UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _______
---------------
Commission file number 1-9924
---------------
Travelers Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1568099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
(212) 816-8000
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Common stock outstanding as of July 31, 1998: 1,156,175,348
<PAGE>
Travelers Group Inc.
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements: Page No.
--------
Condensed Consolidated Statement of Income (Unaudited) -
Three and Six Months Ended June 30, 1998 and 1997 3
Condensed Consolidated Statement of Financial Position -
June 30, 1998 (Unaudited) and December 31, 1997 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity (Unaudited) - Six Months Ended June 30, 1998 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements
(Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Part II - Other Information
Item 1. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Reports on Form 8-K 36
Exhibit Index 37
Signatures 39
2
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Income (Unaudited)
(In millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Insurance premiums $2,395 $2,220 $4,735 $4,444
Commissions and fees 1,432 1,172 2,866 2,378
Interest and dividends 4,556 4,047 8,977 7,545
Finance related interest and other charges 421 321 828 627
Principal transactions 315 709 1,095 1,471
Asset management and administration fees 553 399 1,051 788
Other income 424 316 912 631
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 10,096 9,184 20,464 17,884
- -------------------------------------------------------------------------------------------------------------------------------
Expenses
Policyholder benefits and claims 2,047 1,906 4,041 3,811
Non-insurance compensation and benefits 1,609 1,511 3,391 3,059
Insurance underwriting, acquisition and operating 811 799 1,623 1,604
Interest 3,333 2,792 6,510 5,170
Provision for consumer finance credit losses 91 73 178 145
Other operating 382 654 1,138 1,299
- -------------------------------------------------------------------------------------------------------------------------------
Total expenses 8,273 7,735 16,881 15,088
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 1,823 1,449 3,583 2,796
Provision for income taxes 630 517 1,239 1,000
Minority interest, net of income taxes 52 49 110 98
- -------------------------------------------------------------------------------------------------------------------------------
Net income $1,141 $ 883 $2,234 $1,698
===============================================================================================================================
Basic earnings per share:
Net income $0.99 $0.77 $1.94 $1.47
===============================================================================================================================
Weighted average common shares outstanding 1,117.7 1,101.1 1,116.8 1,102.5
===============================================================================================================================
Diluted earnings per share:
Net income $0.95 $0.73 $1.87 $1.40
===============================================================================================================================
Adjusted weighted average common shares outstanding 1,172.1 1,178.0 1,170.5 1,179.6
===============================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Financial Position
(In millions of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Unaudited)
Cash and cash equivalents (including segregated cash and other deposits) $ 4,895 $ 4,033
Investments 64,442 61,834
Securities borrowed or purchased under agreements to resell 131,318 109,734
Brokerage receivables 22,734 15,627
Trading securities and commodities owned 138,766 139,732
Net consumer finance receivables 11,824 10,816
Reinsurance recoverables 9,487 9,579
Value of insurance in force and deferred policy acquisition costs 2,942 2,812
Cost of acquired businesses in excess of net assets 3,412 3,446
Separate and variable accounts 13,878 11,319
Other receivables 6,057 5,733
Other assets 10,321 11,890
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $420,076 $386,555
==============================================================================================================================
Liabilities
Investment banking and brokerage borrowings $ 18,682 $ 11,464
Short-term borrowings 4,392 3,979
Long-term debt 30,551 28,352
Securities loaned or sold under agreements to repurchase 124,258 120,921
Brokerage payables 27,053 12,763
Trading securities and commodities sold not yet purchased 95,348 96,166
Contractholder funds 15,550 14,848
Insurance policy and claims reserves 43,744 43,782
Separate and variable accounts 13,868 11,309
Accounts payable and other liabilities 21,078 19,553
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 394,524 363,137
- ------------------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock - Series I 280 280
- ------------------------------------------------------------------------------------------------------------------------------
TRV or subsidiary obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debt securities of -- TRV 1,200 1,000
- ------------------------------------------------------------------------------------------------------------------------------
TAP 900 900
- ------------------------------------------------------------------------------------------------------------------------------
Salomon Smith Barney 745 345
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate
liquidation value 1,450 1,450
Common stock ($.01 par value; authorized shares: 3.0 billion;
issued shares: 1998 - 1,246,983,244 and 1997 - 1,234,204,094) 12 12
Additional paid-in capital 5,988 5,368
Retained earnings 17,309 15,451
Treasury stock, at cost (1998 - 96,341,294 shares and 1997 - 89,136,729 shares) (3,118) (2,183)
Accumulated other changes in equity from nonowner sources 1,263 1,147
Unearned compensation (477) (352)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 22,427 20,893
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $420,076 $386,555
==============================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
(In millions of dollars)
<TABLE>
<CAPTION>
Six months ended June 30, 1998 Amount Shares
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Preferred stock, at aggregate liquidation value
Balance, beginning of year $ 1,450 4,900
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,450 4,900
==================================================================================================================================
Common stock and additional paid-in capital
Balance, beginning of year $ 5,380 1,234,204
Issuance of shares pursuant to employee benefit plans 399
Conversion of Series C Preferred Stock 153 6,942
Exercise of warrants 75 5,837
Other (7)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period 6,000 1,246,983
- ----------------------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance, beginning of year 15,451
Net income 2,234
Common dividends (314)
Preferred dividends (62)
- -------------------------------------------------------------------------------------------------------------
Balance, end of period 17,309
- -------------------------------------------------------------------------------------------------------------
Treasury stock, at cost
Balance, beginning of year (2,183) (89,137)
Issuance of shares pursuant to employee benefit plans, net of shares
tendered for payment of option exercise price and withholding taxes (108) 6,961
Treasury stock acquired (827) (14,165)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period (3,118) (96,341)
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated other changes in equity from nonowner sources
Balance, beginning of year 1,147
Net change in unrealized gains and losses on investment securities, net of tax 117
Net translation adjustments, net of tax (1)
- -------------------------------------------------------------------------------------------------------------
Balance, end of period 1,263
- -------------------------------------------------------------------------------------------------------------
Unearned compensation
Balance, beginning of year (352)
Issuance of restricted stock, net of amortization (125)
- -------------------------------------------------------------------------------------------------------------
Balance, end of period (477)
- -------------------------------------------------------------------------------------------------------------
Total common stockholders' equity and common shares outstanding 20,977 1,150,642
==================================================================================================================================
Total stockholders' equity $22,427
=============================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
Travelers Group Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
(In millions of dollars)
<TABLE>
<CAPTION>
Six Months ended June 30, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 2,234 $ 1,698
Amortization of deferred policy acquisition costs and value of insurance in force 743 709
Additions to deferred policy acquisition costs (874) (854)
Other non cash changes 416 373
Changes in:
Trading securities and commodities, net 148 (17,321)
Securities borrowed, loaned and repurchase agreements, net (18,247) 10,835
Brokerage receivables net of brokerage payables 7,183 229
Other, net 3,281 1,486
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (5,116) (2,845)
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Consumer loans originated or purchased (3,055) (2,236)
Consumer loans repaid or sold 2,078 1,391
Purchases of fixed maturities and equity securities (13,472) (12,819)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities 9,125 9,895
Mortgage loans -- 105
Real estate and real estate joint ventures 78 25
Proceeds from maturities of investments:
Fixed maturities 2,699 1,571
Mortgage loans 597 316
Other investments, primarily short-term, net (1,270) (632)
Proceeds from sale of Basis Petroleum -- 365
Other, net (320) (353)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (3,540) (2,372)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (376) (297)
Issuance of preferred stock -- 391
Issuance of redeemable preferred stock of subsidiaries 600 --
Treasury stock acquired (827) (603)
Stock tendered for payment of withholding taxes (402) (156)
Issuance of long-term debt 4,027 4,596
Payments and redemptions of long-term debt (1,912) (1,934)
Net change in short-term borrowings (including investment banking and brokerage
borrowings) 7,631 3,525
Contractholder fund deposits 2,481 1,772
Contractholder fund withdrawals (1,788) (1,310)
Other, net 84 (57)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 9,518 5,927
- --------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 862 710
Cash and cash equivalents at beginning of period 4,033 3,260
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,895 $ 3,970
========================================================================================================
Supplemental disclosure of cash flow information:
Income taxes paid $ 404 $ 713
========================================================================================================
</TABLE>
Interest expense recorded for financial statement purposes did not differ
materially from the amount of interest paid.
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
Travelers Group Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements as of June
30, 1998 and for the three-month and six-month periods ended June 30, 1998
and 1997 are unaudited and include the accounts of Travelers Group Inc.
(TRV) and its subsidiaries (collectively, the Company). In the opinion of
management all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation have been reflected. The condensed
consolidated financial statements, including the notes thereto, should be
read in conjunction with the consolidated financial statements and related
notes included in TRV's Annual Report to Stockholders for the year ended
December 31, 1997.
Certain financial information that is normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles, but is not required for interim reporting purposes,
has been condensed or omitted.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
At TRV's Annual Meeting of Stockholders on April 22, 1998, shareholders
approved an amendment to the Restated Certificate of Incorporation to
increase the common stock authorized for issuance from 1.5 billion shares
to 3 billion shares. At a Special Meeting of Stockholders of TRV held on
July 22, 1998, shareholders approved another amendment to the Restated
Certificate of Incorporation to increase the common stock authorized for
issuance to 6 billion shares.
2. Pending Transactions
Merger with Citicorp
On April 5, 1998, TRV and Citicorp agreed to combine in a merger of equals
(the Merger), with the stockholders of each company owning approximately
50% of the outstanding common stock of the combined company after the
merger. TRV's stockholders will retain their existing shares, which will
automatically represent shares of Citigroup Inc., the new name of TRV
following the Merger. Each share of Citicorp Common Stock will be
exchanged for 2.5 shares of Citigroup Common Stock. The transaction will
be effected through a merger of Citicorp into a newly formed, wholly owned
subsidiary of TRV. The Merger, which is anticipated to be completed in the
third quarter of 1998, is expected to be accounted for under the pooling
of interests method, and, accordingly, the Company's historical
consolidated financial statements presented in future reports will be
restated to include the accounts and results of Citicorp. The Merger
and/or related transactions are subject to customary closing conditions,
including regulatory approvals. On July 22, 1998, the stockholders of each
of TRV and Citicorp approved the Merger.
TRV has applied to the Federal Reserve Board to become a bank holding
company under the provisions of the Bank Holding Company Act of 1956 (the
BHCA). The BHCA precludes a bank holding company and its affiliates from
engaging in certain activities, generally including insurance
underwriting. Under the BHCA in its current form, the Company has two
years from the date it becomes a bank holding company to comply with all
applicable provisions (the BHCA Compliance Period). The BHCA Compliance
Period may be extended, at the discretion of the Federal Reserve Board,
for three additional one-year periods so long as the extension is not
deemed to be detrimental to the public interest.
Upon consummation of the Merger, and as a direct result of TRV becoming a
bank holding company, the BHCA will impose certain restrictions on the
Company's operations going forward, including the ability to make
acquisitions of certain insurance underwriters. It is not expected that
such restrictions will impede the Company's existing businesses
7
<PAGE>
in any material respect or preclude the Company from expanding its
existing insurance underwriting activities (other than by acquisition of
certain insurance underwriters). At this time, the Company believes that
its compliance with applicable law following the Merger will not have a
material adverse effect on the Company's financial condition or results of
operations.
There is pending federal legislation that would, if enacted, amend the
BHCA to authorize a bank holding company to own certain insurance
underwriters. There is no assurance that such legislation will be enacted.
Prior to expiration of the BHCA Compliance Period, the Company will
evaluate its alternatives in order to comply with whatever laws are then
applicable.
The Nikko Securities Co., Ltd.
In early June, The Nikko Securities Co., Ltd. (Nikko) and TRV announced
their intention to form a global strategic alliance. The proposed
agreement calls for the formation of a joint venture, called Nikko Salomon
Smith Barney Limited, which will provide investment banking, sales,
trading and research services for corporate and institutional clients in
Japan and overseas. It will combine the Japanese institutional and
corporate business of Salomon Smith Barney with Nikko's domestic and
international institutional and corporate business. Nikko's retail
business and other activities, including asset management, will continue
under the management of Nikko. Nikko Salomon Smith Barney will be owned
51% by Nikko and 49% by Salomon Smith Barney.
In addition, TRV has agreed to purchase 9.5% of Nikko's common stock
outstanding plus bonds convertible into an additional 15.5% common equity
interest in Nikko on a fully diluted basis, for a purchase price of
approximately $1.5 billion.
A definitive joint venture agreement is expected to be signed by the end
of August 1998, concurrent with TRV's purchase of Nikko's common stock and
convertible bonds, and it is anticipated that the joint venture will be
operational in January 1999 subject to applicable regulatory approvals.
3. Merger with Salomon
On November 28, 1997, a newly formed, wholly owned subsidiary of TRV
merged with and into Salomon Inc (Salomon) (the Salomon Merger).
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 Salomon Merger was
accounted for as a pooling of interests and constituted a tax-free
exchange. As a result of the Salomon Merger, Salomon Smith Barney recorded
in the fourth quarter of 1997 a restructuring charge of $838 million ($496
million after tax). The material components of the restructuring reserve
were as follows:
<TABLE>
<CAPTION>
Original Restructuring Charges and Credits Restructuring Reserve
(millions) Reserve through June 30, 1998 Balance at June 30, 1998
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seven World Trade Center lease $610 ($324)* $286
Other facilities 53 (18) 35
---------------------------------------------------------------------------------------------------------------------
Total facilities 663 (342) 321
Severance 161 (122) 39
Other 14 (3) 11
---------------------------------------------------------------------------------------------------------------------
$838 ($467) $371**
---------------------------------------------------------------------------------------------------------------------
</TABLE>
* In the second quarter of 1998, the Company recorded an adjustment of $324
million ($191 million after tax) to the restructuring reserve relating to
the Seven World Trade Center lease. This reduction in the reserve resulted
from negotiations on a sub-lease which indicated that excess space would
be disposed of on terms more favorable than had originally been estimated.
A current reassessment of space needs, including the pending merger with
Citicorp, could indicate a need for increased occupancy by the Company of
space previously considered excess, and could result in a further
adjustment to reduce the restructuring reserve.
** Reflects $146 million cash component and $225 million non-cash component.
8
<PAGE>
The cash component of these costs will be funded from working capital and
will not require any incremental funding source.
All of the amounts were determined in accordance with accounting
guidelines set forth in Emerging Issues Task Force Issue No. 94-3 and
represent costs that are not associated with future revenues and are
either (1) incremental or (2) contractual with no economic benefit.
At June 30, 1998, the cash and non-cash balances of the restructuring
reserve related to facilities are $97 million and $224 million,
respectively. Lease costs represent the difference between contractual
obligations and the estimated fair market rental obtainable through
sublease from the date that such facilities are expected to be vacated and
other costs incidental to sublease. These contractual lease payments are
estimated to be expended over the remaining term and the remaining cash
costs are expected to be paid in 1998 and 1999.
Non-cash costs of other facilities reflect the write-off of leasehold
improvements, furniture and equipment upon abandonment and represent the
remaining depreciated book value at the estimated dates of abandonment.
Depreciation of these assets will be continued during the period they are
in use.
The facilities are located primarily in the United States and generally
support multiple lines of business. The assets have not been reclassified
to a held for sale category since substantially all are subject to
abandonment and will not be realized through sale.
Severance costs, which covered approximately 1,900 employees, primarily in
the United States, are expected to be paid by the end of 1998.
None of the amounts included in the restructuring charge represent
operating losses or income.
4. Changes in Accounting Principles and Accounting Standards not yet Adopted
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (FAS) No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS 125," which was effective for transfers and
pledges of certain financial assets and collateral made after December 31,
1997. The adoption of FAS No. 127 created additional assets and
liabilities on the Company's condensed consolidated statement of financial
position related to the recognition of securities provided and received as
collateral. At June 30, 1998, the impact of FAS No. 127 on the Company's
condensed consolidated statement of financial position was an increase to
total assets and liabilities of approximately $6.1 billion. In addition,
as a result of FAS No. 127, certain inventory positions, primarily,
"Non-U.S. government and government agency securities" have been
reclassified to receivables or payables.
Effective January 1, 1998, the Company adopted 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 an annual financial statement
that is displayed with the same prominence as other financial statements.
This statement stipulates that comprehensive income reflect the change in
equity of an enterprise during a period from transactions and other events
and circumstances from nonowner sources. Comprehensive income will thus
represent the sum of net income and other changes in stockholders' equity
from nonowner sources. The accumulated balance of changes in equity from
nonowner sources is required to be displayed separately from retained
earnings and additional paid-in capital in the statement of financial
position. The adoption of FAS No. 130 resulted primarily in the Company
reporting unrealized gains and losses on investments in debt and equity
securities held by the insurance subsidiaries in changes in equity from
nonowner sources. The Company's total changes in equity from nonowner
sources is as follows:
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
(millions) 1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $1,141 $ 883 $2,234 $1,698
Other changes in equity from nonowner sources 148 569 116 (40)
----------- ----------- ----------- -----------
Total changes in equity from nonowner sources $1,289 $1,452 $2,350 $1,658
=========== =========== =========== ===========
</TABLE>
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and for determining when specific costs should be capitalized
and when they should be expensed. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. Restatement
of previously issued financial statements is not allowed. The Company has
not yet determined the impact that SOP 98-1 will have on its consolidated
financial statements or when it will be implemented.
In June 1998, the Financial Accounting Standards Board (FASB) issued FAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(FAS No. 133), which becomes effective on January 1, 2000 for calendar
year companies such as the Company. The new standard will significantly
change the accounting treatment of end-user derivative and foreign
exchange contracts by the Company and its customers. Depending on the
underlying risk management strategy, these accounting changes could affect
reported earnings, assets, liabilities, and stockholders' equity. As a
result, the Company and the customers to which it provides derivatives and
foreign exchange products will have to reconsider their risk management
strategies, since the new standard will not permit reflecting the results
of many of those strategies in the same manner as current accounting
practice. The Company is in the process of evaluating the potential
impact of the new accounting standard.
10
<PAGE>
5. Earnings Per Share
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
(in millions, except per share amounts) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 1,141 $ 883 $ 2,234 $ 1,698
Preferred dividends (31) (36) (62) (72)
--------- --------- --------- ---------
Net income available to common stockholders for
basic EPS 1,110 847 2,172 1,626
Effect of dilutive securities 6 10 12 20
--------- --------- --------- ---------
Net income available to common stockholders
for diluted EPS $ 1,116 $ 857 $ 2,184 $ 1,646
========= ========= ========= =========
Weighted average common shares
outstanding applicable to basic EPS 1,117.7 1,101.1 1,116.8 1,102.5
Effect of dilutive securities:
Convertible securities 13.2 26.6 13.2 26.6
Employee stock plans 37.8 43.3 37.2 43.6
Warrants 3.4 7.0 3.3 6.9
--------- --------- --------- ---------
Adjusted weighted average common shares
outstanding applicable to diluted EPS 1,172.1 1,178.0 1,170.5 1,179.6
========= ========= ========= =========
Basic earnings per share $ 0.99 $ 0.77 $ 1.94 $ 1.47
========= ========= ========= =========
Diluted earnings per share $ 0.95 $ 0.73 $ 1.87 $ 1.40
========= ========= ========= =========
</TABLE>
6. Debt
Investment banking and brokerage borrowings consisted of the following:
(millions) June 30, 1998 December 31, 1997
---------- ------------- -----------------
Commercial paper $14,187 $ 7,110
Other short-term borrowings 4,495 4,354
------------ -----------
$18,682 $11,464
============ ===========
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 June 30, 1998 and December 31, 1997 was U.S. dollar
denominated.
Salomon Smith Barney has a $1.5 billion revolving credit agreement with a
bank syndicate that extends through May 2001, and a $3.5 billion 364-day
revolving credit agreement that extends through May 1999. 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 agreements). At June 30, 1998, this
requirement was exceeded by approximately $3.4 billion. At June 30, 1998,
there were no borrowings outstanding under either facility.
11
<PAGE>
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 consisted of commercial paper outstanding as
follows:
(millions) June 30, 1998 December 31, 1997
---------- ------------- -----------------
Commercial Credit Company $4,392 $3,871
Travelers Property Casualty Corp. - 108
---------- ---------
$4,392 $3,979
========== =========
Long-term debt, including its current portion, consisted of the following:
(millions) June 30, 1998 December 31, 1997
---------- ------------- -----------------
Travelers Group Inc. $ 1,975 $ 1,695
Salomon Smith Barney Holdings Inc. 20,988 19,064
Commercial Credit Company 6,300 6,300
Travelers Property Casualty Corp. 1,250 1,249
The Travelers Insurance Group Inc. 38 44
------------ ----------
$30,551 $28,352
============ ==========
TRV, Commercial Credit Company (CCC), Travelers Property Casualty Corp.
(TAP) and The Travelers Insurance Company (TIC) issue commercial paper
directly to investors. Each maintains unused credit availability under its
respective bank lines of credit (as discussed below) 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
August 6, 1998, $700 million was allocated to TRV and $300 million was
allocated to CCC. Under this facility, the Company is required to maintain
a certain level of consolidated stockholders' equity (as defined in the
agreement). At June 30, 1998, this requirement was exceeded by
approximately $11.4 billion. At June 30, 1998, there were no borrowings
outstanding under this facility.
Currently, CCC also has committed and available revolving credit
facilities on a stand-alone basis of $4.750 billion, consisting of $3.4
billion in five-year facilities expiring in 2002 and $1.350 billion in a
364-day facility expiring in July 1999.
CCC is limited by covenants in its revolving credit agreements as to the
amount of dividends and advances that may be made to its parent or its
affiliated companies. At June 30, 1998, CCC would have been able to remit
$672 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 June 30, 1998, this
requirement was exceeded by approximately $3.8 billion. At June 30, 1998,
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 subsidiaries are limited to
$805 million in 1998 without the prior approval of the
12
<PAGE>
Connecticut Insurance Department. TAP received $220 million of dividends
from its insurance subsidiaries during the first six months of 1998.
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, of which $110 million has been
paid during the first six months of 1998.
7. Trading Derivatives
The following table discloses the notional amounts of derivative financial
instruments held by Salomon Smith Barney for trading purposes as of June
30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
----------------------------------- -------------------------------
Current Market or Current Market or
Fair Value Fair Value
Notional -------------------- Notional --------------------
(billions) Amounts Assets Liabilities Amounts Assets Liabilities
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange-issued products:
Futures contracts (a) $1,110.4 $ -- $ -- $940.5 $ -- $ --
Other exchange-issued products:
Equity contracts 7.6 0.2 0.3 10.6 0.2 0.4
Fixed income contracts 167.9 0.1 0.1 138.1 -- --
Commodities contracts 2.3 -- -- 3.5 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total exchange-issued products 1,288.2 0.3 0.4 1,092.7 0.2 0.4
- -----------------------------------------------------------------------------------------------------------------------------
Over-the-counter swaps, swap options, caps and floors:
Swaps 1,685.5 1,328.3
Swaps options written 52.8 38.6
Swap options purchased 66.4 48.8
Caps and floors 171.5 161.4
- -----------------------------------------------------------------------------------------------------------------------------
Total OTC swaps, swap options, caps and floors 1,976.2 6.5 6.4 1,577.1 5.8 6.7
- -----------------------------------------------------------------------------------------------------------------------------
OTC foreign exchange contracts and options:
Forward currency contracts 138.6 1.3 1.2 111.3 1.0 1.0
Options written 72.6 -- 0.7 41.3 -- 0.6
Options purchased 58.5 0.8 -- 37.7 0.6 --
- -----------------------------------------------------------------------------------------------------------------------------
Total OTC foreign exchange contracts and options 269.7 2.1 1.9 190.3 1.6 1.6
- -----------------------------------------------------------------------------------------------------------------------------
Other options and contractual commitments:
Options and warrants on equities and equity indices 58.1 3.1 3.7 54.8 1.8 2.7
Options and forward contracts on fixed-income
securities 511.1 0.3 0.3 343.4 0.3 0.1
Commodities contracts 10.1 0.3 0.2 14.3 0.4 0.2
- -----------------------------------------------------------------------------------------------------------------------------
Total contractual commitments $4,113.4 $12.6 $12.9 $3,272.6 $10.1 $11.7
=============================================================================================================================
</TABLE>
(a) Margin on futures contracts is included in brokerage receivables/payables
on the Condensed Consolidated Statement of Financial Condition.
8. Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
In January 1998, Travelers Capital IV, a wholly owned subsidiary trust of
TRV, issued 8 million 6.850% Trust Preferred Securities (the TRV IV
Preferred Securities) with a liquidation preference of $25 per TRV IV
Preferred Security to the public and 247,440 common securities to TRV, the
proceeds of which were invested by Travelers Capital IV in $206 million of
6.850% Junior Subordinated Deferrable Interest Debentures issued by TRV
(the TRV Debentures). The $206 million of TRV Debentures is the sole asset
of Travelers Capital IV. The TRV Debentures mature on January 22, 2038 and
are redeemable by TRV in whole or in part at any time after January 22,
2003. Travelers Capital IV will use the proceeds from any such redemption
to redeem a like amount of TRV IV Preferred Securities and common
securities. Distributions on the TRV IV Preferred Securities and common
securities are cumulative and payable quarterly in arrears. TRV's
obligations under the agreements that relate to the TRV IV Preferred
Securities, the Trust and the TRV Debentures constitute a full and
unconditional guarantee by TRV of the Trust's obligations under the TRV IV
Preferred Securities.
13
<PAGE>
In January 1998, SSBH Capital I, a wholly owned subsidiary trust of
Salomon Smith Barney, issued 16 million 7.2% Trust Preferred Securities
(SSBH Capital Preferred Securities) with a liquidation preference of $25
per SSBH Capital Preferred Security to the public and 494,880 common
securities to Salomon Smith Barney, the proceeds of which were invested by
SSBH Capital I in $412 million of 7.2% Subordinated Deferrable Interest
Debentures issued by Salomon Smith Barney (the Salomon Smith Barney
Debentures). The $412 million of Salomon Smith Barney Debentures is the
sole asset of SSBH Capital I. The Salomon Smith Barney Debentures mature
on January 28, 2038 and are redeemable by Salomon Smith Barney in whole or
in part at any time after January 28, 2003. SSBH Capital I will use the
proceeds from any such redemption to redeem a like amount of SSBH Capital
Preferred Securities and common securities. Distributions on the SSBH
Capital Preferred Securities and common securities are cumulative and
payable quarterly in arrears. Salomon Smith Barney's obligations under the
agreements that relate to the SSBH Capital Preferred Securities, the Trust
and the Salomon Smith Barney Debentures constitute a full and
unconditional guarantee by Salomon Smith Barney of the Trust's obligations
under the SSBH Capital Preferred Securities.
9. Contingencies
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.
The reserves carried for environmental and asbestos claims at June 30,
1998 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.
In the ordinary course of business TRV and/or its subsidiaries are also
defendants or co-defendants in various litigation matters, other than
those described above. Although there can be no assurances, the Company
believes, based on information currently available, that the ultimate
resolution of these legal proceedings would not be likely to have a
material adverse effect on the Company's results of operations, financial
condition or liquidity.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
Consolidated Results of Operations
<TABLE>
<CAPTION>
-----------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------
(in millions, except per share amounts) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 10,096 $ 9,184 $ 20,464 $ 17,884
========= ========= ========== ==========
Net income $ 1,141 $ 883 $ 2,234 $ 1,698
========= ========= ========== ==========
Earnings per share:
Basic $ 0.99 $ 0.77 $ 1.94 $ 1.47
========= ========= ========== ==========
Diluted $ 0.95 $ 0.73 $ 1.87 $ 1.40
========= ========= ========== ==========
Weighted average common shares
outstanding (Basic) 1,117.7 1,101.1 1,116.8 1,102.5
========= ========= ========== ==========
Adjusted weighted average common shares
outstanding (Diluted) 1,172.1 1,178.0 1,170.5 1,179.6
========= ========= ========== ==========
</TABLE>
Results of Operations
Consolidated results of operations include the accounts of Travelers Group Inc.
(TRV) and its subsidiaries (collectively, the Company). Consolidated net income
for the quarter ended June 30, 1998 was $1.141 billion, and includes reported
investment portfolio gains of $28 million after tax and minority interest and a
credit of $191 million representing a reduction in the restructuring reserve
recorded in the fourth quarter of 1997 in connection with the Salomon Inc
merger (see Note 3 of Notes to Condensed Consolidated Financial Statements).
This compares with net income of $883 million in the 1997 period, which included
reported investment portfolio gains of $6 million after tax and minority
interest. Excluding portfolio gains and losses and the restructuring reserve
credit, income from operations for the second quarter of 1998 increased $45
million or 5% over the comparable period in 1997, primarily reflecting improved
performance at the consumer finance and insurance operations, offset by a
decline in earnings at Salomon Smith Barney.
Consolidated net income for the six months ended June 30, 1998 was $2.234
billion, compared to $1.698 billion in the 1997 period. In addition to the
reserve adjustment discussed above, the 1998 six-month period includes portfolio
gains of $114 million compared to $15 million in portfolio gains in the 1997
period. Excluding these items, net income for the first six months of 1998
increased $246 million or 15% above the comparable period in 1997.
The following discussion presents in more detail each segment's performance.
15
<PAGE>
Segment Results for the Three Months Ended June 30, 1998 and 1997
Investment Services
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------
(millions) Revenues Net income Revenues Net income
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment banking and brokerage (1) $5,582 $538 $5,116 $404
Asset management 227 63 194 49
- -----------------------------------------------------------------------------------------------------------
Salomon Smith Barney $5,809 $601 $5,310 $453
===========================================================================================================
</TABLE>
(1) Net income in 1998 includes a $191 million after-tax credit to income
resulting from adjustment of the restructuring reserve related to the
merger with Salomon Inc.
Salomon Smith Barney reported earnings (before the above mentioned restructuring
credit) of $410 million for the quarter ended June 30, 1998, compared to $453
million reported for the quarter ended June 30, 1997 reflecting lower earnings
from principal transactions as a result of losses in global arbitrage and
commodities trading. Revenues, net of interest expense were $2.742 billion in
the 1998 quarter, relatively even with $2.732 billion in the 1997 quarter.
Salomon Smith Barney's return on equity (before the restructuring credit) was
18.2% in the second quarter of 1998, down from 23.2% in the second quarter of
1997 and 23.1% in the first quarter of 1998. The pretax profit margin (before
the restructuring credit) was 23.5% in the second quarter of 1998, down from
27.1% in the second quarter of 1997.
Salomon Smith Barney Revenues
Three Months ended June 30,
-----------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Commissions $ 784 $ 686
Investment banking 640 475
Principal transactions 315 709
Asset management and administration fees 553 399
Interest income, net* 401 430
Other income 49 33
- --------------------------------------------------------------------------------
Net revenues* $ 2,742 $ 2,732
================================================================================
* Net of interest expense of $3.067 billion and $2.578 billion for the
three-month period ended June 30, 1998 and 1997, respectively. Revenues
included in the condensed consolidated statement of income are before
deductions for interest expense.
Commission revenues increased 14% to $784 million in the second quarter of 1998
from $686 million in the second quarter of 1997. This increase is a result of
strong activity in sales of over-the-counter and listed securities and mutual
fund commissions.
Investment banking revenues increased 35% to $640 million in the second quarter
of 1998 up from $475 million in the second quarter of 1997. The increase in
investment banking revenues reflect increases in all debt and equity
underwriting categories including equities, high yield, public finance, high
grade and unit trusts, as well as higher merger and acquisition advisory fees.
Principal transactions revenues declined sharply to $315 million, down $394
million from last year's second quarter and $464 million from the first quarter
of 1998. The drop was a result of losses principally
16
<PAGE>
in the U.S. fixed income arbitrage business and from commodities trading
conducted by Phibro Inc. In early July, the decision was made to restructure and
significantly reduce the risk profile of the U.S. arbitrage group's activities
because of the lessening profit opportunities and the growing risk and
volatility of the markets.
Asset management and administration fees increased 39% to $553 million in the
second quarter of 1998, up from $399 million in the second quarter of 1997. This
reflects broad growth in all recurring fee-based products. At June 30, 1998,
internally managed assets were $183.9 billion and total assets under fee-based
management were $253.2 billion compared to $150.1 billion and $203.2 billion,
respectively, at June 30, 1997.
Net interest and dividends decreased to $401 million in the second quarter of
1998, from $430 million in the second quarter of 1997 due to a decrease in the
level of net interest-earning assets, partially offset by increased margin
lending to clients.
Compensation and benefits expense, as a percentage of net revenues, for the
second quarter of 1998 was 56.3% compared to 52.8% in the second quarter of 1997
and non-compensation expense (before the restructuring credit) as a percentage
of net revenues was 20.2% in the 1998 quarter compared to 20.1% in the 1997
quarter. Salomon Smith Barney continues to maintain its focus on controlling
fixed expenses.
Assets Under Fee-Based Management
At June 30,
--------------------------------
(billions) 1998 1997
- --------------------------------------------------------------------------------
Money market funds $ 51.1 $ 44.3
Mutual funds 57.6 43.8
Managed accounts 60.9 52.2
- --------------------------------------------------------------------------------
Salomon Smith Barney Asset Management 169.6 140.3
Financial Consultant managed accounts 14.3 9.8
- --------------------------------------------------------------------------------
Total internally managed accounts 183.9 150.1
Consulting Group externally managed assets 69.3 53.1
- --------------------------------------------------------------------------------
Total assets under fee-based management $ 253.2 $ 203.2
================================================================================
Although included in Salomon Smith Barney's overall results, the following
highlights the revenues and operating earnings of the asset management division:
<TABLE>
<CAPTION>
Three months ended June 30,
--------------------------------
(millions) 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Investment advisory, administration and distribution fees $ 214 $ 173
Unit Investment Trust revenues - net 7 7
Other revenues 6 14
- ------------------------------------------------------------------------------------------------
Total revenues $ 227 $ 194
================================================================================================
Operating earnings $ 63 $ 49
================================================================================================
</TABLE>
The division's 29% increase in earnings reflects continued strength in mutual
funds, managed accounts, and its share of unit trust revenues, as well as the
acquisition of $5.9 billion of Common Sense(R) Trust assets at year-end 1997.
17
<PAGE>
At June 30, 1998, assets under fee-based management for Salomon Smith Barney
Asset Management consisted of 30% in money market funds, 34% in mutual funds and
36% in accounts managed for high net worth individuals, pension funds,
corporations and other institutions. Investment advisory, administration and
distribution fees rose 24% to $214 million in the second quarter of 1998,
reflecting a 21% increase in assets under fee-based management from the
comparable period last year.
In the mutual fund sector, dollar inflows increased and performance continued to
show improvement. In addition, during the first half of the year, sales of
proprietary mutual funds rose 48%, and they accounted for an increasing
percentage - 28% in the second quarter of 1998 compared to 25% in the 1997
period - of Salomon Smith Barney's total mutual fund sales.
New products successfully introduced recently include the closed-end Salomon
Brothers High Income Fund II which raised $985 million. In addition, the
acquisition of the asset management business of J.P. Morgan Australia, with $4.8
billion (U.S.) under management closed in July 1998.
Consumer Finance Services
Three Months Ended June 30,
----------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Consumer Finance Services $514 $69 $380 $54
================================================================================
Earnings in the second quarter of 1998 were $69 million compared to $54 million
in the second quarter of 1997. This segment's performance reflects continued
internal receivables growth in all major products, an improved charge-off rate
and the integration of Security Pacific Financial Services (Security Pacific)
into the Commercial Credit Company branch system since July 1997.
Net receivables owned reached a record $12.1 billion, up 34% from the prior year
period and up $1.032 billion or 9% since year-end 1997. This excludes $255.1
million in credit card receivables securitized on March 6, 1998. Most of the
receivables growth was in real estate-secured loans, which reflects the strength
of this product among Primerica Financial Services (PFS) representatives as well
as strong sales in the branch network. On a managed basis, including securitized
assets, receivables totaled $12.3 billion, an increase of $1.1 billion from
year-end 1997.
During the second quarter of 1998, the average yield on owned receivables was
14.15%, down from 14.42% in the second quarter of 1997, reflecting the shift in
the portfolio mix toward lower-risk real estate loans, which have lower margins.
At June 30, 1998, the owned portfolio consisted of 47% real estate-secured
loans, 34% personal loans, 12% credit cards and 7% sales finance and other.
The charge-off rate on owned receivables of 2.66% in the second quarter of 1998
continued to improve from 2.82% in the second quarter of 1997 and from 2.75% in
the first quarter of 1998. Delinquencies over 60 days on owned receivables were
2.23% at June 30, 1998, up from 2.14% at June 30 1997, which did not include
Security Pacific, and down from 2.33% at March 31, 1998.
18
<PAGE>
As of, or for the
Three Months Ended June 30,
--------------------------------
1998 1997
--------------------------------
Allowance for credit losses as a % of
net outstandings 2.87% 2.91%
Charge-off rate for the period 2.66% 2.82%
60 + days past due on a contractual
basis as a % of gross consumer
finance receivables at quarter end 2.23% 2.14%
Life Insurance Services
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------------
1998 1997
-----------------------------------------------------
(millions) Revenues Net income Revenues Net income
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Life and Annuity(1) $ 800 $152 $ 666 $ 115
Primerica Financial Services(2) 421 104 375 81
- ----------------------------------------------------------------------------------------
Total Life Insurance Services $ 1,221 $256 $ 1,041 $ 196
========================================================================================
</TABLE>
(1) Net income includes $22 million and $10 million of reported investment
portfolio gains in 1998 and 1997, respectively.
(2) Net income includes $1 million of reported investment portfolio losses in
1997.
Travelers Life and Annuity
Travelers Life and Annuity consists of annuity, life and long-term care products
marketed by The Travelers Insurance Company (TIC) under the Travelers name.
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. It 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 increased 24% to $130 million in the second
quarter of 1998, from $105 million in the comparable 1997 period. These record
earnings were largely driven by double-digit growth in business volume in all
product lines and strong investment income. The substantial increase in
investment income for the quarter resulted primarily from participation in
partnership investment interests.
In deferred annuities, significant sales through Salomon Smith Barney Financial
Consultants and Copeland, combined with favorable market returns from variable
annuities, drove account balances to $18.151 billion at June 30, 1998, up 23% or
$3.434 billion from a year ago. Net written premium and deposits for the quarter
were up 23% to $774.3 million, of which more than 75% was generated
19
<PAGE>
by cross-selling through Salomon Smith Barney Financial Consultants and
Copeland. Net written premium and deposits through Salomon Smith Barney rose 18%
to $269 million, while Copeland's net written premium and deposits increased 21%
to $315 million, reflecting growth in its core business and continued success
with the Salomon Smith Barney joint venture in the small company segment of the
401(k) market. New annuity products have also been introduced to the Primerica
Financial Services distribution network, and there has been a launch of a pilot
program through Citibank's branch network.
Payout and group annuity account balances and benefit reserves reached $12.673
billion at June 30, 1998, up 10% from a year ago. The revitalization of this
business is reflected in the 63% increase in net written premiums and deposits
(excluding the Company's employee pension plan deposits) in the second quarter
of 1998 to $1.028 billion, up from $632.0 million in the comparable 1997 period.
For individual life insurance, net written premiums and deposits in the second
quarter of 1998 were $82.7 million, up 22% from $68.0 million in the second
quarter of 1997. Single deposits rose nearly 50% to $20.5 million. Sales by
Salomon Smith Barney in the second quarter of 1998 increased to over 30% of new
periodic premium and single deposits. Life insurance in force was $53.2 billion
at June 30, 1998, up $2.5 billion from a year ago.
Earned premiums for the growing long-term care insurance product line increased
25% to $48.7 million in the second quarter of 1998 from $39.1 million in the
second quarter of 1997. Sales through Salomon Smith Barney and other TRV
subsidiaries represented over 25% of total sales for the quarter.
Primerica Financial Services
Earnings before portfolio gains for the second quarter of 1998 increased 26% to
$104 million from $82 million in the second quarter of 1997, reflecting
continued success at cross-selling a range of products, growth in life insurance
in force, favorable mortality experience and disciplined expense management.
Life insurance in force reached a record $377.5 billion at June 30, 1998, up 3%
from June 30, 1997, reflecting good policy persistency and stable sales growth.
New term life insurance sales during the second quarter of 1998 were $15.8
billion in face value, up from $14.1 billion in the second quarter of 1997.
Although the number of policies issued declined quarter-over-quarter, the
average face amount per policy issued during the second quarter of 1998
continued to rise, reaching $224,975.
Cross-selling ventures demonstrated continued success. During the second quarter
of 1998, earnings related to the distribution of non-life insurance products
accounted for $23.0 million, or 22%, of PFS's operating earnings, an increase of
73% from the prior year quarter.
Sales of mutual funds (at net asset value) were $833.2 million for the second
quarter of 1998, a 24% increase over second quarter 1997 sales of $669.4 million
despite some softness in the Canadian mutual fund market. During the second
quarter 1998, Salomon Smith Barney funds accounted for 56% of PFS's U.S. sales
and 48% of total sales.
Cash advanced on $.M.A.R.T. loan(R) and $.A.F.E.(R) loan products underwritten
by Commercial Credit was up almost 25% to $421.2 million in the second quarter
of 1998. The TRAVELERS SECURE(R) line of property and casualty insurance
products showed strong growth, with premiums up 267% to $55.8 million and the
number of policies sold in the second quarter of 1998 up 80% to almost 40,000.
Since the beginning of 1998 the number of agents licensed to sell auto and
homeowners insurance jumped almost 30% to over 11,100 individuals. Variable
annuity sales also climbed, reaching net written premiums and deposits of $175.2
million in the second quarter of 1998.
20
<PAGE>
One of the primary factors in PFS's cross-selling success, the Financial Needs
Analysis (FNA), continues to help the company's Personal Financial Analysts
define and address their client's needs. More than 271,000 FNA's were submitted
since the beginning of 1998, indicating the potential that more than one-half
million people will have an analysis performed for them before year-end 1998.
Property & Casualty Insurance Services
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------
(millions) 1998 1997
- -----------------------------------------------------------------------------------------
Net Net
income income
Revenues (loss) Revenues (loss)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial(1)(2) $1,620 $ 235 $1,612 $ 209
Personal(1)(3) 910 107 815 97
Financing costs and other(1) 2 (29) 4 (30)
Minority interest -- (52) -- (49)
- -----------------------------------------------------------------------------------------
Total Property & Casualty Insurance Services $2,532 $ 261 $2,431 $ 227
=========================================================================================
</TABLE>
(1) Before minority interest.
(2) Net income includes $7 million of reported investment portfolio gains in
1998.
(3) Net income includes $4 million of reported investment portfolio losses in
1997.
Earnings before portfolio gains and minority interest increased 9% to $306
million in the second quarter of 1998 from $280 million in the second quarter of
1997. This increase in earnings was primarily the result of increased after-tax
net investment income and continued productivity improvements and expense
savings, partially offset by increased catastrophe losses.
Commercial Lines
Earnings before portfolio gains increased 9% to $228 million in the second
quarter of 1998 from $209 million in the second quarter of 1997, primarily
reflecting strong net investment income and continued expense savings, partially
offset by increased losses from catastrophes and other weather-related events.
Catastrophe losses in the second quarter of 1998 were $10.4 million after taxes
and reinsurance, primarily due to tornadoes in Nashville, Tennessee, compared to
insignificant losses in the prior year period.
Commercial Lines net written premiums for the second quarter of 1998 totaled
$1.121 billion, compared to $1.141 billion in the second quarter of 1997. The
decrease was driven by lower premiums from involuntary workers' compensation
pools. Also, net written premium levels continue to be unfavorably impacted by
the difficult pricing environment and reflect the Company's disciplined approach
to underwriting and risk management.
Fee income for the second quarter of 1998 was $76.9 million, a $14.5 million
decrease from the second quarter of 1997. This decrease was the result of the
depopulation of involuntary pools as the loss experience of workers'
compensation improved and insureds moved to voluntary markets, the Company's
continued success in lowering workers' compensation losses of service customers
and a slight increase in demand in the marketplace for guaranteed cost products.
21
<PAGE>
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 of $121.6 million for the second quarter of 1998 decreased $28.1
million from the second quarter of 1997. This decrease was primarily the result
of pricing declines due to the highly competitive marketplace, a decrease in the
Company's level of involuntary pool participation and the Company's continued
disciplined approach to underwriting and risk management. National Accounts new
business and the business retention ratio were significantly lower in the second
quarter of 1998 than in the second quarter of 1997, reflecting the addition of
one large account in the second quarter of 1997 and the loss of one large
account in the second quarter of 1998.
Commercial Accounts serves mid-sized businesses through a network of independent
agents and brokers. Commercial Accounts net written premiums were $440.8 million
in the second quarter of 1998 compared to $453.0 million in the second quarter
of 1997. The decrease in net written premiums reflected continued pricing
declines due to the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management, partially offset by
growth through programs designed to leverage underwriting experience in specific
industries. Commercial Accounts new business in the second quarter of 1998 was
significantly lower than in the second quarter of 1997. Commercial Accounts
business retention ratio was moderately lower in the second quarter of 1998 than
in the second quarter of 1997. New business and business retention ratios
reflected the Company's focus on maintaining its selective underwriting policy.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $393.7 million in the second quarter
of 1998 compared to $369.6 million in the second quarter of 1997. The increase
in Select Accounts net written premiums was due to a decrease in ceded premiums,
partially offset by the highly competitive marketplace and the Company's
continued disciplined approach to underwriting and risk management. New premium
business in Select Accounts was virtually the same in the second quarter of 1998
and 1997. Select Accounts business retention ratio remained strong in the second
quarter of 1998 and was virtually the same as the second quarter of 1997.
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 $164.7 million in the second quarter of 1998 compared to
$168.4 million in the second quarter of 1997. This decrease primarily reflects a
highly competitive marketplace and the Company's continued disciplined approach
to underwriting and risk management.
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the second quarter of 1998 was 109.8% compared to 109.7% in the second
quarter of 1997. The GAAP combined ratio (before policyholder dividends) for
Commercial Lines in the second quarter of 1998 was 109.9% compared to 110.0% in
the second quarter of 1997. Although the combined ratios remained relatively
flat, the loss and loss adjustment expense ratio component increased in the
second quarter of 1998 compared to the second quarter of 1997 due to higher
catastrophe and other weather-related property losses and lower fee income, and
was offset by a decrease in the underwriting expense ratio component due to
continued expense savings.
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.
22
<PAGE>
Personal Lines
Earnings before portfolio gains/losses were $107 million in the second quarter
of 1998, compared to $101 million in the second quarter of 1997. The 1998
results were driven by strong net investment income and an increase in
production and were partially offset by higher catastrophe losses and an
increase in investments in service centers and market expansions. Catastrophe
losses, after taxes and reinsurance, were $13.1 million in the second quarter of
1998 compared to $4.5 million in the 1997 quarter. The 1998 catastrophe losses
were due to tornadoes and wind and hail storms in the Southeast and Midwest.
Net written premiums in the second quarter of 1998 grew 17% over the prior year
to $873.9 million. This increase reflects growth in target markets served by
independent agents and growth in affinity group marketing, joint marketing
arrangements and the TRAVELERS SECURE(R) program. Business retention continued
to be strong.
The statutory combined ratio for Personal Lines in the second quarter of 1998
was 92.9% compared to 92.8% in the 1997 second quarter. The GAAP combined ratio
for Personal Lines in the second quarter of 1998 was 91.5% compared to 92.1% in
the 1997 second quarter. Although the combined ratios remained relatively flat,
the loss and loss adjustment expense ratio component increased in the second
quarter of 1998 compared to the second quarter of 1997 due to the higher level
of catastrophe losses and a decrease in favorable prior year reserve development
in the automobile bodily injury line, and was offset by a decrease in the
underwriting expense ratio component due to benefits from productivity
improvements as premium levels increase.
GAAP combined ratios differ from statutory combined ratios for Personal Lines
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
Financing Costs and Other
The primary component of net income (loss) in the second quarter of 1998 and
1997 was interest expense of $26 million after tax, reflecting financing costs
associated with the 1996 acquisition of Travelers Casualty and Surety Company
(formerly The Aetna Casualty and Surety Company) and The Standard Fire Insurance
Company (collectively, Aetna P&C).
Corporate and Other
Three Months Ended June 30,
----------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- --------------------------------------------------------------------------------
Total Corporate and Other $20 $(46) $22 $(47)
================================================================================
Net treasury and corporate staff expenses for the second quarter of 1998 were
approximately even with the prior year period.
23
<PAGE>
Segment Results for the Six Months Ended June 30, 1998 and 1997
The overall operating trends for the six months ended June 30, 1998 and 1997
were substantially the same as those of the second quarter periods except as
noted below:
Investment Services
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------
(millions) Revenues Net income Revenues Net Income
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment banking and brokerage(1) $11,414 $ 981 $ 9,807 $772
Asset management 452 123 380 93
- -----------------------------------------------------------------------------------------------------------------
Salomon Smith Barney $11,866 $ 1,104 $ 10,187 $865
=================================================================================================================
</TABLE>
(1) Net income in 1998 includes a $191 million after-tax credit to the
restructuring charge related to the merger with Salomon Inc.
For the six months ended June 30, 1998 Salomon Smith Barney reported earnings
(before the restructuring reserve credit) of $913 million, an increase of 6%
from the $865 million reported for the six months ended June 30, 1997. Revenues,
net of interest expense, increased 8% to $5.876 billion in the 1998 period
compared to $5.440 billion in the 1997 period. Salomon Smith Barney's return on
equity (before the restructuring credit) was 20.6% in the first half of 1998,
down from 22.5% in the first half of 1997. The pretax profit margin (before the
restructuring credit) was 24.8% in the first half of 1998, down from 26.1% in
the first half of 1997.
Salomon Smith Barney Revenues
Six Months Ended June 30,
---------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Commissions $1,579 $1,402
Investment banking 1,268 959
Principal transactions 1,095 1,471
Asset management and administration fees 1,051 788
Interest income, net* 796 752
Other income 87 68
================================================================================
Net revenues* $5,876 $5,440
================================================================================
* Net of interest expense of $5.990 billion and $4.747 billion for the
six-month period ended June 30, 1998 and 1997, respectively. Revenues
included in the condensed consolidated statement of income are before
deductions for interest expense.
Commission revenues increased 13% to $1.579 billion in the 1998 period from
$1.402 billion in the 1997 period. Investment banking revenues increased 32% to
$1.268 billion in the 1998 period, up from $959 million in the 1997 period.
Principal transaction revenues declined to $1.095 billion in the 1998 period
from $1.471 billion in the 1997 period. Asset management and administration fees
increased 34% to $1.051 billion in the 1998 period, up from $788 million in the
1997 period. Net interest and dividends increased 6% to $796 million in the 1998
period, up from $752 million in the 1997 period.
Compensation and benefits expense, as a percentage of net revenues, for the six
months of 1998 was 55.6% compared to 53.7% in the first six months of 1997 and
non-compensation expense (before the restructuring
24
<PAGE>
credit) as a percentage of net revenues was 19.6% in the 1998 period compared to
20.2% in the 1997 period.
The following highlights the revenues and operating earnings of the asset
management division:
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
(millions) 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Investment advisory, administration and distribution fees $416 $341
Unit Investment Trust revenues - net 20 16
Other revenues 16 23
- ---------------------------------------------------------------------------------------------------
Total revenues $452 $380
===================================================================================================
Operating earnings $123 $ 93
===================================================================================================
</TABLE>
The division's 32% increase in earnings reflects continued strength in mutual
funds, managed accounts, and its share of unit trust revenues, as well as the
acquisition of $5.9 billion of Common Sense(R) Trust assets at year-end 1997.
Investment advisory, administration and distribution fees rose 22% to $416
million in the first six months of 1998, compared to $341 million in the
comparable period last year.
Consumer Finance Services
Six Months Ended June 30,
-----------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------
Consumer Finance Services $999 $129 $757 $101
================================================================================
During the first six months of 1998, the average yield on owned receivables was
14.17%, down from 14.53% in the first six months of 1997. The charge-off rate on
owned receivables of 2.71% in the first six months of 1998 was improved from the
2.88% rate in the first six months of 1997.
Life Insurance Services
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------------------
1998 1997
-----------------------------------------------------------------
(millions) Revenues Net income Revenues Net income
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Travelers Life and Annuity(1) $1,572 $320 $1,284 $220
Primerica Financial Services 822 199 750 160
- --------------------------------------------------------------------------------------------------
Total Life Insurance Services $2,394 $519 $2,034 $380
==================================================================================================
</TABLE>
(1) Net income includes $72 million and $15 million of reported investment
portfolio gains in 1998 and 1997, respectively.
25
<PAGE>
Travelers Life and Annuity
Deferred annuities, net written premium and deposits for the first six months of
1998 were up 33% to $1.594 billion from $1.202 billion in the first six months
of 1997.
Group annuity net written premiums and deposits (excluding the Company's
employee pension plan deposits) in the first six months of 1998 were $1.883
billion, up from $1.279 billion in the comparable 1997 period.
For individual life insurance, net written premiums and deposits in the first
six months of 1998 were $167.9 million, up 22% from $137.8 million in the first
six months of 1997. Single deposits were $44.3 million compared to $25.6 million
in the 1997 period.
Earned premiums for the growing long-term care insurance product line increased
27% to $94.3 million in the first six months of 1998 from $74.0 million in the
first six months of 1997.
Primerica Financial Services
New term life insurance sales during the first six months of 1998 were $28.8
billion in face value, up from $26.1 billion in the first six months of 1997.
During the first six months of 1998, earnings related to the distribution of
non-life insurance products accounted for $42.6 million, or 21%, of PFS's
operating earnings, an increase of 55% from the prior year period.
Sales of mutual funds (at net asset value) were $1.602 billion for the first six
months of 1998, a 15% increase over the first six months of 1997 sales of $1.391
billion.
Cash advanced on $.M.A.R.T. loan(R) and $.A.F.E.(R) loan products was up 20% to
$753.7 million in the first six months of 1998. The TRAVELERS SECURE(R) line of
property and casualty insurance products showed strong growth, with premiums up
almost four-fold to $93.8 million. Variable annuity sales also climbed, reaching
net written premiums and deposits of $301.5 million in the first six months of
1998.
Property & Casualty Insurance Services
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------
(millions) 1998 1997
- ---------------------------------------------------------------------------------------------------
Net Net
income income
Revenues (loss) Revenues (loss)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial(1)(2) $3,317 $495 $ 3,236 $410
Personal(1)(3) 1,803 223 1,620 202
Financing costs and other(1) 6 (58) 6 (63)
Minority interest -- (110) -- (98)
- ---------------------------------------------------------------------------------------------------
Total Property & Casualty Insurance Services $5,126 $550 $ 4,862 $451
===================================================================================================
</TABLE>
(1) Before minority interest.
(2) Net income includes $42 million and $8 million of reported investment
portfolio gains in 1998 and 1997, respectively.
(3) Net income includes $8 million of reported investment portfolio gains in
1998 and $7 million of reported investment portfolio losses in 1997.
26
<PAGE>
Commercial Lines
Commercial Lines net written premiums for the first six months of 1998 totaled
$2.333 billion, compared to $2.479 billion in the first six months of 1997. The
first six months of 1997 net written premiums included an adjustment of $142
million due to a change to conform the Aetna P&C method with The Travelers
Indemnity Company and its subsidiaries (Travelers P&C) method of recording
certain net written premiums.
Fee income for the first six months of 1998 was $158.9 million, a $29.5 million
decrease from the first six months of 1997.
National Accounts net written premiums of $308.2 million for the first six
months of 1998 decreased $63.1 million from the first six months of 1997.
National Accounts new business in the first six months of 1998 was significantly
lower compared to the first six months of 1997. National Accounts business
retention ratio was moderately lower in the first six months of 1998 compared to
the first six months of 1997. New business and business retention ratios reflect
the addition of one large account in the second quarter of 1997 and the loss of
one large account in the second quarter of 1998. Excluding the above, National
Accounts experienced an increase in claim service-only business as well as
favorable results from continued product development efforts, especially in
workers' compensation managed care programs.
Commercial Accounts net written premiums were $903.4 million in the first six
months of 1998 compared to $1.014 billion in the first six months of 1997. The
1997 net written premiums included an adjustment of $127.0 million due to the
change to conform the Aetna P&C method with the Travelers P&C method of
recording certain net written premiums. Excluding this adjustment, net written
premiums increased slightly reflecting lower ceded premiums, partially offset by
pricing declines due to the highly competitive marketplace and the Company's
continued disciplined approach to underwriting and risk management. For the
first six months of 1998, new premium business in Commercial Accounts
significantly declined compared to the first six months of 1997, reflecting the
Company's focus on obtaining new business accounts where it can maintain its
selective underwriting policy. The Commercial Accounts business retention ratio
in the first six months of 1998 remained substantially the same compared to the
first six months of 1997. Commercial Accounts continues to focus on the
retention of existing business while maintaining its product pricing standards
and its selective underwriting policy.
Select Accounts net written premiums were $772.3 million in the first six months
of 1998 compared to $733.3 million in the first six months of 1997. The 1997 net
written premiums included an adjustment of $15.0 million due to the change to
conform the Aetna P&C method with the Travelers P&C method of recording certain
net written premiums. New premium business in Select Accounts was moderately
higher in the first six months of 1998 compared to the first six months of 1997,
reflecting the broader industry and product line expertise of the Company.
Select Accounts business retention ratio remained strong in the first half of
1998 and was virtually the same as that in the first half of 1997.
Specialty Accounts net written premiums were $348.7 million in the first six
months of 1998 compared to $361.0 million in the first six months of 1997.
The statutory combined ratio (before policyholder dividends) for Commercial
Lines in the first six months of 1998 was 108.2% compared to 109.3% in the first
six months of 1997. The GAAP combined ratio (before policyholder dividends) for
Commercial Lines in the first six months of 1998 was 108.9% compared to 108.5%
in the first six months of 1997.
The 1997 first six months statutory and GAAP combined ratios for Commercial
Lines include an adjustment due to a change to conform the Aetna P&C method with
the Travelers P&C method of
27
<PAGE>
recording certain net written premiums. Excluding this adjustment, the statutory
and GAAP combined ratios before policyholder dividends for the first six months
of 1997 would have been 110.1% and 110.3%, respectively. The decrease in the
first six months of 1998 statutory and GAAP combined ratios compared to the
first six months of 1997 statutory and GAAP combined ratios, excluding this
adjustment, was due to continued productivity improvements and favorable loss
experience, partially offset by higher catastrophe and other weather-related
losses and lower fee income.
Personal Lines
Total net written premiums in the first six months of 1998 grew 16% over the
prior year to $1.680 billion, excluding a one-time adjustment in 1997 of $68.7
million due to a change in the quota share reinsurance arrangement.
The statutory combined ratio for Personal Lines in the first six months of 1998
was 93.1% compared to 91.5% in the 1997 first six months. The GAAP combined
ratio for Personal Lines in the first six months of 1998 was 91.9% compared to
90.4% in the first six months of 1997.
The 1997 first six months statutory and GAAP combined ratios for Personal Lines
include an adjustment associated with a change in the quota share reinsurance
arrangement. Excluding this adjustment, the statutory and GAAP combined ratios
for the first six months of 1997 would have been 91.3% and 91.7%, respectively.
The increase in the first six months of 1998 statutory and GAAP combined ratios
compared to the first six months of 1997 statutory and GAAP combined ratios,
excluding this adjustment, was due to higher catastrophe losses and a decrease
in favorable prior year reserve development in the automobile bodily injury
line, partially offset by productivity improvements.
Financing Costs and Other
The primary component of net income (loss) in the first six months of 1998 was
interest expense of $53 million after tax, compared to $52 million after tax in
the first six months of 1997, reflecting financing costs associated with the
1996 acquisition of Aetna P&C.
Environmental Claims
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, 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 June 30, 1998, approximately 19% of the
net aggregate reserve (i.e., approximately $191 million) consists of case
reserve for resolved claims. The balance, approximately 81% of the net aggregate
reserve (i.e., approximately $819 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.
28
<PAGE>
The following table displays activity for environmental losses and loss expenses
and reserves for the six months ended June 30, 1998 and 1997.
Environmental Losses Six Months Ended Six Months Ended
(millions) June 30, 1998 June 30, 1997
------------------ ------------------
Beginning reserves:
Direct $1,193 $1,369
Ceded (74) (127)
----------- -----------
Net 1,119 1,242
Incurred losses and loss expenses:
Direct 54 38
Ceded (27) (2)
Losses paid:
Direct 189 100
Ceded (53) (45)
Ending reserves:
Direct 1,058 1,307
Ceded (48) (84)
----------- -----------
Net $1,010 $1,223
=========== ===========
Asbestos Claims
At June 30, 1998, approximately 29% of the net aggregate reserve (i.e.,
approximately $314 million) is for pending asbestos claims. The balance,
approximately 71% (i.e., approximately $771 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
The following table displays activity for asbestos losses and loss expenses and
reserves for the six months ended June 30, 1998 and 1997. In general, the
Company posts case reserves for pending asbestos claims within approximately 30
business days of receipt of such claims.
Asbestos Losses Six Months Ended Six Months Ended
(millions) June 30, 1998 June 30, 1997
---------------- ----------------
Beginning reserves:
Direct $1,363 $1,443
Ceded (249) (370)
----------- -----------
Net 1,114 1,073
Incurred losses and loss expenses:
Direct 62 37
Ceded (28) (14)
Losses paid:
Direct 98 89
Ceded (35) (58)
Ending reserves:
Direct 1,327 1,391
Ceded (242) (326)
----------- -----------
Net $1,085 $1,065
=========== ===========
29
<PAGE>
Uncertainty Regarding Adequacy of Environmental and Asbestos Reserves
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
The reserves carried for environmental and asbestos claims at June 30, 1998 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 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 (CIOTA) Claims
Cumulative injury other than asbestos (CIOTA) claims are generally submitted to
the Company under general liability policies and often involve an allegation by
a claimant against an insured that the claimant has suffered injuries as a
result of long-term or continuous exposure to 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.
At June 30, 1998, approximately 18% of the net aggregate reserve (i.e.,
approximately $189 million) is for pending CIOTA claims. The balance,
approximately 82% (i.e., approximately $866 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
The following table displays activity for CIOTA losses and loss expenses and
reserves for the six months ended June 30, 1998 and 1997. In general, the
Company posts case reserves for pending CIOTA claims within approximately 30
business days of receipt of such claims.
30
<PAGE>
CIOTA Losses Six Months Ended Six Months Ended
(millions) June 30, 1998 June 30, 1997
---------------- ----------------
Beginning reserves:
Direct $1,520 $1,560
Ceded (432) (446)
----------- -----------
Net 1,088 1,114
Incurred losses and loss expenses:
Direct (18) 12
Ceded 15 --
Losses paid:
Direct 35 36
Ceded (5) (15)
Ending reserves:
Direct 1,467 1,536
Ceded (412) (431)
----------- -----------
Net $1,055 $1,105
=========== ===========
Corporate and Other
Six Months Ended June 30,
-----------------------------------------------------
(millions) 1998 1997
- --------------------------------------------------------------------------------
Net income Net income
Revenues (expense) Revenues (expense)
- --------------------------------------------------------------------------------
Total Corporate and Other $79 $(68) $44 $(99)
================================================================================
Net treasury and corporate staff expenses for the first six months of 1998 were
up from the prior year period. The decline in total operating expense for the
segment reflects income from the disposition of a real estate development
property in the first quarter of 1998.
Liquidity and Capital Resources
TRV services its obligations primarily with dividends and other advances that it
receives from subsidiaries. The subsidiaries' dividend-paying abilities are
limited by certain covenant restrictions in credit agreements and/or by
regulatory requirements. TRV believes it will have sufficient funds to meet
current and future commitments. Each of TRV's major operating subsidiaries
finances its operations on a stand-alone basis consistent with its
capitalization and ratings.
Travelers Group Inc. (TRV)
TRV issues commercial paper directly to investors and maintains unused credit
availability under committed revolving credit agreements at least equal to the
amount of commercial paper outstanding.
TRV, Commercial Credit Company (CCC) and The Travelers Insurance Company (TIC)
have a five-year revolving credit facility 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. This facility
expires in June 2001. At August 6, 1998, $700 million was allocated to TRV and
$300 million was allocated to CCC. Under this facility, TRV is required to
maintain a certain level of consolidated stockholders' equity (as defined in the
agreement). At June 30, 1998, this requirement was exceeded by approximately
$11.4 billion. At June 30, 1998, there were no borrowings outstanding under this
facility.
31
<PAGE>
As of August 6, 1998, TRV had unused credit availability of $700 million under
the five-year revolving credit facility. TRV may borrow under this revolving
credit facility at various interest rate options (LIBOR, CD and base rate) and
compensates the banks for the facility through commitment fees.
Commercial Credit Company (CCC)
CCC also issues commercial paper directly to investors and maintains unused
credit availability under committed revolving credit agreements at least equal
to the amount of commercial paper outstanding. Currently CCC has unused credit
availability of $3.700 billion under five-year revolving credit facilities,
including the $300 million referred to above, and $1.350 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 its parent or its affiliated
companies. At June 30, 1998, CCC would have been able to remit $672 million to
its parent under its most restrictive covenants.
Travelers Property Casualty Corp. (TAP)
TAP also issues commercial paper directly to investors and maintains unused
credit availability under a 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 June 30, 1998, this
requirement was exceeded by approximately $3.8 billion. At June 30, 1998, 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. TAP has received $220
million of dividends from its insurance subsidiaries during the first six months
of 1998.
Salomon Smith Barney
Salomon Smith Barney's total assets were $304 billion at June 30, 1998, up from
$277 billion at December 31, 1997. Due to the nature of trading activities,
including matched book activities, it is not uncommon for asset levels to
fluctuate from period to period. 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 arising from securities
transactions. The highly liquid nature of these assets provides Salomon Smith
Barney 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 has a $1.5 billion revolving credit agreement with a bank
syndicate that extends through May 2001, and a $3.5 billion 364-day revolving
credit agreement that extends through May 1999. 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 agreements).
At June 30, 1998, this requirement was exceeded by approximately $3.4 billion.
At June 30, 1998, there were no outstanding borrowings under either facility.
Salomon Smith
32
<PAGE>
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 the Salomon Smith Barney's
long-term capital. Term debt totaled $21.0 billion at June 30, 1998, compared
with $19.1 billion at December 31, 1997.
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
securities inventories, customer balances, the amount of reverse repurchase
transactions outstanding (i.e., purchases of securities under agreements to
resell the same security) and securities borrowed transactions. As these
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 capital and
funding sources in order to have the capacity to finance itself on a fully
collateralized basis in the event that its access to uncollateralized financing
is temporarily impaired. Its liquidity management process includes a contingency
funding plan designed to ensure adequate liquidity even if access to
uncollateralized 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 the ability to withstand varying levels of stress,
which could impact its liquidation horizons and required margins. In addition,
Salomon Smith Barney monitors its leverage and capital ratios on a daily basis.
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, 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 $7.4 billion at June 30, 1998, the largest high yield exposure to one
counterparty was $649 million.
The Travelers Insurance Company (TIC)
At June 30, 1998, TIC had $25.0 billion of life and annuity product deposit
funds and reserves. Of that total, $13.2 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $11.8 billion is for life and
annuity products that are subject to discretionary withdrawal by the
contractholder. Included in the amount that is subject to discretionary
withdrawal is $2.2 billion of liabilities that are surrenderable with market
value adjustments. Also included are an additional $5.1 billion of the life
insurance and individual annuity liabilities, which are subject to discretionary
withdrawal and have an average surrender charge of 4.7%. In the payout phase,
these funds are credited at significantly reduced interest rates. The remaining
$4.5 billion of liabilities is surrenderable without charge. More than 14% of
these relate to individual life products. These risks would have to be
underwritten again if transferred to another carrier, which is considered a
significant deterrent against withdrawal by long-term policyholders. Insurance
liabilities that are surrendered or withdrawn are reduced by outstanding policy
loans and related accrued interest prior to payout.
33
<PAGE>
TIC issues commercial paper to investors and maintains unused committed
revolving credit facilities at least equal to the amount of commercial paper
outstanding. TIC may borrow under this revolving credit facility at various rate
options (LIBOR, CD or base rate) and compensates the banks for the facility
through commitment fees.
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, of which $110 million has been paid during the
first six months of 1998.
Future Application of Accounting Standards
See Note 4 of Notes to Condensed Consolidated Financial Statements for a
discussion of recently issued accounting pronouncements.
Forward Looking Statements
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," and similar expressions. These forward-looking statements involve
risks and uncertainties including, but not limited to, the following: the
resolution of legal proceedings and related matters; the conduct of the
Company's businesses following the pending Citicorp merger and the pending
global strategic alliance with The Nikko Securities Co., Ltd.; customer
responsiveness to both new products and distribution channels; and the ability
of the Company generally to achieve anticipated levels of operational
efficiencies related to recently acquired companies, as well as achieving its
other cost-savings initiatives.
34
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information concerning nine purported class actions, with
substantially the same allegations, commenced in various courts against certain
subsidiaries of Travelers Property Casualty Corp. ("TAP"), see the description
that appears in the third paragraph under the caption "Legal Proceedings"
beginning on page 53 of the Annual Report on Form 10-K of TAP for the year ended
December 31, 1997 (File No. 1-14328), which description is incorporated by
reference herein. For information concerning six additional purported class
actions, with substantially the same allegations as those described above,
recently commenced in various courts against certain subsidiaries of TAP, see
the description that appears in the first paragraph under the caption "Legal
Proceedings" on page 25 of the Quarterly Report on Form 10-Q of TAP for the
quarter ended June 30, 1998 (File No. 1-14328), which description is
incorporated by reference herein. Copies of the foregoing descriptions are
included as exhibits to this Form 10-Q.
For information concerning a complaint filed by the Antitrust Division of
the U.S. Department of Justice against 24 market makers in certain NASDAQ
stocks, including Salomon Brothers Inc and Smith Barney Inc., see the
description that appears in the fifth and sixth paragraphs under the caption
"Legal Proceedings" beginning on page 13 of the Annual Report on Form 10-K of
Salomon Smith Barney Holdings Inc. ("SSBH") for the year ended December 31, 1997
(File No. 1-4346), which description is incorporated by reference herein. For
recent developments in this matter, see the description that appears in the
first paragraph under the caption "Legal Proceedings" on page 20 of the
Quarterly Report on Form 10-Q of SSBH for the quarter ended June 30, 1998 (File
No. 1-4346), which description is incorporated by reference herein. Copies of
the foregoing descriptions are included as exhibits to this Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders.
A Special Meeting of Stockholders of Travelers Group Inc. (the "Company")
was held on July 22, 1998. At the meeting, (i) The Agreement and Plan of Merger,
dated as of April 5, 1998 by and between the Company and Citicorp and the
transactions contemplated thereby, including the issuance of the Company's
common stock pursuant to the merger (the "Merger") of Citicorp with and into a
subsidiary of the Company and the change of the Company's name to "Citigroup
Inc." following the Merger was approved and (ii) an amendment to the Company's
Restated Certificate of Incorporation to increase to 6 billion the shares of
common stock authorized for issuance was approved. The number of votes cast for,
against or withheld, and the number of abstentions with respect to each such
matter is set forth below, as are the number of broker non-votes, where
applicable.
<TABLE>
<CAPTION>
For Against/Withheld Abstained Broker Non-Votes
--- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Approval of Transactions
Related to the Merger: 884,910,919 7,586,649 2,786,362 132,569,928
Approval of Amendment
to Restated Certificate
of Incorporation: 972,353,319 50,815,270 4,685,269 0
</TABLE>
35
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On April 6, 1998, the Company filed a Current Report on Form 8-K,
dated April 6, 1998, reporting under Item 5 thereof that it had
entered into a definitive merger agreement with Citicorp and filing
a related exhibit under Item 7 thereof.
On April 9, 1998, the Company filed a Current Report on Form 8-K,
dated April 8, 1998, filing under Items 5 and 7 thereof certain pro
forma and historical financial information related to the Citicorp
transaction.
On April 22, 1998, the Company filed a Current Report on Form 8-K,
dated April 20, 1998, reporting under Item 5 thereof the results of
its operations for the quarter ended March 31, 1998, and certain
other selected financial data.
On June 8, 1998, the Company filed a Current Report on Form 8-K,
dated June 1, 1998, reporting under Item 5 thereof certain proposed
transactions between the Company and The Nikko Securities Co., Ltd.
No other reports on Form 8-K were filed during the second quarter of
1998; however, on July 22, 1998, the Company filed a Current Report
on Form 8-K, dated July 20, 1998, reporting under Item 5 thereof the
results of its operations for the quarter ended June 30, 1998, and
certain other selected financial data.
36
<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 Amendment to the Restated Certificate of Incorporation, filed
April 22, 1998, 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 3.01 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 (File No. 1-9924).
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 quarter ended March 31, 1997
(File No. 1-9924).
10.01+ Amendment to the Salomon Inc Equity Partnership Plan for Key
Employees (effective March 25, 1998).
12.01+ Computation of Ratio of Earnings to Fixed Charges.
27.01+ Financial Data Schedule.
99.01+ The third paragraph under the caption "Legal Proceedings"
beginning on page 53 of the Annual Report on Form 10-K of
Travelers Property Casualty Corp. ("TAP") for the fiscal year
ended December 31, 1997 (File No. 1-14328).
99.02+ The paragraph under the caption "Legal Proceedings" on page 25
of the Quarterly Report on Form 10-Q of TAP for the
quarter ended June 30, 1998 (File No. 1-14328).
99.03+ The fifth and sixth paragraphs under the caption "Legal
Proceedings" beginning on page 13 of the Annual Report on Form
10-K of Salomon Smith Barney Holdings Inc. ("SSBH") for the fiscal
year ended December 31, 1997 (File No. 1-4346).
99.04+ The first paragraph under the caption "Legal Proceedings" on page
20 of the Quarterly Report on Form 10-Q of SSBH for the quarter
ended June 30, 1998 (File No. 1-4346).
37
<PAGE>
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.
- ----------
+ Filed herewith.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Travelers Group Inc.
Date: August 13, 1998 By /s/ Heidi Miller
----------------------------------
Heidi Miller
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 1998 By /s/ Irwin Ettinger
----------------------------------
Irwin Ettinger
Executive Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
39
Exhibit 10.01
AMENDMENT TO THE SALOMON INC EQUITY PARTNERSHIP PLAN FOR
KEY EMPLOYEES (THE "KEY EPP")
- --------------------------------------------------------------------------------
As of March 25, 1998, the Board of Directors of Travelers Group Inc.
hereby approves the following amendment to the Key EPP:
1. The first sentence of Section 11(c)(ii) of the Key EPP shall be amended to
read in its entirety as follows:
"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
the later of March 4, 1992 and the date they received any Award, 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: (x) any equity or derivative security position
with respect to Salomon Stock or, effective as of November 28,
1997, common stock of Travelers Group Inc. ("Travelers Stock"), such
as a short sale, a long put option or a short call option, that
increases in value as the value of such Stock decreases (a "Short
Position") that was acquired before March 25, 1998; or (y) any Short
Position that was acquired on or after March 25, 1998 unless, at all
times during which the Participant directly or indirectly held such
Short Position, the Participant also held a number of shares of
Travelers Stock (other than shares of Travelers Stock that are (1)
restricted as to transferability or (2) held in any retirement plan
maintained by Travelers Group Inc. or its affiliates) at least equal
to the number of shares of Travelers Stock underlying all Short
Positions then held, directly or indirectly, by the Participant."
Exhibit 12.01
Travelers Group Inc. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In millions of dollars, except for ratio)
Six months ended
June 30,
----------------------------------
1998 1997
------------- -------------
Income from continuing operations
before income taxes and minority interest $ 3,583 $2,796
Interest 6,510 5,170
Portion of rentals deemed to be interest 62 60
------------- -------------
Earnings available for fixed charges $10,155 $8,026
============= =============
Fixed charges
Interest $ 6,510 $5,170
Portion of rentals deemed to be interest 62 60
------------- -------------
Fixed charges $ 6,572 $5,230
============= =============
Ratio of earnings to fixed charges 1.55x 1.53x
============= =============
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JUNE 30, 1998 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF TRAVELERS GROUP
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,895
<SECURITIES> 334,526 <F1>
<RECEIVABLES> 40,615 <F2>
<ALLOWANCES> 0 <F3>
<INVENTORY> 0 <F3>
<CURRENT-ASSETS> 0 <F3>
<PP&E> 0 <F3>
<DEPRECIATION> 0 <F3>
<TOTAL-ASSETS> 420,076
<CURRENT-LIABILITIES> 0 <F3>
<BONDS> 53,625 <F4>
3,125
1,450
<COMMON> 12
<OTHER-SE> 20,965 <F5>
<TOTAL-LIABILITY-AND-EQUITY> 420,076
<SALES> 0 <F3>
<TOTAL-REVENUES> 20,464
<CGS> 0 <F3>
<TOTAL-COSTS> 16,881
<OTHER-EXPENSES> 0 <F3>
<LOSS-PROVISION> 178 <F6>
<INTEREST-EXPENSE> 6,510 <F6>
<INCOME-PRETAX> 3,583
<INCOME-TAX> 1,239
<INCOME-CONTINUING> 2,234
<DISCONTINUED> 0 <F3>
<EXTRAORDINARY> 0 <F3>
<CHANGES> 0 <F3>
<NET-INCOME> 2,234
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.87
<FN>
<F1> Includes the following items from the financial statements: total
investments $64,442; securities borrowed or purchased under agreements to
resell $131,318; and trading securities and commodities owned, at market
value $138,766.
<F2> Includes the following items from the financial statements: brokerage
receivables $22,734; net consumer finance receivables $11,824 and other
receivables $6,057.
<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 $18,682; short-term borrowings $4,392 and
long-term debt $30,551.
<F5> Includes the following items from the financial statements: additional
paid-in capital $5,988; retained earnings $17,309; treasury stock
$(3,118); accumulated other changes in equity from nonowner sources $1,263
and unearned compensation $(477).
<F6> Included in total costs and expenses applicable to sales and revenues.
</FN>
</TABLE>
Exhibit 99.01
The third paragraph 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).
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 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.
Exhibit 99.02
The paragraph under the caption "Legal
Proceedings" on page 25 of the Quarterly
Report on Form 10-Q of Travelers Property
Casualty Corp. for the quarter ended
June 30, 1998 (File No. 1-14328).
For information concerning nine purported class actions, with
substantially the same allegations, commenced in various courts against certain
subsidiaries of the Company, dozens of other insurers and the National Council
on Compensation Insurance ("NCCI"), see the description that appears in the
third paragraph under the caption "Legal Proceedings" beginning on page 53 of
the Annual Report on Form 10-K of the Company for the year ended December 31,
1997 (File No. 1-14328), which description is incorporated by reference herein.
A copy of the foregoing description is included as an exhibit to this Form 10-Q.
In May 1998, the Georgia action, which had been pending in the Superior Court,
Richmond County, was dismissed by that court. Commencing in April 1998, seven
additional purported class actions, with substantially the same allegations,
have been filed against subsidiaries of the Company, other insurers and the
NCCI. In April 1998, Dal-Tile Corporation, et al. v. NCCI et al. was filed in
the Superior Court, Riverside County, California. In May 1998, Sandwich Chef of
Texas, Inc., et al. v. Reliance National Insurance Company, et al. was filed in
Judicial District Court, Harris County, Texas and Alumax Inc., et al. v. Allianz
Insurance Company, et al. was filed in Circuit Court, Jefferson County, Alabama.
In June 1998, FFE Transportation Services, Inc., et al. v. NCCI, et al. was
filed in Superior Court, Richmond County, Georgia; American Association of
Retired Persons, et al. v. National Surety Corp., et al. was filed in Circuit
Court, Wayne County, Michigan; Payless Cashways, Inc., et al. v. National Surety
Corp., et al. was filed in Circuit Court, Fayette County, Kentucky; and Burnham
Service Corporation v. NCCI, et al. was filed in Supreme Court, New York County,
New York. Additionally, in June 1998, a non-class action, with substantially the
same allegations, entitled Albany International Corporation v. American National
Fire Insurance Company, et al. was filed against a subsidiary of the Company in
Superior Court, Maricopa County, Arizona. The Company intends to contest
vigorously all of the above-described cases.
Exhibit 99.03
The fifth and sixth 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).
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-dealers 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.
Exhibit 99.04
The first paragraph under the caption "Legal
Proceedings" on page 20 of the Quarterly Report
on Form 10-Q of Salomon Smith Barney Holdings
Inc. for the quarter ended June 30, 1998
(File No. 1-4346).
For information concerning a complaint filed by the Antitrust Division of
the U.S. Department of Justice against 24 market makers in certain NASDAQ
stocks, including Salomon Brothers Inc and Smith Barney Inc., see the
description that appears in the sixth paragraph under the caption "Legal
Proceedings" beginning on page 13 of the Annual Report on Form 10-K of the
Company for the year ended December 31, 1997 (File No. 1-4346), which
description is included in Exhibit 99.01 to this Form 10-Q and incorporated by
reference herein. In August 1998, the U.S. Court of Appeals for the Second
Circuit affirmed the settlement with the Department of Justice.
