UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- -------
-----------------------------
Commission file number 1-9924
-----------------------------
Travelers Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1568099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
388 Greenwich Street, New York, New York 10013
-----
(Address of principal executive offices) (Zip Code)
(212) 816-8000
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
Common stock outstanding as of July 31, 1996: 480,426,079 (adjusted to give
effect to the three-for-two stock split paid on May 24, 1996)
<PAGE>
Travelers Group Inc.
TABLE OF CONTENTS
-----------------
Part I - Financial Information
Item 1. Financial Statements: Page No.
--------
Condensed Consolidated Statement of Income (Unaudited) -
Three and Six Months Ended June 30, 1996 and 1995 3
Condensed Consolidated Statement of Financial Position -
June 30, 1996 (Unaudited) and December 31, 1995 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity (Unaudited) - Six Months Ended June 30, 1996 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements -
(Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II - Other Information
Item 1. Legal Proceedings 35
Item 6. Exhibits and Reports on Form 8-K 35
Exhibit Index 36
Signatures 37
2
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Income (Unaudited)
(In millions of dollars, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
- ------------------------------------------------------------------------
Revenues
Insurance premiums $2,060 $1,306 $3,316 $2,595
Commissions and fees 878 722 1,766 1,290
Interest and dividends 1,417 1,121 2,543 2,164
Finance related interest and
other charges 287 277 571 548
Principal transactions 265 225 543 507
Asset management fees 331 242 648 479
Other income 188 279 554 549
- ------------------------------------------------------------------------
Total revenues 5,426 4,172 9,941 8,132
- ------------------------------------------------------------------------
Expenses
Policyholder benefits and claims 2,319 1,329 3,590 2,663
Non-insurance compensation and
benefits 958 844 1,930 1,650
Insurance underwriting, acquisition
and operating 861 469 1,367 952
Interest 563 518 1,060 973
Provision for credit losses 60 41 128 81
Other operating 449 389 850 761
- ------------------------------------------------------------------------
Total expenses 5,210 3,590 8,925 7,080
- ------------------------------------------------------------------------
Gain (loss) on sale of
subsidiaries and affiliates 397 - 397 -
- ------------------------------------------------------------------------
Income before income taxes and
minority interest 613 582 1,413 1,052
Provision for income taxes (81) (205) (361) (370)
Minority interest, net of income taxes
44 - 44 -
- ------------------------------------------------------------------------
Income from continuing operations 576 377 1,096 682
- ------------------------------------------------------------------------
Discontinued operations, net of
income taxes:
Income from operations - 29 - 44
Gain on disposition - - - 20
- ------------------------------------------------------------------------
Net income $576 $406 $ 1,096 $ 746
========================================================================
Net income per share of common stock
and common stock equivalents (1):
Continuing operations $1.17 $0.75 $2.20 $1.35
Discontinued operations - 0.06 - 0.14
- ------------------------------------------------------------------------
Net income $1.17 $0.81 $2.20 $1.49
========================================================================
Weighted average number of common
shares outstanding and
common stock equivalents
(millions) (1) 476.0 475.2 477.0 474.1
- ------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
(1) Current and prior year information has been restated to reflect
stock split (see Note 1 of Notes to Condensed Consolidated
Financial Statements).
3
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Financial Position
(In millions of dollars)
June 30, December 31,
1996 1995
- -------------------------------------------------------------------------
Assets (Unaudited)
Cash and cash equivalents
(including $1,068 and $1,072 segregated
under federal and other regulations) $ 1,635 $ 1,866
Investments and real estate held for sale:
Fixed maturities, primarily available
for sale at market value
(cost - $42,159 and $29,652) 42,044 30,712
Equity securities, at market
(cost - $967 and $759) 1,070 856
Mortgage loans 4,420 4,048
Real estate held for sale 521 321
Policy loans 1,907 1,888
Short-term and other 4,815 3,140
- -----------------------------------------------------------------------
Total investments and real estate held for sale 54,777 40,965
- -----------------------------------------------------------------------
Securities borrowed or purchased under
agreements to resell 21,246 19,601
Brokerage receivables 7,217 6,559
Trading securities owned, at market value 10,851 8,984
Net consumer finance receivables 7,290 7,092
Reinsurance recoverables 11,119 6,461
Value of insurance in force and deferred policy
acquisition costs 2,452 2,172
Cost of acquired businesses in excess of net assets 2,958 1,928
Separate and variable accounts 7,792 6,949
Other receivables 5,866 3,564
Other assets 8,871 7,775
- -----------------------------------------------------------------------
Total assets $142,074 $113,916
=======================================================================
Liabilities
Investment banking and brokerage borrowings $ 3,483 $ 2,955
Short-term borrowings 2,368 1,468
Long-term debt 10,161 9,190
Securities loaned or sold under agreements to
repurchase 22,428 20,619
Brokerage payables 3,493 4,403
Trading securities sold not yet purchased, at
market value 6,282 4,563
Contractholder funds 14,164 14,535
Insurance policy and claims reserves 45,012 26,920
Separate and variable accounts 7,748 6,916
Accounts payable and other liabilities 14,148 10,469
- -----------------------------------------------------------------------
Total liabilities 129,287 102,038
- -----------------------------------------------------------------------
ESOP Preferred stock - Series C 213 235
Guaranteed ESOP obligation (51) (67)
- -----------------------------------------------------------------------
162 168
TAP-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts holding
solely Junior Subordinated Debt Securities 900 -
- -----------------------------------------------------------------------
Stockholders' equity (1)
Preferred stock at aggregate liquidation value 763 800
Common stock ($.01 par value; authorized
shares: 1.5 billion;
issued shares: 1996 - 553,742,005 shares and
1995 - 552,241,886 shares) 6 6
Additional paid-in capital 6,983 6,783
Retained earnings 6,408 5,503
Treasury stock, at cost (1996 - 77,884,913
shares, 1995 - 77,886,615 shares) (2,102) (1,835)
Unrealized gain (loss) on investment securities 1 756
Other, principally deferred compensation and
minimum pension liability (334) (303)
- -----------------------------------------------------------------------
Total stockholders' equity 11,725 11,710
- -----------------------------------------------------------------------
Total liabilities and stockholders' equity $142,074 $113,916
=======================================================================
See Notes to Condensed Consolidated Financial Statements.
(1) Current and prior year information has been restated to reflect
stock split (see Note 1 of Notes to Condensed Consolidated
Financial Statements).
4
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
(In millions of dollars)
Six months ended June 30, 1996 Amount Shares
- ----------------------------------------------------------------------
Preferred stock at aggregate liquidation value (in thousands)
Balance, beginning of year $ 800 11,200
Conversion of Series B preferred stock
to common stock (37) (745)
- ----------------------------------------------------------------------
Balance, end of period 763 10,455
======================================================================
Common stock and additional paid-in capital
Balance, beginning of year (1) 6,789 552,242
Conversion of Series B preferred stock to
common stock 37 1,520
Issuance of shares pursuant to employee
benefit plans 188 (20)
Other (25) -
- ----------------------------------------------------------------------
Balance, end of period 6,989 553,742
- ----------------------------------------------------------------------
Retained earnings
Balance, beginning of year 5,503
Net income 1,096
Common dividends (143)
Preferred dividends (48)
- -----------------------------------------------------------------------
Balance, end of period 6,408
- -----------------------------------------------------------------------
Treasury stock (at cost)
Balance, beginning of year (1) (1,835) (77,887)
Issuance of shares pursuant to employee benefit
plans, net of shares tendered for payment of
option exercise price and withholding taxes 50 7,583
Treasury stock acquired (317) (7,581)
- -----------------------------------------------------------------------
Balance, end of period (2,102) (77,885)
- -----------------------------------------------------------------------
Unrealized gain (loss) on investment securities
Balance, beginning of year 756
Net change in unrealized gains and losses on
investment securities, net of tax (755)
- ------------------------------------------------------------
Balance, end of period 1
- ------------------------------------------------------------
Other, principally deferred compensation and
minimum pension liability
Balance, beginning of year (303)
Restricted stock activity, net of amortization (119)
Other 88
- ------------------------------------------------------------
Balance, end of period (334)
- ------------------------------------------------------------
Total common stockholders' equity and common
shares outstanding $10,962 475,857
======================================================================
Total stockholders' equity $11,725
======================================================================
See Notes to Condensed Consolidated Financial Statements.
(1) Current and prior year information has been restated to reflect stock
split (see Note 1 of Notes to Condensed Consolidated Financial
Statements).
5
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
(In millions of dollars)
Six months ended June 30, 1996 1995
- -----------------------------------------------------------------------------
Cash flows from operating activities
Income from continuing operations before income
taxes and minority interest $ 1,413 $1,052
Adjustments to reconcile income from continuing
operations before income taxes, to net cash
provided by (used in) operating activities:
Amortization of deferred policy acquisition
costs and value of insurance in force 499 407
Additions to deferred policy acquisition costs (587) (431)
Depreciation and amortization 167 152
Provision for credit losses 128 81
Changes in:
Trading securities, net (148) (503)
Securities borrowed, loaned and repurchase
agreements, net 164 5,037
Brokerage receivables net of brokerage payables (1,568) (3,138)
Insurance policy and claims reserves 511 414
Other, net 1,174 776
Net cash flows provided by (used in) operating
activities of discontinued operations - (769)
- -----------------------------------------------------------------------------
Net cash provided by (used in) operations 1,753 3,078
Income taxes paid (475) (284)
- -----------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,278 2,794
- -----------------------------------------------------------------------------
Cash flows from investing activities
Consumer loans originated or purchased (1,468) (1,360)
Consumer loans repaid or sold 1,266 1,069
Purchases of fixed maturities and equity securities (15,216) (7,345)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity
securities 12,584 6,605
Mortgage loans 133 319
Real estate and real estate joint ventures 86 126
Proceeds from maturities of investments:
Fixed maturities 1,748 1,428
Mortgage loans 417 207
Other investments, primarily short term, net (537) (2,004)
Business acquisition (4,160) -
Other, net (15) (216)
Net cash flows provided by (used in) investing
activities of discontinued operations - 1,169
- -----------------------------------------------------------------------------
Net cash provided by (used in) investing activities (5,162) (2)
- -----------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (191) (171)
Subsidiary issuance of preferred stock 900 -
Subsidiary's sale of Class A common stock 1,453 -
Treasury stock acquired (317) (151)
Issuance of long-term debt 1,350 2,625
Payments and redemptions of long-term debt (360) (1,069)
Net change in short-term borrowings (including
investment banking and brokerage borrowings) 1,428 (3,151)
Contractholder fund deposits 899 1,534
Contractholder fund withdrawals (1,469) (2,189)
Other, net (40) (5)
- -------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,653 (2,577)
- -----------------------------------------------------------------------------
Change in cash and cash equivalents (231) 215
Cash and cash equivalents at beginning of period 1,866 1,227
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,635 $ 1,442
- -------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,033 $ 925
==============================================================================
Supplemental schedule of noncash investing and financing activities
Assets and liabilities of business acquired:
Invested assets $ 13,884
Reinsurance recoverables and other assets 10,019
Insurance policy and claim reserves (18,235)
Other liabilities (1,508)
- -----------------------------------------------------------------------
Cash payment $ 4,160
=======================================================================
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
Travelers Group Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements as of June
30, 1996 and for the three-month and six-month periods ended June 30,
1996 and 1995 are unaudited and include the accounts of Travelers Group
Inc. (TRV) and its subsidiaries (collectively, the Company). In the
opinion of management, all adjustments, consisting of normal recurring
adjustments necessary for a fair presentation, have been reflected.
The accompanying condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
related notes included in the Company's Annual Report to Stockholders
for the year ended December 31, 1995.
Certain financial information that is normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles, but is not required for interim reporting
purposes, has been condensed or omitted.
The Board of Directors on January 24, 1996, declared a three-for-two
split in TRV's common stock, in the form of a 50% stock dividend, which
was paid on May 24, 1996 to stockholders of record on May 6, 1996. At
TRV's Annual Meeting of Stockholders on April 24, 1996, stockholders
approved an increase in the number of shares of common stock of TRV
authorized for issuance from 500 million shares to 1.5 billion shares.
Current and prior year information has been restated to reflect the
stock split.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
Discontinued operations
In January 1995 the sale of the group life and related businesses of
The Travelers Insurance Group Inc. (TIGI) to Metropolitan Life
Insurance Company (MetLife) was completed and also in January 1995, the
group medical business was exchanged for a 50% interest in The
MetraHealth Companies, Inc. (MetraHealth). The Company's interest in
MetraHealth was sold on October 2, 1995 and through that date had been
accounted for on the equity method. In 1995 the Company's discontinued
operations reflect the results of the medical insurance business not
transferred, plus its equity interest in the earnings of MetraHealth
through the date of sale. Revenues from discontinued operations for
the three months and six months ended June 30, 1995 amounted to $377
million and $716 million, respectively. Included in net income from
discontinued operations for the six months ended June 30, 1995 is the
gain from the sale in January 1995 of the Company's group life
insurance business.
FAS 121. Effective January 1, 1996 the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS
121). This statement establishes accounting standards for the
impairment of long-lived assets and certain identifiable intangibles to
be disposed of. This statement requires a write down to fair value
when long-lived assets to be held and used are impaired. The statement
also requires long-lived assets to be disposed of (e.g. real estate
held for sale) be carried at the lower of cost or fair value less cost
to sell, and does not allow such assets to be depreciated. The
adoption of this standard did not have a material impact on the
Company's financial condition, results of operations or liquidity.
7
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
2. Acquisition
-----------
On April 2, 1996, Travelers/Aetna Property Casualty Corp. (TAP), an
indirect majority-owned subsidiary of the Company, purchased from Aetna
Life and Casualty Company (Aetna) all of the outstanding capital stock
of The Aetna Casualty and Surety Company (ACSC) and The Standard Fire
Insurance Company (SFIC) (collectively, Aetna P&C) for approximately
$4.16 billion in cash. The acquisition was accounted for under the
purchase method of accounting and, accordingly the condensed
consolidated financial statements include the results of Aetna P&C's
operations only from the date of acquisition. TAP also owns The
Travelers Indemnity Company (Travelers Indemnity), and is the primary
vehicle through which the Company engages in the property and casualty
insurance business.
To finance the $4.16 billion purchase price and transaction costs, and
capital contributions of $710 million to Aetna P&C, TAP borrowed $2.65
billion from a syndicate of banks under a five-year revolving credit
facility (the Credit Facility) and sold approximately 33 million shares
of its Class A Common Stock representing approximately 9% of its
outstanding common stock (at that time) to four private investors,
including Aetna, for an aggregate of $525 million. TIGI, a wholly
owned subsidiary of the Company, acquired approximately 328 million
shares of Class B Common Stock of TAP in exchange for contributing the
outstanding capital stock of Travelers Indemnity and a capital
contribution of approximately $1.14 billion. In addition, TRV
purchased from TAP $540 million of Series Z Preferred Stock of TAP.
Approximately $18 million of the purchase price was funded through the
settlement of receivables from Aetna.
TRV funded its purchase of Series Z Preferred Stock of TAP and the
capital contribution made by TIGI from the issuance of $920 million of
debt, and from $760 million of cash on hand.
On April 23, 1996, TAP sold in a public offering approximately 39
million shares of its Class A Common Stock, representing approximately
9.75% of its outstanding common stock, for total proceeds of $928
million. On April 24, 1996, TAP sold in a public offering $500 million
of 6 3/4% Notes due April 15, 2001 and $200 million of 7 3/4% Notes due
April 15, 2026. On April 26, 1996, Travelers P&C Capital I, a subsidiary
trust of TAP, issued $800 million of 8.08% Trust Preferred Securities
in a public offering. On May 10, 1996, Travelers P&C Capital II, a
subsidiary trust of TAP, issued $100 million of 8.00% Trust Preferred
Securities in a public offering. These Trust Preferred Securities,
which are fully and unconditionally guaranteed by TAP, have a
liquidation value of $25 per Trust Preferred Security and are
mandatorily redeemable under certain circumstances. The aggregate
proceeds from the above offerings of $2.528 billion together with the
proceeds from the issuance by TAP of approximately $700 million of
commercial paper were used to repay in full the borrowings under the
credit facility and to redeem in full TAP's Series Z Preferred Stock.
The assets and liabilities of Aetna P&C are reflected in the Condensed
Consolidated Statement of Financial Position at June 30, 1996 on a
fully consolidated basis at management's best estimate of their fair
values, based on currently available information. Evaluation and
appraisal of assets and liabilities is continuing, including
adjustments to investments, deferred acquisition costs, financial
guarantee obligations which the Company expects to assume, designate
as held for sale and actively market, claim reserves to conform the
accounting policy regarding discounting to that historically used by
the Company, liabilities for lease and severance costs relating to
a restructuring plan for the business acquired, other assets and
liabilities and related deferred income tax amounts; and allocation of
the purchase price may be
8
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
adjusted. The excess of the purchase price over the estimated fair
value of net assets is approximately $1.14 billion and will be
amortized over 40 years.
During the second quarter of 1996 TAP recorded charges related to the
acquisition and integration of Aetna P&C. These charges resulted
primarily from anticipated costs of the merger and the application of
Travelers strategies, policies and practices to Aetna P&C reserves and
include: $301.9 million after tax and minority interest ($566.5
million before tax and minority interest) in reserve increases, net of
reinsurance, related primarily to cumulative injury claims other than
asbestos (CIOTA); and an $18.7 million after tax and minority interest
($35 million before tax and minority interest) provision for lease and
severance costs of Travelers Indemnity related to the restructuring
plan for the merger. In addition the Company recognized a gain of $363
million (before and after tax) from the issuance of shares of Class A
Common Stock by TAP and such gain is not reflected in the pro forma
financial information below.
The unaudited pro forma condensed results of operations presented below
assume the above transactions had occurred at the beginning of each of
the periods presented:
Six Months Ended June 30,
--------------------------
Pro Forma 1996 1995
------------------------------------------------------------------
Revenues $11,541 $10,673
====== ======
Income from continuing operations $ 859 $ 303
====== ===
Net income $ 859 $ 367
====== ===
Net income per share:
Continuing operations $ 1.70 $ 0.55
==== ====
Net income $ 1.70 $ 0.69
==== ====
Excluding the charges discussed above associated with the acquisition
of Aetna P&C, which total $320.6 million after tax and minority
interest, pro forma income from continuing operations and net income
would have been $1.18 billion or $2.38 per share for the six months
ended June 30, 1996. Historical results of Aetna P&C in the second
quarter of 1995 include a charge of $750 million ($488 million after
tax) representing an addition to environmental-related claims reserves.
The unaudited pro forma condensed financial information is not
necessarily indicative either of the results of operations that would
have occurred had this transaction been consummated at the beginning of
the periods presented or of future operations of the combined
companies.
3. Debt
----
Investment banking and brokerage borrowings consisted of the following:
(millions) June 30, 1996 December 31, 1995
--------- ------------- -----------------
Commercial paper $3,205 $2,401
Uncollateralized borrowings 278 399
Collateralized borrowings - 155
-------- ------
$3,483 $2,955
===== =====
9
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
Investment banking and brokerage borrowings are short-term and include
commercial paper and collateralized and uncollateralized borrowings
used to finance Smith Barney Holdings Inc.'s (Smith Barney) operations,
including the securities settlement process. The collateralized and
uncollateralized borrowings bear interest at variable rates based
primarily on the Federal Funds interest rate. Smith Barney has a
commercial paper program that consists of both discounted and
interest-bearing paper. In addition, Smith Barney has substantial
borrowing arrangements consisting of facilities that it has been
advised are available, but where no contractual lending obligation
exists.
Short-term borrowings consisted of commercial paper outstanding as
follows:
<TABLE><CAPTION>
(millions) June 30, 1996 December 31, 1995
--------- ------------- -----------------
<S> <C> <C>
Travelers Group Inc. $ 247 $ -
Commercial Credit Company 1,436 1,394
Travelers/Aetna Property Casualty Corp. 631 -
The Travelers Insurance Company 54 74
------ ------
$2,368 $1,468
===== =====
</TABLE>
TRV, Commercial Credit Company (CCC), TAP 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.
TRV, CCC and TIC have an agreement with a syndicate of banks to provide
$1.0 billion of revolving credit, to be allocated to any of TRV, CCC or
TIC. The participation of TIC in this agreement is limited to $250
million. The revolving credit facility consists of a five-year
revolving credit facility which expires in 2001. Currently, $400
million is allocated to TRV, $475 million to CCC and $125 million to
TIC. Under this facility TRV is required to maintain a certain level
of consolidated stockholders' equity (as defined in the agreement). At
June 30, 1996, this requirement was exceeded by approximately $3.7
billion. In addition to the five-year revolving credit facility, TRV,
during the second quarter of 1996, entered into a 364-day revolving
credit and bid loan agreement with a bank to provide $75 million of
revolving credit.
CCC also has a committed and available revolving credit facility on a
stand-alone basis of $1.5 billion, which expires in 2001.
CCC is limited by covenants in its revolving credit agreements as to
the amount of dividends and advances that may be made to its parent or
its affiliated companies. At June 30, 1996, CCC would have been able
to remit $273 million to its parent under its most restrictive
covenants.
As discussed in Note 2, during the first quarter of 1996 TAP entered
into a five-year revolving credit facility in the amount of $2.65
billion with a syndicate of banks led by Citibank, N.A., Chemical Bank
and Morgan Guaranty Trust Company. This facility expires in March 2001
and was used to finance the purchase of Aetna P&C. All borrowings
under this facility have been repaid in full and the amount of the
facility was subsequently reduced to $1.2 billion, currently there are
no borrowings outstanding under this facility.
10
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
Long-term debt, including its current portion, consisted of the
following:
<TABLE><CAPTION>
(millions) June 30, 1996 December 31, 1995
--------- ------------- -----------------
<S> <C> <C>
Travelers Group Inc. $2,023 $2,042
Commercial Credit Company 5,400 5,200
Smith Barney Holdings Inc. 1,975 1,875
Travelers/Aetna Property Casualty Corp. 700 -
The Travelers Insurance Group Inc. 63 73
------ ------
$10,161 $9,190
====== =====
</TABLE>
In December 1995, TRV, through a private placement, issued $100 million
principal amount of 6 1/4% Notes due December 1, 2005, and $100 million
principal amount of 7% Notes due December 1, 2025, substantially all of
which was exchanged for registered debt in June 1996.
During the first six months of 1996, CCC issued $400 million and Smith
Barney issued $250 million of notes with varying interest rates and
maturities.
Smith Barney has a $1.0 billion revolving credit agreement with a bank
syndicate that extends through May 1999. In addition, Smith Barney has
a $500 million 364-day revolving credit agreement that extends through
May 1997. As of June 30, 1996, there were no borrowings outstanding
under either facility.
Smith Barney is limited by covenants in its revolving credit facility
as to the amount of dividends that may be paid to TRV. The amount of
dividends varies based upon, among other things, levels of net income
of Smith Barney. At June 30, 1996, Smith Barney would have been able
to remit approximately $532 million to TRV under its most restrictive
covenants.
TIGI is subject to various regulatory restrictions that limit the
maximum amount of dividends available to its parent without prior
approval of the Connecticut Insurance Department. A maximum of $580
million of statutory surplus is available in 1996 for such dividends
without Department approval.
4. TAP - Obligated Mandatorily Redeemable Preferred Securities of
--------------------------------------------------------------
Subsidiary Trusts
-----------------
The sole assets of Travelers P&C Capital I and Travelers P&C Capital II
are Junior Subordinated Debt Securities. These debt securities are
eliminated in consolidation and at June 30, 1996 were as follows:
(in millions) Amount Interest Rate Maturity Date
------ ------------- -------------
Travelers P&C Capital I $800 8.08% April 30, 2036
Travelers P&C Capital II $100 8.00% May 15, 2036
11
<PAGE>
Notes to Condensed Consolidated Financial Statements (continued)
5. Contingencies
-------------
Certain subsidiaries of TIGI are in arbitration with underwriters at
Lloyd's of London (Lloyd's) in New York State to enforce reinsurance
contracts with respect to recoveries for certain asbestos claims. The
dispute involves the ability to aggregate asbestos claims under a
market agreement between Lloyd's and those subsidiaries or under the
applicable reinsurance treaties.
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 recoverables. 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 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 reserves by an amount that would be material to the
Company's operating results in a future period. However, it is not
likely that these claims will have a material adverse effect on the
Company's financial condition or liquidity.
In the ordinary course of business TRV and/or its subsidiaries are also
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 the Company's
results of operations, financial condition or liquidity.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
Consolidated Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------
(In millions, except per 1996 1995 1996 1995
share amounts)
-------------------------------------------------------------------
Revenues $5,426 $4,172 $9,941 $8,132
====== ====== ====== ======
Income from continuing
operations $576 $377 $1,096 $ 682
Income from discontinued
operations - 29 - 64
---- ---- ----- ---
Net income $576 $406 $1,096 $ 746
==== ==== ====== ====
Earnings per share*:
Continuing operations $1.17 $0.75 $ 2.20 $1.35
Discontinued operations - 0.06 - 0.14
----- ----- ----- -----
Net income $1.17 $0.81 $ 2.20 $1.49
===== ===== ===== =====
Weighted average number of
common shares
outstanding and common stock 476.0 475.2 477.0 474.1
equivalents* ===== ===== ===== =====
(*) Adjusted for the three-for-two stock split.
Acquisition
As discussed in Note 2 of Notes to the Condensed Consolidated Financial
Statements, on April 2, 1996, Travelers/Aetna Property Casualty Corp.
(TAP), an indirect majority-owned subsidiary of Travelers Group Inc. (TRV),
completed the acquisition of the domestic property and casualty insurance
subsidiaries of Aetna Life and Casualty Company (Aetna P&C) for
approximately $4.16 billion in cash. This acquisition was financed in part
by the issuance by TAP of common stock resulting in a minority interest in
TAP of approximately 18%. The acquisition was accounted for under the
purchase method of accounting and, accordingly the condensed consolidated
financial statements include the results of Aetna P&C's operations only
from the date of acquisition. TAP also owns The Travelers Indemnity
Company (Travelers Indemnity), and is the primary vehicle through which TRV
and its subsidiaries (collectively, the Company) engage in the property and
casualty insurance business.
13
<PAGE>
Results of Operations
Consolidated income from continuing operations for the quarter ended June
30, 1996 was $576 million, and includes the following:
- Portfolio losses of $58.8 million after tax
- Adjustment of $301.9 million (after tax and minority interest) to
loss reserves and other insurance accounts of Aetna's property
casualty operations, related primarily to cumulative injury claims
other than asbestos (CIOTA)
- Restructuring costs of $18.7 million (after tax and minority
interest) incurred by Travelers Indemnity, associated with the
acquisition of Aetna P&C
- Gain of $363.0 million after tax recognized from the sale of shares
of Class A Common Stock by TAP
- Net gain of $25.9 million after tax from disposition of investment
advisory affiliates, including RCM Capital Management
This compares with income from continuing operations of $377 million in the
1995 period, which included reported investment portfolio gains of $4
million. Excluding these items, income from continuing operations for the
second quarter of 1996 was 52% above the comparable period in 1995,
primarily reflecting improved performance at Smith Barney, Primerica
Financial Services, Travelers Life and Annuity and the inclusion of the
business acquired from Aetna.
Income from continuing operations for the six months ended June 30, 1996,
was $1.096 billion, compared to $682 million in the 1995 period. Included
in the 1996 six-month period are portfolio losses of $18.2 million and the
other special items explained above, compared to $14.0 million in portfolio
losses in the 1995 six-month period. Excluding these items, income from
continuing operations for the first six months of 1996 was 50% above the
comparable period in 1995.
The effective income tax rate for the three months and six months ended
June 30, 1996 is below the statutory rate of 35% due primarily to the
nontaxability of the gain recognized from the sale of shares of Class A
Common Stock by TAP.
Discontinued Operations
In January 1995 the sale of the group life and related businesses of The
Travelers Insurance Group Inc. (TIGI) to Metropolitan Life Insurance
Company (MetLife) was completed and also in January 1995, the group medical
business was exchanged for a 50% interest in The MetraHealth Companies,
Inc. (MetraHealth). The Company's interest in MetraHealth was sold on
October 2, 1995 and through that date had been accounted for on the equity
method. In 1995 the Company's discontinued operations reflect the results
of the medical insurance business not transferred, plus its equity interest
in the earnings of MetraHealth through the date of sale. Revenues from
discontinued operations for the three months and six months ended June 30,
1995 amounted to $377 million and $716 million, respectively. Included in
net income from discontinued operations for the six months ended June 30,
1995 is the gain from the sale in January 1995 of the Company's group life
insurance business.
14
<PAGE>
The following discussion presents in more detail each segment's
performance.
Segment Results for the Three Months Ended June 30, 1996 and 1995
-----------------------------------------------------------------
Investment Services
Three Months Ended June 30,
---------------------------------------------
(millions) 1996 1995
- --------------------------------------------------------------------------------
Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Smith Barney $1,970 $230 $1,692 $135
================================================================================
Smith Barney
Smith Barney reported record net income of $230 million for the three
months ended June 30, 1996, compared to $135 million reported for the three
months ended June 30, 1995.
Smith Barney Revenues
Three Months Ended June 30,
---------------------------
(millions) 1996 1995
-----------------------------------------------------
Commissions $ 577 $ 491
Investment banking 298 226
Principal trading 265 225
Asset management fees 331 242
Interest income, net* 100 97
Other income 37 38
-----------------------------------------------------
Net revenues* $1,608 $1,319
=====================================================
* Net of interest expense of $362 million and $373 million for the three-
month period ended June 30, 1996 and 1995, respectively. Revenues
included in the condensed consolidated statement of income are before
deductions for interest expense.
Revenues, net of interest expense, increased 22% compared to 1995's second
quarter, reflecting increases in several categories. Commission revenues
increased by 17% to $577 million in the 1996 second quarter compared to
$491 million in the 1995 period. The increase reflects strong activity in
the over-the-counter and listed securities markets as well as increased
mutual fund sales. Investment banking revenues increased 32% to a record
$298 million in the 1996 second quarter compared to $226 million in the
1995 period, reflecting strong volume in equity, high yield and corporate
debt and public finance underwritings as well as fee income from merger and
acquisition advisory activity. Principal trading revenues of $265 million
for the 1996 second quarter increased 18% over the 1995 period with
particular strength in over-the-counter equities and municipal trading.
Asset management fees were $331 million in the 1996 second quarter compared
to $242 million in the 1995 period. This increase reflects growth in
assets under management, which at June 30, 1996 reached a record $103.7
billion, up from $87.4 billion a year ago, and also reflects fees
associated with bringing in-house all the administrative functions for
proprietary mutual funds and money funds in the third quarter of 1995. Net
interest income was $100 million in the 1996 second quarter, up 3% from $97
million in the 1995 period primarily due to increased margin lending to
clients.
15
<PAGE>
Total expenses, excluding interest, increased 13% to $1.231 billion in the
1996 second quarter as compared to $1.086 billion in the 1995 period. This
increase was driven by higher production-related compensation and benefits
expense. Expenses other than interest and employee compensation and
benefits were $333 million in the 1996 period compared to $298 million in
the 1995 period. Smith Barney's ratio of non-compensation expenses to net
revenues stood at 20.7% at the end of the second quarter of 1996 compared
to 22.6% in the comparable 1995 period. Smith Barney continues to maintain
its focus on controlling fixed expenses.
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. An increasing
interest rate environment could have an 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 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. Smith Barney continues to maintain tight
expense controls which management believes will help the firm weather
periodic downturns in market conditions.
Smith Barney's principal business activities are, by their nature, highly
competitive and subject to various risks, particularly volatile trading
markets and fluctuations in the volume of market activity. While higher
volatility can increase risk, it can also increase order flow, which drives
many of Smith Barney's businesses. Other market and economic conditions,
and the size, number and timing of transactions may also impact net income.
As a result, revenues and profitability can vary significantly from year to
year, and from quarter to quarter.
Note 19 of Notes to the Consolidated Financial Statements included in the
Company's 1995 Annual Report describes Smith Barney's activities in
derivative financial instruments, which are used primarily to facilitate
customer transactions.
Assets Under Management
At June 30,
---------------------
(billions) 1996 1995
-------------------------------------------------------
Smith Barney $103.7 $ 87.4
Travelers Life and Annuity (1) 21.1 20.9
-------------------------------------------------------
Total Assets Under
Management (2) $124.8 $108.3
=======================================================
(1) Part of the Life Insurance Services segment.
(2) Excludes assets under management at RCM Capital Management of $25.5
billion in 1995 (sold in June 1996).
16
<PAGE>
Consumer Finance Services
Three Months Ended June 30,
-----------------------------------------------
(millions) 1996 1995
- ------------------------------------------------------------------------
Revenues Net income Revenues Net income
- ------------------------------------------------------------------------
Consumer Finance
Services(1) $348 $61 $338 $60
========================================================================
(1) Net income in 1996 includes a portion of the gain ($.7 million) from
the disposition of RCM Capital Management, a California Limited
Partnership (RCM).
Earnings before the gain on the disposition of RCM for the second quarter
of 1996 were even with the second quarter of 1995. The impact of a 5%
higher level of receivables and improved margins was offset by higher loan
losses as well as an increase in the loan loss reserve. At June 30, 1996,
consumer finance receivables totaled $7.463 billion.
The average yield on the portfolio, at 15.40%, was lower than the 1995
second quarter yield of 15.57%. Net interest margin, at 8.82%, was up 13
basis points compared with the prior year's second quarter, because of
lower funding costs.
Delinquencies in excess of 60 days were 2.18% as of June 30, 1996, slightly
lower than 2.21% at the end of the first quarter of 1996, but higher than
the 1.86% level at the end of the 1995 second quarter. Despite the
favorable delinquency rate comparison, the charge-off rate for the second
quarter of 1996 was 2.92%, up from 2.14% in the comparable 1995 period and
from 2.87% in the first quarter of 1996. In part, these trends reflect the
high level of personal bankruptcies affecting the credit industry. As a
result of the higher losses, reserves as a percentage of net receivables
were increased in the second quarter of 1996 to 2.92%, up from 2.88% at
March 31, 1996 and 2.64% at June 30, 1995.
As of, and for, the
Three Months Ended June 30,
------------------------------
1996 1995
------------------------------
Allowance for credit
losses as % of
net outstandings 2.92% 2.64%
Charge-off rate for the
period 2.92% 2.14%
60 + days past due on a
contractual basis as a %
of gross consumer
finance receivables
at quarter end 2.18% 1.86%
The total number of offices at the end of the quarter stood at 860, which
includes the addition of 10 offices from the March 31, 1996 acquisition of
Hawaii-based Servco Financial Corp. During the quarter, the Company
completed its initial conversion of 28 existing retail offices into
$.M.A.R.T.(SM) Solution Centers -- devoted exclusively to servicing the
segment's growing business of underwriting real estate loans for Primerica
Financial Services (PFS).
The Consumer Finance segment results for the second quarter of 1996
continued to be influenced by a higher level of loan losses, which the
Company now believes should continue throughout this year, as a result of a
higher level of personal bankruptcies. Also, near-term earnings for this
segment are expected to be affected by a higher level of expenses, as the
Company implements additional investments in marketing, training and
systems enhancements in order to capitalize on future growth opportunities.
Consequently, the Company believes that the segment's operating earnings in
the second half of 1996
17
<PAGE>
could be 15% or more below comparable 1995 levels. The Company expects
improvement in the second half of 1997 results, however, which would make
year-over-year, 1997 to 1996, comparisons favorable.
The statements contained in the foregoing paragraph may be deemed to be
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are typically
identified by the words "believe," "expect," "anticipate," "intend,"
"estimate" and similar expressions. These forward-looking statements are
based largely on the Company's expectations and are subject to a number of
risks and uncertainties, certain of which are beyond the Company's control.
Actual results could differ materially from these forward-looking
statements as a result of a number of factors, including (i) changes in the
consumer lending industry as a result of economic or regulatory influences,
(ii) changes in the interest rate environment and general economic
conditions, (iii) the composition of the Company's receivables portfolio
(i.e. product mix) and (iv) the level of business competition. The Company
undertakes no obligation to update publicly or revise any forward-looking
statements.
Life Insurance Services
Three Months Ended June 30,
---------------------------------------------
(millions) 1996 1995
---------------------------------------------------------------------
Revenues Net income Revenues Net income
---------------------------------------------------------------------
Primerica Financial
Services (1) $354 $ 70 $343 $ 66
Travelers Life and
Annuity (2)(3) 549 78 614 70
---------------------------------------------------------------------
Total Life Insurance
Services $903 $148 $957 $136
=====================================================================
(1) Net income in 1996 includes a portion of the gain ($4 million) from
the disposition of RCM and net income in 1995 includes $7 million of
reported investment portfolio gains.
(2) Net income includes $12 million of reported investment portfolio
losses in 1996.
(3) On September 29, 1995, the Company made a pro rata distribution to its
stockholders of Transport Holdings Inc., which, at the time of
distribution, was the indirect owner of the business of Transport Life
Insurance Company (Transport Life). Revenues and net income of
Transport Life in the 1995 quarter amounted to $66 million and $7
million, respectively.
Primerica Financial Services
Earnings before portfolio gains and the gain on disposition of RCM for the
second quarter of 1996 increased 13% to $66 million compared to $59 million
in the 1995 second quarter, reflecting increased mutual fund sales as well
as continued growth in life insurance in force.
Face amount of new term life insurance sales was $14.0 billion in the
second quarter of 1996, up from $13.5 billion in the prior year period.
Life insurance in force reached $354.8 billion at June 30, 1996, up from
$341.8 billion at June 30, 1995, and continued to reflect good policy
persistency.
Sales of mutual funds (at net asset value) were $636.7 million for the
second quarter of 1996, a 73% increase over second quarter 1995 sales of
$369 million, reflecting strong customer demand in the U.S. and Canada.
Nearly 28% of 1996 quarterly mutual fund sales were from the Smith Barney
Concert Series(SM), which PFS first introduced to its market in March 1996.
Net receivables from $.M.A.R.T.(SM) and $.A.F.E.(SM) consumer loans
continued to advance to $1.326 billion at the end of the second quarter of
1996, up 11% from $1.198 billion in the comparable 1995 period. Earnings
from these consumer loans are included in the Consumer Finance segment.
18
<PAGE>
Travelers Life and Annuity
Travelers Life and Annuity consists of annuity, life and health products
marketed by The Travelers Insurance Company (TIC) under the Travelers name
and, during 1995, the individual accident and health operations of
Transport Life (through the date of the spin-off). Among the range of
products offered are individual universal and term life and long-term care
insurance, payout annuities and fixed and variable deferred annuities to
individuals and small businesses and group pension deposit products,
including guaranteed investment contracts and annuities for
employer-sponsored retirement and savings plans. These products are
primarily marketed through a core group of over 500 independent agencies,
the Copeland Companies (Copeland), an indirect wholly owned subsidiary of
TIC and Smith Barney Financial Consultants.
Earnings before portfolio losses increased 29% to $90 million in the second
quarter of 1996, compared to $70 million in the second quarter of 1995.
The earnings growth was driven by strong investment portfolio performance
and a higher capital base which benefited from the reinvestment of the
proceeds from the sale of the Company's interest in MetraHealth in the 1995
fourth quarter, offset somewhat by the loss of earnings from Transport
Life, which was spun-off to TRV stockholders in September 1995.
The majority of the annuity business and a substantial portion of the life
business written by Travelers Life and Annuity is accounted for as
investment contracts, with the result that the premium deposits collected
are not included in revenues. The decrease in revenues from 1995 reflects
the spin-off of Transport Life.
For deferred annuities, net written premiums and deposits were $509.5
million in the second quarter of 1996, up 34% from $380.6 million in the
1995 second quarter. Total deferred annuity policyholder account balances
and benefit reserves at June 30, 1996 were $12.2 billion compared to $10.4
billion at June 30, 1995. Sales continue to be strengthened by the success
of Vintage(R), the single premium variable annuity product distributed
exclusively by Smith Barney Financial Consultants, now accounting for
nearly 36% of all deferred annuity production at Travelers Life and
Annuity.
Payout annuity policyholder account balances and reserves totaled $4.4
billion at June 30, 1996, level with the prior year's balance. Net
premiums and deposits of $25.3 million for the second quarter of 1996 were
11% higher than the second quarter 1995 amount of $22.8 million. Group
annuity policyholder account balances and benefit reserves totaled $7.1
billion at June 30, 1996, down from $8.2 billion at June 30, 1995,
primarily reflecting management's decision not to renew low margin, fixed
rate guaranteed investment contracts. Since 1994, guaranteed investment
contracts have been written on a more selective basis, resulting in
fluctuations in deposits from period to period. Group annuity net written
premiums and deposits for the second quarter of 1996 were $175 million,
compared to $246 million in the second quarter of 1995.
Face amount of individual life insurance issued during the second quarter
of 1996 was $1.7 billion, up from $1.5 billion in the second quarter of
1995, excluding Transport Life, bringing total life insurance in force to
$49.6 billion at June 30, 1996. Net written premiums and deposits for
individual life insurance were $69.8 million, up 13% in the second quarter
of 1996, compared to $61.9 million in the second quarter of 1995 excluding
Transport Life. This increase reflects sales of Vintage Life(SM), a new
single premium universal life product introduced to Smith Barney Financial
Consultants in September 1995.
Net written premiums for the growing long-term care insurance line,
excluding Transport Life, were $30.8 million in the second quarter of 1996,
compared to $21.7 million in the second quarter of 1995, largely as a
result of a 62% increase in sales of new policies.
19
<PAGE>
Property & Casualty Insurance Services
Three Months Ended June 30,
-------------------------------------------
(millions) 1996 1995
- ------------------------------------------------------------------------------
Net Net
Revenues income Revenues income
(loss) (loss)
- ------------------------------------------------------------------------------
Commercial (1) (2) $ 1,445 $ (237) $ 813 $74
Personal (1) (3) 750 51 361 26
Financing costs and other (1) 7 (30) - -
Minority interest - 44 - -
- ------------------------------------------------------------------------------
Total Property & Casualty
Insurance Services $2,202 $(172) $1,174 $100
==============================================================================
(1) Before minority interest.
(2) Net income includes $32 million and $2 million of reported investment
portfolio losses in 1996 and 1995, respectively, and $383 million of
charges in 1996 related to the acquisition of Aetna P&C.
(3) Net income includes $6 million and $1 million of reported investment
portfolio losses in 1996 and 1995, respectively, and $8 million of
charges in 1996 related to the acquisition of Aetna P&C.
The following segment earnings include the property and casualty operations
of Travelers Indemnity and its parent TIGI for periods prior to April 2,
1996. Certain production statistics related to Aetna P&C operations are
provided for comparative purposes for periods prior to April 2, 1996 and
are not reflected in such prior period revenues or operating results.
As previously indicated, TAP incurred charges during the second quarter of
1996 related to the acquisition and integration of Aetna P&C. These
charges resulted primarily from anticipated costs of the merger and the
application of Travelers strategies, policies and practices to Aetna P&C
reserves. The charges include:
- $301.9 million after tax and minority interest ($566.5 million before
tax and minority interest) in reserve increases, net of reinsurance,
related primarily to cumulative injury claims other than asbestos
(CIOTA)
- $18.7 million after tax and minority interest ($35 million before tax
and minority interest) provision for lease and severance costs of
Travelers Indemnity related to the restructuring plan for the merger
Commercial Lines
Earnings before portfolio gains/losses and acquisition-related charges
increased 134% to $178 million in the second quarter of 1996 compared to
$76 million in the second quarter of 1995, primarily reflecting the
acquisition of Aetna P&C, the emerging benefits of expense reduction
initiatives associated with the merger and strong investment income.
Catastrophe losses in the 1996 second quarter, after taxes and reinsurance
were insignificant, compared with $6.2 million in the 1995 second quarter.
Commercial Lines net written premiums for the second quarter of 1996
totaled $1.100 billion (excluding a one-time adjustment associated with a
reinsurance transaction), up $561 million compared to $539
20
<PAGE>
million for the second quarter of 1995, reflecting the acquisition of Aetna
P&C, offset in small part by the highly competitive conditions in the
marketplace and the Company's continuing focus on profitability. Premium
equivalents for the second quarter of 1996 totaled $752 million, up $78
million compared to $674 million for the second quarter of 1995, reflecting
the acquisition of Aetna P&C. Premium 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 actual premium revenues.
On a combined total basis including Aetna P&C (for periods prior to April
2, 1996 for comparative purposes only), and excluding a one-time adjustment
associated with a reinsurance transaction in 1996, Commercial Lines net
written premiums for the second quarter of 1996 totaled $1.100 billion,
down $192 million compared to $1.292 billion for the second quarter of
1995, reflecting the highly competitive conditions in the Commercial Lines
marketplace and the Company's continuing focus on profitability. On a
combined total basis including Aetna P&C, premium equivalents for the
second quarter of 1996 totaled $752 million, down $120 million compared to
$872 million for the second quarter of 1995. The decrease in premium
equivalents reflects a depopulation of involuntary pools as the loss
experience of workers' compensation improves and insureds move to voluntary
markets, as well as the Company's efforts to help customers control their
loss costs.
A significant component of Commercial Lines is National Accounts, which
works with national brokers and regional agents providing insurance
coverages and services, primarily workers' compensation, mainly to large
corporations. National Accounts net written premiums of $179.6 million
excluding a one-time adjustment associated with a reinsurance transaction
for the second quarter of 1996 increased $25.1 million from the second
quarter of 1995. This increase reflects the acquisition of Aetna P&C,
partially offset by an ongoing shift from risk-bearing business into non
risk-bearing business and efforts to help customers control their loss
costs. National Accounts premium equivalents of $735.7 million for the
second quarter of 1996 were $70.8 million above the second quarter of 1995.
The increase in premium equivalents reflects the acquisition of Aetna P&C,
partially offset by a depopulation of involuntary pools as the loss
experience of workers' compensation improves and insureds move to voluntary
markets.
For the 1996 second quarter, National Accounts new business, including both
premiums and premium equivalents, was $180 million compared to $88 million
for the second quarter of 1995. This increase primarily reflects the
addition of one large account in the second quarter of 1996. National
Accounts renewed business for the second quarter of 1996 of $612 million
increased $109 million above the 1995 levels, reflecting the acquisition of
Aetna P&C, partially offset by the National Accounts policy of maintaining
its product pricing and underwriting standards in a highly competitive
pricing environment as insurers compete to retain business. The National
Accounts business retention ratio was 91% for the second quarter of 1996
and 93% for the second quarter of 1995.
Commercial Accounts serves mid-sized businesses through a network of
independent agencies and brokers. Commercial Accounts net written premiums
were $380.5 million in the 1996 second quarter compared to $162.7 million
in the 1995 second quarter and premium equivalents were $16.5 million in
the 1996 second quarter, $7.7 million above the 1995 second quarter. These
increases reflect the acquisition of Aetna P&C, marginally offset by the
highly competitive market, where Commercial Accounts has continued to be
more selective in renewal activity. Programs designed to leverage
underwriting experience in specific industries have demonstrated continued
growth. For the second quarter of 1996, new premium and premium equivalent
business in Commercial Accounts was $65 million compared to $39 million in
the 1995 second quarter. The Commercial Accounts business retention ratio
was 70% in the 1996 second quarter compared to 71% in the 1995 second
quarter. Commercial Accounts continues to focus on the retention of
existing business while maintaining its product pricing standards and its
selective underwriting policy.
21
<PAGE>
Select Accounts serves small businesses through a network of independent
agencies. Select Accounts net written premiums of $368.6 million for the
second quarter of 1996 were $226.9 million above the second quarter 1995
premium levels, reflecting the acquisition of Aetna P&C. New premium
business in Select Accounts was $75 million in the 1996 second quarter
compared to $33 million in the 1995 second quarter. The Select Accounts
business retention ratio was 78% in the 1996 second quarter compared to 74%
in the comparable 1995 period.
Specialty Accounts addresses unique risks that typically require
specialized underwriting. Specialty Accounts net written premiums were
$171.7 million in the 1996 second quarter compared to $80.9 million in the
1995 second quarter. This growth is primarily attributable to the
acquisition of the Aetna P&C Bond Specialty Business.
The statutory combined ratio for Commercial Lines in the second quarter of
1996 was 171.1% compared to 109.3% in the second quarter of 1995. The GAAP
combined ratio for Commercial Lines in the second quarter of 1996 was
162.2% compared to 107.9% in the second quarter of 1995.
The GAAP combined ratio for Commercial Lines differs from the statutory
combined ratio primarily due to the gross up for GAAP reporting purposes of
revenues and expenses related to service business, including servicing of
residual market pools and deductible policies. In addition, in the 1996
period, purchase accounting adjustments recorded for GAAP in connection
with the Aetna P&C acquisition resulted in a statutory charge.
The increase in the 1996 second quarter statutory and GAAP combined ratios
for Commercial Lines was primarily attributable to the charges related to
the acquisition and integration of Aetna P&C. Excluding these amounts
the statutory and GAAP combined ratios for the three months ended June 30,
1996 would have been 113.4% and 110.7%, respectively. The increase in the
1996 second quarter statutory and GAAP combined ratios excluding
acquisition-related charges compared to the 1995 second quarter statutory
and GAAP combined ratios is generally due to the inclusion in 1996 of
Aetna P&C. Aetna P&C has historically had a higher underwriting expense
ratio, partially offset by a lower loss ratio, which reflects the mix of
business including the favorable effect of the lower loss ratio of the
Bond business.
Personal Lines
Earnings before portfolio gains/losses and acquisition-related charges
increased 144% to $65 million in the second quarter of 1996 compared to $27
million in the second quarter of 1995. Operating earnings included the
impact of catastrophe losses, after taxes and reinsurance, of $14.0 million
in the second quarter of 1996 compared to $1.9 million in the comparable
1995 period. The improvement in operating earnings reflects the
acquisition of Aetna P&C and the emerging benefits of expense reductions
associated with the merger, strong net investment income, and continued
favorable prior year loss reserve development in personal auto lines.
Net written premiums in the 1996 second quarter were $675.8 million,
compared to $318.9 million in the second quarter of 1995. This improvement
reflects the acquisition of Aetna P&C.
On a combined total basis including Aetna P&C (for periods prior to April
2, 1996 for comparative purposes only), Personal Lines net written premiums
for the second quarter of 1996 totaled $676 million, up $35 million
compared to $641 million for the second quarter of 1995. Excluding the
effect of a 1995 change in reinsurance coverage, both automobile and
homeowners lines grew modestly. This underlying strength reflected growth
in target markets, partially offset by reductions due to catastrophe
management strategies.
22
<PAGE>
The statutory combined ratio for Personal Lines in the second quarter of
1996 was 100.1% compared to 103.7% in the 1995 second quarter. The GAAP
combined ratio for Personal Lines in the second quarter of 1996 was 100.7%
compared to 103.4% in the 1995 second quarter. The decrease in the
combined ratios in 1996 was due to the favorable loss experience in
personal auto lines, partially offset by the higher level of catastrophe
losses.
Financing Costs and Other
The primary component for the 1996 second quarter was interest expense of
$25 million after tax, reflecting financing costs associated with the
acquisition of Aetna P&C.
Corporate and Other
Three Months Ended June 30,
-------------------------------------------
(millions) 1996 1995
- -------------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- -------------------------------------------------------------------------------
Net expenses (1) - $(75) - $(54)
Net gain (loss) on sale of
subsidiaries and affiliates - 384 - -
- -------------------------------------------------------------------------------
Total Corporate and Other $3 $309 $11 $(54)
===============================================================================
(1) Net income (expense) includes $15 million of reported investment
portfolio losses in 1996.
Lower staff expenses in the second quarter of 1996 compared to the second
quarter of 1995 were offset by a higher level of corporate borrowings in
the second quarter of 1996.
Segment Results for the Six Months Ended June 30, 1996 and 1995
---------------------------------------------------------------
The overall operating trends for the six months ended June 30, 1996 and
1995 were substantially the same as those of the second quarter periods
except as noted below.
Investment Services
Six Months Ended June 30,
-------------------------------------------
(millions) 1996 1995
- ------------------------------------------------------------------------------
Revenues Net income Revenues Net income
- ------------------------------------------------------------------------------
Smith Barney $3,927 $454 $3,216 $235
==============================================================================
23
<PAGE>
Smith Barney Revenues
Six Months Ended June 30,
---------------------------
(millions) 1996 1995
--------------------------------------------------
Commissions $1,182 $ 939
Investment banking 576 342
Principal trading 543 507
Asset management fees 648 479
Interest income, net* 195 189
Other income 71 72
--------------------------------------------------
Net revenues* $3,215 $2,528
==================================================
* Net of interest expense of $712 million and $688 million for the six-
month period ended June 30, 1996 and 1995, respectively. Revenues
included in the condensed consolidated statement of income are before
deductions for interest expense.
Revenues, net of interest expense, increased 27% compared to 1995's first
six months. Commission revenues increased by 26% to $1.182 billion in the
1996 first half compared to $939 million in the 1995 period. The increase
reflects strong activity in the over-the-counter and listed securities
markets as well as increased mutual fund sales. Investment banking
revenues increased 68% to $576 million in the 1996 first half compared to
$342 million in the 1995 period, reflecting strong volume in equity, high
yield, corporate debt and public finance underwritings as well as fee
income from merger and acquisition advisory activity. Principal trading
revenues of $543 million for the 1996 first half increased 7% over the 1995
period and showed particular strength in over-the-counter equities and was
offset by a decline in municipal trading. Asset management fees were $648
million in the 1996 first half compared to $479 million in the 1995 period.
Net interest income was $195 million in the 1996 first half, up 3% from
$189 million in the 1995 period.
Total expenses, excluding interest, increased 17% to $2.471 billion in the
1996 first half as compared to $2.119 billion in the 1995 period. This
increase was driven by higher production-related compensation and benefits
expense. Expenses other than interest and employee compensation and
benefits were $660 million in the 1996 period compared to $589 million in
the 1995 period. Smith Barney's ratio of non-compensation expenses to net
revenues stood at 20.5% for the first half of 1996 compared to 23.3% in the
comparable 1995 period.
Consumer Finance Services
Six Months Ended June 30,
-----------------------------------------
(millions) 1996 1995
- -----------------------------------------------------------------------------
Revenues Net income Revenues Net income
- -----------------------------------------------------------------------------
Consumer Finance
Services(1) $696 $117 $662 $116
=============================================================================
(1) Net income in 1996 includes a portion of the gain ($.7 million) from
the disposition of RCM.
The average yield on the portfolio for the first half of 1996 was 15.41%,
lower than the 1995 yield of 15.50%. Net interest margin, at 8.78%, was up
11 basis points compared with the prior year's first half, because of lower
funding costs. The charge-off rate was 2.89% for the first half of 1996,
compared to 2.15% for the first half of 1995.
24
<PAGE>
Life Insurance Services
Six Months Ended June 30,
-----------------------------------------
(millions) 1996 1995
-----------------------------------------------------------------
Revenues Net income Revenues Net income
-----------------------------------------------------------------
Primerica Financial
Services (1) $ 709 $141 $ 675 $125
Travelers Life and
Annuity (2)(3) 1,126 163 1,205 119
-----------------------------------------------------------------
Total Life Insurance
Services $1,835 $304 $1,880 $244
=================================================================
(1) Net income includes $6 million and $12 million of reported investment
portfolio gains in 1996 and 1995, respectively, and in 1996 a portion
of the gain ($4 million) from the disposition of RCM.
(2) Net income includes $9 million and $20 million of reported investment
portfolio losses in 1996 and 1995, respectively.
(3) On September 29, 1995, the Company made a pro rata distribution to its
stockholders of Transport Holdings Inc., which, at the time of
distribution, was the indirect owner of the business of Transport
Life. Revenues and net income of Transport Life in the 1995 period
amounted to $134 million and $14 million, respectively.
Primerica Financial Services
Face amount of new term life insurance sales was $26.3 billion in the first
half of 1996, compared to $26.9 billion in the prior year period. Sales of
mutual funds (at net asset value) were $1.204 billion for the first half of
1996, up from sales of $731 million in the first half of 1995.
Travelers Life and Annuity
For deferred annuities, net written premiums and deposits were $997.2
million in the first half of 1996, up 36% from $735.9 million in the 1995
period.
In the guaranteed investment contract and other group annuity business, net
written premiums and deposits were $621.5 million in the 1996 first half,
compared to $576.9 million in the 1995 first half (which excludes deposits
of $200 million related to the first quarter 1995 transfer in-house of
pension fund assets of an affiliate, previously managed externally).
Payout annuity net premiums and deposits of $42.2 million for the first
half of 1996 were 4% higher than the 1995 amount of $40.5 million.
Face amount of individual life insurance issued during the first half of
1996 was $3.2 billion, up from $3.0 billion in the first half of 1995,
excluding Transport Life. Net written premiums and deposits for individual
life insurance were $144.3 million, up 19% in the first half of 1996,
compared to $121.2 million in the first half of 1995 excluding Transport
Life.
Net written premiums for the growing long-term care insurance line,
excluding Transport Life, were $58.5 million in the first half of 1996,
compared to $40.3 million in the first half of 1995.
25
<PAGE>
Property & Casualty Insurance Services
Six Months Ended June 30,
-----------------------------------------
(millions) 1996 1995
-----------------------------------------------------------------------
Net Net
Revenues income Revenues income
(loss) (loss)
-----------------------------------------------------------------------
Commercial (1) (2) $2,250 $(143) $1,626 $142
Personal (1) (3) 1,123 73 721 48
Financing costs and other (1) 7 (30) - -
Minority interest - 44 - -
-----------------------------------------------------------------------
Total Property & Casualty
Insurance Services $3,380 $(56) $2,347 $190
=======================================================================
(1) Before minority interest.
(2) Net income includes $11 million and $3 million of reported investment
portfolio losses in 1996 and 1995, respectively and $383 million of
charges in 1996 related to the acquisition of Aetna P&C.
(3) Net income includes $6 million and $3 million of reported investment
portfolio losses in 1996 and 1995, respectively and $8 million of
charges in 1996 related to the acquisition of Aetna P&C.
Commercial Lines
Commercial Lines net written premiums for the first six months of 1996
totaled $1.740 billion (excluding a one-time adjustment associated with a
reinsurance transaction), up $594 million compared to $1.146 billion for
the first six months of 1995, reflecting the acquisition of Aetna P&C,
partially offset by the highly competitive conditions in the Commercial
Lines marketplace and the Company's continuing focus on profitability.
Premium equivalents for the first six months of 1996 totaled $1.516
billion, down $42 million compared to $1.558 billion for the first six
months of 1995, reflecting the competitive environment.
On a combined total basis including Aetna P&C (for periods prior to April
2, 1996 for comparative purposes only), Commercial Lines net written
premiums for the first six months of 1996 totaled $2.331 billion, down $352
million compared to $2.683 billion for the first six months of 1995,
reflecting the highly competitive conditions in the Commercial Lines
marketplace and the Company's continuing focus on profitability. On a
combined total basis including Aetna P&C, premium equivalents for the first
six months of 1996 totaled $1.632 billion, down $274 million compared to
$1.906 billion for the first six months of 1995. The decrease in premium
equivalents reflects a depopulation of involuntary pools as the loss
experience of workers' compensation improves and insureds move to voluntary
markets.
National Accounts net written premiums for the 1996 first half were $375.5
million (excluding a one-time adjustment associated with a reinsurance
transaction) compared to $321.4 million in the 1995 first half. National
Accounts premium equivalents of $1.488 billion for the 1996 first half were
$49 million below the first half of 1995. In the 1996 first half, National
Accounts new business, including both premiums and premium equivalents, was
$229 million compared to $260 million in the 1995 period. National
Accounts renewed business including both premiums and premium equivalents
for the first six months of 1996 was $1.334 billion compared to $1.179
billion in the 1995 period. National Accounts business retention ratio was
83% for the first six months of 1996 compared to 81% for the first six
months of 1995.
26
<PAGE>
Commercial Accounts net written premiums were $582.1 million in the 1996
first half compared to $369.4 million in the 1995 first half and premium
equivalents were $27.9 million, compared to $20.8 million in the 1995
period. For the first half of 1996, new premium and equivalent business in
Commercial Accounts was $102 million compared to $89 million in the 1995
period. The Commercial Accounts business retention ratio was 71% in the
1996 first half, down slightly from the comparable 1995 period.
Select Accounts net written premiums of $509.5 million for the first half
of 1996 were $232.7 million above the first half of 1995 premium levels.
New premium business in Select Accounts was $116 million in the 1996 first
half compared to $60 million in the 1995 period. The Select Accounts
business retention ratio was 78% in the 1996 first half compared to 74% in
the comparable 1995 period.
Specialty Accounts net written premiums of $273.3 million in the 1996 first
half compared to $178.8 million in the 1995 first half.
The statutory combined ratio for Commercial Lines for the first half of
1996 was 149.2% compared to 109.6% in the first half of 1995. The GAAP
combined ratio for Commercial Lines for the first half of 1996 was 141.3%
compared to 107.2% in the comparable 1995 period.
The increase in the first six months of 1996 statutory and GAAP combined
ratios for Commercial Lines compared to the first six months of 1995 is
primarily attributable to the charges related to the acquisition and
integration of Aetna P&C. Excluding these amounts the statutory and GAAP
combined ratios for the six months ended June 30, 1996 would have been
111.7% and 108.7%, respectively. The increase in the first six months of
1996 statutory and GAAP combined ratios excluding acquisition-related
charges compared to the first six months of 1995 statutory and GAAP
combined ratios is generally due to the inclusion in 1996 of Aetna P&C.
Aetna P&C has historically had a higher underwriting expense ratio,
partially offset by a lower loss ratio, which reflects the mix of business
including the favorable effect of the lower loss ratio of the Bond
business.
Personal Lines
Net written premiums in the first six months of 1996 were $1.017 billion,
compared to $673 million in the first six months of 1995. This improvement
primarily reflects the acquisition of Aetna P&C and, to a lesser extent,
growth in target markets, marginally offset by reductions due to
catastrophe management strategies.
On a combined total basis including Aetna P&C (for periods prior to April
2, 1996 for comparative purposes only), Personal Lines net written premium
for the first six months of 1996 totaled $1.333 billion, up $102 million
compared to $1.231 billion for the first six months of 1995. Excluding the
effect of a 1995 change in reinsurance coverage, both automobile and
homeowners lines grew modestly. This underlying strength reflected growth
in target markets, partially offset by reductions due to catastrophe
management strategies.
The statutory combined ratio for Personal Lines for the first half of 1996
was 101.9% compared to 103.1% in the 1995 first half. The GAAP combined
ratio for Personal Lines in the first half of 1996 was 101.9% compared to
102.2% in the comparable 1995 period.
The decrease in the combined ratios in 1996 was due to the favorable loss
experience in personal auto lines, partially offset by the higher level of
catastrophe losses which after tax and reinsurance were $32 million for the
first half of 1996 compared to $4 million in the 1995 period.
27
<PAGE>
Financing Costs and Other
The primary component for the 1996 second quarter was interest expense of
$25 million after tax, reflecting financing costs associated with the
acquisition of Aetna P&C.
Environmental Claims
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process. This bulk
reserve is established and adjusted based upon the aggregate volume of
in-process environmental claims and the Company's experience in resolving
such claims. Until the dispute is resolved, the estimated amounts for
disputed coverage claims are carried in bulk reserve. At June 30, 1996,
approximately 16% of the net environmental loss reserve (i.e.,
approximately $216 million) is case reserves. The balance, approximately
84% of the net aggregate reserve (i.e. approximately $1.095 billion), is
carried in a bulk reserve together with incurred but not yet reported
environmental claims for which the Company has not received any specific
claims.
The following table displays activity for environmental losses and loss
expenses and reserves for the six months ended June 30, 1996 and 1995.
Environmental Losses Six Months Ended Six Months Ended
(millions) June 30, 1996 June 30, 1995
------------------ ------------------
Beginning reserves:
Direct $ 454 $482
Ceded (50) (11)
---- ----
Net 404 471
Acquisition of Aetna P&C:
Direct 938 -
Ceded (24) -
Incurred losses and loss expenses:
Direct 38 31
Ceded (2) (1)
Losses paid:
Direct 63 52
Ceded (20) (1)
Ending reserves:
Direct 1,367 461
Ceded (56) (11)
------ ----
Net $1,311 $ 450
===== ====
Asbestos Claims
At June 30, 1996, approximately 26% of the net aggregate reserve (i.e.,
approximately $285 million) is case reserves. The balance, approximately
74% (i.e., approximately $813 million) of the net asbestos reserves,
represents incurred but not yet reported losses.
The following table displays activity for asbestos losses and loss expenses
and reserves for the six months ended June 30, 1996 and 1995.
28
<PAGE>
Asbestos Losses Six Months Ended Six Months Ended
(millions) June 30, 1996 June 30, 1995
------------------ ------------------
Beginning reserves:
Direct $695 $702
Ceded (293) (319)
---- ----
Net 402 383
Acquisition of Aetna P&C:
Direct 776 -
Ceded (116) -
Incurred losses and loss expenses:
Direct 49 71
Ceded 16 (51)
Losses paid:
Direct 65 50
Ceded (36) (72)
Ending reserves:
Direct 1,455 723
Ceded (357) (298)
---- ----
Net $1,098 $425
===== ===
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 recoverables. 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 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.
Cumulative Injury Other Than Asbestos (CIOTA)
Cumulative injury other than asbestos (CIOTA) claims are generally
submitted to the Company under general liability policies and often involve
an allegation by a claimant against an insured that the claimant has
suffered injuries as a result of long-term or continuous exposure to
harmful products or substances. Such harmful products or substances
include, but are not limited to, lead paint, pesticides, pharmaceutical
products, silicone-based personal products, solvents and other deleterious
substances.
Due to claimants' allegations of long-term bodily injury in CIOTA claims,
numerous complex issues regarding such claims are presented. The
claimant's theories of liability must be evaluated, evidence pertaining to
a causal link between injury and exposure to a substance must be reviewed,
the potential role of other causes of injury must be analyzed, the
liability of other defendants must be explored, and assessment of a
claimant's damages must be made and the law of the jurisdiction must be
applied. In addition, the Company must review the number of policies
issued by the Company to the insured and whether such policies are
triggered by the allegations, the terms and limits of liability of such
policies, the obligations of other insurers to respond to the claim, and
the applicable law in each jurisdiction.
For these reasons, the Company has long considered CIOTA to be a separate
and distinct type of claim which requires special handling. Approximately
10 years ago the Company established a separate
29
<PAGE>
department to focus on CIOTA claims that has enabled it to better estimate
CIOTA liabilities based on historical data.
To the extent disputes exist between the Company and a policyholder
regarding the coverage available for CIOTA claims, the Company resolves the
disputes, where feasible, through settlements with the policyholder or
through coverage litigation. Generally, the terms of a settlement
agreement set forth the nature of the Company's participation in resolving
CIOTA claims and the scope of coverage to be provided by the Company and
contain the appropriate indemnities and hold harmless provisions to protect
the Company. These settlements generally eliminate uncertainties for the
Company regarding the risks extinguished, including the risk that losses
would be greater than anticipated due to evolving theories of tort
liability or unfavorable coverage determinations. This approach also has
the effect of determining losses at a date earlier than would have occurred
in the absence of such settlement agreements. On the other hand, in cases
where future developments are favorable to insurers, this approach could
have the effect of resolving claims for amounts in excess of those that
would ultimately have been paid had the claims not been settled in this
manner. No inference should be drawn that because of the Company's method
of dealing with CIOTA claims, its reserves for such claims are more
conservatively stated than those of other insurers.
Aetna P&C did not distinguish CIOTA from other general liability claims or
treat CIOTA claims as a special class of claims. In addition, there were
substantial differences in claims approach and resolution between the
Company and Aetna P&C regarding CIOTA claims.
During the second quarter, the Company completed its review of Aetna P&C's
exposure to CIOTA claims in order to determine an appropriate level of
reserves using the Company's approach as described above. Based on the
results of that review, the Company's general liability insurance reserves
were increased $360 million, net of reinsurance ($191.9 million after tax
and minority interest).
Corporate and Other
Six Months Ended June 30,
------------------------------------------
(millions) 1996 1995
-------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
-------------------------------------------------------------------------
Net expenses (1) - $(107) - $(103)
Net gain (loss) on sale of
subsidiaries and affiliates - 384 - -
-------------------------------------------------------------------------
Total Corporate and Other $103 $277 $27 $(103)
=========================================================================
(1) Net income (expense) includes $5 million of reported investment
portfolio losses in 1996.
Lower staff expenses in the first half of 1996 compared to the first half
of 1995 were offset by a higher level of corporate borrowings in the second
quarter of 1996.
Liquidity and Capital Resources
TRV services its obligations primarily with dividends and other advances
that it receives from subsidiaries. The subsidiaries' dividend-paying
abilities are limited by certain covenant restrictions in bank and/or
credit agreements and/or by regulatory requirements. TRV believes it will
have sufficient
30
<PAGE>
funds to meet current and future commitments. Each of TRV's major
operating subsidiaries finances its operations on a stand-alone basis
consistent with its capitalization and ratings.
Travelers Group Inc. (TRV)
TRV 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.
TRV, Commercial Credit Company (CCC) and TIC have an agreement with a
syndicate of banks to provide $1.0 billion of revolving credit, to be
allocated to any of TRV, CCC or TIC. The participation of TIC in this
agreement is limited to $250 million. The revolving credit facility
consists of a five-year revolving credit facility which expires in 2001.
Currently $400 million is allocated to TRV, $475 million to CCC and $125
million to TIC. Under this facility TRV is required to maintain a certain
level of consolidated stockholders' equity (as defined in the agreement).
At June 30, 1996 this requirement was exceeded by approximately $3.7
billion. In addition to the five-year revolving credit facility, during
the second quarter of 1996, TRV entered into a 364-day revolving credit and
bid loan agreement with a bank to provide $75 million of revolving credit.
Currently, TRV has unused credit availability of $475 million. TRV may
borrow under its revolving credit facilities at various interest rate
options and compensates the banks for the facilities through commitment
fees.
TRV as of August 6, 1996, had $1.0 billion available for debt offerings
under its shelf registration statements.
In December 1995, TRV, through a private placement, issued $100 million
principal amount of 6 1/4% Notes due December 1, 2005, and $100 million
principal amount of 7% Notes due December 1, 2025, substantially all of
which was exchanged for registered debt in June 1996.
During the second quarter of 1996, $37 million of liquidation value of the
5.50% Convertible Preferred Stock Series B (Series B Preferred)
representing 744,851 shares of Series B Preferred was converted into
1,520,089 shares of common stock. During July 1996, the remaining $88
million of liquidation value representing 1,755,094 shares of Series B
Preferred was converted into 3,581,735 shares of common stock. Each share
of the Series B Preferred Stock was converted into 2.04082 shares of TRV
common stock at a conversion price of $24.50 per share. The remaining 55
shares were redeemed for cash at $51.925 per share plus accrued and unpaid
dividends.
Travelers/Aetna Property Casualty Corp. (TAP)
On April 2, 1996, Travelers/Aetna Property Casualty Corp. (TAP), an
indirect majority-owned subsidiary of the Company, purchased from Aetna
Life and Casualty Company (Aetna) all of the outstanding capital stock of
The Aetna Casualty and Surety Company (ACSC) and The Standard Fire
Insurance Company (SFIC) (collectively, Aetna P&C) for approximately $4.16
billion in cash. TAP also owns The Travelers Indemnity Company (Travelers
Indemnity), and is the primary vehicle through which the Company engages in
the property and casualty insurance business.
To finance the $4.16 billion purchase price and transaction costs, and
capital contributions of $710 million to Aetna P&C, TAP borrowed $2.65
billion from a syndicate of banks under a five-year revolving credit
facility that expires on March 15, 2001 (the Credit Facility) and sold
approximately 33 million shares of its Class A Common Stock representing
approximately 9% of its outstanding common stock (at that time) to four
private investors, including Aetna, for an aggregate of $525 million. The
Travelers Insurance Group Inc. (TIGI), a wholly owned subsidiary of the
Company, acquired approximately 328 million shares of Class B Common Stock
of TAP in exchange for contributing the outstanding capital stock of
Travelers Indemnity and a capital contribution of approximately $1.14
billion. In addition, TRV
31
<PAGE>
purchased from TAP $540 million of Series Z Preferred Stock of TAP.
Approximately $18 million of the purchase price was funded through the
settlement of receivables from Aetna.
TRV funded its purchase of Series Z Preferred Stock of TAP and the capital
contribution made by TIGI from the issuance of $920 million of debt, and
from $760 million of cash on hand.
On April 23, 1996, TAP sold in a public offering approximately 39 million
shares of its Class A Common Stock, representing approximately 9.75% of its
outstanding common stock, for total proceeds of $928 million. On April 24,
1996, TAP sold in a public offering $500 million of 6 3/4% Notes due April
15, 2001 and $200 million of 7 3/4% Notes due April 15, 2026. On April 26,
1996, Travelers P&C Capital I, a subsidiary trust of TAP, issued $800
million of 8.08% Trust Preferred Securities in a public offering. On May
10, 1996, Travelers P&C Capital II, a subsidiary trust of TAP, issued $100
million of 8.00% Trust Preferred Securities in a public offering. These
Trust Preferred Securities, which are fully and unconditionally guaranteed
by TAP, have a liquidation value of $25 per Trust Preferred Security and
are mandatorily redeemable under certain circumstances. The aggregate
proceeds from the above offerings of $2.528 billion together with the
proceeds from the issuance by TAP of approximately $700 million of
commercial paper were used to repay in full the borrowings under the credit
facility and to redeem in full TAP's Series Z Preferred Stock.
All borrowings under the credit facility have been repaid in full and the
amount of the facility was subsequently reduced to $1.2 billion, currently
there are no borrowings outstanding under this facility.
TAP also issues commercial paper directly to investors and maintains unused
credit availability under the committed revolving credit agreement at least
equal to the amount of commercial paper outstanding.
TAP as of August 6, 1996, had $1.3 billion available for debt offerings
under its shelf registration statement.
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. Currently CCC has
unused credit availability of $1.975 billion. CCC may borrow under its
revolving credit facilities at various interest rate options and
compensates the banks for the facilities through commitment fees.
CCC is limited by covenants in its revolving credit agreements as to the
amount of dividends and advances that may be made to its parent or its
affiliated companies. At June 30, 1996, CCC would have been able to remit
$273 million to its parent under its most restrictive covenants.
CCC completed the following long-term debt offerings in 1996 and, as of
August 6, 1996, had $950 million available for debt offerings under its
shelf registration statement:
- 5 7/8% Notes due January 15, 2003 . . . . . . . $200 million
- 5.55% Notes due February 15, 2001 . . . . . . . $200 million
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. Smith Barney
32
<PAGE>
has a $1.0 billion revolving credit agreement with a bank syndicate that
extends through May 1999. In addition, Smith Barney has a $500 million
364-day revolving credit agreement with a bank syndicate that extends
through May 1997. As of June 30, 1996, there were no borrowings
outstanding under either facility. In addition, Smith Barney 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 attempts to
maintain sufficient capital and funding sources in order to have the
capacity to finance itself on a fully collateralized basis at all times,
including periods of financial stress. In addition, Smith Barney monitors
its leverage and capital ratios on a daily basis.
Smith Barney is limited by covenants in its revolving credit facility as to
the amount of dividends that may be paid to TRV. The amount of dividends
varies based upon, among other things, levels of net income of Smith
Barney. At June 30, 1996, Smith Barney would have been able to remit
approximately $532 million to TRV under its most restrictive covenants.
Smith Barney completed the following long-term debt offering in 1996 and,
as of August 6, 1996, had $725 million available for debt offerings under
its shelf registration statement:
- 5 7/8% Notes due February 1, 2001 . . . . . . . . $250 million
Securities Borrowed, Loaned and Subject to Repurchase Agreements
Smith Barney engages in "matched book" transactions in government and
mortgage-backed securities as well as "conduit" transactions in corporate
equity and debt securities. These transactions are similar in nature. A
"matched book" transaction involves a security purchased under an agreement
to resell (i.e., reverse repurchase transaction) and simultaneously sold
under an agreement to repurchase (i.e., repurchase transaction). A
"conduit" transaction involves the borrowing of a security from a
counterparty and the simultaneous lending of the security to another
counterparty. These transactions are reported gross in the Condensed
Consolidated Statement of Financial Position and typically yield interest
spreads generally ranging from 10 to 30 basis points. The interest spread
results from the net of interest received on the reverse repurchase or
security borrowed transaction and the interest paid on the corresponding
repurchase or security loaned transaction. Interest rates charged or
credited in these activities are usually based on current Federal Funds
rates but can fluctuate based on security availability and other market
conditions. The size of balance sheet positions resulting from these
activities can vary significantly depending primarily on levels of activity
in the bond markets, but would have a relatively smaller impact on net
income.
The Travelers Insurance Company (TIC)
At June 30, 1996, TIC had $22.4 billion of life and annuity product deposit
funds and reserves. Of that total, $11.9 billion is not subject to
discretionary withdrawal based on contract terms. The remaining $10.5
billion is for life and annuity products that are subject to discretionary
withdrawal by the contractholder. Included in the amount that is subject
to discretionary withdrawal is $1.0 billion of liabilities that are
surrenderable with market value adjustments. Also included are an
additional $5.5 billion of the life insurance and individual annuity
liabilities, which are subject to discretionary withdrawal and have an
average surrender charge of 5.1%, and $0.8 billion of liabilities, which
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 $3.2 billion of liabilities is surrenderable without charge.
More than 20% of these relate to individual life products. These risks
would have to be underwritten again if transferred to another carrier,
which is considered a significant deterrent against withdrawal by long-term
policyholders. Insurance liabilities that are surrendered or withdrawn are
reduced by outstanding policy loans and related accrued interest prior to
payout.
33
<PAGE>
TIC, a direct subsidiary of TIGI, issues commercial paper to investors and
maintains unused committed revolving credit facilities at least equal to
the amount of commercial paper outstanding. Currently, TIC has unused
credit availability of $125 million.
The Travelers Insurance Group Inc. (TIGI)
TIGI is subject to various regulatory restrictions that limit the maximum
amount of dividends available to its parent without prior approval of the
Connecticut Insurance Department. A maximum of $580 million of statutory
surplus is available in 1996 for such dividends without Department
approval.
Future Application of Accounting Standards
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), is effective for 1996 reporting. This statement
addresses the accounting for the cost of stock-based compensation, such as
stock options and restricted stock. FAS 123 permits either expensing the
value of stock-based compensation over the period earned or disclosing in
the financial statement footnotes the pro forma impact to net income as if
the value of stock-based compensation awards had been expensed. The value
of awards would be measured at the grant date based upon estimated fair
value, using option pricing models. The Company has selected the
disclosure alternative that requires such pro forma disclosures to be
included in annual financial statements.
In June 1996, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (FAS
125). FAS 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities.
These standards are based on consistent application of a financial-
components approach that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrended, and
derecognizes liabilities when extinguished. FAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings. The requirements of FAS 125
would be effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not
permitted. The Company is currently evaluating the impact of this
statement.
34
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In July 1996, a complaint seeking equitable relief was filed in the
U.S. District Court for the Southern District of New York by the U.S. Department
of Justice, naming twenty-four major brokerage firms, including the Company's
subsidiary, Smith Barney Inc., as defendants. A proposed settlement has been
agreed to by the parties, subject to approval of the court. Pursuant to this
settlement, the defendants, without admitting any liability, would agree not to
engage in certain practices relating to the quoting of Nasdaq securities and
would further agree to implement a program to ensure compliance with federal
antitrust laws and with the terms of the settlement. No monetary fines or
penalties are imposed as part of the settlement.
For information concerning actions filed against several insurance
companies and industry organizations relating to service fee charges and premium
calculations on certain workers' compensation insurance, see the description
that appears in the paragraph beginning on page 90 and continuing on page 91 of
the Prospectus dated April 22, 1996 of Travelers/Aetna Property Casualty Corp.,
a majority-owned subsidiary of the Company, 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-Q. Two of such actions, Four Way Plant Farm v.
NCCI and Weatherford Roofing Company v. Employees National Insurance Company,
have been settled, subject to approval of the court. In NC Steel, Inc. v. NCCI,
the North Carolina Court of Appeals affirmed the trial court's dismissal in
part, reversed in part and remanded for further proceedings.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On April 12, 1996, the Company filed a Current Report on Form
8-K, dated April 2, 1996 (which was amended by a Form 8-K/A-1 filed April 23,
1996), reporting under Item 2 thereof its acquisition from Aetna Life and
Casualty Company ("Aetna") of all of the outstanding capital stock of The Aetna
Casualty and Surety Company ("ACSC") and The Standard Fire Insurance Company
("SFIC") and including certain financial information relating thereto.
On April 22, 1996, the Company filed a Current Report on Form
8-K, dated April 15, 1996, reporting under Item 5 thereof the results of its
operations for the three months ended March 31, 1996, and certain other selected
financial data.
On June 7, 1996, the Company filed a Current Report on Form 8-
K, dated June 7, 1996, reporting under Item 5 thereof certain additional
financial information related to the businesses of ACSC and SFIC and their
subsidiaries.
No other reports on Form 8-K were filed during the quarter
ended June 30, 1996.
35
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
3.01 Restated Certificate of Incorporation of
Travelers Group Inc. (formerly The Travelers
Inc.), (the "Company") and Certificate of
Designation of Cumulative Adjustable Rate
Preferred Stock, Series Y, and Certificate
of Amendment to the Restated Certificate of
Incorporation, incorporated by reference to
Exhibit 3.01 to Amendment No. 1 to
Registration Statement on Form S-4 of the
Company (No. 333-00737).
3.02 By-Laws of the Company as amended through
January 24, 1996, incorporated by reference to
Exhibit 3.02 to the Company's Annual Report on
Form 10-K for the fiscal year ended December
31, 1995 (File No. 1-9924) (the "Company's
1995 10-K").
10.01 Amendment No. 13 to the Stock Option Plan of Electronic
the Company, effective April 24, 1996.
11.01 Computation of Earnings Per Share. Electronic
12.01 Computation of Ratio of Earnings to Fixed Electronic
Charges.
27.01 Financial Data Schedule. Electronic
99.01 The paragraph beginning on page 90 and Electronic
continuing on page 91 of the Prospectus dated
April 22, 1996 of Travelers/Aetna Property
Casualty Corp. (File No. 333-2254).
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 such instrument to
the Commission upon request.
36
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Travelers Group Inc.
Date: August 13, 1996 By /s/ Heidi Miller
--------------------------------
Heidi Miller
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 1996 By /s/ Irwin Ettinger
-------------------------------
Irwin Ettinger
Executive Vice President
(Chief Accounting Officer)
37
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
3.01 Restated Certificate of Incorporation of
Travelers Group Inc. (formerly The Travelers
Inc.), (the "Company") and Certificate of
Designation of Cumulative Adjustable Rate
Preferred Stock, Series Y, and Certificate of
Amendment to the Restated Certificate of
Incorporation, incorporated by reference to
Exhibit 3.01 to Amendment No. 1 to
Registration Statement on Form S-4 of the
Company (No. 333-00737).
3.02 By-Laws of the Company as amended through
January 24, 1996, incorporated by reference to
Exhibit 3.02 to the Company's Annual Report on
Form 10-K for the fiscal year ended December
31, 1995 (File No. 1-9924) (the "Company's
1995 10-K").
10.01 Amendment No. 13 to the Stock Option Plan of Electronic
the Company, effective April 24, 1996.
11.01 Computation of Earnings Per Share. Electronic
12.01 Computation of Ratio of Earnings to Fixed Electronic
Charges.
27.01 Financial Data Schedule. Electronic
99.01 The paragraph beginning on page 90 and Electronic
continuing on page 91 of the Prospectus dated
April 22, 1996 of Travelers/Aetna Property
Casualty Corp. (File No. 333-2254).
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 such instrument to
the Commission upon request.
EXHIBIT 10.01
AMENDMENT NO.13 to the
TRAVELERS GROUP STOCK OPTION PLAN
(effective as of April 24, 1996)
The Travelers Group Stock Option Plan is hereby amended in the following
respects:
1. Section 5(d)(i) is hereby amended by deleting the words "and one
month" appearing in subsection (c) thereof.
2. Section 5(d)(iv)(B) is hereby amended by deleting the words "or on
account of voluntary termination of employment (other than pursuant to
retirement as described in Section 5(d)(iv)(D))" from the first sentence
thereof, by inserting a period after the words "on the date he or she
terminated employment" and by deleting the words "except that the Committee
may in its sole discretion refuse to permit a person who has voluntarily
terminated his employment or who has been involuntarily terminated from
employment for gross misconduct to exercise any Options after the date of
termination; and". The following two sentences are hereby added to the end
of such section:
"Unless the Committee determines otherwise, if such person shall cease
to be such officer or employee on account of a voluntary termination
of employment or an involuntary termination for Cause, while holding
an Option that has not expired and has not been fully exercised, such
Option shall not be exercisable after the date of termination. For
purposes of the Plan, "Cause" shall mean (a) failure by an Optionee to
perform substantially his or her duties with the Company or a
subsidiary, after reasonable notice to the Optionee of such failure;
(b) conduct by a Optionee that is in material competition with the
Company or a subsidiary or (c) conduct by an Optionee that breaches
his or her duty of loyalty to the Company or a subsidiary, or that is
materially injurious to the Company or a subsidiary, monetarily or
otherwise, which conduct shall include, but not be limited to (i)
disclosing or misusing any confidential information pertaining to the
Company or a subsidiary; (ii) any attempt, directly or indirectly to
induce any employee, agent, insurance agent, insurance broker or
broker-dealer of the Company or any subsidiary to be employed or
perform services elsewhere or (iii) any attempt by an Optionee
directly or indirectly to solicit the trade of any customer or
supplier or prospective customer or supplier of the Company or any
subsidiary or (iv) disparaging the Company, any subsidiary or any of
their respective officers or directors. The determination of whether
any conduct, action or failure to act constitutes "Cause" shall be
made by the Committee."
3. Section 5(d)(iv)(E) is hereby amended by deleting the words "his
termination of employment for any reason" and replacing them with the words
"an involuntary termination of employment (other than for Cause)".
<PAGE>
4. Section 9(l) is hereby amended by inserting the words "Plan and/or
the" before the words "participant's award agreement" appearing in the
first sentence of such section and by deleting the words "and shall be
otherwise unrestricted" at the end of such sentence.
5. Section 9(m) is hereby amended by deleting the word "unrestricted"
from clause (i) of the first sentence thereof and adding the following
language after the words "issuable upon the Option exercise" and before the
words "and no reload Option":
"which incremental shares will be subject to restrictions on
transferability for a period of one (1) year, or such other shorter or
longer period as may be determined by the Committee"
6. Section 9(m) is hereby further amended by replacing the words "subject
to a period of restriction on transferability (running from the date of the
Option exercise and determined by the Committee in its discretion from time
to time)" with the following language:
"subject to restrictions on transferability for a period of two
(2) years, or such other shorter or longer period as may be
determined by the Committee"
7. Section 9(m) is further amended by adding the words "authorizing the
Company to sell the appropriate number of Common Shares to cover the
exercise price, and/or by" immediately before the words "surrendering
previously owned Common Shares" appearing in the second to last sentence of
such section.
8. Section 9(m) is further amended to add the words "or sold on behalf of
the Optionee" immediately before the words "to pay for such exercise", and
by replacing the word "used" with the words "tendered or withheld" in the
last sentence of such section.
9. The following new Section 9(n) is hereby added:
"(n) The incremental shares issued as a result of the exercise of
an Option may not be sold, assigned, pledged, hypothecated or
otherwise transferred by the participant, except as specifically
permitted pursuant to subsection (m) above, for a period of one
(1) year following the date of exercise if no reload Option is
granted in connection with such exercise, or for a period of two
(2) years if a reload Option is granted in connection with such
exercise, or such other shorter or longer restricted periods as
may be determined by the Committee."
10. The following new Sections 13, 14, 15 and 16 are hereby added:
"13. Forfeiture of Awards.
---------------------
(a) Options. In any instance where the vesting and/or
--------
exercisability of an Option or reload Option extends past the
date of termination of a participant's employment, either
pursuant to the terms of the Plan or by action of the
<PAGE>
Committee, the rights of the participant to continued vesting and
exercisability shall be forfeited if, in the determination of the
Committee, the participant, at any time within such remaining
period of continued vesting or exercisability engages in any of
the conduct described in subparagraphs (b) or (c) of the
definition of "Cause" appearing in Section 5(d)(iv)(B) of this
Plan.
(b) Incremental Shares. If during any period following the
-------------------
exercise of an Option or reload Option and prior to the
expiration of the restricted period on any incremental shares
issued upon such exercise, the participant, in the determination
of the Committee, engages in any of the conduct described in
subparagraph (c) of the definition of Cause appearing in Section
5(d)(iv)(B) of this Plan, at the option of the Committee, the
participant shall forfeit such incremental shares and shall
receive instead, a cash payment, without interest, equal to the
original exercise price for the Option or reload Option under
which the incremental shares were issued, multiplied by the
number of incremental shares forfeited."
"14. Arbitration. All claims and disputes between a participant
------------
and the Company or any subsidiary arising out of the Plan or any
Option granted hereunder shall be submitted to arbitration in
accordance with the then current arbitration policy of the Company or
the subsidiary with whom the participant is employed. Notice of
demand for arbitration shall be given in writing to the other party
and shall be made within a reasonable time after the claim or dispute
has arisen. The award rendered by the arbitrator shall be made in
accordance with the provisions of the Plan, shall be final, and
judgment may be entered upon it in accordance with applicable law in
any court having jurisdiction thereof. The provisions of this Section
14 shall be specifically enforceable under applicable law in any court
having jurisdiction thereof."
"15. Governing Law. The validity, construction, interpretation,
--------------
administration and effect of the Plan and of its rules and
regulations, and rights relating to the Plan, shall be determined
solely in accordance with the laws of the State of Delaware."
"16. Severability. If any term or provision of this Plan or the
-------------
application thereof to any person or circumstances shall, to any
extent, be invalid or unenforceable, then the remainder of the Plan,
or the application of such term or provision to persons or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term and
provision hereof shall be valid and be enforced to the fullest extent
permitted by applicable law."
EXHIBIT 11.01
Travelers Group Inc. and Subsidiaries
Computation of Earnings Per Share
(In millions, except for per share amounts)
<TABLE><CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------- ------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings:
Income from continuing operations $576 $377 $1,096 $682
Discontinued operations - 29 - 64
--- --- ----- ----
Net income 576 406 1,096 746
Preferred dividends:
8.125% Cumulative
Preferred Stock - Series A (6) (6) (12) (12)
5.5% Convertible
Preferred Stock - Series B (2) (2) (4) (3)
$4.53 Convertible
Preferred Stock - Series C (4) (4) (14) (9)
9 1/4% Preferred Stock - Series D (8) (9) (17) (18)
--- ---- ---- ---
(20) (21) (47) (42)
--- --- ----- ---
Income applicable to common stock $556 $385 $1,049 $704
==== === ===== ===
Average shares:
Common 457.2 461.1 457.5 461.7
Warrants 2.1 .4 2.2 .1
Assumed exercise of dilutive
stock options 7.2 5.9 8.0 5.3
Incremental shares - Stock based
incentive plans 9.5 7.8 9.2 7.0
----- ----- ----- -----
476.0 475.2 477.0 474.1
===== ===== ====== =====
Earnings per share:
Continuing operating $1.17 $0.75 $2.20 $1.35
Discontinued operations - 0.06 - 0.14
---- ---- ------ ----
Net Income $1.17 $0.81 $2.20 $1.49
==== ==== ==== ====
</TABLE>
Earnings per common share is computed after recognition of preferred stock
dividend requirements and is based on the weighted average number of common
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 dilutive convertible preferred stock and the
maximum dilutive effect of common stock equivalents, have not been
presented because the effects are not material. The fully diluted earnings
per common share calculation for the three and six months ended June 30,
1996 would entail adding the number of shares issuable on conversion of the
dilutive convertible preferred stock (8.4 and 8.4 million, respectively)
and the incremental dilutive effect of common stock equivalents (2.0 and
2.5 million, respectively) to the number of shares included in the earnings
per common share calculation (resulting in 486.4 and 487.9 million shares,
respectively) and eliminating the dividend requirements of the dilutive
convertible preferred stock ($5 and $10 million, respectively). The fully
diluted earnings per common share calculation for the three and six months
ended June 30, 1995 would entail adding the number of shares issuable on
conversion of the dilutive convertible preferred stock (10.4 and 10.4
million, respectively) and the incremental dilutive effect of common stock
equivalents (1.8 and 3.9 million, respectively) to the number of shares
included in the earnings per common share calculation (resulting in 487.4
and 488.4 million shares, respectively) and eliminating the dividend
requirements of the dilutive convertible preferred stock ($5 and $10
million, respectively).
All current and prior year information has been restated to reflect the
three-for-two stock split paid on May 24, 1996 to stockholders of record on
May 6, 1996.
EXHIBIT 12.01
Travelers Group Inc. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In millions of dollars, except for ratio)
Six months ended
June 30,
------------------
1996 1995
---- ----
Income from continuing operations
before income taxes and minority interest $1,413 $1,052
Interest 1,060 973
Portion of rentals deemed to be interest 53 54
---- ----
Earnings available for fixed charges $2,526 $2,079
===== ======
Fixed charges
-------------
Interest $1,060 $973
Portion of rentals deemed to be interest 53 54
---- ----
Fixed charges $1,113 $1,027
===== =====
Ratio of earnings to fixed charges 2.27x 2.02x
===== =====
The ratio of earnings to fixed charges has been computed by dividing
earnings from continuing operations before income taxes and fixed charges
by the fixed charges. For purposes of these ratios, fixed charges consist
of interest expense and that portion of rentals deemed representative of
the appropriate interest factor.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
TRAVELERS GROUP, INC.
FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
June 30, 1996 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF TRAVELERS GROUP
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> $1,635
<SECURITIES> 86,874<F1>
<RECEIVABLES> 20,373<F2>
<ALLOWANCES> 0<F3>
<INVENTORY> 0<F3>
<CURRENT-ASSETS> 0<F3>
<PP&E> 0<F3>
<DEPRECIATION> 0<F3>
<TOTAL-ASSETS> 142,074
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 16,012<F4>
213
763
<COMMON> 6
<OTHER-SE> 10,956<F5>
<TOTAL-LIABILITY-AND-EQUITY> 142,074
<SALES> 0<F3>
<TOTAL-REVENUES> 9,941
<CGS> 0<F3>
<TOTAL-COSTS> 8,925
<OTHER-EXPENSES> 0<F3>
<LOSS-PROVISION> 128<F6>
<INTEREST-EXPENSE> 1,060<F6>
<INCOME-PRETAX> 1,413
<INCOME-TAX> 361
<INCOME-CONTINUING> 1,096
<DISCONTINUED> 0<F3>
<EXTRAORDINARY> 0<F3>
<CHANGES> 0<F3>
<NET-INCOME> 1,096
<EPS-PRIMARY> $2.20
<EPS-DILUTED> 0<F3>
<FN>
<F1>Includes the following items from the financial statements: total
investments $54,777; securities borrowed or purchased under agreements to resell
$21,246; and trading securities owned, at market value $10,851.
<F2>Includes the following items from the financial statements: brokerage
receivables $7,217; net consumer finance receivables $7,290 and other
receivables $5,866.
<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 $3,483; short-term borrowings $2,368 and
long-term debt $10,161.
<F5>Includes the following items from the financial statements: additional
paid-in capital $6,983; retained earnings $6,408; treasury stock $(2,102);
unrealized gain (loss) on investment securities $1; and other $(334).
<F6>Included in total costs and expenses applicable to sales and revenues.
</FN>
</TABLE>
EXHIBIT 99.01
PROSPECTUS OF TRAVERLERS/AETNA
PROPERTY CASUALTY CORP.
APRIL 22, 1996
PAGES 90-91
A number of cases have been filed against several insurance
companies and industry organizations relating to service fee charges and premium
calculations on certain workers' compensation insurance. Certain subsidiaries of
the Company are defendants in South Carolina ex rel. Medlock v. National Council
on Compensation Insurance ("NCCI"), an action filed by the Attorney General of
South Carolina in August 1994 in the Court of Common Pleas, County of
Greenville, South Carolina; Four Way Plant Farm v. NCCI, a purported class
action filed in September 1994 in the Circuit Court for Bullock County, Alabama,
and NC Steel, Inc. v. NCCI, a purported class action filed in November 1993 in
the Superior Court Division of the General Court of Justice, Wake County, North
Carolina. In these cases, the plaintiffs generally allege that the
administration of each state's workers' compensation assigned risk pool
conspired with servicing carriers for the pool to collect excessive fees in
violation of state antitrust and/or unfair trade practice laws. The plaintiffs
seek unspecified compensatory, treble and/or punitive damages and injunctive
relief. The Company believes it has meritorious defenses and intends to contest
the allegations. In NC Steel, Inc. v. NCCI, the defendants' motion to dismiss
was granted in February 1995, and the plaintiffs have appealed to the North
Carolina Court of Appeals. In April 1994, certain subsidiaries of [the Company]
were named as additional defendants in a purported class action pending in the
116th District of Dallas County, Texas, entitled Weatherford Roofing Company v.
Employers National Insurance Company. The plaintiffs in this case allege that
the workers' compensation carriers in Texas have conspired to collect excessive
or improper premiums in violation of state insurance laws, antitrust laws and/or
state unfair trade practices laws. The plaintiffs seek compensatory, treble
and/or punitive damages as well as declaratory and injunctive relief. In a
statutory demand letter, plaintiffs' counsel allege classwide compensatory
damages, including interest through October 1994, of approximately $572 million.
Since that time, court-approved settlements with certain other insurers have
been based on single damage, or alleged overcharge, calculations which, if
applied to Company-issued policies of class members, would yield single damages
of $50 million or less. The Company believes it has meritorious defenses and
intends to contest the allegations unless an attractive settlement opportunity
arises.
