UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A-2
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
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Commission file number 1-9924
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TRAVELERS GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1568099
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value New York Stock Exchange and
$ .01 per share Pacific Stock Exchange
Depositary Shares, each New York Stock Exchange
representing 1/10 of a share of
8.125% Cumulative Preferred Stock,
Series A
Depositary Shares, each New York Stock Exchange
representing 1/2 of a share of
9.25% Preferred Stock, Series D
7 3/4% Notes Due June 15, 1999 New York Stock Exchange
1998 Warrants to Purchase Common Stock New York Stock Exchange
8% Trust Preferred Securities of New York Stock Exchange
Subsidiary Trust (and registrant's
guaranty with respect thereto)
7 3/4% Trust Preferred Securities of New York Stock Exchange
Subsidiary Trust (and registrant's
guaranty with respect thereto)
7 5/8% Trust Preferred Securities of New York Stock Exchange
Subsidiary Trust (and registrant's
guaranty with respect thereto)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 5, 1997 was approximately $34.2 billion.
As of March 5, 1997, 641,379,081 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1996 are incorporated by reference into Part II
of this Form 10-K/A-2.
Certain portions of the registrant's Proxy Statement for the 1997 Annual Meeting
of Stockholders to be held on April 23, 1997 are incorporated by reference into
Part III of this Form 10-K/A-2.
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EXPLANATORY NOTE
This Form 10-K/A-2 is being filed to revise the sections entitled
"Property & Casualty Insurance Services -- Reserves" and "Property & Casualty
Insurance Services -- Environmental, Asbestos and Cumulative Injury Claims" in
Item 1 and to make certain revisions to the information incorporated in Items 7
and 8. To reflect those changes, we have revised Exhibit 13.01, which is being
refiled in its entirety, and have amended Item 14 accordingly. There have been
no other changes to the text of the Form 10-K, which speaks as of the date of
its original filing.
PART I
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Item 1. BUSINESS.
THE COMPANY
Travelers Group Inc. (the "Company") is a financial services holding
company engaged, through its subsidiaries, principally in four business
segments: (i) Investment Services; (ii) Consumer Finance Services; (iii)
Property & Casualty Insurance Services; and (iv) Life Insurance Services.
On April 2, 1996, Travelers Property Casualty Corp. (formerly
Travelers/Aetna Property Casualty Corp.) ("TAP"), an indirect majority-owned
subsidiary of the Company that was formed in January 1996 to hold the property
and casualty insurance subsidiaries (collectively, "Travelers P&C") of The
Travelers Insurance Group Inc. ("TIGI"), purchased from Aetna Services Inc.
(formerly Aetna Life and Casualty Company) ("Aetna") all of the outstanding
capital stock of The Aetna Casualty and Surety Company ("Aetna Casualty") and
The Standard Fire Insurance Company ("Standard Fire"), Aetna's property and
casualty insurance subsidiaries (collectively, "Aetna P&C"), for approximately
$4.16 billion in cash. The acquisition of Aetna P&C (the "Acquisition") was
treated as a purchase and, accordingly, the Company's consolidated financial
statements include the results of Aetna P&C's operations only from the date of
the Acquisition. As part of the financing of the Acquisition, TAP 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. TIGI acquired approximately 328 million shares of
TAP's Class B Common Stock in exchange for its contribution of the outstanding
capital stock of The Travelers Indemnity Company ("Travelers Indemnity") and a
capital contribution of approximately $1.14 billion. In April 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 at that time).
The Company indirectly owns approximately 82% of TAP's outstanding common stock.
For additional information about the Acquisition, the public offering and other
related transactions, see Note 2 of Notes to Consolidated Financial Statements.
During 1996, the Company continued and expanded the marketing of its
financial products through the various distribution channels offered by its
subsidiaries, primarily the independent agents of Primerica Financial Services
(the "PFS sales force") and the Financial Consultants of Smith Barney Inc. The
PFS sales force, which primarily sells life insurance and mutual funds, now also
sells personal lines property-casualty insurance offered by Travelers Indemnity,
a subsidiary of TAP. Through this program, over 6,300 members of the PFS sales
force are now licensed to sell automobile and homeowners insurance products
under the Secure-SM- name. The program, which began in 1994 and continues to
experience growth in applications and policies, is now available in 37 states.
See "Property & Casualty Insurance
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Services -- Personal Lines." The PFS sales force has become the largest
distributor of The Concert Series-SM-, a group of mutual funds offered by Smith
Barney, with 1996 sales of approximately $458 million. See "Life Insurance
Services -- Primerica Financial Services." The $.M.A.R.T.-SM- and $.A.F.E.-SM-
loan programs, under which members of the PFS sales force solicit applications
for loans underwritten by Commercial Credit Company ("CCC"), generated net
receivables of over $1.5 billion at December 31, 1996. See "Consumer Finance
Services -- Consumer Finance." Qualified Smith Barney Financial Consultants
offer individual products, primarily variable annuities, of Travelers Life and
Annuity. These products include, among others, Vintage Life-R- and Vintage
Annuity-SM-, single premium variable universal life products, and Travelers
Target Maturity-R-, a market value adjusted fixed annuity. The Company has also
created a subsidiary to facilitate the cross-marketing of the Company's products
among its subsidiaries and to offer a bundled group of those products for sale
to employees of other companies through a directed sales effort.
The periodic reports of CCC, Smith Barney Holdings Inc. ("SB
Holdings"), TAP, The Travelers Insurance Company and The Travelers Life and
Annuity Company, subsidiaries of the Company that make filings pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), provide
additional business and financial information concerning those companies and
their consolidated subsidiaries.
The principal executive offices of the Company are located at 388
Greenwich Street, New York, New York 10013; telephone number 212-816-8000.
This discussion of the Company's business is organized as follows: (i)
a description of each of the Company's four business segments; (ii) a
description of the Corporate and Other Operations segment; and (iii) certain
other information. A glossary of insurance terms is included beginning on page
70.
INVESTMENT SERVICES
The Company's Investment Services segment includes the operations of
SB Holdings and its subsidiaries. As used herein, unless the context otherwise
requires, "Smith Barney" refers to SB Holdings and its consolidated
subsidiaries.
Smith Barney
SB Holdings provides investment banking, asset management, brokerage
and other financial services through its subsidiaries. Its principal operating
subsidiary is Smith Barney Inc. ("SBI"), an investment banking, securities
trading and brokerage firm that traces its origins back to 1873.
Smith Barney operates through approximately 450 offices throughout the
United States, and 17 offices in 15 foreign countries. With approximately 10,400
Financial
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Consultants, the Company believes that Smith Barney is currently the second
largest domestic brokerage firm in the United States.
Investment Banking and Securities Brokerage
Smith Barney is an investment banking and securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. Its business includes securities,
options and commodities brokerage for domestic and international institutional
and individual clients; underwriting and distribution of securities; arranging
for the private placement of securities; assisting in mergers and acquisitions
and providing other financial advisory services; market making and trading in
corporate debt and equity, United States government and agency, mortgage-related
and municipal securities and foreign exchange, futures and forward contracts;
customer financing activities; securities lending activities; investment
management and advisory services; securities research; and other related
activities.
Smith Barney's investment banking services include the underwriting of
debt and equity issues for United States and foreign corporations and for state,
local and other governmental and government-sponsored authorities. Smith Barney
frequently acts as managing underwriter in corporate and public securities
offerings. Smith Barney also acts as a private placement agent for various
clients, and as such helps to place securities for clients with large
institutions and other qualified investors. Smith Barney also provides financial
advice to investment banking clients on a wide variety of transactions including
mergers and acquisitions, exchanges of securities and corporate restructurings.
Smith Barney executes securities brokerage transactions on all major
United States securities exchanges and distributes a wide variety of financial
products. It makes inter-dealer markets and trades as principal in corporate
debt and equity securities, primarily of United States corporate issuers, United
States and foreign government, and agency securities, mortgage-related
securities, whole loans, municipal and other tax-exempt securities, commercial
paper and other money market instruments as well as emerging market debt
securities. The firm carries inventories of securities to facilitate sales to
customers and other dealers and with a view to realizing trading gains. SBI is
one of the leading dealers in municipal securities and is a "Primary Dealer" in
United States government securities, as designated by the Federal Reserve Bank
of New York. Its daily trading inventory positions in United States government
and agency securities are financed largely through the use of repurchase
agreements pursuant to which Smith Barney sells the securities and
simultaneously agrees to repurchase them at a future date. Smith Barney also
acts as an intermediary between borrowers and lenders of short-term funds
utilizing repurchase and reverse repurchase agreements. Smith Barney uses
derivative financial instruments to facilitate customer transactions and to
manage exposure to interest rate, currency and market risk. In addition, for its
own account Smith Barney engages in a limited manner in certain arbitrage
activities, which primarily seek to benefit from temporary price discrepancies
that occur with respect to
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related securities or to the same security on different markets. Smith Barney
also engages in the borrowing and lending of securities. The Smith Barney
network of Financial Consultants also sells Travelers Life and Annuity
individual products, primarily variable annuities. See "Life Insurance Services
- -- Travelers Life and Annuity."
Smith Barney executes transactions in large blocks of exchange-listed
stocks, usually with institutional investors, and often acts as principal to
facilitate these transactions. It makes markets, buying and selling as
principal, in common stocks, convertible preferred stocks, warrants and other
securities traded on the NASDAQ system or otherwise in the over-the-counter
market. Smith Barney also maintains trading positions in equity options,
convertible securities, debt options, foreign exchange and commodities
instruments. It executes significant client transactions in both listed and
unlisted options and in foreign exchange, and often acts as principal to
facilitate these transactions. Smith Barney also sells various types of
structured securities on both a principal and an agency basis. The firm's
securities trading and investment activities involve significant risk in that
the values of positions carried in its trading and investment accounts are
subject to market fluctuations. Smith Barney engages in a variety of financial
techniques designed to manage this risk.
Customer Financing
Customers' securities transactions are executed on either a cash or
margin basis. Federal regulations prescribe the minimum original margin that
must be deposited by securities purchasers, and exchange regulations prescribe
the minimum margins that must be maintained by customers. Smith Barney imposes
margin maintenance requirements that are equal to or exceed those required by
exchange regulations. Such requirements are intended to reduce the risk assumed
by Smith Barney that a market decline will reduce the value of a customer's
collateral below the amount of the customer's indebtedness before the collateral
can be sold. Substantially all transactions in commodities futures contracts are
on margin subject to individual exchange regulations. Margin, in the case of
commodities futures contracts, is primarily funded in the form of cash or United
States Treasury securities. Commodities transactions involve substantial risk,
principally because of low margin requirements permitted by the exchanges.
Income earned on financing customers' securities transactions provides
Smith Barney with an additional source of income. Credit losses may arise as a
result of this financing activity; however, to date, such losses have not been
material.
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Asset Management
Smith Barney provides discretionary and non-discretionary asset
management and consulting services to a wide array of mutual funds and
institutional and individual investors, with respect to domestic and foreign
equity and debt securities, municipal bonds, money market instruments, and
related options and futures contracts. Smith Barney typically receives ongoing
fees from its asset management and consulting clients, generally stated as a
percentage of the client's assets with respect to which Smith Barney's services
are rendered. At December 31, 1996, such client assets in the aggregate exceeded
$111.8 billion, as compared to approximately $96.2 billion at December 31, 1995
and approximately $78.0 billion at December 31, 1994.
At December 31, 1996, Smith Barney sponsored 59 mutual funds (open-end
investment companies) with aggregate assets of approximately $69.7 billion
distributed through its sales force of Financial Consultants. Of these, ten are
taxable and tax-exempt money market funds, with assets of approximately $41.2
billion. At December 31, 1995, aggregate assets in Company-sponsored mutual
funds were approximately $61.6 billion, of which approximately $35.6 billion
related to money market funds, compared to aggregate assets in such funds at
December 31, 1994 of approximately $50.6 billion, $28.6 billion of which related
to money market funds. A wholly owned subsidiary of SB Holdings serves as
investment manager to these mutual funds, as well as to twelve closed-end
investment companies, the shares of which are listed for trading on one or more
securities exchanges. At December 31, 1996 and December 31, 1995, assets of
these closed-end funds aggregated approximately $2.8 billion, as compared to
approximately $2.5 billion at December 31, 1994. The open-end and closed-end
funds sponsored and managed by Smith Barney have various investment objectives,
including growth, growth and income, taxable income and tax-exempt income. In
addition, at December 31, 1996, Smith Barney managed 25 mutual fund portfolios
serving as funding vehicles for variable annuity contracts, with aggregate
assets of approximately $2.3 billion. At December 31, 1995 and December 31,
1994, aggregate assets in the mutual fund portfolios managed by the Company were
approximately $1.8 billion and $1.4 billion, respectively. This includes six
mutual fund portfolios that are investment options for the Travelers Universal
variable annuity contracts. Smith Barney also sponsors and manages nine mutual
funds domiciled outside the U.S. which are offered to Smith Barney's
non-resident alien client base. At December 31, 1996, these off-shore funds had
aggregate assets of approximately $1.2 billion, as compared to approximately
$980 million at December 31, 1995 and approximately $780 million at December 31,
1994.
In 1996, Smith Barney launched The Concert Series-SM-, a group of
mutual funds that invests in various Smith Barney mutual funds instead of
directly in stocks, bonds or other securities. The Concert Series-SM- simplifies
the process of investing and enables investors to achieve a broad
diversification of their investments. The Concert Series-SM- is sold through
Smith Barney Financial Consultants and the PFS sales force.
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In addition to these proprietary funds, Smith Barney also sells
through its Financial Consultants a large number of mutual funds sponsored and
managed by unaffiliated entities. Smith Barney receives commissions and other
sales and service revenues from this activity.
Smith Barney also sponsors and oversees the portfolios of a large
number of unit investment trusts, which are unmanaged investment companies, the
portfolios of which are generally static. Such unit investment trusts may hold
domestic and foreign equity and debt securities, including municipal bonds.
Certain trusts are sponsored and overseen solely by Smith Barney; other trusts
are jointly sponsored through a syndicate of major broker-dealers of which Smith
Barney is a member. At December 31, 1996, outstanding unit trust assets held by
Smith Barney clients exceeded $8.6 billion, as compared to approximately $7.2
billion at December 31, 1995 and approximately $6.4 billion at December 31,
1994.
Smith Barney's asset management units provide separate account
discretionary investment management services to a wide variety of individual and
institutional clients, including private and public retirement plans,
endowments, municipalities and other institutions. Client relationships may be
introduced through Smith Barney's network of Financial Consultants or
independent from such network (e.g., through traditional pension plan
consultants unaffiliated with the Company). Assets under Smith Barney's
management exceeded $24.0 billion at December 31, 1996, as compared to
approximately $20.4 billion at December 31, 1995 and approximately $15.7 billion
at December 31, 1994.
Smith Barney's Consulting Group ("CG") provides a variety of
investment management and consulting services to institutional and individual
clients. CG sponsors a number of different "wrap fee" programs, in which CG and
Smith Barney typically provide: an analysis of the client's financial situation,
investment needs and risk tolerance; a recommendation that the client retain one
or more investment management firms (which may be affiliated or unaffiliated
with Smith Barney); ongoing monitoring of the performance and suitability of the
investment manager(s) retained; securities execution and custody; and client
reporting and recordkeeping. In such programs, the client generally pays a
single bundled fee for the services provided. CG also provides traditional
investment management consulting services to institutions, including assisting
clients in formulating investment objectives and policies and in selecting
investment management firms for the day-to-day management of client portfolios.
CG's programs and services generally are delivered through Smith Barney
Financial Consultants, many of whom specialize in such programs and services. As
of December 31, 1996, Smith Barney provided consulting services with respect to
client assets aggregating approximately $49.1 billion, excluding the TRAK-R-
program described below, as compared to approximately $39.1 billion at December
31, 1995 and approximately $29.7 billion at December 31, 1994.
Smith Barney's TRAK-R- program provides clients with non-discretionary
asset allocation advice based on the client's identification of investment
objectives and risk tolerances. TRAK-R- clients include both individuals and
institutions, including participant-
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directed 401(k) plans. Clients can choose to allocate assets among the CG
Capital Markets funds, a series of 13 mutual funds each corresponding to a
particular asset class and investment style, or from among the selected fund
offerings of 28 no-load or load-waived mutual fund families (including Smith
Barney's family of funds) corresponding to the same asset class and investment
style criteria. At December 31, 1996, TRAK-R- assets exceeded $6.6 billion, as
compared to approximately $4.8 billion at December 31, 1995 and approximately
$3.3 billion at December 31, 1994. Smith Barney also offers a separate offshore
TRAK-R- program to non-resident alien clients, which includes client investment
in a series of asset class/investment style funds domiciled outside the United
States.
Miscellaneous Activities
Certain of the Company's subsidiaries are chartered as trust companies
and provide a full range of fiduciary services with a particular emphasis on
personal trust services. Another subsidiary offers a broad range of trustee
services for qualified retirement plans, with particular emphasis on the 401(k)
plan market. Each of these trust companies is subject to the supervision of the
state banking authority where it was chartered and uses the distribution network
of SBI to market its services. Although these trust companies are subsidiaries
of the Company and not of SB Holdings, their results are included with Smith
Barney for segment reporting purposes. Smith Barney provides certain advisory
and support services to the trust companies and receives fees for such services.
In 1996, Smith Barney formed a joint venture with the Korea Exchange
Bank. The venture, a brokerage and underwriting company based in Seoul, South
Korea, that is owned 49% by Smith Barney, is engaged in the securities brokerage
and underwriting business in the Korean markets. The venture is licensed with
the Korea Ministry of Finance and Economy to conduct securities activities in
Korea.
General
Competition
The businesses in which Smith Barney is engaged are highly
competitive. The principal factors affecting competition in the investment
banking and securities brokerage industry are the quality and ability of
professional personnel and the relative prices of services and products offered.
In addition to competition from other investment banking firms, both domestic
and international, and securities brokerage companies and discount securities
brokerage operations, including regional firms in the United States, there has
been increasing competition from other sources, such as commercial banks,
insurance companies and other major companies that have entered the investment
banking and securities brokerage industry, in many cases through acquisitions.
Certain of those competitors may have greater capital and other resources than
Smith Barney. The Federal Reserve Board has substantially removed the barrier
originally erected by the Glass-Steagall Act restricting investment banking
activities of
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commercial banks and their affiliates, by permitting certain commercial banks to
engage, through affiliates, in the underwriting of and dealing in certain types
of securities, subject to certain limitations. Proposed legislation has been
introduced in Congress from time to time that would modify certain other
provisions of the Glass-Steagall Act and other laws and regulations affecting
the financial services industry. The potential impact of such legislation on the
Company's businesses cannot be predicted at this time.
Competitors of Smith Barney's mutual funds and asset management
operations include a large number of mutual fund management and sales companies
and asset management firms. Competition in mutual fund sales and investment
management is based on investment performance, service to clients and product
design.
Regulation
Certain of the Company's subsidiaries are registered as broker-dealers
and as investment advisers with the Securities and Exchange Commission (the
"Commission") and as futures commission merchants and as commodity pool
operators with the Commodity Futures Trading Commission ("CFTC"). SBI and The
Robinson-Humphrey Company, Inc., an investment banking and financial services
subsidiary of SBI ("R-H"), are members of the New York Stock Exchange, Inc. (the
"NYSE") and other principal United States securities exchanges, as well as the
National Association of Securities Dealers, Inc. ("NASD") and the National
Futures Association ("NFA"), a not-for-profit membership corporation which has
been designated as a registered futures association by the CFTC. SBI and R-H are
registered as broker-dealers in all 50 states, the District of Columbia and
Puerto Rico, and in addition are registered as investment advisers in certain
states that require such registration. SBI is also a reporting dealer to the
Federal Reserve Bank of New York, a member of the principal United States
futures exchanges and a registered broker-dealer in Guam. Both SBI and R-H are
subject to extensive regulation, primarily for the benefit of their customers,
including minimum capital requirements, which are promulgated and enforced by,
among others, the Commission, the CFTC, the NFA, the NYSE, various
self-regulatory organizations of which SBI and R-H are members and the
securities administrators of the 50 states, the District of Columbia and Puerto
Rico and, in SBI's case, Guam. The Commission and the CFTC also require certain
registered broker-dealers (including SBI) to maintain records concerning certain
financial and securities activities of affiliated companies that may be material
to the broker-dealer, and to file certain financial and other information
regarding such affiliated companies.
Smith Barney's operations abroad, described in this paragraph, are
conducted through various subsidiaries. Its activities in the United Kingdom,
which include investment banking, trading, brokerage and asset management
services, are subject to the Financial Services Act 1986, which regulates
organizations that conduct investment businesses in the United Kingdom
(including imposing capital and liquidity requirements), and to the rules of the
Securities and Futures Authority and the Investment Management Regulatory
Organization. Smith Barney is a member of the International Petroleum Exchange,
the London Metals
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Exchange and the London International Financial Futures and Options Exchange
and, as such, is subject to the rules and regulations of those Exchanges. In
Ireland, a Smith Barney subsidiary that sponsors commodities-related pooled
investment funds is subject to the supervision of the Central Bank of Ireland.
In France, Smith Barney operates as a regulated securities house and an
authorized mutual fund manager. Smith Barney is a licensed securities company in
Japan and, as such, its activities in Japan are subject to Japanese law
applicable to securities firms. Smith Barney is also a member of the Tokyo Stock
Exchange and the Osaka Stock Exchange, and its activities in Japan are therefore
subject to the rules and regulations of those Exchanges. Smith Barney conducts
securities and commodities businesses in Singapore and Hong Kong that are
regulated by the Monetary Authority of Singapore and the Hong Kong Securities
and Futures Commission, respectively. Smith Barney also is a member of the
Singapore International Monetary Exchange and is a "B license holder" with the
Zurich Stock Exchange. Additionally, certain subsidiaries of SB Holdings are
licensed as an "international dealer," an "international adviser" and an
"investment dealer" with the Ontario Securities Commission, and as
broker-dealers with the Securities Board of The Netherlands. Smith Barney's
representative offices in Mexico City, Mexico, Paris, France, Beijing, People's
Republic of China, Manama, Bahrain and Taipei, Taiwan are also subject to the
jurisdiction of local financial services regulatory authorities. Smith Barney
also operates a private trust services business that is licensed as a bank and
trust company in the Cayman Islands, and is subject to the regulation of the
Director of Financial Services, Banks & Trust Companies Supervision Department
of the Cayman Islands.
In connection with the mutual funds business, Smith Barney must comply
with regulations of a number of regulatory agencies and organizations, including
the Commission and the NASD. The Company, through Smith Barney, is the indirect
parent of investment advisers registered and regulated under the Investment
Advisers Act of 1940, and of companies that distribute shares of mutual funds
pursuant to distribution agreements subject to regulation under the Investment
Company Act of 1940. Under those Acts, the advisory contracts between the
Company's investment adviser subsidiaries and the mutual funds they serve
("Affiliated Funds"), as well as the mutual fund distribution agreements, would
automatically terminate upon an assignment of such contracts by the investment
adviser or the fund distribution company, as the case may be. Such an assignment
would be presumed to have occurred if any party were to acquire more than 25% of
the Company's voting securities. Continuation of advisory and distribution
relationships under these circumstances could be achieved only by obtaining
consent to the assignment from the shareholders of the Affiliated Funds
involved. In addition, SBI and the Affiliated Funds are subject to certain
restrictions in their dealings with each other. For example, SBI may act as
broker to an Affiliated Fund in a transaction involving an exchange-traded
security only when that fund maintains procedures that govern, among other
things, the execution price of the transaction and the commissions paid; SBI may
not, however, conduct principal transactions with an Affiliated Fund. Further,
an Affiliated Fund may acquire securities during the existence of an
underwriting where SBI is a principal underwriter only in certain limited
situations.
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SBI and R-H are members of the Securities Investor Protection
Corporation ("SIPC"), which, in the event of liquidation of a broker-dealer,
provides protection for customers' securities accounts held by the firm of up to
$500,000 for each eligible customer, subject to a limitation of $100,000 for
claims for cash balances. In addition, Smith Barney has purchased additional
coverage of up to $150 million for eligible customers, approximately $50 million
of which is from a subsidiary of the Company.
As registered broker-dealers, SBI and R-H are subject to the
Commission's net capital rule, Rule 15c3-1 (the "Net Capital Rule"), promulgated
under the Exchange Act. SBI and R-H compute net capital under the alternative
method of the Net Capital Rule which requires the maintenance of minimum net
capital, as defined. A member of the NYSE may be required to reduce its business
if its net capital is less than 4% of aggregate debit balances (as defined) and
may also be prohibited from expanding its business or paying cash dividends if
resulting net capital would be less than 5% of aggregate debit balances.
Furthermore, the Net Capital Rule does not permit withdrawal of equity or
subordinated capital if the resulting net capital would be less than 5% of such
debit balances.
The Net Capital Rule also limits the ability of broker-dealers to
transfer large amounts of capital to parent companies and other affiliates.
Under the Net Capital Rule, equity capital cannot be withdrawn from a
broker-dealer without the prior approval of the Commission in certain
circumstances, including when net capital after the withdrawal would be less
than (i) 120% of the minimum net capital required by the Net Capital Rule, or
(ii) 25% of the broker-dealer's securities position "haircuts," i.e.,
deductions from capital of certain specified percentages of the market value of
securities to reflect the possibility of a market decline prior to disposition.
In addition, the Net Capital Rule requires broker-dealers to notify the
Commission and the appropriate self-regulatory organization two business days
before a withdrawal of excess net capital if the withdrawal would exceed the
greater of $500,000 or 30% of the broker-dealer's excess net capital, and two
business days after a withdrawal that exceeds the greater of $500,000 or 20% of
excess net capital. Finally, the Net Capital Rule authorizes the Commission to
order a freeze on the transfer of capital if a broker-dealer plans a withdrawal
of more than 30% of its excess net capital and the Commission believes that such
a withdrawal would be detrimental to the financial integrity of the firm or
would jeopardize the broker-dealer's ability to pay its customers. For
additional information on the Net Capital Rule, see Note 14 of Notes to
Consolidated Financial Statements.
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CONSUMER FINANCE SERVICES
The Company's Consumer Finance Services segment includes consumer
lending services conducted primarily under the name "Commercial Credit," as well
as credit-related insurance and credit card services. CCC's predecessor was
founded in 1912.
Consumer Finance
As of December 31, 1996, Consumer Finance Services maintained 859 loan
offices in 44 states, including servicing centers for loans sold through the PFS
sales force. The Company owns two state-chartered banks headquartered in Newark,
Delaware, which generally limit their activities to offering credit card
services nationwide.
Loans to consumers by the Consumer Finance Services unit include real
estate-secured loans, both fixed and variable rate secured and unsecured
personal loans and fixed rate loans to finance consumer goods purchases. Credit
card loans are discussed below. CCC's loan offices are generally located in
small to medium-sized communities in suburban or rural areas, and are managed by
individuals who generally have considerable consumer lending experience. The
primary market for CCC's consumer loans consists of households with an annual
income of $20,000 to $50,000. The number of active loan customers (excluding
credit card customers) was approximately 1,333,000 at December 31, 1996, as
compared to approximately 1,275,000 at December 31, 1995 and approximately
1,177,000 at December 31, 1994. In 1996, CCC created an agency that performs
appraisals, sells title insurance and provides other closing-related services
for CCC's real-estate loans.
Two CCC loan programs solicit applications for loans exclusively
through the PFS sales force. During 1996, CCC converted 27 of its loan offices
to servicing centers for the loan products sold through the PFS sales force. At
December 31, 1996, the total loans outstanding generated from this program were
$1.524 billion, or approximately 19% of CCC's total loans outstanding, as
compared to $1.258 billion, or approximately 17%, at December 31, 1995 and
$1.107 billion, or approximately 16%, at December 31, 1994. See "Life Insurance
Services -- Primerica Financial Services."
The average amount of cash advanced per real estate-secured loan made
was approximately $35,800 in 1996, $26,300 in 1995 and $28,400 in 1994. The
average amount of cash advanced per personal loan made was approximately $4,250
in 1996 and $4,200 in each of 1995 and 1994. The average real estate-secured
loan size increased in 1996 due to marketing initiatives that attracted
customers for higher balance loans, particularly in first mortgage programs. The
average annual yield for loans in 1996 was 15.24%, as compared to 15.64% in 1995
and 15.41% in 1994. The average annual yield for real estate-secured loans in
1996 was 12.13%, as compared to 12.33% in 1995 and 12.20% in 1994, and for
personal loans it was 19.95% in 1996, as compared to 20.23% in 1995 and 20.20%
in 1994. The average yield for real estate-secured loans has been affected by
the normal run-off of older, higher
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yielding loans and growth in lower yielding, higher quality loans, while the
average yield for personal loans has been affected by the industry trends
associated with rising personal bankruptcies. Consumer Finance Services' average
net interest margin for loans was 8.64% in 1996, 8.79% in 1995 and 8.76% in
1994.
CCC's delinquency and charge-off rates reached historically low levels
in 1994 and rose in 1995 and 1996, consistent with recent industry trends. This
increase in delinquencies and charge-offs reflects a continued high level of
personal bankruptcies, a national trend that shows no indication of reversing
itself. See "-- Delinquent Receivables and Loss Experience."
Analysis of Consumer Finance Receivables
For an analysis of consumer finance receivables, net of unearned
finance charges ("Consumer Finance Receivables"), see Note 9 of Notes to
Consolidated Financial Statements.
Delinquent Receivables and Loss Experience
Due to the nature of the finance business, some customer delinquency
and loss is unavoidable. The management of the consumer finance business
attempts to control customer delinquencies through careful evaluation of each
borrower's application and credit history at the time the loan is made or
acquired, and appropriate collection activity. An account is considered
delinquent for financial reporting purposes when a payment is more than 60 days
past due, based on the original or extended terms of the contract. The
delinquency and loss experience on real estate-secured loans is generally more
favorable than on personal loans.
The following table sets forth the ratio of receivables delinquent for
60 days or more on a contractual basis (i.e., more than 60 days past due) to
gross receivables outstanding:
Ratio of Receivables Delinquent 60 Days or More
to Gross Receivables Outstanding (1)
Real
Estate-
Personal Secured Credit Sales Total
As of December 31, Loans Loans Cards Finance Consumer
- ------------------ ----- ----- ----- ------- --------
1996 3.42% 1.50% 1.44% 2.27% 2.38%
1995 2.89% 1.42% 1.40% 2.17% 2.14%
1994 2.40% 1.48% 1.05% 1.79% 1.88%
- ----------
(1) The receivable balance used for these ratios is before the deduction of
unearned finance charges and excludes accrued interest receivable.
Receivables delinquent 60 days or more include, for all periods presented,
accounts in the process of foreclosure.
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The following table sets forth the ratio of net charge-offs to average
Consumer Finance Receivables. For all periods presented, the ratios shown give
effect to all deferred origination costs.
Ratio of Net Charge-Offs to Average Consumer Finance Receivables
Real
Estate-
Year Ended Personal Secured Credit Sales Total
December 31, Loans Loans Cards Finance Consumer
- ------------------ ----- ----- ----- ------- --------
1996 5.46% 0.50% 2.75% 3.34% 2.91%
1995 4.01% 0.64% 2.04% 2.46% 2.28%
1994 3.50% 0.82% 1.83% 2.03% 2.08%
The following table sets forth information regarding the ratio of
allowance for losses to Consumer Finance Receivables:
Ratio of Allowance For Losses to Consumer Finance Receivables
As of December 31,
------------------
1996 2.97%
1995 2.66%
1994 2.64%
Credit-Related Insurance
American Health and Life Insurance Company ("AHL"), a subsidiary of
CCC, underwrites or arranges for credit-related insurance, which is offered to
customers of the consumer finance business. AHL has an A+ (superior) rating from
A.M. Best Company ("A.M. Best"), whose ratings may be revised or withdrawn at
any time. At a minimum, credit life insurance covers the declining balance of
unpaid indebtedness. Credit disability insurance provides monthly benefits
during periods of covered disability. Credit property insurance covers the loss
of property given as security for loans. Other insurance products offered or
arranged for by AHL primarily include auto single interest and involuntary
unemployment insurance. Most of AHL's products are single premium, which
premiums are earned over the related contract period. See "Life Insurance
Services" for information concerning life insurance other than credit-related
insurance.
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The following table sets forth gross written insurance premiums, net
of refunds, for consumer finance customers:
Consumer Finance Insurance Premiums Written
(in millions)
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Premiums written by AHL and its affiliates
Writings for consumer finance:
Credit life $ 42.7 $ 41.8 $ 43.3
Credit disability and other 63.1 61.4 66.7
Credit property and other 18.0 4.1 3.0
------ ------ ------
Total $123.8 $107.3 $113.0
====== ====== ======
Premiums written by other insurance companies
Credit property and other $ 42.9 $ 51.6 $ 52.8
====== ====== ======
Net premiums written began to increase in late 1996 compared to 1995
primarily due to growth in loan receivables. Net premiums written were
relatively flat in early 1996 and 1995 compared to 1994 primarily due to slower
growth in loan receivables.
Credit Card Services
The Travelers Bank, a subsidiary of CCC, is a state-chartered bank
located in Newark, Delaware, which provides credit card services, including
upper market gold credit card services, to individuals and to affinity groups
(such as nationwide professional associations and fraternal organizations). The
Travelers Bank USA, another state-chartered bank subsidiary of CCC, is not
subject to certain regulatory restrictions relating to cross-marketing
activities to which The Travelers Bank is subject. See "-- Regulation." These
banks generally limit their activities to credit card operations.
The following table sets forth aggregate information regarding credit
cards issued by The Travelers Bank and The Travelers Bank USA.
Credit Cardholders and Total Outstandings
(outstandings in millions)
As of, or for the year ended, December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
Approximate total credit cardholders 791,000 753,000 621,000
Approximate gold credit cardholders 642,000 615,000 519,000
Total outstandings $907.1 $761.8 $712.5
Average annual yield 11.82% 12.51% 11.88%
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The primary market for the banks' credit cards consists of households
with annual incomes of $40,000 and above.
The banks offer deposit-taking services (which as to The Travelers
Bank USA are limited to deposits of at least $100,000 per account). At December
31, 1996, deposits of unaffiliated entities were $81.9 million, as compared to
$97.9 million at December 31, 1995 and $73.3 million at December 31, 1994. The
decrease in the average annual yield in 1996 primarily resulted from the
offering of promotional rates in 1996 to encourage the transfer of credit card
balances to the Company's banks.
Competition
The consumer finance business competes with banks, savings and loan
associations, credit unions, credit card issuers and other consumer finance
companies. Additionally, substantial national financial services networks have
been formed by major brokerage firms, insurance companies, retailers and bank
holding companies. Some competitors have substantial local market positions;
others are part of large, diversified organizations. Deregulation of banking
institutions has greatly expanded the consumer lending products permitted to be
offered by these institutions, and because of their long-standing insured
deposit base, many of them are able to offer financial services on very
competitive terms. The Company believes that it is able to compete effectively
with such institutions. In particular, the Company believes that the diversity
and features of the products it offers, personal service, and cultivation of
repeat and referral business support and strengthen its competitive position in
its Consumer Finance Services businesses.
Regulation
Most consumer finance activities are subject to extensive federal and
state regulation, including examination and review by state authorities of
consumer finance offices. Personal loan, real estate-secured loan and sales
finance laws generally require licensing of the lender, limitations on the
amount, duration and charges for various categories of loans, adequate
disclosure of certain contract terms and limitations on certain collection
practices and creditor remedies. Federal consumer credit statutes primarily
require disclosure of credit terms in consumer finance transactions. CCC's
banks, which must undergo periodic examination, are subject to additional
regulations relating to capitalization, leverage, reporting, dividends and
permitted asset and liability products. These banks are also covered by the
Competitive Equality Banking Act of 1987 (the "Banking Act"), which, with
respect to The Travelers Bank, restricts cross-marketing of products by or of
certain affiliates. CCC's banks are also subject to the Community Reinvestment
Act, which assesses the bank's record in helping to meet the credit needs of low
and moderate income persons in such bank's delineated community, and the Fair
Credit Reporting Act, which is aimed at ensuring the accuracy and
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<PAGE>
fairness of the mechanism by which consumer credit and other information on
consumers is assembled and evaluated. The Company believes that it complies in
all material respects with applicable regulations. See "Insurance Services -
General -- Regulation" at the end of the description of the Life Insurance
Services segment for a discussion of the regulatory factors governing the
insurance businesses of CCC.
The Real Estate Settlement Procedures Act of 1974 ("RESPA") covers
real estate loans secured by residential real estate. Generally, RESPA requires
disclosure of certain information to customers and regulates the receipt or
payment of fees or charges for services performed.
Proposed legislation has been introduced in Congress that would modify
certain laws and regulations affecting the financial services industry. The
potential impact of such legislation on the Company's businesses cannot be
predicted at this time.
PROPERTY & CASUALTY INSURANCE SERVICES
This segment includes the operations of TAP and its subsidiary and
affiliated property-casualty insurance companies, all of which are collectively
referred to herein as "TAP." TAP provides a wide range of commercial and
personal property and casualty insurance products and services to businesses,
government units, associations and individuals. As described above, on April 2,
1996, TAP acquired Aetna P&C. The Company's results of operations for periods
prior to April 2, 1996 do not include the results of Aetna P&C. See Notes 2 and
4 of Notes to Consolidated Financial Statements. For informational purposes, the
premium and certain other operational information provided below includes Aetna
P&C's businesses prior to the Acquisition.
Commercial Lines
TAP is the third largest writer of commercial lines insurance in the
United States based on 1995 direct written premiums published by A.M. Best,
after giving effect to the Acquisition and recent industry consolidation. TAP's
Commercial Lines offers a broad array of property and casualty insurance and
insurance-related services. Commercial Lines is organized into four marketing
and underwriting groups that are designed to focus on a particular client base
or industry segment to provide products and services that specifically address
customers' needs: National Accounts, primarily serving large national
corporations; Commercial Accounts, serving mid-size businesses; Select Accounts,
serving small businesses and individuals with commercial exposures; and
Specialty Accounts, providing a variety of specialty coverages. TAP also has a
dedicated group within Commercial Lines that serves the construction industry.
TAP distributes its commercial products through approximately 4,600 brokers and
independent agencies located throughout the United States.
The commercial coverages marketed by TAP include workers'
compensation, general liability (including product liability), commercial
multi-peril, commercial automobile, property
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<PAGE>
(including fire and allied lines) and several other miscellaneous coverages. TAP
also underwrites specialty coverages through three separate units, Travelers
Specialty, Gulf Specialty and Bond Specialty, which have historically focused on
unique risks that typically require specialized underwriting. Coverages offered
by Travelers Specialty include general liability for selected product liability
risks, medical malpractice and umbrella and excess liability. Coverages offered
by Gulf Specialty include directors' and officers' liability and errors and
omissions insurance for various professions, umbrella insurance, insurance for
municipalities, hard to place coverages sold on an excess and surplus lines
basis and fidelity and surety coverage. Coverages offered by Bond Specialty
include fidelity and surety, fiduciary liability insurance, directors' and
officers' and other professional liability insurance and other related coverages
such as kidnap and ransom and mail insurance. In addition, TAP offers various
risk management services, generally including claims settlement, loss control
and engineering services, to businesses that choose to self-insure certain
exposures, to state funds and insurance carriers that participate in state
involuntary workers' compensation pools and to employers seeking to manage
workers' compensation medical and disability costs. In 1996, Commercial Lines
generated combined net written premiums of $4.7 billion and combined premium
equivalents of $2.7 billion. As used herein, unless the context otherwise
requires, "combined" refers to the operations of both Travelers P&C and Aetna
P&C, without regard to the date of the Acquisition.
Selected Product and Market Information
The following table sets forth by product line and market net written
premiums and premium equivalents for Commercial Lines for the periods indicated.
For a description of the product lines and markets referred to in the table
below, see "-- Product Lines" and "-- Principal Markets and Methods of
Distribution," respectively.
Over the past several years, National Accounts customers have moved
increasingly from traditional insurance coverages to service-type products,
primarily for workers' compensation coverage and to a lesser extent in general
liability and commercial automobile coverages. These types of products include
risk management services such as claims settlement, loss control and
engineering. The volume of business handled by TAP in servicing relationships is
measured by "premium equivalents." Premium equivalents do not represent actual
premium revenues. Premium equivalents are determined in the pricing process and
represent TAP's estimates of premiums that its customers would have been charged
under a fully insured arrangement, based on expected losses associated with
non-risk-bearing components of each account.
Because the Acquisition occurred on April 2, 1996, the Company's
results of operations for periods prior to April 2, 1996 do not include the
results of Aetna P&C. Accordingly, premium and other operational information
provided for TAP's combined businesses prior to such time is for informational
purposes only.
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<PAGE>
Combined Net Written Premiums and Premium Equivalents
<TABLE>
<CAPTION>
Percentage of Total Net
Written Premiums and
Year Ended December 31, Premium Equivalents
-------------------------------- Year Ended December 31,
1996 1995 1994 1996
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Net written premiums by
product line:
Workers' compensation $1,223 $1,312 $1,675 16.5%
General liability 836 815 941 11.3
Commercial multi-peril 1,223 1,188 1,119 16.5
Commercial automobile 806 888 932 10.9
Property 342 457 441 4.6
Fidelity and surety 215 233 209 2.9
Other 45 251 164 0.7
------ ------ ------ ----
Net written premiums (1) $4,690 $5,144 $5,481 63.4%
Premiums equivalents (2) 2,712 3,458 2,990 36.6
------ ------ ------ ----
Total Commercial Lines $7,402 $8,602 $8,471 100.0%
====== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Percentage of Total Net
Written Premiums and
Year Ended December 31, Premium Equivalents
-------------------------------- Year Ended December 31,
1996 1995 1994 1996
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Net written premiums and premium
equivalents by market:
National Accounts $3,499 $4,550 $4,463 47.3%
Commercial Accounts 1,812 1,962 2,159 24.5
Select Accounts 1,412 1,466 1,293 19.1
Specialty Accounts 679 624 556 9.1
------ ------ ------ -----
Total Commercial Lines (2) $7,402 $8,602 $8,471 100.0%
====== ====== ====== =====
</TABLE>
- ----------
(1) The decreases in net written premiums during the periods shown reflect the
highly competitive marketplace and TAP's selective underwriting practices.
(2) Premium equivalents for the year ended December 31, 1994 are provided for
Travelers P&C only. Historically, Aetna P&C did not track premium
equivalents and such amounts are not available for that period. The
decreases in premium equivalents during the periods shown reflect a
depopulation of involuntary pools as the loss experience of workers'
compensation improves and insureds move to voluntary markets, TAP's
selective renewal activity to address the competitive pricing environment
and its continued success in lowering workers' compensation losses of
customers.
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<PAGE>
Product Lines
TAP writes a broad range of commercial property and casualty insurance
for risks of all sizes. The core products in TAP's Commercial Lines are as
follows:
Workers' Compensation provides coverage for employers' liability for
injuries to employees under common law as well as the obligation of an employer
under state or federal law to provide its employees with specified benefits for
work-related injuries, deaths and diseases, regardless of fault. In addition to
the liability exposure that may arise under common law, there are typically four
types of benefits payable under workers' compensation policies: medical
benefits, disability benefits, death benefits and vocational rehabilitation
benefits. Workers' compensation policies are often written in conjunction with
other commercial policies. TAP offers two types of workers' compensation
products: (i) insurance products, including guaranteed cost policies, in which
policy premiums charged are fixed and do not vary as a result of the insured's
loss experience, and loss sensitive plans, including retrospectively rated
policies, in which premiums are adjusted based on actual loss experience of the
insured during the policy period, and large deductible plans, in which the
customer bears the insurance risk up to its deductible amount, and (ii) service
programs, which are generally sold to TAP's larger National Accounts, where TAP
receives fees for providing loss prevention, risk management, claims
administration and benefit administration services to organizations pursuant to
service agreements. TAP also participates in state assigned risk pools servicing
workers' compensation policies as a servicing carrier and pool participant. TAP
emphasizes managed care cost containment strategies (which involve employers,
employees and care providers in a cooperative effort that focuses on the injured
employee's early return to work), cost-effective quality care, and customer
service in this market. Workers' compensation comprehensive claim and managed
care cost containment services are integrated through TAP's claims management
system to maximize cost savings on both service delivery and loss payout. For
the year ended December 31, 1996, TAP's workers' compensation line generated
$1.2 billion of combined net written premiums and $2.2 billion of combined
premium equivalents.
General Liability provides coverage for liability exposures including
bodily injury and property damage arising from products sold and general
business operations. General liability also includes coverage for directors' and
officers' liability arising in their official capacities, fiduciary liability
for trustees and sponsors of pension, health and welfare and other employee
benefit plans, errors and omissions insurance for employees, agents,
professionals and others arising from acts or failures to act under specified
circumstances, as well as medical malpractice, umbrella and excess insurance.
For the year ended December 31, 1996, TAP's general liability line generated
$836 million of combined net written premiums and $299 million of combined
premium equivalents.
Commercial Multi-Peril provides a combination of property and
liability coverage for businesses and business property for damages such as that
caused by fire, wind, hail, water, theft and vandalism, and protects businesses
from financial loss due to business interruption.
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<PAGE>
It also insures businesses against third-party liability from accidents
occurring on their premises or arising out of their operations, such as injuries
sustained from products sold. For the year ended December 31, 1996, TAP's
commercial multi-peril line generated $1.2 billion of combined net written
premiums.
Commercial Automobile provides coverage for businesses against losses
incurred from personal bodily injury, bodily injury to third parties, property
damage to an insured's vehicle, and property damage to other vehicles and other
property resulting from the ownership, maintenance or use of automobiles and
trucks in a business. For the year ended December 31, 1996, TAP's commercial
automobile line generated $806 million of combined net written premiums and $240
million of combined premium equivalents.
Property provides coverage for loss or damage to buildings, inventory
and equipment from natural disasters, including hurricanes, windstorms,
earthquakes, hail, explosions, severe winter weather and other events such as
theft and vandalism, fires and storms and financial loss due to business
interruption. Property also includes inland marine, which provides coverage for
goods in transit and unique, one-of-a-kind exposures. For the year ended
December 31, 1996, TAP's property line generated $342 million of combined net
written premiums.
Fidelity and Surety provides fidelity insurance coverage which
protects an insured for loss due to embezzlement or misappropriation of funds by
an employee. Surety is a three-party agreement whereby the insurer agrees to pay
a second party or make complete an obligation in response to the default, acts
or omissions of a third party. Surety is generally provided for construction
performance, legal matters such as appeals, trustees in bankruptcy and probate
and other performance bonds. For the year ended December 31, 1996, TAP's
fidelity and surety line generated $215 million of combined net written
premiums.
Other coverages include boiler and machinery insurance, which provides
coverage for loss or damage resulting from the malfunction of boilers and
machinery, as well as miscellaneous assumed reinsurance. For the year ended
December 31, 1996, these other coverages generated $45 million of combined net
written premiums.
Principal Markets and Methods of Distribution
Commercial Lines is organized into four marketing groups that are
designed to focus on a particular client base or industry segment to provide
products and services that specifically address customers' needs: National
Accounts, primarily serving large national corporations; Commercial Accounts,
serving mid-size businesses; Select Accounts, serving small businesses; and
Specialty Accounts, providing a variety of specialty coverages. TAP also has a
dedicated group within Commercial Lines that serves the construction industry.
TAP distributes its commercial products primarily through
approximately 4,600 brokers and independent agencies located throughout the
United States that are serviced by 99
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<PAGE>
field offices. TAP seeks to establish relationships with well-established,
independent insurance agencies and brokers. In selecting new independent
agencies and brokers to distribute TAP's products, TAP considers each agency's
or broker's profitability, financial stability, staff experience and strategic
fit with TAP's operating and marketing plans. Once an agency or broker is
appointed, TAP carefully monitors its performance.
National Accounts
National Accounts serves large companies, as well as employee groups,
associations and franchises. National Accounts also includes TAP's alternative
market business (the "Alternative Market"), which primarily covers workers'
compensation products and services to voluntary and involuntary state pools.
National Accounts customers typically generate annual direct written premiums
and premium equivalents of over $1 million per account and generally select
products under retrospectively rated plans, large self-insured retentions or
some other loss-responsive arrangement. National Accounts programs involve both
traditional insurance (risk transfer) and risk service (claims settlement, loss
control and risk management). Customers are usually national in scope and range
in size from businesses with sales of approximately $10 million per year to
Fortune 2000 corporations. Products are marketed through national brokers and
regional agents with offices throughout the United States. Based on combined net
written premiums of $874 million and combined premium equivalents of $2.6
billion, National Accounts constituted approximately 47% of the Commercial Lines
business in 1996.
National Accounts customers often demand risk service programs where
the ultimate cost is based on their own loss experience. Programs offered by TAP
include claims settlement, loss control and risk management services and are
generally offered in connection with a retrospectively rated insurance policy, a
large deductible plan or a self-insured program. Workers' compensation accounted
for approximately 76% of the products sold in 1996 to National Accounts
customers, based on combined net written premiums and premium equivalents.
The Alternative Market business of National Accounts sells claims and
policy management services to workers' compensation and automobile assigned risk
plans, self-insurance pools throughout the United States and to niche voluntary
markets. Since 1993, most state assigned workers' compensation risk plan
contracts have been awarded through a formal state-by-state bid process.
Contracts, which are generally for three-year terms, are awarded by state
agencies based on quality of service and price. TAP has emerged as the largest
workers' compensation assigned risk plan servicing insurer in the industry with
approximately 28% share of the market in 1996. Assigned risk plan contracts
generated approximately $456 million in combined premium equivalents in 1996 for
TAP.
TAP also services self-insurance groups, sells excess workers'
compensation coverage to these groups and markets various workers' compensation
specialty programs. Self-insurance groups and these specialty programs generated
combined net written premiums
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<PAGE>
and premium equivalents of $89 million in 1996. National Accounts also
participates in various involuntary assigned risk pools, which provide insurance
coverage to individuals or other entities that otherwise are unable to purchase
such coverage in the voluntary market. Participation in these pools in most
states is generally in proportion to voluntary writings of related lines of
business in that state.
Commercial Accounts
Commercial Accounts sells a broad range of property and casualty
insurance products through a large network of independent agents and brokers.
Commercial Accounts targets businesses with 75 to 1,000 employees that generate
between $50,000 and $1 million in annual direct written premiums and premium
equivalents. TAP offers a full line of products to its Commercial Accounts
customers, with an emphasis on guaranteed cost products. TAP also offers
retrospectively rated or large deductible programs to these customers. Based on
combined net written premiums of $1.7 billion and combined premium equivalents
of $87 million, Commercial Accounts constituted approximately 25% of the
Commercial Lines business in 1996.
Commercial Accounts targets certain industries in which TAP has
claims, engineering and underwriting expertise and to which TAP has established
dedicated operations. Industry segments include from the manufacturing sector:
advanced technology, metal products, mineral products, plastic and rubber
products manufacturing and wood products. Also targeted are colleges and
universities, transportation, retail, financial, property management and the
wholesale industry. TAP continues to develop new industry-targeted programs both
on a national and local level. Specific industry knowledge enables TAP to
select, as customers, better managed companies in an industry segment, to tailor
specialized coverages for those companies, and to link price to the individual
exposure and to control risk. Instead of relying on rating bureaus to establish
rates for products, TAP generally uses its proprietary data, which it has
compiled from many years of data generated by its extensive underwriting and
pricing experience. Accordingly, subject to applicable state insurance
regulations, prices are derived from those proprietary rates and numerous
variables that apply to specific risks. TAP believes that relying on extensive
proprietary data to assess individual risk characteristics, rather than relying
on data from industry rating bureaus, provides it with a competitive advantage
in pricing and underwriting commercial risks. TAP uses components of this
approach specifically in connection with loss control and claims management
processing. Through a network of field offices, TAP's marketing and underwriting
specialists, who have point of sale authority, work closely with local brokers
and agents to tailor insurance coverage to individual customer needs.
Construction. TAP has established dedicated operations that
exclusively target the construction industry, providing insurance and risk
management services for virtually all areas of construction, including general
contractors, heavy construction (including street and road) and special trade
contractors, except artisan or smaller trade contractors. TAP offers all product
lines to midsize and national customers in the construction market, including
both
22
<PAGE>
guaranteed cost and loss-responsive products, with general liability, workers'
compensation, commercial auto, commercial property and inland marine coverages.
The dedicated construction operations provide specialized service and
underwriting, with local market expertise and national capability, that enable
TAP to tailor specialized coverages, have competitive pricing and control risk.
This includes local underwriters who understand their state's laws and claim
climates, engineering and loss control specialists, professional claim
management and legal personnel with extensive construction experience.
Construction's products are distributed through independent agents and brokers
throughout the United States.
Select Accounts
Select Accounts serves individuals who have commercial exposures and
firms typically with one to 75 employees, typically generating up to $50,000 in
annual direct written premiums per account. Products offered to Select Accounts
are generally guaranteed cost policies, often a packaged product covering
property and liability exposures. Products are sold through independent agents,
who are often the same agents that sell TAP's Commercial Accounts and Personal
Lines products. Based on combined net written premiums of $1.4 billion, Select
Accounts constituted approximately 19% of the Commercial Lines business in 1996.
Personnel in TAP's field offices and other points of local service,
which are located throughout the United States, work closely with agents to
ensure a strong local presence in the marketplace. TAP utilizes a marketing and
underwriting approach based on agency automation and defined underwriting
criteria. Agency automation allows agents access to TAP's price quotation and
policy issuance systems and enables agents to provide faster and more
cost-effective service to customers with supervision and underwriting control.
Agents that do not utilize the automated quotation and policy issuance systems
work with TAP's sales and marketing representatives who have point of sale
authority. Agents serving Select Accounts are given greater control and
discretion over underwriting decisions, within predefined parameters, than
brokers selling to larger accounts. Because underwriting criteria and pricing
tend to be more standardized for smaller businesses, Select Accounts uses a
standard industry classification (S.I.C.) based process to allow agents and
field marketing representatives to make underwriting and pricing decisions
within predetermined classifications. Business in other classes is subject to
consultative review by in-house underwriters. TAP believes that its breadth of
products, highly qualified field staff and its technology offer distinct
competitive advantages.
Specialty Accounts
Specialty Accounts markets products to national, midsize and small
customers, as well as individuals, and distributes them through both wholesale
brokers and retail agents and brokers throughout the United States. TAP's fast
response time on underwriting decisions, industry expertise and quality service
are important to maintaining relationships with Specialty Accounts insureds and
producers. TAP believes that it has a competitive advantage with
23
<PAGE>
respect to many of these products based on its reputation for clear, timely
decision-making, underwriting and industry expertise and strong producer and
customer relationships as well as its ability to cross-sell with National
Accounts, Commercial Accounts and Select Accounts. Based on combined net written
premiums of $679 million, Specialty Accounts constituted approximately 9% of the
Commercial Lines business in 1996.
TAP has three separate marketing and underwriting groups within
Specialty Accounts:
Travelers Specialty provides a broad range of products targeting risks
that do not fall within the underwriting guidelines of the other Commercial
Lines segments and that require highly specialized underwriting. The core
products include general liability for select product liability risks, umbrella
and excess liability, medical malpractice, various types of professional
liability, errors and omissions liability, primary and excess property, and
various coverages that target the transportation industry.
Gulf Specialty focuses on many non-traditional lines of business with
a particular emphasis on the financial services market. Products include
directors' and officers' liability insurance, errors and omissions coverage for
bankers, investment counselors and mutual fund advisors, and fidelity and surety
coverage for related classes. In addition, Gulf Specialty offers errors and
omissions coverage for professionals and non-professionals such as lawyers,
architects and engineers, insurance agents, podiatrists and chiropractors. Gulf
Specialty also writes umbrella coverage for various industries, provides
insurance products to the entertainment industry and to municipalities and
provides insurance products for other industry specific programs. In addition,
Gulf Specialty has developed a book of excess and surplus lines business through
its non-admitted company.
Bond Specialty's range of products includes fidelity and surety bonds,
directors' and officers' and other professional liability insurance, fiduciary
liability insurance and other related coverages. The customer base ranges from
large financial services companies and commercial entities to small businesses
and individuals. Products and services are distributed primarily through agents
and brokers. Bond is organized around four broad customer segments: Financial
Services, Construction, National Risk (customers with more than $500 million in
revenues) and Commercial Risk (companies with less than $500 million in revenues
and individuals). Bond's agency agreement with Executive Risk Management
Associates ("ERMA"), a partnership owned by Executive Risk, Inc., was
restructured effective January 1, 1997. The restructured agreement replaces the
prior exclusive underwriter status of ERMA for directors' and officers'
liability insurance written by Aetna Casualty with a non-exclusive agreement.
24
<PAGE>
Pricing and Underwriting
Pricing levels for property and casualty insurance products by
Commercial Lines are generally developed based upon the frequency and severity
of estimated losses, the expenses of producing business and administering
claims, and a reasonable allowance for profit. TAP's strategy emphasizes a
profit-oriented approach rather than a premium volume or market share-oriented
approach to underwriting. TAP's National Accounts business, which sells
primarily risk management services and loss sensitive products, continues to be
very competitive on price. Commercial Accounts and Select Accounts primarily
sell guaranteed cost products.
A significant portion of Commercial Lines business is written with
retrospectively rated insurance policies as well as large deductible policies in
which the ultimate cost of insurance for a given policy year is dependent on the
loss experience of the insured. Retrospectively rated policies are primarily
used in workers' compensation coverage. Although the payment terms and long-term
nature of the loss development reduces insurance risk, it introduces some
additional credit risk. Receivables from holders of retrospectively rated and
large deductible policies totaled approximately $755 million at December 31,
1996. Collateral, primarily letters of credit and, to a lesser extent, cash
collateral, is generally requested for contracts that provide for deferred
collection of ultimate premiums. The amount of collateral requested is
predicated upon the creditworthiness of the customer and the nature of the
insured risks. Commercial Lines continually monitors the credit exposure on
individual accounts and the adequacy of collateral.
Under certain workers' compensation insurance contracts with
deductible features, TAP is obligated to pay the claimant the full amount of the
claim. TAP is subsequently reimbursed by the contractholder for the deductible
amount, and is subject to credit risk until such reimbursement is made. At
December 31, 1996, contractholder receivables and payables were approximately
$1.8 billion.
TAP has developed an underwriting methodology that incorporates
underwriting, claims, engineering, actuarial and product development disciplines
for particular industries. This approach is designed to maintain high quality
underwriting and pricing discipline. This approach utilizes proprietary data
gathered and analyzed by TAP with respect to its Commercial Lines business over
many years. The underwriters and engineers use this information to assess and
evaluate risks prior to quotation. This information provides specialized
knowledge about industry segments and catastrophe management and helps analyze
risk based on account characteristics and pricing parameters designed to ensure
that TAP does not compromise its underwriting integrity. This process is linked
with strong underwriting interaction and review at TAP's and agents' locations.
TAP is also a member of and participates in the underwriting
operations of insurance and reinsurance pools and associations, several of which
make independent underwriting decisions on behalf of their members. These pools
insure specialized risks such as exposures related to the aviation and nuclear
power industries.
25
<PAGE>
TAP continually reviews its exposure to catastrophic losses and
attempts to mitigate such exposure. See "Insurance Services - General --
Reinsurance." TAP uses sophisticated computer modeling techniques to assess
underwriting risks and renewal of business in catastrophe-prone areas.
Geographic Distribution
The following table shows the distribution of Commercial Lines' direct
written premiums for the states that accounted for the majority of combined
premium volume for the year ended December 31, 1996:
State % of Total
----- ----------
New York 13.5%
California 8.8
Texas 5.9
Massachusetts 5.9
Pennsylvania 4.5
Florida 4.5
New Jersey 4.1
Illinois 4.0
Connecticut 3.7
North Carolina 3.1
All Others (1) 42.0
------
Total 100.0%
======
- ----------
(1) No other single state accounted for 3.0% or more of the total combined
direct written premiums written in 1996 by TAP.
Personal Lines
TAP is the largest writer of personal lines insurance through
independent agents and the seventh largest writer of personal lines insurance
overall in the United States based on 1995 direct written premiums published by
A.M. Best, after giving effect to the Acquisition and recent industry
consolidation. In 1996, Personal Lines generated combined net written premiums
of approximately $2.7 billion. Personal Lines primarily offers personal
automobile and homeowners insurance.
Personal Lines distributes products primarily through approximately
5,000 independent agents located throughout the United States. TAP is also
pursuing a number of initiatives to broaden its distribution of Personal Lines
products, including targeted marketing to affinity groups, employee groups and
other sponsoring organizations and establishing co-
26
<PAGE>
marketing arrangements with other insurers. In 1994, TAP began a pilot program
to market personal automobile and homeowners insurance through the independent
agents of Primerica Financial Services ("PFS"), a unit of Travelers Group. The
product is sold under the name Secure-SM-, and the program has expanded to reach
37 states. Over 6,300 PFS agents were licensed to sell Secure-SM- products by
the end of 1996, and approximately 5,000 new automobile and homeowners policies
are now being sold through this program each month.
Selected Product Information
The following table sets forth by product line net written premiums
for Personal Lines for the periods indicated. For a description of the product
lines referred to in the table below, see "-- Product Lines."
Because the Acquisition occurred on April 2, 1996, the Company's
results of operations for periods prior to April 2, 1996 do not include the
results of Aetna P&C. Accordingly, premium and other operational information
provided for TAP's combined businesses prior to such time is for informational
purposes only.
Combined Net Written Premiums
<TABLE>
<CAPTION>
Percentage of Total
Net Written Premiums
Year Ended December 31, Year Ended
-------------------------------- December 31,
1996 1995 1994 1996
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Net written premiums by
product line:
Personal automobile $1,851 $1,822 $1,969 69.2%
Homeowners and other 824 721 773 30.8
------ ------ ------ -----
Total Personal Lines $2,675 $2,543 $2,742 100.0%
====== ====== ====== =====
</TABLE>
Product Lines
TAP writes virtually all types of property and casualty insurance
covering personal risks. Personal Lines had approximately 4.2 million policies
in force at December 31, 1996. The primary coverages in Personal Lines are
personal automobile and homeowners insurance sold to individuals.
Personal Automobile provides coverage for liability to others for both
bodily injury and property damage and for physical damage to an insured's own
vehicle from collision and various other perils. In addition, many states
require policies to provide first-party personal injury protection, frequently
referred to as no-fault coverage. For the year ended December 31, 1996, TAP's
personal automobile policies generated $1.9 billion of combined net written
premiums.
27
<PAGE>
Homeowners and Other provides protection against losses to dwellings
and contents from a wide variety of perils, as well as coverage for liability
arising from ownership or occupancy. TAP writes homeowners insurance for
dwellings, condominiums, mobile homes and rental property contents. Other
products include coverage for boats, personal articles such as jewelry, and
umbrella liability protection. For the year ended December 31, 1996, TAP's
homeowners and other policies generated $824 million of combined net written
premiums.
Principal Markets and Methods of Distribution
Personal Lines products are distributed primarily through
approximately 5,000 independent agents located throughout the United States,
supported by a network of 23 field marketing offices and five customer service
centers. The principal markets for Personal Lines insurance are in states along
the East Coast, in the South, and in the Midwest. In the states of Florida, New
Jersey and Massachusetts, TAP operates stand-alone domestic companies to enhance
its competitive capability in these highly regulated markets. Separate business
units within Personal Lines market to affinity groups and through the sales
force of PFS.
Insurance companies generally market personal automobile and
homeowners insurance through one of two distribution systems: independent agents
or direct writing. The independent agents that distribute TAP's Personal Lines
products usually represent several unrelated property and casualty companies. In
contrast, direct writing companies operate either by mail or through exclusive
agents or sales representatives. Due in part to the expense advantage that
direct writers may have relative to companies using independent agents, the
direct writing companies have gradually expanded their market share in recent
years.
Personal Lines continues to focus on the independent agency
distribution system, recognizing the service and underwriting advantages the
agent can deliver. In addition to its agency distribution system, TAP is
pursuing a number of initiatives to broaden its distribution of Personal Lines
products, including targeted marketing to affinity groups, employee groups and
other sponsoring organizations and establishing co-marketing arrangements with
other insurers. In 1994, TAP began writing personal automobile and homeowners
insurance through the independent agents of PFS in order to broaden the
distribution of its Personal Lines products. This program is now available in 37
states.
In 1995, Aetna P&C entered into a marketing agreement with GEICO to
write the majority of GEICO's homeowners business, and to receive referrals from
GEICO for new homeowners business. This agreement added historically profitable
business and helped geographically diversify the homeowners line of business.
New business referrals began in July 1995 and, on January 1, 1996, Personal
Lines began writing renewal policies. This marketing agreement provides for
limits on Personal Lines' obligation to write new and renewal business in
certain catastrophe-prone areas.
TAP believes that its focus on service, including prompt and efficient
claims handling, a high level of automation and development of long-term
relationships with
28
<PAGE>
individual agents gives it a competitive advantage in the Personal Lines market.
In addition, TAP is leveraging its service, claims handling and automation
experience in the expansion of its distribution channels through its PFS and
affinity marketing initiatives.
Pricing and Underwriting
Pricing for personal automobile insurance is driven by changes in the
relative frequency of claims and by inflation in the cost of automobile repairs,
medical care and litigation of liability claims. As a result, the profitability
of the business is largely dependent on promptly identifying and rectifying
disparities between premium levels and expected claim costs, and obtaining
approval of the state regulatory authorities for indicated rate increases.
Premiums charged for physical damage coverage reflect insured car values and,
accordingly, premium levels are somewhat related to the volume of new car sales.
Pricing in the homeowners business is also driven by changes in the
frequency of claims and by inflation in building supplies, labor costs and
household possessions. Most homeowners policies offer (but do not require)
automatic increases in coverage to reflect growth in replacement costs and
property values. In addition to the normal risks associated with any multiple
peril coverage, the profitability and pricing of homeowners insurance is
affected by the incidence of natural disasters, particularly hurricanes, winter
storms, earthquakes and tornadoes. The high level of catastrophe losses in
recent years has resulted in a reduced availability of homeowners insurance and
has led to higher prices for homeowners policies in some markets. In order to
reduce its exposure to catastrophe losses, TAP has limited the writing of new
homeowners business and selectively non-renewed existing homeowners business in
certain markets, tightened underwriting standards and implemented price
increases in certain hurricane-prone areas, subject to restrictions imposed by
insurance regulatory authorities. In California, TAP has introduced an
endorsement that reduces its exposure to catastrophic earthquake claims by
increasing the deductible and limiting other policy coverages in the event of an
earthquake loss. TAP uses computer modeling techniques to assess its level of
exposure to loss in catastrophe-prone areas. Changes to methods of marketing and
underwriting in coastal areas of Florida and New York and in California are
subject to state-imposed restrictions, the general effect of which is to make it
more difficult for an insurer to reduce exposures.
Insurers writing property-casualty policies are generally unable to
increase rates until some time after the costs associated with coverage have
increased, primarily as a result of state insurance rate regulation laws. The
pace at which an insurer can change rates in response to competition or to
increased costs depends, in part, on whether the applicable rate regulation law
requires prior approval of a rate increase or notification to the regulator
either before or after a rate increase is imposed. In states having prior
approval laws, a rate must be approved by the regulator before it may be used by
the insurer. In states having "file-and-use" laws, the insurer must file the
rate with the regulator, but does not need to wait for approval before using it.
A "use-and-file" law requires an insurer to file rates within a certain period
of time
29
<PAGE>
after the insurer begins using the new rate. Approximately one-half of
the states, including New York and Pennsylvania, require prior approval of rate
increases.
Underwriting of Personal Lines products is conducted primarily by
independent agents. Agents underwrite Personal Lines policies under strict
underwriting guidelines established and monitored by TAP. Each agent is assigned
to a specific employee of TAP or team of employees responsible for working with
the agent on business plan development, marketing, and overall growth and
profitability. TAP uses agency level management information to analyze and
understand results and to identify problems and opportunities.
Geographic Distribution
The following table shows the distribution of Personal Lines' direct
written premiums for the states that accounted for the majority of combined
premium volume for the year ended December 31, 1996:
State % of Total
----- ----------
New York 23.2%
Pennsylvania 9.0
New Jersey 8.6
Florida 8.5
Texas 8.3
Massachusetts 6.9
Connecticut 6.1
Virginia 3.8
All others (1) 25.6
------
Total 100.0%
======
- ----------
(1) No other single state accounted for 3.0% or more of the total combined
direct written premiums written in 1996 by TAP.
Claims Administration
TAP employs approximately 8,900 claims employees located throughout
the United States. These employees include telephone and road adjusters,
appraisers, litigation specialists, staff attorneys, regional and home office
management and support staff. TAP handles over 90% of its claims internally and
employs external adjusters primarily where geographic location makes it
impractical to use TAP's own adjusters. TAP has an investigative unit that
handles claims that TAP suspects may be fraudulent. TAP also employs a staff of
lawyers who are responsible for the management of TAP's claims litigation. TAP's
30
<PAGE>
claims handlers include professionals with the technical expertise necessary to
deal with more complex coverage, liability and damage issues.
In its handling of claims, TAP strives to balance customer
expectations of service with its business objectives of effectively managing
loss exposure and controlling claims expense. In an effort to resolve claims
efficiently, TAP matches claims settlement authority to the ability of its
claims personnel and matches its in-house expertise with the issues involved in
the claim. TAP's workers' compensation claim adjudication process is being
re-engineered to encompass a higher level of nursing/medical intervention, a
more effective use of preferred provider networks to better manage medical and
lost-time claims, and a renewed emphasis on prompt and thorough investigations.
TAP's new Personal Lines claims workstation implemented in 1995 and
workers' compensation claim workstation implemented in 1994 have improved the
speed and quality of both Personal Lines and Commercial Lines claims service,
and have helped loss payout performance. Use of technology such as VRUs (voice
response units) has lowered the cost of settling claims and shortened the time
to claim payment. The claim department also provides automated feedback from
claim handlers to underwriters to help with risk assessment and accurate pricing
information. Since the date of the Acquisition, significant progress has been
made in converting all of TAP's claims processing to this technology. In
Personal Lines, all new automobile and homeowners notices are now entered into
TAP's claims database through the new workstation which provides access to data
for both Aetna P&C and Travelers P&C sourced customers through one professional
claim workstation. In Commercial Lines workers' compensation, all first reports
of injury have been converted to the new telephone reporting system and a
conversion of all open claims to utilize the new workstation is under way.
The home office claims department periodically conducts internal file
reviews of claims offices to monitor adherence to claims policies and
procedures, the adequacy of case reserves, claims loss control, claims expense
control, productivity and service standards. Regional claims management
periodically audits sample files of claims representatives as part of their
supervisory process.
Environmental, asbestos and cumulative injury claims are segregated
from other claims and are handled separately by TAP's Special Liability Group, a
special unit staffed by dedicated legal, claim, finance and engineering
professionals. See "-- Environmental, Asbestos and Cumulative Injury Claims."
Reserves
Property and casualty claim reserves are established to account for
the estimated ultimate costs of claims and claim adjustment expenses for claims
that have been reported but not yet settled and claims that have been incurred
but not reported. TAP establishes reserves by line of business, coverage and
year.
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<PAGE>
The process of estimating claim reserves is imprecise due to a number
of variables. These variables are affected by both internal and external events
such as changes in claims handling procedures, inflation, judicial trends and
legislative changes. Many of these items are not directly quantifiable,
particularly on a prospective basis. Additionally, there may be significant
reporting lags between the occurrence of the insured event and the time it is
actually reported to the insurer. TAP continually refines reserve estimates in a
regular ongoing process as experience develops and further claims are reported
and settled. TAP reflects adjustments to reserves in the results of operations
in the periods in which the estimates are changed. In establishing reserves, TAP
takes into account estimated recoveries for reinsurance, salvage and
subrogation.
TAP derives estimates for unreported claims and development on
reported claims principally from actuarial analyses of historical patterns of
claims development by accident year for each line of business and market
segment. Similarly, TAP derives estimates of unpaid claim adjustment expenses
principally from actuarial analyses of historical development patterns of the
relationship of claim adjustment expenses to losses for each line of business
and market segment. For a description of TAP's reserving methods for
environmental and asbestos claims, see "-- Environmental, Asbestos and
Cumulative Injury Claims."
Discounting. The liability for losses for certain long-term disability
payments under workers' compensation insurance and workers' compensation excess
insurance has been discounted using a maximum interest rate of 5%. At December
31, 1996, 1995 and 1994 the combined amounts of discount for TAP were $1.012
billion, $1.206 billion and $1.120 billion, respectively.
For a reconciliation of beginning and ending property and casualty
insurance claims and claim adjustment expense reserves of the Company for each
of the last three years, see Note 11 of Notes to Consolidated Financial
Statements.
The following table sets forth the year-end reserves from 1986 through
1996 and the subsequent changes in those reserves, presented on a historical
basis for TAP. Accordingly, the original estimates, cumulative amounts paid and
reestimated reserves in the table for the years 1986-1995 have not been restated
to include Aetna P&C's business. Beginning in 1996, the table includes the
reserve activity of Aetna P&C. The data in the table are presented in accordance
with reporting requirements of the Commission. Care must be taken to avoid
misinterpretation by those unfamiliar with such information or familiar with
other data commonly reported by the insurance industry. The following data is
not accident year data, but rather a display of 1986-1996 year-end reserves and
the subsequent changes in those reserves.
For instance, the "cumulative deficiency or redundancy" shown in the
following table for each year represents the aggregate amount by which original
estimates of reserves as of that year-end have changed in subsequent years.
Accordingly, the cumulative deficiency for a year relates only to reserves at
that year-end and such amounts are not additive. Expressed another way, if the
original reserves at the end of 1986 included $4 million for a loss that is
finally settled in 1996 for $5 million, the $1 million deficiency (the excess of
the actual
32
<PAGE>
settlement of $5 million over the original estimate of $4 million) would be
included in the cumulative deficiencies in each of the years 1986-1995 shown in
the following table.
Certain factors may distort the re-estimated reserves and cumulative
deficiency or redundancy shown in the following table. For example, a
substantial portion of the cumulative deficiencies in each of the years
1986-1996 arises from claims on policies written prior to the mid-1970s
involving liability exposures such as environmental, asbestos and cumulative
injury claims. In the post-1984 period, TAP has developed more stringent
underwriting standards and policy exclusions and has significantly contracted or
terminated the writing of such risks. See "-- Environmental, Asbestos and
Cumulative Injury Claims." General conditions and trends that have affected the
development of these liabilities in the past will not necessarily recur in the
future.
Other factors that affect the data in the following table include the
discounting of workers' compensation reserves and the use of retrospectively
rated insurance policies. To the extent permitted under applicable accounting
practices, workers' compensation reserves are discounted to reflect the time
value of money, due to the relatively long time period over which these claims
are to be paid. Apparent deficiencies will continue to occur as the discount on
these workers' compensation reserves is accreted at the appropriate interest
rates. Also, a significant portion of National Accounts business is underwritten
with retrospectively rated insurance policies in which the ultimate loss
experience is primarily borne by the insured. Increases in loss experience
result in an increase in reserves, and an offsetting increase in amounts
recoverable from insureds. These amounts recoverable mitigate the impact of the
cumulative deficiencies but are not reflected in the following table.
Retrospective rating is particularly significant for National Accounts business
for workers' compensation, and to a lesser extent in general liability and
commercial automobile coverages. This mechanism affords TAP a significant
financial protection against adverse development on a large block of net
reserves.
Because of these and other factors, it is difficult to develop
meaningful extrapolation of estimated future redundancies or deficiencies in
loss reserves from the data in the following table.
The differences between the reserves for claims and claim adjustment
expenses shown in the following table, which is prepared in accordance with
GAAP, and those reported in the annual statements of TAP filed with state
insurance departments, which are prepared in accordance with statutory
accounting practices, were: $14 million, $(7) million and $(26) million for the
years 1996, 1995 and 1994, respectively.
33
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1986(a) 1987(a) 1988(a) 1989(a) 1990(a) 1991(a) 1992(a) 1993(a) 1994(a) 1995(a) 1996(b)
------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Loss and LAE
Originally Estimated $ 6,658 $ 7,644 $ 8,116 $ 8,947 $ 9,239 $ 9,406 $ 9,873 $10,190 $10,251 $10,102 $21,816
Cumulative amount paid as of
One year later 1,839 2,376 2,147 2,430 2,419 2,135 2,206 1,900 1,852 1,521
Two years later 3,261 3,631 3,632 3,992 3,932 3,584 3,554 3,221 2,888
Three years later 4,075 4,648 4,706 5,095 4,993 4,594 4,561 3,988
Four years later 4,760 5,402 5,487 5,878 5,755 5,375 5,160
Five years later 5,303 5,978 6,080 6,479 6,351 5,851
Six years later 5,735 6,443 6,555 6,966 6,746
Seven years later 6,109 6,829 6,963 7,304
Eight years later 6,443 7,176 7,262
Nine years later 6,751 7,445
Ten years later 6,991
Reserves reestimated as of
One year later 6,799 7,858 8,292 9,099 9,358 9,446 10,013 10,151 9,942 9,848
Two years later 7,078 8,051 8,497 9,220 9,470 9,755 10,112 10,116 9,766
Three years later 7,292 8,254 8,698 9,408 9,897 10,038 10,142 9,990
Four years later 7,569 8,497 8,912 9,953 10,325 10,154 10,148
Five years later 7,765 8,746 9,488 10,421 10,478 10,251
Six years later 8,021 9,333 9,970 10,616 10,614
Seven years later 8,636 9,813 10,150 10,755
Eight years later 9,075 9,966 10,306
Nine years later 9,245 10,131
Ten years later 9,366
Cumulative Deficiency (Redundancy) 2,708 2,487 2,190 1,808 1,375 845 275 (200) (485) (254)
Gross liability--end of year $13,805 $13,872 $14,715 $29,967
Reinsurance recoverables 3,615 3,621 4,613 8,151
----------------------------------
Net liability--end of year $10,190 $10,251 $10,102 $21,816
==================================
Gross reestimated liability--latest $13,673 $13,717 $14,384
Reestimated reinsurance
recoverables--latest 3,683 3,951 4,536
------- ------- -------
Net reestimated liability--latest $ 9,990 $ 9,766 $ 9,848
======= ======= =======
Gross cumulative deficiency (redundancy) $ (132) $ (155) $ (331)
======= ======= =======
</TABLE>
(a) Reflects reserves of Travelers P&C, excluding Aetna P&C reserves which
were acquired on April 2, 1996. Accordingly, the reserve development (net
reserves for loss and LAE recorded at the end of the year, as originally
estimated, less net reserves reestimated as of subsequent years) relates
only to the operations of Travelers P&C and does not include Aetna P&C.
(b) Includes Aetna P&C gross reserves of $16,775 million and net reserves of
$11,752 million acquired on April 2, 1996 and subsequent development
thereon.
Statutory Combined Ratio and Other Information
The following table sets forth the statutory loss and LAE ratios,
underwriting expense ratios and combined ratios for the periods indicated for
the Company.
The statutory combined ratio is an industry measurement of the results
of property and casualty insurance underwriting. This ratio is the sum of the
ratio of incurred losses and loss adjustment expenses to net premiums earned
(the "loss and LAE ratio"), the ratio of underwriting expenses incurred to net
premiums written (the "underwriting expense ratio") and, where applicable, the
ratio of dividends to policyholders to net premiums earned. A combined ratio
under 100% generally indicates an underwriting profit; a combined ratio over
100% generally indicates an underwriting loss. However, investment income,
federal income taxes and other non-underwriting income (e.g., service fee
income) or expenses are not reflected in the combined ratio. The profitability
of property and casualty insurance
34
<PAGE>
companies depends on income from underwriting, investment and service
operations. Lines of business where claims are paid out over a longer period of
time, such as workers' compensation, also provide investment income over a
longer period of time and therefore can be profitable at higher combined ratios
than lines where claims are paid out over a shorter period. Insurers with a high
proportion of long-tail policies will generally have higher combined ratios than
insurers with more short-tail business.
The ratios shown in the table below are computed based upon statutory
accounting practices, not GAAP. For information on GAAP combined ratios, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Statutory Combined Ratios
Year Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
Commercial Lines:
Loss and LAE ratio 95.6% 80.6% 100.0%
Underwriting expense ratio 32.5 24.4 24.7
Combined ratio before
policyholder dividends 128.1 (1) 105.0 124.7 (2)
Combined ratio 128.8 106.3 123.0
Personal Lines:
Loss and LAE ratio 68.7 74.5 71.0
Underwriting expense ratio 28.9 29.9 29.4
Combined ratio 97.6 (3) 104.4 100.4
Total:
Loss and LAE ratio 85.2 78.2 88.7
Underwriting expense ratio 31.2 26.4 26.5
Combined ratio before
policyholder dividends 116.4 104.6 115.2
Combined ratio 116.9 105.4 114.1
- ----------
(1) Includes the effect of charges associated with the Acquisition and also
includes statutory charges made to conform accounting policies and TAP
strategies in connection with the Acquisition (but not for GAAP reporting
purposes due to purchase accounting). The combined ratio excluding such
charges was 109.3%.
(2) Includes statutory reserve increases for environmental claims and a
reduction of ceded reinsurance balance amounting to $225 million by TAP.
The combined ratio excluding this item was 114.2%.
(3) Includes the effect of TAP's review of reserves associated with the
Acquisition. The combined ratio excluding this item was 100.1%.
35
<PAGE>
The following table sets forth information regarding the premium to surplus
ratios of TAP. For informational purposes only, the table includes Aetna P&C for
all periods presented.
Schedule of Premium to Surplus Ratios (Statutory Basis)(1)
Year Ended December 31,
---------------------------------
1996 1995 1994
-------- -------- ---------
(Dollars in millions)
Net written premiums $7,343 $7,701 $7,981
Capital and surplus 5,423 5,231 4,659
Ratio of net written premiums to capital
and surplus 1.35x 1.47x 1.71x
- ----------
(1) Including accident and health business.
Environmental, Asbestos and Cumulative Injury Claims
Environmental, asbestos and cumulative injury claims are segregated
from other claims and are handled separately by TAP's Special Liability Group, a
special unit staffed by dedicated legal, claim, finance and engineering
professionals.
Environmental Claims
As a result of various state and federal regulatory efforts aimed at
environmental remediation, the insurance industry has been, and continues to be,
involved in extensive litigation involving policy coverage and liability issues.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") was first enacted in 1980, and significantly expanded in 1984. CERCLA
enables private parties and the federal and state governments to take action
with respect to releases and threatened releases of hazardous substances and to
recover their response costs from certain liable parties or such parties may be
ordered to undertake remedial action directly. Liability under CERCLA may be
joint and several with other responsible persons. In addition to the regulatory
pressures, TAP believes that certain court decisions have expanded insurance
coverage beyond the original intent of the insurers and insureds, frequently
involving policies that were issued prior to the mid-1970s. The results of court
decisions affecting the industry's coverage positions continue to be
inconsistent. Accordingly, the ultimate responsibility and liability for
environmental remediation costs remain uncertain.
TAP continues to receive claims alleging liability exposures arising
out of insureds' alleged disposition of toxic substances. These claims when
submitted rarely indicate the monetary amount being sought by the claimant from
the insured and TAP does not keep track of the monetary amount being sought in
those few claims which indicated such a monetary
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amount.
TAP's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of TAP's
environmental claims that are in the dispute process, until the dispute is
resolved. This bulk reserve is established and adjusted based upon the aggregate
volume of in-process environmental claims and TAP's experience in resolving such
claims. Environmental loss and loss expense reserves of TAP at December 31, 1996
were $1.242 billion, net of reinsurance of $127 million. Approximately 12% of
such loss and loss expense reserves (i.e., approximately $146 million) were case
reserves for resolved claims. The balance, approximately 88% of the net
aggregate reserve (i.e., approximately $1.096 billion), is carried in a bulk
reserve and includes incurred but not yet reported environmental claims for
which TAP has not received any specific claims.
TAP's reserving methodology is preferable to one based on "identified
claims" since the resolution of environmental exposures by TAP generally occurs
on an insured-by-insured basis as opposed to a claim-by-claim basis. The nature
of the resolution is through coverage litigation, which often pertains to more
than one claim, as well as through a settlement with an insured. Generally, the
settlement between TAP and the insured extinguishes any obligation TAP may have
under any policy issued to the insured for past, present and future
environmental liabilities. This form of settlement is commonly referred to as a
"buy-back" of policies for future environmental liability. Additional provisions
of these agreements include the appropriate indemnities and hold harmless
provisions to protect TAP. TAP's general purpose in executing such agreements
is to reduce its potential environmental exposure and eliminate both risks
presented by coverage litigation with the insured and the cost of such
litigation.
The reserving methodology includes an analysis by TAP of the exposure
presented by each insured and the anticipated cost of resolution, if any, for
each insured. This analysis is completed by TAP on a quarterly basis. In the
course of its analysis, an assessment of the probable liability, available
coverage, judicial interpretations and historical value of similar exposures is
considered by TAP. In addition, due consideration is given to the many variables
presented, such as the nature of the alleged activities of the insured at each
site; the allegations of environmental damage at each site; the number of sites;
the total number of potentially responsible parties at each site; the nature of
environmental harm and the corresponding remedy at a site; the nature of
government enforcement activities at each site; the ownership and general use of
each site; the overall nature of the insurance relationship between TAP and the
insured; the identification of other insurers; the potential coverage available,
if any, including number of years of coverage, if any; and the applicable law in
each jurisdiction. Analysis of these and other factors, including the potential
for future claims, results in the establishment of the bulk reserve.
The duration of TAP's investigation and review of such claims and the
extent of time necessary to determine an appropriate estimate, if any, of the
value of the claim to TAP, varies significantly and is dependent upon a number
of factors. These factors include, but are not limited to, the cooperation of
the insured in providing claim information, the pace of underlying litigation or
claim processes, the pace of coverage litigation between the insured and TAP and
the willingness of the insured and TAP to negotiate, if appropriate, a
resolution of any dispute between them pertaining to such claims. Since the
foregoing factors vary from claim to claim and insured by insured, TAP cannot
provide a meaningful average of the duration of an environmental claim. However,
based upon TAP's experience in resolving such claims, the duration may vary from
months to several years.
The property and casualty insurance industry does not have a standard
method of calculating claim activity for environmental losses. Generally for
environmental claims, Travelers P&C establishes a claim file for each insured on
a per site, per claimant basis. If there is more than one claimant such as a
federal and a state agency, this method will result in two claims being set up
for a policyholder at that one site. Similarly, if one hundred claimants file a
lawsuit against ten policyholders alleging injury as a result of the discharge
of wastes or pollutants, one thousand claims would be established. Travelers P&C
adheres to this method
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<PAGE>
of calculating claim activity on all environmental-related claims, whether such
claims are tendered on primary, excess or umbrella policies.
As of December 31, 1996, Travelers P&C had approximately 30,800
pending environmental-related claims tendered by 664 active policyholders. The
pending environmental-related claims represent federal or state EPA-type claims
as well as plaintiffs' claims alleging bodily injury and property damage due to
the discharge of waste or pollutants. In 1996, the pending inventory increased
by approximately 20,000 claims as a result of several lawsuits being filed in
the states of Louisiana and Texas. These lawsuits, filed against one or more
policyholders of Travelers P&C, allege that the plaintiffs were injured or
damaged as a result of either alleged waste disposal or the alleged release of
deleterious substances from ongoing business operations which have taken place
near the plaintiffs' residences. Claims of this nature have historically been
considered in the level of TAP's environmental reserves. To date, in total
Travelers P&C has resolved environmental-related claims on behalf of 1,628
policyholders.
TAP is preparing a claims system conversion which when completed will
apply Travelers P&C's method of establishing claim files to Aetna P&C's
environmental-related claims. TAP anticipates that this process should be
completed in 1997. As of December 31, 1996, Aetna P&C had pending
environmental-related claims tendered by approximately 948 active policyholders.
Approximately 129 of these 948 active policyholders are also included in the 664
active Travelers P&C policyholders. Aetna P&C's policyholders, like those of
Travelers P&C, have tendered both EPA-type claims and individual claims alleging
injury or damage as a result of the discharge of wastes or pollutants. To date,
Aetna P&C has resolved environmental-related claims on behalf of 1,870
policyholders.
To date, TAP generally has been successful in resolving its coverage
litigation and continues to reduce its potential exposure through favorable
settlements with certain insureds. These settlement agreements with certain
insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds.Based upon TAP's
reserving methodology and the experience of its historical resolution of
environmental exposures, it believes that the environmental reserve provision is
appropriate. As of December 31, 1996, TAP for approximately $1 billion, has
resolved the environmental liabilities presented by 3,498 of the 4,981
policyholders who have tendered environmental claims to TAP. This resolution
comprises 70% of the policyholders who have tendered such claims. TAP has
reserves of approximately $950 million included in its bulk reserves relating to
the remaining 1,483 policyholders (30% of the total) with unresolved
environmental claims, as well as for any other policyholder which may tender an
environmental claim in the future.
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<PAGE>
Asbestos Claims
In the area of asbestos claims, TAP believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. TAP continues to receive asbestos
claims alleging insureds' liability from claimants' asbestos-related injuries.
These claims, when submitted, rarely indicate the monetary amount being sought
by the claimant from the insured and TAP does not keep track of the monetary
amount being sought in those few claims which indicated such a monetary amount.
Originally the cases involved mainly plant workers and traditional asbestos
manufacturers and distributors. However, in the mid-1980s, a new group of
plaintiffs, whose exposure to asbestos was less direct and whose injuries were
often speculative, began to file lawsuits in increasing numbers against the
traditional defendants as well as peripheral defendants who had produced
products that may have contained small amounts of some form of encapsulated
asbestos. These claims continue to arise and on an individual basis generally
involve smaller companies with smaller limits of potential coverage.
Also, there has emerged a group of non-product claims by plaintiffs,
mostly independent labor union workers, mainly against companies, alleging
exposure to asbestos while working at these companies' premises. In addition,
various insurers, including TAP, remain defendants in an action brought in
Philadelphia regarding potential consolidation and resolution of future asbestos
bodily injury claims.
In summary, various classes of asbestos defendants, such as major
product manufacturers, peripheral and regional product defendants as well as
premises owners, are tendering asbestos-related claims to the industry. Because
each insured presents different liability and coverage issues, TAP evaluates
those issues on an insured-by-insured basis.
TAP's evaluations have not resulted in any meaningful data from which
an average asbestos defense or indemnity payment may be determined. The varying
defense and indemnity payments made by TAP on behalf of its insureds have also
precluded TAP from deriving any meaningful data by which it can predict whether
its defense and indemnity payments for asbestos claims (on average or in the
aggregate) will remain the same or change in the future. Based upon TAP's
experience with asbestos claims, the duration period of an asbestos claim from
the date of submission to resolution is approximately two years.
At December 31, 1996, asbestos claims reserves of TAP were $1.073
billion, net of reinsurance of $370 million. Approximately 25% of the net
aggregate reserve (i.e., approximately $263 million) is for pending asbestos
claims. The balance, approximately 75% (i.e., approximately $810 million), of
the net asbestos reserves represents incurred but not yet reported losses for
which TAP has not received any specific claims.
39
<PAGE>
Uncertainty Regarding Adequacy of Environmental and Asbestos Reserves
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are not
used to estimate such reserves.
For environmental claims, TAP estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve
for asbestos-related claims: available insurance coverage; limits and
deductibles; an analysis of each policyholder's potential liability;
jurisdictional involvement; past and projected future claim activity; past
settlement values of similar claims; allocated claim adjustment expense;
potential role of other insurance, and applicable coverage defenses, if any.
Once the gross ultimate exposure for indemnity and allocated claim adjustment
expense is determined for a policyholder by policy year, a ceded projection is
calculated based on any applicable facultative and treaty reinsurance. In
addition, a similar review is conducted for asbestos property damage claims.
However, due to the relatively minor claim volume, these reserves have remained
at a constant level.
As a result of these processes and procedures, the reserves carried
for environmental and asbestos claims at December 31, 1996 are the Company's
best estimate of ultimate claims and claim adjustment expenses based upon known
facts and current law. However, the environment surrounding the final resolution
of these claims continues to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations and changes in Superfund
and other legislation. Because of these future unknowns, additional liabilities
may arise for amounts in excess of the current reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated, and 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, the Company believes that it is not likely that these claims will have
a material adverse effect on the Company's financial condition or liquidity.
Cumulative Injury Other Than Asbestos
Cumulative injury other than asbestos ("CIOTA") claims are generally
submitted to TAP 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
40
<PAGE>
to potentially harmful products or substances. Such potentially 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
claimants' 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, TAP must
review the number of policies issued by TAP 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.
To the extent disputes exist between TAP and a policyholder regarding
the coverage available for CIOTA claims, TAP 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 TAP's participation in resolving CIOTA claims, the scope of coverage to be
provided by TAP and contain the appropriate indemnities and hold harmless
provisions to protect TAP. These settlements generally eliminate uncertainties
for TAP 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. TAP's 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 TAP'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 claim approach and resolution between TAP and
Aetna P&C regarding CIOTA claims.
During the second quarter, TAP completed its review of Aetna P&C's
exposure to CIOTA claims in order to determine an appropriate level of reserves
using TAP's approach as described above. Based on the results of that review,
TAP's general liability insurance reserves were increased $360 million, net of
reinsurance ($234 million after tax).
At December 31, 1996, CIOTA claims reserves of TAP were $1.114
billion, net of reinsurance of $446 million. Approximately 19% of the net
aggregate reserve (i.e., approximately $215 million) is for pending CIOTA
claims. The balance, approximately 81%
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(i.e., approximately $899 million), of the net CIOTA reserves represents
incurred but not yet reported losses for which TAP has not received any specific
claims.
Insurance Pools
Most of TAP's insurance subsidiaries are members of one of three
separate intercompany property and casualty reinsurance pooling arrangements:
the Travelers Indemnity pool, the Aetna Insurance pool and the Gulf pool. Each
of these insurance pools permits the participating companies to rely on the
capacity of the entire pool rather than on its own capital and surplus. Under
the arrangements of each insurance pool, the members share substantially all
insurance business that is written and prorate the combined premiums, losses and
expenses.
Competition and Regulation
For a description of competition and regulation relating to the
Company's property and casualty insurance business, see "Insurance Services -
General" at the end of the description of the Life Insurance Services segment.
Investments
For information on the investment portfolios of the Company's property
and casualty insurance business, see "Insurance Services - General" at the end
of the description of the Life Insurance Services segment.
LIFE INSURANCE SERVICES
The Company's Life Insurance Services segment includes the operations
of The Travelers Insurance Company ("TIC"), which was incorporated in 1863, The
Travelers Life and Annuity Company ("TLAC"), Transport Life Insurance Company
("Transport Life") and its affiliates through the end of the third quarter of
1995 (collectively, "Travelers Life and Annuity") and the Primerica Financial
Services group of companies ("PFS"), including Primerica Life Insurance Company
("Primerica Life"). On September 29, 1995, the Company distributed all of the
outstanding shares of common stock of Transport Holdings Inc., the indirect
parent of Transport Life, to the Company's stockholders. With $43.0 billion of
assets at December 31, 1996, the Company believes that TIC, TLAC and Primerica
Life together constitute one of the largest stock life insurance groups in the
United States as measured by assets. For information concerning the Company's
credit-related insurance businesses, see "Consumer Finance Services."
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Primerica Financial Services
Principal Markets and Methods of Distribution
The business operations of PFS involve the sale of insurance, mutual
funds and other financial products, and consist of an affiliated group of
companies engaged in (i) the underwriting and administration of individual term
life insurance throughout the United States and in Canada and (ii) securities
brokerage, consisting primarily of mutual fund sales. The PFS sales force,
composed of more than 86,000 independent agents, primarily markets term life
insurance of Primerica Life and certain other products of subsidiaries of the
Company, including certain loans offered by the Company's consumer finance
subsidiaries and other products approved by the Company. The domestic PFS sales
force also sells certain property-casualty insurance products of TAP and mutual
funds offered by Smith Barney. Because the great majority of the domestic
licensed sales force works on a part-time basis, a substantial portion of the
sales force is inactive from time to time.
Primerica Life and its subsidiaries, Primerica Life Insurance Company
of Canada and National Benefit Life Insurance Company ("NBL"), primarily offer
individual term life insurance. NBL provides statutory disability benefits in
New York, as well as direct response student term life insurance nationwide.
Primerica Life and its subsidiaries together are licensed to sell and market
term life insurance in all 50 states, the District of Columbia, Canada, Puerto
Rico, Guam, the U.S. Virgin Islands and the Northern Mariana Islands.
For information concerning PFS Investments Inc. ("PFS Investments"),
see "-- Mutual Funds and Asset Management."
Premium revenues, net of reinsurance, for PFS for the years ended
December 31, 1996, 1995 and 1994 were $1.030 billion, $1.012 billion and $962
million, respectively. The increase in premium revenues in recent years is
primarily attributable to the retention of in force business and the increase in
average premium per new policy sold. See "Insurance Services - General --
Reinsurance" for a discussion of reinsurance.
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Life Insurance in Force
The following table provides a reconciliation of beginning and ending
life insurance in force for Primerica Life and subsidiaries, and related
statistical data for 1994-1996.
(in millions of dollars, except as noted)
Year Ended December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
In force beginning of year $ 348,169 $ 334,972 $ 317,403
Additions 52,039 53,045 57,389
Terminations(1) (40,330) (39,848) (39,820)
--------- -------- --------
In force end of year $ 359,878 $ 348,169 $ 334,972
========= ========== =========
The amounts in force at end of
year are before reinsurance ceded
in the following amounts $ 134,330 $ 117,647 $ 94,930
========= ========= =========
At end of year:
Number of policies in force
PFS 2,141,800 2,115,600 2,075,600
NBL other individual lines 418,437 398,988 396,717
Average size of policy
in force (in dollars)
PFS $ 164,694 $ 161,125 $ 157,739
NBL other individual lines 17,055 18,154 19,078
- ----------
(1) Includes terminations due to death, surrenders and lapses.
AIDS-related claims, net of reinsurance, as a percentage of total net
life claims paid by Primerica Life in 1996, 1995 and 1994, were 5.9%, 7.1% and
7.1%, respectively. Management believes that current pricing and reserves make
adequate provision for AIDS-related claim experience.
Mutual Funds and Asset Management
PFS Investments is a registered broker-dealer through which the PFS
sales force markets mutual funds and variable annuities. For the years ended
December 31, 1996, 1995 and 1994, PFS' total mutual fund sales were $2.327
billion, $1.551 billion and $1.622 billion, respectively. The PFS sales force
began marketing Smith Barney mutual funds through a
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separate distribution arrangement with PFS Distributors, Inc. in mid-1995 and in
March 1996 began selling The Concert Series-SM-. The Concert Series-SM- is a
group of mutual funds that invests in various Smith Barney mutual funds instead
of directly in stocks, bonds or other securities. Sales of Smith Barney mutual
funds accounted for approximately 24% and 2%, respectively, of PFS' total mutual
fund sales in 1996 and 1995. At December 31, 1996, approximately 27,500
independent agent members of the PFS sales force (including approximately 2,600
licensed in Canada only) were also independent registered securities
representatives of PFS Investments and/or PFSL Investments Canada Ltd.
PFS Investments is also the exclusive retail distributor of the Common
Sense-R- Trust mutual funds,(1) and certain of the Company's subsidiaries
provide underwriting, transfer agency and custodial services to these funds.
Sales of shares of the Common Sense-R- Trust funds accounted for approximately
27%, 39% and 42%, respectively, of total mutual funds sales by PFS for 1996,
1995 and 1994. In December 1994, the Company sold American Capital Management &
Research, Inc., a mutual fund company and the co-sponsor of the Common Sense-R-
Trust funds, to The Van Kampen Merritt Companies, Inc. ("VKM") and purchased an
equity interest in VKM's parent company. In October 1996, VKM's parent was sold,
and in connection with such sale, the Company sold its equity interest in that
company.
Travelers Life and Annuity
Principal Products
Travelers Life and Annuity offers fixed and variable deferred
annuities, payout annuities and term, universal and variable life and long-term
care insurance to individuals and small businesses. It also provides group
pension products, including guaranteed investment contracts, and group annuities
to employer-sponsored retirement and savings plans. Travelers Life and Annuity
views market specialization and distribution diversification as critical
components of profitability. It has updated its individual product portfolio to
include a range of competitively priced fixed and variable annuity, term,
universal and variable life and long-term care insurance products for its
customers.
Individual accumulation fixed and variable annuities, group annuities
and pension plan products are used for retirement funding purposes. Variable
annuities permit policyholders to direct retirement funds into a number of
separate accounts which offer various investment options. Individual payout
annuities are used for structuring settlements of certain indemnity claims and
making other payments to policyholders over a period of time.
Guaranteed investment contracts, which provide a guaranteed return on
investment, continue to be a popular investment choice for employer-sponsored
retirement and savings
- ----------
(1) Common Sense is a registered trademark of Van Kampen/American Capital Asset
Management, Inc. ("VK/ACAM").
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<PAGE>
plans. Group annuities purchased by employer sponsored plans fulfill retirement
obligations to individual employees.
Individual life insurance provides protection against financial loss
due to death. Life insurance is also used to meet estate, business planning and
retirement needs.
Long-term care insurance provides income and asset protection against
the high costs of care associated with home health, assisted living and nursing
home care. Travelers Life and Annuity ceased writing disability income insurance
in the first quarter of 1995.
The following table sets forth written premiums, net of reinsurance,
and deposits for the Travelers Life and Annuity unit.
Premiums and Deposits
(in millions)
Year Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
Premiums
Individual life $ 122 $ 124 $ 124
Long-term care 128 88 61
Individual accident and health(1) 24 200 273
Payout annuities 76 90 92
----- ----- -----
Total premiums 350 502 550
----- ----- -----
Deposits
Universal life insurance 169 149 162
Annuities
Individual fixed accumulation 621 692 569
Individual variable accumulation(2) 1,370 956 693
Individual payout 44 38 26
Guaranteed investment contracts(3) 764 681 347
Group separate accounts and managed funds(4) 276 362 747
Other fixed funds 186 115 119
Corporate-owned life insurance(5) 30 91 -
----- ----- -----
Total deposits 3,460 3,084 2,663
----- ----- -----
Total premiums and deposits $3,810 $3,586 $3,213
===== ===== =====
- ----------
(1) The declines in 1995 and 1996 reflect the Company's distribution of
Transport Holdings Inc., the indirect parent of Transport Life Insurance
Company, to the Company's stockholders in September 1995.
(2) The increase in individual variable accumulation deposits reflects
successful introduction of variable annuities in the Smith Barney
distribution network and other distribution initiatives.
(3) In 1994, TIC adopted a more selective approach to issuing new contracts.
The 1996 and 1995 increases reflect successful implementation of the new
strategy with both existing and new customers, and also was helped by
ratings upgrades during those years.
(4) The 1996, 1995 and 1994 deposits include $146 million, $200 million and
$512 million, respectively, of deposits relating to the transfer in house
of pension fund assets previously managed externally.
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(5) TIC is not currently marketing corporate owned life insurance. 1996 and
1995 deposits are attributable to contracts previously issued by the
Company's Managed Care and Employee Benefits Operations ("MCEBO") (which
were sold in 1995) and transferred to Travelers Life and Annuity effective
January 1, 1995. For 1994, the premiums and deposits on this business were
$187 million and were reported in the Company's MCEBO unit.
For information about reinsurance, see "Insurance Services - General
- -- Reinsurance."
Principal Markets and Methods of Distribution
TIC is licensed to sell and market its individual products in all 50
states, the District of Columbia, Puerto Rico, Guam, the Bahamas and the U.S.
and British Virgin Islands. TLAC is licensed to sell and market life and annuity
products in 43 states and the District of Columbia.
Individual products are primarily marketed through The Copeland
Companies ("Copeland"), an indirect wholly owned subsidiary of TIC, Smith Barney
Financial Consultants and a core group of approximately 500 independent
agencies. Copeland is a captive sales organization of personal retirement
planning specialists focused primarily on the qualified periodic deferred
annuity marketplace, and accounted for approximately 39% of total individual
deferred annuity production in 1996 and 1995. Smith Barney's Financial
Consultants distribute Travelers Life and Annuity's non-qualified deferred
annuities and individual life and long-term care products. Smith Barney's share
of Travelers Life and Annuity's total individual deferred annuity production
increased from 33% in 1995 to 38% in 1996. The core group of over 500
professional life insurance agencies sold the majority of the individual life
and long term care business in 1996 and 1995 and accounted for 23% and 27%,
respectively, of individual annuity premiums and deposits. Tower Square
Securities, Inc. ("Tower Square Securities"), a wholly owned subsidiary of TIC,
is an introducing broker-dealer offering a full line of brokerage services.
Tower Square Securities facilitates the sale of individual variable life and
annuity insurance products by the independent agents of TIC.
TIC has also begun expanding the sale of its individual life and
long-term care products through other distribution networks. To accomplish this,
TIC has entered into strategic alliances with a select number of established
producers. In 1996, TIC acquired Travelers Net Plus, a long-term care specialty
distributor that markets primarily through targeted direct mailing. TIC also
formed TowerMark, a joint venture focused on recruiting and supporting agencies
serving high-end estate planning customers.
Group pension products and annuities are marketed by Travelers Life
and Annuity's salaried staff directly to plan sponsors and are also placed
through independent consultants and investment advisers. The major factors
affecting the pricing of these contracts are the economics of the capital
markets, primarily the interest rate environment, the availability of
appropriate investments and surplus required to support this business. The
pricing of products
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and services also reflects charges for expenses, mortality, profit and other
relevant financial factors such as credit risk.
Life Insurance in Force
The following table provides a reconciliation of beginning and ending
Travelers Life and Annuity life insurance in force and related statistical data
on a statutory basis for 1994 through 1996.
(in millions of dollars, except as noted)
Year Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
In force beginning of year $ 49,179 $ 48,998 $ 44,909
Additions(1) 6,566 6,153 9,265
Terminations(2) (5,336) (5,972) (5,176)
------- ------- -------
In force end of year $ 50,409 $ 49,179 $ 48,998
======= ======= =======
The amounts in force at end of
year are before reinsurance ceded
in the following amounts $ 19,474 $ 16,806 $ 6,575
======= ======= =======
At end of year:
Number of policies in force(1) (3) 545,682 563,286 606,089
Average size of policy
in force (in dollars) $ 92,371 $ 87,307 $ 80,843
- ----------
(1) The 1995 decline reflects the de-emphasis of sales of certain lower-margin
life insurance products.
(2) Includes terminations due to death, surrenders and lapses. 1995
terminations also include policy terminations attributable to the
distribution of Transport Holdings Inc. to the Company's stockholders.
(3) The decline in 1996 and 1995 reflects the gradual run-off of old whole life
policies written several years ago at relatively low levels of per policy
insurance coverage. This was particularly offset by the sale of term and
universal life policies with significantly higher levels of insurance
coverage.
Insurance Reserves and Contractholder Funds
As life, long-term care and disability income insurance and annuity
premiums are received, Travelers Life and Annuity establishes policy benefit
reserves that reflect the present value of expected future obligations, net of
the present value of expected future net premiums. These reserves generally
reflect long-term fixed obligations to policyholders and are based on
assumptions as to interest rates, future mortality, morbidity, persistency and
expenses, with provision for adverse deviation. Policy benefit reserves, which
give appropriate recognition to reinsurance, are established based on factors
derived from past experience.
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Contractholder funds arise from the issuance of individual life
contracts that include an identifiable investment component, individual deferred
annuities and certain individual payout annuity contracts. Contractholder funds
generally are equal to deposits received and interest credited less withdrawals,
mortality charges and administrative expenses. Contractholder funds also include
receipts from the issuance of pension investment contracts.
AIDS-related claims paid by Travelers Life and Annuity in 1996, 1995
and 1994 were 3.4%, 1.6% and 2.1%, respectively, as a percentage of total life
claims paid, and 0.4%, 0.3% and 1.5%, respectively, as a percentage of total
health claims paid. Management believes that current pricing and reserves make
adequate provision for AIDS-related claim experience.
Competition and Regulation
For a description of competition and regulation relating to the
Company's life insurance businesses, see "Insurance Services - General."
Investments
For information on the investment portfolios of the Company's life
insurance businesses, see "Insurance Services - General."
INSURANCE SERVICES - GENERAL
Ratings
Insurance companies are rated by rating agencies to provide both
industry participants and insurance consumers with meaningful information on
specific insurance companies. Higher ratings generally indicate financial
stability and a strong ability to pay claims. These ratings are based upon
factors relevant to policyholders and are not directed toward protection of
investors. Such ratings are neither a rating of securities nor a recommendation
to buy, hold or sell any security and may be revised or withdrawn at any time.
Ratings focus primarily on the following factors: capital resources, financial
strength, demonstrated management expertise in the insurance business, credit
analysis, systems development, market segment position and growth opportunities,
marketing, sales conduct practices, investment operations, minimum
policyholders' surplus requirements and capital sufficiency to meet projected
growth, as well as access to such traditional capital as may be necessary to
continue to meet standards for capital adequacy.
The following table summarizes the current claims-paying and financial
strength ratings of the Company's subsidiaries, including Aetna Casualty and
Surety Company of America ("Aetna C&S of America"), and insurance pools by A.M.
Best, Duff & Phelps
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Corp., Moody's Investor's Service Inc. and Standard & Poor's Ratings Group. The
table also presents the position of each rating in the applicable agency's
rating scale.
<TABLE>
<CAPTION>
Moody's
A.M. Best Duff & Investor's Standard
Company Phelps Corp. Service Inc. & Poor's
------- ------------ ------------ --------
<S> <C> <C> <C> <C>
TIC A (3rd of 15) AA- (4th of 18) A1 (5th of 19) AA- (4th of 18)
TLAC A (3rd of 15) AA- (4th of 18) A1 (5th of 19) AA- (4th of 18)
Primerica Life A (3rd of 15) AA (3rd of 18) Aa3 (4th of 19) AA (3rd of 18)
Travelers Indemnity pool(1) A (3rd of 15) AA- (4th of 18) A1 (5th of 19) A+ (5th of 18)
Aetna Insurance pool(2) A- (4th of 15) A+ (5th of 18) A1 (5th of 19) A+ (5th of 18)
Gulf pool(3) A+(2nd of 15) - - AA (3rd of 18)
Aetna C&S of America A (3rd of 15) A+ (5th of 18) A1 (5th of 19) A+ (5th of 18)
</TABLE>
- ------------------------------
(1) The Travelers Indemnity Pool consists of The Travelers Indemnity Company,
The Phoenix Insurance Company, The Charter Oak Fire Insurance Company, The
Travelers Indemnity Company of Connecticut, The Travelers Indemnity Company
of America, The Travelers Indemnity Company of Missouri, The Travelers
Indemnity Company of Illinois, TravCo Insurance Company and The Travelers
Home and Marine Insurance Company.
(2) The Aetna Insurance Pool consists of The Aetna Casualty and Surety Company,
The Standard Fire Insurance Company, Aetna Casualty & Surety Company of
Illinois, The Farmington Casualty Company, The Automobile Insurance Company
of Hartford, Connecticut, Aetna Casualty Company of Connecticut, Aetna
Commercial Insurance Company, Aetna Insurance Company, Aetna Insurance
Company of Illinois and Aetna Personal Security Insurance Company.
(3) The Gulf pool consists of Gulf Insurance Company, Gulf Underwriters
Insurance Company, Select Insurance Company, Atlantic Insurance Company and
Gulf Group Lloyds.
Reinsurance
The Company reinsures a portion of the risks it underwrites in an effort to
control its exposure to losses, stabilize earnings and protect surplus. The
Company cedes to reinsurers a portion of these risks and pays premiums based
upon the risk and exposure of the policies subject to such reinsurance.
Reinsurance is subject to collectibility in all cases and to aggregate loss
limits. Although the reinsurer is liable to the Company to the extent of the
reinsurance ceded, the Company remains primarily liable as the direct insurer on
all risks reinsured. Reinsurance recoverables are reported after allowances for
uncollectible amounts. The Company also holds collateral, including escrow funds
and letters of credit, under certain reinsurance agreements. The Company
monitors the financial condition of reinsurers on an ongoing basis, and reviews
its reinsurance arrangements periodically. Reinsurers are selected based on
their financial condition, business practices and the price of their product
offerings. For additional information concerning reinsurance, see Note 12 of
Notes to Consolidated Financial Statements.
Property and Casualty Insurance
TAP utilizes a variety of reinsurance agreements to control its exposure to
large property and casualty losses. TAP utilizes the following types of
reinsurance: (i) facultative reinsurance, in which reinsurance is provided for
all or a portion of the insurance provided by a single policy and each policy
reinsured is separately negotiated; (ii) treaty reinsurance, in
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which reinsurance is provided for a specified type or category of risks; and
(iii) catastrophe reinsurance, in which the ceding company is indemnified for an
amount of loss in excess of a specified retention with respect to losses
resulting from a catastrophic event.
TAP's top five reinsurers, except Lloyd's of London ("Lloyd's") (which is
not rated), are rated "A" or higher by A.M. Best. The ratings and reinsurance
recoverable at December 31, 1996 follow (in millions):
Reinsurance
Reinsurer Recoverable A.M. Best Rating of Reinsurer
- --------------------------------------------------------------------------------
General Reinsurance Corporation $ 483 A++ highest of 15 ratings
American Re-Insurance Company 262 A+ 2nd highest of 15 ratings
Executive Risk Indemnity Inc. 193 A 3rd highest of 15 ratings
Employers Reinsurance Corporation 96 A++ highest of 15 ratings
NAC Reinsurance Corporation 75 A 3rd highest of 15 ratings
As of December 31, 1996, TAP had ceded to Lloyd's and General Reinsurance
Corporation, two reinsurers with which TAP does the most business, approximately
$488 million and $483 million, respectively, of insurance losses and loss
adjustment expenses. In 1996, Lloyd's restructured its operations with respect
to claims for years prior to 1993. The Company is in arbitration with
underwriters at Lloyd's in New York State to enforce reinsurance contracts with
respect to recoveries for certain asbestos claims that constitute a portion of
the total reinsurance recoverable referred to above. The dispute involves the
ability of the Company to aggregate asbestos claims under a market agreement
between Lloyd's and the Company or under the applicable reinsurance treaties.
See Item 3, "Legal Proceedings."
The outcome of the arbitration referred to above is uncertain and the
impact, if any, on collectibility of amounts recoverable by TAP from Lloyd's
cannot be quantified at this time. The Company believes that it is not likely
that the outcome could have a material adverse effect on the Company's operating
results, financial condition or liquidity.
TAP participates in pools with other insurers to provide capacity for
unique and high-valued risks such as exposures related to the aviation and
nuclear power industries. TAP's maximum net exposure to this type of business at
December 31, 1996 was $29 million per risk. For policies written on or after
January 1, 1997, the exposure was reduced to $15 million per risk.
At December 31, 1996, TAP had $9.7 billion in reinsurance recoverables. Of
this amount, $4.2 billion is for pools and associations which relate primarily
to workers' compensation service business and have the strength of the
participating insurance companies on a joint basis supporting these cessions. Of
the remaining $5.5 billion ceded to reinsurers at December 31, 1996, $497
million was environmental and asbestos-related and the remainder principally
reflects reinsurance in support of ongoing business. In addition, at December
31,
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1996, $465 million was collateralized by letters of credit against the asset.
The descriptions below relate to reinsurance arrangements of TAP in effect at
January 1, 1997.
Net Retention Policy. Currently, for third-party liability, including
automobile no-fault, the reinsurance agreements used by Commercial Accounts,
Select Accounts and Construction limit the net retention to a maximum of $4
million per insured, per occurrence. For Travelers Specialty, the reinsurance
agreements for third-party liability, including professional and healthcare
liability, limit TAP's net retention to a maximum of $4 million per policy, per
occurrence. Gulf Specialty utilizes various reinsurance mechanisms and has
limited its net retention to $4 million for any line of business. For commercial
property insurance, there is a $5 million maximum retention per insured with
100% reinsurance coverage for risks with higher limits. The reinsurance
agreement in place for workers' compensation policies written by Commercial
Accounts, Select Accounts, Construction, Travelers Specialty and some segments
of Alternative Markets covers 100% of each loss between $2 million and $10
million. For National Accounts, reinsurance arrangements are typically tiered,
or layered, such that only levels of risk acceptable to TAP are retained. The
reinsurance agreement in place for Personal Lines umbrella policies covers 100%
of each loss between $1 million and $5 million. The reinsurance agreements in
place for Personal Lines property policies covers 100% of each loss between $1
million and $6 million. For surety protection, Bond has reinsurance coverage for
95% of up to $50 million of liability in excess of $50 million of liability. In
addition, Bond's accident year results are protected by an aggregate excess of
loss treaty that provides 93.85% of approximately $52 million of reinsurance
coverage in excess of a $119 million retention.
Catastrophe Reinsurance. TAP utilizes reinsurance agreements with
nonaffiliated reinsurers to control its exposure to losses resulting from one
occurrence. For the accumulation of net property losses arising out of one
occurrence, reinsurance agreements cover 75% of total losses between $250
million and $650 million. For multiple workers' compensation losses arising from
a single occurrence, reinsurance agreements cover 100% of losses between $10
million and $250 million and, for workers' compensation losses caused by
property perils, reinsurance agreements cover 75% of losses between $250 million
and $650 million.
For commercial property insurance sold through Commercial Accounts, Select
Accounts, Construction and certain National Accounts, 10% of all losses are
reinsured in 1997, subject to an occurrence limitation of $275 million. For
Personal Lines homeowners insurance, in 1997, 25% of losses in states along the
East Coast are reinsured up to a maximum recovery of $180 million per
occurrence. The covered territory of this Homeowners Quota Share includes Maine,
New Hampshire, Massachusetts, Rhode Island, Connecticut, New York, New Jersey,
Delaware, Maryland, Virginia, North Carolina, South Carolina, Georgia, Florida
and Washington, D.C.
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Reinsurance Fund
TAP also participates in the Florida Hurricane Catastrophe Fund ("FHCF"),
which is a state-mandated catastrophe reinsurance fund. FHCF is primarily funded
by premiums from insurance companies that write residential property business in
Florida and, if insufficient, assessments on insurance companies that write
other property and casualty insurance, excluding workers' compensation. FHCF's
resources are limited to these contributions and to its borrowing capacity at
the time of a significant catastrophe. There can be no assurance that these
resources will be sufficient to meet the obligations of FHCF.
The Company's recovery of less than contracted amounts from FHCF could have
a material adverse effect on the Company's results of operations in the event of
a significant catastrophe in Florida.
Life Insurance
The Company's policy is to obtain reinsurance on individual life policies
for amounts above certain retention limits, which limits vary with age and
underwriting classification. During 1996, most new business was reinsured under
an 80%/20% quota share reinsurance program. Effective January 1, 1997, for
Primerica Life and its subsidiaries new business is reinsured under a 90%/10%
quota share reinsurance program. Retention on life insurance risks after
reinsurance remains up to a maximum of $1.5 million per insured for an ordinary
life risk, depending on the subsidiary involved, the type of policy, the year of
issue and the age of the insured. Other reinsurance arrangements are made from
time to time to cede or assume existing blocks of business.
Competition and Other Factors Affecting Growth
Property and Casualty Insurance
The property and casualty insurance industry is highly competitive in the
areas of price, service, product offerings, agent relationships and, in the case
of personal property and casualty business, method of distribution (i.e., use of
independent agents, captive agents and/or salaried employees). There are
approximately 3,400 property-casualty insurance companies in the United States.
Of those companies, approximately 800 operate in all or most states and write
the vast majority of the business in the industry while approximately 2,600
offer one or more personal or commercial lines property-casualty products
similar to those marketed by TAP. In addition, an increasing amount of
commercial risks are covered by purchaser self-insurance, large deductibles,
risk-purchasing groups, risk-retention groups and captive companies.
Commercial Lines. The insurance industry is represented in the commercial
lines marketplace by many insurance companies of varying size. The industry is
comprised of small
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local firms, large regional firms and large national firms, as well as
self-insurance programs or captive insurers. Market competition works to set the
price charged for insurance products and the level of service provided within
the insurance regulatory framework. Growth is driven by a company's ability to
provide insurance and services at a price that is reasonable and acceptable to
the customer. In addition, the marketplace is affected by available capacity of
the insurance industry as measured by policyholders' surplus. Surplus expands
and contracts primarily in conjunction with profit levels generated by the
industry. Growth in premium and service business is also measured by a company's
ability to retain existing customers and to attract new customers.
The National Accounts market is highly competitive. Competition is based
primarily on quality and service and, to a lesser extent, on the basis of price.
National Accounts business is generally written through national brokers and
regional agents. The Company also competes for state contracts to provide claims
and policy management services. These contracts, which generally have three-year
terms, are selected by state agencies through a bid process based on quality of
service and price. The Company has emerged as the largest assigned risk plan
service insurer in the industry with approximately 28% of the market in 1996.
The Commercial Accounts market is highly competitive. Commercial Accounts
business has historically been written through independent agents and brokers,
although some companies use direct writing. Competitors in this market are
primarily national property-casualty insurance companies willing to write most
classes of business using traditional products and pricing and, to a lesser
extent, regional insurance companies and companies that have developed niche
programs for specific industry segments. Companies compete on price, product
offerings, response time in policy issuance and claim and loss prevention
services. Additionally, reduced overhead and improved efficiency through
automation and response time to customer needs are key to success in this
market.
The Construction market has become a focused industry segment for several
large insurance companies. Construction market business is written through
agents and brokers. Insurance companies compete in this market based upon price,
product offering and claims service. The Company utilizes its specialized
underwriters and engineers who have extensive experience and knowledge of the
construction industry to work with agents and brokers to compete effectively in
this market.
The Select Accounts market is highly competitive and is typically written
through independent agents and, to a lesser extent, regional brokers. Both
national and regional property-casualty insurance companies compete in the
Select Accounts market which is generally comprised of low risk, "main street"
business customers. Risks are underwritten and priced using standard industry
practices and a combination of proprietary and standard industry product
offerings. Competition in this market is primarily based on price, product
offerings and response time in policy services. The Company has established a
strong
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marketing relationship with its distribution network and has provided it with
defined underwriting policies, competitive prices and efficient automated
environments.
The market in which Specialty Accounts competes includes small to mid-sized
niche companies that target certain lines of insurance and larger, multi-line
companies that focus on various segments of the Specialty Accounts market.
Specialty Accounts business is generally written through wholesale brokers and
retail agents and brokers throughout the United States. Gulf Specialty derives a
competitive advantage through its underwriting practices, low expense levels and
broad product offering base. Bond Specialty's reputation for clear, timely
decision-making, underwriting and industry expertise and strong producer and
customer relationships as well as its ability to offer its customers a full
range of financial services products, enable it to compete effectively. Its
ability to cross-sell Bond products to customers of National Accounts,
Commercial Accounts, Select Accounts and through other Travelers Group units
provides further competitive advantages for the Company.
Personal Lines. Personal lines insurance is written by hundreds of
insurance companies of varying sizes. Although national companies write the
majority of the business, the Company also faces competition from local or
regional companies which often have a competitive advantage because of their
expense structure or because they specialize in providing coverage to particular
risk groups. The Company believes that the principal competitive factors are
price, service, perceived stability of the insurer and name recognition. The
Company also competes for business within each of the independent agencies
representing it, because these agencies also offer policies of competing
independent agency companies. At the agency level, the Company believes that
competition is primarily based on the level of service, including claims
handling, level of automation and the development of long-term relationships
with the individual agents. The Company also competes with insurance companies
that use captive agents or salaried employees to sell their products. Because
these companies generally pay lower commissions than independent agency
companies, they may be able to generate business at a lower cost than the
Company. Due to this expense advantage, the direct writing companies have
gradually expanded their market share in recent years. However, in addition to
its traditional independent agency distribution, Personal Lines is pursuing a
number of initiatives to broaden its distribution of Personal Lines products,
including marketing through the PFS sales force, marketing to affinity groups
and establishing co-marketing arrangements with other insurers.
Life Insurance
The Company's life insurance businesses compete with national, regional and
local insurance companies. Competition is based upon price, product design and
services rendered to producers and policyholders. The insurance industry is
extremely competitive, in both price and services, and no single insurer is
dominant. The recent trend of consolidations in the industry has added to the
competitive environment. Travelers Life and Annuity believes that its focus on
market specialization and its diversified distribution network help it to
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<PAGE>
compete effectively. PFS competes in the market by focusing on supplying an
integrated range of financial products to the middle-income market through a
formalized needs-based sales program.
In January 1995, the U.S. Supreme Court ruled that national banks may sell
annuities. To date, the decision has not had a significant impact on the
Company's annuity sales.
Savings banks also compete directly in the sale of life insurance in
Connecticut, Massachusetts and New York. Competition for the savings dollar
arises from entities such as banks, investment advisors, mutual funds and other
financial institutions.
PFS Investments is registered as a broker-dealer with the Commission, and
in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and
Guam. Tower Square Securities is registered as a broker-dealer with the
Commission, and in all 50 states, Puerto Rico and the District of Columbia.
Similarly, Copeland Equities, Inc., a subsidiary of Copeland, is registered as a
broker-dealer with the Commission, in 49 states and the District of Columbia.
Each is subject to extensive regulation by those agencies and the securities
administrators of those jurisdictions, primarily for the benefits of its
customers, including minimum capital and licensing requirements. PFS Investments
faces competition not only from large financial services firms offering products
and services that cross traditional business boundaries, but also from insurance
companies, including other subsidiaries of the Company, offering life insurance
products with investment features.
Regulation
State Regulation
The Company's insurance subsidiaries are subject to regulation and
supervision in the various states and jurisdictions in which they transact
business. The extent of regulation varies but generally has its source in
statutes that delegate regulatory, supervisory and administrative authority to a
department of insurance of each state. The regulation, supervision and
administration relate, among other things, to the standards of solvency that
must be met and maintained, the licensing of insurers and their agents, the
nature of and limitations on investments, premium rates, restrictions on the
size of risks that may be insured under a single policy, reserves and provisions
for unearned premiums, losses and other obligations, deposits of securities for
the benefit of policyholders, approval of policy forms and the regulation of
market conduct including underwriting and claims practices. In addition, many
states have enacted variations of competitive rate-making laws which allow
insurers to set certain premium rates for certain classes of insurance without
having to obtain the prior approval of the state insurance department. State
insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of companies and other matters.
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At the present time, the Company's insurance subsidiaries are collectively
licensed to transact insurance business in all states, the District of Columbia,
Guam, Puerto Rico, and the U.S. Virgin Islands, as well as Canada, the United
Kingdom and the Northern Mariana Islands.
Although the Company is not regulated as an insurance company, it is the
owner of the capital stock of its insurance subsidiaries and as such is subject
to state insurance holding company statutes, as well as certain other laws, of
each of the states of domicile of its insurance subsidiaries. All holding
company statutes, as well as certain other laws, require disclosure and, in some
instances, prior approval of material transactions between an insurance company
and an affiliate. The holding company statutes, as well as certain other laws,
also require, among other things, prior approval of an acquisition of control of
a domestic insurer and the payment of extraordinary dividends or distributions.
The Company's insurance subsidiaries are subject to various state statutory
and regulatory restrictions in each company's state of domicile, which limit the
amount of dividends or distributions by an insurance company to its
stockholders. The ability of TIC and subsidiaries of TAP to pay dividends to the
Company in the future will depend on their statutory surplus, future earnings
and regulatory restrictions. A maximum of $507 million of statutory surplus is
available in 1997 for dividends from TIC to its parent without prior approval of
the Connecticut Insurance Department. Dividend payments to TAP from its
insurance subsidiaries are limited to $647 million in 1997 without prior
approval of the Connecticut Insurance Department.
The Company's principal insurance subsidiaries are domiciled in Connecticut
and Massachusetts. The insurance holding company law of Connecticut requires
notice to, and approval by, the state insurance commissioner for the declaration
or payment of any dividend, which together with other distributions made within
the preceding twelve months, exceeds the greater of (i) 10% of the insurer's
surplus or (ii) the insurer's net income for the twelve-month period ending the
preceding December 31st, in each case determined in accordance with statutory
accounting practices. Such declaration or payment is further limited by adjusted
unassigned funds (surplus), as determined in accordance with statutory
accounting practices. The insurance holding company laws of other states in
which the Company's insurance subsidiaries are domiciled generally contain
similar (although in certain instances somewhat more restrictive) limitations on
the payment of dividends.
Virtually all states require insurers licensed to do business in their
state to bear a portion of the loss suffered by certain insureds as a result of
the insolvency of other insurers. Depending upon state law, insurers can be
assessed an amount that is generally equal to between 1% and 2% of premiums
written for the relevant lines of insurance in that state each year to pay the
claims of an insolvent insurer. Most of these payments are recoverable through
premium rates, premium tax credits or policy surcharges. Significant increases
in assessments could limit the ability of the Company's insurance subsidiaries
to recover such assessments through tax credits. In addition, there have been
some legislative efforts to limit
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or repeal the tax offset provisions, which efforts, to date, have been generally
unsuccessful. These assessments may increase or decrease in the future depending
upon the rate of insolvencies of insurance companies.
The Company also participates in FHCF, which is a state-mandated
catastrophe reinsurance fund that provides reimbursement to insurers for a
portion of their future catastrophic hurricane losses. FHCF is primarily funded
by premiums from the insurance companies that write residential property
business in Florida and, if insufficient, assessments on insurance companies
that write other property and casualty insurance in Florida, excluding workers'
compensation. FHCF's resources are limited to these contributions and to its
borrowing capacity at the time of a significant catastrophe in Florida.
The Company's insurance subsidiaries are also required to participate in
various involuntary assigned risk pools, principally involving workers'
compensation and automobile insurance, which provide various insurance coverages
to individuals or other entities that otherwise are unable to purchase such
coverage in the voluntary market. Participation in these pools in most states is
generally in proportion to voluntary writings of related lines of business in
that state. The underwriting results of these pools traditionally have been
unprofitable, although the effect of their performance has been partially
mitigated in certain lines of insurance by the states' allowance of increases in
rates for business voluntarily written by pool participants in such states.
Earned premiums related to such pools and assigned risks for the Company were
$379 million, $315 million and $509 million in 1996, 1995 and 1994,
respectively. The related underwriting losses for the Company were $39 million,
$152 million and $300 million in 1996, 1995 and 1994, respectively.
Proposed legislation and regulatory changes have been introduced in the
states from time to time that would modify certain laws and regulations
affecting the financial services industry, including the provisions governing
relationships among insurance companies and agents, investment banks and
commercial banks. The potential impact of such legislation on the Company's
businesses cannot be predicted at this time.
In addition to state insurance laws, the Company's insurance subsidiaries
are also subject to general business and corporation laws, state securities
laws, consumer protection laws, fair credit reporting acts and other laws. The
insurance industry generally is exempt from federal antitrust laws because of
the application of the McCarran-Ferguson Act.
Insurance Regulations Concerning Change of Control
Many state insurance regulatory laws intended primarily for the protection
of policyholders contain provisions that require advance approval by state
agencies of any change in control of an insurance company that is domiciled (or,
in some cases, having such substantial business that it is deemed to be
commercially domiciled) in that state. The Company owns, directly or indirectly,
certain property and casualty insurance companies domiciled in the States of
Connecticut, Florida, Georgia, Illinois, Indiana, Massachusetts,
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Missouri, New Jersey and Texas and certain life insurance companies domiciled in
Connecticut, Massachusetts and Georgia. "Control" is generally presumed to exist
through the ownership of 10% or more of the voting securities of a domestic
insurance company or of any company that controls a domestic insurance company.
Any purchaser of shares of Common Stock representing 10% or more of the voting
power of the Company will be presumed to have acquired control of the Company's
domestic insurance subsidiaries unless, following application by such purchaser
in each insurance subsidiary's state of domicile, the relevant Insurance
Commissioner determines otherwise. In addition, many state insurance regulatory
laws contain provisions that require prenotification to state agencies of a
change in control of a nondomestic admitted insurance company in that state.
While such prenotification statutes do not authorize the state agency to
disapprove the change of control, such statutes do authorize issuance of a cease
and desist order with respect to the nondomestic admitted insurer if certain
conditions exist such as undue market concentration. Any future transactions
that would constitute a change in control of the Company would generally require
prior approval by the insurance departments of the states in which the Company's
insurance subsidiaries are domiciled or commercially domiciled and may require
preacquisition notification in those states that have adopted preacquisition
notification provisions and in which such insurance subsidiaries are admitted to
transact business.
Such requirements may deter, delay or prevent certain transactions
affecting the control of or the ownership of Common Stock, including
transactions that could be advantageous to the stockholders of the Company.
Insurance Regulatory Information System
The NAIC has developed a set of financial relationships or "tests" called
the Insurance Regulatory Information System ("IRIS") that were designed for
early identification of companies that may require special attention by
insurance regulatory authorities. These tests were developed primarily to assist
state insurance departments in executing their statutory mandate to oversee the
financial condition of insurance companies. Insurance companies submit data on
an annual basis to the NAIC, which in turn analyzes the data using ratios
covering twelve categories of financial data with defined "usual ranges" for
each category.
Falling outside the usual range of IRIS ratios is not considered a failing
result; rather, unusual values are viewed as part of the regulatory early
monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges of four or more of the ratios. In normal years,
15% of the companies included in the IRIS system are expected by the NAIC to be
outside the usual range on four or more ratios.
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In each of the last three years certain of the Company's subsidiaries have
been outside of the usual range for certain IRIS ratios. In all such instances,
the regulators have been satisfied upon follow-up that there is no solvency
problem. It is possible that similar events could occur this year, and
management believes that the resolution would be the same. No regulatory action
has been taken by any state insurance department or the NAIC with respect to
IRIS ratios of any of the Company's insurance subsidiaries for the three years
ended December 31, 1996.
For 1996, Travelers Indemnity did not have any IRIS ratios outside the
usual range. However, both the two-year overall operating ratio and the two-year
reserve development to surplus ratios were outside the usual range for Aetna
Casualty and Standard Fire because of actions taken during 1996 and 1995 to
strengthen reserves for environmental and asbestos-related claims. In addition,
the change in writings ratio produced an unusual value for Standard Fire and the
estimated current reserve deficiency to surplus ratio was outside the usual
range for Aetna C&S of America, both as a result of management's decision in
1995 to combine its two intercompany pooling arrangements (one for Personal
Lines and one for Commercial Lines) into one pool. If these two ratios were
recalculated to have all items reflect the new agreement, the ratios would not
produce unusual values. Concurrent with the change in the intercompany pooling
arrangements, capital was reallocated among Aetna P&C insurers, which resulted
in an unusual value in the change in surplus ratio for Standard Fire.
Risk-Based Capital (RBC) Requirements
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement RBC requirements for life insurance
companies and most property and casualty insurance companies, which is designed
to assess minimum capital requirements and to raise the level of protection that
statutory surplus provides for policyholder obligations. The RBC requirements
are to be used as early warning tools by the NAIC and states to identify
companies that merit further regulatory action. For these purposes, an insurer's
surplus is measured in relation to its specific asset and liability profiles. A
company's risk-based capital is calculated by applying factors to various asset,
premium and reserve items, where the factor is higher for those items with
greater underlying risk and lower for less risky items.
The RBC formula for property-casualty insurance companies measures four
major areas of risk facing property and casualty insurers: (i) underwriting,
which encompasses the risk of adverse loss developments and inadequate pricing;
(ii) declines in asset values arising from credit risk; (iii) declines in asset
values arising from investment risks; and (iv) off-balance sheet risk arising
from adverse experience from non-controlled assets, guarantees for affiliates or
other contingent liabilities and reserve and premium growth. Pursuant to the
law, insurers having less statutory surplus than that required by the RBC
calculation will be subject to varying degrees of regulatory action, depending
on the level of capital inadequacy.
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The RBC formula for life insurance companies calculates baseline life
risk-based capital as a mathematical combination of amounts for the following
four categories of risk: (i) asset risk (i.e., the risk of asset default); (ii)
insurance risk (i.e., the risk of adverse mortality and morbidity experience);
(iii) interest rate risk (i.e., the risk of loss due to changes in interest
rates); and (iv) business risk (i.e., normal business and management risk).
The RBC law provides for four levels of regulatory action. The extent of
regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the Company Action Level (as defined by the NAIC),
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing corrective
actions and permits the relevant Insurance Commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) allows the relevant Insurance Commissioner to rehabilitate or liquidate an
insurer in addition to the aforementioned actions if surplus falls below 100% of
the RBC amount. The fourth action level is the Mandatory Control Level (as
defined by the NAIC) which requires the relevant Insurance Commissioner to
rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC
amount. Based on the foregoing formula, at December 31, 1996, the RBC ratios of
the Company's insurance subsidiaries were in excess of levels that would require
company or regulatory action.
The formulas have not been designed to differentiate among adequately
capitalized companies which operate with higher levels of capital. Therefore, it
is inappropriate and ineffective to use the formulas to rate or to rank such
companies. At December 31, 1996, all of the Company's life and property-casualty
insurance companies had adjusted capital in excess of amounts requiring
regulatory action at any of the four levels.
Federal Regulation
Although the federal government does not directly regulate the business of
insurance, other than flood insurance, federal initiatives often have an impact
on the insurance industry. Legislation has been introduced in Congress during
the past several sessions that, if enacted, would result in substantially
greater federal regulation of the insurance business. Current and proposed
federal measures that may affect the property and casualty industry may include
possible changes to CERCLA and the tax laws governing property and casualty
insurance companies, proposed limits to product liability lawsuits and other
tort reform proposals. In addition, proposed legislation has been introduced in
Congress from time to time that would modify certain laws and regulations
affecting the financial services industry, including the provisions regarding
affiliations among insurance companies, investment banks and commercial banks.
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It is not possible to predict whether such proposed legislation will be
enacted, what form such legislation might take when enacted, or the potential
effects of such legislation on the Company and its competitors.
Certain variable life insurance and individual and group variable
annuities, as well as modified guaranteed annuities, and their related separate
accounts are subject to regulation by the Commission.
Investments
This section discusses the investment portfolios of the businesses
described in the Company's insurance services segments.
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities, real
estate mortgages and real estate.
At December 31, 1996, the investment holdings of the companies included in
the insurance services segments were composed primarily of fixed maturities. At
December 31, 1996, approximately 96.1% in total dollar amount of the fixed
maturities portfolios of such companies had investment grade ratings. The
remaining investments are principally mortgage loans and real estate, discussed
below, policy loans and other investments. For additional information regarding
these investment portfolios, see Note 5 of Notes to Consolidated Financial
Statements and the discussion of Asset Quality in the Property & Casualty
Insurance Services Segment discussion in Item 7 of this Form 10-K, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Consistent with the nature of related contract obligations, the invested
assets attributable to group insurance and individual life, accident and health
and financial services are primarily long-term fixed income investments such as
corporate debt securities, mortgage and asset-backed securities and mortgage
loans. A small portion of the invested assets related to these operations is in
preferred and common stocks and real estate equity investments. The
property-casualty fixed maturities portfolios (principally bonds) are shifted
from time to time to respond to the changing economic outlook, insurance
underwriting results and the resultant changes in the federal income tax
position of the Company and its subsidiaries.
Cash available for investment is principally derived from operating
activities and investment income. In addition, cash becomes available for
investment from prepayment, maturity and sale of investments. In recent years,
the underperforming mortgage loan and real estate portfolios have been
significantly reduced. See "-- Mortgage Loans and Real Estate Held for Sale."
Different investment policies have been developed for various lines of
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business based on the product requirements, the type and term of the liabilities
associated with these products, regulatory requirements and tax treatment of the
businesses in which each company is engaged.
Mortgage Loans and Real Estate Held for Sale
At December 31, 1996, the mortgage loan and real estate held for sale
portfolios of the businesses included in the Company's insurance services
segments consisted of approximately $3.8 billion and $695 million, respectively.
Mortgage loans and real estate held for sale at December 31, 1996 include $811
million and $136 million, respectively, from the Acquisition. At December 31,
1995 and 1994, the mortgage loan portfolio consisted of approximately $4.0
billion and $5.4 billion, respectively, and the real estate held for sale
portfolio consisted of approximately $321 million and $418 million,
respectively. The Company has continued a program of disposing of its real
estate investments and expediting the payoff of certain mortgage loans and
reinvesting the proceeds to obtain current market yields. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information.
The Company's accelerated liquidation strategy for foreclosed real estate
and certain mortgage loans has mitigated the negative impact that these
underperforming portfolios have had on the Company's investment income and the
Company believes that continuation of this strategy will have similar mitigating
effects. The Company expects that approximately half of maturing commercial
mortgage loans in its portfolio will be refinanced, restructured or foreclosed.
Restructured loans are defined as loans the terms of which have been changed
from the original contract generally by lowering the pay rate of interest in the
early years after modification. Loans which have pay rates of interest after
modification that are equal to or above market rates are not included in the
underperforming mortgage loan inventory. At December 31, 1996, 1995 and 1994,
approximately $91 million, $252 million and $511 million, or 2%, 6% and 9%,
respectively, of the combined mortgage loan portfolio of the Company was
classified as underperforming. Underperforming mortgage loans include delinquent
loans, loans in the process of foreclosure and loans modified at interest rates
below market.
For information regarding the principal balance of mortgage loans at
December 31, 1996 by contractual maturity, see Note 5 of Notes to Consolidated
Financial Statements. Actual maturities will differ from contractual maturities
because borrowers may have the right to prepay loans with or without prepayment
premiums. Unscheduled payments and sales of mortgage loans were $1.0 billion in
1996, $1.0 billion in 1995 and $1.3 billion in 1994. The average remaining life
of these mortgages is six years.
Real estate management evaluates the portfolio on an ongoing basis,
assessing the probabilities of loss with respect to a comprehensive series of
projections, including a host of
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variables relating to the borrower, the property, the term of the loan, the
tenant composition, rental rates, other supply and demand factors, and overall
economic conditions.
The following table summarizes by property type the mortgage loan portfolio
and real estate held for sale included in the investment portfolios of the
Company as of December 31, 1996, 1995 and 1994. For information summarizing the
geographic distribution of the mortgage loan portfolio and real estate assets,
see Note 5 of Notes to Consolidated Financial Statements.
(in millions)
Property Type: Mortgage Loans Real Estate
- -------------- -------------- -----------
1996 1995 1994 1996 1995 1994
------ ------ ------ ------ ------ ------
Commercial:
Office $1,698 $1,551 $2,141 $ 190 $ 177 $ 224
Apartment 467 654 1,112 68 8 9
Hotel 244 594 642 299 47 79
Retail 518 449 623 60 42 46
Industrial 158 181 228 31 9 13
Other 41 45 108 34 26 33
------ ------ ------ ------ ------ ------
Total commercial 3,126 3,474 4,854 682 309 404
Agricultural 686 574 562 13 12 14
------ ------ ------ ------ ------ ------
Total $3,812 $4,048 $5,416 $ 695 $ 321 $ 418
====== ====== ====== ====== ====== ======
Derivatives
See the section entitled "End User Activity" in Note 19 of Notes to
Consolidated Financial Statements for a discussion of the policies and
transactions related to derivatives of the Company.
CORPORATE AND OTHER OPERATIONS
In addition to its four business segments, the Company's Corporate and
Other segment consists of unallocated expenses and earnings primarily related to
interest, corporate administration, and certain corporate investments. In 1995
and through the date of sale in 1996, this segment also includes the Company's
interest in RCM Capital Management, a California Limited Partnership ("RCM").
In June 1996, the Company sold 100% of its interest in RCM, which provides
investment management services, to Dresdner Bank AG. Assets under management by
RCM were $26.2 billion at December 31, 1995 and $22.5 billion at December 31,
1994.
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In October 1995, the Company completed the sale to United HealthCare
Corporation of its 48.25% interest in The MetraHealth Companies, Inc.
("MetraHealth"). MetraHealth was formed in January 1995 as a joint venture of
the group medical insurance businesses of the Company and Metropolitan Life
Insurance Company ("MetLife"). The Company received $831 million in cash from
the sale of its interest in MetraHealth. During 1996, the Company received a
contingency payment (based on MetraHealth's 1995 results) and recognized a gain
in 1996 of $31 million after tax ($48 million pre-tax).
In January 1995, the Company completed the sale of its group life and
related businesses to MetLife. The purchase price for the group life business
was $350 million. In connection with the sale, the Company agreed to cede to
MetLife 100% of its risks in the businesses sold on an indemnity reinsurance
basis, effective January 1, 1995. All of the businesses sold to MetLife or
contributed to MetraHealth were included in the Company's Managed Care and
Employee Benefits Operations in 1994. These operations have been accounted for
as a discontinued operation. In 1995 and 1996 the Company's discontinued
operations reflect the medical insurance business not yet transferred, the gains
from the sales of these businesses and, in 1995, its equity interest in the
earnings of MetraHealth. See Note 3 of Notes to Consolidated Financial
Statements.
OTHER INFORMATION
General Business Factors
In the judgment of the Company, no material part of the business of the
Company and its subsidiaries is dependent upon a single customer or group of
customers, the loss of any one of which would have a materially adverse effect
on the Company, and no one customer or group of affiliated customers accounts
for as much as 10% of the Company's consolidated revenues.
At December 31, 1996, the Company had approximately 56,200 full-time and
2,700 part-time employees.
Source of Funds
For a discussion of the Company's sources of funds and maturities of the
long-term debt of the Company's subsidiaries, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources," and Note 10 of Notes to Consolidated Financial
Statements.
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Taxation
For a discussion of tax matters affecting the Company and its operations,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Notes 1 and 13 of Notes to Consolidated Financial
Statements.
Financial Information about Industry Segments
For financial information regarding industry segments of the Company, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and Note 4 of Notes to Consolidated Financial Statements.
Executive Officers of the Company
The current executive officers of the Company are indicated below. Periods
of offices held include offices with the Company's predecessor, CCC, and unless
stated otherwise all offices listed below are with the Company. Ages are given
as of March 5, 1997.
Officer
Name Age Positions Since
---- --- --------- -------
Sanford I. Weill 63 Chairman of the Board 1986
and Chief Executive
Officer
James Dimon 40 President and Chief 1986
Operating Officer of the
Company; Chairman and Chief
Executive Officer of SB
Holdings and SBI
Jeffrey B. Lane 54 Vice Chairman 1996
Robert I. Lipp 58 Vice Chairman of the Company; 1986
Chairman of the Board,
President and Chief
Executive Officer of TAP
Jon C. Madonna 53 Vice Chairman of the Company; 1997
Vice Chairman of TAP
Joseph J. Plumeri II 53 Vice Chairman of the Company; 1994
Chief Executive Officer
of PFS
Michael A. Carpenter 49 Executive Vice President 1995
of the Company; Chairman,
President and Chief
Executive Officer of TIC
and TLAC
Irwin Ettinger 58 Executive Vice President 1987
and Chief Accounting
Officer
Charles O. Prince, III 47 Executive Vice President, 1986
General Counsel and
Secretary
Steven D. Black 44 Vice Chairman and Chief 1996*
Operating Officer of
SB Holdings and SBI
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Officer
Name Age Positions Since
---- --- --------- -----
Charles J. Clarke 61 Chairman and Chief Executive 1995*
Officer-Commercial Lines
of TAP
Donald R. Cooper 56 Chief Actuary 1995
Peter M. Dawkins 58 Chairman, President and 1992*
Chief Executive Officer
of Travelers Group Diversified
Distribution Services, Inc.
Jay S. Fishman 44 Senior Vice President of the 1991
Company; Vice Chairman of
TAP and President and Chief
Operating Officer of TAP's
Commercial Lines
Marjorie Magner 47 President and Chief Operating 1996*
Officer of CCC
Heidi G. Miller 43 Senior Vice President and 1992
Chief Financial Officer
Marc P. Weill 40 Senior Vice President and 1991
Chief Investment Officer
Robert B. Willumstad 51 Chairman and Chief Executive 1993*
Officer of CCC
- ----------------
* Indicates date that such officer became a member of the Company's Planning
Group.
Sanford I. Weill has been a director of the Company since 1986. He has been
Chairman of the Board and Chief Executive Officer of the Company and its
predecessor, CCC, since 1986; he was also its President from 1986 until 1991. He
was President of American Express Company from 1983 to 1985; Chairman of the
Board and Chief Executive Officer of American Express Insurance Services, Inc.
from 1984 to 1985; Chairman of the Board and Chief Executive Officer, or a
principal executive officer, of Shearson Lehman Brothers Inc. from 1965 to 1984;
Chairman of the Board of Shearson Lehman Brothers Holdings Inc. from 1984 to
1985; and a founding partner of Shearson's predecessor partnership from 1960 to
1965. Mr. Weill has been a director of TAP since 1996. Mr. Weill's son, Marc P.
Weill, is a Senior Vice President and an executive officer of the Company. Mr.
Weill is Chairman of the Board of Trustees of Carnegie Hall, and a director of
the Baltimore Symphony Orchestra. Mr. Weill is a member of the Board of
Governors of New York Hospital and is Chairman of the Board of Overseers of
Cornell University Medical College. He is on the Board of Overseers of Memorial
Sloan-Kettering Cancer Center. He is a member of Cornell University's Johnson
Graduate School of Management Advisory Board and a Board of Trustees Fellow. Mr.
Weill is Chairman of the National Academy Foundation, whose member programs
include the Academy of Finance, the Academy of Travel and Tourism and the
Academy of Public Service.
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Mr. Dimon has been a director of the Company since September 1991. He is
President and Chief Operating Officer of the Company. He is also Chairman of the
Board, Chief Executive Officer and a member of the executive committee of SBI.
Mr. Dimon has been a director of TAP since 1996. From May 1988 to June 1995, he
was Chief Financial Officer of the Company. From May 1988 to September 1991, he
was Executive Vice President of the Company. Mr. Dimon was Chief Operating
Officer of SBI until January 1996 and was Senior Executive Vice President and
Chief Administrative Officer of SBI from 1990 to 1991. He is also Chief
Executive Officer and Chairman of the Board of SB Holdings. From March 1994 to
January 1996, he was Chief Operating Officer of SB Holdings. From 1986 to 1988,
Mr. Dimon was Senior Vice President and Chief Financial Officer of CCC, the
Company's predecessor. From 1982 to 1985, he was a Vice President of American
Express Company and Assistant to the President, Sanford I. Weill. Mr. Dimon is a
trustee of New York University Medical Center and a director of the Center on
Addiction and Substance Abuse and the National Association of Securities
Dealers, Inc.
Mr. Lane has been a Vice Chairman of the Company since January 1996. He has
served as a Director of SBI from January 1991 through March 1996 and as a
Director of SB Holdings from November 1993. Mr. Lane served as Vice Chairman of
SBI from January 1991 through January 1996 and as Vice Chairman of SB Holdings
from November 1993 through January 1996. He joined the Company in 1990. Prior to
joining the Company in 1990, Mr. Lane was President and Chief Operating Officer
of Shearson Lehman Brothers Inc.
Mr. Lipp has been a director of the Company since 1991 and is a Vice
Chairman of the Company. Mr. Lipp has been Chairman of the Board, Chief
Executive Officer and President of TAP since January 1996. Mr. Lipp has been
Chairman of the Board and Chief Executive Officer of The Travelers Insurance
Group Inc. since December 1993. From 1991 to 1993, he was Chairman and Chief
Executive Officer of CCC. From April 1986 through September 1991, he was an
Executive Vice President of the Company and its corporate predecessor. Prior to
joining the Company in 1986, he was a President and a director of Chemical New
York Corporation and Chemical Bank where he held senior executive positions for
more than five years prior thereto. Mr. Lipp is a director of The New York City
Ballet, Wadsworth Atheneum and the Massachusetts Museum of Contemporary Art and
Chairman of Dance-On Inc., a private foundation.
Mr. Madonna joined the Company in February 1997 as Vice Chairman, and also
serves as Vice Chairman of TAP. Prior to joining the Company, Mr. Madonna was
Chairman of KPMG International since October 1995. From 1990 to 1996, he was
Chairman and Chief Executive Officer of KPMG Peat Marwick LLP.
Mr. Plumeri has been a Vice Chairman of the Company since July 1994 and has
been Chairman and Chief Executive Officer of PFS since April 1996. He joined the
Company in August 1993, serving as President of SBI from that time through July
1994. Mr. Plumeri had worked for Shearson Lehman Brothers Inc. or its
predecessors for over 25 years, in various
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<PAGE>
positions of increasing responsibility, until SBI acquired certain businesses
from Shearson Lehman Brothers Holdings Inc. ("SLB"). At that time, Mr. Plumeri
was a Managing Partner of SLB, and from 1990 until September 1992 he served as
President of SLB's Private Client Group.
Mr. Carpenter has been an Executive Vice President of the Company since
July 1995 and also serves as Chairman, Chief Executive Officer and President of
TIC and TLAC. From January 1989 to June 1994, Mr. Carpenter was Chairman of the
Board, President and Chief Executive Officer of Kidder, Peabody Group, Inc., an
investment banking and brokerage company that was a wholly owned subsidiary of
General Electric Company. Prior thereto, he served as Executive Vice President
of General Electric Capital Corporation and Vice President of General Electric
Company.
Mr. Ettinger has been an Executive Vice President of the Company since
January 1996. Prior to joining CCC as Senior Vice President in October 1987, he
was Partner in charge of the Tax Department of Arthur Young and Company's New
York offices.
Mr. Prince has been General Counsel of the Company or its predecessor since
1983, and served as a Senior Vice President from 1986 until January 1996, when
he became an Executive Vice President.
Mr. Black has been Vice Chairman of SB Holdings since November 1993 and
Vice Chairman of SBI since July 1993. He was elected Chief Operating Officer of
those companies in January 1996. He is also a member of the executive committee
and a director of each of SB Holdings and SBI. Mr. Black has served as the head
of Smith Barney's Capital Markets Division from 1991 to January 1996, and has
served in several positions at Smith Barney since 1974.
Mr. Clarke has been Chairman and Chief Executive Officer--Commercial Lines
of TAP since January 1996, and Chairman of the Company's Property-Casualty
Commercial Lines since 1990. Mr. Clarke has served in various positions at
Travelers P&C since 1958.
Mr. Cooper has been Chief Actuary of the Company since March 1995 and has
been Vice Chairman of Travelers Insurance Holdings Inc. since October 1990. He
also serves as Chairman of the Board of both AHL and Resource Deployment, Inc.,
subsidiaries of the Company.
Mr. Dawkins has been Chairman, President and Chief Executive Officer of
Travelers Group Diversified Distribution Services, Inc. since August 1996. In
addition, he has been a director of Travelers Group Exchange, Inc. since
September 1996 and became its Chief Executive Officer in January 1997. Mr.
Dawkins joined the Company in 1991 as Chairman and Chief Executive Officer of
Primerica Financial Services, Inc., and served in that capacity until August
1996.
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<PAGE>
Mr. Fishman has been a Senior Vice President of the Company since October
1991. In January 1996, he became Vice Chairman and Chief Administrative Officer
of TAP and since October 1996 he has been President and Chief Operating Officer
of TAP's Commercial Lines. He has also served as Vice Chairman of TIGI since
September 1995 and as Chief Financial Officer of that company since December
1993. Mr. Fishman was Treasurer of the Company from October 1991 to December
1993. Prior thereto, he held various other positions with the Company and its
subsidiaries since 1989, when he joined the Company from Shearson Lehman
Brothers Inc., where he was Senior Vice President of Merchant Banking.
Ms. Magner has been President of CCC since June 1993 and became its Chief
Operating Officer in December 1995. Ms. Magner joined CCC in May 1987, and
served as Chief Administrative Officer from 1993 to 1996. From 1991 to 1993, she
was Executive Vice President, Marketing and Operations of CCC.
Ms. Miller has been Chief Financial Officer and Senior Vice President of
the Company since June 1995. She also serves as Chief Credit Officer of SBI, a
position she has held since September 1994. Ms. Miller joined the Company in
February 1992 as a Vice President. Prior thereto, she was a Managing Director in
the Emerging Markets Division of Chemical Bank, a position she held from 1987 to
1992.
Marc P. Weill has been a Senior Vice President and Chief Investment Officer
of the Company since January 1992. He also serves as a director, Chairman of the
Board and President of Travelers Asset Management International Corporation, a
registered investment advisor. Mr. Weill has held various other positions with
the Company and its subsidiaries since January 1991. He is the son of Sanford I.
Weill.
Mr. Willumstad has been Chairman and Chief Executive Officer of CCC since
June 1993 and has been with that company since 1987. From 1989 until assuming
his current position, he served as President of the Consumer Finance Services
unit of the Company. Mr. Willumstad is a member of the U.S. Region Board of
Directors of MasterCard International.
GLOSSARY OF INSURANCE TERMS
Accident year ................ The annual accounting period in which loss
events occurred, regardless of when the
losses are actually reported, booked or paid.
Adjusted unassigned surplus... Unassigned surplus as of the most recent
statutory annual report reduced by
twenty-five percent of that year's unrealized
appreciation in value or revaluation of
assets or unrealized profits on investments,
as defined in such report.
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Admitted insurer.............. A company licensed to transact insurance
business within a state.
Alternative market............ The segment of the insurance market which has
developed in response to volatility in cost
and availability of traditional commercial
insurance coverage and consists of various
risk financing mechanisms, including self
insurance, captive insurance companies, risk
retention groups and residual market
business.
Annuity....................... A contract that pays a periodic income
benefit for the life of a person (the
annuitant), the lives of two or more persons
or for a specified period of time.
Assigned risk pools........... Reinsurance pools which cover risks for those
unable to purchase insurance in the voluntary
market because the risk is too great or rate
inadequacy has reduced the supply of
insurance. The costs of the risks associated
with these pools are charged back to
insurance carriers in proportion to their
direct writings.
Assumed reinsurance........... Insurance liabilities acquired from a ceding
company.
Assumption reinsurance........ A transaction whereby the ceding company
transfers its entire obligation under the
policy to the reinsurer, who becomes directly
liable to the policyholder in all respects,
including collecting premiums and paying
benefits. See "Reinsurance."
Attachment point.............. The amount of losses above which excess of
loss reinsurance becomes operative.
Broker........................ One who negotiates contracts of insurance or
reinsurance on behalf of an insured party,
receiving a commission from the insurer or
reinsurer for placement and other services
rendered.
Capacity...................... The percentage of surplus, or the dollar
amount of exposure, that an insurer or
reinsurer is willing to place at risk.
Capacity may apply to a single risk, a
program, a line of business or an entire book
of business. Capacity may be constrained by
legal restrictions, corporate restrictions or
indirect restrictions.
Captive company............... An insurance company formed to insure the
risks of its parent entity or entities.
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Case reserves................. Loss reserves, established with respect to
specific, individual reported claims.
Casualty insurance............ Insurance which is primarily concerned with
the losses caused by injuries to third
persons (i.e., not the insured) and the legal
liability imposed on the insured resulting
therefrom. It includes, but is not limited
to, employers' liability, workers'
compensation, public liability, automobile
liability, personal liability and aviation
liability insurance. It excludes certain
types of losses that by law or custom are
considered as being exclusively within the
scope of other types of insurance, such as
fire or marine.
Catastrophe................... A severe loss, usually involving risks such
as fire, earthquake, windstorm, explosion and
other similar events.
Catastrophe loss.............. Loss and directly identified loss adjustment
expenses from catastrophes.
Catastrophe reinsurance....... A form of excess of loss property reinsurance
which, subject to a specified limit,
indemnifies the ceding company for the amount
of loss in excess of a specified retention
with respect to an accumulation of losses
resulting from a catastrophic event. The
actual reinsurance document is called a
"catastrophe cover."
Cede; ceding company.......... When an insurer reinsures its liability with
another insurer (a "cession"), it "cedes"
business and is referred to as the "ceding
company."
Ceded reinsurance............. Risks transferred to another company as
reinsurance. See "Reinsurance."
Claim......................... Request by an insured for indemnification by
an insurance company for loss incurred from
an insured peril.
Claim adjustment expense...... See "Loss adjustment expense."
Claims and claim adjustment
expense..................... See "Loss and loss adjustment expenses."
Claims and claim adjustment
expense reserves............ See "Loss reserves."
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Clash cover................... An excess of loss agreement with a retention
higher than the limits on any one reinsured
policy. The agreement is thus only exposed to
loss when two or more policies (perhaps from
different lines of business) are involved in
a common occurrence in an amount greater than
the clash cover retention. Also known as
contingency cover.
Combined ratio................ The sum of the loss and LAE ratio, the
underwriting expense ratio and, where
applicable, the ratio of dividends to
policyholders to net premiums earned. A
combined ratio under 100% generally indicates
an underwriting profit. A combined ratio over
100% generally indicates an underwriting
loss.
Commercial lines.............. The various kinds of insurance which are
written for businesses.
Commutation agreement......... An agreement between a reinsurer and a ceding
company whereby the reinsurer pays an agreed
upon amount in exchange for a complete
discharge of all obligations, including
future obligations, between the parties for
reinsurance losses incurred.
Contractholder funds.......... Receipts from the issuance of universal life,
pension investment and certain individual
annuity contracts. Such receipts are
considered deposits on investment contracts
that do not have substantial mortality or
morbidity risks.
Deductible.................... The amount of loss that an insured retains.
Deferred acquisition costs.... Commissions and premium taxes and, for
certain life insurance lines, other
origination costs, which vary with and are
primarily related to the production of new
business, are deferred and amortized to
achieve a matching of revenues and expenses
when reported in financial statements
prepared in accordance with GAAP.
Defined contribution plans.... Type of pension plan in which the
contribution rate is certain but the
retirement benefit is variable.
Deposits and other
considerations.............. Consist of cash deposits and charges for
mortality risk and expenses associated with
universal life insurance, annuities and group
pensions.
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Direct written premiums....... The amounts charged by a primary insurer to
insureds in exchange for coverages provided
in accordance with the terms of an insurance
contract.
Earned premiums or premiums
earned...................... That portion of property-liability premiums
written that applies to the expired portion
of the policy term. Earned premiums are
recognized as revenues under both SAP and
GAAP.
Excess liability.............. Additional casualty coverage above the first
layer.
Excess loss coverage.......... Coverage which indemnifies the person for
that portion of the loss (arising out of a
loss occurrence) which is in excess of the
deductible.
Excess of loss reinsurance.... Reinsurance that indemnifies the reinsured
against all or a specified portion of losses
under reinsured policies in excess of a
specified dollar amount or "retention."
Expense ratio................. See "Underwriting expense ratio."
Extra contractual obligations
losses...................... Losses incurred by an insurer, beyond those
that would have been incurred as specified in
the insurance agreement with an insured, due
to monetary awards required by a court of law
against the insurer for its negligence to or
bad faith in dealing with its insured.
Facultative reinsurance....... The reinsurance of all or a portion of the
insurance provided by a single policy. Each
policy reinsured is separately negotiated.
Fidelity and surety programs.. Insurance which guarantees performance of an
obligation or indemnifies for loss due to
embezzlement or wrongful abstraction of
money, securities or other property.
Fiduciary accounts............ Accounts held on behalf of others.
General account............... All an insurer's assets other than those
allocated to separate accounts.
Guaranteed cost insurance..... Premium charged on a prospective basis which
may be fixed or adjustable on a specified
rating basis but never on the basis of loss
experience in the period of coverage.
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<PAGE>
Guaranteed cost products...... An insurance policy where the premiums
charged will not be adjusted for actual loss
experience during the covered period.
Guaranteed investment
contracts (GICs)............ Group contracts sold to pension plans, profit
sharing plans and funding agreements that
guarantee a stated interest rate for a
specified period of time.
Guaranty fund................. State-regulated mechanism which is financed
by assessing insurers doing business in those
states. Should insolvencies occur, these
funds are available to meet some or all of
the insolvent insurer's obligations to
policyholders.
Incurred but not reported
("IBNR") reserves........... Reserves for estimated losses and LAE which
have been incurred but not yet reported to
the insurer.
Indemnity reinsurance......... A transaction whereby the reinsurer agrees to
indemnify the ceding company against all or
part of the loss that the latter may sustain
under the policies it issued that are being
reinsured. The ceding company remains
primarily liable as the direct insurer on all
risks ceded. See "Reinsurance."
Inland marine................. A broad type of insurance generally covering
articles that may be transported from one
place to another, as well as bridges, tunnels
and other instrumentalities of
transportation. It includes goods in transit
(generally other than transoceanic) and may
include policies for movable objects such as
personal effects, personal property, jewelry,
furs, fine art and others.
Insurance..................... Mechanism for contractually shifting burdens
of a number of risks by pooling them.
Involuntary business
(alternative market)........ Risks that are not insurable in the voluntary
market due to either the level of risk or
pricing. Alternative markets are largest for
lines in which state governments or other
agencies mandate coverage such as workers'
compensation. Generally states provide
residual market plans that are designed to
allocate the underwriting experience for
these coverages in proportion to a given
carrier's market share.
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<PAGE>
IRIS ratios................... Financial ratios calculated by the NAIC to
assist state insurance departments in
monitoring the financial condition of
insurance companies.
Large deductible
policy...................... An insurance policy where the customer
assumes at least $25,000 or more of each
loss.
Life contingencies............ Contingencies affecting the duration of life
of an individual or a group of individuals.
Long-term care................ Coverage for extended stays in a nursing home
or home health services.
Loss.......................... An occurrence that is the basis for
submission and/or payment of a claim. Losses
may be covered, limited or excluded from
coverage, depending on the terms of the
policy.
Loss adjustment expense
("LAE")..................... The expenses of settling claims, including
legal and other fees and the portion of
general expenses allocated to claim
settlement costs.
Loss and LAE ratio............ For SAP it is the ratio of incurred losses
and loss adjustment expenses to net premiums
earned. For GAAP it is the ratio of incurred
losses and loss adjustment expenses to net
premiums earned plus fee income.
Loss ratios................... See "Combined ratio."
Loss reserves................. Liabilities established by insurers and
reinsurers to reflect the estimated cost of
claims incurred that the insurer or reinsurer
will ultimately be required to pay in respect
of insurance or reinsurance it has written.
Reserves are established for losses and for
LAE, and consist of case reserves and IBNR
reserves.
Losses and loss adjustment
expenses.................... The sum of losses incurred and loss
adjustment expenses.
Losses incurred............... The total losses sustained by an insurance
company under a policy or policies, whether
paid or unpaid. Incurred losses includes a
provision for IBNR.
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<PAGE>
Morbidity..................... The rate at which people become diseased,
mentally or physically, or physically
impaired.
Mortality..................... The rate at which people die.
Multi-peril policies.......... Refers to policies which cover both property
and third party liability exposures.
National Association of
Insurance Commissioners
("NAIC").................... An organization of the insurance
commissioners or directors of all 50 states
and the District of Columbia organized to
promote consistency of regulatory practice
and statutory accounting standards throughout
the United States.
Net written premiums.......... Direct written premiums plus assumed
reinsurance less premiums ceded to
reinsurers.
Non-admitted coverage......... Insurance coverage written in a given state
by an insurer not licensed in that state.
Novation...................... A transaction in which the original direct
insurer's obligations are completely
extinguished, resulting in no further
exposure to loss arising on the business
novated.
Personal lines................ Types of insurance written for individuals or
families, rather than for businesses.
Policy loan................... A loan made by an insurance company to a
policyholder on the security of the cash
value of the policy. Policy loans offset
benefits payable to policyholders.
Pool.......................... An organization of insurers or reinsurers
through which particular types of risks are
underwritten with premiums, losses and
expenses being shared in agreed percentages.
Premium equivalents........... Premium equivalents represent estimates of
premiums that customers would have been
charged under a fully insured arrangement,
based on expected losses associated with
non-risk-bearing components of each account,
as determined in the pricing process. Premium
equivalents are indicative of the volume of
business handled by an insurer in servicing
relationships. Premium equivalents do not
represent actual premium revenues.
77
<PAGE>
Premiums...................... The amount charged during the year on
policies and contracts issued, renewed or
reinsured by an insurance company.
Producer...................... Contractual entity which directs insureds to
the insurer for coverage. See "Broker."
Property insurance............ Insurance that provides coverage to a person
with an insurable interest in tangible
property for that person's property loss,
damage or loss of use.
Quota share reinsurance....... Reinsurance wherein the insurer cedes an
agreed fixed percentage of liabilities,
premiums and losses for each policy covered
on a pro rata basis.
Rate of renewal/retention
ratio....................... Current period renewal accounts or policies
as a percentage of expired accounts or
policies.
Rates......................... Amounts charged per unit of insurance.
Reinsurance................... The practice whereby one insurer, called the
reinsurer, in consideration of a premium paid
to such insurer, agrees to indemnify another
insurer, called the ceding company, for part
or all of the liability assumed by the ceding
company under one or more policies or
contracts of insurance which it has issued.
Reinsurance agreement......... A contract specifying the terms of a
reinsurance transaction.
Reinsurance pools and
associations................ Mechanisms established to aggregate
insurance, and then distribute results to
participants in the mechanism. The pool or
association performs rating, loss adjustment
and engineering services for certain
exposures. In some cases, they are
established to absorb business that will not
be written voluntarily by insurers.
Residual market (involuntary
business)................... Insurance market which provides coverage for
risks unable to purchase insurance in the
voluntary market either because the risk is
too great or rate inadequacy has reduced the
supply of insurance. Residual markets are
frequently created by state legislation
either because of lack of available coverage
such as property coverage in a windstorm
prone area or protection of the accident
victim as in the case of workers'
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<PAGE>
compensation. The costs of the residual
market are usually charged back to the direct
insurance carriers in proportion to the
carriers' voluntary market shares for the
type of coverage involved.
Retention..................... The amount of exposure an insurance company
retains on any one risk or group of risks.
Retrospective premiums........ Premiums related to retrospectively rated
policies.
Retrospective rating.......... A plan or method which permits adjustment of
the final premium or commission on the basis
of actual loss experience, subject to certain
minimum and maximum limits.
Risk-based capital ("RBC").... A measure adopted by the NAIC for assessing
the minimum statutory capital and surplus
requirements of insurers.
Risk retention................ The amount or portion of a risk an insurer
retains for its own account after ceded
reinsurance. Losses above the stated
retention level are collectible from the
reinsurer. The retention level may be stated
as a percentage or dollar amount.
Salvage....................... The amount of money an insurer recovers
through the sale of property transferred to
the insurer as a result of a loss payment.
Second injury fund............ The employer of an injured, impaired worker
is responsible only for the workers'
compensation benefit for the most recent
injury; the second injury fund would cover
the cost of any additional benefits for
aggravation of a prior condition. The cost is
shared by the insurance industry, funded
through assessments to insurance companies
based on either premiums or losses.
Self-insured retentions....... That portion of the risk retained by a person
for its own account.
Separate accounts............. Funds for which investment income and
investment gains and losses accrue directly
to, and investment risk is borne by, the
contractholders. The assets of these separate
accounts are legally segregated and not
subject to claims that arise out of any other
business of the insurance company.
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<PAGE>
Servicing carrier............. An insurance company that provides, for a
fee, various services including policy
issuance, claims adjusting and customer
service for insureds in a reinsurance pool.
Standard policy forms......... Self-contained pre-printed policy language
used when a large number of insureds face
similar loss exposures.
Statutory accounting practices
("SAP")..................... The rules and procedures prescribed or
permitted by United States state insurance
regulatory authorities for recording
transactions and preparing financial
statements. Statutory accounting practices
generally reflect a modified going concern
basis of accounting.
Statutory surplus............. As determined under SAP, the amount remaining
after all liabilities, including loss
reserves, are subtracted from all admitted
assets. Admitted assets are assets of an
insurer prescribed or permitted by a state to
be recognized on the statutory balance sheet.
Statutory surplus is also referred to as
"surplus" or "surplus as regards
policyholders" for statutory accounting
purposes.
Structured settlements........ Periodic payments to an injured person or
survivor for a determined number of years or
for life, typically in settlement of a claim
under a liability policy, usually funded
through the purchase of an annuity.
Subrogation................... A principle of law incorporated in insurance
policies, which enables an insurance company,
after paying a loss to its insured, to
recover the amount of the loss from another
who is legally liable for it.
Surrender value............... The amount of money, usually the legal
reserve under the policy, less sometimes a
surrender charge, which an insurance company
will pay to a policyholder who cancels a
policy. This value may be used as collateral
for a loan.
Third party liability......... A liability owed to a claimant (or "third
party") who is not one of the two parties to
the insurance contract. Insured liability
claims are referred to as third party claims.
Treaty reinsurance............ The reinsurance of a specified type or
category of risks defined in a reinsurance
agreement (a "treaty") between a primary
insurer or other reinsured and a reinsurer.
Typically, in treaty reinsurance, the primary
insurer or reinsured is
80
<PAGE>
obligated to offer and the reinsurer is
obligated to accept a specified portion of
all such type or category of risks
originally written by the primary insurer or
reinsured.
Umbrella coverage............. A form of insurance protection against losses
in excess of amounts covered by other
liability insurance policies or amounts not
covered by the usual liability policies.
Unassigned funds (surplus).... The undistributed and unappropriated amount
of statutory surplus.
Underwriter................... An employee of an insurance company who
examines, accepts or rejects risks and
classifies accepted risks in order to charge
an appropriate premium for each accepted
risk. The underwriter is expected to select
business that will produce an average risk of
loss no greater than that anticipated for the
class of business.
Underwriting.................. The insurer's or reinsurer's process of
reviewing applications for insurance
coverage, and the decision whether to accept
all or part of the coverage and determination
of the applicable premiums; also refers to
the acceptance of such coverage.
Underwriting expense ratio.... For SAP it is the ratio of underwriting
expenses incurred to net premiums written.
For GAAP it is the ratio of underwriting
expenses incurred to net premiums written
plus fee income.
Underwriting profit or
underwriting loss........... The pre-tax profit or loss experienced by a
property and casualty insurance company after
deducting loss and loss adjustment expenses
and operating expenses from net earned
premiums. This profit or loss calculation
includes reinsurance assumed and ceded but
excludes investment income.
Unearned premium.............. The portion of premiums written that is
allocable to the unexpired portion of the
policy term.
Voluntary market.............. The market in which a person seeking
insurance obtains coverage without the
assistance of residual market mechanisms.
Wholesale broker.............. An independent or exclusive agent that
represents both admitted and non admitted
insurers in market areas which include
standard, non-standard, specialty and excess
and
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<PAGE>
surplus lines of insurance. The wholesaler
does not deal directly with the insurance
consumer. The wholesaler deals with the
retail agent or broker.
Workers' compensation......... A system (established under state laws) under
which employers provide insurance for benefit
payments to their employees for work-related
injuries, deaths and diseases, regardless of
fault.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated Financial
Statements and Schedules on page F-1 hereof.
(2) Financial Statement Schedules. See Index to Consolidated
Financial Statements and Schedules on page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1996.
82
<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"), 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 the Company's Registration
Statement on Form S-4 (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* Employment Protection Agreement, dated as of
December 31, 1987, between the Company (as
successor to Commercial Credit Company ("CCC"))
and Sanford I. Weill, incorporated by reference
to Exhibit 10.03 to CCC's Annual Report on Form
10-K for the fiscal year ended December 31, 1987
(File No. 1-6594).
10.02.1* Travelers Group Stock Option Plan (as amended and
restated as of April 24, 1996).
10.02.2* Amendment No. 14 to the Travelers Group Stock
Option Plan, incorporated by reference to Exhibit
10.01 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30,
1996 (File No. 1-9924) (the "Company's September
30, 1996 10-Q").
10.03* Travelers Group 1996 Stock Incentive Plan (as
amended through November 22, 1996).
10.04* Retirement Benefit Equalization Plan of the
Company (as amended and restated as of January 1,
1994).
10.05* Letter Agreement between Joseph A. Califano, Jr.
and the Company, dated December 14, 1988,
incorporated by reference to Exhibit 10.21.1 to
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988 (File No.
1-9924).
83
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.06* Travelers Group Inc. Amended and Restated
Compensation Plan for Non-Employee Directors,
incorporated by reference to Exhibit 10.02 to the
Company's September 30, 1996 10-Q.
10.07.1* Supplemental Retirement Plan of the Company,
incorporated by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (File No.
1-9924).
10.07.2* Amendment to the Company's Supplemental
Retirement Plan, incorporated by reference to
Exhibit 10.06.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1993 (File No. 1-9924) (the "Company's 1993
10-K").
10.08* The Travelers Inc. Executive Performance
Compensation Plan, effective April 27, 1994,
incorporated by reference to Exhibit 10.07 to the
Company's 1995 10-K.
10.09* Travelers Group Capital Accumulation Plan (as
amended through September 25, 1996), incorporated
by reference to Exhibit 10.03 to the Company's
September 30, 1996 10-Q.
10.10* Agreement dated December 21, 1993 between the
Company and Edward H. Budd, incorporated by
reference to Exhibit 10.22 to the Company's 1993
10-K.
10.11* The Travelers Inc. Deferred Compensation and
Partnership Participation Plan, incorporated by
reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K/A-1 for the fiscal
year ended December 31, 1994 (File No. 1-9924).
10.12.1 Stock Purchase Agreement dated as of November 28,
1995, between The Travelers Insurance Group Inc.
and Aetna Life and Casualty Company, incorporated
by reference to Exhibit 10.1 to the Annual Report
on Form 10-K of Aetna Life and Casualty Company
for the fiscal year ended December 31, 1995 (File
No. 1-5704).
84
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.12.2 Assignment of Stock Purchase Agreement, dated as
of March 22, 1996, between Travelers Property
Casualty Corp. (formerly Travelers/Aetna Property
Casualty Corp.) ("TAP") and The Travelers
Insurance Group Inc., incorporated by reference
to Exhibit 2.2 to Amendment No. 5 of the
Registration Statement on Form S-1 of TAP (No.
333-2254).
10.12.3 Amendment to Stock Purchase Agreement, dated as
of April 2, 1996, between TAP and Aetna Casualty
and Surety Company, incorporated by reference to
Exhibit 10.01 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March
31, 1996 (File No. 1-9924) (the "Company's March
31, 1996 10-Q").
10.13* The Travelers Corporation 1984 Management
Incentive Plan, as amended effective January 1,
1991, incorporated by reference to Exhibit 10(c)
to the Annual Report on Form 10-K of The
Travelers Corporation ("old Travelers") for the
fiscal year ended December 31, 1990 (File No.
1-5799).
10.14* The Travelers Corporation Supplemental Benefit
Plan, effective December 20, 1992, incorporated
by reference to Exhibit 10(d) to the Annual
Report on Form 10-K of old Travelers for the
fiscal year ended December 31, 1992 (File No.
1-5799).
10.15* The Travelers Corporation TESIP Restoration and
Non-Qualified Savings Plan, effective January 1,
1991, incorporated by reference to Exhibit 10(e)
to the Annual Report on Form 10-K of old
Travelers for the fiscal year ended December 31,
1991 (File No. 1-5799).
10.16* The Travelers Corporation Directors' Deferred
Compensation Plan, as amended November 7, 1986,
incorporated by reference to Exhibit 10(d) to the
Annual Report on Form 10-K of old Travelers for
the fiscal year ended December 31, 1986 (File No.
1-5799).
10.17* Employment Agreement dated as of December 30,
1994, between SBI and Joseph J. Plumeri II,
incorporated by reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 (File No.
1-9924).
85
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.18* Letter Agreement, dated as of January 13, 1997,
between the Company and Jon C. Madonna.
10.19* Travelers Property Casualty Corp. Capital
Accumulation Plan (as amended through September
1, 1996), incorporated by reference to Exhibit
10.01 to the Quarterly Report on Form 10-Q of
Travelers Property Casualty Corp. (formerly
Travelers/Aetna Property Casualty Corp.) for the
fiscal quarter ended September 30, 1996 (File No.
1-14328).
11.01 Computation of Earnings Per Share.
12.01 Computation of Ratio of Earnings to Fixed
Charges.
13.01*** Pages 32 through 78 of the 1996 Annual Report to Electronic
Stockholders of the Company (pagination of
exhibit does not correspond to pagination in the
1996 Annual Report to Stockholders).
21.01 Subsidiaries of the Company.
23.01*** Consent of KPMG Peat Marwick LLP, Independent Electronic
Certified Public Accountants.
23.02** Accountant's consent to incorporation by
reference of report filed with Exhibit 99.07.
24.01 Powers of Attorney.
27.01 Financial Data Schedule.
99.01 The fourth paragraph on page 26 of the Company's
September 30, 1993 10-Q, the first paragraph
under the heading "Smith Barney" on page 65 of
the Company's 1995 10-K and the first paragraph
on page 34 of the Company's September 30, 1996
10-Q.
99.02 The third paragraph on page 16 of the Quarterly
Report on Form 10-Q of Smith Barney Holdings Inc.
for the fiscal quarter ended September 30, 1994
and the last full paragraph on page 65 of the
Company's 1995 10-K.
99.03 The first paragraph on page 35 of the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996 (the "Company's June
30, 1996 10-Q").
99.04 The paragraph that begins on page 2 and ends on
page 3 of the Company's Current Report on Form
8-K dated March 1, 1994.
86
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
99.05 The paragraph that begins on page 90 and ends on
page 91 of the Prospectus dated April 22, 1996 of
TAP, the second paragraph on page 35 of the
Company's June 30, 1996 10-Q and the second
paragraph on page 34 of the Company's September
30, 1996 10-Q.
99.06 The second paragraph on page 30 of the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995, the fourth
paragraph on page 25 of the Company's March 31,
1996 10-Q and the third paragraph on page 34 of
the Company's September 30, 1996 10-Q.
99.07** 1996 Financial Statements of Travelers Group
401(k) Savings Plan.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company
will furnish copies of any such instrument to the Commission upon request.
The financial statements required by Form 11-K for 1996 for the Travelers Group
401(k) Savings Plan were filed as an exhibit to Form 10-K/A-1 pursuant to Rule
15d-21 of the Securities Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished at a cost of
$.25 per page (although no charge will be made for the 1996 Annual Report on
Form 10-K) to security holders who make written request therefor to Corporate
Communications and Investor Relations Department, Travelers Group Inc., 388
Greenwich Street, New York, New York 10013.
- --------
* Denotes a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
** Filed with Form 10-K/A-1.
*** Filed with Form 10-K/A-2.
Except as otherwise indicated, all other exhibits were filed with the initial
filing of the Form 10-K.
87
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 24th day of
October, 1997.
TRAVELERS GROUP INC.
(Registrant)
By: /s/ Irwin Ettinger
-------------------------------
Irwin Ettinger
Executive Vice President
88
<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"), 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 the Company's Registration
Statement on Form S-4 (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* Employment Protection Agreement, dated as of
December 31, 1987, between the Company (as
successor to Commercial Credit Company ("CCC"))
and Sanford I. Weill, incorporated by reference
to Exhibit 10.03 to CCC's Annual Report on Form
10-K for the fiscal year ended December 31, 1987
(File No. 1-6594).
10.02.1* Travelers Group Stock Option Plan (as amended and
restated as of April 24, 1996).
10.02.2* Amendment No. 14 to the Travelers Group Stock
Option Plan, incorporated by reference to Exhibit
10.01 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30,
1996 (File No. 1-9924) (the "Company's September
30, 1996 10-Q").
10.03* Travelers Group 1996 Stock Incentive Plan (as
amended through November 22, 1996).
10.04* Retirement Benefit Equalization Plan of the
Company (as amended and restated as of January 1,
1994).
10.05* Letter Agreement between Joseph A. Califano, Jr.
and the Company, dated December 14, 1988,
incorporated by reference to Exhibit 10.21.1 to
the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988 (File No.
1-9924).
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.06* Travelers Group Inc. Amended and Restated
Compensation Plan for Non-Employee Directors,
incorporated by reference to Exhibit 10.02 to the
Company's September 30, 1996 10-Q.
10.07.1* Supplemental Retirement Plan of the Company,
incorporated by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (File No.
1-9924).
10.07.2* Amendment to the Company's Supplemental
Retirement Plan, incorporated by reference to
Exhibit 10.06.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31,
1993 (File No. 1-9924) (the "Company's 1993
10-K").
10.08* The Travelers Inc. Executive Performance
Compensation Plan, effective April 27, 1994,
incorporated by reference to Exhibit 10.07 to the
Company's 1995 10-K.
10.09* Travelers Group Capital Accumulation Plan (as
amended through September 25, 1996), incorporated
by reference to Exhibit 10.03 to the Company's
September 30, 1996 10-Q.
10.10* Agreement dated December 21, 1993 between the
Company and Edward H. Budd, incorporated by
reference to Exhibit 10.22 to the Company's 1993
10-K.
10.11* The Travelers Inc. Deferred Compensation and
Partnership Participation Plan, incorporated by
reference to Exhibit 10.31 to the Company's
Annual Report on Form 10-K/A-1 for the fiscal
year ended December 31, 1994 (File No. 1-9924).
10.12.1 Stock Purchase Agreement dated as of November 28,
1995, between The Travelers Insurance Group Inc.
and Aetna Life and Casualty Company, incorporated
by reference to Exhibit 10.1 to the Annual Report
on Form 10-K of Aetna Life and Casualty Company
for the fiscal year ended December 31, 1995 (File
No. 1-5704).
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.12.2 Assignment of Stock Purchase Agreement, dated as
of March 22, 1996, between Travelers Property
Casualty Corp. (formerly Travelers/Aetna Property
Casualty Corp.) ("TAP") and The Travelers
Insurance Group Inc., incorporated by reference
to Exhibit 2.2 to Amendment No. 5 of the
Registration Statement on Form S-1 of TAP (No.
333-2254).
10.12.3 Amendment to Stock Purchase Agreement, dated as
of April 2, 1996, between TAP and Aetna Casualty
and Surety Company, incorporated by reference to
Exhibit 10.01 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March
31, 1996 (File No. 1-9924) (the "Company's March
31, 1996 10-Q").
10.13* The Travelers Corporation 1984 Management
Incentive Plan, as amended effective January 1,
1991, incorporated by reference to Exhibit 10(c)
to the Annual Report on Form 10-K of The
Travelers Corporation ("old Travelers") for the
fiscal year ended December 31, 1990 (File No.
1-5799).
10.14* The Travelers Corporation Supplemental Benefit
Plan, effective December 20, 1992, incorporated
by reference to Exhibit 10(d) to the Annual
Report on Form 10-K of old Travelers for the
fiscal year ended December 31, 1992 (File No.
1-5799).
10.15* The Travelers Corporation TESIP Restoration and
Non-Qualified Savings Plan, effective January 1,
1991, incorporated by reference to Exhibit 10(e)
to the Annual Report on Form 10-K of old
Travelers for the fiscal year ended December 31,
1991 (File No. 1-5799).
10.16* The Travelers Corporation Directors' Deferred
Compensation Plan, as amended November 7, 1986,
incorporated by reference to Exhibit 10(d) to the
Annual Report on Form 10-K of old Travelers for
the fiscal year ended December 31, 1986 (File No.
1-5799).
10.17* Employment Agreement dated as of December 30,
1994, between SBI and Joseph J. Plumeri II,
incorporated by reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 (File No.
1-9924).
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
10.18* Letter Agreement, dated as of January 13, 1997,
between the Company and Jon C. Madonna.
10.19* Travelers Property Casualty Corp. Capital
Accumulation Plan (as amended through September
1, 1996), incorporated by reference to Exhibit
10.01 to the Quarterly Report on Form 10-Q of
Travelers Property Casualty Corp. (formerly
Travelers/Aetna Property Casualty Corp.) for the
fiscal quarter ended September 30, 1996 (File No.
1-14328).
11.01 Computation of Earnings Per Share.
12.01 Computation of Ratio of Earnings to Fixed
Charges.
13.01*** Pages 32 through 78 of the 1996 Annual Report to Electronic
Stockholders of the Company (pagination of
exhibit does not correspond to pagination in the
1996 Annual Report to Stockholders).
21.01 Subsidiaries of the Company.
23.01*** Consent of KPMG Peat Marwick LLP, Independent Electronic
Certified Public Accountants.
23.02** Accountant's consent to incorporation by
reference of report filed with Exhibit 99.07.
24.01 Powers of Attorney.
27.01 Financial Data Schedule.
99.01 The fourth paragraph on page 26 of the Company's
September 30, 1993 10-Q, the first paragraph
under the heading "Smith Barney" on page 65 of
the Company's 1995 10-K and the first paragraph
on page 34 of the Company's September 30, 1996
10-Q.
99.02 The third paragraph on page 16 of the Quarterly
Report on Form 10-Q of Smith Barney Holdings Inc.
for the fiscal quarter ended September 30, 1994
and the last full paragraph on page 65 of the
Company's 1995 10-K.
99.03 The first paragraph on page 35 of the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1996 (the "Company's June
30, 1996 10-Q").
99.04 The paragraph that begins on page 2 and ends on
page 3 of the Company's Current Report on Form
8-K dated March 1, 1994.
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
- ------ ---------------------- ------
99.05 The paragraph that begins on page 90 and ends on
page 91 of the Prospectus dated April 22, 1996 of
TAP, the second paragraph on page 35 of the
Company's June 30, 1996 10-Q and the second
paragraph on page 34 of the Company's September
30, 1996 10-Q.
99.06 The second paragraph on page 30 of the Company's
Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995, the fourth
paragraph on page 25 of the Company's March 31,
1996 10-Q and the third paragraph on page 34 of
the Company's September 30, 1996 10-Q.
99.07** 1996 Financial Statements of Travelers Group 401(k)
Savings Plan.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company
will furnish copies of any such instrument to the Commission upon request.
The financial statements required by Form 11-K for 1996 for the Travelers Group
401(k) Savings Plan were filed as an exhibit to Form 10-K/A-1 pursuant to Rule
15d-21 of the Securities Exchange Act of 1934, as amended.
Copies of any of the exhibits referred to above will be furnished at a cost of
$.25 per page (although no charge will be made for the 1996 Annual Report on
Form 10-K) to security holders who make written request therefor to Corporate
Communications and Investor Relations Department, Travelers Group Inc., 388
Greenwich Street, New York, New York 10013.
- --------
* Denotes a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
** Filed with Form 10-K/A-1.
*** Filed with Form 10-K/A-2.
Except as otherwise indicated, all other exhibits were filed with the initial
filing of the Form 10-K.
Exhibit 13.01
Travelers Group Inc. and Subsidiaries
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, (1)
- ---------------------------
Total revenues $ 21,345 $ 16,583 $ 14,943 $ 6,797 $ 5,125
========== ========== ========== ========== ==========
Income from continuing operations $ 2,300 $ 1,628 $ 1,157 $ 951 $ 756
Discontinued operations 31 206 169 -- --
Cumulative effect of accounting changes (2) -- -- -- (35) (28)
========== ========== ========== ========== ==========
Net income $ 2,331 $ 1,834 $ 1,326 $ 916 $ 728
========== ========== ========== ========== ==========
Return on average common stockholders' equity (3) 19.9% 18.3% 15.6% 18.4% 20.6%
At December 31, (1)
- -------------------
Total assets $ 151,067 $ 113,916 $ 114,641 $ 101,290 $ 24,151
Long-term debt $ 11,327 $ 9,190 $ 7,075 $ 6,991 $ 3,951
Redeemable preferred securities of subsidiary trusts $ 1,900 -- -- -- --
Stockholders' equity (4) $ 13,085 $ 11,710 $ 8,640 $ 9,326 $ 4,229
Per common share data (5):
- -------------------------
Income from continuing operations $ 3.45 $ 2.43 $ 1.67 $ 1.94 $ 1.67
Discontinued operations 0.05 0.33 0.26 -- --
Cumulative effect of accounting changes -- -- -- (0.07) (0.06)
---------- ---------- ---------- ---------- ----------
Net income $ 3.50 $ 2.76 $ 1.93 $ 1.87 $ 1.61
========== ========== ========== ========== ==========
Cash dividends per common share (5) $ 0.450 $ 0.400 $ 0.288 $ 0.245 $ 0.181
Book value per common share (5) $ 19.47 $ 17.25 $ 12.39 $ 13.03 $ 8.85
Book value per common share, excluding
FAS No. 115 adjustment (4,5) $ 18.73 $ 16.06 $ 14.47
Other data:
- -----------
Average number of common shares
and equivalents (millions) (5) 638.8 634.8 644.0 475.6 445.6
Year-end common shares
outstanding (millions) (5) 637.6 632.5 633.0 654.2 444.0
Number of full-time employees 56,200 47,600 52,000 60,000 16,000
</TABLE>
(1) The results of Aetna P&C are included only from the date of acquisition,
April 2, 1996. Results of operations prior to 1994 exclude the amounts of
The Travelers Corporation (old Travelers), except that results for 1993
include the Company's equity in earnings relating to the 27% interest
purchased in December 1992. Results of operations include the Shearson
Businesses from July 31, 1993, the date of acquisition (see Note 2 of Notes
to Consolidated Financial Statements). Data relating to financial position
for 1992 exclude old Travelers and the Shearson Businesses.
(2) Cumulative effect of accounting changes in 1993 represent a change in
accounting for postretirement benefits other than pensions and a change in
accounting for postemployment benefits. Cumulative effect of accounting
changes in 1992 represent a change in accounting for income taxes.
(3) The return on average common stockholders' equity is calculated using
income before the cumulative effect of accounting changes after deducting
preferred stock dividend requirements.
(4) Stockholders' equity at December 31, 1996 and 1995 reflects $469 million
and $756 million, respectively, of net unrealized gains on investment
securities and at December 31, 1994 reflects $1.3 billion of net unrealized
losses on investment securities, pursuant to the adoption of FAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities" in 1994.
(5) During 1996 the Company's Board of Directors declared stock splits payable
in the form of stock dividends (three-for-two in January and four-for-three
in October), which combined are the equivalent of a two-for-one stock
split. Prior years' information has been restated to reflect the stock
splits.
<PAGE>
Travelers Group Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
Consolidated Results of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
(In millions, except per share amounts) 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 21,345 $ 16,583 $ 14,943
========== ========== ==========
Income from continuing operations $ 2,300 $ 1,628 $ 1,157
Income from discontinued operations 31 206 169
========== ========== ==========
Net income $ 2,331 $ 1,834 $ 1,326
========== ========== ==========
Earnings per share*:
Continuing operations $ 3.45 $ 2.43 $ 1.67
Discontinued operations 0.05 0.33 0.26
========== ========== ==========
Net income $ 3.50 $ 2.76 $ 1.93
========== ========== ==========
Weighted average number of common shares outstanding and
common stock equivalents* 638.8 634.8 644.0
===============================================================================================
</TABLE>
* During 1996 the Company's Board of Directors declared a three-for-two stock
split in January and a four-for-three stock split in October (both payable
in the form of stock dividends), which combined are the equivalent of a
two-for-one stock split. Prior years' information has been restated to
reflect the stock splits.
Overview
Consolidated results of operations include the accounts of Travelers Group Inc.
(TRV) and its subsidiaries (collectively, the Company). As discussed in Note 2
of Notes to Consolidated Financial Statements, on April 2, 1996, Travelers
Property Casualty Corp. (formerly Travelers/Aetna Property Casualty Corp.)
(TAP), an indirect majority-owned subsidiary of TRV, acquired the domestic
property and casualty insurance subsidiaries of Aetna Services Inc. (formerly
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 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). Travelers Indemnity along with Aetna
P&C, are the primary vehicles through which the Company engages in the property
and casualty insurance business.
Results of Operations
Income from continuing operations for the year ended December 31, 1996 was
$2.300 billion compared to $1.628 billion in 1995 and $1.157 billion in 1994.
Included in income from continuing operations for the years ended December 31,
1996, 1995 and 1994 are net after-tax gains (losses) of $70 million, $74 million
and $(4) million, respectively, as follows:
2
<PAGE>
1996
- ----
o $346 million (after minority interest) charge for reserve adjustments and
restructuring costs related to the acquisition of Aetna P&C;
o $363 million gain from the sale of Class A Common Stock by TAP;
o $26 million net gain from the disposition of investment advisory
affiliates; and
o $27 million (after minority interest) of reported investment portfolio
gains.
1995
- ----
o $13 million provision for loss on disposition of an affiliate; and
o $87 million of reported investment portfolio gains.
1994
- ----
o $79 million gain on the sales of subsidiaries and affiliates; and
o $83 million of reported investment portfolio losses.
Excluding these items, income from continuing operations for 1996 increased $676
million to $2.230 billion, or 44%, over 1995, primarily reflecting improved
performance at Smith Barney, the inclusion of the property and casualty business
acquired from Aetna Services Inc. and increased earnings in the Life Insurance
segment.
On the same basis, income from continuing operations for 1995 increased $393
million to $1.554 billion, or 34%, over 1994, reflecting improved performance at
all operating units, particularly at Smith Barney.
The following discussion presents in more detail each segment's operating
performance.
Investment Services
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Smith Barney (1) $ 7,802 $ 889 $ 6,808 $ 599 $ 5,534 $ 390
Mutual funds and asset management -- -- -- -- 156 32
- ---------------------------------------------------------------------------------------------------------------------
Total Investment Services $ 7,802 $ 889 $ 6,808 $ 599 $ 5,690 $ 422
=====================================================================================================================
</TABLE>
(1) Net income for 1994 includes a $21 million after-tax gain from the sale of
the interest in HG Asia.
In 1994 mutual funds and asset management sub-segment included the limited
partnership interest in RCM Capital Management, a California Limited Partnership
(RCM) and the operations of American Capital Management & Research, Inc.
(American Capital) through its date of sale in December 1994. RCM is reported as
part of Corporate and Other in 1995 and through its date of sale in 1996.
Smith Barney
Earnings for 1996 increased 48% to $889 million compared to $599 million in
1995. This increase is attributable to continued strength in the financial
markets in 1996 as the Dow Jones Industrial Average reached record levels
throughout the year as well as improved performance in most product categories.
Return on equity reached 34.5% for 1996, up from 24.7% for 1995 and 16.4% for
1994 (excluding the $21 million gain on HG Asia) and continues to be among the
highest of Smith Barney's industry peer group. Pre-tax profit margins increased
to 23.2% for 1996 compared to 18.9% in 1995 and 13.5% in 1994. Excluding the $21
million gain in 1994, Smith
2
<PAGE>
Barney's 1995 earnings increased 63% over 1994 reflecting an improved operating
environment in the securities markets during 1995.
Smith Barney Revenues
Year Ended December 31,
- --------------------------------------------------------------------------------
(millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Commissions $ 2,250 $ 2,008 $ 1,800
Asset management fees 1,349 1,052 941
Investment banking 1,148 847 680
Principal trading 990 1,016 900
Interest income, net* 419 377 329
Other income 139 134 114
- --------------------------------------------------------------------------------
Net revenues* $ 6,295 $ 5,434 $ 4,764
================================================================================
* Net of interest expense of $1,507 million, $1,374 million and $770 million
in 1996, 1995 and 1994, respectively. Revenues included in the
consolidated statement of income are before deductions for interest
expense.
Revenues, net of interest expense, rose 16% to $6.295 billion for 1996 compared
to $5.434 billion in 1995. Revenues, net of interest expense rose 14% in 1995
compared to $4.764 billion in 1994. Commission revenues increased 12% in 1996 to
$2.250 billion, primarily as a result of higher activity in listed and
over-the-counter securities, as well as increased insurance and annuity sales.
Commission revenues increased by 12% to $2.008 billion in 1995 compared to
$1.800 billion in 1994. The increase reflects higher activity in listed and
over-the-counter securities and options markets, offset by declines in futures
and mutual funds. Annualized retail gross production per Financial Consultant in
1996 rose 16% to $354,000. Smith Barney currently has approximately 10,400
registered Financial Consultants working out of 450 domestic retail offices.
Asset management fees rose 28% in 1996 to a record $1.349 billion, reflecting
growth in money market funds, mutual funds, institutional managed accounts,
retail WRAP accounts, and other fee-based businesses. Internally managed assets
reached a record $111.8 billion at year-end 1996, up 16% from 1995. Asset
management fees were $1.052 billion in 1995 compared to $941 million in 1994. At
December 31, 1995, Smith Barney had internally managed assets of $96.2 billion,
up from $78.0 billion at year-end 1994. The increase in asset management
revenues in 1995 also reflects fees associated with bringing in-house all the
administrative functions for proprietary mutual funds and money funds during the
latter part of 1995.
Investment banking revenues increased 36% to $1.148 billion for 1996, reflecting
strong volume in high grade debt, high yield and public finance underwritings.
Investment banking revenues increased 25% to $847 million in 1995 compared to
$680 million in 1994, reflecting strong volume in equity, unit trust, high yield
and high grade corporate debt underwritings, as well as merger and acquisition
fees.
Principal trading revenues during 1996 decreased 3% to $990 million for the year
compared to the 1995 period, largely as a result of a decline in taxable fixed
income trading revenues and was partially offset by gains in equity trading.
Principal trading revenues increased 13% to $1.016 billion in 1995 compared to
$900 million in 1994, with particularly strong results in equities and taxable
fixed income offset by a decline in municipal trading revenues.
Net interest income reached $419 million in 1996, up 11% from the 1995 period.
The increase is primarily due to increased margin lending to clients and
increased taxable fixed income inventories. Net interest income was $377 million
in 1995, up from $329 million in 1994, as a result of higher levels of
interest-earning net assets.
3
<PAGE>
Total expenses, excluding interest, increased 10% to $4.832 billion in 1996 as
compared to $4.406 billion in 1995. This increase was primarily a result of
higher production-related employee compensation and benefits expense which
increased 10% to $3.522 billion in 1996 compared to $3.193 billion in 1995.
Expenses other than interest and employee compensation and benefits were $1.310
billion in 1996 compared to $1.213 billion in 1995. The firm continues to focus
on controlling fixed expenses, and currently has one of the industry's lowest
ratios of non-compensation expense to net revenues, which stood at 20.8% for
1996. The number of non-production related employees decreased 3% during 1996.
Total expenses, excluding interest, increased 7% to $4.406 billion in 1995 as
compared to $4.118 billion in 1994. This increase was driven by higher
production-related Financial Consultant compensation and other employee
compensation and benefits expense, which increased 8% to $3.193 billion in the
1995 period, as compared to $2.953 billion in 1994. Expenses other than interest
and employee compensation and benefits were $1.213 billion in the 1995 period
compared to $1.165 billion in 1994. However, during 1995 the number of
non-production employees and the level of fixed expenses continued the downward
trend that began in the fourth quarter of 1994.
Assets Under Management
At December 31,
-----------------------
(billions) 1996 1995
- --------------------------------------------------------------------------------
Smith Barney $ 111.8 $ 96.2
Travelers Life and Annuity (1) 21.5 22.1
- --------------------------------------------------------------------------------
Total Assets Under Management $ 133.3 $ 118.3
================================================================================
(1) Part of the Life Insurance Services segment.
Asset Quality -- Smith Barney's assets at December 31, 1996 were approximately
$51.2 billion, consisting primarily of highly liquid marketable securities and
collateralized receivables. About 49% of these assets were related to
collateralized financing transactions where U.S. Government and mortgage-backed
securities are bought, borrowed, sold and lent in generally offsetting amounts.
Another 24% represented inventories of securities primarily needed to meet
customer demand. A significant portion of the remainder of the assets
represented receivables from brokers, dealers and customers that relate to
securities transactions in the process of being settled. The carrying values of
the majority of Smith Barney's securities inventories are adjusted daily to
reflect current prices. See Notes 1, 6, 7 and 8 of Notes to Consolidated
Financial Statements for a further description of these assets. See Note 19 of
Notes to Consolidated Financial Statements for a description of Smith Barney's
activities in derivative financial instruments, which it uses primarily to
facilitate customer transactions.
At December 31, 1996 Smith Barney's exposure to high-yield positions and
"bridge" loans was not material. Smith Barney's assets to equity ratio at
December 31, 1996 was 18.6 to 1 compared to 16.6 to 1 at December 31, 1995.
Management believes this is a conservative leverage level and one that allows
for the prospects for future growth.
Smith Barney's assets are financed through a number of sources including long
and short-term credit facilities, the financing transactions described above and
payables to brokers, dealers and customers.
Outlook -- Smith Barney's business is significantly affected by the levels of
activity in the securities markets, which in turn are influenced 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
4
<PAGE>
raising capital). A declining interest rate environment could favorably
influence Smith Barney's business. Smith Barney's asset management business
provides 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.
Consumer Finance Services
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consumer Finance Services $ 1,411 $ 223 $ 1,354 $ 246 $ 1,239 $ 227
=============================================================================================================
</TABLE>
Despite strong growth in receivables during the second half of 1996, net income
in 1996 was lower than 1995, as expected, driven by a higher provision for loan
losses reflecting industry trends associated with personal bankruptcies.
Consumer finance receivables rose to $8.071 billion at December 31, 1996, a 12%
increase from year-end 1995. This growth occurred primarily in real estate loan
and personal loan products generated by Commercial Credit's branch office
network and through Primerica Financial Services (PFS).
Consumer Finance net income in 1995 increased by 9% over 1994, primarily
reflecting a 7% increase in average receivables outstanding highlighted by an
11% increase in personal loan average receivables outstanding, which is the
highest margin product line.
While total interest margin increased from the 1995 period due to the increase
in the portfolio, average net interest margin declined 15 basis points in 1996
to 8.64% from 8.79% in 1995, reflecting a decline to 15.24% from 15.64% in the
average yield, partially offset by a decrease in cost of funds. The decline in
average yield was due to the run-off of older, higher yielding real estate
loans, growth in lower yielding higher quality first mortgage real estate loans
and higher levels of non-accruing personal loans. The average yield on
receivables outstanding was 15.41% in 1994, and average net interest margin was
8.76%.
Consumer Finance borrows from the corporate treasury operations of Commercial
Credit Company (CCC), a major holding company subsidiary of TRV that raises
funds externally. For fixed rate loan products, Consumer Finance is charged
agreed-upon rates that generally have been set within a narrow range and
approximated 7% in 1996, 1995 and 1994. For variable rate loan products,
Consumer Finance is charged rates based on prevailing short-term rates. CCC's
actual cost of funds may be higher or lower than rates charged to Consumer
Finance, with the difference reflected in the Corporate and Other segment.
Delinquencies in excess of 60 days rose to 2.38% at December 31, 1996 compared
to 2.14% at December 31, 1995, versus the historically low level of 1.88% in
1994. Correspondingly, the charge-off rate, which had been at record low levels
in 1994, moved higher in 1996 and 1995 -- reaching 2.91% in 1996 and 2.28% in
1995 versus 2.08% in 1994. This increase in delinquencies and charge-offs
reflects a continued high level of personal bankruptcies, a national trend that
shows no indication of reversing itself.
The allowance for credit losses as a percentage of net outstandings was 2.97% at
year-end 1996 compared to 2.66% at year-end 1995 and 2.64% at year-end 1994.
The total number of offices at year-end 1996 stood at 859, which includes the
addition of 10 offices from the first quarter 1996 acquisition of Hawaii-based
Servco Financial Corp. During the year the Company completed its conversion of
27 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 PFS.
5
<PAGE>
As of, or for, the
Year Ended December 31,
-------------------------
1996 1995 1994
-------------------------
Allowance for credit losses as a %
of net outstandings 2.97% 2.66% 2.64%
Charge-off rate for the year 2.91% 2.28% 2.08%
60 + days past due on a contractual basis as a %
of gross consumer finance receivables at year-end 2.38% 2.14% 1.88%
Insurance subsidiaries of the Company provide credit life, health and property
insurance to Consumer Finance customers. Premiums earned were $155 million in
1996, $139 million in 1995 and $115 million in 1994. The increase in premiums
year-over-year is the result of growth in receivables and expanded availability
of certain products in additional states.
Asset Quality -- Consumer Finance assets totaled approximately $9.1 billion at
December 31, 1996, of which $7.9 billion, or 87%, represented the net consumer
finance receivables (including accrued interest and the allowance for credit
losses). These receivables were predominantly residential real estate-secured
loans and personal loans. Receivable quality depends on the likelihood of
repayment. The Company seeks to reduce its risks by focusing on individual
lending, making a greater number of smaller loans than would be practical in
commercial markets, and maintaining disciplined control over the underwriting
process. The Company has a geographically diverse portfolio as described in Note
9 of Notes to Consolidated Financial Statements. The Company believes that its
loss reserves on the consumer finance receivables are appropriate given current
circumstances. If the charge-off and delinquency rates continue to increase, the
Company would anticipate increasing the loss reserves.
Of the remaining Consumer Finance assets, approximately $755 million were
investments of insurance subsidiaries, including $629 million of fixed income
securities and $69 million of short-term investments with a weighted average
quality rating of A1.
Outlook -- The Consumer Finance results during 1996 continued to be influenced
by a higher level of loan losses, as a result of a higher level of personal
bankruptcies. Also, near-term earnings for Consumer Finance are expected to be
affected by establishing reserves on new business and 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. Consumer Finance is also affected by the interest rate
environment and general economic conditions. Although the lower interest rate
environment, should it continue, is not expected to have a material effect on
Consumer Finance yields, it has resulted in modest downward pressure on interest
rates charged on new receivables secured by real estate. For the Company
overall, however, these trends would be offset by the lower costs of funds in
such an environment. From time to time low interest rates combined with
aggressive competitor pricing may increase the likelihood of prepayments of
mortgages loans. This impact has been mitigated by a number of programs
instituted by the Company including those designed to attract first mortgage
business. Continued low interest rates could result in a reduction of the
interest rates that CCC charges Consumer Finance on borrowed funds.
6
<PAGE>
Life Insurance Services
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Travelers Life and Annuity (1) $ 2,339 $ 371 $ 2,502 $ 330 $ 2,198 $ 211
Primerica Financial Services (2) 1,426 282 1,356 251 1,290 210
- --------------------------------------------------------------------------------------------------------------------
Total Life Insurance Services $ 3,765 $ 653 $ 3,858 $ 581 $ 3,488 $ 421
====================================================================================================================
</TABLE>
(1) Net income includes $11 million, $48 million and $1 million of reported
investment portfolio gains in 1996, 1995 and 1994, respectively.
(2) Net income includes $9 million, $20 million and $7 million of reported
investment portfolio gains in 1996, 1995 and 1994, respectively, and in
1996 a portion of the gain ($4 million) from the disposition of RCM.
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
the individual accident and health operations of Transport Life (through
September 29, 1995 -- the date of spin-off). Among the range of products offered
are 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 The Copeland Companies (Copeland),
an indirect wholly owned subsidiary of TIC, Smith Barney Financial Consultants
and a core group of approximately 500 independent agencies. The majority of the
annuity business and a substantial portion of the life business written by
Travelers Life and Annuity is accounted for as investment contracts, with the
result that the premium deposits collected are not included in revenues.
Earnings before portfolio gains increased 28% to $360 million in 1996, compared
to $282 million in 1995 and 34% from 1995 to 1994. Improved earnings during 1996
were largely driven by strong investment income, reflecting repositioning of the
investment portfolio over the past year. In addition, earnings benefited from
the reinvestment of the proceeds from the sale of the Company's interest in
MetraHealth in the 1995 fourth quarter, partially offset by the loss of earnings
from Transport Life, which was spun off to TRV stockholders in September 1995.
Also offsetting this increase were higher expenses, a portion of which relates
to higher corporate expense allocations of amounts previously absorbed in other
segments. Earnings growth attributable to strong sales of recently introduced
products -- including less capital-intensive variable life insurance and
annuities -- was partially offset by the gradual decline in the amount of higher
margin business written several years ago.
Improved sales through Copeland, Smith Barney Financial Consultants, and a
nationwide network of independent agents, reflect the ongoing effort to build
market share by strengthening relationships in key distribution channels. Future
sales should also benefit from Standard & Poor's recently announced upgrading of
The Travelers Insurance Company's claims paying ability to AA- ("Excellent").
Deferred annuity policyholder account balances and benefit reserves grew to
$13.2 billion at year-end 1996, up from $11.3 billion at year-end 1995 and $9.5
billion at year-end 1994. Net written premiums and deposits, which benefited in
1996 from a continuation of the strong fourth quarter 1995 Smith Barney
marketing initiative, were $1.991 billion in 1996 compared to $1.649 billion in
1995 and $1.262 billion in 1994 (excluding Transport Life).
Payout and group annuity account balances and reserves declined to $10.9 billion
at year-end 1996, compared to $12.0 billion at year-end 1995 and $13.6 billion
at year-end 1994, reflecting run-off of low margin guaranteed
7
<PAGE>
investment contracts written in prior years. Net written premiums and deposits
(excluding those of affiliates) rose to $1.201 billion in 1996 from $1.085
billion in 1995 and $818 million in 1994.
Net written premiums and deposits for individual life insurance rose 17% in 1996
to $291.4 million from $249.3 million in 1995 and $282 million in 1994
(excluding Transport Life, which was spun off in September 1995). Life insurance
in force was $50.4 billion at December 31, 1996, up from $49.2 billion at
year-end 1995 and $48.4 billion at year-end 1994 (excluding Transport Life).
Net written premiums for the growing Long Term Care insurance line reached
$127.7 million for 1996 compared to $88.2 million in 1995 and $61.3 million in
1994.
Outlook -- Travelers Life and Annuity should benefit from growth in the aging
population who are becoming more focused on the need to accumulate adequate
savings for retirement, to protect these savings and to plan for the transfer of
wealth to the next generation. Travelers Life and Annuity is well-positioned to
take advantage of the favorable long-term demographic trends through its strong
financial position, widespread brand name recognition and broad array of
competitive life, annuity and long-term care insurance products sold through the
three established distribution channels.
However, competition in both product pricing and customer service is
intensifying. While there has been some consolidation within the industry, other
financial services organizations are increasingly involved in the sale and/or
distribution of insurance products. Deregulation of the banking industry,
including possible reform of restrictions on entry into the insurance business,
will likely accelerate this trend. Also, the annuities business is interest
sensitive, and swings in interest rates could influence sales and retention of
in force policies. In order to strengthen its competitive position, Travelers
Life and Annuity expects to maintain a current product portfolio, further
diversify its distribution channels, and retain its healthy financial position
through strong sales growth and maintenance of an efficient cost structure.
Primerica Financial Services
Earnings before portfolio gains and the gain on disposition of RCM increased 16%
over 1995 and 14% from 1995 to 1994. This growth reflects higher sales of mutual
funds and consumer loans as well as continued growth in life insurance in force
and improving life insurance margins.
New term life insurance sales were $52.0 billion in face amount for 1996,
compared to $53.0 billion in 1995, and $57.4 billion in 1994. The number of
policies issued was 247,600 in 1996, compared to 266,600 in 1995, and 299,400 in
1994, consistent with the industry-wide downturn in new life insurance sales for
these periods. During this time, PFS has focused upon the strategic expansion of
its business beyond life insurance and now offers a greater variety of financial
products and services, delivered through its sales force. Life insurance in
force at year-end 1996 reached $359.9 billion, up from $348.2 billion at
year-end 1995 and $335.0 billion at year-end 1994, and continued to reflect good
policy persistency.
PFS has traditionally offered mutual funds to customers as a means to invest the
relative savings realized through the purchase of term life insurance as
compared to traditional whole life insurance. Sales of mutual funds were $2.327
billion in 1996 compared to $1.551 billion in 1995 and $1.622 billion in 1994.
Approximately 37% of initial U.S. sales in 1996 were from the Smith Barney
products, predominantly the Concert Series-SM- which PFS first introduced to its
market in March 1996. Loan receivables from the $.M.A.R.T. (real-estate loans)
and $.A.F.E. (personal loans) products of Consumer Finance, which are reflected
in the assets of Consumer Finance, continued to advance during the year and were
$1.524 billion at December 31, 1996 compared to $1.258 billion at December 31,
1995, and $1.107 billion at December 31, 1994. PFS's Secure property and
casualty insurance product (automobile and homeowners insurance) -- issued
through Travelers Property Casualty Corp. -- continues to experience healthy
growth in applications and policies and currently has been introduced in 37
states. More than 6,300 agents are licensed to sell this product.
8
<PAGE>
Outlook -- Over the last few years, programs including sales and product
training were begun that are designed to maintain high compliance standards,
increase the number of producing agents and customer contacts and, ultimately,
increase production levels. Additionally, increased effort has been made to
provide all PFS customers full access to all PFS marketed lines. Insurance in
force is continuing to grow and the number of producing agents is stable. A
continuation of these trends could positively influence future operations. PFS
continues to expand cross-selling with other Company subsidiaries of products
such as loans, mutual funds and, most recently, property and casualty insurance
(automobile and homeowners).
Property & Casualty Insurance Services
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Lines (1) $ 5,528 $ 215 $ 3,063 $ 343 $ 3,058 $ 146
Personal Lines (2) 2,685 281 1,482 110 1,480 103
Financing Costs and Other 11 (87) -- -- -- --
Minority Interest -- (47) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty Insurance
Services $ 8,224 $ 362 $ 4,545 $ 453 $ 4,538 $ 249
========================================================================================================================
</TABLE>
(1) Net income includes $21 million and $36 million of reported investment
portfolio gains in 1996 and 1995, respectively, and $73 million of reported
investment portfolio losses in 1994 and $453 million of charges in 1996
related to the acquisition of Aetna P&C.
(2) Net income includes $5 million of reported investment portfolio losses in
1996, $6 million of reported investment portfolio gains in 1995 and $18
million of reported investment portfolio losses in 1994. 1996 also benefits
from $31 million of adjustments related to the acquisition of Aetna P&C.
1994 also includes a $19 million gain from the sale of Bankers and Shippers
Insurance Company.
Segment earnings include the property and casualty operations of Aetna P&C for
periods subsequent 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 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:
o $229.1 million after tax and minority interest ($430 million before
tax and minority interest) in reserve increases, net of reinsurance,
related primarily to cumulative injury claims other than asbestos
(CIOTA);
o $44.8 million after tax and minority interest ($84 million before tax
and minority interest) in additional asbestos liabilities pursuant to
an existing settlement agreement with a customer of Aetna P&C;
o $32 million after tax and minority interest ($60 million before tax
and minority interest) related to premium collection issues on loss
sensitive programs, specifically large deductible products;
o $21.8 million after tax and minority interest ($41 million before tax
and minority interest) provision for uncollectibility of reinsurance
recoverables of Aetna P&C determined by applying the Company's normal
guidelines for estimating collectibility of such accounts; and
o $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
111% to $647 million in 1996 from $307 million in 1995, primarily reflecting
income from the acquisition of Aetna P&C, the emerging benefits of expense
reduction initiatives associated with the integration of the two companies and
strong investment
9
<PAGE>
income. Earnings before portfolio gains/losses increased 40% to $307 million in
1995 compared to $219 million in 1994. The improvement relative to 1994
primarily resulted from an increase in net investment income and improved loss
trends in the workers' compensation line.
Commercial Lines net written premiums were $4.084 billion in 1996 (excluding a
one-time adjustment associated with a reinsurance transaction) compared to
$2.309 billion in 1995 and $2.391 billion in 1994. Premium equivalents for 1996
were $2.596 billion compared to $2.821 billion in 1995 and $2.990 billion in
1994. 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), Commercial Lines net written premiums for
1996 totaled $4.690 billion, compared to $5.144 billion for 1995 and $5.481
billion in 1994. These decreases reflect the highly competitive marketplace and
the Company's selective underwriting. On the same combined total basis, premium
equivalents for 1996 totaled $2.712 billion, compared to $3.458 billion in 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, the Company's selective renewal activity to address the
competitive pricing environment and its continued success in lowering workers'
compensation losses of customers. Premium equivalents of $2.990 billion for 1994
does not include Aetna P&C. (Historically, Aetna P&C did not track premium
equivalents and such amounts are not available for 1994).
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 also includes the alternative market business which covers
primarily workers' compensation products and services. National Accounts' net
written premiums for 1996 (excluding a one-time adjustment associated with a
reinsurance transaction) were $803 million compared to $703 million in 1995 and
$835 million in 1994. The 1996 increase reflects the acquisition of Aetna P&C,
partially offset by the Company's selective renewal activity and the highly
competitive marketplace. The 1995 decline reflects selective renewal activity in
response to the competitive pricing environment and the highly competitive
marketplace. National Account premium equivalents were $2.526 billion in 1996
compared to $2.779 billion in 1995 and $2.959 billion in 1994. The decrease in
premium equivalents in 1996 and 1995 reflects a depopulation of involuntary
pools as the loss experience of workers' compensation improves and insureds move
to voluntary markets, the Company's selective renewal activity in response to
the competitive pricing environment and its continued success in lowering
workers' compensation losses of customers.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), National Accounts net written premiums of
$874 million in 1996 decreased $318 million from 1995. Net written premiums of
$1.192 billion in 1995 decreased $312 million from 1994. The 1996 and 1995
decreases reflect the Company's selective renewal activity and the highly
competitive marketplace. On the same combined total basis, National Accounts
premium equivalents of $2.625 billion for 1996 were $733 million below 1995. The
decrease in premium equivalents in 1996 reflects a depopulation of involuntary
pools as the loss experience of workers' compensation improves and insureds move
to voluntary markets, the Company's selective renewal activity to address the
competitive pricing environment and its continued success in lowering workers'
compensation losses of customers.
For 1996 National Accounts new business, including both premiums and premium
equivalents, was $389 million compared to $444 million in 1995 and $325 million
in 1994. This decrease, despite the Aetna acquisition, is due to the highly
competitive marketplace. The National Accounts business retention ratio dropped
to 82% in 1996 from 84% in 1995 and 88% in 1994. The new business and retention
ratio declines in 1996 reflect the Company's selective renewal activity and the
highly competitive marketplace.
10
<PAGE>
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. Commercial Accounts' net written premiums were $1.485
billion in 1996 compared to $730 million in 1995 and $791 million in 1994. The
increase in 1996 compared to 1995 reflects 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. Commercial Accounts premium equivalents were $69 million in
1996 compared to $41 million in 1995 and $31 million in 1994.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Commercial Accounts net written premiums of
$1.725 billion for 1996 were $137 million below 1995 premium levels, which were
$266 million below 1994 premium levels. The decrease in 1996 and 1995 in net
written premiums is due to the highly competitive marketplace, the Company's
selective underwriting and the continued softness in guaranteed cost products.
The decrease in 1995 compared to 1994 in net written premiums was partly offset
by the continued growth in Commercial Accounts' industry-specific programs and
in retrospectively rated policies and other loss-responsive products. On the
same combined total basis, Commercial Accounts premium equivalents of $87
million in 1996 were $13 million below 1995 due to the competitive marketplace.
During 1996, new business in Commercial Accounts was $360 million compared to
$269 million in 1995 and $207 million in 1994. The 1996 increase in new
businesses is due to the acquisition of Aetna P&C. The Commercial Accounts
business retention ratio was 72% in 1996 compared to 73% in 1995 and 79% in
1994. These retention ratios reflect Commercial Accounts selective underwriting
policy. Commercial Accounts continues to focus on industry specific programs
which meet strict underwriting guidelines.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $1.191 billion in 1996 compared to
$542 million in 1995 and $466 million in 1994. The increase in 1996 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), Select Accounts net written premiums of
$1.412 billion for 1996 were $54 million lower than 1995. This decrease reflects
the highly competitive marketplace and the Company's selective underwriting.
Select Accounts net written premiums of $1.466 billion for 1995 were $173
million above 1994 premium levels, due primarily to an increase in new business.
New premium business in Select Accounts was $276 million in 1996 compared to
$131 million in 1995 and $112 million in 1994. The 1996 increase in new premium
business is due to the acquisition of Aetna P&C. The Select Accounts business
retention ratio was 78% in 1996 compared to 75% in 1995 and 73% in 1994. The
increase in the 1996 business retention ratio reflects the industry and product
line expertise of the combined company.
Specialty Accounts markets products to national, midsize and small customers and
distributes them through both wholesale brokers and retail agents and brokers
throughout the United States. Specialty Accounts net written premiums were $605
million in 1996 compared to $334 million in 1995 and $299 million in 1994. The
growth in 1996 is primarily attributable to the acquisition of the Aetna P&C
Bond business, the net written premiums of which were $210 million since the
date of acquisition.
On a combined total basis including Aetna P&C (for periods prior to April 2,
1996 for comparative purposes only), Specialty Accounts net written premiums for
1996 were $679 million compared to $624 million in 1995, and was $556 million in
1994. The 1996 increase compared to 1995 is due to increases in directors' and
officers' liability insurance and errors and omissions coverages.
Catastrophe losses, net of tax and reinsurance, were $31 million in 1996
compared to $7 million in 1995 and $30 million in 1994. Catastrophe losses in
1996 were primarily due to Hurricane Fran and December storms on the West Coast.
The 1994 catastrophe losses were due to winter storms in the first quarter of
1994.
11
<PAGE>
The statutory combined ratio for Commercial Lines for 1996 was 128.1% compared
to 105.0% in 1995 and 124.7% in 1994. The GAAP combined ratio for Commercial
Lines for 1996 was 125.4% compared to 102.2% in 1995 and 107.9% in 1994.
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to differences in reporting of revenues and expenses related to
service business, including servicing of residual market pools and deductible
policies. In addition, in 1996, GAAP combined ratios for Commercial Lines differ
from statutory combined ratios due to certain purchase accounting adjustments
recorded in connection with the Aetna P&C acquisition resulting in a charge to
statutory expenses, but not GAAP expenses.
The increase in the 1996 statutory and GAAP combined ratios for Commercial Lines
compared to 1995 was primarily attributable to the charges taken in 1996 related
to the acquisition and integration of Aetna P&C. Excluding these amounts, the
statutory and GAAP combined ratios before policyholder dividends for 1996 would
have been 109.3% and 109.6%, respectively. The increase in the 1996 statutory
and GAAP combined ratios excluding acquisition-related charges compared to the
1995 statutory and GAAP combined ratios is primarily due to the inclusion in
1996 of Aetna P&C's results. Aetna P&C historically has had a higher
underwriting expense ratio, partially offset by a lower loss and LAE ratio, that
reflects the mix of business including the favorable effect of the lower loss
and LAE ratio of the Bond business. The 1994 statutory combined ratio includes a
statutory charge of $225 million for reserve increases for environmental claims
and for a reduction of ceded reinsurance balances. Excluding this charge, the
statutory combined ratio for 1994 was 114.2%. The improvement in the 1995
combined ratios compared to the adjusted 1994 combined ratios was due to the
first quarter 1994 catastrophe losses and favorable loss development in certain
workers' compensation lines and residual markets in 1995.
Personal Lines
Earnings before portfolio gains/losses and acquisition-related adjustments
increased 145% to $255 million in 1996 from $104 million in 1995, primarily
reflecting the post-acquisition results of operations of Aetna P&C,
approximately $70 million of favorable prior year loss development in personal
automobile bodily injury lines, the continued benefit of expense reduction
initiatives and higher net investment income. Earnings before portfolio
gains/losses were $104 million in 1995 compared to $102 million in 1994. Expense
reduction initiatives and higher net investment income contributed to the
increase in earnings in 1995 relative to 1994, largely offset by benefits from
favorable prior year loss reserve development in 1994 in the personal automobile
line of business. In addition, 1994 benefited from a one-time contribution of $9
million from the favorable resolution of the New Jersey Market Transition
Facility (MTF) deficit as well as earnings from Bankers and Shippers Insurance
Company (Bankers and Shippers) which was sold in October 1994.
Net written premiums for 1996 were $2.359 billion, compared to $1.298 billion in
1995 and $1.433 billion in 1994. The 1996 increase compared to 1995 primarily
reflects the acquisition of Aetna P&C and, to a lesser extent, growth in target
markets, partially offset by reductions due to catastrophe management
strategies. The 1995 decline of $135 million compared to 1994 was attributable
to the sale of Bankers and Shippers in October 1994. Excluding Bankers and
Shippers business, net written premiums for 1995 were up approximately 8% from
1994, reflecting reduced reinsurance ceded and targeted growth in sales through
independent agents.
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
1996 totaled $2.675 billion, up $132 million from $2.543 billion in 1995. This
increase on a combined basis reflects continued growth in targeted automobile
and homeowners markets, partially offset by reductions due to catastrophe
management strategies.
Catastrophe losses, net of taxes and reinsurance, were $58 million in 1996
compared to $12 million in 1995 and $26 million in 1994. Catastrophe losses in
1996 were primarily due to Hurricane Fran, as well as severe first quarter
winter storms and second quarter hail and wind storms. Catastrophe losses in
1994 were primarily due to the severe winter storms in the Northeast during the
first quarter.
12
<PAGE>
The statutory combined ratio for Personal Lines in 1996 was 97.6% compared to
104.4% in 1995 and 100.4% in 1994. The GAAP combined ratio for Personal Lines in
1996 was 94.9% compared to 103.6% in 1995 and 100.5% in 1994.
In 1996, GAAP combined ratios for Personal Lines differ from statutory combined
ratios primarily due to certain purchase accounting adjustments recorded in
connection with the Aetna P&C acquisition resulting in a charge to statutory
expenses, but not GAAP expenses.
The 1996 statutory and GAAP combined ratios for Personal Lines include a benefit
resulting from the Company's review of reserves associated with the acquisition
of Aetna P&C. Excluding this item, the 1996 statutory and GAAP combined ratios
were 100.1% and 97.4%, respectively. The decrease in the 1996 statutory and GAAP
combined ratios excluding this item is predominantly due to the favorable prior
year loss development, primarily in the automobile bodily injury line, partially
offset by higher catastrophe losses. The lower ratio in 1994 compared to 1995
was primarily due to the benefit of favorable loss reserve development and the
favorable resolution of the MTF deficit in 1994.
Financing Costs and Other
The primary component for 1996 was interest expense of $77 million after tax,
reflecting financing costs associated with the acquisition of Aetna P&C.
Outlook -- Property & Casualty
A variety of factors continue to affect the property and casualty insurance
market and the Company's core business outlook, including the competitive
pressures affecting pricing and profitability, inflation in the cost of medical
care, litigation and losses from involuntary markets.
Commercial Lines will continue to focus on its core product lines and markets,
with particular emphasis on both product and industry specialization. This
includes specific industry program marketing efforts in Commercial Accounts and
product offerings in Specialty Accounts. In most of Commercial Lines, pricing
did not improve in 1996. For Commercial Accounts and Select Accounts, the soft
underwriting cycle continues to pressure the pricing of guaranteed cost
products, as pricing trends have not kept pace with loss cost inflation in
recent years. The Company's focus is to retain existing profitable business and
obtain new accounts where it can maintain its selective underwriting policy.
National Accounts premiums are primarily loss sensitive and therefore less
affected by these pricing pressures. The market for National Accounts guaranteed
cost products is very competitive and has resulted in a decline in the Company's
new business. The Company will continue to adhere to strict guidelines to
maintain high quality underwriting. The Company's adherence to its selective
underwriting criteria has had an adverse effect on premium levels during the
last two years and, if the competitive pressures on pricing do not improve in
1997, it may continue to affect future premium levels unfavorably. The Company
believes that the competitive pricing environment for Commercial Lines is not
likely to improve in 1997.
Personal Lines strategy includes the control of operating expenses to improve
competitiveness and profitability, growth in sales through independent agents in
target markets, expansion of alternative marketing channels to broaden the
distribution of Personal Lines products, and a reduction of exposure to
catastrophe losses. In order to reduce its exposure to catastrophe losses, the
Company has limited the writing of new homeowners business and selectively
non-renewed existing homeowners business in certain markets, tightened
underwriting standards and implemented price increases in certain
hurricane-prone areas, subject to restrictions imposed by insurance regulatory
authorities, and introduced new policy forms in certain markets to limit the
Company's exposure to earthquake losses.
The property and casualty insurance industry in the United States continues to
consolidate. The Company's strategic objectives are to enhance its position as a
consistently profitable market leader and to become a low-cost provider of
property and casualty insurance in the United States, as the industry
consolidates.
13
<PAGE>
In relation to the Company's objective of being a low-cost provider of property
and casualty insurance, cost reductions and enhanced productivity efforts are
expected to continue. These efforts include reducing overhead expenses,
integrating Aetna P&C to make it more consistent with the decentralized,
streamlined structure of the Company, and eliminating redundant expenses between
the two companies. The Company is approximately two-thirds of the way toward its
objective of achieving $300 million in annual cost savings in the first two
years after the Aetna P&C acquisition.
Environmental Claims
The Company continues to receive claims alleging liability exposures arising out
of insureds' alleged disposition of toxic substances. These claims when
submitted rarely indicate the monetary amount being sought by the claimant from
the insured and the Company does not keep track of the monetary amount being
sought in those few claims which indicated such a monetary amount.
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 until the dispute
is resolved. 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. At December 31, 1996, approximately 12% of the net
environmental loss reserve (i.e., approximately $146 million) consists of case
reserve for resolved claims. The balance, approximately 88% of the net aggregate
reserve (i.e. approximately $1.096 billion), is carried in a bulk reserve and
includes incurred but not yet reported environmental claims for which the
Company has not received any specific claims.
The Company's reserving methodology is preferable to one based on "identified
claims" since the resolution of environmental exposures by the Company generally
occurs on an insured-by-insured basis as opposed to a claim-by-claim basis. The
nature of the resolution is through coverage litigation, which often pertains to
more than one claim, as well as through a settlement with an insured. Generally,
the settlement between the Company and the insured extinguishes any obligation
the Company may have under any policy issued to the insured for past, present
and future environmental liabilities. This form of settlement is commonly
referred to as a "buy-back" of policies for future environmental liability.
Additional provisions of these agreements include the appropriate indemnities
and hold harmless provisions to protect the Company. The Company's general
purpose in executing such agreements is to reduce its potential environmental
exposure and eliminate both the risks presented by coverage litigation with the
insured and the cost of such litigation.
The reserving methodology includes an analysis by the Company of the exposure
presented by each insured and the anticipated cost of resolution, if any, for
each insured. This analysis is completed by the Company on a quarterly basis. In
the course of its analysis, an assessment of the probable liability, available
coverage, judicial interpretations and historical value of similar exposures is
considered by the Company. In addition, due consideration is given to the many
variables presented, such as the nature of the alleged activities of the insured
at each site; the allegations of environmental damage at each site; the number
of sites; the total number of potentially responsible parties at each site; the
nature of environmental harm and the corresponding remedy at a site; the nature
of government enforcement activities at each site; the ownership and general use
of each site; the overall nature of the insurance relationship between the
Company and the insured; the identification of other insurers; the potential
coverage available, if any, including number of years of coverage, if any; and
the applicable law in each jurisdiction. Analysis of these and other factors,
including the potential for future claims, results in the establishment of the
bulk reserve.
The following table displays activity for environmental losses and loss expenses
and reserves for the three years ended December 31, 1996.
14
<PAGE>
Environmental Losses
(millions) 1996 1995 1994
-------- -------- --------
Beginning reserves:
Direct $ 454 $ 482 $ 504
Ceded (50) (11) (13)
-------- -------- --------
Net 404 471 491
Acquisition of Aetna P&C:
Direct 968 -- --
Ceded (39) -- --
Incurred losses and loss expenses:
Direct 114 117 54
Ceded (52) (61) (5)
Losses paid:
Direct 167 145 76
Ceded (14) (22) (7)
-------- -------- --------
Ending reserves:
Direct 1,369 454 482
Ceded (127) (50) (11)
======== ======== ========
Net $ 1,242 $ 404 $ 471
======== ======== ========
The duration of the Company's investigation and review of such claims and the
extent of time necessary to determine an appropriate estimate, if any, of the
value of the claim to the Company, varies significantly and is dependent upon a
number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and the
Company to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, the Company cannot provide a meaningful average of the
duration of an environmental claim. However, based upon the Company's experience
in resolving such claims, the duration may vary from months to several years.
The industry does not have a standard method of calculating claim activity for
environmental losses. Generally for environmental claims, Travelers Indemnity
and its subsidiaries (Travelers P&C) establishes a claim file for each insured
on a per site, per claimant basis. If there is more than one claimant such as a
federal and a state agency, this method will result in two claims being set up
for a policyholder at that one site. Similarly, if one hundred claimants file a
lawsuit against ten policyholders alleging injury as a result of the discharge
of wastes or pollutants, one thousand claims would be established. Travelers P&C
adheres to this method of calculating claim activity on all environmental-
related claims, whether such claims are tendered on primary, excess or umbrella
policies.
As of December 31, 1996, Travelers P&C had approximately 30,800 pending
environmental-related claims tendered by 664 active policyholders. The pending
environmental-related claims represent federal or state EPA-type claims as well
as plaintiffs' claims alleging bodily injury and property damage due to the
discharge of waste or pollutants. In 1996, the pending inventory increased by
approximately 20,000 claims as a result of several lawsuits being filed in the
states of Louisiana and Texas. These lawsuits filed against one or more
policyholders of Travelers P&C allege that the plaintiffs were injured or
damaged as a result of either alleged waste disposal or the alleged release of
deleterious substances from ongoing business operations, which have taken
15
<PAGE>
place near the plaintiffs' residences. Claims of this nature have historically
been considered in the level of environmental reserves. To date, in total
Travelers P&C has resolved environmental-related claims on behalf of 1,628
policyholders.
The Company is preparing a claims system conversion which when completed will
apply Travelers P&C's method of establishing claim files to Aetna P&C's
environmental-related claims. The Company anticipates that this process should
be completed in 1997. As of December 31, 1996, Aetna P&C had pending
environmental-related claims tendered by approximately 948 active policyholders.
Approximately 129 of these 948 active policyholders are also included in the 664
active Travelers P&C policyholders. Aetna P&C's policyholders, like those of
Travelers P&C, have tendered both EPA-type claims and individual claims alleging
injury or damage as a result of the discharge of wastes or pollutants. To date,
Aetna P&C has resolved environmental-related claims on behalf of 1,870
policyholders.
To date, the Company generally has been successful in resolving its coverage
litigation and continues to reduce its potential exposure through favorable
settlements with certain insureds. These settlement agreements with certain
insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds. Based upon the
Company's reserving methodology and the experience of its historical resolution
of environmental exposures, it believes that the environmental reserve provision
is appropriate. As of December 31, 1996, the Company, for approximately $1
billion, has resolved the environmental liabilities presented by 3,498 of the
4,981 policyholders who have tendered environmental claims to the Company. This
resolution comprises 70% of the policyholders who have tendered such claims. The
Company has reserves of approximately $950 million included in its bulk reserves
relating to the remaining 1,483 policyholders (30% of the total) with unresolved
environmental claims, as well as for any other policyholder which may tender an
environmental claim in the future.
Asbestos Claims
In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. The Company continues to receive
asbestos claims alleging insureds' liability from claimants' asbestos-related
injuries. These claims, when submitted, rarely indicate the monetary amount
being sought by the claimant from the insured and the Company does not keep
track of the monetary amount being sought in those few claims which indicated
such a monetary amount. Originally the cases involved mainly plant workers and
traditional asbestos manufacturers and distributors. However, in the mid-1980s,
a new group of plaintiffs, whose exposure to asbestos was less direct and whose
injuries were often speculative, began to file lawsuits in increasing numbers
against the traditional defendants as well as peripheral defendants who had
produced products that may have contained small amounts of some form of
encapsulated asbestos. These claims continue to arise and on an individual basis
generally involve smaller companies with smaller limits of potential coverage.
Also, there has emerged a group of non-product claims by plaintiffs, mostly
independent labor union workers, mainly against companies, alleging exposure to
asbestos while working at these companies' premises. In addition, various
insurers, including the Company, remain defendants in an action brought in
Philadelphia regarding potential consolidation and resolution of future asbestos
bodily injury claims.
In summary, various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as premises
owners, are tendering asbestos-related claims to the industry. Because each
insured presents different liability and coverage issues, the Company evaluates
those issues on an insured-by-insured basis.
The Company's evaluations have not resulted in any meaningful data from which an
average asbestos defense or indemnity payment may be determined. The varying
defense and indemnity payments made by the Company on behalf of its insureds
also have precluded the Company from deriving any meaningful data by which it
can predict
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<PAGE>
whether its defense and indemnity payments for asbestos claims (on average or in
the aggregate) will remain the same or change in the future. Based upon the
Company's experience with asbestos claims, the duration period of an asbestos
claim from the date of submission to resolution is approximately two years.
At December 31, 1996, approximately 25% of the net aggregate reserve (i.e.,
approximately $263 million) is for pending asbestos claims. The balance,
approximately 75% (i.e., approximately $810 million) of the net asbestos
reserves represents incurred but not yet reported losses for which the Company
has not received any specific claims.
The following table displays activity for asbestos losses and loss expenses and
reserves for the three years ended December 31, 1996. In general, the Company
posts case reserves for pending asbestos claims within approximately 30 business
days of receipt of such claims.
Asbestos Losses
(millions) 1996 1995 1994
-------- -------- --------
Beginning reserves:
Direct $ 695 $ 702 $ 775
Ceded (293) (319) (381)
-------- -------- --------
Net 402 383 394
Acquisition of Aetna P&C:
Direct 801 -- --
Ceded (121) -- --
Incurred losses and loss expenses:
Direct 120 109 67
Ceded (35) (66) (16)
Losses paid:
Direct 173 116 140
Ceded (79) (92) (78)
-------- -------- --------
Ending reserves:
Direct 1,443 695 702
Ceded (370) (293) (319)
======== ======== ========
Net $ 1,073 $ 402 $ 383
======== ======== ========
The largest reinsurer of the Company's asbestos risks is Lloyd's of London
(Lloyd's). In 1996, Lloyd's restructured its operations with respect to claims
for years prior to 1993. The Company is in arbitration with underwriters at
Lloyd's in New York State to enforce reinsurance contracts with respect to
recoveries for certain asbestos claims. The dispute involves the ability of the
Company to aggregate asbestos claims under a market agreement between Lloyd's
and the Company or under the applicable reinsurance treaties. The outcome of the
arbitration referred to above is uncertain and the impact, if any, on
collectibility of amounts recoverable by the Company from Lloyd's cannot be
quantified at this time. However, the Company believes that it is not likely
that the outcome of this matter could have a material adverse effect on the
Company's results of operations, financial condition or liquidity.
17
<PAGE>
Uncertainty Regarding Adequacy of Environmental and Asbestos Reserves
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance, and applicable coverage defenses, if any. Once the gross ultimate
exposure for indemnity and allocated claim adjustment expense is determined for
a policyholder by policy year, a ceded projection is calculated based on any
applicable facultative and treaty reinsurance. In addition, a similar review is
conducted for asbestos property damage claims. However, due to the relatively
minor claim volume, these reserves have remained at a constant level.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1996 are the Company's best
estimate of ultimate claims and claim adjustment expenses based upon known facts
and current law. However, the environment surrounding the final resolution of
these claims continues to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations and changes in Superfund
and other legislation. Because of these future unknowns, additional liabilities
may arise for amounts in excess of the current reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated, and 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, the Company believes that is not likely that these claims will have a
material adverse effect on the Company's financial condition or liquidity.
Cumulative Injury Other Than Asbestos (CIOTA) Claims
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 potentially harmful products or substances. Such potentially 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.
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
18
<PAGE>
to evolving theories of tort liability or unfavorable coverage determinations.
The Company's 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 ($192 million after tax and minority interest).
At December 31, 1996, approximately 19% of the net aggregate reserve (i.e.,
approximately $215 million) is for pending CIOTA claims. The balance,
approximately 81% (i.e., approximately $899 million) of the net CIOTA reserves
represents incurred but not yet reported losses for which the Company has not
received any specific claims.
The following table displays activity for CIOTA losses and loss expenses and
reserves for the three years ended December 31, 1996. In general, the Company
posts case reserves for pending CIOTA claims within approximately 30 business
days of receipt of such claims.
CIOTA Losses
(millions) 1996 1995 1994
-------- -------- --------
Beginning reserves:
Direct $ 374 $ 375 $ 377
Ceded -- -- --
-------- -------- --------
Net 374 375 377
Acquisition of Aetna P&C:
Direct 709 -- --
Ceded (293) -- --
Incurred losses and loss expenses:
Direct 565 21 16
Ceded (155) -- --
Losses paid:
Direct 88 22 18
Ceded (2) -- --
-------- -------- --------
Ending reserves:
Direct 1,560 374 375
Ceded (446) -- --
======== ======== ========
Net $ 1,114 $ 374 $ 375
======== ======== ========
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<PAGE>
Outlook - Industry
Changes in the general interest rate environment affect the return received by
the insurance subsidiaries on newly invested and reinvested funds. While a
rising interest rate environment enhances the returns available, it reduces the
market value of existing fixed maturity investments and the availability of
gains on disposition. A decline in interest rates reduces the returns available
on investment of funds but could create the opportunity for realized investment
gains on disposition of fixed maturity investments.
As required by various state laws and regulations, the Company's insurance
subsidiaries are subject to assessments from state-administered guaranty
associations, second injury funds and similar associations. Management believes
that such assessments will not have a material impact on the Company's results
of operations, financial condition or liquidity.
Certain social, economic and political issues have led to an increased number of
legislative and regulatory proposals aimed at addressing the cost and
availability of certain types of insurance. While most of these provisions have
failed to become law, these initiatives may continue as legislators and
regulators try to respond to public availability and affordability concerns and
the resulting laws, if any, could adversely affect the Company's ability to
write business with appropriate returns.
The National Association of Insurance Commissioners (NAIC) adopted risk-based
capital (RBC) requirements for life insurance companies and for property and
casualty insurance companies. The RBC requirements are to be used as early
warning tools by the NAIC and states to identify companies that merit further
regulatory action. The formulas have not been designed to differentiate among
adequately capitalized companies that operate with levels of capital higher than
RBC requirements. Therefore, it is inappropriate and ineffective to use the
formulas to rate or to rank such companies. At December 31, 1996 and 1995, all
of the Company's life and property & casualty companies had adjusted capital in
excess of amounts requiring any regulatory action.
Asset Quality - The investment portfolio of the insurance services segments
which include both Life Insurance and Property & Casualty Insurance totaled
approximately $55 billion, representing 61% of total insurance services' assets
of approximately $90 billion. Because the primary purpose of the investment
portfolio is to fund future policyholder benefits and claims payments, the
Company employs a conservative investment philosophy. The fixed maturity
portfolio totaled $43 billion, comprised of $36 billion of publicly traded fixed
maturities and $7 billion of private fixed maturities. The weighted average
quality ratings of the segment's publicly traded fixed maturity portfolio and
private fixed maturity portfolio at December 31, 1996 were Aa3 and Baa1,
respectively. Included in the fixed maturity portfolio was approximately $1.7
billion of below investment grade securities. Investments in venture capital
investments, highly leveraged transactions, and specialized lendings were not
material in the aggregate.
The insurance services segment makes investments in collateralized mortgage
obligations (CMOs). Such CMOs typically have high credit quality, offer good
liquidity, and provide a significant advantage in yield and total return
compared to U.S. Treasury securities. The investment strategy of the Insurance
Services segment is to purchase CMO tranches that are protected against
prepayment risk, including planned amortization class (PAC) tranches. Prepayment
protected tranches are preferred because they provide stable cash flows in a
variety of scenarios. The segment does invest in other types of CMO tranches if
a careful assessment indicates a favorable risk/return tradeoff; however, it
does not purchase residual interests in CMOs.
At December 31, 1996, the segment held CMOs with a market value of $4.6 billion.
Approximately 84% of CMO holdings are fully collateralized by GNMA, FNMA or
FHLMC securities, and the balance is fully collateralized by portfolios of
individual mortgage loans. In addition, the segment held $3.7 billion of GNMA,
FNMA or FHLMC mortgage-backed pass-through securities. Virtually all of these
securities are rated AAA.
At December 31, 1996, real estate and mortgage loan investments totaled $4.5
billion. Most of these investments are included in the investment portfolio of
the insurance companies. The Company is continuing its strategy to
20
<PAGE>
dispose of these real estate assets and some of the mortgage loans and to
reinvest the proceeds to obtain current market yields.
At December 31, mortgage loan and real estate portfolios consisted of the
following:
(millions) 1996 1995
-------- --------
Current mortgage loans $ 3,721 $ 3,796
Underperforming mortgage loans 91 252
-------- --------
Total mortgage loans 3,812 4,048
-------- --------
Real estate held for sale 695 321
======== ========
Total mortgage loans and real estate $ 4,507 $ 4,369
======== ========
Mortgage loans and real estate held for sale at December 31, 1996 include $811
million and $136 million, respectively, from the Aetna P&C acquisition.
Underperforming mortgage loans include delinquent loans, loans in the process of
foreclosure and loans modified at interest rates below market terms. The new
terms typically defer a portion of contract interest payments to varying future
periods. The accrual of interest is suspended on all restructured loans, and
interest income is reported only as payment is received. Of the total real
estate held for sale, $134 million is underperforming.
For further information relating to investments, see Note 5 of Notes to
Consolidated Financial Statements.
Corporate and Other
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------
Net Net Net
Income Income Income
(millions) Revenues (Expense) Revenues (Expense) Revenues (Expense)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net expenses (1) $ (211) $ (238) $ (201)
Net gain (loss) on sale of
stock of subsidiaries and
affiliates 384 (13) 39
- ----------------------------------------------------------------------------------------------------------
Total Corporate and Other $ 143 $ 173 $ 18 $ (251) $ (12) $ (162)
==========================================================================================================
</TABLE>
(1) Includes $9 million and $23 million, respectively, of reported investment
portfolio losses in 1996 and 1995.
Corporate and Other consists of corporate staff and treasury operations, certain
corporate income and expenses that have not been allocated to the operating
subsidiaries, and certain intersegment eliminations.
The decrease in net expenses (before reported portfolio losses) in 1996 over
1995 is primarily attributable to lower staff expenses in the corporate segment
including the allocation of additional expenses to other operating segments
offset by increased interest costs associated with higher debt levels in 1996.
The increase in net expenses (before reported portfolio losses) in 1995 over
1994 is primarily attributable to increased interest costs borne at the
corporate level resulting from higher average short-term borrowing rates in
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<PAGE>
1995 when compared to 1994 as well as a shift in debt mix to higher levels of
senior long-term debt over the course of 1995.
Discontinued Operations
Year Ended December 31,
--------------------------------------
(millions) 1996 1995 1994
--------------------------------------
Net Income Net Income Net Income
- --------------------------------------------------------------------------------
Operations $ -- $ 76 $ 160
Gain on disposition 31 130 9
- --------------------------------------------------------------------------------
Total Discontinued Operations $ 31 $ 206 $ 169
================================================================================
As discussed in Note 3 of Notes to Consolidated Financial Statements, all of the
businesses sold to Metropolitan Life Insurance Company (MetLife) or contributed
to The MetraHealth Companies, Inc. (MetraHealth) have been classified as
discontinued operations. In 1995, the Company's results reflect the medical
business not yet transferred, plus its equity interest in the earnings of
MetraHealth.
Gain on disposition in 1995 represents a gain of $20 million from the sale in
January of the Company's group life insurance business to MetLife, and a gain of
$110 million (not including a contingency payment based on 1995 results which
was received by the Company in 1996) from the sale in October of the Company's
interest in MetraHealth to United HealthCare Corporation. During 1996 the
Company received the contingency payment recognizing an after tax gain of $31
million. Gain on disposition in 1994 represents the gain from the sale in
December of the group dental insurance business to MetLife.
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 credit agreements and/or by
regulatory requirements. TRV believes it will have sufficient 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, 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 June 2001. At December 31,
1996, $250 million was allocated to TRV, $650 million was allocated to CCC, and
$100 million to TIC. At December 31, 1996 there were no borrowings outstanding
under this facility. Under this facility the Company is required to maintain a
certain level of consolidated stockholders' equity (as defined in the
agreement). The Company exceeded this requirement by approximately $4.3 billion
at December 31, 1996.
As of December 31, 1996, TRV had unused credit availability of $250 million
under the five-year revolving credit facility. TRV may borrow under its
revolving credit facilities at various interest rate options and compensates the
banks for the facilities through commitment fees.
22
<PAGE>
In October 1996, Travelers Capital I, a subsidiary trust of TRV, issued $400
million of 8.00% Trust Preferred Securities in a public offering. These Trust
Preferred Securities, which are fully and unconditionally guaranteed by TRV,
have a liquidation value of $25 per Trust Preferred Security and are mandatorily
redeemable under certain circumstances.
In December 1996, Travelers Capital II, a subsidiary trust of TRV, issued $400
million of 7 3/4% Trust Preferred Securities in a public offering and Travelers
Capital III, a subsidiary trust of TRV, issued $200 million of 7 5/8% Trust
Preferred Securities in a public offering. These Trust Preferred Securities,
which are fully and unconditionally guaranteed by TRV, have a liquidation value
of $1,000 per Trust Preferred Security and are mandatorily redeemable under
certain circumstances.
TRV as of March 4, 1997 had $1.0 billion available for debt offerings under its
shelf registration statements.
Commercial Credit Company (CCC)
CCC also issues commercial paper directly to investors and maintains unused
credit availability under committed revolving credit agreements at least equal
to the amount of commercial paper outstanding. As of December 31, 1996, CCC had
unused credit availability of $2.150 billion under five-year revolving credit
facilities, including the $650 million referred to above. 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 TRV or its affiliated companies.
At December 31, 1996, CCC would have been able to remit $308 million to its
parent under its most restrictive covenants.
During 1996 and through March 4, 1997 CCC completed the following long-term debt
offerings, leaving $550 million available for debt offerings and $400 million
available for trust preferred security offerings under its shelf registration
statements:
o 5 7/8% Notes due January 15, 2003...................... $200 million
o 5.55% Notes due February 15, 2001..................... $200 million
o 6 5/8% Notes due November 15, 2006..................... $200 million
o 6.20% Notes due November 15, 2001..................... $200 million
In addition to the long-term debt offerings above, in October 1996 CCC, through
a private placement, issued $200 million of 6.45% Notes due October 18, 2006
which by their terms can be put to CCC at par on October 18, 1999.
Travelers Property Casualty Corp. (TAP)
On April 2, 1996, Travelers Property Casualty Corp. (TAP), an indirect
majority-owned subsidiary of the Company, purchased from Aetna Services Inc. 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 Travelers Indemnity.
Travelers Indemnity along with Aetna P&C are the primary vehicles through which
the Company engages in the property and casualty insurance business. See Note 2
of Notes to Consolidated Financial Statements regarding the financing of the
Aetna P&C purchase.
In addition to financing the Aetna P&C purchase, in September 1996 TAP sold in a
public offering $200 million of 6 3/4% Notes due September 1, 1999 and in
October an additional $200 million of 6 1/4% Notes due October 1, 1999 and in
November an additional $150 million of 6 3/4% Notes due November 15, 2006.
As discussed in Note 2 of Notes to Consolidated Financial Statements, 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. The Credit Facility was
used to finance in part the purchase of Aetna P&C. All borrowings under the
Credit Facility have been repaid in full. The Credit Facility was subsequently
amended to extend the maturity to December 2001 and reduce the amount
23
<PAGE>
available to $500 million, none of which is currently utilized. Under the Credit
Facility TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At December 31, 1996, this
requirement was exceeded by approximately $2.8 billion.
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's insurance subsidiaries are subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to their parent
without prior approval of insurance regulatory authorities. Dividend payments to
TAP from its insurance subsidiaries are limited to $647 million in 1997 without
prior approval of the Connecticut Insurance Department.
TAP as of March 4, 1997, had $750 million available for debt offerings under its
shelf registration statement.
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 has a $1.0 billion revolving
credit agreement with a bank syndicate that extends through May 1999, and has a
$500 million, 364-day revolving credit agreement with a bank syndicate that
extends through May 1997. Any amounts outstanding on the 364-day revolving
credit agreement's termination date of May 1997 are due in May 1998. As of
December 31, 1996, there were no borrowings outstanding under either facility.
Smith Barney also has substantial borrowing arrangements consisting of
facilities that it has been advised are available, but where no contractual
lending obligation exists.
Smith Barney, through its subsidiary Smith Barney Inc., issues commercial paper
directly to investors. As a policy, Smith Barney maintains sufficient borrowing
power of unencumbered securities to cover uncollateralized borrowings and
uncollateralized letters of credit. 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. At December 31, 1996, Smith Barney
would have been able to remit approximately $659 million to TRV under its most
restrictive covenants.
During 1996 and through March 4, 1997 Smith Barney completed the following
long-term debt offerings leaving $1.0 billion available for debt offerings under
its shelf registration statements:
o 5 7/8% Notes due February 1, 2001................... $250 million
o S&P 500 Equity Linked Notes due August 13, 2001...... $40 million
o 7 1/8% Notes due October 1, 2006.................... $200 million
o 6 5/8% Notes due November 15, 2003.................. $200 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
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
24
<PAGE>
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 December 31, 1996, TIC had $21.9 billion of life and annuity product deposit
funds and reserves. Of that total, $11.6 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $10.3 billion is for life and
annuity products that are subject to discretionary withdrawal by the
contractholder. Included in the amount that is subject to discretionary
withdrawal are $1.7 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $5.4 billion of the life
insurance and individual annuity liabilities which are subject to discretionary
withdrawals, and have an average surrender charge of 5.0%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$3.2 billion of liabilities are surrenderable without charge. More than 11% of
these relate to individual life products. These risks would have to be
underwritten again if transferred to another carrier, which is considered a
significant deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding policy
loans and related accrued interest prior to payout.
Scheduled maturities of guaranteed investment contracts (GICs) in 1997, 1998,
1999, 2000 and 2001 are $1.4 billion, $482 million, $459 million, $218 million
and $66 million, respectively. At December 31, 1996, the interest rates credited
on GICs had a weighted average rate of 6.25%.
TIC issues commercial paper to investors and maintains unused committed,
revolving credit facilities at least equal to the amount of commercial paper
outstanding. As of December 31, 1996, TIC had unused credit availability of $100
million under the joint five-year revolving credit facility referred to above.
TIC 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 $507 million of statutory surplus is
available in 1997 for such dividends without Department approval.
Deferred Income Taxes
The Company has a net deferred tax asset which relates to temporary differences
that are expected to reverse as net ordinary deductions. The Company will have
to generate approximately $5.9 billion of taxable income, before the reversal of
the temporary differences, primarily over the next 10 to 15 years, to realize
the remainder of the deferred tax asset. Management expects to realize the
remainder of the deferred tax asset based upon its expectation of future taxable
income, after the reversal of these deductible temporary differences, of at
least $1.5 billion annually.
Future Application of Accounting Standards
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 125 (FAS No. 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
FAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on consistent application of a financial-components approach
that focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered and derecognizes liabilities when extinguished. FAS No. 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. The requirements of
FAS No. 125 are effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and are to be
applied prospectively. However, in December 1996 the FASB issued FAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125," which delays until January 1, 1998 the effective date for certain
provisions. The adoption of the provisions of this statement effective January
1, 1997 will not have a material impact on results of
25
<PAGE>
operations, financial condition or liquidity and the Company is currently
evaluating the impact of the provisions whose effective date has been delayed
until January 1, 1998.
26
<PAGE>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Income
(In millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Insurance premiums $ 7,633 $ 4,977 $ 5,144
Commissions and fees 3,422 2,874 2,526
Interest and dividends 5,549 4,355 3,401
Finance related interest and other charges 1,163 1,119 1,030
Principal transactions 990 1,016 900
Asset management fees 1,349 1,052 1,010
Other income 1,239 1,190 932
- ---------------------------------------------------------------------------------------------
Total revenues 21,345 16,583 14,943
- ---------------------------------------------------------------------------------------------
Expenses
Policyholder benefits and claims 7,366 5,017 5,227
Non-insurance compensation and benefits 3,768 3,442 3,241
Insurance underwriting, acquisition and operating 3,013 1,912 1,867
Interest 2,259 1,956 1,284
Provision for consumer finance credit losses 260 171 152
Other operating 1,678 1,544 1,524
- ---------------------------------------------------------------------------------------------
Total expenses 18,344 14,042 13,295
- ---------------------------------------------------------------------------------------------
Gain (loss) on sale of subsidiaries and affiliates 397 (20) 226
- ---------------------------------------------------------------------------------------------
Income before income taxes and minority interest 3,398 2,521 1,874
Provision for income taxes 1,051 893 717
Minority interest, net of income taxes 47 -- --
- ---------------------------------------------------------------------------------------------
Income from continuing operations 2,300 1,628 1,157
- ---------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes:
Income from operations (net of taxes of $17 and $87) -- 76 160
Gain on disposition (net of taxes of $17, $66 and $19) 31 130 9
- ---------------------------------------------------------------------------------------------
Income from discontinued operations 31 206 169
- ---------------------------------------------------------------------------------------------
Net income $ 2,331 $ 1,834 $ 1,326
=============================================================================================
Net income per share of common stock
and common stock equivalents:
Continuing operations $ 3.45 $ 2.43 $ 1.67
Discontinued operations 0.05 0.33 0.26
- ---------------------------------------------------------------------------------------------
Net income per share of common stock
and common stock equivalents $ 3.50 $ 2.76 $ 1.93
=============================================================================================
Weighted average number of common shares outstanding
and common stock equivalents (in millions) 638.8 634.8 644.0
=============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Financial Position
(In millions of dollars)
<TABLE>
<CAPTION>
December 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents
(including $1,256 and $1,072 segregated under federal and other brokerage regulations) $ 1,868 $ 1,866
Investments and real estate held for sale:
Fixed maturities, primarily available for sale at market value 43,998 30,712
Equity securities, at market value 1,157 856
Mortgage loans 3,812 4,048
Real estate held for sale 695 321
Policy loans 1,910 1,888
Short-term and other 5,173 3,140
- ---------------------------------------------------------------------------------------------------------------------
Total investments and real estate held for sale 56,745 40,965
- ---------------------------------------------------------------------------------------------------------------------
Securities borrowed or purchased under agreements to resell 25,280 19,601
Brokerage receivables 7,305 6,559
Trading securities owned, at market value 12,465 8,984
Net consumer finance receivables 7,885 7,092
Reinsurance recoverables 10,234 6,461
Value of insurance in force and deferred policy acquisition costs 2,563 2,172
Cost of acquired businesses in excess of net assets 2,933 1,928
Separate and variable accounts 9,023 6,949
Other receivables 4,869 3,564
Other assets 9,897 7,775
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 151,067 $ 113,916
=====================================================================================================================
Liabilities
Investment banking and brokerage borrowings $ 3,217 $ 2,955
Short-term borrowings 1,557 1,468
Long-term debt 11,327 9,190
Securities loaned or sold under agreements to repurchase 24,449 20,619
Brokerage payables 5,809 4,403
Trading securities sold not yet purchased, at market value 8,378 4,563
Contractholder funds 13,621 14,535
Insurance policy and claims reserves 43,944 26,920
Separate and variable accounts 8,949 6,916
Accounts payable and other liabilities 14,702 10,469
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 135,953 102,038
- ---------------------------------------------------------------------------------------------------------------------
ESOP Preferred stock - Series C (net of note guarantee of $35 and $67) 129 168
- ---------------------------------------------------------------------------------------------------------------------
TRV-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debt securities of TRV 1,000 --
- ---------------------------------------------------------------------------------------------------------------------
TAP-obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debt securities of TAP 900 --
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate
liquidation value 675 800
Common stock ($.01 par value; authorized shares: 1.5 billion;
issued shares: 1996 - 743,082,134 and 1995 - 736,303,838) 7 7
Additional paid-in capital 7,217 6,782
Retained earnings 7,452 5,503
Treasury stock, at cost (1996 - 105,503,401 shares and 1995 - 103,848,847 shares) (2,446) (1,835)
Unrealized gain (loss) on investment securities 469 756
Other, principally unearned compensation (289) (303)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,085 11,710
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 151,067 $ 113,916
=====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(In millions of dollars)
<TABLE>
<CAPTION>
Amounts Shares (in thousands)
---------------------------------- -----------------------------------
Year Ended December 31, 1996 1995 1994 1996 1995 1994
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock at aggregate liquidation value
Balance, beginning of year $ 800 $ 800 $ 800 11,200 11,200 11,200
Conversion of Series B preferred stock to common stock (125) (2,500)
- -------------------------------------------------------------------------------------------- -----------------------------------
Balance, end of year 675 800 800 8,700 11,200 11,200
============================================================================================ ===================================
Common stock and additional paid-in capital
Balance, beginning of year 6,789 6,659 6,570 736,304 736,352 736,534
Conversion of Series B preferred stock to common stock 125 6,802
Issuance of shares pursuant to employee benefit plans 355 130 85
Other (45) 4 (24) (48) (182)
- -------------------------------------------------------------------------------------------- -----------------------------------
Balance, end of year 7,224 6,789 6,659 743,082 736,304 736,352
============================================================================================ ===================================
Retained earnings
Balance, beginning of year 5,503 4,199 3,140
Net income 2,331 1,834 1,326
Common dividends (287) (255) (181)
Preferred dividends (95) (86) (86)
Distribution of Transport Holdings Inc. shares (189)
- --------------------------------------------------------------------------------------------
Balance, end of year 7,452 5,503 4,199
- --------------------------------------------------------------------------------------------
Treasury stock, at cost
Balance, beginning of year (1,835) (1,553) (1,121) (103,849) (103,369) (82,309)
Issuance of shares pursuant to employee benefit plans,
net of shares tendered for payment of option exercise
price and withholding taxes (18) 136 111 15,679 17,928 10,636
Treasury stock acquired (593) (418) (543) (17,333) (18,408) (31,752)
Other 56
- -------------------------------------------------------------------------------------------- -----------------------------------
Balance, end of year (2,446) (1,835) (1,553) (105,503) (103,849) (103,369)
============================================================================================ ===================================
Unrealized gain (loss) on investment securities
Balance, beginning of year 756 (1,319) 30
Net change in unrealized gains and losses on investment
securities, net of tax (287) 2,075 (1,349)
- --------------------------------------------------------------------------------------------
Balance, end of year 469 756 (1,319)
- --------------------------------------------------------------------------------------------
Other, principally unearned compensation
Balance, beginning of year (303) (146) (93)
Net issuance of restricted stock (305) (221) (190)
Restricted stock amortization 206 175 136
Adjustment for minimum pension liability, net of tax 114 (114)
Net translation adjustments, net of tax (1) 3 1
- --------------------------------------------------------------------------------------------
Balance, end of year (289) (303) (146)
- --------------------------------------------------------------------------------------------
Total common stockholders' equity and common shares
outstanding 12,410 10,910 7,840 637,579 632,455 632,983
============================================================================================ ===================================
Total stockholders' equity $ 13,085 $ 11,710 $ 8,640
============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(In millions of dollars)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Income from continuing operations before income taxes and minority interest $ 3,398 $ 2,521 $ 1,874
Adjustments to reconcile income from continuing operations before income taxes
and minority interest to net cash provided by (used in) operating activities:
Amortization of deferred policy acquisition costs and value of insurance in force 1,192 803 812
Additions to deferred policy acquisition costs (1,388) (858) (994)
Depreciation and amortization 342 304 297
Provision for consumer finance credit losses 260 171 152
Changes in:
Trading securities, net 334 (1,821) (572)
Securities borrowed, loaned and repurchase agreements, net (1,849) 4,590 (363)
Brokerage receivables net of brokerage payables 660 (1,725) 724
Insurance policy and claims reserves (309) 686 350
Other, net 269 (508) (1,707)
Net cash flows provided by (used in) operating activities of discontinued operations -- (415) 323
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 2,909 3,748 896
Income taxes paid (572) (563) (378)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,337 3,185 518
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Consumer loans originated or purchased (3,410) (2,748) (2,789)
Consumer loans repaid or sold 2,534 2,245 2,094
Purchases of fixed maturities and equity securities (29,246) (18,123) (9,057)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities 23,471 12,864 4,149
Mortgage loans 200 739 402
Real estate and real estate joint ventures 257 256 955
Proceeds from maturities of investments:
Fixed maturities 3,586 2,723 3,319
Mortgage loans 1,050 693 1,301
Other investments, primarily short-term, net (325) (408) (58)
Contingent consideration payment for the Shearson Businesses (110) (76) (69)
Business acquisition (4,160) -- --
Business divestments 196 -- 679
Other, net (334) (236) (284)
Net cash flows provided by (used in) investing activities of discontinued operations 48 1,623 (303)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (6,243) (448) 339
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (382) (341) (267)
Issuance of preferred stock of subsidiaries 1,900 -- --
Subsidiary's sale of Class A common stock 1,453 -- --
Treasury stock acquired (593) (418) (543)
Stock tendered for payment of withholding taxes (201) (94) (42)
Issuance of long-term debt 2,940 3,525 1,150
Payments and redemptions of long-term debt (768) (1,375) (1,033)
Net change in short-term borrowings (including investment banking and brokerage borrowings) 351 (2,431) 865
Contractholder fund deposits 2,493 2,707 1,958
Contractholder fund withdrawals (3,262) (3,755) (3,358)
Other, net (23) 84 30
Net cash flows provided by financing activities of discontinued operations -- -- 84
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,908 (2,098) (1,156)
- ------------------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 2 639 (299)
Cash and cash equivalents at beginning of period 1,866 1,227 1,526
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,868 $ 1,866 $ 1,227
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,221 $ 1,930 $ 1,227
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
Travelers Group Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
Principles of Consolidation. The consolidated financial statements include
the accounts of Travelers Group Inc. (TRV) and its subsidiaries
(collectively, the Company). On April 2, 1996, Travelers Property Casualty
Corp. (formerly Travelers/Aetna Property Casualty Corp.) (TAP), an indirect
majority-owned subsidiary of the Company, purchased from Aetna Services
Inc. (formerly 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 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). Travelers Indemnity along with Aetna P&C are the
primary vehicles through which the Company engages in the property and
casualty insurance business.
Unconsolidated entities in which the Company has at least a 20% interest
are accounted for on the equity method. The minority interest in 1996
represents the interest in TAP held by the private and public investors.
(See Note 2.) Significant intercompany transactions and balances have been
eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
Accounting Changes
FAS 121. Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (FAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement establishes accounting standards for the impairment of
long-lived assets and certain identifiable intangibles to be disposed 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 that
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 results of operations, financial condition or
liquidity.
FAS 123. In October 1995, the Financial Accounting Standards Board (FASB)
issued FAS No. 123, "Accounting for Stock-Based Compensation." FAS No. 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans as well as transactions in which an entity
issues its equity instruments to acquire goods or services from
non-employees. This statement defines a fair value-based method of
accounting for employee stock options or similar equity instruments, and
encourages all entities to adopt this method of accounting for all employee
stock compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value-based
method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (Opinion 25). Entities
electing to remain with the accounting method prescribed in Opinion 25 must
make pro forma disclosures of net income and earnings per share, as if the
fair value-based method of accounting defined by FAS No. 123 had been
applied. FAS No. 123 is applicable to fiscal years beginning after December
15, 1995. The Company has elected to continue to account for its
stock-based compensation plans using the accounting method prescribed by
Opinion 25 and has
31
<PAGE>
Notes to Consolidated Financial Statements (continued)
included in the Notes to Consolidated Financial Statements the pro forma
disclosures required by FAS No. 123. (See Note 15.)
Accounting Policies
Cash and cash equivalents include cash on hand, cash segregated under
federal and brokerage regulations and short-term highly liquid investments
with maturities of three months or less when purchased, other than those
held for sale in the ordinary course of business. These short-term
investments are carried at cost plus accrued interest, which approximates
market value.
Investments are owned principally by the insurance subsidiaries. Fixed
maturities include bonds, notes and redeemable preferred stocks. Equity
securities include common and non-redeemable preferred stocks. Fixed
maturities classified as "held to maturity" represent securities that the
Company has both the ability and the intent to hold until maturity and are
carried at amortized cost. Fixed maturity securities classified as
"available for sale" and equity securities are carried at market values
that are based primarily on quoted market prices or if quoted market prices
are not available, discounted expected cash flows using market rates
commensurate with the credit quality and maturity of the investment. The
difference between amortized cost and market values of such securities net
of applicable income taxes is reflected as a component of stockholders'
equity. Real estate held for sale is carried at the lower of cost or fair
value less estimated costs to sell. Fair value was established at the time
of foreclosure by internal analysis or external appraisers, using
discounted cash flow analyses and other acceptable techniques. Thereafter,
an allowance for losses on real estate held for sale is established if the
carrying value of the property exceeds its current fair value less
estimated costs to sell. There was no such allowance at December 31, 1996
or 1995. Mortgage loans are carried at amortized cost. A mortgage loan is
considered impaired when it is probable that the Company will be unable to
collect principal and interest amounts due. For mortgage loans that are
determined to be impaired, a reserve is established for the difference
between the amortized cost and fair value of the underlying collateral. In
estimating fair value, the Company uses interest rates reflecting the
higher returns required in the current real estate financing market.
Impaired loans were not significant at December 31, 1996 and 1995. Policy
loans are carried at unpaid balances which do not exceed the net cash
surrender value of the related insurance policies. Short-term investments,
consisting primarily of money market instruments and other debt issues
purchased with a maturity of less than one year, are carried at cost plus
accrued interest which approximates market. Realized gains and losses on
sales of investments and unrealized losses considered to be other than
temporary, determined on a specific identification basis, are included in
other income.
Accrual of income is suspended on fixed maturities or mortgage loans that
are in default, or on which it is likely that future interest payments will
not be made as scheduled. Interest income on investments in default is
recognized only as payment is received. Investments included in the
Consolidated Statement of Financial Position that were non-income producing
for the preceding 12 months were not significant.
The cost of acquired businesses in excess of net assets (goodwill) is being
amortized on a straight-line basis principally over a 40-year period. The
carrying amount is regularly reviewed for indicators of impairment in
value, which in the view of management are other than temporary.
Impairments are recognized in operating results if a permanent diminution
in value is deemed to have occurred.
Income taxes have been provided for in accordance with the provisions of
FAS No. 109, "Accounting for Income Taxes." The Company and its wholly
owned domestic non-life insurance subsidiaries file a consolidated federal
income tax return. All but one of the life insurance subsidiaries are
included in their own consolidated federal income tax return. Deferred
income taxes result from temporary differences between the tax basis of
assets and liabilities and their recorded amounts for financial reporting
purposes.
Income taxes are not provided for on the Company's life insurance
subsidiaries' retained earnings designated as "policyholders' surplus"
because such taxes will become payable only to the extent such retained
earnings are distributed as a dividend or exceed limits prescribed by
federal law. Distributions are not contemplated from this
32
<PAGE>
Notes to Consolidated Financial Statements (continued)
portion of the life insurance companies' retained earnings, which
aggregated $971 million (subject to a tax effect of $340 million) at
December 31, 1996.
Subsidiary stock issuance. The Company recognizes gains (losses) on sales
of stock by subsidiaries. For the year ended December 31, 1996, included in
net income is a gain of $363 million from the sale by TAP of 18% of its
common stock.
Earnings per common share is computed after recognition of preferred stock
dividend requirements and is based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect of
common stock warrants and stock options and the incremental shares assumed
issued under the Capital Accumulation Plan and other restricted stock
plans. Fully diluted earnings per common share, assuming conversion of all
outstanding convertible preferred stock, notes, debentures and the maximum
dilutive effect of common stock equivalents, has not been presented because
the effects are not material. The fully diluted earnings per common share
computation for the years ended December 31, 1996, 1995 and 1994 would
entail adding the additional common stock equivalents (7 million, 10
million and 3 million shares, respectively) and the assumed conversion of
the convertible preferred stock (5 million, 14 million and 7 million
shares, respectively) to the number of shares included in the earnings per
common share calculation (resulting in a total of 651 million, 659 million
and 654 million shares, respectively) and the elimination of the
convertible preferred stock dividends ($11 million, $21 million and $7
million, respectively).
During 1996 the Company's Board of Directors declared a three-for-two stock
split in January and a four-for-three stock split in October (both payable
in the form of stock dividends), which combined are the equivalent of a
two-for-one stock split. Prior years' information has been restated to
reflect the stock splits.
Financial Instruments -- Disclosures. Included in the Notes to Consolidated
Financial Statements are various disclosures relating to financial
instruments having off-balance sheet risk. These disclosures indicate the
magnitude of the Company's involvement in such activities, and reflect the
instruments at their face, contract or notional amounts. The Notes to
Consolidated Financial Statements also include various disclosures relating
to the methods and assumptions used to estimate fair value of each material
type of financial instrument. The carrying value of short-term financial
instruments approximates fair value because of the relatively short period
of time between the origination of the instruments and their expected
realization. The carrying value of receivables and payables arising in the
ordinary course of business approximates fair market value. The fair value
assumptions were based upon subjective estimates of market conditions and
perceived risks of the financial instruments at a certain point in time.
Disclosed fair values for financial instruments do not reflect any premium
or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. Potential
taxes and other expenses that would be incurred in an actual sale or
settlement are not reflected in amounts disclosed.
Derivative Financial Instruments. Information concerning derivative
financial instruments and the accounting policies related thereto is
included in Note 19.
Future Application of Accounting Standards
In June 1996, the FASB issued FAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." FAS No.
125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. These standards are
based on consistent application of a financial-components approach that
focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when
extinguished. FAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. The requirements of FAS No. 125 are effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and are to be applied
33
<PAGE>
Notes to Consolidated Financial Statements (continued)
prospectively. However, in December 1996 the FASB issued FAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125" which delays until January 1, 1998 the effective date for certain
provisions. Earlier or retroactive application is not permitted. The
adoption of the provisions of this statement effective January 1, 1997 will
not have a material impact on results of operations, financial condition or
liquidity and the Company is currently evaluating the impact of the
provisions whose effective date has been delayed until January 1, 1998.
INVESTMENT SERVICES
Commissions related to security transactions, underwriting revenues and
related expenses are recognized in income on the trade date.
Management and investment advisory fees are recorded as income for the
period in which the services are performed.
Securities borrowed and securities loaned are recorded at the amount of
cash advanced or received. With respect to securities loaned, the Company
receives cash collateral in an amount in excess of the market value of
securities loaned. The Company monitors the market value of securities
borrowed and loaned on a daily basis with additional collateral obtained as
necessary.
Repurchase and resale agreements are treated as collateralized financing
transactions and are carried at the amounts at which the securities will be
subsequently reacquired or resold, including accrued interest, as specified
in the respective agreements. The Company's policy is to take possession of
securities purchased under agreements to resell. The market value of
securities to be repurchased and resold is monitored, and additional
collateral is requested where appropriate to protect against credit
exposure.
Trading securities are carried at market value. Included in income are
realized and unrealized gains and losses on trading securities and
proprietary futures, forward and option contracts.
Other assets include the value of management advisory contracts, which is
being amortized on the straight-line method over periods ranging from
twelve to twenty years.
INSURANCE SERVICES
Premiums from long-duration contracts, principally life insurance, are
earned when due. Premiums from short-duration insurance contracts are
earned over the related contract period. Short-duration contracts include
primarily property and casualty, credit life and accident and health
policies, including estimated ultimate premiums on retrospectively rated
policies. Benefits and expenses are associated with premiums by means of
the provision for future policy benefits, unearned premiums and the
deferral and amortization of policy acquisition costs.
Value of insurance in force represents the actuarially determined present
value of anticipated profits to be realized from life and accident and
health business on insurance in force at the date of the Company's
acquisition of its insurance subsidiaries using the same assumptions that
were used for computing related liabilities where appropriate. The value of
insurance in force acquired prior to December 31, 1993 is amortized over
the premium paying periods in relation to anticipated premiums. The value
of insurance in force relating to the acquisition of The Travelers
Corporation (old Travelers) was the actuarially determined present value of
the projected future profits discounted at interest rates ranging from 14%
to 18% for the business acquired. The value of the business in force is
amortized over the contract period using current interest crediting rates
to accrete interest and using amortization methods based on the specified
products. Traditional life insurance is amortized over the period of
anticipated premiums; universal life in relation to estimated gross
profits; and annuity contracts employing a level
34
<PAGE>
Notes to Consolidated Financial Statements (continued)
yield method. The value of insurance in force is reviewed periodically for
recoverability to determine if any adjustment is required.
Deferred policy acquisition costs for the life business represent the costs
of acquiring new business, principally commissions, certain underwriting
and agency expenses and the cost of issuing policies. Deferred policy
acquisition costs for traditional life business are amortized over the
premium-paying periods of the related policies, in proportion to the ratio
of the annual premium revenue to the total anticipated premium revenue.
Deferred policy acquisition costs of other business lines are generally
amortized over the life of the insurance contract or at a constant rate
based upon the present value of estimated gross profits expected to be
realized. For certain property and casualty lines, acquisition costs
(commissions and premium taxes) have been deferred to the extent
recoverable from future earned premiums and are amortized ratably over the
terms of the related policies. Deferred policy acquisition costs are
reviewed to determine if they are recoverable from future income, including
investment income, and, if not recoverable, are charged to expense. All
other acquisition expenses are charged to operations as incurred.
Separate and variable accounts primarily represent funds for which
investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contractholders. Each account has specific
investment objectives. The assets of each account are legally segregated
and are not subject to claims that arise out of any other business of the
Company. The assets of these accounts are generally carried at market
value. Amounts assessed to the contractholders for management services are
included in revenues. Deposits, net investment income and realized
investment gains and losses for these accounts are excluded from revenues,
and related liability increases are excluded from benefits and expenses.
Other receivables include receivables related to retrospectively rated
policies on property-casualty business, net of allowance for estimated
uncollectible amounts.
Insurance policy and claims reserves represent liabilities for future
insurance policy benefits. Insurance reserves for traditional life
insurance, annuities, and accident and health policies have been computed
based upon mortality, morbidity, persistency and interest assumptions
applicable to these coverages, which range from 2.5% to 10%, including
adverse deviation. These assumptions consider Company experience and
industry standards and may be revised if it is determined that future
experience will differ substantially from that previously assumed.
Property-casualty reserves include (1) unearned premiums representing the
unexpired portion of policy premiums, and (2) estimated provisions for both
reported and unreported claims incurred and related expenses. The reserves
are adjusted regularly based on experience. Included in the insurance
policy and claims reserves in the Consolidated Statement of Financial
Position at December 31, 1996 and 1995 are $1.568 billion and $778 million,
respectively, of property-casualty loss reserves related to workers'
compensation that have been discounted using an interest rate of 5%.
In determining insurance policy and claims reserves, the Company carries on
a continuing review of its overall position, its reserving techniques and
its reinsurance. Reserves for property-casualty insurance losses represent
the estimated ultimate cost of all incurred claims and claim adjustment
expenses. Since the reserves are based on estimates, the ultimate liability
may be more or less than such reserves. The effects of changes in such
estimated reserves are included in the results of operations in the period
in which the estimates are changed. Such changes may be material to the
results of operations and could occur in a future period.
Contractholder funds represent receipts from the issuance of universal
life, pension investment and certain individual annuity contracts. Such
receipts are considered deposits on investment contracts that do not have
substantial mortality or morbidity risk. Account balances are increased by
deposits received and interest credited and are reduced by withdrawals,
mortality charges and administrative expenses charged to the
contractholders. Calculations of contractholder account balances for
investment contracts reflect lapse, withdrawal and interest rate
assumptions (ranging from 3.8% to 8.6%) based on contract provisions, the
Company's experience and industry
35
<PAGE>
Notes to Consolidated Financial Statements (continued)
standards. Contractholder funds also include other funds that policyholders
leave on deposit with the Company. The fair value of these contracts is
determined by discounting expected cash flows at an interest rate
commensurate with the Company's credit risk and the expected timing of cash
flows.
Permitted Statutory Accounting Practices. The Company's insurance
subsidiaries are domiciled principally in Connecticut and Massachusetts and
prepare statutory financial statements in accordance with the accounting
practices prescribed or permitted by the insurance departments of those
states. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners as well
as state laws, regulations, and general administrative rules. The impact of
any accounting practices not so prescribed on statutory surplus is not
material.
CONSUMER FINANCE SERVICES
Finance related interest and other charges are recognized as income using
the constant yield method. Allowances for losses are established by direct
charges to income in amounts sufficient to maintain the allowance at a
level management determines to be adequate to cover losses in the
portfolio. The allowance fluctuates based upon continual review of the loan
portfolio and current economic conditions. For financial reporting
purposes, finance receivables are considered delinquent when they are 60
days or more contractually past due. Income stops accruing on finance
receivables when they are 90 days contractually past due. If payments are
made on a finance receivable that is not accruing income, and the
receivable is no longer 90 days contractually past due, the accrual of
income resumes. Finance receivables are charged against the allowance for
losses when considered uncollectible. Personal loans are considered
uncollectible when payments are six months contractually past due and six
months past due on a recency of payment basis. Loans that are twelve months
contractually past due regardless of recency of payment are charged off.
Recoveries on losses previously charged to the allowance are credited to
the allowance at the time of recovery. Consideration of whether to proceed
with foreclosure on loans secured by real estate begins when a loan is 60
days past due on a contractual basis. Real estate credit losses are
recognized when the title to the property is obtained.
Fees received and direct costs incurred for the origination of loans are
deferred and amortized over the contractual lives of the loans as part of
interest income. The remaining unamortized balances are reflected in
interest income at the time that the loans are paid in full, renewed or
charged off.
2. Business Acquisitions
---------------------
Acquisition of Aetna P&C
As discussed in Note 1, on April 2, 1996 TAP purchased from Aetna all of
the outstanding capital stock of ACSC and SFIC. To finance the purchase
price and transaction costs of $4.16 billion 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. 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 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.
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. During the
second quarter TAP sold in public offerings $700 million in long-term notes
(see Note 10) and through subsidiary trusts $900 million in Trust Preferred
Securities (see Note 14). 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
36
<PAGE>
Notes to Consolidated Financial Statements (continued)
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 Consolidated
Statement of Financial Position at December 31, 1996 on a fully
consolidated basis at management's best estimate of their fair values at
the acquisition date, based on currently available information. Evaluation
and appraisal of assets and liabilities is continuing and allocation of the
purchase price may be adjusted. The excess of the purchase price over the
estimated fair value of net assets is approximately $1.16 billion and is
being amortized over 40 years.
During 1996, TAP recorded charges related to the acquisition and
integration of Aetna P&C. These charges resulted primarily from anticipated
costs of the acquisition and the application of TAP's strategies, policies
and practices to Aetna P&C reserves and include: $229.1 million after tax
and minority interest ($430 million before tax and minority interest) in
reserve increases, net of reinsurance, related primarily to cumulative
injury claims other than asbestos (CIOTA); $44.8 million after tax and
minority interest ($84 million before tax and minority interest) provision
for an additional asbestos liability related to an existing settlement
agreement with a policyholder of Aetna P&C; $32.0 million after tax and
minority interest ($60 million before tax and minority interest) charge
related to premium collection issues; $21.8 million after tax and minority
interest ($41 million before tax and minority interest) provision for
uncollectibility of reinsurance recoverables; 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 acquisition. 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:
(in millions expect per share amounts) 1996 1995
----------------------------------------------------------------------
Revenues $ 22,945 $ 21,890
Income from continuing operations $ 2,062 $ 1,227
Net income $ 2,093 $ 1,433
Continuing operations $ 3.08 $ 1.80
Net income $ 3.13 $ 2.13
Excluding the charges discussed above associated with the acquisition of
Aetna P&C, which total $346.4 million after tax and minority interest, pro
forma income from continuing operations and net income would have been
$2.41 billion and $2.44 billion, respectively, or $3.62 per share and $3.67
per share, respectively, for the year ended December 31, 1996. Historical
results of Aetna P&C in 1995 include charges of $1.085 billion ($705
million after tax) representing an addition to environmental-related and
asbestos-related claims reserves.
The above 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.
37
<PAGE>
Notes to Consolidated Financial Statements (continued)
Supplemental Information to the Consolidated Statement of Cash Flows
Relating to the Acquisition of Aetna P&C
(millions)
1996
--------
Assets and liabilities of business acquired:
Invested assets $ 13,899
Reinsurance recoverables and other assets 10,409
Insurance policy and claim reserves (18,240)
Other liabilities (1,908)
--------------------------------------------------------------------
Cash payment related to business acquisition $ 4,160
====================================================================
Acquisition of Shearson Business
In July 1993, Smith Barney acquired the domestic retail brokerage and asset
management businesses (the Shearson Businesses) of Shearson Lehman Brothers
Holdings Inc., a subsidiary of American Express Company (American Express).
In addition to the amounts paid in 1993, Smith Barney has agreed to pay
American Express additional amounts that are contingent upon the new unit's
performance (Contingent Consideration), consisting of up to $50 million per
year for three years based on Smith Barney's revenues and 10% of Smith
Barney's after-tax profits in excess of $250 million per year over a
five-year period. Contingent Consideration paid during 1996, 1995 and 1994
amounted to $110 million, $76 million and $69 million, respectively. The
1996 payment includes a final payout of Contingent Consideration based on
revenues. The Contingent Consideration is being accounted for
prospectively, as additional purchase price, which will result in
amortization over periods of up to 20 years.
3. Disposition of Subsidiaries and Discontinued Operations
-------------------------------------------------------
During 1996, gains on sale of subsidiaries and affiliates totaled $397
million pre-tax and consisted of the sale in April of approximately 18% of
TAP ($363 million) and a net gain from the disposition of certain
investment advisory affiliates, including RCM Capital Management, a
California Limited Partnership (RCM) ($34 million).
During 1994, gains on sale of subsidiaries and affiliates totaled $226
million pre-tax and consisted of the sale in December of American Capital
Management & Research Inc. (American Capital) ($162 million), the sale in
November of Smith Barney's investment in HG Asia Holdings Ltd. ($34
million), and the sale in October of Bankers and Shippers Insurance Company
($30 million).
Transport Spin-off
On September 29, 1995, the Company made a pro rata distribution to the
Company's stockholders of shares of Class A Common Stock, $.01 par value
per share, of Transport Holdings Inc. (Holdings), which at the time was a
wholly owned subsidiary of the Company, and the indirect owner of Transport
Life Insurance Company. The results of Holdings were included in income
from continuing operations through September 29, 1995, the spin-off date.
Discontinued Operations
In December 1994, the Company sold its group dental insurance business to
Metropolitan Life Insurance Company (MetLife) for $52 million and
recognized an after-tax gain of $9 million ($28 million pre-tax), and on
January 3, 1995 the Company sold its group life business as well as its
related non-medical group insurance businesses to MetLife for $350 million
and recognized in the first quarter of 1995 an after-tax gain of $20
million ($31 million pre-tax). In connection with the sale, The Travelers
Insurance Company (TIC) ceded 100% of its risks in the group life and
related businesses to MetLife on an indemnity reinsurance basis, effective
January 1, 1995. In connection with the reinsurance transaction, TIC
transferred assets with a fair market value of approximately $1.5 billion
to MetLife, equal to the statutory reserves and other liabilities
transferred.
38
<PAGE>
Notes to Consolidated Financial Statements (continued)
On January 3, 1995, TIC and MetLife, and certain of their affiliates,
formed The MetraHealth Companies, Inc. (MetraHealth) joint venture by
contributing their medical businesses to MetraHealth, in exchange for
shares of common stock of MetraHealth. No gain was recognized upon the
formation of the joint venture. Upon formation of the joint venture TIC and
its affiliates owned 50% of the outstanding capital stock of MetraHealth,
and the other 50% was owned by MetLife and its affiliates. In March 1995,
MetraHealth acquired HealthSpring, Inc. for common stock of MetraHealth,
resulting in a reduction in the participation of the Company and MetLife in
the MetraHealth venture to 48.25% each.
In October 1995, the Company completed the sale of its ownership in
MetraHealth to United HealthCare Corporation. Gross proceeds to the Company
in 1995 were $831 million in cash, and the Company recognized a gain in
1995 of $110 million after tax ($165 million pre-tax). During 1996 the
Company received a contingency payment (based on MetraHealth's 1995
results) and recognized a gain in 1996 of $31 million after tax ($48
million pre-tax). Both of these gains are reflected in discontinued
operations.
All of the businesses sold to MetLife or contributed to MetraHealth have
been accounted for as a discontinued operation. Revenues from discontinued
operations for the years ended December 31, 1995 and 1994 amounted to
$1.040 billion and $3.522 billion, respectively. Revenues in 1996 were
immaterial.
4. Business Segment Information
----------------------------
The Company is a diversified financial services company engaged in
investment services, life and property and casualty insurance services and
consumer finance. The following table presents certain information
regarding these industry segments:
<TABLE>
<CAPTION>
(millions) 1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Investment Services $ 7,802 $ 6,808 $ 5,690
Life Insurance Services 3,765 3,858 3,488
Property & Casualty Insurance Services 8,224 4,545 4,538
Consumer Finance Services 1,411 1,354 1,239
Corporate and Other 143 18 (12)
---------- ---------- ----------
$ 21,345 $ 16,583 $ 14,943
========== ========== ==========
Income from continuing operations
before income taxes and minority interest
Investment Services $ 1,463 $ 1,028 $ 732
Life Insurance Services 1,009 893 651
Property & Casualty Insurance Services 512 595 307
Consumer Finance Services 343 378 356
Corporate and Other 71 (373) (172)
---------- ---------- ----------
$ 3,398 $ 2,521 $ 1,874
========== ========== ==========
</TABLE>
39
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE>
<S> <C> <C> <C>
Income from continuing operations
Investment Services $ 889 $ 599 $ 422
Life Insurance Services 653 581 421
Property & Casualty Insurance Services
(after minority interest of $47 in 1996) 362 453 249
Consumer Finance Services 223 246 227
Corporate and Other 173 (251) (162)
---------- ---------- ----------
$ 2,300 $ 1,628 $ 1,157
========== ========== ==========
Identifiable assets
Investment Services $ 51,245 $ 40,976 $ 45,618
Life Insurance Services 40,329 37,912 33,151
Property & Casualty Insurance Services 49,779 23,647 22,007
Consumer Finance Services 9,061 8,196 7,729
Corporate and Other 653 3,185 6,136
---------- ---------- ----------
$ 151,067 $ 113,916 $ 114,641
========== ========== ==========
</TABLE>
The Investment Services segment consists of investment banking, securities
brokerage, asset management and other financial services provided through
Smith Barney and its subsidiaries for all years presented, and in 1994
only, the investment management services provided by RCM (sold in June
1996) and the mutual fund management and distribution services provided
through American Capital (sold in December 1994, see Note 3).
The Life Insurance Services segment includes individual and group life
insurance, accident and health insurance, annuities and investment
products, which are offered primarily through The Travelers Insurance
Company, The Travelers Life and Annuity Company and Primerica Financial
Services (PFS).
The Property & Casualty Insurance Services segment provides
property-casualty insurance, including workers' compensation, liability,
automobile, property and commercial multi-peril to businesses and other
institutions and automobile and homeowners insurance to individuals.
Property-casualty insurance policies are issued primarily by subsidiaries
of the Company's newly formed majority-owned subsidiary Travelers Property
Casualty Corp. and its property-casualty insurance subsidiaries, including
Travelers Indemnity, Gulf Insurance Company, ACSC and SFIC.
The Consumer Finance Services segment includes consumer lending (including
secured and unsecured personal loans, real estate-secured loans and
consumer goods financing) and credit cards. Also included in this segment
are credit-related insurance services provided through American Health and
Life Insurance Company (AHL) and its affiliate.
Corporate and Other consists of corporate staff and treasury operations,
certain corporate income and expenses that have not been allocated to the
operating subsidiaries, including gains and losses from the sale of stock
of subsidiaries and affiliates. RCM, the remaining component of what were
the Mutual Funds and Asset Management operations in 1994, is reported as
part of Corporate and Other in 1995 and through its date of sale in 1996.
40
<PAGE>
Notes to Consolidated Financial Statements (continued)
Cumulative effect of accounting changes, and capital expenditures for
property, plant and equipment and related depreciation expense are not
material to any of the business segments. Intersegment sales and
international operations are not significant.
For gains and special charges included in each segment, see "Results of
Operations" discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
5. Investments
-----------
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted expected
cash flows using market rates commensurate with the credit quality and
maturity of the investment.
The amortized cost and estimated market values of investments in fixed
maturities were as follows:
<TABLE>
<CAPTION>
December 31, 1996 Gross Unrealized
Amortized ----------------------- Market
(millions) Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities-principally obligations of U.S.
Government agencies $ 8,416 $ 146 $ (38) $ 8,524
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies 3,757 102 (11) 3,848
Obligations of states and political subdivisions 5,254 124 (31) 5,347
Debt securities issued by foreign governments 1,161 41 (4) 1,198
Corporate securities 24,636 462 (70) 25,028
----------------------------------------------------
$ 43,224 $ 875 $ (154) $ 43,945
====================================================
Held to maturity, principally mortgage-backed securities $ 53 $ 9 $ -- $ 62
====================================================
</TABLE>
41
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
December 31, 1995 Gross Unrealized
Amortized ----------------------- Market
(millions) Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities-principally obligations of U.S.
Government agencies $ 5,936 $ 169 $ (20) $ 6,085
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies 2,653 195 -- 2,848
Obligations of states and political subdivisions 3,993 110 (11) 4,092
Debt securities issued by foreign governments 433 20 -- 453
Corporate securities 16,569 619 (22) 17,166
----------------------------------------------------
$ 29,584 $ 1,113 $ (53) $ 30,644
====================================================
Held to maturity, principally mortgage-backed securities $ 68 $ 11 $ -- $ 79
====================================================
</TABLE>
The amortized cost and estimated market value at December 31, 1996 by
contractual maturity are shown below. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Estimated
(millions) Amortized Market
Cost Value
-------- --------
Due in one year or less $ 2,003 $ 2,012
Due after one year through five years 10,962 11,095
Due after five years through ten years 10,249 10,409
Due after ten years 11,594 11,905
-------- --------
34,808 35,421
Mortgage-backed securities 8,469 8,586
-------- --------
$ 43,277 $ 44,007
======== ========
Realized gains and losses on fixed maturities for the years ended December
31, were as follows:
(millions) 1996 1995 1994
------ ------ ------
Realized gains
Pre-tax $ 231 $ 157 $ 52
------ ------ ------
After-tax $ 150 $ 102 $ 34
------ ------ ------
Realized losses
Pre-tax $ 361 $ 244 $ 201
------ ------ ------
After-tax $ 235 $ 159 $ 131
------ ------ ------
Net realized gains on equity securities and other investments, after-tax,
amounted to $120 million, $155 million and $18 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Net unrealized gains
(losses) on equity securities at December 31, 1996 and 1995 were $44
million and $97 million, respectively.
42
<PAGE>
Notes to Consolidated Financial Statements (continued)
The Company had industry concentrations of corporate bonds and short-term
investments at December 31 as follows:
(millions) 1996 1995
-------- --------
Finance $ 4,399 $ 2,342
Banking $ 4,252 $ 2,138
Electric utilities $ 2,268 $ 1,582
Oil and gas $ 1,533 $ 1,362
At December 31, significant concentrations of mortgage loans and real
estate were for properties located in highly populated areas in the states
listed below:
Mortgage Loans Real Estate
------------------ ------------------
(millions) 1996 1995 1996 1995
------ ------ ------ ------
California $ 811 $1,121 $ 393 $ 51
New York $ 390 $ 429 -- $ 49
Florida $ 283 $ 323 $ 49 $ 17
Texas $ 283 $ 300 $ 36 $ 56
Massachusetts $ 276 $ 111 $ 17 $ 4
Illinois $ 182 $ 203 $ 81 $ 58
Virginia $ 247 $ 194 $ -- $ --
Other mortgage loan and real estate investments are dispersed throughout
the United States, with no combined holdings in any other state exceeding
$200 million.
Aggregate annual maturities on mortgage loans are as follows:
(millions)
Past maturity $ 82
1997 462
1998 438
1999 538
2000 556
2001 277
Thereafter 1,459
--------
$ 3,812
========
43
<PAGE>
Notes to Consolidated Financial Statements (continued)
6. Securities Borrowed, Loaned and Subject to Repurchase Agreements
----------------------------------------------------------------
Securities borrowed or purchased under agreements to resell, at their
respective carrying values, consisted of the following at December 31:
(millions) 1996 1995
-------- --------
Resale agreements $ 16,345 $ 12,087
Deposits paid for securities borrowed 8,935 7,514
-------- --------
$ 25,280 $ 19,601
======== ========
Securities loaned or sold under agreements to repurchase, at their
respective carrying values, consisted of the following at December 31:
(millions) 1996 1995
-------- --------
Repurchase agreements $ 19,650 $ 17,183
Deposits received for securities loaned 4,799 3,436
-------- --------
$ 24,449 $ 20,619
======== ========
The resale and repurchase agreements represent collateralized financing
transactions used to generate net interest income and facilitate trading
activity. These instruments are short-term in nature (usually 30 days or
less) and are collateralized principally by U.S. Government and
mortgage-backed securities. The carrying amounts of these instruments
approximate fair value because of the relatively short period of time
between the origination of the instruments and their expected realization.
Deposits paid for securities borrowed (securities borrowed) and deposits
received for securities loaned (securities loaned) are recorded at the
amount of cash advanced or received. Securities borrowed transactions
require the Company to deposit cash with the lender. With respect to
securities loaned, the Company receives cash collateral in an amount
generally in excess of the market value of securities loaned. The Company
monitors the market value of securities borrowed and securities loaned
daily, and additional collateral is obtained as necessary.
Substantially all of the Company's securities borrowed contracts are with
other brokers and dealers, commercial banks and institutional clients.
Substantially all of the Company's securities loaned contracts are with
other brokers and dealers.
7. Brokerage Receivables and Brokerage Payables
--------------------------------------------
The Company has receivables and payables for financial instruments
purchased from and sold to brokers and dealers and customers. The Company
is exposed to risk of loss from the inability of brokers and dealers or
customers to pay for purchases or to deliver the financial instrument sold,
in which case the Company would have to sell or purchase the financial
instruments at prevailing market prices.
The Company seeks to protect itself from the risks associated with customer
activities by requiring customers to maintain margin collateral in
compliance with regulatory and internal guidelines. Margin levels are
monitored daily, and customers deposit additional collateral as required.
Where customers cannot meet collateral requirements, the Company will
liquidate sufficient underlying financial instruments to bring the customer
into compliance with the required margin level.
44
<PAGE>
Notes to Consolidated Financial Statements (continued)
Exposure to credit risk is impacted by market volatility, which may impair
the ability of clients to satisfy their obligations to the Company. Credit
limits are established and closely monitored for customers and brokers and
dealers engaged in forward and futures and other transactions deemed to be
credit-sensitive.
Brokerage receivables and brokerage payables, which arise in the normal
course of business, consisted of the following at December 31:
(millions) 1996 1995
-------- --------
Receivables from customers $ 6,981 $ 6,048
Receivables from brokers and dealers 324 511
-------- --------
Total brokerage receivables $ 7,305 $ 6,559
======== ========
Payables to customers $ 5,588 $ 4,176
Payables to brokers and dealers 221 227
-------- --------
Total brokerage payables $ 5,809 $ 4,403
======== ========
8. Trading Securities
------------------
Trading securities at market value consisted of the following at December
31:
<TABLE>
<CAPTION>
1996 1995
----------------------- ------------------------
Securities Securities
Sold Sold
(millions) Securities Not Yet Securities Not Yet
Owned Purchased Owned Purchased
----- --------- ----- ---------
<S> <C> <C> <C> <C>
Obligations of U.S. Government and agencies $ 6,564 $ 7,388 $ 4,224 $ 3,493
Corporate debt 2,841 348 2,019 385
State and municipal obligations 818 6 698 10
Commercial paper and other short-term debt 958 2 815 1
Corporate convertibles, equities and other securities 1,284 634 1,228 674
-------- -------- -------- --------
$ 12,465 $ 8,378 $ 8,984 $ 4,563
======== ======== ======== ========
</TABLE>
Carrying values are based on quoted market prices or dealer quotes. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities. Securities sold not yet purchased
must ultimately be acquired in the marketplace at the then prevailing
prices. Accordingly, these transactions may result in market risk since the
ultimate purchase price may exceed the amount recognized in the financial
statements.
45
<PAGE>
Notes to Consolidated Financial Statements (continued)
9. Consumer Finance Receivables
----------------------------
Consumer finance receivables, net of unearned finance charges of $635
million and $690 million at December 31, 1996 and 1995, respectively,
consisted of the following:
(millions) 1996 1995
-------- --------
Real estate-secured loans $ 3,457 $ 2,957
Personal loans 3,200 3,051
Credit cards 907 762
Sales finance and other 507 468
-------- --------
Consumer finance receivables 8,071 7,238
Accrued interest receivable 54 47
Allowance for credit losses (240) (193)
-------- --------
Net consumer finance receivables $ 7,885 $ 7,092
======== ========
An analysis of the allowance for credit losses on consumer finance
receivables at December 31, was as follows:
<TABLE>
<CAPTION>
(millions) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance, January 1 $ 193 $ 182 $ 168
Provision for consumer finance credit losses 260 171 152
Amounts written off (245) (188) (163)
Recovery of amounts previously written off 26 27 25
Allowance on receivables purchased 6 1 --
-------- -------- --------
Balance, December 31 $ 240 $ 193 $ 182
-------- -------- --------
Net outstandings $ 8,071 $ 7,238 $ 6,885
-------- -------- --------
Allowance for credit losses as a % of net outstandings 2.97% 2.66% 2.64%
======== ======== ========
</TABLE>
Contractual maturities of receivables before deducting unearned finance
charges and excluding accrued interest were as follows:
<TABLE>
<CAPTION>
Receivables
Outstanding Due
(millions) December 31, Due Due Due Due After
1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Real-estate secured loans $ 3,505 $ 193 $ 199 $ 211 $ 252 $ 2,650
Personal loans 3,710 1,137 996 747 431 399
Credit cards 905 67 63 58 53 664
Sales finance and other 586 343 117 57 46 23
-------- -------- -------- -------- -------- --------
$ 8,706 $ 1,740 $ 1,375 $ 1,073 $ 782 $ 3,736
-------- -------- -------- -------- -------- --------
Percentage 100% 20% 16% 12% 9% 43%
======== ======== ======== ======== ======== ========
</TABLE>
Contractual terms average 16 years on real estate-secured loans (excluding
call provisions) and 4 years on personal loans. Experience has shown that a
substantial amount of the receivables will be renewed or repaid prior to
contractual maturity dates. Accordingly, the foregoing tabulation should
not be regarded as a forecast of future cash collections.
The Company has a geographically diverse consumer finance loan portfolio.
At December 31, the distribution by state was as follows:
46
<PAGE>
Notes to Consolidated Financial Statements (continued)
1996 1995
------ ------
Ohio 11% 12%
North Carolina 9% 10%
Pennsylvania 6% 7%
California 6% 5%
South Carolina 6% 6%
Texas 5% 5%
Tennessee 5% 5%
All other states* 52% 50%
------ ------
100% 100%
====== ======
* In 1996 none of the remaining states individually accounts for more than 5%
of total consumer finance receivables.
The estimated fair value of the consumer finance receivables portfolio
depends on the methodology selected to value such portfolio (i.e., exit
value versus entry value). Exit value represents a valuation of the
portfolio based upon sales of comparable portfolios which takes into
account the value of customer relationships and the current level of
funding costs. Under the exit value methodology, the estimated fair value
of the receivables portfolio at December 31, 1996 is approximately $671
million above the recorded carrying value. Entry value is determined by
comparing the portfolio yields to the yield at which new loans are being
originated. Under the entry value methodology, the estimated fair value of
the receivables portfolio at December 31, 1996 is approximately equal to
the aggregate carrying value due to the increase in variable rate
receivables whose rates are periodically reset and the fact that the
average yield on fixed rate receivables is approximately equal to that on
new fixed rate loans made at year-end 1996. Fair values included in Note 20
are based on the exit value methodology.
10. Debt
----
Investment banking and brokerage borrowings
Investment banking and brokerage borrowings consisted of the following at
December 31:
(millions) 1996 1995
-------- --------
Commercial paper $ 3,028 $ 2,401
Uncollateralized borrowings 189 399
Collateralized borrowings -- 155
-------- --------
$ 3,217 $ 2,955
======== ========
Weighted average interest rate at end of period 5.74% 5.86%
Investment banking and brokerage borrowings are short-term and include
commercial paper, collateralized borrowings and uncollateralized borrowings
used to finance Smith Barney's operations, including the securities
settlement process. The collateralized and uncollateralized borrowings bear
interest at fluctuating 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. Smith Barney also has substantial
borrowing arrangements consisting of facilities that it has been advised
are available, but where no contractual lending obligation exists.
At December 31, 1995, the market value of the securities pledged as
collateral for short-term brokerage borrowings was $171 million.
47
<PAGE>
Notes to Consolidated Financial Statements (continued)
Short-term borrowings
At December 31, short-term borrowings consisted of commercial paper
outstanding with weighted average interest rates as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------- -----------------------------
(millions) Outstanding Interest Rate Outstanding Interest Rate
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Commercial Credit Company $ 1,482 5.55% $ 1,394 5.86%
Travelers Property Casualty Corp. 25 5.64% -- --
The Travelers Insurance Company 50 5.53% 74 5.84%
-------- --------
$ 1,557 $ 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 five-year revolving credit
facility which expires in June 2001. At December 31, 1996, $250 million was
allocated to TRV, $650 million was allocated to CCC, and $100 million was
allocated to TIC. Under this facility, the Company is required to maintain
a certain level of consolidated stockholders' equity (as defined in the
agreement). At December 31, 1996, this requirement was exceeded by
approximately $4.3 billion. At December 31, 1996 there were no borrowings
outstanding under this facility.
At December 31, 1996, CCC also had 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 December 31, 1996, CCC would have been able to
remit $308 million to the 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. The Credit Facility was used to finance in part the
purchase of Aetna P&C. All borrowings under the Credit Facility have been
repaid in full. The Credit Facility was subsequently amended to extend the
maturity to December 2001 and reduce the amount available to $500 million,
none of which is currently utilized. Under the Credit Facility TAP is
required to maintain a certain level of consolidated stockholders' equity
(as defined in the agreement). At December 31, 1996, this requirement was
exceeded by approximately $2.8 billion.
The carrying value of short-term borrowings approximates fair value.
48
<PAGE>
Notes to Consolidated Financial Statements (continued)
Long-term debt
At December 31, long-term debt was as follows:
<TABLE>
<CAPTION>
Weighted
Average
(millions) Coupon Rate Maturities 1996 1995
----------- ---------- ---- ----
<S> <C> <C> <C> <C>
Travelers Group Inc.
Senior Notes 7.34% 1997-2025 $ 1,848 $ 1,948
Other(a) 55 94
Commercial Credit Company
Senior Notes 7.09% 1997-2025 5,750 5,200
Smith Barney Holdings Inc.
Senior Notes 6.64% 1997-2006 2,369 1,875
Travelers Property Casualty Corp.
Senior Notes 6.83% 1999-2026 1,250 --
Other(b) (1) --
The Travelers Insurance Group Inc.
Other(c) 56 73
-------- --------
Total
Senior Notes $ 11,217 $ 9,023
Other 110 167
-------- --------
$ 11,327 $ 9,190
======== ========
</TABLE>
(a) Unamortized premium of $20 million in 1996 and $27 million in 1995;
and an ESOP note guarantee of $35 million in 1996 and $67 million in
1995.
(b) Unamortized discount.
(c) Principally 12% GNMA/FNMA-collateralized obligations.
Smith Barney has a $1.0 billion revolving credit agreement with a bank
syndicate that extends through May 1999, and has a $500 million, 364-day
revolving credit agreement with a bank syndicate that extends through May
1997. Any amounts outstanding on the 364-day revolving credit agreement's
termination date of May 1997 are due in May 1998. As of December 31, 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. At December 31, 1996,
Smith Barney would have been able to remit approximately $659 million to
TRV under its most restrictive covenants.
Aggregate annual maturities for the next five years on long-term debt
obligations (based on final maturity dates) excluding principal payments on
the ESOP loan obligation and the 12% GNMA/FNMA-collateralized obligations,
are as follows:
<TABLE>
<CAPTION>
(millions) 1997 1998 1999 2000 2001 Thereafter (a)
-------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Travelers Group Inc. $ 185 $ 250 $ 100 $ 200 $ -- $ 1,113
Commercial Credit Company 350 300 350 750 700 3,300
Smith Barney Holdings Inc. 200 150 350 500 294 875
Travelers Property Casualty Corp. -- -- 400 -- 500 350
-------- -------- -------- -------- -------- --------
$ 735 $ 700 $ 1,200 $ 1,450 $ 1,494 $ 5,638
======== ======== ======== ======== ======== ========
</TABLE>
(a) Includes $450 million redeemable at option of holders during 1999 at
face amount.
49
<PAGE>
Notes to Consolidated Financial Statements (continued)
The fair value of the Company's long-term debt is estimated based on the
quoted market price for the same or similar issues or on current rates
offered to the Company for debt of the same remaining maturities. At
December 31, 1996 the carrying value and the fair value of the Company's
long-term debt were:
(millions) Carrying Fair
Value Value
-------- --------
Travelers Group Inc. $ 1,903 $ 1,926
Commercial Credit Company 5,750 5,888
Smith Barney Holdings Inc. 2,369 2,374
Travelers Property Casualty Corp. 1,249 1,246
The Travelers Insurance Group Inc. 56 62
-------- --------
$ 11,327 $ 11,496
======== ========
11. Insurance Policy and Claims Reserves
------------------------------------
Insurance policy and claims reserves consisted of the following at December
31:
(millions) 1996 1995
-------- --------
Benefit and loss reserves:
Property-casualty $ 29,967 $ 14,715
Accident and health 928 754
Life and annuity 8,555 8,663
Unearned premiums 3,909 2,166
Policy and contract claims 585 622
-------- --------
$ 43,944 $ 26,920
======== ========
The table below is a reconciliation of beginning and ending
property-casualty reserve balances for claims and claim adjustment expenses
for the years ended December 31:
<TABLE>
<CAPTION>
(millions) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Claims and claim adjustment expense reserves
at beginning of year $ 14,715 $ 13,872 $ 13,805
Less reinsurance recoverables on unpaid losses 4,613 3,621 3,615
-------- -------- --------
Net balance at beginning of year 10,102 10,251 10,190
-------- -------- --------
Provision for claims and claim adjustment expenses
for claims arising in the current year 4,827 2,898 3,201
Estimated claims and claim adjustment expenses for claims
arising in prior years 192 (227) (248)
Increase for purchase of Aetna P&C 11,752 -- --
-------- -------- --------
Total increases 16,771 2,671 2,953
-------- -------- --------
Claims and claim adjustment expense payments for claims arising in:
Current year 1,858 887 989
Prior years 3,199 1,933 1,903
-------- -------- --------
Total payments 5,057 2,820 2,892
-------- -------- --------
Net balance at end of year 21,816 10,102 10,251
Plus reinsurance recoverables on unpaid losses 8,151 4,613 3,621
-------- -------- --------
Claims and claim adjustment expense reserves at end of year $ 29,967 $ 14,715 $ 13,872
-------- -------- --------
</TABLE>
50
<PAGE>
Notes to Consolidated Financial Statements (continued)
In 1996 estimated claims and claim adjustment expenses for claims arising
in prior years included $238 million of net favorable development in
certain Commercial Lines and Personal Lines coverages. Also in 1996,
estimated claims and claim adjustment expenses for claims arising in prior
years included $430 million within Commercial Lines related to
acquisition-related charges primarily related to CIOTA, insurance products
involving financial guarantees, and assumed reinsurance. In addition, as a
result of the Company's review of Aetna P&C's insurance reserves,
Commercial Lines reserves were increased by $60 million and Personal Lines
reserves were decreased by $60 million.
In 1995, estimated claims and claim adjustment expenses for claims arising
in prior years included favorable loss development in certain workers'
compensation, general liability and commercial auto lines of approximately
$150 million; however, since the business to which it relates is subject to
premium adjustments on retrospectively rated policies, the net impact on
results of operations is not significant. In addition, in 1995 estimated
claims and claim adjustment expenses for claims arising in prior years
included favorable loss development in Personal Lines of approximately $60
million.
In 1994, estimated claims and claim adjustment expenses for claims arising
in prior years included favorable loss development in Personal Lines
automobile and homeowners coverage of $100 million, offset by unfavorable
development of $100 million for Commercial Lines asbestos and environmental
claims from 1985 and prior. In addition, in 1994 Commercial Lines
experienced favorable prior year loss development in workers' compensation,
other liability and commercial automobile product lines in its National
Accounts business for post-1985 accident years. This favorable development
amounted to $261 million; however, since the business to which it relates
is subject to premium adjustments on retrospectively rated policies, the
net impact on results of operations is not significant.
The property-casualty claims and claim adjustment expense reserves include
$2.315 billion and $806 million for asbestos and environmental related
claims net of reinsurance at December 31, 1996 and 1995, respectively.
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are
not used to estimate such reserves.
For environmental claims, the Company estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim
experience and the facts of the individual underlying claims. More
specifically, the unique facts presented in each claim are evaluated
individually and collectively. Due consideration is given to the many
variables presented in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and
deductibles; an analysis of each policyholder's potential liability;
jurisdictional involvement; past and projected future claim activity; past
settlement values of similar claims; allocated claim adjustment expense;
potential role of other insurance, and applicable coverage defenses, if
any. Once the gross ultimate exposure for indemnity and allocated claim
adjustment expense is determined for a policyholder by policy year, a ceded
projection is calculated based on any applicable facultative and treaty
reinsurance. In addition, a similar review is conducted for asbestos
property damage claims. However, due to the relatively minor claim volume,
these reserves have remained at a constant level.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1996 are the Company's
best estimate of ultimate claims and claim adjustment expenses, based upon
known facts and current law. However, the conditions surrounding the final
resolution of these claims continues to change. Currently, it is not
possible to predict changes in the legal and legislative environment and
their impact on the future development of asbestos and environmental
claims. Such development will be impacted by future court
51
<PAGE>
Notes to Consolidated Financial Statements (continued)
decisions and interpretations and changes in Superfund and other
legislation. Because of these future unknowns, additional liabilities may
arise for amounts in excess of the current reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated, and 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, the Company believes that it is not likely that these
claims will have a material adverse effect on the Company's financial
condition or liquidity.
The Company has a geographic exposure to catastrophe losses in certain
North Atlantic states, California and South Florida. Catastrophes can be
caused by various events including hurricanes, windstorms, earthquakes,
hail, severe winter weather, explosions and fires, and the incidence and
severity of catastrophes are inherently unpredictable. The extent of losses
from a catastrophe is a function of both the total amount of insured
exposure in the area affected by the event and the severity of the event.
Most catastrophes are restricted to small geographic areas; however,
hurricanes and earthquakes may produce significant damage in large, heavily
populated areas. The Company generally seeks to reduce its exposure to
catastrophe through individual risk selection and the purchase of
catastrophe reinsurance.
12. Reinsurance
-----------
The Company's insurance operations participate in reinsurance in order to
limit losses, minimize exposure to large risks, provide additional capacity
for future growth and effect business-sharing arrangements. Life
reinsurance is accomplished through various plans of reinsurance, primarily
coinsurance, modified coinsurance and yearly renewable term.
Property-casualty reinsurance is placed on both a quota-share and excess of
loss basis. The property-casualty insurance subsidiaries also participate
as a servicing carrier for, and a member of, several pools and
associations. Reinsurance ceded arrangements do not discharge the insurance
subsidiaries or the Company as the primary insurer, except for cases
involving a novation.
52
<PAGE>
Notes to Consolidated Financial Statements (continued)
Reinsurance amounts included in the Consolidated Statement of Income were:
Ceded to
(millions) Gross Other Net
Amount Companies Amount
-------- --------- --------
Year ended December 31, 1996
----------------------------
Premiums
Life insurance $ 1,529 $ (296) $ 1,233
Accident and health insurance 402 (98) 304
Property-casualty insurance 7,902 (1,806) 6,096
-------- -------- --------
$ 9,833 $ (2,200) $ 7,633
======== ======== ========
Claims incurred $ 8,389 $ (1,892) $ 6,497
======== ======== ========
Year ended December 31, 1995
----------------------------
Premiums
Life insurance $ 1,497 $ (272) $ 1,225
Accident and health insurance 499 (87) 412
Property-casualty insurance 4,752 (1,412) 3,340
-------- -------- --------
$ 6,748 $ (1,771) $ 4,977
======== ======== ========
Claims incurred $ 5,806 $ (1,726) $ 4,080
======== ======== ========
Year ended December 31, 1994
----------------------------
Premiums
Life insurance $ 1,484 $ (288) $ 1,196
Accident and health insurance 514 (89) 425
Property-casualty insurance 5,052 (1,529) 3,523
-------- -------- --------
$ 7,050 $ (1,906) $ 5,144
======== ======== ========
Claims incurred $ 5,725 $ (1,328) $ 4,397
======== ======== ========
Reinsurance recoverables, net of valuation allowance, at December 31
include amounts recoverable on unpaid and paid losses and were as follows:
(millions) 1996 1995
-------- --------
Reinsurance Recoverables
------------------------
Life business $ 1,521 $ 1,804
Property-casualty business:
Pools and associations 4,160 2,775
Other reinsurance 4,553 1,882
-------- --------
$ 10,234 $ 6,461
======== ========
Included in Life business reinsurance recoverables at December 31, 1996 and
1995 is approximately $720 million and $929 million, respectively, of
receivables from MetLife in connection with the sale of the group life
business.
53
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Income Taxes
------------
The provision for income taxes attributable to income from continuing
operations (before minority interest) for the years ended December 31 was
as follows:
(millions) 1996 1995 1994
-------- -------- --------
Current:
Federal $ 697 $ 745 $ 271
Foreign 33 19 22
State 114 110 80
-------- -------- --------
844 874 373
-------- -------- --------
Deferred:
Federal 221 24 335
Foreign 1 2 1
State (15) (7) 8
-------- -------- --------
207 19 344
-------- -------- --------
$ 1,051 $ 893 $ 717
======== ======== ========
The reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate applicable to income from continuing
operations (before minority interest) for the years ended December 31 was
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Limited taxability of investment income (2.9) (3.1) (3.5)
State and foreign income taxes
(net of federal income tax benefit) 1.9 2.7 2.7
Issuance of stock by subsidiary (3.9) -- --
Sale of subsidiaries -- -- 2.9
Other, net 0.8 0.8 1.2
------ ------ ------
Effective income tax rate 30.9% 35.4% 38.3%
====== ====== ======
</TABLE>
Tax benefits allocated directly to stockholders' equity for the years ended
December 31, 1996, 1995 and 1994 were $175 million, $82 million and $35
million, respectively.
Deferred income taxes at December 31 related to the following:
(millions) 1996 1995
-------- --------
Deferred tax assets:
Differences in computing policy reserves $ 2,036 $ 1,161
Deferred compensation 350 295
Employee benefits 212 266
Investments 14 --
Other deferred tax assets 878 760
-------- --------
Gross deferred tax assets 3,490 2,482
-------- --------
Valuation allowance 100 100
-------- --------
Deferred tax assets after valuation allowance 3,390 2,382
-------- --------
54
<PAGE>
Notes to Consolidated Financial Statements (continued)
Deferred tax liabilities:
Deferred policy acquisition costs and
value of insurance in force (719) (610)
Investment management contracts (246) (249)
Investments -- (90)
Fixed assets (117) (48)
Other deferred tax liabilities (238) (296)
-------- --------
Gross deferred tax liabilities (1,320) (1,293)
-------- --------
Net deferred tax asset $ 2,070 $ 1,089
======== ========
As a result of the acquisition of old Travelers, a valuation allowance of
$100 million was established in 1993 to reduce the net deferred tax asset
on investment losses to the amount that, based upon available evidence, is
more likely than not to be realized. The $100 million valuation allowance
is sufficient to cover any capital losses on investments that may exceed
the capital gains able to be generated in the life insurance group's
consolidated federal income tax return based upon management's best
estimate of the character of the reversing temporary differences. Reversal
of the valuation allowance is contingent upon the recognition of future
capital gains or a change in circumstances which causes the recognition of
the benefits to become more likely than not. The initial recognition of any
benefit produced by the reversal of the valuation allowance will be
recognized by reducing goodwill.
The net deferred tax asset, after the valuation allowance of $100 million,
relates to temporary differences that are expected to reverse as net
ordinary deductions. The Company will have to generate approximately $5.9
billion of taxable income, before the reversal of these temporary
differences, primarily over the next 10-15 years, to realize the remainder
of the deferred tax asset. Management expects to realize the remainder of
the deferred tax asset based upon its expectation of future taxable income,
after the reversal of these deductible temporary differences, of at least
$1.5 billion annually. The Company has reported pre-tax financial statement
income from continuing operations exceeding $2.5 billion, on average, over
the last three years and has had taxable income of approximately $1.5
billion, on average, over the same period of time. At December 31, 1996,
the Company has no ordinary or capital loss carryforwards.
14. Preferred Stock and Stockholders' Equity
----------------------------------------
Preferred stock
The following table sets forth the Company's preferred stock outstanding at
December 31:
1996 1995
------------------------ ------------------------
Liquidation Carrying Carrying
Preference Number Value Number Value
Per Share of Shares (millions) of Shares (millions)
----------- ------------------------ ------------------------
Series A $ 250 1,200,000 $ 300 1,200,000 $ 300
Series B $ 50 -- -- 2,500,000 125
Series D $ 50 7,500,000 375 7,500,000 375
---------------------- ----------------------
8,700,000 $ 675 11,200,000 $ 800
====================== ======================
Series C $53.25 3,085,612 $ 164 4,406,431 $ 235
====================== ======================
Series A
In July 1992 the Company sold in a public offering 12.0 million depositary
shares, each representing 1/10th of a share of 8.125% Cumulative Preferred
Stock, Series A (Series A Preferred), at an offering price of $25 per
depositary share. The Series A Preferred has cumulative dividends payable
quarterly and a liquidation preference equivalent to $25 per depositary
share plus accrued and accumulated unpaid dividends. On or after July 28,
1997,
55
<PAGE>
Notes to Consolidated Financial Statements (continued)
the Company may, at its option, redeem the Series A Preferred, in whole or
in part, at any time at a redemption price of $25 per depositary share plus
dividends accrued and unpaid to the redemption date.
Series B
During 1996, $125 million of liquidation value of the 5.50% Convertible
Preferred Stock Series B (Series B Preferred) representing 2,499,945 shares
of Series B Preferred was converted into 6,802,432 shares of common stock.
Each share of the Series B Preferred was converted into 2.72109 shares of
TRV common stock at a conversion price of $18.375 per share. The remaining
55 shares were redeemed for cash at $51.925 per share plus accrued and
unpaid dividends.
Series C
In connection with the acquisition of The Travelers Corporation (old
Travelers) in 1993, the Company converted the old Travelers $4.53 Series A
ESOP Convertible Preference Stock which was issued to prefund old
Travelers' matching obligations under its Employee Stock Ownership Plan
(ESOP) into $4.53 Series C Convertible Preferred Stock (Series C Preferred)
of the Company with a stated value and a liquidation preference of $53.25
per share. The Series C Preferred is convertible into one share of
Travelers Group Inc. common stock for each $32.98 of stated value of Series
C Preferred, subject to antidilution adjustments in certain circumstances.
Each share of Series C Preferred is entitled to 2.61 votes on election of
directors and all other matters submitted to a vote of stockholders.
Dividends on the Series C Preferred are cumulative and accrue in the amount
of $4.53 per annum per share. The Series C Preferred is redeemable at the
option of the Company on or after January 1, 1998 (or earlier at the option
of the holder under certain limited circumstances) at a redemption price of
$53.25 per share plus accrued and unpaid dividends thereon to the date
fixed for redemption.
Series D
Also in connection with the Company's acquisition of old Travelers, 7.5
million shares of 9 1/4% Series B Preference Stock of old Travelers were
converted into 7.5 million shares of 9 1/4% Series D Preferred Stock
(Series D Preferred) of the Company with a stated value and liquidation
preference of $50 per share. The Series D Preferred is held in the form of
depositary shares, with two depositary shares representing each preferred
share. Annual dividends of $4.625 per share ($2.3125 per depositary share)
are payable quarterly. Dividends are cumulative from the date of issue. The
Series D Preferred is not redeemable prior to July 1, 1997. On and after
July 1, 1997, the Series D Preferred is redeemable at the Company's option
at a price of $50 per share (equivalent to $25 per depositary share), plus
accrued and unpaid dividends, if any, to the redemption date.
Mandatorily redeemable preferred securities of subsidiary trusts
During 1996 the Company formed the following statutory business trusts
under the laws of the state of Delaware. Each trust exists for the
exclusive purposes of (i) issuing Trust Securities (both common and
preferred) representing undivided beneficial interests in the assets of the
Trust; (ii) investing the gross proceeds of the Trust Securities in Junior
Subordinated Deferrable Interest Debentures (Subordinated Debentures) of
its parent; and (iii) engaging in only those activities necessary or
incidental thereto. These Subordinated Debentures and the related income
effects are eliminated in the consolidated financial statements. At
December 31, 1996 the following preferred securities of subsidiary trusts
were outstanding:
56
<PAGE>
Notes to Consolidated Financial Statements (continued)
Liquidation Interest
(in millions) Value Rate
-------- --------
Travelers Capital I $ 400 8.00%
Travelers Capital II 400 7 3/4%
Travelers Capital III 200 7 3/8%
--------
Total TRV obligated $ 1,000
--------
Travelers P&C Capital I $ 800 8.08%
Travelers P&C Capital II 100 8.00%
--------
Total TAP obligated $ 900
--------
In October 1996 Travelers Capital I, a wholly owned subsidiary trust of
TRV, issued 16 million 8% Trust Preferred Securities (the TRV I 8%
Preferred Securities) with a liquidation preference of $25 per TRV I 8%
Preferred Security to the public and 494,880 common securities to TRV, the
proceeds of which were invested by Travelers Capital I in $412 million of
8% Junior Subordinated Deferrable Interest Debentures due 2036 issued by
TRV (the TRV 8% Debentures). The $412 million of TRV 8% Debentures is the
sole asset of Travelers Capital I. The TRV 8% Debentures mature on
September 30, 2036 and are redeemable by TRV in whole or in part at any
time after October 7, 2001. Travelers Capital I will use the proceeds from
any such redemption to redeem a like amount of TRV I 8% Preferred
Securities and common securities. Distributions on the TRV I 8% Preferred
Securities and common securities are cumulative and payable quarterly in
arrears.
In December 1996 Travelers Capital II, a wholly owned subsidiary trust of
TRV, issued 400 thousand 7 3/4% Trust Preferred Securities (the TRV II 7
3/4% Preferred Securities) with a liquidation preference of $1,000 per TRV
II 7 3/4% Preferred Security to the public and 12,372 common securities to
TRV, the proceeds of which were invested by Travelers Capital II in $412
million of 7 3/4% Junior Subordinated Deferrable Interest Debentures due
2036 issued by TRV (the TRV 7 3/4% Debentures). The $412 million of TRV 7
3/4% Debentures is the sole asset of Travelers Capital II. The TRV 7 3/4%
Debentures mature on December 1, 2036 and are redeemable by TRV in whole or
in part at any time after December 1, 2006. Travelers Capital II will use
the proceeds from any such redemption to redeem a like amount of TRV II 7
3/4% Preferred Securities and common securities. The redemption price for
TRV II 7 3/4% Preferred Securities and common securities for the ten year
period beginning on December 1, 2006 is an amount representing a premium
over the liquidation amount per TRV 7 3/4% Preferred Securities and common
securities which declines annually to 100% of such liquidation amount for
the period from December 1, 2016 and thereafter. Distributions on the TRV
II 7 3/4% Preferred Securities and common securities are cumulative and
payable semi-annually in arrears.
In December 1996 Travelers Capital III, a wholly owned subsidiary trust of
TRV, issued 200 thousand 7 5/8% Trust Preferred Securities (the TRV III 7
5/8% Preferred Securities; and collectively with the TRV I 8% Preferred
Securities and the TRV II 7 3/4% Preferred Securities, the TRV Preferred
Securities) with a liquidation preference of $1,000 per TRV III Preferred
Security to the public and 6,186 common securities to TRV, the proceeds of
which were invested by Travelers Capital III in $206 million of 7 5/8%
Junior Subordinated Deferrable Interest Debentures due 2036 issued by TRV
(the TRV 7 5/8% Debentures; and collectively with the TRV 8% Debentures and
the TRV 7 3/4% Debentures, the TRV Debentures). The $206 million of TRV 7
5/8% Debentures is the sole asset of Travelers Capital III. The TRV 7 5/8%
Debentures mature on December 1, 2036. Distributions on the TRV III 7 5/8%
Preferred Securities and common securities are cumulative and payable
semi-annually in arrears.
TRV has guaranteed, on a subordinated basis, distributions and other
payments due on each series of TRV Preferred Securities. The obligations of
TRV with respect to the TRV Debentures, when considered together with
certain undertakings of TRV with respect to Travelers Capital I, Travelers
Capital II and Travelers Capital III, constitute full and unconditional
guarantees by TRV of Travelers Capital I's, Travelers Capital II's and
Travelers
57
<PAGE>
Notes to Consolidated Financial Statements (continued)
Capital III's obligations under the respective TRV Preferred Securities.
The TRV Preferred Securities are classified in the Consolidated Statement
of Financial Position as "TRV-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior subordinated debt
securities of TRV" at their liquidation value of $1.0 billion. TRV has the
right, at any time, to defer payments of interest on the TRV Debentures and
consequently the distributions on the TRV Preferred Securities and common
securities would be deferred (though such distributions would continue to
accrue with interest thereon since interest would accrue on the TRV
Debentures) during any such extended interest payment period. TRV cannot
pay dividends on its preferred and common stocks during such deferments.
Distributions on the TRV Preferred Securities have been classified as
interest expense in the Consolidated Statement of Income.
In April 1996 Travelers P&C Capital I, a wholly owned subsidiary trust of
TAP, issued 32 million 8.08% Trust Preferred Securities (the TAP I 8.08%
Preferred Securities) with a liquidation preference of $25 per TAP I 8.08%
Preferred Security to the public and 989,720 common securities to TAP, the
proceeds of which were invested by Travelers P&C Capital I in $825 million
of 8.08% Junior Subordinated Deferrable Interest Debentures due 2036 issued
by TAP (the TAP 8.08% Debentures). The TAP 8.08% Debentures mature on April
30, 2036 and are redeemable by TAP in whole or in part at any time after
April 30, 2001. Travelers P&C Capital I will use the proceeds from any such
redemption to redeem a like amount of TAP I 8.08% Preferred Securities and
common securities. Distributions on the TAP I 8.08% Preferred Securities
and common securities are cumulative and payable quarterly in arrears.
In May 1996 Travelers P&C Capital II, a wholly owned subsidiary trust of
TAP issued 4 million 8% Trust Preferred Securities (the TAP II 8% Preferred
Securities; and together with the TAP I 8.08% Preferred Securities, the TAP
Preferred Securities) with a liquidation value of $25 per TAP II 8%
Preferred Security to the public and 123,720 common securities to TAP, the
proceeds of which were invested by Travelers P&C Capital II in $103 million
of 8% Junior Subordinated Deferrable Interest Debentures issued by TAP (the
TAP 8% Debentures; and together with the TAP 8.08% Debentures, the TAP
Debentures). The TAP 8% Debentures mature on May 15, 2036 and are
redeemable by TAP in whole or in part at any time after May 15, 2001.
Travelers P&C Capital II will use the proceeds from any such redemption to
redeem a like amount of TAP II 8% Preferred Securities and common
securities. Distributions on the TAP II 8% Preferred Securities and common
securities are cumulative and payable quarterly in arrears.
TAP has guaranteed, on a subordinated basis, distributions and other
payments due on each series of TAP Preferred Securities. The obligations of
TAP with respect to the TAP Debentures when considered together with
certain undertakings of TAP with respect to Travelers P&C Capital I and
Travelers P&C Capital II constitute full and unconditional guarantees by
TAP of Travelers P&C Capital I's and Travelers P&C Capital II's obligations
under the respective TAP Preferred Securities. The TAP Preferred Securities
are classified in the Consolidated Statement of Financial Position as
"TAP-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debt securities of TAP" at their
liquidation value of $900 million. TAP has the right, at any time, to defer
payments of interest on the TAP Debentures and consequently the
distributions on the TAP Preferred Securities and common securities would
be deferred (though such distributions would continue to accrue with
interest thereon since interest would accrue on the TAP Debentures during
any such extended interest payment period.) TAP cannot pay dividends on its
common stock during such deferments. Distributions on the TAP Preferred
Securities have been classified as interest expense in the Consolidated
Statement of Income.
Stockholders' equity
Common stock
The Company has outstanding warrants to purchase shares of its common stock
at an exercise price of $19.50 per common share, exercisable until July 31,
1998. These warrants are publicly traded and at December 31, 1996 and 1995
outstanding warrants would enable holders to purchase 7,496,518 shares and
7,498,532 shares, respectively, of common stock of the Company.
58
<PAGE>
Notes to Consolidated Financial Statements (continued)
At December 31, 1996, 12,478,593 shares of authorized common stock were
reserved for convertible securities and warrants.
Subsidiary capital
The combined insurance subsidiaries' statutory capital and surplus at
December 31, 1996 and 1995 was $9.046 billion and $5.873 billion,
respectively, and is subject to certain restrictions imposed by state
insurance departments as to the transfer of funds and payment of dividends.
The combined insurance subsidiaries' net income, determined in accordance
with statutory accounting practices, for the years ended December 31, 1996,
1995 and 1994 was $843 million (which includes $285 million for Aetna P&C
in the first quarter of 1996), $745 million and $228 million, respectively.
TIC 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 $507 million of statutory
surplus is available in 1997 for such dividends without the prior approval
of the Connecticut Insurance Department.
TAP's insurance subsidiaries are subject to various regulatory restrictions
that limit the maximum amount of dividends available to be paid to their
parent without prior approval of insurance regulatory authorities. Dividend
payments to TAP from its insurance subsidiaries are limited to $647 million
in 1997 without prior approval of the Connecticut Insurance Department.
Smith Barney's broker-dealer subsidiaries are subject to the Uniform Net
Capital Rule of the Securities and Exchange Commission. At December 31,
1996, the aggregate net capital of such broker-dealer subsidiaries was
$1.216 billion, exceeding the net capital requirement by $1.060 billion.
See Note 10 for additional restrictions on stockholders' equity.
15. Incentive Plans
---------------
The Company's stock option plans provide for the granting of stock options
to officers and key employees of the Company and its participating
subsidiaries. Options are granted at the fair market value of the Company's
common stock at the time of grant for a period of ten years. Generally,
options vest over a five-year period and are exercisable only if the
optionee is employed by the Company. The plans also permit an employee
exercising an option to be granted new options (reload options) in an
amount equal to the number of common shares used to satisfy the exercise
price and the withholding taxes due upon exercise. The reload options are
granted for the remaining term of the related original option and vest over
a six-month period. At December 31, 1996, 108,828,002 shares were available
for future grant under option plans.
Information with respect to stock options granted under the Company's
option plans is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 47,735,420 $ 18.79 48,347,562 $ 15.39 44,667,410 $ 14.09
Granted-original 5,596,973 $ 32.30 9,215,824 $ 21.48 8,652,225 $ 18.05
Granted-reload 20,513,592 $ 36.26 15,023,586 $ 24.62 3,613,475 $ 17.90
Forfeited (2,711,385) $ 18.23 (3,034,670) $ 17.10 (2,774,856) $ 15.92
Exercised (28,141,204) $ 23.85 (21,816,882) $ 16.61 (5,810,692) $ 10.69
----------- ----------- ----------
Outstanding, end of year 42,993,396 $ 25.61 47,735,420 $ 18.79 48,347,562 $ 15.39
========== ========== ==========
Exercisable at year end 9,300,384 9,844,860 16,898,566
</TABLE>
59
<PAGE>
Notes to Consolidated Financial Statements (continued)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contractual Life Price Exercisable Price
------- ----------- ---------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0-$10 1,659,282 3.8 years $ 7.26 1,527,947 $ 7.06
$10-$20 17,755,103 6.9 years $ 16.12 5,209,117 $ 16.29
$20-$30 5,425,784 7.7 years $ 24.83 1,152,007 $ 24.52
$30-$40 14,686,768 6.6 years $ 35.30 1,409,258 $ 32.46
$40-$50 3,466,459 5.7 years $ 43.19 2,055 $ 43.30
---------- ----------
$0-$50 42,993,396 6.7 years $ 25.61 9,300,384 $ 18.25
========== ==========
</TABLE>
The Company applies Opinion 25 and related interpretations in accounting
for its stock-based compensation plans. Since stock options under the
Company's plans are issued at fair market value on the date of award, no
compensation cost has been recognized for these awards.
FAS No. 123 provides an alternative to Opinion 25 whereby fair values may
be ascribed to options using a valuation model and amortized to
compensation cost over the vesting period of the options. Had the Company
applied FAS No. 123 in accounting for stock options, net income and net
income per share would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
In millions Per Share In millions Per Share
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income, as reported $ 2,331 $ 3.50 $ 1,834 $ 2.76
FAS No. 123 pro forma adjustments
after-tax and minority interest (51) (.08) (18) (.03)
-------- -------- -------- --------
Net income, pro forma $ 2,280 $ 3.42 $ 1,816 $ 2.73
======== ======== ======== ========
</TABLE>
The pro forma adjustments relate to options granted during 1996 and 1995
for which a fair value on the date of grant was determined using the
Black-Scholes option pricing model. No effect has been given to options
granted prior to 1995.
FAS No. 123 requires that reload options be treated as separate grants from
the related original option grants. Under the Company's reload program,
upon exercise of an option, employees generally tender previously owned
shares to pay the exercise price and related tax withholding, and receive a
reload option covering the same number of shares rendered for such
purposes. New reload options vest over a six month period and are only
granted if the Company's stock price has increased at least twenty percent
over the exercise price of the option being reloaded. Reload options are
intended to encourage employees to exercise options at an earlier date and
to retain the shares so acquired, in furtherance of the Company's
long-standing policy of encouraging increased employee stock ownership. The
result of this program is that employees generally will exercise options as
soon as they are able and, therefore, these options have shorter expected
lives. Shorter option lives result in lower valuations using the
Black-Scholes option model. However, such values are expensed more quickly
due to the shorter vesting period of
60
<PAGE>
Notes to Consolidated Financial Statements (continued)
reload options. In addition, since reload options are treated as separate
grants, the existence of the reload feature in the Company's plan results
in a greater number of options being valued.
Shares received through option exercises under the Company's reload program
are subject to restrictions on sale. Discounts (as measured by the
estimated cost of protection) have been applied to the fair value of
options granted to reflect these sale restrictions.
The weighted average fair value of options granted during 1996 and 1995 was
$4.50 and $3.30 per share, respectively. The weighted average expected life
of reload options was approximately 1 year for 1996 and 1995. The weighted
average expected life of original grants was approximately 3 years for 1996
and 1995. Valuation and related assumption information are presented below:
Weighted averages for options granted during
--------------------------------------------
1996 1995
------ ------
Valuation assumptions:
Expected volatility 28.5% 27.4%
Risk-free interest rate 5.58% 6.06%
Expected annual dividends per share $ 0.55 $ 0.48
Expected annual forfeitures 5% 5%
The Company, through its Capital Accumulation Plan and other restricted
stock programs, issues shares of the Company's common stock in the form of
restricted stock to participating officers and other key employees. The
restricted stock generally vests after a two or three-year period. Except
under limited circumstances, during this period the stock cannot be sold or
transferred by the participant, who is required to render service to the
Company during the restricted period. Participants may elect to receive
part of their awards in restricted stock and part in stock options.
Unearned compensation expense associated with the restricted stock grants
represents the market value of the Company's common stock at the date of
grant and is recognized as a charge to income ratably over the vesting
period. At December 31, 1996, 48,905,632 shares were available for future
grant under these plans.
Information with respect to restricted stock awards is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Shares awarded 11,427,382 13,966,710 10,601,103
Weighted average fair market value per share $ 30.20 $ 18.00 $ 19.36
After-tax compensation cost charged to earnings
(in millions) $ 134 $ 114 $ 88
</TABLE>
16. Pension Plans
-------------
The Company has a noncontributory defined benefit pension plan covering the
majority of its U.S. employees. Benefits for this plan are based on an
account balance formula. Under this formula, each employee's accrued
benefit can be expressed as an account that is credited with amounts based
upon the employee's pay, length of service and a specified interest rate,
all subject to a minimum benefit level. This plan is funded in accordance
with the Employee Retirement Income Security Act of 1974 and the Internal
Revenue Code. Certain non-U.S. employees of the Company are covered by
noncontributory defined benefit plans. These plans are funded based upon
local laws.
The following is a summary of the components of pension expense for the
Company's defined benefit plan for the years ended December 31:
61
<PAGE>
Notes to Consolidated Financial Statements (continued)
(millions) 1996 1995 1994
------ ------ ------
Service cost $ 74 $ 81 $ 105
Interest cost 190 195 173
Actual return on plan assets (228) (388) (66)
Net amortization and deferral (1) 165 (161)
------ ------ ------
Net periodic pension cost $ 35 $ 53 $ 51
====== ====== ======
The following table sets forth the funded status of the Company's defined
benefit plan at December 31:
<TABLE>
<CAPTION>
(millions) 1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 2,594 $ 2,713
Non-vested benefits 70 52
-------- --------
Accumulated benefit obligation 2,664 2,765
Effect of future salary increases 48 37
-------- --------
Projected benefit obligation 2,712 2,802
Plan assets at fair value 2,718 2,638
-------- --------
Projected benefit obligation in excess of or (less than) plan assets (6) 164
Unrecognized transition asset 1 2
Unrecognized prior service benefit 12 14
Unrecognized net (loss) (71) (228)
Adjustment to recognize minimum liability -- 175
-------- --------
Accrued pension liability (prepaid pension cost) $ (64) $ 127
======== ========
Actuarial assumptions:
Weighted average discount rate 7.50% 7.25%
Weighted average rate of compensation increase 4.50% 4.50%
Expected long-term rate of return on plan assets 9.00% 9.25%
</TABLE>
Plan assets are held in various separate accounts and the general account
of The Travelers Insurance Company, a subsidiary of the Company, and
certain investment trusts. These accounts and trusts invest in stocks, U.S.
Government bonds, corporate bonds, mortgage loans and real estate.
17. Postretirement Benefits
-----------------------
The Company provides postretirement health care, life insurance and
survival income benefits to certain eligible retirees. These benefits
relate primarily to former unionized employees of predecessor companies,
certain employees of Smith Barney and former employees of old Travelers.
Other retirees are generally responsible for most or all of the cost of
these benefits (while retaining the benefits of group coverage and
pricing).
The Company generally funds its share of the cost of postretirement
benefits on a pay-as-you-go basis. However, the Company has made
contributions to a survivor income plan, the assets of which are currently
invested in a major insurance company's general investment portfolio.
The following is a summary of the components of net periodic postretirement
benefit cost for the years ended December 31:
62
<PAGE>
Notes to Consolidated Financial Statements (continued)
(millions) 1996 1995 1994
---- ---- ----
Service cost $ 1 $ 2 $ 3
Interest cost 25 34 33
Net amortization and deferral (10) (1) --
---- ---- ----
Net periodic postretirement benefit cost $ 16 $ 35 $ 36
==== ==== ====
The following table sets forth the funded status of the Company's
postretirement benefit plans at December 31:
(millions) 1996 1995
------ ------
Accumulated postretirement benefit obligation:
Retirees $ 304 $ 396
Other fully eligible plan participants 31 40
Other active plan participants 9 13
------ ------
344 449
Plan assets at fair value 4 4
------ ------
Accumulated postretirement benefit obligation in
excess of plan assets 340 445
Unrecognized net gain 129 37
Unrecognized prior service benefit (cost) 5 6
------ ------
Accrued postretirement benefit liability $ 474 $ 488
====== ======
For measurement purposes, the annual rate of increase in the per capita
cost of covered health care benefits ranged from 12.7% in 1996, decreasing
gradually to 5.5% by the year 2003 and remaining at that level thereafter.
The health care cost trend rate assumption affects the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1996 by approximately $12 million.
The impact on net periodic postretirement benefit cost of such an increase
would not be material.
The weighted average discount rates used in determining the accumulated
postretirement benefit obligation were 7.50% and 7.25% at December 31, 1996
and 1995, respectively. For certain plans associated with Smith Barney and
old Travelers, the weighted average assumed rate of compensation increase
was approximately 3.5% for both 1996 and 1995. For other plans, no
assumptions have been made for rate of compensation increases, since active
employees are responsible for the full cost of these benefits upon
retirement.
18. Lease Commitments
-----------------
Rentals
Rental expense (principally for offices and computer equipment) was $320
million, $319 million and $403 million for the years ended December 31,
1996, 1995 and 1994, respectively.
Future minimum annual rentals under noncancellable operating leases are as
follows:
63
<PAGE>
Notes to Consolidated Financial Statements (continued)
(millions)
1997 $ 332
1998 267
1999 209
2000 138
2001 101
Thereafter 545
-------
$ 1,592
=======
Future sublease rental income of approximately $218 million will partially
offset these commitments.
The Company and certain of Smith Barney's subsidiaries together have an
option to purchase the buildings presently leased for Smith Barney's
executive offices and New York City operations at the expiration of the
lease term.
19. Derivative Financial Instruments
--------------------------------
The Company uses derivative financial instruments in the normal course of
business for end user and, in the case of Smith Barney, trading purposes.
Derivatives are financial instruments, which include forwards, futures,
options and swaps, whose value is based upon an underlying asset, index or
reference rate. A derivative contract may be traded on an exchange or
over-the-counter (OTC). Exchange-traded derivatives are standardized and
include futures and certain option contracts listed on exchanges. OTC
derivative contracts are individually negotiated between contracting
parties and include forwards, swaps, and certain options including interest
rate caps, floors and swaptions. Derivatives are subject to various risks
similar to those related to the underlying financial instruments, including
market, credit and liquidity risk. The risks of derivatives should not be
viewed in isolation but rather should be considered on an aggregate basis
along with risks related to the Company's non-derivative trading and other
activities.
Forwards represent commitments to exchange currencies or to purchase or
sell other financial instruments at specified prices on specified future
dates. Futures contracts are similar to forwards; however, major exchanges
act as intermediaries and require daily cash settlement and collateral
deposits. As a writer of certain option contracts, Smith Barney receives a
fee to become obligated to buy or sell financial instruments at a specified
price for a period of time at the holder's option. As a writer of interest
rate options, Smith Barney receives a fee to become obligated to pay the
holder at specified future dates the amount, if any, by which specified
market interest rates exceed or fall below specified reference rates
applied to a notional amount. In the case of swaptions, Smith Barney is
obligated to enter into an interest rate swap at specified terms or cancel
an existing swap, at the holder's option. Purchased options give Smith
Barney the right, but not the obligation, to buy or sell financial
instruments at a specified price for a period of time. Interest rate swaps
require the exchange of periodic cash payments based on a notional
principal amount and agreed-upon fixed or floating rates. Generally, no
cash is exchanged at the outset of the contract and no principal payments
are made by either party.
Market Risk. Market risk is the potential for change in value caused by
fluctuations in interest rates, foreign exchange rates, or market prices of
an underlying financial instrument or index. Market risk is directly
influenced by the volatility and liquidity in the markets in which the
related underlying assets are traded. The Company seeks to control market
risk related to trading financial instruments by measuring and monitoring
risk limits across trading activities. In many cases, derivative financial
instruments are used to hedge other on-and off-balance sheet transactions.
Credit Risk. Credit risk is the possibility that a loss may occur due to
the failure of a counterparty to perform according to the terms of a
contract. The Company's exposure to the credit risk associated with
counterparty
64
<PAGE>
Notes to Consolidated Financial Statements (continued)
non-performance is limited to the net replacement cost of OTC contracts
(including options held) in a gain position. Options written do not give
rise to counterparty credit risk since they obligate the Company (not its
counterparty) to perform. Exchange-traded financial instruments such as
futures and certain options generally do not give rise to significant
counterparty exposure due to the margin requirements of the individual
exchanges. For significant transactions, the Company's credit review
process includes an evaluation of the counterparty's creditworthiness,
periodic review of credit standing and obtaining collateral and various
credit enhancements in certain circumstances. Smith Barney establishes
credit limits for its trading derivative counterparties by product type,
taking into account the perceived risk associated with each product. The
usage and resultant exposure from these credit limits are then monitored
regularly by management.
Liquidity Risk. Liquidity risk is the possibility that the Company may not
be able to rapidly adjust the size of its derivative positions in times of
high volatility and financial stress at a reasonable cost. The liquidity of
derivative products is correlated to the liquidity of the underlying cash
instrument. As with non-derivative financial instruments, the Company's
valuation policies for derivatives include consideration of liquidity
factors.
Trading Activity
Smith Barney trades both derivative and cash financial instruments. While
trading activities are primarily generated by client order flow, Smith
Barney also takes proprietary positions in interest rate, foreign exchange,
debt, equity and commodity instruments based on expectations of future
market movements and conditions. Smith Barney's trading strategies rely on
the joint management of its client-driven and proprietary transactions,
along with the hedging and financing of these positions. This strategy
helps reduce market risk and volatility in principal trading revenues.
The following is a summary of principal trading revenues by product
category for the years ended December 31:
(millions) 1996 1995 1994
------ ------ ------
Equities $ 493 $ 459 $ 392
Taxable fixed-income 257 305 239
Municipals 189 216 248
Foreign exchange, and other
derivative financial instruments 51 36 21
------ ------ ------
$ 990 $1,016 $ 900
====== ====== ======
The revenue amounts presented include gains and losses from cash
instruments and related derivatives, including swaps, forwards, futures and
options.
Equity revenues include realized and unrealized gains and losses on market
making and trading, primarily in over-the-counter, listed and convertible
securities and options.
Taxable fixed-income revenues include realized and unrealized gains and
losses on market making and trading, primarily in U.S. Government and
agencies obligations, mortgage and asset-backed securities and corporate
debt and preferred securities net of hedges in financial futures, options
on financial futures and forward contracts.
Municipal revenues include realized and unrealized gains and losses in
market making and trading municipal and tax-exempt securities.
Foreign exchanges revenues include realized and unrealized gains and losses
in currency forward and options contracts.
65
<PAGE>
Notes to Consolidated Financial Statements (continued)
Other derivative financial instrument revenues include realized and
unrealized gains and losses on swaps, caps, floors, swaptions, net of
related hedges, including financial futures and options, and non-derivative
(or cash) financial instruments.
All derivatives used for trading purposes relate to Smith Barney, and are
primarily used to facilitate customer transactions. Smith Barney also uses
derivatives to limit its net exposure to loss from market risk related to
derivative and non-derivative inventory positions.
Smith Barney's derivative contracts are generally short-term, with a
weighted average maturity of approximately 7.5 months at December 31, 1996
and 7 months at December 31, 1995. The gross notional or contractual
amounts of these instruments do not represent the exposure to possible loss
or future cash payments, but rather reflect the extent of the Company's
involvement in these instruments. At December 31, Smith Barney had
outstanding trading derivatives with notional values as follows:
<TABLE>
<CAPTION>
Contract or Notional Amount Contract or Notional Amount
1996 1995
----------------------- ----------------------
(millions) Purchase Sell Purchase Sell
-------- -------- -------- --------
<S> <C> <C> <C> <C>
"To be announced" mortgage-backed
securities $ 10,997 $ 11,490 $ 6,907 $ 7,479
Forward and futures contracts:
Foreign currency forwards 13,081 14,174 6,127 7,568
Foreign currency futures 1,469 520 1,458 11
Financial futures 467 3,110 2,889 493
Interest rate and other 150 -- -- 297
Precious metals and commodities 362 370 474 473
-------- -------- -------- --------
$ 26,526 $ 29,664 $ 17,855 $ 16,321
======== ======== ======== ========
(millions) Held Written Held Written
-------- -------- -------- --------
Options:
Foreign currency $ 5,849 $ 5,511 $ 3,266 $ 3,502
Exchange-traded 1,295 1,128 2,201 62
Interest rate caps, floors
and swaptions 2,035 2,571 550 1,197
OTC debt and equity 756 682 210 207
-------- -------- -------- --------
$ 9,935 $ 9,892 $ 6,227 $ 4,968
======== ======== ======== ========
(millions) Open Contracts Open Contracts
-------------- --------------
Interest rate and other swaps $ 5,393 $ 2,305
======== ========
</TABLE>
"To be Announced" Mortgage-Backed Securities. Smith Barney trades
mortgage-backed "to be announced" mortgage pools ("TBAs") to facilitate
customer transactions and to hedge proprietary inventory positions. At
December 31, 1996, over $9.0 billion and at December 31, 1995, over $5.7
billion each of purchase and sale positions represent offsetting purchases
and sales of the same security, and substantially all of the contract
values were for settlement within 60 days.
Foreign Currency Contracts. In its role as a market intermediary, Smith
Barney acts as a principal in foreign currency forward and options
contracts, primarily to facilitate customer transactions. These
transactions expose
66
<PAGE>
Notes to Consolidated Financial Statements (continued)
the firm to foreign exchange rate risk, which is generally hedged by
entering into foreign currency forward, futures and options contracts with
inverse market risk profiles. At December 31, 1996 and 1995, approximately
81% and 83% respectively of the contract values of foreign currency
derivative instruments were for settlement within 90 days, and related
primarily to major currencies such as the Japanese yen, German mark and
British pound. Written foreign currency options consist of $2.373 billion
and $3.138 billion of put and call contracts, respectively, at December 31,
1996 and $1.799 billion and $1.703 billion of put and call contracts,
respectively, at December 31, 1995.
Financial Futures and Options on Financial Futures Contracts. Smith Barney
trades financial futures contracts and options on financial futures,
primarily to hedge other proprietary inventory positions.
Precious Metals Contracts. Forward precious metals contracts are entered
into to facilitate customer transactions, and are transacted in the London
Bullion Market, which is used globally for hedging and trading purposes.
Smith Barney may use precious metals futures as hedges of its forward
inventory to reduce market risk.
Interest Rate Products. Smith Barney enters into interest rate swaps, caps,
floors and swaptions as part of its proprietary trading strategy, which it
hedges with financial futures and options on financial futures.
Trading derivative instruments are carried at market value with changes in
market value reported in principal transactions revenues in the
Consolidated Statement of Income. The fair value of a derivative contract
represents the amount Smith Barney would have to pay a third party to
assume its obligations under the contract or the amount a third party would
pay to receive Smith Barney's benefits under the contract. Smith Barney's
OTC derivative financial instruments, principally forwards, options, and
swaps, are generally marked-to-market by pricing models based on the
present value of future cash flows. These adjustments are integral
components of the mark-to-market process. The trading gains and losses on
these derivative financial instruments, should not be viewed on an
individual basis, but rather as a component of Smith Barney's overall
trading results, as these instruments are frequently hedges of, or hedged
by, other on/off-balance sheet financial instruments.
The fair value of Smith Barney's trading derivative instruments as recorded
in the Consolidated Statement of Financial Position and the average fair
value for each year based on month-end balances are as follows:
<TABLE>
<CAPTION>
Average Fair Value
Fair Value Based on Month-end Balances
at for the Year Ended
December 31, 1996 December 31, 1996
---------------------------- ----------------------------
(millions) Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
"To be announced" mortgage-backed
securities $ 46 $ 25 $ 47 $ 45
Forward contracts:
Foreign currency 296 261 321 272
Interest rate and other -- -- 1 --
Precious metals 5 4 5 5
Options:
Foreign currency 73 75 60 65
Exchange-traded 5 7 10 9
Interest rate caps, floors and swaptions 41 33 26 20
OTC debt and equity 35 29 29 15
Interest rate and other swaps 16 47 19 46
------ ------ ------ ------
$ 517 $ 481 $ 518 $ 477
====== ====== ====== ======
</TABLE>
67
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Average Fair Value
Fair Value Based on Month-end Balances
at for the Year Ended
December 31, 1995 December 31, 1995
---------------------------- ----------------------------
(millions) Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
"To be announced" mortgage-backed
securities $ 45 $ 38 $ 40 $ 39
Forward contracts:
Foreign currency 156 101 273 242
Interest rate and other 7 -- 3 1
Precious metals 5 5 12 12
Options:
Foreign currency 39 48 73 74
Exchange-traded 9 6 11 10
Interest rate caps, floors and swaptions 62 39 40 27
OTC debt and equity 66 13 34 13
Interest rate and other swaps 37 90 34 59
------ ------ ------ ------
$ 426 $ 340 $ 520 $ 477
====== ====== ====== ======
</TABLE>
The fair values do not include receivables or payables related to exchange
traded futures contracts. Fair values for certain exchange-traded
derivatives, principally futures and certain options, are based on quoted
market prices. Futures contracts are settled in cash daily and therefore
the receivable or payable is limited to one day's price move.
End User Activity
In the normal course of business the Company also employs certain
derivative financial instruments as an end user to manage various risks.
Fair values were determined by reference to quoted market prices or, for
interest rate swaps, estimated based upon the payments either party would
have to make to terminate the swap. The notional and fair values of end
user derivatives at December 31, were as follows:
<TABLE>
<CAPTION>
1996 Notional Value Fair Value
------------------ --------------------
(millions) Open Contracts Asset Liability
-------------- ----- ---------
<S> <C> <C> <C> <C>
Interest rate swaps:
Pay a fixed rate, receive a floating rate $ 871
Pay a floating rate, receive a fixed rate 373
Currency swap 15
Interest rate caps 40
------ ------ ------
$1,299 $ 17 $ 15
====== ====== ======
Purchase Sell
-------- ----
Foreign currency forwards $ 15 $ 114 $ 2 $ 4
Financial futures 580 111 -- --
------ ------ ------ ------
$ 595 $ 225 $ 2 $ 4
====== ====== ====== ======
</TABLE>
68
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
1995 Notional Value Fair Value
----- ------------------ --------------------
(millions) Open Contracts Asset Liability
-------------- ----- ---------
<S> <C> <C> <C> <C>
Interest rate swaps:
Pay a fixed rate, receive a floating rate $ 511
Pay a floating rate, receive a fixed rate 70
Currency swap 15
------
$ 596 $ 3 $ 3
====== ====== ======
Purchase Sell
-------- ----
Foreign currency forwards $ 56 $ 150 $ 4 $ 5
Financial futures 256 64 -- --
------ ------ ------ ------
$ 312 $ 214 $ 4 $ 5
====== ====== ====== ======
</TABLE>
Certain of the Company's subsidiaries employ swap contracts to manage
interest rate risk related to variable rate obligations, limiting the
Company's net exposure to interest rate movements to an acceptable level.
Under these swaps the Company at December 31, 1996 and 1995 has fixed $475
million of its short-term or variable rate obligations at an average rate
of 5.21%. The swaps are accounted for as hedges of the related liabilities
and unrealized gains and losses are not recorded in the Consolidated
Statement of Financial Position. Periodic receipts or payments are accrued
as adjustments to expense. In addition, the Company utilizes swaps to
manage the differing interest rate and/or currency risk profiles of its
subsidiaries' liabilities and related fixed income investment portfolio.
These swaps are marked-to-market and recorded as either other assets or
other liabilities with changes in value recorded as an adjustment to
stockholders' equity where unrealized gains and losses on the related debt
securities are recorded.
Certain subsidiaries employ forwards to hedge their exposure to foreign
exchange rate risk related to the net investment in foreign branches and
foreign currency denominated investments. These forwards are
marked-to-market and recorded as other assets or liabilities in the
Consolidated Statement of Financial Position. Changes in value related to
forwards hedging the net investment in foreign subsidiaries are recorded as
an adjustment to stockholders' equity where related translation adjustments
are recorded. Changes in value related to forwards hedging foreign
investments in U.S. portfolios are recorded as other income where the
related translation adjustments to the underlying investments are recorded
and such amounts were not significant in 1996 or 1995.
The Company hedges expected cash flows related to certain customer deposits
and investment maturities, redemptions and sales against adverse changes in
market interest rates with financial futures contracts. These contracts are
marked-to-market and recorded as other liabilities in the Consolidated
Statement of Financial Position. Realized gains or losses are recorded as
an adjustment to the cost basis of the related asset when acquired.
20. Fair Value of Financial Instruments
-----------------------------------
The following table summarizes the fair value and carrying amount of the
Company's financial instruments at December 31, 1996 and 1995.
Contractholder funds amounts exclude certain insurance contracts not within
the scope of FAS No. 107, "Disclosure About Fair Value of Financial
Instruments." The fair value assumptions were based upon subjective
estimates of market conditions and perceived risks of the financial
instruments at a certain point in time as disclosed further in various
notes to the consolidated financial statements. Disclosed fair values for
financial instruments do not reflect any premium or discount that could
result from offering for sale at one time the
69
<PAGE>
Notes to Consolidated Financial Statements (continued)
Company's entire holdings of a particular financial instrument. Potential
taxes and other expenses that would be incurred in an actual sale or
settlement are not reflected in amounts disclosed.
<TABLE>
<CAPTION>
1996 1995
----------------------------- ------------------------------
(millions) Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Assets:
Investments $ 56,745 $ 56,754 $ 40,965 $ 40,976
Securities borrowed or purchased
under agreements to resell 25,280 25,280 19,601 19,601
Trading securities owned 12,465 12,465 8,984 8,984
Net consumer finance receivables 7,885 8,556 7,092 7,745
Separate accounts with guaranteed
returns 1,114 1,118 1,527 1,591
Derivatives:
Trading 517 517 426 426
End User 2 19 4 7
Liabilities:
Long-term debt 11,327 11,496 9,190 9,478
Securities loaned or sold under
agreements to repurchase 24,449 24,449 20,619 20,619
Trading securities sold not
yet purchased 8,378 8,378 4,563 4,563
Contractholder funds:
With defined maturities 1,671 1,665 2,449 2,460
Without defined maturities 9,085 8,841 9,282 9,016
Separate accounts
with guaranteed returns 1,017 899 1,475 1,408
Derivatives:
Trading 481 481 340 340
End User 4 19 5 8
</TABLE>
21. Commitments
-----------
Guarantees of Securities of Other Issuers
TAP underwrote insurance guaranteeing the securities of other issuers,
primarily corporate and industrial revenue bond issuers. The aggregate
gross amount of guarantees of principal and interest for such securities
was $8.285 billion and $1.730 billion at December 31, 1996 and 1995,
respectively. Reserves for the financial guarantee business, which includes
reserves for defaults, incurred but not reported losses and unearned
premiums, totaled $71 million at December 31, 1996 and were not significant
at December 31, 1995.
It is not practicable to estimate a fair value for these financial
guarantees because there is no quoted market price for such contracts, it
is not practicable to reliably estimate the timing and amount of all future
cash flows due to the unique nature of each of these contracts, and TAP no
longer writes such guarantees.
Included in the gross amounts are financial guarantees representing TAP's
participation in the Municipal Bond Insurance Association's guarantee of
municipal bond obligations of $7.556 billion and $1.603 billion at December
31, 1996 and 1995, respectively. The bonds are generally rated A or above,
and TAP's participation has been reinsured.
70
<PAGE>
Notes to Consolidated Financial Statements (continued)
At December 31, 1996, the scheduled maturities for these guarantees, net of
TAP's participation in the municipal bond guarantee pools, are $142
million, $250 million, $8 million, $13 million and $316 million for 1997,
1998, 1999, 2000 and 2001 and thereafter, respectively.
Credit Cards
The Company provides bank and private label credit card services through
CCC and its subsidiaries. These services are provided to individuals and to
affinity groups nationwide. At December 31, 1996 and 1995 total credit
lines available to credit cardholders were $6.622 billion and $5.870
billion, respectively.
Other Commitments
At December 31, 1996 and 1995 Smith Barney had borrowed securities having a
market value of $2.085 billion and $451 million, respectively, against
which it had pledged securities having a market value of $2.132 billion and
$459 million, respectively. In addition, Smith Barney had obtained letters
of credit aggregating $147 million and $119 million at December 31, 1996
and 1995, respectively, of which $147 million and $112 million,
respectively, was used to satisfy various collateral and deposit
requirements principally with clearing organizations.
Smith Barney also trades certain fixed income securities on a "when-issued"
basis, primarily to facilitate customer transactions and to hedge
proprietary inventory positions. At December 31, 1996, Smith Barney had
commitments to purchase $281 million and to sell $20 million of such
securities when-issued. At December 31, 1995 Smith Barney had commitments
to purchase $369 million and to sell $324 million of such securities
when-issued.
Smith Barney has entered into purchase agreements with various municipal
issuers, whereby Smith Barney has purchased securities for forward
delivery. These securities have been sold to the public for the same
forward delivery dates. The total value of these commitments at December
31, 1996 and 1995 is $438 million and $475 million, respectively.
Smith Barney had outstanding commitments to underwrite variable rate
municipal securities totaling $346 million and $800 million at December 31,
1996 and 1995, respectively; conditions of the offerings include bond
insurance and liquidity support facilities.
At December 31, 1996 and 1995, Smith Barney had outstanding forward
repurchase agreements totaling $725 million and $1.2 billion, respectively,
and forward reverse repurchase agreements totaling $500 million and $625
million, respectively. These commitments represent forward financing
transactions with agreed upon interest rates, principal amounts and
delivery dates.
Smith Barney and its principal broker-dealer subsidiary have each provided
a portion of a residual value guarantee in connection with the lease of the
buildings occupied by Smith Barney's executive offices and New York
operations. The amount of the guarantee is dependent upon the final
build-out costs with a maximum of $586 million.
The Company makes commitments to fund partnership investments and transfers
receivables to third parties with recourse from time to time. The
off-balance sheet risks of these financial instruments were not significant
at December 31, 1996 or 1995.
22. Contingencies
-------------
A subsidiary of the Company is 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 of old Travelers to aggregate asbestos claims under a market
agreement between Lloyd's and old Travelers
71
<PAGE>
Notes to Consolidated Financial Statements (continued)
or under the applicable reinsurance treaties. The Company believes that the
outcome of the arbitration is not likely to have a material adverse effect
on its results of operations, financial condition or liquidity.
With respect to environmental and asbestos claims, see Note 11.
In the ordinary course of business, the Company and/or its subsidiaries are
defendants or co-defendants in various litigation matters, other than
environmental and asbestos claims. Although there can be no assurances, the
Company believes, based on information currently available, that the
ultimate resolution of these legal proceedings would not be likely to have
a material adverse effect on its results of operations, financial condition
or liquidity.
72
<PAGE>
Notes to Consolidated Financial Statements (continued)
23. Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------
(In millions, except per share amounts) First Second Third Fourth Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total revenues $ 4,515 $ 5,426 $ 5,622 $ 5,782 $ 21,345
Total expenses 3,715 5,210 4,694 4,725 18,344
Gain (loss) on sales of stock of
subsidiaries and affiliates -- 397 -- -- 397
Income before incomes taxes and
minority interest 800 613 928 1,057 3,398
Provision for income taxes 280 81 323 367 1,051
Minority interest, net of income taxes -- (44) 44 47 47
---------- ---------- ---------- ---------- ----------
Income from continuing operations 520 576 561 643 2,300
Discontinued operations, net of income taxes -- -- 31 -- 31
---------- ---------- ---------- ---------- ----------
Net income $ 520 $ 576 $ 592 $ 643 $ 2,331
========== ========== ========== ========== ==========
Earnings per share of common stock:
Continuing operations $ 0.77 $ 0.88 $ 0.84 $ 0.97 $ 3.45
Discontinued operations -- -- 0.04 -- 0.05
---------- ---------- ---------- ---------- ----------
Net income $ 0.77 $ 0.88 $ 0.88 $ 0.97 $ 3.50
========== ========== ========== ========== ==========
Common stock price per share:
High $ 35.2500 $ 34.3125 $ 37.4063 $ 47.5000 $ 47.5000
Low $ 28.5000 $ 28.2500 $ 29.0625 $ 36.8438 $ 29.0625
Close $ 33.0000 $ 34.2188 $ 36.8438 $ 45.3750 $ 45.3750
Dividends per share of common stock $ 0.1125 $ 0.1125 $ 0.1125 $ 0.1125 $ 0.4500
1995
-------------------------------------------------------------------
(In millions, except per share amounts) First Second Third Fourth Total
---------- ---------- ---------- ---------- ----------
Total revenues $ 3,960 $ 4,172 $ 4,290 $ 4,161 $ 16,583
Total expenses 3,490 3,590 3,583 3,379 14,042
Gain (loss) on sales of stock of
subsidiaries and affiliates -- -- -- (20) (20)
Income before incomes taxes and
minority interest 470 582 707 762 2,521
Provision for income taxes 165 205 251 272 893
Minority interest, net of income taxes -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Income from continuing operations 305 377 456 490 1,628
Discontinued operations, net of income taxes 35 29 25 117 206
---------- ---------- ---------- ---------- ----------
Net income $ 340 $ 406 $ 481 $ 607 $ 1,834
========== ========== ========== ========== ==========
Earnings per share of common stock:
Continuing operations $ 0.45 $ 0.56 $ 0.68 $ 0.74 $ 2.43
Discontinued operations 0.06 0.05 0.04 0.18 0.33
---------- ---------- ---------- ---------- ----------
Net income $ 0.51 $ 0.61 $ 0.72 $ 0.92 $ 2.76
========== ========== ========== ========== ==========
Common stock price per share:
High $ 19.9375 $ 22.5000 $ 26.6875 $ 31.9375 $ 31.9375
Low $ 16.1875 $ 18.9375 $ 22.0000 $ 24.4375 $ 16.1875
Close $ 19.3125 $ 21.8750 $ 26.5625 $ 31.3125 $ 31.3125
Dividends per share of common stock $ 0.1000 $ 0.1000 $ 0.1000 $ 0.1000 $ 0.4000
</TABLE>
Due to changes in the number of average shares outstanding, quarterly earnings
per share of common stock do not add to the totals for the years. The above
information has been restated to reflect the stock splits as discussed in Note
1.
73
<PAGE>
Independent Auditors' Report
KPMG Peat Marwick LLP - LOGO
The Board of Directors and Stockholders
Travelers Group Inc.:
We have audited the accompanying consolidated statement of financial position of
Travelers Group Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Travelers Group Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
New York, New York
January 17, 1997
74
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Travelers Group Inc.:
We consent to the incorporation by reference in the Registration Statements on:
o Form S-3 Nos. 33-49280, 33-55542, 33-56940, 33-68760, 33-51101,
33-52281, 33-54093, 33-62903, 33-63663, 333-04809, 333-12439
and 333-27155;
o Form S-8 Nos. 33-32130, 33-43997, 33-59524, 33-37399, 33-28110,
33-43883, 33-21099, 33-29711, 33-47437, 33-39025, 33-40469,
33-38109, 33-50206, 33-51353, 33-39985, 33-51769,
33-51783, 33-52027, 33-52029, 33-64985, 333-02809, 333-02811,
333-12697 and 333-25603; and
o Form S-4 Nos. 33-37089, 33-25532 and 33-51201
of Travelers Group Inc. of our reports dated January 17, 1997, relating to the
consolidated statement of financial position of Travelers Group Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1996 and the related
financial statement schedules, which reports are incorporated by reference or
included in the annual report on Form 10-K, as amended by Form 10-K/A-2, of
Travelers Group Inc. for the year ended December 31, 1996.
/s/ KPMG PEAT MARWICK LLP
New York, New York
October 24, 1997