgan Stanley Group, Inc. in
January 1989. Mr. Greenhill is a trustee of the Whitney Museum
of American Art, a trustee of the American Enterprise Institute
for Public Policy Research and a member of the International
Advisory Board of the British-American Chamber of Commerce.
Mr. Carpenter joined the Company in January 1995 as
Executive Vice President, and also serves as Chairman and Chief
Executive Officer of Travelers Life and Annuity Company. From
January 1989 to June 1994, Mr. Carpenter was Chairman of the
Board, President and Chief Executive Officer of Kidder, Peabody
Group, Inc., an investment banking and brokerage company that was
a wholly owned subsidiary of General Electric Company. Prior
thereto, he served as Executive Vice President of General
Electric Capital Corporation and Vice President of General
Electric Company.
Mr. Cooperman joined the Company in November 1991. Prior
thereto, he was Chairman and Co-Chief Executive Officer of
American Express Company Travel Related Services. He joined
American Express in 1972 and assumed positions of increasing
responsibility during his tenure there.
Mr. Ettinger, prior to joining CCC in October 1987, was
Partner in charge of the Tax Department of Arthur Young and
Company's New York offices for more than five years prior
thereto.
Mr. Miller has been a Senior Vice President of the Company
since March 1994, and also currently serves as Chairman of NBL
and the Canadian operations of PFS. From March 1994 until
October 1994, he was Chairman and Chief Executive Officer of the
PFS group of companies. For ten years prior to joining the
Company, Mr. Miller was President and Chief Executive Officer of
AMEX Life Assurance Company, a division of American
53
<PAGE>
Express Company. He is a member of the board of directors of the
Health Insurance Association of America.
Mr. Prince has been General Counsel of the Company or its
predecessor since 1983, and has been a Senior Vice President
since 1986.
GLOSSARY OF INSURANCE TERMS
Annuity -- A contract that pays a periodic income benefit
for the life of a person (the annuitant), the lives of two or
more persons or for a specified period of time.
Assumption Reinsurance -- A transaction whereby the ceding
company transfers its entire obligation under the policy to the
reinsurer, who becomes directly liable to the policyholder in all
respects, including collecting premiums and paying benefits. See
"Reinsurance."
Benefits Under Administration, Including Fees -- Estimates
of amounts that fee-based Managed Care and Employee Benefits
customers would have been charged if their group health plans had
been fully insured.
Catastrophe -- A severe loss, usually involving many risks
such as conflagration, earthquake, windstorm, explosion and other
similar events.
Ceded Reinsurance -- Risks transferred to another company
as reinsurance. See "Reinsurance."
Claim -- Request by an insured for indemnification by an
insurance company for loss incurred from an insured peril.
Combined Ratio -- A measure of property-casualty
underwriting results. The combined ratio is the sum of (a) Loss
Ratio -- the ratio of losses, loss adjustment expenses and, where
applicable, policyholder dividends to earned premiums, and (b)
Expense Ratio -- the ratio of other underwriting expenses to
written premiums. When the combined ratio is under 100%,
underwriting results are generally profitable; when the ratio is
over 100%, underwriting results are generally unprofitable.
Underwriting results do not include investment income, which may
make a significant contribution to overall profitability.
Contractholder Funds -- Receipts from the issuance of
universal life, pension investment and certain individual annuity
contracts. Such receipts are considered deposits on investment
contracts that do not have substantial mortality or morbidity
risks.
Deductible -- The amount of loss that an insured retains.
54
<PAGE>
Deferred Acquisition Costs -- Commissions and other selling
expenses that vary with and are directly related to the
production of business. These acquisition costs are deferred and
amortized to achieve a matching of revenues and expenses when
reported in financial statements prepared in conformity with
GAAP.
Defined Contribution Plans -- Type of pension plan in which
the contribution rate is certain but the retirement benefit is
variable.
Deposits and Other Considerations -- Consist of cash
deposits and charges for mortality risk and expenses associated
with universal life insurance, annuities and group pensions.
Excess Loss Coverage -- Coverage which indemnifies the
person for that portion of the loss (arising out of a loss
occurrence) which is in excess of the deductible.
Expense Ratio -- See "Combined Ratio."
Experience Rated Contracts -- Insurance contracts in which
future rates and/or commissions are compiled from past
experience, that is, total premiums earned and losses incurred.
This can be applied by certain risk classifications or to an
individual risk.
Fiduciary Accounts -- Accounts held on behalf of others.
General Account -- All an insurer's assets other than those
allocated to separate accounts.
Guaranteed Cost Insurance -- Premium charged on a
prospective basis which may be fixed or adjustable on a specified
rating basis but never on the basis of loss experience in the
period of coverage.
Guaranteed Investment Contracts (GICs) -- Group contracts
sold to pension plans, profit sharing plans and funding
agreements that guarantee a stated interest rate for a specified
period of time.
Guaranty Fund -- State-regulated mechanism which is
financed by assessing insurers doing business in those states.
Should insolvencies occur, these funds are available to meet some
or all of the obligations to policyholders.
Incurred But Not Reported Losses (IBNR) -- Losses that have
occurred but have not been reported.
Indemnity Reinsurance -- A transaction whereby the
reinsurer agrees to indemnify the ceding company against all or
part of the loss that the latter may sustain under the
55
<PAGE>
policies it issued that are being reinsured. The ceding company
remains primarily liable as the direct insurer on all risks
ceded. See "Reinsurance."
Insurance -- Mechanism for contractually shifting burdens
of a number of risks by pooling them.
Involuntary Business (residual market) -- Risks that are
not insurable in the voluntary market due to either the level of
risk or pricing. Residual markets are largest for lines in which
state governments or other agencies mandate coverage such as
workers' compensation. Generally states provide residual market
plans that are designed to allocate the underwriting experience
for these coverages in proportion to a given carrier's market
share.
Life Contingencies -- Contingencies affecting the duration
of life of an individual or a group of individuals.
Long-Term Care -- Coverage for extended stays in a nursing
home or home health services.
Loss Adjustment Expense (LAE) -- Expenses paid in
connection with settling claims.
Loss Ratios -- See "Combined Ratio."
Loss Reserves -- Liabilities established by insurers to
reflect the estimated cost of claims payments that the insurer
will ultimately be required to pay in the future in respect of
losses occurring on or prior to the balance sheet date.
Losses Under Administration -- Projected loss and loss
adjustment expense payments to be made for the current policy
year on behalf of clients who self-insure and purchase claim
adjustment services.
Market Reinsurance -- Ceded reinsurance purchased from
reinsurance companies in the competitive marketplace.
Morbidity -- The rate at which people become diseased,
mentally or physically, or physically impaired.
Mortality -- The rate at which people die.
Policy Loan -- A loan made by an insurance company to a
policyholder on the security of the cash value of the policy.
Policy loans offset benefits payable to policyholders.
56
<PAGE>
Pool -- Syndicate or association of insurance companies
organized to underwrite a particular risk, usually with high
limits of exposure. Each member shares in premiums, losses and
expenses, according to a predetermined agreement.
Reinsurance -- The acceptance by one or more insurers,
called reinsurers, of all or a portion of the risk underwritten
by another insurer (the ceding company) who has directly written
the coverage. However, the legal rights of the insured generally
are not affected by the reinsurance transaction.
Reinsurance Pools and Associations -- Mechanisms
established to aggregate insurance, and then distribute results
to participants in the mechanism. The pool or association
performs rating, loss adjustment and engineering services for
certain exposures. In some cases, they are established to absorb
business that will not be written voluntarily by insurers.
Residual Market -- See "Involuntary Business."
Retention -- The amount of exposure an insurance company
retains on any one risk or group of risks.
Retrospective Rating -- A plan or method which permits
adjustment of the final premium or commission on the basis of the
actual loss experience, subject to certain minimum and maximum
limits.
Salvage -- Amount received by an insurer from the sale of
property (usually damaged) on which the insurer has paid a total
loss to the insured. For example, when an insurer has paid the
insured the actual cash value of an automobile damaged (usually
extensively) by collision, then the insurer takes title to and
sells the damaged automobile for its own account. Salvage is
applied by insurance companies to reduce the amount of loss paid.
Self-Insured Retentions -- That portion of the risk
retained by a person for its own account. Generally, that person
retains an amount of first loss for its own account and purchases
an excess of loss cover to protect itself for losses above its
retention.
Separate Accounts -- Funds for which investment income and
investment gains and losses accrue directly to, and investment
risk is borne by, the contractholders. The assets of these
separate accounts are legally segregated and not subject to
claims that arise out of any other business of the insurance
company.
Servicing Carrier -- An insurance company that provides
various services including policy issuance, claims adjusting and
customer service for insureds in a reinsurance pool, for a fee.
57
<PAGE>
Statutory Accounting Practices -- Those accounting
practices prescribed or permitted by the National Association of
Insurance Commissioners or an insurer's domiciliary state
insurance regulator for purposes of financial reporting to
regulators.
Statutory Capital and Surplus -- The excess of statutory
admitted assets over statutory liabilities as shown on an
insurer's statutory financial statements.
Structured Settlements -- Periodic payments to an injured
person or survivor for a determined number of years or for life,
typically in settlement of a claim under a liability policy.
Subrogation -- The statutory or legal right of an insurer
to recover from a third party who is wholly or partially
responsible for a loss paid by the insurer under the terms of a
policy. For example, when an insurer has paid the insured for
loss sustained to his or her automobile as a result of a
collision, the insurer may collect through the process of
subrogation from the person whose automobile caused the damage.
Subrogation recoveries are treated as reductions of the losses
paid.
Surrender Value -- The amount of money, usually the legal
reserve under the policy, less sometimes a surrender charge,
which an insurance company will pay to a policyholder who cancels
a policy. This value may be used as collateral for a loan.
Trading Portfolio -- Fixed maturity investments that are
likely to be sold prior to maturity and are therefore carried at
current market value. Unrealized gains and losses on these
investments are reflected in stockholders' equity.
Underwriting --The assumption of risk for designated loss
or damage in consideration of receiving a premium. Also includes
the process of examining, accepting or rejecting insurance risks,
and determining the proper premium.
Item 2. PROPERTIES.
The Company's executive offices are located in New York
City. Offices and other properties used by the Company's
subsidiaries are located throughout the United States. A few
subsidiaries have offices located in foreign countries. Most
office locations and other properties are leased on terms and for
durations which are reflective of commercial standards in the
communities where such offices and other properties are located.
At December 31, 1994, leasehold interests of Travelers
Insurance included a total of approximately 5,700,000 square feet
of office space at about 285 locations throughout the United
States under both operating and capital leases. TIC owns
buildings containing approximately 1,570,000 square feet of
office space located in Hartford, Connecticut and vicinity,
serving as the home office for TIC and Travelers Indemnity. TIC
also owns a building in Norcross, Georgia that is occupied by its
information systems department.
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<PAGE>
SBI owns two office buildings in New York City, which
total approximately 627,000 square feet. Most of SBI's other
offices are located in leased premises, the leases for which
expire at various times.
SBI leases two buildings, including an office building
located at 388 Greenwich Street, with a total of approximately 2.3
million square feet, and plans to consolidate its executive offices
and certain other New York City operations at these locations. The
buildings were acquired from Shearson Lehman Brothers by an
independent third party and are leased by SBI through 1999. SBI
has a purchase option with respect to these properties.
A few other offices and certain warehouse space are owned,
none of which is material to the Company's financial condition or
operations. The Company is the lessee under the lease on old
Primerica's former headquarters in Greenwich, Connecticut. The
lease obligation on half of this property ended in December 1991;
the remainder of the lease expires in December 1996. The Company
believes its properties are adequate and suitable for its
business as presently conducted and are adequately maintained.
For further information concerning leases, see Note 18 of Notes
to Consolidated Financial Statements.
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 of which any of their property is subject. Certain additional
matters may be described in the periodic reports filed under the
Exchange Act by certain subsidiaries of the Company.
Shareholder Litigation
For information concerning purported class actions
challenging certain aspects of the Merger, see the descriptions
that appear in the last paragraph on page 2 and the first two
paragraphs on page 3 of the Company's filing on Form 8-K dated
September 23, 1993, the third paragraph on page 26 of the
Company's filing on Form 10-Q for the quarter ended September 30,
1993, and the third paragraph on page 2 of the Company's filing
on Form 8-K dated March 1, 1994, which descriptions are
incorporated by reference herein. A copy of the pertinent
paragraphs of such filings is included as an exhibit to this Form
10-K. The trial court granted the defendants' motion to dismiss
the case in January 1995.
For information concerning purported class actions
challenging certain aspects of the 1988 merger of Primerica
Corporation, a New Jersey corporation ("old Primerica") into
Primerica Holdings, see the description contained in the third
and fourth paragraphs of page 30 of the Company's filing on Form
10-K for the year ended December 31, 1989, which description is
incorporated by reference herein. A copy of the pertinent
paragraphs of such filing is included as an exhibit to this Form
10-K. Subsequent to that filing, other shareholder class actions
relating to the same subject were commenced in Federal, New
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<PAGE>
Jersey state, New York state and Connecticut state courts. All
of these subsequent actions are currently stayed, and the Company
has reached an agreement to settle these actions, subject to
approval by the court.
Other Litigation and Legal Proceedings
Smith Barney
For information concerning purported class actions and an
individual action against SBI and others in connection with
Worlds of Wonder common stock and convertible debentures, see the
description that appears in the first, second and third
paragraphs of page 31 of the Company's filing on Form 10-K for
the year ended December 31, 1989, and the description that
appears in the first paragraph of page 30 of the Company's filing
on Form 10-K for the year ended December 31, 1990, which
descriptions are incorporated by reference herein. A copy of the
pertinent paragraphs of such filings is included as an exhibit to
this Form 10-K. The individual action was dismissed in May 1992.
In January 1993, summary judgment was granted for SBI and the
other defendants in the class action. The judgment was affirmed
by the U.S. Court of Appeals for the Ninth Circuit in September
1994. Plaintiffs have requested a rehearing en banc.
For information concerning several purported class action
lawsuits filed against SBI in connection with three funds managed
by Hyperion Capital Management Inc., see the description that
appears in the fourth paragraph of page 26 of the Company's
filing on Form 10-Q for the quarter ended September 30, 1993,
which description is incorporated by reference herein. A copy of
the pertinent paragraph of such filing is included as an exhibit
to this Form 10-K. An amended consolidated complaint with
respect to these actions was filed in March 1994, and again in
November 1994, and the consolidated action is entitled In re:
Hyperion Securities Litigation. SBI has moved to dismiss the
claims.
Old Primerica
For information concerning matters involving the Company
and certain of its subsidiaries relating to federal, state or
local regulations or laws regulating the discharge of materials
into the environment, see the description that appears in the
first full paragraph of page 26 of the Company's filing on Form
10-K for the year ended December 31, 1992, which description is
incorporated by reference herein. A copy of the pertinent
paragraph of such filing is included as an exhibit to this Form
10-K. The Company has entered into a consent decrees with
respect to both groundwater and soil remediation. The Company
believes that insurance maintained by or on behalf of the
Company, old Primerica or certain affiliates, indemnities in
favor of the Company or such subsidiaries and contributions from
other potentially responsible parties will be available to
mitigate the financial exposure of the Company and its
subsidiaries in these matters. The Company is using a variety of
approaches to recover from each of these sources, including
pursuing litigation where appropriate relating to such matters.
Although there can be no assurance, the Company does
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<PAGE>
not believe that the ultimate resolution of these matters will
have a material adverse effect on the consolidated financial
condition of the Company and its subsidiaries.
Old Travelers
For information concerning a case brought by the federal
government against old Travelers involving benefit claims for
Medicare handled by old Travelers, see the description that
appears in the fourth paragraph of page 2 of the Company's filing
on Form 8-K, dated March 1, 1994, which description is
incorporated by reference herein. A copy of the pertinent
paragraph of such filing is included as an exhibit to this Form
10-K.
For information concerning a case filed by certain
subsidiaries of old Travelers involving certain reinsurance
contracts with Lloyd's of London, see the description that
appears in the paragraph that begins on page 2 and ends on page 3
of the Company's filing on Form 8-K, dated March 1, 1994, which
description is incorporated by reference herein. A copy of the
pertinent paragraph of such filing is included as an exhibit to
this Form 10-K.
Certain of the subsidiaries that the Company acquired in
the Merger are involved in defending against claims asserting
alleged injuries and damages from asbestos and other hazardous
and toxic substances. For additional information with respect to
these claims, reference is made to the discussion of asbestos and
environmental claims contained on pages 25 through 28 of this
Form 10-K.
Other
For information concerning purported class actions and
other actions relating to service fee charges and premium
calculations on certain workers compensation insurance sold by
subsidiaries of the Company, see the description that appears in
the second paragraph of page 29 of the Company's filing on Form
10-Q for the quarter ended September 30, 1994, which description
is incorporated by reference herein. A copy of the pertinent
paragraph of such filing is included as an exhibit to this Form
10-K. In one of these cases, North Carolina Steel, Inc. v.
National Council on Compensation Insurance, Inc., et al, the
North Carolina trial court granted the Company's motion to
dismiss in February 1995.
The Company and various subsidiaries have also been named
as defendants in various matters incident to and typical of the
businesses in which they are engaged. These include numerous
civil actions, arbitration proceedings and other matters in which
SBI and R-H have been named, arising in the normal course of
business out of activities as a broker and dealer in securities,
as an underwriter, as an investment banker or otherwise. In the
opinion of the Company's management, none of these actions is
expected to have a material adverse effect on the consolidated
financial condition of the Company and its subsidiaries.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is listed on the NYSE and the
Pacific Stock Exchange under the symbol "TRV." It is also listed
on the Toronto Stock Exchange under the symbol "TVG." The high
and low sale prices, as reported on the consolidated transaction
reporting system, for the common stock of the Company for the
periods indicated, and the dividends per share, are set forth
below. All amounts have been adjusted to give retroactive effect
to the two stock splits effected in 1993 on the Company's common
stock.
<TABLE>
<CAPTION>
1993 1994 1995
-------------------------------------- --------------------------------------- ----
1st Q 2nd Q 3rd Q 4th Q 1st Q 2nd Q 3rd Q 4th Q 1st Q*
----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock
Price
High $37.6875 $39.6563 $49.5000 $48.6250 $43.1250 $37.1250 $37.1250 $35.0000 $39.8750
Low $24.0625 $31.2188 $37.2188 $37.6250 $34.3750 $31.3125 $31.0000 $30.3750 $32.3750
Dividends per
Share of
Common Stock $.120 $.120 $.125 $.125 $.125 $.150 $.150 $.150 $.200
</TABLE>
_______________________________
* Through February 28, 1995
At February 28, 1995, the Company had approximately 61,000
common stockholders of record. This figure does not represent
the actual number of beneficial owners of common stock because
shares are frequently held in "street name" by securities dealers
and others for the benefit of individual owners who may vote the
shares.
For information on dividend restrictions in certain long-
term loan and credit agreements of the Company and its
subsidiaries, as well as restrictions on the ability of certain
of the Company's subsidiaries to transfer funds to the Company
in the form of cash dividends or otherwise, see Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
62
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
See "Five-Year Summary of Selected Financial Data" on page
29 of the Company's 1994 Annual Report to Stockholders (the "1994
Annual Report"), included as part of Exhibit 13 to this Form 10-K
and incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 30 of the
1994 Annual Report, included as part of Exhibit 13 to this Form
10-K and incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and
Schedules on page F-1 hereof. There is also incorporated by
reference herein in response to this Item the material under the
caption "Quarterly Financial Data (unaudited)" on page 67 of the
1994 Annual Report, which material is included as part of Exhibit
13 to this Form 10-K.
The preacquisition consolidated balance sheets of The
Travelers Corporation and Subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of operations
and retained earnings and cash flows for each of the three years
in the period ended December 31, 1993, together with the notes
thereto and the related report of Independent Accountants, are
included as Exhibit 99.01 to this Form 10-K and are incorporated
herein by reference.
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.
For information on the directors of the Company, see the
material under the caption "Election of Directors," in the
definitive Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on April 26, 1995, filed with the
Securities and Exchange Commission (the "Proxy Statement"),
incorporated herein by reference. For information on
63
<PAGE>
executive officers, see Item 1, "Business -- Other Information --
Executive Officers of the Company" herein.
Item 11. EXECUTIVE COMPENSATION.
See the material under the caption "Executive
Compensation" of the Proxy Statement, incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
See the material under the captions "Voting Rights" and
"Security Ownership of Management" of the Proxy Statement,
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the material under the captions "Election of
Directors" and "Executive Compensation" of the Proxy Statement,
incorporated herein by reference.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to
Consolidated Financial Statements and Schedules
on page F-1 hereof. Also filed as a part of
this report are the preacquisition consolidated
balance sheets of The Travelers Corporation and
Subsidiaries as of December 31, 1993 and 1992,
and the related consolidated statements of
operations and retained earnings and cash flows
for each of the three years in the period ended
December 31, 1993, together with the notes
thereto and the related report of Independent
Accountants. See Exhibit 99.01.
(2) Financial Statement Schedules. See Index to
Consolidated Financial Statements and Schedules
on page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
64
<PAGE>
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the Company
during the last quarter of the period covered by this
report.
65
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
3.01 Restated Certificate of Incorporation of The
Travelers Inc. (the "Company") and
Certificate of Designation of Cumulative
Adjustable Rate Preferred Stock, Series Y,
incorporated by reference to Exhibit 3.01 to
the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1994
(File No. 1-9924) (the "Company's March 31,
1994 10-Q")
3.02 By-Laws of the Company as amended through
April 27, 1994, incorporated by reference to
Exhibit 3.02 to the Company's March 31, 1994
10-Q.
10.01* Employment Protection Agreement, dated as of
December 31, 1987, between the Company (as
successor to Commercial Credit Company
("CCC")) and Sanford I. Weill, incorporated
by reference to Exhibit 10.03 to CCC's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1987 (File No. 1-
6594).
10.02.1* Stock Option Plan of the Company, as amended
through April 26, 1989, incorporated by
reference to Annex A to the prospectus
contained in the Company's Registration
Statement on Form S-8 (No. 33-29711).
10.02.2* Amendment to the Company's Stock Option
Plan, dated October 23, 1991, incorporated
by reference to Exhibit 10.02.2 to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 (File
No. 1-9924) (the "Company's 1991 10-K").
10.02.3* Amendments to the Company's Stock Option
Plan, approved by the Company's stockholders
on April 22, 1992, incorporated by reference
to Exhibit 10.02.3 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1992 (File No.1-9924)
(the "Company's 1992 10-K").
10.02.4* Amendment to the Company's Stock Option
Plan, dated July 22, 1992, incorporated by
reference to Exhibit 10.02.4 to the
Company's 1992 10-K.
10.02.5* Amendment No. 11 to the Company's Stock
Option Plan, incorporated by reference to
Exhibit 10.02.5 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1993 (File No. 1-9924)
(the "Company's 1993 10-K").
66
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.02.6* Amendment No. 12 to the Company's Stock
Option Plan, incorporated by reference to
Exhibit 10.02.6 to the Company's 1993 10-K.
10.03* Retirement Benefit Equalization Plan of the
Company (as successor to Primerica Holdings,
Inc.), as amended, incorporated by reference
to Exhibit 10.03 to the Company's 1993 10-K.
10.04* Letter Agreement between Joseph A. Califano,
Jr. and the Company, dated December 14,
1988, incorporated by reference to Exhibit
10.21.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December
31, 1988 (File No. 1-9924) (the "Company's
1988 10-K").
10.05.1* The Company's Deferred Compensation Plan for
Directors, incorporated by reference to
Exhibit 10.21.2 to the Company's 1988 10-K.
10.05.2* Amendment to the Company's Deferred
Compensation Plan for Directors, dated July
22, 1992, incorporated by reference to
Exhibit 10.06.2 of the Company's 1992 10-K.
10.06.1* Supplemental Retirement Plan of the Company,
incorporated by reference to Exhibit 10.23
to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990
(File No. 1-9924) (the "Company's 1990 10-
K").
10.06.2* Amendment to the Company's Supplemental
Retirement Plan, incorporated by reference
to Exhibit 10.06.2 to the Company's 1993 10-
K.
10.07* Long-Term Incentive Plan of the Company, as
amended, incorporated by reference to
Exhibit 10.08 to the Company's 1992 10-K.
10.08* Capital Accumulation Plan of the Company Electronic
(the "CAP Plan"), as amended to May 16,
1994.
10.09* Agreement dated December 21, 1993 between
the Company and Edward H. Budd, incorporated
by reference to Exhibit 10.22 to the
Company's 1993 10-K.
67
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.10 Restated Stockholder Rights and Support
Agreement dated as of November 1, 1989 by
and among the Company and Arthur L.
Williams, Jr., Angela H. Williams, A.L.
Williams & Associates, Inc. and The A.L.
Williams & Associates, Inc. Pension and
Profit Sharing Plan, incorporated by
reference to Exhibit 10.13 to the Company's
1990 10-K.
10.11 Amended and Restated Exclusive Marketing
Agreement dated as of November 1, 1989 by
and among the Company, A.L. Williams &
Associates, Inc. and Arthur L. Williams,
Jr., incorporated by reference to Exhibit
10.14 to the Company's 1990 10-K.
10.12 Restated Second Amended General Agency
Agreement ("SAGAA") dated as of November 1,
1989 by and among Primerica Life Insurance
Company (formerly Massachusetts Indemnity
Life Insurance Company; hereinafter
"Primerica Life"), A.L. Williams &
Associates, Inc. and Arthur L. Williams,
Jr., incorporated by reference to Exhibit
10.15 to the Company's 1990 10-K.
10.13 Restated First Amendment to SAGAA dated as
of November 1, 1989 by and among Primerica
Life, A.L. Williams & Associates, Inc. and
Arthur L. Williams, Jr., incorporated by
reference to Exhibit 10.16 to the Company's
1990 10-K.
10.14 Restated and Amended Agreement of Charles D.
Adams dated as of November 1, 1989 for the
benefit of each of the Company, A.L.
Williams & Associates, Inc. and The A.L.
Williams Corporation, incorporated by
reference to Exhibit 10.17 to the Company's
1990 10-K.
10.15 Restated and Amended Agreement of Angela H.
Williams dated as of November 1, 1989 for
the benefit of each of the Company, A.L.
Williams & Associates, Inc. and The A.L.
Williams Corporation, incorporated by
reference to Exhibit 10.18 to the Company's
1990 10-K.
10.16.1 Asset Purchase Agreement dated as of March
12, 1993, by and among Shearson Lehman
Brothers Inc., Smith Barney Inc. ("SBI";
formerly Smith Barney, Harris Upham & Co.
Incorporated), the Company, American Express
Company and Shearson Lehman Brothers
Holdings Inc. (the "SLB Agreement"),
incorporated by reference to Exhibit 10.21
to the Company's 1992 10-K.
68
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.16.2 Amendment No. 1, dated as of July 31, 1993,
to the SLB Agreement, incorporated by
reference to Exhibit 10.01 to the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1993 (File No. 1-
9924) (the "Company's June 30, 1993 10-Q").
10.16.3 Amendment No. 2 dated as of July 31, 1993,
to the SLB Agreement, incorporated by
reference to Exhibit 10.02 to the Company's
June 30, 1993 10-Q.
10.17.1* Employment Agreement dated June 23, 1993, by
and among SBI, the Company and Robert F.
Greenhill (the "RFG Employment Agreement"),
incorporated by reference to Exhibit 10.01
to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September
30, 1993 (File No. 1-9924) (the "Company's
September 30, 1993 10-Q").
10.17.2* Amendment to the RFG Employment Agreement,
incorporated by reference to Exhibit 10.17.2
to the Company's March 31, 1994 10-Q.
10.18* Memorandum of Sale dated June 23, 1993,
between the Company and Robert F. Greenhill,
incorporated by reference to Exhibit 10.02
to the Company's September 30, 1993 10-Q.
10.19* Registration Rights Agreement dated June 23,
1993, between the Company and Robert F.
Greenhill, incorporated by reference to
Exhibit 10.03 to the Company's September 30,
1993 10-Q.
10.20* Restricted Shares Agreement dated June 23,
1993, by and between the Company and Robert
F. Greenhill, incorporated by reference to
Exhibit 10.04 to the Company's September 30,
1993 10-Q.
10.21 Agreement and Plan of Merger, dated as of
September 23, 1993, between the Company and
The Travelers Corporation ("old Travelers"),
incorporated by reference to Exhibit 2.1 to
the Current Report on Form 8-K of old
Travelers, dated September 23, 1993 and
filed with the Commission on October 8, 1993
(File No. 1-5799).
10.22* Employment Agreement effective January 1, Electronic
1995 between the Company and Michael A.
Carpenter.
69
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.23.1* The Travelers Corporation 1982 Stock Option
Plan, as amended January 10, 1992,
incorporated by reference to Exhibit 10(a)
to the Annual Report on Form 10-K of old
Travelers for the fiscal year ended December
31, 1991 (File No. 1-5799) (the "old
Travelers' 1991 10-K").
10.23.2* Amendment to The Travelers Corporation 1982 Electronic
Stock Option Plan.
10.24.1* The Travelers Corporation 1988 Stock
Incentive Plan, as amended April 7, 1992,
incorporated by reference to Exhibit 10(b)
to the Annual Report on Form 10-K of old
Travelers for the fiscal year ended December
31, 1992 (File No. 1-5799) (the "old
Travelers' 1992 10-K").
10.24.2* Amendment to The Travelers Corporation 1988 Electronic
Stock Incentive Plan.
10.25* The Travelers Corporation 1984 Management
Incentive Plan, as amended effective January
1, 1991, incorporated by reference to
Exhibit 10(c) to the Annual Report on Form
10-K of old Travelers for the fiscal year
ended December 31, 1990 (File No. 1-5799).
10.26* The Travelers Corporation Supplemental
Benefit Plan, effective December 20, 1992,
incorporated by reference to Exhibit 10(d)
to the Annual Report on the old Travelers'
1992 10-K.
10.27* The Travelers Corporation TESIP Restoration
and Non-Qualified Savings Plan, effective
January 1, 1991, incorporated by reference
to Exhibit 10(e) to the old Travelers' 1991
10-K.
10.28* The Travelers Severance Plan of Officers, as
amended September 23, 1993, incorporated by
reference to Exhibit 10.30 to the Company's
1993 Form 10-K.
10.29* The Travelers Corporation Directors'
Deferred Compensation Plan, as amended
November 7, 1986, incorporated by reference
to Exhibit 10(d) to the Annual Report on
Form 10-K of old Travelers for the fiscal
year ended December 31, 1986 (File No. 1-
5799).
10.30* Employment Agreement dated as of December Electronic
30, 1994, between SBI and Joseph J. Plumeri
II.
11.01 Computation of Earnings Per Share. Electronic
70
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
12.01 Computation of Ratio of Earnings to Fixed Electronic
Charges.
13.01 Pages 29 through 68 of the 1994 Annual Electronic
Report to Stockholders of the Company
(pagination of exhibit does not correspond
to pagination in the 1994 Annual Report to
Stockholders).
21.01 Subsidiaries of the Company. Electronic
23.01 Consent of KPMG Peat Marwick LLP, Independent Electronic
Certified Public Accountants.
23.02 Consent of Coopers & Lybrand L.L.P., Electronic
Independent Accountants.
24.01 Powers of Attorney. Electronic
27.01 Financial Data Schedule. Electronic
28.01 Information from Reports Furnished to State P
Insurance Regulatory Authorities. Schedule Paper
P of the Combined Annual Statement of
The Travelers Insurance Group Inc. and its
affiliated property and casualty insurers.
99.01 Consolidated balance sheets of The Travelers Electronic
Corporation and Subsidiaries as of December
31, 1993 and 1992, and the related
consolidated statements of operations and
retained earnings and cash flows for each of
the three years in the period ended December
31, 1993, together with the notes thereto
and the related report of Independent
Accountants.
99.02 The last paragraph of page 2 and the first Electronic
two paragraphs of page 3 of the Company's
Current Report on Form 8-K dated September
23, 1993 (File No. 1-9924), the third
paragraph of page 26 of the Company's
September 30, 1993 10-Q, and the third
paragraph of page 2 of the Company's Current
Report on Form 8-K dated March 1, 1994 (File
No. 1-9924) (the "Company's March 1, 1994
8-K").
99.03 The third and fourth paragraphs of page 30 Electronic
of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989
(File No. 1-9924) (the "Company's 1989
10-K").
99.04 The first, second and third paragraphs of Electronic
page 31 of the Company's 1989 10-K, and the
first paragraph of page 30 of the Company's
1990 10-K.
71
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
99.05 The fourth paragraph of page 26 of the Electronic
Company's September 30, 1993 10-Q.
99.06 The first full paragraph of page 26 of the Electronic
Company's 1992 10-K.
99.07 The fourth paragraph of page 2 of the Electronic
Company's March 1, 1994 8-K.
99.08 The paragraph that begins on page 2 and ends Electronic
on page 3 of the Company's March 1, 1994 8-K.
99.09 The second paragraph of page 29 of the Electronic
Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1994
(File No. 1-9924).
The total amount of securities authorized pursuant to any
instrument defining rights of holders of long-term debt of the
Company does not exceed 10% of the total assets of the Company
and its consolidated subsidiaries. The Company will furnish
copies of any such instrument to the Commission upon request.
The financial statements required by Form 11-K for 1994 for the
Company's employee savings plans will be filed as exhibits by
amendment to this Form 10-K pursuant to Rule 15d-21 of the
Securities Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished
at a cost of $.25 per page (except that no charge will be made
for the 1994 Annual Report on Form 10-K) to security holders who
make written request therefor to Corporate Communications and
Investor Relations Department, The Travelers Inc., 388 Greenwich
Street, New York, New York 10013.
-------------
* Denotes a management contract or compensatory plan or
arrangement required to be filed as an exhibit pursuant to
Item 14(c) of Form 10-K.
72
<PAGE>
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 30th day of March, 1995.
THE TRAVELERS INC.
(Registrant)
By: /s/ Sanford I. Weill
. . . . . . . . . . . . . . .
Sanford I. Weill, Chairman of
the Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf
of the registrant and in the capacities indicated on the 30th day of
March, 1995.
Signature Title
--------- -----
/s/ Sanford I. Weill
. . . . . . . . . . . . . . Chairman of the Board, Chief
Sanford I. Weill Executive Officer
(Principal Executive Officer)
and Director
/s/ James Dimon
. . . . . . . . . . . . . . President, Chief Operating
James Dimon Officer,
Chief Financial Officer
(Principal Financial
Officer) and Director
/s/ Irwin R. Ettinger
. . . . . . . . . . . . . . Senior Vice President and Chief
Irwin R. Ettinger Accounting Officer
(Principal Accounting Officer)
*
. . . . . . . . . . . . . . Director
C. Michael Armstrong
*
. . . . . . . . . . . . . . Director
Kenneth J. Bialkin
73
<PAGE>
Signature Title
--------- -----
*
. . . . . . . . . . . . . . Director
Edward H. Budd
*
. . . . . . . . . . . . . . Director
Joseph A. Califano, Jr.
*
. . . . . . . . . . . . . . Director
Douglas D. Danforth
*
. . . . . . . . . . . . . . Director
Robert F. Daniell
*
. . . . . . . . . . . . . . Director
Leslie B. Disharoon
. . . . . . . . . . . . . . Director
Gerald R. Ford
*
. . . . . . . . . . . . . . Director
Robert F. Greenhill
*
. . . . . . . . . . . . . . Director
Ann Dibble Jordan
*
. . . . . . . . . . . . . . Director
Robert I. Lipp
*
. . . . . . . . . . . . . . Director
Dudley C. Mecum
74
<PAGE>
Signature Title
--------- -----
*
. . . . . . . . . . . . . . Director
Andrall E. Pearson
*
. . . . . . . . . . . . . . Director
Frank J. Tasco
. . . . . . . . . . . . . . Director
Linda J. Wachner
*
. . . . . . . . . . . . . . Director
Joseph R. Wright, Jr.
*
. . . . . . . . . . . . . . Director
Arthur Zankel
/s/ James Dimon
*By: . . . . . . . . . . .
James Dimon
Attorney-in-fact
75
<PAGE>
<TABLE>
<CAPTION>
The Travelers Inc. and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES*
_________________________________
Incorporated
By Reference from
the Company's 1994
Annual Report to
Page Stockholders at
Herein Page Indicated
------ ------------------
<S> <C> <C>
Independent Auditors' Report F-2 68
Consolidated Statement of Income for the year ended
December 31, 1994, 1993 and 1992 41
Consolidated Statement of Financial Position at
December 31, 1994 and 1993 42
Consolidated Statement of Changes in Stockholders'
Equity for the year ended December 31, 1994, 1993 and 1992 43
Consolidated Statement of Cash Flows for the year ended
December 31, 1994, 1993 and 1992 44
Notes to Consolidated Financial Statements 45-67
Schedules:
Schedule I - Condensed Financial Information of
Registrant (Parent Company only) F-3 - F-6
Schedule III - Supplementary Insurance Information F-7
Schedule IV - Reinsurance F-8
</TABLE>
*Schedules not listed are omitted as not applicable or not required by
Regulation S-X.
F - 1
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
The Travelers Inc.:
Under date of January 17, 1995, we reported on the consolidated
statements of financial position of The Travelers Inc. and
subsidiaries as of December 31, 1994 and 1993, and the related
statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended
December 31, 1994, which are contained in the 1994 annual report
to stockholders. These consolidated financial statements and our
report thereon are incorporated by reference in the annual report
on Form 10-K for the year ended December 31, 1994. In connection
with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement
schedules which are listed on the accompanying index. These
financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our
audits.
In our opinion, these financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements,
the Company changed its method of accounting for certain
investments in debt and equity securities in 1994. Also, as
discussed in Note 2 to the consolidated financial statements, the
Company changed its methods of accounting for postretirement
benefits other than pensions and accounting for postemployment
benefits in 1993, and its method of accounting for income taxes
in 1992.
/s/ KPMG Peat Marwick LLP
New York, New York
January 17, 1995
F-2
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
The Travelers Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Income
Year Ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Income:
-------
Equity in income of old Travelers $ - $126 $ -
Gain on sales of stock of subsidiaries and affiliate - 96
Other 3 6 12
----- --- ---
Total 3 132 108
----- --- ---
Expenses:
---------
Interest 120 77 79
Other 87 46 58
----- --- ---
Total 207 123 137
----- --- ---
Pre-tax income (loss) (204) 9 (29)
Income tax benefit 82 35 9
----- --- ---
Net (loss) income before equity in net income
of subsidiaries (122) 44 (20)
Equity in net income of subsidiaries 1,448 907 776
Cumulative effect of changes in accounting principles
(including $17 and $28 in 1993 and 1992,
respectively, applicable to subsidiaries) - (35) (28)
----- --- ---
Net income $1,326 $916 $728
===== === ===
</TABLE>
The condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto and
the accompanying notes to the condensed financial information of
Registrant.
F-3
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
The Travelers Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars except per share amounts)
Condensed Statement of Financial Position
December 31,
------------
1994 1993
----- ----
<S> <C> <C>
Assets
------
Investment in subsidiaries at equity $10,592 $11,808
Advances to and receivables from subsidiaries 96 433
Cost of acquired businesses in excess of net assets 508 686
Other 39 24
------ ------
$11,235 $12,951
------ ------
Liabilities
-----------
Short-term borrowings $ 101 $ 329
Long-term debt 1,377 1,504
Advances from and payables to subsidiaries 285 1,033
Other liabilities 433 549
------ ------
2,196 3,415
------ ------
Redeemable preferred stock (held by subsidiary) 261 100
------ ------
ESOP Preferred stock - Series C 235 235
Guaranteed ESOP obligation (97) (125)
------ ------
138 110
------ ------
Stockholders' equity
--------------------
Preferred stock ($1.00 par value; authorized shares: 30 million), at
aggregate liquidation value 800 800
Common stock ($.01 par value; authorized shares:
500 million; issued shares: 1994 - 368,195,609 and
1993 - 368,287,709) 4 4
Additional paid-in capital 6,655 6,566
Retained earnings 4,199 3,140
Treasury stock, at cost (1994 - 51,684,618 shares;
1993 - 41,155,405 shares) (1,553) (1,121)
Unrealized gain (loss) on investment securities and other, net (1,465) (63)
------- ------
8,640 9,326
------- ------
$ 11,235 $12,951
======= ======
</TABLE>
The condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto and the
accompanying notes to the condensed financial information of
Registrant.
F-4
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
The Travelers Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Cash Flows
Year ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities
------------------------------------
Net Income $1,326 $ 916 $ 728
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in net income of subsidiaries (1,448) (907) (776)
Dividends received from subsidiaries, net 1,409 349 365
Advances (to) from subsidiaries, net (411) 45 292
Other, net 377 61 57
------ ----- -----
Net cash provided by (used in) operating activities 1,253 464 666
------ ----- -----
Cash Flows From Investing Activities
------------------------------------
Capital contribution to subsidiaries - (1,100) -
Business acquisitions - - (485)
Business divestments - - 258
------ ------ -----
Net cash provided by (used in) investing activities - (1,100) (227)
------ ------ -----
Cash Flows From Financing Activities
------------------------------------
Issuance of preferred stock - - 290
Dividends paid (267) (139) (85)
Issuance of common stock - 329 -
Treasury stock acquired (543) (58) (122)
Issuance of long-term debt - 450 100
Payments and redemptions of long-term debt (93) (35) (209)
Net change in short-term borrowings (228) 258 (271)
Redemption of redeemable preferred stock
(held by subsidiary) (100) (100) (100)
Other, net (22) (69) (42)
------- ------- ------
Net cash provided by (used in) financing activities (1,253) 636 (439)
------ ------ -----
Change in cash $ - $ - $ -
======= ======= ======
Supplemental disclosure of cash flow information:
-------------------------------------------------
Cash paid during the period for interest $ 107 $ 68 $ 84
====== ====== =====
Cash received during the period for taxes $ 268 $ 129 $ 65
====== ====== =====
</TABLE>
The condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto and the
accompanying notes to the condensed financial information of
Registrant.
F-5
<PAGE>
SCHEDULE I
Notes to Condensed Financial Statements of Registrant
(In millions of dollars)
1. Principles of Consolidation
---------------------------
The accompanying financial statement include the accounts of
The Travelers Inc. (the Parent) and on an equity basis its
subsidiaries and affiliates and should be read in conjunction
with the Consolidated Financial Statements and notes thereto.
2. Debt
----
Aggregate annual maturities for the next five years on long-
term debt obligations excluding principal payments on the ESOP
loan obligation are as follows:
1995 $ -
1996 $ 100
1997 $ 185
1998 $ 250
1999 $ 100
3. Supplementary Disclosure of Non-Cash Investing and Financing
------------------------------------------------------------
Activities
----------
During 1994, the Parent issued $261 of redeemable preferred
stock to various subsidiaries in exchange for an equivalent
value of The Travelers Inc. common stock previously held by
these subsidiaries. This activity was recorded as a non-cash
capital contribution to subsidiaries by the Parent.
F-6
<PAGE>
SCHEDULE III
THE TRAVELERS INC. AND SUBSIDIARIES
Supplementary Insurance Information
1994
(In millions of dollars)
<TABLE><CAPTION>
Value of
insurance in
force and Future policy
deferred benefits Other policy
policy losses, claims claims and Net
acquisition and loss Unearned benefits Premium investment
Segment costs expenses premiums payable revenue income
----------- ----------- -------------- -------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Life Insurance Services $1,923 $ 9,115 $1,853 $1,248 $3,985 $1,869
P&C Insurance Services 221 14,374 103 - 3,498 644
Consumer Finance Services* 19 15 320 56 115 31
Corporate and Other (8) 9
--- -
------ ------- ------ ------ ------- ------
Total $2,163 $23,504 $2,276 $1,304 $7,590 $2,553
====== ======= ====== ====== ======= ======
<CAPTION>
Amortization
Benefits, of deferred
claims policy
losses acquisition costs
and and value Other
settlement of insurance operating Premiums
Segment expenses in force expenses written
----------- ---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Life Insurance Services $4,661 $282 $1,040 $4,032
P&C Insurance Services 3,114 532 615 3,824
Consumer Finance Services* 43 4 22 172
Corporate and Other (21) 77
------- ---- ------ ------
Total $7,797 $818 $1,754 $8,028
======= ==== ====== ======
</TABLE>
* Includes credit life insurance operations.
F-7
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV
The Travelers Inc. and Subsidiaries
Reinsurance
(In millions of dollars)
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
% of
Ceded to Assumed Amount
Gross Other From Other Net Assumed
Amount Companies Companies Amount To Net
------ --------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
----------------------------
Life insurance in force $527,964 $(106,024) $4,284 $426,224 1.01%
======= ======== ===== ======= =====
Premiums
Life insurance $1,872 $(295) $6 $1,583 0.4%
Accident and health insurance 2,568 (107) 23 2,484 0.9%
Property and
casualty insurance 4,630 (1,529) 422 3,523 12.0%
----- ------ --- -----
$9,070 $(1,931) $451 $7,590
===== ====== === =====
Year ended December 31, 1993
----------------------------
Life insurance in force $502,319 $( 93,744) $5,126 $413,701 1.24%
======= ======== ===== ======= ======
Premiums
Life insurance $1,176 $(284) $ 2 $ 894 0.2%
Accident and health insurance 393 (56) (8) 329 (2.4)%
Property and
casualty insurance 417 (177) 17 257 6.6%
----- ---- --- -----
$1,986 $(517) $ 11 $1,480
===== ==== === =====
Year ended December 31, 1992
----------------------------
Life insurance in force $324,643 $ (90,379) $1,550 $235,814 0.7%
======= ======== ===== ======= =====
Premiums
Life insurance $1,212 $(312) $ 9 $ 909 1.0%
Accident and health insurance 437 (40) 7 404 1.7%
Property and
casualty insurance 513 (180) 48 381 12.6%
----- ---- -- -----
$2,162 $(532) $64 $1,694
===== ==== == =====
</TABLE>
F-8
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
3.01 Restated Certificate of Incorporation of The
Travelers Inc. (the "Company") and
Certificate of Designation of Cumulative
Adjustable Rate Preferred Stock, Series Y,
incorporated by reference to Exhibit 3.01 to
the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1994
(File No. 1-9924) (the "Company's March 31,
1994 10-Q")
3.02 By-Laws of the Company as amended through
April 27, 1994, incorporated by reference to
Exhibit 3.02 to the Company's March 31, 1994
10-Q.
10.01* Employment Protection Agreement, dated as of
December 31, 1987, between the Company (as
successor to Commercial Credit Company
("CCC")) and Sanford I. Weill, incorporated
by reference to Exhibit 10.03 to CCC's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1987 (File No. 1-
6594).
10.02.1* Stock Option Plan of the Company, as amended
through April 26, 1989, incorporated by
reference to Annex A to the prospectus
contained in the Company's Registration
Statement on Form S-8 (No. 33-29711).
10.02.2* Amendment to the Company's Stock Option
Plan, dated October 23, 1991, incorporated
by reference to Exhibit 10.02.2 to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 (File
No. 1-9924) (the "Company's 1991 10-K").
10.02.3* Amendments to the Company's Stock Option
Plan, approved by the Company's stockholders
on April 22, 1992, incorporated by reference
to Exhibit 10.02.3 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1992 (File No.1-9924)
(the "Company's 1992 10-K").
10.02.4* Amendment to the Company's Stock Option
Plan, dated July 22, 1992, incorporated by
reference to Exhibit 10.02.4 to the
Company's 1992 10-K.
10.02.5* Amendment No. 11 to the Company's Stock
Option Plan, incorporated by reference to
Exhibit 10.02.5 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1993 (File No. 1-9924)
(the "Company's 1993 10-K").
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.02.6* Amendment No. 12 to the Company's Stock
Option Plan, incorporated by reference to
Exhibit 10.02.6 to the Company's 1993 10-K.
10.03* Retirement Benefit Equalization Plan of the
Company (as successor to Primerica Holdings,
Inc.), as amended, incorporated by reference
to Exhibit 10.03 to the Company's 1993 10-K.
10.04* Letter Agreement between Joseph A. Califano,
Jr. and the Company, dated December 14,
1988, incorporated by reference to Exhibit
10.21.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December
31, 1988 (File No. 1-9924) (the "Company's
1988 10-K").
10.05.1* The Company's Deferred Compensation Plan for
Directors, incorporated by reference to
Exhibit 10.21.2 to the Company's 1988 10-K.
10.05.2* Amendment to the Company's Deferred
Compensation Plan for Directors, dated July
22, 1992, incorporated by reference to
Exhibit 10.06.2 of the Company's 1992 10-K.
10.06.1* Supplemental Retirement Plan of the Company,
incorporated by reference to Exhibit 10.23
to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990
(File No. 1-9924) (the "Company's 1990 10-
K").
10.06.2* Amendment to the Company's Supplemental
Retirement Plan, incorporated by reference
to Exhibit 10.06.2 to the Company's 1993 10-
K.
10.07* Long-Term Incentive Plan of the Company, as
amended, incorporated by reference to
Exhibit 10.08 to the Company's 1992 10-K.
10.08* Capital Accumulation Plan of the Company Electronic
(the "CAP Plan"), as amended to May 16,
1994.
10.09* Agreement dated December 21, 1993 between
the Company and Edward H. Budd, incorporated
by reference to Exhibit 10.22 to the
Company's 1993 10-K.
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.10 Restated Stockholder Rights and Support
Agreement dated as of November 1, 1989 by
and among the Company and Arthur L.
Williams, Jr., Angela H. Williams, A.L.
Williams & Associates, Inc. and The A.L.
Williams & Associates, Inc. Pension and
Profit Sharing Plan, incorporated by
reference to Exhibit 10.13 to the Company's
1990 10-K.
10.11 Amended and Restated Exclusive Marketing
Agreement dated as of November 1, 1989 by
and among the Company, A.L. Williams &
Associates, Inc. and Arthur L. Williams,
Jr., incorporated by reference to Exhibit
10.14 to the Company's 1990 10-K.
10.12 Restated Second Amended General Agency
Agreement ("SAGAA") dated as of November 1,
1989 by and among Primerica Life Insurance
Company (formerly Massachusetts Indemnity
Life Insurance Company; hereinafter
"Primerica Life"), A.L. Williams &
Associates, Inc. and Arthur L. Williams,
Jr., incorporated by reference to Exhibit
10.15 to the Company's 1990 10-K.
10.13 Restated First Amendment to SAGAA dated as
of November 1, 1989 by and among Primerica
Life, A.L. Williams & Associates, Inc. and
Arthur L. Williams, Jr., incorporated by
reference to Exhibit 10.16 to the Company's
1990 10-K.
10.14 Restated and Amended Agreement of Charles D.
Adams dated as of November 1, 1989 for the
benefit of each of the Company, A.L.
Williams & Associates, Inc. and The A.L.
Williams Corporation, incorporated by
reference to Exhibit 10.17 to the Company's
1990 10-K.
10.15 Restated and Amended Agreement of Angela H.
Williams dated as of November 1, 1989 for
the benefit of each of the Company, A.L.
Williams & Associates, Inc. and The A.L.
Williams Corporation, incorporated by
reference to Exhibit 10.18 to the Company's
1990 10-K.
10.16.1 Asset Purchase Agreement dated as of March
12, 1993, by and among Shearson Lehman
Brothers Inc., Smith Barney Inc. ("SBI";
formerly Smith Barney, Harris Upham & Co.
Incorporated), the Company, American Express
Company and Shearson Lehman Brothers
Holdings Inc. (the "SLB Agreement"),
incorporated by reference to Exhibit 10.21
to the Company's 1992 10-K.
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.16.2 Amendment No. 1, dated as of July 31, 1993,
to the SLB Agreement, incorporated by
reference to Exhibit 10.01 to the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1993 (File No. 1-
9924) (the "Company's June 30, 1993 10-Q").
10.16.3 Amendment No. 2 dated as of July 31, 1993,
to the SLB Agreement, incorporated by
reference to Exhibit 10.02 to the Company's
June 30, 1993 10-Q.
10.17.1* Employment Agreement dated June 23, 1993, by
and among SBI, the Company and Robert F.
Greenhill (the "RFG Employment Agreement"),
incorporated by reference to Exhibit 10.01
to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September
30, 1993 (File No. 1-9924) (the "Company's
September 30, 1993 10-Q").
10.17.2* Amendment to the RFG Employment Agreement,
incorporated by reference to Exhibit 10.17.2
to the Company's March 31, 1994 10-Q.
10.18* Memorandum of Sale dated June 23, 1993,
between the Company and Robert F. Greenhill,
incorporated by reference to Exhibit 10.02
to the Company's September 30, 1993 10-Q.
10.19* Registration Rights Agreement dated June 23,
1993, between the Company and Robert F.
Greenhill, incorporated by reference to
Exhibit 10.03 to the Company's September 30,
1993 10-Q.
10.20* Restricted Shares Agreement dated June 23,
1993, by and between the Company and Robert
F. Greenhill, incorporated by reference to
Exhibit 10.04 to the Company's September 30,
1993 10-Q.
10.21 Agreement and Plan of Merger, dated as of
September 23, 1993, between the Company and
The Travelers Corporation ("old Travelers"),
incorporated by reference to Exhibit 2.1 to
the Current Report on Form 8-K of old
Travelers, dated September 23, 1993 and
filed with the Commission on October 8, 1993
(File No. 1-5799).
10.22* Employment Agreement effective January 1, Electronic
1995 between the Company and Michael A.
Carpenter.
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.23.1* The Travelers Corporation 1982 Stock Option
Plan, as amended January 10, 1992,
incorporated by reference to Exhibit 10(a)
to the Annual Report on Form 10-K of old
Travelers for the fiscal year ended December
31, 1991 (File No. 1-5799) (the "old
Travelers' 1991 10-K").
10.23.2* Amendment to The Travelers Corporation 1982 Electronic
Stock Option Plan.
10.24.1* The Travelers Corporation 1988 Stock
Incentive Plan, as amended April 7, 1992,
incorporated by reference to Exhibit 10(b)
to the Annual Report on Form 10-K of old
Travelers for the fiscal year ended December
31, 1992 (File No. 1-5799) (the "old
Travelers' 1992 10-K").
10.24.2* Amendment to The Travelers Corporation 1988 Electronic
Stock Incentive Plan.
10.25* The Travelers Corporation 1984 Management
Incentive Plan, as amended effective January
1, 1991, incorporated by reference to
Exhibit 10(c) to the Annual Report on Form
10-K of old Travelers for the fiscal year
ended December 31, 1990 (File No. 1-5799).
10.26* The Travelers Corporation Supplemental
Benefit Plan, effective December 20, 1992,
incorporated by reference to Exhibit 10(d)
to the Annual Report on the old Travelers'
1992 10-K.
10.27* The Travelers Corporation TESIP Restoration
and Non-Qualified Savings Plan, effective
January 1, 1991, incorporated by reference
to Exhibit 10(e) to the old Travelers' 1991
10-K.
10.28* The Travelers Severance Plan of Officers, as
amended September 23, 1993, incorporated by
reference to Exhibit 10.30 to the Company's
1993 Form 10-K.
10.29* The Travelers Corporation Directors'
Deferred Compensation Plan, as amended
November 7, 1986, incorporated by reference
to Exhibit 10(d) to the Annual Report on
Form 10-K of old Travelers for the fiscal
year ended December 31, 1986 (File No. 1-
5799).
10.30* Employment Agreement dated as of December Electronic
30, 1994, between SBI and Joseph J. Plumeri
II.
11.01 Computation of Earnings Per Share. Electronic
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
12.01 Computation of Ratio of Earnings to Fixed Electronic
Charges.
13.01 Pages 29 through 68 of the 1994 Annual Electronic
Report to Stockholders of the Company
(pagination of exhibit does not correspond
to pagination in the 1994 Annual Report to
Stockholders).
21.01 Subsidiaries of the Company. Electronic
23.01 Consent of KPMG Peat Marwick LLP, Independent Electronic
Certified Public Accountants.
23.02 Consent of Coopers & Lybrand L.L.P., Electronic
Independent Accountants.
24.01 Powers of Attorney. Electronic
27.01 Financial Data Schedule. Electronic
28.01 Information from Reports Furnished to State Paper
Insurance Regulatory Authorities. Schedule
P of the Combined Annual Statement of
The Travelers Insurance Group Inc. and its
affiliated property and casualty insurers.
99.01 Consolidated balance sheets of The Travelers Electronic
Corporation and Subsidiaries as of December
31, 1993 and 1992, and the related
consolidated statements of operations and
retained earnings and cash flows for each of
the three years in the period ended December
31, 1993, together with the notes thereto
and the related report of Independent
Accountants.
99.02 The last paragraph of page 2 and the first Electronic
two paragraphs of page 3 of the Company's
Current Report on Form 8-K dated September
23, 1993 (File No. 1-9924), the third
paragraph of page 26 of the Company's
September 30, 1993 10-Q, and the third
paragraph of page 2 of the Company's Current
Report on Form 8-K dated March 1, 1994 (File
No. 1-9924) (the "Company's March 1, 1994
8-K").
99.03 The third and fourth paragraphs of page 30 Electronic
of the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989
(File No. 1-9924) (the "Company's 1989
10-K").
99.04 The first, second and third paragraphs of Electronic
page 31 of the Company's 1989 10-K, and the
first paragraph of page 30 of the Company's
1990 10-K.
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
99.05 The fourth paragraph of page 26 of the Electronic
Company's September 30, 1993 10-Q.
99.06 The first full paragraph of page 26 of the Electronic
Company's 1992 10-K.
99.07 The fourth paragraph of page 2 of the Electronic
Company's March 1, 1994 8-K.
99.08 The paragraph that begins on page 2 and ends Electronic
on page 3 of the Company's March 1, 1994 8-K.
99.09 The second paragraph of page 29 of the Electronic
Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1994
(File No. 1-9924).
The total amount of securities authorized pursuant to any
instrument defining rights of holders of long-term debt of the
Company does not exceed 10% of the total assets of the Company
and its consolidated subsidiaries. The Company will furnish
copies of any such instrument to the Commission upon request.
The financial statements required by Form 11-K for 1994 for the
Company's employee savings plans will be filed as exhibits by
amendment to this Form 10-K pursuant to Rule 15d-21 of the
Securities Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished
at a cost of $.25 per page (except that no charge will be made
for the 1994 Annual Report on Form 10-K) to security holders who
make written request therefor to Corporate Communications and
Investor Relations Department, The Travelers Inc., 388 Greenwich
Street, New York, New York 10013.
-------------
* Denotes a management contract or compensatory plan or
arrangement required to be filed as an exhibit pursuant to
Item 14(c) of Form 10-K.
Exhibit 10.08
THE TRAVELERS INC.
CAPITAL ACCUMULATION PLAN
as amended to May 16, 1994
SECTION 1. Purpose of the Plan.
The name of this plan is THE TRAVELERS INC. CAPITAL ACCUMULATION PLAN
(the "Plan"). The purpose of the Plan is to enable THE TRAVELERS INC. (the
"Company") and its Subsidiaries to attract, retain and motivate officers
and other key employees, to compensate them for their contributions to the
growth and profits of the Company and to encourage ownership of stock in
the Company on the part of such personnel. The Plan provides incentives to
participating officers and other key employees which are linked directly to
increases in stockholder value and will therefore inure to the benefit of
all stockholders of the Company.
SECTION 2. Definitions.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means termination by the Company or a Subsidiary of a
Participant's employment upon (i) the willful and continued failure by such
Participant to substantially perform his duties with the Company or a
Subsidiary (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to such Participant by the Board, which demand
specifically identifies the manner in which the Board believes that such
Participant has not substantially performed his duties, or (ii) the willful
engaging by a Participant in conduct which is demonstrably and materially
injurious to the Company or a Subsidiary, monetarily or otherwise. For
purposes of this Subsection, no act, or failure to act, on a Participant's
part shall be deemed "willful" unless done, or omitted to be done, by such
Participant not in good faith and without reasonable belief that his action
or omission was in the best interest of the Company or a Subsidiary.
(c) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(d) "Committee" means the Nominations and Compensation Committee of
the Board, appointed by the Board from among its members and shall consist
of not less than three members thereof who are and shall remain Committee
members only so long as they remain "disinterested persons" as defined in
Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
(e) "Disability" means permanent and total disability as determined
under the Company's long- term disability plan.
(f) "Eligible Employee" means an employee of the Company or any
Subsidiary as described in Section 3.
(g) "Options" mean non-qualified stock options to purchase shares
of Stock which are not incentive stock options under Section 422A of the
Code and which are granted under Section 6 herein.
(h) "Participant" means an Eligible Employee selected by the
Committee, pursuant to the Committee's authority in Section 7, to receive
an award of Restricted Stock.
(i) "Related Employment" means the employment of an individual by
an employer which is neither the Company nor a Subsidiary provided (i) such
employment is undertaken by the individual at the request of the Company or
a Subsidiary, (ii) immediately prior to undertaking such employment, the
individual was an officer or employee of the Company or a Subsidiary, or
was engaged in Related Employment as herein defined and (iii) such
employment is recognized by the Committee, in its sole discretion, as
Related Employment for purposes of this Plan. The death or Disability of
an individual during a period of Related Employment as herein defined shall
be treated, for purposes of this Plan, as if the death or onset of
Disability had occurred while the individual was an officer or employee of
the Company or a Subsidiary.
(j) "Restricted Stock" means an award of shares of Stock that is
subject to the restrictions set forth in Section 5.
1
<PAGE>
(k) "Retirement" means retirement of a Participant from active
employment with the Company or any Subsidiary with a full and unreduced
pension benefit under an approved retirement program of the Company or a
Subsidiary.
(l) "Stock" means the common stock of the Company.
(m) "Subsidiary" means any corporation (other than the Company) 50%
or more of the total combined voting power of all classes of stock of which
is owned, directly or indirectly, by the Company.
SECTION 3. Eligibility and Participation.
Officers and other key employees of the Company or its Subsidiaries
who are responsible for or contribute to the management, growth and/or
profitability of the Company or its Subsidiaries shall be eligible to
participate in the Plan. The Participants under the Plan shall be selected
from time of time by the Committee, in its sole discretion, from among
Eligible Employees.
SECTION 4. Amount and Form of Awards.
(a) Awards under the Plan shall be determined by the Committee in
its discretion. Awards will be made in lieu of cash payment of a
percentage of the Participant's annual compensation and will be granted at
such time as the Committee may in its sole discretion determine, and the
Committee may also in its sole discretion provide for alternative methods
for grants of awards. A Participant will receive such award in Restricted
Stock or, alternatively, and, if so elected by the Participant and
determined by the Committee pursuant to Section 6, a portion of such award
may be received in Options.
(b) The maximum number of shares of Stock which may be issued under
the Plan, either as Restricted Stock or pursuant to the exercise of
Options, shall be not more than 31,000,000 shares of Stock, subject to
adjustment as provided in Section 8, and such shares may be authorized but
unissued shares, or previously issued shares reacquired by the Company, or
both. In the event Restricted Stock is forfeited, or an outstanding Option
is terminated, expires or is canceled, prior to the end of the period
during which the restrictions on Restricted Stock expire, or the Options
can be exercised, the shares of Stock called for by such award of
Restricted Stock or the unexercised portion of the Option award will become
available for future awards.
SECTION 5. Restricted Stock.
(a) The number of shares of Restricted Stock awarded to a
Participant under the Plan will be determined by a formula or formulas
approved by the Committee. In order to reflect the impact of the
restrictions on the value of the Restricted Stock, as well as the
possibility of forfeiture of Restricted Stock, the fair market value of
Stock shall be discounted at a rate of 25% in determining the number of
shares of Restricted Stock to be awarded. The Committee may, where it
deems appropriate, and in its sole discretion, provide for an alternative
discount rate. For purpose of this Plan, the fair market value of Stock
for an award will be the average of the Stock's closing prices on the
Composite Tape of the New York Stock Exchange for the five trading days
prior to the date of the award. The dollar value of an award will be
divided by the discounted market value to determine the number of shares of
Restricted Stock in an award. The value of fractional shares will be paid
in cash.
(b) A Participant shall not have any rights with respect to an
award, unless or until such Participant has executed an agreement
evidencing the award (a "Restricted Stock Award Agreement") and has
delivered a fully executed copy thereof to the Company, within a period of
60 days after the date of the award (or such shorter period after the date
of the award as the Committee may specify). Each Participant who is awarded
Restricted Stock may, but need not, be issued a stock certificate in
respect of such shares of Restricted Stock. A "book entry" (i.e., a
computerized or manual entry) shall be made in the records of the Company
to evidence an award of shares of Restricted Stock to a Participant where
no certificate is issued in the name of the Participant. Such Company
records shall, absent manifest error, be binding on the Participants. Each
certificate, if any, registered in the name of a Participant shall bear an
appropriate legend referring to the terms, conditions, and restrictions
applicable to such award, substantially in the following form:
2
<PAGE>
"The transferability of the certificate and the shares of
stock represented hereby are subject to the terms and
conditions (including forfeiture) of The Travelers Inc.
Capital Accumulation Plan and a Restricted Stock Award
Agreement entered into between the registered owner and The
Travelers Inc. Copies of such Plan and Agreement are on
file in the offices of The Travelers Inc."
The Committee shall require that any stock certificate issued in the
name of a Participant evidencing shares of Restricted Stock be held in the
custody of the Company until the restrictions thereon shall have lapsed,
and that, as a condition of such issuance of a certificate for Restricted
Stock, the Participant shall have delivered a stock power, endorsed in
blank, relating to the shares covered by such certificate.
(c) The shares of Restricted Stock awarded pursuant to this Section
5 shall be subject to the following restrictions and conditions:
(i) Subject to the provisions of the Plan and the Restricted
Stock Award Agreements, during the two-year period (together with any
extensions thereof approved as provided herein) commencing on the date
of the award (the "Restricted Period"), the Participant shall not be
permitted to sell, transfer, pledge or assign shares of Restricted
Stock awarded under the Plan. The Committee may, in its sole
discretion, (x) initially provide for an alternative Restricted Period
or alter the two-year Restricted Period for a previously granted award
(provided that the Committee may not extend the Restricted Period for
a previously granted award without the Participant's written consent),
(y) during any extension of such Restricted Period, provide for
alternative restrictions (provided that nothing contained in this
clause shall grant the Committee any additional powers under the Plan
with respect to awards granted to or to be granted to persons who are
subject to Section 16 of the Securities Exchange Act of 1934, as
amended), and (z) provide for the lapse of any such restrictions in
installments and accelerate or waive any such restrictions in whole or
in part based on such factors and such circumstances as the Committee
may determine, in its sole discretion, including, but not limited to,
the Participant's Retirement, termination, death or Disability.
(ii) Unless the Committee in its sole discretion shall determine
otherwise at or prior to the time of the grant of any award, the
Participant shall have the right to direct the vote of his shares of
Restricted Stock during the Restricted Period, in accordance with
paragraph (e) of this Section 5. The Participant shall have the right
to receive any regular dividends on such shares of Restricted Stock.
The Committee shall in its sole discretion determine the Participant's
rights with respect to extraordinary dividends on the shares of
Restricted Stock.
(iii) Certificates for shares of Restricted Stock shall be
delivered to the Participant promptly after, and only after, the
Restricted Period shall expire (or such earlier time as the
restrictions may lapse in accordance with paragraph (c)(i) of this
Section 5) without forfeiture in respect of such shares of Restricted
Stock.
(d) Subject to the provisions of paragraph (c)(i) of this Section
5, the following provisions shall apply to a Participant's shares of
Restricted Stock prior to the end of the Restricted Period (including
extensions and Related Employment):
(i) Upon the death or Disability of a Participant, the
restrictions on his or her Restricted Stock shall immediately lapse.
(ii) If a Participant voluntarily terminates employment or if a
Participant is involuntarily terminated for Cause, such Participant
shall forfeit his or her Restricted Stock.
(iii) If a Participant is involuntarily terminated without cause
or retires from employment, but does not fall within the definition of
Retirement, such Participant shall forfeit his or her Restricted Stock
and receive in return, without interest, a cash payment equal to the
portion of his or her annual compensation that had been paid in the
form of such forfeited Restricted Stock.
(iv) If a Participant whose total annual compensation is less
than $100,000 terminates employment upon Retirement, he or she shall
receive his or her Restricted Stock upon completion of the Restricted
Period. If a Participant whose total annual compensation equals
3
<PAGE>
or exceeds $100,000 terminates employment upon Retirement, he or she
shall receive, in the sole discretion of the Committee, either (A) his
or her Restricted Stock upon the completion of the Restricted Period,
or (B) a cash payment equal to the portion of his or her annual
compensation that had been paid in the form of Restricted Stock,
without interest.
(e) Unless the Committee in its sole discretion shall determine
otherwise at or prior to the time of the grant of any award, during the
Restricted Period the shares of Restricted Stock shall be voted by the
Company's senior administrative officer in charge of administering the
Plan, or such other person as the Committee may designate (the "Plan
Administrator"), and the Plan Administrator shall vote such shares in
accordance with instructions received from Participants (unless to do so
would constitute a violation of the Plan Administrator's fiduciary duties).
Shares as to which no instructions are received shall be voted by the Plan
Administrator proportionately in accordance with instructions received from
Participants in the Plan (unless to do so would constitute a violation of
the Plan Administrator's fiduciary duties).
SECTION 6. Election of Options.
(a) At the time a Participant is notified of his or her award of
Restricted Stock under the Plan, the Committee in its sole discretion may
permit such Participant to elect to receive up to a maximum of one-third
(1/3) of his or her award in the form of Options. The Committee in its
sole discretion shall determine the number of Options to be awarded in lieu
of each share of Restricted Stock given up and may alter the maximum
percentage of Restricted Stock which may be exchanged for Options. Such
election shall be made within a period of 60 days after the grant of the
Option (or such shorter period after the date of the award as the Committee
may specify). In the absence of such an election, the award will be paid
entirely in shares of Restricted Stock.
(b) Options will be granted with an exercise price equal to the
fair market value of Stock, which will be the average of the Stock's
closing prices on the Composite Tape of the New York Stock Exchange on the
five trading days prior to the grant date. The Committee in its discretion
shall determine the expiration date of the Options, provided that in no
event shall the expiration date be later than ten years from the date of
the award. Options granted under the Plan shall vest pursuant to a
schedule determined by the Committee, in its sole discretion, prior to the
Participant's election to receive Options.
(c) Recipients of Options shall enter into a stock option agreement
with the Company, in such form as the Committee shall determine, which
agreement shall set forth, among other things, the exercise price of the
Option, the term of the Option and provisions regarding exercisability of
the Option granted thereunder.
(d) Options are not transferable other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act. During the lifetime of the Participant the Options may be
exercised only by the Participant.
(e) An Option shall not be exercisable unless payment in full is
made for the shares being acquired thereunder at the time of exercise; such
payment shall be made (A) in United States dollars by cash or check, or (B)
in lieu thereof, unless the Committee shall in its sole discretion
determine otherwise, by tendering to the Company Stock owned by the person
exercising the Option (or owned by the person exercising the Option and his
or her spouse, jointly) and acquired more than six months prior to such
tender, including shares of Restricted Stock awarded hereunder at least six
months prior to such tender, and having a fair market value equal to the
cash exercise price applicable to such Option, such fair market value to be
determined in such reasonable manner as may be provided for from time to
time by the Committee or as may be required in order to comply with or to
conform to the requirements of any applicable or relevant laws or
regulations, or (C) by a combination of United States dollars and Stock as
aforesaid.
(f) An Option shall not be exercisable unless the person exercising
the Option has been, at all times during the period beginning with the date
of grant of the Option and ending on the date of such exercise, an officer
or employee of the Company or a Subsidiary, except that:
4
<PAGE>
(i) if such person shall cease to be an officer or employee of
the Company or a Subsidiary solely by reason of a period of Related
Employment, he or she may, during such period of Related Employment,
exercise the Option as if he or she continued to be such an officer or
employee; or
(ii) if such person shall cease to be such an officer or employee
on account of an involuntary termination of employment (other than
death or Disability) or on account of voluntary termination of
employment (other than pursuant to Retirement), while holding an
Option which has not expired and has not been fully exercised, such
person may before the expiration of thirty (30) days after such
termination (but in no event after the Option has expired under the
provisions of Section 6(b) hereof) exercise the Option with respect to
any shares as to which he or she could have exercised the Option on
the date he or she terminated employment, except that the Committee
may in its sole discretion refuse to permit a person who has
voluntarily terminated his or her employment or who has been
involuntarily terminated with Cause to exercise any Options after the
date of termination; or
(iii) if such person shall cease to be such an officer or employee
by reason of death or Disability while holding an Option which has not
expired and has not been fully exercised, such person (or in the case
of death, his or her executors, administrators, heirs or distributees,
as the case may be) may exercise the Option (but in no event after the
Option has expired under the provisions of Section 6(b) hereof) with
respect to any shares as to which such person could have exercised the
Option on the date he or she ceased to be such an officer or employee;
or
(iv) if such person shall cease to be such an officer or employee
by reason of Retirement while holding an Option which has not expired
and has not been fully exercised, such person at any time within three
years of the date he or she ceased to be such an officer or employee
(but in no event after the Option has expired under the provisions of
Section 6(b) hereof), may exercise the Option with respect to any
shares as to which he or she could have exercised the Option on the
date he or she ceased to be such an officer or employee; or
(v) if within 30 days of his termination of employment for any
reason, any person to whom an Option has been granted shall die or
become disabled (as may be determined by the Board in its sole and
absolute discretion) holding an Option which has not been fully
exercised, he or she or his or her executors, administrators, heirs or
distributees, as the case may be, and, at any time within one year
after the date of such event (but in no event after the Option has
expired under the provisions of Section 6(b) hereof), may exercise the
Option with respect to any shares as to which such person could have
exercised his Option at the time of his or her death or disability; or
(vi) notwithstanding the foregoing provisions of this Section
6(f), the Committee shall have the authority, on a case by case basis,
in its sole and absolute discretion, to extend for a period of up to
two (2) years following the termination of employment of an optionee
the period of vesting determined by the Committee prior to the
Participant's election to receive Options and the period of
exercisability, provided such extension complies with Section 6(b).
(g) If an Option is exercised by a Participant, then, at the
discretion of the committee administering the Company's Stock Option Plan,
the Participant may receive a replacement or reload option under such Stock
Option Plan in accordance with the provisions of such plan.
(h) If the exercise price of an Option is paid by delivery of a
number of shares of Restricted Stock, then the Participant shall receive,
in connection with the exercise, an equal number of identically restricted
shares of Stock; the remaining shares of Stock issued upon such exercise
shall contain any applicable restrictions that are set forth in the
Participant's stock option agreement and shall otherwise be unrestricted.
In such event, the fair market value of shares of Restricted Stock
delivered or withheld, for purposes of this Plan, shall not take into
account the restrictions on such shares.
5
<PAGE>
SECTION 7. Administration.
The Plan shall be administered by the Committee which shall be
appointed by the Board and which shall serve at the pleasure of the Board.
The Committee shall have the power and authority to grant Restricted
Stock or Options to Participants, pursuant to the terms of the Plan.
In particular, the Committee shall have the authority:
(i) to select those employees of the Company and its
Subsidiaries who are Eligible Employees;
(ii) to determine whether and to what extent Restricted Stock or
Options are to be granted to Participants hereunder;
(iii) to determine the number of shares of Stock to be covered by
each such award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder; and
(v) to determine the terms and conditions, not inconsistent with
the terms of the Plan, which shall govern all written instructions
evidencing the Options and Restricted Stock.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it
shall, from time to time, deem advisable; to interpret the terms and
provisions of the Plan and any award issued under the Plan; and to
otherwise supervise the administration of the Plan. All decisions made by
the Committee pursuant to the provisions of the Plan shall be final and
binding on all persons, including the Company and the Participants.
SECTION 8. Adjustments upon a Change in Common Stock.
In the event of any change in the outstanding Stock of the Company by
reason of any stock split, stock dividend, recapitalization, merger,
consolidation, reorganization, combination or exchange of shares or other
similar event if such change equitably requires an adjustment in the number
or kind of shares that may be issued under the Plan pursuant to Section
4(b), or in the number or kind of shares subject to, or the option price
per share under, any outstanding Option which has been granted to any
Participant, such adjustment shall be made by the Committee and shall be
conclusive and binding for all purposes of the Plan. In no event shall the
excess of the aggregate fair market value of the Stock subject to the
Options immediately after any substitution, exchange or adjustment over the
aggregate option price for such Stock be more than the excess of the
aggregate fair market value of all of the Stock subject to the Option
immediately before any such substitution, exchange or adjustment over the
aggregate option price of such Stock nor shall the adjusted Option give the
holder thereof any additional benefits he did not have under the old
Option.
SECTION 9. Amendment and Termination.
The Plan may be amended or terminated at any time and from time to
time by the Board, but no amendment which increases the aggregate number of
shares of Stock which may be issued pursuant to the Plan (except as
provided in Section 8) shall be effective unless and until the same is
approved by the stockholders of the Company. Neither an amendment to the
Plan nor the termination of the Plan shall adversely affect any right of
any Participant with respect to any Restricted Stock or Option theretofore
granted without such Participant's written consent.
SECTION 10. General Provisions.
(a) The Committee may require each person purchasing shares
pursuant to an Option to represent and agree with the Company in writing
that such person is acquiring the shares without a view to distribution
thereof. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restriction on transfer.
All certificates for shares of Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations,
6
<PAGE>
and other requirements of the Securities and Exchange Commission, any stock
exchange upon which the Stock is then listed, and any applicable Federal or
state securities law, and the Committee may cause a legend or legends to be
put on any such certificates to make appropriate reference to such
restrictions.
(b) Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements
may be either generally applicable or applicable only in specific cases.
The adoption of the Plan shall not confer upon any employee of the Company
or any Subsidiary any right to continued employment with the Company or a
Subsidiary, as the case may be, nor shall it interfere in any way with the
right of the Company or a Subsidiary to terminate the employment of any of
its employees at any time.
(c) No member of the Board or the Committee, nor any officer or
employee of the Company acting on behalf of the Board or the Committee,
shall be personally liable for any action, determination, or interpretation
taken or made in good faith with respect to the Plan, and all members of
the Board or the Committee and each and any officer or employee of the
Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such
action, determination or interpretation.
(d) A Participant's rights and interest under the Plan may not be
assigned or transferred in whole or in part either directly or by operation
of law or otherwise (except in the event of a Participant's death)
including, but not by way of limitation, execution, levy, garnishment,
attachment, pledge, bankruptcy or in any other manner and no such right or
interest of any Participant in the Plan shall be subject to any obligation
or liability of such Participant.
(e) The Company and its Subsidiaries shall have the right to deduct
from any payment made under the Plan any federal, state or local income or
other taxes required by law to be withheld with respect to such payment.
It shall be a condition to the obligation of the Company to issue Stock
upon the lapse of restrictions on Restricted Stock or upon exercise of an
Option that the Participant (or any beneficiary or person entitled to
exercise the Option) pay to the Company, upon its demand, such amount as
may be requested by the Company for the purpose of satisfying any liability
to withhold federal, state or local income or other taxes. If the amount
requested is not paid, the Company may refuse to issue shares. Unless the
Committee shall in its sole discretion determine otherwise, payment for
taxes required to be withheld may be made in whole or in part by an
election by a Participant, in accordance with rules adopted by the
Committee from time to time (A) to have the Company withhold Stock
otherwise issuable pursuant to the Plan having a fair market value equal to
such tax liability and/or (B) to tender to the Company shares of Stock
owned by the person exercising the option and acquired more than six months
prior to such tender (excluding shares of Restricted Stock awarded
hereunder) and having a fair market value equal to such tax liability, such
fair market value (in the case of clause (A) or (B)), to be determined in
such reasonable manner as may be provided for from time to time by the
Committee or as may be required in order to comply with or to conform to
the requirements of any applicable or relevant laws or regulations.
SECTION 11. Effective Date of Plan.
The Plan shall be effective on the date it is adopted by the Board,
subject to the approval of stockholders.
7
Exhibit 10.22
PERSONAL & CONFIDENTIAL
-----------------------
November 15, 1994
Mr. Michael A. Carpenter
134 Otter Rock Drive
Greenwich, Connecticut 06830
Dear Mike:
We are delighted that you will be joining The Travelers ("Travelers"). The
purpose of this letter is to set forth our mutual understanding of the
terms and conditions of your employment by Travelers.
1. Employment. Travelers hereby employs you, and you hereby accept
----------
employment, upon the terms and conditions specified in this letter
agreement, effective January 1, 1995.
2. Term. Your employment is not for any specific term and may be
----
terminated by you, or by Travelers, at any time, with or without
cause.
3. Compensation.
------------
(a) Base Salary. Travelers will pay you a base salary at a rate of
-----------
Six Hundred Thousand Dollars ($600,000) per year (the "Base
Salary"), to be paid in accordance with the customary payroll
practices of Travelers.
(b) Bonus. In addition to the Base Salary, with respect to each
-----
calendar year of the Employment Term, you will be eligible for a
bonus, the amount of which will be determined by the Compensation
Committee of the Board of Directors of Travelers in its
discretion. Notwithstanding the foregoing, with respect to the
first calendar year of your employment, the amount of the bonus
will be not less than Six Hundred Thousand Dollars ($600,000)
(the "Guaranteed Bonus"); while this is the minimum for the first
year, there is the opportunity for substantial improvement in
this amount, depending upon your performance and that of the
businesses. In each instance, Travelers will pay you the bonus
consistent with its customary practices but no later than
February 1 of the next succeeding calendar year, commencing
February 1, 1996.
<PAGE>
Mr. Michael A. Carpenter
Page Two
November 15, 1994
(c) The Base Salary and bonus provided for in Paragraphs 3(a) and
3(b) will be paid in cash and restricted stock in accordance with
the Travelers Capital Accumulation Plan, as in effect from time
to time.
4. Duties. You will be engaged as an Executive Vice President of Travelers,
------
with responsibility for business development and planning. You will also
serve as Chairman and Chief Executive Officer of Travelers Life Insurance
Company and as a member of the Travelers Planning Group.
5. Extent of Service. You will devote your attention and energies on a full-
-----------------
time basis to the business of Travelers and to the discharge of your duties
provided that this requirement shall not preclude you from devoting
---------
reasonable periods of time which do not interfere with the performance of
your duties hereunder required for serving as a director of any
organization involving no conflict of interest with Travelers or its
affiliates or engaging in charitable or community activities. You will
render your services hereunder to the best of your ability and will use
your best efforts to promote the interests of Travelers.
6. Working Facilities. You will be furnished with office facilities and
------------------
services suitable to your position as an Executive Vice President and
adequate for the performance of your duties.
7. Expenses. You will be reimbursed for ordinary and necessary expenses for
--------
entertainment, travel and similar items, consistent with such policies as
may from time to time be established by the Board of Directors.
8. Insurance and Other Employee Benefits. You will be entitled to participate
-------------------------------------
in any insurance coverage maintained by Travelers for the benefit of all
employees and in any retirement, profit-sharing, pension, disability, group
insurance (including medical, dental and life), death benefit or other
employee benefit programs maintained by Travelers. You will be entitled to
vacation in accordance with Travelers' prevailing policy for its senior
executives and at times consistent with the reasonable needs of the
business.
9. Stock Option Grant. As further consideration for your obligations
------------------
contained herein, Travelers will grant to you, effective as of the first
day of the Employment Term, an option (the "Option") to purchase One
Hundred Seventy Five Thousand (175,000) shares of common stock of Travelers
at the market price at the close of the market on the business day next
preceding the first day of the Employment Term, as reported in The Wall
Street Journal, in accordance with the provisions of the Travelers Stock
Option Plan.
10. Confidentiality. You agree that during and after your Employment Term,
---------------
you will hold confidential all proprietary or confidential information of
Travelers and that, upon termination of the Employment Term, you will
return all proprietary or confidential materials of Travelers and not
retain any copies thereof.
<PAGE>
Mr. Michael A. Carpenter
Page Three
November 15, 1994
11. Other. This letter agreement incorporates all of the terms of our offer
-----
of employment to you. Any dispute concerning the provisions of your
employment shall be resolved by arbitration in accordance with the
provisions of the Travelers Employment Arbitration Policy, as in effect
from time to time.
Mike, we are very excited about you joining our organization. Please indicate
your agreement by signing on the line indicated below.
Very truly yours,
THE TRAVELERS INC.
By: /s/ Charles O. Prince, III
--------------------------
Charles O. Prince, III
AGREED:
/s/ Michael A. Carpenter
___________________________________
Michael A. Carpenter
Dated: November 22, 1994
Exhibit 10.23.2
Amendment to The Travelers Corporation 1982 Stock Option Plan,
as adopted by The Travelers Inc.
As used in this Amendment, all capitalized terms shall have the meanings
assigned to them in the Plan, and the Corporation shall mean the surviving
corporation of the merger between Primerica Corporation and The Travelers
Corporation.
Section 6(h) is hereby amended by adding the following at the end
thereof:
Notwithstanding anything to the contrary in this Section 6, the
optionee's employment with the Corporation or its subsidiaries shall
not be deemed to be terminated if the employment with the Corporation
or any of its subsidiaries ceases by reason of the optionee's engaging
in a period of Related Employment in lieu of employment with the
Corporation or any of its subsidiaries. For the purposes of this Plan,
Related Employment shall mean the employment of an individual by an
employer which is neither the Corporation nor a subsidiary of the
Corporation provided (i) such employment is undertaken by the
individual at the request of the Corporation or a subsidiary of the
Corporation, (ii) immediately prior to undertaking such employment,
the individual was an officer or employee of the Corporation or a
subsidiary of the Corporation, or was engaged in Related Employment as
herein defined and (iii) such employment is recognized by the
Committee, in its sole discretion, as Related Employment for purposes
of this Plan. The death or disability of an individual during a
period of Related Employment as herein defined shall be treated, for
purposes of this Plan, as if the death or onset of the disability had
occurred while the individual was an officer or employee of the
Corporation or a subsidiary of the Corporation.
Exhibit 10.24.2
Amendment to The Travelers Corporation 1988 Stock Incentive
Plan, as adopted by The Travelers Inc.
As used in this Amendment, all capitalized terms shall have the meanings
assigned to them in the Plan, and the Corporation shall mean the surviving
corporation of the merger between Primerica Corporation and The Travelers
Corporation.
1. Section 5(h) is hereby amended by adding the following at the end
thereof:
Notwithstanding anything to the contrary in this Section 5, the
optionee's employment with the Corporation or its subsidiaries shall
not be deemed to be terminated if the employment with the Corporation
or any of its subsidiaries ceases by reason of the optionee's engaging
in a period of Related Employment in lieu of employment with the
Corporation or any of its subsidiaries. For the purposes of this
Plan, Related Employment shall mean the employment of an individual by
an employer which is neither the Corporation nor a subsidiary of the
Corporation provided (i) such employment is undertaken by the
individual at the request of the Corporation or a subsidiary of the
Corporation, (ii) immediately prior to undertaking such employment,
the individual was an officer or employee of the Corporation or a
subsidiary of the Corporation, or was engaged in Related Employment as
herein defined and (iii) such employment is recognized by the
Committee, in its sole discretion, as Related Employment for purposes
of this Plan. The death or disability of an individual during a
period of Related Employment as herein defined shall be treated, for
purposes of this Plan, as if the death or onset of the disability had
occurred while the individual was an officer or employee of the
Corporation or a subsidiary of the Corporation.
2. Section 7(i) is hereby amended by adding the following at the end
thereof:
Notwithstanding anything to the contrary in this Section 7, the
optionee's employment with the Corporation or its subsidiaries shall
not be deemed to be terminated if the employment ceases by reason of
the optionee's engaging in a period of Related Employment in lieu of
employment with the Corporation or any of its subsidiaries.
Exhibit 10.30
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 30th day of December, 1994, by and among
Smith Barney Inc., a Delaware corporation (the "Company"), and
Joseph J. Plumeri II (the "Executive").
The Board of Directors of the Company desires that the Company
continue to employ the Executive, and the Executive is willing to
serve the Company, on the terms and conditions herein provided.
In order to effect the foregoing, the parties hereto wish to
enter into an employment agreement on the terms and conditions
set forth below. Accordingly, in consideration of the premises
and the respective covenants and agreements of the parties herein
contained, and intending to be legally bound hereby, the parties
hereto agree as follows:
1. Employment. The Company hereby agrees to employ the
----------
Executive, and the Executive hereby agrees to serve the
Company, on the terms and conditions set forth herein.
2. Term. The employment term of this Agreement commenced on
----
July 30, 1994 (the "Commencement Date") and, subject to the
provisions of Section 10, will end on the third anniversary
of the Commencement Date unless further extended or sooner
terminated as hereinafter provided.
3. Position and Duties. The Executive shall serve as Vice
--------------------
Chairman of The Travelers Inc. (or if there shall be a
corporate reorganization such that The Travelers Inc. is
replaced by a different ultimate parent company, then of
that other company("Travelers"), the indirect parent of the
Company and shall report only to the Chairman of the Board
of Directors, a Vice Chairman, the Chief Executive Officer
or the Chief Operating Officer of Travelers. The Executive
shall have such responsibilities, duties and authorities
commensurate with his position as may from time to time be
assigned to the Executive by the individual to whom the
Executive shall then report. During the term of this
Agreement, the Executive shall devote substantially all his
time and best efforts during normal business hours to the
business and affairs of Travelers (including the Company and
other Travelers' subsidiaries) except for vacations, illness
or incapacity. Nothing in this Agreement shall preclude the
Executive, subject to compliance with such other policies
and procedures that may be in effect at the Travelers, from
devoting reasonable periods required for (i) serving as a
director or member of a committee of any organization
involving no conflict of interest with the Company, (ii)
delivering lectures and fulfilling speaking engagements, and
(iii) engaging in charitable and community activities
provided that such activities do not materially interfere
with the performance of his duties hereunder.
4. Place of Performance. In connection with the Executive's
--------------------
employment by the Company, the Executive shall be based at
the principal executive offices of Travelers in the City of
New York, except for required travel on business.
<PAGE>
5. Compensation and Related Matters.
--------------------------------
(a) Compensation. During the period of the Executive's
------------
employment hereunder, the Company shall pay to the
Executive a base salary (i) during the period from the
Commencement Date through July 30, 1996 at a rate of
$950,000 per year and (ii) thereafter during the
employment term at a rate to be determined within the
discretion of the Company. In addition, the Executive
shall be entitled to consideration for an annual
discretionary bonus under the Travelers Inc. Executive
Performance Compensation Plan. Notwithstanding the
foregoing, in the event Sanford I. Weill is, at any
time during the employment term, no longer the Chief
Executive Officer of Travelers, then, during any
remaining portion of the employment term, the
compensation payable to the Executive, in addition to
the other items specified herein, shall be, as
specified on Attachment A hereto (or, in the event of a
termination of employment, in accordance with the
provisions of Section 7), including without limitation,
the payment of any Additional Payments specified in
Attachments A or B hereto for the calendar year in
which such event occurs or the prior calendar year if
discretionary bonuses for senior executives of
Travelers for the applicable calendar year in question
have not been determined as of the date that Mr. Weill
is no longer the Chief Executive Officer of Travelers.
The compensation shall be paid in accordance with the
Company's normal payroll practices, as in effect from
time to time and any bonus for 1997 shall, subject to
the other provisions of this Agreement, be paid when
1997 bonuses are generally paid by the Company
notwithstanding whether or not Executive is then
employed by the Company.
(b) Expenses. During the period of the Executive's
--------
employment hereunder, the Executive shall be entitled
to receive prompt reimbursement for all reasonable and
customary expenses incurred by the Executive in
performing services hereunder, including all expenses
of travel and living expenses while away from home on
business, provided that such expenses are incurred and
accounted for in accordance with the policies and
procedures established by the Company.
(c) Other Benefits. The Executive shall be entitled to
--------------
participate in all of the employee benefit plans and
arrangements generally available to senior executives
of Travelers (including without limitation each
retirement plan, supplemental and excess retirement
plans, annual and long-term incentive compensation
plans, stock option and purchase plans, group life
insurance (presently group universal life insurance)
and accident plan, medical and dental insurance plans,
financial planning and disability plan). The Executive
shall participate in the Travelers Supplemental
Retirement Plan through maintenance of the existing
frozen benefit and, if and to the extent that it shall
be reopened to participation generally by senior
officers of the Company or of Travelers, accrual of
future benefits, all in accordance with the plan
provisions as in effect from time to time except that
the Executive's service at Shearson will be counted for
the purpose of vesting only. During the period of the
Executive's employment hereunder, the Company will
reimburse the Executive for annual premium to purchase
a term life insurance policy from Primerica Financial
Services ("PFS") carrying a death benefit of up to
$1,500,000.
2
<PAGE>
(d) Capital Accumulation Plan. The Executive shall
--------------------------
participate in the Travelers Capital Accumulation Plan
("CAP"), and any successor or replacement plan
generally applicable to senior executives of the
Company (provided that (i) the deferred compensation
specified in Section 5 (i) hereof and (ii) any amounts
payable under Section 7 at or following a termination
of employment, shall not be subject to CAP). The
provisions of such plan, as in effect from time to
time, shall govern the participation by the Executive
except as provided in Attachment C hereto.
(e) Vacations. The Executive shall be entitled to no less
---------
than the number of vacation days in each calendar year
determined in accordance with the Company's vacation
policy. The Executive shall also be entitled to all
paid holidays and personal days given by the Company to
its executives.
(f) Services Furnished. The Company shall cause Travelers
------------------
to furnish the Executive with office space, secretarial
assistance and such other facilities and services as
shall be suitable to the Executive's position and
adequate for the performance of his duties as set forth
in Section 3 hereof.
(g) Stock Option. As of the date hereof, the Executive
------------
holds options to purchase 300,000 shares of common
stock of Travelers pursuant to the provisions of the
Travelers Stock Option Plan, including 100,00 shares
granted on September 28, 1994 (the 200,000 shares
granted prior to September 28, 1994 being referred to
herein as the "Original Grant"). In the event of (i)
the termination of this Agreement on account of the
death or disability of the Executive or by the Company
without Cause or by the Executive for Good Reason, the
Executive shall be entitled to two (2) years of
additional vesting and exercise of all such stock
options, or any longer periods of vesting and exercise
provided for in the Stock Option Plan, or (ii) the
termination of this Agreement by the Executive but
without Good Reason, the Executive shall be entitled to
the remainder (if any) of a two (2) year period of
vesting and exercise for the Original Grant ending on
July 30, 1996, in both cases subject to the other
provisions of the Stock Option Plan.
(h) The Executive shall be entitled to have, at the
Company's expense, a car and driver at the level
similar to other senior executives of Travelers.
(i) Deferred Compensation
---------------------
(A) The Executive shall receive a deferred compensation
payment hereunder in the amount set forth in (B) below.
Such payment shall be made in a lump sum thirty (30)
days after the Executive ceases to be employed by the
Company or its affiliates for any reason whatsoever,
including death, disability, termination by the Company
with or without Cause or termination by the Executive
with or without Good Reason (but each portion of such
lump sum shall not be payable earlier than the date
from which "earnings" are to be measured). Such
payments shall be made without counterclaims, offset or
setoff (other than legally required withholding).
3
<PAGE>
(B) The deferred compensation amount shall be the sum
of the following amounts:
(I) $2,000,000 with "earnings" from July 30, 1996;
(ii) $2,000,000 with "earnings" from July 30,
1997; and
(iii) provided the Executive has not voluntarily
terminated employment prior to March 1, 1996
(other than for Good Reason or death) and
provided the Executive has not been
involuntarily terminated for Cause prior to
March 1, 1996, $1,400,000 with "earnings"
from July 30, 1997.
(C) Earnings shall be measured by the published ninety
(90) day T bill rate as in effect at the beginning
of each calendar quarter during the relevant period
and shall be compounded quarterly.
6. Termination. The Executive's employment hereunder may be
-----------
terminated under the following circumstances:
a) Death. The Executive's employment hereunder shall
-----
terminate upon his death.
b) Disability. If, as a result of the Executive's
----------
incapacity due to physical or mental illness, the
Executive shall have been absent from his duties
hereunder on a full-time basis for the entire period of
six (6) consecutive months, and within thirty (30) days
after written notice of termination is given (which may
occur before or after the end of such six (6) months
period) shall not have returned to the performance of
his duties hereunder on a full-time basis, the Company
may terminate the Executive's employment hereunder.
(c) Cause. The Company may terminate the Executive's
-----
employment hereunder for Cause. For purposes of this
Agreement, the Company shall have "Cause" to terminate
the Executive's employment hereunder upon the
Executive's willful refusal to perform his properly
assigned duties, or if the Executive shall be convicted
of or plead guilty or nolo contendre to conduct
constituting a felony, or in the event of a material
violation of Section 10(a) of this Agreement. Such
termination for reason of the Executive's willful
refusal to perform his duties shall only be effective
upon the Company's written notice of termination to the
Executive and the Executive's failure within ten (10)
days following such notice to cure the breach specified
in such notice.
(d) Any termination of the Executive's employment by the
Company or by the Executive (other than termination
pursuant to subsection (a) hereof) shall be
communicated by written Notice of Termination to the
other party hereto in accordance with Section 12. For
purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for
termination of the Executive's employment under the
provision so indicated.
(e) "Date of Termination" shall mean (i) if the Executive's
employment is terminated by his death, the date of his
death, (ii) if the Executive's employment is terminated
pursuant to subsection
4
<PAGE>
(b) above, the later to expire of thirty (30) days
after Notice of Termination is given pursuant to
subsection (b) above or the six (6) month disability
period (provided that the Executive shall not have
returned to the performance of his duties on a full-
time basis prior to expiration of the thirty (30) day
notice period or the six (6) month disability period,
whichever shall expire later) (iii) if the Executive's
employment is terminated pursuant to subsection (c)
above, the date specified in the Notice of Termination,
and (iv) if the Executive's employment is terminated
for any other reason, the date specified in the Notice
of Termination (or, if no date is so specified, on the
date on which a Notice of Termination is given).
(f) Good Reason. The Executive may terminate his
-----------
employment hereunder for Good Reason. For purposes of
this Agreement, the Executive shall have "Good Reason"
to terminate his employment if the Company shall
materially breach its obligations under this Agreement
as to position, reporting relationship,
responsibilities, duties, authority or place of
performance, as specified in Sections 3 and 4. Such
termination for Good Reason shall only be effective
upon the Executive's written notice of termination to
the Company and the Company's failure within ten (10)
days following such notice to cure the breach specified
in such notice.
(g) The Executive may terminate his employment hereunder
without Good Reason. Such termination shall only be
effective upon receipt of Executive's written notice of
termination to the Company. In such event, the
Company's obligations with regard to compensation shall
be as provided in Section 7. Except as otherwise
provided for herein, the provisions of the Stock Option
Plan, the Capital Accumulation Plan and other employee
plans will govern as to participation in such plans.
Such a termination shall not affect the Executive's
other obligations under this Agreement, including
without limitation Section 10.
(h) In the event the Executive shall terminate his
employment with or without Good Reason or if the
Company shall terminate the Executive's employment
other than for Cause, the Company shall furnish to the
Executive appropriate office space, his then
administrative assistant (if employed by the Company or
Travelers or, if not, other appropriate secretarial
assistance) and his existing car and driver until the
earlier of his commencing other employment or six (6)
months after such date of termination.
7. Severance Payments Upon Termination.
-----------------------------------
(a) During any period that the Executive fails to perform
his duties hereunder as a result of incapacity due to
physical or mental illness ("disability period"), the
Executive shall continue to receive his full base
salary at the rate then in effect until his employment
is terminated pursuant to Section 6(b) hereof (provided
that payments so made to the Executive during the
disability period shall be reduced by the sum of the
amounts, if any, payable to the Executive at or prior
to the time of any such payment under disability
benefit plans of the Company and which amounts were not
previously applied to reduce any such payment).
If the Executive's employment is terminated (i) by the
Executive but not for Good Reason and with an effective
date on or prior to February 29, 1996, or (ii) by the
Company for
5
<PAGE>
Cause, the Company shall pay to the Executive the
amounts, if any, to be paid following such date of
termination, as set forth in Attachment B, including,
without limitation, the payment of any Additional
Payments specified therein for the calendar year in
which such date of termination occurs or the prior
calendar year if discretionary bonuses for senior
executives of Travelers for the applicable calendar
year in question have not been determined as of such
date of termination. In addition, Executive shall
retain his rights, if any, under any deferred
compensation (including under Section 5 (i) hereof )or
other benefit plans in which he participates as
specifically provided herein, or, if not otherwise
specifically provided for in this Agreement, as
provided in such plan and any other unpaid amounts
required to be paid hereunder and the Company shall
have no further obligations to the Executive under this
Agreement.
(b) If the Executive's employment is terminated on account
of disability or by his death, the Company shall pay to
the Executive or his estate or as may be directed by
the legal representatives of such estate, the amounts,
if any, to be paid following such date of termination,
as set forth in Attachment A, including, without
limitation, the payment of any Additional Payments
specified therein for the calendar year in which such
date of termination occurs or the prior calendar year
if discretionary bonuses for senior executives of
Travelers for the applicable calendar year in question
have not been determined as of such date of
termination. In addition, the Executive shall retain
his rights, if any, under any deferred compensation
(including under Section 5 (i) hereof) or other
benefit plans in which he participates as specifically
provided herein or, if not otherwise specifically
provided for in this Agreement, as provided in such
plan and any other unpaid amounts required to be paid
hereunder and the Company shall have no further
commitments under this Agreement.
(c) [Intentionally Omitted].
(d) If the Executive's employment is terminated (i) by the
Company other than for Cause (ii) by the Executive for
Good Reason, or (iii) by the Executive but not for Good
Reason and with an effective date after February 29,
1996 then the Company shall pay the Executive the
amounts, if any, to be paid following such date of
termination, as set forth in Attachment A (provided,
that in the event of a termination under clause (iii)
of this sentence, the payment of base salary shall be
made for the remaining employment term in accordance
with Attachment B rather than in accordance with
Attachment A or Section 5(a)), including, without
limitation, the payment of any Additional Payments
specified therein for the calendar year in which such
date of termination occurs or the prior calendar year
if discretionary bonuses for senior executives of
Travelers for the applicable calendar year in question
have not been determined as of such date of
termination. In addition, the Executive shall retain
his rights, if any, under any deferred compensation
(including under Section 5 (i) hereof) or other benefit
plans in which he participates as specifically provided
herein or, if not otherwise specifically provided for
in this Agreement, as provided in such plan and any
other unpaid amounts required to be paid hereunder and
the Company shall have no further obligations to the
Executive under this Agreement.
6
<PAGE>
(e) The provisions of this Section 7 (together with (i) the
provisions of any vacation, deferred compensation or
other benefit plans in which he participates and which
are not otherwise specifically provided for in this
Agreement, (ii) the provisions of the CAP and Stock
Option Plans as in effect from time to time and as
specifically provided for in this Agreement in the
event of a termination and (iii) the continuation of
services provision set forth in Section 6(h)) are the
exclusive rights of the Executive regarding a severance
or termination occurring prior to expiration of the
employment term. The rights of the Executive regarding
a severance or termination occurring after expiration
of the employment term shall be governed exclusively by
the Company's regular severance policies as in effect
at such time, except as otherwise specifically provided
for herein.
8. Mitigation. The Executive shall not be required to mitigate
----------
amounts payable pursuant to Section 7 hereof by seeking
other employment or otherwise and any amounts received from
other employment shall not reduce any amounts due under
Section 7.
9. [Intentionally Omitted]
10. Confidentiality and Non-Solicitation.
------------------------------------
(a) Confidentiality. During the employment term of this
---------------
Agreement and thereafter, the Executive will not,
without the written consent of the Company, make use of
or divulge to any person, firm or corporation, any
trade or business secret which may be disclosed to him
by the Company or Travelers or as a result of his
employment with the Company hereunder or his position
with Travelers excepting only such information which
shall be made public without the fault of the Executive
and such information as the Executive shall be
obligated to disclose pursuant to legal process. In
addition, the foregoing provision shall not impair the
ability of the Executive to exercise his good faith
judgment as to disclosures in connection with his
duties hereunder.
(b) Non-Solicitation. In the event the Executive's
----------------
employment hereunder is terminated for any reason the
Executive (i) shall not be personally involved,
directly or indirectly, in hiring any employee of the
Company or Travelers or any of their subsidiaries who
either is a financial consultant (or similar position)
for the Company or whose annual compensation is in
excess of $100,000 or any independent representative of
the Company or Travelers or any of its subsidiaries who
is intended to act as a full-time representative (e.g.,
at Primerica Financial Services, a sales force
designation of RVP or higher ) (any of the foregoing
being a "Protected Person") unless the Company or
Travelers shall agree in writing to such hiring, and
(ii) shall not be personally involved, directly or
indirectly, in soliciting any Protected Person to leave
their employment or terminate their relationship (it
being agreed that simply responding to a request for a
reference will not be deemed direct or indirect
solicitation), in either case until the latest to occur
of the following:
_ one year after termination of employment (but not
longer than July 30, 1998).
7
<PAGE>
_ the date the last payment of base salary or bonus
actually payable to the Executive is due and
payable under the provisions of Section 7.
_ the later of the date the last payment actually
payable to the Executive is due and payable under
Attachment B and July 30, 1997.
_ in the event the Executive shall voluntarily
terminate his employment but without Good Reason,
July 30, 1996 (notwithstanding the fact that such
date may be more than one year after such
termination of employment).
(c) The provisions of this Section 10 shall survive the
termination, for any reason, or expiration of this
Agreement.
11. Indemnification. Both during and after the employment term,
---------------
the Company shall indemnify the Executive to the full extent
permitted by law for all expenses, costs, liabilities and
legal fees which the Executive may incur by reason of
entering into this Agreement and in the discharge of all his
duties hereunder, other than for any such expenses, costs,
liabilities or legal fees incurred resulting from the
Executive's bad faith or gross negligence. The provisions
of this Section shall be in addition to, and not in lieu of,
any other rights of indemnification available to the
Executive and shall apply to the Executive when serving in
other capacities at the written request of the Company.
Legal fees covered by this indemnification shall be advanced
as incurred. The provisions of this Section 11 shall
survive the termination, for any reason, or expiration of
this Agreement.
12. Notice. For the purposes of this Agreement, notices,
------
demands and all other communications provided for in this
Agreement shall be in writing and shall be deemed to have
been duly given when delivered or (unless otherwise
specified) mailed by United States certified or registered
mail, return receipt requested, postage prepaid, addressed
as follows:
If to the Executive:
Joseph J. Plumeri II
1461 Martine Avenue
Scotch Plains, New Jersey 07076
With a copy to:
Michael S. Sirkin, Esq.
Proskauer Rose Goetz & Mendelsohn
1585 Broadway
New York, New York 10036
If to the Company:
333 West 34th Street
New York, New York 10001
8
<PAGE>
Attention: General Counsel
with a copy to:
The Travelers Inc.
65 East 55th Street
New York, New York 10022
Attention: General Counsel
or to such other address either party may have furnished to
the other in writing in accordance herewith, except that
notices of change of address shall be effective only upon
receipt.
13. Miscellaneous. No provision of this Agreement may be
-------------
modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing and
signed by the Executive and a duly authorized officer of the
Company. No waiver by either party hereto at any time of
any breach of the other party hereto of, or compliance with,
any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any
prior or subsequent time. This Agreement shall not be
assignable by the Executive. This Agreement shall not be
assignable by the Company except in connection with the sale
of all or substantially all of the retail brokerage
business of the Company, in which case it shall be assumed
by Travelers, all references to the Company shall be deemed
thereafter to be references to Travelers and the obligations
of the Company hereunder shall cease; thereafter it shall
not be assignable by Travelers except in connection with the
sale of all or substantially all of the assets of Travelers.
This Agreement shall be binding on the successors and
permitted assigns of the Company. The validity,
interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of
Delaware without regard to its conflicts of law principles.
In the event the Company breaches this Agreement by non-
payment of any amounts due to the Executive hereunder, the
Executive shall be entitled to recover his costs of
collection. Whenever in this Agreement reference is made to
a pro rata portion of an amount, it shall be calculated by
multiplying an annual amount by a fraction, the numerator of
which is the number of elapsed days in a period (e.g., the
number of days in a calendar year prior to a termination of
employment) and the denominator of which is 365.
14. Validity. The invalidity or unenforceability of any
--------
provision or provisions of this Agreement shall not affect
the validity or enforceability of any other provision of
this Agreement, which shall remain in full force and effect.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and
the same instrument.
16. Arbitration. Any controversy or claim arising out of or
-----------
relating to this Agreement, whether arising before or after
the expiration or other termination of this Agreement, shall
be settled by arbitration in New York City in accordance
with the commercial rules of the American Arbitration
Association, except to the extent specifically described in
a document signed by both of the parties hereto and
9
<PAGE>
which specifically refers to this Section. Any decision by
the arbitrators shall be final and binding on the parties
and may be entered into in any court of competent
jurisdiction.
17. Entire Agreement. This Agreement sets forth the entire
----------------
agreement of the parties hereto in respect of the subject
matter contained herein and supersedes all prior agreements,
promises, covenants, arrangements, communications,
representations or warranties, whether oral or written,
express or implied, by any officer, employee or
representative of either party hereto, including without
limitation the prior employment agreements between the
parties dated as of July 30, 1993 and July 30, 1994, except
to the extent specifically described in a document signed by
both of the parties hereto and which specifically refers to
this Section.
10
<TABLE><CAPTION>
Exhibit 11.01
The Travelers Inc. and Subsidiaries
Computation of Earnings Per Share
(In millions, except for per share amounts)
Year ended December 31,
-----------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Earnings:
Net Income $1,326 $916 $728
Preferred dividends - series A (24) (24) (10)
Preferred dividends - series B (7) (4) -
Preferred dividends - series C (17) - -
Preferred dividends - series D (35) - -
----- ---- ----
Income applicable to common stock 1,243 888 718
Interest expense (through the date of conversion) related
to 4 1/2% Eurodollar Convertible Subordinated Debentures,
net of applicable income taxes - - 1
Dilution due to assumed exercise of options of subsidiary - - (2)
----- ---- ----
$1,243 $ 888 $ 717
===== ==== ====
Average shares:
Common 315 229 215
Assumed conversion of 4 1/2% Eurodollar Convertible
Subordinated Debentures - - 1
Assumed exercise of dilutive stock options 3 5 4
Incremental shares - Capital Accumulation Plan 4 4 3
----- ---- ----
322 238 223
===== ==== ====
Earnings Per Share $ 3.86 $3.74 $3.22
===== ==== ====
</TABLE>
Earnings per common share is computed after recognition of preferred stock
dividend requirements and is based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect of
common stock warrants and stock options and the incremental shares assumed
issued under the Capital Accumulation Plan and other restricted stock plans.
Fully diluted earnings per common share, assuming conversion of all outstanding
convertible notes and debentures, the maximum dilutive effect of common stock
equivalents and conversion of the 5.5% convertible preferred stock, has not been
presented because the effects are not material. The fully diluted earnings per
common share computation for the years ended December 31, 1994, 1993 and 1992
would entail adding the number of shares issuable on conversion of the other
debentures (zero and 2 million and 4 million shares, respectively), the
additional common stock equivalents (2 million, zero and 1 million shares
respectively) and the assumed conversion of the 5.5% convertible preferred
stock (3 million, 2 million, and zero shares, respectively) to the number of
shares included in the earnings per common share calculation (resulting in a
total of 327 million, and 242 million and 228 million shares, respectively)
and eliminating the after-tax interest expense related to the conversion of
other debentures (zero, $3 million and $7 million, respectively) and the
elimination of the 5.5% convertible preferred stock dividends ($7 million,
$3 million, and zero, respectively).
<TABLE><CAPTION>
EXHIBIT 12.01
The Travelers Inc. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
ALL COMPANIES CONSOLIDATED
(In millions of dollars)
Year ended December 31,
-----------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes, minority
interests and cumulative effect of
changes in accounting principle . . $2,149 $1,523 $1,188 $ 791 $ 602
Elimination of undistributed
equity earnings . . . . . . . . . . - (116) (26) (5) (3)
Pre-tax minority interest . . . . . . - (32) - - -
Add:
Interest . . . . . . . . . . . . . 1,284 707 674 876 1,027
Interest portion of rentals . . . . 134 61 38 46 43
----- ----- ----- ----- -----
Income available for fixed charges . $3,567 $2,143 $1,874 $1,708 $1,669
===== ===== ===== ===== =====
Fixed charges:
Interest . . . . . . . . . . . . . $1,284 $ 707 $ 674 $876 $1,027
Interest portion of rentals . . . . 134 61 38 46 43
----- ----- ----- ----- -----
Fixed charges . . . . . . . . . . . . $1,418 $ 768 $ 712 $ 922 $1,070
===== ===== ===== ===== =====
Ratio of earnings to fixed charges 2.52x 2.79x 2.63x 1.85x 1.56x
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Exhibit 13.01
The Travelers Inc. and Subsidiaries
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In millions of dollars, except per share amounts)
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, (1)
-----------------------
Total revenues (2) $ 18,465 $ 6,797 $ 5,125 $ 6,608 $ 6,194
After-tax gains from sale
of subsidiaries and affiliates $ 88 $ 8 $ 135 $ 43 $ 10
Income before cumulative effect of
changes in accounting principles $ 1,326 $ 951 $ 756 $ 479 $ 373
Net Income (3) $ 1,326 $ 916 $ 728 $ 479 $ 373
Return on average common equity (4) 15.6% 18.4% 20.6% 15.7% 13.7%
December 31, (1)
-------------
Total assets $115,297 $101,290 $24,151 $ 21,561 $19,689
Long-term debt $ 7,075 $ 6,991 $ 3,951 $ 4,327 $ 3,456
Stockholders' equity (5) $ 8,640 9,326 $ 4,229 $ 3,280 $ 2,859
Per common share data:
---------------------
Income before cumulative effect of
changes in accounting principles $ 3.86 $ 3.88 $ 3.34 $ 2.14 $ 1.64
Net income $ 3.86 $ 3.74 $ 3.22 $ 2.14 $ 1.64
Dividends per common share $ 0.575 $ 0.490 $ 0.363 $ 0.225 $ 0.180
Book value per common share $ 24.77 $ 26.06 $ 17.70 $ 15.10 $ 13.20
Other data:
-----------
Average number of common shares
and equivalents (millions) 322.0 237.8 222.8 226.5 231.8
Year-end common shares
outstanding (millions) 316.5 327.1 222.0 217.2 216.5
Number of full-time employees 52,000 60,000 16,000 15,800 23,600
</TABLE>
(1) The Travelers Inc. (the Company) was formerly Primerica
Corporation. Results of operations prior to 1994
exclude the amounts of The Travelers Insurance Group
Inc. except that results for 1993 include the Company's
equity in earnings relating to the 27% interest
purchased in December 1992. Results of operations
include amounts related to the Shearson Businesses from
July 31, 1993, the date of acquisition. Data relating
to financial position for the years prior to 1993
exclude amounts for The Travelers Insurance Group Inc.
and the Shearson Businesses. (see Note 1 of Notes to
Consolidated Financial Statements).
(2) Revenues for 1991 and 1990 include those of Fingerhut
Companies, Inc. (Fingerhut), which had been carried as a
consolidated subsidiary (see Note 3 of Notes to
Consolidated Financial Statements).
(3) See Note 2 of Notes to Consolidated Financial Statements
for information regarding changes in accounting
principles in 1993 and 1992.
(4) The return on average common stockholders' equity is
calculated using income before cumulative effect of
changes in accounting principles.
(5) Stockholders' equity at December 31, 1994 reflects $1.3
billion of net unrealized losses on investment
securities pursuant to the adoption of FAS No. 115 in
1994 (See Note 2 of Notes to Consolidated Financial
Statements).
<PAGE>
<TABLE>
The Travelers Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
<CAPTION>
Consolidated Results of Operations
Year Ended December 31,
-------------------------------
(In millions, except per share amounts) 1994 1993 1992
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $18,465 $6,797 $5,125
====== ===== =====
Income before cumulative effect of changes in accounting principles $ 1,326 $951 $756
====== === ===
Net income $ 1,326 $916 $728
====== === ===
Earnings per share
Income before cumulative effect of changes in accounting principles $3.86 $3.88 $3.34
==== ==== ====
Net income $3.86 $3.74 $3.22
==== ==== ====
Weighted average number of common shares outstanding and
common stock equivalents (millions) 322.0 237.8 222.8
===== ===== =====
--------------------------------------------------------------------------------------------------------------
</TABLE>
The Travelers Merger
On December 31, 1993, Primerica Corporation (Primerica) acquired the
approximately 73% it did not already own of The Travelers Corporation
(old Travelers), one of the largest multi-line insurance companies in
the United States. The acquisition was effected by means of a merger
of old Travelers into Primerica and, concurrently with the merger,
Primerica changed its name to The Travelers Inc. which, together with
its subsidiaries, is hereinafter referred to as the Company. The old
Travelers businesses acquired are hereinafter referred to as old
Travelers or The Travelers Insurance Group. The acquisition has been
accounted for as a purchase, and accordingly, the results of operations
for periods prior to December 31, 1993 do not include those of old
Travelers other than for the equity in earnings for 1993 related to the
27% previously owned. (See Note 1 of Notes to Consolidated Financial
Statements.)
The Shearson Acquisition
On July 31, 1993, the Company acquired the domestic retail brokerage
and asset management businesses (the Shearson Businesses) of Shearson
Lehman Brothers Holdings Inc., an American Express Company (American
Express) subsidiary. The businesses acquired were combined with the
operations of Smith Barney, Harris Upham & Co. Incorporated, and the
combined firm has been named Smith Barney Inc. which is a subsidiary of
Smith Barney Holdings Inc. (Smith Barney). The acquisition was
accounted for under the purchase method of accounting, and the
consolidated financial statements include the results of the Shearson
Businesses from the date of acquisition. (See Note 1 of Notes to
Consolidated Financial Statements.)
Results of Operations
Results of operations for 1994 reflect the full year impact of both the
Travelers Merger and the Shearson Acquisition. Results of operations
for 1993 include earnings from the Shearson Businesses for five months
and reflect the equity in the earnings relating to the Company's 27%
interest in old Travelers. Included in income before cumulative effect
of changes in accounting principles for the years ended December 31,
1994, 1993 and 1992 are net after-tax gains of $5 million, $52 million
and $163 million, respectively, as follows:
1994
----
- $39 million gain on the sale of American Capital Management &
Research Inc. to Van Kampen Merritt Companies in December for $430
million;
- $21 million gain on the sale of Smith Barney's interest in HG Asia
Holdings Ltd. for $55 million;
- $19 million gain on the sale of Bankers and Shippers Insurance
Company, a subsidiary of The Travelers Indemnity Company, to
Integon Corporation in October for $142 million;
- $9 million gain on the sale of the group dental insurance business
of The Travelers Insurance Company (TIC) to Metropolitan Life
Insurance Company (in conjunction with the sale of the group life
business completed in January 1995) for $52 million; and
- $83 million of reported investment portfolio losses.
<PAGE>
1993
----
- a $65 million provision for one-time expenses related to the
acquisition of the Shearson Businesses;
- $8 million gain on the sale of stock of subsidiaries and
affiliates; and
- $109 million of reported investment portfolio gains.
1992
----
- $116 million gain on the sale of stock of subsidiaries and
affiliates; and
- reported investment portfolio gains of $47 million, including $19
million from the sale of the common stock investment in Musicland
Stores Corporation (Musicland).
Excluding these items, income before cumulative effect of changes in
accounting principles for 1994 increased $422 million to $1.321
billion, or 47%, over 1993, reflecting primarily an earnings increase
at Consumer Finance due to an increase in receivables outstanding, an
increase in Primerica Financial Services' earnings as a result of
improvements in life sales and persistency as well as increases in
$.M.A.R.T. and S.A.F.E. Loans; and the inclusion of the earnings from
the additional 73% investment in The Travelers Insurance Group.
On the same basis, income before cumulative effect of changes in
accounting principles for 1993 increased by $306 million, or 52%, over
1992, reflecting primarily increased operating earnings from the
combined Smith Barney unit, earnings from the 27% investment in old
Travelers and improved performance at Consumer Finance Services.
The most significant factors in 1992's earnings growth over 1991 were
increases in the contributions of Smith Barney and Consumer Finance
Services as well as reduced corporate treasury expense from lower debt
and interest rate levels.
Included in net income for 1993 is an after-tax charge of $18 million
resulting from the adoption of Statement of Financial Accounting
Standards (FAS) No. 112, "Employers' Accounting for Postemployment
Benefits," and an after-tax charge of $17 million resulting from the
adoption of FAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." Included in net income for 1992 is an
after-tax charge of $28 million resulting from the adoption of FAS No.
109, "Accounting for Income Taxes."
The following discussion presents in more detail each segment's
operating performance and net income before the effects of changes in
accounting principles, which were not material to any of the business
segments.
Investment Services
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Smith Barney (1) $5,534 $390 $3,371 $306 $1,677 $157
Mutual funds and asset management
and other 156 32 153 30 145 34
--------------------------------------------------------------------------------------------------------------
Total Investment Services $5,690 $422 $3,524 $336 $1,822 $191
==============================================================================================================
</TABLE>
(1) Net income for 1994 includes a $21 after-tax gain from the sale of
the interest in HG Asia and net income for 1993 includes a $65
after-tax provision for merger-related costs.
2
<PAGE>
The Company's Investment Services segment includes Smith Barney -
investment banking and securities brokerage; a limited partnership
interest in RCM Capital Management (RCM) - asset management; and
American Capital Management & Research, Inc. (American Capital) -
mutual funds, through its date of sale in December 1994.
Smith Barney
A difficult operating environment in the securities markets combined
with the effect of increased expenses related to the acquisition of the
Shearson Businesses contributed to a slight decline in Smith Barney's
earnings when compared to 1993, excluding the $21 million gain in 1994
and the $65 million provision in 1993 referenced above.
Smith Barney Revenues
Year Ended December 31,
-----------------------------------------------------------
(millions) 1994 1993 1992
-----------------------------------------------------------
Commissions $1,964 $1,252 $509
Investment banking 680 667 433
Principal trading 900 549 298
Asset management fees 725 319 73
Interest income, net* 314 207 101
Other income 181 100 35
-----------------------------------------------------------
Net revenues* $4,764 $3,094 $1,449
===========================================================
* Net of interest expense of $770, $277 and $228 in 1994, 1993 and
1992, respectively. Revenues included in the consolidated statement of
income are before deductions for interest expense.
The securities industry experienced a widespread slowdown in activity,
revenues and profitability in 1994 compared to 1993. While Smith
Barney was significantly affected by this industry-wide slowdown, the
inclusion of the Shearson Businesses for the full year in 1994 versus
five months in 1993 resulted in substantial increases in revenues from
commissions, principal trading, asset management fees and net interest
income. Investment banking revenues rose slightly over 1993, in the
face of a poor environment for stock and bond issuances and lower new
issue volume in the securities markets generally during 1994,
reflecting the increased commitment of the firm to this area.
Expenses also increased substantially due to the inclusion of the
Shearson Businesses for the full year 1994. Employee compensation and
benefits were $2.953 billion in 1994 and $1.810 billion in 1993,
reflecting additional production-related financial consultant
compensation, as well as increased staffing levels resulting from the
acquisition of the Shearson Businesses. Communications, occupancy and
equipment expenses in 1994 were $574 million as compared to $323
million in 1993, reflecting higher office rental and related expenses
resulting from the acquisition of the Shearson Businesses. Excluding
interest and the provision in 1993 for merger-related costs, total
expenses increased to $4.118 billion in 1994 from $2.448 in 1993. In
addition to the general staffing and occupancy costs resulting from the
acquisition, Smith Barney has made major investments in the systems,
infrastructure, research, trading and investment banking resources and
staffing needed to service a much greater number of financial
consultants. The investment spending in research, capital markets and
investment banking has essentially leveled off during 1994 while the
upgrade of systems and infrastructure is continuing at a reduced pace.
Smith Barney's return on equity declined from 26.7% for 1993, excluding
the $65 million merger-related provision, to 16.4% for 1994 excluding
the $21 million gain on HG Asia, on a higher equity base, and is still
among the highest of its industry peer group.
3
<PAGE>
Mutual Funds and Asset Management
Performance in this segment was essentially flat year-over-year.
American Capital's mutual fund sales (at net asset value) were $2.698
billion in 1994, $3.061 billion in 1993 and $2.212 billion in 1992.
Assets Under Management (excluding American Capital)
At December 31,
---------------------
(billions) 1994 1993
-----------------------------------------------------------
Smith Barney $ 74.1 $ 74.8
RCM Capital Management 22.4 24.5
Travelers Life and Annuities (1) 19.2 21.7
-----------------------------------------------------------
Total Assets Under Management $115.7 $121.0
===========================================================
(1) Part of the Life Insurance Services segment.
Outlook - Smith Barney's business is significantly affected by the
levels of activity in the securities markets, which in turn are
affected by the level and trend of interest rates, the general state of
the economy and the national and worldwide political environments,
among other factors. Continuance of the increasing interest rate
environment could have further adverse impact on Smith Barney's
businesses, including commissions (which are linked in part to the
economic attractiveness of securities relative to time deposits) and
investment banking (which is affected by the relative benefit to
corporations and public entities of issuing public debt and/or equity
versus other avenues for raising capital). Such effects, however,
could be at least partially offset by a strengthening U.S. economy that
would include growth in the business sector -- accompanied by an
increase in the demand for capital -- and an increase in the capacity
of individuals to invest. A decline in interest rates from present
levels could favorably impact Smith Barney's business. Smith Barney
will continue to concentrate on building its asset management business,
which tends to provide a more predictable and steady income stream than
its other businesses. Notwithstanding the investment spending referred
to above, which is now essentially completed, Smith Barney is
maintaining tight expense controls that management believes will help
the firm weather periodic downturns in market conditions.
Asset Quality - Total Investment Services' assets at December 31, 1994
were approximately $45.6 billion, consisting primarily of highly liquid
marketable securities and collateralized receivables. About 56% of
these assets were related to collateralized financing transactions
where U.S. Government and mortgage-backed securities are bought,
borrowed, sold and lent in generally offsetting amounts. Another 15%
represented inventories of securities primarily needed to meet customer
demand. A significant portion of the remainder of the assets
represented receivables from brokers, dealers and customers that relate
to securities transactions in the process of being settled. The
carrying values of the majority of Smith Barney's securities
inventories are adjusted daily to reflect current prices. See Notes 2,
6, 7 and 8 of Notes to Consolidated Financial Statements for a further
description of these assets. See Note 19 of Notes to Consolidated
Financial Statements for a description of Smith Barney's activities in
derivative financial instruments which are used primarily to facilitate
customer transactions.
At December 31, 1994 there were no "bridge" loans at Smith Barney and
exposure to high-yield positions was not material. Smith Barney's
assets to equity ratio at December 31, 1994 was 19.7 to 1, which
management believes is a conservative leverage level for a securities
broker and one that allows for future growth.
Smith Barney's assets are financed through a number of sources
including long and short-term credit facilities, the financing
transactions described above and payables to brokers, dealers and
customers.
4
<PAGE>
Consumer Finance Services
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1994 1993 1992
------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consumer Finance Services(1) $1,239 $227 $1,193 $232 $1,158 $198
========================================================================================================
</TABLE>
(1) Net income includes $23 and $4 of reported investment portfolio
gains in 1993 and 1992, respectively.
Consumer Finance earnings before reported investment portfolio gains
increased 8% in 1994 over the prior year. The increase primarily
reflects an 11% increase in average receivables outstanding and an
improvement in net interest margins. The increase in net income and
revenues in 1993 compared to 1992 reflects a 3% increase in average
receivables outstanding and a significant decline in loan losses.
Receivables increased in 1994 by $543 million to end the year at $6.885
billion. The increase occurred across-the-board and was highlighted by
a 15% increase in personal loans. Sixty branch offices were added,
bringing the total to 828 at year end.
Consumer Finance borrows from the corporate treasury operations of
Commercial Credit Company (CCC), a major holding company subsidiary of
the Company that raises funds externally. For fixed rate loan products
Consumer Finance is charged agreed-upon rates that have generally been
set within a narrow range and approximated 8% in 1992 and 1993 and 7.2%
in 1994. For variable rate loan products Consumer Finance is charged
rates based on prevailing short term rates. CCC's actual cost of funds
may be higher or lower than rates charged to Consumer Finance, with the
difference reflected in Corporate and Other.
The average yield on receivables outstanding decreased to 15.41% in
1994 from 15.83% in the prior year and 16.31% in 1992, due to lower
yields on fixed rate second mortgages and the adjustable rate real
estate-secured loan product introduced at the end of 1992. Decreased
cost of funds has resulted in an improvement in net interest margins to
8.76% in 1994 from 8.44% in 1993 and 8.66% in 1992.
The allowance for losses as a percentage of net receivables was 2.64%
at year-end 1994 and 1993 compared to 2.91% at year-end 1992 reflecting
the improved credit quality of the loan portfolio.
As of, and for, the
Year Ended December 31,
----------------------------
1994 1993 1992
----------------------------
Allowance for losses as % of net
consumer finance receivables at
year end 2.64% 2.64% 2.91%
Charge-off rate for the year 2.08% 2.36% 2.84%
60 + days past due on a contractual
basis as % of gross consumer finance
receivables at year end 1.88% 2.21% 2.55%
Subsidiaries of the Company provide credit life, health and property
insurance to Consumer Finance customers. Premiums earned were $115
million in 1994, $88 million in 1993 and $90 million in 1992. The
increase in 1994 premiums is the result of the increase in receivables
and expanded availability of certain products in additional states, as
well as the reinsurance by the Company in 1994 of business previously
insured by non-affiliated companies.
5
<PAGE>
Outlook - Consumer Finance is affected by the interest rate environment
and general economic conditions. In a rising interest rate
environment, net real estate loan liquidations may decline compared to
the last two years, when potential customers refinanced their first
mortgages instead of turning to the second mortgage market, or proceeds
from the refinancing of first mortgages were used to pay off existing
second mortgages. Lower loan liquidations would benefit the level of
receivables outstanding. In addition, a rising interest rate
environment could also reduce the downward pressure experienced during
the last several years on the interest rates charged on new real
estate-secured receivables, as well as credit cards, which are
substantially based on the prime rate. However, significantly higher
rates could result in an increase in the interest rates charged to
Consumer Finance on the funds it borrows from CCC to reflect the
Company's overall higher cost of funds.
Asset Quality - Consumer Finance assets totaled approximately $7.7
billion at December 31, 1994, of which $6.7 billion, or 87%,
represented the net consumer finance receivables (after accrued
interest and the allowance for credit losses). These receivables were
predominantly residential real estate-secured loans and personal loans.
Receivable quality depends on the likelihood of repayment. The Company
seeks to reduce its risks by focusing on individual lending, making a
greater number of smaller loans than would be practical in commercial
markets, and maintaining disciplined control over the underwriting
process. The Company has a geographically diverse portfolio as
described in Note 9 of Notes to Consolidated Financial Statements. The
Company believes that its loss reserves on the consumer finance
receivables are appropriate given current circumstances.
Of the remaining Consumer Finance assets, approximately $555 million
were investments of insurance subsidiaries, including $463 million of
fixed-income securities and $61 million of short-term investments with
a weighted average quality rating of Aa2.
Life Insurance Services
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1994 1993 1992
----------------------------------------------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Primerica Financial Services(1) $1,290 $210 $1,266 $223 $1,158 $197
Travelers Life and Annuities(2) 2,198 211 319 42 347 36
Managed Care and Employee Benefits(3) 3,522 169 - - - -
----------------------------------------------------------------------------------------------------------------
Total Insurance Services $7,010 $590 $1,585 $265 $1,505 $233
================================================================================================================
</TABLE>
(1) Net income includes $7, $45 and $10 of reported investment
portfolio gains in 1994, 1993 and 1992, respectively.
(2) Net income includes $1, $17 and $6 of reported investment
portfolio gains in 1994, 1993 and 1992, respectively.
(3) Net income includes $9 gain from the sale of the group dental
insurance business in 1994.
The Life Insurance Services segment includes the results of Primerica
Financial Services (PFS) for all periods presented and, for 1994 only,
the results of the Travelers Life and Annuities and the Managed Care
and Employee Benefits segments of old Travelers which were acquired on
December 31, 1993. The 1993 and 1992 amounts reflected for Travelers
Life and Annuities represent the businesses of Primerica now included
in this segment. Certain 1993 production statistics related to old
Travelers' businesses are included for comparison purposes only and are
not reflected in 1993 revenues or operating results.
Primerica Financial Services
Before reported portfolio gains and a 1993 after-tax charge of $11
million for the cumulative effect of a tax rate increase through
December 31, 1992, PFS's 1994 earnings increased 7% over the prior
year. The increase was a
6
<PAGE>
result of improved life insurance sales and persistency (i.e. the
percentage of policies that continue in force) as well as increases in
sales of other financial products, primarily mutual funds and the loan
products of the Consumer Finance segment.
Sales of individual term life insurance continued an upward trend in
1994. PFS issued 299,400 policies totaling $57.4 billion in face
amount during 1994, an increase from 260,300 policies totaling $49.3
billion in face amount in 1993 and 252,500 policies totaling $47.3
billion in face amount in 1992. The increase in face amount issued has
contributed to an increase in insurance in force, which was $335
billion at December 31, 1994, compared to $317 billion at December 31,
1993.
PFS continued to experience growth in sales of other financial
products, primarily mutual funds through a joint venture with American
Capital, and the $.M.A.R.T. (second mortgage loans) and S.A.F.E.
(personal loans) products of Consumer Finance. Sales of mutual funds
were $1.32 billion in 1994 compared to $1.27 billion in 1993 and $1.07
billion in 1992. PFS has traditionally offered mutual funds to
customers as a way to invest the savings obtained through the purchase
of relatively low-cost term life insurance as compared to traditional
whole life insurance. $.M.A.R.T. and S.A.F.E. loan receivables, which
are reflected in the assets of Consumer Finance, were $1.107 billion at
December 31, 1994 compared to $765 million at December 31, 1993 and
$487 million at December 31, 1992.
Travelers Life and Annuities
Travelers Life and Annuities consists of annuity, life and health
products marketed under the Travelers name (the Financial Services
individual business and the Asset Management & Pension Services group
annuity business of old Travelers) and the individual accident and
health operations of Transport Life Insurance Company. Among the range
of individual products are fixed and variable annuities; term,
universal and whole life insurance; and accident and health coverages.
These products are primarily marketed through 450 core independent
agents, The Copeland Companies (Copeland), a wholly owned subsidiary of
The Travelers Insurance Group Inc. (Travelers Insurance), and Smith
Barney financial consultants.
During 1994, $9.2 billion of face amount of individual life insurance
was issued bringing total life insurance in force to $49 billion.
Individual life insurance net premiums and deposits totaled $287
million in 1994 compared to $279 million in 1993.
Individual annuity production was strong during 1994 compared to 1993
primarily reflecting increased sales of variable annuities. In late
June a variable annuity product was introduced for distribution by
Smith Barney financial consultants and is expected to contribute to
annuity production in future periods. Sales of this product amounted
to $158 million in 1994. Net written premiums and deposits for
individual annuities during 1994 totaled $1.309 billion compared to
$1.023 billion in 1993 bringing total policyholder account balances and
benefit reserves to $10.9 billion at the end of 1994. Annuity sales
activity has been helped by the ratings upgrades that accompanied the
merger of Primerica and old Travelers.
In the group annuity business, net written premiums and deposits for
1994 were $1.284 billion and were down significantly from $2.092
billion in 1993. The decline reflects the Company's more selective
approach to issuance of guaranteed investment contracts and a decision
in the third quarter of 1993 to no longer market index funds and was
partially offset by a non-recurring transfer in-house of old Travelers
pension plan assets amounting to $512 million which were previously
managed externally. Policyholder account balances and benefit reserves
totaled $12.2 billion at year-end 1994 down from $13.6 billion at
year-end 1993.
Net written premiums for individual accident and health products,
primarily long-term care and supplementary products, totaled $334
million in 1994, about even with the 1993 period.
7
<PAGE>
Managed Care and Employee Benefits
Managed Care and Employee Benefits consists of the old Travelers
businesses that market group accident and health and life insurance,
managed health care programs, and administrative services associated
with employee benefit plans to customers ranging from large
multinational corporations to small local employers.
As discussed in Note 3 of Notes to Consolidated Financial Statements,
the group life and related businesses have been sold to Metropolitan
Life Insurance Company and in January 1995, the group medical component
was exchanged for a 50% interest in The MetraHealth Companies, Inc.
Total group life insurance in force amounted to $144.1 billion at
year-end 1994, down from $149.9 billion at year- end 1993. Face amount
of group life insurance issued during 1994 was $11.4 billion versus
$13.6 billion in 1993. Net written premiums, deposits and equivalents
totaled $592 million for 1994 compared to $665 million in 1993.
In the group health business, net written premiums, deposits and
equivalents were $9.2 billion in 1994 compared to $9.7 billion in 1993.
Equivalents represent benefits under administration, which together
with deposits are estimates of premiums that fee-based customers would
have been charged under a fully insured arrangement and do not
represent actual revenues. Total lives covered by medical plans
declined to 5.0 million at December 31, 1994 from 5.9 million at
year-end 1993, although participation in the managed care component
rose 21%. These declines reflect the Company's emphasis on increasing
margins to improve profitability; improvements in underwriting designed
to reduce financial risk rather than emphasize growth; and
uncertainties during the period relating to proposed healthcare
legislation.
Property & Casualty Insurance Services
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
(millions) 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
Net Net Net
Revenues Income Revenues Income Revenues Income
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial (1) $3,058 $146 $315 $45 $316 $54
Minority Interest - Gulf - - - (22) - -
Personal (2) 1,480 103 - - - -
-----------------------------------------------------------------------------------------------------------------
Total Property & Casualty Insurance
Services $4,538 $249 $315 $23 $316 $54
=================================================================================================================
</TABLE>
(1) Net income includes $73 of reported investment portfolio losses
in 1994 and $15 and $6 of reported investment portfolio gains in
1993 and 1992, respectively, and $19 in 1992 from the sale of
Musicland common stock.
(2) Net income in 1994 includes $18 of reported investment portfolio
losses and a $19 gain from the sale of Bankers and Shippers
Insurance Company.
The Property & Casualty Insurance Services segment consists of the
business lines of old Travelers as well as Gulf Insurance Group (Gulf).
Segment operating results for 1993 include only the 50% of Gulf then
owned by old Primerica and 1992 includes Gulf only. Certain 1993
production statistics related to old Travelers' businesses are included
for comparison purposes only and are not reflected in 1993 revenues or
operating results.
Commercial Lines
Commercial Lines net written premiums for 1994 totaled $2.391 billion
compared to $2.499 billion in 1993. Equivalents for 1994 totaled
$2.978 billion compared to $2.757 billion in 1993. Equivalents, which
are associated largely with national accounts, represent estimates of
premiums that customers would have been charged under a fully insured
arrangement and do not represent revenues.
8
<PAGE>
A significant component of Commercial Lines is the National Accounts
division (National), which provides insurance coverages and services,
primarily workers' compensation, to large corporations. National
premium volume of $437 million in 1994 declined $141 million or 24%
from 1993. National equivalents of $1.996 billion for the year ended
December 31, 1994 were $64 million above the same period of 1993. For
the year ended December 31, 1994 new business, including both premiums
and equivalents, was $325 million compared to $407 million in 1993.
Renewed business, including both premiums and equivalents, was $1.997
billion in 1994 compared to $1.983 billion in 1993, reflecting efforts
to help customers control their loss costs, which has helped build a
better than 88% customer retention ratio. The shift to fee-based
service products from insurance products continued in 1994.
Premiums assumed from industry assigned pools of $129 million for the
year ended December 31, 1994 were $24 million less than the 1993
levels. Equivalents associated with Travelers acting as a servicing
carrier of these industry involuntary pools totaled $648 million in
1994, a decrease of $15 million from 1993. The decrease in premiums
and equivalents relative to the prior year is due to the depopulation
of involuntary workers' compensation pools and the formation of
alternative involuntary workers' compensation funding mechanisms in
which Travelers has no obligation to participate.
Commercial Lines Agency Marketing (Agency) business serves small and
mid-sized businesses through brokers and approximately 2,500
independent agents. Agency net written premiums of $1.526 billion for
the year ended December 31, 1994 were $30 million below 1993 premium
levels. Agency equivalents grew to $334 million, $172 million above
1993 levels. New business volume in the old Travelers mid-size
segment, which is a strategic point of business emphasis, was up $80
million or 26% from the same period in 1993; while the old Travelers
small business segment increased by $18 million, or 19%. The retention
for this mid-size business is slightly higher than 1993 levels while
this small business ratio declined by 2% reflecting soft market
conditions and tighter underwriting. Agency continues to focus on the
retention of existing business and maximization of product pricing
while maintaining its selective underwriting policy.
Specialty Lines premiums of $299 million for the year ended December
31, 1994 were $87 million higher than for the year ended December 31,
1993. This increase is primarily attributable to an increase in
property, primary liability and specialty auto writings, and assumed
reinsurance.
Catastrophe losses, net of tax and reinsurance, were $30 million and
$21 million for the years ended December 31, 1994 and 1993,
respectively. The increase in catastrophe losses was due to winter
storms in the first quarter of 1994.
The 1994 full year combined ratio was 124.7% and includes reserve
increases for environmental claims and a reduction of ceded reinsurance
balances amounting to $225 million that were charged against income on
a statutory basis (but not for GAAP reporting due to purchase
accounting adjustments related to the acquisition of old Travelers).
The 1993 full year combined ratio of old Travelers and Gulf combined
was 125.3% and includes $325 million of special reserve strengthening
for environmental and asbestos-related claims recorded by old Travelers
in the third quarter of 1993. The combined ratios excluding such
special charges were 114.2% for 1994 and 111.2% for old Travelers and
Gulf combined for 1993. The 1994 ratio also includes the impact of
winter storm losses in Agency in the first quarter of 1994, partly
offset by favorable loss development in certain workers' compensation
lines and residual markets. In addition, the combined ratio has been,
and will continue to be, affected by the shift to fee-for-service
products, which reduces premiums and losses while expenses remain in
insurance results.
Personal Lines
Net written premiums for 1994 were $1.433 billion compared to $1.361
billion in 1993. Included in 1994 are after-tax catastrophe losses of
$26 million net of reinsurance compared to $13 million in 1993. The
combined ratio for Personal Lines for the full year 1994 was 100.4%
compared to 104.4% in 1993. This improvement is primarily attributable
to improved underwriting results due to lower operating expenses,
favorable loss reserve development in 1994 on prior years' business in
the automobile line of business and a favorable resolution in 1994 of
the New Jersey Market Transition Facility deficit.
9
<PAGE>
On October 18, 1994, The Travelers Indemnity Company, a subsidiary of
The Travelers Insurance Group Inc., consummated the sale of its
subsidiary, Bankers and Shippers Insurance Company (B&S), to Integon
Corporation for $142 million in cash, and recognized an after-tax gain
of $19 million on the sale. B&S primarily writes non- standard
personal automobile insurance.
Outlook - PFS
Over the last few years, programs were begun that are designed to
increase the number of producing agents, customer contacts and,
ultimately, increase production levels. Enhanced customer service and
increased customer contacts have contributed to improved sales and
persistency (i.e., the percentage of policies that continue in force).
Insurance in force has begun to grow and the number of producing agents
has stabilized. A continuation of these trends could positively impact
future operations. PFS continues to expand cross-selling with other
Company subsidiaries of products such as loans and mutual funds.
Outlook - Travelers Life and Annuities
The insurance industry is extremely competitive on both price and
service and no single issuer is dominant. Consolidations are occurring
in the life insurance industry and other financial services
organizations are becoming involved in the sale and/or distribution of
life insurance products. This increases the pressure on the Company to
remain current as to market trends. Also, the annuities business is
interest sensitive and swings in interest rates could impact sales and
retention of in force policies.
On January 18, 1995, the U.S. Supreme Court in Nationsbank of North
--------------------
Carolina, NA. et. al. v. Variable Annuity Life Insurance Co., et. al.
---------------------------------------------------------------------
ruled unanimously that national banks may sell annuities. At this
time, it is not clear what impact, if any, this will have on the
Company's annuity sales. Currently, the Company's methods of
distribution of annuities are primarily through Copeland, independent
insurance agents and financial consultants of Smith Barney.
Outlook - MetraHealth
Upon formation of MetraHealth, the joint venture created by the
combination of the medical businesses of TIC and its affiliates and
Metropolitan Life Insurance Company (MetLife), the Company owned 50% of
Metrahealth's common stock. The Company's interest in MetraHealth will
be accounted for on the equity method. See Note 3 of Notes to
Consolidated Financial Statements.
MetraHealth will provide group health insurance, health maintenance
organizations, managed care and ancillary services throughout the
United States, in Puerto Rico and in the U.S. Virgin Islands. The
range of services provided by these products includes programs to
maintain health and wellness, as well as to promote patient education
and to manage health care through networks of providers of
medical/surgical, mental health and pharmaceutical services.
MetraHealth network products rely on contractual arrangements between
it and providers of health care to deliver services to covered
individuals at negotiated reimbursement levels as well as to
participate in utilization and quality management programs.
As of December 31, 1994, the businesses acquired by MetraHealth
included health maintenance organizations in 29 network areas, with
approximately 400,000 members; point-of-service operations in 72
network areas, with approximately 1.7 million members; and preferred
provider organizations in 90 network areas, with approximately 2.8
million members. Covered lives using the managed care networks and
covered by indemnity products, in the aggregate at December 31, 1994,
were approximately 11.3 million. MetraHealth expects some decline in
covered lives during 1995.
In March 1995, MetraHealth acquired HealthSpring, Inc. for common stock
of Metrahealth. HealthSpring builds and manages primary care physician
practices and serves approximately 32,000 patients through seven sites
in Pennsylvania, Ohio and Illinois. This acquisition resulted in a
reduction in the participation of the Company and MetLife in the
MetraHealth venture to 48.25% each.
10
<PAGE>
Outlook - Property & Casualty
A variety of factors continue to affect the property-casualty market
including inflation in the cost of medical care and litigation and
losses from involuntary markets.
In most lines, pricing did not improve during the past year. For
Agency, the duration of the current downturn in the underwriting cycle
continues to pressure the pricing of guaranteed cost products. In the
small account market, which primarily buys guaranteed cost products,
price increases have not exceeded loss cost inflation for several
years. The focus is to retain existing profitable business and obtain
new accounts where the Company can maintain its selective underwriting
policy. The Company continues to adhere to strict guidelines to
maintain high quality underwriting, which could affect future premium
levels. National business is less affected by pricing; however, the
pricing of large account business continues to be very competitive.
Customer retention levels remained high in 1994 as a result of
Travelers Indemnity's continued delivery of quality service, primarily
claims management focused on loss cost reduction.
In Personal Lines, increasing loss costs in 1994 resulted in pressure
on current underwriting margins. Personal Lines management strategy
includes underwriting more state-specific business, a reduction of
exposure to catastrophe losses and control of operating expenses to
improve competitiveness and profitability.
In an effort to reduce its exposure to catastrophic hurricane losses,
Travelers Insurance has stopped writing new homeowners policies in
coastal areas of New York and Connecticut, and in certain counties in
South Florida, reduced agent commissions on homeowners insurance in
certain markets, and purchased higher amounts of catastrophe
reinsurance.
Environmental Claims
As a result of various state and federal regulatory efforts aimed at
environmental remediation (particularly "Superfund"), the insurance
industry has been, and continues to be, involved in extensive
litigation involving policy coverage and liability issues. The
possible reauthorization of Superfund in 1995 may have some effect on
the resolution of these issues, but it is not possible at the present
time to determine what the potential impact, if any, will be. In
addition to the regulatory pressures, certain court decisions have
expanded insurance coverage beyond the original intent of the insurer
and insured, frequently involving policies that were issued prior to
the mid-1970s. The results of court decisions affecting the industry's
coverage positions continue to be inconsistent. Accordingly, the
ultimate responsibility and liability for environmental remediation
costs remain uncertain.
Travelers Insurance is part of the industry segment affected by these
issues and continues to receive claims alleging liability exposures
arising out of insureds' alleged disposition of toxic substances. The
review of environmental claims includes an assessment of the probable
liability, available coverage, judicial interpretations and historic
value of similar claims. In addition, the unique facts presented in
each claim are evaluated individually and collectively. Due
consideration is given to the many variables presented in each claim,
such as: the nature of the alleged activities of the insured at each
site; the allegations of environmental damage at each site; the number
of sites; the total number of potentially responsible parties at each
site; the nature of environmental harm and the corresponding remedy at
a site; the nature of government enforcement activities at each site;
the ownership and general use of each site; the willingness and ability
of other potentially responsible parties to contribute to the cost of
the required remediation at each site; the overall nature of the
insurance relationship between Travelers Insurance and the insured; the
identification of other insurers; the potential coverage available, if
any; the number of years of coverage, if any; the obligation to provide
a defense to insureds, if any, and the applicable law in each
jurisdiction. Analysis of these and other factors on a case-by-case
basis results in the ultimate reserve assessment.
The following table displays activity for environmental losses and loss
expenses and reserves for 1994. Approximately 14% of the net
environmental loss reserve (i.e. approximately $65 million) is case
reserve for resolved claims. Travelers Insurance does not post
individual case reserves for environmental claims in which there is a
coverage dispute until the dispute is resolved. Until then, the
estimated amounts for disputed coverage claims are carried in a bulk
reserve, together with unreported environmental losses.
11
<PAGE>
Environmental Losses
--------------------
(millions) 1994
----
Beginning reserves:
Direct $504*
Ceded (13)
----
Net 491
Incurred losses and loss expenses:
Direct 54
Ceded (5)
Losses paid:
Direct 76
Ceded (7)
----
Ending reserves:
Direct 482
Ceded (11)
----
Net $ 471
====
* Includes $155 relating to the purchase accounting allocation for the
acquisition of old Travelers. Amounts prior to 1994 relate to Gulf
only and are not material.
The industry does not have a standard method of calculating claim
activity for environmental losses. Generally, for environmental
claims, Travelers Insurance establishes a claim file for each insured
on a per site, per claimant basis, if there is more than one claimant,
e.g. a federal and a state agency. This method will result in two
claims being set up for a policyholder at that one site. Travelers
Insurance adheres to its method of calculating claim activity on all
environmental-related claims, whether such claims are tendered on
primary, excess or umbrella policies.
As of December 31, 1994, Travelers Insurance had approximately 8,200
pending environmental-related claims and had resolved over 17,200 such
claims since 1986. Approximately 70% of the pending claims in
inventory represent Federal or state EPA-type claims tendered by
approximately 725 insureds. The balance represents bodily injury
claims alleging injury due to the discharge of insureds' waste or
pollutants.
To date, Travelers Insurance generally has been successful in its
coverage litigation and continues to reduce its potential exposure
through favorable settlements with certain insureds. These settlement
agreements with certain insureds are based on the variables presented
in each piece of coverage litigation. Generally the settlement dollars
paid in disputed coverage claims are a percentage of the total coverage
sought by such insureds. In addition, with respect to many of the
environmental claims there is a "buy-back" of future environmental
liability risks by Travelers Insurance, together with appropriate
indemnities and hold harmless provisions to protect Travelers
Insurance.
Asbestos Claims
In the area of asbestos, the industry has suffered from judicial
interpretations that have attempted to maximize insurance availability
from both a coverage and liability standpoint far beyond the intent of
the contracting parties. These policies generally were issued prior to
the 1980s. Originally the cases involved mainly plant workers and
traditional asbestos manufacturers and distributors. However, in the
mid-1980s, a new group of plaintiffs, whose exposure to asbestos was
less direct and whose injuries were often speculative, began to file
lawsuits in increasing numbers against the traditional defendants as
well as peripheral defendants who had produced products that may have
contained small amounts of some form of encapsulated asbestos. These
claims continue to arise and on an individual basis generally involve
smaller companies with smaller limits of potential coverage.
12
<PAGE>
Also, there has emerged a group of non-product claims by plaintiffs,
mostly independent labor union workers, against companies, alleging
exposure to asbestos while working at these companies' premises. In
addition, various insurers, including Travelers Insurance, remain
defendants in a widely publicized action brought in Philadelphia
regarding potential consolidation and resolution of future asbestos
bodily injury claims. The cumulative effect of these judicial actions
on Travelers Insurance and its insureds currently is uncertain.
Also, various classes of asbestos defendants, e.g. major product
manufacturers, peripheral and regional product defendants as well as
premises owners, are tendering asbestos-related claims to the industry.
Since each insured presents different liability and coverage issues,
Travelers Insurance evaluates those issues on an insured-by-insured
basis.
Travelers Insurance's evaluations have not resulted in any meaningful
average asbestos defense or indemnity payment. The varying defense and
indemnity payments made by Travelers Insurance on behalf of its
insureds have also precluded the Company from deriving any meaningful
data by which it can predict whether its defense and indemnity payments
for asbestos claims (on average or in the aggregate) will remain the
same or change in the future.
The following table displays activity for asbestos losses and loss
expenses and reserves for 1994. Approximately 85% of the net asbestos
reserves at December 31, 1994 represented incurred but not reported
losses.
Asbestos Losses
---------------
(millions) 1994
----
Beginning reserves:
Direct $775
Ceded (381)*
-----
Net 394
Incurred losses and loss expenses:
Direct 67
Ceded (16)
Losses paid:
Direct 140
Ceded (78)
----
Ending reserves:
Direct 702
Ceded (319)
-----
Net $383
====
* After reflecting a reduction of $70 relating to the purchase
accounting allocation for the acquisition of old Travelers. Amounts
prior to 1994 relate to Gulf only and are not material .
The largest reinsurer of Travelers Insurance asbestos risks is Lloyd's
of London (Lloyds). Lloyds is currently undergoing restructuring to
seek to obtain additional capital and to segregate claims for years
before 1986. The ultimate effect of this restructuring on reinsurance
recoverable from Lloyds is not yet known. The Company does not believe
that any uncollectible amounts of reinsurance recoverables would be
material to its results of operations, financial condition or
liquidity.
In relation to these asbestos and environmental-related claims,
Travelers Insurance carries on a continuing review of its overall
position, its reserving techniques and reinsurance recoverable. In
each of these areas of exposure, Travelers Insurance has endeavored to
litigate individual cases and settle claims on favorable terms. Given
the
13
<PAGE>
vagaries of court coverage decisions, plaintiffs' expanded theories of
liability, the risks inherent in major litigation and other
uncertainties, it is not presently possible to quantify the ultimate
exposure or range of exposure represented by these claims to the
Company's financial condition, results of operations or liquidity. The
Company believes that it is reasonably possible that the outcome of the
uncertainties regarding environmental and asbestos claims could result
in a liability exceeding the reserves by an amount that would be
material to operating results in a future period. However, it is not
likely these claims will have a material adverse affect on the
Company's financial condition or liquidity.
Outlook - Industry
Changes in the general interest rate environment affect the return
received by the insurance subsidiaries on newly invested and reinvested
funds. While a rising interest rate environment enhances the returns
available, it reduces the market value of existing fixed maturity
investments and the availability of gains on disposition.
As required by various state laws and regulations, the Company's
insurance subsidiaries are required to participate in state-
administered guarantee associations established for the benefit of the
policyholders of insolvent insurance companies. Management believes
that such payments will not have a material impact on the Company's
results of operations, financial condition or liquidity.
Certain social, economic and political issues have led to an increased
number of legislative and regulatory proposals aimed at addressing the
cost and availability of certain types of insurance. While most of
these provisions have failed to become law, these initiatives may
continue as legislators and regulators try to respond to public
availability and affordability concerns and the resulting laws, if any,
could adversely affect the Company's ability to write business with
appropriate returns.
The National Association of Insurance Commissioners (NAIC) adopted
risk-based capital (RBC) requirements for life insurance companies in
1992, effective with reporting for 1993, and for property-casualty
companies in December 1993, effective with reporting for 1994. The RBC
requirements are to be used as early warning tools by the NAIC and
states to identify companies that merit further regulatory action. The
formulas have not been designed to differentiate among adequately
capitalized companies which operate with levels of capital higher than
RBC requirements. Therefore, it is inappropriate and ineffective to
use the formulas to rate or to rank such companies. At December 31,
1994 and 1993, all of the Company's life and property-casualty
companies had adjusted capital in excess of amounts requiring any
regulatory action.
Asset Quality - The investment portfolio of the insurance services
segment which includes both Life and Property & Casualty totaled
approximately $38.5 billion, representing 63% of total insurance
services' assets of approximately $61 billion. Because the primary
purpose of the investment portfolio is to fund future policyholder
benefits and claims payments, management employs a conservative
investment philosophy. The investment portfolio supports both the life
and property-casualty insurance operations. The insurance segment's
fixed maturity portfolio totaled $27 billion, comprised of $21 billion
of publicly traded fixed maturities and $6 billion of private fixed
maturities. The weighted average quality ratings of the segment's
publicly traded fixed maturity portfolio and private fixed maturity
portfolio at December 31, 1994 were Aa3 and Baa1, respectively.
Included in the fixed maturity portfolio was approximately $1.4 billion
of below investment grade securities. Investments in venture capital
investments, highly leveraged transactions and specialized lendings
were not material in the aggregate.
The Insurance Services segment makes significant investments in
collateralized mortgage obligations (CMOs). Such CMOs typically have
high credit quality, offer good liquidity, and provide a significant
advantage in yield and total return compared to treasury securities.
The investment strategy of the Insurance Services segment is to
purchase CMO tranches that are most protected against prepayment risk,
typically planned amortization class (PAC) tranches. Prepayment
protected tranches are preferred because they provide stable cash flows
in a variety of scenarios. The segment does invest in other types of
CMO tranches if a careful assessment indicates a favorable risk/return
tradeoff; however, it does not purchase residual interests in CMOs.
14
<PAGE>
At December 31, 1994, the segment held CMOs with a market value of $2.9
billion. Approximately 89% of CMO holdings are fully collateralized by
GNMA, FNMA or FHLMC securities, and the balance are fully
collateralized by portfolios of individual mortgage loans. In
addition, the segment held $1.9 billion of GNMA, FNMA or FHLMC
mortgage-backed securities at December 31, 1994. Virtually all of
these securities are rated AAA.
The segment also held $1.0 billion of securities that are backed
primarily by credit card or car loan receivables at December 31, 1994.
At December 31, 1994, real estate and mortgage loan investments totaled
$5.8 billion. Most of these investments are included in the investment
portfolio of The Travelers Insurance Group. The Company is continuing
its strategy to dispose of these real estate assets and some of the
mortgage loans and to reinvest the proceeds to obtain current market
yields.
At December 31, mortgage loan and real estate portfolios consisted of
the following:
(millions) 1994 1993
---- ----
Current mortgage loans $4,905 $6,096
Underperforming mortgage loans 511 1,269
----- -----
Total mortgage loans 5,416 7,365
----- -----
Real estate held for sale 418 1,049
----- -----
Total mortgage loans and real estate $5,834 $8,414
===== =====
Included in underperforming mortgage loans above are $270 million of
mortgages restructured at below market terms, of which $265 million are
current under the new terms. The new terms typically defer a portion
of contract interest payments to varying future periods. The accrual
of interest is suspended on all restructured loans, and interest income
is reported only as payment is received. Of the total real estate held
for sale $383 million is under- performing.
For further information relating to investments, see Note 5 of Notes to
Consolidated Financial Statements.
Corporate and Other
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1994 1993 1992
--------------------------------------------------------------------------
Net Net Net
Income Income Income
(millions) Revenues (Expense) Revenues (Expense) Revenues (Expense)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net expenses(1) $(201) $(65) $(62)
Equity in income of old
Travelers in 1993 and
Fingerhut in 1992 - 152 26
Net gain on sale of stock of
subsidiaries and affiliates 39 8 116
-------------------------------------------------------------------------------------------------------------
Total Corporate and Other $(12) $(162) $180 $95 $324 $ 80
=============================================================================================================
</TABLE>
(1) Includes $3 and $2 of reported investment portfolio gains in 1993
and 1992, respectively.
15
<PAGE>
Corporate and Other consists of corporate staff and treasury
operations, certain corporate income and expenses that have not been
allocated to the operating subsidiaries and certain intersegment
eliminations.
The increase in net expenses in 1994 is primarily attributable to the
assumption of old Travelers corporate debt and certain corporate
expenses, the full year impact of financing the Shearson Acquisition
and a rise in commercial paper borrowing costs of approximately 117
basis points.
The increase in net expenses in 1993 resulted from lower income from
miscellaneous investments and interest expense on borrowings to finance
the acquisition of the Shearson Businesses, offset by lower interest
rates.
The equity in income of old Travelers in 1993 includes $13 million from
the Company's share of its realized portfolio gains and a tax benefit
of $11 million for the cumulative effect of a tax rate increase through
December 31, 1992.
Liquidity and Capital Resources
The Travelers Inc. (the Parent) services its obligations primarily with
dividends and other advances that it receives from subsidiaries. The
subsidiaries' dividend paying ability is limited by certain covenant
restrictions in credit agreements and/or by regulatory requirements.
The Parent believes it will have sufficient funds to meet current and
future commitments. Each of the Company's major operating subsidiaries
finances its operations on a stand-alone basis consistent with its
capitalization and ratings.
The Parent
The Parent issues commercial paper directly to investors and maintains
unused credit availability under committed revolving credit agreements
at least equal to the amount of commercial paper outstanding. During
1994 the Parent, CCC and TIC entered into an agreement with a syndicate
of banks to provide $1.5 billion of revolving credit, to be allocated
to any of the Parent, CCC or TIC. The participation of TIC in this
agreement is limited to $300 million. The revolving credit facility
consists of a 364-day revolving credit facility in the amount of $300
million and a 5-year revolving credit facility in the amount of $1.2
billion. At December 31, 1994, $650 million was allocated to CCC and
$200 million to TIC. Under this facility the Company is required to
maintain a certain level of consolidated stockholders' equity (as
defined in the agreement). At December 31, 1994, the Company exceeded
this requirement by approximately $2.7 billion.
As of December 31, 1994, the Parent had unused credit availability of
$650 million consisting of $520 million under the 5-year revolving
credit facility and $130 million under the 364-day revolving credit
facility. The Parent may borrow under its revolving credit facilities
at various interest rate options and compensates the banks for the
facilities through commitment fees.
As of March 3, 1995, the Parent had $800 million available for debt
offerings under its shelf registration statements.
Commercial Credit Company (CCC)
CCC also issues commercial paper directly to investors and maintains
unused credit availability under committed revolving credit agreements
at least equal to the amount of commercial paper outstanding. As of
December 31, 1994, CCC had unused credit availability of $3.01 billion
consisting of $2.280 billion under 5-year revolving credit facilities
and $730 million under 364-day revolving credit facilities. CCC may
borrow under its revolving credit facilities at various interest rate
options and compensates the banks for the facilities through commitment
fees.
16
<PAGE>
During 1994 and through March 3, 1995, CCC completed the following debt
offerings leaving $950 million available for debt offerings under its
shelf registration statement:
- 7 7/8% Notes due July 15, 2004 $200 million
- 8 1/4% Notes due November 1, 2001 $300 million
- 7 7/8% Notes due February 1, 2025 $200 million
- 7 3/4% Notes due March 1, 2005 $200 million
CCC is limited by covenants in its revolving credit agreements as to
the amount of dividends and advances that may be made to the Parent or
its affiliated companies. At December 31, 1994, CCC would have been
able to remit $270 million to the Parent under its most restrictive
covenants or regulatory requirements.
Smith Barney Holdings Inc. (Smith Barney)
Smith Barney funds its day to day operations through the use of
commercial paper, collateralized and uncollateralized bank borrowings
(both committed and uncommitted), internally generated funds,
repurchase transactions, and securities lending arrangements. The
volume of Smith Barney's borrowings generally fluctuates in response to
changes in the amount of reverse repurchase transactions outstanding,
the level of securities inventories, customer balances and securities
borrowing transactions. In May of 1994, Smith Barney renegotiated its
three-year revolving credit agreement (the "Agreement") with a bank
syndicate. The amendment to the Agreement extended the term by one
year until May 1997 and increased the amount of the facility from $625
million to $1 billion. As of December 31, 1994, $400 million was
borrowed under the Agreement. In addition, in May 1994, Smith Barney
entered into a $750 million, 364-day revolving credit agreement with a
bank syndicate. As of December 31, 1994, there were no borrowings
outstanding under this facility. Smith Barney also has substantial
borrowing arrangements consisting of facilities that it has been
advised are available, but where no contractual lending obligation
exists.
Smith Barney, through its subsidiary Smith Barney Inc., issues
commercial paper directly to investors. As a policy, Smith Barney
maintains sufficient borrowing power of unencumbered securities to
cover unsecured borrowings and unsecured letters of credit. In
addition, Smith Barney monitors its leverage and capital ratios on a
daily basis.
During 1994 and through March 3, 1995 Smith Barney completed the
following debt offerings leaving $600 million available for debt
offerings under its shelf registration statement:
- 5 1/2% Notes due January 15, 1999 . . . $200 million
- 6% Notes due March 15, 1997 . . . . . . $200 million
- 7 7/8% Notes due October 1, 1999 . . . . $150 million
- 7.4% Notes due November 17, 1996
(Medium-Term Notes) . . . . . . . . . . $ 50 million
- 7.98% Notes due March 1, 2000 . . . . . $200 million
Smith Barney is limited by covenants in its revolving credit facility
as to the amount of dividends that may be paid to the Parent. At
December 31, 1994, Smith Barney would have been able to remit
approximately $500 million to the Parent under its most restrictive
covenants.
The Travelers Insurance Group
At December 31, 1994, The Travelers Insurance Group had $23.3 billion
of life and annuity product deposit funds and reserves. Of that total,
$11.6 billion are not subject to discretionary withdrawal based on
contract terms. The remaining $11.7 billion are for life and annuity
products that are subject to discretionary withdrawal by the
contractholder. Included in the amount subject to discretionary
withdrawal are $1.9 billion of liabilities that are surrenderable with
market value adjustments. An additional $5.7 billion of the life
insurance and individual annuity liabilities are subject to
discretionary withdrawals, with an average surrender charge of 5.5%.
Another $1.4 billion of liabilities are surrenderable at book value
over 5 to 10 years. In the payout phase, these funds are credited at
significantly reduced interest rates. The remaining $2.6 billion of
liabilities are surrenderable without charge. Approximately 30% 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
17
<PAGE>
policyholders. Insurance liabilities surrendered or withdrawn from The
Travelers Insurance Group are reduced by outstanding policy loans and
related accrued interest prior to payout.
Scheduled maturities of guaranteed investment contracts (GICs) in 1995,
1996, 1997, 1998 and 1999 are $1.4 billion, $1.0 billion, $279 million,
$256 million and $200 million, respectively. At December 31, 1994, the
interest rates credited on GICs had a weighted average rate of 5.96%.
The Travelers Insurance Company (TIC), a direct subsidiary of The
Travelers Insurance Group Inc., issues commercial paper to investors
and maintains unused committed, revolving credit facilities at least
equal to the amount of commercial paper outstanding. As of December
31, 1994, TIC has unused credit availability of $200 million consisting
of $160 million under the 5-year revolving credit facility and $40
million under the 364-day revolving credit facility.
Under Connecticut law the statutory capital and surplus of The
Travelers Insurance Group, which amounted to $4.2 billion at December
31, 1994, is not available in 1995 for dividends to its Parent without
prior approval of the Connecticut Insurance Department.
Deferred Income Taxes
The Company has a net deferred tax asset which relates to temporary
differences that are expected to reverse as net ordinary deductions,
except for a deferred tax asset of $723 million which relates to the
unrealized loss on fixed maturity investments. Management has the
intent and the ability not to realize the unrealized loss except to the
extent of offsetting capital gains. The Company will have to generate
approximately $4.6 billion of taxable income, before the reversal of
the temporary differences, primarily over the next 10 to 15 years, to
realize the remainder of the deferred tax asset, exclusive of the
unrealized loss on fixed maturity investments. Management expects to
realize the remainder of the deferred tax asset based upon its
expectation of future taxable income, after the reversal of these
deductible temporary differences, of at least $1 billion annually.
Accounting Standards Not Yet Adopted
FAS 114 and FAS 118
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures," describe how impaired
loans should be measured when determining the amount of a loan loss
accrual. These Statements also amend existing guidance on the
measurement of restructured loans in a troubled debt restructuring
involving a modification of terms. The adoption of these Statements
effective January 1, 1995 will not have a material effect on the
Company's results of operations or financial position.
18
<PAGE>
The Travelers Inc. and Subsidiaries
Consolidated Statement of Income
(In millions of dollars, except per share amounts)
Year Ended December 31, 1994 1993 1992
----------------------------------------------------------------------
Revenues
Insurance premiums $7,590 $1,480 $1,694
Commissions and fees 2,691 1,957 973
Interest and dividends 3,637 718 605
Finance related interest and
other charges 1,030 954 953
Principal transactions 900 549 298
Asset management fees 795 385 131
Equity in income of old Travelers - 164 -
Other income 1,822 590 471
----------------------------------------------------------------------
Total revenues 18,465 6,797 5,125
----------------------------------------------------------------------
Expenses
Policyholder benefits and claims 7,797 833 907
Non-insurance compensation and
benefits 3,241 2,057 1,069
Insurance underwriting,
acquisition and operating 2,572 506 674
Interest 1,284 707 674
Provision for credit losses 152 134 165
Other operating 1,524 1,050 636
----------------------------------------------------------------------
Total expenses 16,570 5,287 4,125
----------------------------------------------------------------------
Gain on sale of subsidiaries
and affiliates 254 13 188
----------------------------------------------------------------------
Income before income taxes,
minority interest and
cumulative effect of changes
in accounting principles 2,149 1,523 1,188
Provision for income taxes 823 550 432
----------------------------------------------------------------------
Income before minority
interest and cumulative
effect of changes in
accounting principles 1,326 973 756
Minority interest, net of
income taxes - (22) -
Cumulative effect of changes
in accounting principles,
net of income taxes - (35) (28)
----------------------------------------------------------------------
Net income $1,326 $ 916 $ 728
======================================================================
Net income per share of common
stock and common stock
equivalents:
Before cumulative effect of
changes in accounting principles $ 3.86 $ 3.88 $ 3.34
Cumulative effect of changes in
accounting principles - (0.14) (0.12)
----------------------------------------------------------------------
Net income per share of common
stock and common stock
equivalents $ 3.86 $ 3.74 $ 3.22
======================================================================
Weighted average number of
common shares outstanding
and common stock equivalents
(in millions) 322.0 237.8 222.8
======================================================================
See Notes to Consolidated Financial Statements.
20
<PAGE>
<TABLE>
<CAPTION>
The Travelers Inc. and Subsidiaries
Consolidated Statement of Financial Position
(In millions of dollars)
December 31, 1994 1993
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents
(including $816 and $914 segregated under federal and
other brokerage regulations) $ 1,227 $ 1,526
Investments:
Fixed maturities:
Available for sale, at market value in 1994 and amortized cost in 1993 27,192 28,109
Held to maturity, at amortized cost 96 177
Equity securities, at market value 510 555
Mortgage loans 5,416 7,365
Real estate held for sale 418 1,049
Policy loans 1,581 1,367
Short-term and other 3,907 3,577
--------------------------------------------------------------------------------------------------------------------
Total investments 39,120 42,199
--------------------------------------------------------------------------------------------------------------------
Securities borrowed or purchased under agreements to resell 25,655 13,353
Brokerage receivables 8,238 8,167
Trading securities owned, at market value 6,945 5,863
Net consumer finance receivables 6,746 6,216
Reinsurance recoverables 5,026 4,929
Value of insurance in force and deferred policy acquisition costs 2,163 1,996
Cost of acquired businesses in excess of net assets 2,045 2,162
Separate and variable accounts 5,162 4,665
Other receivables 4,018 4,624
Other assets 8,952 5,590
--------------------------------------------------------------------------------------------------------------------
Total assets $115,297 $101,290
====================================================================================================================
Liabilities
Investment banking and brokerage borrowings $ 4,374 $ 3,454
Short-term borrowings 2,480 2,535
Long-term debt 7,075 6,991
Securities loaned or sold under agreements to repurchase 21,620 10,144
Brokerage payables 7,807 7,012
Trading securities sold not yet purchased, at market value 4,345 3,835
Contractholder funds 16,392 17,980
Insurance policy and claims reserves 27,084 26,806
Separate and variable accounts 5,127 4,642
Accounts payable and other liabilities 10,215 8,455
--------------------------------------------------------------------------------------------------------------------
Total liabilities 106,519 91,854
--------------------------------------------------------------------------------------------------------------------
ESOP Preferred stock - Series C 235 235
Guaranteed ESOP obligation (97) (125)
--------------------------------------------------------------------------------------------------------------------
138 110
--------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million),
at aggregate liquidation value 800 800
Common stock ($.01 par value; authorized shares: 500 million
issued shares: 1994 - 368,195,609 and 1993 - 368,287,709) 4 4
Additional paid-in capital 6,655 6,566
Retained earnings 4,199 3,140
Treasury stock, at cost (1994 - 51,684,618 shares and 1993 - 41,155,405 shares) (1,553) (1,121)
Unrealized gain (loss) on investment securities and other, net (1,465) (63)
--------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,640 9,326
--------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $115,297 $101,290
====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
<TABLE>
<CAPTION>
The Travelers Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(In millions of dollars)
Amounts Shares (in thousands)
------------------------ -----------------------------
Year Ended December 31, 1994 1993 1992 1994 1993 1992
------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock at aggregate liquidation value
Balance, beginning of year $ 800 $ 300 $ - 11,200 1,200 -
Issuance of preferred stock 500 300 10,000 1,200
----------------------------------------------------------------------------------- -----------------------------
Balance, end of year 800 800 300 11,200 11,200 1,200
=================================================================================== =============================
Common Stock and Additional Paid-In Capital
Balance, beginning of year 6,570 2,150 2,128 368,287 253,524 253,524
Issuance of common stock 329 10,333
Travelers Merger:
Common stock issued to third party stockholders 3,265 85,911
Common stock issued to subsidiaries of the Company 595 18,519
Premium related to preferred stock, options and other 67
Conversion of debentures 17 11
Issuance of common stock warrants 25
Cost of issuance of preferred stock (10)
Issuance of shares pursuant to employee benefit plans 85 122 21
Other 4 (91)
----------------------------------------------------------------------------------- -----------------------------
Balance, end of year 6,659 6,570 2,150 368,196 368,287 253,524
----------------------------------------------------------------------------------- -----------------------------
Retained Earnings
Balance, beginning of year 3,140 2,363 1,720
Net income 1,326 916 728
Common dividends (181) (113) (78)
Preferred dividends (86) (26) (7)
------------------------------------------------------------------------------------
Balance, end of year 4,199 3,140 2,363
------------------------------------------------------------------------------------
Treasury Stock (at cost)
Balance, beginning of year (1,121) (540) (538) (41,155) (31,572) (36,278)
Conversion of debentures 81 65 4,104 4,356
Issuance of shares pursuant to employee benefit
plans, net of shares tendered for payment of option
exercise price and withholding taxes 111 (10) 54 5,318 6,175 6,583
Treasury stock acquired (543) (58) (122) (15,876) (1,478) (6,307)
Common stock issued to subsidiaries of the Company (595) (18,519)
Other 1 1 28 135 74
----------------------------------------------------------------------------------- -----------------------------
Balance, end of year (1,553) (1,121) (540) (51,685) (41,155) (31,572)
------------------------------------------------------------------------------------ ------------------------------
Unrealized Gain (Loss) on Investment Securities
and Other
Balance, beginning of year (63) (44) (30)
Net change in unrealized gains and losses on
investment securities (1,349) 22 7
Net issuance of restricted stock (190) (103) (64)
Restricted stock amortization 136 64 48
Translation adjustments, net 1 (2) (5)
------------------------------------------------------------------------------------
Balance, end of year (1,465) (63) (44)
------------------------------------------------------------------------------------
Total common stockholders' equity and common
shares outstanding $7,840 $8,526 $3,929 316,511 327,132 221,952
=================================================================================== =============================
Total stockholders' equity $8,640 $9,326 $4,229
===================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
The Travelers Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(In millions of dollars)
Year Ended December 31, 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Income before income taxes, minority interest and cumulative effect of
changes in accounting principles $2,149 $ 1,523 $1,188
Adjustments to reconcile income before income taxes, minority interest
and cumulative effect of changes in accounting principles to net cash
provided by (used in) operating activities:
Amortization of deferred policy acquisition costs and value of insurance in force 818 286 423
Additions to deferred policy acquisition costs (1,005) (369) (574)
Depreciation and amortization 349 125 97
Provision for credit losses 152 134 165
Undistributed equity earnings - (116) -
Changes in:
Trading securities, net (572) (1,082) (156)
Securities borrowed, loaned and repurchase agreements, net (826) (1,591) 62
Brokerage receivables net of brokerage payables 724 863 (252)
Insurance policy and claims reserves 278 251 29
Other, net (1,171) 522 (190)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 896 546 792
Income taxes paid (378) (403) (332)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 518 143 460
---------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Consumer loans originated or purchased (2,789) (2,673) (2,067)
Consumer loans repaid or sold 2,094 2,108 2,020
Purchases of fixed maturities and equity securities (9,231) (2,794) (2,014)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities 4,219 2,485 1,658
Mortgage loans 415 5 8
Real estate and real estate joint ventures 955 - -
Proceeds from maturities of investments:
Fixed maturities 3,576 231 312
Mortgage loans 1,372 6 3
Other investments, primarily short-term, net (598) (631) (18)
Payment for purchase of the Shearson Businesses (69) (1,296) -
Payment for net clearing assets transferred - (536) -
Cash acquired in connection with The Travelers Merger - 59 -
Business acquisitions - - (550)
Business divestments 679 120 571
Other, net (284) (274) (90)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 339 (3,190) (167)
---------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Issuance of preferred stock - series A - - 290
Dividends paid (267) (139) (85)
Issuance of common stock - 329 -
Treasury stock acquired (543) (58) (122)
Issuance of long-term debt 1,150 2,733 674
Payments and redemptions of long-term debt (1,033) (448) (972)
Net change in short-term borrowings (including investment banking and brokerage borrowings) 865 1,934 17
Contractholder fund deposits 2,205 - -
Contractholder fund withdrawals (3,529) - -
Other, net (4) (50) (138)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,156) 4,301 (336)
---------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (299) 1,254 (43)
Cash and cash equivalents at beginning of period 1,526 272 315
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,227 $ 1,526 $ 272
---------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $1,227 $ 674 $ 669
Value of assets exchanged for shares of old Travelers $ - $ - $ 173
=====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
The Travelers Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Business Acquisitions
---------------------
The Travelers Acquisition
In December 1992, Primerica Corporation (Primerica), the
predecessor to The Travelers Inc., acquired approximately 27% of
the common stock of The Travelers Corporation (old Travelers) (the
Acquisition). During 1993 this investment was accounted for on the
equity method.
The Travelers Merger
On December 31, 1993, Primerica acquired the approximately 73% of
old Travelers common stock it did not already own (the Merger).
Old Travelers was merged into Primerica, and concurrently,
Primerica changed its name to The Travelers Inc. which, together
with its subsidiaries, is hereinafter referred to as the Company.
The old Travelers businesses acquired are hereinafter referred to
as old Travelers or The Travelers Insurance Group. As
consideration for the Merger, the Company issued .80423 shares of
its common stock for each old Travelers common share then
outstanding. The total purchase price of $3.398 billion is
comprised of $3.265 billion, representing the fair value of the
approximately 86 million newly issued common shares, plus the
premium over book value related to the two issues of old Travelers
preference stock exchanged in the Merger (see Note 14) and certain
other acquisition costs.
The assets and liabilities of old Travelers are reflected in the
Consolidated Statement of Financial Position at December 31, 1993
on a fully consolidated basis at management's then best estimate of
their fair values. Evaluation and appraisal of assets and
liabilities, including investments, the value of insurance in
force, reinsurance recoverable, other insurance assets and
liabilities and related deferred income tax was completed during
1994. The excess of the purchase price over the estimated fair
value of net assets was $917 million and is being amortized over 40
years.
The Acquisition and the Merger are being accounted for as a step
acquisition. The step acquisition method of purchase accounting
requires that the old Travelers' assets and liabilities be recorded
at the fair values determined at each acquisition date (i.e., 27%
of values at December 31, 1992 as carried forward and 73% of values
at December 31, 1993). The merger has been accounted for as a
purchase, and accordingly, the results of operations for periods
prior to December 31, 1993 do not include those of old Travelers
other than for the equity in earnings relating to the 27%
previously owned.
The Shearson Acquisition
On July 31, 1993, the Company acquired the domestic retail
brokerage and asset management businesses (the Shearson Businesses)
of Shearson Lehman Brothers Holdings Inc. (LBI), a subsidiary of
American Express Company (American Express), for approximately $2.1
billion, representing $1.6 billion for the net assets acquired plus
approximately $500 million of cash required to be segregated for
customers under commodities regulations. The businesses acquired
were combined with the operations of Smith Barney, Harris Upham &
Co. Incorporated, and the combined firm has been named Smith
Barney Inc. which is a subsidiary of Smith Barney Holdings Inc.
(Smith Barney). The acquisition was accounted for under the
purchase method of accounting, and the consolidated financial
statements include the results of the Shearson Businesses from the
date of acquisition. Payment for the net assets consisted of
approximately $900 million in cash, $125 million in the form of
convertible preferred stock of the Company, $25 million in the form
of warrants to purchase common stock of the Company and the balance
in notes to LBI. In addition, Smith Barney has agreed to pay
American Express additional amounts that are contingent upon the
new unit's performance, consisting of up to $50 million per year
for three years based on Smith Barney's revenues and 10% of Smith
Barney's after tax profits in excess of $250 million per year over
a five year period. Additional consideration paid during 1994
amounted to $69 million and Smith Barney expects to pay
approximately $50 million in the first quarter of 1995. The
contingent consideration will be accounted for prospectively, as
24
<PAGE>
Notes to Consolidated Financial Statements (continued)
additional purchase price, which will result in amortization over
periods of up to 20 years. Evaluation and appraisal of assets and
liabilities, including the value of identifiable intangible assets
and liabilities assumed, was completed during 1994. As a result of
the acquisition of the Shearson Businesses, the Company recorded a
provision in the third quarter of 1993 of $65 million after-tax
relating primarily to the elimination of duplicate facilities,
severance and other personnel-related costs.
In conjunction with the acquisition of the Shearson Businesses,
Smith Barney entered into a securities clearing agreement with LBI
(the Clearing Agreement) effective August 2, 1993, pursuant to
which Smith Barney has agreed to carry and clear, on a fully
disclosed basis, all customer accounts introduced by LBI and, on a
correspondent basis, LBI's proprietary accounts. LBI transferred
at cost approximately $8.6 billion of assets and $7.787 billion of
liabilities to Smith Barney in connection with the Clearing
Agreement. Payment for these net assets of $813 million consisted
of approximately $536 million in cash and the remainder in notes to
LBI. The Clearing Agreement is terminating in early 1995, and
assets and liabilities related to the Clearing Agreement are being
transferred to LBI in exchange for cash equal to the net assets.
At December 31, 1994, $11.855 billion of assets and $10.428 billion
of liabilities related to the Clearing Agreement are included in
the Consolidated Statement of Financial Position.
Supplemental Information to the Consolidated Statement of Cash
Flows Relating to Acquisitions
Noncash investing and financing transactions relating to the above
transactions that are not reflected in the Consolidated Statement
of Cash Flows for the year ended December 31, 1993 are listed
below.
(millions) Travelers Shearson
--------- ---------
Fair value of assets acquired, $40,922 $4,811
excluding cash acquired
Liabilities assumed (37,642) (2,779)
Issuance of notes - (586)
Equity securities issued (3,339) (150)
------- ------
Cash payment (acquired) $ (59) $1,296
======= ======
2. Summary of Significant Accounting Policies
------------------------------------------
Changes in Accounting Principles
FAS 115. Effective January 1, 1994, the Company adopted Statement
of Financial Accounting Standards (FAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which addresses
accounting and reporting for investments in equity securities that
have a readily determinable fair value and for all debt securities.
Debt securities that the Company has the positive intent and
ability to hold to maturity have been classified as "held to
maturity" and have been reported at amortized cost. Investment
securities that are not classified as "held to maturity" have been
classified as "available for sale" and are reported at fair value,
with unrealized gains and losses, net of income taxes, charged or
credited directly to stockholders' equity. Previously, securities
classified as available for sale were carried at the lower of
aggregate cost or market value. Initial adoption of this standard
resulted in a net increase of $214 million (net of taxes) to net
unrealized gains on investment securities which is included in
stockholders' equity.
FAS 106. In 1993, the Company adopted FAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" (FAS
106). As required, the Company changed its method of accounting
for retiree benefit plans effective January 1, 1993, to accrue for
the Company's share of the costs of postretirement benefits over
the service period rendered by employees. Previously these
benefits were charged to expense when paid. The Company elected to
recognize immediately the liability for
25
<PAGE>
Notes to Consolidated Financial Statements (continued)
postretirement benefits as the cumulative effect of a change in
accounting principle. This resulted in a noncash after-tax charge
to net income of $17 million ($25 million pre-tax) or $0.07 per
share. See Note 17 for additional information relating to FAS 106.
FAS 112. In 1993, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits" (FAS 112), with retroactive
application to January 1, 1993. FAS 112 establishes accounting
standards for employers who provide benefits to former or inactive
employees after employment, but before retirement. For the Company
these benefits are principally disability-related benefits and
severance. The statement requires employers to recognize the cost
of the obligation to provide these benefits on an accrual basis,
and employers must implement FAS 112 by recognizing a cumulative
effect of a change in accounting principle. This resulted in a
noncash after-tax charge to net income of $18 million ($29 million
pre-tax) or $0.07 per share.
FAS 113. In the first quarter of 1993, the Company adopted FAS No.
113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts". FAS 113 requires the reporting of
reinsurance receivables and prepaid reinsurance premiums as assets
and precludes the immediate recognition of gains for all
reinsurance contracts unless the liability to the policyholder has
been extinguished. Adoption of FAS 113 did not have an impact on
the Company's earnings; however, assets and liabilities increased
by like amounts. See Note 12 for additional reinsurance
disclosures.
Interpretations 39 and 41. Effective January 1, 1994, the Company
adopted Financial Accounting Standards Board Interpretation No. 39,
"Offsetting of Amounts Related to Certain Contracts"
(Interpretation 39). The general principle of Interpretation 39
states that amounts due from and due to another party may not be
offset in the balance sheet unless a right of setoff exists and the
parties intend to exercise the right of setoff. In December 1994,
the Financial Accounting Standards Board issued Interpretation No.
41 "Offsetting of Amounts Related to Certain Repurchase and Reverse
Repurchase Agreements" (Interpretation 41). This Interpretation
modifies Interpretation 39 to permit offsetting in the statement of
financial position of payables and receivables that represent
repurchase agreements and reverse repurchase agreements that meet
certain conditions. Implementation of Interpretations 39 and 41
did not have a material impact on the Company's financial position.
Accounting Policies
Principles of Consolidation. The consolidated financial statements
include the accounts of The Travelers Inc. and its subsidiaries.
Results of operations prior to 1994 exclude the amounts of The
Travelers Insurance Group except that results for 1993 include the
Company's equity in earnings related to the 27% purchase.
Unconsolidated entities in which the Company has at least a 20%
interest are accounted for on the equity method. The minority
interest in 1993 represents the old Travelers' interest in Gulf
Insurance Company (Gulf). Significant intercompany transactions
and balances have been eliminated.
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
Cash and cash equivalents include cash on hand, cash and securities
segregated under federal and brokerage regulations and short-term
highly liquid investments with maturities of three months or less
when purchased, other than those held for sale in the ordinary
course of business. These short-term investments are carried at
cost plus accrued interest, which approximates market value.
Investments are owned principally by the insurance subsidiaries.
Fixed maturities include bonds, notes and redeemable preferred
stocks. Equity securities include common and non-redeemable
preferred stocks. Fixed maturities classified as "held to
maturity" represent securities that the Company has both the
ability and the
26
<PAGE>
Notes to Consolidated Financial Statements (continued)
intent to hold until maturity and are carried at amortized cost.
Fixed maturity securities classified as "available for sale" and
equity securities are carried at market values that are based
primarily on quoted market prices. The difference between
amortized cost and market values of such securities net of
applicable income taxes is reflected as a component of
stockholders' equity. Real estate held for sale is carried at the
lower of cost or fair value. Fair values are established by
appraisers, both internal and external, using discounted cash flow
analyses and other acceptable techniques. Mortgage loans are
carried at amortized cost. Policy loans are carried at unpaid
balances which do not exceed the net cash surrender value of the
related insurance policies. Short-term investments are carried at
cost, which approximates market. Realized gains and losses on
sales of investments and unrealized losses considered to be other
than temporary, determined on a specific identification basis, are
included in other income.
Accrual of income is suspended on fixed maturities or mortgage
loans that are in default, or on which it is likely that future
interest payments will not be made as scheduled. Interest income
on investments in default is recognized only as payment is
received.
The cost of acquired businesses in excess of net assets is being
amortized on a straight-line basis principally over a 40-year
period.
Income taxes have been provided for in accordance with the
provisions of FAS No. 109, "Accounting for Income Taxes" (FAS 109),
which was adopted effective January 1, 1992. The Company and its
wholly owned domestic non-life insurance subsidiaries file a
consolidated federal income tax return. All but one of the life
insurance subsidiaries are included in their own consolidated
federal income tax return. Deferred income taxes result from
temporary differences between the tax basis of assets and
liabilities and their recorded amounts for financial reporting
purposes.
Income taxes are not provided for on the Company's life insurance
subsidiaries' retained earnings designated as "policyholders'
surplus" because such taxes will become payable only to the extent
such retained earnings are distributed as a dividend or exceed
limits prescribed by federal law. Distributions are not
contemplated from this portion of the life insurance companies'
retained earnings, which aggregated $971 million (subject to a tax
effect of $340 million) at December 31, 1994.
Earnings per common share is computed after recognition of
preferred stock dividend requirements and is based on the weighted
average number of shares outstanding during the period after
consideration of the dilutive effect of common stock warrants and
stock options and the incremental shares assumed issued under the
Capital Accumulation Plan and other restricted stock plans. Fully
diluted earnings per common share, assuming conversion of all
outstanding convertible notes and debentures, the maximum dilutive
effect of common stock equivalents and conversion of the 5.5%
convertible preferred stock, has not been presented because the
effects are not material. The fully diluted earnings per common
share computation for the years ended December 31, 1994, 1993 and
1992 would entail adding the number of shares issuable on
conversion of the other debentures (zero and 2 million and 4
million shares, respectively), the additional common stock
equivalents (2 million, zero and 1 million shares respectively) and
the assumed conversion of the 5.5% convertible preferred stock (3
million, 2 million, and zero shares, respectively) to the number of
shares included in the earnings per common share calculation
(resulting in a total of 327 million, and 242 million and 228
million shares, respectively) and eliminating the after-tax
interest expense related to the conversion of other debentures
(zero, $3 million and $7 million, respectively) and the elimination
of the 5.5% convertible preferred stock dividends ($7 million, $3
million, and zero, respectively).
Financial Instruments - Disclosures. Included in the Notes to
Consolidated Financial Statements are various disclosures relating
to financial instruments having off-balance sheet risk. These
disclosures indicate the magnitude of the Company's involvement in
such activities, and reflect the instruments at their face,
contract or notional amounts. The Notes to Consolidated Financial
Statements also include various disclosures
27
<PAGE>
Notes to Consolidated Financial Statements (continued)
relating to the methods and assumptions used to estimate fair value
of each material type of financial instrument. The carrying value
of short-term financial instruments approximates fair value because
of the relatively short period of time between the origination of
the instruments and their expected realization. The carrying value
of receivables and payables arising in the ordinary course of
business approximates fair market value. The fair value
assumptions were based upon subjective estimates of market
conditions and perceived risks of the financial instruments at a
certain point in time. Disclosed fair values for financial
instruments do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Potential taxes and
other expenses that would be incurred in an actual sale or
settlement are not reflected in amounts disclosed.
Derivative Financial Instruments. Information concerning
derivative financial instruments and the accounting policies
related thereto is included in Note 19 of Notes to Consolidated
Financial Statements.
Accounting Standards Not Yet Adopted
FAS 114 and FAS 118. FAS No. 114, "Accounting by Creditors for
Impairment of a Loan," and FAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures,"
describe how impaired loans should be measured when determining the
amount of a loan loss accrual. These Statements also amend
existing guidance on the measurement of restructured loans in a
troubled debt restructuring involving a modification of terms. The
adoption of these statements, effective January 1, 1995, will not
have a material effect on results of operations or financial
position.
INVESTMENT SERVICES
Commissions related to security transactions, underwriting revenues
and related expenses are recognized in income on the trade date.
Management and investment advisory fees are recorded as income for
the period in which the services are performed.
Securities borrowed and securities loaned are recorded at the
amount of cash collateral advanced or received. With respect to
securities loaned, the Company receives collateral in the form of
cash or financial instruments in an amount in excess of the market
value of securities loaned. The Company monitors the market value
of securities borrowed and loaned on a daily basis with additional
collateral obtained as necessary.
Repurchase and resale agreements are treated as collateralized
financing transactions and are carried at the amounts at which the
securities will be subsequently reacquired or resold, including
accrued interest, as specified in the respective agreements. The
Company's policy is to take possession of securities purchased
under agreements to resell. The market value of securities to be
repurchased and resold is monitored, and additional collateral is
requested where appropriate to protect against credit exposure.
Trading securities are carried at market value. Included in income
are realized and unrealized gains and losses on trading securities
and proprietary futures, forward and option contracts.
Other assets include the value of management advisory contracts,
which is being amortized on the straight-line method over periods
ranging from twelve to thirty years.
28
<PAGE>
Notes to Consolidated Financial Statements (continued)
INSURANCE SERVICES
Premiums from long-duration contracts, principally life insurance,
are earned when due. Premiums from short-duration insurance
contracts are earned over the related contract period. Short-
duration contracts include primarily property and casualty, credit
life and accident and health policies, including estimated ultimate
premiums on retrospectively rated and reporting-form policies.
Benefits and expenses are associated with premiums by means of the
provision for future policy benefits, unearned premiums and the
deferral and amortization of policy acquisition costs.
Value of insurance in force represents the actuarially determined
present value of anticipated profits to be realized from life and
accident and health business on insurance in force at the date of
the Company's acquisition of its insurance subsidiaries using the
same assumptions that were used for computing related liabilities
where appropriate. The value of insurance in force acquired prior
to December 31, 1993 is amortized over the premium paying periods
in relation to anticipated premiums. The value of insurance in
force relating to The Travelers Insurance Group merger was the
actuarially determined present value of the projected future
profits discounted at interest rates ranging from 14% to 18% for
the business acquired. The value of the business in force is
amortized over the contract period using current interest crediting
rates to accrete interest and using amortization methods based on
the specified products. Traditional life insurance is amortized
over the period of anticipated premiums; universal life in relation
to estimated gross profits; and annuity contracts employing a
level yield method. The value of insurance in force is reviewed
periodically for recoverability to determine if any adjustment is
required.
Deferred policy acquisition costs for the life business represent
the costs of acquiring new business, principally commissions,
certain underwriting and agency expenses and the cost of issuing
policies. Deferred policy acquisition costs for traditional life
business are amortized over the premium-paying periods of the
related policies, in proportion to the ratio of the annual premium
revenue to the total anticipated premium revenue. Deferred policy
acquisition costs of other business lines are generally amortized
over the life of the insurance contract or at a constant rate based
upon the present value of estimated gross profits expected to be
realized. For certain property and casualty lines, acquisition
costs, such as commissions, premium taxes and certain other
underwriting and agency expenses, have been deferred to the extent
recoverable from future earned premiums and are amortized ratably
over the terms of the related policies. Deferred policy
acquisition costs are reviewed to determine if they are recoverable
from future income, including investment income, and, if not
recoverable, are charged to expense.
Separate and variable accounts primarily represent funds for which
investment income and investment gains and losses accrue directly
to, and investment risk is borne by, the contractholders. Each
account has specific investment objectives. The assets of each
account are legally segregated and are not subject to claims that
arise out of any other business of the Company. The assets of
these accounts are carried at market value. Certain other separate
accounts provide guaranteed levels of return or benefits, and the
assets of these accounts are carried at amortized cost. At
December 31, 1993, the balances of all separate accounts are
recorded at the values assigned at the acquisition dates. 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.
Other receivables include receivables related to retrospectively
rated policies on property-casualty business, net of allowance for
estimated uncollectible amounts.
Insurance policy and claims reserves represent liabilities for
future insurance policy benefits. Insurance reserves for
traditional life insurance, annuities, and accident and health
policies have been computed based upon mortality, morbidity,
persistency and interest assumptions applicable to these coverages,
which range
29
<PAGE>
Notes to Consolidated Financial Statements (continued)
from 2.5% to 12%, including adverse deviation. These assumptions
consider company experience and industry standards and may be
revised if it is determined that future experience will differ
substantially from that previously assumed. Property-casualty
reserves include (1) unearned premiums representing the unexpired
portion of policy premiums, and (2) estimated provisions for both
reported and unreported claims incurred and related expenses. The
reserves are regularly adjusted based on experience. Included in
the insurance policy and claims reserves in the Consolidated
Statement of Financial Position at December 31, 1994 and 1993 are
$793 million and $803 million, respectively, of property-casualty
loss reserves related to workers' compensation that have been
discounted using an interest rate of 5%.
In determining benefit and loss reserves, the Company carries on a
continuing review of its overall position, its reserving techniques
and reinsurance. Reserves for property-casualty insurance losses
represent the estimated ultimate unpaid cost of all incurred
property and casualty claims. Since the reserves are based on
estimates, the ultimate liability may be more or less than such
reserves. The effects of changes in such estimated reserves are
included in the results of operations in the period in which the
estimates are changed.
Contractholder funds represent receipts from the issuance of
universal life, pension investment and certain individual annuity
contracts. Such receipts are considered deposits on investment
contracts that do not have substantial mortality or morbidity risk.
Account balances are increased by interest credited and reduced by
withdrawals, mortality charges and administrative expenses charged
to the contractholders. Calculations of contractholder account
balances for investment contracts reflect lapse, withdrawal and
interest rate assumptions (ranging from 3.4% to 8%) based on
contract provisions, the Company's experience and industry
standards. Contractholder funds also include other funds that
policyholders leave on deposit with the Company.
Permitted Statutory Accounting Practices. The Travelers Insurance
Group Inc. and its subsidiaries, domiciled principally in
Connecticut and Massachusetts, prepare statutory financial
statements in accordance with the accounting practices prescribed
or permitted by the insurance departments of those states.
Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners
as well as state laws, regulations, and general administrative
rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed. The impact of any
permitted accounting practices on statutory surplus is not
material.
CONSUMER FINANCE SERVICES
Finance related interest and other charges are recognized as income
using the constant yield method. Allowances for losses are
established by direct charges to income in amounts sufficient to
maintain the allowance at a level management determines to be
adequate to cover losses in the portfolio. The allowance
fluctuates based upon continual review of the loan portfolio and
current economic conditions. For financial reporting purposes,
finance receivables are considered delinquent when they are more
than 60 days contractually past due. Income stops accruing on
finance receivables when they are 90 days contractually past due.
If payments are made on a finance receivable that is not accruing
income, and the receivable is no longer 90 days contractually past
due, the accrual of income resumes. Finance receivables are
charged against the allowance for losses when considered
uncollectible. Personal loans are considered uncollectible when
payments are six months contractually past due and six months past
due on a recency of payment basis. Loans that are twelve months
contractually past due regardless of recency of payment are charged
off. Recoveries on losses previously charged to the allowance are
credited to the allowance at the time of recovery. Consideration
of whether to proceed with foreclosure on loans secured by real
estate begins when a loan is 60 days past due on a contractual
basis. Real estate credit losses are recognized when the title to
the property is obtained.
30
<PAGE>
Notes to Consolidated Financial Statements (continued)
Fees received and direct costs incurred for the origination of
loans are deferred and amortized over the contractual lives of the
loans as part of interest income. The remaining unamortized
balances are reflected in interest income at the time that the
loans are paid in full, renewed or charged off.
3. Sales of Subsidiaries and Affiliates
------------------------------------
During 1994, gains on sale of subsidiaries and affiliates totaled
$254 million pre-tax and consisted of the sale in December of
American Capital Management & Research Inc. (American Capital)
($162 million), the sale in November of Smith Barney's investment
in HG Asia Holdings Ltd. ($34 million), the sale in October of
Bankers and Shippers Insurance Company ($30 million), and the sale
in December of the group dental insurance business of The Travelers
Insurance Company (TIC) ($28 million).
During 1992, gains on sale of stock of subsidiaries and affiliates
totaled $188 million pre-tax and consisted principally of the sale
of Margaretten & Company, Inc. ($83 million) and the sale of a
substantial portion of the Company's investment in Fingerhut
Companies, Inc. (Fingerhut) ($87 million pre-tax). Fingerhut's
results of operations were included with those of the Company on a
consolidated basis through December 31, 1991. During 1992 the
remaining investment in Fingerhut was accounted for as an equity
investment, with the Company's share of earnings reflected in
"Other Income." In 1993 the Company sold its remaining interest in
Fingerhut.
On January 3, 1995, the Company completed the sale of its group
life and related businesses to Metropolitan Life Insurance Company
(MetLife), and completed the formation of The MetraHealth
Companies, Inc. (MetraHealth), a joint venture of the medical
businesses of TIC and MetLife.
The Company sold its group life business as well as related non-
medical group insurance businesses to MetLife for $350 million.
The assets transferred included customer lists, books and records,
and furniture and equipment. In connection with the sale, TIC
ceded 100% of its risks in the group life and related businesses to
MetLife on an indemnity reinsurance basis, effective January 1,
1995. In connection with the reinsurance transaction, TIC
transferred assets with a fair market value of approximately $1.5
billion to MetLife, equal to the statutory reserves and other
liabilities transferred.
On January 3, 1995, TIC and MetLife, and certain of their
affiliates formed the MetraHealth joint venture by contributing
their medical businesses to MetraHealth, in exchange for shares of
common stock of MetraHealth. The assets transferred included cash,
fixed assets, customer lists, books and records, certain trademarks
and other assets used exclusively or primarily in the medical
businesses. TIC also contributed all of the capital stock of its
wholly owned subsidiary, The Travelers Employee Benefits Company,
to MetraHealth. The total contribution amounted to $448 million at
carrying value on the date of contribution. No gain was recognized
upon the formation of the joint venture. Upon formation of the
joint venture TIC and its affiliates owned 50% of the outstanding
capital stock of MetraHealth, and the other 50% was owned by
MetLife and its affiliates.
In connection with the formation of the joint venture, the transfer
of the fee based medical business (Administrative Services Only)
and other noninsurance business to MetraHealth was completed on
January 3, 1995. As the medical insurance business of The
Travelers Insurance Group comes due for renewal, and after
obtaining regulatory approvals, the risks will be transferred to
MetraHealth. In the interim the related operating results for this
medical insurance business will be reported by The Travelers
Insurance Group.
All of the businesses sold to MetLife or contributed to MetraHealth
were included in the Company's Managed Care and Employee Benefits
Operations (MCEBO). Revenues and net income from MCEBO for the
year ended 1994 amounted to $3.522 billion and $169 million,
respectively. Beginning in 1995 the
31
<PAGE>
Notes to Consolidated Financial Statements (continued)
Company's results will reflect the medical insurance business not
yet transferred, plus its equity interest in the earnings of
MetraHealth.
4. Business Segment Information
----------------------------
The Company is a diversified financial services company engaged in
investment services, life and property and casualty insurance
services and consumer finance. Data relating to results of
operations prior to 1994 exclude the amounts of old Travelers
except that Corporate and Other results for 1993 include the equity
earnings relating to the 27% purchase of old Travelers in December
1992 (see Note 1). Data relating to identifiable assets in 1992
exclude amounts for old Travelers. The following table presents
certain information regarding these industry segments:
<TABLE>
<CAPTION>
(millions) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Revenues
Investment Services $5,690 $3,524 $1,822
Life Insurance Services 7,010 1,585 1,505
Property & Casualty Insurance Services 4,538 315 316
Consumer Finance Services 1,239 1,193 1,158
Corporate and Other (12) 180 324
------ ----- -----
$18,465 $6,797 $5,125
====== ===== =====
Income before income taxes, minority
interest and cumulative effect of
changes in accounting principles
Investment Services $ 732 $ 592 $ 321
Life Insurance Services 926 428 356
Property & Casualty Insurance Services 307 65 80
Consumer Finance Services 356 360 305
Corporate and Other (172) 78 126
----- ----- -----
$ 2,149 $1,523 $1,188
===== ===== =====
Income before cumulative effect of changes
in accounting principles
Investment Services $ 422 $ 336 $ 191
Life Insurance Services 590 265 233
Property & Casualty Insurance Services
(after minority interest of $22 in 1993) 249 23 54
Consumer Finance Services 227 232 198
Corporate and Other (162) 95 80
------ ----- -----
$1,326 $ 951 $ 756
====== ===== =====
Identifiable assets
Investment Services $ 45,618 $ 31,864 $10,439
Life Insurance Services 38,473 40,300 4,727
Property & Casualty Insurance Services 22,663 20,515 885
Consumer Finance Services 7,729 7,155 6,495
Corporate and Other 814 1,456 1,605
-------- -------- ------
$115,297 $101,290 $24,151
======= ======= ======
</TABLE>
32
<PAGE>
Notes to Consolidated Financial Statements (continued)
The Investment Services segment consists of investment banking,
securities brokerage, asset management and other financial services
provided through Smith Barney and its subsidiaries, investment
management services provided by RCM Capital Management and mutual
fund management and distribution services provided through American
Capital (sold in December 1994, see Note 3).
The Life Insurance Services segment includes individual and group
life insurance, accident and health insurance, annuities and
investment products, which are offered primarily through The
Travelers Insurance Company and Primerica Financial Services (PFS).
The Property & Casualty Insurance Services segment provides
property-casualty insurance, including workers' compensation,
liability, automobile, property and multiple-peril to businesses
and other institutions and automobile and homeowners insurance to
individuals. Property-casualty insurance policies are issued
primarily by The Travelers Indemnity Company and its subsidiary and
affiliated property-casualty insurance companies, which now include
Gulf Insurance Company.
The Consumer Finance Services segment includes consumer lending
(including secured and unsecured personal loans, real estate-
secured loans and consumer financing) and credit cards. Also
included in this segment are credit-related insurance services
provided through American Health and Life Insurance Company (AHL).
Corporate and Other consists of corporate staff and treasury
operations, certain corporate income and expenses that have not
been allocated to the operating subsidiaries, including gains and
losses from the sale of stock of subsidiaries and affiliates, the
Company's approximately 27% interest in old Travelers during 1993
and the results of Fingerhut for 1992.
Cumulative effect of changes in accounting principles, and capital
expenditures for property, plant and equipment and related
depreciation expense are not material to any of the business
segments. Intersegment sales and international operations are not
significant.
For gains and special charges included in each segment, see
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
5. Investments
-----------
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.
33
<PAGE>
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated market values of investments in fixed
maturities were as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
--------------------------------------------- ---------------------------------------------
Amortized Gross Unrealized Market Amortized Gross Unrealized Market
--------------------- ---------------------
December 31, 1994 Cost Gains Losses Value Cost Gains Losses Value
----------------- --------------------------------------------- ---------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities-principally
obligations of U.S.
Government agencies $ 5,227 $ 3 $(401) $ 4,829 $84 $12 $ - $ 96
U.S. Treasury
securities
and obligations of
U.S. Government
corporations
and agencies 4,652 4 (426) 4,230 - - - -
Obligations of states
and political
subdivisions 4,093 5 (369) 3,729 6 - - 6
Debt securities issued
by foreign governments 562 1 (32) 531 - - - -
Corporate securities 14,724 22 (873) 13,873 6 - - 6
--------------------------------------------- ---------------------------------------------
Totals $29,258 $35 $(2,101) $27,192 $96 $12 $ - $108
============================================= =============================================
<CAPTION>
Available for Sale Held to Maturity
--------------------------------------------- ---------------------------------------------
Amortized Gross Unrealized Market Amortized Gross Unrealized Market
--------------------- ---------------------
December 31, 1993 Cost Gains Losses Value Cost Gains Losses Value
----------------- --------------------------------------------- ---------------------------------------------
(millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities-principally
obligations of U.S.
Government agencies $ 5,754 $ 26 $(27) $ 5,753 $118 $22 $ - $ 140
U.S. Treasury
securities
and obligations of
U.S. Government
corporations
and agencies 4,556 82 (11) 4,627 20 - - 20
Obligations of states
and political
subdivisions 3,062 38 (1) 3,099 7 1 - 8
Debt securities issued
by foreign governments 535 8 - 543 6 - - 6
Corporate securities 14,202 249 (35) 14,416 26 1 - 27
--------------------------------------------- ---------------------------------------------
Totals $28,109 $403 $(74) $28,438 $177 $24 $- $201
============================================= =============================================
</TABLE>
34
<PAGE>
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated market value at December 31, 1994 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.
Estimated
(millions) Amortized Market
Cost Value
-------- --------
Due in one year or less $ 1,508 $ 1,484
Due after one year through five years 6,977 6,643
Due after five years through ten years 8,342 7,758
Due after ten years 7,216 6,490
------ ------
24,043 22,375
Mortgage-backed securities 5,311 4,925
------ ------
$29,354 $27,300
====== ======
Realized gains and losses on fixed maturities for the years ended
December 31, were as follows:
(millions) 1994 1993 1992
---- ---- ----
Realized gains
Pre-tax $ 52 $168 $ 61
--- --- ---
After-tax $ 34 $109 $ 40
--- --- ---
Realized losses
Pre-tax $201 $ 2 $ 1
--- --- ---
After-tax $131 $ 1 $ -
--- --- ----
Net realized gains on equity securities and other investments, after-tax,
amounted to $18 million, $14 million and $25 million for the years ended
December 31, 1994, 1993 and 1992, respectively. Net unrealized gains
(losses) on equity securities at December 31, 1994 and 1993 were $(6)
million and $42 million, respectively.
The Company had industry concentrations of corporate bonds and fixed
income securities at December 31 as follows:
(millions) 1994 1993
------ ------
Finance $2,040 $2,234
Banking* $1,718 $1,607
Electric utilities $1,676 $1,850
* Includes $547 million in 1994 and $515 million in 1993 of primarily
short-term investments and cash equivalents issued by foreign banks.
At December 31, significant concentrations of mortgage loans and real
estate were for properties located in highly populated areas in the
states listed below:
Mortgage Loans Real Estate
------------------------- -------------------------
(millions) 1994 1993 1994 1993
---- ---- ---- ----
California $1,246 $1,471 $ 11 $ 33
New York $ 589 $ 836 $129 $ 90
Texas $ 395 $ 600 $ 79 $ 192
Florida $ 435 $ 583 $ 15 $ 111
Illinois $ 375 $ 517 $ 48 $ 88
35
<PAGE>
Notes to Consolidated Financial Statements (continued)
Other mortgage loan and real estate investments are dispersed throughout
the United States, with no combined holdings in any other state exceeding
$400 million.
Aggregate annual maturities on mortgage loans are as follows:
(millions)
Past maturity $ 219
1995 734
1996 508
1997 590
1998 671
1999 640
Thereafter 2,054
------
$5,416
======
6. Securities Borrowed, Loaned and Subject to Repurchase Agreements
----------------------------------------------------------------
Securities borrowed or purchased under agreements to resell, at their
respective carrying values, consisted of the following at December 31:
(millions) 1994 1993
------- -------
Resale agreements (by
counterparty)
Brokers and dealers $ 3,703 $ 2,340
Commercial banks,
foreign banks
and savings and loans 2,799 555
Other 1,804 1,386
------- -------
Total resale agreements 8,306 4,281
Deposits paid for
securities borrowed 17,349 9,072
------- -------
$25,655 $13,353
======= =======
36
<PAGE>
Notes to Consolidated Financial Statements (continued)
Securities loaned or sold under agreements to repurchase, at their
respective carrying values, consisted of the following at December 31:
(millions) 1994 1993
-------- -------
Repurchase agreements (by
counterparty)
Brokers and dealers $ 4,910 $ 1,904
Commercial banks, foreign
banks and
savings and loans 2,852 1,600
Municipalities 3,023 301
Corporations 1,145 517
Other 2,692 953
------ ------
Total repurchase agreements 14,622 5,275
Deposits received for
securities loaned 6,998 4,869
------ ------
$21,620 $10,144
====== ======
The resale and repurchase agreements represent collateralized financing
transactions used to generate net interest income and facilitate trading
activity. These instruments are short-term in nature (usually 30 days
or less) and are collateralized principally by U.S. Government and
mortgage-backed securities. The carrying amounts of these instruments
approximate fair value because of the relatively short period of time
between the origination of the instruments and their expected
realization.
7. Brokerage Receivables and Brokerage Payables
--------------------------------------------
The Company has receivables and payables for financial instruments
purchased from and sold to brokers and dealers and customers. The
Company is exposed to risk of loss from the inability of brokers and
dealers or customers to pay for purchases or to deliver the financial
instrument sold, in which case the Company would have to sell or
purchase the financial instruments at prevailing market prices.
The Company seeks to protect itself from the risks associated with
customer activities by requiring customers to maintain margin collateral
in compliance with regulatory and internal guidelines. Margin levels
are monitored daily, and customers deposit additional collateral as
required. Where customers cannot meet collateral requirements, the
Company will liquidate sufficient underlying financial instruments to
bring the customer into compliance with the required margin level.
Exposure to credit risk is impacted by market volatility, which may
impair the ability of clients to satisfy their obligations to the
Company. Credit limits are established and closely monitored for
customers and brokers and dealers engaged in forward and futures and
other transactions deemed to be credit-sensitive.
37
<PAGE>
Notes to Consolidated Financial Statements (continued)
Brokerage receivables and brokerage payables, which arise in the normal
course of business, consisted of the following at December 31:
<TABLE>
<CAPTION>
(millions) 1994 1993
---- -----
<S> <C> <C>
Receivables from brokers and dealers $ 736 $1,063
Receivables from customers 7,502 7,104
----- -----
Total brokerage receivables $8,238 $8,167
===== =====
Payables to brokers and dealers $1,159 $1,841
Payables to customers 6,648 5,171
----- -----
Total brokerage payables $7,807 $7,012
===== =====
</TABLE>
Included in payables to brokers and dealers as of December 31, 1994 and
1993 is approximately $338 million and $966 million, respectively, of
payables due LBI in connection with LBI's proprietary transactions.
8. Trading Securities
------------------
Trading securities at market value consisted of the following at
December 31:
<TABLE>
<CAPTION>
1994 1993
---------------------------------- ----------------------------------
Securities Securities
Sold Sold
Securities Not Yet Securities Not Yet
(millions) Owned Purchased Owned Purchased
-------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C>
Obligations of U.S. Government and
agencies $3,670 $3,658 $2,233 $3,258
State and municipal obligations 978 16 839 42
Corporate debt and collateralized
mortgage obligations 1,688 424 2,214 198
Corporate convertibles, equities
and other securities 609 247 577 337
----- ----- ----- -----
$6,945 $4,345 $5,863 $3,835
===== ===== ===== =====
</TABLE>
Carrying values are based on quoted market prices or dealer quotes. If
a quoted market price is not available, fair value is estimated using
quoted market prices for similar securities. Securities sold not yet
purchased must be acquired in the marketplace at prevailing prices.
Accordingly, these transactions may result in market risk since the
ultimate purchase price may exceed the amount recognized in the
financial statements.
38
<PAGE>
Notes to Consolidated Financial Statements (continued)
9. Consumer Finance Receivables
----------------------------
Consumer finance receivables, net of unearned finance charges of $674
million and $613 million at December 31, 1994 and 1993, respectively,
consisted of the following:
(millions) 1994 1993
---- -----
Real estate-secured loans $2,845 $2,706
Personal loans 2,875 2,495
Credit cards 712 697
Sales finance and other 453 444
----- ------
Consumer finance receivables 6,885 6,342
Accrued interest receivable 43 42
Allowance for credit losses (182) (168)
----- ------
Net consumer finance receivables $6,746 $6,216
===== ======
An analysis of the allowance for credit losses on consumer finance
receivables at December 31, was as follows:
(millions) 1994 1993 1992
---- ----- ----
Balance, January 1 $168 $ 169 $ 167
Provision for credit losses 152 134 165
Amounts written off (163) (163) (184)
Recovery of amounts previously written off 25 23 21
Allowance on receivables purchased - 5 -
----- ------ ------
Balance, December 31 $ 182 $ 168 $ 169
===== ===== =====
Net outstandings $6,885 $6,342 $5,788
===== ===== =====
Ratio of allowance for credit losses
to net outstandings 2.64% 2.64% 2.91%
==== ==== ====
Contractual maturities of receivables before deducting unearned finance
charges and excluding accrued interest were as follows:
<TABLE><CAPTION>
Receivables
Outstanding Due
(millions) December 31, Due Due Due Due After
1994 1995 1996 1997 1998 1998
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Real estate-secured loans $2,908 $ 185 $ 191 $ 200 $ 206 $2,126
Personal loans 3,400 1,046 931 717 414 292
Credit cards 711 62 57 52 47 493
Sales finance and other 540 245 133 67 36 59
----- ----- ----- ----- ----- -----
Total $7,559 $1,538 $1,312 $1,036 $ 703 $2,970
===== ===== ===== ===== ===== =====
Percentage 100% 20% 18% 14% 9% 39%
===== ===== ===== ===== ===== =====
</TABLE>
Contractual terms average 12 years on real estate-secured loans and 4
years on personal loans. Experience has shown that a substantial amount
of the receivables will be renewed or repaid prior to contractual
maturity dates. Accordingly, the foregoing tabulation should not be
regarded as a forecast of future cash collections.
39
<PAGE>
Notes to Consolidated Financial Statements (continued)
The Company has a geographically diverse consumer finance loan
portfolio. At December 31, the distribution by state was as follows:
1994 1993
---- ------
Ohio 13% 13%
North Carolina 10% 10%
South Carolina 7% 7%
Pennsylvania 6% 6%
Maryland 5% 6%
California 5% 5%
Texas 5% 5%
All other states* 49% 48%
---- ----
Total 100% 100%
==== ====
* None of the remaining states individually accounts for more than 4%
of total consumer finance receivables.
The estimated fair value of the consumer finance receivables portfolio
depends on the methodology selected to value such portfolio (i.e., exit
value versus entry value). Exit value represents a valuation of the
portfolio based upon sales of comparable portfolios which takes into
account the value of customer relationships and the current level of
funding costs. Under the exit value methodology, the estimated fair
value of the receivables portfolio at December 31, 1994 is approximately
$618 million above the recorded carrying value. Entry value is
determined by comparing the portfolio yields to the yield at which new
loans are being originated. Under the entry value methodology, the
estimated fair value of the receivables portfolio at December 31, 1994
is approximately equal to the aggregate carrying value due to the
increase in variable rate receivables whose rates are periodically reset
and the fact that the average yield on fixed rate receivables is
approximately equal to that on new fixed rate loans made at year end
1994. Fair values included in Note 20 are based on the exit value
methodology.
10. Debt
----
Investment banking and brokerage borrowings consisted of the following
at December 31:
(millions) 1994 1993
---- ----
Commercial paper $2,455 $1,401
Secured borrowings 185 105
Unsecured borrowings 1,141 693
Notes to LBI 593 1,255
----- -----
$4,374 $3,454
===== =====
Weighted average interest rate
at end of period, excluding
non-interest bearing balances 5.8% 3.3%
===== ====
Investment banking and brokerage borrowings are short-term and include
commercial paper, secured and unsecured bank loans used to finance Smith
Barney's operations, including the securities settlement process, and
notes issued to LBI inconnection with the Shearson Businesses acquired.
The secured and unsecured bank loans bear interest at fluctuating rates
based primarily on the federal funds interest rate. Notes payable to
LBI at December 31, 1994 represent a non-interest bearing note (the
Clearing Note) outstanding in connection with LBI's activities under the
Clearing Agreement. The Clearing Note, which matures upon termination
of the Clearing Agreement (see Note 1), fluctuates daily based on LBI's
borrowing activities. Notes payable to LBI at December 31, 1993 also
included a $586 million variable rate note which was issued as partial
payment for the businesses acquired and was repaid in January 1994. In
1993, Smith Barney put in place a commercial paper program that consists
of both discounted and interest
40
<PAGE>
Notes to Consolidated Financial Statements (continued)
bearing paper and is currently authorized up to $2.5 billion. Smith
Barney also has substantial borrowing arrangements consisting of
facilities that it has been advised are available, but where no
contractual lending obligation exists.
At December 31, 1994 and 1993, the market value of the securities
pledged as collateral for short-term brokerage borrowings was $229
million and $124 million, respectively, including $163 million of
customer margin securities at December 31, 1994.
At December 31, short-term borrowings consisted of commercial paper
outstanding with weighted average interest rates as follows:
<TABLE><CAPTION>
(millions) 1994 1993
-------------------------- ----------------------------
Outstanding Interest Rate Outstanding Interest Rate
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
The Travelers Inc. $ 101 5.83% $329 3.43%
Commercial Credit Company 2,305 5.89% 2,206 3.34%
The Travelers Insurance Company 74 6.02% -
----- -----
$2,480 $2,535
===== =====
</TABLE>
The Travelers Inc. (the Parent), Commercial Credit Company (CCC) and The
Travelers Insurance Company (TIC) issue commercial paper directly to
investors. Each maintains unused credit availability under its
respective bank lines of credit at least equal to the amount of its
outstanding commercial paper. Each may borrow under its revolving
credit facilities at various interest rate options and compensates the
banks for the facilities through commitment fees.
In 1994 the Parent, CCC and TIC entered into an agreement with a
syndicate of banks to provide $1.5 billion of revolving credit, to be
allocated to any of the Parent, CCC or TIC. The participation of TIC in
this agreement is limited to $300 million. The revolving credit
facility consists of a 364-day revolving credit facility in the amount
of $300 million and a 5-year revolving credit facility in the amount of
$1.2 billion. At December 31, 1994, $650 million was allocated to the
Parent, $650 million was allocated to CCC and $200 million was allocated
to TIC. Under this facility the Company is required to maintain a
certain level of consolidated stockholders' equity (as defined in the
agreement). At December 31, 1994, the Company exceeded this requirement
by approximately $2.7 billion.
At December 31, 1994, CCC also had committed and available revolving
credit facilities on a stand alone basis of $2.360 billion, of which
$600 million expires in 1995 and $1.760 billion expires in 1999.
CCC is limited by covenants in its revolving credit agreements as to the
amount of dividends and advances that may be made to the Parent or its
affiliated companies. At December 31, 1994, CCC would have been able to
remit $270 million to the Parent under its most restrictive covenants or
regulatory requirements.
The carrying value of short-term borrowings approximates fair value.
41
<PAGE>
Notes to Consolidated Financial Statements (continued)
Long-term debt, including its current portion, and final maturity dates
were as follows at December 31:
(millions) 1994 1993
---- ----
The Travelers Inc.
8.6% Notes due 1994 $ - $ 93
8 3/8% Notes due 1996 100 100
7 5/8% Notes due 1997 185 185
5 3/4% Notes due 1998 250 250
7 3/4% Notes due 1999 100 100
6 1/8% Notes due 2000 200 200
9 1/2% Senior Notes due 2002 300 300
8 5/8% Debentures due 2007 100 100
Other indebtedness, 5 7/8% - 8 7/8%
due 1996 - 2007 13 13
ESOP note guarantee 97 125
Debt premium (discount), net 32 38
----- -----
1,377 1,504
----- -----
Commercial Credit Company
8.29% to 12.85% Medium-Term Notes
due 1994-1995 10 55
8% Notes due 1994 - 100
12.7% Notes due 1994 - 15
6.95% Notes due 1994 - 200
8.45% Notes due 1994 - 100
9 7/8% Notes due 1995 150 150
9.2% Notes due 1995 100 100
6.25% Notes due 1995 100 100
7.7% Notes due 1995 150 150
8.1% Notes due 1995 150 150
8 3/8% Notes due 1995 150 150
6.375% Notes due 1996 200 200
7.375% Notes due 1996 150 150
8% Notes due 1996 100 100
6.75% Notes due 1997 200 200
8 1/8% Notes due 1997 150 150
5.70% Notes due 1998 100 100
5 1/2% Notes due 1998 100 100
8 1/2% Notes due 1998 100 100
6.70% Notes due 1999 150 150
10% Notes due 1999 100 100
9.6% Notes due 1999 100 100
6.00% Notes due 2000 100 100
5 3/4% Notes due 2000 200 200
6 1/8% Notes due 2000 100 100
6.00% Notes due 2000 150 150
8.25% Notes due 2001 300 -
5.9% Notes due 2003 200 200
42
<PAGE>
Notes to Consolidated Financial Statements (continued)
7.875% Notes due 2004 200 -
10% Notes due 2008 150 150
10% Debentures due 2009 100 100
8.7% Debentures due 2009 150 150
8.7% Debentures due 2010 100 100
----- -----
4,010 3,970
----- -----
Smith Barney
Revolving credit facility 400 825
7.4% Medium-Term Notes due 1996 50 -
5 3/8% Notes due 1996 150 150
6.0% Notes due 1997 200 -
5 5/8% Notes due 1998 150 150
5 1/2% Notes due 1999 200 -
7 7/8% Notes due 1999 150 -
6 5/8% Notes due 2000 150 150
Capital Note with LBI due 1995 150 100
----- -----
1,600 1,375
----- -----
The Travelers Insurance Group
12% GNMA/FNMA - collateralized obligations 88 132
Other indebtedness - 10
----- -----
88 142
----- -----
$7,075 $6,991
===== =====
The Company has guaranteed the loan obligation of its Employee Stock
Ownership Plan (ESOP) (see Note 14). The minimum principal payments on
the ESOP loan obligation to be made in 1995, 1996 and 1997 are $30
million, $32 million and $35 million, respectively.
Debt discount or premium is being amortized to interest expense using
the effective interest method over the remaining maturities of the
related debt obligations.
In May 1994, Smith Barney renegotiated its three-year revolving credit
agreement (the "Agreement") with a bank syndicate. The amendment to the
Agreement extended the term by one year until May 1997 and increased the
amount of the facility from $625 million to $1.0 billion. As of
December 31, 1994, $400 million was borrowed under the Agreement. In
addition, in May 1994, Smith Barney entered into a $750 million, 364-day
revolving credit agreement with a bank syndicate. As of December 31,
1994, there were no borrowings outstanding under this new facility.
Smith Barney is limited by covenants in its revolving credit facility as
to the amount of dividends that may be paid to the Parent. At December
31, 1994, Smith Barney would have been able to remit approximately $500
million to the Parent under its most restrictive covenants.
43
<PAGE>
Notes to Consolidated Financial Statements (continued)
Aggregate annual maturities for the next five years on long-term debt
obligations excluding principal payments on the ESOP loan obligation and
the 12% GNMA/FNMA collateralized obligations, are as follows:
(millions)
1995 $960
1996 $750
1997 $1,135
1998 $700
1999 $800
The fair value of the Company's long-term debt is estimated based on the
quoted market price for the same or similar issues or on current rates
offered to the Company for debt of the same remaining maturities. At
December 31, 1994 the carrying value and the fair value of the Company's
long-term debt were:
(millions) Carrying Fair
Value Value
-------- ------
The Travelers Inc. $1,377 $1,314
Commercial Credit 4,010 3,926
Smith Barney 1,600 1,531
The Travelers Insurance Group 88 96
----- -----
$7,075 $6,867
===== =====
11. Insurance Policy and Claims Reserves
------------------------------------
Insurance policy and claims reserves consisted of the following at
December 31:
(millions) 1994 1993
---- ----
Benefit and loss reserves:
Property-casualty $13,872 $13,805
Accident and health 1,029 857
Life and annuity 8,603 8,490
Unearned premiums 2,276 2,307
Policy and contract claims 1,304 1,347
------ ------
$27,084 $26,806
====== ======
44
<PAGE>
Notes to Consolidated Financial Statements (continued)
The table below is a reconciliation of beginning and ending property-
casualty reserve balances for loss and loss adjustment expenses (LAE)
for the years ended December 31, 1994, 1993 and 1992. Loss provisions
and payments for 1993 and 1992 reflect only the activity of Gulf
Insurance Company.
<TABLE><CAPTION>
(millions) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Losses and LAE at beginning of year $13,805 $ 313 $ 296
Less reinsurance recoverables on unpaid losses 3,615 85 74
------ ------- -------
Net balance at beginning of year 10,190 228 222
------ ------- -------
Provision for losses and LAE for claims arising in the
current year 3,201 185 185
Estimated losses and LAE for claims arising
in prior years (248) (6)
Increase for purchase of old Travelers 9,938
-------- ------ --------
Total increases 2,953 10,123 179
------ ------ ------
Losses and LAE payments for claims arising in:
Current year 989 67 80
Prior years 1,903 94 93
------ ------- -------
Total payments 2,892 161 173
------ ------- -------
Net balances at end of year 10,251 10,190 228
Plus reinsurance recoverables on unpaid losses 3,621 3,615 85
------ ------ -------
Losses and LAE at end of year $13,872 $13,805 $ 313
------ ------ -------
</TABLE>
In 1994, estimated losses and LAE for claims arising in prior years
includes favorable loss development in Personal Lines automobile and
homeowners coverage of $100 million, offset by unfavorable development
of $100 million for Commercial Lines asbestos and environmental claims
from 1985 and prior. In addition, in 1994 Commercial Lines experienced
favorable prior year loss development in workers' compensation, other
liability and commercial automobile product lines in its National
business for post-1985 accident years. This favorable development
amounted to $261 million, however, since the business to which it
relates is subject to retrospective rating premium adjustments, the net
impact on results of operations is minimal.
The increase for purchase of old Travelers includes a purchase
accounting adjustment of $225 million. The adjustment reflects
appellate court decisions that resolved issues concerning obligations of
insurers for environmental claims under liability policies in certain
jurisdictions, and the measurement of amounts recoverable for asbestos
claims from reinsurers based upon commutation of reinsurers' liabilities
at a discount. The $225 million was included in other liabilities at
December 31, 1993.
The property-casualty loss and LAE reserves include $854 million and
$885 million for asbestos and environmental related claims net of
reinsurance at December 31, 1994 and 1993, respectively. Travelers
Insurance carries on a continuing review of its overall position, its
reserving techniques and reinsurance recoverable. However, the industry
does not have a standard method of calculating claim activity for
environmental and asbestos losses. In each of these areas of exposure,
Travelers Insurance has endeavored to litigate individual cases and
settle claims on favorable terms. Given the vagaries of court coverage
decisions, plaintiffs' expanded theories of liability, the risks
inherent in major litigation and other uncertainties, it is not
presently possible to quantify the ultimate exposure or range of
exposure represented by these claims to the Company's financial
condition, results of operations or liquidity. The Company believes
that it is reasonably possible that the outcome of the uncertainties
regarding environmental and asbestos claims
45
<PAGE>
Notes to Consolidated Financial Statements (continued)
could result in a liability exceeding the reserves by an amount that
would be material to operating results in a future period. However, it
is not likely these claims will have a material adverse effect on the
Company's financial condition or liquidity.
12. Reinsurance
-----------
The Company's insurance operations cede insurance in order to limit
losses, minimize exposure on large risks, provide additional capacity
for future growth, and effect business sharing arrangements. Life
reinsurance is accomplished through various plans of reinsurance,
primarily coinsurance, modified coinsurance and yearly renewable term.
Property-casualty reinsurance is placed on both a quota-share and excess
basis. The property-casualty insurance subsidiaries also participate as
a servicing carrier for, and a member of, several pools and
associations. Reinsurance ceded arrangements do not discharge the
insurance subsidiaries or the Company as the primary insurer.
Reinsurance amounts included in the Consolidated Statement of Income
were:
Ceded to
(millions) Gross Other Net
Amount Companies Amount
------ --------- ------
Year ended December 31, 1994
----------------------------
Premiums
Life insurance $1,878 $(295) $1,583
Accident and health insurance 2,591 (107) 2,484
Property-casualty insurance 5,052 (1,529) 3,523
----- ------ -----
$9,521 $(1,931) $7,590
===== ====== =====
Claims $8,126 $(1,357) $6,769
===== ====== =====
Year ended December 31, 1993
----------------------------
Premiums
Life insurance $1,178 $(284) $ 894
Accident and health insurance 385 (56) 329
Property-casualty insurance 434 (177) 257
----- ---- -----
$1,997 $(517) $1,480
===== ==== =====
Claims $1,096 $(287) $ 809
===== ==== ======
46
<PAGE>
Notes to Consolidated Financial Statements (continued)
Ceded to
Gross Other Net
(millions) Amount Companies Amount
------ --------- ------
Year ended December 31, 1992
----------------------------
Premiums
Life insurance $1,221 $(312) $ 909
Accident and health insurance 443 (39) 404
Property-casualty insurance 562 (181) 381
----- ---- -----
$2,226 $(532) $1,694
===== ==== =====
Claims $1,056 $(271) $ 785
===== ==== =====
Reinsurance recoverables at December 31 include amounts recoverable on
unpaid losses, paid losses and unearned premiums and were as follows:
(millions) 1994 1993
---- ----
Reinsurance Recoverables
------------------------
Life business $ 758 $ 739
Property and Casualty business:
Pools and associations 2,524 2,585
Other reinsurance 1,744 1,605
----- -----
Total $5,026 $4,929
===== =====
13. Income Taxes
------------
The provision for income taxes (before minority interest) for the years
ended December 31 was as follows:
(millions) 1994 1993 1992
---- ---- ----
Current:
Federal $378 $406 $350
Foreign 22 3 5
State 80 75 53
--- --- ---
480 484 408
--- --- ---
Deferred:
Federal 334 64 26
Foreign 1 (2) (2)
State 8 4 -
---- --- ---
343 66 24
---- --- ---
Total $823 $550 $432
=== === ===
47
<PAGE>
Notes to Consolidated Financial Statements (continued)
Deferred income taxes at December 31 related to the following:
<TABLE><CAPTION>
(millions) 1994 1993
---- ----
<S> <C> <C>
Deferred tax assets:
Differences in computing policy reserves $1,288 $1,353
Deferred compensation 214 145
Employee benefits 213 221
Investments 1,074 432
Other deferred tax assets 765 1,015
----- -----
Gross deferred tax assets 3,554 3,166
----- -----
Valuation allowance 100 100
----- -----
Deferred tax assets after valuation allowance 3,454 3,066
----- -----
Deferred tax liabilities:
Deferred policy acquisition costs and
value of insurance in force (608) (576)
Investment management contracts (244) (277)
Other deferred tax liabilities (273) (355)
------- -------
Gross deferred tax liabilities (1,125) (1,208)
------- -------
Net deferred tax asset $ 2,329 $ 1,858
======= =======
</TABLE>
The reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate for the year ended December 31 was
as follows:
1994 1993 1992
---- ---- ----
Federal statutory rate 35.0% 35.0% 34.0%
Limited taxability of investment income (3.5) (1.6) (.8)
State and foreign income taxes
(net of federal income tax benefit) 2.7 3.4 2.9
Sale of subsidiaries 2.9 - (.3)
Equity in income of old Travelers - (2.2) -
Other, net 1.2 1.5 .5
---- ---- ----
Effective income tax rate 38.3% 36.1% 36.3%
==== ==== ====
Tax benefits allocated directly to stockholders' equity for the years
ended December 31, 1994 and 1993 were $35 million and $79 million,
respectively.
As a result of the acquisition of old Travelers, a valuation allowance
of $100 million was established in 1993 to reduce the net deferred tax
asset on investment losses to the amount that, based upon available
evidence, is more likely than not to be realized. 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 which causes
48
<PAGE>
Notes to Consolidated Financial Statements (continued)
the recognition of the benefits to become more likely than not. The
initial recognition of any benefit produced by the reversal of the
valuation allowance will be recognized by reducing goodwill.
The net deferred tax asset, after the valuation allowance of $100
million, relates to temporary differences that are expected to reverse
as net ordinary deductions, except for a deferred tax asset of $723
million which relates to the unrealized loss on fixed maturity
investments. Management has the intent and the ability not to realize
the unrealized loss except to the extent of offsetting capital gains.
The Company will have to generate approximately $4.6 billion of taxable
income, before the reversal of the temporary differences, primarily over
the next 10-15 years, to realize the remainder of the deferred tax
asset, exclusive of the unrealized loss on fixed maturity investments.
Management expects to realize the remainder of the deferred tax asset
based upon its expectation of future taxable income, after the reversal
of these deductible temporary differences, of at least $1 billion
annually. The Company has reported pre-tax financial statement income
exceeding $1.6 billion, on average, over the last three years and has
incurred taxable income of approximately $1 billion, on average, over
the same period of time. At December 31, 1994, the Company has no
ordinary or capital loss carryforwards.
14. Preferred Stock and Stockholders' Equity
----------------------------------------
Preferred Stock
The following table sets forth the Company's preferred stock outstanding
at December 31, 1994 and 1993:
Liquidation
Number Preference Carrying
of Shares Per Share Value
--------- ---------- --------
(millions)
Series A 1,200,000 $250 $300
Series B 2,500,000 $50 125
Series D 7,500,000 $50 375
---------- ---
11,200,000 $800
========== ===
Series C 4,406,431 $53.25 $235
========== ===
Series A
In July 1992 the Company sold in a public offering 12.0 million
depositary shares, each representing 1/10th of a share of 8.125%
Cumulative Preferred Stock, Series A (Series A Preferred), at an
offering price of $25 per depositary share. The Series A Preferred has
cumulative dividends payable quarterly commencing September 1, 1992 and
a liquidation preference equivalent to $25 per depositary share plus
accrued and accumulated unpaid dividends. On or after July 28, 1997,
the Company may, at its option, redeem the Series A Preferred, in whole
or in part, at any time at a redemption price of $25 per depositary
share plus dividends accrued and unpaid to the redemption date.
Series B
In connection with the Shearson Acquisition the Company issued to
American Express 2.5 million shares of 5.5% Convertible Preferred Stock,
Series B (Series B Preferred) of the Company. Each Series B Preferred
share has cumulative dividends payable quarterly and a liquidation
preference of $50 per share and is convertible at any time at the option
of the holder at a conversion price of $36.75 per common share. The
Series B Preferred is not redeemable prior to July 30, 1996. On or
after July 30, 1996, the Series B Preferred is redeemable at the
Company's option, at a price of $51.925 per share if redeemed prior to
July 29, 1997, and at decreasing prices thereafter to $50 per share
49
<PAGE>
Notes to Consolidated Financial Statements (continued)
from and after July 30, 2003, plus accrued and unpaid dividends, if any,
to the redemption date. In addition, the Company issued to American
Express warrants to purchase 3,749,466 shares of common stock of the
Company at an exercise price of $39 per common share, exercisable until
July 31, 1998. Both the Series B Preferred and the warrant are publicly
traded.
Series C
In connection with the acquisition of old Travelers, the Company
converted the old Travelers $4.53 Series A ESOP Convertible Preference
Stock which was issued to prefund old Travelers' matching obligations
under its Employee Stock Ownership Plan (ESOP) into $4.53 Series C
Convertible Preferred Stock ("Series C Preferred") of the Company with a
stated value and a liquidation preference of $53.25 per share. The
Series C Preferred is convertible into one share of The Travelers Inc.
Common Stock for each $66.21 of stated value of Series C Preferred,
subject to antidilution adjustments in certain circumstances. Dividends
on the Series C Preferred are cumulative and accrue in the amount of
$4.53 per annum per share. The Series C Preferred is redeemable at the
option of the Company on or after January 1, 1998 (or earlier at the
option of the holder in the event of a change in control, as defined, of
the Company) at a redemption price of $53.25 per share plus accrued and
unpaid dividends thereon to the date fixed for redemption.
Series D
Also in connection with the Company's acquisition of old Travelers, 7.5
million shares of 9 1/4% Series B Preference Stock of old Travelers were
converted into 7.5 million shares of 9 1/4% Series D Preferred Stock
("Series D Preferred") of the Company with a stated value and
liquidation preference of $50 per share. The Series D Preferred is held
in the form of depositary shares, with two depositary shares
representing each preferred share. Annual dividends of $4.625 per share
($2.3125 per depository share) are payable quarterly. Dividends are
cumulative from the date of issue. The Series D Preferred is not
redeemable prior to July 1, 1997. On and after July 1, 1997, the Series
D Preferred is redeemable at the Company's option at a price of $50 per
share (equivalent to $25 per depositary share), plus accrued and unpaid
dividends, if any, to the redemption date. In the event that dividends
on the series D Preferred are in arrears in an amount equal to at least
six full quarterly dividends, holders of the stock would have the right
to elect two additional directors to the Board of Directors of the
Company.
Stockholders' Equity
The combined insurance subsidiaries' statutory capital and surplus at
December 31, 1994 and 1993 was $4.342 billion and $4.340 billion,
respectively, and is subject to certain restrictions imposed by state
insurance departments as to the transfer of funds and payment of
dividends. The combined insurance subsidiaries' (including The
Travelers Insurance Group for 1994 only) net income, determined in
accordance with statutory accounting practices, for the years ended
December 31, 1994, 1993 and 1992 was $228 million, $204 million and $199
million, respectively.
Under Connecticut law, the statutory capital and surplus of The
Travelers Insurance Group Inc., which amounted to $4.218 billion at
December 31, 1994 is not available in 1995 for dividends to its Parent
without prior approval of the Connecticut Insurance Department.
The Company's broker-dealer subsidiaries are subject to The Uniform Net
Capital Rule of the Securities and Exchange Commission. At December 31,
1994, the aggregate net capital of such broker-dealer subsidiaries was
$1.313 billion, exceeding the net capital requirement by $1.119 billion.
See Note 10 for additional restrictions on stockholders' equity.
50
<PAGE>
Notes to Consolidated Financial Statements (continued)
In April 1993, the Company sold 9,333,333 shares of newly issued common
stock. The offering was made exclusively to foreign investors, and
shares were not offered in the United States or to United States
persons, in accordance with Regulation S under the Securities Act of
1933. Therefore the shares have not been registered under such act. In
June 1993, the Company sold 1,000,000 shares of newly issued common
stock to a senior executive of the Company. In total these transactions
generated net proceeds of $329 million.
At December 31, 1994, 10,694,740 shares of authorized common stock were
reserved for convertible securities and warrants.
15. Incentive Plans
---------------
The Company's 1986 Stock Option Plan provides for the granting to
officers and key employees of the Company and its participating
subsidiaries of non-qualifiedstock options and incentive stock options.
Options generally are granted at the fair market value at the time of
grant for a period not in excess of ten years. They vest over five
years, or in full upon a change of control of the Company, and are
generally exercisable only if the optionee is employed by the Company.
The plan also permits an employee exercising an option to be granted new
options (reload options) in an amount equal to the number of common
shares used to satisfy the exercise price and the withholding taxes due
upon exercise. The maximum number of shares that may be granted under
this plan is 73,008,140, of which 35,000,000 were reserved for the
granting of reload options; at December 31, 1994, 26,265,245 shares were
available for grant, of which 15,011,009 were available for reload
option grants. The Company also has other option plans.
Information with respect to stock options granted under the Company's
various option plans is as follows:
Number of Price
Shares Per Share
---------- --------------
Balance, at January 1, 1992 21,181,108 $ 6.07-32.03
Granted 11,924,090 18.50-24.94
Expired or canceled (518,956) 9.74-21.88
Exercised (13,279,940) 6.07-21.49
----------- -----------
Balance, at December 31, 1992 19,306,302 $ 7.82-32.03
----------- -----------
Granted 9,593,308 24.19-49.50
Converted upon the Merger 4,011,726 15.54-62.02
Expired or canceled (679,064) 9.74-44.63
Exercised (9,898,567) 8.00-37.41
----------- -----------
Balance, at December 31, 1993 22,333,705 $ 7.82-62.02
----------- -----------
Granted 6,132,850 31.00-42.88
Expired or canceled (1,387,428) 9.74-62.02
Exercised (2,905,346) 7.81-40.13
----------- -----------
Balance at December 31, 1994 24,173,781 $ 9.74-62.02
----------- -----------
Currently exercisable,
December 31, 1994 8,449,283 $ 9.74-62.02
=========== ===========
51
<PAGE>
Notes to Consolidated Financial Statements (continued)
At the time of the Merger, 7,193,486 options to purchase old Travelers
common stock were outstanding. Of this amount, 2,205,204 options were
forfeited or redeemed for cash, and the remaining 4,988,282 options, at
a weighted average price of $33.92, were converted into options to
receive 4,011,726 shares of the Company's common stock, at a weighted
average price of $42.18.
The Company, through its Capital Accumulation Plan (the Plan) and other
restricted stock programs, has issued a total of 15,464,592 shares of
the Company's common stock in the form of restricted stock to
participating officers and other key employees. The restricted stock
generally vests after a two-year period. The Nominations and
Compensation Committee of the Board of Directors that administers the
Plan has determined that the restricted period for awards made with
respect to the 1994 Plan year will generally be three years. Except
under limited circumstances, during this period the stock cannot be sold
or transferred by the participant, who is required to render service to
the Company during the restriction period. At the discretion of the
Committee, participants may elect to receive part of their awards in
restricted stock and part in stock options. Unearned compensation
expense associated with the restricted stock grants represents the
market value of the Company's common stock at the date of grant and is
recognized as a charge to income ratably over the vesting period.
16. Pension Plans
-------------
The Company and its subsidiaries have noncontributory defined benefit
pension plans covering the majority of their U.S. employees. Benefits
for the Company's principal plans are based on an account balance
formula. Under this formula, each employee's accrued benefit can be
expressed as an account that is credited with amounts based upon the
employee's pay, length of service and a specified interest rate, all
subject to a minimum benefit level. These plans are funded in
accordance with the Employee Retirement Income Security Act of 1974 and
the Internal Revenue Code. Certain non-U.S. employees of the Company
are covered by noncontributory defined benefit plans. These plans are
funded based upon local laws.
The following is a summary of the components of pension expense included
in the Consolidated Statement of Income for the Company's significant
defined benefit plans for the years ended December 31:
(millions) 1994 1993 1992
---- ---- ----
Service cost $105 $34 $17
Interest cost 173 36 26
Actual return on plan assets (66) (59) (28)
Net amortization and deferral (161) 11 (10)
---- --- ---
Net periodic pension cost $51 $22 $ 5
==== === ===
52
<PAGE>
Notes to Consolidated Financial Statements (continued)
The following table sets forth the funded status of the Company's
significant defined benefit plans at December 31:
(millions) 1994 1993
---- ----
Actuarial present value of benefit obligation:
Vested benefits $2,091 $2,223
Non-vested benefits 49 40
------ ------
Accumulated benefit obligation 2,140 2,263
Effect of future salary increases 46 79
----- -----
Projected benefit obligation 2,186 2,342
Plan assets at fair value 2,335 2,434
----- -----
Plan assets in excess of projected
benefit obligation 149 92
Unrecognized transition asset (3) (3)
Unrecognized prior service cost (benefit) 2 (36)
Unrecognized net (gain) loss (145) 2
----- ------
Prepaid pension cost
recognized in the Statement of
Financial Position $ 3 $ 55
==== =====
Actuarial Assumptions:
Weighted average discount rate 8.75% 7.5%
Weighted average rate of compensation
increase 4.5% 4.5%
Expected long-term rate of return on
plan assets 9.5% 9.75%
Plan assets associated with the plans of old Travelers are held
primarily in various separate accounts and the general account of The
Travelers Insurance Company, a subsidiary of the Company, and certain
investment trusts. These accounts invest in stocks, bonds, mortgage
loans and real estate. Plan assets for the Company's other significant
pension plans are invested primarily in U.S. Government securities,
corporate bonds and stocks.
17. Postretirement Benefits
-----------------------
The Company provides postretirement health care, life insurance and
survival income benefits to certain eligible retirees. These benefits
relate primarily to former unionized employees of predecessor companies,
certain employees of SmithBarney and former employees of old Travelers.
Other retirees are generally responsible for most or all of the cost of
these benefits (while retaining the benefits of group coverage and
pricing).
As required by FAS 106, the Company changed its method of accounting for
retiree benefit plans effective January 1, 1993, to accrue the Company's
share of the costs of postretirement benefits over the service period
rendered by an employee. Previously these benefits were charged to
expense when paid.
The Company elected to recognize immediately the liability for
postretirement benefits as the cumulative effect of a change in
accounting principle. This change resulted in a noncash after-tax
charge to net income of $17 million in 1993.
53
<PAGE>
Notes to Consolidated Financial Statements (continued)
The Company generally funds its share of the cost of postretirement
benefits on a pay-as-you-go basis. However, the Company has made
contributions to a survivor income plan, the assets of which are
currently invested in a major insurance company's general investment
portfolio.
Payments and net periodic postretirement benefit cost for 1993 were not
material. The following is a summary of the components of net periodic
postretirement benefit cost for the year ended December 31, 1994:
(millions)
Service cost $ 3
Interest cost 33
Actual return on plan assets -
Net amortization and deferral -
---
Net periodic postretirement benefit cost $ 36
===
The following table sets forth the funded status of the Company's
postretirement benefit plans at December 31:
(millions)
1994 1993
---- ----
Accumulated postretirement benefit obligation
Retirees $363 $418
Other fully eligible plan participants 32 33
Other active plan participants 18 53
--- ----
413 504
Plan assets at fair value 4 3
--- -----
Accumulated postretirement benefit obligation
in excess of plan assets 409 501
Unrecognized net gain (loss) 79 (18)
Unrecognized prior service cost (5) (6)
--- ---
Accrued postretirement benefit liability $483 $477
=== ===
For measurement purposes, the annual rate of increase in the per capita
cost of covered health care benefits ranged from 16% in 1995, decreasing
gradually to 5.5% by the year 2003 and remaining at that level
thereafter. The health care cost trend rate assumption affects the
amounts reported. To illustrate, increasing the assumed health care
cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1994 by
approximately $14 million. The impact on net periodic postretirement
benefit cost of such an increase would not be material.
The weighted average discount rates used in determining the accumulated
postretirement benefit obligation were 8.75% and 7.5% at December 31,
1994 and 1993, respectively. For certain plans associated with Smith
Barney and old Travelers, the weighted average assumed rate of
compensation increase was approximately 3.5% for both 1994 and 1993.
For other plans, no assumptions have been made for rate of compensation
increases, since active employees are responsible for the full cost of
these benefits upon retirement.
54
<PAGE>
Notes to Consolidated Financial Statements (continued)
18. Lease Commitments
------------------
Rentals
Rental expense (principally for offices and computer equipment) was $403
million, $182 million and $114 million for the years ended December 31,
1994, 1993 and 1992, respectively.
At December 31, 1994, future minimum annual rentals under noncancellable
operating leases were as follows:
(millions)
1995 $ 323
1996 277
1997 221
1998 155
1999 127
Thereafter 138
-----
$1,241
=====
Future sublease rental income of approximately $31 million will
partially offset these commitments.
The Company and certain of Smith Barney's subsidiaries together have an
option to purchase the buildings presently leased for Smith Barney's
executive offices and New York City operations at the expiration of the
lease term.
19. Derivative Financial Instruments
--------------------------------
The Company uses derivative financial instruments in the normal course
of business for end user and, in the case of Smith Barney, trading
purposes. Derivatives are financial instruments, which include
forwards, futures, options and swaps, whose value is based upon an
underlying asset, index or reference rate. A derivative contract may be
traded on an exchange or over-the-counter (OTC). Exchange-traded
derivatives are standardized and include futures and certain option
contracts listed on exchanges. OTC derivative contracts are
individually negotiated between contracting parties and include
forwards, swaps, and certain options including interest rate caps,
floors and swaptions. Derivatives are subject to various risks similar
to those related to the underlying financial instruments, including
market, credit and liquidity risk. The risks of derivatives should not
be viewed in isolation but rather should be considered on an aggregate
basis along with risks related to the Company's non-derivative trading
and other activities. The Company manages derivative and non-derivative
risks on an aggregate basis as part of its firm-wide risk management
policies.
Forwards represent commitments to exchange currencies or to purchase or
sell other financial instruments at specified prices on specified future
dates. Futures contracts are similar to forwards, however, major
exchanges act as intermediaries and require daily cash settlement and
collateral deposits. As a writer of certain option contracts, Smith
Barney receives a fee to become obligated to buy or sell financial
instruments at a specified price for a period of time at the holder's
option. As a writer of interest rate options, Smith Barney receives a
fee to become obligated to pay the holder at specified future dates the
amount, if any, by which specified market interest rates exceed or fall
below specified reference rates applied to a notional amount. In the
case of swaptions, Smith Barney is obligated to enter into an interest
rate swap at specified terms or cancel an existing swap, at the holder's
option. Purchased options give Smith Barney the right, but not the
obligation, to buy or sell financial instruments at a specified price
for a period of time. Interest rate swaps require the exchange of
periodic cash payments based on a notional principal amount and
55
<PAGE>
Notes to Consolidated Financial Statements (continued)
agreed-upon fixed or floating rates. Generally, no cash is exchanged at
the outset of the contract and no principal payments are made by either
party.
Market Risk. Market risk is the potential for changes in the value of
derivative financial instruments due to market changes, including
interest and foreign exchange rate movements and fluctuations in
commodity or security prices. Market risk is directly impacted by the
volatility and liquidity in the markets in which the related underlying
assets are traded.
Credit Risk. Credit risk is the possibility that a loss may occur due
to the failure of a counterparty to perform according to the terms of a
contract. At any point in time, the credit risk for derivative
contracts is limited to the unrealized gains for each counterparty to
the extent not offset under any master netting agreements or collateral
arrangements. There is no credit risk associated with written options
as the counterparty pays a cash premium up front. Credit risk is reduced
to the extent that an exchange or clearing organization acts as a
counterparty to the transaction. For significant transactions, the
Company's credit review process includes an evaluation of the
counterparty's creditworthiness, periodic review of credit standing and
obtaining collateral and various credit enhancements in certain
circumstances. Smith Barney establishes credit limits for its trading
derivative counterparties by product type, taking into account the
perceived risk associated with each product. The usage and resultant
exposure from these credit limits are then monitored regularly by
management.
Liquidity Risk. Liquidity risk is the possibility that the Company may
not be able to rapidly adjust the size of its derivative positions in
times of high volatility and financial stress at a reasonable cost. The
liquidity of derivative products is highly related to the liquidity of
the underlying cash instrument. As with non-derivative financial
instruments, the Company's valuation policies for derivatives include
consideration of liquidity factors.
Trading Activity
All derivatives used for trading purposes relate to Smith Barney, and
are primarily used to facilitate customer transactions. Smith Barney
also uses derivatives to limit its net exposure to loss from market risk
related to derivative and non-derivative inventory positions. On a
limited basis, Smith Barney also began structuring derivative
instruments in 1994, primarily OTC foreign currency options and interest
rate options and swaps, as part of its proprietary trading activities.
The level of this activity may expand in the future. To the extent that
activities are related to servicing customer business, the objective is
to minimize market risk as much as possible.
Smith Barney's derivative contracts are generally short-term, with a
weighted average maturity of approximately three months at December 31,
1994 and 1993. The notional or contractual amounts of these instruments
do not represent the exposure to possible loss or future cash payments,
but rather reflect the extent of the Company's involvement in these
instruments. At December 31, 1994 and 1993, Smith Barney had
outstanding trading derivatives with notional values as follows:
56
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE><CAPTION>
Contract or Notional Amount Contract or Notional Amount
(millions) 1994 1993
----------------------------- ----------------------------
Purchase Sell Purchase Sell
-------- ---- -------- ----
<S> <C> <C> <C> <C>
"To be announced" mortgage-backed
securities $15,016 $15,747 $7,402 $7,499
Forward and futures contracts:
Foreign currency forwards 5,136 6,076 4,237 4,110
Foreign currency futures 865 6 701 854
Financial futures 50 2,661 100 750
Precious metals and other commodities 339 357 417 389
------ ------ ------ ------
$21,406 $24,847 $12,857 $13,602
====== ====== ====== ======
(millions) Purchased Written Purchased Written
--------- ------- --------- -------
Options:
Foreign currency $1,353 $1,340 $ - $ -
Financial futures 50 2,150 - -
Interest rate caps, floors and
swaptions - 725 - -
Other securities and commodities 34 22 127 74
----- ----- ------ -----
$1,437 $4,237 $ 127 $ 74
===== ===== ====== =====
(millions) Open Contracts Open Contracts
-------------- --------------
Interest rate swaps
$135 $ -
=== ===
</TABLE>
"To be Announced" Mortgage-Backed Securities. Smith Barney trades
---------------------------------------------
mortgage-backed "to be announced" mortgage pools ("TBAs") to facilitate
customer transactions and as hedges of proprietary inventory positions.
At December 31, 1994, over $13.2 billion each of purchase and sale
positions represent offsetting purchases and sales of the same security,
and over 95% of the contract values were for settlement within 60 days.
Net revenue from TBAs in 1994 was a loss of $10 million.
Foreign Currency Contracts. In its role as a market intermediary, Smith
----------------------------
Barney acts as a principal in foreign currency forward and options
contracts, primarily to facilitate customer transactions. These
transactions expose the firm to foreign exchange rate risk, which is
generally hedged by entering into foreign currency forward, futures and
options
57
<PAGE>
Notes to Consolidated Financial Statements (continued)
contracts with inverse market risk profiles. At December 31, 1994,
approximately 87% of the contract values of foreign currency derivative
instruments were for settlement within 90 days, and related primarily to
major European currencies and the Japanese yen. Written foreign
currency options consist of $733 million and $607 million of put and
call contracts, respectively, at December 31, 1994. Net revenues from
foreign currency contracts in aggregate were $19 million in 1994.
Financial Futures and Options on Financial Futures Contracts. Smith
------------------------------------------------------------
Barney trades financial futures contracts and options on financial
futures, primarily to hedge other proprietary inventory positions.
Written financial futures options consist of $1.075 billion of put
contracts and $1.075 billion of call contracts written on the same
underlying futures contracts. Net revenues from these transactions were
$9 million in 1994.
Precious Metals Contracts. Forward precious metals contracts are
-------------------------
entered into to facilitate customer transactions, and are transacted in
the "Loco London" Bullion Market, which is used globally for hedging and
trading purposes. Smith Barney may use precious metals futures as
hedges of its forward inventory to reduce market risk. Net revenues
from precious metals contracts were $2 million in 1994.
Interest Rate Products. Smith Barney enters into interest rate swaps,
-----------------------
caps, floors and swaptions as part of its proprietary trading strategy,
which it hedges with financialfutures and options on financial futures.
Net revenues from interest rate swap products were $3 million in 1994.
Trading derivative instruments are carried at market value, primarily
based on quoted market prices, with changes in market value reported in
principal transactions revenues in the Statement of Income. The trading
gains and losses on these derivative financial instruments, should not
be viewed on an individual basis, but rather as a component of the
Company's overall trading results, as these instruments are frequently
hedges of, or hedged by, other on-or off-balance-sheet financial
instruments.
The fair value of Smith Barney's trading derivative instruments as
recorded in the Statement of Financial Position at December 31, 1994 and
the average fair value for the year based on month end balances are
presented below.
58
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE><CAPTION>
Ending Fair Value Average Fair Value
------------------------ -----------------------
(millions) Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
"To be announced" mortgage-backed
securities $29 $28 $54 $54
Forward and futures contracts:
Foreign currency forwards 92 98 87 92
Foreign currency futures 2 3 4 3
Financial futures 7 2 3 2
Precious metals and other commodities 1 2 3 3
Options:
Foreign currency 5 8 7 8
Financial futures 2 6 1 1
Interest rate caps, floors and swaptions - 5 - 5
Other securities and commodities 1 1 3 5
Interest rate swaps 1 - 1 -
--- --- --- ---
$140 $153 $163 $173
=== === === ===
</TABLE>
End User Activity
In the normal course of business the Company also employs certain
derivative financialinstruments as an end user to manage various risks.
At December 31, 1994 the notional and fair values of end user
derivatives were as follows. Fair values were determined by reference
to quoted market prices or, for interest rate swaps, estimated based
upon the payments either party would have to make to terminate the swap.
<TABLE><CAPTION>
Notional Value Fair Value
---------------------- -----------------------
(millions) Open Contracts Asset Liability
-------------- ----- ---------
<S> <C> <C> <C>
Interest rate swaps:
Pay a fixed rate, receive a floating rate $712
Pay a floating rate, receive a fixed rate 70
---
$782 $ 43 $ 6
=== === ===
<CAPTION>
Purchase Sell
-------- ----
<C> <C> <C> <C> <C>
Foreign currency forwards $47 $183 15 7
Financial futures 13 - - -
---- ----- --- ---
$60 $183 $ 15 $ 7
=== ==== === ===
</TABLE>
59
<PAGE>
Notes to Consolidated Financial Statements (continued)
Certain of the Company's subsidiaries employ swap contracts to manage
interest rate risk related to variable rate obligations, limiting the
Company s net exposure to interest rate movements to an acceptable
level. Under these swaps the Company has fixed $590 million of its short
term or variable rate obligations at an average rate of 5.94%. The
swaps are accounted for as hedges of the related liabilities and
unrealized gains and losses are not recorded in the Statement of
Financial Position. Periodic receipts or payments are accrued as
adjustments to expense. In addition, Travelers Insurance Group utilizes
swaps to manage the differing interest rate risk profiles of its
insurance liabilities and related fixed income investment portfolio.
These swaps are marked to market and recorded as other assets with
changes in value recorded as an adjustment to stockholders' equity where
unrealized gains and losses on the related debt securities are recorded.
Travelers Insurance Group employs forwards to hedge its exposure to
foreign exchange rate risk related to the net investment in foreign
branches and foreign currency denominated investments. These forwards
are marked to market and recorded as other assets or liabilities in the
Statement of Financial Position. Changes in value related to forwards
hedging the net investment in foreign subsidiaries are recorded as an
adjustment to stockholders' equity where related translation adjustments
are recorded. Changes in value related to forwards hedging foreign
investments in U.S. portfolios, amounting to a net loss of $3 million in
1994, are recorded as other income where the related translation
adjustments to the underlying investments are recorded.
Travelers Insurance Group hedges expected cash flows related to certain
customer deposits and investment maturities, redemptions and sales
against adverse changes in market interest rates with financial futures
contracts. These contracts are marked to market and recorded as other
assets or liabilities in the Statement of Financial Position. Realized
gains or losses are recorded as an adjustment to the cost basis of the
related asset when acquired.
20. Fair Value of Financial Instruments
-----------------------------------
The following table summarizes the fair value and carrying amount of the
Company's financial instruments at December 31, 1994 and 1993.
Contractholder funds amounts exclude certain insurance contracts not
covered by FAS 107 "Disclosure About Fair Value of Financial
Instruments." The fair value assumptions were based upon subjective
estimates of market conditions and perceived risks of the financial
instruments at a certain point in time as disclosed further in various
Notes to the Consolidated Financial Statements. Disclosed fair values
for financial instruments do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Potential taxes and
other expenses that would be incurred in an actual sale or settlement
are not reflected in amounts disclosed.
60
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE><CAPTION>
1994 1993
------------------------------ -----------------------------
(millions) Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Assets:
Investments $39,120 $39,092 $42,199 $42,223
Securities borrowed or purchased
under agreements to resell 25,655 25,655 13,353 13,353
Trading securities owned 6,945 6,945 5,863 5,863
Net consumer finance receivables 6,746 7,364 6,216 6,831
Separate accounts
with guaranteed returns 1,483 1,379 1,508 1,593
Derivatives:
Trading 142 142 95 95
End user 15 58 7 7
Liabilities:
Long-term debt 7,075 6,867 6,991 7,324
Securities loaned or sold under
agreements to repurchase 21,620 21,620 10,144 10,144
Trading securities sold
not yet purchased 4,345 4,345 3,835 3,835
Contractholder funds:
With defined maturities 4,219 4,047 5,022 5,046
Without defined maturities 9,159 8,875 12,894 12,733
Separate accounts
with guaranteed returns 1,465 1,331 1,506 1,674
Derivatives:
Trading 153 153 98 98
End User 8 13 2 20
</TABLE>
21. Commitments
-----------
Financial Guarantees
At December 31, 1994 and 1993 The Travelers Insurance Group had
outstanding financial guarantees of $2.236 billion and $3.016 billion,
respectively, of which $2.086 billion and $2.598 billion, respectively,
represented its participation in the Municipal Bond Insurance
Association's guarantee of municipal bond obligations. The bonds
guaranteed are generally rated A or above and The Travelers Insurance
Group's participation has been reinsured.
61
<PAGE>
Notes to Consolidated Financial Statements (continued)
Credit Cards
The Company provides bank and private label credit card services through
CCC and its subsidiaries. These services are provided to individuals
and to affinity groups nationwide. At December 31, 1994 and 1993 total
credit lines available to credit cardholders were $5.423 billion and
$4.263 billion, of which $820 million and $790 million were utilized,
respectively.
Other Commitments
At December 31, 1994, and 1993 Smith Barney had borrowed securities
having a market value of $1.505 billion and $1.225 billion,
respectively, against which it had pledged securities having a market
value of $1.589 billion and $1.279 billion, respectively. In addition,
Smith Barney had obtained letters of credit aggregating $192 million and
$154 million at December 31, 1994 and 1993, respectively, of which $147
million and $116 million, respectively, was used to satisfy various
collateral and deposit requirements principally with clearing
organizations. Smith Barney also trades certain fixed income securities
on a "when issued" basis. At December 31, 1994 Smith Barney had
commitments to purchase $309 million and to sell $1.122 billion of
certain fixed income securities when issued. At December 31, 1993,
Smith Barney had commitments to sell $9 million of such securities when
issued.
Smith Barney and its broker-dealer subsidiary have each provided a
portion of a residual value guarantee in connection with the lease of
the buildings occupied by Smith Barney's executive offices and New York
operations. The amount of the guarantee is dependent upon the final
build-out costs with a maximum of $625 million.
The Travelers Insurance Group makes unfunded commitments to partnerships
and transfers receivables to third parties with recourse from time to
time. The off-balance sheet risks of these financial instruments were
not considered significant at December 31, 1994 or 1993.
22. Contingencies
-------------
A subsidiary of The Travelers Insurance Group is in litigation with
certain underwriters at Lloyds of London (Lloyd's) in New York state
court to enforce reinsurance contracts with respect to recoveries for
certain asbestos claims. The dispute involves the ability of old
Travelers to aggregate asbestos products claims with asbestos premises
claims under a market agreement between Lloyd's and old Travelers or
under the applicable reinsurance treaties. In January 1994 the court
stayed litigation of this matter in favor of arbitration of the contract
issues raised by old Travelers.
With respect to environmental and asbestos claims, see Note 11.
In the ordinary course of business the Company and/or its subsidiaries
are defendants or co-defendants in various litigation matters, other
than environmental and asbestos claims. Although there can be no
assurances, the Company believes, based on information currently
available, that the ultimate resolution of these legal proceedings would
not be likely to have a material adverse effect on its results of
operations, financial condition or liquidity.
62
<PAGE>
Notes to Consolidated Financial Statements (continued)
23. Quarterly Financial Data (unaudited)
------------------------------------
<TABLE><CAPTION>
1994
----------------------------------------------------
(in millions except per share amounts) First Second Third Fourth Total
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $4,769 $4,601 $4,714 $4,381 $18,465
Total expenses 4,231 4,111 4,212 4,016 16,570
Gain on sales of stock of
subsidiaries and affiliates - - - 254 254
----- ----- ----- ----- -----
Income before income taxes, and minority
interest and cumulative effect of changes
in accounting principles 538 490 502 619 2,149
Provision for income taxes 198 170 170 285 823
Minority interest, net of income taxes - - - - -
----- ----- ----- ----- -----
Net income before cumulative effect of changes
in accounting principles 340 320 332 334 1,326
Cumulative effect of changes in
accounting principles - - - - -
----- ----- ----- ----- -----
Net income $ 340 $ 320 $ 332 $ 334 $1,326
===== ===== ===== ===== =====
Earnings per share of common stock:
Net income before cumulative effect
of changes in accounting principles $ 0.98 $ 0.93 $ 0.97 $ 0.99 $ 3.86
Cumulative effect of changes in
accounting principles -. -. -. -. -.
------- ------- ------- ------- -------
Net income $ 0.98 $ 0.93 $ 0.97 $ 0.99 $ 3.86
======= ======= ======= ======= =======
Common stock price
High $ 42.875 $ 36.375 $ 36.875 $ 35.000 $42.875
Low $ 34.500 $ 32.000 $ 31.000 $ 31.000 $31.000
Close $ 35.250 $ 32.250 $ 32.875 $ 32.375 $32.375
Dividends per share of common stock $ .125 $ .150 $ .150 $ .150 $ .575
<CAPTION>
1993
----------------------------------------------------
(in millions except per share amounts) First Second Third Fourth Total
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $1,302 $1,284 $2,016 $2,195 $6,797
Total expenses 974 987 1,576 1,750 5,287
Gain on sales of stock of
subsidiaries and affiliates 6 - 7 - 13
----- ----- ----- ----- -----
Income before income taxes, and minority
interest and cumulative effect of changes
in accounting principle 334 297 447 445 1,523
Provision for income taxes 119 106 182 143 550
Minority interest, net of income taxes (8) (4) (6) (4) (22)
----- ----- ----- ----- -----
Net income before cumulative effect of changes
in accounting principles 207 187 259 298 951
Cumulative effect of changes in
accounting principles
(35) - - - (35)
----- ----- ----- ----- -----
Net income $ 172 $ 187 $ 259 $ 298 $ 916
===== ===== ===== ===== =====
Earnings per share of common stock:
Net income before cumulative effect
of changes in accounting principles $ 0.89 $ 0.76 $ 1.03 $ 1.19 $ 3.88
Cumulative effect of changes in
accounting principles (0.15) -. -. -. (0.14)
------- ------- ------- ------- -------
Net income $ 0.74 $ 0.76 $ 1.03 $ 1.19 $ 3.74
======= ======= ======= ======= =======
Common stock price
High $ 37.313 $ 39.469 $ 49.500 $ 48.625 $49.500
Low $ 24.313 $ 31.219 $ 37.594 $ 38.000 $24.313
Close $ 34.594 $ 39.469 $ 47.750 $ 38.875 $38.875
Dividends per share of common stock $ .120 $ .120 $ .125 $ .125 $ .490
Fourth quarter 1994 gain on sales of stock of subsidiaries and affiliates amounted to $88 million after-tax. Fourth quarter
1994 results also include $88 million of after-tax portfolio losses.
Results of operations prior to 1994 exclude the amounts of The Travelers Insurance Group Inc. except that results for 1993
include the Company's equity in earnings relating to the 27% interest purchased in December 1992. Results of operations
include amounts related to the Shearson Business from July 31, 1993, the date of acquisition.
Due to changes in the number of average shares outstanding, quarterly earnings per share of common stock do not add to the
totals for the years.
</TABLE>
63
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
The Travelers Inc.:
We have audited the accompanying consolidated statements of financial
position of The Travelers Inc. and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1994. 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 Inc. and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in debt
and equity securities in 1994. Also, as discussed in Note 2 to the
consolidated financial statements, the Company changed its methods of
accounting for postretirement benefits other than pensions and accounting
for postemployment benefits in 1993, and its method of accounting for
income taxes in 1992.
/s/ KPMG Peat Marwick LLP
New York, New York
January 17, 1995
Exhibit 21.01
Subsidiaries of The Travelers Inc.
The following list omits certain subsidiaries which, considered in the
aggregate as a single subsidiary, would not constitute a significant
subsidiary. The jurisdiction of incorporation of each subsidiary is
included in parentheses after its name.
AC Health Ventures, Inc. (Delaware)
AMCO Biotech, Inc. (Delaware)
Associated Madison Companies, Inc. (Delaware)
- American National Life Insurance (T & C), Ltd. (Turks and Caicos
Islands)
- ERISA Corporation (New York)
- Mid-America Insurance Services, Inc. (Georgia)
- National Marketing Corporation (Pennsylvania)
(also D/B/A American Service Associates)
- PFS Custodial Services, Inc. (Georgia)
- PFS Distributors, Inc. (Georgia)
- PFS Investments Inc. (Georgia)
- PFS Services, Inc. (Georgia)
- Primerica Finance Corporation (Delaware)
- American Capital Custodial Services, Inc. (Delaware)
- American Capital T.A., Inc. (Delaware)
- Primerica Financial Services Home Mortgages, Inc. (Georgia)
- Primerica Financial Services, Inc. (Nevada)
- Primerica Financial Services Agency of New York, Inc. (New York)
- Primerica Financial Services Insurance Marketing of Connecticut,
Inc. (Connecticut)
- Primerica Financial Services Insurance Marketing of Idaho, Inc.
(Idaho)
- Primerica Financial Services Insurance Marketing of Nevada, Inc.
(Nevada)
- Primerica Financial Services Insurance Marketing of Pennsylvania,
Inc. (Pennsylvania)
(also D/B/A Primerica Financial Services)
- Primerica Financial Services Insurance Marketing of the Virgin
Islands, Inc. (United States Virgin Islands)
- Primerica Financial Services Insurance Marketing of Wyoming, Inc.
(Wyoming)
- Primerica Financial Services Insurance Marketing, Inc. (Delaware)
- Primerica Financial Services of Alabama, Inc. (Alabama)
- Primerica Financial Services of New Mexico, Inc. (New Mexico)
- Primerica Insurance Agency of Massachusetts, Inc. (Massachusetts)
- Primerica Insurance Marketing Services of Puerto Rico, Inc. (Puerto
Rico)
- Primerica Insurance Services of Louisiana, Inc. (Louisiana)
(also D/B/A A.L. Williams)
- Primerica Insurance Services of Maryland, Inc. (Maryland)
(also D/B/A Primerica Financial Service Insurance Marketing, Inc.)
- Primerica Services, Inc. (Georgia)
- RCM Acquisition Inc. (Delaware)
- SCN Acquisitions Company (Delaware)
- SL&H Reinsurance, Ltd. (Turks and Caicos Islands)
- Southwest Service Agreements, Inc. (North Carolina)
- Southwest Warranty Corporation (Florida)
- The Travelers Insurance Group Inc. (Connecticut)
- Harbour Associates I, Inc. (Delaware)
<PAGE>
- Deer Run II, Inc. (Delaware)
- Net & Twine II Corporation (Delaware)
- KP Properties Corporation (Massachusetts)
- KPI 85, Inc. (Massachusetts)
- KRA Advisers Corporation (Massachusetts)
- KRP Corporation (Massachusetts)
- La Metropole S.A. (Belgium)
- The Plaza Corporation (Connecticut)
- Joseph A. Wynne Agency (California)
- The Copeland Companies (New Jersey)
- American Odyssey Funds Management, Inc. (New Jersey)
- American Odyssey Funds, Inc. (Maryland)
- Copeland Administrative Services, Inc. (New Jersey)
- Copeland Associates, Inc. (Delaware)
- Copeland Associates Agency of Ohio, Inc. (Ohio)
- Copeland Associates of Alabama, Inc. (Alabama)
- Copeland Associates of Montana, Inc. (Montana)
- Copeland Benefits Management Company (New Jersey)
- Copeland Equities, Inc. (New Jersey)
- H.C. Copeland Associates, Inc. of Massachusetts (Massachusetts)
- Copeland Financial Services, Inc. (New Jersey)
- Copeland Healthcare Services, Inc. (New Jersey)
- H.C. Copeland and Associates, Inc. of Texas (Texas)
- The Parker Realty and Insurance Agency, Inc. (Vermont)
- Travelers General Agency of Hawaii, Inc. (Hawaii)
- The Prospect Company (Delaware)
- 89th & York Avenue Corporation (New York)
- 979 Third Avenue Corporation (Delaware)
- Meadow Lane, Inc. (Georgia)
- Panther Valley, Inc. (New Jersey)
- Prospect Management Services Company (Delaware)
- The Travelers Asset Funding Corporation (Connecticut)
- Travelers Capital Funding Corporation (Connecticut)
- The Travelers Corporation of Bermuda Limited (Bermuda)
- The Travelers Indemnity Company (Connecticut)
- Commercial Insurance Resources, Inc. (Delaware)
- Gulf Insurance Company (Missouri)
- Atlantic Insurance Company (Texas)
- Gulf Group Lloyds (Texas)
(also D/B/A Texas Lloyd Plan)
- Gulf Risk Services, Inc. (Delaware)
- Gulf Underwriters Insurance Company (North Carolina)
- Penn Casualty Insurance Company (Missouri)
- Select Insurance Company (Texas)
- Countersignature Agency, Inc. (Florida)
- First Trenton Indemnity Company (New Jersey)
- Laramia Insurance Agency, Inc. (North Carolina)
- Lynch, Ryan & Associates, Inc. (Massachusetts)
- The Charter Oak Fire Insurance Company (Connecticut)
- The Exchange Agency, Inc. (Delaware)
2
<PAGE>
- The Phoenix Insurance Company (Connecticut)
- Constitution State Service Company (Montana)
- The Travelers Indemnity Company of America (Georgia)
- The Travelers Indemnity Company of Connecticut (Connecticut)
- The Travelers Indemnity Company of Illinois (Illinois)
- The Premier Insurance Company of Massachusetts (Massachusetts)
- The Travelers Home and Marine Insurance Company (Indiana)
- The Travelers Lloyds Insurance Company (Texas)
- TI Home Mortgage Brokerage, Inc. (Delaware)
- TravCo Insurance Company (Indiana)
- Travelers Medical Management Services Inc. (Delaware)
- The Travelers Insurance Company (Connecticut)
- Delaware Windtree Realty Corporation (Delaware)
- Market Funding Corporation I (Delaware)
- Market Funding Corporation II (Delaware)
- Travelers Insurance Holdings, Inc. (Georgia)
- AC RE, Ltd. (Bermuda)
- American Financial Life Insurance Company (Texas)
- Transport Life Insurance Company (Texas)
- Continental Life Insurance Company (Texas)
(also D/B/A CLIA Life Insurance Company)
- Travelers Life Insurance Company (Massachusetts)
- National Benefit Life Insurance Company (New York)
- Primerica Financial Services (Canada) Ltd. (Canada)
- PFSL Investments Canada Ltd. (Canada)
- Primerica Financial Services Ltd. (Canada)
- Primerica Life Insurance Company of Canada (Canada)
- Red Oak Plaza Holding Company, Inc. (Delaware)
- The Travelers Life and Annuity Company (Connecticut)
- The Travelers Insurance Corporation Proprietary Limited (Australia)
- The Travelers Marine Corporation (California)
- The Travelers Realty Investment Company (Connecticut)
- AdVision, Inc. (Connecticut)
- Constitution Plaza, Inc. (Connecticut)
- Travelers Asset Management International Corporation (New York)
- Travelers Canada Corporation (Canada)
- Travelers Equities Sales, Inc. (Connecticut)
- Travelers Mortgage Securities Corporation (Delaware)
- Travelers of Ireland Limited (Ireland)
- Travelers Specialty Property Casualty Company, Inc. (Connecticut)
CCC Holdings, Inc. (Delaware)
- Commercial Credit Company (Delaware)
- American Health and Life Insurance Company (Maryland)
- Brookstone Insurance Company (Vermont)
- CC Finance Company, Inc. (New York)
- CC Financial Services, Inc. (Hawaii)
- CCC Fairways, Inc. (Delaware)
- City Loan Financial Services, Inc. (Ohio)
- Commercial Credit Banking Corporation (Oregon)
- Commercial Credit Consumer Services, Inc. (Minnesota)
3
<PAGE>
- Commercial Credit Corporation (Alabama)
- Commercial Credit Corporation (California)
- Commercial Credit Corporation (Iowa)
(also D/B/A Commercial Credit Corporation (IA)
- Commercial Credit Corporation (Kentucky)
- Certified Insurance Agency, Inc. (Kentucky)
- Commercial Credit Investment, Inc. (Kentucky)
- National Life Insurance Agency of Kentucky, Inc. (Kentucky)
- Union Casualty Insurance Agency, Inc. (Kentucky)
- Commercial Credit Corporation (Maryland)
(also D/B/A Commercial Credit Corporation (MD))
- Action Data Services, Inc. (Missouri)
- Commercial Credit Plan, Incorporated (Oklahoma)
(also D/B/A Commercial Credit Consumer Services, Inc.)
- Commercial Credit Corporation (New Jersey)
- Commercial Credit Corporation (New York)
- Commercial Credit Corporation (South Carolina)
- Commercial Credit Corporation (West Virginia)
- Commercial Credit Corporation NC (North Carolina)
- Commercial Credit Europe, Inc. (Delaware)
- Commercial Credit Far East Inc. (Delaware)
- Commercial Credit Insurance Services, Inc. (Maryland)
- Commercial Credit Insurance Agency (P&C) of Mississippi, Inc.
(Mississippi)
- Commercial Credit Insurance Agency of Alabama, Inc. (Alabama)
- Commercial Credit Insurance Agency of Kentucky, Inc. (Kentucky)
- Commercial Credit Insurance Agency of Massachusetts, Inc.
(Massachusetts)
- Commercial Credit Insurance Agency of Nevada, Inc. (Nevada)
- Commercial Credit Insurance Agency of Ohio, Inc. (Ohio)
- Commercial Credit Insurance Agency of New Mexico, Inc. (New
Mexico)
- Commercial Credit International, Inc. (Delaware)
- Commercial Credit International Banking Corporation (Oregon)
- Commercial Credit Corporation CCC Limited (Canada)
- Commercial Credit Services do Brazil Ltda. (Brazil)
- Commercial Credit Services Belgium S.A. (Belgium)
- Commercial Credit Services Israel Limited (Israel)
- Industrial Leasing Services Limited (Israel)
- Comlease Ltd. (Israel)
- Commercial Credit Limited (Delaware)
- Commercial Credit Loan, Inc. (New York)
- Commercial Credit Loans, Inc. (Delaware)
- Commercial Credit Loans, Inc. (Ohio)
- Commercial Credit Loans, Inc. (Virginia)
- Commercial Credit Management Corporation (Maryland)
- Commercial Credit Plan Incorporated (Tennessee)
(also D/B/A Commercial Credit Plan (TN))
- Commercial Credit Plan Incorporated (Utah)
- Commercial Credit Plan Incorporated of Georgetown (Delaware)
- Commercial Credit Plan Industrial Loan Company (Virginia)
- Commercial Credit Plan, Incorporated (Colorado)
4
<PAGE>
- Commercial Credit Plan, Incorporated (Delaware)
- Commercial Credit Plan, Incorporated (Georgia)
- Commercial Credit Plan, Incorporated (Missouri)
- Commercial Credit Securities, Inc. (Delaware)
- DeAlessandro & Associates, Inc. (Delaware)
- Park Tower Holdings, Inc. (Delaware)
- CC Retail Services, Inc. (Delaware)
- Troy Textiles, Inc. (Delaware)
- COMCRES, Inc. (Delaware)
- Commercial Credit Development Corporation (Delaware)
- Myers Park Properties, Inc. (Delaware)
- Penn Re, Inc. (North Carolina)
- Plympton Concrete Products, Inc. (Delaware)
- Resource Deployment, Inc. (Texas)
- The Travelers Bank (Delaware)
- The Travelers Banks USA (Delaware)
- Travelers Home Equity, Inc.
- CC Consumer Services of Alabama, Inc. (Alabama)
- CC Home Lenders Financial, Inc. (Georgia)
- CC Home Lenders, Inc. (Ohio)
- Commercial Credit Corporation (Texas)
- Commercial Credit Financial of Kentucky, Inc. (Kentucky)
- Commercial Credit Financial of West Virginia, Inc. (West Virginia)
- Commercial Credit Plan Consumer Discount Company (Pennsylvania)
- Commercial Credit Services of Kentucky, Inc. (Kentucky)
- Travelers Home Equity Services, Inc. (North Carolina)
- Verochris Corporation (Delaware)
- AMC Aircraft Corp. (Delaware)
- Voyager Guaranty Insurance Company (Missouri)
- World Service Life Insurance Company (Colorado)
D.I.R.E.C.T. Resources, Inc. (Delaware)
Greenwich Street Capital Partners, Inc. (Delaware)
Greenwich Street Investments, Inc. (Delaware)
- Greenwich Street Offshore Holdings, Inc. (British Virgin Islands)
Margco Holdings, Inc. (Delaware)
- Berg Associates (New Jersey)
- Berg Enterprises Realty, Inc. (New York)
- Dublin Escrow, Inc. (California)
- M.K.L. Realty Corporation (New Jersey)
- MFC Holdings, Inc. (Delaware)
- MRC Holdings, Inc. (Delaware)
- The Berg Agency, Inc. (New Jersey)
Mirasure Insurance Company, Ltd. (Bermuda)
PA/RCM Corporation (Delaware)
PA/RCM LP Corporation (Delaware)
Pacific Basin Investments Ltd. (Delaware)
Primerica Corporation (Wyoming)
Primerica, Inc. (Delaware)
RCM Capital Trust Company (California)
Smith Barney Corporate Trust Company
5
<PAGE>
Smith Barney Holdings Inc. (Delaware)
- Mutual Management Corp. (New York)
- Smith Barney Asset Management Co., Ltd. (Japan)
- R-H Sports Enterprises Inc. (Georgia)
- SB Cayman Holdings I Inc. (Delaware)
- SB Cayman Holdings II Inc. (Delaware)
- SBS Software Inc. (Delaware)
- Smith Barney (Delaware) Inc. (Delaware)
- 1345 Media Corp. (Delaware)
- Americas Avenue Corporation (Delaware)
- Corporate Realty Advisors, Inc. (Delaware)
- CRA Acquisition Corp. (Delaware)
- IPO Holdings Inc. (Delaware)
- MLA 50 Corporation (Delaware)
- MLA GP Corporation (Delaware)
- Municipal Markets Advisors Incorporated (Delaware)
- SBF Corp. (Delaware)
(also D/B/A SB GP Company)
- Smith Barney Acquisition Corporation (Delaware)
- Smith Barney Commercial Corp. (Delaware)
- Smith Barney Funding Holding Corp. (Delaware)
- Smith Barney Global Capital Management, Inc. (Delaware)
- Smith Barney Investment, Inc. (Delaware)
- Smith Barney Offshore, Inc. (Delaware)
- Decathlon Offshore Limited (Cayman Islands)
- Smith Barney Pension Advisors Corp. (Delaware)
- Smith Barney Realty Advisors, Inc. (Delaware)
- Smith Barney Realty, Inc. (Delaware)
- Smith Barney Risk Investors, Inc. (Delaware)
- Smith Barney Venture Corp. (Delaware)
- Smith Barney Asia Inc. (Delaware)
- Smith Barney Asset Management Group (Asia) Pte. Ltd. (Singapore)
- Smith Barney Canada Inc. (Canada)
- Smith Barney Capital Services Inc. (Delaware)
- Smith Barney Cayman Islands, Ltd. (Cayman Islands)
- Smith Barney Commercial Corporation Asia Limited (Hong Kong)
- Smith Barney Europe Holdings, Ltd. (United Kingdom)
- Smith Barney Europe, Ltd. (United Kingdom)
- Smith Barney Shearson Futures, Ltd. (United Kingdom)
- Smith Barney Futures Management Inc. (Delaware)
- Smith Barney Inc. (Delaware)
- SBHU Life Agency, Inc. (Delaware)
- Robinson-Humphrey Insurance Services Inc. (Georgia)
- Robinson-Humphrey Insurance Services of Alabama, Inc. (Alabama)
- SBHU Life & Health Agency, Inc. (Delaware)
- SBHU Life Agency of Arizona, Inc. (Arizona)
- SBHU Life Agency of Indiana, Inc. (Indiana)
- SBHU Life Agency of Utah, Inc. (Utah)
- SBHU Life Insurance Agency of Massachusetts, Inc. (Massachusetts)
- SBS Insurance Agency of Hawaii, Inc. (Hawaii)
6
<PAGE>
- SBS Insurance Agency of Idaho, Inc. (Idaho)
- SBS Insurance Agency of Maine, Inc. (Maine)
- SBS Insurance Agency of Montana, Inc. (Montana)
- SBS Insurance Agency of Nevada, Inc. (Nevada)
- SBS Insurance Agency of North Carolina, Inc. (North Carolina)
- SBS Insurance Agency of Ohio, Inc. (Ohio)
- SBS Insurance Agency of South Dakota, Inc. (South Dakota)
- SBS Insurance Agency of Wyoming, Inc. (Wyoming)
- SBS Insurance Brokerage Agency of Arkansas, Inc. (Arkansas)
- SBS Insurance Brokers of Arizona, Inc. (Arizona)
- SBS Insurance Brokers of Kentucky, Inc. (Kentucky)
- SBS Insurance Brokers of Louisiana, Inc. (Louisiana)
- SBS Insurance Brokers of New Hampshire, Inc. (New Hampshire)
- SBS Insurance Brokers of North Dakota, Inc. (North Dakota)
- SBS Life Insurance Agency of Puerto Rico, Inc. (Puerto Rico)
- SLB Insurance Agency of Maryland, Inc. (Maryland)
- Smith Barney Life Agency Inc. (Louisiana)
- Smith Barney (France) S.A. (France)
- Smith Barney (Hong Kong) Limited (Hong Kong)
- Smith Barney (Netherlands) Inc. (Delaware)
- Smith Barney International Incorporated (Oregon)
- Smith Barney Pacific Holdings, Inc. (British Virgin Islands)
- Smith Barney Shearson (Asia) Limited (Hong Kong)
- Smith Barney Shearson (Singapore) Pte Ltd (Singapore)
- Smith Barney Shearson, HG Asia (Singapore) Pte Ltd (Singapore)
- HG Asia (Singapore) Pte. Ltd. (Singapore)
- The Robinson-Humphrey Company, Inc. (Delaware)
- Smith Barney Mortgage Brokers Inc. (Delaware)
- Smith Barney Mortgage Capital Corp. (Delaware)
- Smith Barney Mortgage Capital Group, Inc. (Delaware)
- Smith Barney Mutual Funds Management Inc. (Delaware)
- Smith Barney Strategy Advisers Inc.
- E.C. Tactical Management S.A. (Luxembourg)
- Smith Barney Private Trust Company (Cayman) Limited (Cayman Islands)
- Smith Barney S.A. (France)
- Smith Barney Shearson (Chile) Corredora de Seguro Limitada (Chile)
(also D/B/A SBS (Chile) Corredora de Seguros Ltda.)
- Smith Barney Shearson (Ireland) Limited (Ireland)
- Structured Mortgage Securities Corporation (Delaware)
- The Travelers Investment Management Company (Connecticut)
Smith Barney Private Trust Company (New York)
Smith Barney Private Trust Company of Florida (Florida)
Tinmet Corporation (Delaware)
Travelers Services Inc. (Delaware)
TRV Employees Investments, Inc. (Delaware)
7
Exhibit 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
The Travelers Inc.:
We consent to the incorporation by reference in the Registration Statements on:
- Form S-3 Nos. 33-49280, 33-55542, 33-56940, 33-68760, 33-51101,
33-52281 and 33-54093; and,
- Form S-8 Nos. 33-32130, 33-43997, 33-59524, 33-37399, 33-28437, 33-7665,
33-28110, 33-43883, 33-21099, 33-29711, 33-47437, 33-39025,
33-40469, 33-38109, 33-50206, 33-39985, 33-51353, 33-51769,
33-51783, 33-52027 and 33-52029; and,
- Form S-4 Nos. 33-37089, 33-25532 and 33-51201
of The Travelers Inc., of our report dated January 17, 1995, relating to the
consolidated statements of financial position of The Travelers Inc. and
subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1994, which report is
included with the annual report on Form 10-K for the year ended December 31,
1994, of The Travelers Inc. Our report refers to: a change in the method of
accounting for certain investments in debt and equity securities in 1994;
changes in the methods of accounting for postretirement benefits other than
pensions and accounting for postemployment benefits in 1993; and a change in
the method of accounting for income taxes in 1992.
/s/ KPMG Peat Marwick LLP
New York, New York
March 29, 1995
Exhibit 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
The Board of Directors of
The Travelers Inc. :
We consent to the incorporation by reference in the Registration Statements on
Form S-3 (Nos. 33-49280, 33-55542, 33-56940, 33-68760, 33-51101, 33-52281 and
33-54093), the Registration Statements on Form S-8 (Nos. 33-32130, 33-43997,
33-59524, 33-37399, 33-28437, 33-7665, 33-28110, 33-43883, 33-21099, 33-29711,
33-47437, 33-39025, 33-40469, 33-38109, 33-50206, 33-39985, 33-51353, 33-51769,
33-51783, 33-52027 and 33-52029) and the Registration Statements on Form S-4
(Nos. 33-37089, 33-25532, and 33-51201) of The Travelers Inc., of our report
dated January 24, 1994, relating to our audit of the preacquisition consolidated
balance sheets of The Travelers Corporation and Subsidiaries (the "Company") as
of December 31, 1993 and 1992, and the related preacquisition consolidated
statements of operations and retained earnings and cash flows for each of the
three years in the period ended December 31, 1993, which include only those
accounts of the Company immediately prior to it being acquired and were prepared
for the purpose of complying with the requirements of the Staff of the
Securities and Exchange Commission, which report is included in the Annual
Report on Form 10-K for the period ended December 31, 1994, of The Travelers
Inc. These preacquisition consolidated financial statements are not intended
to be a complete presentation of the Company's financial statements after its
acquisition.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut
March 28, 1995
Exhibit 24.01
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ C. Michael Armstrong
------------------------
C. Michael Armstrong
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Kenneth J. Bialkin
----------------------
Kenneth J. Bialkin
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Edward H. Budd
------------------
Edward H. Budd
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Joseph A. Califano, Jr.
---------------------------
Joseph A. Califano, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Douglas D. Danforth
-----------------------
Douglas D. Danforth
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Robert F. Daniell
---------------------
Robert F. Daniell
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Leslie B. Disharoon
-----------------------
Leslie B. Disharoon
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Robert F. Greenhill
-----------------------
Robert F. Greenhill
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Ann Dibble Jordan
---------------------
Ann Dibble Jordan
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Robert I. Lipp
------------------
Robert I. Lipp
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Dudley C. Mecum
-------------------
Dudley C. Mecum
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Andrall E. Pearson
----------------------
Andrall E. Pearson
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Frank J. Tasco
------------------
Frank J. Tasco
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Joseph R. Wright, Jr.
-------------------------
Joseph R. Wright, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
The Travelers Inc., a Delaware corporation, do hereby constitute and
appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each
of them severally, to be my true and lawful attorneys-in-fact and agents,
each acting alone with full power of substitution and re-substitution, to
sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the
fiscal year ended December 31, 1994, and all amendments thereto, and to
file, or cause to be filed, the same with all exhibits thereto (including
this power of attorney), and other documents in connection therewith with
the Securities and Exchange Commission, provided that such Annual Report on
Form 10-K in final form, and any amendment or amendments thereto and such
other documents, be approved by said attorneys-in-fact, or by any one of
them; and I do hereby grant unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done in or about the premises, as fully and
to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 22, 1995.
/s/ Arthur Zankel
-----------------
Arthur Zankel
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1994 FINANCIAL STATEMENTS OF THE TRAVELERS INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,227
<SECURITIES> 71,720<F1>
<RECEIVABLES> 19,002<F2>
<ALLOWANCES> 0<F3>
<INVENTORY> 0<F3>
<CURRENT-ASSETS> 0<F3>
<PP&E> 0<F3>
<DEPRECIATION> 0<F3>
<TOTAL-ASSETS> 115,297
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 13,929<F4>
<COMMON> 4
138
800
<OTHER-SE> 7,836<F5>
<TOTAL-LIABILITY-AND-EQUITY> 115,297
<SALES> 0<F3>
<TOTAL-REVENUES> 18,465
<CGS> 0<F3>
<TOTAL-COSTS> 16,570
<OTHER-EXPENSES> 0<F3>
<LOSS-PROVISION> 152<F6>
<INTEREST-EXPENSE> 1,284<F6>
<INCOME-PRETAX> 2,149
<INCOME-TAX> 823
<INCOME-CONTINUING> 1,326
<DISCONTINUED> 0<F3>
<EXTRAORDINARY> 0<F3>
<CHANGES> 0<F3>
<NET-INCOME> 1,326
<EPS-PRIMARY> 3.86
<EPS-DILUTED> 0.00<F3>
<FN>
<F1>Includes the following items from the financial statements: total
investments $39,120; securities borrowed or purchased under agreements
to resell $25,655; and trading securities owned, at market value $6,945
<F2>Includes the following items from the financial statements: brokerage
receivables $8,238; net consumer finance receivables $6,746 and other
receivables $4,018.
<F3>Items which are inapplicable relative to the underlying financial
statements are indicated with a zero as required.
<F4>Includes the following items from the financial statements: investment
banking and brokerage borrowings $4,374; short-term borrowings $2,480
and long-term debt $7,075.
<F5>Includes the following items from the financial statements: additional
paid-in capital $6,655; retained earnings $4,199; treasury stock $(1,553);
and unrealized gain (loss) on investment securities and other, $(1,465).
<F6>Included in total costs and expenses applicable to sales and revenues.
</FN>
</TABLE>
<TABLE>
Exhibit 99.01
<CAPTION>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
OPERATIONS AND RETAINED EARNINGS Pre-merger, historical accounting basis
------------------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1993 1992 1991
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Premiums $ 6,584 $ 6,688 $ 7,302
Net investment income 2,600 2,799 3,228
Realized investment gains (losses) 209 (635) (2)
Other, including gains and losses on dispositions 891 823 849
------------------------------------------------------------------------------------------------
10,284 9,675 11,377
------------------------------------------------------------------------------------------------
Benefits and expenses
Current and future insurance benefits 5,956 6,196 6,314
Interest credited to contractholders 1,206 1,456 1,656
Loss adjustment expenses 895 951 975
Amortization of deferred acquisition costs 531 558 569
General and administrative expenses 1,464 1,868 1,540
------------------------------------------------------------------------------------------------
10,052 11,029 11,054
------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes,
extraordinary credit and cumulative effects
of changes in accounting principles 232 (1,354) 323
------------------------------------------------------------------------------------------------
Federal income taxes
Current 86 (23) 48
Deferred (142) (503) (32)
------------------------------------------------------------------------------------------------
(56) (526) 16
------------------------------------------------------------------------------------------------
Income (loss) before extraordinary credit
and cumulative effects of changes in
accounting principles 288 (828) 307
Extraordinary credit - - 11
Cumulative effect of change in accounting
for postretirement benefits other than
pensions, net of tax - (258) -
Cumulative effect of change in accounting
for income taxes - 428 -
------------------------------------------------------------------------------------------------
Net income (loss) 288 (658) 318
Retained earnings beginning of year 2,865 3,724 3,583
Dividends to preference shareholders (55) (38) (18)
Dividends to common shareholders (231) (167) (165)
Tax benefit on preference dividends 4 4 6
------------------------------------------------------------------------------------------------
Retained earnings end of year $ 2,871 $ 2,865 $ 3,724
------------------------------------------------------------------------------------------------
Per common share (in dollars)
Primary
Income (loss) before extraordinary credit and
cumulative effects of changes in
accounting principles N/A $ (8.11) $ 2.87
Extraordinary credit N/A - .10
Cumulative effect of change in accounting
for postretirement benefits other than
pensions, net of tax N/A (2.43) -
Cumulative effect of change in accounting
for income taxes N/A 4.03 -
Net income (loss) N/A (6.51) 2.97
Assuming full dilution
Income (loss) before extraordinary credit and
cumulative effects of changes in
accounting principles N/A (8.11) 2.80
Extraordinary credit N/A - .09
Cumulative effect of change in accounting
for postretirement benefits other than
pensions, net of tax N/A (2.43) -
Cumulative effect of change in accounting
for income taxes N/A 4.03 -
Net income (loss) N/A (6.51) 2.89
Dividends 1.60 1.60 1.60
------------------------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
</TABLE>
<TABLE><CAPTION>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET Pre-merger, historical accounting basis
------------------------------------------------------------------------------------------------
(At December 31, in millions) 1993 1992
------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Fixed maturities
Bonds (market, $16,832; $14,774) $ 15,887 $ 13,950
Trading portfolio securities (cost, $8,747; $8,622) 8,952 8,944
Redeemable preferred stocks (market, $39; $53) 37 52
Equity securities, at market
Common stocks (cost, $88; $114) 156 151
Nonredeemable preferred stocks (cost, $164; $137) 170 138
Mortgage loans 7,490 10,072
Investment real estate, net of accumulated depreciation
of $39; $54 593 826
Real estate held for sale, net of accumulated depreciation
of $97; $133 806 1,332
Policy loans 1,212 1,210
Short-term securities 998 1,341
Other investments 1,226 1,313
------------------------------------------------------------------------------------------------
Total investments 37,527 39,329
------------------------------------------------------------------------------------------------
Cash and cash equivalents 798 1,688
Investment income accrued 496 510
Premium balances receivable 1,771 1,855
Reinsurance recoverable 4,196 4,168
Deferred acquisition costs 827 791
Deferred federal income taxes 1,523 1,371
Separate and variable accounts 4,588 5,330
Other assets 2,884 2,987
------------------------------------------------------------------------------------------------
Total assets $ 54,610 $ 58,029
------------------------------------------------------------------------------------------------
Liabilities
Contractholder funds $ 17,729 $ 19,276
Benefit and loss reserves 20,224 20,173
Unearned premium reserves 1,782 1,790
Policy and contract claims 1,099 1,129
Short-term debt - 64
Long-term debt 752 1,124
Current federal income taxes 175 73
Separate and variable accounts 4,485 5,251
Other liabilities 3,239 4,095
------------------------------------------------------------------------------------------------
Total liabilities 49,485 52,975
------------------------------------------------------------------------------------------------
Commitments and contingencies - note 9
ESOP Preference stock series A 235 225
Guaranteed ESOP obligation (125) (149)
------------------------------------------------------------------------------------------------
110 76
------------------------------------------------------------------------------------------------
Shareholders' equity
Preference stock series B 375 375
Common stock (147 and 145 shares issued) 184 182
Additional paid-in capital 1,442 1,400
Unrealized investment gains, net of taxes 181 197
Retained earnings 2,871 2,865
Cost of common stock in treasury (38) (41)
------------------------------------------------------------------------------------------------
Total shareholders' equity 5,015 4,978
------------------------------------------------------------------------------------------------
Total $ 54,610 $ 58,029
------------------------------------------------------------------------------------------------
Shareholders' equity per common share (in dollars) N/A $ 31.96
------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE><CAPTION>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Pre-merger, historical accounting basis
----------------------------------------------------------------------------------------------------
(For the year ended December 31, in millions) 1993 1992 1991
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Premiums collected $ 6,333 $ 6,645 $ 7,464
Net investment income received 2,496 2,837 3,243
Other revenues received 582 615 682
Benefits and claims paid, net (6,481) (6,677) (6,916)
Interest credited to contractholders (1,154) (1,404) (1,618)
Operating expenses paid (2,045) (2,003) (2,289)
Income taxes refunded (paid) 33 (41) (81)
Trading account investments, (purchases) sales, net (998) (938) (1,973)
Other 306 239 174
----------------------------------------------------------------------------------------------------
Net cash used in operating activities (928) (727) (1,314)
----------------------------------------------------------------------------------------------------
Cash flows from investing activities
Investment repayments
Fixed maturities 3,824 3,161 2,843
Mortgage loans 1,475 1,360 994
Proceeds from investments sold
Fixed maturities 1,203 1,103 3,440
Equity securities 172 839 661
Mortgage loans 344 303 198
Real estate 1,000 270 122
Investments in
Fixed maturities (6,154) (5,143) (4,670)
Equity securities (181) (582) (670)
Mortgage loans (211) (159) (237)
Real estate (92) (61) (37)
Policy loans, net (2) (184) (184)
Short-term securities, (purchases) sales, net 342 242 (16)
Other investments, (purchases) sales, net 59 51 (47)
Securities transactions in course of settlement (44) 671 (884)
Proceeds from disposition of subsidiaries and
other operations 48 9 122
Other (9) 65 (101)
----------------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,774 1,945 1,534
----------------------------------------------------------------------------------------------------
Cash flows from financing activities
Issuance (redemption) of short-term debt, net (9) 64 (185)
Issuance (redemption) of certificates of deposit, net 19 (136) (415)
Issuance of long-term debt - 367 95
Payments of long-term debt (319) (169) (68)
Contractholder fund deposits 3,159 3,048 4,101
Contractholder fund withdrawals (4,418) (5,003) (5,325)
Issuance of preference stock series B - 375 -
Issuance of common stock - 550 -
Dividends to shareholders (278) (196) (182)
Other 110 59 83
----------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,736) (1,041) (1,896)
----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $ (890) $ 177 $ (1,676)
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 798 $ 1,688 $ 1,511
----------------------------------------------------------------------------------------------------
Interest paid $ 96 $ 140 $ 306
----------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
<PAGE>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. Summary Of Significant Accounting Policies
Basis of presentation. The financial statements and the
accompanying notes reflect the operations of The Travelers
Corporation and its subsidiaries (the Company) for the years
ended December 31, 1993, 1992 and 1991 on a historical accounting
basis. On December 31, 1993, The Travelers Inc. (formerly
Primerica Corporation) acquired the approximately 73% of the
Company which it did not already own (the Merger). No
adjustments have been made to the financial statements and the
accompanying notes to reflect the merger of the Company into The
Travelers Inc. or to reflect any of the capital transactions
related to the Merger. For discussion of the merger see note 23.
Changes in accounting principles. In the first quarter of 1993,
the Company implemented Statement of Financial Accounting
Standards No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts" (FAS 113). Further
disclosures relating to FAS 113 are included in note 2.
In July 1993, the Financial Accounting Standards Board Emerging
Issues Task Force (EITF) reached a conclusion on Issue No. 93-6
"Accounting for Multiple-Year Retrospectively Rated Contracts by
Ceding and Assuming Enterprises" (EITF No. 93-6). Further
disclosures relating to EITF No. 93-6 are included in
note 2.
In the third quarter of 1992, the Company implemented Statement
of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pension" (FAS 106), and
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (FAS 109). These accounting changes were
implemented with retroactive application to January 1, 1992.
Further disclosures relating to FAS 106 and FAS 109 are included
in note 2.
As of December 31, 1992, the Company implemented the American
Institute of Certified Public Accountants' Statement of Position
92-3, "Accounting for Foreclosed Assets" (SOP 92-3). This
accounting change was implemented with prospective application.
Further disclosures relating to SOP 92-3 are included in note 2.
Principles of consolidation. The financial statements have been
prepared in conformity with generally accepted accounting
principles and include the Company and its insurance and
significant noninsurance subsidiaries on a fully consolidated
basis. Certain prior year amounts have been reclassified to
conform with the 1993 presentation.
Investments. The aggregate carrying values of fixed maturities,
equity securities, mortgage loans and real estate are determined
after deducting appropriate investment valuation reserves.
Investment valuation reserves are discussed below and are
presented in note 16.
Fixed maturities comprise bonds and redeemable preferred stocks
and the majority are carried at amortized cost, since the Company
- 1 -
<PAGE>
has the ability and intention to hold those securities on a long-
term basis. Trading portfolio securities, consisting of fixed
maturities that are likely to be sold prior to maturity, are
carried at current market value. Transfers of securities from
the amortized cost portfolio to the trading portfolio result in
adjustments to unrealized investment gains or losses, which are
included in shareholders' equity.
Equity securities, which consist of common and nonredeemable
preferred stocks, are generally carried at market value as of the
balance sheet date.
Mortgage loans are carried at the aggregate of the unpaid
balances and include in-substance foreclosures.
Real estate is carried at cost less accumulated depreciation.
Real estate held for sale is carried at the lower of cost or fair
value less estimated costs to sell. At foreclosure, real estate
is recorded at the lower of the unpaid principal balance or fair
value. Fair value is established at time of foreclosure by
appraisers, both internal and external, using discounted cash
flow analyses and other acceptable techniques.
Effective January 1, 1994, the Company will adopt Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Debt and Equity Securities" (FAS 115). FAS 115 addresses
accounting and reporting for investments in equity securities
that have a readily determinable fair value and for all debt
securities.
Accrual of income is suspended on fixed maturities or mortgage
loans that are in default, or on which it is likely that future
interest payments will not be made as scheduled, and interest
income on investments in default is recognized only as payment is
received.
Gains or losses arising from futures contracts used to hedge
investments are treated as basis adjustments and are recognized
in income over the life of the hedged investments.
Gains and losses arising from forward contracts used to hedge
foreign investments in the Company's U.S. portfolios are a
component of realized investment gains and losses. Gains and
losses arising from forward contracts used to hedge investments
in foreign operations (primarily Canadian) are generally
reflected directly in shareholders' equity.
Rate differentials on interest rate swap agreements are accrued
and recognized as an adjustment to interest income from the
related item.
Investment gains and losses. Realized investment gains and
losses are included as a component of pretax revenues based upon
specific identification of the investments sold on the trade date
and include adjustments to investment valuation reserves. These
adjustments reflect changes considered to be other than temporary
in the net realizable value of investments. Also included are
gains and losses arising from the translation of the local
currency value of foreign investments to U.S. dollars, the
functional currency of the Company.
Unrealized investment gains and losses on equity securities,
trading portfolio fixed maturities and investments in foreign
operations (primarily Canadian), net of related taxes, are
- 2 -
<PAGE>
generally reflected directly in shareholders' equity.
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.
Cash and cash equivalents. Cash equivalents include liquid
investments with maturities of 90 days or less when purchased.
The carrying value of these instruments approximates their fair
value.
Deferred acquisition costs. Commissions and premium taxes
incurred in connection with property-casualty insurance are
deferred and amortized pro rata over the contract periods in
which the related premiums are earned. Future investment income
attributable to related premiums is taken into account in
assessing the carrying value of this asset. All other
acquisition expenses are charged to operations as incurred.
Costs of acquiring individual life insurance, annuities and
accident and health business, principally commissions and certain
expenses related to policy issuance, underwriting and marketing,
all of which vary with and are primarily related to the
production of new business, are deferred. For traditional
insurance products, these costs are amortized, with interest, in
proportion to the ratio of estimated annual revenues to the
estimated total revenues over the contract period. For most life
insurance, a 20- to 30-year amortization period is used, and a
10- to 15-year period is used for variable annuities. A 10-year
period is used for guaranteed renewable health policies.
Deferred acquisition costs for universal life contracts and
certain annuity contracts are amortized at a constant rate based
upon the present value of estimated gross profit expected to be
realized over the life of the contracts, which is reevaluated
annually.
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. The assets of these
accounts are carried at amortized cost. Amounts assessed to the
contractholders for management services are included in revenues.
Deposits, net investment income and realized investment gains and
losses for these accounts are excluded from revenues, and related
liability increases are excluded from benefits and expenses.
Other assets. Goodwill is being amortized over periods generally
not exceeding 25 years and other intangibles over their estimated
useful lives. Goodwill is included in other assets in the
consolidated balance sheet and amounted to $91 million and $97
million at December 31, 1993 and 1992, respectively.
- 3 -
<PAGE>
Receivables related to retrospectively rated policies on
property-casualty business, net of allowance for estimated
uncollectible amounts, are included in other assets.
Contractholder funds. Contractholder funds represent receipts
from the issuance of universal life, pension investment and
certain individual annuity contracts. Such receipts are
considered deposits on investment contracts that do not have
substantial mortality or morbidity risk.
Account balances are also increased by interest credited and reduced
by withdrawals, mortality charges and administrative expenses
charged to the contractholders. Calculations of contractholder
account balances for investment contracts reflect lapse,
withdrawal and interest rate assumptions based on contract
provisions, the Company's experience and industry standards.
Interest rates range from 2.90% to 17.42%. Contractholder funds
also include other funds that policyholders leave on deposit with
the Company.
Benefit and loss reserves. Benefit reserves for traditional
individual life insurance, annuities and accident and health
policies have been computed based upon mortality, morbidity,
lapse and interest assumptions applicable to these coverages,
including provision for adverse deviations. Interest rates
range from 2.00% to 14.00%, and mortality, morbidity and
withdrawal assumptions reflect the Company's experience and
industry standards. The assumptions vary by plan, age at issue,
year of issue and duration.
Traditional group life insurance, certain pension contracts and
accident and health benefit reserves have been computed generally
using interest rates ranging from 2.00% to 16.35%, and mortality,
morbidity and withdrawal assumptions based on the Company's
experience and industry standards. Appropriate recognition has
been given to experience rating and reinsurance.
Property-casualty reserves include (1) unearned premiums representing
the unexpired portion of policy premiums, including adjustments
for reinsurance, and (2) estimated provisions for both reported
and unreported claims incurred and related expenses. The
reserves are regularly adjusted based upon experience. Included
in the benefit and loss reserves in the consolidated balance
sheet at December 31, 1993 and 1992, are $796 million and $736
million, respectively, of property-casualty loss reserves that
have been discounted using an interest rate of 5%.
Premiums. Premiums are recognized as revenues when due.
Reserves are established for the portion of premiums that will be
earned in future periods and for deferred profits on limited-
payment policies that are being recognized in income over the
policy term.
Other revenues. Other revenues include surrender, mortality and
administrative charges and fees as earned on investment,
universal life and other insurance contracts. Other revenues
also include gains and losses on dispositions of assets other
than realized investment gains and losses and revenues of
noninsurance subsidiaries.
- 4 -
<PAGE>
Interest credited to contractholders. Interest credited to
contractholders represents amounts earned by universal life,
pension investment and certain individual annuity contracts in
accordance with contract provisions.
Federal income taxes. The provision for federal income taxes is
comprised of two components, current income taxes and deferred
income taxes. Deferred federal income taxes arise from changes
in the Company's deferred federal income tax asset during the
year. 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. The impact of the Omnibus Budget
Reconciliation Act of 1993, the Omnibus Budget Reconciliation Act
of 1990 and the Tax Reform Act of 1986 on net income is discussed
in note 14.
Accounting standards not yet adopted. In November 1992, the
Financial Accounting Standards Board (the Board) issued Statement
of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" (FAS 112). The Company must adopt
FAS 112 for its financial statements no later than January 1,
1994.
FAS 112 establishes accounting standards for employers who provide
benefits to former or inactive employees after employment, but
before retirement. The statement requires employers to recognize
the cost of the obligation to provide these benefits on an
accrual basis. Employers must implement this guidance by
recognizing a cumulative catch-up adjustment. The Company
estimates that the adoption of FAS 112 will have a pretax impact
of $57 million.
In May 1993, the Board issued Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" (FAS 114). The Company must adopt FAS 114 for its
financial statements no later than January 1, 1995.
FAS 114 describes how impaired loans should be measured when
determining the amount of a loan loss accrual. The Statement
also amends existing guidance on the measurement of restructured
loans in a troubled debt restructuring involving a modification
of terms. The Company has not yet determined when it will adopt
FAS 114 or the impact this statement will have on its financial
statements.
On January 1, 1994, the Company will adopt Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities", (FAS 115) which addresses
accounting and reporting for investments in equity securities
that have a readily determinable fair value and for all debt
securities. Those investments are to be classified in one of
three categories. Debt securities that the Company has the
positive intent and ability to hold to maturity are to be
classified as "held to maturity" and are to be reported at
amortized cost. Securities that are bought and held principally
for the purpose of selling them in the near term are classified
as "trading securities" and are to be reported at fair value,
with unrealized gains and losses included in earnings.
Securities that are neither to be held to maturity nor to be sold
in the near term are classified as "available for sale" and are
to be reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a component of
- 5 -
<PAGE>
shareholders' equity. At December 31, 1993, the market value of
fixed maturities exceeded the carrying value by $947 million.
Financial Accounting Standards Board Interpretation No. 39,
"Offsetting of Amounts Related to Certain Contracts",
(Interpretation 39) must be adopted by the Company for its first
quarter 1994 financial statements.
The general principle of Interpretation 39 states that amounts due
from and due to another party may not be offset in the balance
sheet unless a right of setoff exists. The Company currently
maintains contracts where amounts due from customers are offset
against amounts due to others. Implementation of Interpretation
39 is not expected to have a material impact on the Company's
financial position; however, assets and liabilities will be
increased by like amounts.
2. Changes in Accounting Principles
Accounting and reporting for reinsurance contracts. In the first
quarter of 1993, the Company changed its method of reporting for
reinsurance in compliance with FAS 113. FAS 113 requires the
reporting of reinsurance receivables and prepaid reinsurance
premiums as assets and precludes the immediate recognition of
gains for all reinsurance contracts unless the liability to the
policyholder has been extinguished. Implementation of FAS 113
did not have an impact on earnings, however, assets and
liabilities increased by like amounts. Assets and liabilities
within the consolidated balance sheet were increased by $4,427
million as of December 31, 1992. See note 15 for additional
disclosures.
Accounting for multiple-year retrospectively rated contracts.
EITF No. 93-6 clarifies the accounting for certain reinsurance
agreements with restrospectively rated features. The Company
changed its method of accounting for such contracts to conform
with the conclusion of the EITF. The effects of the change in
method of accounting did not materially impact the Company's
financial results.
Postretirement benefits other than pensions. In the third
quarter of 1992, the Company changed its method of accounting for
the costs of its retiree benefit plans, in compliance with FAS
106. This change was made effective as of January 1, 1992. FAS
106 requires the Company to accrue the cost of postretirement
benefits over the years of service rendered by an employee.
Previously these costs were accounted for on a
"pay-as-you-go" (cash) basis.
The implementation of FAS 106 resulted in a one time noncash
after-tax charge to net income of $258 million in the first quarter
of 1992. See note 13 for further discussion of FAS 106.
Accounting for income taxes. During the third quarter of 1992,
the Company adopted FAS 109 with retroactive application to
January 1, 1992. FAS 109 establishes new principles for
- 6 -
<PAGE>
calculating and reporting the effects of federal income taxes in
the financial statements. FAS 109 replaces the income statement
orientation inherent in the prior income tax accounting standard
with a balance sheet approach. Under the new approach, deferred
tax assets and liabilities are generally determined based on the
difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. FAS 109
allows recognition of deferred tax assets if 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.
The implementation of FAS 109 resulted in a one time increase to
earnings of $428 million in the first quarter of 1992. This
increase in earnings was principally due to the accelerated
recognition of "fresh start" tax benefits, tax rate differences
and the recognition of a portion of previously unrecognized
deferred tax assets. See note 14 for further discussion of FAS
109.
Accounting for foreclosed assets. In February 1993, the Company
announced its intent to accelerate the sale of foreclosed real
estate and, effective December 31, 1992, changed its method of
accounting for foreclosed assets in compliance with SOP 92-3.
This guidance requires that in-substance foreclosures and
foreclosed assets held for sale be carried at the lower of cost
or fair value less estimated costs to sell. Previously, all
foreclosed assets were carried at cost less accumulated
depreciation. This accounting change resulted in a pretax charge
of $437 million to realized investment losses in 1992.
3. Acquisitions and Dispositions
In the third quarter of 1993, the Company sold The Massachusetts
Company (TMC), its banking subsidiary, and received cash proceeds
of $53 million. Consolidated assets and liabilities were reduced
as a result of this disposition. TMC assets, consisting
primarily of mortgage loans and fixed maturities, were $949
million at the date of sale. Liabilities, consisting primarily
of customer deposits, were $896 million at the date of sale. The
impact of this sale was insignificant to the consolidated
financial results of the Company.
In December 1992, the Company acquired a 50% interest in
Commercial Insurance Resources, Inc., and acquired Transport Life
Insurance Company's preferred provider and third party
administrator organizations from Primerica Corporation (see note
23).
In the fourth quarter of 1991, the Company sold Dillon, Read
Inc. (Dillon Read), its investment banking subsidiary. The
Company received cash proceeds of $122 million. Consolidated
assets and liabilities were reduced as a result of this
disposition. Dillon Read assets, consisting primarily of cash
and cash equivalents of $2.7 billion and investments, were $4.3
billion at the date of sale. Liabilities, consisting primarily of
securities sold under repurchase agreements, were $4.2 billion at
the date of sale. The pretax loss on the sale of $41 million is
included in other revenues.
- 7 -
<PAGE>
In the fourth quarter of 1990, the Company completed the sale
of its wholly owned subsidiary, the Travelers Mortgage Services,
Inc. (TMSI), which originates and services home mortgage loans
and operates a relocation services business. Sales proceeds of
$210 million are subject to final settlement adjustments which,
in the opinion of management, are not expected to be material.
On an after-tax basis, the gain on this transaction was
insignificant. Under the terms of the sales agreement, the
Company has indemnified the purchaser for losses from certain
preclosing activities and for excess losses that may be
experienced on a portfolio of mortgage loans generated prior to
the sale, which losses will be calculated following the third
anniversary of the sale. A reserve has been established for
these items based upon management's current estimate of the range
of potential losses. These estimates are subject to revision as
indemnifiable losses are identified and actual excess losses on
the indemnified portfolio are realized.
Revenues, income before federal income taxes and net income of
TMC and Dillon Read are as follows:
========================================================================
TMC Dillon Read
------------------- --------------
(in millions) 1993* 1992 1991 1991*
------------------------------------------------------------------------
Revenues $20 $26 $58 $135
Income before federal income taxes 10 10 33 9
Net income 7 7 22 5
========================================================================
* Through the date of sale.
In addition, the Company sold and/or purchased several other
interests, subsidiaries and operations in 1993, 1992 and 1991.
The impact of these transactions was not material to the
consolidated financial results of the Company. Net losses on
dispositions after related income taxes amounted to $2 million
and $33 million for 1993 and 1991, respectively. Net gains on
dispositions after related income taxes amounted to $3 million
for 1992.
4. Selected Consolidated Quarterly and Other Financial Data
Selected unaudited consolidated quarterly and other financial
data for 1993 and 1992 are presented on pages 35-37.
5. Debt
=============================================================
(in millions) 1993 1992
-------------------------------------------------------------
Short-term debt
Federal Home Loan Bank advances - $ 64
-------------------------------------------------------------
Long-term debt
9 1/2% senior notes $300 $300
8.32% debentures - 194
12% GNMA/FNMA-collateralized obligations 132 188
7 5/8% notes 185 185
ESOP note guarantee 125 149
Federal Home Loan Bank advances - 90
Other 10 18
-------------------------------------------------------------
$752 $1,124
=============================================================
- 8 -
<PAGE>
At December 31, 1993 and 1992, the estimated fair value of the
Company's long-term debt was $821 million and $1.2 billion,
respectively, primarily determined by quoted market prices.
Senior Notes. On March 10, 1992, the Company issued $300 million
of 9 1/2% senior notes which mature on March 1, 2002. No
principal or sinking fund payments are required prior to maturity
date. The senior notes rank equally with all other unsecured,
unsubordinated obligations of the Company. On December 31, 1993,
in conjunction with the Merger, these notes were assumed by The
Travelers Inc.
Debentures. On December 28, 1993, the Company defeased all of
its 8.32% convertible subordinated debentures due 2015. The
debentures will be redeemed on March 10, 1994 at a price of
$1,008.30 in cash per $1,000 of principal amount. As of December
27, 1993, approximately $194 million principal amount of the
debentures was outstanding.
GNMA/FNMA-collateralized obligations. The 12% obligations of
Travelers Mortgage Securities Corporation have a stated maturity
(assuming no prepayments) of March 1, 2014. Distributions on the
GNMA and FNMA certificates, together with reinvestment earnings,
are used to make principal and interest payments on the
obligations. Since the rate of payment of principal depends on
the rate of payment (including prepayments) of the underlying
GNMA and FNMA certificates, the actual annual amounts of future
principal payments cannot be reasonably estimated.
The approximate minimum principal payments to be made in each of the
next five years, assuming no further prepayments on the GNMA and
FNMA certificates, are as follows:
=======================================
(in millions)
---------------------------------------
1994 $18
1995 2
1996 2
1997 2
1998 3
=======================================
Notes. The 7 5/8% notes were issued in January 1987 and mature
on January 15, 1997. No principal payments are required prior to
the maturity date. On December 31, 1993, in conjunction with the
Merger, these notes were assumed by The Travelers Inc.
ESOP note guarantee. The Company has guaranteed the loan
obligation of its Employee Stock Ownership Plan (ESOP) (see note
13). The minimum principal payments to be made in 1994, 1995,
1996 and 1997 are $28 million, $30 million, $32 million and $35 million,
respectively. On December 31, 1993, in conjunction with the
Merger, this guarantee was assumed by The Travelers Inc.
Federal Home Loan Bank advances. In 1992, the Company's banking
subsidiary became a member of the Federal Home Loan Bank and
participated in its Advance Program. Advances outstanding at
December 31, 1992 had various maturity dates from February 1993
to April 2002 and had interest rates ranging from 3.68% to 7.91%.
At December 31, 1992, $205 million of mortgage loans were pledged
to collateralize these advances. The subsidiary was sold during
the third quarter of 1993.
Lines of credit. At December 31, 1993, the Company and its
subsidiaries had approximately $275 million of unused lines of
credit, all of which expires beyond December 31, 1994.
- 9 -
<PAGE>
6. Capital And Preference Stock
Number of shares at December 31, 1993:
================================================================================
Issued Treasury Stock Outstanding
--------------------------------------------------------------------------------
Common stock,
par value $1.25,
500,000,000 authorized 146,872,701 1,256,405 145,616,296
Preferred stock,
no par value,
10,000,000 authorized - - -
Preference stock,
no par value,
25,000,000 authorized
Series A,
$53.25 stated value 4,406,431 - 4,406,431
Series B,
$50 stated value 7,500,000 - 7,500,000
================================================================================
On December 31, 1993, each outstanding share of the Company's common
stock (except for shares issued and held by The Travelers Inc., shares
in treasury of the Company and dissenting shares) was converted into
.80423 of a share of The Travelers Inc. common stock.
Common Stock. Summary of activity in common stock outstanding:
==============================================================================
1993 1992 1991
------------------------------------------------------------------------------
Balance beginning of year 144,020,518 104,156,082 102,170,021
Shares issued 736,388 38,026,314 -
Dividend reinvestment plan 378,542 1,662,282 719,694
Accrued vacation
buy-back plan - - 874,877
Exercise of options 793,397 134,074 31,397
Restricted stock awards 240,836 134,072 335,179
Acquired for treasury (367,955) (82,217) -
Other (185,430) (10,089) 24,914
------------------------------------------------------------------------------
Balance end of year, prior to merger 145,616,296 144,020,518 104,156,082
==============================================================================
At December 31, 1993, prior to the Merger, unissued common shares
were reserved for the following:
=======================================================
Stock plans 8,383,316
Conversion of Series A preference shares 4,406,431
Conversion of debentures 3,776,848
Dividend reinvestment plan 744,660
Other 129,563
-------------------------------------------------------
Total 17,440,818
=======================================================
- 10 -
<PAGE>
Common stock purchase rights. In 1986, the Company adopted a Share
Purchase Rights Plan, and a dividend distribution of one common share
purchase right on each outstanding share of common stock was declared
and paid. The rights traded automatically with the common shares.
These rights were redeemed by the Company for $.05 per right effective
December 30, 1993 and payment was made by The Travelers Inc. As a
result of the redemption, the Rights Plan became of no further force
and effect.
Series A convertible preference stock. The Company's $4.53 Series A
ESOP Convertible Preference Stock was issued to prefund the Company's
matching obligation under one of its benefit plans (see note 13). On
December 31, 1993, in conjunction with the Merger, the $4.53 Series A
ESOP Convertible Preference Stock was converted into shares of The
Travelers Inc. Series C Preferred Stock with substantially similar
terms as the Series A shares.
Series B preference stock. In June 1992, 7,500,000 shares of the
Company's 9 1/4% Series B preference stock were issued at a stated
value of $50 per share. The Series B preference shares were held in
the form of depositary shares, with two depositary shares representing
each preference share. Annual dividends of $4.625 per share ($2.3125
per depositary share) were payable quarterly. Dividends were
cumulative from the date of issue. The Series B preference stock was
not redeemable prior to July 1, 1997. On and after July 1, 1997, the
stock was redeemable at the Company's option, in whole or in part, at
any time, at a price of $50 per share (equivalent to $25 per
depositary share), plus accrued and unpaid dividends, if any, to the
redemption date.
In the event that dividends on the Series B preference stock were in
arrears in an amount equal to at least six full quarterly dividends,
holders of the stock would have the right to elect two additional
directors to the Company's Board of Directors.
On December 31, 1993, in conjunction with the Merger, the Series B
preference stock was converted into shares of The Travelers Inc.
Series D Preferred Stock with substantially similar terms as the
Series B shares.
Accrued vacation buy-back plan. Under the Accrued Vacation Buy-Back
Plan, employees elected in 1991 either to exchange accumulated unused
vacation balances as of January 1, 1991 for shares of the Company's
common stock, or use such days before December 31, 1993. Under this
plan, 874,877 shares of the Company's common stock were issued in June
1991. These elections resulted in after-tax income of $4 million in
1991.
Additional paid-in capital. The changes in additional paid-in capital
for the three years ended December 31, 1993 are primarily attributable
to the issuance of common stock in connection with The Travelers Inc.
investment in 1992 (see note 23), the Accrued Vacation Buy-Back Plan
in 1991, and the issuance of common stock in connection with the dividend
reinvestment plan, exercise of stock options and restricted stock awards
in all three years.
Unrealized investment gains (losses). An analysis of the change in
unrealized gains and losses on investments is shown in note 16.
7. Shareholders' Equity and Dividend Availability
State insurance regulatory authorities prescribe statutory accounting
practices for calculating net income and capital and surplus that
differ in certain respects from generally accepted accounting
principles (GAAP). The significant differences relate to deferred
acquisition costs, which are charged to expenses as incurred; federal
income taxes, which reflect amounts that are currently taxable;
postretirement benefits, which are accrued for retirees and fully
eligible employees, including amortization of the transition
obligation over 20 years; and benefit reserves, which are determined
using mortality, morbidity and interest assumptions, and which, when
considered in light of the assets supporting these reserves,
adequately provide for obligations under policies and contracts. In
addition, the recording of impairments in the value of investments
generally lags recognition under GAAP. Statutory net income and
capital and surplus also include the benefit of certain actions taken
by the Company, with the approval of state insurance regulatory
authorities, to strengthen its statutory capital position.
- 11 -
<PAGE>
The tables below reconcile consolidated statutory net income and
statutory capital and surplus computed in accordance with state
insurance regulatory practices with consolidated net income and
shareholders' equity as reported herein in conformity with GAAP.
==============================================================================
Net income (loss) for the year ended December 31
------------------------------------------------------------------------------
(in millions) 1993 1992 1991
------------------------------------------------------------------------------
Statutory net income (loss)
Life companies $(601) $ (319) $ (55)
Property-casualty companies 123 (237) 258
------------------------------------------------------------------------------
Total (478) (556) 203
Adjustments to life and health
reserves and contractholder funds (68) (2) (120)
Deferred acquisition costs 36 71 35
Equity in undistributed loss of
noninsurance subsidiaries (18) (19) (37)
Timing of recognition of realized
investment gains and losses 680 (539) 194
Deferred federal income taxes 142 503 32
Other, including certain
restructuring expenses (6) (286) 11
Cumulative effect of change in
accounting for postretirement
benefits other than pensions,
net of tax - (258) -
Cumulative effect of change in
accounting for income taxes - 428 -
------------------------------------------------------------------------------
Net income (loss) $ 288 $ (658) $ 318
------------------------------------------------------------------------------
Shareholders' equity at end of year
------------------------------------------------------------------------------
(in millions) 1993 1992 1991
------------------------------------------------------------------------------
Statutory capital and surplus
Life companies $ 873 $1,571 $1,932
Property-casualty companies 1,483 1,665 1,843
------------------------------------------------------------------------------
Total 2,356 3,236 3,775
Adjustments to life and health
reserves and contractholder funds 309 316 279
Deferred acquisition costs 827 791 720
Valuation reserves, nonadmitted
and other asset adjustments 668 (85) (245)
Deferred federal income taxes 1,523 1,371 353
Liability for postretirement benefits
other than pensions (385) (408) -
Other liability adjustments, including
restructuring reserves (283) (243) (292)
------------------------------------------------------------------------------
Shareholders' equity $5,015 $4,978 $4,590
------------------------------------------------------------------------------
Dividend availability. The Company is currently subject to various
regulatory restrictions that limit the maximum amount of dividends
available to shareholders without prior approval of insurance
regulatory authorities. Under statutory accounting practices, no
statutory surplus is available in 1994 for dividends to shareholders
without prior approval.
Dividend payments to the Company from its insurance subsidiaries are
subject to similar restrictions and, absent the Merger, would be
limited to $242 million in 1994.
- 12 -
<PAGE>
8. Leases
The Company and its subsidiaries have entered into various operating
and capital lease agreements for office space and data processing and
certain other equipment. Rental expense under operating leases was
$192 million, $216 million and $208 million in 1993, 1992 and 1991,
respectively. Future net minimum rental and lease payments are
estimated as follows:
==============================================================
Minimum operating Minimum capital
(in millions) rental payments lease payments
--------------------------------------------------------------
Year ending December 31,
1994 $138 $ 7
1995 116 7
1996 87 7
1997 47 4
1998 27 4
Thereafter 16 68
--------------------------------------------------------------
$431 $ 97
==============================================================
Included in these expenses are the rentals related to the sale of
certain buildings leased back under operating and capital leases with
initial terms ranging from 5 to 25 years. Deferred gains arising from
these sales are being amortized over the primary lease terms. At
December 31, 1993 and 1992, the amount remaining to be amortized is
$53 million and $59 million, respectively.
The following is a summary of assets under capital leases:
=======================================================
(in millions) 1993 1992 1991
-------------------------------------------------------
Buildings $31 $31 $31
Equipment 16 18 10
-------------------------------------------------------
47 49 41
Less accumulated depreciation 15 12 13
-------------------------------------------------------
Net $32 $37 $28
=======================================================
9. Commitments and Contingencies
Financial instruments with off-balance-sheet risk. The Company trades
and issues financial instruments with off-balance-sheet risk in the
normal course of its business. These instruments, which are used to
reduce the Company's overall exposure to market risk and to enhance
the Company's investment opportunities, include financial guarantees,
financial futures, forward contracts, fixed rate loan commitments and
variable rate loan commitments, including revolving lines of credit.
Financial instruments with off-balance-sheet risk involve, to
varying degrees, elements of credit and market risk in excess of the
amount recognized in the consolidated balance sheet. The contract or
notional amounts of these instruments reflect the extent of
involvement the Company has in a particular class of financial
instrument. However, the maximum credit loss or cash flow associated
with these instruments can be less than these amounts.
The Company also may use other kinds of financial instruments from
time to time that expose the Company to similar kinds of off-balance-
sheet risk. These instruments include unfunded commitments to
partnerships, transfers of receivables with recourse and interest
rate swaps. The off-balance-sheet risks of these financial
instruments were not considered significant at December 31, 1993 and
1992.
- 13 -
<PAGE>
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for financial
guarantees and fixed and variable rate loan commitments is represented
by the contractual amount of these instruments. For financial futures
contracts and forward contracts, the Company's exposure to credit loss
in the event of nonperformance by the counterparty is less than the
contractual or notional amount.
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.
Many transactions include the use of collateral to minimize credit
risk and lower the effective cost to the borrower.
A summary of contract or notional amounts is presented below:
=============================================================
(in millions) 1993 1992
-------------------------------------------------------------
Financial instruments whose contract
amount represents credit exposure:
Financial guarantees $3,016 $4,039
Fixed rate loan commitments 126 160
Variable rate loan commitments 17 278
Financial instruments whose contract
amount exceeds credit exposure:
Forward contracts used as hedges 279 722
Financial futures contracts 25 418
=============================================================
Financial guarantees are written conditional commitments issued by
the Company to guarantee the performance of a customer to a third
party. At December 31, 1993 and 1992, the fair value of financial
guarantee contracts was $1 million and $7 million, respectively, which
is an estimate of current replacement cost. These obligations are
described more fully in note 10.
Fixed rate loan commitments are obligations to make investments at
fixed interest rates, including obligations to invest in fixed
maturities and fixed rate mortgage loans. Variable rate loan
commitments are obligations to make investments at variable interest
rates, including obligations to invest in variable rate mortgage
loans. At December 31, 1993 and 1992, fixed and variable rate loan
commitments have no meaningful fair value because the terms of the
commitments approximate market rates.
The Company uses a variety of financial futures contracts to manage
its sensitivity to changes in market interest rates. These contracts
generally hedge the interest rate risk of other investments.
Financial futures contracts are traded on recognized exchanges.
Cash payments are not required to enter into financial futures
contracts. Outstanding positions are marked to market and settled
daily. The notional 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, 1993 and 1992, the Company's futures
contracts have no fair value because these contracts are marked to
market and settled in cash.
The Company uses a variety of forward contracts to manage its
sensitivity to changes in foreign currency exchange rates. These
contracts generally act as hedges for foreign investments held by U.S.
portfolios or for investments in foreign operations (primarily
Canadian). Forward contracts are traded over-the-counter, generally
with a financial institution.
Cash payments are not required to enter into foreign currency forward
contracts. Outstanding positions are marked to market; however, they
are not settled in cash until maturity. The market risk attributed to
either a futures contract or a forward contract is balanced by the
market risk attributed to the associated hedged asset to minimize the
Company's overall sensitivity to risk. At December 31, 1993 and 1992,
the fair value of forward contracts used as hedges was $7 million and
$9 million, respectively, which is based on quoted market prices.
- 14 -
<PAGE>
Litigation. In response to the announcement in September 1993 of the
anticipated merger with Primerica, a number of proposed class
action lawsuits were filed in state court in Connecticut and New
York against the Company, its directors and Primerica. These
cases are now consolidated in Connecticut, and the consolidated
amended complaint generally seeks damages on behalf of
shareholders of the Company based on the alleged inadequacy of the
merger consideration offered by Primerica under the terms of the
merger. On January 27, 1994, the defendants, including the Company by its
successor, The Travelers Inc., filed a motion to dismiss the case
based on, among other things, Connecticut law limiting claims by
dissenting shareholders to statutory appraisal rights.
In December 1993, the Company and National Medical Enterprises,
Inc. (NME) executed an agreement in principal to settle lawsuits
brought by both parties arising out of alleged fraudulent practices
by NME during the years 1988 through 1992. The Company will
receive the settlement, including interest, in 1994. Most of the
proceeds will be distributed back to the Company's customers.
The Company and certain of its subsidiaries were plaintiffs in a
recently settled lawsuit in Federal Court in Connecticut relating
to Separate Account "R", a real estate separate account that is
administered and managed by The Travelers Insurance Company. The
defendant Account participants filed counterclaims alleging that
the Company breached its fiduciary obligations in the management of
Separate Account "R". In April 1993, the Company entered into a
class action settlement agreement with all defendants, which
resolved all counterclaims and, as a result, all outstanding issues
with the class of Account participants. Pursuant to the final
settlement, the Company paid approximately $87 million to all
Account participants. In 1992, the Company established a $53
million reserve for the estimated net cost of resolving this
lawsuit. The Company is pursuing a declaratory action in Federal
Court in New York against its primary errors and omissions insurer
in response to a denial of coverage for the Separate Account "R"
settlement. In January 1994, the Company settled a claim with
its excess insurer. As of December 31, 1993, the Company had a
receivable of $32 million for its insurance claims which was
reduced by $7 million in 1993.
In February 1990, the New Jersey Department of Insurance filed an
administrative action, Fortunato v. Aetna Casualty & Surety Co. et
al., seeking restitution from fifteen insurance companies, including
the Company, arising from their acting as servicing carriers for the
New Jersey Automobile Full Insurance Underwriting Association. In
June 1993, the Company resolved this action and received a Consent
Order from the New Jersey Insurance Department dismissing the action
with prejudice. Compliance with the terms of the settlement agreement
was not material to the financial statements.
In April 1989, a lawsuit was filed against the Company by the
federal government alleging the Company improperly handled health
benefit claims for individuals who are actively employed and
eligible for Medicare coverage. In November 1992, the court ruled
on cross motions for summary judgment. The court found that the
Company had no liability when acting in the capacity of an
administrator of claims. However, the court also recognized that,
while the government's right of recovery with respect to insured
claims is governed by the substantive terms of our customer's
health benefit plan, the right of recovery is independent of
procedural limitations in the Company's contracts.
The Securities and Exchange Commission is conducting a nonpublic
inquiry pursuant to an order of investigation with respect to the
Company's accounting, reporting and disclosure treatment of certain
matters in connection with its lending and loss recognition practices
pertaining to real estate investments and related matters going back
to January 1, 1988. The Company is cooperating fully with the
Commission's staff.
The Company is in litigation with certain underwriters at Lloyd's of
London in New York state court to enforce reinsurance contracts with
respect to recoveries for certain asbestos claims. In January 1994,
the court stayed litigation of this matter in favor of arbitration of
the contract issues raised by the Company under the applicable
treaties and an agreement with the Lloyd's market on coverage for
asbestos-related claims.
Certain of the Company's subsidiaries are involved in litigation
with respect to claims arising with regard to insurance, which is
taken into account in establishing benefit reserves. On insurance
contracts written many years ago, the Company continues to receive
claims asserting alleged injuries and damages from asbestos and other
hazardous and toxic substances. In relation to these claims, the
Company carries on a continuing review of its overall position, its
reserving techniques and reinsurance recoverable. In each of these
areas of exposure, the Company has endeavored to litigate individual
cases and settle claims on favorable terms. Given the vagaries of
- 15 -
<PAGE>
court coverage decisions, plaintiffs' expanded theories of liability,
the risks inherent in major litigation and other uncertainties, it is
not presently possible to quantify the ultimate exposure represented
by these claims. As a result, the Company expects that future
earnings may be adversely affected by environmental and asbestos
claims, although the amounts cannot be reasonably estimated. However,
it is not likely these claims will have a material adverse effect on
the Company's financial condition.
The Company and/or its subsidiaries are defendants or co-defendants
in various litigation matters. Although there can be no assurances,
as of December 31, 1993, the Company believes, based on information
currently available, that the ultimate resolution of these legal
proceedings (other than environmental and asbestos claims) would not
be likely to have, but may have, a material adverse effect on the
results of operations.
The amount of related litigation costs for 1993, 1992 and 1991 was
$44 million, $48 million and $51 million, respectively.
10. Guarantees of the Securities of Other Issuers
As part of its regular insurance business in which a wide range of
risks are assumed to cover possible future economic loss by third
parties, the Company underwrites insurance guaranteeing the securities
of certain issuers. The aggregate net amount of guarantees of
principal and interest for such securities was approximately $180
million ($2.8 billion gross of reinsurance) and $2.8 billion ($3.6
billion gross of reinsurance) at December 31, 1993 and 1992,
respectively. Estimated net earned premiums amounted to
$5 million and $7 million in 1993 and 1992, respectively. Premiums
are earned pro rata over the policy term. The related unearned
premium reserve amounted to $1 million and $14 million at December 31,
1993 and 1992, respectively.
The Company's participation in the Municipal Bond Insurance
Association (MBIA) has been reinsured to Municipal Bond Investors
Assurance Corporation, effective August 31, 1993. This accounts for
the decline in aggregate net amount of guarantees of principal and
interest and the reduction in the unearned premium reserves in 1993.
11. Per Share Data
No earnings per share information is provided for 1993 because the
Company became a wholly-owned subsidiary of The Travelers Inc.
effective December 31, 1993.
Primary income per common share was computed after provision for the
dividend requirements on preference stocks. It is based upon the
weighted average number of common shares outstanding including, if
applicable, common stock equivalents. Fully diluted income per share
was based on the number of shares used in the calculation of primary
income per share plus shares issuable if Series A preference shares,
convertible debentures and preferred shares were converted for the
periods they were outstanding. In 1992 and 1990, such conversions
were not assumed as the effect was antidilutive.
The number of shares used in the calculation was:
==============================================================
Primary Fully diluted
--------------------------------------------------------------
1992 106,149,028 106,149,028
1991 103,022,370 111,595,983
1990 101,814,180 101,814,180
1989 102,587,596 108,336,328
==============================================================
- 16 -
<PAGE>
12. Additional Operating Information*
Results included in the table below reflect 1993 fourth quarter after-tax
charges of $111 million for an addition to reserves for foreclosed properties
held for sale and 1992 fourth quarter after-tax charges of $288 million for
implementation of SOP 92-3 and $197 million for an addition to mortgage loan
valuation reserves.
<TABLE><CAPTION>
Pre-merger, historical accounting basis
------------------------------------------------------------------------------------------------------------------------------------
Property- Property- Managed Asset
Casualty Casualty Care and Management Corporate
Commercial Personal Financial Employee & Pension and Other
(in millions) Lines Lines Services Benefits Services Operations Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993
Revenues
Premiums $ 2,234 $ 1,361 $ 235 $ 2,617 $ 137 - $ 6,584
Net investment income 525 152 677 294 951 $ 1 2,600
Realized investment gains (losses) 150 46 77 32 (122) 26 209
Other, including gains and losses on dispositions (7) 32 113 742 11 - 891
-----------------------------------------------------------------------------------------------------------------------------------
Total 2,902 1,591 1,102 3,685 977 27 10,284
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes 7 167 173 205 (248) (72) 232
Net income (loss) 44 125 128 148 (98) (59) 288
Assets 16,393 2,745 14,319 5,049 15,764 340 54,610
-----------------------------------------------------------------------------------------------------------------------------------
1992
Revenues
Premiums $ 2,295 $ 1,428 $ 231 $ 2,620 $ 114 - $ 6,688
Net investment income 546 156 631 328 1,180 $ (42) 2,799
Realized investment gains (losses) 78 22 (98) (18) (626) 7 (635)
Other, including gains and losses on dispositions 10 27 120 657 23 (14) 823
-----------------------------------------------------------------------------------------------------------------------------------
Total 2,929 1,633 884 3,587 691 (49) 9,675
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before federal
income taxes and cumulative effects
of changes in accounting principles (61) (289) (72) (70) (761) (101) (1,354)
Cumulative effect of change in
accounting for postretirement benefits
other than pensions, net of tax (88) (37) (15) (106) (10) (2) (258)
Cumulative effect of change in
accounting for income taxes 57 11 36 123 191 10 428
Net income (loss) (45) (201) (20) (23) (311) (58) (658)
Assets 15,770 2,656 13,021 5,309 19,514 1,759 58,029
-----------------------------------------------------------------------------------------------------------------------------------
1991
Revenues
Premiums $ 2,726 $ 1,457 $ 249 $ 2,687 $ 183 - $ 7,302
Net investment income 595 162 641 356 1,510 $ (36) 3,228
Realized investment gains (losses) 4 9 6 14 (42) 7 (2)
Other, including gains and losses on dispositions (3) 31 117 616 23 65 849
-----------------------------------------------------------------------------------------------------------------------------------
Total 3,322 1,659 1,013 3,673 1,674 36 11,377
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before federal income taxes 242 27 56 143 (35) (110) 323
Net income (loss) 219 35 40 107 (5) (78) 318
Assets 15,118 2,547 11,922 5,057 22,209 1,122 57,975
-----------------------------------------------------------------------------------------------------------------------------------
<FN>
* Included above in Corporate and Other Operations are The Massachusetts Company
which was sold in 1993, and Dillon, Read Inc., which was sold in 1991
(see note 3).
</TABLE>
- 17 -
<PAGE>
13. Benefit Plans
Pension plans. The Company and its subsidiaries maintain defined
benefit pension plans for salaried employees. The primary plan is
noncontributory and was amended in 1993 to provide benefits based on
the account balances of participating employees at the time of
retirement. The account balances of employees are credited annually
with an amount based on salary and age, and accrue interest. Vesting
occurs after five years of service in compliance with the provisions
of the Tax Reform Act of 1986. The Company's funding policy for
qualified U.S. pension plans is to contribute, at a minimum, the
equivalent of the amount required under the Employee Retirement Income
Security Act of 1974 and the Internal Revenue Code. Actuarially
determined costs are provided for all other plans.
Components of pension expense are:
========================================================
(in millions) 1993 1992 1991
--------------------------------------------------------
U.S. plans:
Service costs $30 $40 $46
Interest costs 122 128 125
Actual return on assets (201) (67) (167)
Net amortization and deferral 62 (53) 7
--------------------------------------------------------
Net pension expense $13 $48 $11
========================================================
As a result of certain organizational restructuring initiatives (see
note 20), special termination benefits of $25 million are included in
the net amortization and deferral component of 1992 net pension expense.
Reconciliation of the funded status of the qualified plans follows:
=============================================================
(in millions) 1993 1992 1991
-------------------------------------------------------------
Actuarial present value of vested
benefit obligations $1,534 $1,399 $1,127
Actuarial present value of
accumulated benefit obligations 1,548 1,418 1,153
-------------------------------------------------------------
Plan assets at fair value $1,719 $1,624 $1,644
Actuarial present value of
projected benefit obligation 1,620 1,656 1,525
-------------------------------------------------------------
Assets in excess of (less than)
projected benefit obligation 99 (32) 119
Unamortized transition asset (27) (36) (45)
Unrecognized net actuarial loss 185 268 198
Unrecognized prior service benefit (101) (40) (78)
-------------------------------------------------------------
Prepaid pension expense $156 $160 $194
=============================================================
At December 31, 1993, the non-qualified plan had projected benefit
obligations of $60 million, which were $4 million less than the recorded
liability. At December 31, 1992, the projected benefit obligation was
$6 million less than the recorded liability. At December 31, 1991,
the projected benefit obligation exceeded the recorded liability by
$35 million.
The expected long-term rate of return on plan assets was 8.9%, 9.7%
and 10.2% for 1993, 1992 and 1991, respectively. In 1993, the
discount rate used in determining the projected benefit obligation was
- 18 -
<PAGE>
7.5% and the assumed rate of future annual salary increases varied
between 2% and 9%, based upon employees' ages. The discount rate was
8.25% and 8.5% in 1992 and 1991, respectively, and the rate of
increase in future compensation levels used in determining the
projected benefit obligation was between 3% and 10% based on employees
ages for 1992 and 6.5% for 1991. Changes in assumptions from period
to period can result in adjustments to the accumulated and projected
benefit obligations. Such changes may also affect the expense
recognized and/or the unrecognized net actuarial gain or loss. Plan
assets are held primarily in various separate accounts and the general
account of The Travelers Insurance Company and certain investment
trusts. These accounts invest in stocks, bonds, mortgage loans and
real estate of entities unrelated to the Company.
The Company also sponsors defined contribution pension plans for
certain agents. Company contributions are primarily a function of
production. The expense for these plans was $3 million in 1993 and $2
million in both 1992 and 1991.
Other benefit plans. In addition to pension benefits, the Company
provides certain health care and life insurance benefits for retired
employees. Substantially all employees may become eligible for these
benefits if they reach retirement age while working for the Company.
Retirees may elect certain prepaid health care benefit plans. Life
insurance benefits generally are set at a fixed amount.
In the third quarter of 1992, the Company adopted FAS 106 and
elected to recognize the accumulated postretirement benefit obligation
(i.e., the transition obligation) as a change in accounting principle
retroactive to January 1, 1992.
Prior to the adoption of FAS 106, the Company accounted for these
postretirement costs on a cash basis. The cost recognized by the
Company for these and similar benefits provided to active employees
was based upon paid claims, net of employee contributions. Total
costs of the plans for retirees were $20 million in 1991.
The Company made contributions to the plans in 1993 and 1992 as
claims were incurred. These contributions totaled $25 million and $23
million for 1993 and 1992, respectively. Retirees' contributions to
these plans vary, based upon the retiree's age and election of
coverage. Generally, increases in the Company's contributions for
health care will be limited to two times the current average cost per
retiree. In addition, retirees' contributions will vary based upon
their years of service with the Company.
Components of net periodic postretirement benefit cost are:
========================================================
(in millions) 1993 1992
--------------------------------------------------------
Service costs $ 4 $ 7
Interest costs 35 33
Net amortization and deferral (1) 14
--------------------------------------------------------
Net periodic postretirement benefit cost $38 $54
========================================================
As a result of certain organizational restructuring initiatives (see
note 20), curtailment losses of $14 million in 1992 are included in
the net amortization and deferral component of net periodic
postretirement benefit cost in that year.
The following table sets forth the plans' funded status reconciled
with amounts recognized in the Company's consolidated balance sheet:
=====================================================================
(in millions) 1993 1992
---------------------------------------------------------------------
Accumulated postretirement benefit obligation for:
Retirees $387 $286
Other fully eligible plan participants 13 60
Other active plan participants 53 84
---------------------------------------------------------------------
Total accumulated postretirement benefit obligation 453 430
Plan assets at fair value - -
---------------------------------------------------------------------
Accumulated postretirement benefit obligation
in excess of plan assets 453 430
Unrecognized net loss from experience
different from that assumed (62) (7)
Unrecognized prior service benefit 45 -
---------------------------------------------------------------------
Accrued postretirement benefit cost $436 $423
=====================================================================
- 19 -
<PAGE>
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% and 8.0% for
1993 and 1992, respectively, and the assumed rate of future annual
salary increases varied between 2% and 9% for 1993 and 3% and 10% for
1992 based on employees' ages.
For measurement purposes, an annual rate of increase in the per
capita cost of health care benefits (the health care cost trend rate)
of up to 16.8% was assumed through 1994; the rate is assumed to
decrease gradually to a maximum of 7.0% in 2001, and remain at that
level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. To illustrate, increasing
the assumed health care cost trend rates by 1% in each year would
increase the accumulated postretirement benefit obligation as of
December 31, 1993 by $30 million and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost
for 1993 by $3 million.
The Merger transaction resulted in a change in control of the
Company, as defined in the applicable plans, and provisions of some
employee benefit plans secured existing compensation and benefit
entitlements earned prior to any change in control and provided a
salary and benefit continuation floor for employees whose employment
was affected.
Stock plans. Stock options, stock appreciation rights (SARs) and
shares of restricted stock have been granted pursuant to plans adopted
by the Board of Directors and approved by shareholders at the 1982 and
1988 annual meetings. The 1988 plan provided for the award of up to
10,000,000 shares of the Company's common stock in the form of options
to purchase common stock or SARs, and restricted stock. Commencing in
1988, all grants were made pursuant to the 1988 plan, although the
prior plan continued to govern awards of options and SARs made
pursuant to it.
All outstanding options and SARs were either exercisable or became
exercisable over various periods beginning one year after the date of
grant and could be exercised until 10 years from the date of grant.
A holder of an option with an SAR attached has the right to
surrender the SAR for the appreciation in the common stock between the
time of the grant and the surrender. However, the maximum value of an
SAR was limited to twice the option purchase price. The exercise of
an SAR canceled the option grant with which the SAR was associated,
and vice versa.
Shares of restricted stock were granted subject to restrictions on
their transferability. These restrictions lapsed upon the expiration
of a period of employment or the achievement of stated criteria, or
both. The restrictions lapsed over a period of between one and ten
years from the date of grant.
Effective December 30, 1993, all stock options became exercisable or
could be liquidated for a cash amount, all stock appreciation rights
were terminated, all restrictions on time-lapse restricted stock
lapsed and restrictions on 50% of the performance contingent
restricted stock lapsed. In addition, The Travelers Inc. offered an
alternative stock option election which option holders could choose in
lieu of exercising or exchanging their options.
At the time of the Merger, 7,193,486 options to purchase the
Company's common stock were outstanding. Of this amount, 2,205,204
options were forfeited or liquidated and the remaining 4,988,282
options at a weighted average price of $26.94 were converted to
options to receive 4,011,726 shares of The Travelers Inc. common stock
at a weighted average price of $33.50. The cost related to options
liquidated is approximately $8 million. In addition, the remaining
outstanding restricted stock awards of 141,759 shares were converted
into 113,977 restricted shares of The Travelers Inc. common stock.
- 20 -
<PAGE>
Information with respect to grants follows:
================================================================================
Options outstanding
------------------------------
Shares Average
available option
for grant Shares price
--------------------------------------------------------------------------------
Balance, January 1, 1991 2,465,712 2,823,861 $34.79
Options:
Granted (1,109,209) 1,109,209 $17.09
Exercised - (36,219) $13.91
Forfeited 64,473 (208,755)
Restricted stock:
Granted (330,568) -
Forfeited 9,579 -
--------------------------------------------------------------------------------
Balance, December 31, 1991 1,099,987 3,688,096 $29.46
Options:
Authorized 5,000,000 -
Granted (2,056,100) 2,056,100 $22.38
Exercised - (190,001) $14.52
Forfeited 142,348 (231,007)
Restricted stock:
Granted (131,072) -
Forfeited 41,767 -
--------------------------------------------------------------------------------
Balance, December 31, 1992 4,096,930 5,323,188 $27.28
Options:
Granted (3,144,365) 3,144,365 $27.37
Exercised - (938,758) $19.16
Forfeited 307,124 (335,309)
Restricted stock:
Awarded (231,110) -
Forfeited 161,251 -
--------------------------------------------------------------------------------
Balance, December 31, 1993 1,189,830 7,193,486 $28.30
================================================================================
Options exercisable at December 31, 1993, 1992 and 1991 were
7,193,486, 2,782,576 and 1,859,359, respectively.
Savings, investment and stock ownership plan. Under the savings,
investment and stock ownership plan available to substantially all
employees, the Company matches a portion of employee contributions.
Effective April 1, 1993, the match decreased from 100% to 50% of an
employee's first 5% contribution and a variable match based on the
Company's profitability was added. The Company's matching obligations
were $22 million in 1993 and $36 million in both 1992 and 1991. In the
second quarter of 1989, the Company established an Employee Stock
Ownership Plan (ESOP) to serve as the funding vehicle for its matching
obligation under the savings, investment and stock ownership plan
beginning in 1990. In June 1989, the ESOP purchased 3,755,869 shares
of the Company's $4.53 Series A ESOP Convertible Preference Stock at
$53.25 per share. The Series A preference stock is convertible into
the Company's common stock at a one-to-one conversion rate. The
shares may be redeemed at the option of the Company or the holder
under certain circumstances. Annual dividends of $4.53 are
cumulative. The Series A preference stock has a minimum liquidation
value of $53.25 plus unpaid and accrued dividends. The ESOP financed
the purchase of the Series A preference shares with a $200 million
variable interest rate loan from a third party. The Company has
guaranteed the ESOP's debt obligation, and the unpaid principal
balance is included in the Company's long-term debt with a
corresponding offset to the ESOP Series A preference stock.
Increasing semi-annual payments that began January 1, 1990 will fully
amortize the debt by July 1, 1997.
- 21 -
<PAGE>
The Series A preference shares are held by the ESOP Trustee and are
allocated to participants by a method that considers the debt service
requirements of the ESOP. In 1993, 429,361 Series A preference shares
were allocated to participants under this method. This compares with
394,044 shares in 1992 and 384,738 shares in 1991. Remaining
unallocated shares are 2,061,214, 2,490,575 and 2,884,619 in 1993,
1992 and 1991, respectively. To the extent that the shares allocated
by this method are not sufficient to meet the Company's matching
obligation under the savings plan, additional contributions will be
made. No such contribution was required to meet the 1993 obligation.
In January 1993, 184,397 additional preference shares were contributed
to the ESOP to meet the 1992 matching obligation. In December 1991,
320,000 additional preference shares were contributed to the ESOP to
meet the estimated 1991 matching obligation. Likewise, in January
1991, 146,165 additional preference shares were contributed to the ESOP to
meet the 1990 matching obligation.
ESOP expense is recognized based upon the value of preference shares
allocated to plan participants, giving consideration to interest
incurred on the debt and credit for dividends received. The value of
additional Series A preference shares, common stock or cash necessary
to satisfy the matching requirement is included as a component of ESOP
expense. The amount of ESOP expense recognized by the Company was $25
million in 1993, $26 million in 1992 and $29 million in 1991.
Dividends of $20 million, $19 million and $17 million in 1993, 1992
and 1991, respectively, as well as contributions of $8 million in 1993
and 1992 and $10 million in 1991, were used by the ESOP to service its
debt. The ESOP incurred $4 million, $5 million and $9 million of
interest expense in 1993, 1992 and 1991, respectively.
Effective December 31, 1993, in conjunction with the Merger, all
outstanding Series A preference shares were transferred and converted
to shares of The Travelers Inc. $4.53 ESOP Convertible Preferred Stock,
Series C with substantially similar terms, and The Travelers Inc.
assumed the guarantee of the ESOP's debt obligation.
- 22 -
<PAGE>
14. Federal Income Taxes
============================================================
(in millions) 1993 1992 1991
------------------------------------------------------------
Effective tax rate
Income (loss) before federal
income taxes $232 $(1,354) $ 323
------------------------------------------------------------
Statutory tax rate 35% 34% 34%
------------------------------------------------------------
Expected federal income taxes $ 81 $ (460) $ 110
Tax effect of:
Nontaxable investment income (39) (38) (44)
"Fresh start" adjustments (16) (20) (50)
Adjustment to benefit and
other reserves (41) (9) (1)
Adjustment to deferred tax asset
for enacted change in tax rates
from 34% to 35% (44) - -
Nondeductible merger expenses 10 - -
Other (7) 1 1
------------------------------------------------------------
Federal income taxes $ (56) $(526) $ 16
------------------------------------------------------------
Effective tax rate (24)% 39% 5%
------------------------------------------------------------
Composition of federal income taxes
Current:
United States $ 81 $ (31) $ 46
Foreign 5 8 2
------------------------------------------------------------
Total 86 (23) 48
------------------------------------------------------------
Deferred:
United States (142) (503) (32)
Foreign - - -
------------------------------------------------------------
Total (142) (503) (32)
------------------------------------------------------------
Federal income taxes $ (56) $(526) $ 16
============================================================
- 23 -
<PAGE>
The net deferred tax assets at December 31, 1993 and 1992 were
comprised of the tax effects of the temporary differences related to
the following assets and liabilities:
======================================================================
(For the year ended December 31,
in millions) 1993 1992
----------------------------------------------------------------------
Deferred tax assets:
Property-casualty loss reserves $600 $570
Benefit, reinsurance and other reserves 347 239
Contractholder funds 185 173
Investments 382 379
Reserve for postretirement benefits 153 144
Restructuring reserves 60 98
Other 221 196
----------------------------------------------------------------------
Total 1,948 1,799
----------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 240 230
Accumulated depreciation 30 44
Prepaid pension expense 55 54
----------------------------------------------------------------------
Total 325 328
----------------------------------------------------------------------
Net deferred tax asset before valuation allowance 1,623 1,471
Valuation allowance for deferred tax assets (100) (100)
----------------------------------------------------------------------
Net deferred tax asset after valuation allowance $1,523 $1,371
======================================================================
The change in the net deferred tax asset after valuation allowance
includes a $10 million change in the deferred taxes relating to
unrealized investment losses.
The net tax effects of significant timing differences in the
deferred tax provision for 1991 were as follows:
===============================================
(in millions) 1991
-----------------------------------------------
Components of deferred taxes:
Deferred acquisition costs $ (6)
Benefit, reinsurance and other reserves (32)
Dividends to contractholders 7
Property-casualty loss reserves (39)
Prepaid pension expense 2
Compensated absences 9
Investment valuation and other reserves 17
Other 10
-----------------------------------------------
Deferred federal income taxes $(32)
===============================================
Consolidated federal income taxes. The Company files its federal
income tax return on a consolidated basis. The return includes one
subgroup of companies that are considered life insurers for federal
income tax purposes and one subgroup of companies that are not life
insurers. Certain limitations and restrictions apply to the
utilization of losses generated by one subgroup against income of the
other subgroup.
In August 1993, the President signed into law the Omnibus Budget
Reconciliation Act of 1993 (the Act). Included in the Act was a
provision that raised the tax rate on corporations from 34% to 35%.
Under current GAAP accounting rules, the Company was required to
restate its deferred tax asset using the new 35% rate as of the
enactment date of the legislation. This restatement produced a $40
million increase to the deferred tax asset (and an increase to
earnings) for 1993.
Upon adoption of FAS 109, a valuation allowance of $100 million was
established to reduce the net deferred tax asset on investment losses
to the amount that, based upon all available evidence, is more likely
- 24 -
<PAGE>
than not to be realized. Reversal of the valuation allowance is
contingent upon the recognition of future capital gains in the
Company's federal income tax return or a change in circumstances which
causes the recognition of the benefits to become more likely than not.
There was no net change in the total valuation allowance during 1993.
As of December 31, 1993, the Company has no ordinary or capital loss
carryforwards. The Company has an alternative minimum tax (AMT)
credit carryforward of $51 million as of December 31, 1993 and
$63 million as of December 31, 1992. This credit will be utilized to
offset the excess of regular tax over AMT in future years and has no
expiration period.
Extraordinary tax credits of $11 million relating to the realization
of book capital loss carryforwards were recognized in 1991. In
addition, $316 million of deferred tax assets, which were in excess of
the amount of tax recoverable through carrybacks, were not recognized
at December 31, 1991. In 1992, this amount was included in the FAS
109 cumulative effect adjustment net of the valuation allowance of
$100 million.
Life insurance companies. The "policyholders surplus account", which
arose under prior tax law, is generally that portion of the gain from
operations that has not been subjected to tax, plus certain
deductions. The balance of this account, which, under provisions of
the Tax Reform Act (TRA) of 1984, will not increase after 1983, is
estimated to be $893 million. This amount has not been subjected to
current income taxes but, under certain conditions that management
considers to be remote, may become subject to income taxes in future
years. At current rates, the maximum amount of such tax (for which no
provision has been made in the financial statements) is approximately
$313 million.
Nonlife companies. Commencing in 1987, the TRA of 1986 required
insurance companies to discount property-casualty loss reserves for
tax purposes. Companies were, however, allowed a "fresh start"
adjustment by recomputation of the opening 1987 loss reserves. This
adjustment reduced 1991 taxes by $35 million. There was no 1993 or 1992
effect since the unamortized "fresh start" balance at December 31, 1991
was included in the FAS 109 cumulative effect adjustment.
Starting in 1990, the Omnibus Budget Reconciliation Act of 1990
required property-casualty insurance companies to accrue estimated
salvage and subrogation recoverables. Companies were, however,
allowed a "fresh start" adjustment equal to 87% of the discounted
opening 1990 reserve. For the Company, this amount was spread over a
four-year period beginning in 1990. "Fresh start" adjustments
relating to salvage and subrogation reduced 1993, 1992 and 1991 taxes
by $16 million, $20 million and $15 million, respectively.
15. Reinsurance
The Company, through its insurance subsidiaries, participates in
reinsurance to reduce overall risks, including exposure to large
losses and catastrophic events, and to effect business-sharing
arrangements. Its property-casualty insurance subsidiaries also
participate as a servicing carrier for and member of several pools and
associations. Amounts recoverable from reinsurers of short-duration
contracts are estimated in a manner consistent with the claim
liability associated with the reinsured policy. The Company remains
primarily liable as the direct insurer on all risks reinsured.
Reinsurance recoverables are reported after allowances for
uncollectible amounts. Generally, the cost of reinsurance is
recognized over the period of the reinsurance contract. Prepaid
reinsurance premiums are included in other assets within the
consolidated balance sheet.
- 25 -
<PAGE>
A summary of reinsurance financial data reflected within the
consolidated statement of operations and retained earnings is
presented below (in millions):
========================================================================
(For the year ended
December 31, in millions) 1993 1992 1991
------------------------------------------------------------------------
Written Premiums:
----------------
Direct $ 7,716 $ 7,738 $ 8,178
Assumed 425 539 539
Ceded (1,557) (1,589) (1,415)
------------------------------------------------------------------------
Total $ 6,584 $ 6,688 $ 7,302
========================================================================
Earned Premiums:
---------------
Direct
Life business $ 3,005 $ 2,898 $ 2,978
Property-casualty business 4,510 4,936 5,256
Assumed
Life business 34 127 137
Property-casualty business 383 362 402
Ceded
Life business (87) (65) (20)
Property-casualty business (1,452) (1,454) (1,444)
------------------------------------------------------------------------
Total $ 6,393 $ 6,804 $ 7,309
========================================================================
The following table reflects reinsurance recoveries (in millions):
========================================================================
(For the year ended
December 31, in millions) 1993 1992 1991
------------------------------------------------------------------------
Reinsurance Recoveries:
----------------------
Life business $ 85 $ 85 $ 102
Property-casualty business 1,240 1,568* 1,191
------------------------------------------------------------------------
Total $1,325 $ 1,653 $ 1,293
========================================================================
* Increase in 1992 is due to Hurricane Andrew.
A summary of financial data reflected within the consolidated balance
sheet follows (in millions):
========================================================
(At December 31, in millions) 1993 1992
--------------------------------------------------------
Reinsurance Recoverables:
------------------------
Life business $ 65 $ 86
Property-casualty business:
Pools and associations 2,585 2,582
Other reinsurers 1,546 1,500
--------------------------------------------------------
4,131 4,082
--------------------------------------------------------
Total $ 4,196 $ 4,168
========================================================
Included within the December 31, 1993 reinsurance recoverable balance
is a current estimate of reinsurance recoverable from Lloyd's of
London of $330 million. The collectibility of the reinsurance
recoverable from Lloyd's relating to the arbitration (see note 9) is
supported by a market agreement with Lloyd's favorable to the Company.
- 26 -
<PAGE>
16. Investments and Investment Gains (Losses)
==========================================================================
(For the year ended
December 31, in millions) 1993 1992 1991
--------------------------------------------------------------------------
Realized
Fixed maturities $372 $ 99 $ 103
Equity securities 43 34 43
Mortgage loans (35) (400) (103)
Real estate (235) (425) -
Foreign currency translation (7) (37) (32)
Other 71 94 (13)
--------------------------------------------------------------------------
Realized investment gains (losses) $209 $(635) $ (2)
==========================================================================
Unrealized
Fixed maturities $(98) $167 $ 170
Equity securities 35 3 59
Other 35 16 27
--------------------------------------------------------------------------
(28) 186 256
Related taxes (12) 62 65
--------------------------------------------------------------------------
Net unrealized investment
gains (losses) (16) 124 191
Balance beginning of year 197 73 (118)
--------------------------------------------------------------------------
Balance end of year $181 $197 $ 73
==========================================================================
Equity securities
Unrealized
----------------
(At December 31, in millions) Cost Gains Losses
--------------------------------------------------------------------------
1993 $252 $96 $ 23
1992 251 58 20
1991 510 80 44
==========================================================================
Fixed maturities
Estimated Estimated market
(At December 31, Carrying market value greater than
in millions) value value carrying value
----------------------------------------------------
Amount Percent
--------------------------------------------------------------------------
1993 $24,876 $25,823 $ 947 4
1992 22,946 23,771 825 4
1991 20,987 22,144 1,157 6
==========================================================================
Fixed maturities. Fixed maturities are valued based upon quoted
market prices or, if quoted prices are not available, discounted
expected cash flows using market rates commensurate with the credit
quality and maturity of the investment.
Sales from the amortized cost portfolios have been made periodically.
Such sales were $806 million, $1.1 billion and $2.6 billion in 1993,
1992 and 1991, respectively. Gross gains of $59 million, $49 million
and $92 million in 1993, 1992 and 1991 respectively, and gross losses
of $4 million in 1993 and $10 million in 1992 and 1991 were realized
on those sales.
The carrying values of the trading portfolio fixed maturities are
adjusted to market value as it is likely they will be sold prior to
maturity. These fixed maturities had market values of $9.0 billion at
December 31, 1993 and $8.9 billion at December 31, 1992. Net unrealized
gains were $205 million at December 31, 1993 and $322 million at
December 31, 1992. Sales of trading portfolio fixed maturities
were $9.6 billion, $4.4 billion and $3.8 billion in 1993, 1992
- 27 -
<PAGE>
and 1991, respectively. Gross gains of $317 million, $124 million and
$90 million in 1993, 1992 and 1991, respectively, and gross losses of
$6 million, $16 million and $13 million in 1993, 1992 and 1991,
respectively, were realized on those sales.
Effective January 1, 1994, the Company will adopt FAS 115. For
further discussion see note 1.
<TABLE><CAPTION>
==========================================================================================
Fixed maturities carried at amortized cost by investment type
------------------------------------------------------------------------------------------
Gross Gross
Carrying unrealized unrealized Market
(in millions) value gains losses value
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1993
Mortgage-backed securities,
CMOs and pass through securities $ 1,107 $ 64 $ 9 $ 1,162
U.S. Government and government
agencies and authorities 165 11 1 175
States, municipalities
and political subdivisions 2,664 89 7 2,746
Foreign governments 439 40 - 479
Public utilities 2,776 197 12 2,961
Convertible bonds 2 - - 2
All other corporate bonds 8,810* 578 81 9,307
Redeemable preferred stock 37 2 - 39
------------------------------------------------------------------------------------------
Total $16,000 $981 $110 $16,871
==========================================================================================
December 31, 1992
Mortgage-backed securities,
CMOs and pass through securities $ 1,186 $112 $ 1,298
U.S. Government and government
agencies and authorities 504 17 $ 2 519
States, municipalities
and political subdivisions 1,560 43 21 1,582
Foreign governments 453 28 1 480
Public utilities 2,847 165 6 3,006
Convertible bonds 1 - - 1
All other corporate bonds 7,496* 417 25 7,888
Redeemable preferred stock 52 3 2 53
------------------------------------------------------------------------------------------
Total $14,099 $785 $ 57 $14,827
==========================================================================================
</TABLE>
* Before valuation reserves of $76 million and $97 million at December
31, 1993 and 1992, respectively.
- 28 -
<PAGE>
======================================================================
Trading portfolio securities by investment type
----------------------------------------------------------------------
Carrying value at December 31,
(in millions) 1993 1992
----------------------------------------------------------------------
Mortgage-backed securities -
principally obligations of
U.S. Government agencies $3,779 $4,005
U.S. Government and government
agencies and authorities 3,472 3,168
States, municipalities and political subdivisions 14 18
Foreign governments 19 13
Public utilities 105 89
Convertible bonds 406 458
All other corporate bonds 1,157 1,193
----------------------------------------------------------------------
Total trading portfolio securities $8,952 $8,944
======================================================================
The carrying value and market value of fixed maturities at December
31, 1993, by contractual maturity, are shown below. Fixed maturities
subject to early or unscheduled prepayments have been included based
upon their contractual maturity dates. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
======================================================
Maturity Carrying Market
(in millions) value* value
------------------------------------------------------
One year or less $1,090 $1,118
Over 1 year through 5 years 6,769 7,020
Over 5 years through 10 years 7,488 7,883
Over 10 years 4,719 4,861
------------------------------------------------------
20,066 20,882
Mortgage-backed securities 4,886 4,941
------------------------------------------------------
$24,952 $25,823
======================================================
* Before valuation reserves of $76 million at December 31, 1993.
Concentrations. At December 31, 1993, the Company had no
concentration of investments in a single investee exceeding 10% of
consolidated shareholders' equity.
Included in fixed maturities is a concentration in below investment
grade assets totaling $1.2 billion and $1.3 billion at December 31,
1993 and 1992, 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, highly leveraged transactions and certain other privately
issued bonds that are classified as below investment grade loans. The
Company also has concentrations of investments in the following industries
prior to consideration of investment valuation reserves:
===============================================
(in millions) 1993 1992
------------------------------------------------
Electric utilities $1,715 $1,366
Banking* 1,519 1,681
Finance 1,471 1,683
================================================
* Includes $509 million and $900 million at December 31, 1993 and
1992, respectively, of primarily short-term investments and cash
equivalents issued by foreign banks.
- 29 -
<PAGE>
Below investment grade assets included in the totals above were as
follows:
====================================================
(in millions) 1993 1992
----------------------------------------------------
Electric utilities $ 81 $ 33
Finance 61 121
Banking 21 37
====================================================
At December 31, 1993 and 1992, significant concentrations of
mortgage loans were for properties located in highly populated areas
in the states listed below. The amounts shown are prior to
consideration of investment valuation reserves:
====================================================
(in millions) 1993 1992
----------------------------------------------------
California $1,307 $1,460
New York 951 1,326
Texas 647 1,010
Illinois 620 694
Florida 614 962
====================================================
Other mortgage loan investments are fairly evenly dispersed
throughout the United States, with no holdings in any other state
exceeding $400 million and $600 million at December 31, 1993 and 1992,
respectively.
Mortgage loans by property type at December 31, 1993 and 1992 are
shown below, prior to consideration of investment valuation reserves:
====================================================
(in millions) 1993 1992
----------------------------------------------------
Office $3,571 $4,389
Apartment 1,769 2,690
Retail 974 1,236
Hotel 566 540
Industrial 316 423
Other 141 261
----------------------------------------------------
Total commercial 7,337 9,539
Agricultural 650 805
Residential 1 610
----------------------------------------------------
Total $7,988 $10,954
====================================================
Real estate assets at December 31, 1993 and 1992 included office
properties with carrying values of $1,270 million and $1,689 million,
respectively.
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.
- 30 -
<PAGE>
Investment valuation reserves. At December 31, 1993, 1992 and 1991,
total investment valuation reserves, which are deducted from the
applicable investment carrying values in the consolidated balance
sheet, were as follows:
===================================================
(in millions) 1993 1992 1991
---------------------------------------------------
Beginning of year $1,497 $ 925 $1,046
Increase 208 883 172
Impairments, net of
gains/recoveries (628) (311) (293)
---------------------------------------------------
End of year $1,077 $1,497 $ 925
===================================================
At December 31, 1993, investment valuation reserves were comprised
of $498 million for mortgage loans, $495 million for real estate and
$84 million for securities. Increases in the investment valuation
reserves are reflected as realized investment losses.
The Company continually monitors its investment portfolios,
assessing status and creditworthiness of borrowers as well as other
variables. The valuation reserves reflect management's judgment of
the probable losses inherent in the portfolios. This judgment is
based on a review of factors that include individual loan and
historical loss experience and the specific industry and economic
conditions. Management believes the reserves are adequate based on
the current environment.
Nonincome producing. Investments included in the consolidated balance
sheets that were nonincome producing were as follows:
================================================
(in millions) 1993 1992
------------------------------------------------
Mortgage loans $ 451 $ 514
Real estate 337 699
Fixed maturities 36 16
------------------------------------------------
Total $ 824 $1,229
================================================
Restructured. The Company has restructured investments totaling
approximately $1.2 billion and $1.4 billion at December 31, 1993 and
1992, respectively. The new terms typically defer a portion of
contract interest payments to varying future periods. The accrual of
interest is suspended on all restructured loans, and interest income
is reported only as payment is received. Gross interest income on
restructured mortgage loans that would have been recorded in
accordance with the original terms of such loans amounted to $128
million in 1993 and $166 million in 1992. Interest on these loans,
included in net investment income, aggregated $56 million and $72
million in 1993 and 1992, respectively.
- 31 -
<PAGE>
17. Net Investment Income
==========================================================
(For the year ended December 31,
in millions) 1993 1992 1991
----------------------------------------------------------
Gross investment income
Fixed maturities
Bonds $1,969 $1,984 $2,344
Redeemable preferred stocks 5 4 6
Equity securities
Common stocks 2 8 -
Nonredeemable preferred stocks 8 8 7
Mortgage loans 753 983 1,238
Real estate 415 399 266
Policy loans 106 109 96
Other 1 6 72
-----------------------------------------------------------
3,259 3,501 4,029
-----------------------------------------------------------
Investment expenses
General investment 544 553 443
Interest, discount and expense
on long-term debt 81 90 72
Other interest 34 59 286
-----------------------------------------------------------
659 702 801
-----------------------------------------------------------
Net investment income $2,600 $2,799 $3,228
===========================================================
The amounts shown in the above table are net of increases in the
investment income valuation reserves, which reflect estimates of
amounts considered doubtful of realization. There were no such
increases in 1993, 1992 and 1991. At December 31, 1993 and 1992, the
reserve, which is deducted from investment income accrued in the
consolidated balance sheet, amounted to $44 million and $58 million,
respectively.
At December 31, 1993 and 1992, the investment income valuation
reserves of a noninsurance subsidiary amounted to $17 million and $27
million, respectively.
18. Fair Value Of Certain Financial Instruments
The Company uses various financial instruments in the normal course of
its business. Fair value information for financial instruments not
presented elsewhere in these financial statements is discussed below.
Fair values of financial instruments which are considered insurance
contracts are not required to be disclosed and are not included in the
amounts discussed.
The estimated fair value of the Company's mortgage loan portfolio at
December 31, 1993 and 1992 is $7.2 billion and $9.7 billion, respectively.
Mortgage loans are grouped into homogeneous categories based on the Company's
internal rating system. Performing loans generally are valued using either
discounted cash flow analysis, reflecting market-based interest rates
commensurate with the underlying risk, or, if foreclosure is deemed
possible, the lower of carrying value or underlying collateral value.
In arriving at estimated fair value, the Company used interest rates
reflecting the higher returns required in the current real estate
financing market. As the marketplace changes, these rates will be
adjusted accordingly. Underperforming loans are valued at the lower
of carrying value or underlying collateral value.
The carrying value of $890 million and $537 million of financial
instruments classified as other assets approximates their fair value
at December 31, 1993 and 1992, respectively. The carrying values of
$2.5 billion and $2.7 billion of financial instruments classified as
other liabilities also approximate their fair values at December 31,
1993 and 1992, respectively. Fair value is determined using various
methods including discounted cash flows and carrying value, as
appropriate for the various financial instruments.
- 32 -
<PAGE>
At December 31, 1993, contractholder funds with defined maturities
have a carrying value of $4.8 billion and a fair value of $5.0
billion, compared with a carrying value of $6.0 billion and fair value
of $6.2 billion at December 31, 1992. 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 have a carrying value of $12.9 billion and a fair value of
$12.7 billion at December 31, 1993, compared to a carrying value of
$10.7 billion and a fair value of $10.4 billion at December 31, 1992.
These contracts generally are valued at surrender value.
The assets of separate accounts providing a guaranteed return have a
carrying value and fair value of $1.1 billion and $1.2 billion, respectively,
at December 31, 1993, compared to a carrying value and fair value of $711
million and $767 million, respectively, at December 31, 1992. The liabilities
of separate accounts providing a guaranteed return have a carrying value
and fair value of $1.1 billion and $1.3 billion, respectively, at
December 31, 1993, compared to a carrying value and fair value of $632
million and $735 million, respectively, at December 31, 1992.
The carrying values of short-term securities, investment income
accrued and securities transactions in the course of settlement
approximate their fair value.
19. Asbestos, Environmental Liabilities and Litigation Reserves
In the third quarter of 1993, the Company added $325 million to its
reserves for asbestos and environmental liabilities, as well as for
blood-related claims for policies issued in the early 1980s. This
addition to reserves resulted in an after-tax charge of $211 million.
Several recent developments contributed to the decision to add to
reserves. The insurance industry is witnessing a growth in claims
brought by outside workers who allege exposure to asbestos while
working on site at various companies. There has been an increase in
the incidence of this type of claim during 1993. The Company also has
experienced a growth in environmental claims primarily from smaller
companies with lower coverage limits and has been named as a defendant
in coverage cases brought by other insurers against their
policyholders and the policyholders' other carriers.
The insurance industry has been, and continues to be, involved in
extensive litigation involving policy coverage and liability issues as
they relate to environmental claims, as a result of various state and
federal regulatory efforts aimed at environmental remediation.
In addition to the regulatory pressures, certain court decisions
have expanded insurance coverage beyond the original intent of the
insurer and insured, frequently involving policies that were issued
prior to the mid-1970s. The results of court decisions affecting the
industry's coverage positions continue to be inconsistent.
Accordingly, the ultimate responsibility and liability for
environmental remediation costs remain uncertain.
- 33 -
<PAGE>
The following table displays activity for environmental losses and
loss expenses and reserves for the three years ended December 31,
1993. Approximately 12% of the net environmental loss reserve (i.e.
approximately $40 million) at December 31, 1993 is case reserve for
resolved claims. The Company does not post case reserves for
environmental claims in which there is a coverage dispute. The
remainder of the reserve is for claims in which coverage is in dispute
and unreported environmental losses.
Environmental Losses
----------------------------------------------------------
(in millions) 1993 1992 1991
----------------------------------------------------------
Beginning reserves:
Direct $194 $ 170 $ 148
Ceded - - -
----------------------------------------------------------
Net 194 170 148
Incurred losses and loss expenses:
Direct 211 70 75
Ceded (21) (3) (2)
Losses paid:
Direct 61 46 53
Ceded (10) (3) (2)
----------------------------------------------------------
Ending reserves:
Direct 344 194 170
Ceded (11) - -
----------------------------------------------------------
Net $ 333 $ 194 $ 170
==========================================================
In the area of asbestos claims, the industry has suffered from
judicial interpretations that have attempted to maximize insurance
availability from both a coverage and liability standpoint far beyond
the intentions of the contracting parties. These policies generally
were issued prior to the 1980s. As a result of recent developments in
asbestos litigation, various classes of asbestos defendants, e.g.
major product manufacturers, peripheral and regional product
defendants as well as premises owners, are tendering asbestos-related
claims to the industry. Since each insured presents different
liability and coverage issues, the Company evaluates those issues on
an insured-by-insured basis. The following table displays asbestos
losses and loss expenses and reserves for the three years ended
December 31, 1993. Approximately 80% of the net asbestos reserves at
December 31, 1993 represented incurred but not reported losses.
Asbestos Losses
-----------------------------------------------------------
(in millions) 1993 1992 1991
-----------------------------------------------------------
Beginning reserves:
Direct $425 $ 395 $ 348
Ceded (247) (220) (167)
-----------------------------------------------------------
Net 178 175 181
Incurred losses and loss expenses:
Direct 447 111 118
Ceded (218) (50) (69)
Losses paid:
Direct 98 81 71
Ceded (14) (23) (16)
-----------------------------------------------------------
Ending reserves:
Direct 774 425 395
Ceded (451) (247) (220)
-----------------------------------------------------------
Net $ 323 $ 178 $ 175
===========================================================
- 34 -
<PAGE>
For both environmental and asbestos-related claims, the Company
carries on a continuing review of its overall position, its reserving
techniques and reinsurance recoverable. In each of these areas of
exposure, the Company has endeavored to litigate individual cases and
settle claims on favorable terms. Given the vagaries of court
coverage decisions, plaintiffs' expanded theories of liability, the
risks inherent in major litigation and other uncertainties, it is not
presently possible to quantify the ultimate exposure represented by
these claims. As a result, the Company expects that future earnings
may be adversely affected by environmental and asbestos claims,
although the amounts cannot be reasonably estimated. However, it is
not likely these claims will have a material adverse effect on the
Company's financial condition.
20. Restructuring Costs
During 1992, the Company announced a series of organizational
restructuring initiatives associated with its plan to streamline its
business and corporate operations. These initiatives resulted in a
pretax charge of $308 million, consisting of $197 million for severance,
benefits, accrued vacation and outplacement costs related to employees
who will be terminated, $13 million for relocation costs due to consolidation
efforts, $48 million for lease costs, $14 million for curtailment losses
charged to postretirement benefit plans, $15 million for writeoff of
goodwill related to identified divestitures and $21 million of miscellaneous
other costs.
21. Reconciliation of Net Income (Loss) to Net
Cash Used in Operating Activities
In the first quarter of 1992, the Company changed its presentation of
cash flows from operating activities from the indirect method to the
direct method. The following table reconciles net income (loss) to
net cash used in operating activities:
=======================================================================
(For the year ended December 31,
-----------------------------------------------------------------------
in millions) 1993 1992 1991
-----------------------------------------------------------------------
Net income (loss) $288 $(658) $ 318
Reconciling adjustments
Trading account investments,
(purchases) sales, net (998) (938) (1,973)
Realized gains (127) (159) (93)
Investment income accrued 9 30 67
Premium balances receivable 84 9 (9)
Deferred acquisition costs (36) (71) (14)
Deferred federal income taxes (142) (503) (32)
Cumulative effects of changes
in accounting principles - (170) -
Insurance reserves and
accrued expenses (36) 529 266
Restructuring reserve (122) 229 (28)
Other, including investment
valuation reserves 152 975 184
-----------------------------------------------------------------------
Net cash used in operating activities $(928) $(727) $(1,314)
=======================================================================
- 35 -
<PAGE>
22. Noncash Investing and Financing Activities
Significant noncash investing and financing activities include: a)
acquisition of real estate through foreclosures of mortgage loans
amounting to $600 million, $809 million and $861 million in 1993, 1992
and 1991, respectively; b) the 1993 transfer of $362 million of
mortgage loans and bonds from the Company's general account to two
separate accounts; c) acceptance of purchase money mortgages for sales
of real estate aggregating $192 million, $72 million and $33 million
in 1993, 1992 and 1991, respectively; d) increases in investment
valuation reserves in 1993, 1992 and 1991 for securities, mortgage
loans and real estate (see note 16); e) the issuance of additional
Series A preference stock in 1993 and 1991 (see note 13); f) the
issuance of stock under the Accrued Vacation Buy-Back Plan (see note
6); g) the 1992 acquisition of a 50% interest in Commercial Insurance
Resources, Inc. and the acquisition of Transport Life Insurance Company's
preferred provider and third party administrator organizations through
the issuance of common stock (see note 3); and h) the 1991 transfer of
$560 million of assets and liabilities supporting certain annuity businesses
into a separate account.
23. Subsequent Event - Acquisition by The Travelers Inc.
In December 1992, The Travelers Inc. (formerly Primerica Corporation)
exchanged $550 million in cash, 50 percent of the equity of Commercial
Insurance Resources, Inc. (the parent of Gulf Insurance Company), and
100 percent of the preferred provider organization and third party administrator
networks of Transport Life Insurance Company (a wholly owned subsidiary of
Primerica) for 38,026,314 shares of the Company's common stock issued
at $19 per share. These transactions resulted in an increase in the
shareholders' equity of the Company of $723 million and the ownership
by The Travelers Inc. of approximately 27% of the Company's common
stock.
Effective December 31, 1993, The Travelers Inc. acquired the
approximately 73% of the Company's common stock which it did not
already own, through the exchange of .80423 shares of The Travelers
Inc. common stock for each share of the Company's common stock. On
December 31, 1993, The Travelers Corporation merged into The Travelers
Inc. All subsidiaries of the former Travelers Corporation were
contributed to The Travelers Insurance Group Inc., a second tier
subsidiary of The Travelers Inc. In conjunction with the merger, The
Travelers Inc. contributed Primerica Insurance Holdings, Inc. and its
subsidiaries and made a cash capital contribution of $200 million to
the Company, and assumed the public debt obligations of the Company.
- 36 -
<PAGE>
<TABLE> <CAPTION>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED QUARTERLY DATA (UNAUDITED) Pre-merger, historical accounting basis
------------------------------------------------------------------------------------------------
First Second Third Fourth
1993 (in millions) Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $1,783 $1,652 $1,547 $1,602
Net investment income 659 653 644 644
Realized investment gains (losses) 185 (1) 63 (38)
Other revenues, including gains and losses
on dispositions 223 223 223 222
Federal income taxes 67 13 (124) (12)
Net income (loss) 195 93 (36) 36
------------------------------------------------------------------------------------------------
Per common share (in dollars)
Primary
Net income (loss) $ 1.25 $ .55 $(.33) N/A
Assuming full dilution
Net income (loss) 1.22 .54 (.33) N/A
Dividends .40 .40 .40 $ .40
Common stock data
Price ranges
High 30 3/4 33 38 7/8 38 3/8
Low 23 3/4 26 1/8 29 3/4 30 1/2
Close 27 1/2 32 37 5/8 N/A - (1)
------------------------------------------------------------------------------------------------
<FN>
(1) On December 31, 1993, all of the Company's common stock was acquired by
The Travelers Inc. and, therefore, is no longer traded.
</TABLE>
<TABLE> <CAPTION>
First Second Third Fourth
1992 (in millions) Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums $1,875 $1,601 $1,668 $1,545
Net investment income 719 713 696 671
Realized investment gains (losses) (2) 12 57 (701)
Other revenues, including gains and losses
on dispositions 217 230 210 166
Federal income taxes 6 8 (206) (334)
Income (loss) before cumulative effects
of changes in accounting principles 54 66 (358) (589)
Cumulative effect of change in
accounting for postretirement benefits
other than pensions, net of tax (258) - - -
Cumulative effect of change in
accounting for income taxes 428 - - -
Net income (loss) 224 66 (358) (589)
------------------------------------------------------------------------------------------------
Per common share (in dollars)
Primary
Income (loss) before cumulative effects
of changes in accounting principles $ .49 $ .59 $ (3.54) $ (5.38)
Cumulative effect of change in
accounting for postretirement benefits
other than pensions, net of tax (2.48) - - -
Cumulative effect of change in
accounting for income taxes 4.11 - - -
Net income (loss) 2.12 .59 (3.54) (5.38)
Assuming full dilution
Income (loss) before cumulative effects
of changes in accounting principles .49 .58 (3.54) (5.38)
Cumulative effect of change in
accounting for postretirement benefits
other than pensions, net of tax (2.37) - - -
Cumulative effect of change in
accounting for income taxes 3.93 - - -
Net income (loss) 2.05 .58 (3.54) (5.38)
Dividends .40 .40 .40 .40
Common stock data
Price ranges
High 23 3/4 21 1/2 23 1/8 27 5/8
Low 19 1/2 19 1/2 17 1/8 21 1/2
Close 20 1/4 20 5/8 22 1/2 27 1/4
------------------------------------------------------------------------------------------------
Shareholders at year end 67,290
------------------------------------------------------------------------------------------------
</TABLE>
- 37 -
<PAGE>
<TABLE> <CAPTION>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA Pre-merger, historical accounting basis
------------------------------------------------------------------------------------------------------------------
(in millions) 1993 1992 1991 1990 1989
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Premiums $6,584 $6,688 $7,302 $7,435 $7,793
Net investment income 2,600 2,799 3,228 3,494 3,567
Realized investment gains (losses) 209 (635) (2) (616) 134
Other revenues, including gains and
losses on dispositions 891 823 849 1,001 1,029
Federal income taxes (56) (526) 16 26 84
Income (loss) before extraordinary
credit and cumulative effects of
changes in accounting principles 288 (828) 307 (178) 424
Extraordinary credit - - 11 - 31
Cumulative effect of change in
accounting for postretirement
benefits other than pensions, net of tax - (258) - - -
Cumulative effect of change in
accounting for income taxes - 428 - - -
Net income (loss) 288 (658) 318 (178) 455
Assets 54,610 58,029 57,975 61,826 62,071
Long-term debt 752 1,124 945 934 1,055
------------------------------------------------------------------------------------------------------------------
Per common share (in dollars)
Primary
Income (loss) before extraordinary
credit and cumulative effects of
changes in accounting principles N/A $ (8.11) $ 2.87 $ (1.85) $ 4.07
Extraordinary credit N/A - .10 - .30
Cumulative effect of change in
accounting for postretirement
benefits other than pensions, net of tax N/A (2.43) - - -
Cumulative effect of change in
accounting for income taxes N/A 4.03 - - -
Net income (loss) N/A (6.51) 2.97 (1.85) 4.37
Assuming full dilution
Income (loss) before extraordinary
credit and cumulative effects of
changes in accounting principles N/A (8.11) 2.80 (1.85) 3.99
Extraordinary credit N/A - .09 - .29
Cumulative effect of change in
accounting for postretirement
benefits other than pensions, net of tax N/A (2.43) - - -
Cumulative effect of change in
accounting for income taxes N/A 4.03 - - -
Net income (loss) N/A (6.51) 2.89 (1.85) 4.28
Dividends 1.60 1.60 1.60 2.20 2.40
Shareholders' equity at year end N/A 31.96 44.06 41.44 47.09
------------------------------------------------------------------------------------------------------------------
</TABLE>
- 38 -
<PAGE>
<TABLE> <CAPTION>
THE TRAVELERS CORPORATION AND SUBSIDIARIES
-----------------------------------------------------------------------------------------------------------------
SELECTED LINE OF BUSINESS FINANCIAL DATA Pre-merger, historical accounting basis
-----------------------------------------------------------------------------------------------------------------
(in millions) 1993 1992 1991 1990 1989
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Life companies
Premiums $ 2,947 $ 2,833 $ 2,976 $ 3,038 $ 2,976
Net investment income 1,894 2,107 2,464 2,654 2,714
Realized investment gains (losses) (19) (746) (23) (588) 89
Other revenues, including gains
and losses on dispositions 675 565 532 510 445
Income (loss) before extraordinary
credit and cumulative effects of
changes in accounting principles 152 (574) 105 (327) 246
Extraordinary credit - - 11 - 31
Cumulative effect of change in
accounting for postretirement
benefits other than pensions, net of tax - (120) - - -
Cumulative effect of change in
accounting for income taxes - 345 - - -
Net income (loss) 152 (349) 116 (327) 277
Assets 33,986 35,838 36,756 36,639 36,429
Annual premiums on new individual
life and annuity business 232 227 230 226 239
Face amount of life insurance sales 23,442 26,828 27,326 42,008 14,259
Face amount of life insurance in force 184,257 196,093 218,128 204,904 182,037
-----------------------------------------------------------------------------------------------------------------
Property-casualty companies
Premiums $3,637 $3,855 $4,326 $4,397 $4,817
Net investment income 682 673 724 731 705
Realized investment gains (losses) 223 112 17 (30) 42
Other revenues, including gains
and losses on dispositions (51) 32 - 157 66
Income (loss) before cumulative
effects of changes in
accounting principles 97 (231) 207 147 123
Cumulative effect of change in
accounting for postretirement
benefits other than pensions, net of tax - (123) - - -
Cumulative effect of change in
accounting for income taxes - 82 - - -
Net income (loss) 97 (272) 207 147 123
Assets 21,032 20,650 19,759 20,328 18,979
-----------------------------------------------------------------------------------------------------------------
Noninsurance subsidiaries
Net income (loss) $ 39 $ (37) $ (5) $ 2 $ 55
-----------------------------------------------------------------------------------------------------------------
</TABLE>
- 39 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors,
The Travelers Corporation:
We have audited the accompanying balance sheets of The Travelers Corporation and
Subsidiaries (the "Company") as of December 31, 1993 and 1992, and the related
consolidated statements of operations and retained earnings and cash flows for
each of the three years in the period ended December 31, 1993 (the
"Preacquisition Consolidated Financial Statements"). These Preacquisition
Consolidated Financial Statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these Preacquisition
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 Preacquisition Consolidated Financial
Statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
Preacquisition Consolidated Financial Statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Preacquisition
Consolidated Financial Statements. We believe that our audits provide a
reasonable basis for our opinion.
As more fully described in Notes 1 and 23, as of the close of business on
December 31, 1993, the Company was acquired in a purchase business combination
by The Travelers Inc. (formerly Primerica Corporation). The accompanying
Preacquisition Consolidated Financial Statements, which include only those
accounts of the Company immediately prior to it being acquired, were prepared
for the purpose of complying with the requirements of the Staff of the
Securities and Exchange Commission for inclusion in the Form 10-K of The
Travelers Inc. These Preacquisition Consolidated Financial Statements are not
intended to be a complete presentation of the Company's financial statements
after its acquisition.
In our opinion, the Preacquisition Consolidated Financial Statements referred to
above present fairly, in all material respects, the preacquisition consolidated
financial position of The Travelers Corporation and Subsidiaries as of
December 31, 1993 and 1992, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1993, in conformity with generally accepted accounting principles.
As discussed in Notes 2, 13, 14 and 15 to the Preacquisition Consolidated
Financial Statements, the Company changed its method of accounting and reporting
for reinsurance in 1993 and its method of accounting for postretirement benefits
other than pensions, accounting for income taxes and accounting for foreclosed
assets in 1992.
/s/ Coopers & Lybrand
Coopers & Lybrand
Hartford, Connecticut
January 24, 1994
EXHIBIT NO. 99.02
COMPANY'S FORM 8-K
September 23, 1993
Pages 2 & 3
Item 5. Other Events.
On September 22, 1993, Primerica and TC issued a joint
press release announcing that they were engaged in discussions
concerning a possible business merger. On that day,
complaints with respect to seven purported class actions were
filed in the Connecticut Superior Court for the Judicial
District of Hartford at Hartford/ New Britain, generally
naming TC, Primerica and the individual directors of TC as
defendants. On September 23, 1993, complaints with respect to
six purported class actions were filed with that court and two
actions were brought in the Connecticut Superior Court for the
Judicial District of New Haven at New Haven, and on September
24, 1993, four such complaints were filed, two in the Superior
Court for the Judicial District of Hartford and two in the
Superior Court for the Judicial District of New Haven.
Primerica was named as a defendant in all but two of these
nineteen actions. It is possible that additional actions of
this nature may be filed.
Each of the plaintiffs in these cases alleges, among
other things, that (i) such plaintiff is a holder of TC stock;
(ii) the defendants have by their wrongful acts deprived the
plaintiffs of the opportunity to maximize the value of their
TC Common Stock; (iii) the individual defendants have, as
directors of TC, breached their fiduciary duties of good
faith, fair dealing, due care and candor to the public
stockholders of TC; and (iv) that the exchange ratio of
Primerica Common Stock for TC Common Stock contemplated by the
Merger is grossly inadequate and unfair.
The plaintiffs request, in each case, certification of
the action as a class action and of the plaintiffs as class
representatives, and seek relief in various forms, including:
declaratory judgment that the defendants have breached their
fiduciary duties to the plaintiffs and other members of the
class of TC's shareholders; an order that the defendants take
appropriate measures to assure an open and vigorous auction
for TC; to maximize shareholder value; preliminary and
permanent injunctive relief against the defendants' proceeding
with the merger, or alternatively if the merger shall be
consummated, its rescission; compensatory damages, costs and
counsel fees for the plaintiffs; and/or such other relief as
the court may deem just and equitable.
<PAGE>
COMPANY'S FORM 10-Q
September 30, 1993
Page 26
Item 1. Legal Proceedings.
For information concerning purported class action
lawsuits arising from the announcement of the proposed merger
between the Company and Travelers, reference is made to the
description that appears in Item 5 of the Company's Current
Report on Form 8-K dated September 23, 1993. Since the filing
of that report, one additional purported class action suit
arising from the announcement of the proposed merger has been
brought in the New York State Supreme Court.
<PAGE>
COMPANY'S FORM 8-K
March 1, 1994
Page 2
Item 5. OTHER EVENTS.
As previously disclosed by the Company, in response to
the announcement in September 1993 of the merger between the
Company and old Travelers, a number of purported class action
lawsuits were filed in state court in Connecticut and New York
against old Travelers, its directors and the Company and
certain of its directors. For information concerning these
cases, see the description that appears in the last paragraph
on page 2 and the first two paragraphs on page 3 of the
Company's Current Report on Form 8-K dated September 23, 1993,
and the third paragraph on page 26 of the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 23,
1993, and the third paragraph on page 26 of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1993, which descriptions are incorporated by
reference herein. A copy of the pertinent paragraphs of such
filings is included as Exhibit 99.01 to this Form 8-K. These
cases are now consolidated in Connecticut in a case entitled
Robert Brandt, IRA, et al. v. The Travelers Corporation, et
al. The consolidated amended complaint generally seeks
damages on behalf of shareholders of old Travelers based on
the alleged inadequacy of the merger consideration offered by
the Company under the terms of the merger agreement. In
January 1994, the defendants filed a motion to dismiss the
case based on, among other things, Connecticut law limiting
claims by dissenting shareholders to statutory appraisal
rights.
EXHIBIT NO. 99.03
COMPANY'S FORM 10-K
December 31, 1989
Page 30
Item 3. LEGAL PROCEEDINGS
Shareholder Litigation
On August 29, 1988, the Company entered into an Agreement
and Plan of Merger among the Company, Primerica Holdings and
old Primerica, providing for the merger of old Primerica into
Primerica Holdings.
In late 1988, fifteen purported class actions were filed
in various jurisdictions, challenging certain aspects of the
merger. The plaintiffs in the various cases were purportedly
shareholders of old Primerica prior to the merger. They
allege that, in connection with the merger, old Primerica
and/or its officers or directors and/or former officers or
directors committed fraud and breached fiduciary duties.
Plaintiffs allege that the proxy statement by which the
shareholders' votes on the merger were solicited contained
representations which were materially misleading or failed to
disclose material facts. Plaintiffs seek to rescind the
transaction or in the alternative to recover compensatory
damages. A motion brought in one of these cases to enjoin the
merger was denied. The litigation is proceeding with the
designated lead case in United States District Court, Eastern
District of New York, under the caption Wallerstein, et al v.
---------------------
Primerica Corporation, et al.
-----------------------------
EXHIBIT NO. 99.04
COMPANY'S FORM 10-K
December 31, 1989
Page 31
Item 3. LEGAL PROCEEDINGS
Other Litigation
Eight purported class actions were filed in late 1987 and
early 1988 (two of which named SBHU as a defendant) in
connection with the June 1986 initial public offering of
Worlds of Wonder ("WOW") common stock, open market trading in
WOW common stock, the public offering in June 1987 of $80
million in WOW convertible debentures, and open market trading
in the debentures. The eight actions have been consolidated
in In re Worlds of Wonder, Inc. Securities Litigation, in the
---------------------------------------------------
United States District Court for the Northern District of
California.
SBHU acted as co-lead underwriter for the initial public
offering and as sole underwriter for the debenture offering.
The Complaint alleges that the prospectuses by which the
initial public offering and the debenture offering were made
and various press releases and public statements were
materially false and misleading. Plaintiffs seek to recover
the amounts paid by all purchasers in the initial public
offering and in the debenture offering, as well as losses
sustained by purchasers of WOW common stock or debentures in
the open market between June 20, 1986 and November 9, 1987.
On June 8, 1988, purchasers of approximately $12 million
of the WOW convertible debentures offered in June 1987 filed
an individual action naming SBHU and others as defendants,
Steinhardt Partners, et al. v. Smith Barney etc., et al., in
----------------------------------------------------------
the United States District Court for the southern District of
New York. These plaintiffs, who are seeking compensatory
damages based on claims similar to those asserted in the
consolidated class actions, have asserted that they will opt
out of any class certified in the other actions and pursue
their claims individually. On February 2, 1989, the Court
granted defendants' joint motion to transfer the Steinhardt
----------
action to the Northern District of California.
<PAGE>
COMPANY'S FORM 10-K
December 31, 1990
Page 30
Item 3. LEGAL PROCEEDINGS
Other Litigation
For information concerning purported class actions and an
individual action against SBHU and others in connection with
Worlds of Wonder common stock and convertible debentures, see
the description that appears in the first, second and third
paragraphs of page 31 of the Company's filing on Form 10-K for
the year ended December 31, 1989, which description is
incorporated by reference herein. A copy of the pertinent
paragraphs of such filing is included as an exhibit to this
Form 10-K. On March 26, 1990, the United States District
Court for the Northern District of California certified a
class of common stock purchasers and a class of debenture
purchasers.
EXHIBIT NO. 99.05
COMPANY'S FORM 10-Q
September 30, 1993
Page 26
Item 1. Legal Proceedings
In October 1993, several purported class action lawsuits
were filed in the Federal District Court for the Southern
District of New York naming Smith Barney, Harris Upham & Co.
Incorporated ("SBS") as defendant. The cases arise from SBS's
participation as lead and co-underwriter in the initial public
offerings of three separate funds managed by Hyperion Capital
Management Inc. The plaintiffs have also named as defendants
the funds' directors and the co-underwriters and their
representatives. Plaintiffs allege that the registration
statements and prospectuses by which the offerings were made
between June 1992 and October 1992 were materially false and
misleading, and are seeking unspecified damages in claims
brought under the Federal securities laws. The Company
believes it has meritorious defenses to these actions and
intends to defend against them vigorously.
EXHIBIT NO. 99.06
COMPANY'S FORM 10-K
December 31, 1992
Page 26
Because of former operations of old Primerica, the
Company and certain of its subsidiaries are involved in
matters relating to Federal, state or local regulations or
laws regulating the discharge of materials into the
environment. The most significant of these matters involves
the manufacturing facility at the Chemplex site in Clinton,
Iowa, which was formerly operated as a joint venture by ACC
Chemical Co., a former subsidiary of old Primerica, and Getty
Chemical Company. In connection with the 1984 sale of its
interest in this venture, old Primerica agreed to indemnify
the purchaser for up to 50% of certain liabilities including
liabilities relating to environmental matters prior to the
date of sale. The Company and other potentially responsible
parties have negotiated an agreement with the United States
Environmental Protection Agency ("EPA") for remediation of
groundwater contamination at the site. A consent decree for
groundwater remediation was entered on November 7, 1991. A
separate Remedial Investigation and Feasibility Study work
plan concerning soil contamination has been prepared and EPA
is in the process of selecting its preferred remedy. The
majority of the remaining environmental matters relate to
manufacturing operations that were sold by old Primerica prior
to 1987. For the majority of the environmental sites,
liability was assumed by the purchasers of the operations.
The Company believes that insurance maintained by or on behalf
of the Company, old Primerica or certain affiliates,
indemnities in favor of the Company or such subsidiaries and
contributions from other potentially responsible parties will
be available to mitigate the financial exposure of the Company
and its subsidiaries in these matters. The Company is using a
variety of approaches to recover from each of these sources,
including pursuing litigation where appropriate relating to
such matters.
EXHIBIT NO. 99.07
COMPANY'S FORM 8-K
March 1, 1994
Page 2
Item 5. Other Events
In a case entitled United States v. Travelers Insurance
Co., filed in the United States District Court for the
District of Connecticut in April 1989, the federal government
alleges that old Travelers improperly handled health benefit
claims for individuals who are actively employed and eligible
for Medicare coverage. In November 1992, the Court ruled on
cross motions for summary judgment, and found that old
Travelers had no liability for actions taken in its capacity
as a claims administrator. However, the Court also recognized
that the government's right of recovery is independent of the
rights of the insured, and is not governed by procedural
limitations in the plans.
EXHIBIT NO. 99.08
COMPANY'S FORM 8-K
March 1, 1994
Page 2
Item 5. Other Events.
In a case entitled The Travelers Insurance Company et al.
v. Richard John Ratcliffe Keeling et al., filed in New York
Supreme Court in June 1991, old Travelers seeks to enforce
reinsurance contracts with certain underwriters at Lloyd's of
London with respect to recoveries for certain asbestos claims.
In January 1994, the Court stayed litigation of this matter in
favor of arbitration. The issues before the arbitration panel
include the underwriters' breach of contract and anticipated
breach of their agreement with the Company on asbestos-related
reinsurance claims.
EXHIBIT 99.09
COMPANY'S FORM 10-Q
September 30, 1994
Page 29
A number of cases have been filed against subsidiaries
of the Company, other insurance companies and industry
organizations relating to service fee charges and premium
calculations on certain workers compensation insurance.
Subsidiaries of the Company are defendants in an action filed by
the Attorney General of South Carolina in August 1994 in the
Court of Common Pleas, County of Greenville, South Carolina, and
a purported class action filed in September 1994 in the Circuit
Court for Bullock County, Alabama. Certain of the Company's
subsidiaries have also been named as defendants in a purported
class action filed in 1993 in the Superior Court Division of the
General Court of Justice, Wake County, North Carolina, and, in
April 1994, were named as additional defendants in a purported
class action pending in the 116th District of Dallas County,
Texas. The plaintiffs in these cases generally allege that the
workers compensation carriers in the state have conspired to
collect excessive or improper service fees or premiums in
violation of state antitrust laws and/or state unfair trade
practices laws. The plaintiffs seek monetary damages and
possible injunctive relief. The Company believes it has
meritorious defenses and intends to contest the allegations.
