UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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:
<TABLE>
<CAPTION>
<S> <C>
Title of each class Name of each exchange on which registered
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Common Stock, par value $ .01 per share New York Stock Exchange and Pacific Exchange
Depositary Shares, each representing 1/5th of a share of New York Stock Exchange
6.365% Cumulative Preferred Stock, Series F
Depositary Shares, each representing 1/5th of a share of New York Stock Exchange
6.213% Cumulative Preferred Stock, Series G
Depositary Shares, each representing 1/5th of a share of New York Stock Exchange
6.231% Cumulative Preferred Stock, Series H
Depositary Shares, each representing 1/20th of a share of New York Stock Exchange
8.08% Cumulative Preferred Stock, Series J
Depositary Shares, each representing 1/20th of a share of New York Stock Exchange
8.40% Cumulative Preferred Stock, Series K
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 Subsidiary Trust (and New York Stock Exchange
registrant's guaranty with respect thereto)
7 3/4% Trust Preferred Securities of Subsidiary Trust (and New York Stock Exchange
registrant's guaranty with respect thereto)
7 5/8% Trust Preferred Securities of Subsidiary Trust (and New York Stock Exchange
registrant's guaranty with respect thereto)
6.850% Trust Preferred Securities (TRUPS(R)) of Subsidiary New York Stock Exchange
Trust (and registrant's guaranty with respect thereto)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
[Cover page 1 of 2 pages.]
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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 4, 1998 was approximately $61.5 billion.
As of March 4, 1998, 1,152,647,587 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, 1997 are incorporated by reference into Part II
of this Form 10-K.
Certain portions of the registrant's Proxy Statement for the 1998 Annual Meeting
of Stockholders to be held on April 22, 1998 are incorporated by reference into
Part III of this Form 10-K.
[Cover page 2 of 2 pages.]
<PAGE>
TRAVELERS GROUP INC.
Annual Report on Form 10-K
For Fiscal Year Ended December 31, 1997
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TABLE OF CONTENTS
Form 10-K
Item Number Page
- ----------- ----
Part I
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1. Business........................................................... 1
2 Properties......................................................... 70
3. Legal Proceedings.................................................. 71
4. Submission of Matters to a Vote of Security Holders................ 72
Part II
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5. Market for Registrant's Common Equity and
Related Stockholder Matters...................................... 72
6. Selected Financial Data............................................ 73
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 73
7A. Quantitative and Qualitative Disclosures About Market Risk......... 73
8. Financial Statements and Supplementary Data........................ 73
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 73
Part III
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10. Directors and Executive Officers of the Registrant................. 74
11. Executive Compensation............................................. 74
12. Security Ownership of Certain Beneficial Owners
and Management................................................... 74
13. Certain Relationships and Related Transactions..................... 74
Part IV
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14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...................................................... 74
Exhibit Index...................................................... 76
Signatures......................................................... 80
Index to Consolidated Financial Statements and Schedules........... F-1
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PART I
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Item 1. BUSINESS.
THE COMPANY
Travelers Group Inc. (the "Company") is a diversified financial services
holding company engaged, through its subsidiaries, principally in four business
segments: (i) Investment Services (primarily through Salomon Smith Barney
Holdings Inc. and its subsidiaries), including Asset Management; (ii) Consumer
Finance Services (primarily through Commercial Credit Company and its
subsidiaries); (iii) Property & Casualty Insurance Services (primarily through
Travelers Property Casualty Corp. and its subsidiaries); and (iv) Life Insurance
Services (primarily through The Travelers Insurance Company and its subsidiaries
and the Primerica Financial Services group of companies).
On November 28, 1997, a newly formed wholly owned subsidiary of the
Company was merged (the "Merger") into Salomon Inc ("Salomon"). Under the terms
of the Merger, approximately 188.5 million shares of Company common stock were
issued in exchange for all of the outstanding shares of Salomon common stock,
based on an exchange ratio of 1.695 shares of Company common stock for each
share of Salomon common stock, for a total value of approximately $9 billion.
Each of Salomon's series of preferred stock outstanding was exchanged for a
corresponding series of Company preferred stock having substantially identical
terms, except that the Company preferred stock issued in conjunction with the
Merger has certain voting rights. Thereafter, Smith Barney Holdings Inc. ("SB
Holdings"), a wholly owned subsidiary of the Company, was merged into Salomon to
form Salomon Smith Barney Holdings Inc. ("SSBH"), which is the primary vehicle
through which the Company engages in investment banking, securities and
commodities trading, brokerage, asset management and other financial services
activities. The Merger constituted a tax-free exchange and was accounted for
under the pooling of interests method. This method of accounting requires the
restatement of all periods presented as if the Company and Salomon had always
been combined. For additional information about the Merger, see Note 2 of Notes
to Consolidated Financial Statements.
On July 31, 1997, Commercial Credit Company ("CCC") acquired Security
Pacific Financial Services from BankAmerica Corporation for a purchase price of
approximately $1.6 billion. The purchase included approximately $1.2 billion of
net consumer finance receivables. The excess of the purchase price over the
estimated fair value of net assets was $380 million and is being amortized over
25 years. The purchase price for the transaction was financed entirely by CCC,
except for an equity contribution by the Company of $520 million to CCC.
During 1997, the Company continued and expanded the marketing of its
products through the various distribution channels offered by its subsidiaries,
primarily the independent agents of Primerica Financial Services (the "PFS sales
force") and the Financial Consultants of Salomon Smith Barney. The PFS sales
force distributes an array of financial products offered by other subsidiaries
of the Company, including mutual funds offered by Salomon Smith Barney, personal
lines property-casualty insurance (TRAVELERS SECURE(R)) offered by The Travelers
Indemnity Company ("Travelers Indemnity"), a subsidiary of Travelers Property
Casualty Corp. ("TAP"), and mortgage and personal loans ($.M.A.R.T. loan(R) and
$.A.F.E.(R) loan) underwritten by CCC.
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Qualified Salomon Smith Barney Financial Consultants offer individual insurance
products, primarily variable annuities, of Travelers Life and Annuity. For more
information on cross-marketing by the PFS sales force and Salomon Smith Barney,
see "Life Insurance Services -- Primerica Financial Services" and "Investment
Services -- Salomon Smith Barney." Travelers Group Diversified Distribution
Services, Inc., a subsidiary of the Company, offers a bundled group of the
Company's products for sale to employees of other companies through a directed
sales effort and also facilitates the cross-marketing of the Company's products
by its subsidiaries.
The periodic reports of CCC, SSBH, 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.(1)
INVESTMENT SERVICES
The Company's Investment Services segment includes the operations of SSBH
and its subsidiaries. As used herein, unless the context otherwise requires,
"Salomon Smith Barney" refers to SSBH and its consolidated subsidiaries.
Investment banking and securities trading activities are principally conducted
by Salomon Brothers Holding Company Inc ("SBHC") and its subsidiaries and Smith
Barney Inc. ("Smith Barney") and its subsidiaries and affiliated companies.
Salomon Smith Barney provides capital raising, advisory, research and brokerage
services to its customers, and executes proprietary trading strategies on its
own behalf. Salomon Smith Barney Asset Management provides its services
principally through Mutual Management Corp. (formerly Smith Barney Mutual Funds
Management Inc) ("MMC"), Smith Barney and Salomon Brothers Asset Management Inc
("Salomon Brothers Asset Management"). Salomon Smith Barney's commodities
trading business is conducted principally by Phibro Inc. and its subsidiaries
(collectively, "Phibro").
- ----------
(1) Certain items in this Form 10-K, including certain matters discussed under
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" (the "MD&A"), are forward-looking statements. The matters
referred to in such statements could be affected by the risks and uncertainties
involved in the Company's business, including the effect of economic and market
conditions, the level and volatility of interest rates and currency values, the
impact of current or pending legislation and regulation and the other risks and
uncertainties detailed in the Results of Operations section under the heading
"Outlook" for each business segment, and in the Forward-Looking Statements
section of the MD&A.
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Salomon Smith Barney
Salomon Smith Barney is a global investment bank and broker-dealer that
operates through over 450 offices throughout the United States and 45 offices in
26 foreign countries. Its principal U.S. operating companies for the investment
banking, brokerage and trading operations are Smith Barney and Salomon Brothers
Inc ("SBI") in New York, as well as SBHC and Salomon Swapco Inc ("Swapco") in
New York, which act as counterparties for many of the derivative transactions to
which Salomon Smith Barney is a party, and The Robinson-Humphrey Company, LLC
("R-H"), a regional broker-dealer based in Atlanta. Salomon Forex Inc acts as
counterparty in many foreign exchange transactions. With approximately 10,300
Financial Consultants and approximately 875 institutional brokers, Salomon Smith
Barney believes that it is currently the second largest brokerage firm in the
United States.
Salomon Smith Barney also maintains branches, subsidiaries, representative
offices or other operations in Australia, Bahrain, Canada, the Cayman Islands,
China, France, Germany, Hong Kong, India, Ireland, Israel, Italy, Japan,
Republic of Korea, Mexico, the Netherlands, Russia, Singapore, Spain,
Switzerland, Taiwan, Thailand and the United Kingdom, and affiliates in
Argentina, Brazil, Indonesia and Republic of Korea. The principal operating
companies for these international operations are Salomon Brothers International
Limited ("SBIL"), Salomon Brothers Asia Limited ("SBAL"), Salomon Brothers Hong
Kong Limited ("SBHK") and Salomon Brothers AG ("SBAG"). SBIL is based in London
and primarily acts as a dealer and market maker in fixed income and equity
securities and related products, including derivative instruments, in the
international capital markets, as well as an underwriter and provider of
corporate finance services. SBAL, based in Tokyo, and SBHK, based in Hong Kong,
act as agent and for their own account in trading of fixed income and equity
securities, primarily in securities of issuers based in Japan and the Asia
Pacific region, respectively. SBAG, a German bank based in Frankfurt with
branches in Tokyo and Milan, acts as a broker and dealer in primarily domestic
German fixed income and equity securities and related products, including
derivative instruments, as well as an underwriter and provider of corporate
finance advisory services to international clients.
Investment Banking and Trading
Salomon Smith Barney's global investment banking services encompass a full
range of capital market activities, including the underwriting and distribution
of debt and equity securities for United States and foreign corporations and for
state, local and other governmental and government sponsored authorities.
Salomon Smith Barney frequently acts as an underwriter or private placement
agent in corporate and public securities offerings and provides alternative
financing options through bank and bridge loans. It also provides financial
advice to investment banking clients on a wide variety of transactions including
mergers and acquisitions, divestitures, leveraged buyouts, financial
restructurings and a variety of cross-border transactions.
Salomon Smith Barney executes securities and commodity futures brokerage
transactions on all major United States securities and futures exchanges and
major international exchanges on behalf of customers and for its own account.
Salomon Smith Barney's significant capital base and
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extensive distribution capabilities also enable it to provide liquidity to
investors across a broad range of markets and financial instruments, and to
execute capital-intensive transactions on behalf of its customers and for its
own account. It 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 over
1,550 equity securities traded on the NASDAQ system. Additionally, the firm
makes markets in convertible and preferred stocks, warrants and other equity
securities.
Salomon Smith Barney also engages in principal transactions in fixed
income securities. Through its subsidiaries, it is a major dealer in government
securities in New York, London, Frankfurt and Tokyo. Salomon Smith Barney makes
inter-dealer markets and trades as principal in corporate debt and equity
securities, including those of United States and foreign 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 and foreign exchange. Salomon Smith Barney also enters into
repurchase and reverse repurchase agreements to provide financing for itself and
its customers, and engages in securities lending and borrowing transactions.
Salomon Smith Barney is a major participant in the over-the-counter
("OTC") market for derivative instruments involving a wide range of products,
including interest rate, equity and currency swaps, caps and floors, options,
warrants and other derivative products. It also creates and sells various types
of structured securities. Salomon Smith Barney's ability to execute transactions
is enhanced by its established presence in international capital markets, its
use of information technology and quantitative risk management tools, its
research capabilities, and its knowledge and experience in various derivative
markets.
Salomon Smith Barney also trades for its own account in various markets
throughout the world, and uses many different strategies involving a broad
spectrum of financial instruments and derivative products. Historically, these
trading strategies have primarily involved the fixed income securities of the
G-7 countries, but they also involve the trading of fixed income securities
globally (including emerging markets) as well as currencies and equities.
Because these trading strategies are often designed with time horizons of one
year or more, profits or losses reported in interim periods can be volatile and
may not reflect the ultimate success or failure of these strategies. For a
discussion of certain of the risks involved in Salomon Smith Barney's securities
trading and investment activities, and the firm's strategies to manage these
risks, see Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Investment Services -- Risk Management."
Retail Brokerage and Related Services
The Private Client Division provides investment advice and financial
planning and brokerage services for over five million client accounts, primarily
through the network of Salomon Smith Barney Financial Consultants. A significant
portion of Salomon Smith Barney's revenues is generated from the commissions
that it earns as a broker for its clients in the purchase and sale of
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securities. Financing customers' securities transactions provides Salomon Smith
Barney with an additional source of income. While credit losses may arise as a
result of this financing activity, to date such losses have not been material.
The Financial Consultants also sell proprietary mutual funds and a large number
of mutual funds sponsored and managed by unaffiliated entities, and Salomon
Smith Barney receives commissions and other sales and services revenues from
these activities.
Qualified Salomon Smith Barney Financial Consultants also offer individual
insurance products, primarily variable annuities. These products include, among
others, Travelers Life and Annuity's Vintage Life(R) and Vintage Annuity(R),
single premium variable annuity and universal life products, 401(k) Blueprint(R)
and Travelers Target Maturity(R), a market value-adjusted fixed annuity.
Salomon Smith Barney's Corporate Client Group provides retirement plan
services and stock plan services to a wide variety of corporations. These
services involve the management of defined benefit and defined contribution plan
products such as 401(k) plans, as well as the administration of stock option and
other stock-based plans.
In addition to more traditional brokerage services, Salomon Smith Barney
Financial Consultants also deliver the programs and services offered by Salomon
Smith Barney's Consulting Group ("CG"). CG, which has become an area of
specialization for many Salomon Smith Barney Financial Consultants, 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 Salomon Smith Barney typically provide a range of services, such as
an analysis of the client's financial situation, investment needs and risk
tolerance; a recommendation and ongoing monitoring of the performance and
suitability of the investment manager(s) retained; and securities execution,
custody, reporting and recordkeeping. In such programs, the client generally
pays a single bundled fee for these services. CG also offers "wrap fee" programs
in which separate accounts are managed by selected, specially trained Salomon
Smith Barney Financial Consultants. Assets in the Financial Consultant managed
programs at December 31, 1997, totaled $11.6 billion, as compared to $7.9
billion and $5.6 billion at year-end 1996 and 1995, respectively. In addition,
CG 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. As of December 31, 1997, Salomon Smith Barney
provided consulting services with respect to externally managed client assets
aggregating approximately $49.2 billion, excluding the TRAK(R) program described
below, as compared to approximately $37.5 billion at December 31, 1996 and
approximately $30.5 billion at December 31, 1995.
Salomon 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-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 37 no-load or
load-waived mutual fund families (including Smith Barney
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proprietary funds) corresponding to the same asset class and investment style
criteria. At December 31, 1997, TRAK(R) assets exceeded $10.5 billion, as
compared to approximately $6.6 billion at December 31, 1996 and approximately
$4.8 billion at December 31, 1995. Salomon 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.
Salomon Smith Barney Asset Management
Salomon Smith Barney provides discretionary and non-discretionary asset
management 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. Salomon Smith Barney receives ongoing fees, generally stated
as a percentage of the client's assets, from asset management clients. At
December 31, 1997, client assets managed by Salomon Smith Barney Asset
Management were approximately $152.5 billion, as compared to approximately
$126.5 billion at December 31, 1996 and approximately $107.1 billion at December
31, 1995. These amounts include separately managed accounts with assets of
approximately $54.1 billion at December 31, 1997, $44.5 billion at December 31,
1996 and $35.2 billion at December 31, 1995.
The table below shows the aggregate assets in, and number of, mutual funds
managed by Salomon Smith Barney Asset Management at December 31 for each of the
last three years.
Mutual Fund Assets Under Management
December 31,
1997 1996 1995
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(Dollars in billions)
No. of No. of No. of
Funds Assets Funds Assets Funds Assets
----- ------ ----- ------ ----- ------
Money market 15 $46.5 13 $41.6 13 $35.8
Mutual funds 124 48.7 120 38.1 121 34.3
Annuities 26 3.2 25 2.3 26 1.8
-- ------- -- ----- -- -------
Total 165 $98.4 158 $82.0 160 $71.9
=== ======= === ======= === =======
Smith Barney Asset Management
At December 31, 1997, Smith Barney sponsored 68 mutual funds (open-end
investment companies), including taxable and tax-exempt money market funds,
equity funds, taxable fixed income funds and tax-exempt fixed income funds
distributed primarily through Salomon Smith Barney Financial Consultants and the
PFS sales force, affiliates of the Company. MMC serves as the primary investment
manager to these mutual funds, as well as to eleven closed-end investment
companies, the shares of which are listed for trading on one or more securities
exchanges. In addition, at December 31, 1997, Salomon Smith Barney managed 26
mutual fund portfolios serving as funding vehicles for variable annuity
contracts, including certain variable annuities and other
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individual products of the Company's Travelers Life and Annuity unit (see "Life
Insurance Services"), which are sold by Salomon Smith Barney Financial
Consultants. Smith Barney Asset Management also sponsors and manages ten mutual
funds domiciled outside the United States, which are offered to Salomon Smith
Barney's non-resident alien client base as well as to the general public.
In December 1997, Salomon Smith Barney acquired the mutual fund advisory
contracts for the Common Sense(R) Trust from Van Kampen American Capital. This
series of mutual funds is marketed exclusively by the PFS sales force, and had
$5.9 billion in assets at December 31, 1997. In January 1998 the name of these
funds was changed to Concert Investment Series(sm).
Smith Barney Asset Management also provides separate account discretionary
and non-discretionary investment management services to a wide variety of
individual and institutional clients, including private and public retirement
plans, endowments, foundations, banks, central banks, insurance companies, other
corporations and governmental agencies. Client relationships may be introduced
either through Salomon Smith Barney's network of Financial Consultants or
independently of that network.
Smith Barney Asset Management 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 Asset Management; other trusts are jointly sponsored through a syndicate
of major broker-dealers of which Smith Barney is a member. At December 31, 1997,
outstanding unit trust assets held by Smith Barney's clients were approximately
$11.8 billion, as compared to approximately $8.6 billion at December 31, 1996
and approximately $7.2 billion at December 31, 1995.
Salomon Brothers Asset Management
Salomon Brothers Asset Management provides separate account discretionary
and non-discretionary investment management services to pension funds,
investment companies, endowments, foundations, banks, central banks, insurance
companies, other corporations, governmental agencies and individuals. Client
relationships may be introduced through traditional independent consultant
evaluations as well as through the individual and institutional client
relationships of SBI.
At December 31, 1997, Salomon Brothers Asset Management sponsored 18
mutual funds, including taxable and tax-exempt money market funds, equity funds,
taxable fixed income funds and tax-exempt fixed income funds distributed
primarily through dealer agreements with a variety of national and regional
brokerage firms, including Smith Barney. Salomon Brothers Asset Management
serves as investment manager to these mutual funds, as well as to 16 closed-end
investment companies, the shares of which are listed for trading on one or more
securities exchanges. Salomon Brothers Asset Management also manages 16 mutual
funds domiciled outside the United States, which are offered to Salomon Smith
Barney's non-resident alien client base as well as to the general public.
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Trust Services
Certain subsidiaries of the Company are chartered as trust companies and
provide a full range of fiduciary services with a particular emphasis on
personal trust services. Another subsidiary of the Company 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 Salomon Smith Barney to market its services. Salomon
Smith Barney provides certain advisory and support services to the trust
companies and receives fees for such services. Certain subsidiaries of SSBH also
operate a private trust services business that is licensed as a bank and trust
company in the Cayman Islands.
Phibro and Other
Phibro conducts a global commodities dealer business through its principal
offices in Westport (Connecticut), London and Singapore. Commodities traded
include crude oil, refined oil products, natural gas, electricity, metals and
various soft commodities. In December 1997, Phibro began implementing a
downsizing plan that will significantly reduce the scope of some of its
activities. In 1996, Phibro discontinued trading coal, coke and fertilizers.
Phibro makes extensive use of futures markets and is a participant in the OTC
derivatives market. Its principal competitors are major integrated oil
companies, other commodity trading companies, certain investment banks and other
financial institutions.
As a dealer, Phibro's strategy is to focus on taking positions in
commodities on a longer-term horizon while also engaging in counterparty flow
business on a short-term basis. Phibro's operating results are subject to a high
degree of volatility, particularly on a quarterly basis, due to the predominance
of directional positions in commodities that have a longer-term horizon until
realization. Thus, results are better evaluated over the longer term.
For a summary of Salomon Smith Barney's operations by geographic area, see
Note 4 of Notes to Consolidated Financial Statements.
Derivatives and Risk Management
Derivative instruments are contractual commitments or payment exchange
agreements between counterparties that "derive" their value from some underlying
asset, index, interest rate or exchange rate. Salomon Smith Barney enters into
various bilateral financial contracts involving future settlement, which are
based upon a predetermined principal or par value (referred to as the "notional"
amount). Such instruments include swaps, swap options, caps and floors, futures
contracts, forward purchase and sale agreements, option contracts and warrants.
Derivatives activities, like Salomon Smith Barney's other ongoing business
activities, give rise to market, credit and operational risks, although Salomon
Smith Barney also uses derivative instruments to manage these risks in its other
businesses. For a more complete discussion of Salomon Smith Barney's use
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of derivative financial instruments and certain of the related risks, see Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 1, 5, 11 and 20 of Notes to Consolidated Financial
Statements.
Competition
The businesses in which Salomon Smith Barney is engaged are highly
competitive. The principal factors affecting competition in the investment
banking and 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
Salomon Smith Barney. The Federal Reserve Board has substantially removed the
barrier originally erected by the Glass-Steagall Act restricting investment
banking activities of commercial banks and their affiliates, by permitting
certain commercial banks to engage, through affiliates, in the underwriting of
and dealing in certain types of securities, subject to certain limitations.
Proposed legislation has been introduced in Congress 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 Salomon Smith Barney's businesses cannot be predicted at
this time.
Competitors of the Salomon Brothers and Smith Barney mutual funds and
asset management groups include a large number of mutual fund management and
sales companies, asset management firms and banks. Competition in mutual fund
sales and investment management is based on investment performance, service to
clients and product design.
Regulation
Certain U.S. and non-U.S. subsidiaries are subject to various securities
and commodities regulations and capital adequacy requirements promulgated by the
regulatory and exchange authorities of the jurisdictions in which they operate.
SSBH's principal regulated subsidiaries are discussed below.
Certain of SSBH's subsidiaries are registered as broker-dealers and as
investment advisers with the U.S. Securities and Exchange Commission (the "SEC")
and as futures commission merchants and as commodity pool operators with the
Commodity Futures Trading Commission ("CFTC"). SBI, Smith Barney and R-H are
members of the New York Stock Exchange, Inc. (the "NYSE") and other principal
United States securities exchanges, as well as the National Association of
Securities Dealers, Inc. ("NASD") and the National Futures Association ("NFA"),
a not-for-profit membership corporation designated as a registered futures
association by the CFTC. SBI, Smith Barney 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
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registration. Smith Barney is also a registered broker-dealer in Guam. Smith
Barney and SBI are also reporting dealers to the Federal Reserve Bank of New
York and members of the principal United States futures exchanges. SBI, Smith
Barney 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 SEC, the CFTC, the NFA, the NYSE, various
self-regulatory organizations of which these subsidiaries are members and the
securities administrators of the 50 states, the District of Columbia and Puerto
Rico and, in Smith Barney's case, Guam. The SEC and the CFTC also require
certain registered broker-dealers (including SBI and Smith Barney) 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.
Salomon Smith Barney's operations abroad are conducted through various
subsidiaries, principally SBIL in London, SBAL in Tokyo and SBAG in Frankfurt.
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 Organisation. SBAL is a licensed foreign securities
company in Japan and, as such, its activities in Japan are subject to Japanese
law applicable to non-Japanese securities firms and are regulated by the
Japanese Ministry of Finance. SBAG is a German bank, principally engaged in
securities trading and investment banking and is regulated by Germany's Banking
Supervisory Authority. These and other subsidiaries of SSBH are also members of
various securities and commodities exchanges and are subject to the rules and
regulations of those exchanges. Salomon Smith Barney's other offices are also
subject to the jurisdiction of local financial services regulatory authorities.
In connection with the mutual funds business, SSBH and its subsidiaries
must comply with regulations of a number of regulatory agencies and
organizations, including the SEC, the NASD and regulatory agencies in the United
Kingdom and Germany. SSBH is the direct or 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 SSBH'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. In that event, consent to the assignment from the shareholders of
the Affiliated Funds involved would be needed for the advisory and distribution
relationships to continue. In addition, Smith Barney, SBI, MMC, Salomon Brothers
Asset Management and the Affiliated Funds are subject to certain restrictions in
their dealings with each other. For example, Smith Barney or 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; it may
not, however, conduct principal transactions with an Affiliated Fund. Further,
an Affiliated Fund may acquire
10
<PAGE>
securities during the existence of an underwriting where Smith Barney or SBI is
a principal underwriter only in certain limited situations.
SBI, Smith Barney 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, SSBH has purchased
additional coverage of up to $150 million for eligible customers, approximately
$50 million of which is from a subsidiary of the Company.
President Clinton's recent budget proposal (the "Budget Proposal")
contains a number of tax provisions that could adversely impact Salomon Smith
Barney, including provisions relating to tax-exempt interest obligations and
variable annuities. The Budget Proposal, which is in its early stages of
consideration, has not yet been introduced as part of any legislation in
Congress but has engendered considerable opposition from the public and members
of Congress.
Capital Requirements
As registered broker-dealers, SBI, Smith Barney and R-H are subject to the
SEC's net capital rule, Rule 15c3-1 (the "Net Capital Rule"), promulgated under
the Exchange Act. These companies 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 SEC 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 SEC 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 SEC 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 SEC 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.
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<PAGE>
Compliance with the Net Capital Rule could limit those operations of the
Company that require the intensive use of capital, such as underwriting and
trading activities and the financing of customer account balances, and also
could restrict SSBH's ability to withdraw capital from its broker-dealer
subsidiaries, which in turn could limit SSBH's ability to pay dividends and make
payments on its debt. See Note 15 of Notes to Consolidated Financial Statements.
At December 31, 1997, SBI and Smith Barney had net capital, computed in
accordance with the Net Capital Rule, of $1.047 billion and $1.086 billion,
respectively, which exceeded the minimum net capital requirement by $974 million
and $884 million, respectively. The net capital of R-H was $66 million above its
minimum requirement.
SBAL, SBIL and SBAG are also subject to regulation in the countries in
which they do business. Such regulations include requirements to maintain
specified levels of net capital or its equivalent. At December 31, 1997, SBAL's
regulatory capital was $307 million above the minimum required by Japan's
Ministry of Finance. SBIL's regulatory capital was $699 million above the
minimum required by the Securities and Futures Authority, and SBAG's regulatory
capital was $32 million above the minimum required by Germany's Banking
Supervisory Authority.
In addition, in order to maintain its triple-A rating, Swapco, an indirect
wholly owned subsidiary of SSBH, must maintain minimum levels of capital in
accordance with agreements with its rating agencies. At December 31, 1997,
Swapco was in compliance with all such agreements. Swapco's capital requirements
are dynamic, varying with the size and concentration of its counterparty
receivables.
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, 1997, CCC maintained 1,026 loan offices in 45 states,
including 24 servicing centers for loans sold through the PFS sales force. This
includes a net increase of approximately 175 loan offices from the July 1997
acquisition of Security Pacific Financial Services. CCC owns one state-chartered
bank and one federally chartered savings bank, each headquartered in Newark,
Delaware.
Loans to consumers include both fixed and variable rate real
estate-secured loans, both fixed and variable rate unsecured and partially
secured personal loans and fixed rate loans to finance consumer goods purchases.
Travelers Bank & Trust, fsb (formerly The Travelers Bank), a federal savings
bank and a subsidiary of CCC, and The Travelers Bank USA, also a subsidiary of
CCC (together, the "Banks"), provide credit card loans as 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
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for consumer loan customers 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 1,924,000 at December 31, 1997, as compared to
approximately 1,333,000 at December 31, 1996 and approximately 1,275,000 at
December 31, 1995. CCC also operates an agency that performs appraisals, sells
title insurance and provides other closing-related services for CCC's real
estate loans.
The $.M.A.R.T. loan(R) and $.A.F.E.(R) loan programs involve the
solicitation of applications for mortgage and personal loans exclusively through
the PFS sales force. At December 31, 1997, the total loans outstanding generated
from this program were $2.264 billion, or approximately 21% of total loans
outstanding, as compared to $1.524 billion, or approximately 19%, at December
31, 1996 and $1.258 billion, or approximately 17%, at December 31, 1995. See
"Life Insurance Services -- Primerica Financial Services." Since early 1998, all
new $.M.A.R.T. loan(R) business is being written through Travelers Bank & Trust,
fsb.
The average amount of cash advanced per real estate-secured loan made was
approximately $44,700 in 1997, $35,800 in 1996 and $26,300 in 1995. The average
amount of cash advanced per personal loan made was approximately $4,400 in 1997,
$4,250 in 1996 and $4,200 in 1995. The average real estate-secured loan size
increased in 1997 and 1996 due to marketing initiatives that attracted customers
for higher balance loans, particularly in first mortgage programs. The average
annual yield for loans in 1997 was 14.58%, as compared to 15.24% in 1996 and
15.64% in 1995. The average annual yield for real estate-secured loans in 1997
was 11.73%, as compared to 12.13% in 1996 and 12.33% in 1995, and for personal
loans it was 19.66% in 1997, as compared to 19.95% in 1996 and 20.23% in 1995.
The average yield for real estate-secured loans has been affected by the normal
run-off of older, higher yielding loans and growth in lower yielding, higher
quality loans, while the average yield for personal loans has been affected by a
shift in the portfolio to loans partially secured by real estate (classified as
personal loans) as well as the industry trends associated with a high level of
personal bankruptcies. Consumer Finance Services' average net interest margin
for loans was 8.14% in 1997, 8.64% in 1996 and 8.79% in 1995.
As a result of the Security Pacific acquisition, charge-offs in the second
half of 1997 reflect a short-term benefit largely from the transition of that
portfolio to CCC's charge-off policies. As a result, the Company expects the
charge-off rate to increase somewhat in the first half of 1998. 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 10 of Notes to Consolidated
Financial Statements.
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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
- ------------------ ----- ----- ----- ------- --------
1997 3.41% 1.61% 1.41% 2.49% 2.35%
1996 3.42% 1.50% 1.44% 2.27% 2.38%
1995 2.89% 1.42% 1.40% 2.17% 2.14%
- ----------
(1) The receivable balance used for these ratios is before the deduction of
unearned finance charges and excludes accrued interest receivable.
Receivables delinquent 60 days or more include, for all periods presented,
accounts in the process of foreclosure.
The following table 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
- ------------ ----- ----- ----- ------- --------
1997 5.39% 0.41% 2.66% 2.86% 2.65%
1996 5.46% 0.50% 2.75% 3.34% 2.91%
1995 4.01% 0.64% 2.04% 2.46% 2.28%
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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,
------------------
1997 2.91%
1996 2.97%
1995 2.66%
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.
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,
----------------------------
1997 1996 1995
---- ---- ----
Premiums written by AHL and its affiliates
Writings for consumer finance:
Credit life $ 65.4 $ 42.7 $ 41.8
Credit disability and other 91.0 63.1 63.6
Credit property and other 51.5 18.0 4.1
-------- -------- --------
Total $ 207.9 $ 123.8 $ 109.5
======== ======== ========
Premiums written by other insurance companies
Credit property and other $ 26.9 $ 42.9 $ 51.6
======== ======== ========
The increase in premiums year-over-year is the result of growth in
receivables and expanded availability of certain products in additional states.
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Credit Card and Other Services
Travelers Bank & Trust, fsb ("Travelers Bank & Trust") is a federally
chartered savings 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). Travelers Bank & Trust was granted a federal savings bank
charter on November 25, 1997, upon conversion of The Travelers Bank, a Delaware
state-chartered bank. The Travelers Bank USA is a state-chartered bank located
in Newark, Delaware, which also provides credit card services and loans to
finance consumer goods purchases. Although the Banks have historically limited
their activities to credit card operations, since early 1998, all new $.M.A.R.T.
loan(R) business is being written through Travelers Bank & Trust.
The following table sets forth aggregate information regarding credit
cards issued by the Banks.
Credit Cardholders and Total Outstandings
(Dollars in millions)
As of, or for the year ended, December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
Approximate total credit cardholders 984,000 791,000 753,000
Approximate gold credit cardholders 792,000 642,000 615,000
Total outstandings $1,164.6 $907.1 $761.8
Average annual yield 10.81% 11.82% 12.51%
The decrease in the average annual yield in 1997 and 1996 primarily
resulted from the offering of promotional rates in both years to encourage the
transfer of credit card balances to the Banks. 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,
1997, deposits of unaffiliated entities were $45.0 million, as compared to $81.9
million at December 31, 1996 and $97.9 million at December 31, 1995.
In March 1998, the Banks entered into a securitized transaction pursuant
to which they transferred approximately $356.5 million of their credit card
receivables to an affiliated special purpose corporation, which transferred such
receivables to a trust. The trust then sold to the public $227.5 million of
securities securitized by such receivables.
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
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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 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. The
Travelers Bank USA, a credit card bank, must undergo periodic examination by the
Delaware State Bank Commissioner and the Federal Deposit Insurance Corporation.
Travelers Bank & Trust is subject to regulation and examination by the Office of
Thrift Supervision. The Banks are subject to additional regulations relating to
capitalization, leverage, reporting, dividends and permitted asset and liability
products. The Banks are also subject to the Community Reinvestment Act, which
assesses the records of the Banks in helping to meet the credit needs in the
delineated community of the Banks, including low and moderate income
neighborhoods, consistent with a safe and sound banking operation. In addition,
a number of federal and state consumer protection laws and regulations are
applicable to the Banks including the Truth in Lending Act, which requires
disclosure to the consumer of the cost of credit and governs billing dispute
resolution, the Equal Credit Opportunity Act, which prohibits discrimination in
any aspect of a credit transaction based on race, color, national origin,
gender, marital status, age, income from public assistance programs or exercise
of rights under the Consumer Protection Act, and the Fair Credit Reporting Act,
which is aimed at ensuring the accuracy and fairness of the mechanism by which
consumer credit and other information about consumers is assembled and
evaluated. Travelers Bank & Trust is also covered by the Home Mortgage
Disclosure Act, which requires disclosure of customer demographics, including
race, gender and age. The Banks are also subject to certain regulatory
restrictions relating to transactions with affiliates. 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.
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 consumer finance
businesses cannot be predicted at this time.
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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. On April 2, 1996, 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 Travelers Casualty and Surety Company (formerly The
Aetna Casualty and Surety Company) ("Travelers Casualty") and The Standard Fire
Insurance Company ("Standard Fire"), Aetna's property and casualty insurance
subsidiaries (collectively, "Aetna P&C"), for approximately $4.2 billion in cash
(the "Acquisition"). 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. The Company currently
owns approximately 83.4% of TAP's outstanding common stock. See Note 2 of Notes
to Consolidated Financial Statements for additional information about the
Acquisition and related transactions. 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 1996 direct written premiums published by A.M. Best
Company ("A.M. Best"). 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 Accounts that serves the
construction industry. TAP distributes its commercial products through
approximately 5,200 brokers and independent agencies located throughout the
United States. In 1997, Commercial Lines generated net written premiums of $4.8
billion.
Selected Product and Market Information
The following table sets forth by product line and market net written
premiums for Commercial Lines for the periods indicated. For a description of
the product lines and markets referred to in the table, see "-- Product Lines"
and "-- Principal Markets and Methods of Distribution," respectively.
Many National Accounts customers often demand 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
18
<PAGE>
settlement, loss control and engineering. Many of these products generate fee
income rather than net written premiums, and are not reflected in the following
table.
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 has been included below for
informational purposes only. 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.
Combined Net Written Premiums
Percentage of Total
Net Written Premiums
Year Ended December 31, Year Ended
---------------------- December 31,
1997 1996 1995 1997
---- ---- ---- ----
(Dollars in millions)
Net written premiums by product
line:
Workers' compensation $1,176 $1,223 $1,312 24.7%
Commercial multi-peril 1,037 1,223 1,188 21.8
General liability 931 836 815 19.6
Commercial automobile 866 806 888 18.2
Property 383 342 457 8.1
Fidelity and surety 201 215 233 4.2
Other 163 45 251 3.4
------ ------ ------ ------
Total Commercial Lines (1) $4,757 $4,690 $5,144 100.0%
====== ====== ====== ======
Net written premiums by market:
National Accounts (2) $ 657 $ 874 $1,192 13.8%
Commercial Accounts 1,986 1,725 1,862 41.8
Select Accounts 1,432 1,412 1,466 30.1
Specialty Accounts 682 679 624 14.3
------ ------ ------ ------
Total Commercial Lines (1) $4,757 $4,690 $5,144 100.0%
====== ====== ====== ======
- ----------
(1) 1997 includes a $142 million increase due to a change to conform the Aetna
P&C method of recording certain net written premiums to the method
employed by Travelers P&C.
(2) The decreases in National Accounts net written premiums during the periods
shown primarily reflect the highly competitive marketplace and TAP's
selective underwriting practices.
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The following table sets forth service fee income by market for Commercial
Lines for the periods indicated and includes information with respect to Aetna
P&C only from the date of the Acquisition.
Commercial Lines Service Fee Income
Year Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
(Dollars in millions)
Service fee income by market:
National Accounts $346 $382 $424
Commercial Accounts 19 10 8
---- ---- ----
Total Commercial Lines $365 $392 $432
==== ==== ====
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 three types of workers' compensation
products: (i) guaranteed cost insurance products in which policy premiums
charged are fixed and do not vary as a result of the insured's loss experience,
(ii) loss sensitive insurance products, 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 (iii) service
programs, which are generally sold to TAP's larger national accounts, where TAP
receives fees for providing loss prevention, risk management, claim
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. The
Company 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.
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. It also
20
<PAGE>
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.
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, employment practices
liability insurance, 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.
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.
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
resulting from property damage. Property also includes inland marine, which
provides coverage for goods in transit and unique, one-of-a-kind exposures.
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.
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.
Principal Markets and Methods of Distribution
TAP's Commercial Lines are 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,
primarily serving mid-size businesses; Select Accounts, serving small
businesses; and Specialty Accounts, providing a variety of specialty coverages.
The Company also has a dedicated group within Commercial Accounts that serves
the construction industry.
TAP distributes its commercial products primarily through approximately
5,200 brokers and independent agencies located throughout the United States that
are serviced by 98 field offices. TAP seeks to establish relationships with
well-established, independent insurance agencies and
21
<PAGE>
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, the Company carefully monitors its
performance.
National Accounts
TAP's National Accounts provides a variety of casualty products to large
companies, as well as employee groups, associations and franchises. TAP's
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
generally select products under retrospectively rated plans, large self-insured
retentions or some other loss-responsive arrangement. 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.
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 69% of the products sold in 1997 to National Accounts
customers, based on net written premiums and service fee income.
The Alternative Market business of TAP's 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 25% share of the market in 1997. Assigned risk plan contracts
generated approximately $75 million in service fee income in 1997 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
net written premiums of $43 million and service fee income of $4 million in
1997. 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.
22
<PAGE>
Commercial Accounts
TAP's Commercial Accounts sells a broad range of property and casualty
insurance products through a large network of independent agents and brokers.
Commercial Accounts casualty products target businesses with 75 to 1,000
employees, while its property products target both large and medium sized
businesses. TAP offers a full line of products to its Commercial Accounts
customers, with an emphasis on guaranteed cost products.
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 and wood products. Also targeted are colleges and universities, food,
retail, financial, property management and the wholesale industries. 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
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
guaranteed cost and loss-responsive products, and wrap-up insurance programs,
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 states' 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. Construction
operations contributed approximately 22% of the Commercial Accounts
premium-based business in 1997. Additionally, construction operations
service-based business contributed $6 million of service fees to TAP in 1997.
23
<PAGE>
Select Accounts
Select Accounts serves individuals who have commercial exposures and firms
typically with one to 75 employees. 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.
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 classifications 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, broad range of
products and quality service are important to maintaining relationships with
Specialty Accounts insureds and producers. TAP believes that it has a
competitive advantage with 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.
TAP has two separate marketing and underwriting groups within Specialty
Accounts:
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
medical malpractice, primary and excess property, and various coverages that
target the transportation industry. Gulf Specialty also writes umbrella coverage
for various industries, provides insurance products to the entertainment
industry and to municipalities
24
<PAGE>
and provides insurance products for other industry specific programs. In
addition, Gulf Specialty has developed a book of excess and surplus lines
business through Gulf Underwriters Insurance Company. Effective January 1, 1998,
TAP's former Travelers Specialty unit has been combined with Gulf Specialty, and
it is anticipated that during 1998 and 1999 renewal policies within the former
Travelers Specialty unit will be written as Gulf Specialty policies.
Bond Specialty's range of products includes fidelity and surety bonds,
directors' and officers' and other professional liability insurance, employment
practices 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 Specialty is
organized around three broad customer segments: Financial Services, Construction
and Commercial Risk and one specialized product niche: National Commercial
Surety.
Pricing and Underwriting
Pricing levels for property and casualty insurance products by TAP's
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 sells primarily risk
management services and loss sensitive products. Commercial Accounts and Select
Accounts primarily sell guaranteed cost products. The market conditions for all
Commercial Lines products are characterized by difficult pricing and increased
competition.
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 the insured is dependent on the loss
experience of the insured. Retrospectively rated policies are primarily used in
workers' compensation coverage. Although the retrospectively rated feature of
the policy substantially reduces insurance risk to TAP, it introduces credit
risk to TAP. Receivables on unpaid losses from holders of retrospectively rated
policies totaled approximately $502 million at December 31, 1997. 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,
1997, contractholder receivables and payables on unpaid losses were each
approximately $1.9 billion.
25
<PAGE>
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 local offices 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.
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 premium
volume for the year ended December 31, 1997:
State % of Total
----- ----------
New York 12.6%
California 8.0
Texas 6.4
Massachusetts 6.4
Pennsylvania 4.5
Florida 4.3
New Jersey 4.0
Connecticut 3.8
Illinois 3.7
North Carolina 3.3
All Others (1) 43.0
--------
Total 100.0%
========
- ----------
(1) No other single state accounted for 3.0% or more of the total direct written
premiums written in 1997 by TAP.
26
<PAGE>
Personal Lines
TAP is the second largest writer of personal lines insurance through
independent agents and the eighth largest writer of personal lines insurance
overall in the United States based on 1996 direct written premiums published by
A.M. Best. In 1997, Personal Lines generated net written premiums of
approximately $3.1 billion. Personal Lines primarily offers personal automobile
and homeowners insurance.
Personal Lines distributes products primarily through approximately 5,000
independent agencies located throughout the United States. TAP is also marketing
its Personal Lines products through alternative distribution channels, including
sponsoring organizations such as employee and affinity groups, joint marketing
arrangements with other insurers and through the PFS sales force. The
property-casualty licensed PFS agents market Personal Lines products under the
name TRAVELERS SECURE(R) in 39 states. At the end of 1997, approximately 8,700
members of the PFS sales force were licensed to sell TRAVELERS SECURE(R)
products and approximately 10,000 new automobile and homeowners policies are now
being sold through this program each month. Approximately one-third of Personal
Lines new business originated from alternative distribution channels in 1997.
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,
1997 1996 1995 1997
------- ------- ------- -------
(Dollars in millions)
Net written premiums by product
line:
<S> <C> <C> <C> <C>
Personal automobile $ 1,950 $ 1,851 $ 1,822 63.4%
Homeowners and other 1,124 824 721 36.6
------- ------- ------- -------
Total Personal Lines $ 3,074(1) $ 2,675 $ 2,543 100.0%
======= ======= ======= =======
</TABLE>
- ----------
(1) In 1997, $371 million of Personal Lines net written premiums were generated
by alternative distribution channels.
27
<PAGE>
Product Lines
TAP writes virtually all types of property and casualty insurance covering
personal risks. Personal Lines had approximately 4.4 million policies in force
at December 31, 1997. 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. In 1997, TAP introduced a nonstandard
automobile product in Texas and Alabama, distributed through independent agents.
In February 1998, TAP expanded its nonstandard auto product into New York, and
later this year it plans to further expand such product into its larger markets,
including Pennsylvania, Florida and Connecticut.
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.
Principal Markets and Methods of Distribution
TAP's Personal Lines products are distributed primarily through
approximately 5,000 independent agencies located throughout the United States,
supported by a network of 15 field marketing offices and five customer service
centers. Personal Lines also markets through affinity groups, the PFS sales
force and under joint marketing arrangements with other insurers. While TAP's
principal markets for Personal Lines insurance are in states along the East
Coast, in the South, and Texas, Personal Lines is expanding its geographical
presence across the United States. 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. In addition, in
October 1997, TAP commenced operations in its California domestic companies,
which sell personal automobile policies.
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.
TAP's Personal Lines continues to distribute its products through the
independent agency distribution system, recognizing the service and underwriting
advantages the agent can deliver. In addition to its agency distribution system,
TAP has broadened its distribution channels for Personal
28
<PAGE>
Lines products to include sponsoring organizations such as employee and affinity
groups, joint marketing arrangements with other insurers and sales through
members of the PFS sales force, who primarily sell life insurance products
issued by affiliates of TAP, as well as mutual funds and other products of the
Company. This program is available in 39 states. In general, members of the PFS
sales force contact potential customers directly, and then transmit information
about the customer to one of four regional telemarketing centers. An authorized
telemarketing sales representative contacts the customer to underwrite, sell and
ultimately process new business.
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, Aetna P&C
began writing renewal policies. This marketing agreement provided for limits on
Personal Lines' obligation to write new and renewal business in certain
catastrophe-prone areas.
TAP believes that its focus on service and development of long-term
relationships with individual agents gives it a competitive advantage in the
Personal Lines market. TAP believes that its expense management practices,
including prompt and efficient claims handling and high level of automation,
allow it to offer a competitively priced product. In addition, TAP is leveraging
its service, claims handling and automation experience in the expansion of the
distribution of Personal Lines products through its alternative channels.
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. 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
catastrophe-prone areas, subject to restrictions imposed by insurance regulatory
authorities. In California, TAP introduced in 1996 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
29
<PAGE>
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 after the insurer begins using the new rate. Approximately one-half of
the states, including New York and New Jersey, require prior approval of most
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 premium
volume for the year ended December 31, 1997:
State % of Total
----- ----------
New York 22.0%
New Jersey 9.4
Texas 9.2
Pennsylvania 8.7
Florida 7.2
Connecticut 5.9
Massachusetts 5.7
Virginia 3.8
Georgia 3.2
All others (1) 24.9
---------
Total 100.0%
=========
- ----------
(1) No other single state accounted for 3.0% or more of the total direct written
premiums written in 1997 by TAP.
30
<PAGE>
Claim Administration
TAP employs approximately 8,200 claim adjusters, appraisers,
investigators, staff attorneys, system specialists and training, management and
support personnel in the claim department. These employees manage over 90% of
TAP's claims. Approved external vendors, such as claim adjusters, appraisers,
investigators and attorneys, are used only when the geographic location or
unique issues raised by a claim warrant such use. To be approved, these vendors
must have a proven record and have demonstrated cost-consciousness and relevant
technical skills.
TAP is dedicated to providing outstanding service standards to its
customers while seeking to reach optimal levels of losses and loss adjustment
expenses. During 1997, TAP reorganized the claim department to more effectively
meet these goals. The new structure features seven operating regions, and grants
to the regions wider authority to address the needs of local customers,
underwriters, agents and brokers across Commercial Lines and Personal Lines. In
addition, the home office and legal personnel created teams around technical
specialties to better support the regional operations. This streamlined
structure of the claim department permits TAP to maintain the economies of scale
of a larger, established company while enjoying the flexibility of a smaller
company that can more quickly respond to the needs of its customers,
underwriters, agents and brokers. The home office continues to monitor adherence
to claims policies and procedures, the adequacy of case reserves, loss and
expense controls and productivity and service standards.
In 1997, TAP also introduced TravComp, a workers' compensation claim and
medical management program that assists adjusters in promptly investigating,
validating or rejecting workers' compensation claims. New medical management
workstations also permit nurse professionals to access additional information
that supports TAP's emphasis on early return to work strategies for these
claims. These new technologies, together with better matching of professional
skills and authority to specific claim issues, have resulted in workers'
compensation cases closing faster and with lower losses and loss adjustment
expenses. A new, loss and analytical reporting tool made possible by the
implementation of the new workers' compensation process is now available to
employers.
Environmental, asbestos and cumulative injury claims are separately
managed by TAP's Special Liability Group. This group is comprised of 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.
31
<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, 1997, 1996 and 1995 the combined amounts of discount for TAP were $912
million, $1.012 billion and $1.206 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 12 of Notes to Consolidated Financial
Statements.
The following table sets forth the year-end reserves from 1987 through
1997 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 1987-1995 have not been restated
to include Aetna P&C. 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 SEC. 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 1987-1997 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 1987 included $4 million for a loss that is
finally settled in 1997 for $5 million, the $1 million deficiency (the excess of
the actual settlement of $5 million over the original
32
<PAGE>
estimate of $4 million) would be included in the cumulative deficiencies in each
of the years 1987-1996 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
1987-1997 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, the Company 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. Likewise, decreases in loss experience result in a
decrease in reserves, and an offsetting decrease in amounts recoverable from
insureds. These amounts recoverable mitigate the impact of the cumulative
deficiencies or redundancies 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 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: $31 million, $14 million and $(7) million for the
years 1997, 1996 and 1995 respectively.
33
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1987(a) 1988(a) 1989(a) 1990(a) 1991(a)
------- ------- ------- ------- -------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Reserves for Loss and Loss Adjustment
Expense Originally Estimated: $ 7,644 $ 8,116 $ 8,947 $ 9,239 $ 9,406
Cumulative amounts paid as of
One year later 2,376 2,147 2,430 2,419 2,135
Two years later 3,631 3,632 3,992 3,932 3,584
Three years later 4,648 4,706 5,095 4,993 4,594
Four years later 5,402 5,487 5,878 5,755 5,375
Five years later 5,978 6,080 6,479 6,351 5,851
Six years later 6,443 6,555 6,966 6,746 6,547
Seven years later 6,829 6,963 7,304 7,325
Eight years later 7,176 7,262 7,822
Nine years later 7,445 7,736
Ten years later 7,899
Reserves re-estimated as of
One year later 7,858 8,292 9,099 9,358 9,446
Two years later 8,051 8,497 9,220 9,470 9,755
Three years later 8,254 8,698 9,408 9,897 10,038
Four years later 8,497 8,912 9,953 10,325 10,154
Five years later 8,746 9,488 10,421 10,478 10,251
Six years later 9,333 9,970 10,616 10,614 10,495
Seven years later 9,813 10,150 10,755 10,870
Eight years later 9,966 10,306 11,019
Nine years later 10,131 10,598
Ten years later 10,457
Cumulative deficiency (redundancy) 2,813 2,482 2,072 1,631 1,089
Gross liability--end of year
Reinsurance recoverables
Net liability--end of year
Gross reestimated liability--latest
Reestimated reinsurance recoverables--latest
Net reestimated liability--latest
Gross cumulative deficiency (redundancy)
<CAPTION>
Year Ended December 31,
1992(a) 1993(a) 1994(a) 1995(a) 1996(b) 1997(b)
c
<S> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Reserves for Loss and Loss Adjustment
Expense Originally Estimated: $9,873 $10,190 $ 10,251 $ 10,102 $ 21,816 $ 21,406
Cumulative amounts paid as of
One year later 2,206 1,900 1,852 1,521 3,704
Two years later 3,554 3,221 2,888 2,809
Three years later 4,561 3,988 4,055
Four years later 5,160 4,941
Five years later 5,963
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Reserves re-estimated as of
One year later 10,013 10,151 9,942 9,848 21,345
Two years later 10,112 10,116 9,766 9,785
Three years later 10,142 9,990 9,851
Four years later 10,148 10,153
Five years later 10,364
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative deficiency (redundancy) 491 (37) (400) (317) (471)
Gross liability--end of year $ 13,805 $ 13,872 $ 14,715 $ 29,967 $ 29,343
Reinsurance recoverables 3,615 3,621 4,613 8,151 7,937
-------- -------- -------- -------- --------
Net liability--end of year $ 10,190 $ 10,251 $ 10,102 $ 21,816 $ 21,406
======== ======== ======== ======== ========
Gross reestimated liability--latest $ 13,862 $ 13,837 $ 14,381 $ 29,502
Reestimated reinsurance recoverables--latest 3,709 3,986 4,596 8,157
-------- -------- -------- --------
Net reestimated liability--latest $ 10,153 $ 9,851 $ 9,785 $ 21,345
======== ======== ======== ========
Gross cumulative deficiency (redundancy) $ 57 $ (35) $ (334) $ (465)
======== ======== ======== ========
</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 Loss Adjustment Expense recorded at the end of the
year, as originally estimated, less net reserves reestimated as of
subsequent years) relates only to losses recorded by Travelers P&C and
does not include reserve development recorded by 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
recorded by Aetna P&C.
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
34
<PAGE>
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 or expenses are not reflected in the statutory combined
ratio. The profitability of property and casualty insurance 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 ("long-tail"), 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 ("short-tail"). 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 generally accepted accounting principles ("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,
-------------------------
1997 1996 1995
---- ---- ----
Commercial Lines:
Loss and LAE ratio 78.4% 96.2% 80.6%
Underwriting expense ratio 30.6 32.7 24.4
Combined ratio before
policyholder dividends 109.0 128.9(1) 105.0
Combined ratio 111.0 129.6 106.3
Personal Lines:
Loss and LAE ratio 63.5 68.7 74.5
Underwriting expense ratio 28.7 28.9 29.9
Combined ratio 92.2 97.6(2) 104.4
Total:
Loss and LAE ratio 72.4 85.5 78.2
Underwriting expense ratio 29.9 31.3 26.4
Combined ratio before
policyholder dividends 102.3 116.8 104.6
Combined ratio 103.5 117.2 105.4
- ----------
(1) Includes the effect of charges associated with the Acquisition and also
includes statutory charges made to conform accounting policies and Company
strategies in connection with the Acquisition (but not for GAAP reporting
purposes due to purchase accounting). Excluding such charges, the combined
ratio before policyholder dividends was 110.0%.
(2) 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)
Year Ended December 31,
-----------------------
1997 1996 1995
------ ------ ------
(Dollars in millions)
Net written premiums $7,832 $7,343 $7,701
Capital and surplus 6,188 5,423 5,231
Ratio of net written premiums to capital
and surplus 1.27x 1.35x 1.47x
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 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
36
<PAGE>
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, 1997 were $1.119 billion, net of reinsurance of $74 million.
Approximately 17% of such loss and loss expense reserves (i.e., approximately
$192 million) were case reserves for resolved claims. The balance, approximately
83% of the net aggregate reserve (i.e., approximately $927 million), is carried
in a bulk reserve and includes incurred but not 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 often 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 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 TAP. TAP'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 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 each 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 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 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.
37
<PAGE>
The property and casualty insurance industry does not have a standard
method of calculating claim activity for environmental losses. Generally for
environmental (Superfund remediation type) claims, TAP 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. TAP adheres to this
method of calculating claim activity on all environmental-related claims,
whether such claims are tendered on primary, excess or umbrella policies. Since
the implementation of the claim system conversion in 1997, TAP's method of
establishing claims in the foregoing manner now applies to claims tendered under
the Travelers P&C and Aetna P&C policies.
In addition, TAP establishes claim files for bodily injury or property
damage claims brought by individual claimants who allege injury or damage as a
result of the discharge of wastes or pollutants. As it pertains to such claims
tendered on policies issued by Travelers P&C, TAP establishes a claim file on a
per claim, per insured, per site basis. For example, if one hundred claimants
file a lawsuit against five policyholders alleging bodily injury and property
damage as a result of the discharge of wastes or pollutants, one thousand claims
(five hundred for the bodily injury claims and five hundred for the property
damage claims) would be established.
As it pertains to the bodily injury and property damage claims tendered on
Aetna P&C policies, TAP's claim system conversion has not been completed to
permit the establishment of such claims in a manner consistent with
establishment of Travelers P&C bodily injury and property damage claims. As it
pertains to such claims tendered on policies issued by Aetna P&C, TAP currently
establishes a claim file on a per insured basis, per site basis. For example, if
one hundred claimants file a lawsuit against five policyholders alleging bodily
injury and property damage as a result of the discharge of wastes or pollutants,
five claims would be established for all the bodily injury claims and five
claims would be established for all of the property damage claims.
As of December 31, 1997, calculated as described above, TAP had
approximately 40,300 pending environmental-related claims tendered by 1,400
active policyholders. Of the total pending environmental-related claims, 29,800
claims relate to Travelers P&C policies tendered by 569 policyholders and 10,500
claims relate to Aetna P&C policies tendered by 961 policyholders. Approximately
130 of these Aetna P&C policyholders are also included in the 569 Travelers P&C
policyholders' count. 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.
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 position is
appropriate. As of December 31, 1997, TAP, for approximately
38
<PAGE>
$1.16 billion, has resolved the environmental liabilities presented by 3,931 of
the 5,331 policyholders who have tendered environmental claims to TAP. This
resolution comprises 74% of the policyholders who have tendered such claims. TAP
has reserves of approximately $800 million included in its bulk reserve relating
to the remaining 1,400 policyholders (26% 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, 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. TAP continues to receive this type
of asbestos claim.
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, 1997, asbestos claims reserves of TAP were $1.114 billion,
net of reinsurance of $249 million. Approximately 24% of the net aggregate
reserve (i.e., approximately $266 million) is for pending asbestos claims. The
balance, approximately 76% (i.e., approximately
39
<PAGE>
$848 million), of the net asbestos reserve represents incurred but not reported
losses for which TAP has not received any specific claims.
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 and past ceded experience. 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, 1997 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
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 to potentially harmful
products or substances. Such potentially harmful products or substances include,
but are not
40
<PAGE>
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, an 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.
Prior to the Acquisition, 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 of
1996, 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, 1997, CIOTA claims reserves of TAP were $1.088 billion,
net of reinsurance of $432 million. Approximately 18% of the net aggregate
reserve (i.e., approximately $195 million) is for pending CIOTA claims. The
balance, approximately 82% (i.e., approximately $893 million), of the net CIOTA
reserve represents incurred but not reported losses for which TAP has not
received any specific claims.
41
<PAGE>
Insurance Pools
Most of TAP's insurance subsidiaries are members of one of two separate
intercompany property and casualty reinsurance pooling arrangements: the
Travelers Property Casualty 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. Travelers
Casualty and Surety Company of America ("Travelers C&S of America") does not
participate in either pool and is dedicated to the Bond Specialty business.
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" and together with TIC, "Travelers
Life and Annuity") and the Primerica Financial Services group of companies
("PFS"), including Primerica Life Insurance Company ("Primerica Life"). With
$50.0 billion of assets and $422 billion of life insurance in force at December
31, 1997, the Company believes that TIC, TLAC and Primerica Life together
constitute one of the largest stock life insurance groups in the United States
as measured by these criteria. For information concerning the Company's
credit-related insurance businesses, see "Consumer Finance Services."
Primerica Financial Services
Principal Markets and Methods of Distribution
The business operations of PFS involve the sale of life insurance, mutual
funds and other financial products. PFS consists of an affiliated group of
companies engaged in (i) the underwriting and administration of individual term
life insurance throughout the United States and in Canada, (ii) securities
brokerage, consisting primarily of mutual fund sales, and (iii) the sale of
other products approved by the Company, including personal lines
property-casualty insurance (TRAVELERS
42
<PAGE>
SECURE(R)) of TAP and mortgage and personal loans ($.M.A.R.T. loan(R) and
$.A.F.E.(R) loan) underwritten by CCC. The PFS sales force is composed of
approximately 80,000 independent agents. A great majority of the domestic
licensed sales force works on a part-time basis.
The PFS sales force is one of the principal distribution arms for the
Company's cross-marketing efforts. Sales of Salomon Smith Barney funds,
predominantly The Concert Series(R), by the PFS sales force were $690.2 million
and $558.1 million in 1997 and 1996, respectively. The PFS sales force is also
the exclusive distributor of Concert Investment Series(sm), an additional group
of mutual funds advised by Salomon Smith Barney. Within PrimElite(TM), a
variable annuity product offered by the PFS sales force, $214.9 million and $
44.9 million were invested in Salomon Smith Barney funds in 1997 and 1996,
respectively. Beginning in 1998, the PrimElite(TM) product will be underwritten
by Travelers Life and Annuity. In addition, approximately 8,700 members of the
PFS sales force are now licensed to sell automobile and homeowners insurance
products under the TRAVELERS SECURE(R) name. This program, which began in 1994
and continues to experience growth in applications and policies, is now
available in 39 states. Finally, the $.M.A.R.T. loan(R) and $.A.F.E.(R) loan
programs, under which members of the PFS sales force solicit applications for
mortgage and personal loans underwritten by CCC, had net receivables outstanding
of over $2.2 billion and $1.5 billion at December 31, 1997 and 1996,
respectively.
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 law
insurance, primarily in New York, as well as direct response student term life
insurance nationwide. Primerica Life and its subsidiaries together are licensed
to sell and market term life insurance in all 50 states, the District of
Columbia, Canada, Puerto Rico, Guam, the U.S. Virgin Islands and the Northern
Mariana Islands.
For information concerning PFS Investments Inc. ("PFS Investments"), see
"-- Mutual Funds and Asset Management" below.
Premium revenues, net of reinsurance, for PFS for the years ended December
31, 1997, 1996 and 1995 were $1.035 billion, $1.030 billion and $1.012 billion,
respectively. See "Insurance Services - General -- Reinsurance" for a discussion
of reinsurance.
In 1996, PFS began utilizing the Financial Needs Analysis ("FNA"), a
diagnostic tool that enhances its ability to address client needs. During 1997,
more than 483,000 FNAs were submitted.
43
<PAGE>
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 1995-1997.
Year Ended December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
(In millions of dollars, except as noted)
In force beginning of year $ 359,878 $ 348,169 $ 334,972
Additions 52,598 52,039 53,045
Terminations(1) (42,605) (40,330) (39,848)
----------- ----------- -----------
In force end of year $ 369,871 $ 359,878 $ 348,169
=========== =========== ===========
The amounts in force at end of
year are before reinsurance ceded
in the following amounts $ 152,899 $ 134,330 $ 117,647
=========== =========== ===========
At end of year:
Number of policies in force
PFS 2,146,200 2,141,800 2,115,600
NBL other individual lines 427,908 418,437 398,988
Average size of policy
in force (in dollars)
PFS $ 169,093 $ 164,694 $ 161,125
NBL other individual lines 16,264 17,055 18,154
- ----------
(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 1997, 1996 and 1995, were 3.2%, 5.9% 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, 1997, 1996 and 1995, PFS' total mutual fund sales were $2.689 billion,
$2.327 billion and $1.551 billion, respectively. The PFS sales force began
marketing Smith Barney mutual funds through a separate distribution arrangement
with PFS Distributors, Inc. in mid-1995 and in March 1996 began selling The
Concert Series(R). The Concert Series(R) 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
26%, 24% and 2%, respectively, of PFS' total mutual fund sales in 1997, 1996 and
1995. At December 31, 1997, approximately 27,500 independent agent members of
the PFS sales force (including approximately 3,000 licensed in Canada only) were
also independent registered securities representatives of PFS Investments and/or
PFSL Investments Canada Ltd.
44
<PAGE>
PFS Investments is also the exclusive retail distributor of Concert
Investment Series(sm) mutual funds (formerly Common Sense(R) Trust mutual
funds), and certain of the Company's subsidiaries provide underwriting, transfer
agency and custodial services to these funds. Sales of shares of Concert
Investment Series(sm) accounted for approximately 23%, 27% and 39%,
respectively, of total mutual funds sales by PFS for 1997, 1996 and 1995. In
December 1994, the Company sold American Capital Management & Research, Inc., a
mutual fund company and also the co-sponsor of Concert Investment Series(sm), to
The Van Kampen Merritt Companies, Inc. ("VKM"). In December 1997, the Company
repurchased the advisory contracts for this series of mutual funds from an
affiliate of VKM.
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, indexed 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. 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 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.
45
<PAGE>
The following table sets forth written premiums, net of reinsurance, and
deposits for the Travelers Life and Annuity unit.
Premiums and Deposits
Year Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In millions)
Premiums
Individual life $ 116 $ 122 $ 124
Long-term care 184 128 88
Individual accident and health(1) 16 24 200
Payout annuities 229 76 90
------ ------ ------
Total premiums 545 350 502
------ ------ ------
Deposits
Universal life insurance 172 169 149
Annuities
Individual fixed accumulation 779 621 692
Individual variable accumulation(2) 1,775 1,370 956
Payout annuities 102 86 88
Guaranteed investment contracts 1,816 764 681
Group separate accounts and managed funds(3) 557 276 362
Other fixed funds 68 186 115
Corporate-owned life insurance(4) 7 30 91
------ ------ ------
Total deposits 5,276 3,502 3,134
------ ------ ------
Total premiums and deposits $5,821 $3,852 $3,636
====== ====== ======
- ----------
(1) The decline in 1996 reflects 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 Salomon Smith Barney
distribution network and other distribution and product development
initiatives.
(3) The 1997, 1996 and 1995 deposits include $353 million, $146 million and
$200 million, respectively, of deposits relating to the transfer in house
of pension fund assets previously managed externally.
(4) TIC is not currently marketing corporate-owned life insurance. 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 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 in 47 states and the District of
Columbia to sell and market life insurance and is licensed in 46 states and the
District of Columbia to sell and market variable annuity products.
46
<PAGE>
Individual products are primarily marketed through The Copeland Companies
("Copeland"), an indirect wholly owned subsidiary of TIC, Salomon Smith Barney
Financial Consultants and a nationwide network of 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 41% of total individual deferred annuity production
in 1997 and approximately 39% in each of 1996 and 1995. Copeland account
executives also sell Smith Barney mutual funds. Salomon Smith Barney's Financial
Consultants distribute Travelers Life and Annuity's non-qualified deferred
annuities and individual life and long-term care products. Salomon Smith
Barney's share of Travelers Life and Annuity's total individual deferred annuity
production was 38% in each of 1997 and 1996 and 33% in 1995. The nationwide
network of independent agencies sold the majority of the individual life and
long term care business in each of 1997, 1996 and 1995 and accounted for 21%,
23% and 27%, respectively, of individual annuity premiums and deposits in each
of those years. 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 been 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
including Travelers Net Plus, a long-term care specialty distributor that
markets primarily through targeted direct mailing, and TowerMark, a joint
venture focused on recruiting and supporting agencies serving high-end estate
planning customers. In March 1997, Copeland further broadened its distribution
channels through its acquisition of Donald F. Smith & Associates, a regional
provider of tax-sheltered annuity programs in the healthcare marketplace.
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 and services
also reflects charges for expenses, mortality, profit and other relevant
financial factors such as credit risk.
47
<PAGE>
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 1995 through 1997.
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(In millions of dollars, except as noted)
In force beginning of year $ 50,409 $ 49,179 $ 48,998
Additions 6,476 6,566 6,153
Terminations(1) (5,240) (5,336) (5,972)
--------- --------- ---------
In force end of year $ 51,645 $ 50,409 $ 49,179
========= ========= =========
The amounts in force at end of
year are before reinsurance ceded
in the following amounts $ 22,863 $ 19,474 $ 16,806
========= ========= =========
At end of year:
Number of policies in force(2) 528,273 545,682 563,286
Average size of policy
in force (in dollars) $ 97,761 $ 92,371 $ 87,307
- ----------
(1) 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.
(2) The declines reflect the gradual run-off of old whole life policies
written several years ago at relatively low levels of per policy insurance
coverage. This was partially 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.
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.
48
<PAGE>
AIDS-related claims paid by Travelers Life and Annuity in 1997, 1996 and
1995 were 0.3%, 0.7% and 1.6%, respectively, as a percentage of total life
claims paid, and 0.3%, 0.4% and 0.3%, 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. Rating agencies 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.
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<PAGE>
The following table summarizes the current claims-paying and financial
strength ratings of the Company's subsidiaries, including Travelers C&S of
America, and insurance pools by A.M. Best, Duff & Phelps 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+ (2nd of 15) AA (3rd of 18) Aa3 (4th of 19) AA- (4th of 18)
TLAC A+ (2nd of 15) AA (3rd of 18) Aa3 (4th 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 Property Casualty
pool(1) A (3rd of 15) AA- (4th of 18) Aa3 (4th of 19) A+ (5th of 18)
Gulf pool(2) A+ (2nd of 15) - - AA (3rd of 18)
Travelers C&S of America A+ (2nd of 15) AA- (4th of 18) Aa3 (4th of 19) A+ (5th of 18)
</TABLE>
- ----------
(1) The Travelers Property Casualty pool consists of The Travelers Indemnity
Company, Travelers Casualty and Surety Company, The Phoenix Insurance
Company, The Standard Fire Insurance Company, Travelers Casualty and
Surety Company of Illinois, Farmington Casualty Company, The Travelers
Indemnity Company of Connecticut, The Automobile Insurance Company of
Hartford, Connecticut, The Charter Oak Fire Insurance Company, The
Travelers Indemnity Company of America, The Travelers Indemnity Company of
Missouri, Travelers Casualty Company of Connecticut, Travelers Commercial
Insurance Company, The Travelers Indemnity Company of Illinois, Travelers
Property Casualty Insurance Company, TravCo Insurance Company, The
Travelers Home and Marine Insurance Company, Travelers Personal Security
Insurance Company, Travelers Property Casualty Insurance Company of
Illinois and Travelers Excess and Surplus Lines Company.
(2) The Gulf pool consists of Gulf Insurance Company, Gulf Insurance Company
U.K. Limited, 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 capital
resources. 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 involves credit risk and is subject 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 13 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
50
<PAGE>
each policy reinsured is separately negotiated; (ii) treaty reinsurance, in
which reinsurance is provided for a specified type or category of risks; and
(iii) catastrophe reinsurance, in which TAP is indemnified for an amount of loss
in excess of a specified retention with respect to losses resulting from a
catastrophic event.
The following presents TAP's top five reinsurers (excluding Lloyd's of
London ("Lloyd's") which is discussed in more detail below) by reinsurance
recoverable at December 31, 1997 (in millions):
<TABLE>
<CAPTION>
Reinsurance
Reinsurer Recoverable A.M. Best Rating of Reinsurer
--------- ----------- -----------------------------
<S> <C> <C>
General Reinsurance Corporation $444 A++ highest of 15 ratings
American Re-Insurance Company 428 A+ 2nd highest of 15 ratings
Executive Risk Indemnity Inc. 182 A 3rd highest of 15 ratings
Employers Reinsurance Corporation 97 A++ highest of 15 ratings
New England Reinsurance Corporation 77 NR-3 rating not applicable because
(Subsidiary of The Hartford Insurance Group) company is in run-off
</TABLE>
As of December 31, 1997, TAP had ceded insurance losses and loss
adjustment expenses to Lloyd's of $352 million. In 1996, Lloyd's restructured
its operations with respect to claims for years prior to 1993 and reinsured
these into Equitas Limited ("Equitas"). Approximately $266 million of TAP's
Lloyd's reinsurance recoverable at year end relates to Equitas liabilities and
is currently unrated. The remaining recoverables of $86 million is from Lloyd's
continuing market which was recently rated A (3rd highest of 15 ratings) by A.M.
Best, whose ratings may be revised or withdrawn at any time.
The impact of the Lloyd's restructuring on the 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, 1997 was $15 million per risk.
At December 31, 1997, TAP had $8.2 billion in reinsurance recoverables. Of
this amount, $3.4 billion is for pools and associations that relate primarily to
workers' compensation service business and have the strength of the
participating insurance companies on a joint basis supporting these cessions.
Also, $1.3 billion is attributable to structured settlements relating primarily
to personal injury claims for which TAP has purchased an annuity and remains
contingently liable in the event of a default by the company issuing the
annuity. Of the remaining $3.5 billion ceded to reinsurers at December 31, 1997,
$755 million was environmental, asbestos and cumulative injury-related and the
remainder principally reflects reinsurance in support of ongoing business. In
addition, at December 31, 1997, $397 million of reinsurance recoverables were
collateralized by letters of credit.
51
<PAGE>
Net Retention Policy. The descriptions below relate to reinsurance
arrangements of TAP in effect at January 1, 1998. For third-party liability,
including automobile no-fault, the reinsurance agreements used by Commercial
Accounts and Select Accounts limit the net retention to a maximum of $4 million
per insured, per occurrence. Gulf Specialty utilizes various reinsurance
mechanisms and has limited its net retention to $4.5 million per risk for any
line of business. For commercial property insurance, there is a $5 million
maximum retention per risk with 100% reinsurance coverage for risks with higher
limits. The reinsurance agreement in place for workers' compensation policies
written by Commercial Accounts and Select Accounts and some segments of
Alternative Markets and Gulf Specialty covers 100% of each loss between $1
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. For
personal property insurance, there is a $6 million maximum retention per risk.
For directors' and officers' liability, employment practices liability and
blended insurance, Bond Specialty retains up to $5 million per risk. For surety
protection, Bond Specialty has reinsurance coverage for 95% of up to $50 million
of liability in excess of $50 million of liability. In addition, Bond
Specialty's accident year results are protected by an aggregate excess of loss
treaty that provides 100% of approximately $53 million of reinsurance coverage
in excess of a $122 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 40% of total losses between $250
million and $750 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 40% of losses between $250 million
and $750 million.
For commercial property insurance sold through Commercial Accounts and
certain National Accounts, 10% of all losses are reinsured in 1998, subject to
an occurrence limitation of $200 million. For Personal Lines homeowners
insurance, in 1998, 25% of losses in states along the East Coast are reinsured
up to a maximum recovery of $187 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.
For the accumulation of net casualty losses arising out of one occurrence,
a casualty clash agreement covers 95% of losses between $10 million and $50
million.
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
52
<PAGE>
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. However, the Company believes
that it is not likely that the Company's recovery of less than contracted
amounts from FHCF would have a material adverse effect on the Company's
financial condition or liquidity.
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 1997, new universal life business was
reinsured under an 80%/20% quota share reinsurance program and new term life
business was reinsured under a 90%/10% quota share reinsurance program.
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 1,140 property-casualty organizations in the United States,
comprised of approximately 2,400 property-casualty companies. Of those
organizations, the top 200 account for over 90% of the consolidated industry's
total net written premiums. 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 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.
53
<PAGE>
The National Accounts market is highly competitive. Competition is based
primarily on price and breadth of products and services. 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 25% of the market in 1997.
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 claim and risk management service. The Company
utilizes its specialized underwriters, engineers, auditors and claim handlers
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 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, a nationwide network of local underwriting
and industry experts 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 Specialty's
products to customers of National Accounts, Commercial Accounts, Select Accounts
and through other Company units provides further competitive advantages for the
Company.
54
<PAGE>
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
knowledge of the local marketplace and their relationship with local independent
agents. 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 price and the level of service, including claims handling, as
well as the 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 has broadened
its distribution channels for Personal Lines products to include marketing
through the PFS sales force, marketing to sponsoring organizations including
employee and affinity groups and establishment of joint marketing arrangements
with other insurers. The Company believes that its continued focus on expense
management practices enables it to price its products competitively in all of
its distribution channels.
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
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.
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 SEC, and in all
50 states, the District of Columbia, Puerto Rico, the Northern Mariana Islands,
the U.S. Virgin Islands and Guam. Tower Square Securities is registered as a
broker-dealer with the SEC, 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 SEC, 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
55
<PAGE>
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 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 in 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 the use of credit information in underwriting as well as other
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.
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 $551 million of statutory surplus is
available in 1998 for dividends from TIC to its parent without prior approval of
the Connecticut Insurance Department.
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Dividend payments to TAP from its insurance subsidiaries are limited to $805
million in 1998 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 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 property and casualty 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. Earned premiums related to such pools and assigned
risks for the Company were $226 million, $379 million and $315 million in 1997,
1996 and 1995, respectively. The related underwriting losses for the Company
were $16 million, $39 million and $152 million in 1997, 1996 and 1995,
respectively.
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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
insurance 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
California, Connecticut, Florida, Illinois, Indiana, Massachusetts, 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
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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.
In each of the last three years certain of the Company's insurance
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, 1997.
For 1997, Travelers Indemnity was outside the usual range for the
liabilities to liquid assets ratio. Travelers Indemnity is the lead company for
the Travelers Property Casualty pool and is also the parent of 19 insurance
companies and several other non-insurance entities. As a result, this ratio is
distorted because all of the liabilities are included in the calculation while
Travelers Indemnity's significant investment in affiliates, which increased in
1997, is excluded from liquid assets. For 1996, both the two-year overall
operating ratio and the two-year reserve development to surplus ratios were
outside the usual range for Travelers 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 Travelers C&S of America, both as
a result of a 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
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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.
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, 1997, 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, 1997, 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.
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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 and on insurance products, some of which are also
securities under the federal securities laws. 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; proposals regarding natural disaster protection,
tort reform (including limits to product liability lawsuits) and the use of
credit history; and the enforcement of territorial underwriting in Personal
Lines. 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.
The Budget Proposal, as described in "Investment Services -- Regulation,"
may also adversely impact the Company's insurance businesses.
It is not possible to predict whether any of the proposed legislation
discussed above will be enacted, what form such legislation might take when
enacted, or the potential effects of such legislation on the Company and its
competitors.
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 SEC.
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, mortgage
loans, real estate and certain other investments.
At December 31, 1997, the investment holdings of the companies included in
the insurance services segments were composed primarily of fixed maturities. At
December 31, 1997, approximately 96% 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 6 of Notes to Consolidated Financial
Statements and the discussion
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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-backed 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 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.
Joint Venture
In October 1997, TIC and Tishman Speyer Properties ("Tishman"), a
worldwide real estate owner, developer and manager, formed a joint real estate
venture with an initial equity commitment of $792 million. TIC and certain of
its affiliates committed $420 million in real estate equity and $100 million in
cash while Tishman committed $272 million in properties and cash. Both companies
are serving as asset managers for the venture and Tishman is primarily
responsible for the venture's real estate acquisition and development efforts.
Mortgage Loans and Real Estate Held for Sale
At December 31, 1997, 1996 and 1995, the mortgage loan portfolio of the
businesses included in the Company's insurance services segments consisted of
approximately $3.6 billion, $3.8 billion and $4.0 billion, respectively. At
December 31, 1997, 1996 and 1995, the real estate held for sale portfolio
consisted of approximately $237 million, $459 million and $321 million,
respectively. The Company has continued a program of disposing of its
underperforming real estate investments, 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 underperforming real
estate and certain mortgage loans has mitigated the negative impact that these
underperforming portfolios have had on the Company's investment income. As a
result of this strategy and improved real estate markets, the
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underperforming loans have declined to less than 1% of the portfolio. At
December 31, 1997, 1996 and 1995, approximately $19 million, $91 million and
$252 million or 0.5%, 2% and 6%, 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, 1997 by contractual maturity, see Note 6 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 $770 million in
1997 and $1.0 billion in each of 1996 and 1995. 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 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, 1997, 1996 and 1995. For information summarizing
the geographic distribution of the mortgage loan portfolio and real estate
assets, see Note 6 of Notes to Consolidated Financial Statements.
Property Type: Mortgage Loans Real Estate
- -------------- -------------- -----------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
(In millions)
Commercial:
Office $1,751 $1,698 $1,551 $ 45 $ 190 $ 177
Apartment 317 467 654 24 68 8
Hotel 208 244 594 81 63 47
Retail 341 518 449 48 60 42
Industrial 114 158 181 1 31 9
Other 54 41 45 27 34 26
------ ------ ------ ------ ------ ------
Total commercial 2,785 3,126 3,474 226 446 309
Agricultural 777 686 574 11 13 12
------ ------ ------ ------ ------ ------
Total $3,562 $3,812 $4,048 $ 237 $ 459 $ 321
====== ====== ====== ====== ====== ======
Derivatives
See the section entitled "End User Activity" in Note 20 of Notes to
Consolidated Financial Statements for a discussion of the policies and
transactions related to the derivatives activity of the Company.
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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 June 1996, this segment also includes the
Company's interest in RCM Capital Management, a California Limited Partnership.
In May 1997, SSBH sold all of the outstanding stock of Basis Petroleum,
Inc. ("Basis") to Valero Energy Corporation. Basis owned and operated three oil
refineries in the U.S. Gulf Coast region. Basis is presented as a discontinued
operation in the Company's Consolidated Financial Statements. The loss on sale
was recorded in the fourth quarter of 1996. See Note 2 of Notes to Consolidated
Financial Statements.
In January 1995, the Company sold its group life and related businesses to
Metropolitan Life Insurance Company ("MetLife") for $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. In
January 1995, The MetraHealth Companies, Inc. was formed as a joint venture of
the group medical insurance businesses of the Company and MetLife and was
subsequently sold in October 1995. 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, 1997, the Company had approximately 65,600 full-time and
3,300 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 11 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 14 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. Ages are
given as of March 4, 1998.
Officer
Name Age Positions Since*
- ---- --- --------- ------
Sanford I. Weill 64 Chairman of the Board and Chief 1986
Executive Officer of the Company
James Dimon 41 President and Chief Operating Officer of 1986
the Company; Co-Chairman and Co-Chief
Executive Officer of Salomon Smith Barney
Michael A. Carpenter 50 Vice Chairman of the Company; 1995
Chairman, President and Chief Executive
Officer of TIC and TLAC
Thomas W. Jones 48 Vice Chairman of the Company; 1997
Chief Executive Officer of the
Company's Asset Management division
Jeffrey B. Lane 55 Vice Chairman of the Company 1992
Robert I. Lipp 59 Vice Chairman of the Company; Chairman 1986
of the Board, President and Chief
Executive Officer of TAP
Jon C. Madonna 54 Vice Chairman of the Company; 1997
Vice Chairman of TAP
Deryck C. Maughan 50 Vice Chairman of the Company; 1997
Co-Chairman and Co-Chief Executive
Officer of Salomon Smith Barney
Joseph J. Plumeri II 54 Vice Chairman of the Company; Chief 1993
Executive Officer of PFS
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Officer
Name Age Positions Since*
- ---- --- --------- ------
Robert B. Willumstad 52 Vice Chairman of the Company; Chairman 1993
and Chief Executive Officer of CCC
Irwin Ettinger 59 Executive Vice President and Chief 1987
Accounting Officer of the Company
Charles O. Prince, III 48 Executive Vice President, General Counsel 1986
and Secretary of the Company
Steven D. Black 45 Vice Chairman of Salomon Smith Barney 1996
Charles J. Clarke 62 Vice Chairman of TAP; Chairman-- 1995
Commercial Lines of TAP
Donald R. Cooper 57 Chief Actuary of the Company 1995
Peter M. Dawkins 59 Chairman, President and Chief Executive 1992
Officer of Travelers Group Diversified
Distribution Services, Inc.
Jay S. Fishman 45 Senior Vice President of the Company; 1991
Vice Chairman of TAP and President and
Chief Executive Officer--Commercial Lines
of TAP
Marjorie Magner 48 President and Chief Operating Officer 1996
of CCC
Heidi G. Miller 44 Senior Vice President and Chief Financial 1992
Officer of the Company
Marc P. Weill 41 Senior Vice President and Chief 1991
Investment Officer of the Company
- ----------
* Indicates the earlier of the date that such officer became an officer of
the Company or the Company's predecessor and the 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 a member of the Business Roundtable and the Business Council. 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, Chairman of the Board of Overseers of Cornell University
Medical College and a member of the Joint Board of
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New York Hospital - Cornell University Medical College. He is on the Board of
Overseers of Memorial Sloan-Kettering Cancer Center and is a director of The New
York and Presbyterian Hospitals Care Network, Inc. He is a member of Cornell
University's Johnson Graduate School of Management Advisory Board and a Board of
Trustees Fellow Emeritus of Cornell University. 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.
Mr. Weill is a member of the United States Treasury Department's Working Group
on Child Care.
Mr. Dimon has been a director of the Company since September 1991. He is
President and Chief Operating Officer of the Company. Since the Company's
acquisition of Salomon in November 1997, he has also served as Co-Chairman of
the Board and Co-Chief Executive Officer of Salomon Smith Barney. From January
1996 until November 1997, Mr. Dimon was Chairman of the Board and Chief
Executive Officer of Smith Barney. Mr. Dimon has been a director of TAP since
1996. Mr. Dimon joined the Company in 1986 and since such time has served the
Company and certain of its subsidiaries in various positions of increasing
responsibility. From 1982 to 1985, Mr. Dimon 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, the National Association of Securities Dealers,
Inc. and Tricon Global Restaurants, Inc. and a member of the Nominating
Committee of the New York Stock Exchange, Inc.
Mr. Carpenter serves as Chairman, Chief Executive Officer and President of
TIC and TLAC and has been a Vice Chairman of the Company since February 1998.
From July 1995 until February 1998 he served as an Executive Vice President of
the Company. From January 1989 to June 1994, Mr. Carpenter was Chairman of the
Board, President and Chief Executive Officer of Kidder, Peabody Group, Inc., an
investment banking and brokerage company that was a wholly owned subsidiary of
General Electric Company. Mr. Carpenter is a director of General Signal
Corporation, ProSource Inc. and the New York City Investment Fund.
Mr. Jones has been a director of the Company since April 1997 and is a
Vice Chairman of the Company. He is also the Chief Executive Officer of the
Company's Asset Management division. He was, from January 1995 until August
1997, Vice Chairman and a director of the Teachers Insurance and Annuity
Association - College Retirement Equities Fund ("TIAA-CREF"). From January 1993
to August 1997, he was President and Chief Operating Officer of TIAA-CREF. From
1989 to 1993, Mr. Jones was Executive Vice President and Chief Financial Officer
of TIAA-CREF. Mr. Jones is a director of Freddie Mac (Federal Home Loan Mortgage
Corp.) and Thomas & Betts Corporation and a director and Deputy Chairman of the
Federal Reserve Bank of New York. He is a trustee of Cornell University,
Brookings Institution and Educational Broadcasting Corporation (Thirteen/WNET).
Mr. Lane has been a Vice Chairman of the Company since January 1996. He
has served as a director of Smith Barney from January 1991 through March 1996
and as a director of SB Holdings from November 1993. Mr. Lane served as Vice
Chairman of Smith Barney from January 1991 through January 1996 and as Vice
Chairman of SB Holdings from November 1993 through January
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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. Maughan has been a director and a Vice Chairman of the Company since
December 1997. He is also Co-Chairman of the Board and Co-Chief Executive
Officer of Salomon Smith Barney. He was, until the consummation of the Merger in
November 1997, Chairman and Chief Executive Officer of SBI and an Executive Vice
President of Salomon. He had served in such capacities since 1992 and 1993,
respectively. Mr. Maughan is Vice Chairman of the New York Stock Exchange, Inc.
He is a member of the Trilateral Commission, a trustee of Carnegie Hall, a
director of the New York City Investment Fund and a member of the Stanford
University Graduate School of Business Advisory Council.
Mr. Plumeri has been Chairman and Chief Executive Officer of PFS since
April 1996 and has been a Vice Chairman of the Company since July 1994. He
joined the Company in August 1993, serving as President of Smith Barney from
that time through July 1994. Mr. Plumeri had worked for Shearson Lehman Brothers
Inc. or its predecessors for over 25 years, in various positions of increasing
responsibility, until Smith Barney 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. Willumstad has been Chairman and Chief Executive Officer of CCC since
June 1993 and has been with that company since 1987. In February 1998, he also
became a Vice Chairman of the Company. From 1989 until June 1993, 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.
68
<PAGE>
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 office.
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 and a director of Salomon Smith Barney
since November 1997 and Vice Chairman of Smith Barney since July 1993. He was
Vice Chairman of SB Holdings from November 1993 until November 1997 and was
Chief Operating Officer of SB Holdings from January 1996 until November 1997.
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 a Vice Chairman of TAP since January 1998. He has been
Chairman of Commercial Lines since 1990, and served as Chief Executive Officer
of TAP's Commercial Lines from January 1996 through January 1998. Prior thereto,
Mr. Clarke was Senior Vice President of the National Accounts and the
Reinsurance business units of Travelers P&C. 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.
Mr. Fishman was named Chief Executive Officer of TAP's Commercial Lines in
January 1998, and has been President of TAP's Commercial Lines since October
1996. From October 1996 through January 1998, he also served as Chief Operating
Officer of TAP's Commercial Lines. Mr. Fishman has been a Vice Chairman of TAP
since January 1996, and from January 1996 through January 1998 he was TAP's
Chief Administrative Officer. Mr. Fishman has also served as Vice Chairman of
The Travelers Insurance Group Inc. since September 1995, and has been Chief
Financial Officer and Chief Administrative Officer of that company since
December 1993 and June 1996, respectively. Mr. Fishman has also served as Senior
Vice President of the Company since October 1991, and served as Treasurer of the
Company from 1991 to December 1993. From 1989 to 1991, he held various other
positions with the Company and its subsidiaries.
69
<PAGE>
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. 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 and
Chairman of the Board 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.
Item 2. PROPERTIES.
The Company's executive offices are located in New York City. Offices and
other properties used by the Company's subsidiaries are located throughout the
United States. Several subsidiaries have offices located in foreign countries.
Most office locations and other properties are leased on terms and for durations
which are reflective of commercial standards in the communities where such
offices and other properties are located.
As of December 31, 1997, leasehold interests of the Company's
property-casualty insurance subsidiaries included a total of approximately
5,890,000 square feet of office space at about 248 locations throughout the
United States. In addition, TIC owns buildings containing approximately
1,500,000 square feet of office space located in Hartford, Connecticut and
vicinity, serving as the home office for TIC and TAP, and TAP leases
approximately 1,030,000 square feet of such office space under a ten-year lease
that expires on April 1, 2006. TAP also rents from Aetna approximately 373,000
square feet of office space at CityPlace, located in Hartford, Connecticut,
under an eight-year sublease that expires in 2004. The Company's life insurance
units also lease approximately 656,000 square feet of office space at about 16
locations throughout the United States, under various leases. TIC and/or TIGI
lease two other buildings in Hartford, Connecticut with an aggregate of
approximately 707,500 square feet, most of which is subleased to third parties.
TIC also owns a building in Norcross, Georgia that is occupied by its
information systems department.
Salomon Smith Barney owns two office buildings in New York City, which
total approximately 627,000 square feet. Salomon Smith Barney also owns an
office building in Rutherford, New Jersey, totaling approximately 249,000 square
feet and an office building in Tampa, Florida, totaling approximately 135,000
square feet. In addition, Salomon Smith Barney owns an office building in
London, England, that contains approximately 212,760 net square feet. The
building is subject to a mortgage that becomes due in 2007, but which may be
prepaid without
70
<PAGE>
premium at any time with notice. Most of Salomon Smith Barney's other offices
are located in leased premises, the leases for which expire at various times.
Salomon Smith Barney leases two buildings located at 388 and 390 Greenwich
Street in New York City and totaling approximately 2,300,000 square feet,
through 1999. Salomon Smith Barney expects to extend the lease term to 2003.
Salomon Smith Barney has a purchase option with respect to these properties.
Salomon Smith Barney also leases approximately 1,018,000 square feet of office
space at Seven World Trade Center in New York City, through 2010.
A few other offices and certain warehouse space are owned, none of which
is material to the Company's financial condition or operations. The Company owns
26 acres of land in North Castle, New York, on which it has constructed an
executive conference and planning center.
The Company believes its properties are adequate and suitable for its
business as presently conducted and are adequately maintained. For further
information concerning leases, see Note 19 of Notes to Consolidated Financial
Statements.
Item 3. LEGAL PROCEEDINGS.
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which the Company or
its subsidiaries is a party or to which any of their property is subject.
Certain additional matters may be described in the periodic reports filed under
the Exchange Act by certain subsidiaries of the Company. As a result of the
Company's acquisition of Salomon in November 1997, certain matters previously
reported by Salomon are described herein and certain other pending matters
previously reported by the Company are no longer required to be disclosed
herein.
Pursuant to Rule 12b-23 under the Exchange Act, certain matters described
under the caption "Legal Proceedings" in the Annual Report on Form 10-K of SSBH
for the year ended December 31, 1997 (File No. 1-4346) (the "SSBH Form 10-K")
and in the Annual Report on Form 10-K of TAP for the year ended December 31,
1997 (File No. 1-14328) (the "TAP Form 10-K") are incorporated by reference
herein. Specifically, the descriptions that appear in the fifth through sixth
and the eighth through sixteenth paragraphs under the caption "Legal
Proceedings" beginning on page 13 of the SSBH Form 10-K and the descriptions
that appear in the second through sixth paragraphs under the caption "Legal
Proceedings" beginning on page 53 of the TAP Form 10-K are incorporated by
reference herein. Copies of the foregoing descriptions are included as exhibits
to this Form 10-K.
Subsidiaries of the Company have also been named as defendants in
various matters incident to and typical of the businesses in which they are
engaged. These include numerous civil actions, arbitration proceedings and other
matters in which the Company's broker-dealer subsidiaries have been named,
arising in the normal course of business out of activities as a broker and
dealer in securities, as an underwriter of securities, as an investment banker
or otherwise. These also include numerous matters in which the Company's
insurance subsidiaries are named, arising in the normal
71
<PAGE>
course of their business. In the opinion of the Company's management, none of
these actions is expected to have a material adverse effect on the consolidated
financial condition of the Company and its subsidiaries.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the NYSE and the Pacific Exchange
under the symbol "TRV." The high and low sale prices, as reported on the
consolidated transaction reporting system, for the common stock of the Company
for the periods indicated, and the dividends per share, are set forth below.
In October 1997, the Company's Board of Directors declared a three-for-two
split in the Company's common stock, paid in the form of a 50% stock dividend in
November 1997. All amounts have been adjusted to give retroactive effect to the
stock split effected in 1997.
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------- ------------------------------------- ----
1st Q 2nd Q 3rd Q 4th Q 1st Q 2nd Q 3rd Q 4th Q 1st Q*
----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock
Price
High $23.500 $22.875 $24.937 $31.667 $38.922 $44.078 $49.078 $57.375 $56.375
Low $19.000 $18.833 $19.375 $24.563 $29.172 $30.828 $42.000 $43.125 $45.125
Dividends per
Share of
Common Stock $ .075 $ .075 $ .075 $ .075 $ .10 $ .10 $ .10 $ .10 $ .125
</TABLE>
- ----------
* Through March 4, 1998.
At March 4, 1998, the Company had approximately 55,600 common stockholders
of record. This figure does not represent the actual number of beneficial owners
of common stock because shares are frequently held in "street name" by
securities dealers and others for the benefit of individual owners who may vote
the shares.
72
<PAGE>
For information on dividend restrictions in certain long-term loan and
credit agreements of the Company and its subsidiaries, as well as restrictions
on the ability of certain of the Company's subsidiaries to transfer funds to the
Company in the form of cash dividends or otherwise, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Item 6. SELECTED FINANCIAL DATA.
See "Five-Year Summary of Selected Financial Data" on page 32 of the
Company's 1997 Annual Report to Stockholders (the "1997 Annual Report"),
included as part of Exhibit 13 to this Form 10-K and incorporated herein by
reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 33 of the 1997 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 33 of the 1997 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page F-1
hereof. There is also incorporated by reference herein in response to this Item
the material under the caption "Selected Quarterly Financial Data (unaudited)"
on page 91 of the 1997 Annual Report, which material is included as part of
Exhibit 13 to this Form 10-K, and the Independent Auditors' Report filed as
Exhibit 99.02 herewith.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
73
<PAGE>
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information on the directors of the Company, see the material under
the caption "Election of Directors," in the definitive Proxy Statement for the
Company's Annual Meeting of Stockholders to be held on April 22, 1998, filed
with the SEC (the "Proxy Statement"), incorporated herein by reference. For
information on executive officers, see Item 1, "Business -- Other Information --
Executive Officers of the Company" herein.
Item 11. EXECUTIVE COMPENSATION.
See the material under the caption "Executive Compensation" of the Proxy
Statement, incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the material under the captions "Voting Rights," "Security Ownership
of Certain Beneficial Owners" and "Security Ownership of Management" of the
Proxy Statement, incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the material under the captions "Election of Directors" and "Executive
Compensation" of the Proxy Statement, incorporated herein by reference.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated
Financial Statements and Schedules on page F-1 hereof.
(2) Financial Statement Schedules. See Index to Consolidated
Financial Statements and Schedules on page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
74
<PAGE>
(b) Reports on Form 8-K:
On October 7, 1997, the Company filed a Current Report on Form
8-K, dated October 3, 1997, filing certain exhibits under Item
7 thereof relating to the offer and sale of the Company's
5.864% Cumulative Preferred Stock, Series M, $1.00 par value
per share.
On October 20, 1997, the Company filed a Current Report on
Form 8-K, dated October 13, 1997, reporting under Item 5
thereof the results of its operations for the three and nine
months ended September 30, 1997, and certain other selected
financial data.
On October 28, 1997, the Company filed a Current Report on
Form 8-K/A (which amended the Form 8-K filed on September 25,
1997), filing under Item 7 thereof certain pro forma financial
information.
On November 28, 1997, the Company filed a Current Report on
Form 8-K, dated November 28, 1997, reporting under Item 2
thereof the consummation of the transaction with Salomon Inc,
reporting under Item 5 thereof certain material pending legal
proceedings and filing under Item 7 thereof certain financial
statements and exhibits.
No other reports on Form 8-K were filed during the fourth
quarter of 1997; however, on January 8, 1998, the Company
filed a Current Report on Form 8-K, dated January 6, 1998,
filing certain exhibits under Item 7 thereof relating to the
offer and sale of the Company's 6 5/8% Notes due January 15,
2028; on January 28, 1998, the Company filed a Current Report
on Form 8-K, dated January 26, 1998, reporting under Item 5
thereof the results of its operations for the quarter and year
ended December 31, 1997, and certain other selected financial
data; and on February 19, 1998, the Company filed a Current
Report on Form 8-K, dated February 17, 1998, filing certain
exhibits under Item 7 thereof relating to the offer and sale
of the Company's 6 7/8% Notes due February 15, 2098.
75
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.01 Restated Certificate of Incorporation of Travelers Group Inc.
(the "Company"), Certificate of Amendment to the Restated
Certificate of Incorporation, filed April 26, 1995,
Certificate of Amendment to the Restated Certificate of
Incorporation, filed, April 24, 1996, Certificate of Amendment
to the Restated Certificate of Incorporation, filed April 23,
1997, Certificate of Designation of 6.365% Cumulative
Preferred Stock, Series F, Certificate of Designation of
6.213% Cumulative Preferred Stock, Series G, Certificate of
Designation of 6.231% Cumulative Preferred Stock, Series H,
Certificate of Designation of Series I Cumulative Convertible
Preferred Stock, Certificate of Designation of 8.08%
Cumulative Preferred Stock, Series J, Certificate of
Designation of 8.40% Cumulative Preferred Stock, Series K,
Certificate of Designation of 9.50% Cumulative Preferred
Stock, Series L, Certificate of Designation of 5.864%
Cumulative Preferred Stock, Series M, and Certificate of
Designation of Cumulative Adjustable Rate Preferred Stock,
Series Y, incorporated by reference to Exhibit 99.01 to the
Form 8-A/A of Salomon Smith Barney Holdings Inc. and SI
Financing Trust I (File No. 1-04346).
3.02 By-Laws of the Company, as amended through April 23, 1997,
incorporated by reference to Exhibit 3.02 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1997 (File No. 1-9924).
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), incorporated by reference to Exhibit
10.02.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 1-9924) (the
"Company's 1996 10-K").
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").
10.02.3* Amendment No. 15 to the Travelers Group Stock Option Plan
(effective July 23, 1997), incorporated by reference to
Exhibit 10.04 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1997 (File No.
1-9924) (the "Company's September 30, 1997 10-Q").
76
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.03* Travelers Group 1996 Stock Incentive Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.03 to
the Company's September 30, 1997 10-Q.
10.04* Travelers Group Retirement Benefit Equalization Plan (as
amended and restated as of January 1, 1994), incorporated by
reference to Exhibit 10.03 to the Company's 1996 10-K.
10.05* Letter Agreement, dated December 14, 1988, between Joseph A.
Califano, Jr. and the Company, 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).
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 Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (File No. 1-9924).
10.09* Travelers Group Capital Accumulation Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.02 to
the Company's September 30, 1997 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).
77
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.12* 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).
10.13* 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).
10.14*+ The Travelers Insurance Deferred Compensation Plan (formerly
The Travelers Corporation TESIP Restoration and Non-Qualified
Savings Plan) (as amended and restated through January 1,
1997).
10.15* 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).
10.16* Travelers Property Casualty Corp. Capital Accumulation Plan
(as amended through July 23, 1997), incorporated by reference
to Exhibit 10.01 to the Quarterly Report on Form 10-Q of
Travelers Property Casualty Corp. for the fiscal quarter ended
September 30, 1997 (File No. 1-14328).
10.17* Letter Agreement, dated as of August 14, 1997, between the
Company and Thomas W. Jones, incorporated by reference to
Exhibit 10.01 to the Company's September 30, 1997 10-Q.
10.18 Agreement and Plan of Merger, dated as of September 24, 1997,
among the Company, Diamonds Acquisition Corp. and Salomon Inc,
incorporated by reference to Exhibit 2.01 to the Company's
Current Report on Form 8-K/A-1, dated September 24, 1997 (File
No. 1-9924).
10.19*+ Salomon Inc Equity Partnership Plan for Key Employees (as
amended through March 19, 1997).
12.01+ Computation of Ratio of Earnings to Fixed Charges.
13.01+ Pages 32 through 92 of the 1997 Annual Report to Stockholders
of the Company (pagination of exhibit does not correspond to
pagination in the 1997 Annual Report to Stockholders).
21.01+ Subsidiaries of the Company.
23.01+ Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
78
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
23.02+ Consent of Arthur Andersen LLP, Independent Certified Public
Accountants.
24.01+ Powers of Attorney.
27.01+ Financial Data Schedule.
27.02+ Restated Financial Data Schedule - 1996.
27.03+ Restated Financial Data Schedule - 1995.
99.01+ Glossary of Insurance Terms.
99.02+ Independent Auditors' Report.
99.03+ The fifth through sixth and the eighth through sixteenth
paragraphs under the caption "Legal Proceedings" beginning on
page 13 of the Annual Report on Form 10-K of Salomon Smith
Barney Holdings Inc. for the fiscal year ended December 31,
1997 (File No. 1-4346).
99.04+ The second through sixth paragraphs under the caption "Legal
Proceedings" beginning on page 53 of the Annual Report on
From 10-K of Travelers Property Casualty Corp. for the fiscal
year ended December 31, 1997 (File No. 1-14328).
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 SEC upon request.
The financial statements required by Form 11-K for 1997 for the Company's
employee savings plan will be filed as an exhibit by amendment to this
Form 10-K pursuant to Rule 15d-21 of the Securities Exchange Act of 1934,
as amended.
Copies of any of the exhibits referred to above will be furnished at a
cost of $.25 per page (although no charge will be made for the 1997 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 herewith.
79
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 24th day of
March, 1998.
TRAVELERS GROUP INC.
(Registrant)
By: /s/ Sanford I. Weill
--------------------------------------
Sanford I. Weill, Chairman of
the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on the 24th day of March, 1998.
Signature Title
--------- -----
/s/ Sanford I. Weill
- ------------------------ Chairman of the Board, Chief Executive Officer
Sanford I. Weill (Principal Executive Officer) and Director
/s/ Heidi G. Miller
- ------------------------ Senior Vice President and Chief Financial
Heidi G. Miller Officer (Principal Financial Officer)
/s/ Irwin Ettinger
- ------------------------ Executive Vice President and Chief Accounting
Irwin Ettinger Officer (Principal Accounting Officer)
*
- ------------------------
Judith Arron Director
- ------------------------
C. Michael Armstrong Director
80
<PAGE>
Signature Title
--------- -----
*
- ------------------------
Kenneth J. Bialkin Director
*
- ------------------------
Edward H. Budd Director
*
- ------------------------
Joseph A. Califano, Jr. Director
*
- ------------------------
Douglas D. Danforth Director
/s/ James Dimon
- ------------------------
James Dimon Director
*
- ------------------------
Leslie B. Disharoon Director
*
- ------------------------
Gerald R. Ford Director
*
- ------------------------
Thomas W. Jones Director
*
- ------------------------
Ann Dibble Jordan Director
81
<PAGE>
Signature Title
--------- -----
*
- ------------------------
Robert I. Lipp Director
*
- ------------------------
Michael T. Masin Director
*
- ------------------------
Deryck C. Maughan Director
- ------------------------
Dudley C. Mecum Director
*
- ------------------------
Andrall E. Pearson Director
*
- ------------------------
Frank J. Tasco Director
*
- ------------------------
Linda J. Wachner Director
*
- ------------------------
Joseph R. Wright, Jr. Director
82
<PAGE>
Signature Title
--------- -----
*
- ------------------------
Arthur Zankel Director
/s/ James Dimon
*By:
------------------------
James Dimon
Attorney-in-fact
83
<PAGE>
Travelers Group Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES*
---------------------------------
Incorporated
By Reference from
the Company's 1997
Annual Report to
Page Stockholders at
Herein Page Indicated
------ --------------
Independent Auditors' Report F-2 92
Consolidated Statement of Income
for the year ended December 31,
1997, 1996 and 1995 58
Consolidated Statement of
Financial Position at December 31,
1997 and 1996 59
Consolidated Statement of Changes
in Stockholders' Equity for the
year ended December 31, 1997, 1996
and 1995 60
Consolidated Statement of Cash
Flows for the year ended December
31, 1997, 1996 and 1995 61
Notes to Consolidated Financial
Statements 62-91
Schedules:
Schedule I - Condensed Financial
Information of Registrant (Parent
Company only) F-3 - F-6
Schedule III - Supplementary
Insurance Information F-7
Schedule IV - Reinsurance F-8
* Schedules not listed are omitted as not applicable or not
required by Regulation S-X.
F-1
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Travelers Group Inc.:
Under date of January 26, 1998, we reported on the consolidated statement of
financial position of Travelers Group Inc. and subsidiaries as of December 31,
1997 and 1996, 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, 1997, as contained in the 1997 annual report to
stockholders. These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year ended
December 31, 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits. We did not audit the separate consolidated statement of
financial condition of Salomon Inc and subsidiaries or the parent company only
condensed statement of financial condition of Salomon Inc as of December 31,
1996, or the related consolidated statements of income, changes in stockholders'
equity and cash flows or the parent company only condensed statements of income
and cash flows for each of the years ended December 31, 1996 and 1995, which
parent company only condensed financial statements reflect total assets of
$19,964 million and total liabilities of $14,687 million as of December 31,
1996, and net income of $617 million and $457 million for the years ended
December 31, 1996 and 1995, respectively. Those consolidated financial
statements and parent company only condensed financial statements, which are
included in the restated and combined December 31, 1996 and 1995 consolidated
financial statements and financial statement schedules (parent company only) of
Travelers Group Inc. that resulted from the November 28, 1997 pooling of
interests transaction described in Note 1 to the consolidated financial
statements, were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Salomon
Inc and subsidiaries and Salomon Inc (parent company only) for such periods, is
based solely on the report of such other auditors.
In our opinion, based on our audits and the report of other auditors, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
New York, New York
January 26, 1998
F-2
<PAGE>
SCHEDULE I
Travelers Group Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Income
Year Ended December 31,
--------------------------------
1997 1996 1995
------- ------- -------
Revenues $ 1 $ 1 $ (5)
------- ------- -------
Expenses:
Interest 171 162 129
Other 143 126 104
------- ------- -------
Total 314 288 233
------- ------- -------
Pre-tax loss (313) (287) (238)
Income tax benefit 112 103 85
------- ------- -------
Loss before equity in net income
of subsidiaries (201) (184) (153)
Equity in net income of subsidiaries
from continuing operations 3,305 3,466 2,294
Equity in net income of subsidiaries
from discontinued operations -- (334) 150
------- ------- -------
Net income $ 3,104 $ 2,948 $ 2,291
======= ======= =======
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-3
<PAGE>
SCHEDULE I
Travelers Group Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Financial Position
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Assets
Investment in subsidiaries at equity $ 24,073 $ 21,018
Advances to and receivables from subsidiaries 80 88
Cost of acquired businesses in excess of net assets 422 436
Other-principally investments 430 650
-------- --------
$ 25,005 $ 22,192
======== ========
Liabilities
Junior Subordinated Debentures, held by subsidiary Trusts $ 1,026 $ 1,026
Long-term debt 1,695 1,903
Advances from and payables to subsidiaries 29 --
Other liabilities 721 546
-------- --------
3,471 3,475
-------- --------
Redeemable preferred stock, held by subsidiary 226 226
-------- --------
Redeemable preferred stock - Series I 280 420
-------- --------
ESOP Preferred stock - Series C 153 164
Guaranteed ESOP obligation (18) (35)
-------- --------
135 129
-------- --------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million), at
aggregate liquidation value 1,450 1,125
Common stock ($.01 par value; authorized shares:
1.5 billion; issued shares: 1997 - 1,234,204,094 and
1996 -1,384,665,499) 12 14
Additional paid-in capital 5,368 7,806
Retained earnings 15,451 12,934
Treasury stock, at cost (1997 - 89,136,729 shares;
1996 - 243,643,475 shares) (2,183) (4,123)
Unrealized gain (loss) on investment securities 1,157 469
Other, principally unearned compensation (362) (283)
-------- --------
20,893 17,942
-------- --------
$ 25,005 $ 22,192
======== ========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-4
<PAGE>
SCHEDULE I
Travelers Group Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,104 $ 2,948 $ 2,291
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in net income of subsidiaries (3,305) (3,132) (2,444)
Dividends received from subsidiaries, net 1,324 1,808 508
Advances (to) from subsidiaries, net 37 (83) 132
Other, net 1,078 316 217
------- ------- -------
Net cash provided by (used in) operating activities 2,238 1,857 704
------- ------- -------
Cash flows from investing activities
Capital contribution to subsidiary (521) (1,140) --
Other investments, primarily short-term, net 240 (408) (198)
------- ------- -------
Net cash provided by (used in) investing activities (281) (1,548) (198)
------- ------- -------
Cash flows from financing activities
Dividends paid (587) (518) (478)
Issuance of preferred stock 1,000 250 --
Redemption of preferred stock (675) (112) --
Redemption of Series I redeemable preferred stock -- -- (140)
Redemption of redeemable preferred stock (held by
subsidiary) -- -- (35)
Stock tendered for payment of withholding taxes (384) (201) (94)
Treasury stock acquired (1,188) (642) (420)
Issuance of long-term debt -- -- 700
Issuance of junior subordinated debentures -- 1,026 --
Payments and redemptions of long-term debt (185) (100) --
Net change in short-term borrowings -- -- (101)
Other, net 62 (12) 62
------- ------- -------
Net cash provided by (used in) financing activities (1,957) (309) (506)
------- ------- -------
Change in cash $ -- $ -- $ --
------- ------- -------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 180 $ 157 $ 112
======= ======= =======
Cash received during the period for taxes $ 569 $ 263 $ 155
======= ======= =======
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-5
<PAGE>
SCHEDULE I
Notes to Condensed Financial Statements of Registrant
1. Basis of Presentation
The accompanying financial statements include the accounts of Travelers
Group Inc. (the Parent) and on an equity basis its subsidiaries and
affiliates and should be read in conjunction with the Consolidated
Financial Statements and notes thereto.
2. Supplementary Disclosure of Non-Cash Investing and Financing Activities
During 1994, the Parent issued $261 million of redeemable preferred stock
to various subsidiaries in exchange for an equivalent value of Travelers
Group Inc. common stock previously held by these subsidiaries. This
activity was recorded as a non-cash capital contribution to subsidiaries
by the Parent. During 1995, $35 million of this redeemable preferred stock
was repurchased and retired.
F-6
<PAGE>
SCHEDULE III
TRAVELERS GROUP INC. AND SUBSIDIARIES
Supplementary Insurance Information
(In millions of dollars)
<TABLE>
<CAPTION>
Value of
insurance in
force and Future policy
deferred benefits, Other policy
policy losses, claims claims and Net
Segment acquisition and loss Unearned benefits Premium investment
1997 costs expenses premiums payable Revenue income
- -------- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Life Insurance Services $2,306 $ 9,728 $ 8 $ 378 $1,579 $2,038
P&C Insurance Services 501 29,344 3,867 -- 7,225 2,051
Consumer Finance Services* 5 11 392 54 177 45
Corporate and Other -- -- -- -- 14 31
--------------------------------------------------------------------------------------
Total $2,812 $39,083 $4,267 $ 432 $8,995 $4,165
======================================================================================
1996
Life Insurance Services $2,127 $ 9,263 $ 9 $ 536 $1,404 $1,888
P&C Insurance Services 426 30,175 3,554 -- 6,050 1,658
Consumer Finance Services* 10 12 346 49 155 41
Corporate and Other -- -- -- -- 24 37
--------------------------------------------------------------------------------------
Total $2,563 $39,450 $3,909 $ 585 $7,633 $3,624
======================================================================================
1995
Life Insurance Services $1,953 $ 8,035 $ 9 $ 496 $1,537 $1,836
P&C Insurance Services 202 14,758 1,827 - 3,300 744
Consumer Finance Services* 17 16 330 51 139 38
Corporate and Other - 1,323 - 75 1 7
-------------------------------------------------------------------------------------
Total $2,172 $24,132 $2,166 $ 622 $4,977 $2,625
=====================================================================================
<CAPTION>
Amortization
Benefits, of deferred
claims, policy
losses acquisition costs
and and value Other
Segment settlement of insurance operating Premiums
1997 expenses in force expenses written
- -------- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Life Insurance Services $2,173 $ 292 $ 385 $1,596
P&C Insurance Services 5,484 1,127 1,385 7,832
Consumer Finance Services* 62 5 21 235
Corporate and Other (5) - 21 -
-----------------------------------------------------------
Total $7,714 $1,424 $1,812 $9,663
===========================================================
1996
Life Insurance Services $2,002 $ 280 $ 345 $1,416
P&C Insurance Services 5,283 905 1,406 6,360
Consumer Finance Services* 50 7 21 182
Corporate and Other 31 - 49 4
-----------------------------------------------------------
Total $7,366 $1,192 $1,821 $7,962
===========================================================
1995
Life Insurance Services $2,173 $283 $ 406 $1,367
P&C Insurance Services 2,806 512 632 3,607
Consumer Finance Services* 51 8 2 161
Corporate and Other (13) - 69 132
-----------------------------------------------------------
Total $5,017 $803 $1,109 $5,267
===========================================================
</TABLE>
* Includes credit life insurance operations.
F-7
<PAGE>
SCHEDULE IV
Travelers Group Inc. and Subsidiaries
Reinsurance
(In millions of dollars)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
--------
% of
Ceded to Assumed Amount
Gross Other From other Net Assumed
Year ended December 31, 1997 Amount Companies Companies Amount To Net
- ---------------------------- ------ --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
Life insurance in force $ 424,815 $(175,910) $ 145 $ 249,050 0.06%
========= ========= ========= ========= =========
Premiums
Life insurance $ 1,667 $ (279) $ 2 $ 1,390 0.1%
Accident and health insurance 371 (62) 2 311 0.6%
Property and casualty insurance 8,268 (1,751) 777 7,294 10.7 %
--------- --------- --------- ---------
$ 10,306 $ (2,092) $ 781 $ 8,995
========= ========= ========= =========
Year ended December 31, 1996
- ----------------------------
Life insurance in force $ 413,351 $(154,021) $ 150 $ 259,480 0.06%
========= ========= ========= ========= =========
Premiums
Life insurance $ 1,523 $ (296) $ 6 $ 1,233 0.5%
Accident and health insurance 400 (98) 2 304 0.7%
Property and casualty insurance 7,239 (1,806) 663 6,096 10.9%
--------- --------- --------- ---------
$ 9,162 $ (2,200) $ 671 $ 7,633
========= ========= ========= =========
Year ended December 31, 1995
- ----------------------------
Life insurance in force $ 400,622 $(134,828) $ 139 $ 265,933 0.05%
========= ========= ========= ========= =========
Premiums
Life insurance $ 1,496 $ (272) $ 1 $ 1,225 0.1%
Accident and health insurance 497 (87) 2 412 0.5%
Property and casualty insurance 4,302 (1,412) 450 3,340 13.5%
--------- --------- --------- ---------
$ 6,295 $ (1,771) $ 453 $ 4,977
========= ========= ========= =========
</TABLE>
F-8
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.01 Restated Certificate of Incorporation of Travelers Group Inc.
(the "Company"), Certificate of Amendment to the Restated
Certificate of Incorporation, filed April 26, 1995,
Certificate of Amendment to the Restated Certificate of
Incorporation, filed, April 24, 1996, Certificate of Amendment
to the Restated Certificate of Incorporation, filed April 23,
1997, Certificate of Designation of 6.365% Cumulative
Preferred Stock, Series F, Certificate of Designation of
6.213% Cumulative Preferred Stock, Series G, Certificate of
Designation of 6.231% Cumulative Preferred Stock, Series H,
Certificate of Designation of Series I Cumulative Convertible
Preferred Stock, Certificate of Designation of 8.08%
Cumulative Preferred Stock, Series J, Certificate of
Designation of 8.40% Cumulative Preferred Stock, Series K,
Certificate of Designation of 9.50% Cumulative Preferred
Stock, Series L, Certificate of Designation of 5.864%
Cumulative Preferred Stock, Series M, and Certificate of
Designation of Cumulative Adjustable Rate Preferred Stock,
Series Y, incorporated by reference to Exhibit 99.01 to the
Form 8-A/A of Salomon Smith Barney Holdings Inc. and SI
Financing Trust I (File No. 1-04346).
3.02 By-Laws of the Company, as amended through April 23, 1997,
incorporated by reference to Exhibit 3.02 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1997 (File No. 1-9924).
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), incorporated by reference to Exhibit
10.02.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 1-9924) (the
"Company's 1996 10-K").
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").
10.02.3* Amendment No. 15 to the Travelers Group Stock Option Plan
(effective July 23, 1997), incorporated by reference to
Exhibit 10.04 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1997 (File No.
1-9924) (the "Company's September 30, 1997 10-Q").
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.03* Travelers Group 1996 Stock Incentive Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.03 to
the Company's September 30, 1997 10-Q.
10.04* Travelers Group Retirement Benefit Equalization Plan (as
amended and restated as of January 1, 1994), incorporated by
reference to Exhibit 10.03 to the Company's 1996 10-K.
10.05* Letter Agreement, dated December 14, 1988, between Joseph A.
Califano, Jr. and the Company, 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).
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 Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (File No. 1-9924).
10.09* Travelers Group Capital Accumulation Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.02 to
the Company's September 30, 1997 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).
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.12* 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).
10.13* 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).
10.14*+ The Travelers Insurance Deferred Compensation Plan (formerly
The Travelers Corporation TESIP Restoration and Non-Qualified
Savings Plan) (as amended and restated through January 1,
1997).
10.15* 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).
10.16* Travelers Property Casualty Corp. Capital Accumulation Plan
(as amended through July 23, 1997), incorporated by reference
to Exhibit 10.01 to the Quarterly Report on Form 10-Q of
Travelers Property Casualty Corp. for the fiscal quarter ended
September 30, 1997 (File No. 1-14328).
10.17* Letter Agreement, dated as of August 14, 1997, between the
Company and Thomas W. Jones, incorporated by reference to
Exhibit 10.01 to the Company's September 30, 1997 10-Q.
10.18 Agreement and Plan of Merger, dated as of September 24, 1997,
among the Company, Diamonds Acquisition Corp. and Salomon Inc,
incorporated by reference to Exhibit 2.01 to the Company's
Current Report on Form 8-K/A-1, dated September 24, 1997 (File
No. 1-9924).
10.19*+ Salomon Inc Equity Partnership Plan for Key Employees (as
amended through March 19, 1997).
12.01+ Computation of Ratio of Earnings to Fixed Charges.
13.01+ Pages 32 through 92 of the 1997 Annual Report to Stockholders
of the Company (pagination of exhibit does not correspond to
pagination in the 1997 Annual Report to Stockholders).
21.01+ Subsidiaries of the Company.
23.01+ Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
23.02+ Consent of Arthur Andersen LLP, Independent Certified Public
Accountants.
24.01+ Powers of Attorney.
27.01+ Financial Data Schedule.
27.02+ Restated Financial Data Schedule - 1996.
27.03+ Restated Financial Data Schedule - 1995.
99.01+ Glossary of Insurance Terms.
99.02+ Independent Auditors' Report.
99.03+ The fifth through sixth and the eighth through sixteenth
paragraphs under the caption "Legal Proceedings" beginning on
page 13 of the Annual Report on Form 10-K of Salomon Smith
Barney Holdings Inc. for the fiscal year ended December 31,
1997 (File No. 1-4346).
99.04+ The second through sixth paragraphs under the caption "Legal
Proceedings" beginning on page 53 of the Annual Report on
From 10-K of Travelers Property Casualty Corp. for the fiscal
year ended December 31, 1997 (File No. 1-14328).
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 SEC upon request.
The financial statements required by Form 11-K for 1997 for the Company's
employee savings plan will be filed as an exhibit by amendment to this
Form 10-K pursuant to Rule 15d-21 of the Securities Exchange Act of 1934,
as amended.
Copies of any of the exhibits referred to above will be furnished at a
cost of $.25 per page (although no charge will be made for the 1997 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 herewith.
Exhibit 10.14
THE TRAVELERS INSURANCE
DEFERRED COMPENSATION PLAN
[FORMERLY THE TRAVELERS TESIP
RESTORATION AND NON-QUALIFIED SAVINGS PLAN]
ARTICLE 1
PURPOSE
The purpose of The Travelers Insurance Deferred Compensation Plan (the
"Plan") is to provide a means whereby The Travelers Insurance Group Inc. (the
"Company"), as successor to The Travelers Corporation, may restore the
tax-deferral savings opportunities to employees of The Travelers Insurance
Company and The Travelers Indemnity Company and certain of their affiliates who
are treated as "highly compensated employees" under the Internal Revenue Code of
1986, as amended (the "Code"), and as such are restricted in the level of
participation under 401(k) and similar plans as are afforded non-highly
compensated employees and to offer improved flexibility for retirement, tax and
estate planning to a select group of key management employees of the Company and
its subsidiaries (including, at the Committee's option, subsidiaries the
employees of which are not eligible to participate in TESIP) who have rendered
and continue to render valuable services to the Company.
The Plan incorporates and replaces the TESIP Restoration Plan which was
effective as of January 1, 1990 and The Travelers TESIP Restoration and
Non-Qualified Savings Plan which was effective as of January 1, 1991. The Plan
includes the rollover of non-qualified balances for Transferred Employees that
had previously been part of Aetna Life and Casualty Company's Incentive Deferral
Plan and Aetna Life and Casualty Company's Supplemental Incentive Savings Plan
("SISP"). The Plan set forth herein is amended and restated as of January 1,
1997.
ARTICLE 2
DEFINITIONS AND CERTAIN PROVISIONS
Beneficiary. "Beneficiary" means the person or persons designated as such
in accordance with Article 6.
Board. "Board" means the Board of Directors of the Company.
Committee. "Committee" means the Plans Administration Committee of
Travelers Group Inc.
Fixed Income Declared Rate. "Fixed Income Declared Rate" means the fixed
interest rate expressed as an effective annual yield for the Plan Year for Fund
2 under TESIP which is invested in a group annuity contract. The Fixed Income
Declared Rate will be determined annually at the beginning of each Plan Year and
credited monthly as of the last business day of the month.
Deferral Account. "Deferral Account" means the account maintained on the
books of account of the Company for each Participant for each Deferral Account
Cycle pursuant to Section 4.2.
<PAGE>
Deferral Account Cycle. "Deferral Account Cycle" means a period of five
(5) Plan Years as determined by the Committee over which a Participant defers
Salary and/or Incentive Award. The first Deferral Account Cycle covers the Plan
Years 1990 through 1994.
Disability. "Disability" means any disability as defined under the terms
of The Travelers Group Long-Term Disability Plan.
Eligible Employee. "Eligible Employee" means any Employee of the Company
or any designated subsidiary who is considered by the Company to be a key
management employee, including employees of a subsidiary which does not
participate in TESIP and employees who have not yet met the TESIP service
requirements.
Employee. "Employee" means any person employed by an Employer on a regular
full-time salaried basis, including officers of the Employer.
Employer. "Employer" means the Company and any of its subsidiaries.
Enrollment Agreement. "Enrollment Agreement" means the authorization form
which an Eligible Employee files with the Company to participate in the Plan.
Enrollment Period. "Enrollment Period" means the period from 10/31 to
12/31 of the calendar year preceding the Plan Year or for newly hired employees,
within 30 days of employment and otherwise as determined by the Committee.
Incentive Award. "Incentive Award" means with respect to a Participant for
any Plan Year the incentive award paid to the Participant for such Plan Year
under an annual incentive plan.
Participant. "Participant" means an Eligible Employee who has filed a
completed and executed Enrollment Agreement with the Committee and is
participating in the Plan in accordance with the provisions of Article 4.
Plan Year. "Plan Year" means the calendar year beginning January 1 and
ending December 31.
Retirement. "Retirement" means the termination of a Participant's
employment with an Employer for reasons other than death or disability on or
after attaining age 55 with 5 or more years of Continuous Service, as determined
under The Travelers Pension Plan, or termination of employment on or after
attaining age 50 with 5 or more years of continuous service under circumstances
where the Participant is separated from service and entitled to payments under
the terms of The Travelers Separation Pay Plan. Retirement also means, where
applicable, the termination of a Participant's employment with the ability to
begin receiving benefits following such termination under the Retirement Plan
for Employees of Aetna Life and Casualty Company, however, in such event,
certain payments may not commence until a participant reaches age 62 in
accordance with elections made at the time of deferral.
2
<PAGE>
Salary. "Salary" means with respect to a Participant for any Plan Year
such Participant's annual base salary, as established on the books and records
of the participating employers.
TESIP. "TESIP" means the Travelers Group 401(k) Savings Plan, as successor
plan to The Travelers Savings, Investment and Stock Ownership Plan, as amended
from time to time.
The Travelers Pension Plan means The Pension Plan for Salaried Employees
of The Travelers Insurance Company and certain affiliates and any successor plan
thereto as amended from time to time.
ARTICLE 3
ADMINISTRATION OF THE PLAN
The Plan is administered by the Committee which is responsible for
overseeing the operation of the Plan and has the power to interpret provisions
of the plan. The Committee shall have all of the powers vested in it pursuant to
the terms of the Plan, including but not limited to the power and authority to
establish and modify eligibility criteria for participation and to modify the
terms and provisions of the Plan.
Members of the Committee are appointed by the Board of Directors of
Travelers Group Inc. ("Travelers") for indefinite terms, may resign or be
removed at any time and serve without compensation for their services. Travelers
indemnifies such members to the fullest extent permitted by law and the By-Laws
of Travelers. Members of the Committee currently are officers or employees of
Travelers or its subsidiaries. The Committee maintains an office at 388
Greenwich Street, 36th Floor, New York, New York 10013. Correspondence to the
Committee should be sent to such address c/o Travelers Group Inc., Attention:
Plans Administration Committee.
The Committee has delegated the day-to-day operations of the Plan which
are managed by the Corporate Compensation Department. Corporate Compensation can
be reached by dialing (860) 954-4099.
Additional information about the Plan, the Committee and its members may
be obtained upon written request to Travelers Group Inc., Attn: Corporation
Compensation Department, 388 Greenwich Street, 36th Floor, New York, New York
10013 or by calling (212) 816-2577.
ARTICLE 4
PARTICIPATION
4.1 Election to Participate. Any Eligible Employee may elect to
participate in the Plan effective as of the first day of the Plan Year by filing
during the Enrollment Period a completed and fully executed Enrollment Agreement
with the Committee prior to the beginning of such Plan Year. A separate
Enrollment Agreement must be completed for each Plan Year in which a Participant
makes deferrals under the Plan.
3
<PAGE>
For any Plan Year an Eligible Employee may elect to defer a percentage of
Salary (not to exceed 50% of the Participant's Salary at the rate in effect
during the Plan Year, or for newly hired eligible employees 50% of their initial
annual salary prorated for the remaining months of the Plan Year) and/or a
percentage of an Incentive Award (up to 70% of the Participant's cash Incentive
Award). This plan is offered in addition to the Travelers Group Capital
Accumulation Plan (CAP), Travelers Property Casualty Corp. Capital Accumulation
Plan (TAP CAP), and the Greenwich Street Capital Partners, L.P. (GSP). Incentive
deferrals to this plan will be made subsequent to any deferrals which may apply
due to voluntary or automatic participation in CAP, TAP CAP, or GSP.
The Committee may establish minimum or maximum individual or aggregate
deferral amounts for each Plan Year. The Company reserves the right to make a
reduction in individual deferral amounts if the individual or aggregate
deferrals exceed a Company-determined dollar threshold. The Committee may
establish a minimum account value for continued participation in the plan and
may pay to participants the value of accounts below the minimum.
4.2 Deferral Accounts. The Company shall establish and maintain a separate
Deferral Account for each Participant for each Deferral Account Cycle. The
amount by which a Participant's Salary or Incentive Award is reduced pursuant to
Section 4.1 shall be credited to the Participant's Deferral Account no later
than the first day of the month following the month in which such compensation
would otherwise have been paid. The Deferral Account shall be debited by the
amount of any such payments made to the Participant or the Participant's
Beneficiary with respect to such Deferral Account pursuant to this Plan.
(a) Company Contributions. Prior to the 1997 Plan Year, the Plan
provided that certain eligible Participants received Company
Contributions. For 1990, the Company made contributions in accordance with
Appendix A hereto. For 1991 to 1993 the Company made contributions in
accordance with Appendix B hereto. For 1994 and 1995 the Company made
contributions in accordance with Appendix C hereto. For 1996 the Company
made contributions in accordance with Appendix D hereto for participants
in Aetna Life and Casualty Company's Incentive Deferral Plan and Aetna
Life and Casualty Company's Supplemental Incentive Savings Plan.
(b) Interest on Deferral Accounts. Prior to 1996 two types of
returns were credited on Deferral Accounts prior to commencement of
payment of benefits depending on the Declared Rate option which a
Participant chose. These options were the Fixed Income Declared Rate and
Equity Simulator Declared Rate.
Under the Fixed Income Declared Rate interest will be credited
monthly to Deferral Accounts in the same manner as interest is credited on
Fund 2 under TESIP. Under the Equity Simulator Declared Rate in effect
prior to 1996, a rate of return (which may be positive or negative) was
credited as of the end of each month at the same rate which was credited
on Fund 1 under TESIP. After 1995 all Deferral Accounts are credited with
the Fixed Income Declared Rate.
A Participant's Deferral Account will continue to be credited with
the Fixed Income Declared Rate after benefit payments from such Deferral
Account commence.
4
<PAGE>
4.3 Valuation of Accounts. The value of a Deferral Account as of any date
shall equal the amounts theretofore credited to such account, plus the interest
deemed to be earned on such account in accordance with Section 4.2 through the
valuation date, less the amounts theretofore debited to such account. Any
valuation shall be made as of the last business day of the month.
4.4 Statement of Accounts. The Committee shall submit to each Participant,
within one hundred twenty (120) days after the close of each Plan Year, a
statement in such form as the Committee deems desirable setting forth the
balance standing to the credit of each Participant in each of his or her
Deferral Accounts.
ARTICLE 5
BENEFITS
5.1 Retirement Benefit. A Participant is eligible for a Retirement Benefit
under this Plan when he or she has satisfied all of the requirements for
Retirement (as defined in Article 2). The Retirement Benefit for a Deferral
Account will be based on the total value of the Deferral Account.
The Retirement Benefit for a Deferral Account will be paid beginning
approximately 30 days of the date and in the manner which the Participant elects
when he or she enrolls in the Deferral Account. After the Participant elects the
commencement date and the form of payment, he or she may not change the
election. At the time of enrollment a Participant may elect to receive a
Retirement Benefit for a Deferral Account at Retirement or at age 65, if later,
in either a lump sum or annual installments over 5, 10 or 15 years. The lump-sum
payment will be made or annual installment payments will commence approximately
30 days after Retirement or approximately 30 days following the date on which
the Participant attains age 65, according to the Participant's enrollment
agreement. The account valuation will be as of the last business day of the
month preceding the payment date.
If a Participant elects to receive his or her Retirement Benefit in
installment payments, the account will be valued on the last business day of the
month in which the Participant is deemed to be retired, or attained age 65 if
applicable. Retirements are deemed to be the first of a month following the
termination of employment. The payments will be determined annually by dividing
the Participant's then current Deferral Account balance at commencement and on
each anniversary of the valuation year by the number of remaining years in the
payment period based on the Participant's retirement payment election. The Fixed
Income Declared Rate will be credited during any payment year on the unpaid
Deferral Account balance. After the Participant's death, interest earned during
the payment period will instead be distributed in full.
The Committee may, in its discretion, permit alternative payment elections
for future deferrals and may permit the form and timing of payments elected by
participants (in accordance with the terms and provisions of a plan then in
effect) with respect to balances transferred into the Plan when such transfers
are authorized by the Company or the Employer in connection with a merger,
acquisition or other business combination.
5.2 Disability. If a Participant becomes disabled, Participant deferrals
that otherwise would have been credited to the Participant's Deferral Accounts
will cease during such Disability. The Participant's Deferral Accounts will
continue to earn interest at the Declared Rate. The Participant's Deferral
Account balances will be distributed as a Retirement Benefit or Survivor
5
<PAGE>
Benefit, whichever is applicable, beginning on the date and in the form which
the Participant elected in his Enrollment Agreement, but in no event beginning
earlier than 12 months after the date of the Participant's Disability. In the
sole discretion of the Committee, the Company may commence payments on an
earlier date.
5.3 Termination Benefit. Notwithstanding other provisions of this plan if
a Participant (i) ceases to be an Employee for any reason other than death,
Disability or Retirement, or (ii) fails to return to the status of an Active
Employee within sixty (60) days following recovery from a Disability prior to
Retirement, the Company shall pay to the Participant in one lump sum an amount
(the "Termination Benefit") equal to the value of the Participant's Deferral
Accounts as provided in Section 4.3.
The account valuation will be as of the last business day of the month of
termination of employment (or the end of the 60-day period following the end of
a disability).
5.4 Survivor Benefits.
If a Participant dies, a Survivor Benefit will be paid to his Beneficiary
in a lump sum in the month following the Participant's death. The Survivor
Benefit will be equal to the Deferral Account balance(s) of the Participant.
The account valuation will be as of the last business day of the month of
the death.
5.5 Emergency Benefit. In the event that the Committee, upon written
petition of the Participant or beneficiary of such Participant, determines in
its sole discretion that the Participant has suffered an unforeseeable financial
emergency, the Employer shall pay to the Participant, as soon as practicable
following such determination, an amount necessary to meet the emergency.
Participants who suffer an emergency prior to commencement of benefit payments
would receive an amount not in excess of the Deferral Account balance to which
such Participant would have been entitled pursuant to Section 5.3 if he or she
had a termination of employment on the date of such determination and received a
lump sum payment (the "Emergency Benefit"). Participants in the process of
receiving installment payments would receive an amount not in excess of the
present value of the remaining installment payments. For purposes of this Plan,
an unforeseeable financial emergency is an unexpected need for cash arising from
an illness, casualty loss, sudden financial reversal, or other such
unforeseeable occurrence. The amount of the benefits otherwise payable under the
Plan shall thereafter be adjusted to reflect the early payment of the Emergency
Benefit.
5.6 Small Benefit. In the event the Committee determines that the balance
of a Participant's Deferral Account is less than $10,000 at the time of
commencement of payment of his or her Retirement Benefit, or the portion of the
balance of the Participant's Deferral Account payable to any Beneficiary is less
than $10,000 at the time of commencement of payment of a Survivor Benefit to
such Beneficiary, the Company may pay the benefit in the form of a lump-sum
payment, notwithstanding any provision of this Article 5 to the contrary. Such
lump-sum payment shall be equal to the balance of the Participant's Deferral
Account or the portion thereof payable to a Beneficiary.
6
<PAGE>
5.7 Withholding; Unemployment Taxes. To the extent required by the law in
effect at the time payments are made, the Company shall withhold from any
amounts deferred under the Plan or from payments made hereunder the taxes
required to be withheld by the federal or any state or local government.
ARTICLE 6
BENEFICIARY DESIGNATION
Each Participant shall have the right, at any time, to designate any
person or persons as Beneficiary or Beneficiaries to whom payments under this
Plan shall be made in the event of the Participant's death prior to complete
distribution to the Participant of the benefits due under the Plan. Each
Beneficiary designation shall become effective only when filed in writing with
the Committee on a form prescribed or accepted by the Committee.
Any Participant shall have the right to designate a new Beneficiary at any
time by filing with the Committee a written request for such change, but any
such change shall become effective only upon receipt of such request by the
Committee. Upon receipt by the Committee of such request, the change shall
relate back to and take effect as of the date the Participant signs such request
whether or not the Participant is living at the time the Committee receives such
request.
To the extent a Participant designates a beneficiary other than a spouse,
the administrative rules under the Travelers Group 401(k) Savings Plan apply. If
there is no designated Beneficiary living at the death of the Participant when
any payment hereunder shall be payable to a Beneficiary, then such payment shall
be made as follows:
To such Participant's wife or husband, if living and if not living, to
such Participant's then living lineal descendants, in equal shares, per
stirpes; if none survives, to such Participant's surviving parents,
equally; if neither survives, to such Participant's executors or
administrators.
ARTICLE 7
AMENDMENT AND TERMINATION OF PLAN
7.1 Amendment. The Senior Vice President, Human Resources of Travelers
Group Inc. or the Board may at any time amend the Plan in whole or in part;
provided, however, that no such amendment shall be effective to decrease the
benefits accrued by any Participant prior to the date of such amendment and any
change in the definitions of the Declared Rates shall be effective only as to
Plan Years beginning after the date of such amendment. Written notice of any
amendment shall be given to each current or former Employee then participating
in the Plan.
7.2 Termination.
(a) Company's Right to Terminate. The Senior Vice President, Human
Resources of Travelers Group Inc. or the Board may at any time terminate
the Plan, if in his or her or its judgment, the continuance of the Plan
would not be in the best interests of Travelers Group Inc., the Company or
its affiliates.
(b) Payments Upon Termination. Upon termination of the Plan under
this Section 7.2, the Participants will be deemed to have voluntarily
terminated their participation
7
<PAGE>
under the Plan as of the date of such termination. Salary and Incentive
Awards shall cease to be deferred, and the Company will pay to each
Participant the value of each of the Participant's Deferral Accounts,
determined as if each Participant had terminated employment on the date of
such termination of the Plan, at such times and pursuant to such terms and
conditions as the Committee in its sole discretion shall determine.
Participants or Beneficiaries receiving Retirement Benefit installments
shall receive a lump sum payment equal to the remaining, unpaid Deferred
Account balance.
ARTICLE 8
MISCELLANEOUS
8.1 Unsecured General Creditor. Participants and their Beneficiaries,
heirs, successors, and assigns shall have no legal or equitable rights, claims,
or interests in any specific property or assets of the Company, nor shall they
be beneficiaries of, or have any rights, claims, or interests in any life
insurance policies, annuity contracts, or the proceeds therefrom owned or which
may be acquired by the Company ("Policies"). Such Policies or other assets of
the Company shall not be held under any trust for the benefit of Participants,
their Beneficiaries, heirs, successors, or assigns (other than a grantor trust
established to assist the Company in meeting its obligations hereunder and the
assets of which are available to general creditors if the Company becomes
insolvent), or held as collateral security for the fulfilling of the obligation
of the Company under this Plan. Any and all of the Company's assets and Policies
shall be, and remain, the general, unpledged, unrestricted assets of the
Company. The Company's obligation under the Plan shall be merely that of an
unfunded and unsecured promise of the Company to pay money in the future.
8.2 Obligations to Company. If a Participant becomes entitled to a
distribution of benefits under the Plan, and if at such time the Participant has
outstanding any debt, obligation, or other liability representing an amount
owing to the Company or its affiliates, then the Company may offset such amount
owed to it against the amount of benefits otherwise distributable. Such
determination shall be made by the Committee.
8.3 Nonassignability. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage
or otherwise encumber, hypothecate or convey in advance of actual receipt the
amounts, if any, payable, hereunder, or any part thereof, or interest therein
which are, and all rights to which are, expressly declared to be unassignable
and non-transferable. No part of the amounts payable shall, prior to actual
payment, be subject to seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by a Participant or any other
person, nor be transferable by operation of law in the event of a Participant's
or any other person's bankruptcy or insolvency.
8.4 Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed as a contract of employment or as
giving any Employee any right to be retained in the employ of the Company or its
affiliates.
8.5 Protective Provisions. Each Participant shall cooperate with the
Company by furnishing any and all information requested by the Company in order
to facilitate the payment of benefits hereunder, by taking such physical
examinations as the Company may deem necessary and by taking such other relevant
action as may be requested by the Company. If a Participant refuses to
cooperate, the Company shall have no further obligation to the Participant under
the Plan, other than payment to such Participant of the cumulative reductions in
Salary and Incentive Awards theretofore made pursuant to this Plan.
8
<PAGE>
8.6 Gender, Singular & Plural. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as the identity
of the person or persons may require. As the context may require, the singular
may be read as the plural and the plural as the singular.
8.7 Captions. The captions of the articles, sections, and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
of construction of any of its provisions.
8.8 Validity. In the event any provision of this Plan is held invalid,
void, or unenforceable, the same shall not affect, in any respect, whatsoever,
the validity of any other provision of this Plan.
8.9 Notice. Any notice or filing required or permitted to be given to the
Committee under the Plan shall be sufficient if in writing and hand delivered,
or sent by registered or certified mail, to the Company, directed to the
attention of the Plans Administration Committee of the Company, Attention:
Administrator, at the address set forth in Article 3. Such notice shall be
deemed given as to the date of delivery or, if delivery is made by mail, as of
the date shown on the postmark on the receipt for registration or certification.
8.10 Applicable Law. This Plan shall be governed and construed in
accordance with the laws of the State of Connecticut.
8.11 Trust Fund. The Company shall be responsible for the payment of all
benefits provided under the Plan. At its discretion, the Company may establish
one or more trusts, with such trustees as the Board or the Committee may
approve, for the purpose of providing for the payment of such benefits. Such
trust or trusts may be irrevocable, but the assets thereof shall be subject to
the claims of the Company's creditors. To the extent any benefits provided under
the Plan are actually paid from any such trust, the Company shall have no
further obligation with respect thereto, but to the extent not so paid, such
benefits shall remain the obligation of, and shall be paid by, the Company.
8.12 Ineligible Participant. Notwithstanding any other provisions of this
Plan to the contrary, if any Participant is determined not to be a "management
or highly compensated employee" within the meaning of ERISA or Regulations
thereunder, such Participant will not be eligible to participate in this Plan
and shall receive an immediate lump-sum payment equal to the amounts standing
credited to his or her Deferral Accounts. Upon such payment, no survivor benefit
or other benefit shall thereafter be payable under this Plan either to the
Participant or any Beneficiary of the Participant.
9
<PAGE>
APPENDIX A
TESIP RESTORATION PLAN
The TESIP Restoration Plan was effective only for 1990. Deferral Accounts
under the TESIP Restoration Plan were converted to Deferral Accounts under The
Travelers TESIP Restoration and Non-Qualified Savings Plan effective January 1,
1991.
Eligible Employees were permitted to make Salary deferrals for the period
from July through December 1990 and were permitted to defer Incentive Awards
paid in 1990. The maximum deferral permitted was 17% of compensation (year-end
1989 Salary plus last paid Incentive Award) minus the TESIP Offset ($10,480 for
1990).
For 1990 the Company contributed to the Deferral Account of a Participant
the following amounts:
(a) Company Matching Contribution. The Company made a matching
contribution of 100% of the amount of compensation the Participant
deferred (up to a maximum of the first 5% of compensation), less the TESIP
Offset of $10,480.
(b) TESIP Restoration Contribution. The Company also made an
additional contribution if participation in the TESIP Restoration Plan
reduced the Participant's Company contribution under TESIP.
The Fixed Income Declared Rate was credited during 1990 on all Deferral
Accounts under the TESIP Restoration Plan.
10
<PAGE>
APPENDIX B
1991 - 1993
o Deferral of up to 50% of salary and up to 100% of incentive plan
award (eg., MIP) on a pre-tax basis.
o Restore matching contributions from The Travelers up to a full 5% of
compensation.
o Earn tax-deferred interest based on either a fixed rate of return or
a simulated equity rate of return, eg., S&P 500 Index.
11
<PAGE>
APPENDIX C
1994 and 1995
o Deferral of up to 50% of salary and up to 100% of eligible incentive
plan awards on a pre-tax basis.
o Restore matching contributions from The Travelers up to 2.5% of
compensation plus a variable matching contribution in the event such
a contribution is made under TESIP.
o Earn tax-deferred interest based on either a fixed rate of return or
a simulated equity rate of return, e.g., S&P 500 Index.
12
<PAGE>
APPENDIX D
Pursuant to section 4.2 of the Plan, the Company allows the tax deferred
rollover of non-qualified balances that had previously been part of Aetna's
Incentive Deferral Plan and Aetna's Supplemental Incentive Savings Plan (SISP)
and will credit to Deferral Accounts any amounts deferred during 1996 and
Company Contributions made pursuant to Aetna's Incentive Deferral Plan and
Aetna's SISP during 1996.
Distribution Elections
For all balances transferred from Aetna's Incentive Deferral plan, the payment
elections that were made under Aetna's Plan will continue to govern the
distribution of those balances.
For all balances transferred from Aetna's SISP, participants will make a payment
election based on choices that are similar to those that existed under Aetna's
Incentive Deferral Plan. The Company reserves the right to require participants
to provide new payment elections consistent with those then available under the
Plan. Elections for payment upon retirement for balances transferred from
Aetna's SISP plan commence by definition under such plan on or after age 62.
13
Exhibit 10.19
================================================================================
SALOMON INC
EQUITY PARTNERSHIP PLAN
FOR
KEY EMPLOYEES
================================================================================
Adopted as of June 6, 1990
Amended and Restated as of January 1, 1996
Unless Otherwise Stated Herein
March 19, 1997
<PAGE>
SALOMON INC
EQUITY PARTNERSHIP PLAN
FOR KEY EMPLOYEES
Page
----
1. Purpose of the Plan......................................................1
2. Definitions..............................................................1
3. Election by a Company to Participate in the Plan.........................9
4. Stock Subject to the Plan................................................9
5. Administration of the Plan..............................................10
6. Eligibility.............................................................10
7. Awards and Rollovers under the Plan.....................................11
(a) Awards.............................................................11
(b) Rollovers..........................................................13
(c) Vesting of Awards and Rollovers....................................14
(d) Simultaneous Occurrence of Realization Event and Termination of
Employment.......................................................17
8. Funding of the Plan.....................................................17
9. Maintenance of Accounts.................................................21
(a) Stock Account......................................................21
(b) Rollover Account...................................................22
(c) Cash Account.......................................................23
10. Long-Term Investment Election...........................................24
11. Payments under the Plan.................................................24
12. Securities Matters......................................................29
<PAGE>
13. Voting and Tender of Salomon Stock......................................30
(a) Voting Rights......................................................30
(b) Tender Rights......................................................31
(c) Tender Prior to Allocation.........................................32
(d) Notices and Information Statements.................................32
(e) Confidentiality of Voting and Tender Directions....................32
14. Adjustment of Accounts in Certain Events................................32
15. Certain Divestitures....................................................33
(a) Company with Publicly Traded Stock That No Longer is a 50%
Affiliate......................................................33
(b) Company with Publicly Traded Stock That Remains a 50% Affiliate ...34
(c) Satisfaction of Obligations After a Divestiture....................35
16. No Special Employment Rights..........................................35
17. Payroll and Withholding Taxes.........................................35
18. Termination and Amendment.............................................36
19. Payments upon the Death of a Participant..............................38
20. Shareholder Approval Required.........................................39
21. Effect of Revocation Event............................................39
22. Miscellaneous.........................................................40
ii
<PAGE>
APPENDIX A................................................................A-1
Award Schedule for 1996 and Thereafter....................................A-1
Award Schedule for 1995...................................................A-2
Award Schedule for Phibro Division Effective 1993 and 1994................A-3
Award Schedule for 1991--1994.............................................A-4
Award Schedule for 1990...................................................A-5
iii
<PAGE>
SALOMON INC
EQUITY PARTNERSHIP PLAN
FOR KEY EMPLOYEES
1. PURPOSE OF THE PLAN
This Equity Partnership Plan for Key Employees is designed to provide
participants, as compensation in respect of past services rendered, with a
continuing long-term investment in common stock of Salomon Inc, the realization
of which will be deferred to a future date. By placing participants in the
position of long-term shareholders of Salomon Inc, participants are expected to
have the same motivations and interests as other shareholders of Salomon Inc,
such as controlling costs (including compensation costs) and seeking to maximize
the return on equity of Salomon Inc and its subsidiaries and affiliates, and are
expected to analyze the activities in which they personally are involved in
terms of the overall benefit of such activities to Salomon Inc and its
affiliates and subsidiaries, as well as the effect that such activities will
have on the participants' individual departments or direct compensation. This
plan is intended to be an unfunded "bonus program" (within the meaning of 29 CFR
Part 2510.3-2(c)) designed primarily to provide deferred bonuses to a select
group of highly compensated or management employees.
2. DEFINITIONS
As used in the Plan, the following definitions apply to the terms indicated
below:
(a) "Accounts" shall mean a Participant's Cash Account, Rollover Account
and Stock Account.
(b) "Affiliate" shall mean any corporation (other than a Company) which is
a member of a "controlled group of corporations" (as that term is defined in
Section 4l4(b) of the Code) of which a Company is a member and any trade or
business (whether or not incorporated) under "common control" (as that term is
defined in Section 414(c) of the Code) with a Company.
(c) "Average Cost Per Share" shall mean a cost per share of Salomon Stock
calculated as follows:
(i) After each purchase (or deemed purchase) of shares made in
connection with or in anticipation of an award under an Equity Partnership
Plan, the Average Cost Per Share shall be recalculated and shall equal (A)
the Total Cost of Net Shares immediately after such purchase, divided by
(B) the total number of Net Shares immediately after such purchase.
<PAGE>
(ii) After each allocation of shares from the Suspense Account in
respect of Salomon Inc's 17.65% contribution obligation with respect to
dividends (or deemed dividends) as provided in Section 8 or under another
Equity Partnership Plan, the Average Cost Per Share shall be recalculated
and shall equal (A) the Total Cost of Net Shares immediately after such
allocation, divided by (B) the total number of Net Shares held immediately
after such allocation.
(iii) Contributions of Salomon Stock to the trusts under the Equity
Partnership Plans by Salomon Inc shall be treated as purchases in
anticipation of awards under the Equity Partnership Plans at the Daily
Value as of the date of the contribution.
(iv) Forfeitures under the Equity Partnership Plans (other than
forfeitures with respect to Rollovers from the Partnership Pool Plan that
are described in Section 7(c)(ii)) shall be treated as purchases for the
Equity Partnership Plans at the Daily Value as of the date of forfeiture
of the number of shares forfeited. Restored forfeitures shall be treated
as allocations as of the forfeiture date.
(v) If, on any date that shares of Salomon Stock are purchased for
the Equity Partnership Plans, any Awards, Rollovers or dividends paid on
Salomon Stock allocated to Participants' Accounts are awaiting investment,
such purchases shall be deemed to be purchases to satisfy such Awards,
Rollovers and dividends, pro rata based on the dollar amounts of such
Awards, Rollovers and dividends. Any shares that are purchased in excess
of the shares necessary to satisfy such uninvested Awards, Rollovers and
dividends shall be held in the Suspense Account and shall be deemed to be
purchased in anticipation of awards under the Equity Partnership Plans.
(vi) Effective as of June 6, 1990, in the event that there are any
shares of Salomon Stock remaining in the Suspense Account on January 1 of
any calendar year that were purchased or deemed to have been purchased in
a prior calendar year, the Average Cost Per Share of such shares shall be
deemed to be the Daily Value on the last trading day immediately preceding
such January 1.
(vii) Shares of Salomon Stock withheld in accordance with Section
17(c) hereof that Salomon Inc directs the Trustee to continue to hold in
the Suspense Account pursuant to Section 17(c) shall be treated as
purchases in anticipation of awards under the Equity Partnership Plans at
the Daily Value on the distribution date with respect to which such shares
were withheld.
(d) "Award" shall mean, with respect to each Participant, an award granted
to such Participant with respect to a calendar year by the Committee pursuant to
Section 7. An Award shall be deemed to have been made with respect to the
calendar year
2
<PAGE>
within which ends the compensation year by reference to which the year-end bonus
related to the Award is calculated and in which a Company would, in the absence
of the Plan, have accrued a compensation expense for accounting purposes for the
cash value of the Award.
(e) "Beneficiary" shall mean the person or entity determined to be a
Participant's beneficiary pursuant to Section 19 hereof.
(f) "Board of Directors" shall mean the Board of Directors of Salomon Inc.
(g) "Cash Account" shall mean (i) a book account maintained by Salomon Inc
reflecting, (A) with respect to tendered shares of Salomon Stock credited to a
Participant's Accounts and (B) with respect to amounts described in Section
11(d) of the Plan, the cash amount to be distributed to a Participant upon a
Realization Event and (ii) an account in the Trust reflecting (A) the
consideration received as a result of tendering shares of Salomon Stock credited
to a Participant's Accounts, adjusted to reflect gains and losses resulting from
the Trustee's investment of such amount and (B) the amount described in Section
11(d) of the Plan.
(h) "Cause" shall mean, when used in connection with the termination of a
Participant's employment, the termination of the Participant's employment by a
Company or an Affiliate on account of (i) the willful violation by the
Participant of (A) any federal or state law, (B) any rule of any Company or
Affiliate or (C) any rule or regulation of any regulatory body to which any
Company or Affiliate is subject, including, without limitation, the New York
Stock Exchange or any other exchange or contract market of which any Company or
Affiliate is a member and the National Association of Securities Dealers, Inc.,
which violation would materially reflect on the Participant's character,
competence or integrity, (ii) a breach by a Participant of the Participant's
duty of loyalty to the Companies and Affiliates in contemplation of the
Participant's termination of the Participant's employment, such as the
Participant's pre-termination of employment solicitation of customers or
employees of any Company or Affiliate or (iii) the Participant's unauthorized
removal from the premises of any Company or Affiliate of any document (in any
medium or form) relating to any Company or Affiliate or the customers of any
Company or Affiliate. Any rights a Company or an Affiliate may have hereunder in
respect of the events giving rise to Cause shall be in addition to the rights
the Company or Affiliate may have under any other agreement with the employee or
at law or in equity. If, subsequent to a Participant's voluntary termination of
employment or involuntary termination of employment without Cause, it is
discovered that the Participant's employment could have been terminated for
Cause, such Participant's employment shall, at the election of the Committee in
its sole discretion, be deemed to have been terminated for Cause.
3
<PAGE>
(i) "Change in Control" shall mean:
(i) The acquisition by any person (including a group within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than
Salomon Inc or any of its subsidiaries or Berkshire Hathaway, Inc. or any
of its subsidiaries or affiliates (as defined in Rule 12b-2 promulgated
under the Exchange Act), without the prior written approval of the Board
of Directors, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either the then
outstanding shares of Salomon Stock or the combined voting power of
Salomon Inc's then outstanding voting securities in a transaction or
series of transactions not approved by a vote of at least a majority of
the Continuing Directors (as hereinafter defined); or
(ii) A change in the composition of the Board of Directors of
Salomon Inc such that individuals who, as of January 1, 1988, constitute
the Board of Directors of Salomon Inc (generally the "Directors" and as of
January 1, 1988 the "Continuing Directors") cease for any reason to
constitute at least a majority thereof, provided that any person becoming
a Director subsequent to January 1, 1988 whose nomination for election was
approved by a vote of at least a majority of the Continuing Directors
(other than a nomination of an individual whose initial assumption of
office is in connection with an actual or threatened election contest
relating to the election of the Directors of Salomon Inc, as such terms
are used in Rule 14a-11 of Regulation 14A under the Exchange Act) shall be
deemed to be a Continuing Director.
(j) "Code" shall mean the Internal Revenue Code of 1986.
(k) "Committee" shall mean such committee as the Board of Directors shall
appoint from time to time to administer the Plan. The Committee shall consist of
two or more persons, each of whom shall be (i) prior to August 15, 1996, a
"disinterested person" and (ii) on or after August 15, 1996, a "non-employee
director," in each case within the meaning of Rule 16b-3 promulgated under
Section 16 of the Exchange Act.
(1) "Companies" shall mean Salomon Inc and its subsidiaries and affiliates
that have adopted the Plan pursuant to Section 3(a) hereof, while such companies
remain subsidiaries or affiliates of Salomon Inc.
(m) "Company" shall mean Salomon Inc or any of its subsidiaries or
affiliates that have adopted the Plan pursuant to Section 3(a) hereof, while any
such company remains a subsidiary or affiliate of Salomon Inc.
(n) "Compensation" shall mean, with respect to a calendar year, the sum of
the dollar amounts of an employee's (i) base salary, (ii) night differential,
(iii) overtime,
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(iv) year-end bonus, (v) effective with respect to Awards granted on or January
1, 1997, any bonus payable pursuant to a special incentive compensation
agreement or arrangement and (vi) Award, resulting from services rendered to the
Companies, before giving effect to (A) any "compensation reduction election"
under the Retirement Plan (as that term is defined in the Retirement Plan) or to
any similar compensation reduction election made in connection with a plan
within the meaning of Code Section 401(k), (B) any compensation reduction
election made in connection with a "cafeteria plan" within the meaning of Code
Section 125 and (C) any compensation reduction election made in connection with
an "employee stock purchase plan" within the meaning of Code Section 423.
Compensation shall not include the amount of any 17.65% contribution made
pursuant to Section 8 hereof or the amount of any up front or "sign-on" bonus
paid to any individual.
(o) "Daily Value" shall mean, with respect to a share of Salomon Stock,
the average of the high and low reported sales price regular way per share of
Salomon Stock on the New York Stock Exchange Composite Tape, or if Salomon Stock
is not traded on such stock exchange, the principal national securities exchange
on which Salomon Stock is traded, or if not so traded, the mean between the
highest bid and lowest asked quotation on the over-the-counter market as
reported by the National Quotations Bureau, or any similar organization, on any
relevant date, or if not so reported, as determined by the Committee in a manner
consistently applied.
(p) "Disability" shall mean any physical or mental condition that would
qualify a Participant for a disability benefit under the long-term disability
plan maintained by any Company and applicable to the Participant.
(q) "Equity Partnership Plans" shall mean the Plan, the Salomon Inc Equity
Partnership Plan for Professional and Other Highly Compensated Employees and any
other equity plan maintained by any Company and designated by the Committee as
an Equity Partnership Plan.
(r) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
(s) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(t) "Investment Period" shall mean, with respect to an Award or a Rollover
from a Prior Incentive Plan, the later of (i)(A) with respect to Awards or such
Rollovers made prior to January 1, 1996, the expiration of the 5-year period
beginning on the date as of which such Award is granted or such Rollover is made
and (B) with respect to Awards made on or after January 1, 1996, the expiration
of the 3-year period beginning on the date as of which such Award is granted or
(ii) the expiration of any
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period determined pursuant to any Long-Term Investment Election made by a
Participant. In addition to the foregoing, the Investment Period with respect to
an Award or a Rollover from a Prior Incentive Plan shall end upon the
Participant's Permissive Retirement that occurs prior to the date on which the
Investment Period otherwise would end if the Participant so elects in writing
within 45 days after the date such Award is granted or such Rollover is made or
simultaneously with the filing of a Long-Term Investment Election with respect
to such Award or Rollover. The Investment Period of a Rollover from another
Equity Partnership Plan shall be determined as if such Rollover were an Award
under the Plan as of the date on which the related award was granted under such
other Equity Partnership Plan.
(u) "Long-Term Investment Election" shall mean a Participant's irrevocable
written election pursuant to Section 10 hereof.
(v) "Minimum Eligible Compensation" shall mean: (i) $300,000 with respect
to 1990; (ii) effective as of January 1, 1991, with respect to each calendar
year after 1990 and before 1995, 1.5 multiplied by the compensation limitation
in effect under Section 401(a)(17) of the Code for the immediately preceding
calendar year; and (iii) with respect to each calendar year beginning in 1995
and thereafter, 2.4 multiplied by the compensation limitation in effect under
Section 401(a)(17) for the immediately preceding calendar year.
(w) "Net Shares" shall mean the number of shares purchased or deemed to
have been purchased with respect to or in anticipation of Awards and awards
under the other Equity Partnership Plans, excluding purchases or deemed
purchases with respect to dividends paid on Salomon Stock credited to
Participants' Accounts, less the number of shares credited to Participants'
Accounts (and not theretofore forfeited) from the Suspense Account.
(x) "Participant" shall mean a key employee, including an officer or
director, of any Company who is determined by the Committee to be eligible to
participate in the Plan and who is designated a Participant pursuant to Section
6 hereof.
(y) "Partnership Pool Plan" shall mean the 1988 Managing Directors'
Partnership Pool.
(z) "Permissive Retirement" shall mean a Participant's termination of
employment with the Companies and Affiliates, other than by reason of death or
Disability and other than for Cause, on or after the earliest to occur of: (i)
the December 31st following the date the Participant attains age 55 and
completes 10 years of service determined pursuant to the Retirement Plan; (ii)
the Participant's 65th birthday; (iii) the December 31st following the date the
Participant completes 25 years of service determined pursuant to the Retirement
Plan; or (iv) the later of the date the
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Participant has completed at least 10 years of service determined pursuant to
the Retirement Plan and the December 31st following the date the Participant
attains an age which, when added to the Participant's number of years of service
determined pursuant to the Retirement Plan, equals 75. The Committee may
consider an extended leave of absence to be a termination of employment even
though the Participant may render limited services to the Companies or
Affiliates during such leave.
(aa) "Plan" shall mean the Salomon Inc Equity Partnership Plan for Key
Employees.
(ab) "Prior Incentive Plan" shall mean the Partnership Pool Plan or the
Special Bonus Plan.
(ac) "Realization Event" shall mean, with respect to an Award or a
Rollover, the first to occur of (i) the expiration of the Investment Period with
respect to such Award or Rollover, (ii) the occurrence of a Change in Control,
(iii) the termination of the Plan pursuant to Section 18 hereof, (iv) the
Participant's termination of employment with a Company or Affiliate as a result
of the Participant's Disability or (v) the Participant's death.
(ad) "Retirement Plan" shall mean the Salomon Inc Retirement Plan, as
amended from time to time, and its predecessors and successors.
(ae) "Revocation Event" shall mean a determination by the Board of
Directors in its sole discretion that any of the following has occurred or is
likely to occur:
(i) A determination by the Department of Labor or a court of
competent jurisdiction that the assets of the Trust are subject to Part 4
of Subtitle B of Title I of ERISA.
(ii) A determination by the Department of Labor or a court of
competent jurisdiction that the Plan is a "pension plan" (within the
meaning of Section 3(2) of ERISA) subject to Parts 2, 3 and 4 of Subtitle
B of Title I of ERISA.
(iii) A determination by the Internal Revenue Service or a court of
competent jurisdiction that any amount deposited in the Trust is taxable
to any Participant or Beneficiary prior to the distribution to the
Participant or Beneficiary of such amount.
(iv) A determination by Salomon Inc's independent public accountants
that the accounting expense to the Companies of maintaining the Accounts
under the Plan (other than a Participant's Accounts with respect to an
Award credited with 100 shares of Salomon Stock or less that may be
distributed in the form of
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cash) is based on a value of the shares of Salomon Stock other than such
value (A) on the date shares of Salomon Stock are acquired by the Trust or
(B) on the date the shares of Salomon Stock are credited to a
Participant's Accounts.
(af) "Rollover" shall mean an amount transferred to the Plan from another
Equity Partnership Plan or from a Prior Incentive Plan pursuant to Section 7(b).
(ag) "Rollover Account" shall mean a book account maintained by Salomon
Inc and an account maintained in the Trust reflecting, with respect to a
Rollover, the number of shares of Salomon Stock to be distributed to a
Participant upon a Realization Event.
(ah) "Rollover Election" shall mean a written election by a Participant to
transfer to the Plan amounts credited to the Participant's accounts from another
Equity Partnership Plan or a Prior Incentive Plan pursuant to Section 7(b).
(ai) "Salomon Stock" shall mean the common stock of Salomon Inc or any
successor thereto.
(aj) "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.
(ak) "Special Bonus Plan" shall mean the Salomon Brothers Inc Special
Bonus Plan, adopted effective as of January 1, 1986.
(al) "Stock Account" shall mean a book account maintained by Salomon Inc
and an account maintained in the Trust reflecting, with respect to each Award,
the number of shares of Salomon Stock to be distributed to each Participant upon
a Realization Event.
(am) "Suspense Account" shall mean an account in the Trust in which
unallocated shares of Salomon Stock are held.
(an) "Total Cost of Net Shares" immediately after a purchase (or deemed
purchase) made in connection with or in anticipation of an award under the
Equity Partnership Plans or an allocation shall mean the Average Cost Per Share
immediately, preceding the purchase or allocation, as the case may be,
multiplied by the number of Net Shares immediately preceding the purchase or
allocation, as the case may be (i) in the case of a purchase, plus (A) the
number of such shares purchased multiplied by (B) the amount paid per share,
excluding brokerage commissions, for such shares or (ii) in the case of an
allocation, minus (A) the number of shares allocated multiplied by (B) the Daily
Value on the date of the allocation.
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(ao) "Trust" shall mean any trust established in connection with the Plan.
(ap) "Trustee" shall mean the trustee of the Trust.
(aq) "Voluntary Award Election" shall mean, with respect to a Participant
described in Section 7(a)(iii), an election made pursuant to Section 7(a)(iii)
to reduce the Participant's Compensation by a percentage of such Compensation
(determined without reference to the Voluntary Award Election) and have the
amount by which the Participant's Compensation is so reduced converted to an
Award.
3. ELECTION BY A COMPANY TO PARTICIPATE IN THE PLAN
(a) By appropriate corporate action, subject to the approval of the Board
of Directors, any subsidiary or affiliate of Salomon Inc may adopt the Plan.
Such subsidiary or affiliate may recommend to the Committee which of its
employees should be eligible to participate in the Plan.
(b) By appropriate corporate action, a Company may terminate its
participation in the Plan.
(c) No affiliate or subsidiary of Salomon Inc that participates in the
Plan shall have any power with respect to the Plan except as specifically
provided in the Plan.
(d) As a condition of participation in the Plan, Salomon Inc shall require
any subsidiary or affiliate to enter into an agreement or agreements to obligate
such subsidiary or affiliate to pay to Salomon Inc or to the Trust, in cash, the
appropriate value, as determined by the Board of Directors, of any Salomon Stock
that Salomon Inc contributes to the Trust in respect of the Participants
employed by such subsidiary or affiliate. In addition, Salomon Inc may require
any subsidiary or affiliate to enter into such other agreement or agreements as
it shall deem necessary to obligate such subsidiary or affiliate to reimburse
Salomon Inc or the Trust for any other amounts paid hereunder, directly or
indirectly, in respect of such subsidiary's or affiliate's employees.
4. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 14 hereof, shares of Salomon
Stock may be allocated to Participants' accounts under the Equity Partnership
Plans in an amount that, in the aggregate since the inception of the Equity
Partnership Plans in 1990, does not exceed 40,000,000 shares. In the event that
any shares of Salomon Stock allocated to a Participant's accounts under the
Equity Partnership Plans are
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forfeited for any reason, the number of shares of Salomon Stock forfeited shall
again be available for allocation under the Equity Partnership Plans.
5. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee. The Committee shall have
full authority, consistent with the Plan, to administer the Plan, including
authority to interpret and construe any provision of the Plan and to adopt such
rules and regulations for administering the Plan and such forms of elections as
it may deem necessary or appropriate. Decisions of the Committee shall be final
and binding on all parties. Committee decisions shall be made by a majority of
its members present at a meeting (which meeting may be held by telephone) at
which a quorum is present. Any decision reduced to writing and signed by all of
the members of the Committee shall be as fully effective as if it had been made
at a meeting duly held. All expenses of the Plan shall be borne by Salomon Inc.
No member of the Committee shall be liable for any action, omission or
determination relating to the Plan, and the Companies shall indemnify and hold
harmless each member of the Committee and each other director or employee of the
Companies to whom any duty or power relating to the administration or
interpretation of the Plan has been delegated, against any cost, expense
(including counsel fees, which fees shall be paid as incurred) or liability
(including any sum paid in settlement of a claim with the approval of the Board
of Directors) arising out of any action, omission or determination relating to
the Plan, if such action, omission or determination was taken or made by such
member, director or employee in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Companies, and
with respect to any criminal action or proceeding, such member had no reasonable
cause to believe his conduct was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the Companies, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
6. ELIGIBILITY
(a) Effective as of January 1, 1991, the persons who shall be eligible to
participate in the Plan with respect to a calendar year shall be such employees
or classes of employees of the Companies (i) (A) whose principal work location
during such calendar year is within the United States of America or (B) who are
citizens of the United States of America, whose principal work location during
such calendar year is outside of the United States of America and who do not
participate in a plan maintained
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by their employer during such calendar year that the Committee determines to be
comparable to the Plan, (ii)(A) with respect to an individual who did not
participate in the Plan in the immediately preceding year, whose Compensation
with respect to such calendar year is at least equal to the Minimum Eligible
Compensation or (B) with respect to an individual who did participate in the
Plan in the immediately preceding year, whose Compensation with respect to such
calendar year is at least equal to the compensation limitation under Section
401(a)(17) of the Code and who would have been eligible for an Award under the
Salomon Inc Equity Partnership Plan for Professional and Other Highly
Compensated Employees for such calendar year and (iii) who are designated as
eligible to participate in the Plan by the Committee.
(b) Notwithstanding Paragraph (a) of this Section, the Committee may from
time to time add or exclude from participation one or more individuals or
classes of individuals. Each eligible individual shall become a Participant
effective on the date as of which the individual (or class of individuals
including such individual) is designated as a Participant.
7. AWARDS AND ROLLOVERS UNDER THE PLAN
(a) Awards
(i) Subject to Paragraphs (ii) and (iv) of this Section, the
Committee shall grant Awards to Participants pursuant to the schedule
attached hereto as Appendix A. The Committee may from time to time and in
its sole discretion amend the schedule contained in Appendix A. Any such
schedule shall provide for Awards based on a percentage of a Participant's
Compensation (or, in the Committee's discretion, with respect to any
Participant whose year-end bonus constitutes "performance-based
compensation" under Section 162(m)(4)(C) of the Code, such Participant's
year-end bonus) with respect to a calendar year, and will reduce the
Participant's cash bonus that would otherwise be payable with respect to
such calendar year.
(ii) Notwithstanding the schedule attached hereto as Appendix A or
any amendment thereto, subject to Section 7(a)(iii), no Award to a
Participant with respect to a calendar year will exceed the lesser of
(A)(1) for the 1991 calendar year, 50% of the Participant's Compensation
for such calendar year and (2) for each calendar year after 1991, 50% of
the Participant's Compensation or such greater percentage of Compensation
as shall be determined by the Committee in its sole discretion, (B) the
dollar amount of the bonus (excluding the amount of any up-front or
sign-on bonus) payable to such Participant with respect to such calendar
year, before reduction for any Award with respect to such calendar year,
but reduced by the portion of the bonus (other than an up-front or sign-on
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bonus) contributed by the Companies pursuant to the Participant's salary
reduction election to (1) the Retirement Plan or any similar plan, (2) a
"cafeteria plan" within the meaning of Code Section 125 or (3) an
"employee stock purchase plan" within the meaning of Code Section 423 or
(C) any additional limit determined by the Committee and included as part
of an Award schedule attached as Exhibit A.
(iii) Effective as of January 1, 1994, any Participant whom the
Committee determines may be a "covered employee" within the meaning of
Section 162(m) of the Code in a calendar year (other than a Participant
whose year-end bonus constitutes "performance-based compensation" and
whose Award under Section 7(a)(i) is determined solely on the basis of the
Participant's year-end bonus) shall be permitted to receive an additional
Award for a calendar year based on the Participant's Voluntary Award
Election for such calendar year. Each Voluntary Award Election (A) shall
state the percentage of the Participant's Compensation (determined without
reference to the Voluntary Award Election) by which the Participant's
Compensation shall be reduced and converted to an Award hereunder, (B)
shall be made in such form as may be required by the Committee and (C)
shall be delivered to the Committee no later than December 31 of the
calendar year immediately preceding the calendar year for which the
Voluntary Award Election is made (or, with respect to Voluntary Award
Elections for the 1994 calendar year, no later than the date 30 days after
the Plan, as amended and restated as of January 1, 1994, is approved by
Salomon Inc's shareholders). Notwithstanding any Voluntary Award Election,
the amount by which the Participant's Compensation shall be reduced and
which shall be converted to an Award hereunder shall not exceed the lesser
of (1) the excess, if any, of (I) the Participant's Compensation after
reduction for any Award granted pursuant to Section 7(a)(i) over (II) $1
million, and (2) the dollar amount of the bonus (excluding the amount of
any up-front or sign-on bonus) payable to such Participant with respect to
such calendar year, after reduction for any Award granted pursuant to
Section 7(a)(i) with respect to such calendar year and further reduced by
the portion of the bonus (other than an up-front or sign-on bonus)
contributed by the Companies pursuant to the Participant's salary
reduction election to (A) the Retirement Plan or any similar plan, (B) a
"cafeteria plan" within the meaning of Code Section 125 or (C) an
"employee stock purchase plan" within the meaning of Code Section 423.
(iv) Notwithstanding the foregoing, effective as of January 1, 1991
with respect to calendar years beginning prior to January 1, 1996, unless
the Committee determines otherwise in its sole discretion, the following
individuals
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shall not be entitled to receive an Award for a calendar year (whether or
not Awards already have been allocated to Participants for such calendar
year):
(A) an individual who, prior to December 31 of such calendar
year, has notified the applicable Company or Affiliate that the
individual intends to terminate employment with the Companies and
Affiliates effective in such calendar year or the next succeeding
calendar year;
(B) an individual who, prior to December 31 of such calendar
year, has been notified by the applicable Company or Affiliate that
the individual's employment with the Companies and Affiliates will
be terminated effective in such calendar year or the next succeeding
calendar year; or
(C) an individual whose employment with the Companies and
Affiliates terminates prior to the end of such calendar year.
(v) Notwithstanding the foregoing, effective as of January 1, 1996,
unless the Committee otherwise determines in its sole discretion, an
individual who, prior to December 31 of such calendar year, has been
notified by the applicable Company or Affiliate that the individual's
employment with the Companies and Affiliates will be terminated effective
in such calendar year or the next succeeding calendar year shall not be
entitled to receive an Award for a calendar year (whether or not Awards
already have been allocated to Participants for such calendar year). An
individual who, prior to December 31 of such calendar year, has notified
the applicable Company or Affiliate that the individual intends to
terminate employment with the Companies and Affiliates effective in such
calendar year or the next succeeding calendar year shall receive an Award
for the calendar year unless otherwise determined by the Committee in its
sole discretion (which determination may be made after Awards already have
been allocated to Participants for such calendar year).
(b) Rollovers
(i) A Participant shall be permitted to make a Rollover with respect
to a percentage, up to 100%, of the amount credited to such Participant's
accounts under the Partnership Pool Plan as of December 31, 1990 by
delivering to the Committee, on or before December 31, 1990, a Rollover
Election indicating the percentage of each such amount to be rolled over.
(ii) A Participant shall be permitted to make a Rollover with
respect to a percentage, up to 100%, of the amount credited to such
Participant's accounts under the Special Bonus Plan as of December 31,
1990 by delivering to the
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Committee, on or before December 31, 1990, a Rollover Election indicating
the percentage of each such amount to be rolled over.
(iii) To the extent a Participant elects to roll over a portion of
the Participant's accounts under the Partnership Pool Plan or the Special
Bonus Plan, the Participant's rights under the Plan with respect to any
such amount shall be in lieu of all rights the Participant would have had
under either such Prior Incentive Plan.
(iv) Upon becoming eligible to participate in the Plan, all amounts
credited to the Participant's accounts under the Equity Partnership Plans
(other than the Plan) shall be transferred to the Plan as a Rollover.
(v) No Rollover shall be given effect with respect to a Participant
whose employment with the Companies terminates prior to the effective date
of such Rollover.
(c) Vesting of Awards and Rollovers
(i) Subject to Sections 7(a)(iv) and 11, with respect to Awards
granted and Rollover Elections made prior to January 1, 1996, each Award
and Rollover shall be 100% vested in each Participant, except as follows:
(A) a Participant shall forfeit any Award or Rollover if the
Participant's employment with a Company or an Affiliate is (or is
deemed to have been) terminated by such Company or Affiliate for
Cause on or prior to the Realization Event for that Award or
Rollover;
(B) a Participant shall forfeit any shares of Salomon Stock
attributable to a Rollover from the Partnership Pool Plan if, prior
to the earlier of January 1, 1992 and the Realization Event for that
Rollover, the Participant's employment with the Companies and
Affiliates terminates (whether or not for Cause); and
(C) a Participant shall forfeit 20% of the shares of Salomon
Stock attributable to a Rollover from the Special Bonus Plan if,
prior to the earliest of (1) January 1, 1992, (2) the date the
Participant would be entitled to Permissive Retirement as a result
of the criteria described in Sections 2(z)(i), (ii) or (iii), (3)
the date the Participant has completed 10 years of service under the
Retirement Plan in the capacity of Managing Director and/or as a
General Partner of Salomon Brothers Inc, regardless of the
Participant's age at the time of termination and (4) the Realization
Event for that Rollover, the Participant's employment with the
Companies
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and Affiliates terminates (whether or not for Cause), provided,
however, that a Participant who otherwise would achieve full vesting
as a result of Clauses (2) or (3) of this Paragraph nevertheless
shall forfeit 20% of the shares of Salomon Stock attributable to a
Rollover from the Special Bonus Plan if the Participant joins a
"competitor organization" prior to the Realization Event for that
Rollover.
(ii) Subject to Sections 7(a)(iv), 7(a)(v) and 11, with respect to
Awards granted on or after January 1, 1996, each Award and Rollover shall
be subject to forfeiture only as follows:
(A) A Participant shall forfeit the entire amount attributable
to any Award or Rollover if the Participant's employment is (or is
deemed to have been) terminated by such Company or Affiliate for
Cause on or prior to the Realization Event for that Award or
Rollover;
(B) Subject to Paragraph (ii)(A), a Participant shall forfeit
a portion of the amount attributable to any Award or Rollover (other
than an Award resulting from a Voluntary Award Election) as follows
in the event the Participant voluntarily terminates employment with
the Company or Affiliate and joins a "competitor organization" prior
to the Realization Event for the Award or Rollover (without taking
into account any Long-Term Investment Election):
(I) if the termination occurs prior to the expiration of one year
after the Award or (or, in the case of a Rollover, the award
to which the Rollover was related) was granted, the
Participant shall forfeit 100% of the amount attributable to
the Award or Rollover;
(II) if the termination occurs on or after the expiration of one
year, but prior to the expiration of two years after the Award
(or, in the case of a Rollover, the award to which the
Rollover was related) was granted, the Participant shall
forfeit 73-1/3% of the amount attributable to the Award or
Rollover; and
(III) if the termination occurs on or after the expiration of the
two years, but prior to the expiration of three years after
the Award (or, in the case of a Rollover, the award to which
the Rollover was related) was granted, the Participant shall
forfeit 46-2/3% of the amount attributable to the Award or
Rollover;
(C) Subject to Paragraphs (ii)(A), (ii)(B) and (ii)(D) of this
Section, a Participant shall forfeit 20% of the amount attributable
to an
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Award or Rollover (other than an Award resulting from a Voluntary
Award Election) if, prior to the Realization Event for the Award or
Rollover (without taking into account any Long-Term Investment
Election), the Participant's employment with the Companies and
Affiliates terminates for any reason;
(D) Subject to Paragraph (ii)(A) of this Section, a
Participant whose employment with a Company or an Affiliate is
involuntarily terminated as a result of a downsizing or general
reduction in work force at the Company or Affiliate prior to the
Realization Event for an Award or Rollover (without taking into
account any Long-Term Investment Election) shall forfeit a portion
of the amount attributable to the Award or Rollover (other than an
Award resulting from of a Voluntary Award Election) as follows:
(I) if the termination occurs prior to the expiration of one year
after the Award (or, in the case of a Rollover, the award to
which the Rollover was related) was granted, the Participant
shall forfeit 20% of the amount attributable to the Award or
Rollover;
(II) if the termination occurs on or after one year, but prior to
the expiration of two years after the Award (or, in the case
of a Rollover, the award to which the Rollover was related)
was granted, the Participant shall forfeit 13-1/3% of the
amount attributable to the Award or Rollover; and
(III) if the termination occurs on or after two years, but prior to
the expiration or three years after the Award (or, in the case
of a Rollover, the award to which the Rollover was related)
was granted, the Participant shall forfeit 6-2/3% of the
amount attributable to the Award or Rollover.
Except as provided in this Section 7(c)(ii) and Section 11, a Participant shall
not forfeit any portion of the balance credited to the Participant's Accounts
attributable to Awards (or, in the case of a Rollover, the award to which the
Rollover was related) made on or after January 1, 1996.
(iii) For purposes of this Section 7(c), whether a participant's
termination of employment shall be considered voluntary or involuntary and
whether or not a termination is deemed to be as a result of a downsizing
or general reduction in work force shall be determined by Salomon Inc in
its sole discretion. For purposes of this Section 7(c), the term
"competitor organization" shall mean an organization
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that is determined by the Committee to be a competitor of Salomon Inc
and/or its Affiliates.
(iv) In the case of any Participant who forfeits all or a portion of
their Account by reason of Section 7(c)(ii)(B), (C) or (D) and who again
becomes employed by a Company or an Affiliate within a reasonable time
determined by the Committee, the Committee may, in its sole discretion,
elect to restore to the Participant's Accounts part or all of the amounts
forfeited.
(d) Simultaneous Occurrence of Realization Event and Termination of
Employment
In the event of the simultaneous occurrence of a Realization Event
described in Section 2(ac)(iv) or 2(ac)(v) with respect to a Rollover from the
Partnership Pool Plan or the Special Bonus Plan and the termination of the
Participant's employment with the Companies and Affiliates, for purposes of
determining whether a Participant will forfeit any amount of such Rollover
pursuant to Section 7(c)(i), such Realization Event shall be deemed to have
occurred prior to such termination of the Participant's employment.
8. FUNDING OF THE PLAN
The Plan shall be unfunded. Benefits under the Plan shall be paid from the
general assets of Salomon Inc. Salomon Inc shall establish the Trust, which
shall be intended to be a "grantor trust" within the meaning of Section 671 of
the Code, pursuant to a trust agreement, to assist Salomon Inc in meeting its
obligations hereunder. Such trust agreement shall provide that the Trust shall
be invested primarily in Salomon Stock.
The trust agreement creating the Trust shall contain procedures to the
following effect:
(a) In the event of the insolvency of any Company, the assets of the Trust
shall be available to pay the claims of any creditor of such Company to whom a
distribution may be made in accordance with state and federal bankruptcy laws. A
Company shall be deemed to be "insolvent" if such Company is subject to a
pending proceeding as a debtor under the Federal Bankruptcy Code (or any
successor federal statute) or any state bankruptcy code. In the event a Company
becomes insolvent, the Board of Directors and the Chief Executive Officer of
Salomon Inc shall notify the Trustee of the event as soon as practicable. Upon
receipt of such notice, or if the Trustee receives other written allegations of
such Company's insolvency from a third party considered by the Trustee to be
reliable and responsible, the Trustee shall cease making payments of benefits
from the assets of the Trust, shall hold the assets in the Trust for the benefit
of such Company's creditors and shall take such steps as are necessary to
determine within a reasonable
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period of time whether such Company is insolvent. In making such determination,
the Trustee may rely upon a certificate of the Board of Directors and the Chief
Executive Officer of Salomon Inc or a determination by a court of competent
jurisdiction that such Company is or is not insolvent. In the case of the
Trustee's determination of such Company's insolvency, the Trustee will deliver
assets of the Trust to satisfy claims of such Company's creditors pursuant to a
final order of a court of competent jurisdiction.
(b) The assets of the Trust shall be available to pay any claim or claims
of any judgment creditor or judgment creditors of any Company to the extent such
claim or claims are then payable and the Company otherwise shall fail to pay
such claim or claims. The Board of Directors and the Chief Executive Officer of
Salomon Inc shall notify the Trustee as soon as practicable in the event of any
such failure of any Company to pay a judgment creditor. Upon receipt of such
notice, or if the Trustee receives other written allegations of any Company's
such failure to pay a judgment creditor or judgment creditors from a third party
considered by the Trustee to be reliable and responsible, the Trustee shall, to
the extent of such failure, hold the assets of the trusts under the Equity
Partnership Plans for the benefit of such judgment creditor or judgment
creditors and shall take such steps as are necessary to determine within a
reasonable period of time whether such creditors are entitled to payment. In
making such determination, the Trustee may rely upon a certificate of the Board
of Directors and the Chief Executive Officer of Salomon Inc or a determination
by a court of competent jurisdiction that such creditors are or are not entitled
to payment. In the case of the Trustee's determination of any such Company's
failure to pay a judgment creditor or judgment creditors, the Trustee will
deliver assets of the trusts under the Equity Partnership Plans to satisfy
claims of such Company's judgment creditors as directed pursuant to a final
order of a court of competent jurisdiction. In the event that the Trustee is
required to hold any assets of the trusts under the Equity Partnership Plans for
the benefit of any judgment creditor, Participants' Accounts shall be ratably
reduced by such amount.
(c) In the event the Trustee ceases making payments of benefits as a
result of a Company's insolvency, the Trustee shall resume making payments of
benefits only after the Trustee has determined that no Company is then insolvent
or upon receipt of an order of a court of competent jurisdiction requiring the
payment of benefits. In the event the Trustee holds any assets in the trusts
under the Equity Partnership Plans for the benefit of a judgment creditor of a
Company, the Trustee shall, if the Trustee determines that no Company then owes
any such amount to a judgment creditor, allocate the then remaining amounts that
had been held for the benefit of any such judgment creditor to the Participants'
Accounts that were reduced, pro rata in proportion to the excess of the
reduction in each such Participant's Accounts over the amounts paid by Salomon
Inc to each such Participant as a result of such reduction. No Participant shall
receive a restoration that exceeds the amount of the reduction
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together with the earnings that would have accrued had no reduction been
effected, less amounts paid to the Participant by Salomon Inc as a result of the
reduction. Notwithstanding the provisions of this Section 8(c), the Trustee
shall restore Participants' Accounts in accordance with an order of a court of
competent jurisdiction. In the event the amount available for restoration
exceeds the amount required to be restored to Participants' Accounts, such
excess shall be allocated to the Suspense Account and shall be treated as a
purchase for the Plans at the Daily Value as of the date of such allocation. In
making any determination under this Section, the Trustee may rely upon a
certificate of the Board of Directors and the Chief Executive Officer of Salomon
Inc.
(d) The Trustee shall reinvest all dividends paid on Salomon Stock held in
the Trust in Salomon Stock as follows:
(i)(A) Subject to Paragraph (d)(i)(B) of this Section, solely with
respect to Awards and Rollovers made prior to January 1, 1996, as soon as
practicable after the payment date for dividends paid (or deemed paid) on
Salomon Stock credited (or deemed to be credited) to Participants'
Accounts, other than Salomon Stock credited to Participants' Rollover
Accounts with respect to a Rollover from a Prior Incentive Plan, Salomon
Inc shall contribute to the Trust, as compensation to Participants, an
amount equal to 17.65% of such dividends (or deemed dividends) (less
required withholding taxes, if any). As soon as practicable after receipt
of such dividends (or deemed dividends) and any such 17.65% contribution,
the Trustee shall use such dividends (or deemed dividends) and
contribution to purchase Salomon Stock. With respect to Awards and
Rollovers made on or after January 1, 1996, no such 17.65% contribution
shall be required.
(B) If and to the extent that the Committee elects by notice to the
Trustee, Salomon Inc's 17.65% contribution obligation shall be satisfied
out of the Suspense Account. Effective as of January 1, 1991, if the
Committee makes such an election, the contribution obligation shall be
satisfied (1) first from the dividends paid on shares of Salomon Stock
held in the Suspense Account and (2) second from shares of Salomon Stock
held in the Suspense Account, based on the Daily Value of the shares on
the relevant payment date. Any such share shall be deemed to have been
purchased at such Daily Value for allocation purposes.
(C) Shares of Salomon Stock purchased or deemed purchased pursuant
to this Section 8(d)(i) shall be allocated to the Participant's Accounts
with respect to which they were purchased.
(ii) Subject to Paragraph (d)(iv) of this Section, as soon as
practicable after the payment date for dividends paid on Salomon Stock
credited to Participants' Rollover Accounts as of the record date for such
dividends with respect to a
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Rollover from a Prior Incentive Plan, the Trustee shall use the amount of
such dividends to purchase Salomon Stock. Shares of Salomon Stock
purchased pursuant to this Section 8(d)(ii) shall be allocated to the
Participant's Rollover Account with respect to which they were purchased.
(iii) Subject to Paragraph (d)(iv) of this Section, as soon as
practicable after receipt of dividends paid on Salomon Stock held in the
Suspense Account, the Trustee shall use the amount of such dividends to
purchase Salomon Stock. Shares of Salomon Stock purchased pursuant to this
Section 8(d)(iii) (other than with dividends used to satisfy Salomon Inc's
contribution obligation pursuant to Paragraph (d)(i)(B)) shall be held in
the Suspense Account.
(iv) (A) Notwithstanding the foregoing, effective as of October 12,
1995, the Committee may, in its sole discretion, elect by notice to the
Trustee to direct the Trustee to satisfy allocations in respect of
dividends paid on shares of Salomon Stock credited to Participants'
Accounts out of shares of Salomon Stock held in the Suspense Account based
on the Daily Value of Salomon Stock on the dividend payment date. In such
a case, the dividends paid on shares allocated to a Participant's Stock
Account shall be transferred to the Suspense Account.
(B) To the extent the Committee elects to satisfy allocations under
the Equity Partnership Plans in respect of dividends paid on shares of
Salomon Stock credited to Participants' Accounts out of shares of Salomon
Stock held in the Suspense Account or otherwise at the election of the
Committee, dividends paid on Salomon Stock held by the Trusts shall not be
reinvested in Salomon Stock but instead shall be held in the Suspense
Account and, unless the Board of Directors otherwise directs the Trustee,
shall be invested in accordance with the investment guidelines applicable
to assets held in the Trusts and credited to a Participant's Cash Account.
(e) Notwithstanding any other provision hereunder, Salomon Inc may, at any
time, by notice to the Trustee, substitute for part or all of the assets held by
the Trust other assets of equal fair market value at the time of such
substitution. The fair market value of any shares of Salomon Stock being
substituted shall be the Daily Value of such shares of Salomon Stock on the day
as of which the substitution is to be effected. The Trustee shall distribute to
Salomon Inc the assets to be substituted as soon as practicable after receipt of
a notice of substitution, but in no case later than 7 days thereafter, provided,
however, that in the event Salomon Inc elects to substitute Salomon Stock held
in the Trust within 90 days prior to the record date of a meeting of the
shareholders of Salomon Inc or on or after the commencement of a tender offer
with respect to Salomon Stock, the Trustee shall continue to hold the Salomon
Stock to be substituted and shall make voting decisions at such meeting and
shall make tender decisions with respect to such Salomon Stock pursuant to
Section 13 of the Plan. As
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soon as practicable after the conclusion of such meeting or the expiration of
such tender offer, as the case may be, the Trustee shall distribute such shares
of Salomon Stock from the Trust to Salomon Inc.
Notwithstanding the foregoing, the Committee shall be permitted to modify
or eliminate the provisions described in Sections 8(a), (b), (c), (d) and (e) if
and to the extent it determines that such action is appropriate based on advice
of counsel.
9. MAINTENANCE OF ACCOUNTS
(a) Stock Account
(i) If, on November 30 of any calendar year, the number of shares
held in the Suspense Account is at least equal to (A) with respect to
Awards granted for the 1990 calendar year, 80% of the amount of shares
necessary to satisfy the total amount of Awards granted for such calendar
year and (B) with respect to Awards granted for each calendar year
thereafter, 90% of the amount of shares necessary to satisfy the total
amount of Awards granted for such calendar year, each Participant's Stock
Account shall be credited with a number of shares of Salomon Stock equal
to the dollar amount of such Participant's Award divided by the product of
(A) with respect to Awards granted prior to January 1, 1996, .85
multiplied by the Average Cost Per Share of Salomon Stock on November 30
of the calendar year for which the Award was granted to such Participant,
and (B) with respect to Awards granted on or after January 1, 1996, .80
multiplied by the Average Cost Per Share of Salomon Stock on November 30
of the calendar year for which the Award was granted to such Participant.
In the event that on any such November 30 the number of shares held in the
Suspense Account is less than 80% or 90%, as the case may be, of the
number of shares necessary to satisfy the total amount of Awards granted
for such calendar year, each Participant's Stock Account shall be credited
with a number of shares of Salomon Stock equal to the dollar amount of
such Participant's Award divided by the product of (1) with respect to
Awards granted prior to January 1, 1996, .85 multiplied by the Average
Cost Per Share of Salomon Stock on the date on which the shares are
credited to such Participant's Stock Account and (2) with respect to
Awards granted on or after January 1, 1996, .80 multiplied by the Average
Cost Per Share of Salomon Stock on the date on which the shares are
credited to such Participant's Stock Account.
(ii) If, as of the date an Award is granted, the number of shares
held in the Suspense Account is insufficient to satisfy such Award, the
date on which Salomon Stock in respect of such Award is credited to a
Participant's Stock Account shall
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be deferred until such date as the number of shares held in the Suspense
Account equals or exceeds the number of shares with respect to such Award.
(iii) If the date as of which Awards are granted for a calendar year
is on or prior to the record date for the dividends payable on Salomon
Stock but the number of shares held in the Suspense Account is
insufficient to satisfy such Awards, (A) for purposes of Sections 8(d) and
9(a)(iv), the shares held in the Suspense Account shall be treated as held
in each Participant's Stock Account pro rata in proportion to each
Participant's Award for such calendar year and (B) Salomon Inc shall make
a contribution to the Trust equal to the difference between (1) the
dividends that would have been paid on shares in respect of Awards for
such calendar year had the Suspense Account held sufficient shares to
satisfy the Awards for such calendar year and (2) the dividends actually
paid on the shares held in the Suspense Account. For purposes of Sections
8(d) and 9(a)(iv), the Salomon Inc contribution described in Clause (B) of
this Section shall be treated as a dividend paid on Salomon Stock held in
a Participant's Stock Account, pro rata in proportion to each
Participant's Award for such calendar year.
(iv) As of the payment date for dividends paid (or deemed paid) on
Salomon Stock held (or deemed held) in a Participant's Stock Account as of
the record date for such dividends, each such Participant's Stock Account
shall be credited with the number of shares of Salomon Stock that are in
fact purchased or deemed to have been purchased with such dividends and,
solely with respect to Awards granted prior to January 1, 1996, the
additional 17.65% compensation contribution made in respect of such
dividends, as determined pursuant to Section 8(d).
(v) Each Participant's Stock Account shall be reduced by the number
of shares of Salomon Stock distributed to the Participant in respect of an
Award, whether such shares are distributed from the Trust or directly from
Salomon Inc.
(b) Rollover Account
(i) With respect to a Participant who has an automatic Rollover of
his accounts from another Equity Partnership Plan to the Plan pursuant to
Section 7(b)(iv), the Committee shall maintain such Participant's Rollover
Account as follows:
(A) Each such Participant's Rollover Account shall be credited
with a number of shares of Salomon Stock that were credited to the
Participant's accounts under the Equity Partnership Plans
immediately prior to the Rollover.
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(B) All assets held in such Participant's accounts under any
trust maintained in connection with another Equity Partnership Plan
immediately prior to the Rollover shall be transferred to the
Participant's corresponding accounts under the Trust on the date as
of which the Rollover occurs.
(C) As of the payment date for dividends paid on Salomon Stock
held in a Participant's Rollover Account as of the record date for
such dividends, each such Participant's Rollover Account shall be
credited with the number of shares of Salomon Stock purchased or
deemed to have been purchased with such dividends and, solely with
respect to Rollovers related to awards granted prior to January 1,
1996, the additional 17.65% compensation contribution made in
respect of such dividends, as determined pursuant to Section 8(d).
(ii) With respect to a Participant who makes a Rollover Election
with respect to benefits under a Prior Incentive Plan, the Committee shall
maintain such Participant's Rollover Account as follows:
(A) Each such Participant's Rollover Account shall be credited
as of January 1, 1991 with the number of shares of Salomon Stock
purchased with the dollar amount rolled over from a Prior Incentive
Plan.
(B) As of the payment date for dividends paid on Salomon Stock
held in a Participant's Rollover Account as of the record date for
such dividends, each such Participant's Rollover Account shall be
credited with the number of shares of Salomon Stock purchased with
such dividends.
(iii) Each Participant's Rollover Account shall be reduced by the
number of shares of Salomon Stock distributed to the Participant in
respect of a Rollover, whether such shares are distributed from the Trust
or directly from Salomon Inc.
(c) Cash Account
In the event that a Participant shall elect to tender shares of Salomon
Stock held in the Participant's Accounts pursuant to Section 13(b)(i), the
number of shares of Salomon Stock credited to such Participant's Accounts that
are tendered shall be converted to a dollar amount per share equal to the
consideration received in respect of such tender. Such dollar amount shall
thereafter be credited to the Participant's Cash Account and shall be credited
with interest during the period beginning on the date as of which such shares
were tendered and ending on the last day of the month immediately preceding the
month in which such amounts are paid to the Participant at a
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rate which, through the end of the first calendar month in such period, shall
equal the London Interbank Offered Rate ("LIBOR") for 1-month deposits that
appears in The Wall Street Journal on the date immediately preceding the date
that such shares were tendered, and which shall be recalculated for each
successive 1-month period based on LIBOR for 1-month deposits published in The
Wall Street Journal on the last day of each preceding calendar month. If such
rate does not appear in The Wall Street Journal on any date as provided above,
then such rate shall be the last such rate that appeared in The Wall Street
Journal prior to the date of determination set forth above.
10. LONG-TERM INVESTMENT ELECTION
To the extent permitted by the Committee, each Participant who (a) is
employed by a Company or an Affiliate and (b) earned the Minimum Eligible
Compensation in the immediately preceding calendar year, shall be entitled to
make a Long-Term Investment Election with respect to an Award or Rollover. Any
such Long-Term Investment Election shall be delivered to the Committee no later
than a date 2 years prior to any date a Participant's Investment Period
otherwise would expire pursuant to the first sentence of Section 2(t) hereof.
The effect of a Long-Term Investment Election will be to defer the realization
of an Award until the earlier of the expiration of an additional 3-year period
beginning on the date the Participant's Investment Period otherwise would expire
or, if the Participant so elects at the time the Participant makes the Long-Term
Investment Election, the Participant's Permissive Retirement that occurs during
such additional 3-year period. The Committee may limit the ability of any
Participant to make a Long-Term Investment Election pursuant to uniform rules
adopted by it. No Participant shall be permitted to make more than two Long-Term
Investment Elections with respect to any Award or Rollover.
11. PAYMENTS UNDER THE PLAN
(a) Subject to Paragraphs (b), (d) and (e) of this Section, within 30
business days after the occurrence of a Realization Event with respect to an
Award or a Rollover, Salomon Inc shall deliver or cause to be delivered to the
Participant (i) certificates for a number of shares of Salomon Stock equal to
the number of whole shares of Salomon Stock credited to such Participant's
Accounts as of the Realization Event as a result of such Award or Rollover
(including shares reflecting the reinvestment of dividends paid thereon), and
cash with respect to any fractional shares of Salomon Stock credited to such
Participant's Accounts in an amount equal to the Daily Value of such fractional
shares as of the Realization Event, and (ii) with respect to a Participant who
has directed the Trustee to tender shares of Salomon Stock allocated to the
Participant's Accounts, the dollar amount credited to the Participant's Cash
Account as of the Realization Event in respect of such Award or Rollover. In the
event that shares of Salomon Stock that are allocated to a Participant's
Accounts as of the record date for a dividend are to be
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distributed to the Participant prior to the payment date for such dividend,
Salomon Inc shall deliver or cause to be delivered from the Suspense Account to
the Participant a number of shares of Salomon Stock equal to the number of whole
shares, and cash with respect to that number of fractional shares, of Salomon
Stock that could have been purchased with the amount of such unpaid dividends,
plus, solely with respect to Awards granted and Rollover Elections made prior to
January 1, 1996, 17.65% thereof, at the Daily Value as of the Realization Event.
Notwithstanding the fact that Salomon Inc establishes the Trust for the purpose
of assisting it in meeting its obligations under the Plan, Salomon Inc shall
remain obligated to pay the amounts credited to the Participants' Accounts.
Nothing shall relieve Salomon Inc of its liabilities under the Plan except to
the extent amounts are paid to Participants or Beneficiaries from assets of the
Trust.
(b) Notwithstanding the foregoing, with respect to shares of Salomon Stock
allocated to Participants' Accounts in respect of Awards granted in 1990, 1991
and 1992:
(i) On or before December 31, 1992, Salomon Inc shall deliver or
cause to be delivered to Participants selected by the Committee,
certificates for a number of shares of Salomon Stock equal to 60% of the
number of whole shares of such Salomon Stock allocated to such
Participant's Accounts (including shares reflecting the reinvestment of
dividends paid thereon), and cash with respect to 60% of any fractional
shares of such Salomon Stock allocated to such Participant's Accounts in
an amount equal to the Daily Value of such fractional shares as of the
distribution date. Such distributions shall be made to a Participant only
if and to the extent the Committee determines in its sole discretion that
such distributions would not impair the rights of such Participant in any
Award or Rollover theretofore granted or made or any earnings with respect
thereto within the meaning of Section 18 of the Plan. Subject to Section
11(b)(iii), the stock certificates so distributed to such Participants
shall be restricted as to transferability and shall remain subject to
Sections 7(c) and 11(c)(ii) of the Plan until the date that a Realization
Event would have occurred with respect to such shares had they not been
distributed to the Participant, and each such stock certificate shall bear
the following legend:
The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and
conditions contained in the Salomon Inc Equity Partnership Plan for
Key Employees (the violation of which may result in forfeiture). A
copy of the Plan is on file in the office of the Secretary of
Salomon Inc, Seven World Trade Center, New York, New York 10048.
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Any shares remaining in the Participants' Accounts in respect of the
1990, 1991 and 1992 Awards after the distribution of the shares pursuant
to this Section 11(b)(i) shall be distributed to Salomon Inc in exchange
for Salomon Inc's undertaking to pay the amounts set forth in Section
11(b)(ii).
(ii) On or before December 31, 1992, Salomon Inc shall pay each
Participant who receives a distribution under Paragraph (b)(i) of this
Section cash equal to the following amounts:
(A) the Daily Value on December 9, 1992 of 36.24% of the
shares allocated to the Accounts of such Participant in respect of
Awards granted in 1990;
(B) the Daily Value on December 9, 1992 of 35.11% of the
shares allocated to the Account of such Participant in respect of
Awards granted in 1991; and
(C) 40% of the dollar amount of such Participant's 1992
Awards.
Notwithstanding Section 17 hereunder, in order to meet all federal,
state, local and other withholding tax requirements, if any, attributable
to a distribution described in Section 11(b), Salomon Inc shall withhold
from any distribution under this Section 11(b)(ii) cash equal to the
amount the Committee determines to be sufficient to satisfy the minimum
federal, state, local and other withholding tax requirements under
applicable law.
(iii) Notwithstanding Section 11(b)(i), the Committee may, in its
sole discretion, waive the restrictions on transferability and other
restrictions applicable to shares distributed pursuant to Section
11(b)(i). The Committee may impose such conditions on any such waiver,
including, without limitation, requiring a forfeiture of any portion of
such shares, as the Committee may determine in its sole discretion.
(c) The Plan's principal purpose is to provide Participants with a
continuing long-term investment in Salomon Stock. In order to accomplish that
principal purpose, it is imperative that Participants generally be required to
remain invested in the Salomon Stock allocated to their Accounts until the
occurrence of a Realization Event with respect to such Salomon Stock.
Accordingly:
(i) In the event that a court of competent jurisdiction finally
determines that Salomon Inc is obligated to distribute to a Participant,
Beneficiary or any other person certificates representing any shares of
Salomon Stock allocated to a
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Participant's Accounts prior to the occurrence of a Realization Event with
respect to such shares, the stock certificates so distributed to such
Participant, Beneficiary or other person shall be restricted as to
transferability until the date that a Realization Event would have
occurred with respect to such shares had they not been distributed to the
Participant, Beneficiary or other person and remained subject to the Plan,
and each such stock certificate shall bear the following legend:
The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and
conditions contained in the Salomon Inc Equity Partnership Plan for
Key Employees (the violation of which may result in forfeiture). A
copy of the Plan is on file in the office of the Secretary of
Salomon Inc, Seven World Trade Center, New York, New York 10048.
(ii) Effective with respect to distributions of Salomon Stock
allocated to Participants' Accounts with respect to awards under the
Equity Partnership Plans on or after March 4, 1992, prior to receiving any
distribution of such shares, each Participant shall be required to certify
in a form acceptable to the Committee that at no time after March 4, 1992
and before the occurrence of the Realization Event with respect to which
the distribution is to be made has the Participant, directly or
indirectly, held any equity or derivative security position with respect
to Salomon Stock, such as a short sale, a long put option or a short call
option, that increases in value as the value of Salomon Stock decreases.
If the Participant does not make the certification required by this
Paragraph, the Participant shall receive a distribution with respect to
such Award or Rollover equal to the number of shares of Salomon Stock
otherwise to be distributed as of the Realization Event reduced by (A)
with respect to Awards granted and Rollover Elections made prior to
January 1, 1996, .15, and (B) with respect to Awards granted and Rollover
Elections made on or after January 1, 1996, .20, multiplied by the number
of shares of Salomon Stock otherwise to be distributed, and the number of
shares by which the distribution is reduced shall be forfeited as of the
Realization Event. In the event that a Participant makes a false
certification, the Participant shall forfeit all of the shares allocated
to his Accounts in respect of awards under the Equity Partnership Plans on
or after March 4, 1992 as of such Realization Event. All amounts forfeited
hereunder shall be treated as purchases for the Equity Partnership Plans
at the Daily Value as of the date of forfeiture of the number of shares
forfeited pursuant to Section 2(c)(iv) hereof. For purposes of applying
this Section 11(c)(ii) to shares of Salomon Stock distributed to
Participants pursuant to Sections 11(b)(i) and 18(a), the Realization Date
with respect to such Salomon Stock shall be deemed
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to occur on the date as of which the restrictions under Section 11(b)(i)
or 18(a), as the case may be, are to be removed and the removal of such
restrictions shall be deemed to be distributions under this Section.
(d) Effective with respect to Awards granted on or after December 1, 1993,
notwithstanding any other provision hereunder, if and to the extent that the
Committee determines any Company's or Affiliate's Federal tax deduction in
respect of a distribution under the Plan may be limited as a result of Section
162(m) of the Code, the Committee may delay such distribution as provided below.
In the event the Committee determines to delay a distribution, the Committee
shall convert the shares of Salomon Stock to a dollar amount equal to the
product of (i) the Daily Value of Salomon Stock on the date such shares
otherwise would have been distributed to the Participant multiplied by (ii) the
number of shares of Salomon Stock that otherwise would have been distributed to
the Participant in the absence of this Section 11(d). Such amount shall then be
credited to the Participant's Cash Account. The amount so credited to the
Participant's Cash Account shall, subject to the second succeeding sentence, be
credited with interest during the period beginning on the date on which the
distribution would have been made in the absence of this Section 11(d) and
ending on the last day of the month immediately preceding the month in which
such amount is paid to the Participant, at a rate which, through the end of the
first calendar month in such period, shall equal LIBOR for 1-month deposits that
appears in The Wall Street Journal on the date immediately preceding the date on
which the distribution would have been made in the absence of this Section, and
which shall be recalculated for each successive 1-month period based on LIBOR
for 1-month deposits published in The Wall Street Journal on the last day of
each preceding calendar month. If such rate does not appear in The Wall Street
Journal on any date as provided above, then such rate shall be the last such
rate that appeared in The Wall Street Journal prior to the date of determination
set forth above. The Committee may, in its discretion, elect not to credit
interest to the Participant's Cash Account at LIBOR as described above, but
instead to adjust the amount so credited to the Participant's Cash Account to
reflect gains and losses that would have resulted from the investment of such
amount in any investment vehicle or vehicles selected by the Committee. Part or
all of the amount credited to the Participant's Cash Account hereunder shall be
paid to the Participant at such times as shall be determined by the Committee,
if and to the extent the Committee determines that a Company's or an Affiliate's
deduction for any such payment will not be reduced by Section 162(m) of the
Code. Notwithstanding the foregoing, the entire balance credited to the
Participant's Cash Account hereunder shall be paid to the Participant within 30
business days after the earlier of (A) the date the Participant ceases to be a
"covered employee" within the meaning of Section 162(m) of the Code or (B) the
occurrence of a Change in Control.
(e) Notwithstanding Paragraph (a)(i) of this Section, effective as of
October 12, 1995, any Participant who has credited to his Accounts with respect
to an Award 100 shares of Salomon Stock or less on the Realization Date for such
Award shall, unless the
28
<PAGE>
Participant otherwise elects at such time and in such form as may be acceptable
to the Committee, receive, in lieu of a distribution of certificates for the
number of whole shares of Salomon Stock credited to the Participant's Accounts
as of the Realization Date as a result of such Award, a distribution in cash
equal to the Daily Value on the distribution date of the number of whole shares
of Salomon Stock allocated to the Participant's Accounts as a result of such
Award.
12. SECURITIES MATTERS
(a) Subject to Sections 11 and 18, with respect to shares of Salomon Stock
allocated to Participants' Accounts in respect of Awards or Rollovers granted or
made on or before December 31, 1992, Salomon Inc shall use its best efforts to
assure that any securities distributed to Participants hereunder are marketable
at the time of distribution, including, to the extent required under applicable
law, effecting the registration pursuant to the Securities Act of any shares of
Salomon Stock to be distributed hereunder or effecting similar compliance under
any state laws.
(b) Subject to Section 11, with respect to shares of Salomon Stock
allocated to Participants' Accounts in respect of Awards or Rollovers granted or
made after December 31, 1992, Salomon Inc shall use its best efforts to assure
that any securities distributed to Participants hereunder on or after the
Realization Date for the Award or Rollover with respect to which the
distribution is made are marketable at the time of distribution, including, to
the extent required under applicable law, effecting the registration pursuant to
the Securities Act of any shares of Salomon Stock to be distributed hereunder or
effecting similar compliance under any state laws.
(c) Notwithstanding anything herein to the contrary, Salomon Inc shall not
be obligated to cause to be issued or delivered any certificates evidencing
shares of Salomon Stock pursuant to the Plan unless and until Salomon Inc is
advised by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of the New York Stock Exchange and any other securities
exchange on which shares of Salomon Stock are traded. The Committee may require,
as a condition of the issuance and delivery of certificates evidencing shares of
Salomon Stock pursuant to the terms hereof, the recipient of such shares to make
such covenants, agreements and representations, and that such certificates bear
such legends, as the Committee, in its sole discretion, deems necessary or
desirable.
(d) Without limitation on the Committee's powers pursuant to Paragraph (c)
of this Section, if and to the extent required by Rule 16b-3 promulgated under
Section l6(b) of the Exchange Act or by any comparable or successor exemption
under which the Board of Directors believes it is appropriate for the Plan to
qualify, the Committee may (i) restrict a Participant's ability to sell any
shares of Salomon Stock distributed to such Participant hereunder until the
expiration of 6 months (or such other period as the
29
<PAGE>
Committee deems appropriate) after the date as of which such shares were
allocated to the Participant's Accounts, (ii) in lieu of distributing shares of
Salomon Stock that were allocated to a Participant's Accounts within 6 months
(or such other period as the Committee deems appropriate) prior to the
Realization Event, distribute a cash amount equal to the Daily Value of such
Salomon Stock as of the Realization Event or (iii) impose such other conditions
on the exercise of any election under the Plan or in connection with any
distribution under the Plan as the Committee deems appropriate.
13. VOTING AND TENDER OF SALOMON STOCK
(a) Voting Rights
(i) Each Participant shall be entitled to direct the Trustee, and
the Trustee shall have no discretion, as to the manner in which Salomon
Stock that is entitled to vote and is allocated to such Participant's
Accounts is to be voted. The Trustee shall vote combined fractional
shares, to the extent possible, to reflect the directions of the
Participants holding such shares.
(ii) The Trustee shall have no discretion as to the voting of (A)
any Salomon Stock allocated to any Participant's Accounts for which the
Trustee does not receive affirmative and valid Participant voting
directions and (B) any Salomon Stock held in the Suspense Account. The
Trustee shall vote such Salomon Stock in the same proportions as Salomon
Stock held in the Trust for which the Trustee receives affirmative and
valid Participant voting instructions under the Equity Partnership Plans.
(iii) Notwithstanding any other provision of this Section, the
Trustee shall vote the shares of Salomon Stock held in the Accounts of any
Participant with respect to whom counsel to Salomon Inc advises the
Participant would be taxed on the value of the Participant's Accounts if
the Participant were permitted to direct the voting of such shares, in the
same proportions as Salomon Stock held in the Trust for which the Trustee
receives affirmative and valid Participant voting instructions under the
Equity Partnership Plans.
(b) Tender Rights
(i) If any person shall commence a tender or exchange offer or any
similar transaction with respect to Salomon Stock, each Participant shall
be entitled to direct the Trustee, and the Trustee shall have no
discretion, as to whether the Salomon Stock allocated to such
Participant's Accounts is to be tendered and whether such tender is to be
revoked (to the extent such a revocation is permitted by the terms of such
tender or exchange offer or applicable law). The Trustee shall tender
shares of Salomon Stock allocated to any Participant's Accounts for which
30
<PAGE>
the Trustee shall have received affirmative and valid Participant
directions to tender (except to the extent such directions are revoked
prior to such tender); the Trustee shall revoke the tender of shares of
Salomon Stock allocated to any Participant's Accounts for which the
Trustee shall have received affirmative and valid Participant directions
to revoke such tender.
(ii) The Trustee shall have no discretion as to whether or not to
tender, or whether to revoke tenders with respect to any Salomon Stock
held in the Suspense Account. The Trustee shall tender or not and shall
revoke tenders with respect to shares of Salomon Stock held in the
Suspense Account in the same proportions as the shares of Salomon Stock
held in the Trust for which the Trustee receives affirmative and valid
Participant directions under the Equity Partnership Plans whether or not
to tender and whether to revoke such tender.
(iii) The Trustee shall not tender, or revoke the tender of, shares
allocated to Participants' Accounts for which the Trustee does not receive
affirmative and valid Participant directions.
(iv) To the extent that a Participant elects to tender shares of
Salomon Stock held in the Participant's Accounts, the Trustee shall
transfer the consideration the Trustee receives as a result of such tender
to the Participant's Cash Account.
(v) Notwithstanding any other provision of this Section, the Trustee
shall tender or not and shall revoke tenders with respect to shares of
Salomon Stock held in the Accounts of Participants with respect to whom
counsel to Salomon Inc advises that the Participant would be taxed on the
value of the Participant's Accounts if the Participant were permitted to
direct the tender of shares, in the same proportions as the shares of
Salomon Stock held in the Trust for which the Trustee receives affirmative
and valid Participant directions whether or not to tender and whether to
revoke such tender.
(c) Tender Prior to Allocation
In the event the Trustee is required to make any tender decision prior to
the date on which any shares of Salomon Stock are allocated to any Participant's
Accounts, the Trustee shall poll the participants under the Equity Partnership
Plans (other than the Participants described in Paragraph (b)(v) of this
Section) and shall tender or revoke tenders with respect to shares in proportion
to the number of tender or revocation directions received by such participants.
Each such participant shall have one vote.
(d) Notices and Information Statements
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<PAGE>
Salomon Inc shall provide the Trustee and each Participant with notices
and information statements (including proxy statements) when voting rights are
to be exercised, and with respect to tender, exchange or similar offers, at the
same time and in the same manner (except to the extent the Exchange Act requires
otherwise) as such notices and information statements (including proxy
statements) are provided to shareholders of Salomon Inc generally.
(e) Confidentiality of Voting and Tender Directions
The Trustee shall devise and implement a procedure that is designed to
assure the confidentiality of any Participant's voting or tender directions so
that in directing the Trustee to vote or tender any shares of Salomon Stock,
Participants are in fact rendering independent decisions without influence from
any Company. Salomon Inc shall cooperate with the Trustee in devising and
implementing such procedures to the extent the Trustee so requests.
14. ADJUSTMENT OF ACCOUNTS IN CERTAIN EVENTS
(a) Unless the Committee otherwise determines, a Participant's Accounts
shall be adjusted to reflect any securities, cash and other property received
with respect to shares of Salomon Stock credited to such Participant's Accounts
as a result of any stock dividend or split, recapitalization, extraordinary
dividend, merger, consolidation, combination or exchange of shares or similar
change or any other event that the Committee, in its sole discretion, deems
appropriate. The purpose of this adjustment is to treat Participants as if they
were shareholders of Salomon Stock with respect to the number of shares credited
to their Accounts. However, the Committee may, in its sole discretion, convert
any securities, cash or other property that would have been received in respect
of shares of Salomon Stock credited to a Participant's Accounts into an
equivalent number of equity securities of Salomon Inc or any successor company
or into cash or other property of equivalent value.
(b) In the event of any change in the number of shares of Salomon Stock
outstanding by reason of any stock dividend or split, recapitalization,
extraordinary dividend, merger, consolidation, combination or exchange of shares
or similar corporate change or any other event that the Committee, in its sole
discretion, deems appropriate, the maximum aggregate number of shares of Salomon
Stock subject to the Equity Partnership Plans shall be appropriately adjusted by
the Committee. In the event of any change in the number of shares of Salomon
Stock outstanding by reason of any other event or transaction, the Committee
may, but need not, make such adjustments in the number and class of shares of
Salomon Stock subject to the Equity Partnership Plans as the Committee may deem
appropriate.
32
<PAGE>
(c) Except as is expressly provided in this Section, a Participant shall
have no rights as a result of any stock dividend or split, recapitalization,
extraordinary dividend, merger, consolidation, combination or exchange of shares
or similar corporate change.
15. CERTAIN DIVESTITURES
(a) Company with Publicly Traded Stock That No Longer is a 50% Affiliate
In the event of any transaction immediately after which any Company both
ceases to be a member of a "controlled group of corporations" (as that term is
defined in Section 4l4(b) of the Code but substituting the phrase "at least 50%"
for the phrase "at least 80%" in each place that it appears in Section 1563 (a)
of the Code) of which Salomon Inc is a member and either has stock that is
publicly traded or is a member of a "controlled group of corporations" (as that
term is defined in Section 4l4(b) of the Code) with any trades or businesses,
one or more members of which have publicly traded stock as a result of the
transaction:
(i) the Salomon Stock credited to the Accounts of (A) Participants
who are employed by such Company immediately after the transaction and (B)
terminated Participants who are not so employed, but who were employed by
such Company on the date that their employment with the Companies and
Affiliates terminated, shall be converted to equivalent amounts of such
publicly traded stock based on the relative values of such publicly traded
stock and Salomon Stock immediately after the transaction. Thereafter,
each such Participant's Accounts shall be maintained in such publicly
traded stock and such Company shall cease to participate in the Plan with
respect to future Awards;
(ii) the Board of Directors of the affected Company shall succeed to
the powers of the Committee and the Board of Directors under the Plan with
respect to the Participants described in Section 15(a)(i); and
(iii) a separate trust containing the Accounts of such Participants
shall be created to hold the stock credited to the Participants' Accounts.
Such trust shall be substantially the same as the Trust and shall be
created pursuant to a trust agreement between the affected Company and the
Trustee.
(b) Company with Publicly Traded Stock That Remains a 50% Affiliate
In the event that a public market develops for the stock of any Company
and immediately after such public market develops such Company remains a member
of a "controlled group of corporations" (as that term is defined in Section
4l4(b) of the Code but substituting the phrase "at least 50%" for the phrase "at
least 80%" in each place that it appears in Section 1563(a) of the Code) of
which Salomon Inc is a member, the
33
<PAGE>
Salomon Stock credited to the Accounts of (i) the Participants who are employed
by such Company immediately after such public market develops and (ii)
terminated Participants who are not so employed, but who were employed by such
Company on the date that their employment with the Companies and Affiliates
terminated, shall be converted to equivalent amounts of the publicly traded
stock of such Company based on the principles described in Section 15(a)(i), or
its economic equivalent, as the Committee deems appropriate, unless the
Committee and the Company determine that such a conversion would be financially
detrimental to any Company or Affiliate or such Participants. Thereafter, each
such Participant's Accounts shall be maintained in such publicly traded stock or
its economic equivalent, as the case may be, and such Company shall cease to
participate in the Plans with respect to future Awards.
(c) Satisfaction of Obligations After a Divestiture
In the event of a divestiture described in this Section 15, any
distributions in respect of the shares credited to the affected Participants'
Accounts as of the date of the divestiture shall be deemed to be payments in
respect of Salomon Inc's obligations under the Plan, except to the extent such
obligations are assumed and discharged by the affected Company.
16. NO SPECIAL EMPLOYMENT RIGHTS
Nothing contained in the Plan shall confer upon any Participant any right
with respect to the continuation of the Participant's employment by any Company
or Affiliate or interfere in any way with the right of any Company or Affiliate
at any time to terminate such employment or to increase or decrease the
compensation of the Participant. Nothing in the Plan shall be deemed to give any
employee of any Company or Affiliate any right to participate in the Plan.
17. PAYROLL AND WITHHOLDING TAXES
All federal, state, local and other withholding tax requirements, if any,
attributable to a distribution shall be met pursuant to the following
procedures:
(a) The Companies and Affiliates shall have the right to withhold
from any cash amounts payable to a Participant (including salary, bonus or
any other amounts payable from any Company or Affiliate to the
Participant) an amount sufficient to satisfy such federal, state, local
and other withholding tax requirements, prior to the delivery of any
certificate or certificates for such shares of Salomon Stock or other
payments under the Plan; or
(b) Salomon Inc shall have the right to require Participants to
remit to Salomon Inc in cash an amount sufficient to satisfy such federal,
state, local and
34
<PAGE>
other withholding tax requirements, prior to the delivery of any
certificate or certificates for such shares of Salomon Stock or other
payments under the Plan; or
(c) Salomon Inc (or, if a distribution is to be made from the Trust,
the Trustee) shall have the right to withhold a number of such shares of
Salomon Stock, the Daily Value of which on the date the shares of Salomon
Stock are to be distributed to the Participant the Committee determines to
be sufficient to satisfy the minimum federal, state, local and other
withholding tax requirements under applicable law. In the event that the
Trustee withholds shares of Salomon Stock pursuant to this Paragraph, the
Trustee shall, as directed by Salomon Inc, (i) distribute such shares of
Salomon Stock from the Trust to Salomon Inc or (ii) continue to hold such
shares in the Suspense Account and, in either case, Salomon Inc shall make
or shall cause to be made from the Trust, as the case may be, to the
appropriate governmental entity the appropriate withholding tax payments.
18. TERMINATION AND AMENDMENT
The Plan may be terminated with respect to any or all Participants at any
time by the Board of Directors. Subject to Section 21 hereof, upon such
termination: (i) with respect to each affected Participant who is not employed
by a Company or Affiliate on the date such termination occurs, the amounts
credited the Participant's Accounts, other than amounts forfeited in accordance
Section 7 or 11 hereof, shall be distributed to each such Participant; and (ii)
with respect to each affected Participant who is employed by a Company or an
Affiliate on the date such termination occurs, the amounts credited the
Participant's Accounts, other than amounts that would have been forfeited in
accordance Section 7(c)(ii)(D) hereof had the Participant's employment with the
Companies and Affiliates been involuntarily terminated as a result of a
downsizing or general reduction in work force immediately prior to the
termination (which amounts shall be treated as forfeitures hereunder) or 11,
shall be distributed to each such Participant in order to meet the entire
benefit obligations under the Plan with respect to each such Participant. With
respect to any termination effected on or before December 31, 1992, if and to
the extent that the Committee determines in its sole discretion that the
following distribution method would not impair the rights of any such
Participant in any Award or Rollover theretofore granted or made or any earnings
with respect thereto within the meaning of this Section 18, the benefit
obligation under the Plan shall be satisfied in the following manner:
(a) Salomon Inc shall deliver or cause to be delivered to
Participants with respect to whom the Plan is terminated certificates for
a number of shares of Salomon Stock equal to 60% of the number of whole
shares of Salomon Stock allocated to such Participant's Accounts in
respect of Awards (including shares reflecting the reinvestment of
dividends paid thereon), and cash with respect to 60% of any fractional
shares of Salomon Stock allocated to such Participant's Accounts in
respect of Awards in an amount equal to the Daily
35
<PAGE>
Value of such fractional shares as of the distribution date. The stock
certificates so distributed to such Participants shall be restricted as to
transferability and shall remain subject to Section 7(c) and 11(c)(ii) of
the Plan until the date that a Realization Event would have occurred with
respect to such shares had they not been distributed to the Participant,
and each such stock certificate shall bear the following legend:
The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and
conditions contained in the Salomon Inc Equity Partnership Plan for
Key Employees (the violation of which may result in forfeiture). A
copy of the Plan is on file in the office of the Secretary of
Salomon Inc, Seven World Trade Center, New York, New York 10048.
Any shares remaining in the Participants' Accounts in respect of the 1990, 1991
and 1992 Awards after the distribution of the shares pursuant to this Section
18(a) shall be distributed to Salomon Inc in exchange for Salomon Inc's
undertaking to pay the amounts set forth in Section 18(b).
(b) On or before December 31, 1992, Salomon Inc shall pay each Participant
who receives a distribution under Paragraph (a) of this Section cash equal to
the following amounts:
(i) the Daily Value on December 9, 1992 of 36.24% of the shares
allocated to the Account of such Participant in respect of Awards granted
in 1990;
(ii) the Daily Value on December 9, 1992 of 35.11% of the shares
allocated to the Accounts of such Participants in respect of Awards
granted in 1991; and
(iii) 40% of the dollar amount of such Participant's 1992 Awards.
Notwithstanding Section 17 hereunder, in order to meet all federal, state,
local and other withholding tax requirements, if any, attributable to a
termination on or before December 31, 1992 described in Paragraphs (a) and (b)
of this Section, Salomon Inc shall withhold from any distribution under this
Paragraph (b) cash equal to the amount the Committee determines to be sufficient
to satisfy the minimum federal, state, local and other withholding tax
requirements under applicable law.
(c) In the event the entire Plan is terminated, the remaining assets, if
any, in the Trust after the payment of such benefits shall be paid to Salomon
Inc. In the event of a partial termination of the Plan, the assets, if any,
remaining in any terminated Accounts
36
<PAGE>
shall be held in the Suspense Account and may be used to satisfy Salomon Inc's
contribution requirements hereunder; provided, however, that (i) with respect to
a termination described in Paragraphs (a) and (b) of this Section, and (ii) in
the event of a partial termination of the Plan involving 40% or more of the
amounts payable under the Plan immediately prior to such termination, the Board
of Directors may elect that any such remaining assets be distributed to Salomon
Inc.
(d) The Plan may be amended by the Board of Directors from time to time in
any respect, provided, however, that if and to the extent required by Rule 16b-3
promulgated under Section 16(b) of the Exchange Act or by any comparable or
successor exemption under which the Board of Directors believes it is
appropriate for the Plan to qualify, no amendment shall be effective without the
approval of the shareholders of Salomon Inc that (a) except as provided in
Section 14 hereof, increases the number of shares of Salomon Stock that may be
distributed under the Plan, (b) materially increases the benefits accruing to
individuals under the Plan or (c) materially modifies the requirements as to
eligibility for participation in the Plan. No amendment or termination shall be
made that would impair the rights of any Participant in any Award or Rollover
theretofore granted or made, or any earnings with respect thereto, without such
Participant's prior written consent; provided, however, that Salomon Inc may
amend the Plan and the Trust from time to time in such a manner as may be
necessary to prevent the trust agreement pursuant to which the Trust is created,
the Equity Partnership Plans or the Trust from becoming subject to ERISA and to
avoid the current taxation of the assets held in the trusts established in
connection with the Equity Partnership Plans to Participants. Neither a
Participant's incurring any income tax liability nor the loss of an investment
opportunity as a result of the termination of, or, with respect to amounts
allocated to Participants' Accounts on or after December 31, 1992, any amendment
to, the Plan shall be considered an impairment of the rights of a Participant.
19. PAYMENTS UPON THE DEATH OF A PARTICIPANT
Each Participant shall have the right to designate in writing from time to
time a Beneficiary by filing a written notice of such designation with the
Committee. A Participant's designation of a Beneficiary may be revoked by filing
with the Trustee an instrument of revocation or a later designation. Any
designation or revocation shall be effective when received by the Trustee. In
the event of the death of a Participant, any payment required to be made
hereunder to such Participant shall be made to such Participant's Beneficiary.
Unless the Participant's Beneficiary designation provides otherwise, no person
shall be entitled to benefits upon the death of the Participant unless such
person survives the Participant. If the Beneficiary designated by a Participant
does not survive the Participant or if the Participant has not made a valid
Beneficiary designation, such Participant's Beneficiary shall be such
Participant's estate. If the Participant's Beneficiary is the Participant's
estate, no payment shall be made unless the
37
<PAGE>
Committee shall have been furnished with such evidence as the Committee may deem
necessary to establish the validity of the payment.
20. SHAREHOLDER APPROVAL REQUIRED
The Plan, as amended and restated as of January 1, 1996, is subject to
approval by the shareholders of Salomon Inc at their annual meeting in May, 1996
in accordance with applicable law, the rules of the New York Stock Exchange and
the requirements of Rule 16b-3 promulgated under Section 16(b) of the Exchange
Act. If the Plan is not so approved, then the Plan shall remain in full force
and effect without regard to the amendments adopted effective as of January 1,
1996.
21. EFFECT OF REVOCATION EVENT
Upon the occurrence of a Revocation Event, the Board of Directors may, in
its sole discretion, elect to terminate the Plan, the Trust, or any
Participant's Accounts. In the event that the Board of Directors elects to so
terminate the Plan, the Trust or any Participant's Accounts as a result of a
Revocation Event, in consideration of and as soon as practicable after Salomon
Inc's providing the Trustee with a written undertaking to pay to Participants
the amount required to be paid under this Section, all amounts held in the Trust
(or if the entire Trust is not terminated, any terminated Accounts) shall be
distributed to Salomon Inc. Salomon Inc shall, in its sole discretion, (a) pay
to each Participant whose Accounts are terminated, as soon as practicable after
the date of such termination, a lump sum in cash equal to the Daily Value
multiplied by the number of shares of Salomon Stock and cash amounts reflected
in each Participant's Accounts as of the date of such termination, (b)
distribute to each Participant whose Accounts are terminated, as soon as
practicable after the date of such termination, that number of shares of Salomon
Stock that would have been distributable to such Participant under the Plan and
pay to such Participant at such time any cash allocated to the Participant's
Cash Account or (c) distribute to each Participant whose Accounts are terminated
that number of shares of Salomon Stock and that amount of cash that would have
been distributable to such Participant at such time as shares and cash would
have been distributable to such Participant under the Plan, had the Plan
continued. If it is finally determined in a proceeding that Salomon Inc either
controls or was offered the right to control and declines, that the
Participant's interest in the Trust was taxable to the Participant,
notwithstanding any termination of such Participant's Accounts in the Trust,
Salomon Inc shall pay or distribute the Participant's interest (whether or not
the Board of Directors has previously elected to terminate the Plan, the Trust
or the Participant's Accounts) in accordance with either Clause (a) or (b) of
the preceding sentence.
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<PAGE>
22. MISCELLANEOUS
(a) No transfer (other than any transfer made by will or by the laws of
descent and distribution) by a Participant of any right to any payment
hereunder, whether voluntary or involuntary, by operation of law or otherwise,
shall vest the transferee with any interest or right in or with respect to such
payment, and the transfer shall be of no force and effect.
(b) The Plan and all rights hereunder shall be subject to and interpreted
in accordance with the laws of the State of New York, without reference to the
principles of conflicts of law.
39
Exhibit 12.01
Travelers Group Inc. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
ALL COMPANIES CONSOLIDATED
(In millions of dollars)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income from continuing operations before
income taxes, minority interests and
cumulative effect of accounting changes...... $ 5,012 $ 5,008 $ 3,320 $ 1,025 $ 3,034
Elimination of undistributed equity earnings... -- -- -- -- (116)
Pre-tax minority interest...................... -- -- -- -- (32)
Other adjustments.............................. -- 1 -- -- 22
Add:
Interest..................................... 11,443 8,927 9,378 7,626 6,821
Interest portion of rentals.................. 142 132 135 159 105
---------- ---------- ---------- ---------- ----------
Income available for fixed charges............. $ 16,597 $ 14,068 $ 12,833 $ 8,810 $ 9,834
========== ========== ========== ========== ==========
Fixed charges:
Interest..................................... $ 11,443 $ 8,927 $ 9,378 $ 7,626 $ 6,821
Interest portion of rentals.................. 142 132 135 159 105
---------- ---------- ---------- ---------- ----------
Fixed charges.................................. $ 11,585 $ 9,059 $ 9,513 $ 7,785 $ 6,926
========== ========== ========== ========== ==========
Ratio of earnings to fixed charges............. 1.43x 1.55x 1.35x 1.13x 1.42x
========== ========== ========== ========== ==========
</TABLE>
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>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, (1)
- ---------------------------
Total revenues $37,609 $32,414 $27,287 $22,719 $16,964
========= ========= ========= ========= =========
Income from continuing operations (1) $3,104 $3,282 $2,141 $747 $1,843
Discontinued operations -- (334) 150 180 (28)
Cumulative effect of accounting
changes (2) -- -- -- -- (72)
--------- --------- --------- --------- ---------
Net income $3,104 $2,948 $2,291 $927 $1,743
========= ========= ========= ========= =========
Return on average common
stockholders' equity (3) 16.6% 18.0% 16.3% 6.6% 19.9%
At December 31,(1)
- ------------------
Total assets $386,555 $345,948 $302,344 $287,093 $286,125
Long-term debt:
Parent company $1,695 $1,903 $2,042 $1,377 $1,504
Consolidated $28,352 $24,696 $22,235 $22,277 $18,683
Redeemable preferred securities:
Parent company obligated $1,280 $1,420 $560 $700 $700
Consolidated $2,525 $2,665 $560 $700 $700
Stockholders' equity $20,893 $17,942 $15,853 $12,432 $13,872
Per common share data (4):
Basic earnings per share
Income from continuing operations $2.69 $2.84 $1.81 $0.53 $2.02
========= ========= ========= ========= =========
Net income $2.69 $2.53 $1.94 $0.69 $1.91
========= ========= ========= ========= =========
Diluted earnings per share
Income from continuing operations $2.54 $2.71 $1.74 $0.53 $1.92
========= ========= ========= ========= =========
Net income $2.54 $2.42 $1.86 $0.68 $1.81
========= ========= ========= ========= =========
Cash dividends per common share (4) $0.400 $0.300 $0.267 $0.192 $0.163
Book value per common share (4) $16.98 $14.74 $13.06 $10.03 $10.92
Other data (shares in millions):
- --------------------------------
Weighted average common shares
outstanding (Basic) (4) 1,102.6 1,097.6 1,099.4 1,127.1 873.4
Adjusted weighted average common
shares outstanding (Diluted) (4) 1,179.9 1,170.6 1,184.4 1,157.0 944.1
Year-end common shares outstanding (4) 1,145.1 1,141.0 1,128.9 1,128.7 1,168.8
Number of full-time employees 65,600 64,800 56,000 61,000 68,500
</TABLE>
(1) On November 28, 1997, Travelers Group Inc. completed the merger with Salomon
Inc in a transaction accounted for as a pooling of interests and,
accordingly, current and prior year information has been restated. As a
result of the merger, Salomon Smith Barney recorded an after-tax
restructuring charge of $496 million, primarily for severance and costs
related to excess or unused office space, facilities and other assets, which
is included in income from continuing operations and net income. The results
of Aetna P&C are included only from the date of acquisition, April 2, 1996.
(See Note 2 of Notes to Consolidated Financial Statements). 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.
(2) Cumulative effect of accounting changes in 1993 represents a change in
accounting for postretirement benefits other than pensions and a change in
accounting for postemployment benefits.
(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. Excluding portfolio gains and losses, gains and
losses on sale of subsidiaries, restructuring charges and other
non-operating items, return on average common stockholders' equity was 18%
in 1997, 19% in 1996, 15% in 1995, 7% in 1994 and 19% in 1993.
(4) On October 22, 1997, the Company declared a three-for-two stock split that
was paid on November 19, 1997. All amounts presented herein have been
restated to reflect the stock split.
1
<PAGE>
Travelers Group Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
Consolidated Results of Operations
Year Ended December 31,
----------------------------------
(In millions, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------
Revenues $37,609 $ 32,414 $ 27,287
======= ========== ==========
Income from continuing operations $ 3,104 $ 3,282 $ 2,141
Income (loss) from discontinued operations -- (334) 150
------- ---------- ----------
Net income $ 3,104 $ 2,948 $ 2,291
======= ========== ==========
Income (loss) per share*:
Basic
Continuing operations $ 2.69 $ 2.84 $ 1.81
Discontinued operations -- (0.31) 0.13
------- ---------- ----------
Net income $ 2.69 $ 2.53 $ 1.94
======= ========== ==========
Diluted
Continuing operations $ 2.54 $ 2.71 $ 1.74
Discontinued operations -- (0.29) 0.12
------- ---------- ----------
Net income $ 2.54 $ 2.42 $ 1.86
======= ========== ==========
Weighted average common shares
outstanding (Basic) 1,102.6 1,097.6 1,099.4
======= ========== ==========
Adjusted weighted average common
shares outstanding (Diluted) 1,179.9 1,170.6 1,184.4
======= ========== ==========
* On October 22, 1997, the Company declared a three-for-two stock split that
was paid on November 19, 1997. All amounts presented herein have been
restated to reflect the stock split.
Basis of Presentation
On November 28, 1997, a newly formed wholly owned subsidiary of Travelers Group
Inc. merged with and into Salomon Inc (Salomon) (the Merger). Under the terms of
the Merger, approximately 188.5 million shares of Travelers Group Inc. (TRV)
common stock were issued in exchange for all of the outstanding shares of
Salomon common stock, based on an exchange ratio of 1.695 shares of TRV common
stock for each share of Salomon common stock, for a total value of approximately
$9 billion. Shares of each of Salomon's series of preferred stock outstanding
were exchanged for a corresponding series of TRV preferred stock having
substantially identical terms, except that the TRV preferred stock issued in
conjunction with the Merger has certain voting rights. Thereafter, Smith Barney
Holdings Inc. (Smith Barney), a wholly owned subsidiary of TRV, was merged with
and into Salomon to form Salomon Smith Barney Holdings Inc. (Salomon Smith
Barney), which is the primary vehicle through which TRV engages in investment
banking, proprietary trading, retail brokerage and asset management. The Merger
constituted a tax-free exchange and was accounted for under the pooling of
interests method. As a result of the Merger, Salomon Smith Barney recorded an
after-tax restructuring charge of $496 million, primarily for severance and
costs related to excess or unused office space, facilities and other assets,
which is included in income from continuing operations and net income.
2
<PAGE>
On April 2, 1996, Travelers Property Casualty Corp. (TAP), an indirect
majority-owned subsidiary of TRV, acquired the domestic property and casualty
insurance subsidiaries of Aetna Services, Inc. (Aetna P&C) for approximately
$4.2 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). TAP's insurance subsidiaries
are the primary vehicles through which the Company engages in the property and
casualty insurance business. On June 23, 1997, TAP repurchased an aggregate of
approximately 6.6 million shares of its Class A Common Stock held by four
private investors for approximately $240.8 million. This repurchase increased
TRV's ownership of TAP to approximately 83.4%.
Results of Operations
Consolidated results of operations include the accounts of TRV and its
subsidiaries, including Salomon and its subsidiaries (collectively, the
Company). Income from continuing operations for the year ended December 31, 1997
was $3.104 billion compared to $3.282 billion in 1996 and $2.141 billion in
1995. Included in income from continuing operations for the years ended December
31, 1997, 1996 and 1995 are net after-tax gains (losses) of $(255) million, $101
million and $74 million, respectively, as follows:
1997
- ----
o $496 million restructuring charge related to the acquisition of Salomon
Inc; and
o $241 million (after minority interest) of reported investment portfolio
gains.
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 $31 million gain from the sale of The Mortgage Corporation Limited;
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.
Excluding these items, income from continuing operations for 1997 increased $178
million to $3.359 billion, or 6%, over 1996, primarily reflecting improved
performance in the Property & Casualty and Life Insurance segments, offset by
lower earnings at Salomon Smith Barney reflecting a decline in revenues from
principal transactions.
On the same basis, income from continuing operations for 1996 increased $1.114
billion to $3.181 billion, or 54%, over 1995, primarily reflecting improved
performance at Salomon Smith Barney, the inclusion of the property and casualty
business acquired from Aetna Services Inc. and increased earnings in the Life
Insurance segment.
3
<PAGE>
The following discussion presents in more detail each segment's operating
performance.
Investment Services
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1997 1996 1995
----------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salomon Smith Barney (1) (2) $21,507 $ 1,151 $18,871 $ 1,871 $17,512 $ 1,112
=========================================================================================
</TABLE>
(1) Net income in 1997 includes a $496 million after-tax restructuring charge
related to the acquisition of Salomon Inc. Net income for 1996 includes a
$31 million after-tax gain on the sale of The Mortgage Corporation
Limited.
(2) Excludes results of Basis Petroleum, which are classified as discontinued
operations.
Salomon Smith Barney
Salomon Smith Barney's earnings have been restated as a result of the Merger to
include Salomon for all periods presented. As previously indicated, in 1997
Salomon Smith Barney recorded an after-tax restructuring charge of $496 million
($838 million before tax), primarily for severance and costs related to excess
or unused office space, facilities and other assets. Salomon Smith Barney's 1996
income includes a $31 million after-tax gain ($48 million before tax) related to
the sale of The Mortgage Corporation Limited (TMC), which originated and
serviced residential mortgages in the United Kingdom. Pre-tax profit margin
before the restructuring charge and the gain on the sale of TMC was 24.3% in
1997 compared to 28.3% in 1996 and 20.9% in 1995.
Salomon Smith Barney Revenues
Year Ended December 31,
- --------------------------------------------------------------------------------
(millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Commissions $2,967 $2,612 $2,376
Investment banking 2,118 2,001 1,318
Principal transactions 2,504 3,027 2,140
Asset management and
administration fees 1,715 1,390 1,087
Interest income, net* 1,513 1,488 1,645
Other income 160 178 149
- --------------------------------------------------------------------------------
Net revenues* $10,977 $10,696 $8,715
================================================================================
* Net of interest expense of $10,530 million, $8,175 million and $8,797
million in 1997, 1996 and 1995, respectively. Revenues included in the
consolidated statement of income are before deductions for interest
expense.
Net revenues in 1997 were $11.0 billion, a 3% improvement over $10.7 billion in
1996, primarily reflecting increases in commissions and asset management and
administration fees offset by a decline in principal transaction revenues from
equities, fixed income and commodities trading. Net revenues in 1996 reflect
improvements over 1995 in most businesses, including fixed income trading,
investment banking, asset management and retail sales, and were partially offset
by a decrease in revenues from equities trading.
4
<PAGE>
Commission revenues increased 14% in 1997 to $2.97 billion, from $2.61 billion
in 1996 and $2.38 billion in 1995. The 1997 and 1996 increases reflect growth
in sales of listed and over-the-counter (OTC) securities as well as increased
insurance and annuity sales. The 1997 increase, also reflects higher commissions
from mutual funds activity.
Investment banking revenues were $2.12 billion in 1997 compared to $2.00 billion
in 1996 and $1.32 billion in 1995. The 6% increase in 1997 reflects revenue
growth in unit trusts, public finance, high yield and high grade debt
underwritings, and mergers and acquisitions. This was offset somewhat by a
decline in equity underwritings. For 1997, Salomon Smith Barney was ranked #1 in
the industry in municipal and mortgage debt underwritings, and #2 in both
domestic and global debt and equity underwriting, according to Securities Data
Corp. The 52% increase in 1996 was attributable to significant improvements in
equity and debt underwriting, combined with a higher level of advisory fees.
Principal transaction revenues from fixed income were $1.88 billion in 1997
compared to $2.05 billion in 1996 and $900 million in 1995. The 8% decrease in
1997 was the result of a decrease in revenues from long-term trading strategies,
partially offset by an increase in customer sales and trading. The 128% increase
in 1996 reflects strong performances in customer sales and trading, favorable
market conditions, and excellent results from long-term trading strategies.
Principal transaction revenues from equities were $397 million in 1997 compared
to $576 million in 1996 and $995 million in 1995. The 31% decrease in 1997
reflects the volatility in the global equity markets and a loss on a risk
arbitrage position in British Telecommunications PLC and MCI Communications
Corporation, partially offset by improved results in long-term equity
strategies. The 42% decrease in 1996 primarily reflects losses associated with
long-term equity strategies.
Principal transaction revenues from commodities were $218 million in 1997
compared with $393 million in 1996 and $238 million in 1995.
Asset management and administration fees were $1.72 billion in 1997 compared to
$1.39 billion in 1996 and $1.09 billion in 1995. The 23% increase in 1997
reflects broad growth in all recurring fee-based products, led by a 36% increase
in managed accounts, a 28% increase in externally managed Consulting Group
revenues, and an 11% increase in money market and mutual fund revenues.
Internally managed assets reached $164.1 billion, and total assets under
fee-based management were $223.8 billion at the end of 1997, representing
increases of 22% and 25%, respectively, compared with the prior year. The 28%
increase in asset management and administration fees in 1996 is due to growth in
assets under management, as well as bringing in-house all of the administrative
functions for Smith Barney proprietary mutual funds and money funds in the third
quarter of 1995.
Assets Under Fee-Based Management
Total assets under fee-based management at December 31, were as follows:
(billions) 1997 1996 1995
- --------------------------------------------------------------------------------
Money market funds $ 46.5 $ 41.6 $ 35.8
Mutual funds 51.9 40.4 36.1
Managed accounts 54.1 44.5 35.2
- --------------------------------------------------------------------------------
Salomon Smith Barney Asset Management 152.5 126.5 107.1
Financial Consultant managed accounts 11.6 7.9 5.6
- --------------------------------------------------------------------------------
Total internally managed accounts 164.1 134.4 112.7
Consulting Group externally managed assets 59.7 44.1 35.3
- --------------------------------------------------------------------------------
Total assets under fee-based management $223.8 $178.5 $148.0
================================================================================
5
<PAGE>
Net interest and dividends were $1.51 billion in 1997 compared to $1.49 billion
in 1996 and $1.64 billion in 1995. The 10% decrease in 1996 is primarily due to
a decrease in average net inventory balances partially offset by increased
margin lending to clients.
Total expenses, excluding interest and the Merger-related restructuring charge,
were $8.31 billion in 1997 compared to $7.67 billion in 1996 and $6.89 billion
in 1995. The 8% increase in 1997 and 11% increase in 1996 primarily reflect an
increase in production-related compensation and employee benefits expense,
reflecting increased revenues, as well as higher floor brokerage and other
production related costs. Compensation and employee-related expenses as a
percentage of revenues, net of interest expense was 55% in 1997, compared with
52% in 1996 and 56% in 1995. The ratio of non-compensation expenses (before the
restructuring charge) to revenues, net of interest expense was 21% in 1997, 20%
in 1996 and 23% in 1995. Salomon Smith Barney continues to maintain its focus on
controlling fixed expenses.
Asset Quality -- Salomon Smith Barney's assets at December 31, 1997 were
approximately $277 billion, consisting primarily of highly liquid marketable
securities and collateralized receivables. Approximately 51% of these assets
represent trading securities, commodities and derivatives used for proprietary
trading and to facilitate customer transactions and approximately 40% of these
assets were related to collateralized financing transactions where securities
are bought, borrowed, sold and lent in generally offsetting amounts. A
significant portion of the remainder of the assets represented receivables from
brokers, dealers, clearing organizations and customers that relate to securities
transactions in the process of being settled. The carrying values of the
majority of Salomon Smith Barney's securities inventories are adjusted daily to
reflect current prices. See Notes 1, 7, 8, 9 and 20 of Notes to Consolidated
Financial Statements for a further description of these assets.
Salomon Smith Barney's activities include trading securities that are less than
investment grade, characterized as "high yield." High yield securities include
corporate debt, convertible debt and preferred and convertible preferred equity
securities rated lower than "triple B-" by internationally recognized rating
agencies, unrated securities with market yields comparable to entities rated
below "triple B-," as well as sovereign debt issued by certain countries in
currencies other than their local currencies and which are not collateralized by
U.S. government securities. For example, high yield securities exclude the
collateralized portion of Salomon Smith Barney's holdings of "Brady Bonds," but
include such securities to the extent they are not collateralized. The trading
portfolio of high yield securities owned is carried at market or fair value and
totaled $6.8 billion at December 31, 1997; the largest high yield exposure to
one counterparty was $785 million.
Salomon Smith Barney's assets are financed through a number of sources including
long and short-term unsecured borrowings, the financing transactions described
above and payables to brokers, dealers and customers.
Outlook -- Salomon 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 global economy
and the national and worldwide political environments, among other factors.
As Salomon's operations are integrated with the existing operations of Smith
Barney, management expects to achieve, by the end of a two-year period,
annualized after-tax cost savings in excess of $200 million from the reduction
of overhead expenses, changes in corporate infrastructure and the elimination of
redundant expenses. There can be no assurance that these projected cost savings
will be achieved.
The following is a discussion of derivatives and risk management as they relate
to the operations of Salomon Smith Barney.
6
<PAGE>
Derivative Instruments
Derivatives are an integral element of the world's financial and commodity
markets. Globalization of economic activity has brought more market participants
in contact with foreign exchange and interest rate risk at a time when market
volatility has increased. Salomon Smith Barney has developed many techniques
using derivatives to enhance the efficiency of capital and trading risk
management.
Derivative instruments - overview -- Derivative instruments are contractual
commitments or payment exchange agreements between counterparties that "derive"
their value from some underlying asset, index, interest rate or exchange rate.
The markets for these instruments have grown tremendously over the past decade.
A vast increase in the types of derivative users and their motivations in using
these products has resulted in an expansion of geographic coverage, transaction
volume and liquidity, and the number of underlying products and instruments.
Derivatives have been used quite successfully by multinational corporations to
hedge foreign currency exposure, by financial institutions to manage gaps in
maturities between assets and liabilities, by investment companies to reduce
transaction costs and take positions in foreign markets without assuming
currency risk, and by non-financial companies to fix the prices of inputs into
the manufacturing process or prices of the products they sell. Derivatives are
also used by investors when, considering such factors as taxes, regulations,
capital, and liquidity, they provide the most efficient means of taking a
desired market position. These are just a few of the business objectives for
which derivatives are used. The list of objectives is large and continues to
grow rapidly.
Derivatives are accounted for and settled differently than cash instruments and
their use requires special management oversight. Such oversight should ensure
that management understands the transactions to which it commits the firm and
that the transactions are executed in accordance with sensible corporate risk
policies and procedures.
Derivatives activities, like Salomon Smith Barney's other ongoing business
activities, give rise to market, credit, and operational risks. Market risk
represents the risk of loss from adverse market price movements. While market
risk relating to derivatives is clearly an important consideration for
intermediaries such as Salomon Smith Barney, such risk represents only a
component of overall market risk, which arises from activities in non-derivative
instruments as well. Consequently, the scope of Salomon Smith Barney's market
risk management procedures extends beyond derivatives to include all financial
instruments and commodities. Credit risk is the loss that Salomon Smith Barney
would incur if counterparties failed to perform pursuant to their contractual
obligations. While credit risk is not a principal consideration with respect to
exchange-traded instruments, it is a major factor with respect to
non-exchange-traded OTC instruments. Whenever possible, Salomon Smith Barney
uses industry master netting agreements to reduce aggregate credit exposure.
Swap and foreign exchange agreements are documented utilizing counterparty
master netting agreements supplemented by trade confirmations. Over the past
several years, Salomon Smith Barney has enhanced the funding and risk management
of its derivatives activities through the increased use of bilateral security
agreements. Salomon Smith Barney, in particular, has been an industry leader in
promoting the use of this risk reduction technique. Based on notional amounts,
at December 31, 1997 and 1996, respectively, approximately 80% of Salomon Smith
Barney's swap portfolio was subject to the bilateral exchange of collateral.
This initiative, combined with the success of Salomon Swapco Inc, Salomon Smith
Barney's triple-A rated derivatives subsidiary, has greatly strengthened the
liquidity profile of Salomon Smith Barney's derivative trading activities. See
"Risk Management" for discussions of Salomon Smith Barney's management of
market, credit, and operational risks.
Nature and Terms of Derivative Instruments -- Salomon Smith Barney and its
subsidiaries enter into various bilateral financial contracts involving future
settlement, which are based upon a predetermined principal or par value
(referred to as the "notional" amount). Such instruments include swaps, swap
options, caps and floors, futures contracts, forward purchase and sale
agreements, option contracts and warrants. Transactions are conducted either
through organized exchanges or OTC. For a discussion of the nature and terms of
these instruments see Note 20 of Notes to Consolidated Financial Statements.
7
<PAGE>
Salomon Smith Barney's Use of Derivative Instruments -- Salomon Smith Barney's
use of derivatives can be broadly classified between trading and non-trading
activities. The vast majority of Salomon Smith Barney's derivatives use is in
its trading activities, which include market-making activities for customers and
the execution of proprietary trading strategies. Salomon Smith Barney's
derivative counterparties consist primarily of other major derivative dealers,
financial institutions, insurance companies, pension funds and investment
companies, and other corporations. The scope of permitted derivatives activities
both for trading and non-trading purposes for each of Salomon Smith Barney's
businesses is defined by senior management.
Trading Activities
A fundamental activity of Salomon Smith Barney is to provide market liquidity to
its customers across a broad range of financial instruments, including
derivatives. Salomon Smith Barney also seeks to generate returns by executing
proprietary trading strategies which are generally longer term in nature. By
their very nature, trading activities represent the assumption of risk. However,
trading positions are constructed in a manner that seeks to define and limit
risk taking only to those risks that Salomon Smith Barney intends to assume. The
most significant derivatives-related activity conducted by Salomon Smith Barney
is in fixed-income derivatives, which includes interest rate swaps, financial
futures, swap options, and caps and floors. Other derivative transactions, such
as currency swaps, forwards and options as well as derivatives linked to
equities, are also regularly executed by Salomon Smith Barney. Salomon Smith
Barney generally earns a spread from market-making transactions involving
derivatives, as it generally does from its market-making activities for
non-derivative transactions. Salomon Smith Barney also utilizes derivatives to
manage the market risk inherent in the securities inventories and derivative
portfolios it maintains for market-making purposes as well as its "book" of swap
agreements and related transactions with customers. Salomon Smith Barney
conducts its commodities dealer activities in organized futures exchanges as
well as in OTC forward markets. Salomon Smith Barney executes transactions
involving commodities options, forwards and swaps, much in the same manner as it
does in the financial markets.
Non-Trading Activities
Salomon Smith Barney also makes use of financial derivatives for non-trading, or
end user, purposes. As an end user, these instruments provide Salomon Smith
Barney with added flexibility in the management of its capital and funding
costs. Interest rate swaps are utilized to effectively convert the majority of
Salomon Smith Barney's fixed-rate term debt and a portion of its short-term
borrowings to variable-rate obligations. Cross-currency swaps and forward
currency contracts are utilized to effectively convert a portion of its non-U.S.
dollar-denominated term debt to U.S. dollar-denominated obligations and to
minimize the variability in equity otherwise attributable to exchange rate
movements.
Risk Management
Effective management of the risks inherent in Salomon Smith Barney's businesses
is critical. The following section discusses certain of the risks inherent in
Salomon Smith Barney's businesses, procedures in place to manage such risks, and
initiatives underway to continue to enhance Salomon Smith Barney's management of
risk.
Market Risk
Market risk represents the potential loss Salomon Smith Barney may incur as a
result of absolute and relative price movements in financial instruments,
commodities and contractual commitments, due to price volatility, changes in
yield curves, currency fluctuations and changes in market liquidity. Salomon
Smith Barney manages aggregate market risk across both on- and off-balance sheet
products and therefore separate discussion of market risk for individual
products, including derivatives, is not meaningful. The distinguishing risks
relative to derivatives are credit risk and funding (liquidity) risk, which is
roughly equivalent to the risk of margin calls. Each type of risk can be
increased or decreased by market movements. See "Risk Management - Credit Risk -
Credit Exposure from Derivative Activities."
Within Salomon Smith Barney's trading businesses, sound management of market
risk has always been a critical consideration. The sections that follow discuss
organizational elements of market risk management, as well as specific risk
management tools and techniques. Salomon Smith Barney has sought to
institutionalize these elements
8
<PAGE>
across all its businesses. Efforts to further strengthen Salomon Smith Barney's
management of market risk are ongoing and the enhancement of risk management
systems and reporting, including the development and utilization of quantitative
tools, is of major importance. Nevertheless, the basis for strong risk
management is the expertise and judgment of Salomon Smith Barney's trading
professionals and senior management, and open lines of communication.
Salomon Smith Barney's Risk Management Control Framework -- is based upon the
ongoing participation of senior management, business unit managers and the
coordinated efforts of various support units throughout the firm.
Salomon Smith Barney's risk management capabilities meet or exceed the risk
management requirements of the major regulatory and reporting bodies. These
requirements include the establishment of appropriate market and credit risk
controls, policies and procedures; appropriate senior management risk oversight
with thorough risk analysis and reporting; and independent risk management with
capabilities to evaluate and monitor risk limits.
Valuation and Control of Trading Inventory -- With regard to Salomon Smith
Barney's trading inventory (financial instruments, commodities and contractual
commitments), the Chairmen and Chief Executive Officers determine the
appropriate risk profile of Salomon Smith Barney with assistance from the other
members of the Risk Management Committee. This committee also includes senior
business managers, the Chief Financial Officer, the Chief Risk Officer and the
Global Risk Manager and reviews and recommends appropriate levels of risk,
reviews risk capital allocations, balance sheet and regulatory capital usage by
business units and recommends overall risk policies and controls. Lastly, an
independent Global Risk Management Group provides technical and quantitative
analysis of the market risk associated with inventory to the Chairmen and Chief
Executive Officers and members of the Risk Management Committee on a frequent
basis.
Trading inventory is necessary for an active market maker, but can be a major
source of liquidity risk. Monitoring Salomon Smith Barney's trading inventory
levels and composition and oversight for pricing is the responsibility of the
Global Risk Management Group and various support units, which monitor trading
inventory on a position by position level, and employ specific risk models to
track inventory exposure in credit markets, emerging markets and the mortgage
market. Salomon Smith Barney also provides for liquidity risk by imposing
markdowns as the age of the inventory increases. Inventory event risk, both for
issuer credit and emerging markets, is analyzed with the involvement of senior
traders, economists and credit department personnel. Market scenarios for the
major emerging markets are maintained and updated to reflect the event risk for
the emerging market inventory. In addition, Salomon Smith Barney, as a dealer of
securities in the global capital markets, has risk to issuers of fixed income
securities for the timely payment of principal and interest. Principal risk is
reviewed by the Global Risk Management Group, which identifies and reports major
risks undertaken by the trading businesses. The Credit Department combines
principal risk positions with credit risks resulting from market and delivery
risk to review aggregate exposures by counterparty, industry and country.
Risk Limits -- Salomon Smith Barney's trading businesses have implemented
business unit limits on exposure to risk factors. These limits, which are
intended to enforce the discipline of communicating and gaining approval for
higher risk positions, are periodically reviewed by the Global Risk Management
Group. Business units may not exceed risk limits without the approval of the
appropriate member of the Risk Management Committee.
Theoretical Revenue Reconciliation -- The trading units of Salomon Smith Barney,
the Global Risk Management Group and various support units perform periodic
revenue reconciliations, comparing actual revenues with the revenue outcome that
would have been expected based on risk factor exposures. A discrepancy between
the expected revenue impact for a given market event and the actual revenues may
indicate an unexplained dimension of market risk. Comparing the two thus
provides a fundamental check that risk management is capturing all the material
market risk factors and that the sources of trading risk and trading revenue are
consistent with the realized revenue.
9
<PAGE>
Tools for Risk Management and Reporting -- Salomon Smith Barney's market risk
measurement begins with the identification of relevant market risk factors.
These core risk factors vary from market to market, and region to region. Risk
factors are used in three types of analysis: stress analysis, scenario analysis
and value-at-risk analysis.
Stress Analysis. Salomon Smith Barney performs stress analysis by repricing
inventory positions for specified upward and downward moves in risk factors, and
computing the revenue implications of these repricings. Stress analysis is a
useful tool for identifying exposures that appear to be relatively small in the
current environment but grow more than proportionately with changes in risk
factors. Such risk is typical of a number of derivative instruments, including
options sold, many mortgage derivatives and a number of structured products.
Stress analysis provides for the measurement of the potential impact of
extremely large moves in risk factors, which, though infrequent, can be expected
to occur from time to time.
Scenario Analysis. Scenario analysis is a tool that generates forward-looking
"what-if" simulations for specified changes in market factors. For example, a
scenario analysis could simulate the impact of a dramatic tightening of interest
rates by the Federal Reserve Board. The revenue implications of the specified
scenario are quantified not only for Salomon Smith Barney as a whole, but on a
business unit basis and on a geographic basis. The risk management system keeps
track of many scenarios developed by members of the Global Risk Management Group
and by Salomon Smith Barney's economists and strategists.
Value at Risk. Value at risk (VAR) is a statistical tool for measuring the
variability of trading revenue. The VAR reported reflects a potential range of
revenue loss, over a one day period, at the "95% confidence level." This level
implies that on 95 trading days out of 100, the mark-to-market of the portfolio
will likely result in either (1) an increase in revenue, or (2) a decrease from
average revenue that is less than the VAR estimate; and that on 5 trading days
out of 100, a decrease from average revenue that will likely exceed the VAR
estimate.
Value at risk is calculated by performing simulation analysis of the
volatilities and correlations of key underlying market risk factors (e.g.,
interest rates, interest rate spreads, equity prices, foreign exchange rates,
commodity prices, option volatilities) to estimate the range of possible changes
in the market value of Salomon Smith Barney's market risk sensitive financial
instruments.
Measuring market risk using statistical risk management models has recently
become the main focus of risk management efforts by many companies whose
earnings are exposed to changes in the fair value of financial instruments.
Management believes that statistical models alone do not provide a reliable
method of monitoring and controlling risk. While VAR models are relatively
sophisticated, they are of limited value for internal risk management in that
they do not give any indication of which individual exposures are problematic or
which of the many risk simulations are particularly worrisome. Therefore, such
models do not substitute for the experience or judgment of senior management and
the Global Risk Management Group, who have extensive knowledge of the markets
and revise strategies as they deem necessary. These models are used by Salomon
Smith Barney only as a supplement to other risk management tools.
Salomon Smith Barney engages in long-term trading activities. The horizon of
these trading activities can vary and is often in excess of a fiscal quarter.
Therefore, daily VAR is of limited use in measuring the true risk over longer
horizons. For long-term strategies that have convergence or mean-reverting
characteristics, the daily VAR will overestimate the risk that these strategies
will have over a longer horizon. Salomon Smith Barney believes that this feature
of the trading horizon makes comparisons of VAR across different firms
problematic.
The following table shows the results of Salomon Smith Barney's VAR analysis,
which includes substantially all of its financial assets and liabilities,
including all financial instruments and commodities owned and sold, contractual
commitments, repurchase and resale agreements, and related funding at December
31, 1997:
10
<PAGE>
(millions)
-----------------------------------------------------
Interest rate $41
Equities $ 8
Commodities $ 8
Currency $ 9
All financial assets and liabilities $44
The quantification of market risk using VAR analysis requires a number of key
assumptions. In calculating the above market risk amounts, Salomon Smith Barney
used a 95% confidence level and a one day interval. The standard deviations and
correlation assumptions are based on historical data and reflect a horizon of
one year or more and no more than five years. Over 100 risk factors are used in
the simulations. VAR reflects the risk profile of Salomon Smith Barney at
December 31, 1997 and is not a predictor of future results.
The following describes the components of market risk:
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates
will affect the value of financial instruments. In connection with Salomon Smith
Barney's dealer and arbitrage activities, including market-making in OTC
derivative contracts, Salomon Smith Barney is exposed to interest rate risk
arising from changes in the level or volatility of interest rates, mortgage
prepayment speeds or the shape and slope of the yield curve. Salomon Smith
Barney's corporate bond activities expose it to the risk of loss related to
changes in credit spreads. When appropriate, Salomon Smith Barney attempts to
hedge its exposure to interest rate risk by entering into transactions such as
interest rate swaps, options, U.S. and non-U.S. government securities and
futures and forwards contracts designed to mitigate such exposure.
Equity Price Risk
Salomon Smith Barney is exposed to equity price risk as a consequence of making
markets in equity securities and equity derivatives. Equity price risk results
from changes in the level or volatility of equity prices, which affect the value
of equity securities, or instruments that derive their value from a particular
stock, a basket of stock or a stock index. Salomon Smith Barney attempts to
reduce the risk of loss inherent in its inventory in equity securities by
entering into hedging transactions, including equity options, designed to
mitigate its market risk profile.
Commodity Price Risk
Commodity price risk results from the possibility that the price of the
underlying commodity may rise or fall. Cash flows from commodity contracts are
based on the difference between an agreed-upon fixed price and a price that
varies with changes in a specified commodity price or index. Commodity contracts
principally relate to energy, precious metals and base metals.
Currency Risk
Currency risk arises from the possibility that changes in foreign exchange rates
will impact the value of financial instruments. When Salomon Smith Barney buys
or sells a foreign currency or financial instrument denominated in a currency
other than U.S. dollars, exposure exists from a net open currency position.
Until the position is covered by selling or buying an equivalent amount of the
same currency or by entering into a financing arrangement denominated in the
same currency, Salomon Smith Barney is exposed to a risk that the exchange rate
may move against it.
11
<PAGE>
CREDIT RISK
Credit risk represents the loss Salomon Smith Barney could incur if an issuer or
counterparty is unable or unwilling to perform on its commitments, including the
timely payment of principal and interest or settlement of swap and foreign
exchange transactions, repurchase agreements, securities purchases and sales,
and other contractual obligations. Salomon Smith Barney's credit risk management
process considers the many factors that influence the probability of a potential
loss, including, but not limited to, the issuer's or counterparty's financial
profile, its business prospects and reputation, the specific terms and duration
of the transactions, the exposure of the transactions to market risk,
macroeconomic developments and sovereign risk.
Origin of Credit Risk
In the normal course of its operations, Salomon Smith Barney and its
subsidiaries enter into various transactions that give rise to credit risk.
Credit risk is generally attributable to one or more of the following risks:
market, delivery and default of principal. Market and delivery risks create
credit risk with respect to transactions with counterparties. Default of
principal risk is the risk of nonpayment of the principal and interest of a
security.
The components of market risk such as absolute and relative price movements,
price volatility, changes in yield curves, currency fluctuations and changes in
market liquidity result in credit risk even where the right of offset exists
when a counterparty's obligation to Salomon Smith Barney exceeds the obligation
of Salomon Smith Barney to the counterparty. Delivery risk arises from the
requirement, in certain circumstances, to release cash or securities before
receiving payment. For both market and delivery risk, the Credit Department sets
credit limits or requires specific approvals that anticipate the potential
exposure of transactions.
Credit Risk Management at Salomon Smith Barney
The Chief Credit Officer, who is independent of any revenue-generating function,
manages the Credit Department, whose professionals assess, approve, monitor, and
coordinate the extension of credit on a global basis. In considering such risk,
the department evaluates the risk/return trade-offs as well as current and
potential credit exposures to a counterparty or to groups of counterparties that
are related because of industry, geographic, or economic characteristics. The
department also has established various credit policies and control procedures
used singularly or in combination, depending upon the circumstances.
Credit Risk Management of Commodities-Related Transactions
Phibro's credit department determines the credit limits for counterparties in
its commodities-related activities. Exposure reports, which contain detailed
information about cash flows with customers, goods in transit and forward
mark-to-market positions, are reviewed daily.
Credit Exposure from Derivatives Activities
The following table summarizes Salomon Smith Barney's credit exposure, net of
cash and securities collateral for swap agreements, swap options and caps and
floors and foreign exchange contracts and options at December 31, 1997. These
numbers do not present potential credit exposure that may result from factors
that influence market risk or from the passage of time. Severe changes in market
factors may cause credit exposure to increase suddenly and dramatically. Swap
agreements, swap options, caps and floors include transactions with both short-
and long-term periods of commitment.
12
<PAGE>
<TABLE>
<CAPTION>
Transactions
with over 3
years to
(billions) All transactions maturity 1997 average
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Swaps, swap options, caps and floors:
Risk classes 1 and 2 $1.5 $1.1 $1.1
Risk class 3 1.5 .8 1.2
Risk classes 4 and 5 1.0 .5 .8
Risk classes 6, 7 and 8 .1 .1 .1
- ----------------------------------------------------------------------------------------
$4.1 $2.5 $3.2
========================================================================================
Foreign exchange contracts and options:
Risk classes 1 and 2 $ .7 -- $ .7
Risk class 3 .7 -- .6
Risk classes 4 and 5 .2 -- .2
- ----------------------------------------------------------------------------------------
$1.6 -- $1.5
========================================================================================
</TABLE>
To monitor credit risk, Salomon Smith Barney utilizes a series of eight internal
designations of counterparty credit quality. These designations are analogous to
external credit ratings whereby risk classes one through three are high quality
investment grades. Risk classes four and five include counterparties ranging
from the lowest investment grade to the highest non-investment grade. Risk
classes six, seven and eight represent higher risk counterparties.
With respect to sovereign risk related to derivatives, credit exposure at
December 31, 1997 was primarily to counterparties in the U.S. ($2.9 billion),
Germany ($.6 billion), Great Britain ($.5 billion), Italy ($.4 billion), Japan
($.3 billion) and France ($.3 billion).
OPERATIONAL RISK
As a major intermediary in financial and commodities markets, Salomon Smith
Barney is directly exposed to market risk and credit risk, which arise in the
normal course of its business activities. Slightly less direct, but of critical
importance, are risks pertaining to operational and back office support. This is
particularly the case in a rapidly changing and increasingly global environment
with increasing transaction volumes and an expansion in the number and
complexity of products in the marketplace. Such risks include:
o Operational/Settlement Risk - the risk of financial and opportunity loss
and legal liability attributable to operational problems, such as
inaccurate pricing of transactions, untimely trade execution, clearance
and/or settlement, or the inability to process large volumes of
transactions. Salomon Smith Barney is subject to increased risks with
respect to its trading activities in emerging market securities, where
clearance, settlement, and custodial risks are often greater than in more
established markets.
o Technological Risk - the risk of loss attributable to technological
limitations or hardware failure that constrain Salomon Smith Barney's
ability to gather, process, and communicate information efficiently and
securely, without interruption, with customers, among units within Salomon
Smith Barney, and in the markets where Salomon Smith Barney participates.
In addition, Salomon Smith Barney must enhance its systems to process
dates starting with the year 2000 and to address the technological
implications that will result from regulatory and market changes, such as
Europe's Economic and Monetary Union.
o Legal/Documentation Risk - the risk of loss attributable to deficiencies
in the documentation of transactions (such as trade confirmations) and
customer relationships (such as master netting agreements) or errors that
result in noncompliance with applicable legal and regulatory requirements.
13
<PAGE>
o Financial Control Risk - the risk of loss attributable to limitations in
financial systems and controls. Strong financial systems and controls
ensure that assets are safeguarded, that transactions are executed in
accordance with management's authorization, and that financial information
utilized by management and communicated to external parties, including
Salomon Smith Barney's stockholder, creditors, and regulators, is free of
material errors.
As the above risks are largely interrelated, so are Salomon Smith Barney's
actions to mitigate and manage them. Salomon Smith Barney's Chief Administrative
Officer is responsible for, among other things, oversight of global operations
and technology. An essential element in mitigating the risks noted above is the
optimization of information technology and the ability to manage and implement
change. To be an effective competitor in an information-driven business of a
global nature requires the development of global systems and databases that
ensure increased and more timely access to reliable data.
For related disclosures see Notes 1, 5, 11 and 20 of Notes to Consolidated
Financial Statements.
Consumer Finance Services
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
- --------------------------------------------------------------------------------
Consumer Finance Services $1,688 $ 237 $1,411 $ 223 $1,354 $ 246
================================================================================
Consumer finance earnings were $237 million in 1997 compared to $223 million in
1996 and $246 million in 1995. The 6% increase in 1997 reflects strong
receivables growth in all major products, largely as a result of investments
made over the last year in marketing, training and systems enhancements. Net
receivables at December 31, 1997 reached a record $11.05 billion (which excludes
$186 million in credit card receivables held for securitization) compared to
$8.07 billion at year-end 1996 and $7.24 billion at year end 1995. The
receivables increase in 1997 reflects strong internal growth as well as the July
31, 1997 acquisition of Security Pacific Financial Services (Security Pacific).
Security Pacific contributed approximately $1.2 billion in receivables growth
while internal sources generated the remainder, which grew 22% over year-end
1996 levels. The internal growth during 1997 was led by the Primerica Financial
Services (PFS) generated portfolio, which grew 49% to $2.3 billion for the year,
as well as credit card outstandings, which grew 28% or $257 million to $1.16
billion. (Including the receivables held for securitization, credit card growth
was $443.5 million, or 49%.) Receivables originated in the branch system during
1997 grew 14%, excluding the impact of Security Pacific.
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. The
growth in Consumer finance receivables in 1996 occurred primarily in real estate
loan and personal loan products generated by Commercial Credit's branch office
network and through PFS.
While total interest margin has increased in 1997 from the 1996 and 1995 periods
due to the increase in the portfolio, average net interest margin declined 50
basis points in 1997 to 8.14% and declined 15 basis points in 1996 to 8.64% from
8.79% in 1995, reflecting a decline in the average yield to 14.58% in 1997 and
15.24% in 1996. These declines were partially offset by a decrease in cost of
funds over the period. The decline in average yield has resulted from a shift in
the portfolio mix towards lower yielding higher quality real estate loans,
particularly first mortgage loans, as well as credit cards.
14
<PAGE>
Consumer Finance borrows from the corporate treasury operations of Commercial
Credit Company (CCC), a 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 6.55% in 1997 and 6.75% in 1996 and 6.95% in 1995. 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 were 2.35% as of December 31, 1997 compared
to 2.38% at year end 1996 and 2.14% at year end 1995. The charge off-rate of
2.65% in 1997 was down from the 2.91% rate in 1996 and higher than the 2.28%
rate in 1995. As a result of the Security Pacific acquisition, charge-offs in
the second half of 1997 reflect a short-term benefit largely from the transition
of that portfolio to Commercial Credit's charge-off policies. As a result, the
Company expects the charge-off rate to increase somewhat in the first half of
1998.
The allowance for credit losses as a percentage of net outstandings was 2.91% at
year-end 1997 compared to 2.97% at year-end 1996 and 2.66% at year-end 1995.
Integration of Security Pacific has proceeded rapidly, with the conversion to
the Company's proprietary systems and the addition of approximately 175 Security
Pacific branch offices. As of December 31, 1997, the Company had 1,026 branches,
making it the third largest domestic branch network in the consumer finance
industry.
As of, or for, the
Year Ended December 31,
---------------------------------
1997 1996 1995
---------------------------------
Allowance for credit losses as a %
of net outstandings 2.91% 2.97% 2.66%
Charge-off rate for the year 2.65% 2.91% 2.28%
60 + days past due on a contractual basis as
a % of gross consumer finance receivables at
year-end 2.35% 2.38% 2.14%
Insurance subsidiaries of the Company provide credit life, health and property
insurance to Consumer Finance customers. Premiums earned were $177 million in
1997, $155 million in 1996 and $139 million in 1995. 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 $12.8 billion at
December 31, 1997, of which $10.8 billion, or 84%, 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. In response to the high level of personal bankruptcies in the unsecured
market, the Company has shifted its portfolio mix toward higher quality real
estate loans, particularly first mortgage loans. The Company has a
geographically diverse portfolio as described in Note 10 of Notes to
Consolidated Financial Statements. The Company believes that its loss reserves
on the consumer finance receivables are appropriate given current circumstances.
Of the remaining Consumer Finance assets, approximately $915 million were
investments of insurance subsidiaries, including $748 million of fixed income
securities and $93 million of short-term investments with a weighted average
quality rating of A1.
15
<PAGE>
Outlook -- The Consumer Finance results over the last several years have been
influenced by a higher level of loan losses, as a result of a higher level of
personal bankruptcies. Consumer Finance is also affected by the interest rate
environment and general economic conditions. The lower interest rate environment
has resulted in modest downward pressure on interest rates charged on new
receivables secured by real estate and credit cards. For the Company overall,
however, these trends have been offset somewhat by the lower costs of funds.
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.
Life Insurance Services
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Travelers Life and Annuity (1), (2) $2,890 $567 $2,339 $371 $2,502 $330
Primerica Financial Services (3) 1,536 343 1,426 282 1,356 251
- -----------------------------------------------------------------------------------------------
Total Life Insurance Services $4,426 $910 $3,765 $653 $3,858 $581
===============================================================================================
</TABLE>
(1) Net income includes $143 million, $11 million and $48 million of reported
investment portfolio gains in 1997, 1996 and 1995, respectively.
(2) Excludes results of The MetraHealth Companies Inc. which are classified as
discontinued operations.
(3) Net income includes $8 million, $9 million and $20 million of reported
investment portfolio gains in 1997, 1996 and 1995, respectively, and in
1996 a portion of the gain ($4 million) from the disposition of RCM
Capital Management, a California Limited Partnership (RCM).
Travelers Life and Annuity
Travelers Life and Annuity consists of annuity, life and long-term care products
marketed by The Travelers Insurance Company (TIC) and its wholly owned
subsidiary The Travelers Life and Annuity Company (TLAC) under the Travelers
name and the individual accident and health operations of Transport Life
(through September 29, 1995 -- the date of its spin-off). Among the range of
products offered are fixed and variable deferred annuities, payout annuities and
term, universal and variable life and long-term care insurance to individuals
and small businesses. Travelers Life and Annuity also provides group pension
products, including guaranteed investment contracts, and group annuities to
employer-sponsored retirement and savings plans. These products are primarily
marketed through The Copeland Companies (Copeland), an indirect wholly owned
subsidiary of TIC, Salomon Smith Barney Financial Consultants and a nationwide
network of independent agents. 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 were $424 million in 1997 compared to $360
million in 1996 and $282 million in 1995. The 18% improvement in 1997 was
largely driven by strong investment income as well as by double-digit growth in
individual and group annuity account balances and long-term care insurance
premiums. Positive earnings momentum attributable to strong sales growth of less
capital-intensive products --including variable life insurance and annuities --
continues to be partially offset by a gradual decline in the amount of higher
margin business written in prior years. The 28% improvement in 1996 was largely
driven by strong investment income, reflecting a repositioning of the investment
portfolio and 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 the increase in 1996
16
<PAGE>
were higher expenses, a portion of which relate to higher corporate expense
allocations of amounts previously absorbed in other segments.
Improved sales through Copeland, Salomon 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 the major rating agency upgrades of The Travelers
Insurance Company during 1997.
Significant deferred annuities sales, combined with favorable market returns
from variable annuities, drove account balances to $16.1 billion at December 31,
1997, up 22% from $13.2 billion at year-end 1996 and $11.3 billion at year-end
1995. Net written premiums and deposits increased 28% in 1997 to $2.55 billion
from $1.99 billion in 1996 and $1.65 billion in 1995. The strong sales reflect a
fourth quarter marketing initiative at Salomon Smith Barney, as well as
Copeland's successful penetration of the small company segment of the 401(k)
market.
Payout and group annuity account balances and benefit reserves reached $11.94
billion at December 31, 1997, up 10%, from $10.86 billion at year-end 1996 and
were slightly lower than the $12.03 billion at year-end 1995. The 1997
revitalization of the payout and group annuities business reflects a doubling of
sales of new payout annuities and guaranteed investment contracts. Net written
premiums and deposits (excluding the Company's employee pension plan deposits)
in 1997 were $2.42 billion, up more than 95% from $1.24 billion in 1996 and
$1.14 billion in 1995.
Direct periodic premiums and deposits for individual life insurance of $290.4
million in 1997 were marginally ahead of the $285.3 million in 1996 and $278.6
million in 1995. Life insurance in force was $51.6 billion at December 31, 1997,
up from $50.4 billion at year-end 1996 and $49.2 billion at year-end 1995.
Net written premiums for the growing long-term care insurance line reached
$183.8 million in 1997 compared to $127.7 million in 1996 and $88.2 million in
1995.
Outlook -- Travelers Life and Annuity should benefit from growth in the aging
population who are becoming more focused on the need to accumulate adequate
savings for retirement, to protect these savings and to plan for the transfer of
wealth to the next generation. Travelers Life and Annuity is well-positioned to
take advantage of the favorable long-term demographic trends through its strong
financial position, widespread brand name recognition and broad array of
competitive life, annuity and long-term care insurance products sold through
established distribution channels.
However, competition in both product pricing and customer service is
intensifying. While there has been some consolidation within the industry, other
financial services organizations are increasingly involved in the sale and/or
distribution of insurance products. Deregulation of the banking industry,
including 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 were $335
million in 1997 compared to $269 million in 1996 and $231 million in 1995. The
25% increase in 1997 results principally reflects strong sales of mutual funds
and variable annuities, continued growth in life insurance in force, as well as
favorable mortality experience and disciplined expense management. Substantial
increases in total production and cross-selling initiatives were achieved during
1997 as PFS continued to benefit from greater application of the Financial Needs
Analysis (FNA) -- the diagnostic tool that enhances the ability of the Personal
Financial Analysts to address client needs. More than 483,000 FNAs were
submitted during 1997, a 351% increase over the 107,000 submitted in
17
<PAGE>
1996. The 16% increase in 1996 results reflects higher sales of mutual funds and
consumer loans as well as continued growth in life insurance in force and
improved life insurance margins.
Total face amount of issued term life insurance was $52.6 billion in 1997
compared to $52.0 billion in 1996 and $53.0 billion in 1995. Included in the
$52.6 billion face amount issued in 1997 is $45.7 billion in newly issued face
amount, $1.2 billion in non-PFS term insurance issued by National Benefit Life
Insurance Company (NBL) and $5.7 billion in additional coverage to existing PFS
policies through add-on riders. The $52.0 billion issued in 1996 includes $45.9
billion in newly issued face amount, $1.2 in non-PFS term insurance issued by
NBL and $4.9 billion in add-on riders. The $53.0 billion issued in 1995 includes
$47.9 billion in newly issued face amount, $1.1 in non-PFS term insurance issued
by NBL and $4.0 billion in add-on riders. The number of policies issued was
228,900 in 1997, compared to 247,600 in 1996 and 266,600 in 1995, consistent
with the industry-wide downturn in new life insurance sales for these periods.
The average face value (in thousands) per policy issued was $200 in 1997
compared to $185 in 1996 and $180 in 1995. 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 1997 reached $369.9
billion, up from $359.9 billion at year-end 1996 and $348.2 billion at year-end
1995, 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 $2.689
billion in 1997 compared to $2.327 billion in 1996 and $1.551 billion in 1995.
Approximately 42% of initial U.S. sales in 1997 were from the Salomon Smith
Barney products, predominantly the Concert Series(R) which PFS first introduced
to its market in early 1996. Loan receivables from the $.M.A.R.T. loan(R)
(real-estate loans) and $.A.F.E.(R) loan (personal loans) products of Consumer
Finance, which are reflected in the assets of Consumer Finance, continued to
advance during the year and were $2.264 billion at December 31, 1997 compared to
$1.524 billion at December 31, 1996, and $1.258 billion at December 31, 1995.
The TRAVELERS SECURE(R) 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 39 states. Approximately 8,700 agents are
licensed to sell this product.
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).
18
<PAGE>
Property & Casualty Insurance Services
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
(millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------
Net Net Net
Revenues Income Revenues Income Revenues Income
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Lines (1) $6,557 $946 $5,528 $215 $3,063 $343
Personal Lines (2) 3,341 413 2,685 281 1,482 110
Financing Costs and Other 13 (123) 11 (87) -- --
Minority Interest -- (212) -- (47) -- --
- ---------------------------------------------------------------------------------------
Total Property & Casualty
Insurance Services $9,911 $1,024 $8,224 $362 $4,545 $453
=======================================================================================
</TABLE>
(1) Net income includes $100 million, $21 million and $36 million of reported
investment portfolio gains in 1997, 1996 and 1995, respectively, and $453
million of charges in 1996 related to the acquisition of Aetna P&C.
(2) Net income includes $10 million of reported investment portfolio gains in
1997, $5 million of reported investment portfolio losses in 1996 and $6
million of reported investment portfolio gains in 1995. 1996 also benefits
from $31 million of adjustments related to the acquisition of Aetna P&C.
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 acquisition and the application of Travelers
strategies, policies and practices to Aetna P&C reserves. The charges include:
o $229 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 $45 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 a $32 million after tax and minority interest ($60 million before tax and
minority interest) charge related to premium collection issues on loss
sensitive programs, specifically large deductible products;
o a $22 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 an $18 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.
For purposes of computing GAAP combined ratios, fee income is allocated as a
reduction of losses and loss adjustment expenses and other underwriting
expenses. Previously fee income was included with premiums for purposes of
computing GAAP combined ratios. The 1996 and 1995 GAAP combined ratios have been
restated to conform to the current year's presentation.
19
<PAGE>
Commercial Lines
Earnings before portfolio gains/losses and acquisition-related charges were $846
million in 1997 compared to $647 million in 1996 and $307 million in 1995. The
31% improvement in 1997 primarily resulted from the inclusion in 1997 of Aetna
P&C for the entire year compared to only nine months for 1996, higher net
investment income, lower catastrophe losses and expense savings associated with
the acquisition and integration of Aetna P&C. Operating results also reflected
market conditions characterized by difficult pricing and increased competition.
The impact of this trend on 1997 operating results was offset by the continued
disciplined approach to underwriting and risk management. The 1996 increase
compared to 1995 was primarily the result of higher net investment income, the
benefits of expense-reduction initiatives and the inclusion of Aetna P&C's
results of operations for nine months in 1996.
Commercial Lines net written premiums totaled $4.757 billion in 1997 compared to
$4.084 billion in 1996 (excluding an adjustment associated with a reinsurance
transaction) and $2.309 billion in 1995. 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 totaled $4.690 billion in 1996 and $5.144
billion in 1995. The 1997 increase was primarily attributable to a $142 million
adjustment due to the change to conform the Aetna P&C method of recording
certain net written premiums to the method employed by Travelers Indemnity and
its subsidiaries (Travelers P&C). The increase was offset in part by the highly
competitive conditions in the marketplace and the Company's continued
disciplined approach to underwriting and risk management. The 1996 decrease
reflected the highly competitive marketplace and the Company's selective
underwriting.
Fee income was $365 million in 1997 compared to $392 million in 1996 and $432
million in 1995. The decreases in fee income were the result of the depopulation
of involuntary pools as the loss experience of workers' compensation improved
and insureds moved to voluntary markets and the Company's continued success in
lowering workers' compensation losses of service customers, partially offset by
the Company writing more service fee-based product versus premium-based product.
National Accounts 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 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. National Accounts' net written
premiums were $657 million in 1997 compared to $803 million in 1996 (excluding a
one-time adjustment associated with a reinsurance transaction) and $703 million
in 1995. 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 were $874 million in 1996 and $1.192 billion in 1995. The 1997 decrease
was primarily due to a decrease in the Company's level of involuntary pool
participation, National Accounts writing less premium-based products versus
service fee-based products, the highly competitive marketplace and the Company's
continued disciplined approach to underwriting and risk management. The 1996
decrease reflected the Company's selective renewal activity and the highly
competitive marketplace.
National Accounts new business in 1997 was significantly higher than in 1996,
reflecting continued product development efforts, especially in workers'
compensation managed care programs. National Accounts business retention ratio
was also significantly higher in 1997 than in 1996, reflecting the Company's
continued focus on retaining profitable business. National Accounts new business
in 1996 was significantly lower than in 1995 despite the Aetna P&C acquisition,
and was due to the highly competitive marketplace. National Accounts business
retention ratio in 1996 was moderately lower than in 1995 and reflected the
Company's selective renewal activity and the highly competitive marketplace.
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. Commercial Accounts' net written premiums were $1.986
billion in 1997 compared to $1.485 billion in 1996 and $730 million in 1995. 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 were
$1.725 billion in 1996 and $1.862
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<PAGE>
billion in 1995. The increase in 1997 reflected a $127 million adjustment due to
the change to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums and the continued growth through programs
designed to leverage underwriting experience in specific industries, partially
offset by the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management. The decrease in 1996
in net written premiums was due to the highly competitive marketplace, the
Company's selective underwriting and the continued softness in guaranteed cost
pricing.
In 1997, new business in Commercial Accounts significantly improved compared to
1996, reflecting continued growth in programs designed to leverage underwriting
experience in specific industries. The Commercial Accounts business retention
ratio in 1997 significantly improved compared to 1996. Commercial Accounts
continues to focus on the retention of existing business while maintaining its
product pricing standards and its selective underwriting policy. For 1996, new
business in Commercial Accounts was significantly higher than in 1995. The 1996
increase in new business was due to the acquisition of Aetna P&C. The Commercial
Accounts business retention ratio in 1996 was virtually the same as in 1995 and
reflected Commercial Accounts selective underwriting policy.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $1.432 billion in 1997 compared to
$1.191 billion in 1996 and $542 million in 1995. 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 were $1.412 billion in 1996 and
$1.466 billion in 1995. The increase in 1997 reflected a $15 million adjustment
due to the change to conform the Aetna P&C method with the Travelers P&C method
of recording certain net written premiums and the continued benefit from the
broader industry and product line expertise of the combined company, partially
offset by the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management. The decrease in 1996
reflected the highly competitive marketplace and the Company's selective
underwriting.
New premium business in Select Accounts was moderately higher in 1997 than in
1996 reflecting an increase due to the acquisition of Aetna P&C, partially
offset by a decrease due to the competitive marketplace. The Select Accounts
business retention ratio remains very strong in 1997 and was moderately higher
than in 1996, reflecting the Company's focus on retaining profitable business.
New premium business in Select Accounts was significantly higher in 1996 than in
1995 due to the acquisition of Aetna P&C. The Select Accounts business retention
ratio was moderately higher in 1996 than in 1995 reflecting the industry and
product line expertise of the combined company.
Specialty Accounts markets products to national, midsize and small customers,
including individuals, and distributes them through both wholesale brokers and
retail agents and brokers throughout the United States. Specialty Accounts net
written premiums were $682 million in 1997 compared to $605 million in 1996 and
$334 million in 1995. 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 and $624 million in 1995. The 1997
increase compared to 1996 was due to increased writings of its excess and
surplus lines business, partially offset by lower directors' and officers'
liability insurance writings due to the termination of an exclusive arrangement
with a managing general agent. The 1996 increase compared to 1995 was due to
increases in directors' and officers' liability insurance and errors and
omissions coverages.
Catastrophe losses, net of tax and reinsurance, were $5 million in 1997 compared
to $31 million in 1996 and $7 million in 1995. The 1997 catastrophe losses were
primarily due to tornadoes in the Midwest in the first quarter. Catastrophe
losses in 1996 were primarily due to Hurricane Fran and December storms on the
West Coast.
The statutory combined ratio for Commercial Lines for 1997 was 109.0% compared
to 128.1% in 1996 and 105.0% in 1995. The GAAP combined ratio for Commercial
Lines in 1997 was 108.7% compared to 128.3% in 1996 and 103.6% in 1995.
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<PAGE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only. In 1996, the net deferral for GAAP was offset by
certain purchase accounting adjustments recorded in connection with the Aetna
P&C acquisition which resulted in a charge to statutory expenses.
The decreases in the 1997 statutory and GAAP combined ratios for Commercial
Lines compared to 1996 were primarily attributable to the 1996 charges 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 110.8%, respectively. The decrease in the 1997 statutory
and GAAP combined ratios compared to the 1996 statutory and GAAP combined ratios
excluding acquisition-related charges was due to lower catastrophe losses and
reduced expenses, partially offset by the inclusion in 1997 of Aetna P&C's
results for the entire year compared to only nine months in 1996. Aetna P&C has
historically had a higher underwriting expense ratio, partially offset by a
lower loss ratio, which reflected the mix of business including the favorable
effect of the lower loss ratio of the Bond Specialty business. The increase in
the 1996 statutory and GAAP combined ratios excluding acquisition-related
charges compared to the 1995 statutory and GAAP combined ratios was primarily
due to the inclusion in 1996 of Aetna P&C's results.
Personal Lines
Earnings before portfolio gains/losses and acquisition-related adjustments
increased 58% in 1997 to $403 million from $255 million in 1996 and $104 million
in 1995. The 1997 increase primarily reflected the inclusion in 1997 of Aetna
P&C for the entire year compared to only nine months in 1996, lower catastrophe
losses, an increase in favorable prior year reserve development of $40 million
primarily in the automobile bodily injury line and production-related growth,
partially offset by investments in service centers and market expansions. The
1996 increase was primarily attributable to the post-acquisition results of
operations of Aetna P&C, approximately $70 million of favorable prior year
reserve development primarily in the automobile bodily injury line, the
continued benefit of expense reduction initiatives and higher net investment
income.
Personal Lines net written premiums for 1997 were $3.074 billion compared to
$2.359 billion in 1996 and $1.298 billion in 1995. 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 in 1996 were $2.675 billion and
$2.543 billion in 1995. The 1997 increase primarily reflected lower ceded
premiums due to a change in a reinsurance arrangement in January 1997, growth in
sales in targeted markets served by independent agents and growth in affinity
marketing, joint marketing arrangements and TRAVELERS SECURE(R). Business
retention continued to be strong. The 1996 increase was due to the 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 $10 million in 1997
compared to $58 million in 1996 and $12 million in 1995. 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.
The statutory combined ratio for Personal Lines in 1997 was 92.2% compared to
97.6% in 1996 and 104.4% in 1995. The GAAP combined ratio for Personal Lines in
1997 was 91.8% compared to 97.1% in 1996 and 103.4% in 1995.
GAAP combined ratios for Personal Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only. In addition, certain 1996 purchase accounting
adjustments recorded in connection with the Aetna P&C acquisition resulted in a
charge to statutory 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 99.7%, respectively. The decrease in the 1997 statutory and GAAP
22
<PAGE>
combined ratios compared to the 1996 statutory and GAAP combined ratios
excluding this item was due to lower catastrophe losses and favorable prior year
reserve development, primarily in the automobile bodily injury line. The
decrease in the 1996 statutory and GAAP combined ratios excluding this item
compared to the 1995 statutory and GAAP combined ratios was predominantly due to
the favorable prior year reserve development, partially offset by higher
catastrophe losses.
Financing Costs and Other
The primary component for 1997 and 1996 was after tax interest expense of $106
million and $77 million, respectively, reflecting financing costs associated
with the acquisition of Aetna P&C.
Outlook -- 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 and litigation.
Commercial Lines operating results for 1997 reflected the negative impact of
pricing declines in all markets. This trend in market conditions, characterized
by difficult pricing and increased competition, continued from prior years.
In National Accounts, where the majority of products are loss-sensitive
retrospectively rated or high deductible policies, pricing declines have been
the most severe. This business continues to reflect the negative impact of price
declines as evidenced by the decrease in premium and fee levels and, more
importantly, in the narrowing of profit margins earned on this business.
Additionally, there has been an increasing trend in this marketplace for
guaranteed cost products at what the Company believes are inadequate price
levels.
For Commercial Accounts and Select Accounts, the highly competitive marketplace
and soft underwriting cycle continue to pressure the pricing of guaranteed cost
products. Premiums on this business continue to reflect price declines, and have
not kept pace with loss cost inflation in recent years. The impact of this
negative trend in market conditions and resultant price declines has been
partially offset by a continued disciplined approach to underwriting and risk
management by the Company. The Company's focus is to retain existing profitable
business and obtain new accounts where it can maintain its selective
underwriting policy. The Company continues to adhere to strict guidelines to
maintain high quality underwriting and to focus on its core product lines and
markets, with particular emphasis on both product and industry specialization.
Specialty Accounts also operates within a highly competitive marketplace
characterized by pressure on both price and terms. The Company's focus in this
market is to sustain its emphasis on strict adherence to underwriting standards
and to increase its efforts to cross-sell its expanding array of specialty
products to existing customers of National Accounts, Commercial Accounts and
Select Accounts where it believes it has the greatest sales and profit
opportunities.
The combination of price declines associated with the highly competitive
marketplace and the Company's selective underwriting criteria has had an adverse
impact on premium and fee levels during the past several years. If the
competitive pressures on pricing do not improve in 1998, these factors may
continue to affect premium and fee levels unfavorably. The Company believes that
the competitive pricing environment for Commercial Lines is not likely to
improve in 1998.
Personal Lines strategy includes the control of operating expenses to improve
competitiveness and profitability, growth in sales through independent agents
and continued expansion of alternative marketing channels to broaden its
distribution of personal lines products. Personal Lines is expanding its product
capabilities, including nonstandard auto coverages, in conjunction with this
growth strategy. In addition, Personal Lines continues to take action to reduce
its exposure to catastrophe losses, including limiting the writing of new
homeowners business and selectively non-renewing existing homeowners business in
certain markets, tightening underwriting
23
<PAGE>
standards and implementing price increases in certain hurricane-prone areas,
subject to restrictions imposed by insurance regulatory authorities.
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.
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,
completing the integration of Aetna P&C to make it more consistent with the
decentralized, streamlined structure of the Company, and improving claims
expense control. The Company has reached 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, 1997, approximately 17% of the net
environmental loss reserve (i.e., approximately $192 million) consists of case
reserve for resolved claims. The balance, approximately 83% of the net aggregate
reserve (i.e., approximately $927 million), is carried in a bulk reserve and
includes incurred but not 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 often 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 the 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.
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<PAGE>
The following table displays activity for environmental losses and loss expenses
and reserves for the years ended December 31:
Environmental Losses
(millions) 1997 1996 1995
------- ------- -------
Beginning reserves:
Direct $ 1,369 $ 454 $ 482
Ceded (127) (50) (11)
------- ------- -------
Net 1,242 404 471
Acquisition of Aetna P&C:
Direct -- 968 --
Ceded -- (39) --
Incurred losses and loss expenses:
Direct 79 114 117
Ceded (14) (52) (61)
Losses paid:
Direct 271 167 145
Ceded (67) (14) (22)
Other:*
Direct 16 -- --
Ceded -- -- --
------- ------- -------
Ending reserves:
Direct 1,193 1,369 454
Ceded (74) (127) (50)
------- ------- -------
Net $ 1,119 $ 1,242 $ 404
======= ======= =======
* Represents reallocation of general liability reserves to environmental
reserves.
The duration of the Company's investigation and review of environmental-related
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 property and casualty industry does not have a standard method of
calculating claim activity for environmental losses. Generally for Superfund
remediation type environmental claims, the Company establishes a claim file for
each insured on a per site, per claimant basis. If there is more than one
claimant 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. The Company adheres to
this method of calculating claim activity on all environmental-related claims,
whether such claims are tendered on primary, excess or umbrella policies. Since
the implementation of the claim system conversion in 1997, the Company's method
of establishing claims in the foregoing manner now applies to claims tendered
under the Travelers P&C and Aetna P&C policies.
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<PAGE>
In addition, the Company establishes claim files for bodily injury or property
damage environmental claims brought by individual claimants who allege injury or
damage as a result of the discharge of wastes or pollutants. As it pertains to
such claims tendered on policies issued by Travelers P&C, the Company
establishes a claim file on a per claim, per insured, per site basis. For
example, if one hundred claimants file a lawsuit against five policyholders
alleging bodily injury and property damage as a result of the discharge of
wastes or pollutants, one thousand claims (five hundred for the bodily injury
claims and five hundred for the property damage claims) would be established.
As it pertains to bodily injury and property damage claims tendered on Aetna P&C
policies, the Company's claim system conversion has not been completed to permit
the establishment of such claims in a manner consistent with the establishment
of Travelers P&C bodily injury and property damage claims. As it pertains to
such claims tendered on policies issued by Aetna P&C, the Company currently
establishes a claim file on a per insured, per site basis. For example, if one
hundred claimants file a lawsuit against five policyholders alleging bodily
injury and property damage as a result of the discharge of wastes or pollutants,
five claims would be established for all the bodily injury claims and five
claims would be established for all of the property damage claims.
As of December 31, 1997, calculated as described above, the Company had
approximately 40,300 pending environmental-related claims tendered by 1,400
active policyholders. Of the total pending environmental-related claims, 29,800
claims relate to Travelers P&C policies tendered by 569 policyholders and 10,500
claims relate to Aetna P&C policies tendered by 961 policyholders. Approximately
130 of these Aetna P&C policyholders are also included in the 569 Travelers P&C
policyholders' count. 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.
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 position
is appropriate. As of December 31, 1997, the Company, for approximately $1.16
billion, has resolved the environmental liabilities presented by 3,931 of the
5,331 policyholders who have tendered environmental claims to the Company. This
resolution comprises 74% of the policyholders who have tendered such claims. The
Company has reserves of approximately $800 million included in its bulk reserve
relating to the remaining 1,400 policyholders (26% of the total) with unresolved
environmental claims, as well as for any other policyholder that 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 that 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. The Company continues to
receive this type of asbestos claim.
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<PAGE>
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 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, 1997, approximately 24% of the net aggregate reserve (i.e.,
approximately $266 million) is for pending asbestos claims. The balance,
approximately 76% (i.e., approximately $848 million) of the net asbestos
reserves, represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending asbestos claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for asbestos losses and loss expenses and reserves for the
years ended December 31:
Asbestos Losses
(millions) 1997 1996 1995
------- ------- -------
Beginning reserves:
Direct $ 1,443 $ 695 $ 702
Ceded (370) (293) (319)
------- ------- -------
Net 1,073 402 383
Acquisition of Aetna P&C:
Direct -- 801 --
Ceded -- (121) --
Incurred losses and loss expenses:
Direct 87 120 109
Ceded (18) (35) (66)
Losses paid:
Direct 174 173 116
Ceded (140) (79) (92)
Other:*
Direct 7 -- --
Ceded (1) -- --
------- ------- -------
Ending reserves:
Direct 1,363 1,443 695
Ceded (249) (370) (293)
------- ------- -------
Net $ 1,114 $ 1,073 $ 402
======= ======= =======
* Represents reallocation of reserves.
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<PAGE>
In 1997 the Company reached an agreement to settle the arbitration with
underwriters at Lloyd's of London (Lloyd's) and certain London companies in New
York State to enforce reinsurance contracts with respect to recoveries for
certain asbestos claims. The dispute involved 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. This agreement had no
impact on earnings.
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, and past ceded experience. 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, 1997 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 continue 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.
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<PAGE>
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, the scope of coverage
to be provided by the Company and contain the appropriate indemnities and hold
harmless provisions to protect the Company. These settlements generally
eliminate uncertainties for the Company regarding the risks extinguished,
including the risk that losses would be greater than anticipated due to evolving
theories of tort liability or unfavorable coverage determinations. 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.
Prior to the acquisition, 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 the Company and Aetna P&C regarding CIOTA claims. During the second
quarter of 1996, 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 in 1996 by $360
million, net of reinsurance ($192 million after tax and minority interest).
At December 31, 1997, approximately 18% of the net aggregate reserve (i.e.,
approximately $195 million) is for pending CIOTA claims. The balance,
approximately 82% (i.e., approximately $893 million) of the net CIOTA reserves
represents incurred but not reported losses for which the Company has not
received any specific claims.
In general, the Company posts case reserves for pending CIOTA claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for CIOTA losses and loss expenses and reserves for the years
ended December 31:
29
<PAGE>
CIOTA Losses
(millions) 1997 1996 1995
------- ------- -------
Beginning reserves:
Direct $ 1,560 $ 374 $ 375
Ceded (446) -- --
------- ------- -------
Net 1,114 374 375
Acquisition of Aetna P&C:
Direct -- 709 --
Ceded -- (293) --
Incurred losses and loss expenses:
Direct 32 565 21
Ceded (6) (155) --
Losses paid:
Direct 72 88 22
Ceded (20) (2) --
------- ------- -------
Ending reserves:
Direct 1,520 1,560 374
Ceded (432) (446) --
------- ------- -------
Net $ 1,088 $ 1,114 $ 374
======= ======= =======
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 return 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, 1997 and 1996, all
of the Company's life and property & casualty companies had adjusted capital in
excess of amounts requiring any regulatory action.
30
<PAGE>
Asset Quality -- The investment portfolio of the insurance services segments,
which include both Life Insurance and Property & Casualty Insurance, totaled
approximately $61 billion, representing 63% of total insurance services' assets
of approximately $97 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 $49 billion, comprised of $41 billion of publicly traded fixed
maturities and $8 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, 1997 were Aa3 and Baa1,
respectively. Included in the fixed maturity portfolio was approximately $2.2
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, 1997, the segment held CMOs with a market value of $5.0 billion.
Approximately 75% 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, 1997, real estate and mortgage loan investments totaled $3.8
billion. Most of these investments are included in the investment portfolio of
the insurance companies. The Company is continuing its strategy to dispose of
these real estate assets and some of the mortgage loans and to reinvest the
proceeds to obtain current market yields. At December 31, mortgage loan and real
estate portfolios consisted of the following:
(millions) 1997 1996
------ ------
Current mortgage loans $3,543 $3,721
Underperforming mortgage loans 19 91
------ ------
Total mortgage loans 3,562 3,812
------ ------
Real estate held for sale 237 459
------ ------
Total mortgage loans and
real estate $3,799 $4,271
====== ======
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, $31 million is underperforming at December 31, 1997.
For further information relating to investments, see Note 6 of Notes to
Consolidated Financial Statements.
31
<PAGE>
Corporate and Other
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------
Net Net Net
Income Income Income
(millions) Revenues (Expense) Revenues (Expense) Revenues (Expense)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net expenses (1) $(218) $(211) $(238)
Net gain (loss) on sale
of stock of subsidiaries
and affiliates -- 384 (13)
- -----------------------------------------------------------------------------------------
Total Corporate and Other $ 77 $(218) $ 143 $ 173 $ 18 $(251)
=========================================================================================
</TABLE>
(1) Includes $3 million, $9 million and $23 million, respectively, of reported
investment portfolio losses in 1997, 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.
Net corporate expenses (before reported investment portfolio gains/losses)
increased in 1997 compared to 1996, however, corporate expenses as a percentage
of operating earnings were slightly lower than a year ago.
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.
Discontinued Operations
Year Ended December 31,
----------- --------------
(millions) 1996 1995
----------- --------------
Net Income Net Income
(Loss) (Loss)
-----------------------------------------------------------------
Operations $ (75) $ 20
Gain (loss) on disposition (259) 130
-----------------------------------------------------------------
Total Discontinued Operations $(334) $ 150
=================================================================
As discussed in Note 3 of Notes to Consolidated Financial Statements, Basis
Petroleum, Inc. (Basis), which was sold to Valero Energy Corporation (Valero),
as well as the life and health insurance 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.
The Company's 1996 loss on disposition of $259 million represents the $290
million after-tax loss on the sale of Basis to Valero, partially offset by a $31
million after-tax gain resulting from a contingency payment received from United
HealthCare Corporation related to the 1995 sale of MetraHealth (see below).
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 the contingency payment based on 1995
32
<PAGE>
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.
Liquidity and Capital Resources
TRV services its obligations primarily with dividends and 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 that expires in June 2001. At December 31,
1997, $500 million was allocated to TRV, $450 million was allocated to CCC, and
$50 million to TIC. At December 31, 1997 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 $10.5 billion
at December 31, 1997.
As of December 31, 1997, TRV had unused credit availability of $500 million
under the five-year revolving credit facility. TRV may borrow under its
revolving credit facilities at various interest rate options (LIBOR, CD or base
rate) and compensates the banks for the facilities through commitment fees.
In June 1997, the Company sold in a public offering 8.0 million depositary
shares, each representing one-fifth of a share of 6.365% Cumulative Preferred
Stock, Series F (Series F Preferred Stock), at an offering price of $50 per
depositary share for an aggregate principal amount of $400 million. The Series F
Preferred Stock has cumulative dividends payable quarterly commencing September
1, 1997 and a liquidation preference equivalent to $50 per depositary share plus
accrued and accumulated unpaid dividends. On or after June 16, 2007, the Company
may redeem the Series F Preferred Stock, in whole or in part, at any time at a
redemption price of $50 per depositary share plus dividends accrued and unpaid
to the redemption date.
In July 1997, the Company sold in a public offering 4.0 million depositary
shares, each representing one-fifth of a share of 6.213% Cumulative Preferred
Stock, Series G (Series G Preferred Stock), at an offering price of $50 per
depositary share for an aggregate principal amount of $200 million. The Series G
Preferred Stock has cumulative dividends payable quarterly commencing September
1, 1997 and a liquidation preference equivalent to $50 per depositary share plus
accrued and accumulated unpaid dividends. On or after July 11, 2007, the Company
may redeem the Series G Preferred Stock, in whole or in part, at any time at a
redemption price of $50 per depositary share plus dividends accrued and unpaid
to the redemption date.
In September 1997, the Company sold in a public offering 4.0 million depositary
shares, each representing one-fifth of a share of 6.231% Cumulative Preferred
Stock, Series H (Series H Preferred Stock), at an offering price of $50 per
depositary share for an aggregate principal amount of $200 million. The Series H
Preferred Stock has cumulative dividends payable quarterly commencing November
1, 1997 and a liquidation preference equivalent to $50 per depositary share plus
accrued and accumulated unpaid dividends. On or after September 8, 2007, the
Company may redeem the Series H Preferred Stock, in whole or in part, at any
time at a redemption price of $50 per depositary share plus dividends accrued
and unpaid to the redemption date.
In October 1997, the Company sold in a public offering 4.0 million depositary
shares, each representing one-fifth of a share of 5.864% Cumulative Preferred
Stock, Series M (Series M Preferred Stock), at an offering price of
33
<PAGE>
$50 per depositary share for an aggregate principal amount of $200 million. The
Series M Preferred Stock has cumulative dividends payable quarterly commencing
November 1, 1997 and a liquidation preference equivalent to $50 per depositary
share plus accrued and accumulated unpaid dividends. On or after October 8,
2007, the Company may redeem the Series M Preferred Stock, in whole or in part,
at any time at a redemption price of $50 per depositary share plus dividends
accrued and unpaid to the redemption date.
On October 17, 1997, Berkshire Hathaway, Inc. converted 140,000 shares ($140
million) of cumulative convertible preferred stock of the Company into 6.2
million shares of common stock.
On July 1, 1997 the Company redeemed all of the 7.5 million outstanding shares
(15 million depositary shares) of its 9.25% Preferred Stock, Series D (Series D
Preferred Stock) at $50 per share ($25 per depositary share). The aggregate
amount of Series D Preferred Stock outstanding on the redemption date was $375
million.
On July 28, 1997 the Company redeemed all of the 1.2 million outstanding shares
(12 million depositary shares) of its 8.125% Cumulative Preferred Stock, Series
A (Series A Preferred Stock) at $250 per share ($25 per depositary share) plus
accrued and unpaid dividends to the redemption date. The aggregate amount of
Series A Preferred Stock outstanding on the redemption date was $300 million.
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, 1997, CCC had
unused credit availability of $3.850 billion under five-year revolving credit
facilities (including the $450 million referred to above) and $1.0 billion under
a 364-day facility. CCC may borrow under its revolving credit facilities at
various interest rate options (LIBOR, CD base rate or money market) 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, 1997, CCC would have been able to remit $567 million under its
most restrictive covenants.
Travelers Property Casualty Corp. (TAP)
TAP also issues commercial paper directly to investors and maintains unused
credit availability under its committed revolving credit agreement at least
equal to the amount of commercial paper outstanding.
TAP has a five year revolving credit facility in the amount of $500 million with
a syndicate of banks that expires in December 2001. TAP may borrow under this
revolving credit facility at various interest rate options (LIBOR or base rate)
and compensates the banks for the facility through commitment fees. Under this
facility TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At December 31, 1997, this
requirement was exceeded by approximately $3.4 billion. At December 31, 1997,
there were no borrowings outstanding under this facility.
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 $805 million in 1998 without
prior approval of the Connecticut Insurance Department.
Salomon Smith Barney Holdings Inc. (Salomon Smith Barney)
Salomon Smith Barney's total assets were $277 billion at December 31, 1997, up
from $246 billion at year-end 1996. Due to the nature of Salomon Smith Barney's
trading activities, including its matched book activities, it is not uncommon
for asset levels to fluctuate from period to period. 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). Salomon Smith Barney's balance sheet
is highly liquid, with the vast majority of its assets consisting of marketable
securities and collateralized short-term financing agreements
34
<PAGE>
arising from securities transactions. The highly liquid nature of these assets
provides the Company with flexibility in financing and managing its business.
Salomon Smith Barney monitors and evaluates the adequacy of its capital and
borrowing base on a daily basis in order to allow for flexibility in its
funding, to maintain liquidity, and to ensure that its capital base supports the
regulatory capital requirements of its subsidiaries.
Salomon Smith Barney funds its operations through the use of secured and
unsecured short-term borrowings, long-term borrowings and TRUPS(R). Secured
short-term financing, including repurchase agreements and secured loans, is the
Company's principal funding source. Such borrowings totaled $120.3 billion at
December 31, 1997. Unsecured short-term borrowings provide a source of
short-term liquidity and are also utilized as an alternative to secured
financing when they represent a cheaper funding source. Sources of short-term
unsecured borrowings include commercial paper, unsecured bank borrowings and
letters of credit, deposit liabilities, promissory notes and corporate loans.
Short-term unsecured borrowing totaled $10.7 billion at December 31, 1997.
Salomon Smith Barney has a $1.250 billion revolving credit agreement with a bank
syndicate that extends through May 2000, and a $750 million, 364-day revolving
credit agreement that extends through May 1998. Salomon Smith Barney may borrow
under its revolving credit facilities at various interest rate options (LIBOR,
CD or base rate) and compensates the banks for the facilities through commitment
fees. Under these facilities Salomon Smith Barney is required to maintain a
certain level of consolidated adjusted net worth (as defined in the agreement).
At December 31, 1997, this requirement was exceeded by approximately $2.6
billion. At December 31, 1997, there were no borrowings outstanding under either
facility.
Phibro Inc. has committed uncollateralized revolving line of credit totaling
$550 million. In addition, Salomon Brothers Inc, a wholly owned subsidiary of
Salomon Smith Barney, has a $2.1 billion committed secured standby bank credit
facility for financing securities positions, which enables it to borrow on a
secured basis using a variety of financial instruments as collateral. Salomon
Brothers International Limited, a wholly owned subsidiary of Salomon Smith
Barney, has a committed securities repurchase facility in the amount of $1
billion. At December 31, 1997 there were no outstanding borrowings under these
facilities. Salomon Smith Barney also has substantial borrowing arrangements
consisting of facilities that it has been advised are available, but where no
contractual lending obligation exists. These arrangements are reviewed on an
ongoing basis to ensure flexibility in meeting short-term requirements.
Unsecured term debt is a significant component of Salomon Smith Barney's
long-term capital. Long-term debt totaled $19.1 billion at December 31, 1997,
compared with $15.7 billion at December 31, 1996. Salomon Smith Barney utilizes
interest rate swaps to convert the majority of its fixed rate long-term debt
used to fund inventory-related working capital requirements into variable rate
obligations. Long-term debt issuances denominated in currencies other than the
U.S. dollar that are not used to finance assets in the same currency are
effectively converted to U.S. dollar obligations through the use of
cross-currency swaps and forward currency contracts. The average remaining
maturity of Salomon Smith Barney long-term debt was 3.7 years at December 31,
1997 and 3.6 years at December 31, 1996. See Note 11 of Notes to Consolidated
Financial Statements for additional information regarding debt and an analysis
of the impact of interest rate swaps on debt.
Salomon Smith Barney's borrowing relationships are with a broad range of banks,
financial institutions and other firms from which it draws funds. The volume of
borrowings generally fluctuates in response to changes in the level of the
Company's financial instruments, commodities and contractual commitments,
customer balances, the amount of reverse repurchase transactions outstanding and
securities borrowed transactions. As Salomon Smith Barney's activities increase,
borrowings generally increase to fund the additional activities. Availability of
financing can vary depending upon market conditions, credit ratings, and the
overall availability of credit to the securities industry. Salomon Smith Barney
seeks to expand and diversify its funding mix as well as its creditor sources.
Concentration levels for these sources, particularly for short-term lenders, are
closely monitored both in terms of single investor limits and daily maturities.
Salomon Smith Barney monitors liquidity by tracking asset levels, collateral and
funding availability to maintain flexibility to meet its financial commitments.
As a policy, Salomon Smith Barney attempts to maintain sufficient
35
<PAGE>
capital and funding sources in order to have the capacity to finance itself on a
fully collateralized basis in the event that access to unsecured financing was
impaired. Salomon Smith Barney's liquidity management process includes a
contingency funding plan designed to ensure adequate liquidity even if access to
unsecured funding sources is severely restricted or unavailable. This plan is
reviewed periodically to keep the funding options current and in line with
market conditions. The management of this plan includes an analysis which is
utilized to determine ability to withstand varying levels of stress, which could
impact Salomon Smith Barney's liquidation horizons and required margins. In
addition, Salomon Smith Barney monitors its leverage and capital ratios on a
daily basis.
The Travelers Insurance Company (TIC)
At December 31, 1997, TIC had $24.0 billion of life and annuity product deposit
funds and reserves. Of that total, $13.0 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $11.0 billion is for life and
annuity products that are subject to discretionary withdrawal by the
contractholder. Included in the amount that is subject to discretionary
withdrawal are $2.0 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $5.2 billion of the life
insurance and individual annuity liabilities which are subject to discretionary
withdrawals, and have an average surrender charge of 4.8%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$3.8 billion of liabilities are surrenderable without charge. More than 16.8% of
these relate to individual life products. These risks would have to be
underwritten again if transferred to another carrier, which is considered a
significant deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding policy
loans and related accrued interest prior to payout.
Scheduled maturities of guaranteed investment contracts (GICs) in 1998, 1999,
2000, 2001 and 2002 are $1.76 billion, $198.4 million, $123.5 million, $134.4
million and $150.6 million, respectively. At December 31, 1997, 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, 1997, TIC had unused credit availability of $50
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 $551 million of statutory surplus is
available in 1998 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 $6.8 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 $3.3 billion annually.
Market Risk on Non-Trading Financial Instruments
The primary market risk related to the Company's non-trading financial
instruments is the risk of loss associated with adverse changes in interest
rates. The table below reflects the estimated decrease in the fair value of such
financial instruments as a result of a 100 basis point increase in interest
rates:
(millions) December 31, 1997
-----------------
Assets
Investments $2,636
Net consumer finance receivables 435
Liabilities
Long-term debt 545
Contractholder funds 308
Redeemable preferred securities of
subsidiary trusts 115
36
<PAGE>
A significant portion of the Company's liabilities, e.g. insurance policy and
claims reserves, are not financial instruments and are excluded from the above
sensitivity analysis. Corresponding changes in fair value of these accounts,
based on the present value of estimated cash flows, would materially mitigate
the impact of the net decrease in values implied above. The analysis also
excludes all financial instruments, including long-term debt, identified with
trading activities. The analysis reflects the estimated gross change in value
resulting from a change in interest rates only and is not comparable to the
value at risk analysis employed with respect to trading instruments described in
the investment services segment.
Changes in value representing unrealized gains or losses on non-trading
financial instruments are not reflected in earnings.
For additional information regarding the use of and accounting for non-trading
financial instruments, see Notes 1, 6, 10, 11, 15, 20 and 21 of Notes to
Consolidated Financial Statements.
Future Application of Accounting Standards
See Note 1 of Notes to Consolidated Financial Statements for a discussion of
recently issued accounting pronouncements.
Year 2000 Date Conversion
In 1996, the Company began the process of identifying, evaluating and
implementing changes to computer programs and equipment necessary to address the
year 2000 issue. This issue involves the ability of computer systems and
equipment that have time-sensitive programs to properly recognize the year 2000.
The inability to do so could result in major failures or miscalculations. The
Company is currently addressing its internal year 2000 issue with modifications
to existing programs and conversions to new programs and expects to bring all of
its business systems into year 2000 compliance by early 1999. The total pre-tax
cost associated with the required modifications and conversions is expected to
be $200 million to $275 million and is being expensed as incurred in the period
1996 through 1999. The Company is also communicating with customers, financial
institutions, vendors and others with which it conducts business to identify and
resolve year 2000 issues. While it is likely that these efforts will be
successful, if necessary modifications and conversions are not completed in a
timely manner, the year 2000 issue could have a material adverse effect on
certain operations of the Company.
Forward-Looking Statements
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. In particular, the information
appearing in the Results of Operations section under the heading "Outlook" for
each of the Company's business segments is forward-looking. These
forward-looking statements involve risks and uncertainties including, but not
limited to, the following: changes in general economic conditions, including the
performance of financial markets, interest rates, and the level of personal
bankruptcies; customer responsiveness to both new products and distribution
channels; competitive, regulatory, or tax changes that affect the cost of or
demand for the Company's products; adverse litigation results; and the
possibility that the Company will be unable to achieve anticipated levels of
operational efficiencies related to recently acquired companies, as well as
achieving its other cost-saving initiatives. Readers also are directed to other
risks and uncertainties discussed in documents filed by the Company with the
Securities and Exchange Commission.
37
<PAGE>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Income
(In millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Insurance premiums $ 8,995 $ 7,633 $ 4,977
Commissions and fees 5,119 4,637 3,713
Interest and dividends 16,214 13,286 13,045
Principal transactions 2,504 3,027 2,140
Asset management and administration fees 1,715 1,390 1,087
Finance related interest and other charges 1,404 1,163 1,119
Other income 1,658 1,278 1,206
- -------------------------------------------------------------------------------------------------------------------
Total revenues 37,609 32,414 27,287
- -------------------------------------------------------------------------------------------------------------------
Expenses
Policyholder benefits and claims 7,714 7,366 5,017
Non-insurance compensation and benefits 6,345 5,804 5,149
Insurance underwriting, acquisition and operating 3,236 3,013 1,912
Interest 11,443 8,927 9,378
Provision for consumer finance credit losses 277 260 171
Other operating 3,582 2,481 2,320
- -------------------------------------------------------------------------------------------------------------------
Total expenses 32,597 27,851 23,947
- -------------------------------------------------------------------------------------------------------------------
Gain (loss) on sale of subsidiaries and affiliates -- 445 (20)
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 5,012 5,008 3,320
Provision for income taxes 1,696 1,679 1,179
Minority interest, net of income taxes 212 47 --
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations 3,104 3,282 2,141
- -------------------------------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes:
Income (loss) from operations net of tax expense (benefit)
of $(48) and $(18) -- (75) 20
Gain (loss) on disposition net of tax expense (benefit) of
$(198) and $66 -- (259) 130
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations -- (334) 150
- -------------------------------------------------------------------------------------------------------------------
Net income $ 3,104 $ 2,948 $ 2,291
===================================================================================================================
Basic earnings per share:
Income from continuing operations $ 2.69 $ 2.84 $ 1.81
Discontinued operations -- (0.31) 0.13
- -------------------------------------------------------------------------------------------------------------------
Net income $ 2.69 $ 2.53 $ 1.94
===================================================================================================================
Weighted average common shares outstanding (in millions) 1,102.6 1,097.6 1,099.4
===================================================================================================================
Diluted earnings per share:
Income from continuing operations $ 2.54 $ 2.71 $ 1.74
Discontinued operations -- (0.29) 0.12
- -------------------------------------------------------------------------------------------------------------------
Net income $ 2.54 $ 2.42 $ 1.86
===================================================================================================================
Adjusted weighted average common shares outstanding (in millions) 1,179.9 1,170.6 1,184.4
===================================================================================================================
</TABLE>
38
<PAGE>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Financial Position
(In millions of dollars)
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents (including segregated cash and other deposits) $ 4,033 $ 3,260
Investments and real estate held for sale 61,834 56,509
Securities borrowed or purchased under agreements to resell 109,734 97,985
Brokerage receivables 15,627 11,592
Trading securities and commodities owned 139,732 126,573
Net consumer finance receivables 10,816 7,885
Reinsurance recoverables 9,579 10,234
Value of insurance in force and deferred policy acquisition costs 2,812 2,563
Cost of acquired businesses in excess of net assets 3,446 3,060
Separate and variable accounts 11,319 9,023
Other receivables 5,733 4,869
Other assets 11,890 12,395
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $386,555 $345,948
================================================================================================================================
Liabilities
Investment banking and brokerage borrowings $ 11,464 $ 10,020
Short-term borrowings 3,979 1,557
Long-term debt 28,352 24,696
Securities loaned or sold under agreements to repurchase 120,921 103,572
Brokerage payables 12,763 10,019
Trading securities and commodities sold not yet purchased 96,166 92,141
Contractholder funds 14,848 13,621
Insurance policy and claims reserves 43,782 43,944
Separate and variable accounts 11,309 8,949
Accounts payable and other liabilities 19,418 16,693
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 363,002 325,212
- --------------------------------------------------------------------------------------------------------------------------------
ESOP preferred stock - Series C (net of note guarantee of $18 and $35) 135 129
- --------------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock - Series I 280 420
- --------------------------------------------------------------------------------------------------------------------------------
TRV or subsidiary obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debt securities of -- TRV 1,000 1,000
- --------------------------------------------------------------------------------------------------------------------------------
TAP 900 900
- --------------------------------------------------------------------------------------------------------------------------------
Salomon Smith Barney 345 345
- --------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate
liquidation value 1,450 1,125
Common stock ($.01 par value; authorized shares: 1.5 billion;
issued shares: 1997 - 1,234,204,094 and 1996 - 1,384,665,499) 12 14
Additional paid-in capital 5,368 7,806
Retained earnings 15,451 12,934
Treasury stock, at cost (1997 - 89,136,729 shares and 1996 - 243,643,475 shares) (2,183) (4,123)
Unrealized gain (loss) on investment securities 1,157 469
Other, principally unearned compensation (362) (283)
- --------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 20,893 17,942
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $386,555 $345,948
================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(In millions of dollars)
<TABLE>
<CAPTION>
Amounts
--------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1997 1996 1995
--------------------------------------
Preferred stock at aggregate liquidation value
Balance, beginning of year $ 1,125 $ 1,112 $ 1,112
Issuance of preferred stock 1,000 250 --
Redemption of preferred stock (675) -- --
Redemption of Salomon Series C preferred stock -- (112) --
Conversion of Series B preferred stock to common stock -- (125) --
- ------------------------------------------------------------------------------------------------------
Balance, end of year 1,450 1,125 1,112
======================================================================================================
Common stock and additional paid-in capital
Balance, beginning of year 7,820 7,241 7,107
Conversion of Series B and Series I preferred stock
to common stock 140 265 --
Exercise of common stock warrants 14 -- --
Issuance of shares pursuant to employee benefit plans 775 355 126
Retirement of treasury stock (3,347) -- --
Other (22) (41) 8
- ------------------------------------------------------------------------------------------------------
Balance, end of year 5,380 7,820 7,241
- ------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 12,934 10,504 8,880
Net income 3,104 2,948 2,291
Common dividends (445) (355) (323)
Preferred dividends (142) (163) (155)
Distribution of Transport Holdings Inc. shares -- -- (189)
- ------------------------------------------------------------------------------------------------------
Balance, end of year 15,451 12,934 10,504
- ------------------------------------------------------------------------------------------------------
Treasury stock, at cost
Balance, beginning of year (4,123) (3,470) (3,207)
Issuance of shares pursuant to employee benefit
plans, net of shares tendered for payment of
option exercise price and withholding taxes (219) (11) 157
Treasury stock acquired (1,188) (642) (418)
Retirement of treasury stock 3,347 -- --
Other -- -- (2)
- -------------------------------------------------------------------------------------------------------
Balance, end of year (2,183) (4,123) (3,470)
- ------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on investment securities
Balance, beginning of year 469 756 (1,319)
Net change in unrealized gains and losses on investment
securities, net of tax 688 (287) 2,075
- ------------------------------------------------------------------------------------------------------
Balance, end of year 1,157 469 756
- ------------------------------------------------------------------------------------------------------
Other, principally unearned compensation
Balance, beginning of year (283) (290) (141)
Net issuance of restricted stock (364) (305) (221)
Restricted stock amortization 297 206 175
Adjustment for minimum pension liability, net of tax -- 114 (114)
Net translation adjustments, net of tax (12) (8) 11
- ------------------------------------------------------------------------------------------------------
Balance, end of year (362) (283) (290)
- ------------------------------------------------------------------------------------------------------
Total common stockholders' equity and common shares
outstanding 19,443 16,817 14,741
======================================================================================================
Total stockholders' equity $ 20,893 $ 17,942 $ 15,853
======================================================================================================
<CAPTION>
Shares (in thousands)
---------------------------------------
<S> <C> <C> <C>
Year Ended December 31, 1997 1996 1995
- ---------------------- ---------------------------------------
Preferred stock at aggregate liquidation value
Balance, beginning of year 9,600 11,825 11,825
Issuance of preferred stock 4,000 500 --
Redemption of preferred stock (8,700) -- --
Redemption of Salomon Series C preferred stock -- (225) --
Conversion of Series B preferred stock to common stock -- (2,500) --
- ----------------------------------------------------------- ---------------------------------------
Balance, end of year 4,900 9,600 11,825
=========================================================== =======================================
Common stock and additional paid-in capital
Balance, beginning of year 1,384,665 1,368,227 1,368,257
Conversion of Series B and Series I preferred stock
to common stock 6,245 16,448 --
Exercise of common stock warrants 1,113 -- --
Issuance of shares pursuant to employee benefit plans -- -- --
Retirement of treasury stock (157,836) -- --
Other 17 (10) (30)
- ----------------------------------------------------------- ---------------------------------------
Balance, end of year 1,234,204 1,384,665 1,368,227
- ----------------------------------------------------------- ---------------------------------------
Retained earnings
Balance, beginning of year
Net income
Common dividends
Preferred dividends
Distribution of Transport Holdings Inc. shares
- -----------------------------------------------------------
Balance, end of year
- -----------------------------------------------------------
Treasury stock, at cost
Balance, beginning of year (243,643) (239,301) (239,555)
Issuance of shares pursuant to employee benefit plans,
net of shares tendered for payment of option exercise
price and withholding taxes 26,116 23,862 27,866
Treasury stock acquired (29,446) (28,204) (27,612)
Retirement of treasury stock 157,836 -- --
Other -- -- --
- ----------------------------------------------------------- ---------------------------------------
Balance, end of year (89,137) (243,643) (239,301)
- ----------------------------------------------------------- ---------------------------------------
Unrealized gain (loss) on investment securities
Balance, beginning of year
Net change in unrealized gains and losses on investment
securities, net of tax
- ----------------------------------------------------------
Balance, end of year
- ----------------------------------------------------------
Other, principally unearned compensation
Balance, beginning of year
Net issuance of restricted stock
Restricted stock amortization
Adjustment for minimum pension liability, net of tax
Net translation adjustments, net of tax
- ----------------------------------------------------------
Balance, end of year
==========================================================
Total common stockholders' equity and common shares
outstanding 1,145,067 1,141,022 1,128,926
========================================================== =====================================
Total stockholders' equity
==========================================================
</TABLE>
See Notes to Consolidated Financial Statements
40
<PAGE>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(In millions of dollars)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Income from continuing operations $ 3,104 $ 3,282 $ 2,141
Adjustments to reconcile income from continuing operations
to net cash provided by (used in) operating activities:
Amortization of deferred policy acquisition costs and value of insurance in force 1,424 1,192 803
Additions to deferred policy acquisition costs (1,685) (1,388) (858)
Depreciation and amortization 421 430 416
Deferred tax provision (benefit) (552) 47 (289)
Provision for consumer finance credit losses 277 260 171
Changes in:
Trading securities and commodities, net (9,134) 25,026 (24,032)
Securities borrowed, loaned and repurchase agreements, net 5,600 (22,857) 20,949
Brokerage receivables net of brokerage payables (1,291) (3,418) 2,879
Insurance policy and claims reserves 381 (309) 686
Other, net 2,122 274 (37)
Net cash flows provided by (used in) operating activities of discontinued operations -- (59) (462)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 667 2,480 2,367
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Consumer loans originated or purchased (4,981) (3,410) (2,748)
Consumer loans repaid or sold 3,208 2,534 2,245
Purchases of fixed maturities and equity securities (25,819) (29,246) (18,123)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities 18,423 23,471 12,864
Mortgage loans 414 200 739
Real estate and real estate joint ventures 530 257 256
Proceeds from maturities of investments:
Fixed maturities 3,687 3,586 2,723
Mortgage loans 841 1,050 693
Other investments, primarily short-term, net (501) (325) (408)
Assets securing collateralized mortgage obligations 175 480 721
Business acquisitions (1,618) (4,160) --
Business divestments -- 338 --
Other, net (976) (365) (538)
Net cash flows provided by (used in) investing activities of discontinued operations -- (27) 1,545
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (6,617) (5,617) (31)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (587) (518) (478)
Subsidiary's sale of Class A common stock -- 1,453 --
Issuance of preferred stock 1,000 250 --
Issuance of redeemable preferred stock of subsidiaries -- 2,245 --
Redemption of preferred stock (675) (112) --
Redemption of redeemable preferred stock -- -- (140)
Treasury stock acquired (1,188) (642) (420)
Stock tendered for payment of withholding taxes (384) (201) (94)
Issuance of long-term debt 8,962 7,648 6,322
Payments and redemptions of long-term debt (4,944) (4,886) (6,347)
Net change in short-term borrowings (including investment banking and brokerage borrowings) 3,866 (1,140) (801)
Collateralized mortgage obligations (185) (403) (704)
Contractholder fund deposits 3,544 2,493 2,707
Contractholder fund withdrawals (2,757) (3,262) (3,755)
Other, net 71 (19) 99
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,723 2,906 (3,611)
- -------------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 773 (231) (1,275)
Cash and cash equivalents at beginning of period 3,260 3,491 4,766
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,033 $ 3,260 $ 3,491
===============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 1,559 $ 1,553 $ 923
===============================================================================================================================
</TABLE>
Interest expense recorded in the consolidated statement of income did not differ
materially from the amount of interest paid.
See Notes to Consolidated Financial Statements.
41
<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). The consolidated financial statements give
retroactive effect to the merger with Salomon Inc (Salomon) in a
transaction accounted for as a pooling of interests (see Note 2). The
pooling of interests method of accounting requires the restatement of all
periods presented as if TRV and Salomon had always been combined. The
consolidated statement of changes in stockholders' equity reflects the
accounts of the Company as if the additional preferred and common stock
had been issued during all periods presented.
Unconsolidated entities in which the Company has at least a 20% interest
are accounted for on the equity method. The minority interest in 1997 and
1996 represents the interest in Travelers Property Casualty Corp. (TAP)
held by the private and public investors. (See Note 2). Significant
intercompany transactions and balances have been eliminated.
Assets and liabilities denominated in non-U.S. dollar currencies are
translated into U.S. dollar equivalents using year-end spot foreign
exchange rates. Revenues and expenses are translated monthly at amounts
which approximate weighted average exchange rates, with resulting gains
and losses included in income. The effects of translating the statements
of financial condition of non-U.S. subsidiaries with functional currencies
other than the U.S. dollar are recorded in stockholders' equity net of
related hedge gains and losses and income taxes. Hedges of such exposure
include designated issues of non-U.S. dollar debt and, to a lesser extent,
forward currency contracts.
The preparation of the consolidated financial statements 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 consolidated 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 recorded to conform the accounting
policies of Salomon and TRV.
Accounting Changes
FAS 128. Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards (FAS) No. 128, "Earnings per Share" (FAS
No. 128). This statement establishes standards for computing and
presenting earnings per share (EPS) and applies to entities with publicly
held common stock. This statement requires restatement of all prior-period
EPS data presented. This statement is intended to simplify the standards
for computing earnings per share previously found in Accounting Principles
Board Opinion No. 15, "Earnings per Share" (Opinion 15), and makes them
comparable to international EPS standards. FAS No. 128 supersedes Opinion
15 and related accounting interpretations. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement
and a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. (See Note 16.)
FAS 125. Effective January 1, 1997, the Company adopted FAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (FAS No. 125). This statement establishes
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are
based on an approach that focuses on control. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. FAS No. 125 provides standards
for distinguishing transfers of financial assets that are sales from
42
<PAGE>
Notes to Consolidated Financial Statements (continued)
transfers that are secured borrowings. In December 1996 the Financial
Accounting Standards Board (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 did not have a
material impact on results of operations, financial condition or
liquidity. The adoption of the provisions of FAS No. 127 effective January
1, 1998 will not have any impact on results of operations or liquidity;
however, total assets and total liabilities may increase significantly by
like amounts.
Accounting Policies
Cash and cash equivalents include cash on hand, cash segregated under
federal and brokerage regulations, cash deposited with clearing
organizations 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. Included in
cash and cash equivalents at December 31, 1997 and 1996 is $2,034 million
and $1,446 million, respectively, of cash segregated under federal and
other brokerage regulations or deposited with clearing organizations.
Investments and real estate held for sale are owned principally by the
insurance subsidiaries. Fixed maturities include bonds, notes and
redeemable preferred stocks. Also included in fixed maturities are
loan-backed and structured securities which are amortized using the
retrospective method. The effective yield used to determine amortization
is calculated based on actual historical and projected future cash flows,
which are obtained from a widely-accepted securities data provider. 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 fair 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 fair 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, 1997
or 1996. 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
returns required in the current real estate financing market. Impaired
loans were not significant at December 31, 1997 and 1996. 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 value. 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.
43
<PAGE>
Notes to Consolidated Financial Statements (continued)
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. TRV 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. Salomon Inc and its wholly owned domestic
subsidiaries filed their own consolidated federal income tax return prior
to the merger. Deferred income taxes result from temporary differences
between the tax basis of assets and liabilities and their recorded amounts
for financial reporting purposes.
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.
Stock-based compensation. The Company accounts for its stock-based
compensation plans using the accounting method prescribed by Opinion 25
and has included in the Notes to Consolidated Financial Statements the pro
forma disclosures required by FAS No. 123 "Accounting for Stock-Based
Compensation." (See Note 17.)
Earnings per common share is computed after recognition of preferred stock
dividend requirements. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and has been computed after
giving consideration to the dilutive effect of the Company's convertible
securities, common stock warrants, stock options and the incremental
shares assumed issued under the Company's Capital Accumulation Plan and
other restricted stock plans.
In October 1997 the Company's Board of Directors declared a three-for-two
stock split that was paid on November 19, 1997 in the form of a 50% stock
dividend. All amounts presented herein have been restated to reflect the
stock split.
Future Application of Accounting Standards
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty fund
and other insurance-related assessments, how to measure that liability,
and when an asset may be recognized for the recovery of such assessments
through premium tax offsets or policy surcharges. This SOP is effective
for fiscal years beginning after December 15, 1998, and the effect of
initial adoption is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not allowed. The
Company has not yet determined the impact that SOP 97-3 will have on its
financial statements or when it will be implemented.
44
<PAGE>
Notes to Consolidated Financial Statements (continued)
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive
Income" (FAS No. 130). FAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive
income are to be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement
stipulates that comprehensive income reflect the change in equity of an
enterprise during a period from transactions and other events and
circumstances from nonowner sources. Comprehensive income will thus
represent the sum of net income and other comprehensive income, although
FAS No. 130 does not require the use of the terms comprehensive income or
other comprehensive income. The accumulated balance of other comprehensive
income is required to be displayed separately from retained earnings and
additional paid-in capital in the statement of financial position. This
statement is effective for fiscal years beginning after December 15, 1997.
The Company anticipates that the adoption of FAS No. 130 will result
primarily in reporting unrealized gains and losses on investments held by
the insurance subsidiaries in debt and equity securities in comprehensive
income.
In June 1997, the FASB also issued FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (FAS No. 131). FAS No.
131 establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires that selected information about those operating segments be
reported in interim financial statements. This Statement supersedes FAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." FAS
No. 131 requires that all public enterprises report financial and
descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources
and in assessing performance. This statement is effective for fiscal years
beginning after December 15, 1997. The Company's reportable operating
segments are not expected to change as a result of the adoption of FAS No.
131.
INVESTMENT SERVICES
Commissions, underwriting and principal transaction revenues and related
expenses are recognized in income on a trade date basis. Customer security
transactions are recorded on a settlement date basis.
Asset management and administration fees are recorded as income for the
period in which the services are performed.
Trading securities, commodities and derivatives used for trading purposes
are recorded at either market value or, when market prices are not readily
available, fair value, which is determined under an alternative approach,
such as matrix or model pricing. Fair value includes related accrued
interest or dividends. The determination of market or fair value considers
various factors, including: closing exchange or over-the-counter market
price quotations; time value and volatility factors underlying options,
warrants and derivatives; price activity for equivalent or synthetic
instruments in markets located in different time zones; counterparty
credit quality; and the potential impact on market prices or fair value of
liquidating the Company's positions in an orderly manner over a reasonable
period of time under current market conditions.
Commodities include physical quantities of commodities involving future
settlement or delivery and related gains or losses are reported as
"Principal transactions."
The majority of the Company's trading securities, commodities and
derivatives are recorded on a trade date basis. Recording the remaining
instruments on a trade date basis would not materially affect the
consolidated financial statements.
45
<PAGE>
Notes to Consolidated Financial Statements (continued)
Derivatives used for trading purposes include interest rate, currency and
commodity swap agreements, swap options, caps and floors, options,
warrants and financial and commodity futures and forward contracts. The
market values (unrealized gains and losses) associated with derivatives
are reported net by counterparty, provided a legally enforceable master
netting agreement exists, and are netted across products and against cash
collateral when such provisions are stated in the master netting
agreement. Derivatives in a net receivable position, as well as options
owned and warrants held, are reported as assets in "Trading securities and
commodities owned." Similarly, derivatives in a net payable position, as
well as options written and warrants issued, are reported as liabilities
in "Trading securities and commodities sold not yet purchased." This
category also includes the Company's long-term obligations that have
principal repayments directly linked to equity securities of unaffiliated
issuers for which the Company holds in inventory a note exchangeable for
the same equity securities. Cash collateral received in connection with
interest rate swaps totaled $340 million and $250 million at December 31,
1997 and 1996, respectively, and cash collateral paid totaled $2.507
billion and $1.637 billion, respectively. Revenues generated from
derivative instruments used for trading purposes are reported as
"Principal transactions" and include realized gains and losses as well as
unrealized gains and losses resulting from changes in the market or fair
value of such instruments.
Derivatives used for non-trading purposes, which are designated as hedges,
must be effective at reducing the risk associated with the exposure being
hedged and must be designated as a hedge at the inception of the
derivative contract. Accordingly, changes in the market or fair value of
the derivative instrument must be highly correlated with changes in the
market or fair value of the underlying hedge item. The Company monitors
the effectiveness of its hedges by periodically comparing the change in
value of the derivative instrument with the change in value of the
underlying hedged item. Derivatives used as hedges include interest rate
swaps, cross currency swaps and forward currency contracts.
Interest rate and cross currency swaps are utilized to effectively convert
a portion of investment banking and brokerage borrowings and the majority
of fixed rate long-term debt to variable rate instruments. These swaps are
recorded "off-balance sheet," with accrued inflows and outflows reflected
as adjustments to interest expense.
The Company utilizes forward currency contracts to hedge a portion of the
currency exchange rate exposure relating to non-U.S. dollar term debt
issued by the Company. The impact of translating the forward currency
contracts and the related debt to prevailing exchange rates is recognized
currently in income. The Company also utilizes forward currency contracts
to hedge certain investments in subsidiaries with functional currencies
other than the U.S. dollar. The impact of marking open contracts to
prevailing exchange rates and the impact of realized gains or losses on
maturing contracts, both net of the related tax effects, are included as
net translation adjustments in stockholders' equity as is the impact of
translating the investments being hedged. Upon the disposition of an
investment in a subsidiary with a functional currency other than the U.S.
dollar, accumulated gains or losses previously included as net translation
adjustments in stockholders' equity are recognized currently in income.
Derivative instruments that do not meet the criteria to be designated as a
hedge are considered trading derivatives and are recorded at market or
fair value.
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. In the determination of income,
certain financing transactions are marked to fair value, which has no
material effect on the Company's results of operations. The Company's
46
<PAGE>
Notes to Consolidated Financial Statements (continued)
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.
Brokerage receivables and brokerage payables include margin on futures
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. The value of management advisory contracts is
reviewed periodically for recoverability to determine if any adjustment is
required.
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 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.
47
<PAGE>
Notes to Consolidated Financial Statements (continued)
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, 1997 and 1996 are $1.5 billion and $1.6
billion, 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 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.
Derivatives used for non-trading purposes. See Note 20 for a discussion of
derivatives used for non-trading purposes.
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
48
<PAGE>
Notes to Consolidated Financial Statements (continued)
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
---------------------
Merger with Salomon
On November 28, 1997, a newly formed wholly owned subsidiary of TRV merged
with and into Salomon (the Merger). Under the terms of the Merger,
approximately 188.5 million shares of TRV common stock were issued in
exchange for all of the outstanding shares of Salomon common stock, based
on an exchange ratio of 1.695 shares of TRV common stock for each share of
Salomon common stock, for a total value of approximately $9 billion. Each
of Salomon's series of preferred stock outstanding was exchanged for a
corresponding series of TRV preferred stock having substantially identical
terms, except that the TRV preferred stock issued in conjunction with the
Merger has certain voting rights (see Note 15). Thereafter, Smith Barney
Holdings Inc. (Smith Barney), a wholly owned subsidiary of TRV, was merged
with and into Salomon to form Salomon Smith Barney Holdings Inc. (Salomon
Smith Barney), which is the primary vehicle through which the Company
engages in investment banking, proprietary trading, retail brokerage and
asset management. The Merger constituted a tax-free exchange. As a result
of the Merger, Salomon Smith Barney recorded in the fourth quarter of 1997
a restructuring charge of $838 million ($496 million after tax). This
restructuring charge reflects severance and other termination-related
costs to be incurred in connection with staff reductions ($161 million),
costs in connection with planned abandonment of certain facilities,
premises and other assets ($663 million), and other costs related directly
to the Merger ($14 million). At December 31, 1997 the reserve balance
associated with the above charge was $825 million, reflecting $13 million
of charges related to severance and facilities costs.
The results of operations for the separate companies and the combined
amounts for periods prior to the merger follow:
Nine Months Ended
September 30, 1997 Year Ended December 31,
-------------------------
(millions) (unaudited) 1996 1995
------------ --------- ----------
Revenues
TRV $18,377 $21,345 $16,583
Salomon 9,468 11,069 10,704
------- ------- -------
Combined $27,845 $32,414 $27,287
======= ======= =======
Net Income
TRV $ 2,128 $ 2,331 $ 1,834
Salomon 599 617 457
------- ------- -------
Combined $ 2,727 $ 2,948 $ 2,291
======= ======= =======
49
<PAGE>
Notes to Consolidated Financial Statements (continued)
Acquisition of Security Pacific
On July 31, 1997, Commercial Credit Company acquired Security Pacific
Financial Services from BankAmerica Corporation for a purchase price of
approximately $1.6 billion. The purchase included approximately $1.2
billion of net consumer finance receivables. The excess of the purchase
price over the estimated fair value of net assets acquired was $380
million and is being amortized over 25 years.
Acquisition of Aetna P&C
On April 2, 1996, TAP, an indirect majority-owned subsidiary of the
Company, purchased from Aetna Services, Inc. (Aetna), all of the
outstanding capital stock of Travelers Casualty and Surety Company
(formerly The Aetna Casualty and Surety Company) and The Standard Fire
Insurance Company (collectively, Aetna P&C) for approximately $4.2 billion
in cash. The acquisition was financed in part by the sale by TAP of
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 and
the sale in a public offering of 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. 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 The Travelers
Indemnity Company (Travelers Indemnity) and a capital contribution of
approximately $1.1 billion.
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. The
excess of the purchase price over the estimated fair value of net assets
acquired was approximately $1.2 billion and is being amortized over 40
years. 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.
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
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); a $45
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; a
$32 million after tax and minority interest ($60 million before tax and
minority interest) charge related to premium collection issues; a $22
million after tax and minority interest ($41 million before tax and
minority interest) provision for uncollectibility of reinsurance
recoverables; and an $18 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 in 1996 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.
50
<PAGE>
Notes to Consolidated Financial Statements (continued)
The unaudited pro forma condensed results of operations presented below
assume the acquisition of Aetna P&C had occurred at the beginning of each
of the periods presented:
(in millions, expect per share amounts) 1996 1995*
-----------------------------------------------------------
Revenues $34,014 $32,594
Income from continuing operations $ 3,044 $ 1,740
Net income $ 2,710 $ 1,890
Basic earnings per share:
Income from continuing operations $2.63 $1.44
Net income $2.32 $1.58
Diluted earnings per share:
Income form continuing operations $2.51 $1.40
Net income $2.22 $1.53
* 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.
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 $ 13,969
Reinsurance recoverables and other assets 10,386
Insurance policy and claim reserves (18,302)
Other liabilities (1,893)
-------------------------------------------------------------------
Cash payment related to business acquisition $ 4,160
===================================================================
On June 23, 1997, TAP repurchased an aggregate of approximately 6.6
million shares of its Class A Common Stock held by four private investors
for approximately $241 million. This repurchase increased TRV's ownership
of TAP to approximately 83.4%.
3. Disposition of Subsidiaries and Discontinued Operations
-------------------------------------------------------
During 1996, gains on sale of subsidiaries and affiliates totaled $445
million pre-tax and consisted of the sale in April of approximately 18% of
TAP ($363 million), a net gain from the disposition of certain investment
advisory affiliates, including RCM Capital Management, a California
Limited Partnership (RCM) ($34 million) and the sale in the third quarter
of The Mortgage Corporation Limited ($48 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.
51
<PAGE>
Notes to Consolidated Financial Statements (continued)
Discontinued Operations
In March 1997, the Company entered into a non-binding letter of intent to
sell all of the outstanding stock of Basis Petroleum, Inc. (Basis), a
wholly owned subsidiary that owns and operates oil refineries in the U.S.
Gulf Coast area, to Valero Energy Corporation (Valero). This transaction
resulted in the recognition in the 1996 Consolidated Financial Statements
of a pre-tax loss of approximately $505 million ($290 million after tax).
The sale was completed on May 1, 1997. Proceeds from the sale included
cash of $365 million, Valero common stock with a market value of $120
million and participation payments based on a fixed notional throughput
and the difference, if any, between an average market crackspread, as
defined, and a base crackspread, as defined, over each of the next ten
years. The total of the participation payments is capped at $200 million,
with a maximum of $35 million per year. In addition, as a result of
Valero's merger agreement with PG&E Corporation, Valero's common stock was
exchanged for stock of PG&E Corporation and a new stock of the spin-off
company (New Valero), representing Valero's refining assets. In the third
quarter of 1997, the Company liquidated its interest in the PG&E and New
Valero common stock. In July 1997, the Company paid Valero $3 million in
connection with the final determination of working capital. The estimated
loss includes severance costs and anticipated operating losses to be
incurred prior to the completion of the sale, and reflects other estimates
of value at time of closing. Revenues of Basis for the years ended
December 31, 1996 and 1995 were immaterial.
On January 3, 1995 the Company sold its group life business as well as its
related non-medical group insurance businesses to Metropolitan Life
Insurance Company (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.
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 these
discontinued operations for the year ended December 31, 1995 amounted to
$1.040 billion. Revenues in 1997 and 1996 were immaterial.
4. Business Segment Information
----------------------------
The Company is a diversified, integrated 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:
52
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
(millions) 1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Revenues
Investment Services $21,507 $18,871 $ 17,512
Life Insurance Services 4,426 3,765 3,858
Property & Casualty Insurance Services 9,911 8,224 4,545
Consumer Finance Services 1,688 1,411 1,354
Corporate and Other 77 143 18
------------ ------------ -------------
$37,609 $32,414 $27,287
============ ============ =============
Income from continuing operations
before income taxes and minority interest
Investment Services $ 1,830 $ 3,073 $ 1,827
Life Insurance Services 1,401 1,009 893
Property & Casualty Insurance Services 1,752 512 595
Consumer Finance Services 367 343 378
Corporate and Other (338) 71 (373)
------------ ------------ -------------
$ 5,012 $ 5,008 $ 3,320
============ ============ =============
Income from continuing operations
Investment Services $ 1,151 $ 1,871 $ 1,112
Life Insurance Services 910 653 581
Property & Casualty Insurance Services
(after minority interest of $212 in 1997 and $47
in 1996) 1,024 362 453
Consumer Finance Services 237 223 246
Corporate and Other (218) 173 (251)
------------ ------------ -------------
$ 3,104 $ 3,282 $ 2,141
============ ============ =============
Identifiable assets
Investment Services $276,632 $246,126 $229,404
Life Insurance Services 46,118 40,329 37,912
Property & Casualty Insurance Services 50,682 49,779 23,647
Consumer Finance Services 12,839 9,061 8,196
Corporate and Other 284 653 3,185
------------ ------------ -------------
$386,555 $345,948 $302,344
============ ============ =============
</TABLE>
The Investment Services segment consists of investment banking, asset
management, securities brokerage, proprietary trading, and other financial
services provided through Salomon Smith Barney and its subsidiaries.
The Life Insurance Services segment provides individual life insurance,
accident and health insurance, annuities, long-term care and investment
products. Among the range of products offered are fixed and variable
deferred annuities, payout annuities and term, universal and variable life
and long-term care insurance to individuals and small businesses and group
pension products, including guaranteed investment contracts, and group
annuities to employer-sponsored retirement and savings plans. These
products are offered primarily through The Travelers Insurance Company,
The Travelers Life and Annuity Company and Primerica Financial Services
(PFS).
53
<PAGE>
Notes to Consolidated Financial Statements (continued)
The Property & Casualty Insurance Services segment provides
property-casualty insurance, including workers' compensation, general
liability, commercial automobile, property, commercial multi-peril,
fidelity and surety and professional liability 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 majority-owned subsidiary, TAP. TAP's property-casualty
insurance subsidiaries include Travelers Indemnity, Travelers Casualty and
Surety Company, The Standard Fire Insurance Company and Gulf Insurance
Company.
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 is reported as part of Corporate and
Other in 1995 and through its date of sale in 1996.
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 are not
significant.
For gains and special charges included in each segment, see the "Results
of Operations" discussion in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The operations of the Company's Life Insurance, Property & Casualty
Insurance and Consumer Finance segments are conducted predominantly in
North America. The Investments Services segment conducts business
primarily in North America, Europe and Asia. The following table sets
forth financial data by geographic location for the Company's Investment
Services segment:
<TABLE>
<CAPTION>
(millions) 1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Revenues
North America $ 16,631 $ 15,326 $ 12,869
Europe 4,506 3,365 4,370
Asia and other 370 180 273
--------- ---------- ----------
$ 21,507 $ 18,871 $ 17,512
========= ========== ==========
Income from continuing
operations before income taxes
North America $ 1,385 $ 2,952 $ 1,263
Europe 351 77 607
Asia and other 94 44 (43)
--------- ---------- ----------
$ 1,830 $ 3,073 $ 1,827
========= ========== ==========
Total assets
North America $ 162,696 $ 152,435 $ 141,973
Europe 82,497 76,875 75,292
Asia and other 31,439 16,816 12,139
--------- ---------- ----------
$ 276,632 $ 246,126 $ 229,404
========= ========== ==========
</TABLE>
54
<PAGE>
Notes to Consolidated Financial Statements (continued)
5. Principal Transaction Revenues
------------------------------
The following table presents principal transaction revenues by business
activity for the years ended December 31:
(millions) 1997 1996 1995
------ ------ ------
Fixed Income $1,882 $2,049 $ 900
Equities 397 576 995
Commodities 218 393 238
Other 7 9 7
------ ------ ------
Principal transaction revenues $2,504 $3,027 $2,140
====== ====== ======
Fixed income revenues include realized and unrealized gains and losses
arising from trading government and government agency securities,
investment and non-investment grade corporate debt, municipal securities,
preferred stock, mortgage securities (primarily U.S. government agencies,
including interest only and principal only strips), and emerging market
fixed income securities and derivatives. Revenues also include realized
and unrealized gains and losses generated from a variety of fixed income
securities utilized in arbitrage strategies for the Company's own account,
and realized and unrealized gains and losses arising from the spot and
forward trading of currencies and exchange-traded and over-the-counter
(OTC) currency options. Realized and unrealized gains and losses resulting
from changes in the market or fair value of options on fixed income
securities, interest rate swaps, currency swaps, swap options, caps and
floors, financial futures, OTC options and forward contracts on fixed
income securities are reflected as fixed income revenue.
Equities. Revenues from equities consist of realized and unrealized gains
and losses arising from proprietary and customer trading of U.S. and
non-U.S. equity securities, including common and convertible preferred
stock, convertible corporate debt, equity-linked notes and exchange-traded
and OTC equity options and warrants. Revenues also include realized and
unrealized gains and losses on equity securities and related derivatives
utilized in arbitrage strategies for the Company's own account.
Commodities trading is conducted primarily through Salomon Smith Barney's
wholly owned subsidiary Phibro Inc. (Phibro). Phibro trades crude oil,
refined oil products, natural gas, electricity, metals and various soft
commodities. In December 1997, Phibro commenced implementation of a
downsizing plan which will significantly reduce the scope of some of its
activities. In 1996, Phibro discontinued trading coal, coke and
fertilizers. Commodity revenues consist of realized and unrealized gains
and losses from trading these commodities and related derivative
instruments.
6. Investments and Real Estate Held for Sale
-----------------------------------------
Investments and real estate held for sale, which are owned principally by
the insurance subsidiaries, consisted of the following at December 31:
<TABLE>
<CAPTION>
(millions) 1997 1996
------- -------
<S> <C> <C>
Fixed maturities, primarily available for sale at market value $49,462 $43,998
Equity securities, at market value 1,624 1,157
Mortgage loans 3,562 3,812
Real estate held for sale 237 459
Policy loans 1,872 1,910
Short-term and other 5,077 5,173
------- -------
$61,834 $56,509
======= =======
</TABLE>
55
<PAGE>
Notes to Consolidated Financial Statements (continued)
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted
expected cash flows using market rates commensurate with the credit
quality and maturity of the investment. The fair value of investments for
which a quoted market price or dealer quote are not available amounted to
$6.6 billion and $6.1 billion at December 31, 1997 and 1996, respectively.
The amortized cost and fair value of investments in fixed maturities at
December 31, were as follows:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
-----------------------
1997 Cost Gains Losses Value
- ---- --------------------------------------------
(millions)
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities-principally obligations of U.S.
Government agencies $ 8,704 $ 298 $ (4) $ 8,998
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies 3,698 264 -- 3,962
Obligations of states and political subdivisions 7,735 377 (2) 8,110
Debt securities issued by foreign governments 1,275 57 (6) 1,326
Corporate securities 26,102 961 (38) 27,025
-------------------------------------------
$ 47,514 $ 1,957 $ (50) $ 49,421
===========================================
Held to maturity, principally mortgage-backed securities $ 41 $ 9 $ -- $ 50
===========================================
Amortized Gross Unrealized Fair
-----------------
1996 Cost Gains Losses Value
- ---- -------------------------------------------
(millions)
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>
The amortized cost and fair value at December 31, 1997 by contractual
maturity are shown below. Actual maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
(millions) Cost Value
--------- -------
Due in one year or less $ 2,097 $ 2,110
Due after one year through five years 11,454 11,735
Due after five years through ten years 11,409 11,853
Due after ten years 13,850 14,725
------- -------
38,810 40,423
Mortgage-backed securities 8,745 9,048
------- -------
$47,555 $49,471
======= =======
56
<PAGE>
Notes to Consolidated Financial Statements (continued)
Realized gains and losses on fixed maturities for the years ended December
31, were as follows:
(millions) 1997 1996 1995
------------ ------------ ------------
Realized gains
Pre-tax $343 $231 $157
------------ ------------ ------------
After-tax $223 $150 $102
------------ ------------ ------------
Realized losses
Pre-tax ($196) ($361) ($244)
------------ ------------ ------------
After-tax ($127) ($235) ($159)
------------ ------------ ------------
Net realized gains on equity securities and other investments, after-tax,
amounted to $168 million, $120 million and $155 million for the years
ended December 31, 1997, 1996 and 1995, respectively. Net pre-tax
unrealized gains on equity securities at December 31, 1997 and 1996 were
$94 million and $44 million, respectively.
The Company had industry concentrations of corporate securities and
short-term investments at December 31 as follows:
(millions) 1997 1996
------------ ------------
Banking $4,901 $4,252
Finance $3,655 $4,399
Electric utilities $3,138 $2,268
Oil and gas $1,456 $1,533
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) 1997 1996 1997 1996
--------- ------- -------- --------
California $921 $811 $ 83 $157
New York $375 $390 $ -- $ --
Texas $329 $283 $ 34 $ 36
Massachusetts $265 $276 $ -- $ 17
Florida $261 $283 $ 29 $ 49
Virginia $183 $247 $ -- $ --
Illinois $131 $182 $ 10 $ 81
Other mortgage loan and real estate investments are dispersed throughout
the United States, with no combined holdings in any other state exceeding
$200 million.
57
<PAGE>
Notes to Consolidated Financial Statements (continued)
Aggregate annual maturities on mortgage loans are as follows:
(millions)
Past maturity $ 70
1998 305
1999 457
2000 494
2001 445
2002 126
Thereafter 1,665
---------
$ 3,562
=========
7. 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) 1997 1996
-------- --------
Resale agreements $ 75,802 $ 72,881
Deposits paid for securities borrowed 33,932 25,104
-------- --------
$109,734 $ 97,985
======== ========
Securities loaned or sold under agreements to repurchase, at their
respective carrying values, consisted of the following at December 31:
(millions) 1997 1996
-------- --------
Repurchase agreements $113,593 $ 97,282
Deposits received for securities loaned 7,328 6,290
-------- --------
$120,921 $103,572
======== ========
The resale and repurchase agreements represent collateralized financing
transactions used to generate net interest income and facilitate trading
activity. These instruments are collateralized principally by government
and government agency securities and generally have terms ranging from
overnight to up to a year. It is the Company's policy to take possession
of the underlying collateral, monitor its market value relative to the
amounts due under the agreements, and, when necessary, require prompt
transfer of additional collateral or reduction in the loan balance in
order to maintain contractual margin protection. In the event of
counterparty default, the financing agreement provides the Company with
the right to liquidate the collateral held. Resale agreements and
repurchase agreements are reported net by counterparty, when applicable,
pursuant to FASB Interpretation 41, "Offsetting of Amounts Related to
Certain Repurchase and Reverse Repurchase Agreements" (FIN 41). Excluding
the impact of FIN 41, resale agreements totaled $114.3 billion and $88.0
billion at December 31, 1997 and 1996, respectively. At December 31, 1997
and 1996, the market value of securities collateralizing resale agreements
was $116.6 billion and $89.0 billion, respectively.
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 and are collateralized principally by
government and government agency securities, corporate debt and equity
securities. 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
58
<PAGE>
Notes to Consolidated Financial Statements (continued)
Company monitors the market value of securities borrowed and securities
loaned daily, and additional collateral is obtained as necessary.
Excluding the impact of FIN 41, securities borrowed totaled $40.5 billion
and $28.5 billion at December 31, 1997 and 1996, respectively. At December
31, 1997 and 1996, the market value of securities collateralizing
securities borrowed was $40.1 billion and $24.6 billion, respectively.
8. 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. Credit risk is reduced
to the extent that an exchange or clearing organization acts as a
counterparty to the transaction.
The Company seeks to protect itself from the risks associated with
customer activities by requiring customers to maintain margin collateral
in compliance with regulatory and internal guidelines. Margin levels are
monitored daily, and customers deposit additional collateral as required.
Where customers cannot meet collateral requirements, the Company will
liquidate sufficient underlying financial instruments to bring the
customer into compliance with the required margin level.
Exposure to credit risk is impacted by market volatility, which may impair
the ability of clients to satisfy their obligations to the Company. Credit
limits are established and closely monitored for customers and brokers and
dealers engaged in forward and futures and other transactions deemed to be
credit-sensitive.
Brokerage receivables and brokerage payables, which arise in the normal
course of business, consisted of the following at December 31:
(millions) 1997 1996
------- -------
Receivables from customers $12,415 $ 9,488
Receivables from brokers, dealers and clearing organizations 3,212 2,104
------- -------
Total brokerage receivables $15,627 $11,592
======= =======
Payables to customers $ 9,791 $ 8,160
Payables to brokers, dealers and clearing organizations 2,972 1,859
------- -------
Total brokerage payables $12,763 $10,019
======= =======
9. Trading Securities and Commodities
----------------------------------
Trading securities and commodities at market value consisted of the
following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
Sold Sold
Not Yet Not Yet
(millions) Owned Purchased Owned Purchased
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Government and government agency securities - U.S. $ 52,109 $ 33,970 $ 51,980 $ 41,864
Government and government agency securities - non-U.S 46,502 45,166 35,189 31,699
Corporate debt securities 13,614 1,763 14,668 2,309
Contractual commitments 10,120 11,688 7,218 9,984
Equity securities 6,420 3,462 7,396 6,142
Mortgage loans and collateralized mortgage securities 3,103 -- 4,345 1
Commodities 1,274 4 995 9
Other 6,590 113 4,782 133
-------- -------- -------- --------
$139,732 $ 96,166 $126,573 $ 92,141
======== ======== ======== ========
</TABLE>
59
<PAGE>
Notes to Consolidated Financial Statements (continued)
See Note 20 for a discussion of trading securities, commodities,
derivatives and related risks.
10. Consumer Finance Receivables
----------------------------
Consumer finance receivables, net of unearned finance charges of $729
million and $635 million at December 31, 1997 and 1996, respectively,
consisted of the following:
(millions) 1997 1996
-------- --------
Real estate-secured loans $ 5,108 $ 3,457
Personal loans 3,922 3,200
Credit cards 1,164 907
Sales finance and other 857 507
-------- --------
Consumer finance receivables 11,051 8,071
Accrued interest receivable 86 54
Allowance for credit losses (321) (240)
-------- --------
$ 10,816 $ 7,885
======== ========
An analysis of the allowance for credit losses on consumer finance
receivables at December 31, was as follows:
<TABLE>
<CAPTION>
(millions) 1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Balance, January 1 $ 240 $ 193 $ 182
Provision for consumer finance credit losses 277 260 171
Amounts written off (281) (245) (188)
Recovery of amounts previously written off 30 26 27
Allowance on receivables purchased 55 6 1
------------- ------------- -------------
Balance, December 31 $ 321 $ 240 $ 193
------------- ------------- -------------
Net outstandings $11,051 $8,071 $7,238
------------- ------------- -------------
Allowance for credit losses as a % of net outstandings 2.91% 2.97% 2.66%
============= ============= =============
</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 Due After
1997 1998 1999 2000 2001 2002 2002
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Real-estate secured loans $ 5,179 $ 235 $ 244 $ 317 $ 267 $ 272 $ 3,844
Personal loans 4,500 1,346 1,163 872 518 251 350
Credit cards 1,162 107 97 88 80 73 717
Sales finance and other 939 617 151 140 21 9 1
------- ------- ------- ------- ------- ------- -------
$11,780 $ 2,305 $ 1,655 $ 1,417 $ 886 $ 605 $ 4,912
------- ------- ------- ------- ------- ------- -------
Percentage 100% 20% 14% 12% 7% 5% 42%
======= ======= ======= ======= ======= ======= =======
</TABLE>
Contractual terms average 18 years on real estate-secured loans (excluding
call provisions) and 5 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.
60
<PAGE>
Notes to Consolidated Financial Statements (continued)
The Company has a geographically diverse consumer finance loan portfolio.
At December 31, the distribution by state was as follows:
1997 1996
-------- --------
Ohio 10% 11%
North Carolina 8% 9%
Pennsylvania 7% 6%
California 5% 6%
South Carolina 5% 6%
Texas 4% 5%
Tennessee 4% 5%
New York 4% 4%
All other states* 53% 48%
-------- --------
100% 100%
======== ========
* In 1997 none of the remaining states individually accounts for more than
4% of total consumer finance receivables.
The estimated fair value of the consumer finance receivables portfolio
depends on the methodology selected to value such portfolio (i.e., exit
value versus entry value). Exit value represents a valuation of the
portfolio based upon sales of comparable portfolios which takes into
account the value of customer relationships and the current level of
funding costs. Under the exit value methodology, the estimated fair value
of the receivables portfolio at December 31, 1997 is approximately $612
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, 1997 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 1997. Fair values included in Note
21 are based on the exit value methodology.
11. Debt
----
Investment banking and brokerage borrowings
Investment banking and brokerage borrowings and the corresponding weighted
average interest rates at December 31 are as follows:
1997 1996
---------------------------- --------------------------
Balance Interest Rate Balance Interest Rate
----------- ------------- ----------- -------------
Bank borrowings $ 2,415 5.9% $ 4,388 5.8%
Commercial paper 7,110 5.8% 4,133 5.7%
Other 1,939 1,499
--------- ---------
$11,464 $ 10,020
========= =========
Investment banking and brokerage borrowings are short-term in nature and
include commercial paper, bank borrowings and other borrowings, such as
deposit liabilities, used to finance Salomon Smith Barney's operations,
including the securities settlement process. Outstanding bank borrowings
include both U.S. dollar and non-U.S. dollar denominated loans. The
non-U.S. dollar loans are denominated in multiple currencies including
Japanese yen, German mark and U.K. sterling. All commercial paper
outstanding at December 31, 1997 and 1996 was U.S. dollar denominated.
61
<PAGE>
Notes to Consolidated Financial Statements (continued)
Salomon Smith Barney has a $1.250 billion revolving credit agreement with
a bank syndicate that extends through May 2000, and a $750 million,
364-day revolving credit agreement that extends through May 1998. Salomon
Smith Barney may borrow under its revolving credit facilities at various
interest rate options (LIBOR, CD or base rate) and compensates the banks
for the facilities through commitment fees. Under these facilities Salomon
Smith Barney is required to maintain a certain level of consolidated
adjusted net worth (as defined in the agreement). At December 31, 1997,
this requirement was exceeded by approximately $2.6 billion. At December
31, 1997, there were no borrowings outstanding under either facility.
Salomon Brothers Inc (SBI), an indirect wholly owned subsidiary of Salomon
Smith Barney, has a $2.1 billion committed secured standby bank credit
facility for financing securities positions. The facility contains certain
restrictive covenants that require, among other things, that SBI maintain
minimum levels of excess net capital and net worth (as defined in the
agreement). SBI's excess net capital exceeded the minimum required under
the facility by $574 million and SBI's net worth exceeded the minimum
amount required by $1.0 billion at December 31, 1997. In 1996, Salomon
Brothers International Limited (SBIL), an indirect wholly owned subsidiary
of Salomon Smith Barney, entered into a $1.0 billion committed securities
repurchase facility. The facility is subject to restrictive covenants
including a requirement that SBIL maintain minimum levels of tangible net
worth and excess financial resources (as defined in the agreement). At
December 31, 1997, SBIL exceeded these requirements by $4.0 billion and
$669 million, respectively. In 1997, Phibro entered into a $550 million
unsecured committed revolving line of credit. This facility requires
Phibro to maintain minimum levels of capital and net working capital (as
defined in the agreement). Phibro Inc. exceeded these minimums by $54
million and $98 million, respectively, at December 31, 1997. At December
31, 1997, there were no outstanding borrowings under any of these
facilities.
Salomon Smith Barney also has substantial borrowing arrangements
consisting of facilities that it has been advised are available, but where
no contractual lending obligation exists.
Short-term borrowings
At December 31, short-term borrowings consisted of commercial paper
outstanding with weighted average interest rates as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ---------------------------
Outstanding Interest Rate Outstanding Interest Rate
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Commercial Credit Company $3,871 5.83% $1,482 5.55%
Travelers Property Casualty Corp. 108 6.11% 25 5.64%
The Travelers Insurance Company -- 50 5.53%
------ ------
$3,979 $1,557
====== ======
</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 banklines 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 (LIBOR, CD, base rate or money market) and compensates the
banks for the facilities through commitment fees.
TRV, CCC and TIC have a five-year revolving credit facility which expires
in June 2001 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 facility is limited to $250 million. At
December 31, 1997, $500 million was allocated to TRV, $450 million was
allocated to CCC, and $50 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, 1997, this requirement was exceeded by approximately $10.5
billion. At December 31, 1997, there were no borrowings outstanding under
this facility.
62
<PAGE>
Notes to Consolidated Financial Statements (continued)
At December 31, 1997, CCC also had a committed and available revolving
credit facility on a stand-alone basis of $4.4 billion, of which $3.4
billion expires in 2002 and $1.0 billion in July 1998.
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, 1997, CCC would have been able to
remit $567 million under its most restrictive covenants.
TAP has a five-year revolving credit facility in the amount of $500
million with a syndicate of banks that expires in December 2001. Under
this facility TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At December 31, 1997,
this requirement was exceeded by approximately $3.4 billion. At December
31, 1997, there were no borrowings outstanding under this facility.
The carrying value of short-term borrowings approximates fair value.
Long-term debt
At December 31, long-term debt was as follows:
<TABLE>
<CAPTION>
Weighted
Average
(millions) Coupon Rate Maturities 1997 1996
----------- ---------- -------- --------
<S> <C> <C> <C> <C>
Travelers Group Inc.
Senior Notes 7.31% 1998-2025 $ 1,662 $ 1,848
Other(a) 33 55
Commercial Credit Company
Senior Notes 6.99% 1998-2025 6,300 5,750
Salomon Smith Barney Holdings Inc.
Senior Notes (b) 6.56% 1998-2023 19,064 15,738
Travelers Property Casualty Corp.
Senior Notes 6.83% 1999-2026 1,250 1,250
Other (c) (1) (1)
The Travelers Insurance Group Inc.
Other(d) 44 56
-------- --------
Total
Senior Notes 28,276 24,586
Other 76 110
-------- --------
$ 28,352 $ 24,696
======== ========
</TABLE>
(a) Unamortized premium of $15 million in 1997 and $20 million in 1996; and an
ESOP note guarantee of $18 million in 1997 and $35 million in 1996.
(b) Includes $3.427 billion and $4.036 billion of non-U.S. dollar denominated
debt at December 31, 1997 and 1996, respectively.
(c) Unamortized discount.
(d) Principally 12% GNMA/FNMA-collateralized obligations.
Salomon Smith Barney issues both U.S. dollar and non-U.S. dollar
denominated fixed and variable rate debt. However, Salomon Smith Barney
utilizes interest rate swap agreements to effectively convert most of its
fixed rate debt to variable rate debt. The maturity structure of the swaps
generally corresponds with the maturity structure of the debt being
hedged. At December 31, 1997, Salomon Smith Barney had entered into
interest rate swaps to convert $11.2 billion of its $15.0 billion of fixed
rate debt to variable rate obligations. The contractual weighted average
fixed rate on swapped fixed rate debt and the weighted average variable
rate on swapped debt (Salomon Smith Barney's actual borrowing cost) was
6.8% and 6.2% at December 31, 1997 and 6.8% and 6.1% at December 31, 1996,
respectively.
63
<PAGE>
Notes to Consolidated Financial Statements (continued)
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) 1998 1999 2000 2001 2002 Thereafter
------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Travelers Group Inc. $ 250 $ 100 $ 200 $ -- $ 300 $ 812
Commercial Credit Company 350 350 750 700 900 3,250(a)
Salomon Smith Barney Holdings Inc. 3,878 2,878 2,989 1,872 2,480 4,967
Travelers Property Casualty Corp. -- 400 -- 500 -- 350
------ ------ ------ ------ ------ ----------
$4,478 $3,728 $3,939 $3,072 $3,680 $ 9,379
====== ====== ====== ====== ====== ==========
</TABLE>
(a) Includes $450 million redeemable at option of holders during 1999 at face
amount and $200 million redeemable at option of holders during 2002 at
face amount.
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, 1997 the carrying value and the fair value of the Company's
long-term debt were:
Carrying Fair
(millions) Value Value
----------- ----------
Travelers Group Inc. $ 1,695 $ 1,753
Commercial Credit Company 6,300 6,515
Salomon Smith Barney Holdings Inc. 19,064 19,364
Travelers Property Casualty Corp. 1,249 1,275
The Travelers Insurance Group Inc. 44 49
----------- ----------
$ 28,352 $ 28,956
=========== ==========
12. Insurance Policy and Claims Reserves
------------------------------------
Insurance policy and claims reserves consisted of the following at
December 31:
(millions) 1997 1996
------- -------
Benefit and loss reserves:
Property-casualty $29,343 $29,967
Accident and health 1,080 928
Life and annuity 8,660 8,555
Unearned premiums 4,267 3,909
Policy and contract claims 432 585
------- -------
$43,782 $43,944
======= =======
64
<PAGE>
Notes to Consolidated Financial Statements (continued)
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) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Claims and claim adjustment expense reserves
at beginning of year $ 29,967 $ 14,715 $ 13,872
Less reinsurance recoverables on unpaid losses 8,151 4,613 3,621
-------- -------- --------
Net balance at beginning of year 21,816 10,102 10,251
-------- -------- --------
Provision for claims and claim adjustment expenses
for claims arising in the current year 5,730 4,827 2,898
Estimated claims and claim adjustment expenses for claims
arising in prior years (492) 192 (227)
Increase for purchase of Aetna P&C -- 11,752 --
-------- -------- --------
Total increases 5,238 16,771 2,671
-------- -------- --------
Claims and claim adjustment expense payments for claims arising in:
Current year 1,944 1,858 887
Prior years 3,704 3,199 1,933
-------- -------- --------
Total payments 5,648 5,057 2,820
-------- -------- --------
Net balance at end of year 21,406 21,816 10,102
Plus reinsurance recoverables on unpaid losses 7,937 8,151 4,613
-------- -------- --------
Claims and claim adjustment expense reserves at end of year $ 29,343 $ 29,967 $ 14,715
-------- -------- --------
</TABLE>
In 1997, estimated claims and claim adjustment expenses for claims arising
in prior years included $154 million of net favorable development in
certain Personal Lines coverages and Commercial Lines coverages,
predominantly automobile coverages. In addition, in 1997 Commercial Lines
experienced $122 million of favorable prior year loss development in the
workers' compensation line; however, since the business to which it
relates is subject to premium adjustments, there was no impact on results
of operations. Also in 1997, the Company adopted newly prescribed
statutory allocations of certain claim adjustment expenses. The new
allocations resulted in favorable prior year loss development of $216
million offset by an increase in the current accident year provision of
the same amount.
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.
65
<PAGE>
Notes to Consolidated Financial Statements (continued)
The property-casualty claims and claim adjustment expense reserves include
$2.233 billion and $2.315 billion for asbestos and environmental-related
claims net of reinsurance at December 31, 1997 and 1996, 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, 1997 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 continue 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 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 catastrophes through individual risk selection and the
purchase of catastrophe reinsurance.
13. 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.
66
<PAGE>
Notes to Consolidated Financial Statements (continued)
Reinsurance amounts included in the Consolidated Statement of Income for
the year ended December 31 were as follows:
Ceded to
(millions) Gross Other Net
Amount Companies Amount
-------- --------- ---------
1997
----
Premiums
Property-casualty insurance $ 9,045 $ (1,751) $ 7,294
Life insurance 1,669 (279) 1,390
Accident and health insurance 373 (62) 311
-------- -------- --------
$ 11,087 $ (2,092) $ 8,995
======== ======== ========
Claims incurred $ 8,226 $ (1,357) $ 6,869
======== ======== ========
1996
----
Premiums
Property-casualty insurance $ 7,902 $ (1,806) $ 6,096
Life insurance 1,529 (296) 1,233
Accident and health insurance 402 (98) 304
-------- -------- --------
$ 9,833 $ (2,200) $ 7,633
======== ======== ========
Claims incurred $ 8,389 $ (1,892) $ 6,497
======== ======== ========
1995
----
Premiums
Property-casualty insurance $ 4,752 $ (1,412) $ 3,340
Life insurance 1,497 (272) 1,225
Accident and health insurance 499 (87) 412
-------- -------- --------
$ 6,748 $ (1,771) $ 4,977
======== ======== ========
Claims incurred $ 5,806 $ (1,726) $ 4,080
======== ======== ========
Reinsurance recoverables, net of valuation allowance, at December 31
include amounts recoverable on unpaid and paid losses and were as follows:
(millions) 1997 1996
-------- --------
Life insurance $ 1,372 $ 1,521
Property-casualty business:
Pools and associations 3,378 4,160
Other reinsurance 4,829 4,553
-------- --------
$ 9,579 $ 10,234
======== ========
Included in Life business reinsurance recoverables at December 31, 1997
and 1996 is approximately $697 million and $720 million, respectively, of
receivables from MetLife in connection with the sale of the group life
business.
67
<PAGE>
Notes to Consolidated Financial Statements (continued)
14. 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) 1997 1996 1995
-------- -------- --------
Current:
Federal $ 1,673 $ 1,287 $ 924
Foreign 314 12 356
State 261 333 188
-------- -------- --------
2,248 1,632 1,468
-------- -------- --------
Deferred:
Federal (297) 51 (95)
Foreign (109) 67 (130)
State (146) (71) (64)
-------- -------- --------
(552) 47 (289)
-------- -------- --------
$ 1,696 $ 1,679 $ 1,179
======== ======== ========
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:
1997 1996 1995
------ ------ ------
Federal statutory rate 35.0% 35.0% 35.0%
Limited taxability of investment income (3.1) (2.7) (3.2)
State and foreign income taxes
(net of federal income tax benefit) 1.6 3.6 2.6
Issuance of stock by subsidiary -- (2.7) --
Other, net 0.3 0.3 1.1
------ ------ ------
Effective income tax rate 33.8% 33.5% 35.5%
====== ====== ======
68
<PAGE>
Notes to Consolidated Financial Statements (continued)
Deferred income taxes at December 31 related to the following:
(millions) 1997 1996
------- -------
Deferred tax assets:
Differences in computing policy reserves $ 2,042 $ 2,036
Deferred compensation 1,035 834
Employee benefits 301 241
Lease obligations and fixed assets 261 --
Other deferred tax assets 981 930
------- -------
Gross deferred tax assets 4,620 4,041
------- -------
Valuation allowance 100 100
------- -------
Deferred tax assets after valuation allowance 4,520 3,941
------- -------
Deferred tax liabilities:
Deferred policy acquisition costs and
value of insurance in force (780) (719)
Investment management contracts (236) (246)
Investments (516) (84)
Mark to market on inventory -- (187)
Cumulative translation adjustments (91) (114)
Undistributed earnings of non-U.S. subsidiaries (119) (84)
Other deferred tax liabilities (334) (275)
------- -------
Gross deferred tax liabilities (2,076) (1,709)
------- -------
Net deferred tax asset $ 2,444 $ 2,232
======= =======
Tax benefits allocated directly to stockholders' equity for the years
ended December 31, 1997, 1996 and 1995 were $488 million, $171 million,
and $84 million, respectively.
The Company provides income taxes on the undistributed earnings of
non-U.S. subsidiaries except to the extent that such earnings are
indefinitely invested outside the United States. At December 31, 1997,
$1.3 billion of accumulated undistributed earnings of non-U.S.
subsidiaries was indefinitely invested. At the existing U.S. federal
income tax rate, additional taxes of $376 million would have to be
provided if such earnings were remitted.
Income taxes are not provided for on the Company's life insurance
subsidiaries' retained earnings designated as "policyholders' surplus"
because such taxes will become payable only to the extent such retained
earnings are distributed as a dividend or exceed limits prescribed by
federal law. Distributions are not contemplated from this portion of the
life insurance companies' retained earnings, which aggregated $971 million
(subject to a tax effect of $340 million) at December 31, 1997.
As a result of the acquisition of The Travelers Corporation (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 that causes the recognition of the benefits to
69
<PAGE>
Notes to Consolidated Financial Statements (continued)
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 $6.8
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 $3.3 billion annually. The Company has reported pre-tax financial
statement income from continuing operations exceeding $4.4 billion, on
average, over the last three years and has incurred taxable income of
approximately $3.3 billion, on average, over the same period of time. At
December 31, 1997, the Company has no ordinary or capital loss
carryforwards.
15. Preferred Stock and Stockholders' Equity
----------------------------------------
Preferred stock
The following table sets forth the Company's preferred stock outstanding
at December 31:
1997 1996
---------------------- -----------------------
Liquidation Carrying Carrying
Preference Number Value Number Value
Per Share of Shares (millions) of Shares (millions)
------------- ---------------------- -----------------------
Series A $ 250 -- $ -- 1,200,000 $ 300
Series D $ 50 -- -- 7,500,000 375
Series F $ 250 1,600,000 400 -- --
Series G $ 250 800,000 200 -- --
Series H $ 250 800,000 200 -- --
Series J $ 500 400,000 200 400,000 200
Series K $ 500 500,000 250 500,000 250
Series M $ 250 800,000 200 -- --
--------- --------- --------- ---------
4,900,000 $ 1,450 9,600,000 $ 1,125
========= ========= ========= =========
Series C $ 53.25 2,866,689 $ 153 3,085,612 $ 164
========= ========= ========= =========
Series I $ 1,000 280,000 $ 280 420,000 $ 420
========= ========= ========= =========
Series F
In June 1997, the Company sold in a public offering 8.0 million depositary
shares, each representing one-fifth of a share of 6.365% Cumulative
Preferred Stock, Series F (Series F Preferred Stock), at an offering price
of $50 per depositary share for an aggregate principal amount of $400
million. The Series F Preferred Stock has cumulative dividends payable
quarterly and a liquidation preference equivalent to $50 per depositary
share plus accrued and accumulated unpaid dividends. On or after June 16,
2007, the Company may redeem the Series F Preferred Stock, in whole or in
part, at any time at a redemption price of $50 per depositary share plus
dividends accrued and unpaid to the redemption date.
Series G
In July 1997, the Company sold in a public offering 4.0 million depositary
shares, each representing one-fifth of a share of 6.213% Cumulative
Preferred Stock, Series G (Series G Preferred Stock), at an offering price
of $50 per depositary share for an aggregate principal amount of $200
million. The Series G Preferred Stock has cumulative dividends payable
quarterly and a liquidation preference equivalent to $50 per depositary
share plus accrued and accumulated unpaid dividends. On or after July 11,
2007, the Company may redeem the Series G Preferred Stock, in whole or in
part, at any time at a redemption price of $50 per depositary share plus
dividends accrued and unpaid to the redemption date.
70
<PAGE>
Notes to Consolidated Financial Statements (continued)
Series H
In September 1997, the Company sold in a public offering 4.0 million
depositary shares, each representing one-fifth of a share of 6.231%
Cumulative Preferred Stock, Series H (Series H Preferred Stock), at an
offering price of $50 per depositary share for an aggregate principal
amount of $200 million. The Series H Preferred Stock has cumulative
dividends payable quarterly and a liquidation preference equivalent to $50
per depositary share plus accrued and accumulated unpaid dividends. On or
after September 8, 2007, the Company may redeem the Series H Preferred
Stock, in whole or in part, at any time at a redemption price of $50 per
depositary share plus dividends accrued and unpaid to the redemption date.
Series J
The Company has outstanding 8.0 million depositary shares, each
representing one-twentieth of a share of 8.08% Cumulative Preferred Stock,
Series J (Series J Preferred). Holders of the Series J Preferred are
entitled to three votes per share (.15 votes per depositary share) when
voting together as a class with the TRV common stock on all matters
submitted to a vote of the Company's stockholders. The Series J Preferred
has cumulative dividends payable quarterly and a liquidation preference of
$500 per share ($25 per depositary share) plus any accrued and unpaid
dividends. On or after March 31, 1998, the Company may, at its option,
redeem the Series J Preferred, in whole or in part, at any time at a
redemption price of $500 per share ($25 per depositary share) plus
dividends accrued and unpaid to the redemption date.
Series K
The Company has outstanding 10.0 million depositary shares, each
representing one-twentieth of a share of 8.40% Cumulative Preferred Stock,
Series K (Series K Preferred). Holders of the Series K Preferred are
entitled to three votes per share (.15 votes per depositary share) when
voting together as a class with the TRV common stock on all matters
submitted to a vote of the Company's stockholders. The Series K Preferred
has cumulative dividends payable quarterly and a liquidation preference of
$500 per share ($25 per depositary share) plus any accrued and unpaid
dividends. On or after March 31, 2001, the Company may, at its option,
redeem the Series K Preferred, in whole or in part, at any time at a
redemption price of $500 per share ($25 per depositary share) plus
dividends accrued and unpaid to the redemption date.
Series M
In October 1997, the Company sold in a public offering 4.0 million
depositary shares, each representing one-fifth of a share of 5.864%
Cumulative Preferred Stock, Series M (Series M Preferred Stock), at an
offering price of $50 per depositary share for an aggregate principal
amount of $200 million. The Series M Preferred Stock has cumulative
dividends payable quarterly and a liquidation preference equivalent to $50
per depositary share plus accrued and accumulated unpaid dividends. On or
after October 8, 2007, the Company may redeem the Series M Preferred
Stock, in whole or in part, at any time at a redemption price of $50 per
depositary share plus dividends accrued and unpaid to the redemption date.
Series A
On July 28, 1997 the Company redeemed all of the 1.2 million outstanding
shares (12 million depositary shares) of its 8.125% Cumulative Preferred
Stock, Series A (Series A Preferred Stock) at $250 per share ($25 per
depositary share) plus accrued and unpaid dividends to the redemption
date. The aggregate amount of Series A Preferred Stock outstanding on the
redemption date was $300 million.
Series D
On July 1, 1997 the Company redeemed all of the 7.5 million outstanding
shares (15 million depositary shares) of its 9.25% Preferred Stock, Series
D (Series D Preferred Stock) at $50 per share ($25 per depositary share).
The aggregate amount of Series D Preferred Stock outstanding on the
redemption date was $375 million.
71
<PAGE>
Notes to Consolidated Financial Statements (continued)
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 10,203,648 shares of
common stock. The remaining 55 shares were redeemed for cash at $51.925
per share plus accrued and unpaid dividends.
Salomon Series C
In August 1996, the Company redeemed 225,000 shares (4.5 million
depositary shares) of its Series C 9.50% Cumulative Preferred Stock
(Salomon Series C Preferred) at $500 per share ($25 per depositary share).
The aggregate amount of Salomon Series C Preferred outstanding on the
redemption date was $112 million.
Series C
The Series C Convertible Preferred Stock (Series C Preferred) has a stated
value and a liquidation preference of $53.25 per share. The Series C
Preferred is convertible into one share of TRV common stock for each
$21.99 of stated value of Series C Preferred, subject to antidilution
adjustments in certain circumstances. Dividends on the Series C Preferred
are cumulative and accrue in the amount of $4.53 per annum per share. In
January 1998, all of the outstanding shares of Series C Preferred were
converted into 6,941,859 shares of common stock.
Series I
In October 1987, the Company issued 700,000 shares of Series I Cumulative
Convertible Preferred Stock (Series I Preferred) to affiliates of
Berkshire Hathaway Inc. at $1,000 per share. Annual cumulative dividends
on the Series I Preferred of $90 per share are payable quarterly. Each
share of Series I Preferred has a redemption value of $1,000 and is
convertible into 44.60526 shares of TRV common stock (subject to
antidilution adjustments in certain circumstances). Series I Preferred
shareholders are entitled to vote on all matters on which the Company's
common stockholders vote, and are entitled to one vote per common share
into which it is convertible. Commencing October 31, 1995, 140,000 Series
I Preferred shares must be redeemed annually (if not previously converted)
at $1,000 per share plus any accrued and unpaid dividends. The first
tranche of 140,000 Series I Preferred shares was redeemed in October 1995,
while the second and third tranches of 140,000 shares were converted into
6.2 million shares of common stock each in October 1996 and October 1997,
respectively.
Mandatorily redeemable preferred securities of subsidiary trusts
During 1996 the Company formed 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. Distributions on the
mandatorily redeemable preferred securities of subsidiary trusts below
have been classified as interest expense in the Consolidated Statement of
Income. The following table summarizes the financial structure of the
Company's subsidiary trusts at December 31, 1997 and 1996:
72
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
Travelers Travelers Travelers Travelers P&C Travelers P&C
Capital I Capital II Capital III Capital I Capital II
--------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Trust Preferred Securities:
Issuance date October 1996 December 1996 December 1996 April 1996 May 1996
Shares issued 16,000,000 400,000 200,000 32,000,000 4,000,000
Liquidation preference per share $ 25 $1,000 $1,000 $ 25 $ 25
Liquidation value (in millions) $ 400 $ 400 $ 200 $ 800 $ 100
Coupon rate 8% 7 3/4% 7 5/8% 8.08% 8%
Distributions payable Quarterly Semi-annually Semi-annually Quarterly Quarterly
Distributions guaranteed by TRV TRV TRV TAP TAP
Common shares issued to parent 494,880 12,372 6,186 989,720 123,720
Junior Subordinated Debentures:
Amount owned (in millions) $412 $412 $206 $825 $103
Coupon rate 8% 7 3/4% 7 5/8% 8.08% 8%
Interest payable Quarterly Semi-annually Semi-annually Quarterly Quarterly
Maturity date September 30, 2036 December 1, 2036 December 1, 2036 April 30, 2036 May 15, 2036
Redeemable by issuer on or after October 7, 2001 December 1, 2006 Not redeemable April 30, 2001 May 15, 2001
</TABLE>
SI Financing
Trust I
-------
Trust Preferred Securities:
Issuance date July 1996
Shares issued 13,800,000
Liquidation preference per share $ 25
Liquidation value (in millions) $345
Coupon rate 9 1/4%
Distributions payable Quarterly
Distributions guaranteed by Salomon Smith
Barney
Common shares issued to parent 426,800
Junior Subordinated Debentures:
Amount owned (in millions) $356
Coupon rate 9 1/4%
Interest payable Quarterly
Maturity date June 30, 2026
Redeemable by issuer on or after June 30, 2001
SI Financing Trust I, a wholly owned subsidiary of Salomon Smith Barney,
issued TRUPS(R) units to the public. Each TRUPS(R) unit includes a
preferred security of SI Financing Trust I, as shown in the table above,
and a purchase contract that requires the holder to purchase, in 2021 (or
earlier if Salomon Smith Barney elects to accelerate the contract), one
depositary share representing a one-twentieth interest in a share of TRV
9.50% Cumulative Preferred Stock, Series L. Salomon Smith Barney is
obligated under the terms of each purchase contract to pay contract fees
of 0.25% per annum.
Stockholders' equity
Common stock
The Company has outstanding warrants to purchase shares of its common
stock at an exercise price of $13.00 per common share, exercisable until
July 31, 1998. These warrants, which enable the holder to purchase three
shares of common stock each, are publicly traded and at December 31, 1997
and 1996 outstanding warrants would enable holders to purchase 10,131,162
and 11,244,777 shares, respectively, of common stock of the Company.
At December 31, 1997, 30,231,061 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, 1997 and 1996 was $10.505 billion and $9.046 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, 1997, 1996 and 1995 was $1.794 billion, $843 million (which
includes $285 million for Aetna P&C in the first quarter of 1996) and $745
million (excluding Aetna P&C), 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 $551 million of statutory
surplus is available in 1998 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.
73
<PAGE>
Notes to Consolidated Financial Statements (continued)
Dividend payments to TAP from its insurance subsidiaries are limited to
$805 million in 1998 without prior approval of the Connecticut Insurance
Department.
Certain of the Company's U.S. and non-U.S. broker-dealer subsidiaries are
subject to various securities and commodities regulations and capital
adequacy requirements promulgated by the regulatory and exchange
authorities of the countries in which they operate. The principal
regulated subsidiaries, their net capital requirement or equivalent and
excess over the minimum requirement as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
($Millions) ($Millions)
Excess over
Net Capital minimum
Subsidiary Jurisdiction or equivalent requirement
===================================================================================================================================
<S> <C> <C> <C>
Salomon Brothers Inc U.S. Securities and Exchange Commission
Uniform Net Capital Rule (Rule 15c3-1) $1,047 $974
Smith Barney Inc. U.S. Securities and Exchange Commission
Uniform Net Capital Rule (Rule 15c3-1) $1,086 $884
Salomon Brothers International Limited United Kingdom's Securities and Futures Authority $4,796 $699
</TABLE>
See Note 11 for additional restrictions on stockholders' equity.
16. Earnings Per Share
------------------
Earnings per share has been computed in accordance with the provisions of
FAS No. 128. The following is a reconciliation of the income and share
data used in the basic and diluted earnings per share computations for the
years ended December 31:
<TABLE>
<CAPTION>
(in millions, except per share amounts) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income from continuing operations $ 3,104 $ 3,282 $ 2,141
Discontinued operations -- (334) 150
Preferred dividends (139) (162) (153)
-------- -------- --------
Income available to common stockholders for basic EPS 2,965 2,786 2,138
Effect of dilutive securities 36 51 70
-------- -------- --------
Income available to common stockholders for diluted EPS $ 3,001 $ 2,837 $ 2,208
======== ======== ========
Weighted average common shares outstanding applicable
to basic EPS 1,102.6 1,097.6 1,099.4
-------- -------- --------
Effect of dilutive securities:
Convertible securities 25.2 31.9 51.7
Options 19.9 16.3 14.0
Warrants 7.0 5.0 1.6
Restricted stock 25.2 19.8 17.7
-------- -------- --------
Adjusted weighted average common shares outstanding
applicable to diluted EPS 1,179.9 1,170.6 1,184.4
======== ======== ========
</TABLE>
74
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Basic earnings per share:
Continuing operations $ 2.69 $ 2.84 $ 1.81
Discontinued operations -- (0.31) 0.13
-------- ------- --------
$ 2.69 $ 2.53 $ 1.94
======== ======= ========
Diluted earnings per share:
Continuing operations $ 2.54 $ 2.71 $ 1.74
Discontinued operations -- (0.29) 0.12
-------- ------- --------
$ 2.54 $ 2.42 $ 1.86
======== ======== ========
</TABLE>
During 1997, 1996 and 1995, weighted average options of 8.1 million
shares, 4.1 million shares and 8.1 million shares with weighted average
exercise prices of $45.47 per share, $25.70 per share and $16.80 per
share, respectively, were excluded from the computation of diluted EPS
because the options' exercise price was greater than the average market
price of TRV's common stock.
17. Incentive Plans
---------------
The Company has adopted a number of compensation plans to attract, retain
and motivate officers and other key employees, to compensate them for
their contributions to the growth and profits of the Company and to
encourage employee stock ownership.
Stock Option Plans
The Company has a number of stock option plans that 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 majority
of the Company's 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.
To further encourage employee stock ownership, during 1997 the Company
introduced the Wealthbuilder stock option program. Under this program all
employees meeting certain requirements have been granted stock options.
These options vest over a five-year period and do not contain a reload
feature.
Information with respect to stock options granted under the Company's
stock option plans is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
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 68,052,764 $ 17.37 72,812,462 $ 12.52 74,959,414 $ 10.34
Granted-original 14,463,322 $ 42.56 11,107,460 $ 22.74 13,823,736 $ 14.32
Granted-reload 33,958,262 $ 41.11 30,770,388 $ 24.17 22,535,379 $ 16.41
Forfeited (1,303,179) $ 20.36 (4,077,926) $ 12.15 (4,737,946) $ 11.97
Exercised (51,084,532) $ 23.90 (42,559,620) $ 15.89 (33,768,121) $ 11.07
----------- ----------- -----------
Outstanding, end of year 64,086,637 $ 30.37 68,052,764 $ 17.37 72,812,462 $ 12.52
=========== =========== ===========
Exercisable at year end 9,978,056 14,801,246 15,976,622
</TABLE>
75
<PAGE>
Notes to Consolidated Financial Statements (continued)
The following table summarizes information about stock options outstanding
under the Company's stock option plans at December 31, 1997:
<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>
$3.48 - $ 9.99 3,643,835 4.0 years $ 6.61 2,841,850 $ 6.26
$10 - $19.99 18,387,969 6.7 years $13.33 4,055,558 $12.72
$20 - $29.99 10,067,589 7.2 years $22.92 999,876 $22.10
$30 - $39.99 4,265,118 7.6 years $33.60 1,551,872 $34.51
$40 - $49.99 22,803,214 6.8 years $45.77 528,900 $42.54
$50 - $56.50 4,918,912 6.8 years $52.73 -- --
----------- ----------
$3.48 - $56.50 64,086,637 6.7 years $30.37 9,978,056 $16.79
=========== ==========
</TABLE>
At December 31, 1997, 118,243,916 shares were available for grant under
the Company's option plans. However, if the number of shares granted but
unexercised under the Company's option plans is greater than ten percent
of the Company's common stock outstanding at the close of the most recent
fiscal quarter, the Company will not be permitted to grant any additional
options until the number of outstanding but unexercised options is less
than ten percent of the common stock outstanding. Based on the number of
shares of common stock outstanding and the number of options granted but
unexercised, the maximum number of additional options that could be
granted was 50,420,099 at December 31, 1997.
Pro Forma Impact of FAS No. 123
The Company applies Opinion 25 and related interpretations in accounting
for its stock-based compensation plans. Since stock options 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>
(in millions, except per share amounts) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C> <C>
Net income As reported $ 3,104 $ 2,948 $ 2,291
Pro forma $ 2,985 $ 2,897 $ 2,273
Basic earnings per share As reported $ 2.69 $ 2.53 $ 1.94
Pro forma $ 2.58 $ 2.48 $ 1.92
Diluted earnings per share As reported $ 2.54 $ 2.42 $ 1.86
Pro forma $ 2.44 $ 2.38 $ 1.84
</TABLE>
The pro forma adjustments relate to options granted during 1997, 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.
76
<PAGE>
Notes to Consolidated Financial Statements (continued)
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 tendered for
such purposes. New reload options are only granted if TRV's stock price
has increased at least twenty percent over the exercise price of the
option being reloaded, and vest at the end of a six-month period. 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 reload options.
In addition, since reload options are treated as separate grants, the
existence of the reload feature results in a greater number of options
being valued.
Shares received through option exercises under the 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 1997, 1996 and
1995 was $6.44, $3.00 and $2.20 per share, respectively. The weighted
average expected life of reload options was approximately 1 year and the
weighted average expected life of original grants was approximately 3
years for 1997, 1996 and 1995. Valuation and related assumption
information are presented below:
<TABLE>
<CAPTION>
Weighted averages for options granted during
--------------------------------------------
1997 1996 1995
----------- --------- ----------
<S> <C> <C> <C>
Valuation assumptions:
Expected volatility 32.2% 28.5% 27.4%
Risk-free interest rate 5.75% 5.58% 6.06%
Expected annual dividends per share $ 0.47 $ 0.37 $ 0.32
Expected annual forfeitures 5% 5% 5%
</TABLE>
The Restricted Stock Plans
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, 1997, 63,812,576 shares were available for future grant
under the Company's restricted stock plans. Information with respect to
restricted stock awards is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Shares awarded 12,259,829 17,141,073 20,950,065
Weighted average fair market value per share $ 32.05 $ 20.13 $ 12.00
After-tax compensation cost charged to earnings
(in millions) $ 178 $ 127 $ 104
</TABLE>
77
<PAGE>
Notes to Consolidated Financial Statements (continued)
The Equity Partnership Plan (EPP)
Under EPP, qualifying Salomon Smith Barney employees receive a portion of
their compensation in the form of common stock. Original terms of EPP
deferred payment of the stock for five years and required the Company to
contribute an additional 17.65% of the deferred compensation amount to the
participant's account. The EPP award is forfeited if the participant's
employment is terminated for cause within the five year vesting period.
Beginning in 1996, EPP was amended to reduce the deferral period from five
years to three years, increase the additional contribution of the Company
from 17.65% to 25%, and introduce additional forfeiture provisions. Under
the amended plan, the award is forfeited if the participant leaves the
Company to join a competitor within three years after the award date. If a
participant leaves other than by virtue of death, disability, retirement
or as a result of downsizing during the three years following the award,
the entire additional contribution of 25% is forfeited. The 1996
amendments apply only to awards granted in 1996 and subsequent years.
Information with respect to EPP awards is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Shares awarded 5,416,476 6,097,798 4,508,066
Fair market value per share $ 35.26 $ 26.55 $ 21.24
After-tax compensation cost charged to earnings
(in millions) $ 120 $ 90 $ 63
</TABLE>
18. Retirement Benefits
-------------------
The Company's significant pension plan is 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.
The following is a summary of the components of pension expense for the
Company's principal defined benefit plan for the years ended December 31:
(millions) 1997 1996 1995
----- ----- -----
Service cost $ 78 $ 74 $ 81
Interest cost 200 190 195
Actual return on plan assets (389) (228) (388)
Net amortization and deferral 152 (1) 165
----- ----- -----
Net periodic pension cost $ 41 $ 35 $ 53
===== ===== =====
78
<PAGE>
Notes to Consolidated Financial Statements (continued)
The following table sets forth the funded status of the Company's
principal defined benefit plan at December 31:
<TABLE>
<CAPTION>
(millions) 1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(2,867) $(2,594)
Non-vested benefits (74) (70)
------- -------
Accumulated benefit obligation (2,941) (2,664)
Effect of future salary increases (53) (48)
------- -------
Projected benefit obligation (2,994) (2,712)
Plan assets at fair value 2,965 2,718
------- -------
Plan assets in excess of or (less than) projected benefit obligation (29) 6
Unrecognized transition asset -- (1)
Unrecognized prior service cost (11) (12)
Unrecognized net loss 112 71
------- -------
Prepaid pension cost $ 72 $ 64
======= =======
Actuarial assumptions:
Weighted average discount rate 7.00% 7.50%
Weighted average rate of compensation increase 4.50% 4.50%
Expected long-term rate of return on plan assets 9.00% 9.00%
</TABLE>
Plan assets are held in various separate accounts and the general account
of The Travelers Insurance Company, a subsidiary of TRV and certain
investment trusts. These accounts and trusts invest in stocks, U.S.
Government bonds, corporate bonds, mortgage loans and real estate.
Currently, substantially all U.S. employees of Salomon Smith Barney who
were formerly employees of Salomon Inc and its subsidiaries participate in
defined contribution plans. The costs of these plans are not material.
These employees are expected to join the Company's noncontributory defined
benefit pension plan beginning in 1999.
Certain non-U.S. employees of the Company are covered by noncontributory
defined benefit plans. These plans are funded in accordance with local
laws and the costs associated with these plans are not material.
The Company provides postretirement health care, life insurance and
survival income benefits to certain eligible retirees. These benefits
relate primarily to former employees of predecessor companies. 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 has provided for the cost of postretirement benefits over the
service periods of eligible participants. The present value of the
liability related to these benefits, included in "Accounts payable and
other liabilities," was $548 million and $556 million at December 31, 1997
and 1996, respectively. Expenses related to postretirement benefits were
$28 million, $22 million and $40 million for 1997, 1996 and 1995,
respectively.
19. Lease Commitments
-----------------
Rentals
Rental expense (principally for offices and computer equipment) was $425
million, $397 million and $405 million for the years ended December 31,
1997, 1996 and 1995, respectively.
79
<PAGE>
Notes to Consolidated Financial Statements (continued)
Future minimum annual rentals under noncancellable operating leases, net
of sublease income, are as follows:
(millions)
1998 $ 372
1999 338
2000 252
2001 216
2002 177
Thereafter 938
------
$2,293
======
The Company and certain of Salomon Smith Barney's subsidiaries together
have an option to purchase the buildings presently leased for Salomon
Smith Barney's executive offices and New York City operations at the
expiration of the lease term.
20. Trading Securities, Commodities, Derivatives and Related Risks
--------------------------------------------------------------
The Company uses derivative financial instruments in the normal course of
business for end user and, in the case of Salomon Smith Barney, trading
purposes. The Company enters into a variety of derivatives such as swaps,
swap options, cap and floor agreements, futures contracts, forward
currency contracts, forward purchase and sale agreements, option contracts
and warrants. These transactions generally require future settlement, and
are either executed on an exchange or traded as OTC instruments.
Derivatives have widely varying terms, and durations that range from a few
days to a number of years depending on the instrument.
Interest rate swaps are OTC instruments where two counterparties agree to
exchange periodic interest payment streams calculated on a predetermined
notional principal amount. The most common interest rate swaps generally
involve one party paying a fixed interest rate and the other party paying
a variable rate. Other types of swaps include basis swaps, cross-currency
swaps, equity swaps and commodity swaps. Basis swaps consist of both
parties paying variable interest streams based on different reference
rates. Cross-currency swaps involve the exchange of coupon payments in one
currency for coupon payments in another currency. An equity swap is an
agreement to exchange cash flows on a notional amount based on changes in
the values of a referenced index, such as the Standard & Poor's 500 Index.
Commodity swaps involve the exchange of a fixed price of a commodity for a
floating price, which is usually the prevailing spot price, throughout the
swap term. The most common commodity swaps are petroleum-based; other
types are based on metals or soft commodities.
Caps are derivatives which require the writer to pay the purchaser an
excess amount, if the reference rate exceeds a contractual rate at
specified times during the contract. Likewise, a floor is a contractual
commitment that requires the writer to pay an excess amount, if any, of a
contractual rate over a reference rate at specified times over the life of
the contract. Swap options are OTC contracts that entitle the holder to
either enter into an interest rate swap at a future date or to cancel an
existing swap at a future date.
Futures contracts are exchange-traded derivatives to either receive
(purchase) or deliver (sell) a standard amount or value of a commodity or
financial instrument at a specified future date and price (or, with
respect to futures contracts on indices, the net cash amount). Maintaining
a futures contract will typically require the Company to deposit with the
futures exchange (or other financial intermediary), as security for its
obligations, an amount of cash or other specified asset (initial margin)
that typically ranges from 1% to 10% of the face amount of the contract
(but may be higher in some circumstances). Additional cash or assets
(variation margin) may be required to be deposited daily as the
mark-to-market value of the futures contract fluctuates. Futures contracts
may be settled by physical delivery of the underlying asset or cash
settlement (for index futures) on the settlement date, or by entering into
an offsetting futures contract with the futures exchange prior to the
settlement date. Forward contracts are OTC derivatives to purchase or sell
a specified amount of financial
80
<PAGE>
Notes to Consolidated Financial Statements (continued)
instruments, foreign currency, or commodities at a future date at a
predetermined price. The notional amount for forward settling securities
transactions represents the amount of cash that will be paid or received
by the counterparties when the transaction settles. Upon settlement, the
security is reflected on the statement of financial condition as either
long or short inventory.
Option contracts are contractual agreements which give the purchaser the
right, but not the obligation, to purchase or sell a financial instrument,
commodity, or currency at a predetermined price. In return for this right,
the purchaser pays a premium to the seller (or writer) of the option.
Option contracts also exist for various indices and are similar to options
on a security or other instruments except that, rather than settling by
physical delivery of the underlying instrument, they are settled in cash.
Options on futures contracts give the purchaser the right, in return for
the premium paid, to assume a position in a futures contract. Warrants
have characteristics similar to those of options whereby the buyer has the
right, but not the obligation, to purchase a certain instrument at a
specific future date and price. The seller (or writer) of the
option/warrant is subject to the risk of an unfavorable change in the
underlying financial instrument, commodity, or currency. The purchaser is
subject to market risk to the extent of the premium paid and credit risk.
The Company is obligated to post margin for options on futures. Option
contracts may be either exchange-traded or OTC. Exchange-traded options
issued by certain regulated intermediaries, such as the Options Clearing
Corporation, are the obligations of the issuing intermediary. In contrast
to such options, which generally have standardized terms and performance
mechanics, all of the terms of an OTC option, including the method of
settlement, term, exercise price, premium, guarantees and security, are
determined by negotiation of the parties, and there is no intermediary
between the parties to assume the risks of performance. The Company issues
warrants that entitle holders to cash settlements on exercise based upon
movements in market prices of specific financial instruments and
commodities, foreign exchange rates and equity indices.
The Company sells various financial instruments that have not been
purchased (short sales). In order to sell them short, the Company borrows
these securities, or receives the securities as collateral in conjunction
with short-term financing agreements and, at a later date, must deliver
(i.e. replace) like or substantially the same financial instruments or
commodities to the parties from which they were originally borrowed. The
Company is exposed to market risk for short sales. If the market value of
an instrument sold short increases, the Company's obligation, reflected as
a liability, would increase and revenues from principal transactions would
be reduced.
The way in which the Company accounts for and presents derivatives in its
financial statements depends on both the type and purpose of the
derivative held or issued. As discussed in the Summary of Significant
Accounting Policies, the Company records all derivatives used for trading
purposes, including those used to hedge trading positions, at market or
fair value. Consequently, changes in the amounts recorded in the Company's
Consolidated Statements of Financial Condition resulting from movements in
market or fair value are included in "Principal transactions" in the
period in which they occur. The accounting and reporting treatment of
derivatives used for non-trading purposes vary, depending on the nature of
exposure being hedged (see Summary of Significant Accounting Policies).
Derivatives and short sales risk may expose the Company to both market
risk and credit risk in excess of the amount recorded on the consolidated
statements of financial condition. These off-balance sheet risks are
discussed in more detail below.
Market Risk. Market risk is the potential loss the Company may incur as a
result of changes in the market or fair value of a particular financial
instrument, commodity or derivative. All financial and commodities-related
instruments, including derivatives and short sales, are subject to market
risk. The Company's exposure to market risk is determined by a number of
factors, including the size, duration, composition and diversification of
positions held and the absolute and relative levels of interest rates and
foreign currency exchange rates, as well as market volatility and
illiquidity. For instruments such as options and warrants, the time period
during which the options or warrants may be exercised and the relationship
between the current market price of the
81
<PAGE>
Notes to Consolidated Financial Statements (continued)
underlying instrument and the option's or warrant's contractual strike or
exercise price also affect the level of market risk. The most significant
factor influencing the overall level of market risk to which the Company
is exposed is its use of hedging techniques to mitigate such risk. The
Company manages market risk by setting risk limits and monitoring the
effectiveness of its hedging policies and strategies.
Credit Risk. The Company regularly transacts business with, and owns
securities issued by, a broad range of corporations, governments,
international organizations, central banks and other financial
institutions. Phibro, a wholly owned subsidiary of Salomon Smith Barney,
regularly transacts business with independent and government-owned oil
producers, a wide variety of end users, trading companies and financial
institutions. Credit risk is measured by the loss the Company would record
if its counterparties failed to perform pursuant to terms of their
contractual obligations and the value of collateral held, if any, was not
adequate to cover such losses. The Company has established controls to
monitor the creditworthiness of counterparties, as well as the quality of
pledged collateral, and uses master netting agreements whenever possible
to mitigate the Company's exposure to counterparty credit risk. Master
netting agreements enable the Company to net certain assets and
liabilities by counterparty. The Company also nets across product lines
and against cash collateral, provided such provisions are established in
the master netting and cash collateral agreements. The Company may require
counterparties to submit additional collateral when deemed necessary.
The Company enters into collateralized financing agreements in which it
extends short-term credit, primarily to major financial institutions. The
Company generally controls access to the collateral pledged by the
counterparties, which consists largely of securities issued by the G-7
governments or their agencies that may be liquidated in the event of
counterparty default.
In addition, the Company seeks to protect itself from the risks associated
with customer activities by requiring customers to maintain margin
collateral in compliance with regulatory requirements and its own internal
guidelines, which are generally more stringent than regulatory margin
requirements. Margin levels are monitored daily and additional collateral
must be deposited as required. If customers cannot meet collateral
requirements, the Company will liquidate sufficient underlying financial
instruments to bring the account in compliance with the required margin
level.
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
Salomon Smith Barney trades both derivative and cash financial
instruments. The trading activities are conducted for both Salomon Smith
Barney's customers as well as for the Company's own account. The
determination of notional amounts does not consider any of the market risk
factors previously discussed. Notional amounts are indicative only of the
volume of activity and are not a measure of market risk. Market risk is
influenced by the nature of the items that comprise a particular category
of financial instrument, as well as the relationship among the various off
and on-balance sheet items. For these reasons, the interpretation of
notional amounts as a measure of market risk could be materially
misleading. In accordance with FAS No. 105, "Disclosure of Information
about Financial Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentrations of Credit Risk" (FAS No. 105) and FAS No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments" (FAS No. 119), the following table discloses the
notional amounts of derivative financial instruments held by Salomon Smith
Barney for trading purposes at December 31:
82
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------
Current Market or Current Market or
Notional Fair Value Notional Fair Value
------------------- -------------------
(billions) Amounts Assets Liabilities Amounts Assets Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $940.5 $ -- $ -- $530.9 $ -- $ --
Other exchange-issued products:
Equity contracts 10.6 0.2 0.4 13.1 0.1 0.2
Fixed income contracts 138.1 -- -- 61.2 -- --
Commodities contracts 3.5 -- -- 5.0 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 1,092.7 0.2 0.4 610.2 0.1 0.2
- ----------------------------------------------------------------------------------------------------------------------------
OTC swaps, swap options, caps and floors:
Swaps 1,328.3 842.3
Swap options written 38.6 10.8
Swap options purchased 48.8 24.1
Caps and floors 161.4 117.1
- ----------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors 1,577.1 5.8 6.7 994.3 4.2 6.6
- ----------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts 111.3 1.0 1.0 94.3 0.7 0.6
Options written 41.3 -- 0.6 37.1 -- 0.3
Options purchased 37.7 0.6 -- 38.7 0.5 --
- ----------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 190.3 1.6 1.6 170.1 1.2 0.9
- ----------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices 54.8 1.8 2.7 45.8 1.1 1.8
Options and forward contracts on
fixed-income securities 343.4 0.3 0.1 202.8 0.3 0.2
Commodities contracts 14.3 0.4 0.2 22.6 0.3 0.3
- ----------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $3,272.6 $10.1 $11.7 $2,045.8 $7.2 $10.0
============================================================================================================================
</TABLE>
(a) Margin on futures contracts is included in brokerage
receivables/payables on the Consolidated Statement of Financial
Condition.
The annual average balances of the Company's options and contractual
commitments, based on month-end balances for the year ended December 31,
are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Average Average Average Average
(billions) Assets Liabilities Assets Liabilities
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swaps, swap options, caps and floors $4.4 $6.2 $3.6 $5.5
Index and equity contracts and options 1.9 2.9 1.5 1.4
Foreign exchange contracts and options 1.5 1.4 1.0 1.0
Commodities contracts .3 .2 .4 .3
Forward contracts on fixed income .4 .3 .3 .4
- ----------------------------------------------------------------------------------------
Total contractual commitments $8.5 $11.0 $6.8 $8.6
========================================================================================
</TABLE>
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, are as follows:
83
<PAGE>
Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
1997 Notional Value Fair Value
- ---- ---------------------- ---------------------
(billions) Open Contracts Asset Liability
-------------- ----- ---------
<S> <C> <C> <C> <C>
Interest rate swaps:
Pay a fixed rate, receive a floating rate $ 0.7
Pay a floating rate, receive a fixed rate 16.1
Currency swap 1.4
----------------------------------------------
$18.2 $0.5 $0.2
==============================================
Purchase Sell
-------- ----
Foreign currency forwards $1.6 $2.6 $0.1 $ --
Financial futures 0.1 0.5 -- $ --
----------------------------------------------
$1.7 $3.1 $0.1 $ --
==============================================
1996 Notional Value Fair Value
- ---- ---------------------- ---------------------
(billions) Open Contracts Asset Liability
-------------- ----- ---------
Interest rate swaps:
Pay a fixed rate, receive a floating rate $0.9
Pay a floating rate, receive a fixed rate 14.6
Currency swap 1.3
----------------------------------------------
$16.8 $0.4 $0.2
==============================================
Purchase Sell
-------- ----
Foreign currency forwards $1.6 $0.5 $ -- $ --
Financial futures 0.6 0.1 $ -- $ --
----------------------------------------------
$2.2 $0.6 $ -- $ --
==============================================
</TABLE>
Certain of the Company's subsidiaries utilize swap contracts to
effectively manage interest rate and currency risk. Salomon Smith Barney
utilizes interest rate and cross currency swaps to effectively convert a
majority of its long-term debt and a portion of its short-term borrowings
from fixed to variable rate instruments (see Note 11). Salomon Smith
Barney also employs an interest rate swap contract to convert variable
interest rate risk to a fixed rate of interest. These swaps are recorded
"off-balance sheet," with accrued inflows and outflows reflected as
adjustments to interest expense. Certain of the Company's insurance
subsidiaries utilize swaps to manage differing interest rate and/or
currency risk profiles of its liabilities and related fixed income
investment portfolio. These swaps are recorded on the consolidated
statement of financial position at fair value with unrealized gains and
losses on the swap reported as adjustments to stockholders' equity.
Certain subsidiaries also utilize forward contracts to hedge exposure to
volatility of foreign currency exchange rates. Salomon Smith Barney uses
forward currency contracts to hedge a portion of the currency exchange
rate exposure relating to non-U.S. dollar denominated debt. The impact of
translating the forward currency contract and related debt to prevailing
exchange rates is recognized currently in income. Certain of the Company's
insurance subsidiaries use forward contracts to hedge foreign investments.
Changes in the fair value of these forwards are recorded currently in
income as an offset to the translation adjustment related to the
underlying investment. Both Salomon Smith Barney and certain insurance
subsidiaries utilize forward currency contracts to hedge certain
investments in foreign branches and foreign currency denominated
investments. These forward contracts are recorded on the Consolidated
Statement of Financial Position at fair value with unrealized gains and
losses on the forward contract reported as adjustments to stockholders'
equity.
84
<PAGE>
Notes to Consolidated Financial Statements (continued)
The Company's insurance subsidiaries also enter into financial futures
contracts to hedge expected cash flows related to certain customer
deposits and investment maturities, redemptions and sales against adverse
changes in market interest rates. These futures contracts, which are
settled in cash on a daily basis, are recorded as other liabilities on the
Consolidated Statement of Financial Position at fair value. Realized gains
or losses are recorded as an adjustment to the cost basis of the related
asset when acquired.
21. Fair Value of Financial Instruments
-----------------------------------
The following table summarizes the fair value and carrying amount of the
Company's financial instruments at December 31, 1997 and 1996.
Contractholder funds amounts exclude certain insurance contracts not
within the scope of FAS No. 107, "Disclosure About Fair Value of Financial
Instruments." 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 as
disclosed further in various Notes to the Consolidated Financial
Statements. Disclosed fair values for financial instruments do not reflect
any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument.
Potential taxes and other expenses that would be incurred in an actual
sale or settlement are not reflected in amounts disclosed.
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ---------------------------------
(millions) Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Assets:
Investments $61,834 $61,843 $56,509 $56,518
Securities borrowed or purchased
under agreements to resell 109,734 109,734 97,985 97,985
Trading securities and
commodities owned 139,732 139,732 126,573 126,573
Net consumer finance receivables 10,816 11,428 7,885 8,556
Separate accounts with guaranteed
returns 260 260 1,114 1,118
Liabilities:
Long-term debt 28,352 28,956 24,696 25,065
Securities loaned or sold under
agreements to repurchase 120,921 120,921 103,572 103,572
Trading securities and commodities
sold not yet purchased 96,166 96,166 92,141 92,141
Contractholder funds:
With defined maturities 2,302 2,299 1,671 1,665
Without defined maturities 9,697 9,503 9,058 8,841
Separate accounts
with guaranteed returns 209 206 1,017 899
</TABLE>
85
<PAGE>
Notes to Consolidated Financial Statements (continued)
22. Pledged Assets and Commitments
------------------------------
Pledged Assets
At December 31, the approximate market values of securities sold under
agreements to repurchase, excluding the impact of FIN 41, or pledged by
the Company were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(millions) 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
For securities sold under agreements to repurchase $158,209 $114,021
As collateral for securities borrowed of approximately equivalent value 59,139 39,734
As collateral on bank loans 1,066 3,195
To clearing organizations or segregated under securities laws and regulations 1,935 1,998
For securities loaned 14,269 4,993
As collateral for letters of credit 1,043 127
Other 431 65
- -------------------------------------------------------------------------------------------------------------
$236,092 $164,133
=============================================================================================================
</TABLE>
At December 31, 1997 and 1996, the Company had $2.7 billion and $2.4
billion, respectively, of outstanding letters of credit from banks to
satisfy various collateral and margin requirements.
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 $5.6 billion and $8.3 billion at December 31, 1997 and 1996,
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, 1997 and 1996.
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 $5.3 billion and $7.6 billion at December
31, 1997 and 1996, respectively. The bonds are generally rated A or above,
and TAP's participation has been reinsured.
At December 31, 1997, the scheduled maturities for these guarantees, net
of TAP's participation in the municipal bond guarantee pools, are $6
million, $6 million, $8 million, $4 million and $310 million for 1998,
1999, 2000, 2001 and 2002 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, 1997 and 1996 total credit
lines available to credit cardholders were $8.766 billion and $6.622
billion, respectively.
Other Commitments
Salomon Smith Barney and a principal broker-dealer subsidiary have each
provided a portion of a residual value guarantee in the amount of $586
million in connection with the lease of the buildings occupied by Salomon
Smith Barney's executive offices and New York operations.
86
<PAGE>
Notes to Consolidated Financial Statements (continued)
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, 1997 or 1996.
23. Contingencies
-------------
In 1997, the Company reached an agreement to settle the arbitration with
underwriters at Lloyd's of London (Lloyd's) and certain London companies
in New York State to enforce reinsurance contracts with respect to
recoveries for certain asbestos claims. The dispute involved 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 this agreement had no impact on earnings.
With respect to environmental and asbestos property and casualty insurance
claims, see Note 12.
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 property and casualty insurance 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.
87
<PAGE>
Notes to Consolidated Financial Statements (continued)
24. Selected Quarterly Financial Data (unaudited)
---------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------- ----------------------------------------------
(In millions, except
per share amounts) First Second Third Fourth Total First Second Third Fourth Total
----------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $8,700 $9,184 $9,961 $9,764 $37,609 $7,509 $8,248 $8,096 $8,561 $32,414
Total expenses 7,353 7,735 8,279 9,230 32,597 6,194 7,534 6,985 7,138 27,851
Gain (loss) on sales of stock of
subsidiaries and affiliates -- -- -- -- -- -- 397 48 -- 445
Income before income taxes and
minority interest 1,347 1,449 1,682 534 5,012 1,315 1,111 1,159 1,423 5,008
Provision for income taxes 483 517 598 98 1,696 485 281 414 499 1,679
Minority interest, net of
income taxes 49 49 55 59 212 -- (44) 44 47 47
----------------------------------------------- ----------------------------------------------
Income from continuing operations 815 883 1,029 377 3,104 830 874 701 877 3,282
Discontinued operations, net
of income taxes -- -- -- -- -- (34) (7) 3 (296) (334)
----------------------------------------------- ----------------------------------------------
Net income $815 $883 $1,029 $377 $3,104 $796 $867 $704 $581 $2,948
=============================================== ==============================================
Basic earnings per share:
Continuing operations $0.71 $0.77 $0.90 $0.31 $2.69 $0.72 $0.76 $0.60 $0.76 $2.84
Discontinued operations -- -- -- -- -- (0.03) -- -- (0.26) (0.31)
----------------------------------------------- ----------------------------------------------
Net income $0.71 $0.77 $0.90 $0.31 $2.69 $0.69 $0.76 $0.60 $0.50 $2.53
=============================================== ==============================================
Diluted earnings per share:
Continuing operations $0.67 $0.73 $0.85 $0.30 $2.54 $0.68 $0.72 $0.57 $0.72 $2.71
Discontinued operations -- -- -- -- -- (0.03) -- -- (0.25) (0.29)
----------------------------------------------- ----------------------------------------------
Net income $0.67 $0.73 $0.85 $0.30 $2.54 $0.65 $0.72 $0.57 $0.47 $2.42
=============================================== ==============================================
Common stock price per share:
High $38.922 $44.078 $49.078 $57.375 $57.375 $23.500 $22.875 $24.937 $31.667 $31.667
Low $29.172 $30.828 $42.000 $43.125 $29.172 $19.000 $18.833 $19.375 $24.563 $18.833
Close $32.000 $42.047 $45.547 $53.875 $53.875 $22.000 $22.812 $24.562 $30.250 $30.250
Dividends per share of
common stock $.100 $.100 $.100 $.100 $.400 $0.075 $0.075 $0.075 $0.075 $0.300
</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 split as
discussed in Note 1.
The selected quarterly financial data gives retroactive effect to the
Merger with Salomon (Note 2) in a transaction accounted for as a pooling
of interests. The pooling of interests method of accounting requires the
restatement of all periods presented as if TRV and Salomon had always been
combined. As a result of the Merger, in the fourth quarter of 1997,
Salomon Smith Barney recorded an after-tax restructuring charge of $496
million ($838 million before tax) primarily for severance and costs
related to excess or unused office space, facilities and other assets.
88
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
Independent Auditors' Report
The Board of Directors and Stockholders
Travelers Group Inc.
We have audited the consolidated statement of financial position of Travelers
Group Inc. and subsidiaries as of December 31, 1997 and 1996, 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, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the separate
consolidated statement of financial condition of Salomon Inc and subsidiaries as
of December 31, 1996 or the related consolidated statements of income, changes
in stockholders' equity and cash flows for each of the years ended December 31,
1996 and 1995, which consolidated statements reflect total assets of $194,881
million as of December 31, 1996 and total revenues of $9,046 million and $8,953
million for the years ended December 31, 1996 and 1995, respectively. Those
consolidated financial statements, which are included in the restated and
combined December 31, 1996 and 1995 consolidated financial statements of
Travelers Group Inc. that resulted from the November 28, 1997 pooling of
interests transaction described in Note 1 to the consolidated financial
statements, were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Salomon
Inc and subsidiaries for such periods, is based solely on the report of such
other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
New York, New York
January 26, 1998
89
Exhibit 21.01
SUBSIDIARIES OF TRAVELERS GROUP INC.
as of March 4, 1998
The following list omits certain subsidiaries which, considered in the aggregate
as a single subsidiary, would not constitute a significant subsidiary. The
jurisdiction of incorporation of each subsidiary is also indicated.
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
.... Associated Madison Companies, Inc. Delaware
.... .... Mid-America Insurance Services, Inc. Georgia
(also D/B/A M-A Insurance Services, Inc., Mid-AM of Texas, Inc.,
Mid-America Insurance Services of South Dakota, Inc., Mid-America
of Illinois, Inc., Mid-America of Mississippi and Mid-America of New York)
.... .... PFS Services, Inc. Georgia
.... .... .... The Travelers Insurance Group Inc. Connecticut
.... .... .... .... Constitution Plaza, Inc. Connecticut
.... .... .... .... The Prospect Company Delaware
.... .... .... .... .... 89th & York Avenue Corporation New York
.... .... .... .... .... Panther Valley, Inc. New Jersey
.... .... .... .... The Travelers Insurance Company Connecticut
.... .... .... .... .... The Plaza Corporation Connecticut
.... .... .... .... .... .... The Copeland Companies (Holding Company) New Jersey
.... .... .... .... .... .... .... American Odyssey Funds Management, Inc. New Jersey
.... .... .... .... .... .... .... .... American Odyssey Funds, Inc. Maryland
.... .... .... .... .... .... .... Copeland Associates, Inc. Delaware
.... .... .... .... .... .... .... .... Copeland Associates Agency of Ohio, Inc. Ohio
.... .... .... .... .... .... .... .... Copeland Associates of Alabama, Inc. Alabama
.... .... .... .... .... .... .... .... Copeland Associates of Montana, Inc. Montana
.... .... .... .... .... .... .... .... Copeland Associates of Nevada, Inc. Nevada
.... .... .... .... .... .... .... .... Copeland Equities, Inc. New Jersey
.... .... .... .... .... .... .... .... Donald F. Smith & Associates New Jersey
.... .... .... .... .... .... .... .... Donald F. Smith Insurance Benefit Services, Inc. Massachusetts
.... .... .... .... .... .... .... .... H.C. Copeland Associates, Inc. of Massachusetts Massachusetts
.... .... .... .... .... .... .... .... Smith Annuity Services, Inc. New Jersey
.... .... .... .... .... .... .... Copeland Financial Services, Inc. New Jersey
.... .... .... .... .... .... .... Copeland Mortgage Services, Inc. New Jersey
.... .... .... .... .... .... .... H.C. Copeland and Associates, Inc. of Texas Texas
.... .... .... .... .... .... Three Parkway Inc. - I Pennsylvania
.... .... .... .... .... .... Three Parkway Inc. - II Pennsylvania
.... .... .... .... .... .... Three Parkway Inc. - III Pennsylvania
.... .... .... .... .... .... Tower Square Securities, Inc. Connecticut
.... .... .... .... .... .... .... Tower Square Securities Insurance Agency of Alabama, Inc. Alabama
.... .... .... .... .... .... .... Tower Square Securities Insurance Agency of Massachusetts, Inc. Massachusetts
.... .... .... .... .... .... .... Tower Square Securities Insurance Agency of New Mexico, Inc. New Mexico
.... .... .... .... .... .... .... Tower Square Securities Insurance Agency of Ohio, Inc. Ohio
.... .... .... .... .... .... .... Tower Square Securities Insurance Agency of Texas, Inc. Texas
.... .... .... .... .... .... Travelers Asset Management International Corporation New York
.... .... .... .... .... .... Travelers Distribution Company Delaware
.... .... .... .... .... .... Travelers Investment Adviser, Inc. Delaware
.... .... .... .... .... .... Travelers/Net Plus Insurance Agency, Inc. Massachusetts
.... .... .... .... .... .... Travelers/Net Plus, Inc. Connecticut
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
.... .... .... .... .... .... .... Travelers/Net Plus Agency of Ohio, Inc. Ohio
.... .... .... .... .... The Travelers Life and Annuity Company Connecticut
.... .... .... .... .... Travelers Group Investment Management, LLC* Delaware
.... .... .... .... .... Travelers Insurance Holdings Inc. Georgia
.... .... .... .... .... Tribeca Investments, L.L.C.* Delaware
.... .... .... .... .... .... American Financial Life Insurance Company Texas
.... .... .... .... .... .... Primerica Life Insurance Company Massachusetts
.... .... .... .... .... .... .... National Benefit Life Insurance Company New York
.... .... .... .... .... .... .... Primerica Financial Services (Canada) Ltd. Canada
.... .... .... .... .... .... .... .... PFSL Investments Canada Ltd. Canada
.... .... .... .... .... .... .... .... Primerica Client Services, Inc. (Canada) Canada
.... .... .... .... .... .... .... .... Primerica Financial Services Ltd. Canada
.... .... .... .... .... .... .... .... Primerica Life Insurance Company of Canada Canada
.... .... .... .... Travelers Mortgage Securities Corporation Delaware
.... .... .... .... Travelers Property Casualty Corp.** Delaware
.... .... .... .... .... The Standard Fire Insurance Company Connecticut
.... .... .... .... .... .... AE Properties, Inc. California
.... .... .... .... .... .... .... Industry Land Development Company Connecticut
.... .... .... .... .... .... Community Rehabilitation Investment Corporation Connecticut
.... .... .... .... .... .... The Automobile Insurance Company of Hartford, Connecticut Connecticut
.... .... .... .... .... .... TravCal Secure Insurance Company California
.... .... .... .... .... .... .... TravCal Indemnity Company California
.... .... .... .... .... .... Travelers Personal Security Insurance Company Connecticut
.... .... .... .... .... .... Travelers Property Casualty Insurance Company Connecticut
.... .... .... .... .... .... Travelers Property Casualty Insurance Company of Illinois Illinois
.... .... .... .... .... The Travelers Indemnity Company Connecticut
.... .... .... .... .... .... Commercial Insurance Resources, Inc. Delaware
.... .... .... .... .... .... .... Gulf Insurance Company Missouri
.... .... .... .... .... .... .... .... Gulf National Accounts U.K. Limited United Kingdom
.... .... .... .... .... .... .... .... Atlantic Insurance Company Texas
.... .... .... .... .... .... .... .... Gulf Group Lloyds Texas
.... .... .... .... .... .... .... .... Gulf Risk Services, Inc. Delaware
.... .... .... .... .... .... .... .... Gulf Underwriters Insurance Company Missouri
.... .... .... .... .... .... .... .... Select Insurance Company Texas
.... .... .... .... .... .... Countersignature Agency, Inc. Florida
.... .... .... .... .... .... First Floridian Auto and Home Insurance Company Florida
.... .... .... .... .... .... First Trenton Indemnity Company New Jersey
.... .... .... .... .... .... .... Red Oak Insurance Company New Jersey
.... .... .... .... .... .... Laramia Insurance Agency, Inc. North Carolina
.... .... .... .... .... .... Secure Affinity Agency, Inc. Delaware
.... .... .... .... .... .... The Charter Oak Fire Insurance Company Connecticut
.... .... .... .... .... .... The Parker Realty and Insurance Agency, Inc.*** Vermont
.... .... .... .... .... .... The Phoenix Insurance Company Connecticut
.... .... .... .... .... .... .... Constitution State Service Company Montana
.... .... .... .... .... .... .... Constitution State Services LLC* Delaware
.... .... .... .... .... .... .... The Travelers Indemnity Company of America Connecticut
.... .... .... .... .... .... .... The Travelers Indemnity Company of Connecticut Connecticut
.... .... .... .... .... .... .... The Travelers Indemnity Company of Illinois Illinois
.... .... .... .... .... .... The Premier Insurance Company of Massachusetts Massachusetts
.... .... .... .... .... .... The Travelers Home and Marine Insurance Company Indiana
.... .... .... .... .... .... The Travelers Indemnity Company of Missouri Missouri
.... .... .... .... .... .... The Travelers Lloyds Insurance Company Texas
.... .... .... .... .... .... The Travelers Marine Corporation California
.... .... .... .... .... .... TI Home Mortgage Brokerage, Inc. Delaware
.... .... .... .... .... .... TravCo Insurance Company Indiana
.... .... .... .... .... .... Travelers Bond Investments, Inc. Connecticut
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
.... .... .... .... .... .... Travelers General Agency of Hawaii, Inc. Hawaii
.... .... .... .... .... .... Travelers Medical Management Services Inc. Delaware
.... .... .... .... .... Travelers Casualty and Surety Company Connecticut
.... .... .... .... .... .... Travelers Casualty & Surety Company of Canada Canada
.... .... .... .... .... .... Charter Oak Services Corporation New York
.... .... .... .... .... .... Farmington Casualty Company Connecticut
.... .... .... .... .... .... Farmington Management, Inc. Connecticut
.... .... .... .... .... .... Travelers Casualty and Surety Company of America Connecticut
.... .... .... .... .... .... Travelers Casualty and Surety Company of Illinois Illinois
.... .... .... .... .... .... Travelers Casualty Company of Connecticut Connecticut
.... .... .... .... .... .... Travelers Commercial Insurance Company Connecticut
.... .... .... .... .... .... Travelers Excess and Surplus Lines Company Connecticut
.... .... .... .... .... .... Travelers Lloyds of Texas Insurance Company Texas
.... .... Primerica Client Services, Inc. (USA) Delaware
.... .... Primerica Convention Services, Inc. Georgia
.... .... Primerica Finance Corporation Delaware
.... .... .... PFS Distributors, Inc. Georgia
.... .... .... PFS Investments Inc. Georgia
.... .... .... PFS T.A., Inc. Delaware
.... .... Primerica Financial Services Home Mortgages, Inc. Georgia
.... .... Primerica Financial Services, Inc. Nevada
.... .... .... Primerica Financial Services Agency of New York, Inc. New York
.... .... .... Primerica Financial Services Agency of Ohio, Inc. Ohio
.... .... .... Primerica Financial Services Insurance Marketing of Connecticut, Inc. Connecticut
.... .... .... Primerica Financial Services Insurance Marketing of Idaho, Inc. Idaho
.... .... .... Primerica Financial Services Insurance Marketing of Maine, Inc. Maine
(also D/B/A Primerica Financial Services Agency)
.... .... .... Primerica Financial Services Insurance Marketing of Nevada, Inc. Nevada
.... .... .... Primerica Financial Services Insurance Marketing of Pennsylvania, Inc. Pennsylvania
(also D/B/A Primerica Financial Services)
.... .... .... Primerica Financial Services Insurance Marketing of the Virgin Islands, Inc. U.S. Virgin Islands
.... .... .... Primerica Financial Services Insurance Marketing of Wyoming, Inc. Wyoming
.... .... .... Primerica Financial Services Insurance Marketing, Inc. Delaware
.... .... .... Primerica Financial Services of Alabama, Inc. Alabama
.... .... .... Primerica Financial Services of Arizona, Inc. Arizona
.... .... .... Primerica Financial Services of Kentucky Inc. Kentucky
.... .... .... Primerica Financial Services of New Mexico, Inc. New Mexico
.... .... .... Primerica Insurance Agency of Massachusetts, Inc. Massachusetts
.... .... .... Primerica Insurance Marketing Services of Puerto Rico, Inc. Puerto Rico
.... .... .... Primerica Insurance Services of Louisiana, Inc. Louisiana
.... .... .... Primerica Insurance Services of Maryland, Inc. Maryland
(also D/B/A Primerica Financial Services Insurance Marketing, Inc.)
.... .... .... Primerica Insurance Services of Texas, Inc. Texas
.... .... Primerica Services, Inc. Georgia
.... .... SL&H Reinsurance, Ltd. Nevis
.... .... .... Southwest Service Agreements, Inc. North Carolina
.... .... Southwest Warranty Corporation Florida
.... CCC Holdings, Inc. Delaware
.... .... CCC Fairways, Inc. Delaware
.... .... Commercial Credit Company Delaware
.... .... .... American Health and Life Insurance Company Maryland
.... .... .... Brookstone Insurance Company Vermont
(also D/B/A Alexander Insurance Managers)
.... .... .... CC Credit Card Corporation Delaware
.... .... .... CC Finance Company, Inc. New York
.... .... .... CC Finance System Incorporated Delaware
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
.... .... .... .... CC Consumer Discount Company Pennsylvania
(also D/B/A Security Pacific Financial Services of Pennsylvania)
.... .... .... .... CC Finance Credit Corp. Delaware
.... .... .... .... CC Financial Management Services, Inc. Delaware
.... .... .... .... CC Financial Services Inc. Delaware
(also D/B/A Security Pacific Distribution Services and Security
Pacific Manufacturer Funding)
.... .... .... .... .... CC Advertising Agency, Inc. Kansas
.... .... .... .... .... CC Financial Services of Minnesota Inc. Minnesota
.... .... .... .... .... CC Financial Services of Nevada Inc. Nevada
.... .... .... .... .... CC of West Virginia Inc. West Virginia
.... .... .... .... .... The Midwestern Agency Corporation, Inc. Iowa
.... .... .... .... CC Financial Services of Des Moines Inc. Iowa
.... .... .... .... CC Mortgage Corporation Virginia
.... .... .... .... Dealers Credit, Inc. Delaware
.... .... .... CC Financial Services, Inc. Hawaii
.... .... .... Chesapeake Appraisal and Settlement Services Inc. Maryland
.... .... .... .... Chesapeake Appraisal and Settlement Services Agency of Ohio Inc. Ohio
.... .... .... .... Chesapeake West Escrow Services Inc. California
.... .... .... City Loan Financial Services, Inc. Ohio
.... .... .... Commercial Credit Consumer Services, Inc. Minnesota
.... .... .... Commercial Credit Corporation (Hawaii) Hawaii
.... .... .... Commercial Credit Corporation Alabama
.... .... .... Commercial Credit Corporation California
.... .... .... Commercial Credit Corporation Iowa
(also D/B/A Commercial Credit Loans, Inc. and Commercial Credit
Corporation (IA))
.... .... .... .... Commercial Credit of Alabama, Inc. Delaware
.... .... .... .... Commercial Credit of Mississippi, Inc. Delaware
.... .... .... Commercial Credit Corporation Kentucky
.... .... .... .... Certified Insurance Agency, Inc. Kentucky
.... .... .... .... Commercial Credit Investment, Inc. Kentucky
.... .... .... .... National Life Insurance Agency of Kentucky, Inc. Kentucky
.... .... .... .... Union Casualty Insurance Agency, Inc. Kentucky
.... .... .... Commercial Credit Corporation Maryland
(also D/B/A Commercial Credit Corporation (MD))
.... .... .... .... Action Data Services, Inc. Missouri
.... .... .... .... Commercial Credit Plan, Incorporated Oklahoma
(also D/B/A Commercial Credit Consumer Services, Inc.)
.... .... .... Commercial Credit Corporation New York
.... .... .... Commercial Credit Corporation South Carolina
.... .... .... Commercial Credit Corporation West Virginia
.... .... .... Commercial Credit Corporation NC North Carolina
.... .... .... Commercial Credit Insurance Services, Inc. Maryland
(also D/B/A Commercial Credit Insurance Agency and Commercial
Credit Insurance Agency of Oklahoma)
.... .... .... .... Commercial Credit Insurance Agency (P&C) of Mississippi, Inc. Mississippi
.... .... .... .... Commercial Credit Insurance Agency of Alabama, Inc. Alabama
.... .... .... .... Commercial Credit Insurance Agency of Hawaii, Inc. Hawaii
.... .... .... .... Commercial Credit Insurance Agency of Kentucky, Inc. Kentucky
.... .... .... .... Commercial Credit Insurance Agency of Massachusetts, Inc. Massachusetts
.... .... .... .... Commercial Credit Insurance Agency of Nevada, Inc. Nevada
.... .... .... .... Commercial Credit Insurance Agency of New Mexico, Inc. New Mexico
.... .... .... .... Commercial Credit Insurance Agency of Ohio, Inc. Ohio
.... .... .... Commercial Credit International, Inc. Delaware
.... .... .... .... Commercial Credit International Banking Corporation Oregon
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
.... .... .... .... .... Commercial Credit Corporation CCC Limited Canada
.... .... .... .... .... Commercial Credit Services do Brazil Ltda. Brazil
.... .... .... Commercial Credit Loan, Inc. New York
.... .... .... Commercial Credit Loans, Inc. Delaware
.... .... .... Commercial Credit Loans, Inc. Ohio
.... .... .... Commercial Credit Loans, Inc. Virginia
.... .... .... Commercial Credit Management Corporation Maryland
.... .... .... Commercial Credit Plan Incorporated Tennessee
(also D/B/A Commercial Credit Plan Incorporated (TN))
.... .... .... Commercial Credit Plan Incorporated Utah
.... .... .... Commercial Credit Plan Incorporated of Georgetown Delaware
.... .... .... Commercial Credit Plan Industrial Loan Company Virginia
.... .... .... Commercial Credit Plan, Incorporated (CO) Colorado
.... .... .... Commercial Credit Plan, Incorporated (DE) Delaware
.... .... .... Commercial Credit Plan, Incorporated (GA) Georgia
.... .... .... Commercial Credit Plan, Incorporated (MO) Missouri
.... .... .... Park Tower Holdings, Inc. Delaware
.... .... .... .... CC Retail Services, Inc. Delaware
.... .... .... .... .... Park Tower Brokerage Associates Delaware
.... .... .... .... .... Troy Textiles, Inc. Delaware
.... .... .... .... Commercial Credit Development Corporation Delaware
.... .... .... .... Travelers Home Mortgage Services of Alabama, Inc. Delaware
.... .... .... Resource Deployment, Inc. Texas
.... .... .... SBHU Mortgage Pass-Through Corporation Delaware
.... .... .... The Travelers Bank USA Delaware
.... .... .... Travelers Bank & Trust, fsb Delaware
.... .... .... Travelers Home Equity, Inc. North Carolina
.... .... .... .... CC Consumer Services of Alabama, Inc. Alabama
.... .... .... .... CC Home Lenders Financial, Inc. Georgia
.... .... .... .... CC Home Lenders, Inc. Ohio
.... .... .... .... Commercial Credit Corporation (TX) Texas
.... .... .... .... Commercial Credit Financial of Kentucky, Inc. Kentucky
.... .... .... .... Commercial Credit Financial of West Virginia, Inc. West Virginia
.... .... .... .... Commercial Credit Plan Consumer Discount Company Pennsylvania
(also D/B/A Commercial Credit Corporation)
.... .... .... .... Commercial Credit Services of Kentucky, Inc. Kentucky
.... .... .... .... Travelers Home Mortgage Services, Inc. North Carolina
.... .... .... Travelers Home Mortgage Services of Pennsylvania, Inc. Pennsylvania
.... .... .... Triton Insurance Company Missouri
(also D/B/A Voyager Guaranty Insurance Company)
.... .... .... Verochris Corporation Delaware
(also D/B/A Air Operations Associates)
.... .... .... .... AMC Aircraft Corp. Delaware
.... .... .... World Service Life Insurance Company Colorado
.... Greenwich Street Capital Partners, Inc. Delaware
.... Greenwich Street Investments, Inc. Delaware
.... .... Greenwich Street Capital Partners Offshore Holdings, Inc. Delaware
.... Mirasure Insurance Company, Ltd. Bermuda
.... MRC Holdings, Inc. Delaware
.... Salomon Smith Barney Holdings Inc. Delaware
.... .... Basis Clearing, Inc. Delaware
.... .... Mutual Management Corp. Delaware
.... .... .... Smith Barney Asset Management Co., Ltd. Japan
.... .... .... Smith Barney Management Company (Ireland) Limited Ireland
.... .... .... Smith Barney Strategy Advisers Inc. Delaware
.... .... Nextco Inc. Delaware
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
.... .... Phibro Energy Production, Inc. Delaware
.... .... Phibro Inc. Delaware
.... .... .... Phibro Commodities England
.... .... .... Phibro Energy Clearing, Inc. Delaware
.... .... .... Phibro Energy Hong Kong Limited Hong Kong
.... .... .... Phibro Energy Oil, Inc. Delaware
.... .... .... Phibro GmbH Switzerland
.... .... .... .... Phibro Energy (Overseas) AG Switzerland
.... .... .... .... Phibro Energy Marketing AG Switzerland
.... .... .... .... Phibro Energy Representacoes Commerciaia Ltda. Brazil
.... .... .... .... Phibro S.A. Argentina
.... .... .... .... Politrade Sp. Poland
.... .... .... .... Scansport Limited England
.... .... .... .... .... Shipalks Shipping Limited England
.... .... .... .... Turavent Oil AG Switzerland
.... .... .... Phibro Holdings Limited England
.... .... .... .... Phibro Bullion Limited England
.... .... .... Scanport Shipping, Inc. Delaware
.... .... Phibro Resources Corp. Delaware
.... .... Phillip Brothers Inc. New York
.... .... .... Phillip Brothers Trading Corp. Delaware
.... .... .... Ropin Steel Co., Inc. Illinois
.... .... R-H Capital, Inc. Delaware
.... .... RH Sports Enterprises Inc Georgia
.... .... Salomon Brothers Holding Company Inc Delaware
.... .... .... Banco Patrimonio de Investimento Brazil
.... .... .... Grove Street Film Corp Delaware
.... .... .... Loan Participation Holding Corporation Delaware
.... .... .... .... Home Mortgage Access Corporation District of Columbia
.... .... .... .... .... Home MAC Government Financial Corporation District of Columbia
.... .... .... .... .... Home MAC Government Financial Corporation West District of Columbia
.... .... .... .... .... Home MAC Mortgage Securities Corporation District of Columbia
.... .... .... PB-SB Investments, Inc Delaware
.... .... .... PB-SB Ventures, Inc Delaware
.... .... .... PT SB NUSA Securities Indonesia
.... .... .... Salomon (International) Finance AG Switzerland
.... .... .... .... Phibro S.A. Spain
.... .... .... .... Salomon Brothers Holdings GmbH Switzerland
.... .... .... .... .... Salomon Brothers Asia Limited Cayman Islands
.... .... .... .... .... Salomon Contractuals Limited Hong Kong
.... .... .... .... .... Salomon International Financial Products Hong Kong
.... .... .... .... .... Salomon Brothers Asia Management Services Ltd Cayman Islands
.... .... .... .... Salomon Brothers Overseas Inc Cayman Islands
.... .... .... Salomon Analytics Inc Delaware
.... .... .... Salomon Brothers Asia Capital Corp Ireland
.... .... .... .... Darkland International Limited Ireland
.... .... .... .... Solom International Limited Ireland
.... .... .... .... .... Samchully Investment Partnership No. 3 Ireland
.... .... .... Salomon Brothers Asia Pacific Ltd. Delaware
.... .... .... Salomon Brothers Asset Management (Ireland) Ltd Ireland
.... .... .... Salomon Brothers Asset Management Asia Pacific Ltd Hong Kong
.... .... .... Salomon Brothers Asset Management Inc Delaware
.... .... .... Salomon Brothers Australia Ltd. Australia
.... .... .... Salomon Brothers Canada Holding Co Canada
.... .... .... Salomon Smith Barney Australia Pty Limited Australia
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
.... .... .... .... Salomon Smith Barney Canada Inc. Canada
.... .... .... Salomon Brothers China Ltd Hong Kong
.... .... .... Salomon Brothers Finance AG Switzerland
.... .... .... Salomon Brothers Hong Kong Futures Hong Kong
.... .... .... Salomon Brothers Hong Kong Limited* Hong Kong
.... .... .... .... Salomon Brothers Hong Kong Nom. Ltd. Hong Kong
.... .... .... Salomon Brothers Housing Investment Inc Delaware
.... .... .... Salomon Brothers Inc Delaware
.... .... .... Salomon Brothers International Operations (Japan) Inc Delaware
.... .... .... Salomon Brothers International Operations (Jersey) Limited Channel Islands
.... .... .... Salomon Brothers International Operations (Overseas) Limited Channel Islands
.... .... .... Salomon Brothers International Operations Inc Delaware
.... .... .... Salomon Brothers Mortgage Securities II, Inc Delaware
.... .... .... Salomon Brothers Mortgage Securities III, Inc Delaware
.... .... .... Salomon Brothers Mortgage Securities Inc Delaware
.... .... .... Salomon Brothers Mortgage Securities VI, Inc Delaware
.... .... .... Salomon Brothers Mortgage Securities VII, Inc Delaware
.... .... .... Salomon Brothers Pacific Holding Company Inc Delaware
.... .... .... Salomon Brothers Properties, Inc Delaware
.... .... .... .... Salomon Brothers Investments Inc Delaware
.... .... .... Salomon Brothers Real Estate Development Corp Delaware
.... .... .... Salomon Brothers Realty Corp New York
.... .... .... Salomon Brothers Russia Holding Company Inc Delaware
.... .... .... .... A.O. Salomon Brothers Russia
.... .... .... Salomon Brothers S.A. France
.... .... .... Salomon Brothers Services GmbH Germany
.... .... .... Salomon Brothers Services Inc Delaware
.... .... .... .... Salomon Brothers Asia Management Services Limited (Hong Kong) Cayman Islands
.... .... .... Salomon Brothers SIM SPA Italy
.... .... .... Salomon Brothers Singapore Pte Ltd Singapore
.... .... .... Salomon Brothers Taiwan Limited Taipei
.... .... .... Salomon Brothers Tosca Inc Delaware
.... .... .... Salomon Capital Access for Savings Institutions, Inc Delaware
.... .... .... .... Salomon Capital Access Corporation Delaware
.... .... .... Salomon Forex Inc Delaware
.... .... .... .... Salomon Brothers Finance Corporation Delaware
.... .... .... .... .... Salomon Brothers AG Germany
.... .... .... Salomon International Limited Delaware
.... .... .... .... Salomon Brothers Europe Limited* England
.... .... .... .... .... Phibro Energy Services Limited England
.... .... .... .... .... Salomon Brothers Asset Management Limited England
.... .... .... .... .... Salomon Brothers Eastern Europe Limited England
.... .... .... .... .... Salomon Brothers International Limited England
.... .... .... .... .... Salomon Brothers Nominees Limited England
.... .... .... .... .... Salomon Brothers UK Equity Limited England
.... .... .... .... .... Salomon Brothers UK Limited England
.... .... .... .... .... SB Finance PLC England
.... .... .... .... .... SB Funding No 1 Limited England
.... .... .... .... .... SB Funding No 2 Limited England
.... .... .... .... .... SB Mortgage Securities No 21 PLC England
.... .... .... .... .... SB Mortgage Securities No 22 PLC England
.... .... .... .... .... SB Mortgage Securities No 23 PLC England
.... .... .... .... .... SB Mortgage Securities No 24 PLC England
.... .... .... .... .... SB Placement No 2 Limited England
.... .... .... .... .... SB Portfolio Services Limited England
.... .... .... .... .... SB Residential PLC England
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
.... .... .... Salomon Loan Fund Inc Delaware
.... .... .... Salomon Millennium Bridge Fund Inc Delaware
.... .... .... Salomon Northpoint Corp Delaware
.... .... .... Salomon Plaza Holdings Inc Delaware
.... .... .... .... Plaza Holdings Inc. Delaware
.... .... .... .... .... Salomon Brothers Finance Corporation and Co beschrankthaftende KG* Germany
.... .... .... .... .... .... Salomon Brothers Corporate Support GmbH Germany
.... .... .... .... .... .... Salomon Brothers Kapitalanlage-Gesellschaft mbH Germany
.... .... .... Salomon Swapco Inc Delaware
.... .... .... Salomon Reinvestment Company, Inc. Delaware
.... .... .... SB Contractual Products, Inc Delaware
.... .... .... SB Funding Corp. Delaware
.... .... .... SB Graphics Corp Delaware
.... .... .... SB Insurances Ltd Bermuda
.... .... .... SB Management Services Inc Delaware
.... .... .... SB Motel Corp Delaware
.... .... .... .... SB Motel Durham I-85 Corp Delaware
.... .... .... .... SB Motel Mortgage Corp Delaware
.... .... .... SB-MBA Participation Corporation New York
.... .... .... SB/EJV Participation Corp Delaware
.... .... .... SB/OT Participation Corp. Delaware
.... .... .... Seals SA Delaware
.... .... .... Seven World Holdings Inc Delaware
.... .... .... .... Salomon International Investments Inc Delaware
.... .... .... Seven World Technologies, Inc Delaware
.... .... .... Structured Placements Corp Delaware
.... .... .... Structured Products Corp Delaware
.... .... .... TCEP Participation Corp New York
.... .... .... TCP Corp Delaware
.... .... .... The Downtown Conference Center Inc Delaware
.... .... .... The S.W. Shattuck Chemical Corp. Colorado
.... .... .... Third Street Promenade Productions Inc Delaware
.... .... Salomon Inc SI Financing Trust I Delaware
.... .... Salomon Technology Services Inc. Delaware
.... .... SB Cayman Holdings I Inc. Delaware
.... .... .... Smith Barney Private Trust Company (Cayman) Limited* Cayman Islands
.... .... .... .... Greenwich (Cayman) I Limited Cayman Islands
.... .... .... .... Greenwich (Cayman) II Limited Cayman Islands
.... .... .... .... Greenwich (Cayman) III Limited Cayman Islands
.... .... SB Cayman Holdings II Inc. Delaware
.... .... SB Cayman Holdings III Inc. Delaware
.... .... .... Smith Barney Credit Services (Cayman) Ltd.* Cayman Islands
.... .... SB Cayman Holdings IV Inc. Delaware
.... .... Smith Barney (Delaware) Inc. Delaware
.... .... .... 1345 Media Corp. Delaware
.... .... .... Corporate Realty Advisors, Inc. Delaware
.... .... .... IPO Holdings Inc. Delaware
.... .... .... .... Institutional Property Owners, Inc. V Delaware
.... .... .... .... Institutional Property Owners, Inc. VI Delaware
.... .... .... MLA 50 Corporation Delaware
.... .... .... MLA GP Corporation Delaware
.... .... .... Smith Barney Acquisition Corporation Delaware
.... .... .... Smith Barney Acquisition Fund, Inc. Cayman Islands
.... .... .... Smith Barney Global Capital Management, Inc. Delaware
.... .... .... Smith Barney Realty, Inc. Delaware
.... .... .... Smith Barney Risk Investors, Inc. Delaware
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
.... .... .... Smith Barney Venture Corp. Delaware
.... .... .... .... First Century Company Delaware
.... .... .... .... First Century Management Company Delaware
.... .... Smith Barney (Ireland) Limited Ireland
.... .... Smith Barney Asia Inc. Delaware
.... .... Smith Barney Asset Management Group (Asia) Pte. Ltd. Singapore
.... .... Smith Barney Capital Services Inc. Delaware
.... .... Smith Barney Cayman Islands, Ltd. Cayman Islands
.... .... Smith Barney Commercial Corp. Delaware
.... .... Smith Barney Commercial Corporation Asia Limited Hong Kong
.... .... Smith Barney Europe Holdings, Ltd. United Kingdom
.... .... .... Smith Barney Europe Ltd. United Kingdom
.... .... Smith Barney Funding Corp. Delaware
.... .... Smith Barney Futures Management Inc. Delaware
.... .... .... Smith Barney Offshore Fund Ltd. Delaware
.... .... Smith Barney Inc. Delaware
.... .... .... SBHU Life Agency, Inc. Delaware
.... .... .... .... Robinson-Humphrey Insurance Services Inc. Georgia
.... .... .... .... .... Robinson-Humphrey Insurance Services of Alabama, Inc. Alabama
.... .... .... .... SBHU Life Agency of Arizona, Inc. Arizona
.... .... .... .... SBHU Life Agency of Indiana, Inc. Indiana
.... .... .... .... SBHU Life Agency of Ohio, Inc. Ohio
.... .... .... .... SBHU Life Agency of Oklahoma, Inc. Oklahoma
.... .... .... .... SBHU Life Agency of Texas, Inc. Texas
.... .... .... .... SBHU Life Agency of Utah, Inc. Utah
.... .... .... .... SBHU Life Insurance Agency of Massachusetts, Inc. Massahchusetts
.... .... .... .... SBS Insurance Agency of Hawaii, Inc. Hawaii
.... .... .... .... SBS Insurance Agency of Idaho, Inc. Idaho
.... .... .... .... SBS Insurance Agency of Maine, Inc. Maine
.... .... .... .... SBS Insurance Agency of Montana, Inc. Montana
.... .... .... .... SBS Insurance Agency of Nevada, Inc. Nevada
.... .... .... .... SBS Insurance Agency of Ohio, Inc. Ohio
.... .... .... .... SBS Insurance Agency of South Dakota, Inc. South Dakota
.... .... .... .... SBS Insurance Agency of Wyoming, Inc. Wyoming
.... .... .... .... SBS Insurance Brokerage Agency of Arkansas, Inc. Arkansas
.... .... .... .... SBS Insurance Brokers of Kentucky, Inc. Kentucky
.... .... .... .... SBS Insurance Brokers of New Hampshire, Inc. New Hampshire
.... .... .... .... SBS Insurance Brokers of North Dakota, Inc. North Dakota
.... .... .... .... SBS Life Insurance Agency of Puerto Rico, Inc. Puerto Rico
.... .... .... .... SLB Insurance Agency of Maryland, Inc. Maryland
.... .... .... .... Smith Barney Life Agency Inc. Louisiana
.... .... .... Smith Barney (Hong Kong) Limited Hong Kong
.... .... .... Smith Barney (Netherlands) Inc. Delaware
.... .... .... Smith Barney International Incorporated Oregon
.... .... .... .... Smith Barney (Singapore) Pte Ltd Singapore
.... .... .... .... Smith Barney Pacific Holdings, Inc. British Virgin Islands
.... .... .... .... .... Smith Barney (Asia) Limited Hong Kong
.... .... .... .... .... Smith Barney (Pacific) Limited Hong Kong
.... .... .... .... Smith Barney Securities Pte Ltd Singapore
.... .... .... Smith Barney Puerto Rico Inc. Puerto Rico
.... .... .... The Robinson-Humphrey Company, LLC Delaware
.... .... Smith Barney Mortgage Brokers Inc. Delaware
.... .... Smith Barney Mortgage Capital Corp. Delaware
.... .... Smith Barney Mortgage Capital Group, Inc. Delaware
.... .... Smith Barney Offshore, Inc. Delaware
.... .... .... Decathlon Offshore Limited Cayman Islands
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Name of Subsidiary Company Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
.... .... Smith Barney Private Trust GmbH Switzerland
.... .... Smith Barney SA France
.... .... .... Smith Barney Asset Management France SA France
.... .... Smith Barney Securities Investment Consulting Co. Ltd. Taiwan
.... .... Smith Barney Shearson (Chile) Corredora de Seguro Limitada Chile
(also D/B/A SBS (Chile) Corredora de Seguros Ltda.)
.... .... SP Insurance Company Limited Bermuda
.... .... Structured Mortgage Securities Corporation Delaware
.... .... The Travelers Investment Management Company Connecticut
.... Smith Barney Corporate Trust Company Delaware
.... Smith Barney Private Trust Bank of Michigan Michigan
.... Smith Barney Private Trust Company New York
.... Smith Barney Private Trust Company of Florida Florida
.... Smith Barney Private Trust Company of New Jersey New Jersey
.... Smith Barney Private Trust Company of Texas Texas
.... Tinmet Corporation Delaware
.... Travelers Group Diversified Distribution Services, Inc. Delaware
.... .... Travelers Group Exchange, Inc. Delaware
(also D/B/A VIPortfolio Agency)
.... .... .... TGE Insurance Agency of Alabama, Inc. Alabama
.... .... .... TGE Insurance Agency of Kentucky, Inc. Kentucky
.... .... .... TGE Insurance Agency of Massachusetts, Inc. Delaware
.... .... .... TGE Insurance Agency of Mississippi, Inc. P.C. Mississippi
.... .... .... TGE Insurance Agency of New Mexico, Inc. New Mexico
.... .... .... TGE Insurance Agency of Ohio, Inc. Ohio
.... .... .... TGE Insurance Agency of Texas, Inc. Texas
.... Travelers Investment Group Inc. Delaware
.... Travelers Services Inc. Delaware
(also D/B/A Travelers Coronado Services Inc.)
.... Tribeca Management Inc. Delaware
.... TRV Employees Investments, Inc. Delaware
.... TRV/RCM Corp. Delaware
.... TRV/RCM LP Corp. Delaware
</TABLE>
- ----------
* Indicates that wholly owned subsidiary is partially owned by more than one
subsidiary of Travelers Group Inc.
** Travelers Group Inc., through The Travelers Insurance Group Inc., owns
approximately 83.4% of Travelers Property Casualty Corp.
*** The Travelers Indemnity Company owns 58% of The Parker Realty and
Insurance Agency, Inc.
10
Exhibit 23.01
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, 333-27155,
333-42575 and 333-44549; and
o Form S-8 Nos. 33-32130, 33-43997, 33-59524, 33-28110, 33-43883, 33-21099,
33-29711, 33-47437, 33-39025, 33-40469, 33-38109, 33-50206,
33-51201-1, 33-51353, 33-51769, 33-51783, 33-52027, 33-52029,
33-64985, 333-02809, 333-02811, 333-12697, 333-25603, 333-38647-1
and 333-41865
of Travelers Group Inc. of our reports dated January 26, 1998, with respect to
the consolidated statement of financial position of Travelers Group Inc. and
subsidiaries as of December 31, 1997 and 1996, 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, 1997, and the related
financial statement schedules, which reports are incorporated by reference or
included in the annual report on Form 10-K of Travelers Group Inc. for the year
ended December 31, 1997.
/s/ KPMG Peat Marwick LLP
New York, New York
March 23, 1998
Exhibit 23.02
[Letterhead of Arthur Andersen LLP]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby 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, 333-27155, 333-42575
and 333-44549; and
o Form S-8 Nos. 33-32130, 33-43997, 33-59524, 33-28110, 33-43883, 33-21099,
33-29711, 33-47437, 33-39025, 33-40469, 33-38109, 33-50206, 33-51201-1,
33-51353, 33-51769, 33-51783, 33-52027, 33-52029, 33-64985, 333-02809,
333-02811, 333-12697, 333-25603, 333-38647-1 and 333-41865
of Travelers Group Inc. of our report dated March 13, 1997, relating to the
consolidated statement of financial condition of Salomon 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 three
years in the period ended December 31, 1996, which report is incorporated by
reference or included in the annual report on Form 10-K of Travelers Group Inc.
for the year ended December 31, 1997.
/s/ Arthur Andersen LLP
New York, New York
March 23, 1998
Exhibit 24.01
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group, Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to
an Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the
premises, as fully and to all intents and purposes as I might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 27,
1998.
/s/ Judith Arron
-----------------------
Judith Arron
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Kenneth J. Bialkin
----------------------
Kenneth J. Bialkin
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Edward H. Budd
----------------------
Edward H. Budd
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Joseph A. Califano, Jr.
---------------------------
Joseph A. Califano, Jr.
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Douglas D. Danforth
-----------------------
Douglas D. Danforth
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Leslie B. Disharoon
-----------------------
Leslie B. Disharoon
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 27,
1998.
/s/ Gerald R. Ford
-----------------------
Gerald R. Ford
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Thomas W. Jones
-----------------------
Thomas W. Jones
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Ann D. Jordan
-----------------------
Ann D. Jordan
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1998.
/s/ Robert I. Lipp
-----------------------
Robert I. Lipp
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Michael T. Masin
-----------------------
Michael T. Masin
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Deryck C. Maughan
-----------------------
Deryck C. Maughan
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Andrall E. Pearson
-----------------------
Andrall E. Pearson
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Frank J. Tasco
-----------------------
Frank J. Tasco
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Linda J. Wachner
-----------------------
Linda J. Wachner
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Joseph R. Wright, Jr.
-------------------------
Joseph R. Wright, Jr.
<PAGE>
POWER OF ATTORNEY
Annual Report on Form 10-K
Travelers Group Inc.
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of
Travelers Group Inc., a Delaware corporation, do hereby constitute and appoint
Sanford I. Weill, James Dimon and Charles O. Prince, III, and each of them
severally, to be my true and lawful attorneys-in-fact and agents, each acting
alone with full power of substitution and re-substitution, to sign my name to an
Annual Report on Form 10-K of Travelers Group Inc. for the fiscal year ended
December 31, 1997, and all amendments thereto, and to file, or cause to be
filed, the same with all exhibits thereto (including this power of attorney),
and other documents in connection therewith with the Securities and Exchange
Commission, provided that such Annual Report on Form 10-K in final form, and any
amendment or amendments thereto and such other documents, be approved by said
attorneys-in-fact, or by any one of them; and I do hereby grant unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in or about the premises,
as fully and to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have subscribed these presents as of January 28,
1998.
/s/ Arthur Zankel
-----------------------
Arthur Zankel
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 FINANCIAL STATEMENTS OF TRAVELERS GROUP INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,033
<SECURITIES> 311,300 <F1>
<RECEIVABLES> 32,176 <F2>
<ALLOWANCES> 0 <F3>
<INVENTORY> 0 <F3>
<CURRENT-ASSETS> 0 <F3>
<PP&E> 0 <F3>
<DEPRECIATION> 0 <F3>
<TOTAL-ASSETS> 386,555
<CURRENT-LIABILITIES> 0 <F3>
<BONDS> 43,795 <F4>
2,660
1,450
<COMMON> 12
<OTHER-SE> 19,431 <F5>
<TOTAL-LIABILITY-AND-EQUITY> 386,555
<SALES> 0 <F3>
<TOTAL-REVENUES> 37,609
<CGS> 0 <F3>
<TOTAL-COSTS> 32,597
<OTHER-EXPENSES> 0 <F3>
<LOSS-PROVISION> 277 <F6>
<INTEREST-EXPENSE> 11,443 <F6>
<INCOME-PRETAX> 5,012
<INCOME-TAX> 1,696
<INCOME-CONTINUING> 3,104
<DISCONTINUED> 0 <F3>
<EXTRAORDINARY> 0 <F3>
<CHANGES> 0 <F3>
<NET-INCOME> 3,104
<EPS-PRIMARY> 2.69 <F7>
<EPS-DILUTED> 2.54 <F7>
<FN>
F1 Includes the following items from the financial statements: total
investments $61,834; securities borrowed or purchased under agreements to
resell $109,734; and trading securities and commodities owned, at market
value $139,732.
F2 Includes the following items from the financial statements: brokerage
receivables $15,627; net consumer finance receivables $10,816 and other
receivables $5,733.
F3 Items which are inapplicable relative to the underlying financial
statements are indicated with a zero as required.
F4 Includes the following items from the financial statements: investment
banking and brokerage borrowings $11,464; short-term borrowings $3,979 and
long-term debt $28,352.
F5 Includes the following items from the financial statements: additional
paid-in capital $5,368; retained earnings $15,451; treasury stock
$(2,183); and unrealized gain (loss) on investment securities $1,157 and
other, principally unearned compensation $(362).
F6 Included in total costs and expenses applicable to sales and revenues.
F7 Effective December 31, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Accordingly the Company
has restated EPS for each of the quarters during 1997 and restated EPS are
as follows:
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
Basic $0.71 $0.77 $0.90 $0.31
Diluted $0.67 $0.73 $0.85 $0.30
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 FINANCIAL STATEMENTS OF TRAVELERS GROUP INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 3,260
<SECURITIES> 281,067 <F1>
<RECEIVABLES> 24,346 <F2>
<ALLOWANCES> 0 <F3>
<INVENTORY> 0 <F3>
<CURRENT-ASSETS> 0 <F3>
<PP&E> 0 <F3>
<DEPRECIATION> 0 <F3>
<TOTAL-ASSETS> 345,948
<CURRENT-LIABILITIES> 0 <F3>
<BONDS> 36,273 <F4>
2,794
1,125
<COMMON> 14
<OTHER-SE> 16,803 <F5>
<TOTAL-LIABILITY-AND-EQUITY> 345,948
<SALES> 0 <F3>
<TOTAL-REVENUES> 32,414
<CGS> 0 <F3>
<TOTAL-COSTS> 27,851
<OTHER-EXPENSES> 0 <F3>
<LOSS-PROVISION> 260 <F6>
<INTEREST-EXPENSE> 8,927 <F6>
<INCOME-PRETAX> 5,008
<INCOME-TAX> 1,679
<INCOME-CONTINUING> 3,282
<DISCONTINUED> (334) <F3>
<EXTRAORDINARY> 0 <F3>
<CHANGES> 0 <F3>
<NET-INCOME> 2,948
<EPS-PRIMARY> 2.53 <F7>
<EPS-DILUTED> 2.42 <F7>
<FN>
F1 Includes the following items from the financial statements: total
investments $56,509; securities borrowed or purchased under agreements to
resell $97,985; and trading securities and commodities owned, at market
value $126,573.
F2 Includes the following items from the financial statements: brokerage
receivables $11,592; net consumer finance receivables $7,885 and other
receivables $4,869.
F3 Items which are inapplicable relative to the underlying financial
statements are indicated with a zero as required.
F4 Includes the following items from the financial statements: investment
banking and brokerage borrowings $10,020; short-term borrowings $1,557 and
long-term debt $24,696.
F5 Includes the following items from the financial statements: additional
paid-in capital $7,806; retained earnings $12,934; treasury stock
$(4,123); and unrealized gain (loss) on investment securities $469 and
other, principally unearned compensation $(283).
F6 Included in total costs and expenses applicable to sales and revenues.
F7 Effective December 31, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Accordingly the Company
has restated EPS for each of the quarters during 1996 and restated EPS are
as follows:
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
Basic $0.69 $0.76 $0.60 $0.50
Diluted $0.65 $0.72 $0.57 $0.47
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 FINANCIAL STATEMENTS OF TRAVELERS GROUP INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1995
<CASH> 3,491
<SECURITIES> 247,793 <F1>
<RECEIVABLES> 20,968 <F2>
<ALLOWANCES> 0 <F3>
<INVENTORY> 0 <F3>
<CURRENT-ASSETS> 0 <F3>
<PP&E> 0 <F3>
<DEPRECIATION> 0 <F3>
<TOTAL-ASSETS> 302,344
<CURRENT-LIABILITIES> 0 <F3>
<BONDS> 34,952 <F4>
728
1,112
<COMMON> 14
<OTHER-SE> 14,727 <F5>
<TOTAL-LIABILITY-AND-EQUITY> 302,344
<SALES> 0 <F3>
<TOTAL-REVENUES> 27,287
<CGS> 0 <F3>
<TOTAL-COSTS> 23,947
<OTHER-EXPENSES> 0 <F3>
<LOSS-PROVISION> 171 <F6>
<INTEREST-EXPENSE> 9,378 <F6>
<INCOME-PRETAX> 3,320
<INCOME-TAX> 1,179
<INCOME-CONTINUING> 2,141
<DISCONTINUED> 150 <F3>
<EXTRAORDINARY> 0 <F3>
<CHANGES> 0 <F3>
<NET-INCOME> 2,291
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.86
<FN>
F1 Includes the following items from the financial statements: total
investments $40,965; securities borrowed or purchased under agreements to
resell $85,026; and trading securities and commodities owned, at market
value $121,802.
F2 Includes the following items from the financial statements: brokerage
receivables $10,312; net consumer finance receivables $7,092 and other
receivables $3,564.
F3 Items which are inapplicable relative to the underlying financial
statements are indicated with a zero as required.
F4 Includes the following items from the financial statements: investment
banking and brokerage borrowings $11,249; short-term borrowings $1,468 and
long-term debt $22,235.
F5 Includes the following items from the financial statements: additional
paid-in capital $7,227; retained earnings $10,504; treasury stock
$(3,470); and unrealized gain (loss) on investment securities $756 and
other, principally unearned compensation $(290).
F6 Included in total costs and expenses applicable to sales and revenues.
</FN>
</TABLE>
Exhibit 99.01
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.
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.
<PAGE>
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 or
able 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.
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."
<PAGE>
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."
Clash agreement.......... 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 agreement 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 property and casualty 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.
<PAGE>
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.
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-casualty 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."
<PAGE>
Extra contractual
obligations ........... Amounts 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.
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.
<PAGE>
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.
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.
<PAGE>
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 expenses
("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 earned premiums. For GAAP
it is the ratio of incurred losses and loss
adjustment expenses reduced by an allocation of fee
income to net earned premiums.
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.
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.
<PAGE>
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 property and casualty 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.
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.
<PAGE>
Rate of renewal/retention
ratio.................. Current period renewal accounts or policies as a
percentage of total accounts or policies available
for renewal.
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' 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.
<PAGE>
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.
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.
<PAGE>
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
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.
<PAGE>
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 written premiums. For GAAP it is the
ratio of underwriting expenses incurred reduced by
an allocation of fee income to net written premiums.
Underwriting gain 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 surplus lines of insurance.
The wholesaler does not deal directly with the
insurance consumer. The wholesaler deals with the
retail agent or broker.
<PAGE>
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.
Exhibit 99.02
[Letterhead of Arthur Andersen LLP]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Salomon Inc:
We have audited the accompanying consolidated statement of financial
condition of Salomon Inc (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements on income,
changes in stockholders' equity and cash flows for each of the three years in
the 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 consolidated 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 Salomon Inc and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
March 13, 1997
Exhibit 99.03
Fifth through sixth and eighth through
sixteenth paragraphs under the caption
"Legal Proceedings" beginning on page 13
of the Annual Report on Form 10-K of
Salomon Smith Barney Holdings Inc. for
the fiscal year ended December 31, 1997
(File No. 1-4346)
[Fifth through sixth paragraphs]
In the fall of 1994, various federal and state lawsuits brought as purported
class actions against SBI, Smith Barney, R-H, and 34 other broker-dealers were
consolidated for pre-trial purposes as In re Nasdaq Market-Makers Antitrust
Litigation in the U.S. District Court for the Southern District of New York. In
the consolidated action, plaintiffs allege that broker-dealers making markets in
securities traded on NASDAQ violated antitrust laws by conspiring to maintain a
minimum spread between the bid and asked price for certain securities, and seek
unspecified monetary damages, subject to trebling under the antitrust laws,
injunctive relief, attorneys' fees and court costs. In late 1996, the Court
certified a class. In December 1997, SBI, Smith Barney, R-H, and all but one of
the other 34 broker-dealer defendants executed a settlement agreement with the
plaintiffs that has been preliminarily approved by the Court subject to final
approval following a hearing scheduled for September 1998. If approved, the
settlement will not have a material effect on the Company's results of
operations, financial condition or liquidity.
In July 1996, the Antitrust Division of the Department of Justice filed a
complaint containing similar allegations to the above-described action against
24 market makers in certain NASDAQ stocks. When the complaint was filed, and
with no admission of liability, SBI, Smith Barney and the other defendants
entered into a settlement pursuant to which the defendants agreed not to engage
in certain practices relating to the quoting and trading of NASDAQ securities
and to implement additional compliance procedures. There are no fines,
penalties, or other payments of money in connection with this settlement, which
the Court approved in April 1997. In May 1997, plaintiffs in the above-described
related civil action (who were permitted to intervene for limited purposes)
appealed the Court's approval of the settlement. The appeal was argued before
the U.S. Court of Appeals, Second Circuit in March 1998.
<PAGE>
[Eighth through sixteenth paragraphs]
Environmental Matters
Because of now discontinued industrial operations previously conducted by
subsidiaries of Salomon, SSBH is subject to uncertain remedial liability under
the federal Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended ("CERCLA" or "Superfund"), and comparable environmental
laws. Under CERCLA, in certain circumstances, a potentially responsible party
("PRP") may be held jointly and severally liable, without regard to fault, for
the costs of investigation and cleanup of contamination. In most cases, such
remediation expenditures are incurred over a number of years.
In 1988, a subsidiary of Salomon, The S.W. Shattuck Chemical Company, Inc.
("Shattuck"), along with over 350 industrial, municipal and other entities, was
named by the federal Environmental Protection Agency ("EPA") as a PRP at Section
6 of the Lowry Landfill in Arapaho County, Colorado ("Lowry"), a federal
Superfund site owned by the City and County of Denver ("Denver"). Based on
current EPA estimates, that remediation at Lowry will cost approximately $94
million. Under the terms of settlements among Salomon, Shattuck and certain
PRPs, Salomon's share is not expected to exceed $13 million, of which
approximately 60% has been paid into a trust fund.
In August 1992, EPA issued an administrative order for remedial studies and
action to be performed by Shattuck under CERCLA at a Superfund site (Denver
Radium Site, Operable Unit VIII), which includes property owned by, and a metal
processing plant previously operated by, Shattuck in Denver, Colorado. Shattuck
has since performed significant remediation activities at the site and has
maintained financial assurance of $26.6 million to guarantee performance of the
remediation, both in accordance with the order.
In July 1996, Denver enacted an ordinance imposing a substantial "fee" on any
radioactive waste or radium-contaminated material disposed of in the City of
Denver. Under this ordinance, Denver assessed Shattuck $9.35 million for certain
disposal already carried out. This "fee," and any additional "fees," if upheld,
would greatly increase remediation costs for the Denver Radium Site. Shattuck
has sued to enjoin enforcement of the "fee." The United States has also sued,
seeking to enjoin imposition of the "fee" on constitutional grounds. Denver has
counterclaimed and has moved to add SSBH as a defendant. These cases, which have
been consolidated, are now pending before the U.S. District Court in Colorado.
In another matter, in May 1993, the National Zinc site in Bartlesville,
Oklahoma, defined by EPA to include a smelter facility that had been owned by a
former subsidiary of Salomon, and an eight square mile area surrounding the
smelter, was proposed for listing as a Superfund site. Salomon and one other
PRP, Cyprus Amax Minerals Company ("Cyprus"), removed contamination from the
site pursuant to an order from EPA in 1994.
<PAGE>
In 1994, Salomon, Cyprus and the City of Bartlesville entered into a consent
agreement with the Oklahoma regulatory authorities to conduct further
investigation of the site. In August 1995, Cyprus and the City of Bartlesville
(but not Salomon) entered into a consent agreement with state regulatory
authorities to perform remediation of Operable Unit 1 at the site, related to
protection of human health. These remediation activities are nearing completion.
The remedy selected to protect ecologically sensitive areas, known as Operable
Unit 2, is estimated to cost approximately $2.8 million. In February 1997,
Cyprus (but not Salomon) entered into a consent agreement to perform this
remediation, but these remediation activities have not commenced.
In March 1998, SSBH and Cyprus received letters from EPA demanding reimbursement
of past response costs of $12.3 million allegedly incurred by EPA at the
National Zinc site. SSBH intends to contest vigorously this claim asserted by
EPA to the extent it exceeds amounts which SSBH may be obligated to pay to EPA
under the 1994 EPA order and the 1994 consent agreement with Oklahoma regulatory
authorities.
In February 1994, Horseheads Industries, Inc. d/b/a/ Zinc Corporation of America
("ZCA"), the current owner of the facility, filed suit in the U.S. District
Court for the Northern District of Oklahoma against former owners or operators
of the smelters, including Salomon, St. Joe Minerals Company ("St. Joe"), Fluor
Corporation ("Fluor") and Cyprus seeking recovery of response costs under
CERCLA. In August 1994, a settlement agreement was entered into among ZCA,
Fluor/St. Joe and Salomon (collectively, the "Settling Parties"), allocating
both past and future response costs and establishing a committee to study future
corrective action at the smelter under the Resource Conservation and Recovery
Act ("RCRA"). Cyprus did not join in the settlement. In April 1996, the Court
allocated past and future response costs at the National Zinc site 70% to the
Settling Parties and 30% to Cyprus, except for response costs relating to
certain residue piles stored at the facility, which the Court allocated 100% to
the Settling Parties. Salomon subsequently entered into an agreement with Cyprus
that satisfies certain of the liabilities and obligations of the parties as set
forth in the Court's decision. In November 1997, ZCA's modified RCRA permit
became effective, approving a corrective action at the facility. SSBH's share of
the cost of the corrective action is not expected to exceed $15 million.
Philipp Brothers, Inc. ("Philipp Brothers"), a subsidiary of Salomon, together
with 23 other parties, is the subject of a motion brought by the United States
in August 1997 seeking to join them as additional defendants in an action under
CERCLA to recover response costs and natural resource damages allegedly caused
by activities in the "Coeur D'Alene Basin," an area in northern Idaho
encompassing the Bunker Hill Superfund site in Kellogg, Idaho. At the same time,
the Coeur D'Alene Tribe moved the Court to join 13 additional parties, including
Philipp Brothers, as defendants in an action brought by the Tribe to recover
natural resource damages under CERCLA. Philipp Brothers believes that it
conducted no activities with respect to the Bunker Hill Superfund site which
would give rise to such liability.
Exhibit 99.04
Second through sixth paragraphs under the
caption "Legal Proceedings" beginning on
page 53 of the Annual Report on Form 10-K
of Travelers Property Casualty Corp. for
the fiscal year ended December 31, 1997
(File No. 1-14328)
A number of cases have been filed against large segments of the
property-casualty insurance industry, including certain industry organizations,
relating to service fee charges and premium calculations on certain workers'
compensation insurance. A subsidiary of the Company is one of ten defendants in
South Carolina ex rel. Medlock v. National Council on Compensation Insurance
("NCCI"), an action filed by the Attorney General of South Carolina in August
1994 in the Court of Common Pleas, County of Greenville, South Carolina. Suing
on behalf of all employers insured through the South Carolina workers'
compensation assigned risk pool, the plaintiff alleges that the pool's
administrator and servicing carriers conspired to set excessive fees in
violation of the state's unfair trade practices law. The plaintiff seeks
declaratory and injunctive relief, disgorgement of unspecified excess profits,
and additional statutory penalties. In August 1997, all pending motions to
dismiss were denied in this case.
Beginning in January 1997, nine purported class actions were commenced in
various courts against certain subsidiaries of the Company, dozens of other
insurers, and the NCCI. The allegations in these nine lawsuits are substantially
the same. The plaintiffs generally allege that the defendants conspired to
collect excessive or improper premiums on certain loss-sensitive workers'
compensation insurance policies, in violation of state insurance laws, antitrust
laws, and state unfair trade practices laws. Plaintiffs seek unspecified
monetary damages. In January 1997, two of these purported class actions, both
entitled El Chico Restaurants, Inc. v. The Aetna Casualty and Surety Company, et
al., were filed in the Chancery Court, Davidson County, Tennessee, and Superior
Court, Richmond County, Georgia. In February 1997, the Tennessee action was
removed to the U.S. District Court for the Middle District of Tennessee and the
Georgia action was removed to the U.S. District Court for the Southern District
of Georgia. In October 1997, the Georgia action was remanded to the Superior
Court, Richmond County, Georgia. In December 1997, the Tennessee action was
remanded to the Chancery Court, Davidson County, Tennessee. In July 1997,
Bristol Hotel Management Corp. et al. v. The Aetna Casualty and Surety Company,
et al., was filed in the U.S. District Court for the Southern District of
Florida. In December 1997, three actions, entitled Foodarama Supermarkets, Inc.,
et al. v. The Aetna Casualty and Surety Company, et al.; Bristol Hotel
Management Corp. et al. v. The Aetna Casualty and Surety Company, et al., and
Hill-Behan Lumber Co. v. Hartford Insurance Co., et al. were commenced,
respectively, in the Superior Court of New Jersey (Law Division), Morris County,
New Jersey; the Circuit Court of Palm Beach County, Florida and the Circuit
Court of Madison County, Illinois. In February 1998, three additional lawsuits
were commenced: CR/PL Management Co., et al. v. Allianz Insurance Company Group,
et al., in the Circuit Court
<PAGE>
of Cook County, Illinois, Foodarama Supermarkets, Inc., et al. v. The Aetna
Casualty and Surety Company, et al. in the Court of Common Pleas, Philadelphia,
Pennsylvania, and Hill-Behan Lumber Co. v. Hartford Insurance Co., et al., in
the Circuit Court of the City of St. Louis, Missouri.
The Company intends to contest vigorously all of the above-described
cases.
In January 1997, a purported class of Texas workers' compensation insureds
filed a petition to intervene in a lawsuit pending in District Court, Travis
County, Texas, entitled Travelers Indemnity Company of Connecticut v. Texas
Workers Compensation Insurance Facility. In its most recent pleadings, the
purported class challenges certain premium calculations on certain workers'
compensation policies from 1992 through 1994. In July 1997, the Texas Department
of Insurance issued a rule addressing the same premium calculation issues raised
by the purported class. The Company joined with several other insurers in an
appeal proceeding, entitled Highlands Insurance Company v. Texas Department of
Insurance, which was filed in July 1997 in the District Court of Travis County,
Texas, challenging the rule on the ground that it exceeds the Department's
regulatory authority. In January 1998, the Company, the Department and the
purported class reached an agreement in principle to settle all claims among
themselves, subject to court approval. If approved, the settlement will not have
a material effect on the Company's results of operations, financial condition or
liquidity.
In the ordinary course of business, certain of the Company's subsidiaries
receive claims asserting alleged injuries and damages from asbestos and other
hazardous waste and toxic substances. The conditions surrounding the final
resolution of these claims continues to change. Currently, it is not possible to
predict legal and legislative changes 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 current reserves. The magnitude of 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.
