-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, hMwme3J4moVVaupa4u719dfjJAZejYjss50eqHE6jnOME39q4ae6xbazOqYbJzvc 7376f2oKNxDYTGp03Bc7fg== 0000950112-94-000839.txt : 19940404 0000950112-94-000839.hdr.sgml : 19940404 ACCESSION NUMBER: 0000950112-94-000839 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 32 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRAVELERS INC CENTRAL INDEX KEY: 0000831001 STANDARD INDUSTRIAL CLASSIFICATION: 6141 IRS NUMBER: 521568099 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-09924 FILM NUMBER: 94519502 BUSINESS ADDRESS: STREET 1: 65 E 55TH ST CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2128918900 FORMER COMPANY: FORMER CONFORMED NAME: PRIMERICA CORP /NEW/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: COMMERCIAL CREDIT GROUP INC DATE OF NAME CHANGE: 19890102 10-K 1 TRAVELERS INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1993 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 -------------------- THE TRAVELERS INC. (Exact name of registrant as specified in its charter) Delaware 52-1568099 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 65 East 55th Street, New York, New York 10022 (Address of principal executive offices) (Zip Code) (212) 891-8900 (Registrant's telephone number, including area code) _______________ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which ------------------------------ Title of each class registered ------------------- ---------- Common Stock, par value $ .01 per New York Stock Exchange and share Pacific Stock Exchange Depositary Shares, each representing New York Stock Exchange 1/10th of a share of 8.125% Cumulative Preferred Stock, Series A 5.50% Convertible Preferred Stock, New York Stock Exchange Series B Depositary Shares, each representing 1/2 New York Stock Exchange of a share of 9.25% Preferred Stock, Series D 7 3/4% Notes Due June 15, 1999 New York Stock Exchange 7 5/8% Notes Due January 15, 1997 New York Stock Exchange 1998 Warrants to Purchase Common Stock New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ --------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 8, 1994 was approximately $10.78 billion. As of March 8, 1994, 323,716,455 shares of the registrant's common stock, par value $.01 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1993 are incorporated by reference into Part II of this Form 10-K. Certain portions of the registrant's Proxy Statement for the 1994 Annual Meeting of Stockholders to be held on April 27, 1994 are incorporated by reference into Part III of this Form 10-K. THE TRAVELERS INC. Annual Report on Form 10-K For Fiscal Year Ended December 31, 1993 ______________________________ TABLE OF CONTENTS Form 10-K Item Number - ----------- Part I ------ 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . Part II ------- 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . Part III -------- 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . Part IV ------- 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Index to Financial Statements and Schedules . . . . . . . . . . . . . . PART I ------ Item 1. BUSINESS. THE COMPANY The Travelers Inc. (the "Company") is a financial services holding company engaged, through its subsidiaries, principally in four business segments: (i) Investment Services; (ii) Consumer Finance Services; (iii) Life Insurance Services; and (iv) Property & Casualty Insurance Services. In December 1992, the Company, then known as Primerica Corporation, acquired approximately 27% of the common stock of The Travelers Corporation, a Connecticut corporation ("old Travelers"), in a series of related transactions. See Note 1 of Notes to Consolidated Financial Statements. This acquisition was accounted for as a purchase with an effective accounting date of December 31, 1992. During 1993, this investment was accounted for on the equity method. On December 31, 1993, the Company acquired the approximately 73% of old Travelers common stock it did not already own through the merger of old Travelers into the Company (the "Merger"). In the Merger, each share of old Travelers common stock (other than shares held by the Company, old Travelers or shareholders who properly exercised dissenters' rights) was exchanged for 0.80423 of a share of the Company's common stock. The Company, as the surviving corporation of the Merger, changed its name from Primerica Corporation to The Travelers Inc. The Company also issued shares of its preferred stock in exchange for outstanding shares of old Travelers preference stock. The total purchase price in the Merger was approximately $3.4 billion. The 1992 acquisition and the Merger are being accounted for as a step acquisition. The assets and liabilities of old Travelers are reflected in the Consolidated Statement of Financial Position at December 31, 1993 on a fully consolidated basis at management's best estimate of their fair values based on currently available information. See Note 1 of Notes to Consolidated Financial Statements. The Company's results of operations for periods prior to the Merger do not include those of old Travelers, other than for the equity in earnings relating to the 27% previously owned. Accordingly, the Company's Consolidated Financial Statements reflect the three business segments in which the Company was engaged during 1993. For financial information of old Travelers, provided on an historical accounting basis, see Exhibit 99.01 to this Form 10-K. In July 1993, the Company and certain of its subsidiaries acquired substantially all of the assets and assumed certain of the liabilities of the domestic retail brokerage business and the asset management business of Shearson Lehman Brothers Holdings Inc. As a result of this acquisition, the Company's subsidiary Smith Barney Shearson Inc. became one of the largest retail brokerage firms in the United States. See "Investment Services -- Smith Barney Shearson." The periodic reports of Commercial Credit Company ("CCC"), Smith Barney Shearson Holdings Inc. ("SBS Holdings"), and The Travelers Insurance Company ("TIC"), subsidiaries of the Company that make filings pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), provide additional business and financial information concerning those companies and their consolidated subsidiaries. The principal executive offices of the Company are located at 65 East 55th Street, New York, New York 10022; telephone number 212-891-8900. This discussion of the Company's business is organized as follows: (i) a description of each of the Company's four business segments, including descriptions of the old Travelers businesses; (ii) combined product line information for the property-casualty businesses, consolidating the operations of the old Travelers property-casualty commercial and personal lines and Gulf 1 Insurance Group; (iii) a description of the Corporate and Other Operations segment; and (iv) certain other information. A glossary of insurance terms is included at page 59. INVESTMENT SERVICES This segment includes the operations of SBS Holdings and its subsidiaries, the mutual fund and other asset management activities of American Capital Management & Research, Inc. and its subsidiaries ("American Capital") and the Company's interest in RCM Capital Management, A California Limited Partnership ("RCM"). It also includes the mortgage banking operations of Margaretten & Company, Inc. ("Margaretten") through February 5, 1992, the date the Company sold its interest in Margaretten in an underwritten public offering. SMITH BARNEY SHEARSON - --------------------- SBS Holdings provides investment banking, asset management, brokerage and other financial services through its subsidiaries. Its principal operating subsidiary is Smith Barney Shearson Inc. ("SBSI"), an investment banking, securities trading and brokerage firm that traces its origins back to 1873. As noted above, in July 1993, SBS Holdings acquired substantially all of the assets and certain of the liabilities of the domestic retail brokerage business and the asset management business (the "Shearson Acquisition") of Shearson Lehman Brothers Holdings Inc. and its subsidiaries ("SLB"). See "Shearson Acquisition" below. As used herein, unless the context otherwise requires, "SBS" refers to SBS Holdings and its consolidated subsidiaries. Investment Banking and Securities Brokerage SBS is an investment banking and securities trading and brokerage firm serving United States and foreign corporations, governments and institutional and individual investors. Its business includes securities, options and commodities brokerage for domestic and international institutional and individual clients; underwriting and distribution of securities; arranging for the private placement of securities; assisting in mergers and acquisitions and providing financial advisory services; market making and trading in corporate, United States government and agency, mortgage-related and municipal securities; customer financing activities; securities lending activities; and other activities, including investment management and advisory activities and securities research. SBS's investment banking services include the underwriting of debt and equity issues for United States and foreign corporations and for state, local and other governmental authorities. Frequently, SBS acts as managing underwriter in corporate and public securities offerings. SBS also acts as a private placement agent for various clients. In this role SBS helps to place securities for clients with large institutions and other eligible investors. SBS also provides financial advice to investment banking clients on a wide variety of transactions including securities offerings, mergers and acquisitions and corporate restructurings. SBS effects securities brokerage transactions on all major United States exchanges and distributes a wide variety of financial products. It makes inter-dealer markets and trades as principal in corporate debt and equity securities primarily of United States corporate issuers, United States government and agency securities, mortgage-related securities, whole loans and municipal and other tax-exempt securities. The firm carries inventories of securities to facilitate sales to customers and other dealers and with a view to realizing trading gains. SBSI is one of the leading dealers in municipal securities and is a "Primary Dealer" in United States government securities, as 2 designated by the Federal Reserve Bank of New York. Its daily trading inventory positions in United States government and agency securities are financed largely through the use of repurchase agreements pursuant to which SBS sells the securities and simultaneously agrees to repurchase them at a future date. SBS also acts as an intermediary between borrowers and lenders of short- term funds utilizing repurchase and reverse repurchase agreements. In addition, SBS engages for its own account in certain arbitrage activities, which primarily seek to benefit from temporary price discrepancies that occur when a convertible security is trading at a price that is not fully reflective of the price of the security into which it is convertible. SBS also engages in the borrowing and lending of securities. SBS effects transactions in large blocks of exchange-listed stocks, usually with institutional investors, and often acts as principal to facilitate these transactions. It makes markets, buying and selling as principal, in common stocks, convertible preferred stocks, warrants and other securities traded on the NASDAQ system or otherwise in the over-the-counter market. SBS also maintains trading positions in equity options, convertible securities, debt options and foreign exchange transactions. It executes significant client transactions in both listed and unlisted options and in foreign exchange, and often acts as principal to facilitate these transactions. SBS also sells various types of structured securities on both a principal and an agency basis. The firm's securities trading and investment activities involve significant risk in that the values of positions carried in its trading and investment accounts are subject to market fluctuations. SBS engages in a variety of financial techniques designed to manage this risk. Customer Financing Customers' securities transactions are effected on either a cash or margin basis. Federal regulations prescribe the minimum original margin that must be deposited by securities purchasers, and exchange regulations prescribe the minimum margins that must be maintained by customers. SBS imposes margin maintenance requirements that are equal to or exceed those required by exchange regulations. Such requirements are intended to reduce the risk assumed by SBS that a market decline will reduce the value of a customer's collateral below the amount of the customer's indebtedness before the collateral can be sold. Substantially all transactions in commodities futures contracts are on margin subject to individual exchange regulations. Margin, in the case of commodities futures contracts, is primarily made in the form of cash or United States Treasury securities which represent good faith deposits. Commodities transactions involve substantial risk, principally because of low margin requirements permitted by the exchanges. Income earned on financing customers' securities transactions provides SBS with an additional source of income. Credit losses may arise as a result of this financing activity; however, such losses have not been material. Asset Management SBS provides asset management services to corporations, not-for-profit institutions, pension and profit-sharing plans, municipalities and individual investors in equity, fixed income and other securities. The SBS Consulting Group is a money management consulting service that offers "wrap fee" and other programs for individual as well as institutional investors. "Wrap fee" accounts consist of customer accounts paying a single asset-based fee for multiple services that may include brokerage, custody and advisory services. The SBS TRAK(R) program provides investors with personalized investment management through a broad array of investment portfolios. SBSI receives a fee, but does not have investment discretion, with respect to assets invested through TRAK(R). SBS provides asset management services to, and sponsors, 128 separate portfolios within 55 investment companies that invest in United States and 3 foreign corporate debt and equity securities, and municipal and United States government and agency securities, including 14 taxable or tax-exempt money market portfolios. The portfolios managed by SBS have various investment objectives, including growth, growth and income, taxable income and tax-exempt income. At December 31, 1993, SBS had total assets under management of approximately $74.8 billion, consisting of approximately $29.9 billion of money market funds, $25.2 billion of other mutual funds and $19.7 billion of assets of other institutional and individual clients. These amounts exclude assets held in trust by the trust companies described under the heading "Miscellaneous Activities" below, except for the portion of such assets that are held in accounts actively managed by SBS. SBS also sells mutual funds sponsored by other organizations, including funds managed by other subsidiaries of the Company. In addition, SBS's Unit Trust business (i.e., unit investment trusts that do not involve continuing investment management) consists of the TEST and CST series of securities trusts and other proprietary unit trusts. The TEST and CST securities trusts, for which SBS is the managing sponsor of the syndicate, consist of municipal and corporate securities. A total of $3.1 billion par value of all series of TEST and CST trusts was outstanding as of December 31, 1993. The other proprietary unit trusts, consisting of equity and taxable bond trusts for which SBS is the sole sponsor, have a market value of approximately $2.1 billion as of December 31, 1993. SBS also participates in a syndicate that sponsors unit trusts including equity, taxable and tax-exempt fixed income trusts. Shearson Acquisition On July 31, 1993, SBS acquired substantially all of the assets and assumed certain of the liabilities of the domestic retail brokerage and asset management businesses of SLB for approximately $2.1 billion, representing approximately $1.6 billion for the net assets acquired, plus approximately $500 million of cash required to be segregated for the benefit of customers under commodities regulations. Following the transaction, SLB was renamed Lehman Brothers Holdings Inc. ("LBI"). The purchase price for the net assets acquired consisted of approximately $900 million in cash, $125 million in the form of 5.50% Convertible Preferred Stock, Series B, of the Company, $25 million in the form of a warrant to purchase approximately 3.75 million shares of the Company's common stock at an initial price of $39 per share, and the balance in notes. The Series B Preferred Stock is convertible into approximately 3.4 million shares of the Company's common stock at a price of $36.75 per share. (The foregoing share numbers and per share price information have been adjusted to give effect to the 4-for-3 stock split declared by the Company's Board of Directors in July 1993.) On March 9, 1993, American Express Company, the parent company of LBI, completed a public offering of the Series B Preferred Stock and the warrants. SBS has agreed to pay additional amounts based upon the performance of SBSI, consisting of up to $50 million per year for three years based on SBSI's revenues and 10% of SBSI's after-tax profits in excess of $250 million per year over a five-year period. See Note 1 of Notes to Consolidated Financial Statements. For an interim period of up to two years from the closing, SBSI has agreed to provide securities clearing, data processing and other operational services to LBI. Miscellaneous Activities SBS has entered into several joint ventures and affiliate relationships (in some cases subject to approval by appropriate regulatory bodies) with foreign financial services firms. These arrangements provide for SBS and the other firms to supply sales and research services in the United States and foreign markets. SBS is also a participant in a joint U.S.-Russian group that formed the Russian-American Bank, which will assist Russian enterprises in restructuring efforts. 4 Smith Barney Shearson Trust Company, a New York trust company chartered in 1991, and Smith Barney Shearson Trust Company of Florida, a Florida trust company chartered in 1993, both subsidiaries of the Company, provide a full range of fiduciary services with a particular emphasis on personal trusts, corporate trust services and employee benefit trust services. SBS Trust Company, chartered in Delaware in 1992 and also a subsidiary of the Company, offers a broad range of trustee services for qualified retirement plans, with particular emphasis on the 401(k) plan market. Each trust company is subject to the supervision of the state banking authority where it was chartered. Although these trust companies are not subsidiaries of SBS Holdings, they use the distribution network of SBSI to market their services. SBS provides certain advisory and support services to the trust companies and receives fees for such services. AMERICAN CAPITAL AND RCM - ------------------------ Mutual Funds and Asset Management American Capital constitutes one of the larger mutual fund management and distribution organizations in the United States. At December 31, 1993, the group included (i) an investment adviser to 39 investment company fund portfolios with aggregate fund assets under management of approximately $16.7 billion; (ii) a wholesale distribution firm, which is a registered broker- dealer with selling group agreements with approximately 2,500 other registered broker-dealers; (iii) a retail distribution firm, Advantage Capital Corporation, which is a registered broker-dealer marketing the open-end funds and other securities products directly to the public through a licensed sales force of approximately 600 persons located throughout the United States; and (iv) a transfer and shareholder servicing agent, which provides services to 28 of the mutual funds mentioned above. In 1993, American Capital Management & Research, Inc. ("ACMR") also began providing investment advisory services to fund portfolios of which it is not the distributor. A number of joint ventures between subsidiaries of ACMR and companies that are part of the Primerica Financial Services group of companies (collectively, "PFS") provide investment advisory, underwriting, transfer agency and custodial services to the Common Sense(R) Trust mutual funds included in the statistics above. In addition, PFS Investments Inc. ("PFS Investments") is the exclusive retail distributor of the Common Sense(R) Trust funds. For the years ended December 31, 1993, 1992 and 1991, PFS Investments' total mutual fund sales were $1,266.4 million, $1,071.2 million and $788.0 million, respectively, with sales of shares of the Common Sense(R) Trust funds accounting for approximately 61%, 75% and 75% respectively, of total sales. This decline in 1993 reflected increased product offerings outside the Common Sense(R) Trust funds. At December 31, 1993, approximately 21,000 members of the PFS sales force were also independent registered securities representatives of PFS Investments. The increase in sales in recent years is primarily attributable to the economic environment and expanded marketing efforts for mutual funds. See "Life Insurance Services -- Primerica Financial Services." ACMR managed $16.7 billion in fund portfolio assets as of December 31, 1993, as compared with $14.5 billion as of December 31, 1992 and $13.7 billion as of December 31, 1991. A subsidiary of the Company is the sole limited partner in RCM, a limited partnership headquartered in San Francisco, California, which provides investment management services, principally for pension funds, other institutional clients and high net worth individuals. Assets under management by RCM were $24.5 billion at December 31, 1993, as compared to $23.8 billion at December 31, 1992 and $23.0 billion at December 31, 1991. 5 The investment company and asset management operations of SBS are described above under "Smith Barney Shearson -- Investment Banking and Securities Brokerage" and "-- Asset Management." GENERAL - ------- Competition The businesses included in the Investment Services segment are highly competitive. The principal factors affecting competition in the investment banking and securities brokerage industry are the quality and ability of professional personnel and the relative prices of services and products offered. In addition to competition from other investment banking firms, both domestic and international, and securities brokerage companies and discount securities brokerage operations, including regional firms in the United States, there has been increasing competition from other sources, such as commercial banks, insurance companies and other major companies that have entered the investment banking and securities brokerage industry, in many cases through acquisitions. Certain of those competitors may have greater capital and other resources than SBS. In addition, certain large commercial banks have been granted permission by the Federal Reserve Board, subject to certain limitations, to engage, through affiliates, in the underwriting of and dealing in corporate debt securities, mortgage-backed securities, municipal revenue securities, commercial paper and securities backed by consumer loans. The Federal Reserve Board has also permitted certain bank holding companies to underwrite and deal in equities through their securities subsidiaries, subject to certain operational limitations. With this action, the Federal Reserve Board has substantially removed the barrier originally erected by the Glass- Steagall Act restricting investment banking activities of commercial banks and their affiliates. Competitors of the Company's mutual funds and asset management groups, including those of SBS, include a large number of mutual fund management and sales companies and asset management firms. Competition in mutual fund sales and investment management is based on investment performance, service to clients, and product design. PFS Investments faces competition not only from large financial services firms offering products and services that cross traditional business boundaries, but also from insurance companies offering life insurance products with investment features. Regulation Certain of the Company's subsidiaries are registered as broker-dealers and as investment advisers with the Securities and Exchange Commission (the "Commission") and as futures commission merchants and as a commodity pool operator with the Commodity Futures Trading Commission ("CFTC"). SBSI and its subsidiary, The Robinson-Humphrey Company ("R-H"), are members of the New York Stock Exchange, Inc. (the "NYSE") and other principal United States securities exchanges, as well as the National Association of Securities Dealers, Inc. ("NASD") and the National Futures Association ("NFA"), a not-for-profit membership corporation which has been designated as a registered futures association by the CFTC. SBSI and R-H are registered as broker-dealers in all 50 states, the District of Columbia and Puerto Rico, and in addition are registered as investment advisers in certain states that require such registration. SBSI is also a reporting dealer to the Federal Reserve Bank of New York, a member of the principal United States futures exchanges and a registered broker-dealer in Guam. Both SBSI and R-H are subject to extensive regulation, primarily for the benefit of their customers, including minimum capital requirements, which are promulgated and enforced by, among others, the Commission, the CFTC, the NFA, various self-regulatory organizations of which SBSI and R-H are members and the securities administrators of the 50 states, the District of Columbia and Puerto Rico and, 6 in SBSI's case, Guam. In 1992, the Commission promulgated regulations under the Market Reform Act of 1990 that, among other things, require certain registered broker-dealers (including SBSI) to maintain records concerning certain financial and securities activities of affiliated companies that may be material to the broker-dealer, and to file certain financial and other information regarding such affiliated companies. In addition, the Investment Company Act of 1940 generally prohibits registered investment companies managed by affiliates of the Company (including ACMR) from, among other things, entering into securities transactions on a principal basis with SBS, and restricts their ability to purchase securities in underwritings in which SBS participates as an underwriting syndicate member. Transactions between SBS and RCM are also subject to certain limitations. SBS's operations abroad, described in this paragraph, are conducted through various subsidiaries, and through a representative office in Paris. Its activities in the United Kingdom are subject to the Financial Services Act 1986, which regulates organizations that conduct investment businesses in the United Kingdom (including imposing capital and liquidity requirements). SBS has received permanent authorization to engage in certain types of investment business in the United Kingdom. It is also a member of the International Petroleum Exchange and the London International Financial Futures and Options Exchange, and as such is subject to the rules and regulations of those Exchanges. SBS is a licensed securities company in Japan and, as such, its activities in Japan are subject to Japanese law applicable to foreign securities firms. SBS is also a member of the Tokyo Stock Exchange and, therefore, its activities in Japan are subject to the rules and regulations of that Exchange. SBS conducts a securities and commodities brokerage and corporate finance business and securities research business in Singapore for individual and institutional clients which is regulated by the Monetary Authority of Singapore. Additionally, the firm is registered as a "dealer" and "adviser" with the Hong Kong Securities and Futures Commission, as an "international dealer" with the Ontario Securities Commission and as a "B license holder" with the Zurich Stock Exchange. In connection with the mutual funds business, the Company and its subsidiaries must comply with regulations of a number of regulatory agencies and organizations, including the Commission and the NASD. The Company is the indirect parent of investment advisers registered and regulated under the Investment Advisers Act of 1940, and of companies that distribute shares of mutual funds pursuant to distribution agreements subject to regulation under the Investment Company Act of 1940. Under those Acts, the advisory contracts between the Company's investment adviser subsidiaries and the mutual funds they serve, as well as the mutual fund distribution agreements, would automatically terminate upon an assignment of such contracts by the investment adviser or the fund distribution company, as the case may be. Such an assignment would be presumed to have occurred if any party were to acquire more than 25% of the Company's voting securities. Continuation of advisory and distribution relationships under these circumstances could be achieved only by obtaining consent to the assignment from the shareholders of the mutual funds involved. SBSI and R-H are members of the Securities Investor Protection Corporation ("SIPC"), which, in the event of liquidation of a broker-dealer, provides protection for customers' securities accounts held by the firm of up to $500,000 for each eligible customer, subject to a limitation of $100,000 for claims for cash balances. In addition, SBS has purchased additional coverage from a subsidiary of the Company, Gulf Insurance Company, for eligible customers. As registered broker-dealers, SBSI and R-H are subject to the Commission's net capital rule (Rule 15c3-1, the "Net Capital Rule") promulgated under the Exchange Act. SBSI and R-H compute net capital under the alternative method of the Net Capital Rule which requires the maintenance of minimum net capital, as defined. A member of the NYSE may be required to reduce its business if 7 its net capital is less than 4% of aggregate debit balances (as defined) and may also be prohibited from expanding its business or paying cash dividends if resulting net capital would be less than 5% of aggregate debit balances. Furthermore, the Net Capital Rule does not permit withdrawal of equity or subordinated capital if the resulting net capital would be less than 5% of such debit balances. The Net Capital Rule also limits the ability of broker-dealers to transfer large amounts of capital to parent companies and other affiliates. Under the Net Capital Rule, equity capital cannot be withdrawn from a broker- dealer without the prior approval of the Commission when net capital after the withdrawal would be less than 25% of its securities position "haircuts," or deductions from capital of certain specified percentages of the market value of securities to reflect the possibility of a market decline prior to disposition. In addition, the Net Capital Rule requires broker-dealers to notify the Commission and the appropriate self-regulatory organization two business days before a withdrawal of excess net capital if the withdrawal would exceed the greater of $500,000 or 30% of the broker-dealer's excess net capital, and two business days after a withdrawal that exceeds the greater of $500,000 or 20% of excess net capital. Finally, the Net Capital Rule authorizes the Commission to order a freeze on the transfer of capital if a broker-dealer plans a withdrawal of more than 30% of its excess net capital and the Commission believes that such a withdrawal would be detrimental to the financial integrity of the firm or would jeopardize the broker-dealer's ability to pay its customers. PFS Investments is registered as a broker-dealer with the SEC, in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam, and is a member of the NASD. Advantage Capital Corporation is also registered as a broker-dealer with the SEC, in all 50 states, the District of Columbia and Puerto Rico and is a member of the NASD. These companies are subject to extensive regulation by those agencies and the securities administrators of those jurisdictions, primarily for the benefit of their customers, including minimum capital and licensing requirements. CONSUMER FINANCE SERVICES The Company's Consumer Finance Services segment includes consumer lending services conducted primarily under the name "Commercial Credit," as well as credit-related insurance and credit card services. Consumer Finance As of December 31, 1993, CCC maintained 768 loan offices in 42 states, and it plans to open approximately 60 additional offices in 1994. The Company owns two state-chartered banks headquartered in Newark, Delaware, which generally limit their activities to offering credit card services nationwide. Loans to consumers by the Consumer Finance Services unit include secured and unsecured personal loans, real estate-secured loans and consumer goods financing. Credit card loans are discussed below. CCC's loan offices are located throughout the United States. They are generally located in small to medium-sized communities in suburban or rural areas, and are managed by individuals who generally have considerable consumer lending experience. The primary market for CCC's consumer loans consists of households with an annual income of $15,000 to $54,000. The number of loan customers (excluding credit card customers) was approximately 1,142,000 at December 31, 1993, as compared to approximately 1,058,000 at December 31, 1992, and approximately 1,078,000 at December 31, 1991. A CCC loan program solicits applications for second mortgage loans through the PFS sales force. See "Life Insurance Services -- Primerica Financial Services." The average amount of cash advanced per personal loan made was approxi- mately $3,800 in each of 1993, 1992 and 1991. The average amount of cash 8 advanced per real estate-secured loan made was approximately $28,800 in 1993 and approximately $26,000 in each of 1992 and 1991. The average annual yield for loans in 1993 was 15.83%, as compared to 16.31% in 1992 and 16.69% in 1991. The average annual yield for personal loans in 1993 was 20.11%, as compared to 19.99% in 1992 and 19.97% in 1991, and for real estate-secured loans it was 13.14% in 1993, as compared to 14.05% in 1992 and 14.48% in 1991. The 1993 average yield for real estate-secured loans was affected by the successful introduction of a variable rate product. The Company's average net interest margin for loans was 8.44% in 1993, 8.66% in 1992 and 8.63% in 1991. Prior to 1992, both delinquencies and charge-offs had increased, reflecting the recessionary economic environment. CCC took steps to combat this trend, by tightening the credit criteria used for making new loans and placing a greater emphasis on collection policies and practices. As a result of these measures and recent economic trends, delinquency rates generally have continued to improve throughout 1993. See "Delinquent Receivables and Loss Experience," below. In addition, aggregate quarterly loss charge-off rates have generally declined since the first quarter of 1992, and charge-offs generally decreased in 1993. Analysis of Consumer Finance Receivables For an analysis of consumer finance receivables, net of unearned finance charges ("Consumer Finance Receivables"), see Note 9 of Notes to Consolidated Financial Statements. Delinquent Receivables and Loss Experience The management of the consumer finance business attempts to prevent customer delinquency through careful evaluation of each borrower's application and credit history at the time the loan is made or acquired, and attempts to control losses through appropriate collection activity. An account is considered delinquent for financial reporting purposes when a payment is more than 60 days past due, based on the original or extended terms of the contract. Due to the nature of the finance business, some customer delinquency and loss is unavoidable. The delinquency and loss experience on real estate-secured loans is generally more favorable than on personal loans. 9 The table below shows the ratio of receivables delinquent for 60 days or more on a contractual basis (i.e., more than 60 days past due) to gross receivables outstanding: Ratio of Receivables Delinquent 60 Days or More to Gross Receivables Outstanding (1) Real Estate- Personal Secured Credit Sales Total As of December 31, Loans Loans Cards Finance Consumer - ------------------ ----- ----- ----- ------- -------- 1993 2.62% 2.15% 1.03% 1.54% 2.21%(2) 1992 3.02% 2.31% 1.87% 1.48% 2.55% 1991 3.51% 2.19% 2.57% 2.00% 2.80% __________________________ (1) The receivable balance used for these ratios is before the deduction of unearned finance charges and excludes accrued interest receivable. Receivables delinquent 60 days or more include, for all periods presented, accounts in the process of foreclosure. (2) Includes the reacquisition in the fourth quarter of 1993 of the remainder of a portfolio of loans collateralized by manufactured housing units. The following table shows the ratio of net charge-offs to average Consumer Finance Receivables. For all periods presented, the ratios shown below give effect to all deferred origination costs. Ratio of Net Charge-Offs to Average Consumer Finance Receivables Real Estate- Year Ending Personal Secured Credit Sales Total December 31, Loans Loans Cards Finance Consumer - ------------ -------- ------- ----- ------- -------- 1993 4.08% 0.84% 2.56% 1.78% 2.36%(1) 1992 5.09% 0.74% 4.01% 2.05% 2.84% 1991 5.03% 0.69% 3.05% 2.52% 2.72% ______________________________ (1) Includes the reacquisition in the fourth quarter of 1993 of the remainder of a portfolio of loans collateralized by manufactured housing units. The following table sets forth information regarding the ratio of allowance for losses to Consumer Finance Receivables. Ratio of Allowance For Losses to Consumer Finance Receivables As of December 31, ------------------ 1993 2.64% 1992 2.91% 1991 2.86% Credit-Related Insurance American Health and Life Insurance Company ("AHL"), a subsidiary of CCC, underwrites or arranges for credit-related insurance, which is offered to customers of the consumer finance business. AHL has an A+ (superior) rating from the A.M. Best Company, whose ratings may be revised or withdrawn at any time. Credit life insurance covers the declining balance of unpaid indebtedness. Credit disability insurance provides monthly benefits during periods of covered disability. Credit property insurance covers the loss of property given as security for loans. Other insurance products offered or 10 arranged for by AHL include accidental death and dismemberment, auto single interest, nonfiling, involuntary unemployment insurance and mortgage impairment insurance. Most of AHL's products are single premium, which premiums are earned over the related contract period. See "Life Insurance Services" for information concerning life and health insurance other than credit-related insurance. The following table sets forth gross written insurance premiums, net of refunds, for consumer finance customers: Consumer Finance Insurance Premiums Written (in millions) Year Ended December 31, ------------------------ 1993 1992 1991 ---- ---- ---- Premiums written (1) Writings for consumer finance: Credit life . . . . . . . . . $ 36.4 $ 36.0 $ 45.0 Credit disability . . . . . . 47.1 $ 44.7 $ 49.9 ------- ------- ------- Total . . . . . . . . . . . $ 83.5 $ 80.7 $ 94.9 ======= ======= ======= _________________________ (1) Premiums are written by AHL and by other subsidiaries of the Company. Credit Card Services Primerica Bank, a subsidiary of CCC, is a state-chartered bank located in Newark, Delaware, which provides credit card services, including upper market gold credit card services, to individuals and to affinity groups (such as nationwide professional associations and fraternal organizations). Primerica Bank USA, another state-chartered bank subsidiary of CCC, was formed in September 1989. Primerica Bank USA is not subject to certain regulatory restrictions relating to growth and cross-marketing activities to which Primerica Bank is subject. See "Regulation" below. These banks generally limit their activities to credit card operations. The following table sets forth aggregate information regarding credit cards issued by Primerica Bank and Primerica Bank USA: Credit Cardholders and Total Outstandings (outstandings in millions) As of and for the year ended December 31, ----------------------------------------- 1993 1992 1991 ---- ---- ---- Approximate total credit cardholders 534,000 423,000 370,000 Approximate gold credit cardholders 478,000 371,000 305,000 Total outstandings $697.1 $538.2 $472.9 Average annual yield 11.66% 12.12% 13.50% The primary market for the banks' credit cards consists of households with annual incomes of $40,000 and above. The Delaware credit card banks offer deposit-taking services (which as to Primerica Bank USA are limited to deposits of at least $100,000 per account). At December 31, 1993, deposits at the Delaware offices were $51.2 million, as compared to $22.3 million at December 31, 1992 and $23.8 million at December 31, 1991. At December 31, 1993, substantially all of such deposits were federally insured. The increase in deposits supported a balance transfer promotion conducted by Primerica Bank during 1993. 11 Competition The consumer finance business competes with banks, savings and loan associations, credit unions, credit card issuers and other consumer finance companies. Additionally, substantial national financial services networks have been formed by major brokerage firms, insurance companies, retailers and bank holding companies. Some competitors have substantial local market positions; others are part of large, diversified organizations. Deregulation of banking institutions has greatly expanded the consumer lending products permitted to be offered by these institutions, and because of their long-standing insured deposit base, many of them are able to offer financial services on very competitive terms. The Company believes that it is able to compete effectively with such institutions. In particular, the Company believes that the diversity and features of the products it offers, personal service and cultivation of repeat and referral business support and strengthen its competitive position in its Consumer Finance Services businesses. Regulation Most consumer finance activities are subject to extensive federal and state regulation. Personal loan, real estate-secured loan and sales finance laws generally require licensing of the lender, limitations on the amount, duration and charges for various categories of loans, adequate disclosure of certain contract terms and limitations on certain collection practices and creditor remedies. Federal consumer credit statutes primarily require disclosure of credit terms in consumer finance transactions. CCC's banking operations, which must undergo periodic examination, are subject to additional regulations relating to capitalization, leverage, reporting, dividends and permitted asset and liability products. CCC's credit card banks are also covered by the Competitive Equality Banking Act of 1987 (the "Banking Act"), which, among other things, prevents the Company from acquiring or forming most types of new banks or savings and loan institutions and, with respect to Primerica Bank, restricts cross-marketing of products by or of certain affiliates. CCC's banks are also subject to the Community Reinvestment Act, which requires a bank to provide equal credit opportunity to all persons in such bank's delineated community. The Company believes that it complies in all material respects with applicable regulations. See "Insurance Services - General -- Regulation" at the end of the description of the Property & Casualty Insurance segment for a discussion of the regulatory factors governing the insurance businesses of CCC. The Real Estate Settlement Procedures Act of 1974 ("RESPA") has been extended to cover real estate-secured loans that are subordinated to other mortgage loans. Generally, RESPA requires disclosure of certain information to customers and regulates the receipt or payment of fees or charges for services performed. LIFE INSURANCE SERVICES The businesses in the Company's Life Insurance Services segment write principally individual and group life insurance, annuities, accident and health insurance, and pension and managed health care programs. Most of these products are offered on a nationwide basis in the United States. This segment includes the operations of PFS, including Primerica Life Insurance Company ("Primerica Life"), and Transport Life Insurance Company and its affiliates ("Transport"). It also includes the businesses of The Travelers Insurance Company ("TIC"), which became a subsidiary of the Company on December 31, 1993, as a result of the Merger. In conjunction with the Merger, Primerica Life and Transport were contributed by the Company to TIC. With $503.8 billion of life insurance in force and $41.3 billion of assets at December 31, 1993, the Company believes that TIC and its subsidiaries constitute one of the 12 largest stock life insurance groups in the United States as measured by insurance in force and assets at December 31, 1993. Because the Company's interest in old Travelers was accounted for during 1993 on the equity method, the Company's results of operations for 1993 do not include the full results of TIC's business. See Notes 1 and 4 of Notes to Consolidated Financial Statements. Accordingly, premium and other operational information is provided for TIC's businesses for informational purposes only. PRIMERICA FINANCIAL SERVICES - ---------------------------- During 1993, the Company wrote individual and group life insurance, accident and health insurance and credit insurance through a number of subsidiaries, including Primerica Life. The Company's insurance activities relating to its consumer finance business are discussed above under "Consumer Finance Services." Primerica Financial Services Principal Markets and Methods of Distribution The business operations of the PFS group of companies involve the sale of insurance, mutual funds and other financial products, and consist of an affiliated group of companies engaged, in (i) the underwriting and administration of individual term life insurance throughout the United States and in Canada and (ii) securities brokerage, consisting primarily of mutual fund sales. The PFS sales force, composed of approximately 100,000 independent agents, primarily markets certain products of subsidiaries of the Company, including certain loans offered by the Company's consumer finance subsidiaries, and other products approved by the Company. Because the great majority of the licensed sales force works on a part-time basis, a substantial portion of the sales force is inactive from time to time. Primerica Life offers individual term life insurance. Through a subsidiary, it provides statutory disability benefits in New York, as well as direct response student term life insurance nationwide. Primerica Life and its subsidiary together are licensed to sell and market term life insurance in all 50 states and the District of Columbia. Products offered by PFS Investments include a proprietary group of mutual funds managed and administered through a group of partnerships owned equally by PFS and by the Company's subsidiary ACMR. For additional information concerning PFS Investments and ACMR, see "Investment Services -- American Capital and RCM." Premium revenues, net of reinsurance, for PFS for the years ended December 31, 1993, 1992 and 1991 were $889.9 million, $862.7 million and $878.1 million, respectively. See "Insurance Services - General -- Reinsurance," at the end of the description of the Property & Casualty Insurance Services segment, for a discussion of reinsurance. Life Insurance in Force The table on the next page provides a reconciliation of beginning and ending term life insurance in force for Primerica Life, and related statistical data on a statutory basis for 1991-1993. 13 (in millions of dollars, except as noted) Year Ended December 31, ------------------------ 1993 1992 1991 ---- ---- ---- In force beginning of year $302,314 $309,337 $324,465 Additions 48,307 46,244 51,135 Terminations(1) (41,362) (53,267) (66,263) -------- -------- -------- In force end of year $309,259 $302,314 $309,337 ======= ======== ======= The amounts in force at end of year are before reinsurance ceded in the following amounts $75,907 $ 84,237 $97,821 ======= ======= ======= At end of year: Number of policies in force 2,003,491 1,993,686 2,067,441 Average size of policy in force (in dollars) $154,360 $151,636 $149,623 ______________________________ (1) Includes terminations due to death, surrenders and lapses. AIDS-related claims, net of reinsurance, as a percentage of total net life claims paid by Primerica Life in 1993, were 6.7%. Management believes that current pricing and reserves make adequate provision for AIDS-related claim experience. TRAVELERS INSURANCE COMPANY - --------------------------- Other Life and Annuities This section includes the businesses identified by old Travelers as Financial Services and Asset Management & Pension Services ("AMPS"), as well as Transport. Principal Products TIC offers individual life insurance, accident and health insurance, annuities and investment products and services to individuals and small businesses. It also provides guaranteed investment products, annuities and recordkeeping services to employer-sponsored retirement and savings plans, and provides short-term domestic equity and balanced investment management services on a pooled basis to present clients through its separate accounts. TIC views market specialization as a critical component of profitability and has updated its individual product portfolio with a range of competitively priced life, disability income, long-term care and fixed and variable annuity products for target customers. Individual fixed income annuities are used for retirement funding purposes and for structuring settlements for certain indemnity claims not paid as a single lump sum. TIC also offers deferred annuity products under which deposits are directed by the contract owner among separate accounts with investments in common stocks, money market obligations, debt obligations or managed portfolios, or into a variable interest rate deposit fund held in the general account. In recent years, TIC has increased the amount of individual variable annuities that it sells. Various other investment products and services, such as mutual funds, limited partnerships, managed accounts and trust facilities, are also available. 14 The table below sets forth written premiums, net of reinsurance, and deposits for the Financial Services and AMPS businesses of old Travelers. Premiums and Deposits (in millions) Year Ended December 31, ------------------------ 1993 1992 1991 ---- ---- ---- Premiums Individual life $ 112 $ 99 $91 Individual accident and health 104 110 115 Annuities Individual single premium 19 22 43 Group single premium 27 28 41 Group fixed 110 86 142 ------ ----- --- Total premiums 372 345 432 ------ ------ --- Deposits Universal life insurance 163 164 157 Annuities Individual fixed accumulation 577 647 689 Individual variable accumulation 392 232 160 Individual immediate(1) 34 50 60 Guaranteed investment contracts(2) 918 502 955 Group separate accounts and managed funds(3) 772 730 613 Other fixed funds 265 223 410 ------ ----- --- Total deposits 3,121 2,548 3,044 -------- ------ ----- Total premiums and deposits $3,493 $2,893 $3,476 ===== ===== ====== ______________________________ (1) Represents primarily structured settlement annuities, in which payments are currently being made to annuitants. (2) The 1992 amount reflects the adverse impact of downgrades in TIC's financial strength ratings and general industry conditions. The 1993 increase reflects success in attracting guaranteed business in alternative markets, and such business is not expected to recur. (3) The 1992 amount reflects the shift in emphasis to separate account production. The 1993 increase reflects an increase in deposits to guaranteed separate accounts offset by a decrease in deposits to indexed separate accounts. 15 For information about reinsurance, see "Insurance Services - General -- Reinsurance" at the end of the description of the Property & Casualty Insurance Services segment. Principal Markets and Methods of Distribution TIC is licensed to sell and market its individual products in all 50 states and the District of Columbia. Individual products are marketed through a variety of distribution systems, primarily by a core group of approximately 450 independent professional life agents and by H. C. Copeland and Associates, Inc., a subsidiary of TIC's parent company and a major distributor of annuity products. Approximately 60% of the total individual fixed and variable annuities sold by TIC in each of the last three years (as measured by deposits) were sold through this subsidiary. Another subsidiary acts as a broker-dealer for TIC and affiliates. The various distribution systems for individual products operate through TIC's field offices, through general agencies representing TIC or directly to TIC. The price of individual products is affected by long-term assumptions as to interest, expenses and rates of mortality, morbidity and persistency, as well as competitive and regulatory considerations. Guaranteed investment products, annuities and recordkeeping services are marketed principally by TIC's salaried staff directly to plan sponsors. Business is also placed through independent consultants and investment advisers. The major factors affecting the pricing of these contracts are the economics of the capital markets, primarily the interest rate environment, the availability of appropriate investments and surplus required to support this business due to risk-adjusted capital standards. The pricing of products and services also reflects charges for expenses, mortality, profit and other relevant financial factors such as credit risk. The current pension market reflects product pricing that is sensitive to the quality and relative investment risk of the assets supporting those products. Life Insurance in Force The table on the next page provides a reconciliation of beginning and ending Financial Services life insurance in force and related statistical data on a statutory basis for 1991-1993. 16 (in millions of dollars, except as noted) Year Ended December 31, ------------------------ 1993 1992 1991 ---- ---- ---- In force beginning of year $38,834 $31,990 $27,651 Additions 9,944 10,503 7,729 Terminations(1) (4,469) (3,659) (3,390) ------- ------- ------- In force end of year $44,309 $38,834 $31,990 ====== ====== ====== The amounts in force at end of year are before reinsurance ceded in the following amounts $5,042 $ 3,933 $ 2,902 ====== ====== ====== At end of year: Number of policies in force 592,710 596,411 596,793 Average size of policy in force (in dollars) $74,757 $65,113 $53,603 ______________________________ (1) Includes terminations due to death, surrenders and lapses. Insurance Reserves and Contractholder Funds As life, accident and health insurance and annuity premiums are received, TIC establishes policy benefit reserves that reflect the present value of expected future obligations, net of the present value of expected future net premiums. These reserves generally reflect long-term fixed obligations to policyholders and are based on assumptions as to interest rates, future mortality, morbidity, persistency and expenses, with provision for adverse deviation. Policy benefit reserves, which give appropriate recognition to reinsurance, are established based on factors derived from past experience. Contractholder funds arise from the issuance of individual life contracts that include an investment component, deferred annuities and certain individual immediate annuity investment contracts. Contractholder funds are equal to deposits received and interest credited less withdrawals, mortality charges and administrative expenses. Contractholder funds also include receipts from the issuance of pension investment contracts. AIDS-related claims paid in 1993 were 1.2%, as a percentage of total life claims paid, and .7%, as a percentage of total health claims paid. Such claims have not materially affected TIC's financial results. Transport Transport specializes in accident and health insurance including cancer, heart/stroke and long-term care coverage. It distributes such products nationwide through a sales force of approximately 13,000 independent agents. For the three years ended December 31, 1993, Transport's premium revenues, net of reinsurance ceded, were $245.0 million in 1993, $273.9 million in 1992 and $325.5 million in 1991. 17 Managed Care and Employee Benefits Operations Principal Products Managed Care and Employee Benefits Operations ("MCEBO") markets group life and accident and health insurance, managed health care programs, and administrative services associated with employee benefit plans. These products are sold through group contracts to employers, employer associations and trusts, and other organizations ranging in size from small local employers to very large multinational corporations. Life insurance products are primarily group renewable term life insurance. Group accident and health insurance benefits include reimbursement of hospital, medical and dental expenses, as well as indemnity payments for short- and long- term disability. Flexible benefit or cafeteria style programs, where employees can pick and choose benefits, are also available. More than 90% of MCEBO's group life and accident and health insurance premiums, deposits and benefits under administration, including fees, are individually experience rated, i.e., future (prospectively rated) and past (retrospectively rated) premiums are adjusted annually to reflect actual claims, administrative expenses and investable funds attributable to each policyholder. In response to employers' concerns with the rapidly increasing cost of providing health care benefits to their employees, MCEBO offers a continuum of managed health care products that are designed to control those costs as well as maintain the quality of care. The range of services provided by these products includes programs to maintain health and wellness, as well as to promote patient education and to manage health care through networks of providers of medical/surgical, mental health and pharmaceutical services. MCEBO network products rely on contractual arrangements between TIC and providers of health care to deliver services to covered individuals at negotiated reimbursement levels as well as to participate in utilization and quality management programs. The most comprehensive network products provide HMO-like medical management with a reliance on primary care physicians to manage the delivery of health care to the individuals who have enrolled with them. TIC also offers other levels of managed care, including preferred provider organizations ("PPOs") where participants have the option to seek care from any provider in the network. TIC currently has a nationwide system of 59 medical/surgical networks in 37 states in 130 metropolitan areas. Covered lives using the managed care networks at December 31, 1993 were 1.8 million, which represent 31% of total lives covered by TIC's medical benefits. Included in this total are 678,000 lives covered by comprehensive managed care plans, consisting of point of service and health maintenance organization ("HMO") plans. Medical covered lives in the aggregate for indemnity products were 4.1 million at December 31, 1993. MCEBO is a contractor for the Health Care Financing Administration and the Railroad Retirement Board to administer the federally funded Medicare program. The underlying contracts are generally on a cost reimbursement basis with respect to costs incurred to administer the programs. The Company and Metropolitan Life Insurance Company are engaged in exploratory discussions concerning possible alliances among their health care operations. Because of the preliminary nature of these discussions, the Company believes that it is premature to speculate on the possible outcomes of these discussions. There is a continuing trend on the part of policyholders to self-insure part or all of their accident and health benefits and to utilize administrative or claim adjudication services for a fee. The table below includes the amount of deposits and benefits under administration associated with those benefit plans for which MCEBO provides the administration under a partially insured or self-insured arrangement. The deposits and benefits under administration for these plans are estimates of premiums that fee-based customers would have been charged to provide these benefits under a fully insured arrangement. Deposits 18 and benefits under administration, other than HMO revenues and fee income, do not represent actual revenues. The following table sets forth written premiums, net of reinsurance, and deposits and benefits under administration, including fees, for the MCEBO businesses. Premiums, Deposits and Benefits Under Administration, Including Fees (in millions) Year Ended December 31, ------------------------- 1993 1992 1991 ---- ---- ---- Premiums Group life $ 426 $ 483 $ 537 Group health 2,191 2,137 2,150 ----- ----- ----- Total premiums 2,617 2,620 2,687 Deposits and benefits under administration, including fees(1) 7,791 7,747 7,473 ----- ----- ----- Total premiums, deposits and benefits under administration, including fees $ 10,408 $10,367 $10,160 ========= ====== ====== ______________________________ (1) Reflects an ongoing shift from insurance to administratively managed types of products. For information about reinsurance, see "Insurance Services - General -- Reinsurance" at the end of the description of the Property & Casualty Insurance Services segment. 19 Life Insurance in Force The following table provides a reconciliation of beginning and ending group life insurance in force and related statistical data on a statutory basis for 1991-1993. (in millions of dollars) Year Ended December 31, ------------------------ 1993 1992 1991 ---- ---- ---- In force beginning of year $157,259 $186,138 $177,253 ------- ------- ------- Additions(1) 12,738 6,181 23,920 Terminations(2) (30,049) (35,060) (15,035) -------- -------- -------- In force end of year $139,948 $157,259 $186,138 ======= ======= ======= The amounts in force at end of year are before reinsurance ceded in the following amounts $ 4,669(3) $7,030(3) $5,934 ======= ======= ====== At end of year: Number of policies in force 67,084(4) 48,174(4) 42,593 ====== ====== ====== The average size of group life policies in force is not presented due to the range of coverage and varying number of participants in each group. ______________________________ (1) Includes business written directly by MCEBO plus reinsurance assumed and is subject to year-to-year fluctuations. Also includes increases and decreases caused by changes in the composition of groups covered (i.e., number of employees and the coverage amounts). (2) Includes terminations due to death, surrender and lapses. Also includes the surrender of a single large group life policy, the cancellation of Servicemen's Employees Group Life Insurance in 1993 and the cancellation of Federal Employees Group Life Insurance in 1992, both of which were large assumed reinsurance policies, and the cancellation of several relatively large life policies. (3) In 1993, the decrease is due to a large decrease in the amount of insurance on two policies which were ceded and the cancellation of two policies. In 1992, the increase is attributable to a large increase in the amount of insurance on one policy which is ceded. (4) In 1993 and 1992, the number of policies reflects a large increase in the number of small group policies. 20 Principal Markets and Methods of Distribution TIC has been actively engaged in writing group insurance for over 80 years and is a licensed group insurer in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and the Bahamas. MCEBO's group products and administrative services are sold principally through independent insurance agents, brokers and consultants, although some direct marketing occurs in the managed care area. A salaried staff of approximately 530 field representatives, located in 66 offices throughout the United States, assist in the sale and servicing of these products. Premiums charged for group insurance products reflect, in addition to a profit margin, assumptions as to claims, investment return and expenses. Except for the smaller group cases, most group policies are individually experience rated. The pricing of MCEBO's fee-based business incorporates a review of actual expenses incurred by MCEBO in providing its services, a study of competitive market rates, and a provision for profit and margin for adverse expense fluctuation. MCEBO has continued its efforts to improve financial underwriting to ensure prudent selection of new risks, and is emphasizing careful management of risks already undertaken. Insurance Reserves Group life and group accident and health reserves reflect assumptions as to withdrawal, mortality, morbidity and interest rates based on TIC's experience and industry standards. Life and health claim reserves are monitored to ensure proper reserve levels. Appropriate recognition has been given to experience rating and reinsurance. In management's view, life and health reserves make adequate provision for AIDS claims experience. AIDS-related claims as a percentage of total life claims have approximated 4% for each of the three years ended December 31, 1993. AIDS claims as a percentage of total health claims paid have approximated .6% for each of the three years ended December 31, 1993. MCEBO's products generally are not underwritten individually, and therefore AIDS- related claims are expected to continue to reflect the AIDS experience in the employed population. Competition and Regulation For a description of competition and regulation relating to the Company's life insurance businesses, see "Insurance Services - General" at the end of the description of the Property & Casualty Insurance Services segment. 21 PROPERTY & CASUALTY INSURANCE SERVICES This segment includes the operations of The Travelers Indemnity Company and its subsidiary and affiliated property-casualty insurance companies ("Travelers Indemnity") and Gulf Insurance Company and its subsidiaries ("Gulf"). Because the Company's interest in old Travelers was accounted for during 1993 on the equity method, the Company's results of operations for 1993 do not include the full results of the businesses of Travelers Indemnity. See Notes 1 and 4 of Notes to Consolidated Financial Statements. Accordingly, premium and other operational information is provided for Travelers Indemnity for informational purposes only. For additional information with respect to the combined property and casualty insurance businesses of the Company, see "Combined Property-Casualty Product Line Information." TRAVELERS INDEMNITY - ------------------- Property-Casualty Commercial Lines Principal Products Property-Casualty Commercial Lines ("Commercial Lines") is organized to serve the needs of its customer base by market: National Accounts ("National") and Field Marketing ("Field"). Each marketing and underwriting area targets specific segments of the marketplace based upon size of business, nature of risk and specific customer needs. National serves large organizations, as well as employee groups, associations and franchises. Field serves small and medium-sized businesses and individuals with commercial exposures through a network of independent agents and brokers. Protection is afforded to businesses and other institutions for the risks of property loss such as fire and windstorm, financial loss such as business interruption, liability claims arising from operations and workers' compensation benefits through insurance products where risk is transferred from the customer to Commercial Lines. Such coverages include workers' compensation, liability, automobile, property and multiple-peril. In addition to more traditional insurance products, Commercial Lines provides policy, loss and benefit administration through service agreements. The primary product serviced under these agreements is workers' compensation. Commercial Lines emphasizes cost containment strategies and customer service in this market. It has introduced managed care coupled with services such as toll free telephone numbers for reporting of claims and early intervention in the care process. Losses under administration, presented in the tables on the next page, are losses that Commercial Lines services under this type of service agreement, or under a policy with a deductible. The amounts are based on expected losses associated with non-risk bearing components of each account, as determined in the pricing process. Losses under administration do not represent actual revenues. 22 The following tables set forth written premiums, net of reinsurance, for Commercial Lines. Premiums (in millions) Year Ended December 31, ----------------------- 1993 1992 1991 ---- ---- ---- National Premiums $ 946 $1,011 $1,215 Losses under administration 1,784 1,366 826 ------- ----- --- Total National $ 2,730 $2,377 $2,041 ======= ===== ===== Field Premiums $1,288 $1,284 $1,511 Losses under administration 157 86 30 ----- ----- ---- Total Field $ 1,445 $1,370 $1,541 ======= ===== ===== Year Ended December 31, ----------------------- 1993 1992 1991 ---- ---- ---- Workers' compensation $ 933 $ 961 $1,180 Other liability 416 424 544 Automobile 381 375 378 Multiple-peril 239 256 306 Property and other 265 279 318 ----- ------ ----- Total premiums $ 2,234 $ 2,295(1) $2,726 ======== ======= ====== Losses under administration $ 1,941 $1,452 $856 ======== ====== ==== _________________________ (1) Adverse market conditions, coupled with a shift in product mix from insurance to service business, caused the premium decline in 1992. Principal Markets and Methods of Distribution National markets financial programs that involve both insurance (i.e., risk transfer) and risk service (i.e., claim settlement, loss control and risk management). Customers range in size from businesses with sales of approximately $10 million per year to Fortune 1000 corporations. Each customer typically generates annual premiums of at least $1 million and generally selects products under which the ultimate cost of insurance is retrospectively rated. National customers continue to demand increased levels of risk service programs where the ultimate cost is based on their own loss experience. Based on premiums written and estimated loss dollars serviced, National constituted approximately 60% of Commercial Lines' business in 1993. These large accounts are usually national in scope and highly complex in their operations. The majority of this business is written under retrospective rating plans, large self-insured retentions or some other loss-responsive arrangement. Receivables from retrospectively rated policies totaled $1.3 billion at December 31, 1993. Collateral, primarily letters of credit, is routinely required for agreements that provide for deferred collection of ultimate premiums. Travelers Indemnity is also a member of, and therefore participates in, the underwriting operations of insurance and reinsurance pools and associations, several of which make independent underwriting decisions on behalf of their members. These pools insure specialized risks such as aircraft and airline liability, property exposures of large manufacturing plants, nuclear power plants and transporters of nuclear materials and other specialty risks. Travelers Indemnity monitors its involuntary market exposure state by 23 state and will continue to modify state specific strategies as prevailing market conditions warrant. Field, which made up approximately 40% of Commercial Lines' business in 1993, sells a broad range of commercial property-casualty products to small and medium-sized customers. Small accounts tend to be more price-sensitive and make up approximately 25% of such business. The core products for the small customer are package contracts covering property and general liability exposures. The product choice for the medium-sized customer is a loss- sensitive contract covering workers' compensation. Other coverages are sold to complement the core products. Products are distributed primarily through independent agents (for small customers) and brokers (for medium-sized customers) working with Travelers Indemnity's marketing and underwriting specialists in a field office network of 42 locations. Field continues to selectively streamline its distribution force as management focuses on selected markets and producers. The following table shows the distribution of 1993 premiums for the states that accounted for the majority of the premium volume. % of State Total ----- ----- New York 10.6% California 8.4 Texas 7.6 Massachusetts 7.2 Florida 5.2 New Jersey 4.5 Illinois 4.0 Pennsylvania 4.0 All others(1) 48.5 ------------ Total 100.0% ===== ______________________________ (1) No one of these states accounted for as much as 3.0% of the total. Pricing levels for property and casualty insurance products are generally developed based upon estimated losses, the expenses of producing business and administering claims, and a reasonable allowance for profit. In addition, most retrospective rating plans contain sufficient flexibility that the subjective evaluation of a risk by the underwriter can be incorporated in the pricing. In guaranteed cost products, loss cost inflation has outpaced marketplace price changes. In addition, current economic conditions have constrained business growth, decreasing the size of customers' workforces and consequently reducing the insurable market. A variety of factors continue to affect the casualty market. Travelers Indemnity attempts to avoid exposure to high hazard liability risks through careful underwriting, extensive use of retrospective rating and reliance on financially secure reinsurers. In addition, the absence of needed rate relief, rapidly rising medical costs, and the need for legislative reform in workers' compensation continue to have an adverse effect on profitability, particularly in business written on a guaranteed cost basis. Travelers Indemnity's response to these negative issues is to underwrite more state-specific business, increase its use of deductibles and loss sensitive rating plans as well as aggressive use of self-insurance programs. In the property market, the extraordinarily high level of catastrophe losses in recent periods has led to the contraction of the reinsurance market and corresponding price increases for reinsurance protection. This contraction and the steep increase in the price of reinsurance coverage have contributed to overall higher prices for commercial property policies and may result in the reduced availability of commercial insurance in some markets. 24 The underwriting cycle has improved slightly over the past year, but is still trailing loss trends. Certain coastal areas experienced price increases as a result of the 1992 catastrophic events. For Field, the duration of the current downturn in the underwriting cycle continues to pressure the pricing of guaranteed cost products. The small account market, which primarily buys guaranteed cost products, is extremely price competitive. In this market, loss cost inflation has outpaced price increases in recent years. The focus is to retain existing profitable business and obtain new accounts where Travelers Indemnity can maintain its selective underwriting policy. Travelers Indemnity continues to adhere to strict guidelines to maintain high quality underwriting, which could affect future premium levels. National business is less affected by the underwriting cycle; however, the pricing of large account business continues to be very competitive. Retention levels surpassed those from the prior year as a result of Travelers Indemnity's continued delivery of quality service, primarily claim management focused on loss cost reduction. National has realized growth in certain states as competitors withdraw and Travelers Indemnity's position in deductible and fee-for-service products increases. See "Insurance Services - General -- Reinsurance" below for information regarding reinsurance. Hazardous Substances The Special Liability Group ("SLG") was established in 1986 to deal exclusively with environmental exposures and other exposures of a cumulative nature. SLG is essentially a claim operation, segregated from other claim areas within the Company. Its objective is to fulfill all of the Company's contractual obligations to its policyholders in a manner that most effectively preserves corporate assets. Environmental Claims As a result of various state and federal regulatory efforts aimed at environmental remediation (particularly "Superfund"), the insurance industry has been, and continues to be, involved in extensive litigation involving policy coverage and liability issues. The Administration's current Superfund proposal would change the manner in which Superfund clean ups would be financed, by imposing a premium tax on insurance companies. The revenues from that tax would be used to fund the clean up of sites on the National Priorities List. Other proposals to change Superfund clean ups have also been introduced. One of such proposals includes a provision requiring a minimum level of participation by claimants. The Company is reviewing the proposals and has not yet determined the ultimate effect that the Administration's Superfund proposal, or the other proposals, is likely to have on the Company's financial statements. In addition to the regulatory pressures, certain court decisions have expanded insurance coverage beyond the original intent of the insurer and insured, frequently involving policies that were issued prior to the mid-1970s. The results of court decisions affecting the industry's coverage positions continue to be inconsistent. Accordingly, the ultimate responsibility and liability for environmental remediation costs remain uncertain. Travelers Indemnity is part of the industry segment affected by these issues and continues to receive claims alleging liability exposures arising out of insureds' alleged disposition of toxic substances. The review of environmental claims includes an assessment of the probable liability, available coverage, judicial interpretations and historic value of similar claims. In addition, the unique facts presented in each claim are evaluated individually and collectively. Due consideration is given to the many variables presented in each claim, such as: the nature of the alleged activities of the insured at each site; the allegations of environmental damage at each site; the number of sites; the total number of potentially responsible 25 parties at each site; the nature of environmental harm and the corresponding remedy at a site; the nature of government enforcement activities at each site; the ownership and general use of each site; the willingness and ability of other potentially responsible parties to contribute to the cost of the required remediation at each site; the overall nature of the insurance relationship between Travelers Indemnity and insured; the identification of other insurers; the potential coverage available, if any; the number of years of coverage, if any; and the applicable law in each jurisdiction. Analysis of these and other factors on a case-by-case basis results in ultimate reserve assessment. To date, Travelers Indemnity has been successful in its coverage litigation and continues to reduce its potential exposure through favorable settlements with certain insureds. These settlement agreements are based on the variables presented in each piece of coverage litigation. Generally the settlement dollars paid in disputed coverage claims are a percentage of the total coverage sought by such insureds. In addition, with respect to many of the environmental claims there is a "buy-back" of future environmental liability risks by Travelers Indemnity, together with appropriate indemnities and hold harmless provisions to protect Travelers Indemnity. Environmental loss and loss expense reserves of Travelers Indemnity at December 31, 1993 were $333 million, net of reinsurance of $11 million. Approximately 12% of the net environmental loss reserve (i.e., approximately $40 million) is case reserve for resolved claims. Travelers Indemnity does not post case reserves for environmental claims in which there is a coverage dispute. The remainder of the reserve is for claims in which coverage is in dispute and unreported environmental losses. To date, the reinsurance claims for environmental losses have been relatively minor due to the allocation of the favorable settlement amounts over the appropriate policy years. The industry does not have a standard method of calculating claim activity for environmental losses. Generally, for environmental claims, Travelers Indemnity establishes a claim file for each insured on a per site, per claimant basis. If there is more than one claimant, e.g., a federal and a state agency, this method will result in two claims being set up for a policyholder at that one site. Travelers Indemnity adheres to its method of calculating claim activity on all environmental-related claims, whether such claims are tendered on primary, excess or umbrella policies. As of December 31, 1993, Travelers Indemnity had approximately 8,300 pending environmental-related claims and had resolved over 12,500 such claims since 1986. Approximately 75% of the pending environmental-related claims are property damage claims instituted by governmental agencies, seeking remediation of contaminated property. The balance represents bodily injury claims alleging injury due to the discharge of insureds' waste or pollutants. Asbestos Claims In the area of asbestos claims, the property and casualty insurance industry has suffered from judicial interpretations that have attempted to maximize insurance availability from both a coverage and liability standpoint far beyond the intentions of the contracting parties. These policies generally were issued prior to the 1980s. Originally the cases involved mainly plant workers and traditional asbestos manufacturers and distributors. However, in the mid-1980s, a new group of plaintiffs, whose exposure to asbestos was less direct and whose injuries were often speculative, began to file lawsuits in increasing numbers against the traditional defendants as well as peripheral defendants who had produced products that may have contained small amounts of encapsulated asbestos. These claims continue to arise and on an individual basis generally involve smaller companies and small limits of potential 26 coverage. As a result, state and federal court dockets became clogged with asbestos cases. This backlog has given rise to various efforts, including the consolidation of federal cases in Philadelphia in 1993, to alleviate the congestion. More recently, there has emerged a group of nonproduct claims by plaintiffs, mostly independent labor union workers, mainly against companies, alleging exposure to asbestos while working at these companies' premises. In addition, various insurers, including Travelers Indemnity, remain parties to a widely publicized action brought in Philadelphia regarding potential resolution of future asbestos bodily injury claims. The various classes of asbestos defendants, including major product manufacturers, peripheral and regional product defendants as well as premises owners, continue to tender asbestos-related claims to the industry. Since each insured presents different liability and coverage issues, Travelers Indemnity evaluates those issues on an insured-by-insured basis. The cumulative effect of these claims and the judicial actions on the Company and its insureds currently is uncertain. In addition, the evaluations have not resulted in any meaningful data from which an average asbestos defense or indemnity payment may be determined. The varying defense and indemnity payments made by Travelers Indemnity on behalf of its insureds has also precluded Travelers Indemnity from deriving any meaningful data by which it can predict whether its defense and indemnity payments for asbestos claims (on average or in the aggregate) will remain the same or change in the future. Asbestos loss and loss expense reserves of Travelers Indemnity at December 31, 1993 were $323 million, net of reinsurance of $451 million. Approximately 80% of the net asbestos reserves at December 31, 1993 represented incurred but not reported losses. Travelers Indemnity estimates future reinsurance billings for asbestos claims based on a review of each insured's projected asbestos exposure and policies, as well as the reinsurance contracts of Travelers Indemnity. With respect to the asbestos and environmental-related claims, Travelers Indemnity carries on a continuing review of its overall position, its reserving techniques and reinsurance recoverable. In each of these areas of exposure Travelers Indemnity has endeavored to litigate individual cases and settle claims on favorable terms. Given the inconsistencies of court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties, it is not presently possible to quantify the ultimate exposure represented by these claims. As a result, the Company expects that future earnings may be adversely affected by environmental and asbestos claims, although the amounts cannot be reasonably estimated. However, it is not likely these claims will have a material adverse effect on the Company's financial condition. Property-Casualty Personal Lines Principal Products The primary coverages in Property-Casualty Personal Lines ("Personal Lines") are automobile and homeowners insurance sold to individuals, which account for 97% of the premium volume. Automobile policies provide coverage for liability to others for both bodily injury and property damage, and for physical damage to an insured's own vehicle from collision and various other perils. In addition, many states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage. Homeowners policies are available for dwellings, condominiums, mobile homes and rental property contents. Protection against losses to dwellings and contents from a wide variety of perils is included in these policies, as well as coverage for liability arising from ownership or occupancy. 27 The following table sets forth written premiums, net of reinsurance, for Personal Lines. Premiums (in millions) Year Ended December 31, ------------------------ 1993 1992 1991 ---- ---- ---- Automobile $1,202 $1,153 $1,129 Homeowners 122 236 282 Other 37 39 46 ---- ----- ---- Total premiums $1,361(1) $ 1,428(2) $1,457 ======= ======= ====== ______________________________ (1) The written premium decline in 1993 reflects the purchase of additional reinsurance to reduce exposure to catastrophe losses. (2) The written premium decline in 1992 reflects the Company's efforts to eliminate unprofitable business. Principal Markets and Methods of Distribution Personal Lines writes virtually all types of property and casualty insurance covering personal risks. Business written is distributed through independent agencies and brokerage firms, supported by a network of 15 field marketing offices and two regional service centers. The principal markets for Personal Lines insurance are in states along the east coast, in the south, and in the mid-west. Personal Lines has implemented various programs over the past four years in order to improve operating and financial results, including the restructuring of Home Office and Field Office operations, the termination of 1,850 contracts of underperforming agents and the withdrawal from markets where Personal Lines had a small market share or saw little potential for long-term, profitable growth. These actions have reduced the overall size of the Personal Lines business in terms of policy counts and premium volume. For 1993, Personal Lines business was concentrated in the states shown in the table below. State % of Total ----- ---------- New York 24.5% Massachusetts 14.9 Florida 8.1 Connecticut 7.1 New Jersey 7.0 Pennsylvania 6.1 Virginia 6.0 All others(1) 26.3 ------ Total 100.0% ====== ______________________________ (1) No one of these states accounted for as much as 3.5% of the total. In addition, approximately 50% of Personal Lines' homeowners premiums in 1993 was in New York, Florida, Massachusetts and New Jersey. Pricing for automobile insurance is driven by changes in the relative frequency of claims and by inflation in the cost of automobile repairs, medical care and litigation of liability claims. As a result, the profitability of the business is largely dependent on promptly identifying and rectifying 28 disparities between premium levels and expected claim costs, and obtaining the indicated rate increases. Premiums charged for physical damage coverages reflect insured car values and, accordingly, premium levels are somewhat related to the volume of new car sales. In addition to the normal risks associated with any multiple-peril coverage, the profitability and pricing of homeowners insurance is affected by the incidence of natural disasters, particularly tornadoes and hurricanes. Most policies offer automatic increases in coverage to reflect growth in replacement costs and property values. As noted above, the high level of catastrophe losses in recent periods has led to the contraction of the reinsurance market and corresponding price increases for reinsurance protection. These factors have resulted in a reduced availability of homeowners insurance and have led to higher prices for homeowners policies in some markets. Several insurance companies have attempted to limit their writings in coastal areas of the country as a result of heavy claim losses sustained from Hurricane Andrew. Travelers Indemnity has stopped writing new homeowners policies in certain counties in South Florida and in coastal areas of New York and Connecticut. In addition, Travelers Indemnity has reduced agents' commissions on homeowners insurance in certain markets within those states previously identified, strengthened underwriting standards, implemented price increases, and purchased additional reinsurance to limit its exposure to future catastrophe losses. GULF INSURANCE GROUP - -------------------- During 1993, the Company's property and casualty insurance operations were conducted principally through Gulf. Gulf operates through regional offices for traditional lines of property and casualty insurance and specialty lines of business. Gulf obtains its regional property and casualty insurance business primarily through independent insurance agencies that represent it on a nonexclusive basis. During 1993, approximately 19% of Gulf's regional business represented personal lines of insurance, approximately 29% represented workers' compensation insurance and approximately 52% represented other commercial lines of business, including commercial automobile liability and physical damage, and commercial multiple peril insurance. At the end of 1993, Gulf discontinued writing personal lines of insurance and transferred a major part of that business to Travelers Indemnity, although Gulf does retain some run-off business. Approximately 73% of Gulf's regional business, as represented by direct written premiums during 1993, is in Texas, Georgia, Florida and Missouri. Product offerings in Gulf's specialty lines include directors' and officers' liability and various forms of nonprofessional errors and omissions, fidelity bonds, commercial umbrella coverages and contingent liability coverages; coverages relating to the entertainment industry; and standard commercial property and casualty products for specific niche markets. These speciality lines are produced mainly through commercial insurance brokers and several wholesale brokers, and underwriting managers for specific industry programs. In the aggregate these specialty lines constituted approximately 53%, 47% and 42% of Gulf's earned premiums in 1993, 1992 and 1991, respectively. Reserves are subject to ongoing review as additional experience and other data become available. Increases or decreases to reserves for loss and loss adjustment expenses may be made, which would be reflected in operating results for the period in which such adjustments, if any, are made. 29 For information regarding reinsurance, see "Insurance Services - General - -- Reinsurance" below. Also included in this area is account insurance provided by Gulf to SBSI, in excess of that provided by SIPC. This insurance provides certain excess coverage for losses due to forced liquidation of broker-dealers, which losses would be recoverable by securities customers from SIPC but for SIPC's $500,000 limitation on liability per customer. The following table sets forth information concerning the property and casualty operations of Gulf and its subsidiaries: (dollars in millions) Year Ended December 31, ------------------------------- 1993 1992 1991 ---- ---- ---- Net premiums written . . $264.9 $250.1 $ 232.2 Premiums earned: Regional business . . . $121.9 $128.4 $ 128.7 Specialty business . . 135.4 112.1 93.0 ------- ------- ------- Total premiums earned $257.3 $240.5 $ 221.7 Total Loss and Expense Reserve $ 244.7 $ 223.1 $216.8 Loss ratio (1) . . . . . 72.1% 70.3% 75.1% Expense ratio (2) . . . . 23.8% 27.3% 26.8% Combined ratio (3) . . . 95.9% 97.6% 101.9% ____________________________ (1) Ratio of losses and loss expenses incurred to premiums earned, determined in accordance with statutory insurance accounting principles. (2) Ratio of underwriting expenses incurred to net premiums written, determined in accordance with statutory insurance accounting principles. (3) Total of loss ratio and expense ratio. INSURANCE SERVICES - GENERAL - ---------------------------- The following table summarizes the financial strength ratings of the Company's life insurance companies and the claims-paying ratings of its property-casualty insurance companies. These ratings are not a recommendation to buy, sell or hold securities, and they may be revised or withdrawn at any time. Each rating should be evaluated independently of any other rating. Moody's Investor's Duff & Standard A.M. Best Service Inc. Phelps Corp. & Poor's Corp. Company ------------ ------------ ---------------- -------- TIC A2 (good) A+ (high) A+ (strong) A-(excellent) Primerica Life _ _ AA (excellent) A-(excellent) Travelers Indemnity Pool(1) A1 (good) AA-(very high) AA-(excellent) A (excellent) Gulf Pool(2) _ _ _ A+ (superior) ______________________________ (1) The companies that participate in the pool are The Travelers Indemnity Company, The Charter Oak Fire Insurance Company, The Phoenix Insurance Company, The Travelers Indemnity Company of America, The Travelers Indemnity Company of Illinois and The Travelers Indemnity Company of Rhode Island. (2) The Gulf pool includes Gulf Insurance Company and its subsidiaries. Reinsurance Reinsurance is subject to collectibility in all cases and to aggregate loss limits in certain cases. The Company remains primarily liable as the 30 direct insurer on all risks reinsured. Reinsurance recoverables are reported after allowances for uncollectible amounts. The Company also holds collateral including escrow funds and letters of credit under certain reinsurance agreements. Uncollectible reinsurance recoverables have not had, and management does not expect that any amounts becoming uncollectible in the future would have, a material adverse effect on the consolidated financial position of the Company. Evaluation of the value assigned to the reinsurance recoverable of old Travelers at the date of acquisition is continuing and such value is subject to adjustment. For additional information concerning reinsurance for the insurance companies included in the Company's Statement of Income for 1993, see Note 12 of Notes to Consolidated Financial Statements. Reinsurers are selected based on their financial position and business practices. The Company monitors the financial condition of reinsurers on an ongoing basis, and reviews its reinsurance arrangements periodically. Life Insurance Retention on life insurance risks after reinsurance in these companies varies up to a maximum of $1.5 million per insured, depending on the subsidiary involved, the type of policy and the age of the insured. In addition, certain of these companies maintain catastrophic coverage limiting their exposure to losses on multiple lives arising out of a single occurrence and use reinsurance arrangements that provide protection against mortality fluctuation on large blocks of business. Other reinsurance arrangements are made from time to time to reinsure or assume existing blocks of business. MCEBO primarily uses two reinsurance agreements with nonaffiliated insurers to control its exposure to large group insurance losses. The first such agreement provides protection to MCEBO against losses in excess of $1 million and up to $101 million arising from a single occurrence involving three or more lives for group life and accidental death and dismemberment, with a limit of $3 million per life. The second agreement provides MCEBO protection for death and for waiver of premium disability on group life coverages in excess of $1 million on a single life up to a limit per life of $5 million. Another reinsurance agreement provides excess loss coverage for the HMOs operated by a subsidiary of the Company. This coverage could pay for either 80% or 90% of hospital services provided to a member in excess of $250,000 ($10,000 for certain emergency care) at a maximum of $1,750 per day up to a limit of $1 million per year and $2 million over a member's lifetime. Most of the other reinsurance agreements are entered into at the direction of MCEBO customers for the purpose of sharing those customers' business with other insurance companies. 31 Property and Casualty Insurance Currently, for third-party liability, including automobile no-fault, the reinsurance agreements used by Commercial Lines limit its net retention to a maximum of $5 million per insured, per occurrence. For commercial property insurance, there is a $5 million retention per insured with 100% coverage for risks with higher limits. For large accounts, reinsurance arrangements are typically tiered, or layered, such that only levels of risk acceptable to Travelers Indemnity are retained. The reinsurance agreements in place for Personal Lines cover 90% of each loss between $2 million and $6 million for all third-party liability, including automobile no-fault. In addition to traditional reinsurance agreements which serve to control its exposure to loss, Travelers Indemnity acts as a servicing carrier for many pools and associations, such as workers' compensation pools. These transactions are reflected as direct business on the company's books and records. This business is then ceded to the pools and recorded as reinsurance ceded. In Gulf's regional business, losses on any single claim are limited by reinsurance to $500,000 per occurrence and reinsurance arrangements limit Gulf's maximum loss from any single property catastrophic occurrence to $4.0 million, and it participates for 5% of any excess, up to a maximum excess participation of $36 million. For its specialty lines coverages, Gulf's maximum risk is limited through reinsurance to approximately $2.73 million per policy or, under certain policies, per occurrence. Catastrophe Reinsurance For the accumulation of net property losses arising out of one occurrence, reinsurance coverage averages 60% of total losses between $75 million and $325 million. For the accumulation of net property losses in Florida only, an additional $100 million of protection in excess of $325 million of loss was purchased, subject to an industry loss trigger of $10 billion. For multiple workers' compensation losses arising from a single occurrence, reinsurance coverage averages 100% of losses between $10 million and $160 million and 68% on average for losses caused by property perils between $140 million and $282 million. The Company utilizes reinsurance agreements with nonaffiliated reinsurers to control its exposure to losses resulting from a single occurrence. For Field-produced commercial property insurance, 30% of all losses were reinsured in 1993, subject to an occurrence limitation of 200% of ceded premium or an estimated $240 million. In 1994, the quota share is 25%, with the same occurrence limit as 1993. For Personal Lines homeowners insurance, 30% of losses are reinsured up to a maximum recovery of approximately $96 million. At December 31, 1993, the Company had $4.3 billion in reinsurance deducted from loss reserves. Of this amount, $2.6 billion was ceded to pools and associations, which have the strength of the participating insurance companies supporting these cessions. The remainder is due from reinsurers. The two largest reinsurers, Lloyd's of London and General Reinsurance Corporation, had assumed losses from the Company at December 31, 1993 of $351 million and $119 million, respectively. Competition and Other Factors Affecting Growth Life Insurance The Company's life insurance businesses compete with national, regional and local insurance companies, as well as with self-insurance programs and captive insurers. Competition is based upon price, product design and services 32 rendered to producers and policyholders. The insurance industry is extremely competitive, in both price and services, and no single insurer is dominant. Insurance companies that operate through salaried personnel and employee agents may benefit from cost advantages, once they have achieved sufficient size, over insurers that utilize independent agents and brokers. The PFS sales force is composed of independent commissioned agents and brokers, and Transport operates primarily through independent agents. PFS competes in its market segment by emphasizing the value of term life insurance, and aggressively markets its products which often replace existing life insurance policies underwritten by other companies, including cash value whole life policies. Savings banks also compete directly in the sale of life insurance in Connecticut, Massachusetts and New York. Competition for the savings dollar arises from entities such as banks, investment advisers, mutual funds and other financial institutions. All segments of the employee benefits business are highly competitive because of the market structure and the large number of insurance companies and other entities in the business. These factors prevent any one insurance company from dominating the market. There continues to be intense competition, particularly for the group accident and health coverage where HMOs and third party administrators compete for the coverage and administration traditionally provided by insurance companies. Property and Casualty Insurance The insurance industry is represented in the commercial lines marketplace by many insurance companies of varying size. Companies may be small local firms, large regional firms or large national firms, as well as self-insurance programs or captive insurers. Market competition, regulated by state insurance departments, works to set the price charged for insurance products and the level of service provided. Growth is driven by a company's ability to provide insurance and services at a price that is reasonable and acceptable to the customer. In addition, the marketplace is affected by available capacity of the insurance industry as measured by policyholders' surplus. Surplus expands and contracts primarily in conjunction with profit levels generated by the industry, which is generally referred to as the underwriting cycle. Growth in premium and service business is also measured by a company's ability to retain existing customers and to attract new customers. In addition to traditional insurance services, National offers risk managers of large national accounts programs that provide increased flexibility in selecting loss prevention and claim services, and premium payment plans. This business is highly competitive on the basis of quality of service provided and somewhat sensitive to price competition, and is written primarily by Travelers Indemnity and several other very large companies. New business levels improved in 1993, and retentions remained high in both traditional insurance products and risk service programs. Overhead reductions and improved efficiency through automation are key competitive issues for Field business. During the past several years, Field management has taken significant steps to streamline this operation and establish efficiencies to make these products more competitive in the marketplace. In addition, Travelers Indemnity believes that its breadth of products, highly qualified field staff and applied technology provide for distinct competitive advantages. The highly competitive business for medium- sized accounts has historically been written by companies dealing through agents and brokers, although some direct writing companies are represented in the field. A competitive advantage resides in local representation and underwriting authority. With emphasis on regional locations and resident entrepreneurs marketing the full spectrum of Travelers Indemnity's commercial 33 products, Travelers Indemnity believes it has created significant opportunity for growth in this area. The insurance industry is represented in the personal lines marketplace by many hundreds of insurance companies of varying size. Although national companies write the majority of the business, local or regional companies are effective competitors because of their expense structure or because they specialize in providing coverage to particular risk groups. Personal automobile and homeowners insurance is marketed mainly through one of two distribution systems: independent agents or direct writing. Personal Lines operates through 2,500 independent agents who usually represent several unrelated property-casualty companies. Direct writing companies operate either by mail or through exclusive agents or sales representatives. Due in part to the expense advantage that direct writers typically have relative to agency companies, the direct writers have been able to gradually expand their market share. Personal Lines continues to focus primarily on the independent agency distribution system, recognizing the service and underwriting advantages the agent can deliver. In addition, Personal Lines has taken advantage of opportunities presented within certain alternate distribution mechanisms, including affinity groups and mortgage lenders, and plans to continue to pursue other opportunities as they arise. In recent years, reductions in the volume of Personal Lines voluntary business have caused similar reductions in the involuntary business assigned to the Company. However, this trend has been somewhat offset by increases in the size of many of the pools themselves. Intense regulation in the personal automobile insurance business has caused some insurance companies to withdraw from or reduce their writings in the personal lines market, which has forced more individuals to obtain insurance in the involuntary market. Regulation The Company's insurance subsidiaries are subject to considerable regulation and supervision by insurance departments or other authorities in each state or other jurisdiction in which they transact business. The laws of the various jurisdictions establish supervisory and regulatory agencies with broad administrative powers. The purpose of such regulation and supervision is primarily to provide safeguards for policyholders, rather than to protect the interests of the insurers' stockholders. Typically, state regulation extends to such matters as licensing companies, regulating the type, amount and quality of permitted investments, licensing agents, regulating aspects of a company's relationship with its agents, requiring triennial financial examinations, market conduct surveys and the filing of reports on financial condition, recording complaints, restricting expenses, commissions and new business issued, restricting use of some underwriting criteria, regulating rates, forms and advertising, specifying what might constitute unfair practices, fixing maximum interest rates on policy loans and establishing minimum reserve requirements and minimum policy surrender values. Such powers also extend to premium rate regulation, which varies from open competition to limited review upon implementation, to requirements for prior approval for rate changes. State regulation may also cover regulating capital and surplus and actuarial reserve maintenance, setting solvency standards, mandating loss ratios for certain kinds of insurance, limiting the grounds for cancellation or nonrenewal of policies and regulating solicitation and replacement practices. State laws also regulate transactions and dividends between an insurance company and its parent or affiliates, and require prior approval or notification of any change in control of an insurance subsidiary. In addition, under insurance holding company legislation, most states regulate affiliated groups with respect to intercorporate transfers of assets, service arrangements and dividend payments from insurance subsidiaries. The insurance industry generally is exempt from federal antitrust laws because of the application of the McCarran-Ferguson Act. In recent years, 34 legislation has been introduced to modify or repeal the McCarran-Ferguson Act. The effect of any such modification or repeal cannot currently be determined. Virtually all states mandate participation in insurance guaranty associations and/or insolvency funds, which assess insurance companies in order to fund claims of policyholders of insolvent insurance companies. Under these arrangements, insurers are assessed their proportionate share (based on premiums written for the relevant lines of insurance in that state each year) of the estimated loss and loss expense of insolvent insurers. Similarly, as a condition to writing a line of property and casualty business, many states mandate participation in "fair plans" and/or "assigned risk pools" that underwrite insurance for individuals and businesses that are otherwise unable to obtain insurance. Participation is based on the amount of premiums written in past years by the participating company in an individual state for the classes of insurance involved. These plans or pools traditionally have been unprofitable, although the effect of their performance has been partially mitigated in certain lines of insurance by the states' allowance of increases in rates for business voluntarily written by plan or pool participants in such states. For workers' compensation plans or pools the effect may be further mitigated by the method of participation selected by insurance companies. In addition to state insurance laws, the Company's insurance subsidiaries are also subject to general business and corporation laws, state securities laws, consumer protection laws, fair credit reporting acts and other laws. On the federal level, most employers purchasing group life and accident and health insurance from the Company are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and its enforcement provisions, as administered by the U.S. Department of Labor. ERISA restrictions on "prohibited transactions" and its fiduciary responsibilities increase the complexity of providing insurance and other services to employer sponsored life and health benefit plans. However, in recent years there have been several significant court decisions in which ERISA has preempted state law. These decisions have allowed the Company to provide its products in a more efficient and uniform way throughout the United States. Federal health care reform may, however, change the impact of ERISA on the group insurance business. Certain variable life insurance and individual variable annuities and their related separate accounts are subject to regulation by the Securities and Exchange Commission. In addition, the Company's HMOs are subject to state regulation which is similar to the regulation of insurers. Five of the HMOs are federally qualified and accordingly are also subject to federal requirements. Health care reform is at the forefront of domestic policy issues at the federal level and is a leading issue in many state legislatures in 1994. Various proposals, including that of the Clinton Administration, have been introduced. A great deal of uncertainty remains regarding what the final health reform package will contain or what effect it will have on the Company's managed care programs. These proposals may also affect workers' compensation and automobile insurance. Furthermore, a number of states have passed, or are considering, some form of health care reform. Such state regulation primarily impacts fully insured small employer plans. The overall impact of federal or state legislation on the Company's businesses is impossible to predict at this time. The Company continues to monitor political and legislative activity that addresses the cost, availability and quality of health care. Recently, a United States Supreme Court decision has changed the interpretation of the impact of ERISA on the nonguaranteed benefit portion of certain pension contracts. Industry efforts to obtain regulatory or legislative relief from the effects of this decision are ongoing. TIC is conducting a review of its 35 pension contracts, but the potential impact of this case on the Company is uncertain at this time. In October 1992, the Department of Labor issued final regulations under Section 404(c) of ERISA. These regulations apply to ERISA-covered defined contribution plans that allow participants to control the investment of their account balances. In general, under certain conditions, Section 404(c) provides that a plan fiduciary is not liable for investment losses directly resulting from investment decisions made by a plan participant. For most plans, the rules will begin to apply to transactions occurring in the 1994 plan year for plans administered on a calendar year basis. Many jurisdictions require prior regulatory approval of rate and rating plan changes and some impose restrictions on the cancellation or nonrenewal of risks and the termination of agency contracts, or have regulations that preclude immediate withdrawal from certain lines of business. Certain lines of business, such as commercial automobile and workers' compensation, experience rate inadequacies in many jurisdictions. Automobile insurance is also subject to varying regulatory requirements as to mandated coverages and availability, such as no-fault benefits, assigned risk pools, reinsurance facilities and joint underwriting associations. The added expense associated with involuntary pools in this and other areas has adversely affected profitability. See "Property-Casualty Commercial Lines -- Hazardous Substances" on pages 29 through 31 for a discussion of the effect on the Company of various state and federal regulatory efforts aimed at environmental remediation, including proposed amendments to the federal Superfund statute. In December 1992, the Florida legislature created the Residential Property and Casualty Joint Underwriting Association ("RPCJUA") to provide residential property and casualty insurance to individuals who cannot obtain coverage in the voluntary market. Property-casualty insurance companies in Florida, including Travelers Indemnity, will be required to share the risk in the RPCJUA. In November 1993, the Florida legislature created a Florida Hurricane Catastrophe Fund to provide reimbursement to insurers for a portion of their future catastrophic hurricane losses. This Hurricane Catastrophe Fund will be funded in part by assessments on insurance companies. Recent Developments in Insurance Regulations The National Association of Insurance Commissioners (the "NAIC") adopted risk-based capital ("RBC") requirements for life insurance companies in 1992, effective with reporting for 1993, and for property-casualty companies in December 1993, effective with reporting for 1994. The RBC requirements are to be used as early warning tools by the NAIC and states to identify companies that merit further regulatory action. For these purposes, an insurer's surplus is measured in relation to its specific asset and liability profiles. A company's risk-based capital is calculated by applying factors to various asset, premium and reserve items, where the factor is higher for those items with greater underlying risk and lower for less risky items. The life formula calculates baseline life risk-based capital ("LRBC") as a mathematical combination of amounts for the following four categories of risk: asset risk (i.e., the risk of asset default), insurance risk (i.e., the risk of adverse mortality and morbidity experience), interest rate risk (i.e., the risk of loss due to changes in interest rates) and business risk (i.e., normal business and management risk). Fifty percent of the baseline LRBC calculation is defined as Authorized Control Level RBC. The insurer's ratio of adjusted capital to Authorized 36 Control Level RBC (the "RBC ratio") can then be calculated from data contained in the annual statement. Adjusted capital is defined as the sum of statutory capital, statutory surplus, asset valuation reserve, voluntary investment reserves and one-half the policyholder dividend liability. The property-casualty formula calculates baseline property-casualty risk-based capital ("PCRBC") as a mathematical combination of amounts for the following categories of risk: asset risk, credit risk (i.e., the risk of nonpayment of amounts due under reinsurance ceded and other miscellaneous receivables), off-balance-sheet risk (i.e., the risk of loss due to adverse experience from non-controlled assets, guarantees for affiliates, contingent liabilities, and reserve and premium growth) and underwriting risk (i.e., the risk associated with loss reserves and written premiums). Forty percent of the baseline PCRBC calculation is defined as Authorized Control Level RBC for 1994 (this percentage will increase to fifty percent by 1996). The PCRBC ratio is then calculated from data contained in the annual statement. Property-casualty companies will implement this formula with 1994 annual statement filings. Within certain ratio ranges, regulators have increasing authority to take action as the RBC ratio decreases. There are four levels of regulatory action. The first of these levels is the "company action level." The RBC ratio for this level is less than 200% but greater than 150%. Insurers within this level must submit a comprehensive plan (an "RBC plan") to the commissioner. The next level is the "regulatory action level." The RBC ratio for this level is less than 150% but greater than 100%. An insurer within this level must submit an RBC plan, is subject to an examination of assets, liabilities and operations by the commissioner, and is subject to provisions of any corrective order subsequently issued by the commissioner. The third level is the "authorized control level." The RBC ratio for this level is less than 100% but greater than 70%. At this level, the commissioner takes action as described under "regulatory action level" and may cause the insurer to be placed under regulatory control if such action is deemed to be in the best interests of policyholders. The fourth level is the "mandatory control level." The RBC ratio for this level is less than 70%, and the commissioner takes actions necessary to place the insurer under regulatory control. The formulas have not been designed to differentiate among adequately capitalized companies which operate with higher levels of capital. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank such companies. At December 31, 1993, all of the Company's life companies had adjusted capital in excess of amounts requiring any regulatory action. As part of the process of accreditation by the NAIC, state insurance regulators have been recommending the adoption of new statutory standards for the payment of dividends by insurance companies without prior approval. As part of this effort, the Connecticut General Assembly passed legislation to require prior approval by the Connecticut Insurance Commissioner for any dividend distributions during a twelve month period that are in excess of the greater of (i) ten percent of an insurer's surplus limited by unassigned funds- surplus, or (ii) net gain from operations (for life companies) or net income (for non-life companies), in each case measured as of the preceding December 31. Under the legislation, statutory surplus would not be available in 1994 for dividends from The Travelers Insurance Group Inc. (the parent of TIC and Travelers Indemnity) to The Travelers Inc. without prior approval. The NAIC IRIS ratios, discussed under "Combined Property-Casualty Product Line Information" on page 55, are part of the NAIC solvency surveillance process. They consist of approximately 12 ratios with defined acceptable ranges. They are used as an initial screening process for identifying companies that may be in need of special attention. Companies that 37 have several ratios that fall outside of the acceptable range are selected for closer review by the NAIC examiner team. If the examiner determines that more attention may be warranted, one of several priority designations is assigned, and the insurance department of the state of domicile is then responsible for follow-up action. Occasionally one or more of the Company's subsidiaries has been "flagged" by the IRIS ratios. In all such instances, the regulators have been satisfied upon follow up that there is no solvency problem. It is possible that similar occasions could occur this year, and management believes that the resulting resolution would be the same. Reserving Methods Property-casualty loss reserves are established to account for the estimated ultimate costs of claims and claim adjustment expenses that have been reported but not yet settled, reopened claims, and claims which have been incurred but not reported. Property-casualty personal and commercial lines actuaries use a number of generally accepted actuarial and statistical techniques to estimate ultimate liabilities. These techniques generally rely upon analyses of historical development patterns of various types of accident year data. Typically, these techniques utilize review of paid and incurred claim data and paid and incurred expense data, closed claim data, claim counts, claim costs and various types of pricing data. Subsequent to reviewing a variety of tests, management selects what it believes is the best estimate of ultimate loss and loss adjustment expense for each line of business and market segment. These estimates are refined over time as experience develops and further claims are reported and settled. Any required adjustments to reserves are reflected in the results of the periods in which such adjustments are made. Recognition is given to recoveries for reinsurance, salvage and subrogation. The ultimate incurred losses and the corresponding reserve levels carried for all accident years have an implicit provision for inflation and other factors that result in differences in levels of claim cost by accident year. Ultimate claim values are based in part on analysis of historical trends in average closed claim costs and open claim costs. Average closed claim costs reflect actual historic inflation trends while reported losses reflect historic trends based upon both paid losses and adjusters' estimates. There is no precise method for evaluating the impact of inflation since claim settlements are also affected by many other factors including judicial decisions, the social environment and claims handling procedures. Frequent reviews are therefore performed for the major property-casualty insurance coverages, particularly those related to third party claims. Such third party claims often involve lengthy litigation or are otherwise settled only after a considerable passage of time and are particularly subject to the effects of judicial trends and changes in the social environment. Investments This section discusses the investment portfolios of the businesses described in the Company's Insurance Services segments. At December 31, 1993, the investment holdings of the companies included in the Insurance Services segments were composed primarily of fixed maturities. At December 31, 1993, approximately 95.5% in total dollar amount of the fixed maturities portfolios of such companies had investment grade ratings. The remaining investments are principally mortgage loans and real estate, discussed below, policy loans and other investments. For additional information regarding these investment portfolios, see Note 5 of Notes to Consolidated Financial Statements, Schedule I to this Form 10-K and the discussion of Asset Quality in the Insurance Services Segment discussion in Item 7 of this Form 10- K, "Management's Discussion and Analysis of Financial Condition and Results of Operations." State insurance laws prescribe the types, quality and diversity of permissible investments for insurance companies. 38 Consistent with the nature of their contract obligations, the invested assets attributable to group insurance and individual life, health and financial services are primarily long-term fixed income investments such as corporate debt securities, mortgage and asset-backed securities, and mortgage loans. A small portion of the invested assets related to these operations is in preferred and common stocks and real estate equity investments. The Company did not originate a significant amount of new real estate business in 1993 and does not plan to do so in 1994. The property-casualty fixed maturities portfolios (principally bonds) are shifted from time to time to respond to the changing economic outlook, insurance underwriting results and the resultant changes in the federal income tax position of the Company and its subsidiaries. Cash available for investment is principally derived from operating activities and investment income. In addition, cash becomes available for investment from prepayment, maturity and sale of investments. The underperforming mortgage loan and real estate portfolios may continue to have an adverse impact on cash available for investment. See "Mortgage Loans and Real Estate" below. Different investment policies have been developed for various lines of business based on the product requirements, the type and term of the liabilities associated with these products, regulatory requirements and tax treatment of the businesses in which each company is engaged. Mortgage Loans and Real Estate Primarily all of the mortgage loan and real estate portfolios are held for sale and are carried at their fair values. At December 31, 1993, the mortgage loan and real estate portfolios of the businesses included in the Company's Insurance Services segments consisted of approximately $7.4 billion and $1.0 billion, respectively. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for additional information. The underperforming mortgage loan and real estate portfolios have had a negative impact on investment income. While the level of underperforming assets will continue to have an adverse effect on investment income, this is expected to be mitigated by the implementation of the Company's accelerated liquidation strategy for mortgage loans and foreclosed real estate. As a result of the continued problems in the real estate markets, management anticipates that a considerable amount of maturing commercial mortgage loans will be refinanced, restructured, sold or foreclosed. Consequently, the adverse impact on investment income is expected to continue. For information regarding the principal balance of mortgage loans at December 31, 1993 by contractual maturity, see Note 5 of Notes to Consolidated Financial Statements. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay loans with or without prepayment premiums. Unscheduled payments and sales of mortgage loans were $1.0 billion in 1993. The majority of these mortgages are seven-year term loans. Restructured loans are defined as loans the terms of which have been changed from the original contract generally by lowering the pay rate of interest in the early years after modification. Loans which have pay rates of interest after modification that are equal to or above market rates are not included in the underperforming mortgage loan inventory. At December 31, 1993, approximately $1.3 billion, or 17%, of the mortgage loan portfolio was classified as underperforming. In addition to loans classified as underperforming, the Company identifies certain loans that are in some form of default (generally having missed at least one payment). It is possible that some of these loans may become underperforming within the next year. Interest income on these loans is recorded only upon receipt of actual payment. The carrying value of loans in that category at December 31, 1993 totaled $66 million. 39 Based on the Company's investment review process, certain loans that are currently performing have been identified as having characteristics that cause management to have serious doubts as to the ability of those borrowers to continue to meet contractual mortgage loan terms which could result in impairments to loan carrying value. The Company estimates that up to $306 million of loans that are currently performing have characteristics suggesting a high likelihood that they will become underperforming. Because this estimate is based on a series of judgments and observations, actual performance will likely vary due to the dynamics of the factors influencing real estate. Real estate management evaluates the portfolio on an ongoing basis, assessing the probabilities of loss with respect to a comprehensive series of future projections, including a host of variables relating to the borrower, the property, the term of the loan, the tenant composition, rental rates, other supply and demand factors, and overall economic conditions. The mortgage loan portfolio and real estate assets included in the investment portfolios as of December 31, 1993, are summarized by property type as set forth in the table below. For information summarizing the geographic distribution of the mortgage loan portfolio and real estate assets, see Note 5 of Notes to Consolidated Financial Statements. (dollars in millions) Property Type: Mortgage Loans Real Estate - -------------- -------------- ----------- Office $2,875 $ 641 Apartment 1,711 66 Retail 938 137 Hotel 782 77 Industrial 267 69 Other 116 41 ---- ---- Total commercial 6,689 1,031 Agricultural 673 18 Residential 3 - ---- ---- Total $7,365 $1,049 ===== ===== At December 31, 1993, the Company's investment portfolios had second mortgage loans on commercial properties with purchase accounting value of approximately $82 million. Third-party first mortgage loans on these properties are estimated to be $65 million. The Company's subordinated position in these loans increases risk for which the Company is compensated through the interest rate charged for the second mortgage loan. COMBINED PROPERTY-CASUALTY PRODUCT LINE INFORMATION The following discussion of the Company's combined property-casualty lines displays information for the insurance operations of Property-Casualty Commercial Lines and Property-Casualty Personal Lines on a combined basis, consolidating Gulf and Travelers Indemnity. The operating results of Travelers Indemnity prior to the December 31, 1993 Merger are not included in the Company's Consolidated Financial Statements. 40 Combined Property-Casualty Reserves Property-casualty loss reserves are established to account for the estimated ultimate costs of claims and claim adjustment expenses for claims that have been reported but not yet settled, reopened claims and claims which have been incurred but not reported. The process of estimating this liability is an imprecise science subject to a number of variables. These variables are impacted by both internal and external events such as changes in claim handling procedures, economic inflation, judicial trends and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of the insured event and its actual reporting to the insurer. At December 31, 1993 and 1992, $5.5 billion and $5.4 billion, respectively, of unpaid claim and claim adjustment expenses were provided for claims which had not yet been reported and for future development on reported claims. Reserve estimates are continually refined in a regular ongoing process as experience develops and further claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such adjustments are made. Estimates for reported claims are established based on judgments by the claim department on a case by case basis. These estimates are reviewed on a regular basis and revised as additional facts become known. Estimates for unreported claims, future reopened claims and development on reported claims are principally derived from actuarial analyses of historical patterns of claim development by accident year for each line of business and market segment. Similarly, estimates of unpaid claim adjustment expenses are also principally derived from actuarial analyses of historical development patterns of the relationship of claim adjustment expenses to losses by accident year for each line of business and market segment. Refer to "Insurance Services - General -- Reserving Methods" at page 44 for a more complete discussion of reserving methodology. The table on the next page provides a reconciliation of beginning and ending reserve liability balances for 1993, 1992 and 1991. The table on page 51 shows the development of the estimated reserves for the 10 years prior to 1993. Reconciliation of Reserves for Losses and Loss Adjustment Expenses (LAE) (Excluding Accident and Health Business) (in millions) 1993 1992 1991 ---- ---- ---- Reserves for losses and LAE at beginning of year $ 9,872 $9,406 $9,239 ------- ----- ----- Plus: Provision for losses and LAE for claims arising in the current year 3,132 3,875 3,653 Increase in estimated losses and LAE for claims arising in prior years 142 39 119 ----- ----- ----- Total incurred losses and LAE 3,274 3,914 3,772 ----- ----- ----- Less: Losses and LAE payments for claims arising in: The current year 975 1,312 1,187 Prior years 2,206 2,136 2,418 ----- ----- ----- Total payments 3,181 3,448 3,605 ----- ----- ----- Reserves for losses and LAE at end of year $ 9,965 $ 9,872 $9,406 ======= ======= ===== The increases in estimated losses and LAE for claims arising in prior years in all three calendar years pertain primarily to reserve increases for insurance coverages related to asbestos and environmental claims. Reserves for these coverages were increased on a pretax basis by $420 million in 1993 and by $129 million and $124 million in 1992 and 1991, respectively. Most of these claims were incurred in years prior to 1985. In 1993, Commercial Lines added 41 $325 million to its reserves for asbestos and environmental liabilities, as well as for blood-related claims for policies issued in the early 1980s. This addition to reserves resulted in an after-tax charge of $211 million. Several recent developments contributed to the decision to add to reserves. The insurance industry is witnessing a growth in claims brought by outside workers who allege exposure to asbestos while working on site at various companies. There has been an increase in the incidence of this type of claim during 1993. Commercial Lines also has experienced a growth in environmental claims primarily from smaller companies with lower coverage limits and has been named as a defendant in coverage cases brought by other insurers against their policyholders and the policyholders' other carriers. Accrual of the interest for workers' compensation long-term disability claims which are discounted accounted for $25 million of pretax reserve increases in 1993, and $24 million in each of 1992 and 1991. There was favorable reserve development on other lines of business which acts to offset a significant portion of the increases to reserves cited above. During 1993, Commercial Lines experienced favorable development in the workers' compensation, other liability and commerical automobile product lines for National business for the post-1985 accident years. During 1992 Travelers Indemnity experienced favorable development in Personal Lines and certain sublines of other liability commercial exposure. The differences between the reserves for losses and LAE shown in the tables above and on page 51, all of which are prepared in accordance with generally accepted accounting principles ("GAAP"), and those reported in the annual statements filed with state insurance departments, which are prepared in accordance with statutory accounting practices ("SAP"), were $32 million, $38 million and $100 million for the years 1993, 1992 and 1991, respectively. Those differences are primarily attributable to estimated salvage and subrogation recoveries for automobile physical damage and property damage liability, which are recorded on an accrual basis for GAAP and on a cash basis for SAP in 1991, and a certain portion of the discounting of workers' compensation reserves impacting all three years. See "Property & Casualty Insurance Services -- Property-Casualty Commercial Lines" for a discussion of environmental and asbestos claims and the Special Liability Group that deals with such claims. Discounting The liability for losses for certain long-term disability payments under workers' compensation insurance has been discounted by $610 million at December 31, 1993 using a maximum interest rate of 5%. The corresponding amounts of discount for calendar years 1992 and 1991 were $623 million and $620 million, respectively. 42 Analysis of Combined Property-Casualty Loss and Loss Adjustment Expense Development (excluding accident and health business) (in millions)
Year Ended December 31, ----------------------------------------------------- - 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Reserves for Loss and LAE Originally Estimated $4,455 $4,817 $5,475 $6,658 $7,644 $8,116 $8,947 $9,239 $9,406 $9,872 $9,965 Cumulative Amount Paid as of - ---------------------------- One year later 1,573 1,655 1,753 1,839 2,376 2,146 2,430 2,418 2,136 2,206 Two years later 2,435 2,559 2,748 3,261 3,631 3,632 3,992 3,932 3,584 Three years later 2,990 3,138 3,737 4,075 4,648 4,706 5,095 4,993 Four years later 3,350 3,795 4,258 4,760 5,402 5,487 5,878 Five years later 3,823 4,119 4,732 5,303 5,978 6,080 Six years later 4,047 4,425 5,130 5,735 6,443 Seven years later 4,265 4,717 5,459 6,109 Eight years later 4,495 4,951 5,784 Nine years later 4,686 5,128 Ten years later 4,812 Reserves Reestimated as of - -------------------------- One year later 4,717 4,937 5,863 6,799 7,858 8,292 9,099 9,358 9,446 10,014 Two years later 4,767 5,261 6,135 7,078 8,051 8,497 9,220 9,470 9,756 Three years later 5,006 5,460 6,376 7,292 8,254 8,698 9,408 9,898 Four years later 5,159 5,656 6,665 7,569 8,497 8,912 9,954 Five years later 5,317 5,856 6,922 7,765 8,746 9,489 Six years later 5,483 6,097 7,136 8,021 9,334 Seven years later 5,676 6,266 7,368 8,637 Eight years later 5,781 6,464 7,951 Nine years later 5,948 6,988 Ten years later 6,393 Cumulative Deficiency 1,938 2,171 2,476 1,979 1,690 1,373 1,007 659 350 142 Gross liability - end of year $13,513 $13,650 Reinsurance recoverable 3,641 3,685 ----- ----- Net liability - end of year $ 9,872 $9,965 ====== ===== Gross reestimated liability - latest $13,962 Reestimated recoverable - latest 3,948 ----- Net reestimated liability - latest $10,014 ====== Gross cumulative deficiency $ 449 ======
The data in the above table is presented in accordance with reporting requirements of the Securities and Exchange Commission. Care must be taken to avoid misinterpretation by those unfamiliar with such information or familiar with other data commonly reported by the insurance industry. The above data is not "accident year" data, but rather a display of 1983-1993 year-end reserves and the subsequent changes in those reserves. 43 For instance, the "cumulative deficiency" shown above for each year represents the aggregate amount by which original estimates of reserves as of that year end have changed in subsequent years through charges to income. Accordingly, the cumulative deficiency for each year relates only to reserves at that year end and such amounts are not additive. Expressed another way, if the original reserves at the end of 1983 included $4 million for a loss which is finally settled in 1993 for $5 million, the $1 million deficiency (excess of actual settlement of $5 million over original estimate of $4 million) would be included in the cumulative deficiencies in each of the years 1983-1992 shown above. A substantial portion of the cumulative deficiencies in each of the years 1983-1992 arises from claims on policies written prior to the mid-1970s involving liability exposures such as asbestos. In the post-1984 period, the Company has developed more stringent underwriting standards and significantly contracted or terminated the writing of such risks. General conditions and trends that have affected the development of these liabilities in the past will not necessarily recur in the future; however, deficiencies will occur in the future due to the discount on the workers compensation reserves, therefore, it would be difficult to develop meaningful extrapolation of estimated future redundancies or deficiencies in loss reserves from the data in the table on page 51. A significant portion of National business is underwritten with retrospectively rated insurance policies in which the ultimate cost of insurance for a given year is dependent on the loss experience of the insured. This analysis does not reflect amounts recoverable from insureds in the retrospective rating process. Such recoverables tend to significantly mitigate the impact of the cumulative deficiencies shown above. Retrospective rating is particularly significant for National business for the workers' compensation, general liability and commercial automobile liability coverages. This mechanism affords the Company a significant measure of financial protection against adverse development on a large block ($3.2 billion) of net reserves. Combined Ratios Combined ratios are a measure of property-casualty underwriting results. The combined ratio is the sum of (i) the ratio of losses, loss adjustment expenses and policyholder dividends to earned premiums, and (ii) the ratio of other underwriting expenses to written premiums. When the combined ratio is under 100%, underwriting results are generally profitable; when this ratio is over 100%, underwriting results are generally unprofitable. Underwriting results do not include investment income which makes a significant contribution to overall property-casualty profitability. In preparing the following tables, anticipated salvage and subrogation were deducted from losses. 44 The following table and related discussions present information regarding the combined ratios of Travelers Indemnity and other property- casualty insurance operations of old Travelers and its subsidiaries. For information regarding the combined ratios of Gulf, see "Property & Casualty Insurance Services - Gulf Insurance Group." Travelers Indemnity Year Ended December 31, ------------------------ 1993 1992 1991 ---- ---- ---- Personal Lines Automobile 101.6% 104.1% 113.5% Homeowners 131.9 246.6 108.2 Total Personal Lines Losses and loss adjustment expenses 71.2 98.1 79.4 Other underwriting expenses 33.2 33.7 32.7 ---- ---- ---- Combined Personal Lines 104.4 131.8 112.1 Commercial Lines Workers' compensation 103.0 105.6 97.5 Multiple-peril 127.9 141.1 121.0 Automobile 106.0 116.0 118.6 Other liability 254.3 153.6 144.1 Property and other 95.2 144.1 110.5 Total Commercial Lines Losses and loss adjustment expenses 101.8 96.6 88.1 Other underwriting expenses 27.2 27.7 23.8 ----- ----- ----- Combined before policyholder dividends 129.0 124.3 111.9 Combined Commercial Lines 130.4 124.6 112.7 Total Personal and Commercial Lines Losses and loss adjustment expenses 89.5 97.2 85.0 Other underwriting expenses 29.5 30.0 26.9 ----- ----- ----- Combined before policyholder dividends 119.0 127.2 111.9 Combined 119.8% 127.4% 112.4% Personal Lines underwriting profitability is driven principally by results in the automobile line and is influenced by factors such as inflation in medical, legal and auto repair costs, accident frequencies and regulatory actions. Results have improved in the automobile line since 1990 due in part to programs implemented by Travelers Indemnity to be more selective in marketing and underwriting. In 1993, Personal Lines purchased additional amounts of reinsurance to reduce its exposure to future catastrophe losses. Homeowners results are heavily influenced by the cost of reinsurance, as well as the incidence of natural catastrophes. Personal Lines' results in 1992 were adversely affected by Hurricane Andrew, which added 22.3 percentage points to the total Personal Lines combined ratio. Excluding Hurricane Andrew, the total Personal Lines combined ratio in 1992 would have been 109.5. Commercial Lines underwriting profitability has historically been cyclical, influenced by factors such as inflation levels, changes in the interpretation of the doctrines of tort liability, unemployment trends, legislative actions affecting workers' compensation benefit levels, crime rates, natural catastrophes and general business conditions. The softening of market prices which began in 1988 has continued. The combined ratio has been, and will continue to be, affected by the shift to fee-for-service products, which reduces premiums and losses while expenses remain in insurance results. During 1993, asbestos and environmental claims continued to negatively impact other liability lines. The combined impact from these claims added 20.3 percentage points to the total 1993 Commercial Lines combined ratio. Asbestos claims incurred totaled $229 million in 1993, $61 million in 1992 and $49 million in 1991. Environmental claims incurred were $190 million in 1993, $67 million in 1992 and $73 million in 1991. In the multiple-peril and property lines, the 1992 combined ratios were severely impacted by Hurricane Andrew and 45 other natural catastrophes. Hurricane Andrew alone added 4.9 percentage points to the total Commercial Lines combined ratio. Travelers Indemnity has heavily invested in workers' compensation cost containment initiatives since 1989. Investments in early intervention, managed care, systems technology and employer education have allowed Travelers Indemnity to consistently outperform the industry's workers' compensation combined ratio results. In addition, Travelers Indemnity's overall strategy of restricting growth in states with rate inadequacy, its strong shift towards large self-insured and loss responsive products, and its growth in service of assigned risk pools have all contributed to favorable combined ratio trends. The following table and related discussion sets forth information regarding the premium to surplus ratios of Travelers Indemnity and other property-casualty insurance operations of old Travelers and its subsidiaries. Travelers Indemnity Schedule of Premiums to Surplus Ratios (Statutory Basis) (Including Accident and Health Business) (in millions) Year Ended December 31, ----------------------- 1993 1992 1991 ---- ---- ---- A. Net written premiums $3,637 $3,855 $4,327 B. Capital and surplus 2,294 1,665 1,843 Ratio of premiums to capital and surplus (A divided by B) 1.59 2.32 2.35 The ratio of net written premiums to capital and surplus is a key financial indicator of the overall strength of a property-casualty insurance company. The usual range for this ratio, which is used as a benchmark by the Insurance Regulatory Information System ("IRIS") of the National Association of Insurance Commissioners, is 3.00 to 1 or less. The ratio improved in 1993 due to a modest decline in premium volume from the continuing trend toward self- insured service business in Commercial Lines, and due to a significant increase in capital and surplus, largely resulting from the assumption of old Travelers public debt by the Company. Although 1992 capital and surplus was adversely impacted by Hurricane Andrew, further reductions in premiums caused by the shift to self-insured service business kept the ratio essentially level for 1992. CORPORATE AND OTHER OPERATIONS In addition to its four business segments, the Company's Corporate and Other segment consists of unallocated expenses and earnings primarily related to interest, corporate administration, and certain corporate investments. This segment has also included the Company's 27% equity interest in old Travelers (1993), lines of business retained from the sale of Voyager Group, Inc. and its affiliates ("Voyager") (1993 and 1992), and the Company's interest in Fingerhut Companies, Inc. ("Fingerhut") (1992 and 1991), a direct marketing business. Between 1990 and 1992, the Company completed several public offerings that reduced its formerly 100% ownership interest in Fingerhut to approximately 42% by the end of 1991 and 2% by the end of 1992. The Company's remaining interest in Fingerhut was sold in January 1993. Through December 31, 1991, Fingerhut's results of operations were included with those of the Company on a consolidated basis. For additional information regarding the inclusion of Fingerhut in the Company's consolidated operating results, see Note 2 of Notes to Consolidated Financial Statements. 46 In May 1993, the stock of Voyager was sold. Voyager sold credit insurance on installment loans through independent consumer finance companies and furniture and appliance retailers. The Company retained a portion of Voyager's run-off business, but it does not plan to engage in marketing activities for this business. At December 31, 1992, the net carrying value of the Company's investment in Voyager was classified as held for sale. OTHER INFORMATION General Business Factors In the judgment of the Company, no material part of the business of the Company and its subsidiaries is dependent upon a single customer or group of customers, the loss of any one of which would have a materially adverse effect on the Company, and no one customer or group of affiliated customers accounts for as much as 10% of the Company's consolidated revenues. At January 1, 1994, the Company had approximately 60,000 full-time and 5,000 part-time employees. Source of Funds For a discussion of the Company's sources of funds and maturities of the long-term debt of the Company's subsidiaries, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources," and Note 10 of Notes to Consolidated Financial Statements. Taxation For a discussion of tax matters affecting the Company and its operations, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Notes 2 and 13 of Notes to Consolidated Financial Statements. Financial Information about Industry Segments For financial information regarding industry segments of the Company, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 4 of Notes to Consolidated Financial Statements. 47 Executive Officers of the Company The current executive officers of the Company are indicated on the following page. Periods of offices held include offices with the Company's predecessor, CCC. Ages are given as of March 8, 1994. Officer Name Age Positions Since ---- --- --------- ------- Sanford I. Weill 60 Chairman of the Board 1986 and Chief Executive Officer* Robert I. Lipp 55 Vice Chairman of the Board and 1986 Group Chief Executive of the Company; Chief Executive Officer of The Travelers Insurance Group Inc.* Frank G. Zarb 59 Vice Chairman of the Board and 1991 Group Chief Executive of the Company* James Dimon 37 President, Chief Operating Officer and 1986 Chief Financial Officer of the Company; Chief Operating Officer of SBS Holdings* Robert F. Greenhill 57 Chairman and Chief Executive Officer of 1993 SBS Holdings* Edwin M. Cooperman 50 Executive Vice President 1991 Irwin R. Ettinger 55 Senior Vice President, Taxes and 1987 Audit and Chief Accounting Officer Charles O. Prince, III 44 Senior Vice President, General Counsel 1986 and Secretary ______________________________ * Member of the Office of the Chairman Mr. Weill has been a director of the Company since 1986. He has been Chairman of the Board and Chief Executive Officer of the Company and its predecessor, CCC, since 1986; he was also its President from 1986 until 1991. He was President of American Express Company from 1983 to 1985; Chairman of the Board and Chief Executive Officer of American Express Insurance Services, Inc. from 1984 to 1985; Chairman of the Board and Chief Executive Officer, or a principal executive officer, of Shearson Lehman Brothers Inc. from 1965 to 1984; Chairman of the Board of Shearson Lehman Brothers Holdings Inc. from 1984 to 1985; and a founding partner of Shearson's predecessor partnership from 1960 to 1965. He is Chairman of the Board of Trustees of Carnegie Hall, and a director of the Baltimore Symphony Orchestra. Mr. Weill is a member of the Board of Governors of New York Hospital and is Vice Chairman of the Board of Overseers of Cornell University Medical Center and a member of the Joint Board of New York Hospital--Cornell University Medical College. He is a member of Cornell University's Johnson Graduate School of Management Advisory Board and a Board of Trustees Fellow. He has served as Chairman of the Joint Mayoral/City Council Commission on Early Child and Child Care Programs during the Dinkins Administration. He is co-chair, serving with New York Lieutenant Governor Stan Lundine, of the Leadership Council for the Early Childhood Investment Fund. He is also a member of The Business Roundtable. Mr. Lipp has been a director of the Company since 1991, and is a Vice Chairman and Group Chief Executive of the Company. In November 1993, he was named a member of the newly-created Office of the Chairman of the Company. Since completion of the merger with old Travelers, Mr. Lipp has acted as chief executive officer of the Travelers insurance companies based in Hartford, Connecticut. From 1991 to 1993, he was Chairman and Chief Executive Officer of CCC. From April 1986 through September 1991, he was an Executive Vice President of the Company and its corporate predecessor. Prior to joining the Company in 1986, he was a President and a director of Chemical New York Corporation and Chemical Bank where he held senior executive positions for more 48 than five years prior thereto. Mr. Lipp is a director of The New York City Ballet. Mr. Zarb has been a director of the Company since 1986, and is a Vice Chairman and Group Chief Executive of the Company. In November 1993, he was named a member of the newly-created Office of the Chairman of the Company. He was Chairman and Chief Executive Officer of Smith Barney Inc. and Smith Barney, Harris Upham & Co. Incorporated from November 1988 to June 1993, and President of such corporations from June 1989 to June 1993. He was a General Partner at Lazard Freres & Co. (an investment banking firm) from 1978 to 1988. Previously, he served in the United States Government as Administrator for the Federal Energy Administration from 1974 to 1977; Assistant to the President of the United States for Energy Affairs from 1975 to 1977; Associate Director of the United States Office of Management and Budget from 1973 to 1974; and United States Assistant Secretary of Labor from 1971 to 1972. Mr. Zarb is a director of the Securities Investor Protection Corporation and a member of the Board of Trustees of Hofstra University and the Gerald R. Ford Foundation. He is a member of the New York Stock Exchange Nominating Committee, and serves on the U.S. Enrichment Corporation's Board of Directors. Mr. Dimon has been a director of the Company since September 1991. He is President, Chief Operating Officer and Chief Financial Officer of the Company. In November 1993, he was named a member of the newly-created Office of the Chairman of the Company. He was, from May 1988 to September 1991, Executive Vice President and Chief Financial Officer of the Company, and was Senior Executive Vice President and Chief Administrative Officer of Smith Barney Inc., a subsidiary of the Company, from 1990 to 1991. He is also a director, the Chief Operating Officer and a member of the Executive Committee of SBSI, and Chief Operating Officer and a director of SBS Holdings. From 1986 to 1988, Mr. Dimon was Senior Vice President and Chief Financial Officer of CCC, the Company's predecessor. From 1982 to 1985, he was a Vice President of American Express Company and Assistant to the President, Sanford I. Weill. Mr. Dimon is a trustee of New York University Medical Center, Chairman of the Board of the New York Academy of Finance, and a member of the Young Presidents' Organization. Mr. Greenhill became a director of the Company in August 1993. In November 1993, he was named a member of the newly-created Office of the Chairman of the Company. He became Chairman and Chief Executive Officer of SBS in June 1993. He also serves as Chairman and Chief Executive Officer of SBS Holdings. Mr. Greenhill was President of Morgan Stanley Group, Inc. from January 1991 to June 1993. Mr. Greenhill joined Morgan Stanley in 1962 and became a Partner in 1970. In 1972, he directed Morgan Stanley's newly-formed Mergers and Acquisitions Department. In 1980, Mr. Greenhill was named director of Morgan Stanley's Investment Banking Division with responsibility for domestic and international corporate finance, mergers and acquisitions, merchant banking, capital market services and real estate. In 1980, he also became a member of Morgan Stanley's Management Committee which was the firm's policy-making group. He became a Vice Chairman of Morgan Stanley Group, Inc. in January 1989. Mr. Greenhill is a trustee of the Whitney Museum of American Art, a trustee of the American Enterprise Institute for Public Policy Research, a member of the International Advisory Board of the British-American Chamber of Commerce, and is also a member of the Advisory Board of the New York Academy of Finance. Mr. Cooperman joined the Company in November 1991. Prior thereto, he was Chairman and Co-Chief Executive Officer of American Express Company Travel Related Services. He joined American Express in 1972 and assumed positions of increasing responsibility during his tenure there. Mr. Ettinger, prior to joining CCC in October 1987, was Partner in charge of the Tax Department of Arthur Young and Company's New York offices for more than five years prior thereto. 49 Mr. Prince has been General Counsel of the Company or its predecessor since 1983, and has been a Senior Vice President since 1986. GLOSSARY OF INSURANCE TERMS Annuity -- A contract that pays a periodic income benefit for the life of a person (the annuitant), the lives of two or more persons or for a specified period of time. Assumed Reinsurance -- Business received as reinsurance from another company. See "Reinsurance." Benefits Under Administration, Including Fees -- Estimates of amounts that fee-based Managed Care and Employee Benefits customers would have been charged if their group health plans had been fully insured. Catastrophe -- A severe loss, usually involving many risks such as conflagration, earthquake, windstorm, explosion and other similar events. Ceded Reinsurance -- Risks transferred to another company as reinsurance. See "Reinsurance." Claim -- Request by an insured for indemnification by an insurance company for loss incurred from an insured peril. Combined Ratio -- A measure of property-casualty underwriting results. The combined ratio is the sum of (a) Loss Ratio -- the ratio of losses, loss adjustment expenses and, where applicable, policyholder dividends to earned premiums, and (b) Expense Ratio -- the ratio of other underwriting expenses to written premiums. When the combined ratio is under 100%, underwriting results are generally profitable; when the ratio is over 100%, underwriting results are generally unprofitable. Underwriting results do not include investment income, which may make a significant contribution to overall profitability. Contractholder Funds -- Receipts from the issuance of universal life, pension investment and certain individual annuity contracts. Such receipts are considered deposits on investment contracts that do not have substantial mortality or morbidity risks. Deductible -- The amount of loss that an insured retains. Deferred Acquisition Costs -- Commissions and other selling expenses that vary with and are directly related to the production of business. These acquisition costs are deferred and amortized to achieve a matching of revenues and expenses when reported in financial statements prepared in conformity with GAAP. Defined Contribution Plans -- Type of pension plan in which the contribution rate is certain but the retirement benefit is variable. Deposits and Other Considerations -- Consist of cash deposits and charges for mortality risk and expenses associated with universal life insurance, annuities and group pensions. Excess Loss Coverage -- Coverage which indemnifies the person for that portion of the loss (arising out of a loss occurrence) which is in excess of the deductible. Expense Ratio -- See "Combined Ratio." Experience Rated Contracts -- Insurance contracts in which future rates and/or commissions are compiled from past experience, that is, total premiums 50 earned and losses incurred. This can be applied by certain risk classifications or to an individual risk. Fiduciary Accounts -- Accounts held on behalf of others. General Account -- All an insurer's assets other than those allocated to separate accounts. Guaranteed Cost Insurance -- Premium charged on a prospective basis which may be fixed or adjustable on a specified rating basis but never on the basis of loss experience in the period of coverage. Guaranteed Investment Contracts (GICs) -- Group contracts sold to pension plans, profit sharing plans and funding agreements that guarantee a stated interest rate for a specified period of time. Guaranty Fund -- State-regulated mechanism which is financed by assessing insurers doing business in those states. Should insolvencies occur, these funds are available to meet some or all of the obligations to policyholders. Health Maintenance Organization (HMO) -- A group of medical care entities organized to provide defined health care services to members in return for fixed periodic premiums paid in advance (usually monthly). Incurred But Not Reported Losses (IBNR) -- Losses that have occurred but have not been reported. Insurance -- Mechanism for contractually shifting burdens of a number of risks by pooling them. Involuntary Business (residual market) -- Risks that are not insurable in the voluntary market due to either the level of risk or pricing. Residual markets are largest for lines in which state governments or other agencies mandate coverage such as workers' compensation. Generally states provide residual market plans that are designed to allocate the underwriting experience for these coverages in proportion to a given carrier's market share. Life Contingencies -- Contingencies affecting the duration of life of an individual or a group of individuals. Long-Term Care -- Coverage for extended stays in a nursing home or home health services. Loss Adjustment Expense (LAE) -- Expenses paid in connection with settling claims. Loss Ratios -- See "Combined Ratio." Loss Reserves -- Liabilities established by insurers to reflect the estimated cost of claims payments that the insurer will ultimately be required to pay in the future in respect of losses occurring on or prior to the balance sheet date. Losses Under Administration -- Projected loss and loss adjustment expense payments to be made for the current policy year on behalf of clients who self- insure and purchase claim adjustment services. Managed Health Care Programs -- A method to curb rising medical costs by favorably influencing provider practice patterns and making employees knowledgeable health care consumers by identifying inappropriate care, providing a managed structure in which medical services are offered, and maintaining integrated management information systems to encourage quality and cost-effective use of medical care. 51 Market Reinsurance -- Ceded reinsurance purchased from reinsurance companies in the competitive marketplace. Morbidity -- The rate at which people become diseased, mentally or physically, or physically impaired. Mortality -- The rate at which people die. Policy Loan -- A loan made by an insurance company to a policyholder on the security of the cash value of the policy. Policy loans offset benefits payable to policyholders. Pool -- Syndicate or association of insurance companies organized to underwrite a particular risk, usually with high limits of exposure. Each member shares in premiums, losses and expenses, according to a predetermined agreement. Reinsurance -- The acceptance by one or more insurers, called reinsurers, of all or a portion of the risk underwritten by another insurer who has directly written the coverage. However, the legal rights of the insured generally are not affected by the reinsurance transaction and the insurance enterprise issuing the insurance contract remains liable to the insured for payment of policy benefits. Reinsurance Pools and Associations -- Mechanisms established to aggregate insurance, and then distribute results to participants in the mechanism. The pool or association performs rating, loss adjustment and engineering services for certain exposures. In some cases, they are established to absorb business that will not be written voluntarily by insurers. Residual Market -- See "Involuntary Business." Retention -- The amount of exposure an insurance company retains on any one risk or group of risks. Retrospective Rating -- A plan or method which permits adjustment of the final premium or commission on the basis of the actual loss experience, subject to certain minimum and maximum limits. Salvage -- Amount received by an insurer from the sale of property (usually damaged) on which the insurer has paid a total loss to the insured. For example, when an insurer has paid the insured the actual cash value of an automobile damaged (usually extensively) by collision, then the insurer takes title to and sells the damaged automobile for its own account. Salvage is applied by insurance companies to reduce the amount of loss paid. Self-Insured Retentions -- That portion of the risk retained by a person for its own account. Generally, that person retains an amount of first loss for its own account and purchases an excess of loss cover to protect itself for losses above its retention. Separate Accounts -- Funds for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholders. The assets of these separate accounts are legally segregated and not subject to claims that arise out of any other business of the insurance company. Servicing Carrier -- An insurance company that provides various services including policy issuance, claims adjusting and customer service for insureds in a reinsurance pool, for a fee. Statutory Accounting Practices -- Those accounting practices prescribed or permitted by the National Association of Insurance Commissioners or an 52 insurer's domiciliary state insurance regulator for purposes of financial reporting to regulators. Statutory Capital and Surplus -- The excess of statutory admitted assets over statutory liabilities as shown on an insurer's statutory financial statements. Structured Settlements -- Periodic payments to an injured person or survivor for a determined number of years or for life, typically in settlement of a claim under a liability policy. Subrogation -- The statutory or legal right of an insurer to recover from a third party who is wholly or partially responsible for a loss paid by the insurer under the terms of a policy. For example, when an insurer has paid the insured for loss sustained to his or her automobile as a result of a collision, the insurer may collect through the process of subrogation from the person whose automobile caused the damage. Subrogation recoveries are treated as reductions of the losses paid. Surrender Value -- The amount of money, usually the legal reserve under the policy, less sometimes a surrender charge, which an insurance company will pay to a policyholder who cancels a policy. This value may be used as collateral for a loan. Trading Portfolio -- Fixed maturity investments that are likely to be sold prior to maturity and are therefore carried at current market value. Unrealized gains and losses on these investments are reflected in stockholders' equity. Underwriting --The assumption of risk for designated loss or damage in consideration of receiving a premium. Also includes the process of examining, accepting or rejecting insurance risks, and determining the proper premium. Item 2. PROPERTIES. The Company's executive offices are located in New York City. Offices and other properties used by the Company's subsidiaries are located throughout the United States. A few subsidiaries have offices located in foreign countries. Most office locations and other properties are leased on terms and for durations which are reflective of commercial standards in the communities where such offices and other properties are located. At December 31, 1993, leasehold interests of old Travelers included a total of approximately 6,100,000 square feet of office space at about 300 locations throughout the United States under both operating and capital leases. TIC owns buildings containing approximately 1,610,000 square feet of office space located in Hartford, Connecticut and vicinity, serving as the home office for TIC and Travelers Indemnity. TIC also owns a building in Norcross, Georgia that is occupied by its information systems department. SBS owns a 318,000 total square foot office building and data processing center in New York City. Most of SBS's other offices are located in leased premises, the leases for which expire at various times. As part of the Shearson Acquisition, SBS leased three buildings including an office building located at 388 Greenwich Street with approximately 1.6 million square feet, which had been the operations and administration building of LBI. SBS plans to consolidate its executive offices and certain other New York City operations at these locations. Two of the buildings were acquired by an independent third party and were leased by SBS for a period of five years. SBS has a purchase option with respect to these properties. SBS expects to purchase the other building, in which it is currently a tenant, from a partnership in which SBS has an equity interest. In connection with the purchase, SBS will relinquish its interest in the partnership. 53 A few other offices and certain warehouse space are owned, none of which is material to the Company's financial condition or operations. The Company is the lessee under the lease on old Primerica's former headquarters in Greenwich, Connecticut. The lease obligation on half of this property ended in December 1991; the remainder of the lease expires in December 1996. The Company believes its properties are adequate and suitable for its business as presently conducted and are adequately maintained. For further information concerning leases, Note 18 of Notes to Consolidated Financial Statements. 54 Item 3. LEGAL PROCEEDINGS. This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or its subsidiaries is a party or of which any of their property is subject. Certain additional matters may be described in the periodic reports filed under the Exchange Act by certain subsidiaries of the Company. Shareholder Litigation For information concerning purported class actions challenging certain aspects of the Merger, see the descriptions that appear in the last paragraph on page 2 and the first two paragraphs on page 3 of the Company's filing on Form 8-K dated September 23, 1993, the third paragraph on page 26 of the Company's filing on Form 10-Q for the quarter ended September 30, 1993 and the third paragraph on page 2 of the Company's filing on Form 8-K dated March 1, 1994, which descriptions are incorporated by reference herein. A copy of the pertinent paragraphs of such filings is included as an exhibit to this Form 10-K. For information concerning purported class actions challenging certain aspects of the 1988 merger of Primerica Corporation, a New Jersey Corporation ("old Primerica") into Primerica Holdings, see the description contained in the third and fourth paragraphs of page 30 of the Company's filing on Form 10-K for the year ended December 31, 1989, which description is incorporated by reference herein. A copy of the pertinent paragraphs of such filing is included as an exhibit to this Form 10-K. Subsequent to that filing, other shareholder class actions relating to the same subject were commenced in Federal, New Jersey state, New York state and Connecticut state courts. All of these subsequent actions are currently stayed. Other Litigation and Legal Proceedings Smith Barney Shearson For information concerning purported class actions and an individual action against SBHU and others in connection with Worlds of Wonder common stock and convertible debentures, see the description that appears in the first, second and third paragraphs of page 31 of the Company's filing on Form 10-K for the year ended December 31, 1989, and the description that appears in the first paragraph of page 30 of the Company's filing on Form 10-K for the year ended December 31, 1990, which descriptions are incorporated by reference herein. A copy of the pertinent paragraphs of such filings is included as an exhibit to this Form 10-K. The individual action was dismissed in May 1992. In January 1993, summary judgment was granted for SBHU and the other defendants in the class action. Plaintiffs have appealed the grant of summary judgment to the U.S. Court of Appeals for the Ninth Circuit. For information concerning several purported class action lawsuits filed against SBSI in connection with three funds managed by Hyperion Capital Management Inc., see the description that appears in the fourth paragraph of page 26 of the Company's filing on Form 10-Q for the quarter ended September 30, 1993, which description is incorporated by reference herein. A copy of the pertinent paragraph of such filing is included as an exhibit to this Form 10-K. An amended consolidated complaint with respect to these actions was filed in March 1994, and the consolidated action is entitled In re: Hyperion Securities Litigation. Old Primerica For information concerning a purported class action against the Company and others in connection with certain changes in the retirement benefits of old Primerica retirees, see the description that appears in the fourth paragraph of page 31 of the Company's filing on Form 10-K for the year ended December 31, 55 1989, and the description that appears in the fourth full paragraph of page 26 of the Company's filing on Form 10-K for the year ended December 31, 1991, which descriptions are incorporated by reference herein. A copy of the pertinent paragraphs of such filings is included as an exhibit to this Form 10- K. In June 1992, the United States Court of Appeals for the Third Circuit reversed the trial court's grant of summary judgment in favor of the Company and the other defendants in the class action, and remanded the case to the District Court to determine certain factual matters. Discovery is proceeding. For information concerning matters involving the Company and certain of its subsidiaries relating to federal, state or local regulations or laws regulating the discharge of materials into the environment, see the description that appears in the first full paragraph of page 26 of the Company's filing on Form 10-K for the year ended December 31, 1992, which description is incorporated by reference herein. A copy of the pertinent paragraph of such filing is included as an exhibit to this Form 10-K. The Company is in the process of negotiating a consent decree with respect to soil remediation. The Company believes that insurance maintained by or on behalf of the Company, old Primerica or certain affiliates, indemnities in favor of the Company or such subsidiaries and contributions from other potentially responsible parties will be available to mitigate the financial exposure of the Company and its subsidiaries in these matters. The Company is using a variety of approaches to recover from each of these sources, including pursuing litigation where appropriate relating to such matters. Although there can be no assurance, the Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the consolidated financial condition of the Company and its subsidiaries. Old Travelers For information concerning a case brought by the federal government against old Travelers involving benefit claims for Medicare handled by old Travelers, see the description that appears in the fourth paragraph of page 2 of the Company's filing on Form 8-K, dated March 1, 1994, which description is incorporated by reference herein. A copy of the pertinent paragraph of such filing is included as an exhibit to this Form 10-K. For information concerning a case filed by certain subsidiaries of old Travelers involving certain reinsurance contracts with Lloyd's of London, see the description that appears in the paragraph that begins on page 2 and ends on page 3 of the Company's filing on Form 8-K, dated March 1, 1994, which description is incorporated by reference herein. A copy of the pertinent paragraph of such filing is included as an exhibit to this Form 10-K. Certain of the subsidiaries that the Company acquired in the Merger are involved in defending against claims asserting alleged injuries and damages from asbestos and other hazardous and toxic substances. For additional information with respect to these claims, reference is made to the discussion of asbestos and environmental claims contained on pages 29 through 31 of this Form 10-K. The Securities and Exchange Commission (the "Commission") has been conducting a nonpublic inquiry pursuant to an order of investigation with respect to old Travelers' accounting, reporting and disclosure treatment of certain matters in connection with its lending and loss recognition practices pertaining to real estate investments and related matters going back to January 1, 1988. The Company is cooperating fully with the Commission's staff. Other For information concerning a California Superior Court case against Transport arising out of a hospital indemnity policy issued by Transport, see the description that appears in the second paragraph of page 26 of the Company's filing on Form 10-Q for the quarter ended September 30, 1993, which 56 description is incorporated by reference herein. A copy of the pertinent paragraph of such filing is included as an exhibit to this Form 10-K. The Company has reached a settlement agreement with respect to this case. The Company and various subsidiaries have also been named as defendants in various matters incident to and typical of the businesses in which they are engaged. These include numerous civil actions, arbitration proceedings and other matters in which SBSI, R-H and American Capital have been named, arising in the normal course of business out of activities as a broker and dealer in securities, as an underwriter, as an investment banker or otherwise. In the opinion of the Company's management, none of these actions is expected to have a material adverse effect on the consolidated financial condition of the Company and its subsidiaries. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At a special meeting held on December 30, 1993, the stockholders of the Company voted upon four proposals, one of which related to the combination of the businesses of the Company and old Travelers and three of which were amendments to two of the Company's incentive plans. The proposals were (i) to approve and adopt the Agreement and Plan of Merger dated as of September 23, 1993, between the Company (then known as Primerica Corporation) and old Travelers, including the issuance of up to 110,500,000 shares of the Company's Common Stock in connection with such business combination, (ii) to approve an amendment to the Company's Capital Accumulation Plan, authorizing an increase of 17,000,000 shares in the number of shares of the Company's Common Stock available for issuance under such plan, (iii) to approve an amendment to the Company's Stock Option Plan that established maximum allocations of option grants to certain executive officers of the Company, and (iv) to approve an amendment to the Company's Stock Option Plan, which amendment (x) authorized an increase of 8,000,000 shares in the number of shares of the Company's Common Stock available for issuance pursuant to option grants under such plan, and an increase of 15,000,000 shares in the number of shares of the Company's Common Stock available for issuance pursuant to reload option grants under such plan, and (y) provided for a period of restricted transferability of shares of the Company's Common Stock acquired upon exercise of an option and a minimum appreciation in the market price of the Company's Common Stock over the option exercise price in order for an optionee to receive a reload option in connection with such exercise. The voting with respect to these matters was as follows: Proposal Votes Cast Votes Cast Abstentions Broker FOR AGAINST Non-Votes -------- ---------- ---------- ----------- ---------- Proposal 1 203,835,497 621,403 849,925 20,875,874 Proposal 2 183,091,851 20,898,097 1,316,877 20,875,874 Proposal 3 209,248,799 15,292,575 1,641,325 0 Proposal 4 158,785,353 44,565,912 1,955,560 20,875,874 PART II ------- Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is listed on the NYSE and on the Pacific Stock Exchange under the symbol "TRV." The high and low sale prices, as reported on the consolidated transaction reporting system, for the common stock of the Company for the periods indicated, and the dividends per share, are set forth on the next page. All amounts have been adjusted to give retroactive effect to the two stock splits effected in 1993 on the Company's common stock. 57
1992 1993 1994 ---------------------------------------------- ------------------------------------------------- ---- 1st Q 2nd Q 3rd Q 4th Q 1st Q 2ndQ 3rd Q 4th Q 1st Q* ------- ------- ------- ------ ------ ----- ------- ------- ------- Common Stock Price High $21.3125 $20.8750 $22.2500 $24.9375 $37.3125 $39.4688 $49.5000 $48.6250 $43.125 Low $18.8125 $17.8750 $19.0625 $20.7500 $24.3125 $31.2188 $37.5938 $38.0000 $36.500 Dividends per Share of Common Stock $.063 $.100 $.100 $.100 $.120 $.120 $.125 $.125 $.125 _______________________________ * Through February 28, 1994
At March 8, 1994, the Company had approximately 57,000 common stockholders of record. This figure does not represent the actual number of beneficial owners of common stock because shares are frequently held in "street name" by securities dealers and others for the benefit of individual owners who may vote the shares. For information on dividend restrictions in certain long-term loan and credit agreements of the Company and its subsidiaries, as well as restrictions on the ability of certain of the Company's subsidiaries to transfer funds to the Company in the form of cash dividends or otherwise, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Item 6. SELECTED FINANCIAL DATA. See "Five-Year Summary of Selected Financial Data" on page 24 of the Company's 1993 Annual Report to Stockholders (the "1993 Annual Report"), included as part of Exhibit 13 to this Form 10-K and incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 25 of the 1993 Annual Report, included as part of Exhibit 13 to this Form 10-K and incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Index to Consolidated Financial Statements and Schedules on page F-1 hereof. There is also incorporated by reference herein in response to this Item the material under the caption "Quarterly Financial Data (unaudited)" on page 57 of the 1993 Annual Report, which material is included as part of Exhibit 13 to this Form 10-K. The preacquisition consolidated balance sheets of The Travelers Corporation and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1993, together with the notes thereto and the related report of Independent Accountants, are included as Exhibit 99.01 to this Form 10-K and are incorporated herein by reference. 58 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. For information on the directors of the Company, see the material under the caption "Election of Directors," in the definitive Proxy Statement for the Company's Annual Meeting of Stockholders to be held on April 27, 1994 filed with the Securities and Exchange Commission (the "Proxy Statement"), incorporated herein by reference. For information on executive officers, see Item 1, "Business -- Other Information -- Executive Officers of the Company" herein. Item 11. EXECUTIVE COMPENSATION. See the material under the caption "Executive Compensation" of the Proxy Statement, incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. See the material under the captions "Voting Rights" and "Security Ownership of Management" of the Proxy Statement, incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. See the material under the captions "Election of Directors" and "Executive Compensation" of the Proxy Statement, incorporated herein by reference. PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as a part of the report: (1) Financial Statements. See Index to Consolidated Financial Statements and Schedules on page F-1 hereof. Also filed as a part of this report are the preacquisition consolidated balance sheets of The Travelers Corporation and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1993, together with the notes thereto and the related report of Independent Accountants. See Exhibit 99.01. (2) Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedules on page F-1 hereof. (3) Exhibits: See Exhibit Index. (b) Reports on Form 8-K: 59 On October 1, 1993, the Company filed a Current Report on Form 8-K dated September 23, 1993, reporting under Item 5 thereof its agreement to acquire the remaining approximately 73% of the common stock of The Travelers Corporation that it did not already own, and certain legal proceedings arising out of the announcement of that agreement. On October 21, 1993, the Company filed a Current Report on Form 8-K, dated October 18, 1993, reporting under Item 5 thereof the results of its operations for the three months and nine months ended September 30, 1993, and certain other selected financial data. On December 2, 1993, the Company filed a Current Report on Form 8-K dated November 29, 1993, including under Items 5 and 7 thereof certain historical financial information of The Travelers Corporation and certain pro forma financial information with respect to its merger with The Travelers Corporation. No other reports on Form 8-K have been filed by the Company during the last quarter of the period covered by this report; however, on January 13, 1994, the Company filed a Current Report on Form 8-K, dated December 31, 1993, reporting under Item 2 thereof the consummation of the merger of The Travelers Corporation into the Company; and on January 26, 1994, the Company filed a Current Report on Form 8-K, dated January 24, 1994, reporting under Item 5 thereof the results of its operations for the three months and year ended December 31, 1993; and on March 1, 1994, the Company filed a Current Report on Form 8-K, dated March 1, 1994, reporting under Item 5 thereof certain information with respect to legal proceedings in order to update the information incorporated by reference into its shelf registration statements. 60 EXHIBIT INDEX ------------- Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 3.01 Restated Certificate of Incorporation of Electronic The Travelers Inc., as filed with the Delaware Secretary of State on March 30, 1994. 3.02 By-Laws of the Company as amended effective December 17, 1992, incorporated by reference to Exhibit 3.02 to the Company's Registration Statement on Form S-3 (No. 33- 55542). 10.01* Employment Protection Agreement, dated as of December 31, 1987, between the Company (as successor to Commercial Credit Company) and Sanford I. Weill, incorporated by reference to Exhibit 10.03 to CCC's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 (File No. 1-6594). 10.02.1* Stock Option Plan of the Company, as amended through April 26, 1989, incorporated by reference to Annex A to the prospectus contained in the Company's Registration Statement on Form S-8 (No. 33- 29711). 10.02.2* Amendment to the Company's Stock Option Plan, dated October 23, 1991, incorporated by reference to Exhibit 10.02.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (File No. 1-9924) (the "Company's 1991 10- K"). 10.02.3* Amendments to the Company's Stock Option Plan, approved by the Company's stockholders on April 22, 1992, incorporated by reference to Exhibit 10.02.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No.1-9924) (the "Company's 1992 10-K"). 10.02.4* Amendment to the Company's Stock Option Plan, dated July 22, 1992, incorporated by reference to Exhibit 10.02.4 to the Company's 1992 10-K. 10.02.5* Amendment No. 11 to the Company's Stock Electronic Option Plan. 10.02.6* Amendment No. 12 to the Company's Stock Electronic Option Plan. 10.03* Retirement Benefit Equalization Plan of Electronic Primerica Corporation (as successor to Primerica Holdings, Inc.), as amended. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.04* Letter Agreement between Joseph A. Califano, Jr. and the Company, dated December 14, 1988, incorporated by reference to Exhibit 10.21.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (File No. 1-9924) (the "Company's 1988 10- K"). 10.05.1* The Company's Deferred Compensation Plan for Directors, incorporated by reference to Exhibit 10.21.2 to the Company's 1988 10-K. 10.05.2* Amendment to the Company's Deferred Compensation Plan for Directors, dated July 22, 1992, incorporated by reference to Exhibit 10.06.2 of the Company's 1992 10-K. 10.06.1* Supplemental Retirement Plan of the Company, incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-9924) (the "Company's 1990 10-K"). 10.06.2* Amendment to the Company's Supplemental Electronic Retirement Plan. 10.07* Long-Term Incentive Plan of Primerica Corporation, as amended, incorporated by reference to Exhibit 10.08 to the Company's 1992 10-K. 10.08.1* Capital Accumulation Plan of the Company (the "CAP Plan"), as amended to January 31, 1993, incorporated by reference to Exhibit 10.09 to the Company's 1992 10-K. 10.08.2* Amendment No. 8 to the Company's CAP Plan. Electronic 10.09.1* Employment Agreement dated as of December 16, 1988 among Smith Barney Shearson Inc. (formerly Smith Barney, Harris Upham & Co. Incorporated; hereinafter "SBS"), the Company and Frank G. Zarb (the "FGZ Employment Agreement"), incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1989 (File No. 1-9924). 10.09.2* Assignment Agreement and Amendment No. One Electronic to FGZ Employment Agreement. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.10 Restated Stockholder Rights and Support Agreement dated as of November 1, 1989 by and among the Company and Arthur L. Williams, Jr., Angela H. Williams, A.L. Williams & Associates, Inc. and The A.L. Williams & Associates, Inc. Pension and Profit Sharing Plan, incorporated by reference to Exhibit 10.13 to the Company's 1990 10-K. 10.11 Amended and Restated Exclusive Marketing Agreement dated as of November 1, 1989 by and among the Company, A.L. Williams & Associates, Inc. and Arthur L. Williams, Jr., incorporated by reference to Exhibit 10.14 to the Company's 1990 10-K. 10.12 Restated Second Amended General Agency Agreement ("SAGAA") dated as of November 1, 1989 by and among Primerica Life Insurance Company (formerly Massachusetts Indemnity Life Insurance Company; hereinafter "Primerica Life"), A.L. Williams & Associates, Inc. and Arthur L. Williams, Jr., incorporated by reference to Exhibit 10.15 to the Company's 1990 10-K. 10.13 Restated First Amendment to SAGAA dated as of November 1, 1989 by and among Primerica Life, A.L. Williams & Associates, Inc. and Arthur L. Williams, Jr., incorporated by reference to Exhibit 10.16 to the Company's 1990 10-K. 10.14 Restated and Amended Agreement of Charles D. Adams dated as of November 1, 1989 for the benefit of each of the Company, A.L. Williams & Associates, Inc. and The A.L. Williams Corporation, incorporated by reference to Exhibit 10.17 to the Company's 1990 10-K. 10.15 Restated and Amended Agreement of Angela H. Williams dated as of November 1, 1989 for the benefit of each of the Company, A.L. Williams & Associates, Inc. and The A.L. Williams Corporation, incorporated by reference to Exhibit 10.18 to the Company's 1990 10-K. 10.16.1 Asset Purchase Agreement dated as of March 12, 1993, by and among Shearson Lehman Brothers Inc., SBS, the Company, American Express Company and Shearson Lehman Brothers Holdings Inc. (the "SLB Agreement"), incorporated by reference to Exhibit 10.21 to the Company's 1992 10-K. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.16.2 Amendment No. 1, dated as of July 31, 1993, to the SLB Agreement, incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1993 (File No. 1-9924) (the "Company's June 30, 1993 10-Q"). 10.16.3 Amendment No. 2 dated as of July 31, 1993, to the SLB Agreement, incorporated by reference to Exhibit 10.02 to the Company's June 30, 1993 10-Q. 10.17.1* Employment Agreement dated June 23, 1993, by and among SBS, the Company and Robert F. Greenhill (the "RFG Employment Agreement"), incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1993 (File No. 1-9924) (the "Company's September 30, 1993 10-Q"). 10.17.2* Form of Amendment to the RFG Employment Electronic Agreement. 10.18* Memorandum of Sale dated June 23, 1993, between the Company and Robert F. Greenhill, incorporated by reference to Exhibit 10.02 to the Company's September 30, 1993 10-Q. 10.19* Registration Rights Agreement dated June 23, 1993, between the Company and Robert F. Greenhill, incorporated by reference to Exhibit 10.03 to the Company's September 30, 1993 10-Q. 10.20* Restricted Shares Agreement dated June 23, 1993, by and between the Company and Robert F. Greenhill, incorporated by reference to Exhibit 10.04 to the Company's September 30, 1993 10-Q. 10.21 Agreement and Plan of Merger, dated as of September 23, 1993, between the Company and The Travelers Corporation ("old Travelers"), incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of old Travelers, dated September 23, 1993 and filed with the Commission on October 8, 1993 (File No. 1-5799). 10.22* Agreement dated December 21, 1993 between Electronic the Company and Edward H. Budd. 10.23* Employment Agreement dated December 31, Electronic 1993 between The Travelers Insurance Group Inc. and Richard H. Booth. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.24* Employment Agreement dated December 31, Electronic 1993 between The Travelers Insurance Group Inc. and Robert W. Crispin. 10.25* The Travelers Corporation 1982 Stock Option Plan, as amended January 10, 1992, incorporated by reference to Exhibit 10(a) to the Annual Report on Form 10-K of old Travelers for the fiscal year ended December 31, 1991 (File No. 1-5799) (the "old Travelers' 1991 10-K"). 10.26* The Travelers Corporation 1988 Stock Incentive Plan, as amended April 7, 1992, incorporated by reference to Exhibit 10(b) to the Annual Report on Form 10-K of old Travelers for the fiscal year ended December 31, 1992 (File No. 1-5799) (the "old Travelers' 1992 10-K"). 10.27* The Travelers Corporation 1984 Management Incentive Plan, as amended effective January 1, 1991, incorporated by reference to Exhibit 10(c) to the Annual Report on Form 10-K of old Travelers for the fiscal year ended December 31, 1990 (File No. 1- 5799). 10.28* The Travelers Corporation Supplemental Benefit Plan, effective December 20, 1992, incorporated by reference to Exhibit 10(d) to the Annual Report on the old Travelers' 1992 10-K. 10.29* The Travelers Corporation TESIP Restoration and Non-Qualified Savings Plan, effective January 1, 1991, incorporated by reference to Exhibit 10(e) to the old Travelers' 1991 10-K. 10.30* The Travelers Severance Plan of Officers, Electronic as amended September 23, 1993. 10.31* The Travelers Corporation Directors' Deferred Compensation Plan, as amended November 7, 1986, incorporated by reference to Exhibit 10(d) to the Annual Report on Form 10-K of old Travelers for the fiscal year ended December 31, 1986 (File No. 1- 5799). 11.01 Computation of Earnings Per Share. Electronic 12.01 Computation of Ratio of Earnings to Fixed Electronic Charges. 13.01 Pages 24 through 57 of the 1993 Annual Report Electronic to Stockholders of the Company. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 21.01 Subsidiaries of the Company. Electronic 23.01 Consent of KPMG Peat Marwick, Independent Electronic Certified Public Accountants. 23.02 Consent of Coopers & Lybrand, Independent Electronic Accountants. 24.01 Powers of Attorney. Electronic 28.01 Information from Reports Furnished to State P Insurance Regulatory Authorities. Schedule Paper P of the Consolidated Annual Statement of The Travelers Insurance Group Inc. and its affiliated fire and casualty insurers, and Schedule P of the Consolidated Annual Statement of Gulf Insurance Company and its affiliated fire and casualty insurers. 99.01 Consolidated balance sheets of The Electronic Travelers Corporation and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1993, together with the notes thereto and the related report of Independent Accountants. 99.02 The last paragraph of page 2 and the first Electronic two paragraphs of page 3 of the Company's Current Report on Form 8-K dated September 23, 1993 (File No. 1-9924), the third paragraph of page 26 of the Company's September 30, 1993 10-Q, and the third paragraph of page 2 of the Company's Current Report on Form 8-K dated March 1, 1994 (File No. 1-9924) (the "Company's March 1, 1994 8-K"). 99.03 The third and fourth paragraphs of page 30 Electronic of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 1-9924) (the "Company's 1989 10- K"). 99.04 The first, second and third paragraphs of Electronic page 31 of the Company's 1989 10-K, and the first paragraph of page 30 of the Company's 1990 10-K. 99.05 The fourth paragraph of page 26 of the Electronic Company's September 30, 1993 10-Q. 99.06 The fourth paragraph of page 31 of the Electronic Company's 1989 10-K, and the fourth full paragraph of page 26 of the Company's 1991 10-K. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 99.07 The first full paragraph of page 26 of the Electronic Company's 1992 10-K. 99.08 The fourth paragraph of page 2 of the Electronic Company's March 1, 1994 8-K. 99.09 The paragraph that begins on page 2 and Electronic ends on page 3 of the Company's March 1, 1994 8-K. 99.10 The second paragraph of page 26 of the Electronic Company's September 30, 1993 10-Q. The total amount of securities authorized pursuant to any instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the Commission upon request. The financial statements required by Form 11-K for 1993 for the Company's employee savings plans will be filed as exhibits by amendment to this Form 10-K pursuant to Rule 15d-21 of the Securities Exchange Act of 1934, as amended. Copies of any of the exhibits referred to above will be furnished at a cost of $.25 per page (except that no charge will be made for the 1993 Annual Report on Form 10-K) to security holders who make written request therefor to Corporate Communications and Investor Relations Department, The Travelers Inc., 65 East 55th Street, New York, New York 10022. ______________________________ * Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March, 1994. THE TRAVELERS INC. (Registrant) By: /s/ Sanford I. Weill . . . . . . . . . . . . . . . . . . . . Sanford I. Weill, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the 30th day of March, 1994. Signature Title --------- ----- /s/ Sanford I. Weill . . . . . . . . . . . . . . Chairman of the Board, Chief Sanford I. Weill Executive Officer (Principal Executive Officer) and Director /s/ James Dimon . . . . . . . . . . . . . . President, Chief Operating James Dimon Officer, Chief Financial Officer (Principal Financial Officer) and Director /s/ Irwin R. Ettinger . . . . . . . . . . . . . . Senior Vice President and Chief Irwin R. Ettinger Accounting Officer (Principal Accounting Officer) * . . . . . . . . . . . . . . Director C. Michael Armstrong * . . . . . . . . . . . . . . Director Kenneth J. Bialkin 62 Signature Title --------- ----- * . . . . . . . . . . . . . . Director Richard H. Booth * Director . . . . . . . . . . . . . . Edward H. Budd * . . . . . . . . . . . . . . Director Joseph A. Califano, Jr. * . . . . . . . . . . . . . . Director Robert W. Crispin * . . . . . . . . . . . . . . Director Douglas D. Danforth * . . . . . . . . . . . . . . Director Robert F. Daniell * . . . . . . . . . . . . . . Director Leslie B. Disharoon * . . . . . . . . . . . . . . Director Gerald R. Ford * . . . . . . . . . . . . . . Director Robert F. Greenhill 63 Signature Title --------- ----- * . . . . . . . . . . . . . . Director Ann Dibble Jordan * . . . . . . . . . . . . . . Director Robert I. Lipp * . . . . . . . . . . . . . . Director Dudley C. Mecum * . . . . . . . . . . . . . . Director Andrall E. Pearson * . . . . . . . . . . . . . . Director Frank J. Tasco * . . . . . . . . . . . . . . Director Linda J. Wachner * . . . . . . . . . . . . . . Director Joseph R. Wright, Jr. * . . . . . . . . . . . . . . Director Arthur Zankel * . . . . . . . . . . . . . . Director Frank G. Zarb /s/ James Dimon *By: . . . . . . . . . . . James Dimon Attorney-in-fact 64
The Travelers Inc. and Subsidiaries INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES* _________________________________ Incorporated By Reference from the Company's 1993 Annual Report to Page Stockholders at Herein Page Indicated ------ ------------------ Independent Auditors' Report F-2 58 Consolidated Statement of Income for the year ended December 31, 1993, 1992 and 1991 34 Consolidated Statement of Financial Position at December 31, 1993 and 1992 35 Consolidated Statement of Changes in Stockholders' Equity for the year ended December 31, 1993, 1992 and 1991 36 Consolidated Statement of Cash Flows for the year ended December 31, 1993, 1992 and 1991 37 Notes to Consolidated Financial Statements 38-57 Schedules: Schedule I - Marketable Securities - Other Investments F-3 Schedule II - Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties F-4 - F-10 Schedule III - Condensed Financial Information of Registrant (Parent Company only) F-11 - F-14 Schedule VI - Reinsurance F-15 Schedule IX - Short-Term Borrowings F-16 *Schedules not listed are omitted as not applicable or not required by Regulation S-X.
F-1 Independent Auditors' Report The Board of Directors and Stockholders The Travelers Inc.: Under date of January 24, 1994, we reported on the consolidated statements of financial position of The Travelers Inc. (formerly Primerica Corporation) and subsidiaries as of December 31, 1993 and 1992, and the related statements of income, changes in stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1993, as contained in the 1993 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, these financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick KPMG Peat Marwick New York, New York January 24, 1994 F-2
SCHEDULE I The Travelers Inc. and Subsidiaries Marketable Securities - Other Investments December 31, 1993 (In millions of dollars) Column A Column B Column C Column D -------- -------- -------- -------- Amount at Which Shown Market in the Type of Investment Cost Value Balance Sheet ------------------ ---- ----- ------------- Fixed maturities Bonds United States Government and government agencies and authorities (1) $8,427 $8,530 $8,427 States, municipalities and political sub-divisions 3,073 3,111 3,073 Foreign governments 541 549 541 Public utilities 3,105 3,136 3,105 Convertibles and bonds with warrants attached 405 412 405 All other corporate bonds 12,672 12,836 12,672 Redeemable preferred stock 63 65 63 ------- ------- ------- Total fixed maturities $28,286 $28,639 $28,286 ------ ------ ------ Equity securities Common stocks Banks, trust and insurance companies $ 15 $ 14 $ 14 Industrial and all other 263 297 297 Non-redeemable preferred stocks 235 244 244 ------- ------- ------- Total equity securities 513 $ 555 555 ------- ======= ------- Mortgage loans on real estate 7,365 7,365 Real estate held for sale 1,049 1,049 Policy loans 1,367 1,367 Short-term investments 1,651 1,651 Other investments 1,008 1,008 ------- ------- Total investments $41,239 $41,281 ====== ====== (1) includes mortgage-backed security obligations of U.S. Government agencies.
F-3
SCHEDULE II The Travelers Inc. and Subsidiaries Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties Year Ended December 31, 1993 Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at End of Year ------------------------- Balance at Amounts Due within Due after Name of Debtor Beginning of Year Additions Collected one-year one-year - ------------------------------------------------------------------------------------------------------------------ D. Allen * $ - $144,313 $ - $ - $144,313 R. Altemus * - 198,725 - - 198,725 S. Baritz * - 203,400 - - 203,400 W. Barndollar * - 136,676 30,044 - 106,632 N. Boccella * - 101,875 - - 101,875 L. Brachfeld * - 199,475 - - 199,475 J. Brock * - 350,375 - - 350,375 R. Buckingham * - 100,000 - - 100,000 E. Butler, Jr. * - 148,925 - - 148,925 R. Cerasia * - 216,250 - - 216,250 R. Chanin * - 477,471 - - 477,471 R. Conway * - 298,500 - - 298,500 T. Cook * - 143,000 - - 143,000 G. Dahl * - 421,663 - - 421,663 G. Daniels * - 351,059 - - 351,059 D. Darrah * - 285,750 - - 285,750 W. Davis * - 298,000 - - 298,000 J. Delahaye * - 142,963 - - 142,963 E. Depatie * - 149,875 - - 149,875 D. Desmon * - 152,250 - - 152,250 E. Dipple * - 601,138 - - 601,138 M. Donohue * - 100,000 - - 100,000 D. Drescher * - 394,363 - - 394,363 I. Dublirer * - 380,750 - - 380,750 L. Epstein * - 448,250 - - 448,250 R. Ferrelli * - 181,250 - - 181,250 E. Fitzsimons * - 221,278 - - 221,278 G. Foley * - 224,100 - - 224,100 J. Frager * - 121,125 - - 121,125 H. Gaykian * - 179,150 - - 179,150
F-4
SCHEDULE II The Travelers Inc. and Subsidiaries Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties Year Ended December 31, 1993 Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at End of Year ------------------------ Balance at Amounts Due within Due after Name of Debtor Beginning of Year Additions Collected one-year one-year - ------------------------------------------------------------------------------------------------------------------ R. Gintz * - 148,300 - - 148,300 A. Goldstein * - 118,375 - - 118,375 L. Goldstein * - 104,250 - - 104,250 P. Grassi * - 299,475 - - 299,475 W. Greer * - 144,382 - - 144,382 G. Helmich * - 218,000 - - 218,000 M. Hess * - 150,130 - - 150,130 R. Hlavek * - 393,988 - - 393,988 J. Hogue * - 287,475 - - 287,475 I. Hovey * - 148,438 - - 148,438 G. Irish * - 216,688 - - 216,688 R. Isaacman * - 150,425 - - 150,425 B. Jackson * - 151,037 - - 151,037 B. Klefos * - 104,018 - - 104,018 M. Koblak * - 265,502 - - 265,502 K. Kuklenski * - 148,500 - - 148,500 R. Leo * - 404,063 - - 404,063 J. Levitt * - 387,125 - - 387,125 G. Linger * - 106,750 - - 106,750 C. Lofgren * - 701,390 16,371 - 685,019 R. Mathews * - 104,038 - - 104,038 M. McHugh * - 101,125 - - 101,125 R. McCord III * - 449,350 - - 449,350 T. McNellis * - 141,525 - - 141,525 R. Melzer * - 317,393 - - 317,393 J. Moreau * - 212,913 - - 212,913 C. Muff * - 142,853 - - 142,853 G. Mulqueen * - 187,875 - - 187,875
F-5
SCHEDULE II The Travelers Inc. and Subsidiaries Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties Year Ended December 31, 1993 Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at End of Year ------------------------ Balance at Amounts Due within Due after Name of Debtor Beginning of Year Additions Collected one-year one-year - ------------------------------------------------------------------------------------------------------------------ A. Munroe * - 147,688 - - 147,688 W. Murphy * - 150,413 - - 150,413 D. Nee * - 150,338 - - 150,338 E. Osman * - 151,663 - - 151,663 J. Plumeri * - 403,141 - - 403,141 M. Pullman * - 148,225 - - 148,225 A. Purdie, Jr. * - 399,996 - - 399,996 G. Rach * - 149,000 - - 149,000 M. Rader * - 147,863 - - 147,863 R. Reissiger * - 148,925 - - 148,925 W. Rogan * - 418,203 - - 418,203 M. Rogers, Jr. * - 437,250 - - 437,250 R. Rogers * - 426,413 - - 426,413 J. Sando * - 249,993 - - 249,993 C. Sawicki * - 102,813 - - 102,813 D. Scharenberg * - 100,013 - - 100,013 G. Scheidt * - 473,250 - - 473,250 M. Serranio * - 100,000 - - 100,000 R. Shores * - 119,000 - - 119,000 C. Singer * - 148,838 - - 148,838 K. Skiba * - 148,063 - - 148,063 J. Sokol * - 155,850 - - 155,850 R. Sproul * - 100,000 - - 100,000 M. Steckler * - 150,450 - - 150,450 M. Stocklan * - 1,157,178 70,543 - 1,086,635 S. Stoker * - 159,175 - - 159,175 A. Stuvland * - 152,438 - - 152,438 C. Tara * - 148,000 - - 148,000
F-6
SCHEDULE II The Travelers Inc. and Subsidiaries Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties Year Ended December 31, 1993 Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at End of Year ------------------------ Balance at Amounts Due within Due after Name of Debtor Beginning of Year Additions Collected one-year one-year - ------------------------------------------------------------------------------------------------------------------ D. Tidlund * - 316,350 - - 316,350 A. Trattner * - 145,625 - - 145,625 W. Ullmark * - 416,011 - - 416,011 D. Verhille * - 150,000 - - 150,000 R. Warren * - 285,000 - - 285,000 W. Wilcox * - 451,100 - - 451,100 N. Wood * - 128,750 - - 128,750 A. Fedele (1) 33,253 103,630 4,427 35,017 97,439 R. Hammack (2) - 810,461 39,625 ** 770,836 D. Holt (3) - 157,101 - 100,000 57,101 H. Irvine (4) - 104,982 - 104,982 - B. Klein (5) - 379,997 218,329 ** 161,668 A. Langer (6) - 138,980 6,991 131,989 - L. Lekai (7) - 353,500 133,380 41,620 178,500 J. McKenzie (8) 107,985 4,745 106,039 6,691 - P. Morrison (9) - 175,944 43,749 70,986 61,209 C. Nolting (10) - 155,537 - - 155,537 D. Perez (11) - 264,670 125,000 139,670 - S. Ricardo (12) - 315,474 - ** 315,474 M. Rogers (13) - 212,167 50,000 ** 162,167 J. Rupp (14) 172,595 4,456 95,535 81,516 - R. Salyer (15) - 296,617 110,284 180,000 6,333 C. Santoro (16) - 468,179 - 78,179 390,000 D. Standridge (17) - 156,480 26,080 52,160 78,240 F. Traynor (18) - 156,540 36,806 12,000 107,734 M. Wagner (19) - 164,509 34,977 ** 129,532 Others (20) $ - $298,475 $ - $ - $298,475
F-7
SCHEDULE II The Travelers Inc. and Subsidiaries Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties Year Ended December 31, 1993 (*) The Executive Stock Loan Program of Smith Barney Shearson, which was initiated in 1987 by LBI and is no longer available, provided low interest demand loans on an unsecured basis, to assist key employees in acquiring common stock through open market purchases. These loans, which were acquired as part of the Shearson Acquisition, are payable on demand and may not extend beyond December 31, 1996. Loans under this program bear interest at the lower of the prime lending rate minus 2% or 11%, which is forgivable if still employed by Smith Barney Shearson at December 31, 1996. (**) Due to the nature of the repayment terms, it cannot be determined how much will be repaid during 1994. Therefore, all amounts are included in "Due After One-Year." (1) Consists of: a note for $200,000 of which $28,500 is remianing, is payable by $250 bi-monthly payroll deductions. The balance is payable in February 1994 vs. bonus and bears interest at 8%; a note for $100,000 is payable by $250 bi-monthly payroll deductions. The balance is payable in three equal installments of $30,000, plus interest, February 1995, 1996 and 1997, respectively, vs. bonus and interest accrues at 8%. (2) The note is payable by monthly payroll deductions of 15% of all net after-tax income. Interest is payable monthly and accrues at the prime lending rate plus 1%. (3) The note is payable in three equal installments of $50,000, plus interest, January 1, 1994, July 1, 1994, and July 1, 1995 and accrues interest at 8%. (4) The note is payable by March 31, 1994 and interest accrues at Smith Barney Shearson's margin rate. (5) The note is payable by monthly payroll deductions of $2,500, plus $5,000 from monthly gross commission from $90,000 to $125,000, plus $10,000 for gross commission over $125,000 and interest accrues at broker's call rate. (6) The note is payable by April 30, 1994 and interest accrues at broker's call rate. (7) The note is payable in two installments of $41,620, plus interest, February 1994 and $175,000 plus interest February 1995 vs. bonus and interest accrues at 8%. (8) The note is payable May 1, 1994 and bears interest at 110% of the applicable IRS rate. This note is collateralized by a mortgage on the premises owned by the debtor. Smith Barney Shearson also has a security interest in and general continuing lien upon all property of the debtor. (9) The note is payable by monthly payroll deductions of $2,582 plus a quarterly payment of $10,000 and interest accrues at 8%. (10) The note is payable from retirement deferred compensation and interest accrues at broker's call rate. (11) The note is payable by December 31, 1993, and is currently in arrears and interest accrues at Smith Barney Shearson's margin rate. (12) The note is payable by 5/1/95 from annual gross commissions and bonus excess of $250,000 and interest on loan and interest accrues at 8%. (13) The note is payable February 1994 and 1995 vs. bonus and interest accrues at Smith Barney Shearson's margins rate. (14) The note is payable on January 19, 1994 and interest accrues at 7%. (15) The notes are payable by monthly payroll deductions of $15,000 and interest accrues at Smith Barney Shearson's margin rate. (16) The note is payable in installments of $60,000, plus interest, February 1994, $130,000, plus interest in February 1995, 1996 and 1997 and interest accrues at 8%. (17) The note is payable in annual installments as follows: $26,080 in February, 1994 vs. bonus and $52,160 in February 1995 and 1996 vs. bonuses and is non-interest bearing. (18) The notes are payable by monthly payroll deductions of $1,000 and interest accrues at broker's call rate. (19) The note of $100,000 is payable by payroll deductions of $542 and from all bonuses and the interest accrues at Smith Barney Shearson's margin rate. The note for $42,137 is payable in annual installments of $10,534 on June 18, 1993, and $31,603 on June 20, 1994 and interest accrues at broker's call rate plus 1/4%. (20) The aggregate amount of loans to individuals who terminated employment and are outstanding at December 31, 1993.
F-8
SCHEDULE II The Travelers Inc. and Subsidiaries Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties Year Ended December 31, 1992 Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at End of Year -------------------------- Balance at Amounts Due within Due after Name of Debtor Beginning of Year Additions Collected one-year one-year - ------------------------------------------------------------------------------------------------------------------ K. Yarnell (1) $549,982 $ - $549,982 $ - $ - J. Long (1) 310,251 - 310,251 - - R. White (2) 124,667 4,634 51,560 77,741 - A. Fedele (2) 101,946 6,038 74,731 6,000 27,253 J. McKenzie (2) - 107,985 - 53,993 53,992 J. Rupp (2) - 191,685 19,090 172,595 - (1) Represent loans to current and former members of senior management made during their employment to purchase shares of the Company's common stock pursuant to the Stock Purchase Assistance Plan approved by the shareholders during 1984. In accordance with the terms of the plan the loans bear interest at 6.7% to 10% currently. The rate is not less than that which is necessary to avoid unstated interest under the Internal Revenue Code. The notes generally mature within five years and are collateralized by all or a portion of the shares of the common stock acquired with the proceeds. (2) Interest bearing promissory note to current employees.
F-9
SCHEDULE II The Travelers Inc. and Subsidiaries Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties Year Ended December 31, 1991 Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at End of Year ------------------------- Balance at Amounts Due within Due after Name of Debtor Beginning of Year Additions Collected one-year one-year - ------------------------------------------------------------------------------------------------------------------ D. Rosellini (1) $395,646 $ - $395,646 $ - $ - C. Dornbush (1) 135,438 - 135,438 - - K. Yarnell (1) 549,982 - - 549,982 - J. Long (1) 310,251 - - 310,251 - P. Goldberg (1) 101,942 - 63,000 38,942 - R. White (2) 113,000 11,667 - 86,667 38,000 A. Fedele (2) - 106,268 4,322 6,000 95,946 (1) Represent loans to current and former members of senior management made during their employment to purchase shares of the Company's common stock pursuant to the Stock Purchase Assistance Plan approved by the shareholders during 1984. In accordance with the terms of the plan the loans bear interest at 6.7% to 10% currently. The rate is not less than that which is necessary to avoid unstated interest under the Internal Revenue Code. The notes generally mature within five years and are collateralized by all or a portion of the shares of the common stock acquired with the proceeds. (2) Interest bearing promissory note to current employee.
F-10
SCHEDULE III The Travelers Inc. (Parent Company Only) Condensed Financial Information of Registrant (In millions of dollars) Condensed Statement of Income Years Ended December 31, -------------------------------- 1993 1992 1991 ---- ---- ---- Income: ------- Equity in income of old Travelers $126 $ - $ - Gain on sales of stock of subsidiaries and affiliate - 96 40 Other 6 12 5 --- ---- --- Total 132 108 45 --- ---- --- Expenses: --------- Interest $ 77 $ 79 $103 Other 46 58 91 --- --- --- Total 123 137 194 --- --- --- Pre-tax income (loss) 9 (29) (149) Income tax benefit (35) 9 50 ---- ---- ---- Net loss before equity in net income of subsidiaries 44 (20) (99) Equity in net income of subsidiaries 907 776 578 Cumulative effect of changes in accounting principles (including $17 and $28, respectively, applicable to subsidiaries) (35) (28) - ---- ----- ---- Net income $916 $728 $479 === === === The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes to the condensed financial information of Registrant.
F-11
SCHEDULE III The Travelers Inc. (Parent Company Only) Condensed Financial Information of Registrant (In millions of dollars except per share amounts) Condensed Statement of Financial Position December 31, ----------------------- 1993 1992 ------- -------- Assets ------ Investment in subsidiaries at equity $11,808 $4,830 Advances to and receivables from subsidiaries 433 263 Investment in old Travelers - 485 Cost of acquired businesses in excess of net assets 686 538 Other 24 49 ------ ----- $12,951 $6,165 ====== ===== Liabilities ----------- Short-term borrowings $ 329 $ 71 Long-term debt 1,504 518 Advances from and payables to subsidiaries 1,033 818 Other liabilities 549 329 ----- ----- 3,415 1,736 ----- ----- Redeemable preferred stock (held by subsidiary) 100 200 ----- ----- ESOP Preferred stock - Series C 235 - Guaranteed ESOP obligation (125) - ----- ----- 110 - ----- ----- Stockholders' equity -------------------- Preferred stock ($1.00 par value) authorized shares: 30 million), at aggregate liquidation value 800 300 Common stock ($.01 par value; authorized shares: 500 million; issued shares: 1993 - 368,287,709 and 1992 - 253,524,014) 4 3 Additional paid-in capital 6,566 2,147 Retained earnings 3,140 2,363 Treasury stock, at cost (1993 - 41,155,405 shares; 1992 - 31,572,048 shares) (1,121) (540) Unearned compensation - restricted stock and other, net (63) (44) ------ ----- 9,326 4,229 ------ ----- $12,951 $6,165 ====== ===== The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes to the condensed financial information of Registrant.
F-12
SCHEDULE III The Travelers Inc. (Parent Company Only) Condensed Financial Information of Registrant (In millions of dollars) Condensed Statement of Cash Flows Year ended December 31, ----------------------- 1993 1992 1991 ------ ------ ----- Cash Flows From Operating Activities ------------------------------------ Net Income $ 916 $ 728 $ 479 Adjustment to reconcile net income to cash provided by operating activities: Equity in net income of subsidiaries (907) (776) (578) Dividends received from subsidiaries, net 349 365 187 Advances from subsidiaries, net 45 292 115 Other, net 61 57 (15) ----- --- ---- Net cash provided by (used in) operating activities 464 666 188 --- --- ---- Cash Flows From Investing Activities ------------------------------------ Capital contribution to subsidiaries (1,100) - - Business acquisitions - (485) - Business divestments - 259 103 ------ ----- --- Net cash provided by (used in) investing activities (1,100) (227) 103 ------ ----- --- Cash Flows From Financing Activities ------------------------------------ Issuance of preferred stock - 290 - Dividends paid (139) (85) (48) Issuance of common stock 329 - - Cash received from stock options exercised 8 14 41 Treasury stock acquired (58) (122) (89) Stock tendered by employees for payment of withholding taxes (77) (56) (10) Issuance of long-term debt 450 100 100 Payments and redemptions of long-term debt (35) (209) (20) Net change in short-term borrowings 258 (271) (165) Redemption of redeemable preferred stock (held by subsidiary) (100) (100) (100) ---- ----- ---- Net cash provided by (used in) financing activities 636 (439) (291) ---- ----- ---- Change in cash $ - $ - $ - ====== ===== ===== Supplemental disclosure of cash flow information: ------------------------------------------------- Cash paid during the period for interest $ 68 $ 84 $ 100 ==== ==== ==== Cash received during the period for taxes $ 129 $ 65 $ 27 ==== ==== ==== The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes to the condensed financial information of Registrant.
F-13 SCHEDULE III Notes to Condensed Financial Statements of Registrant (In millions of dollars) 1. Principles of Consolidation --------------------------- The accompanying financial statement include the accounts of The Travelers Inc. (the Parent) and on an equity basis its subsidiaries and affiliates and should be read in conjunction with the Consolidated Financial Statements and notes thereto. On December 17, 1992 Primerica Holdings, Inc. (Primerica Holdings), one of the Parent's principal holding company subsidiaries, merged with and into the Parent. The Parent is the surviving corporation of the merger and has succeeded to all of the rights and obligations of Primerica Holdings. 2. Debt ---- Aggregate annual maturities on long-term debt obligations excluding principal payments on the ESOP loan obligation and the 12% GNMA/FNMA collateralized obligations, are as follows: 1994 $ 93 1995 $ - 1996 $ 100 1997 $ 185 1998 $ 250 F-14
SCHEDULE VI The Travelers Inc. and Subsidiaries Reinsurance (In millions of dollars) Column A Column B Column C Column D Column E Column F -------- -------- -------- -------- -------- -------- % of Ceded to Assumed Amount Gross Other From Other Net Assumed Amount Companies Companies Amount To Net ------ --------- --------- ------ ------- Year ended December 31, 1993 ---------------------------- Life insurance in force (1) $502,319 $ 93,747 $5,126 $413,701 1.24% ======= ======= ====== ======= ===== Premiums Life insurance $1,176 $284 $ 2 $ 894 0.2% Accident and health insurance 393 56 (8) 329 (0.2)% Warranty, property and casualty insurance 417 177 17 257 0.6% ----- --- --- ----- $1,986 $517 $ 11 $1,480 ===== === === ===== Year ended December 31, 1992 ---------------------------- Life insurance in force $324,643 $ 90,379 $1,550 $235,814 .7% ======= ======= ===== ======= ==== Premiums Life insurance $1,212 $312 $ 9 $ 909 1.0% Accident and health insurance 437 40 7 404 1.6% Warranty, property and casualty insurance 513 180 48 381 12.8% ----- --- -- ----- $2,162 $532 $64 $1,694 ===== === == ===== Year ended December 31, 1991 ---------------------------- Life insurance in force $331,661 $105,994 $2,653 $228,320 1.2% ======= ======= ===== ======= ==== Premiums Life insurance $1,281 $390 $38 $ 929 4.1% Accident and health insurance 530 58 17 489 3.6% Warranty, property and casualty insurance 508 174 31 365 8.1% ----- --- -- ----- $2,319 $622 $86 $1,783 ===== === == =====
(1) Amounts at December 31, 1993 include The Travelers Insurance Group. F-15
Schedule IX The Travelers Inc. and Subsidiaries Short-term Borrowings Year Ended December 31, (In millions of dollars) Column A Column B Column C Column D Column E Column F - ------------------ ---------- -------------- --------------- --------------- ------------- Category of Weighted Maximum Average Weighted Average Aggregate Short- Balance at Average Amount Outstanding Amount Outstanding Interest Rate Term Borrowings End of Year Interest Rate During the Year During the Year During the Year - ------------------ ----------- ------------- --------------- --------------- ---------- 1993 ---- Commercial paper - ---------------- Commercial Credit Company (2) $2,206 3.34% $2,387 $2,027 3.18% The Travelers Inc. (2) $ 329 3.43% $ 361 $ 115 3.17% Smith Barney Shearson (3) $1,401 3.29% $1,401 $ 606 3.16% Amounts payable to banks for borrowings (1,3) $2,053 2.24% $2,838 $1,660 3.00% --------------------------------------- Securities loaned or sold - ------------------------- under agreements to repurchase $5,275 2.77% $7,968 $5,797 2.72% ------------------------------- 1992 ---- Commercial paper (2) ---------------- Commercial Credit Company $2,387 3.55% $2,432 $2,092 3.76% The Travelers Inc. $ 71 3.74% $ 374 $ 163 3.92% Amounts payable to banks for borrowings(1,3) $ 670 4.07% $1,202 $ 871 4.05% --------------------------------------- Securities loaned or sold - ------------------------- under agreements to repurchase $3,441 3.30% $5,451 $4,357 3.26% ------------------------------- 1991 ---- Commercial paper (2) ---------------- Commercial Credit Company $2,293 4.83% $3,002 $2,564 6.12% The Travelers Inc. $1,020 5.61% $1,079 $ 913 6.22% Amounts payable to banks for borrowings (1,3) $ 937 4.76% $1,118 $ 902 5.64% - --------------------------------------- Securities loaned or sold - ------------------------- under agreements to repurchase $2,701 4.36% $5,442 $3,978 5.41% ------------------------------- (1) Included at December 31, 1993, 1992 and 1991 is $2,053, $595 and $534, respectively, of bank loans and notes to Lehman Brother Inc. (for 1993 only) which are included in the Statement of Financial Position under the Caption "Investment banking and brokerage borrowings" and at December 31, 1991, amounts include $237 of bank loans which are included in the Statement of Financial Position under the caption "Notes payable principally collateralized by first mortgage loans." (2) Weighted average interest rates are computed by dividing the interest during the period by the weighted average daily borrowings. (3) Weighted average interest rates are computed by dividing the interest during the period by the average amount outstanding based on month end balances.
F-16 EXHIBIT INDEX ------------- Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 3.01 Restated Certificate of Incorporation of Electronic The Travelers Inc., as filed with the Delaware Secretary of State on March 30, 1994. 3.02 By-Laws of the Company as amended effective December 17, 1992, incorporated by reference to Exhibit 3.02 to the Company's Registration Statement on Form S-3 (No. 33- 55542). 10.01* Employment Protection Agreement, dated as of December 31, 1987, between the Company (as successor to Commercial Credit Company) and Sanford I. Weill, incorporated by reference to Exhibit 10.03 to CCC's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 (File No. 1-6594). 10.02.1* Stock Option Plan of the Company, as amended through April 26, 1989, incorporated by reference to Annex A to the prospectus contained in the Company's Registration Statement on Form S-8 (No. 33- 29711). 10.02.2* Amendment to the Company's Stock Option Plan, dated October 23, 1991, incorporated by reference to Exhibit 10.02.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (File No. 1-9924) (the "Company's 1991 10- K"). 10.02.3* Amendments to the Company's Stock Option Plan, approved by the Company's stockholders on April 22, 1992, incorporated by reference to Exhibit 10.02.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (File No.1-9924) (the "Company's 1992 10-K"). 10.02.4* Amendment to the Company's Stock Option Plan, dated July 22, 1992, incorporated by reference to Exhibit 10.02.4 to the Company's 1992 10-K. 10.02.5* Amendment No. 11 to the Company's Stock Electronic Option Plan. 10.02.6* Amendment No. 12 to the Company's Stock Electronic Option Plan. 10.03* Retirement Benefit Equalization Plan of Electronic Primerica Corporation (as successor to Primerica Holdings, Inc.), as amended. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.04* Letter Agreement between Joseph A. Califano, Jr. and the Company, dated December 14, 1988, incorporated by reference to Exhibit 10.21.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (File No. 1-9924) (the "Company's 1988 10- K"). 10.05.1* The Company's Deferred Compensation Plan for Directors, incorporated by reference to Exhibit 10.21.2 to the Company's 1988 10-K. 10.05.2* Amendment to the Company's Deferred Compensation Plan for Directors, dated July 22, 1992, incorporated by reference to Exhibit 10.06.2 of the Company's 1992 10-K. 10.06.1* Supplemental Retirement Plan of the Company, incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-9924) (the "Company's 1990 10-K"). 10.06.2* Amendment to the Company's Supplemental Electronic Retirement Plan. 10.07* Long-Term Incentive Plan of Primerica Corporation, as amended, incorporated by reference to Exhibit 10.08 to the Company's 1992 10-K. 10.08.1* Capital Accumulation Plan of the Company (the "CAP Plan"), as amended to January 31, 1993, incorporated by reference to Exhibit 10.09 to the Company's 1992 10-K. 10.08.2* Amendment No. 8 to the Company's CAP Plan. Electronic 10.09.1* Employment Agreement dated as of December 16, 1988 among Smith Barney Shearson Inc. (formerly Smith Barney, Harris Upham & Co. Incorporated; hereinafter "SBS"), the Company and Frank G. Zarb (the "FGZ Employment Agreement"), incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1989 (File No. 1-9924). 10.09.2* Assignment Agreement and Amendment No. One Electronic to FGZ Employment Agreement. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.10 Restated Stockholder Rights and Support Agreement dated as of November 1, 1989 by and among the Company and Arthur L. Williams, Jr., Angela H. Williams, A.L. Williams & Associates, Inc. and The A.L. Williams & Associates, Inc. Pension and Profit Sharing Plan, incorporated by reference to Exhibit 10.13 to the Company's 1990 10-K. 10.11 Amended and Restated Exclusive Marketing Agreement dated as of November 1, 1989 by and among the Company, A.L. Williams & Associates, Inc. and Arthur L. Williams, Jr., incorporated by reference to Exhibit 10.14 to the Company's 1990 10-K. 10.12 Restated Second Amended General Agency Agreement ("SAGAA") dated as of November 1, 1989 by and among Primerica Life Insurance Company (formerly Massachusetts Indemnity Life Insurance Company; hereinafter "Primerica Life"), A.L. Williams & Associates, Inc. and Arthur L. Williams, Jr., incorporated by reference to Exhibit 10.15 to the Company's 1990 10-K. 10.13 Restated First Amendment to SAGAA dated as of November 1, 1989 by and among Primerica Life, A.L. Williams & Associates, Inc. and Arthur L. Williams, Jr., incorporated by reference to Exhibit 10.16 to the Company's 1990 10-K. 10.14 Restated and Amended Agreement of Charles D. Adams dated as of November 1, 1989 for the benefit of each of the Company, A.L. Williams & Associates, Inc. and The A.L. Williams Corporation, incorporated by reference to Exhibit 10.17 to the Company's 1990 10-K. 10.15 Restated and Amended Agreement of Angela H. Williams dated as of November 1, 1989 for the benefit of each of the Company, A.L. Williams & Associates, Inc. and The A.L. Williams Corporation, incorporated by reference to Exhibit 10.18 to the Company's 1990 10-K. 10.16.1 Asset Purchase Agreement dated as of March 12, 1993, by and among Shearson Lehman Brothers Inc., SBS, the Company, American Express Company and Shearson Lehman Brothers Holdings Inc. (the "SLB Agreement"), incorporated by reference to Exhibit 10.21 to the Company's 1992 10-K. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.16.2 Amendment No. 1, dated as of July 31, 1993, to the SLB Agreement, incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1993 (File No. 1-9924) (the "Company's June 30, 1993 10-Q"). 10.16.3 Amendment No. 2 dated as of July 31, 1993, to the SLB Agreement, incorporated by reference to Exhibit 10.02 to the Company's June 30, 1993 10-Q. 10.17.1* Employment Agreement dated June 23, 1993, by and among SBS, the Company and Robert F. Greenhill (the "RFG Employment Agreement"), incorporated by reference to Exhibit 10.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1993 (File No. 1-9924) (the "Company's September 30, 1993 10-Q"). 10.17.2* Form of Amendment to the RFG Employment Electronic Agreement. 10.18* Memorandum of Sale dated June 23, 1993, between the Company and Robert F. Greenhill, incorporated by reference to Exhibit 10.02 to the Company's September 30, 1993 10-Q. 10.19* Registration Rights Agreement dated June 23, 1993, between the Company and Robert F. Greenhill, incorporated by reference to Exhibit 10.03 to the Company's September 30, 1993 10-Q. 10.20* Restricted Shares Agreement dated June 23, 1993, by and between the Company and Robert F. Greenhill, incorporated by reference to Exhibit 10.04 to the Company's September 30, 1993 10-Q. 10.21 Agreement and Plan of Merger, dated as of September 23, 1993, between the Company and The Travelers Corporation ("old Travelers"), incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of old Travelers, dated September 23, 1993 and filed with the Commission on October 8, 1993 (File No. 1-5799). 10.22* Agreement dated December 21, 1993 between Electronic the Company and Edward H. Budd. 10.23* Employment Agreement dated December 31, Electronic 1993 between The Travelers Insurance Group Inc. and Richard H. Booth. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.24* Employment Agreement dated December 31, Electronic 1993 between The Travelers Insurance Group Inc. and Robert W. Crispin. 10.25* The Travelers Corporation 1982 Stock Option Plan, as amended January 10, 1992, incorporated by reference to Exhibit 10(a) to the Annual Report on Form 10-K of old Travelers for the fiscal year ended December 31, 1991 (File No. 1-5799) (the "old Travelers' 1991 10-K"). 10.26* The Travelers Corporation 1988 Stock Incentive Plan, as amended April 7, 1992, incorporated by reference to Exhibit 10(b) to the Annual Report on Form 10-K of old Travelers for the fiscal year ended December 31, 1992 (File No. 1-5799) (the "old Travelers' 1992 10-K"). 10.27* The Travelers Corporation 1984 Management Incentive Plan, as amended effective January 1, 1991, incorporated by reference to Exhibit 10(c) to the Annual Report on Form 10-K of old Travelers for the fiscal year ended December 31, 1990 (File No. 1- 5799). 10.28* The Travelers Corporation Supplemental Benefit Plan, effective December 20, 1992, incorporated by reference to Exhibit 10(d) to the Annual Report on the old Travelers' 1992 10-K. 10.29* The Travelers Corporation TESIP Restoration and Non-Qualified Savings Plan, effective January 1, 1991, incorporated by reference to Exhibit 10(e) to the old Travelers' 1991 10-K. 10.30* The Travelers Severance Plan of Officers, Electronic as amended September 23, 1993. 10.31* The Travelers Corporation Directors' Deferred Compensation Plan, as amended November 7, 1986, incorporated by reference to Exhibit 10(d) to the Annual Report on Form 10-K of old Travelers for the fiscal year ended December 31, 1986 (File No. 1- 5799). 11.01 Computation of Earnings Per Share. Electronic 12.01 Computation of Ratio of Earnings to Fixed Electronic Charges. 13.01 Pages 24 through 57 of the 1993 Annual Report Electronic to Stockholders of the Company. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 21.01 Subsidiaries of the Company. Electronic 23.01 Consent of KPMG Peat Marwick, Independent Electronic Certified Public Accountants. 23.02 Consent of Coopers & Lybrand, Independent Electronic Accountants. 24.01 Powers of Attorney. Electronic 28.01 Information from Reports Furnished to State P Insurance Regulatory Authorities. Schedule Paper P of the Consolidated Annual Statement of The Travelers Insurance Group Inc. and its affiliated fire and casualty insurers, and Schedule P of the Consolidated Annual Statement of Gulf Insurance Company and its affiliated fire and casualty insurers. 99.01 Consolidated balance sheets of The Electronic Travelers Corporation and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1993, together with the notes thereto and the related report of Independent Accountants. 99.02 The last paragraph of page 2 and the first Electronic two paragraphs of page 3 of the Company's Current Report on Form 8-K dated September 23, 1993 (File No. 1-9924), the third paragraph of page 26 of the Company's September 30, 1993 10-Q, and the third paragraph of page 2 of the Company's Current Report on Form 8-K dated March 1, 1994 (File No. 1-9924) (the "Company's March 1, 1994 8-K"). 99.03 The third and fourth paragraphs of page 30 Electronic of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 1-9924) (the "Company's 1989 10- K"). 99.04 The first, second and third paragraphs of Electronic page 31 of the Company's 1989 10-K, and the first paragraph of page 30 of the Company's 1990 10-K. 99.05 The fourth paragraph of page 26 of the Electronic Company's September 30, 1993 10-Q. 99.06 The fourth paragraph of page 31 of the Electronic Company's 1989 10-K, and the fourth full paragraph of page 26 of the Company's 1991 10-K. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 99.07 The first full paragraph of page 26 of the Electronic Company's 1992 10-K. 99.08 The fourth paragraph of page 2 of the Electronic Company's March 1, 1994 8-K. 99.09 The paragraph that begins on page 2 and Electronic ends on page 3 of the Company's March 1, 1994 8-K. 99.10 The second paragraph of page 26 of the Electronic Company's September 30, 1993 10-Q. The total amount of securities authorized pursuant to any instrument defining rights of holders of long-term debt of the Company does not exceed 10% of the total assets of the Company and its consolidated subsidiaries. The Company will furnish copies of any such instrument to the Commission upon request. The financial statements required by Form 11-K for 1993 for the Company's employee savings plans will be filed as exhibits by amendment to this Form 10-K pursuant to Rule 15d-21 of the Securities Exchange Act of 1934, as amended. Copies of any of the exhibits referred to above will be furnished at a cost of $.25 per page (except that no charge will be made for the 1993 Annual Report on Form 10-K) to security holders who make written request therefor to Corporate Communications and Investor Relations Department, The Travelers Inc., 65 East 55th Street, New York, New York 10022. ______________________________ * Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. EX-3.01 2 Exhibit 3.01 RESTATED CERTIFICATE OF INCORPORATION OF THE TRAVELERS INC. The Travelers Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: The name of the corporation is The Travelers Inc. (hereinafter the "Corporation") and the date of filing of its original Certificate of Incorporation with the Delaware Secretary of State is March 8, 1988. The name under which the Corporation filed its Certificate of Incorporation is Commercial Credit Group, Inc. The text of the Certificate of Incorporation as amended or supplemented heretofore is hereby restated and integrated, but not amended, to read as herein set forth in full: FIRST: The name of the Corporation is: THE TRAVELERS INC. SECOND: The registered office of the Corporation is to be located at the Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, in the county of New Castle, in the State of Delaware. The name of its registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: A. The total number of shares of Common Stock which the Corporation shall have authority to issue is Five Hundred Million (500,000,000) shares of Common Stock having a par value of one cent ($.01) per share. The total number of shares of Preferred Stock which the Corporation shall have the authority to issue is Thirty Million (30,000,000) shares having a par value of one dollar ($1.00) per share. B. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article FOURTH, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (i) The number of shares constituting that series and the distinctive designation of that series. (ii) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (iii) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (iv) Whether that series shall have conversion or exchange privileges, and, if so, the terms and conditions of such conversion or exchange, including provision for adjustment of the conversion or exchange rate in such events as the Board of Directors shall determine; (v) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the manner of selecting shares for redemption if less than all shares are to be redeemed, the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (vi) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (vii) The right of the shares of that series to the benefit of conditions and restrictions upon the creation of indebtedness of the Corporation or any subsidiary, upon the issue of any additional stock (including additional shares of such series or any other series) and upon the payment of dividends or the making of other distributions on, and the purchase, redemption or other acquisition by the Corporation or any subsidiary of any outstanding stock of the Corporation; (viii) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (ix) Any other relative, participating, optional or other special rights, qualifications, limitations or restrictions of that series. C. Dividends on outstanding shares of Preferred Stock shall be paid, or declared and set apart for payment, before any dividends shall be paid or declared and set apart for payment on outstanding shares of Common 2 Stock. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential amounts (including unpaid cumulative dividends, if any) payable with respect thereto. D. Shares of any series of Preferred Stock which have been redeemed (whether through the operation of a sinking fund or otherwise) or which, if convertible or exchangeable, have been converted into or exchanged for shares of stock of any other class or classes shall have the status of authorized and unissued shares of Preferred Stock of the same series and may be reissued as a part of the series of which they were originally a part or may be reclassified and reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors or as part of any other series of Preferred Stock, all subject to the conditions and the restrictions on issuance set forth in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock. E. Subject to the provisions of any applicable law or except as otherwise provided by the resolution or resolutions providing for the issue of any series of Preferred Stock, the holders of outstanding shares of Common Stock shall exclusively possess voting power for the election of directors and for all other purposes, each holder of record of shares of Common Stock being entitled to one vote for each share of Common Stock standing in his name on the books of the Corporation. F. Except as otherwise provided by the resolution or resolutions providing for the issue of any series of Preferred Stock, after payment shall have been made to the holders of Preferred Stock of the full amount of dividends to which they shall be entitled pursuant to the resolution or resolutions providing for the issue of any series of Preferred Stock, the holders of Common Stock shall be entitled, to the exclusion of the holders of Preferred Stock of any and all series, to receive such dividends as from time to time may be declared by the Board of Directors. G. Except as otherwise provided by the resolution or resolutions providing for the issue of any series of Preferred Stock, in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment shall have been made to the holders of Preferred Stock of the full amount to which they shall be entitled pursuant to the resolution or resolutions providing for the issue of any series of Preferred Stock, the holders of Common Stock shall be entitled, to the exclusion of the holders of Preferred Stock of any and all series, to share ratably according to the number of shares of Common Stock held by them, in all remaining assets of the Corporation available for distribution. 3 H. The issuance of any shares of Common Stock or Preferred Stock authorized hereunder and any other actions permitted to be taken by the Board of Directors pursuant to this Article FOURTH must be authorized by the affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the entire Board of Directors or by a committee of the Board of Directors constituted by the affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the entire Board of Directors. I. Notwithstanding any other provision of this Certificate of Incorporation, the affirmative vote of the holders of at least seventy-five percent (75%) of the voting power of the shares entitled to vote at an election of directors shall be required to amend, alter, change or repeal, or adopt any provision as part of this Certificate of Incorporation inconsistent with the purpose and intent of, section B through I of this Article FOURTH. J. 8.125% CUMULATIVE PREFERRED STOCK, SERIES A 1. Designation and Number of Shares. The designation of such series shall be 8.125% Cumulative Preferred Stock, Series A (the "Series A Preferred Stock"), and the number of shares constituting such series shall be 1,200,000. The number of authorized shares of Series A Preferred Stock may be reduced (but not below the number of shares thereof then outstanding) by further resolution duly adopted by the Board of Directors or the Executive Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, but the number of authorized shares of Series A Preferred Stock shall not be increased. 2. Dividends. Dividends on each share of Series A Preferred Stock shall be cumulative from the date of original issue of such share and shall be payable, when and as declared by the Board of Directors out of funds legally available therefor, in cash on March 1, June 1, September 1 and December 1 of each year, commencing September 1, 1992. Each quarterly period beginning on February 15, May 15, August 15 and November 15 in each year and ending on and including the day next preceding the first day of the next such quarterly period shall be a "Dividend Period." If a share of Series A Preferred Stock is outstanding during an entire Dividend Period, the dividend payable on such share on the first day of the calendar month immediately following the last day of such Dividend Period shall be $5.078125 (or one-fourth of 8.125% of the Liquidation Preference (as defined in Section 7) for such share). If a share of Series A Preferred Stock is outstanding for less than an entire Dividend Period, the dividend payable on such share on the first day of the calendar month immediately following the last day of such Dividend Period on which such share shall be outstanding shall be the product of $5.078125 multiplied by the ratio (which shall not exceed one) that the number of days that such share was outstanding during such Dividend Period bears to the number of days in such Dividend Period. 4 Each dividend on the shares of Series A Preferred Stock shall be paid to the holders of record of shares of Series A Preferred Stock as they appear on the stock register of the Corporation on such record date, not more than 60 days nor less than 10 days preceding the payment date of such dividend, as shall be fixed in advance by the Board of Directors. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date, not exceeding 45 days preceding the payment date thereof, as may be fixed in advance by the Board of Directors. If there shall be outstanding shares of any other class or series of preferred stock of the Corporation ranking on a parity as to dividends with the Series A Preferred Stock, the Corporation, in making any dividend payment on account of arrears on the Series A Preferred Stock or such other class or series of preferred stock, shall make payments ratably upon all outstanding shares of Series A Preferred Stock and such other class or series of preferred stock in proportion to the respective amounts of dividends in arrears upon all such outstanding shares of Series A Preferred Stock and such other class or series of preferred stock to the date of such dividend payment. Holders of shares of Series A Preferred Stock shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full cumulative dividends on such shares. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment that is in arrears. 3. Redemption. The Series A Preferred Stock is not subject to any mandatory redemption pursuant to a sinking fund or otherwise. The Corporation, at its option, may redeem shares of Series A Preferred Stock, as a whole or in part, at any time or from time to time on or after July 28, 1997, at a price of $250 per share, plus accrued and accumulated but unpaid dividends thereon to but excluding the date fixed for redemption (the "Redemption Price"). If the Corporation shall redeem shares of Series A Preferred Stock pursuant to this Section 3, notice of such redemption shall be given by first class mail, postage prepaid, not less than 30 or more than 90 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as shown on the stock register of the Corporation. Each such notice shall state: (a) the redemption date; (b) the number of shares of Series A Preferred Stock to be redeemed and, if less than all such shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (c) the Redemption Price; (d) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price; and (e) that dividends on the shares to be redeemed will cease to accrue on such redemption date. Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing money for the payment of the Redemption Price) dividends on the shares of Series A Preferred Stock so called for redemption shall cease to accrue, and such shares shall no longer be deemed to be outstanding, and all rights of the 5 holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the Redemption Price) shall cease. Upon surrender in accordance with such notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the notice shall so state), the Corporation shall redeem such shares at the Redemption Price. If less than all the outstanding shares of Series A Preferred Stock are to be redeemed, the Corporation shall select those shares to be redeemed from outstanding shares of Series A Preferred Stock not previously called for redemption by lot or pro rata (as nearly as may be) or by any other method determined by the Board of Directors to be equitable. The Corporation shall not redeem less than all the outstanding shares of Series A Preferred Stock pursuant to this Section 3, or purchase or acquire any shares of Series A Preferred Stock otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of shares of Series A Preferred Stock, unless full cumulative dividends shall have been paid or declared and set apart for payment upon all outstanding shares of Series A Preferred Stock for all past Dividend Periods, and unless all matured obligations of the Corporation with respect to all sinking funds, retirement funds or purchase funds for all series of Preferred Stock then outstanding have been met. 4. Shares to be Retired. All shares of Series A Preferred Stock redeemed by the Corporation shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be reissued. 5. Conversion or Exchange. The holders of shares of Series A Preferred Stock shall not have any rights to convert any such shares into or exchange any such shares for shares of any other class or series of capital stock of the Corporation. 6. Voting. Except as otherwise provided in this Section 6 or as otherwise required by law, the Series A Preferred Stock shall have no voting rights. If six quarterly dividends (whether or not consecutive) payable on shares of Series A Preferred Stock are in arrears at the time of the record date to determine stockholders for any annual meeting of stockholders of the Corporation, the number of directors of the Corporation shall be increased by two, and the holders of shares of Series A Preferred Stock (voting separately as a class with the holders of shares of any one or more other series of Preferred Stock upon which like voting rights have been conferred and are exercisable) shall be entitled at such annual meeting of stockholders to elect two directors of the Corporation, with the remaining directors of the Corporation to be elected by the holders of shares of any other class or classes or series of stock entitled to vote therefor. In any such election, holders of shares of Series A Preferred Stock shall have one vote for each share held. 6 At all meetings of stockholders at which holders of Preferred Stock shall be entitled to vote for Directors as a single class, the holders of a majority of the outstanding shares of all classes and series of capital stock of the Corporation having the right to vote as a single class shall be necessary to constitute a quorum, whether present in person or by proxy, for the election by such single class of its designated Directors. In any election of Directors by stockholders voting as a class, such Directors shall be elected by the vote of at least a plurality of shares held by such stockholders present or represented at the meeting. At any such meeting, the election of Directors by stockholders voting as a class shall be valid notwithstanding that a quorum of other stockholders voting as one or more classes may not be present or represented at such meeting. Any director who has been elected by the holders of shares of Series A Preferred Stock (voting separately as a class with the holders of shares of any one or more other series of Preferred Stock upon which like voting rights have been conferred and are exercisable) may be removed at any time, with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of any such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. If a vacancy occurs among the Directors elected by such stockholders voting as a class, other than by removal from office as set forth in the preceding sentence, such vacancy may be filled by the remaining Director so elected, or his successor then in office, and the Director so elected to fill such vacancy shall serve until the next meeting of stockholders for the election of Directors. The voting rights of the holders of the Series A Preferred Stock to elect Directors as set forth above shall continue until all dividend arrearages on the Series A Preferred Stock have been paid or declared and set apart for payment. Upon the termination of such voting rights, the terms of office of all persons who may have been elected pursuant to such voting rights shall immediately terminate, and the number of directors of the Corporation shall be decreased by two. Without the consent of the holders of shares entitled to cast at least two-thirds of the votes entitled to be cast by the holders of the total number of shares of Preferred Stock then outstanding, voting separately as a class without regard to series, with the holders of shares of Series A Preferred Stock being entitled to cast one vote per share, the Corporation may not: (i) create any class of stock that shall have preference as to dividends or distributions of assets over the Series A Preferred Stock; or (ii) alter or change the provisions of the Certificate of Incorporation (including any Certificate of Amendment or Certificate of Designation relating to the Series A Preferred 7 Stock) so as to adversely affect the powers, preferences or rights of the holders of shares of Series A Preferred Stock; provided, however, that if such creation or such alteration or change would adversely affect the powers, preferences or rights of one or more, but not all, series of Preferred Stock at the time outstanding, such alteration or change shall require consent of the holders of shares entitled to cast at least two-thirds of the votes entitled to be cast by the holders of all of the shares of all such series so affected, voting as a class. 7. Liquidation Preference. In the event of any liquidation, dissolution or winding up of the Corporation, voluntary or involuntary, the holders of Series A Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, before any distribution of assets shall be made to the holders of the Common Stock or of any other shares of stock of the Corporation ranking as to such distribution junior to the Series A Preferred Stock, a liquidating distribution in an amount equal to $250 per share (the "Liquidation Preference") plus an amount equal to any accrued and accumulated but unpaid dividends thereon to the date of final distribution. The holders of the Series A Preferred Stock shall not be entitled to receive the Liquidation Preference and such accrued dividends, however, until the liquidation preference of any other class of stock of the Corporation ranking senior to the Series A Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. If, upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets available for distribution are insufficient to pay in full the amounts payable with respect to the Series A Preferred Stock and any other shares of stock of the Corporation ranking as to any such distribution on a parity with the Series A Preferred Stock, the holders of the Series A Preferred Stock and of such other shares shall share ratably in any distribution of assets of the Corporation in proportion to the full respective preferential amounts to which they are entitled. After payment to the holders of the Series A Preferred Stock of the full preferential amounts provided for in this Section 7, the holders of the Series A Preferred Stock shall be entitled to no further participation in any distribution of assets by the Corporation. Consolidation or merger of the Corporation with or into one or more other corporations, or a sale, whether for cash, shares of stock, securities or properties, of all or substantially all of the assets of the Corporation, shall not be deemed or construed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 7 if the preferences or special voting rights of the holders of shares of Series A Preferred Stock are not impaired thereby. 8. Limitation on Dividends on Junior Stock. So long as any Series A Preferred Stock shall be outstanding the Corporation shall not 8 declare any dividends on the Common Stock or any other stock of the Corporation ranking as to dividends or distributions of assets junior to the Series A Preferred Stock (the Common Stock and any such other stock being herein referred to as "Junior Stock"), or make any payment on account of, or set apart money for, a sinking fund or other similar fund or agreement for the purchase, redemption or other retirement of any shares of Junior Stock, or make any distribution in respect thereof, whether in cash or property or in obligations or stock of the Corporation, other than a distribution of Junior Stock (such dividends, payments, setting apart and distributions being herein called "Junior Stock Payments"), unless the following conditions shall be satisfied at the date of such declaration in the case of any such dividend, or the date of such setting apart in the case of any such fund, or the date of such payment or distribution in the case of any other Junior Stock Payment: (i) full cumulative dividends shall have been paid or declared and set apart for payment on all outstanding shares of Preferred Stock other than Junior Stock; and (ii) the Corporation shall not be in default or in arrears with respect to any sinking fund or other similar fund or agreement for the purchase, redemption or other retirement of any shares of Preferred Stock other than Junior Stock; provided, however, that any funds theretofore deposited in any sinking fund or other similar fund with respect to any Preferred Stock in compliance with the provisions of such sinking fund or other similar fund may thereafter be applied to the purchase or redemption of such Preferred Stock in accordance with the terms of such sinking fund or other similar fund regardless of whether at the time of such application full cumulative dividends upon shares of Series A Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment by the Corporation. K. 5.50% CONVERTIBLE PREFERRED STOCK, SERIES B 1. Designation and Number of Shares. The designation of such series shall be 5.50% Convertible Preferred Stock, Series B (the "Series B Convertible Preferred Stock"), and the number of shares constituting such series shall be 2,500,000. The number of authorized shares of Series B Convertible Preferred Stock may be reduced (but not below the number of shares thereof then outstanding) by further resolution duly adopted by the Board of Directors or the Executive Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, but the number of authorized shares of Series B Convertible Preferred Stock shall not be increased. 2. Dividends. Dividends on each share of Series B Convertible Preferred Stock shall be cumulative from the date of original issue of such share and shall be payable, when and as declared by the Board of Directors 9 out of funds legally available therefor, in cash on March 1, June 1, September 1 and December 1 of each year, commencing September 1, 1993. Each quarterly period beginning on February 15, May 15, August 15 and November 15 in each year and ending on and including the day next preceding the first day of the next such quarterly period shall be a "Dividend Period." If a share of Series B Convertible Preferred Stock is outstanding during an entire Dividend Period, the dividend payable on such share on the first day of the calendar month immediately following the last day of such Dividend Period shall be $.6875 (or one-fourth of 5.50% of the Liquidation Preference (as defined in Section 6) for such share). If a share of Series B Convertible Preferred Stock is outstanding for less than an entire Dividend Period, the dividend payable on such share on the first day of the calendar month immediately following the last day of such Divi- dend Period on which such share shall be outstanding shall be the product of $.6875 multiplied by the ratio (which shall not exceed one) that the number of days that such share was outstanding during such Dividend Period bears to the number of days in such Dividend Period. Each dividend on the shares of Series B Convertible Preferred Stock shall be paid to the holders of record of shares of Series B Con- vertible Preferred Stock as they appear on the stock register of the Corporation on such record date, not more than 60 days nor less than 10 days preceding the payment date of such dividend, as shall be fixed in advance by the Board of Directors. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time, without reference to any regular dividend payment date, to holders of record on such date, not exceeding 45 days preceding the payment date thereof, as may be fixed in advance by the Board of Directors. If there shall be outstanding shares of any other class or series of preferred stock of the Corporation ranking on a parity as to dividends with the Series B Convertible Preferred Stock, the Corporation, in making any dividend payment on account of arrears on the Series B Convertible Preferred Stock or such other class or series of preferred stock, shall make payments ratably upon all outstanding shares of Series B Convertible Preferred Stock and such other class or series of preferred stock in proportion to the respective amounts of dividends in arrears upon all such outstanding shares of Series B Convertible Preferred Stock and such other class or series of preferred stock to the date of such dividend payment. Holders of shares of Series B Convertible Preferred Stock shall not be entitled to any dividend, whether payable in cash, property or stock, in excess of full cumulative dividends on such shares. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment that is in arrears. 3. Redemption. The Series B Convertible Preferred Stock is not subject to any mandatory redemption pursuant to a sinking fund or otherwise. The Corporation, at its option, may redeem shares of Series B Convertible Preferred Stock, as a whole or in part, at any time or from 10 time to time on or after July 30, 1996 at the following redemption prices per share (expressed as a percentage of the Liquidation Preference (as defined in Section 6 hereof)), if redeemed during the 12-month period beginning July 30 of the year indicated: Year Redemption Price ---- ---------------- 1996 103.85% 1997 103.30% 1998 102.75% 1999 102.20% 2000 101.65% 2001 101.10% 2002 100.55% and thereafter at a price of $50.00 per share, plus, in each case, accrued and accumulated but unpaid dividends thereon to but excluding the date fixed for redemption (the "Redemption Price"). If the Corporation shall redeem shares of Series B Convertible Preferred Stock pursuant to this Section 3, notice of such redemption shall be given by first class mail, postage prepaid, not less than 30 or more than 90 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as shown on the stock register of the Corporation. Each such notice shall state: (a) the redemption date; (b) the number of shares of Series B Convertible Preferred Stock to be redeemed and, if less than all such shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (c) the Redemption Price; (d) the place or places where certifi- cates for such shares are to be surrendered for payment of the Redemption Price; and (e) that dividends on the shares to be redeemed will cease to accrue on such redemption date. Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing money for the payment of the Redemption Price) dividends on the shares of Series B Convertible Preferred Stock so called for redemption shall cease to accrue, and such shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the Redemption Price) shall cease. Upon surrender in accor- dance with such notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the notice shall so state), the Corporation shall redeem such shares at the Redemption Price. If less than all the outstand- ing shares of Series B Convertible Preferred Stock are to be redeemed, the Corporation shall select those shares to be redeemed from outstanding shares of Series B Convertible Preferred Stock not previously called for redemption by lot or pro rata (as nearly as may be) or by any other method reasonably determined by the Board of Directors in good faith to be equitable. The Corporation shall not redeem less than all the outstanding shares of Series B Convertible Preferred Stock pursuant to this Section 3, or purchase or acquire any shares of Series B Convertible Preferred Stock 11 otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of shares of Series B Convertible Preferred Stock, unless full cumulative dividends shall have been paid or declared and set apart for payment upon all outstanding shares of Series B Convertible Preferred Stock for all past Dividend Periods, and unless all matured obligations of the Corporation with respect to all sinking funds, retirement funds or purchase funds for all series of Preferred Stock then outstanding have been met. 4. Shares to be Retired. All shares of Series B Convertible Preferred Stock redeemed by the Corporation shall be retired and canceled and shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series, and may thereafter be reissued. 5. Voting. Except as otherwise provided in this Section 5 or as otherwise required by law, the Series B Convertible Preferred Stock shall have no voting rights. If six quarterly dividends (whether or not consecutive) payable on shares of Series B Convertible Preferred Stock are in arrears at the time of the record date to determine stockholders for any annual meeting of stockholders of the Corporation, the number of directors of the Corporation shall be increased by two, and the holders of shares of Series B Convertible Preferred Stock (voting separately as a class with the holders of shares of any one or more other series of Preferred Stock upon which like voting rights have been conferred and are exercisable) shall be enti- tled at such annual meeting of stockholders to elect two directors of the Corporation, with the remaining directors of the Corporation to be elected by the holders of shares of any other class or classes or series of stock entitled to vote therefor. In any such election, holders of shares of Series B Convertible Preferred Stock shall have one vote for each share held. At all meetings of stockholders at which holders of Preferred Stock shall be entitled to vote for Directors as a single class, the holders of a majority of the outstanding shares of all classes and series of capital stock of the Corporation having the right to vote as a single class shall be necessary to constitute a quorum, whether present in person or by proxy, for the election by such single class of its designated Directors. In any election of Directors by stockholders voting as a class, such Directors shall be elected by the vote of at least a plurality of shares held by such stockholders present or represented at the meeting. At any such meeting, the election of Directors by stockholders voting as a class shall be valid notwithstanding that a quorum of other stockholders voting as one or more classes may not be present or represented at such meeting. Any director who has been elected by the holders of shares of Series B Convertible Preferred Stock (voting separately as a class with the holders of shares of any one or more other series of Preferred Stock upon which like voting rights have been conferred and are exercisable) may be 12 removed at any time, with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of any such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. If a vacancy occurs among the Directors elected by such stockholders voting as a class, other than by removal from office as set forth in the preceding sentence, such vacancy may be filled by the remaining Director so elected, or his successor then in office, and the Director so elected to fill such vacancy shall serve until the next meeting of stockholders for the election of Directors. The voting rights of the holders of the Series B Convertible Preferred Stock to elect Directors as set forth above shall continue until all dividend arrearages on the Series B Convertible Preferred Stock have been paid or declared and set apart for payment. Upon the termination of such voting rights, the terms of office of all persons who may have been elected pursuant to such voting rights shall immediately terminate, and the number of directors of the Corporation shall be decreased by two. Without the consent of the holders of shares entitled to cast at least two-thirds of the votes entitled to be cast by the holders of the total number of shares of Preferred Stock then outstanding, voting separately as a class without regard to series, with the holders of shares of Series B Convertible Preferred Stock being entitled to cast one vote per share, the Corporation may not: (i) create any class of stock that shall have preference as to dividends or distributions of assets over the Series B Convertible Preferred Stock; or (ii) alter or change the provisions of the Certificate of Incorporation (including any Certificate of Amendment or Certif- icate of Designation relating to the Series B Convertible Pre- ferred Stock) so as to adversely affect the powers, preferences or rights of the holders of shares of Series B Convertible Pre- ferred Stock; provided, however, that if such creation or such alteration or change would adversely affect the powers, preferences or rights of one or more, but not all, series of Preferred Stock at the time outstanding, such alteration or change shall require consent of the holders of shares entitled to cast at least two-thirds of the votes entitled to be cast by the holders of all of the shares of all such series so affected, voting as a class. 6. Liquidation Preference. In the event of any liquidation, dissolution or winding up of the Corporation, voluntary or involuntary, the holders of Series B Convertible Preferred Stock shall be entitled to re- ceive out of the assets of the Corporation available for distribution to stockholders, before any distribution of assets shall be made to the holders of the Common Stock or of any other shares of stock of the Corporation ranking as to such distribution junior to the Series B Convert- ible Preferred Stock, a liquidating distribution in an amount equal to 13 $50.00 per share (the "Liquidation Preference") plus an amount equal to any accrued and accumulated but unpaid dividends thereon to the date of final distribution. The holders of the Series B Convertible Preferred Stock shall not be entitled to receive the Liquidation Preference and such accrued dividends, however, until the liquidation preference of any other class of stock of the Corporation ranking senior to the Series B Con- vertible Preferred Stock as to rights upon liquidation, dissolution or winding up shall have been paid (or a sum set aside therefor sufficient to provide for payment) in full. If, upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the assets available for distribution are insufficient to pay in full the amounts payable with respect to the Series B Convertible Preferred Stock and any other shares of stock of the Corporation ranking as to any such distribution on a parity with the Series B Convertible Preferred Stock, the holders of the Series B Convertible Pre- ferred Stock and of such other shares shall share ratably in any distribution of assets of the Corporation in proportion to the full respec- tive preferential amounts to which they are entitled. After payment to the holders of the Series B Convertible Pre- ferred Stock of the full preferential amounts provided for in this Section 6, the holders of the Series B Convertible Preferred Stock shall be entitled to no further participation in any distribution of assets by the Corporation. Consolidation or merger of the Corporation with or into one or more other corporations, or a sale, whether for cash, shares of stock, securities or properties, of all or substantially all of the assets of the Corporation, shall not be deemed or construed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 6 if the preferences or special voting rights of the holders of shares of Series B Convertible Preferred Stock are not impaired thereby. 7. Limitation on Dividends on Junior Stock. So long as any Series B Convertible Preferred Stock shall be outstanding, the Corporation shall not declare any dividends on the Common Stock or any other stock of the Corporation ranking as to dividends or distributions of assets junior to the Series B Convertible Preferred Stock (the Common Stock and any such other stock being herein referred to as "Junior Stock"), or make any payment on account of, or set apart money for, a sinking fund or other similar fund or agreement for the purchase, redemption or other retirement of any shares of Junior Stock, or make any distribution in respect thereof, whether in cash or property or in obligations or stock of the Corporation, other than a distribution of Junior Stock (such dividends, payments, setting apart and distributions being herein called "Junior Stock Payments"), unless the following conditions shall be satisfied at the date of such declaration in the case of any such dividend, or the date of such setting apart in the case of any such fund, or the date of such payment or distribution in the case of any other Junior Stock Payment: 14 (i) full cumulative dividends shall have been paid or de- clared and set apart for payment on all outstanding shares of Preferred Stock other than Junior Stock; and (ii) the Corporation shall not be in default or in arrears with respect to any sinking fund or other similar fund or agree- ment for the purchase, redemption or other retirement of any shares of Preferred Stock other than Junior Stock; provided, however, that any funds theretofore deposited in any sinking fund or other similar fund with respect to any Preferred Stock in compliance with the provisions of such sinking fund or other similar fund may thereafter be applied to the purchase or redemption of such Preferred Stock in accordance with the terms of such sinking fund or other similar fund re- gardless of whether at the time of such application full cumulative dividends upon shares of Series B Convertible Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment by the Corporation. 8. Conversion Rights. The shares of Series B Convertible Pre- ferred Stock shall be convertible, in whole or in part, at the option of the holder(s) thereof, into shares of Common Stock subject to the following terms and conditions: (a) The shares of Series B Convertible Preferred Stock shall be convertible at the office of any transfer agent of the Corporation, and at such other office or offices, if any, as the Board of Directors may designate, into fully paid and nonassess- able shares (calculated as to each conversion to the nearest 1/100 of a share) of common stock, $.01 par value per share, of the Corporation ("Common Stock") at the rate of that number of shares of Common Stock for each share of Series B Convertible Preferred Stock that is equal to $50.00 divided by the Conver- sion Price applicable per share of Common Stock at the time of conversion (the "Conversion Price"). The Conversion Price shall initially be $49.00. The Conversion Price shall be adjusted in certain instances as provided below. (b) In order to convert shares of Series B Convertible Preferred Stock into Common Stock, the holder thereof shall surrender the certificate or certificates evidencing such shares of Series B Convertible Preferred Stock at the office of the transfer agent for the Series B Convertible Preferred Stock, which certificate or certificates, if the Corporation shall so require, shall be duly endorsed to the Corporation or in blank, or accompanied by proper instruments of transfer to the Corpora- tion or in blank, accompanied by (i) an irrevocable written notice to the Corporation that the holder elects so to convert such shares of Series B Convertible Preferred Stock and specify- ing the name or names (with address or addresses) in which a certificate or certificates evidencing shares of Common Stock are to be issued and (ii) if required pursuant to paragraph (p) 15 of this Section 8, an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Corpora- tion demonstrating that such taxes have been paid). A payment or adjustment shall not be made by the Corpora- tion upon any conversion on account of any dividends accrued on the shares of Series B Convertible Preferred Stock surrendered for conversion or on account of any dividends on the Common Stock issued upon conversion. Shares of Series B Convertible Preferred Stock shall be deemed to have been converted immediately prior to the close of business on the day of the surrender of such shares for conversion in accordance with the foregoing provisions, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the conversion date, the Corporation shall issue and shall deliver at such office a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion, together with payment in lieu of any fraction of a share, as hereinafter provided, to the person or persons entitled to receive the same. In case shares of Series B Convertible Preferred Stock are called for redemption, the right to convert such shares shall cease and terminate at the close of business on the date fixed for redemption, unless default shall be made in payment of the Redemption Price. (c) In case the Corporation shall pay or make a dividend or other distribution on any class of capital stock of the Corporation in Common Stock, the Conversion Price in effect at the close of business on the date fixed for the determination of stockholders entitled to receive such dividend or other distri- bution shall be reduced to a price determined by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective at the opening of business on the day following the date fixed for such deter- mination. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjust- ed to be the Conversion Price which would then be in effect if such date fixed for the determination of stockholders entitled to receive such dividend or other distribution had not been fixed, but such subsequent adjustment shall not affect the number of shares of Common Stock issued upon any conversion of the Series B Convertible Preferred Stock prior to the date such subsequent adjustment is made. For the purposes of this para- graph (c), the number of shares of Common Stock at any time 16 outstanding shall not include shares held in the treasury of the Corporation, but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. (d) In case the Corporation shall issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Average Market Price (as defined below) of Common Stock on the date fixed for the determination of stockholders entitled to receive such rights or warrants, the Conversion Price in ef- fect at the close of business on the date fixed for such determination shall be reduced to a price determined by multi- plying such Conversion Price by a fraction of which the numera- tor shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such Average Market Price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective at the opening of business on the day following the date fixed for such determination. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Con- version Price shall again be adjusted to be the Conversion Price which would then be in effect if the date fixed for the determi- nation of stockholders entitled to receive such rights or war- rants had not been fixed, but such subsequent adjustment shall not affect the number of shares of Common Stock issued upon any conversion of the Series B Convertible Preferred Stock prior to the date such subsequent adjustment is made. For the purposes of this paragraph (d), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Corporation, but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. As used herein the term "Average Market Price" of the Common Stock shall mean the average of the daily reported closing sales prices, regular way, per share of the Common Stock on the New York Stock Exchange (the "NYSE") or, if the Common Stock is not principally traded on the NYSE, such other market on which the Common Stock is listed or principally traded, for the 10 consecutive trading days prior to the date of determination. 17 (e) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the close of business on the date upon which such subdivision becomes effective shall be propor- tionately reduced, and, conversely, in case outstanding shares of Common Stock shall each be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the close of business on the date upon which such combination be- comes effective shall be proportionately increased, such reduc- tion or increase, as the case may be, to become effective at the opening of business on the day following the date upon which such subdivision or combination becomes effective. (f) In case the Corporation shall, by dividend or other- wise, distribute to all holders of its Common Stock evidences of its indebtedness or assets (including securities, but excluding (i) any rights or warrants referred to in paragraph (d) of this Section 8, (ii) any dividend or distribution paid in cash or other property out of the retained earnings of the Corporation and (iii) any dividend or distribution referred to in paragraph (c) of this Section 8), then either (at the option of the Corpo- ration) (A) the Corporation shall elect to include in such distribution the holders of Series B Convertible Preferred Stock (as of the record date for such distribution) as if such holders had converted all shares of Series B Convertible Preferred Stock into Common Stock immediately prior to such record date (such conversion assumed to be made at the Conversion Price in effect without regard to the adjustment provided in the following clause (B)), or (B) the Conversion Price shall be reduced to a price determined by multiplying the Conversion Price in effect at the close of business on the date fixed for the determination of stockholders entitled to receive such distribution by a fraction of which the numerator shall be the Average Market Price per share of the Common Stock on the date fixed for such determination less the then fair market value (as reasonably determined in good faith by the Board of Directors) on such date of the portion of the assets or evidences of indebtedness so to be distributed applicable to one share of Common Stock and the denominator shall be such Average Market Price per share of the Common Stock, such adjustment to become effective at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such distribution. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such date fixed for the determination of stockholders entitled to receive such dividend or other distribution had not been fixed, but such subsequent adjustment shall not affect the number of shares of Common Stock issued upon any conversion of the Series B Convertible Preferred Stock prior to the date such subsequent adjustment is made. If the Corporation makes an election under clause (A) of this paragraph (f) with respect to 18 any such distribution payable on the Series B Convertible Preferred Stock (an "Elected Corporation Dividend"), the Corporation may in lieu of such distribution elect to pay to the holder of any share of Series B Convertible Preferred Stock the fair market value (determined as provided above) of such Elected Corporation Dividend in cash (the "Cash Equivalent"). (g) The reclassification (including any reclassification upon a consolidation or merger in which the Corporation is the continuing corporation, but not including any transactions for which an adjustment is provided in paragraph (i) below) of Common Stock into securities including other than Common Stock shall be deemed to involve (i) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be "the date fixed for the determination of stockholders entitled to receive such distribution" and "the date fixed for such determination" within the meaning of paragraph (f) of this Section 8) and (ii) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the date upon which such subdivision becomes effective" or "the day upon which such combination becomes effective," as the case may be, and "the date upon which such subdivision or combi- nation becomes effective" within the meaning of paragraph (e) of this Section 8). (h) The Corporation may make such reductions in the Con- version Price, in addition to those required by paragraphs (c), (d), (e), (f) and (g) above, as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. (i) In case of any consolidation of the Corporation with, or merger of the Corporation into, any other corporation, part- nership, joint venture, association or other entity (a "Per- son"), any merger of another Person into the Corporation (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock) or any sale or transfer of all or substantially all of the assets of the Corporation, then each share of Series B Convertible Preferred Stock shall be convertible only into the kind and amount (if any) of securities, cash or other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock into which such share of Series B Convertible Preferred Stock was convertible immediately prior to such consolidation, merger, sale or trans- fer. The above provisions of this paragraph (i) shall similarly apply to successive consolidations, mergers, sales or transfers. 19 (j) No adjustment in the Conversion Price shall be re- quired unless such adjustment would require an increase or decrease of at least 1% in the Conversion Price; provided, however, that any adjustments which by reason of this subpara- graph (j) are not required to be made shall be carried forward and taken into account in determining whether any subsequent adjustment shall be required. (k) Notwithstanding any other provision of this Section 8, no adjustment to the Conversion Price shall reduce the Conver- sion Price below the then par value per share of the Common Stock, and any such purported adjustment shall instead reduce the Conversion Price to such par value. (l) Whenever the Conversion Price is adjusted as herein provided the Corporation shall compute the adjusted Conversion Price in accordance with this Section 8 and shall prepare a certificate signed by the Treasurer of the Corporation setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed with the transfer agent or agents for the Series B Convertible Preferred Stock and a copy mailed as soon as practicable to the holders of record of the shares of Series B Convertible Preferred Stock. (m) In case: (i) the Corporation shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its retained earnings; or (ii) the Corporation shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (iii) of any reclassification of the capital stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or of the sale or transfer of all or substantially all of the assets of the Corporation; or (iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then, in any such case, the Corporation shall cause to be filed with the transfer agent or agents, if any, for the Series B Convertible Preferred Stock, and shall cause to be mailed to the holders of record of the outstanding shares of Series B Convert- ible Preferred Stock, at least 30 days (or 15 days in any case 20 specified in clause (i) or (ii) above) prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, trans- fer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up (but no failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of the corporate action required to be specified in such notice). (n) The Corporation shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of shares of Series B Convertible Preferred Stock, the full number of shares of Common Stock then deliverable upon the conversion of all shares of Series B Convertible Preferred Stock then outstanding. (o) No fractional shares of Common Stock shall be issued upon conversion, but, instead of any fraction of a share which would otherwise be issuable, the Corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the market price per share of Common Stock (as determined in good faith by the Board of Directors or in any manner prescribed by the Board of Directors) at the close of business on the day of conversion. (p) The Corporation will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of shares of Series B Convertible Preferred Stock pursuant hereto. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Series B Convertible Preferred Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of any such tax, or has established to the satisfaction of the Corporation that such tax has been paid. (q) For the purpose of this Section 8, the term "Common Stock" shall include any stock of any class of the Corporation which has no preference in respect of dividends or of amounts 21 payable in the event of any voluntary or involuntary liquida- tion, dissolution or winding up of the Corporation and which is not subject to redemption by the Corporation. However, shares issuable on conversion of shares of Series B Convertible Pre- ferred Stock shall include only shares of the class designated as Common Stock of the Corporation as of July 31, 1993, or shares of any class or classes resulting from any reclassifica- tion or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation and which are not subject to redemption by the Corporation; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. (r) In any case in which this Section 8 shall require that an adjustment shall become effective on the day following a record date for an event, the Corporation may defer until the occurrence of such event (i) issuing to the holder of any share of Series B Convertible Preferred Stock, if such share is con- verted after such record date and before the occurrence of such event, the additional Common Stock (and associated Elected Corporation Dividend or Cash Equivalent, if any) issuable upon such conversion by reason of the adjustment required by such event over and above Common Stock (and associated Elected Corpo- ration Dividend or Cash Equivalent, if any) issuable upon such conversion before giving effect to such adjustment and (ii) pay- ing to such holders any amount in cash in lieu of a fractional share of Common Stock pursuant to paragraph (p) of this Section 8; provided that upon request of any such holder, the Corpo- ration shall deliver to such holder a due bill or other ap- propriate instrument evidencing such holder's right to receive such additional Common Stock and such cash, upon the occurrence of the event requiring such adjustment. 9. Sinking Fund. The Series B Convertible Preferred Stock shall not be subject to any right of mandatory payment or prepayment (except for liquidation, dissolution or winding up of the Corporation) or to any sinking fund. 10. Ranking. The Series B Convertible Preferred Stock shall rank on a parity with the Corporation's 8.125% Cumulative Preferred Stock, Series A and $45,000 Cumulative Redeemable Preferred Stock, Series Z with respect to dividends and distributions of assets upon liquidation, dissolution or winding up of the Corporation. 11. Exchanges. Certificates representing shares of Series B Convertible Preferred Stock shall be exchangeable, at the option of the holder, for a new certificate or certificates of the same or different 22 denominations representing in the aggregate the same number of shares of Series B Convertible Preferred Stock. L. $ 4.53 ESOP CONVERTIBLE PREFERRED STOCK, SERIES C 1. Designation, Issuance and Transfer. (a) There shall be a series of Preferred Stock, the designation of which shall be "$4.53 ESOP Convertible Preferred Stock, Series C" (hereinafter called the "Series C Preferred Stock") and the number of authorized shares constituting the Series C Preferred Stock shall be eight million (8,000,000). Shares of the Series C Preferred Stock shall have a stated value of $53.25 per share. The number of authorized shares of the Series C Preferred Stock may be reduced by resolution duly adopted by the Board of Directors, or by a duly authorized committee thereof, and by the filing, pursuant to the provisions of the General Corporation Law of the State of Delaware, of a certificate of amendment to the Certificate of Incorporation of the Corporation, as theretofore amended, stating that such reduction has been so authorized, but the number of authorized shares of the Series C Preferred Stock shall not be increased. (b) Shares of Series C Preferred Stock shall be issued only to Shawmut Bank Connecticut, National Association, as trustee (the "Trustee") acting on behalf of the employee stock ownership feature of The Travelers Savings, Investment and Stock Ownership Plan, as amended from time to time or any successor to such plan (the "Plan"), or any successor trustee under the Plan. In the event of any transfer of shares of Series C Preferred Stock to any person other than the Trustee, other than a pledge of the shares of Series C Preferred Stock by the Trust in connection with the financing or refinancing of the purchase by the Trustee of shares of $4.53 Series A ESOP Convertible Preference Stock (without par value) of The Travelers Corporation (the "Series A Preference Stock"; such shares of Series A Preference Stock having been assumed by the Corporation and become shares of Series C Preferred Stock pursuant to the terms of such Series A Preference Stock) or of shares of Series C Preferred Stock, the shares of the Series C Preferred Stock so transferred, upon such transfer and without any further action by the Corporation or the holder, shall be automatically converted into shares of Common Stock on the terms otherwise provided for the conversion of shares of Series C Preferred Stock into shares of Common Stock pursuant to paragraph 4 of this Section L and no such transferee shall have any of the voting powers, preferences or rights of shares of Series C Preferred Stock hereunder, but rather, only the powers and rights pertaining to the Common Stock into which such shares of Series C Preferred Stock shall be so converted. Notwithstanding the foregoing provisions of this paragraph 1(b), shares of Series C Preferred Stock may be converted into shares of Common Stock as provided by paragraph 4 of this Section L and the 23 shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law. 2. Dividend Rate. (a) Dividends on each share of the Series C Preferred Stock shall accrue from the date of its original issue (for purposes of this paragraph 2(a), the date of original issue of the Series C Preferred Stock shall be the date of commencement of the full quarterly period ending April 1, 1994) in the amount of $4.53 per annum per share (the "Rate"). Such dividends shall be cumulative from the date of original issue and shall be payable, when and as declared by the Board of Directors, out of assets legally available for such purpose, on January 1, April 1, July 1 and October 1 of each year, commencing April 1, 1994 (each such date being hereinafter individually a "Dividend Payment Date" and collectively the "Dividend Payment Dates"), except that if such date is a Sunday or legal holiday then such dividend shall be payable on the first immediately succeeding calendar day which is not a Sunday or legal holiday. Each such dividend shall be paid to the holders of record of shares of the Series C Preferred Stock as they appear on the books of the Corporation on such Dividend Payment Date, or such other date as shall be fixed by the Board of Directors as the record date. Dividends in arrears may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on the payment date (which payment date may be fixed by the Board of Directors as the record date), or such other date as may be fixed by the Board of Directors as the record date. (b) Except as hereinafter provided, no dividends shall be declared or paid or set apart for payment on Preferred Stock of any other series ranking on a parity with the Series C Preferred Stock as to dividends and upon liquidation for any period unless full cumulative dividends have been or contemporaneously are declared and paid on the Series C Preferred Stock through the latest Dividend Payment Date. When dividends are not paid in full, as aforesaid, upon the shares of the Series C Preferred Stock and any such other series of Preferred Stock, all dividends declared upon shares of the Series C Preferred Stock and such other series of Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on the Series C Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of the Series C Preferred Stock and such other series of Preferred Stock bear to each other. Holders of shares of the Series C Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided, on the Series C Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series C Preferred Stock which may be in arrears. 24 (c) So long as any shares of the Series C Preferred Stock are outstanding, no dividend (other than a dividend in Common Stock or in any other stock of the Corporation ranking junior to the Series C Preferred Stock as to dividends and upon liquidation and other than as provided in paragraph 2(b) of this Section L) shall be declared or paid or set aside for payment, and no other distribution shall be declared or made upon the Common Stock or upon any other stock of the Corporation ranking junior to or on a parity with the Series C Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock nor any other stock of the Corporation ranking junior to or on a parity with the Series C Preferred Stock as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to the Series C Preferred Stock as to dividends and upon liquidation), unless, in each case, the full cumulative dividends on all outstanding shares of the Series C Preferred Stock shall have been paid or contemporaneously are declared and paid through the latest Dividend Payment Date. (d) Dividends payable on the Series C Preferred Stock for any full quarterly period shall be computed by dividing the Rate by four (for purposes of this paragraph 2(d), the Series C Preferred Stock shall be deemed to have been outstanding for the full quarterly period ending April 1, 1994). Subject to the preceding sentence, dividends payable on the Series C Preferred Stock for any period less than a full quarterly period shall be computed on the basis of a 360-day year of 30-day months. 3. Redemption. (a) The shares of Series C Preferred Stock shall not be redeemable before January 1, 1998 except as set forth in paragraphs 3(b), 3(c), 3(d) and 3(e) of this Section L. On or after January 1, 1998, the Corporation, at its sole option, may redeem the Series C Preferred Stock as a whole or in part at a price of $53.25 per share plus accrued and unpaid dividends thereon to the date fixed for redemption. (b) The shares of Series C Preferred Stock shall be redeemable by the Corporation, at its sole option, at any time and from time to time if there is a change in the Federal tax law of the United States of America which has the effect of precluding the Corporation from claiming any of the tax deductions for dividends paid on the Series C Preferred Stock when such dividends are used as provided under Section 404(k)(2) of the Internal Revenue Code of 1986, as amended, and as in effect on the date shares of Series C Preferred Stock are initially issued (for this purpose, such date of initial issuance being the date of the original issuance of the Series A Preference Stock), at the higher of (i) $53.25 per share plus 25 accrued and unpaid dividends thereon to the date fixed for redemption or (ii) the fair market value per share of the Series C Preferred Stock as determined by an independent appraiser, appointed by the Trustee in accordance with the provisions of the Plan, as of the most recent Valuation Date, as defined in the Plan. (c) The shares of Series C Preferred Stock shall be redeemable in whole at any time upon the commencement of any action by a governmental authority having jurisdiction which may result in the divestiture or other material change in the business of the Corporation or any subsidiary by reason of the issuance of the Series C Preferred Stock. At such time as the shares of Series C Preferred Stock shall be redeemable pursuant to this paragraph 3(c), the Corporation, at its sole option, may redeem the Series C Preferred Stock at the following redemption prices per share plus, in each case, accrued and unpaid dividends thereon to the date fixed for redemption. If redeemed during the twelve-month period beginning January 1, Year Price ---- ----- 1994 $55.52 1995 $54.95 1996 $54.38 1997 $53.82 and $53.25 if redeemed on or after January 1, 1998. (d) The shares of Series C Preferred Stock shall be redeemed by the Corporation at a redemption price which shall be the higher of (i) $53.25 per share plus accrued and unpaid dividends thereon to the date fixed for redemption or (ii) the fair market value per share of the Series C Preferred Stock as determined by an independent appraiser appointed by the Trustee in accordance with the provisions of the Plan, as of the most recent Valuation Date, as defined in the Plan, at the option of the holder, at any time and from time to time upon notice to the Corporation given not less than five business days prior to the date fixed by the holder in such notice for such redemption, upon certification by such holder to the Corporation, when and to the extent necessary for such holder to provide for distributions required to be made to participants under, or to satisfy an investment election provided to participants in accordance with, the Plan. (e) At the option of the holder, the shares of Series C Preferred Stock shall be redeemed in whole by the Corporation at a redemption price of $53.25 per share plus accrued and unpaid dividends thereon to the date fixed for redemption, at any time (i) upon a Change in Control of the Corporation or 26 (ii) in the event that the Plan is not initially determined by the Internal Revenue Service to be qualified within the meaning of Sections 401(a) and 4975(e)(7) of the Internal Revenue Code of 1986, as amended, upon notice to the Corporation given not less than five business days prior to the date fixed by the holder in such notice for such redemption. For purposes of this paragraph (e), a "Change in Control" will be deemed to have occurred upon either of the following: (i) The date of public disclosure that any person or group of persons (excluding persons or entities affiliated with the Corporation) directly or indirectly acquires actual or beneficial ownership of 30% or more of the combined voting power of the Corporation's outstanding securities entitled to vote in the election of members of the Board of Directors, or the right to obtain such ownership; or (ii) The date Incumbent Directors cease to constitute a majority of the Board of Directors. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to (i) above solely because 30% or more of the combined voting power of the Corporation's outstanding securities entitled to vote in the election of members of the Board of Directors is acquired by a person, the majority interest in which is held, directly or indirectly, by the Corporation, or by one or more employee benefit plans maintained by the Corporation or an affiliated employer, the majority interest in which is held, directly or indirectly, by the Corporation. For the purposes of this definition, the term "person" shall have the same meaning as set forth in Section 3(a) of the Securities Exchange Act of 1934, as amended, and in the regulations promulgated thereunder. For purposes of this definition, the term "Incumbent Directors" shall mean the Board of Directors on December 31, 1993, to the extent that they continue to serve as members thereof. Any individual who becomes a member of such Board after December 31, 1993, if his or her election or nomination for election as a director was approved by a majority of the then Incumbent Directors, is an Incumbent Director. (f) Except with respect to subparagraph 3(e)(i) of this Section L, the Corporation, at its option, may make payment of the redemption price required upon redemption of shares of Series C Preferred Stock in cash or in shares of Common Stock, or in a combination of such shares and cash, any such shares of Common Stock to be valued for such purpose at the current 27 market price as determined pursuant to paragraphs 4(d) and 9 of this Section L, provided, however, that in calculating the current market price, the five consecutive business days preceding and including the date of redemption shall be used. Payment of the redemption price required upon redemption of shares of Series C Preferred Stock pursuant to subparagraph 3(e)(i) of this Section L shall be made in cash. (g) In the event the Corporation shall redeem shares of the Series C Preferred Stock, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 20 nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the books of the Corporation. Each such notice shall state: (i) the redemption date; (ii) the number of shares of the Series C Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) whether such payment shall be in cash or shares of Common Stock, or in a combination of such shares and cash; (v) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised, the conversion price and the number of shares of Common Stock issuable upon conversion of a share of Series C Preferred Stock at the time. (h) Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing money or shares of Common Stock for the payment of the redemption price of the shares called for redemption) dividends on the shares of the Series C Preferred Stock so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as preferred stockholders of the Corporation (except the right to receive from the Corporation the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the redemption price aforesaid. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. (i) Any shares of the Series C Preferred Stock which shall at any time have been redeemed or repurchased by the Corporation, or surrendered to the Corporation upon conversion 28 or otherwise acquired by the Corporation shall, upon such redemption, repurchase, surrender or other acquisition, be retired and thereafter have the status of authorized but unissued shares of Preferred Stock, without designation as to series until such shares are once more designated as part of a particular series by the Board of Directors or a duly authorized committee thereof. (j) Notwithstanding the foregoing provisions of this paragraph 3, unless the full cumulative dividends on all outstanding shares of the Series C Preferred Stock shall have been paid or contemporaneously are declared and paid through the latest Dividend Payment Date, no shares of the Series C Preferred Stock shall be redeemed, except at the option of the holder pursuant to paragraph 3(d) and paragraph 3(e) of this Section L, unless all outstanding shares of the Series C Preferred Stock are simultaneously redeemed, and the Corporation shall not purchase or otherwise acquire any shares of the Series C Preferred Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of the Series C Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of the Series C Preferred Stock. (k) Any redemption, repurchase or other acquisition by, or any surrender upon conversion to, the Corporation of shares of Series C Preferred Stock may, to the extent required to be made out of funds legally available for such purpose, be made to the extent of any unreserved and unrestricted capital surplus attributable to such shares in addition to any other surplus, profits, earnings or other funds or amounts legally available for such purpose. 4. Conversion. (a) The holder of any shares of the Series C Preferred Stock at his option may at any time (except that if any such shares shall have been called for redemption, then, as to such shares, such right shall terminate at the close of business on the date fixed for such redemption, unless default shall be made by the Corporation in providing money or shares of Common Stock for the payment of the redemption price of the shares called for redemption) convert the stated value of all such shares into a number of fully paid and nonassessable shares of Common Stock determined by dividing the stated value of the shares surrendered for conversion by the Conversion Price fixed or determined pursuant to paragraph 4(d) and paragraph 9 of this Section L. Such right shall be exercised by the surrender of the shares so to be converted to the Corporation at any time during normal business hours at the office of the Corporation, accompanied by written notice of such holder's election to convert and (if so required by the Corporation) by instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or 29 by his duly authorized attorney, and transfer tax stamps or funds therefor, if required pursuant to paragraph 4(i) of this Section L. (b) As promptly as practicable after the surrender for conversion of the shares of the Series C Preferred Stock in the manner provided in paragraph 4(a) of this Section L and the payment in cash of any amount required by the provisions of paragraphs 4(a) and 4(h) of this Section L, the Corporation will deliver or cause to be delivered to or upon the written order of the holder of such shares, certificates representing the number of full shares of Common Stock issuable upon such conversion, issued in such name or names as such holder may direct. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares, and all rights of the holder of such shares as a holder of such shares shall cease at such time and the person or persons in whose name or names the certificates for such shares of Common Stock are to be issued shall be treated for all purposes as having become the record holder or holders thereof at such time and such conversion shall be at the Conversion Price (as hereinafter defined) in effect at such time; provided, however, that any such surrender and payment on any date when the stock transfer books of the Corporation shall be closed shall constitute the person or persons in whose name or names the certificates for such shares of Common Stock are to be issued as the record holder or holders thereof for all purposes immediately prior to the close of business on the next succeeding day on which such stock transfer books are opened and such conversion shall be at the Conversion Price in effect at such time on such succeeding day. If the last day for the exercise of the conversion right shall be other than a business day, then such conversion right may be exercised on the next succeeding business day. (c) No adjustments in respect of dividends shall be made upon the conversion of the shares of the Series C Preferred Stock. (d) The initial Conversion Price shall be $66.21 per share of the Common Stock. The Conversion Price shall be subject to adjustment as provided in paragraph 9. (e) No fractional shares of stock shall be issued upon the conversion of shares of the Series C Preferred Stock. If any fractional interest in a share of Common Stock would, except for the provisions of this paragraph 4(e), be deliverable upon the conversion of shares, the Corporation shall in lieu of delivering the fractional share therefor, adjust such fractional interest by payment to the holder of such surrendered share or shares of an amount in cash equal 30 (computed to the nearest cent) to the current market value of such fractional interest, computed on the basis of the last reported sale price regular way of Common Stock on the New York Stock Exchange, or, if not reported for such Exchange, on the Composite Tape, on the business day prior to the date of conversion, or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked quotations on the New York Stock Exchange, or, if the Common Stock is not listed on such Exchange or no such quotations are available, the last sale price in the over-the-counter market reported by the National Association of Securities Dealers Automated Quotations System, or if not reported by such System, the average of the high bid and low asked quotations in the over-the-counter market as reported by National Quotation Bureau, Incorporated, or similar organization, or if no such quotations are available, the fair market price as determined by the Corporation (whose determination shall be conclusive). (f) The Corporation covenants that it will at all times reserve and keep available, solely for the purpose of issue upon conversion of the outstanding shares of the Series C Preferred Stock, such number of shares of Common Stock as shall be issuable upon the conversion of all such outstanding shares, provided that nothing contained herein shall be construed to preclude the Corporation from satisfying its obligations in respect of (i) such reservation by reserving purchased shares of Common Stock which are held in the treasury of the Corporation and (ii) conversion of any shares of the Series C Preferred Stock by delivery of purchased shares of Common Stock which are held in the treasury of the Corporation. The Corporation covenants that if any shares of Common Stock required to be reserved for purposes of conversion of the shares hereunder require registration with or approval of any governmental authority under any Federal or state law before such shares may be issued upon conversion, the Corporation will cause such shares to be duly registered or approved, as the case may be. The Corporation will endeavor to list the shares of Common Stock required to be delivered upon conversion of shares prior to such delivery upon each national securities exchange upon which the outstanding Common Stock is listed at the time of such delivery. The Corporation covenants that all shares of Common Stock which shall be issued upon conversion of the shares of Series C Preferred Stock will upon issue be fully paid and nonassessable. (g) Before taking any action which would cause an adjustment reducing the Conversion Price below the then par 31 value of the Common Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at the Conversion Price as so adjusted. (h) The issuance of certificates for shares of Common Stock upon conversion or payment of the redemption price shall be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate is to be issued in a name other than that of the holder of the share or shares converted, the person or persons requesting the issuance thereof shall pay to the Corporation the amount of any tax which may be payable in respect of any transfer involved in such issuance or shall establish to the satisfaction of the Corporation that such tax has been paid. (i) Notwithstanding anything elsewhere contained in this Certificate of Incorporation, any funds which at any time shall have been deposited or set aside by the Corporation or on its behalf with any paying agent or otherwise for the purpose of paying dividends on or the redemption price of any of the shares of the Series C Preferred Stock and which shall not be required for such purposes because of the conversion of such shares, as provided in this paragraph 4, shall, upon delivery to the paying agent of evidence satisfactory to it of such conversion, after such conversion be repaid to the Corporation by the paying agent. (j) In case: (i) the Corporation shall take any action which would require an adjustment in the Conversion Price pursuant to paragraph 9 of this Section L; or (ii) the Corporation shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights and notice thereof shall be given to holders of Common Stock; or (iii) there shall be any capital reorganization or reclassification of the Common Stock (other than a subdivision or combination of the outstanding Common Stock and other than a change in par value or from par value to no par value or from no par value to par value of the Common Stock), or any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or any sale or transfer of all or substantially all of the assets of the Corporation; or 32 (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be given to the holders of the shares of the Series C Preferred Stock at least ten days prior to the applicable date hereinafter specified, a notice of (x) the date on which a record is to be taken for the purpose of any distribution or grant to holders of Common Stock, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such distribution or grant are to be determined or (y) the date on which such reorganization, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. Failure to give such notice or any defect therein shall not affect the legality or validity of any proceedings described in clauses (i), (ii), (iii) or (iv) of this paragraph 4(j). 5. Voting. The shares of the Series C Preferred Stock shall be entitled to vote for the election of directors and on all other matters submitted to a vote of stockholders of the Corporation. Each share of the Series C Preferred Stock shall be entitled to 1.3 votes per share when voting together as a single class with shares of Common Stock, such voting rights to be adjusted as the Conversion Price is adjusted pursuant to paragraphs 4(d) and 9 of this Section L. Such shares shall vote jointly as a single class with shares of Common Stock and not as a separate class except as otherwise expressly provided for in the General Corporation Law of the State of Delaware; provided, however, that whether or not the General Corporation Law of the State of Delaware so provides, the affirmative vote of the holders of at least two-thirds of the outstanding shares of the Series C Preferred Stock and all other series of Preferred Stock ranking on a parity with the Series C Preferred Stock as to dividends and upon liquidation, voting together as a class, shall be required for the Corporation to create a new class or increase an existing class of stock having rights in respect of the payment of dividends or in liquidation prior to the Series C Preferred Stock or any other series of Preferred Stock ranking on a parity with the Series C Preferred Stock as to dividends and upon liquidation, to issue any preferred stock of the Corporation ranking prior to the Series C Preferred Stock either as to dividends or upon liquidation, or to change the terms, limitations or relative rights or preferences of the Series C Preferred Stock or any other series of Preferred Stock ranking on a parity with the Series C Preferred Stock as to dividends and upon liquidation, either directly or by increasing the relative rights of the shares of another class. When the shares of Series C Preferred Stock are entitled to vote together with any other series of Preferred Stock, shares of Series C Preferred Stock shall be entitled to one vote per share. 33 6. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of the shares of the Series C Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, before any payment or distribution shall be made on the Common Stock or on any other class of stock ranking junior to the Preferred Stock upon liquidation, the amount of $53.25 per share, plus accrued and unpaid dividends thereon to the date of final distribution. (b) Neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all the property and assets of the Corporation nor the merger or consolidation of the Corporation into or with any other corporation or the merger or consolidation of any other corporation into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this paragraph 6. (c) After the payment to the holders of the shares of the Series C Preferred Stock of the full preferential amounts provided for in this paragraph 6, the holders of the Series C Preferred Stock as such shall have no right or claim to any of the remaining assets of the Corporation. (d) In the event the assets of the Corporation available for distribution to the holders of shares of the Series C Preferred Stock upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph 6(a) of this Section L, no such distribution shall be made on account of any shares of any other series of Preferred Stock or any other class of stock of the Corporation, in either case ranking on a parity with the shares of the Series C Preferred Stock upon such dissolution, liquidation or winding up, unless proportionate distributive amounts shall be paid on account of the shares of the Series C Preferred Stock, ratably, in proportion to the full distributable amounts to which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. 7. Ranking. For purposes of the foregoing paragraphs 1 through 6 of this Section L, any stock of any class or classes of the Corporation shall be deemed to rank: (a) prior to the shares of the Series C Preferred Stock, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, 34 whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of the Series C Preferred Stock; (b) on a parity with shares of the Series C Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, be different from those of the Series C Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of the Series C Preferred Stock; and (c) junior to shares of the Series C Preferred Stock, either as to dividends or upon liquidation, if such class or classes shall be Common Stock or if the holders of shares of the Series C Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of such class or classes. Notwithstanding any other provision of this Section L or of Section M, the Series C Preferred Stock shall rank on a parity (within the meaning of paragraph 7(b) of this Section L) with the Corporation's 8.125% Cumulative Preferred Stock, Series A, 5.50% Convertible Preferred Stock, Series B, $45,000 Cumulative Redeemable Preferred Stock, Series Z and 9.25% Preferred Stock, Series D as to dividends and distributions of assets. 8. Consolidation, Merger, etc. (a) In the event that the Corporation shall consummate any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Corporation) that constitutes "qualifying employer securities" with respect to a holder of Series C Preferred Stock within the meaning of Section 409(1) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the Series C Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be assumed by and shall become preferred stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and relative, 35 participating, optional or other special rights (including the redemption rights provided by paragraph 3 of this Section L), and the qualifications, limitations or restrictions thereon, that the Series C Preferred Stock had immediately prior to such transaction, except that after such transaction each share of Series C Preferred Stock shall be convertible, otherwise on the terms and conditions provided by paragraph 4 of this Section L, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such Series C Preferred Stock could have been converted immediately prior to such transaction; provided, however, that if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the Series C Preferred Stock, then the Series C Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such Series C Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election to receive any kind or amount of stock, securities, cash or other property (other than such qualifying employer securities and a cash payment, if applicable, in lieu of fractional shares) receivable upon such transaction (provided that, if the kind or amount of qualifying employer securities receivable upon such transaction is not the same for each non-electing share, then the kind and amount so receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by the plurality of the non-electing shares). The rights of the Series C Preferred Stock as preferred stock of such successor or resulting corporation shall successively be subject to adjustments pursuant to paragraphs 4 and 9 of this Section L after any such transaction as nearly equivalent as practicable to the adjustment provided for by such paragraph prior to such transaction. The Corporation shall not consummate any such merger, consolidation or similar transaction unless all then outstanding Series C Preferred Stock shall be assumed and authorized by the successor or resulting corporation as aforesaid. (b) In the event that the Corporation shall consummate any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying 36 employer securities (as referred to in paragraph 8(a) of this Section L) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of Series C Preferred Stock shall, without any action on the part of the Corporation or any holder thereof (but subject to paragraph 8(c) of this Section L), be automatically converted by virtue of such merger, consolidation or similar transaction immediately prior to such consummation into the number of shares of Common Stock into which such Series C Preferred Stock could have been converted at such time so that each share of Series C Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of Series C Preferred Stock could have been converted immediately prior to such transaction; provided, however, that if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holder of the Series C Preferred Stock, then the Series C Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such Series C Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction (provided that, if the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares). (c) In the event the Corporation shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph 8(b) of this Section L, then the Corporation shall as soon as practicable thereafter (and in any event at least ten business days before consummation of such transaction) give notice of such agreement and the material terms thereof to each holder of Series C Preferred Stock and each such holder shall have the right to elect, by written notice to the Corporation, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Corporation or the successor of the Corporation, in redemption of such Series C Preferred Stock, a 37 cash payment equal to the following redemption prices per share, plus, in each case, accrued and unpaid dividends thereon to the date fixed for redemption. If redeemed during the twelve-month period beginning January 1, Year Price ---- ----- 1994 . . . . $ 55.52 1995 . . . . $ 54.95 1996 . . . . $ 54.38 1997 . . . . $ 53.82 and $53.25 if redeemed on or after January 1, 1998. No such notice of redemption shall be effective unless given to the Corporation prior to the close of business on the fifth business day prior to consummation of such transaction, unless the Corporation or the successor of the Corporation shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Corporation prior to the close of business on the fifth business day prior to consummation of such transaction. 9. Anti-dilution Adjustments. (a) In the event the Corporation shall, at any time or from time to time while any of the Series C Preferred Stock is outstanding, (i) pay a dividend or make a distribution in respect of the Common Stock in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, in each case whether by reclassification of shares, recapitalization of the Corporation (including a recapitalization effected by a merger or consolidation to which paragraph 8 of this Section L does not apply) or otherwise, the Conversion Price in effect immediately prior to such action shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately before such event, and the denominator of which is the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this paragraph 9(a) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of stockholders entitled to receive such dividend or distribution (on a retroactive basis) and in the case of a subdivision or combination shall become effective immediately as of the effective date thereof. (b) In the event that the Corporation shall, at any time or from time to time while any of the Series C Preferred Stock is outstanding, issue to holders of shares of Common Stock as a dividend or distribution, including by way of a reclassification of shares or a recapitalization of the 38 Corporation, any right or warrant to purchase shares of Common Stock (but not including as such a right or warrant any security convertible into or exchangeable for shares of Common Stock) at a purchase price per share less than the Fair Market Value (as hereinafter defined) of a share of Common Stock on the date of issuance of such right or warrant, then, subject to the provisions of paragraphs 9(e) and 9(f) of this Section L, the Conversion Price shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance for the maximum aggregate consideration payable upon exercise in full of all such rights or warrants, and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock that could be acquired upon exercise in full of all such rights and warrants. (c) In the event the Corporation shall, at any time or from time to time while any of the shares of Series C Preferred Stock are outstanding, issue, sell or exchange shares of Common Stock (other than pursuant to any right or warrant to purchase or acquire shares of Common Stock (including as such a right or warrant any security convertible into or exchangeable for shares of Common Stock) and other than pursuant to any employee or director incentive or benefit plan or arrangement, including any employment, severance or consulting agreement, of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted) for a consideration having a Fair Market Value, on the date of such issuance, sale or exchange, less than the Fair Market Value of such shares on the date of issuance, sale or exchange, then, subject to the provisions of paragraphs 9(e) and 9(f) of this Section L, the Conversion Price shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which shall be the sum of (i) the Fair Market Value of all the shares of Common Stock outstanding on the day immediately preceding the first public announcement of such issuance, sale or exchange plus (ii) the Fair Market Value of the consideration received by the Corporation in respect of such issuance, sale or exchange of shares of Common Stock, and the denominator of which shall be the product of (x) the Fair Market Value of a share of Common Stock on the day immediately preceding the first public announcement of such issuance, sale or exchange multiplied by (y) the sum of the number of shares of Common Stock outstanding on such day plus the number of shares of Common Stock so issued, sold or exchanged by the Corporation. In the event the Corporation shall, at any time or from time to time while any Series C Preferred Stock is outstanding, issue, sell or exchange any 39 right or warrant to purchase or acquire shares of Common Stock (including as such a right or warrant any security convertible into or exchangeable for shares of Common Stock), other than any such issuance to holders of shares of Common Stock as a dividend or distribution (including by way of a reclassification of shares or a recapitalization of the Corporation) and other than pursuant to any employee or director incentive or benefit plan or arrangement (including any employment, severance or consulting agreement) of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted, for a consideration having a Fair Market Value, on the date of such issuance, sale or exchange, less than the Non-Dilutive Amount (as hereinafter defined), then, subject to the provisions of paragraphs 9(e) and 9(f) of this Section L, the Conversion Price shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which shall be the sum of (i) the Fair Market Value of all the shares of Common Stock outstanding on the day immediately preceding the first public announcement of such issuance, sale or exchange plus (ii) the Fair Market Value of the consideration received by the Corporation in respect of such issuance, sale or exchange of such right or warrant plus (iii) the Fair Market Value at the time of such issuance of the consideration which the Corporation would receive upon exercise in full of all such rights or warrants, and the denominator of which shall be the product of (x) the Fair Market Value of a share of Common Stock on the day immediately preceding the first public announcement of such issuance, sale or exchange multiplied by (y) the sum of the number of shares of Common Stock outstanding on such day plus the maximum number of shares of Common Stock which could be acquired pursuant to such right or warrant at the time of the issuance, sale or exchange of such right or warrant (assuming shares of Common Stock could be acquired pursuant to such right or warrant at such time). (d) In the event the Corporation shall, at any time or from time to time while any of the Series C Preferred Stock is outstanding, make an Extraordinary Distribution (as hereinafter defined) in respect of the Common Stock, whether by dividend, distribution, reclassification of shares or recapitalization of the Corporation (including a recapitalization or reclassification effected by a merger or consolidation to which paragraph 8 of this Section L does not apply) or effect a Pro Rata Repurchase (as hereinafter defined) of Common Stock, the Conversion Price in effect immediately prior to such Extraordinary Distribution or Pro Rata Repurchase shall, subject to paragraphs 9(e) and 9(f) of this Section L, be adjusted by multiplying such Conversion Price by a fraction, the numerator of which is the difference between (i) the product of (x) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase multiplied by (y) the Fair Market Value of a share 40 of Common Stock on the day before the ex-dividend date with respect to an Extraordinary Distribution which is paid in cash and on the distribution date with respect to an Extraordinary Distribution which is paid other than in cash, or on the applicable expiration date (including all extensions thereof) of any tender offer which is a Pro Rata Repurchase, or on the date of purchase with respect to any Pro Rata Repurchase which is not a tender offer, as the case may be, and (ii) the Fair Market Value of the Extraordinary Distribution minus the aggregate amount of regularly scheduled quarterly dividends declared by the Board of Directors and paid by the Corporation in the twelve months immediately preceding such Extraordinary Distribution or the aggregate purchase price of the Pro Rata Repurchase, as the case may be, and the denominator of which shall be the product of (a) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase minus, in the case of a Pro Rata Repurchase, the number of shares of Common Stock repurchased by the Corporation multiplied by (b) the Fair Market Value of a share of Common Stock on the day before the ex-dividend date with respect to an Extraordinary Distribution which is paid in cash and on the distribution date with respect to an Extraordinary Distribution which is paid other than in cash, or on the applicable expiration date (including all extensions thereof) of any tender offer which is a Pro Rata Repurchase or on the date of purchase with respect to any Pro Rata Repurchase which is not a tender offer, as the case may be. The Corporation shall send each holder of Series C Preferred Stock (i) notice of its intent to make any Extraordinary Distribution and (ii) notice of any offer by the Corporation to make a Pro Rata Repurchase, in each case at the same time as, or as soon as practicable after, such offer is first communicated (including by announcement of a record date in accordance with the rules of any stock exchange on which the Common Stock is listed or admitted to trading) to holders of Common Stock. Such notice shall indicate the intended record date and the amount and nature of such dividend or distribution, or the number of shares subject to such offer for a Pro Rata Repurchase and the purchase price payable by the Corporation pursuant to such offer, as well as the Conversion Price and the number of shares of Common Stock into which a share of Series C Preferred Stock may be converted at such time. (e) Notwithstanding any other provisions of this paragraph 9, the Corporation shall not be required to make any adjustment to the Conversion Price unless such adjustment would require an increase or decrease of at least one percent (1%) in the Conversion Price. Any lesser adjustment shall be carried forward and shall be made no later than the time of, and together with, the next subsequent adjustment which, together with any adjustment or adjustments so carried forward, shall 41 amount to an increase or decrease of at least one percent (1%) in the Conversion Price. (f) If the Corporation shall make any dividend or distribution on the Common Stock or issue any Common Stock, other capital stock or other security of the Corporation or any rights or warrants to purchase or acquire any such security, which transaction does not result in an adjustment to the Conversion Price pursuant to the foregoing provisions of this paragraph 9, the Board of Directors shall consider whether such action is of such a nature that an adjustment to the Conversion Price should equitably be made in respect of such transaction. If in such case the Board of Directors determines that an adjustment to the Conversion Price should be made, an adjustment shall be made effective as of such date, as determined by the Board of Directors. The determination of the Board of Directors as to whether an adjustment to the Conversion Price should be made pursuant to the foregoing provisions of this paragraph 9(f), and, if so, as to what adjustment should be made and when, shall be final and binding on the Corporation and all stockholders of the Corporation. The Corporation shall be entitled to make such additional adjustments in the Conversion Price, in addition to those required by the foregoing provisions of this paragraph 9, as shall be necessary in order that any dividend or distribution in shares of capital stock of the Corporation, subdivision, reclassification or combination of shares of stock of the Corporation or any recapitalization of the Corporation shall not be taxable to the holders of the Common Stock. (g) For purposes of this paragraph 9 the following definitions shall apply: "Business Day" shall mean each day that is not a Saturday, Sunday or a day on which state or federally chartered banking institutions in New York, New York are not required to be open. "Current Market Price" of publicly traded shares of Common Stock or any other class of capital stock or other security of the Corporation or any other issuer for any day shall mean the last reported sales price, regular way, or, in the event that no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange Composite Tape or, if such security is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which such security is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the NASDAQ National Market System or, if such security is not quoted on such National Market System, the average of the closing bid and 42 asked prices on each such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in such security selected for such purpose by the Board of Directors or a committee thereof, in each case, on each trading day during the Adjustment Period. "Adjustment Period" shall mean the period of five consecutive trading days preceding, and including, the date as of which the Fair Market Value of a security is to be determined. The "Fair Market Value" of any security which is not publicly traded or of any other property shall mean the fair value thereof as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board of Directors or a committee thereof, or, if no such investment banking or appraisal firm is in the good faith judgment of the Board of Directors or such committee available to make such determination, as determined in good faith by the Board of Directors or such committee. "Extraordinary Distribution" shall mean any dividend or other distribution to holders of Common Stock (effected while any shares of the Series C Preferred Stock are outstanding) (i) of cash, where the aggregate amount of such cash dividend or distribution together with the amount of all cash dividends and distributions made during the preceding period of 12 months, when combined with the aggregate amount of all Pro Rata Repurchases (for this purpose, including only that portion of the aggregate purchase price of such Pro Rata Repurchases which is in excess of the Fair Market Value of the Common Stock repurchased as determined on the applicable expiration date (including all extensions thereof) of any tender offer or exchange offer which is a Pro Rata Repurchase, or the date of purchase with respect to any other Pro Rata Repurchase which is not a tender offer or exchange offer made during such period), exceeds twelve and one-half percent (12 1/2%) of the aggregate Fair Market Value of all shares of Common Stock outstanding on the day before the ex-dividend date with respect to such Extraordinary Distribution which is paid in cash and on the distribution date with respect to an Extraordinary Distribution which is paid other than in cash, and/or (ii) of any shares of capital stock of the Corporation (other than shares of Common Stock), other securities of the Corporation (other than securities of the type referred to in paragraphs 9(b) or 9(c) of this Section L), evidences of indebtedness of the Corporation or any other person or any other property (including shares of any subsidiary of the Corporation) or any combination thereof. The Fair Market Value of an Extraordinary Distribution for purposes of paragraph 9(d) of this Section L 43 shall be equal to the sum of the Fair Market Value of such Extraordinary Distribution plus the amount of any cash dividends which are not Extraordinary Distributions made during such 12-month period and not previously included in the calculation of an adjustment pursuant to paragraph 9(d) of this Section L. "Fair Market Value" shall mean, as to shares of Common Stock or any other class of capital stock or securities of the Corporation or any other issuer which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period. "Non-Dilutive Amount" in respect of an issuance, sale or exchange by the Corporation of any right or warrant to purchase or acquire shares of Common Stock (including any security convertible into or exchangeable for shares of Common Stock) shall mean the difference between (i) the product of the Fair Market Value of a share of Common Stock on the day preceding the first public announcement of such issuance, sale or exchange multiplied by the maximum number of shares of Common Stock which could be acquired on such date upon the exercise in full of such rights and warrants (including upon the conversion or exchange of all such convertible or exchangeable securities), whether or not exercisable (or convertible or exchangeable) at such date, and (ii) the aggregate amount payable pursuant to such right or warrant to purchase or acquire such maximum number of shares of Common Stock; provided, however, that in no event shall the Non-Dilutive Amount be less than zero. For purposes of the foregoing sentence, in the case of a security convertible into or exchangeable for shares of Common Stock, the amount payable pursuant to a right or warrant to purchase or acquire shares of Common Stock shall be the Fair Market Value of such security on the date of the issuance, sale or exchange of such security by the Corporation. "Pro Rata Repurchase" shall mean any purchase of shares of Common Stock by the Corporation or any subsidiary thereof, whether for cash, shares of capital stock of the Corporation, other securities of the Corporation, evidences of indebtedness of the Corporation or any other person or any other property (including shares of a subsidiary of the Corporation), or any combination thereof, effected while any of the shares of Series C Preferred Stock are outstanding, pursuant to any tender offer or exchange offer subject to Section 13(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision of law, or pursuant to any other offer available to substantially all holders of Common Stock; provided, however, that no purchases of shares by the Corporation or any subsidiary thereof made in open market transactions shall be deemed a Pro Rata Repurchase. For 44 purposes of this paragraph 9(g), shares shall be deemed to have been purchased by the Corporation or any subsidiary thereof "in open market transactions" if they have been purchased substantially in accordance with the requirements of Rule 10b-18 as in effect under the Exchange Act, on the date Series C Preferred Stock is initially issued by the Corporation or on such other terms and conditions as the Board of Directors or a committee thereof shall have determined are reasonably designed to prevent such purchases from having a material effect on the trading market for the Common Stock. (h) Whenever an adjustment to the Conversion Price and the related voting rights of the Series C Preferred Stock is required pursuant to this paragraph 9, the Corporation shall forthwith place on file with the transfer agent for the Common Stock and with the Secretary of the Corporation, a statement signed by two officers of the Corporation stating the adjusted Conversion Price determined as provided herein and the resulting conversion ratio, and the voting rights (as appropriately adjusted), of the Series C Preferred Stock. Such statement shall set forth in reasonable detail such facts as shall be necessary to show the reason and the manner of computing such adjustment, including any determination of Fair Market Value involved in such computation. Promptly after each adjustment to the Conversion Price and the related voting rights of the Series C Preferred Stock, the Corporation shall mail a notice thereof and of the then prevailing conversion ratio to each holder of Series C Preferred Stock. M. 9.25% PREFERRED STOCK, SERIES D 1. Designation; Issuance and Transfer. There shall be a series of Preferred Stock, the designation of which shall be "9.25% Preferred Stock, Series D" (hereinafter called the "Series D Preferred Stock") and the number of authorized shares constituting the Series D Preferred Stock shall be 7,500,000. Shares of the Series D Preferred Stock shall have a stated value of $50.00 per share. The number of authorized shares of the Series D Preferred Stock may be reduced by resolution duly adopted by the Board of Directors, or by a duly authorized committee thereof, and by the filing, pursuant to the provisions of the General Corporation Law of the State of Delaware, of a certificate of amendment to the Certificate of Incorporation, as theretofore amended, stating that such reduction has been so authorized, but the number of authorized shares of the Series D Preferred Stock shall not be increased. 2. Dividend Rate. (a) Dividends on each share of the Series D Preferred Stock shall accrue from the date of its original issue (for purposes of this paragraph 2(a), the date of original issue of the Series D Preferred Stock shall be the date of commencement of the full quarterly period ending April 1, 1994) at a rate of 9.25% per annum per share (the "Rate") applied to the stated value of each such share. Such dividends 45 shall be cumulative from the date of original issue and shall be payable, when and as declared by the Board of Directors, out of assets legally available for such purpose, on January 1, April 1, July 1 and October 1 of each year, commencing April 1, 1994 (each such date being hereinafter individually a "Dividend Payment Date" and collectively the "Dividend Payment Dates"), except that if such date is a Sunday or legal holiday then such dividend shall be payable on the first immediately succeeding calendar day which is not a Sunday or legal holiday. Each such dividend shall be paid to the holders of record of shares of the Series D Preferred Stock as they appear on the books of the Corporation on such record date, not exceeding 45 days preceding the payment date thereof, as shall be fixed by the Board of Directors. Dividends in arrears may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such record date, not exceeding 45 days preceding the payment date thereof, as may be fixed by the Board of Directors. (b) Except as hereinafter provided, no dividends shall be declared or paid or set apart for payment on Preferred Stock of any other series ranking on a parity with the Series D Preferred Stock as to dividends and upon liquidation for any period unless full cumulative dividends have been or contemporaneously are declared and paid on the Series D Preferred Stock through the latest Dividend Payment Date. When dividends are not paid in full, as aforesaid, upon the shares of the Series D Preferred Stock and any such other series of Preferred Stock, all dividends declared upon shares of the Series D Preferred Stock and such other series of Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on the Series D Preferred Stock and such other series of Preferred Stock shall in all cases bear to each other the same ratio that accrued dividends per share on the shares of the Series D Preferred Stock and such other series of Preferred Stock bear to each other. Holders of shares of the Series D Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends, as herein provided, on the Series D Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series D Preferred Stock which may be in arrears. (c) So long as any shares of the Series D Preferred Stock are outstanding, no dividend (other than a dividend in Common Stock or in any other stock of the Corporation ranking junior to the Series D Preferred Stock as to dividends and upon liquidation and other than as provided in paragraph 2(b) of this Section M) shall be declared or paid or set aside for payment, and no other distribution shall be declared or made upon the Common Stock or upon any other stock of the 46 Corporation ranking junior to or on a parity with the Series D Preferred Stock as to dividends or upon liquidation, nor shall any Common Stock nor any other stock of the Corporation ranking junior to or on a parity with the Series D Preferred Stock as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation (except by conversion into or exchange for stock of the Corporation ranking junior to the Series D Preferred Stock as to dividends and upon liquidation) unless, in each case, the full cumulative dividends on all outstanding shares of the Series D Preferred Stock shall have been paid or contemporaneously are declared and paid through the latest Dividend Payment Date. (d) Dividends payable on each share of Series D Preferred Stock for any full quarterly period shall be computed by dividing the Rate by four and multiplying the quotient by the stated value of such share (for purposes of this paragraph 2(d), the Series D Preferred Stock shall be deemed to have been outstanding for the full quarterly period ending April 1, 1994). Subject to the preceding sentence, dividends payable on the Series D Preferred Stock for any period less than a full quarterly period shall be computed on the basis of a 360-day year of 30-day months. 3. Redemption. (a) The shares of Series D Preferred Stock shall not be redeemable before July 1, 1997. On or after July 1, 1997, the Corporation, at its sole option, may redeem the Series D Preferred Stock as a whole or in part at a price of $50.00 per share plus accrued and unpaid dividends thereon to the date fixed for redemption. (b) In the event that fewer than all the outstanding shares of the Series D Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors or by any other method as may be determined by the Board of Directors in its sole discretion to be equitable, except that, notwithstanding such method of determination, the Corporation may redeem all shares of the Series D Preferred Stock owned by all stockholders of a number of shares not to exceed 100 as may be specified by the Corporation. (c) In the event the Corporation shall redeem shares of the Series D Preferred Stock, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the books of the Corporation. Each such notice shall state: (i) the redemption 47 date; (ii) the number of shares of the Series D Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date. (d) Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Corporation in providing money for the payment of the redemption price of the shares called for redemption) dividends on the shares of the Series D Preferred Stock so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the Corporation (except the right to receive from the Corporation the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the redemption price aforesaid. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without cost to the holder thereof. (e) Any shares of the Series D Preferred Stock which shall at any time have been redeemed, repurchased or otherwise acquired by the Corporation shall, upon such redemption, repurchase or other acquisition, be retired and thereafter have the status of authorized but unissued shares of Preferred Stock, without designation as to series until such shares are once more designated as part of a particular series by the Board of Directors or a duly authorized committee thereof. (f) Notwithstanding the foregoing provisions of this paragraph 3, unless the full cumulative dividends on all outstanding shares of the Series D Preferred Stock shall have been paid or contemporaneously are declared and paid through the last Dividend Payment Date, no shares of the Series D Preferred Stock shall be redeemed unless all outstanding shares of the Series D Preferred Stock are simultaneously redeemed, and the Corporation shall not purchase or otherwise acquire any shares of the Series D Preferred Stock; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of the Series D Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of the Series D Preferred Stock. 48 (g) Any redemption, repurchase or other acquisition by the Corporation of shares of Series D Preferred Stock may, to the extent required to be made out of funds legally available for such purpose, be made to the extent of any unreserved and unrestricted capital surplus attributable to such shares in addition to any other surplus, profits, earnings or other funds or amounts legally available for such purpose. 4. Voting. The shares of the Series D Preferred Stock shall not have any voting powers, either general or special, except that: (a) If on the date used to determine stockholders of record for any annual meeting of stockholders at which directors are to be elected, a Default in Preferred Dividends (as hereinafter defined) on the Series D Preferred Stock shall exist, the number of directors constituting the Board of Directors shall be increased by two, and the holders of the Series D Preferred Stock and all other series of Preferred Stock ranking on a parity with the Series D Preferred Stock as to dividends and upon liquidation and upon which like voting rights have been conferred and are exercisable (whether or not the holders of such other series of Preferred Stock would be entitled to vote for the election of directors if such Default in Preferred Dividends did not exist) shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two directors of the Corporation to fill such newly created directorships. Each director elected by the holders of shares of the Preferred Stock (herein called a "Preferred Director") as aforesaid shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a Default in Preferred Dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding shares of the Series D Preferred Stock and all other series of Preferred Stock ranking on a parity with the Series D Preferred Stock as to dividends and upon liquidation, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of such Preferred Stock, called for the purpose. So long as a Default in Preferred Dividends on the Preferred Stock shall exist (i) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (ii)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding shares of Preferred Stock entitled to vote with respect to the removal of such Preferred Director, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by 49 the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and no Default in Preferred Dividends shall exist, the number of directors constituting the Board of Directors shall be reduced by two. For the purposes hereof, a "Default in Preferred Dividends" on any series of Preferred Stock shall be deemed to have occurred whenever the amount of accrued and unpaid dividends upon such series of the Preferred Stock shall be equivalent to six full quarterly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all shares of the Preferred Stock of such series then outstanding shall have been paid through the last Dividend Payment Date; (b) Whether or not the General Corporation Law of the State of Delaware so provides, the affirmative vote of the holders of at least two-thirds of the outstanding shares of the Series D Preferred Stock and all other series of Preferred Stock ranking on a parity with the Series D Preferred Stock as to dividends and upon liquidation, voting together as a single class without regard to series, shall be required for the Corporation to create a new class or increase an existing class of stock having rights in respect of the payment of dividends or in liquidation prior to the Series D Preferred Stock or any other series of Preferred Stock ranking on a parity with the Series D Preferred Stock as to dividends and upon liquidation, or to change the terms, limitations or relative rights or preferences of the Series D Preferred Stock or any other series of Preferred Stock ranking on a parity with the Series D Preferred Stock as to dividends and upon liquidation, either directly or by increasing the relative rights of the shares of another class; and (c) Whether or not the General Corporation Law of the State of Delaware so provides, the affirmative vote of the holders of at least two-thirds of the outstanding shares of the Series D Preferred Stock voting together as a single class without regard to series with the holders of any one or more other series of Preferred Stock ranking on a parity with the Series D Preferred Stock as to dividends and upon liquidation and similarly affected shall be required for authorizing, effecting, or validating the amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation or of any Certificate of Amendment thereof or any similar document (including any Certificate of Amendment or any similar document relating to any series of the Preferred Stock) which would adversely affect the preferences, rights or privileges of the Series D Preferred Stock. (d) Whether or not the General Corporation Law of the State of Delaware so provides, the affirmative vote of the 50 holders of at least two-thirds of the outstanding shares of the Series D Preferred Stock and all other series of Preferred Stock ranking on a parity with the Series D Preferred Stock as to dividends and upon liquidation and upon which like voting rights have been conferred, voting together as a single class without regard to series, shall be required for the Corporation to issue any authorized shares of preferred stock of the Corporation ranking prior to the Series D Preferred Stock either as to dividends or upon liquidation. 5. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, the holders of the shares of the Series D Preferred Stock shall be entitled to receive and to be paid out of the assets of the Corporation available for distribution to stockholders, before any payment or distribution shall be made on the Common Stock or on any other class of stock ranking junior to the Preferred Stock upon liquidation, the amount of $50.00 per share, plus accrued and unpaid dividends thereon to the date of final distribution. (b) Neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all the property and assets of the Corporation nor the merger or consolidation of the Corporation into or with any other corporation or the merger or consolidation of any other corporation into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this paragraph 5. (c) After the payment to the holders of the shares of the Series D Preferred Stock of the full preferential amounts provided for in this paragraph 5, the holders of the Series D Preferred Stock as such shall have no right or claim to any of the remaining assets of the Corporation. (d) In the event the assets of the Corporation available for distribution to the holders of shares of the Series D Preferred Stock upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph 5(a) of this Section M, no such distribution shall be made on account of any shares of any other series of the Preferred Stock or any other class of stock of the Corporation ranking on a parity with the shares of the Series D Preferred Stock upon such dissolution, liquidation or winding up unless proportionate distributive amounts shall be paid on account of the shares of the Series D Preferred Stock, ratably, in proportion to the full distributable amounts to which holders of all such parity shares are respectively entitled upon such dissolution, liquidation or winding up. 51 6. Ranking. For purposes of the foregoing paragraphs 1 through 5 of this Section M, any stock of any class or classes of the Corporation shall be deemed to rank: (a) prior to the shares of the Series D Preferred Stock, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of the Series D Preferred Stock; (b) on a parity with shares of the Series D Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, be different from those of the Series D Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of the Series D Preferred Stock; and (c) junior to shares of the Series D Preferred Stock, either as to dividends or upon liquidation, if such class or classes shall be Common Stock or if the holders of shares of the Series D Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of such class or classes. Notwithstanding any other provision of this Section M or of Section L, the Series D Preferred Stock shall rank on a parity (within the meaning of paragraph 6(b) of this Section M) with the Corporation's 8.125% Cumulative Preferred Stock, Series A, 5.50% Convertible Preferred Stock, Series B, $45,000 Cumulative Redeemable Preferred Stock, Series Z and Series C Preferred Stock as to dividends and distributions of assets. N. $45,000 CUMULATIVE REDEEMABLE PREFERRED STOCK, SERIES Z 1. Designation and Number of Shares. The designation of such series shall be $45,000 Cumulative Redeemable Preferred Stock, Series Z (the "Series Z Preferred Stock"), and the number of shares constituting such series shall be 4,444. Shares of the Series Z Preferred Stock shall have a par value of $1.00 per share and the amount of $45,000 shall be the "liquidation value" of each share of the Series Z Preferred Stock. The number of authorized shares of Series Z Preferred Stock may be reduced (but 52 not below the number of shares thereof then outstanding) by further resolution duly adopted by the Board of Directors or the Executive Committee and by the filing of a certificate pursuant to the provisions of the General Corporation Law of the State of Delaware stating that such reduction has been so authorized, but the number of authorized shares of Series Z Preferred Stock shall not be increased. 2. Dividends. (a) Dividends on each share of Series Z Preferred Stock shall be payable with respect to each quarter ending on February 15, May 15, August 15 and November 15 of each year ("Quarterly Dividend Period"), in arrears, payable commencing on March 1, 1993 and on each June 1, September 1, December 1 and March 1 thereafter ("Dividend Payment Dates") with respect to the quarter then ended, at a rate per annum equal to the Applicable Rate (as defined in paragraph (b) of this Section 2) in effect during the Quarterly Dividend Period to which such dividend relates, multiplied by the liquidation value ($45,000) of each such share. Such dividends shall be cumulative from December 16, 1992 and shall be payable, when and as declared by the Board of Directors, out of assets legally available for such purpose, on each Dividend Payment Date as set forth above. Each such dividend shall be paid to the holders of record of shares of the Series Z Preferred Stock as they appear on the books of the Corporation on such record date, not exceeding 30 days preceding the payment date thereof, as shall be fixed in advance by the Board of Directors of the Corporation. Dividends in arrears for any past Quarterly Dividend Periods may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not exceeding 45 days preceding the payment date thereof, as may be fixed by the Board of Directors of the Corporation. (b) Except as provided below in this paragraph, the "Applicable Rate" for any Quarterly Dividend Period shall be 85% of the daily average of the Dealer Offer Rates for 30-day Commercial Paper placed by dealers whose firm's bond ratings are AA or equivalent, as reported in the Federal Reserve Board statistical release designated H-15 and converted to a 360-day yield basis and rounded to two decimal places. The daily average shall be calculated by the treasurer of the Corporation, whose calculation shall be final and conclusive, by dividing (i) the sum of (A) for each day in the Quarterly Dividend Period for which such rate is so published, the Dealer Offered Rate for such date, and (B) for each day in the Quarterly Dividend Period for which such rate is not so published, the Dealer Offered Rate for the most recent date for which such rate was so published, by (ii) the number of days in the Quarterly Dividend Period. Dividends payable on the Series Z Preferred Stock for any period shall be computed on the basis of the actual number of days elapsed in the period for which such dividends are payable (whether a full or partial 53 Quarterly Dividend Period) and based upon a year of 360 days. If the Corporation determines in good faith that for any reason the Applicable Rate cannot be determined for any Quarterly Dividend Period, then the Applicable Rate in effect for the preceding Quarterly Dividend Period shall be continued for such Quarterly Dividend Period. 3. Redemption. (a) The Corporation, at its sole option, out of funds legally available therefor, may redeem shares of the Series Z Preferred Stock, as a whole or in part, at any time or from time to time, at a redemption price of $45,000 per share, plus, in each case, an amount equal to accrued and unpaid dividends thereon to the date fixed for redemption (the "Redemption Price"). (b) In the event that fewer than all the outstanding shares of the Series Z Preferred Stock are to be redeemed, the shares to be redeemed from each holder of record shall be determined by lot or pro rata as may be determined by the Board of Directors or by any other method as may be determined by the Board of Directors in its sole discretion to be equitable. (c) In the event the Corporation shall redeem shares of the Series Z Preferred Stock, written notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder's address as the same appears on the books of the Corporation. Each such notice shall state: (i) the redemption date; (ii) the number of shares of the Series Z Preferred Stock to be redeemed and, in the case of a partial redemption pursuant to Section 3(b) hereof, the identification (by the number of the certificate or otherwise) and the number of shares of Series Z Preferred Stock evidenced thereby to be redeemed; (iii) the Redemption Price; (iv) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price; and (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date. (d) If notice of redemption shall have been duly given, and if, on or before the redemption date specified therein, all funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares called for redemption, so as to be and continue to be available therefor, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, all shares so called for redemption shall no longer be deemed outstanding on and after such redemption date, and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right 54 of the holders thereof to receive the amount payable on redemption thereof, without interest. If such notice of redemption shall have been duly given or if the Corporation shall have given to the bank or trust company hereinafter referred to irrevocable authorization promptly to give such notice, and if on or before the redemption date specified therein the funds necessary for such redemption shall have been deposited by the Corporation with such bank or trust company in trust for the pro rata benefit of the holders of the shares called for redemption, then, notwithstanding that any certificate for shares so called for redemption shall not have been surrendered for cancellation, from and after the time of such deposit, all shares so called for redemption shall no longer be deemed to be outstanding and all rights with respect to such shares shall forthwith cease and terminate, except only the right of the holders thereof to receive from such bank or trust company at any time after the time of such deposit the funds so deposited, without interest. The aforesaid bank or trust company shall be a bank or trust company organized and in good standing under the laws of the United States of America or of the State of New York, doing business in the Borough of Manhattan, The City of New York, having capital surplus and undivided profits aggregating at least $50,000,000 according to its latest published statement of condition, and shall be identified in the notice of redemption. Any interest accrued on such funds shall be for the benefit of the Corporation. Any funds so set aside or deposited, as the case may be, and unclaimed at the end of one year from such redemption date shall, to the extent permitted by law, be released or repaid to the Corporation, after which repayment the holders of the shares so called for redemption shall look only to the Corporation for payment thereof. (e) Any shares of the Series Z Preferred Stock that shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued shares of Preferred Stock, without designation as to series until such shares are once again designated as part of a particular series by the Board of Directors. (f) Notwithstanding the foregoing provisions of this Section 3, unless the full cumulative dividends on all outstanding shares of the Series Z Preferred Stock shall have been paid or contemporaneously are declared and paid for all past Quarterly Dividend Periods, no shares of the Series Z Preferred Stock shall be redeemed unless all outstanding shares of the Series Z Preferred Stock are simultaneously redeemed, and neither the Corporation nor a subsidiary of the Corporation shall purchase or otherwise acquire for valuable consideration any shares of the Series Z Preferred Stock, provided, however, that the foregoing shall not prevent the purchase or 55 acquisition of shares of the Series Z Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all the outstanding shares of the Series Z Preferred Stock and mailed to the holders of record of all such outstanding shares at such holders' addresses as the same appear on the books of the Corporation and provided further that if some, but less than all, of the shares of the Series Z Preferred Stock are to be purchased or otherwise acquired pursuant to such purchase or exchange offer and the number of shares so tendered exceeds the number of shares so to be purchased or otherwise acquired by the Corporation, the shares of the Series Z Preferred Stock so tendered will be purchased or otherwise acquired by the Corporation on a pro rata basis according to the number of such shares duly tendered by each holder so tendering shares of the Series Z Preferred Stock for such purchase or exchange. (g) If all the outstanding shares of the Series Z Preferred Stock shall not have been redeemed on or prior to September 15, 1998, each holder of the shares of the Series Z Preferred Stock remaining outstanding shall have the right to require that the Corporation repurchase such holder's shares, in whole, at a purchase price (the "Purchase Price") in cash equal to 100% of the liquidation value of such share, together with all accrued and unpaid dividends on such shares to the date of such repurchase (the "Repurchase Date"), in accordance with the procedures set forth below. Within 30 days prior to September 15, 1998, the Corporation shall send by first-class mail, postage prepaid, to each holder of the shares of the Series Z Preferred Stock, at its address as the same appears on the books of the Corporation, a notice stating the Repurchase Date, which shall be no earlier than 45 days nor later than 60 days from the date such notice is mailed, and the instructions a holder must follow in order to have his shares of the Series Z Preferred Stock repurchased in accordance with this Section 3. Holders electing to have shares of the Series Z Preferred Stock repurchased will be required to surrender the certificate or certificates representing such shares to the Corporation at the address specified in the notice at least five business days prior to the Repurchase Date. 4. Conversion or Exchange; Sinking Fund. The holders of shares of the Series Z Preferred Stock shall not have any rights herein to convert such shares into, or exchange such shares for, shares of any other class or classes or of any other series of any class or classes of capital stock of the Corporation; nor shall the holders of shares of the Series Z Preferred Stock be entitled to the benefits of a sinking fund in respect of their shares of the Series Z Preferred Stock. 56 5. Voting. (a) Except as otherwise provided in this Section 5 or as otherwise required by law, the Series Z Preferred Stock shall have no voting rights. (b) If six quarterly dividends (whether or not consecutive) payable on shares of Series Z Preferred Stock are in arrears at the time of the record date to determine stockholders for any annual meeting of stockholders of the Corporation, the number of directors of the Corporation shall be increased by two, and the holders of shares of Series Z Preferred Stock (voting separately as a class with the holders of shares of any one or more other series of Preferred Stock upon which like voting rights have been conferred and are exercisable) shall be entitled at such annual meeting of stockholders to elect two directors of the Corporation, with the remaining directors of the Corporation to be elected by the holders of shares of any other class or classes or series of stock entitled to vote therefor. In any such election, holders of shares of Series Z Preferred Stock shall have one vote for each share held. At all meetings of stockholders at which holders of Preferred Stock shall be entitled to vote for Directors as a single class, the holders of a majority of the outstanding shares of all classes and series of capital stock of the Corporation having the right to vote as a single class shall be necessary to constitute a quorum, whether present in person or by proxy, for the election by such single class of its designated Directors. In any election of Directors by stockholders voting as a class, such Directors shall be elected by the vote of at least a plurality of shares held by such stockholders present or represented at the meeting. At any such meeting, the election of Directors by stockholders voting as a class shall be valid notwithstanding that a quorum of other stockholders voting as one or more classes may not be present or represented at such meeting. (c) Any director who has been elected by the holders of shares of Series Z Preferred Stock (voting separately as a class with the holders of shares of any one or more other series of Preferred Stock upon which like voting rights have been conferred and are exercisable) may be removed at any time, with or without cause, only by the affirmative vote of the holders of the shares at the time entitled to cast a majority of the votes entitled to be cast for the election of any such director at a special meeting of such holders called for that purpose, and any vacancy thereby created may be filled by the vote of such holders. If a vacancy occurs among the Directors elected by such stockholders voting as a class, other than by removal from office as set forth in the preceding sentence, such vacancy may be filled by the remaining Director so elected, or his or her successor then in office, and the 57 Director so elected to fill such vacancy shall serve until the next meeting of stockholders for the election of Directors. (d) The voting rights of the holders of Series Z Preferred Stock to elect Directors as set forth above shall continue until all dividend arrearages on the Series Z Preferred Stock have been paid or declared and set apart for payment. Upon the termination of such voting rights, the terms of office of all persons who may have been elected pursuant to such voting rights shall immediately terminate, and the number of directors of the Corporation shall be decreased by two. (e) Without the consent of the holders of shares entitled to cast at least two-thirds of the votes entitled to be cast by the holders of the total number of shares of Preferred Stock then outstanding, voting separately as a class without regard to series, with the holders of shares of Series Z Preferred Stock being entitled to cast one vote per share, the Corporation may not: (i) create any class of stock that shall have preference as to dividends or distributions of assets over the Series Z Preferred Stock; or (ii) alter or change the provisions of the Certificate of Incorporation (including any Certificate of Amendment or Certificate of Designation relating to the Series Z Preferred Stock) so as to adversely affect the powers, preferences or rights of the holders of shares of Series Z Preferred Stock; provided, however, that if such creation or such alteration or change would adversely affect the powers, preferences or rights of one or more, but not all, series of Preferred Stock at the time outstanding, such alteration or change shall require consent of the holders of shares entitled to cast at least two-thirds of the votes entitled to be cast by the holders of all of the shares of all such series so affected, voting as a class. 6. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up of the Corporation, the holders of the shares of the Series Z Preferred Stock shall be entitled to receive out of the assets of the Corporation available for distribution to stockholders, before any payment or distribution shall be made on the Common Stock or on any other class or series of stock ranking junior to shares of the Series Z Preferred Stock as to amounts distributable on dissolution, liquidation or winding up, $45,000 per share, plus an amount equal to all dividends (whether or not earned or declared) on such shares accrued and unpaid thereon to the date of final distribution. 58 (b) Neither the merger or consolidation of the Corporation into or with any other corporation nor the merger or consolidation of any other corporation into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, of the Corporation for the purpose of this Section 6. (c) After the payment to the holders of the shares of the Series Z Preferred Stock of the full preferential amounts provided for in this Section 6, the holders of the Series Z Preferred Stock as such shall have no right or claim to any of the remaining assets of the Corporation. (d) In the event the assets of the Corporation available for distribution to the holders of shares of the Series Z Preferred Stock upon any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to paragraph (a) of this Section 6, the holders of shares of the Series Z Preferred Stock and of any shares of Preferred Stock of any series or any other stock of the Corporation ranking, as to the amounts distributable upon dissolution, liquidation or winding up, on a parity with the Series Z Preferred Stock, shall share ratably in any distribution in proportion to the full respective preferential amounts to which they are entitled. 7. Ranking of Stock of the Corporation. In respect of the Series Z Preferred Stock, any stock of any class or classes of the Corporation shall be deemed to rank: (a) prior to the shares of the Series Z Preferred Stock or prior to the Series Z Preferred Stock, either as to dividends or upon liquidation, if the holders of such stock shall be entitled to either the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of the Series Z Preferred Stock; (b) on a parity with shares of the Series Z Preferred Stock or on a parity with the Series Z Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, redemption amounts per share or liquidation values per share or sinking fund provisions, if any, are different from those of the Series Z Preferred Stock, if the holders of such stock shall be entitled to either the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in proportion to their respective dividend rates or liquidation values, without preference or priority, one over the other, as 59 between the holders of such stock and the holders of shares of the Series Z Preferred Stock, provided in any such case such stock does not rank prior to the Series Z Preferred Stock; and (c) junior to shares of the Series Z Preferred Stock or junior to the Series Z Preferred Stock, as to dividends and upon liquidation, if such stock shall be Common Stock or if the holders of shares of the Series Z Preferred Stock shall be entitled to receipt of dividends and of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of such stock. The Series Z Preferred Stock is on a parity with the 8.125% Cumulative Preferred Stock, Series A, of the Corporation, heretofore authorized for issuance by the Corporation. 8. Definition. When used herein, the term "subsidiary" shall mean any corporation a majority of whose voting stock ordinarily entitled to elect directors is owned, directly or indirectly, by the Corporation. 9. Limitation on Dividends on Junior Stock. So long as any Series Z Preferred Stock shall be outstanding, without the consent of the holders of two-thirds of the shares of the Series Z Preferred Stock then outstanding the Corporation shall not declare any dividends on the Common Stock or any other stock of the Corporation ranking as to dividends or distributions of assets junior to the Series Z Preferred Stock (the Common Stock and any such other stock being herein referred to as "Junior Stock"), or make any payment on account of, or set apart money for, a sinking fund or other similar fund or agreement for the purchase, redemption or other retirement of any shares of Junior Stock, or make any distribution in respect thereof, whether in cash or property or in obligations or stock of the Corporation, other than a distribution of Junior Stock (such dividends, payments, setting apart and distributions being herein called "Junior Stock Payments"), unless the following conditions shall be satisfied at the date of such declaration in the case of any such dividend, or the date of such setting apart in the case of any such fund, or the date of such payment or distribution in the case of any other Junior Stock Payment: (a) full cumulative dividends shall have been paid or declared and set apart for payment on all outstanding shares of Preferred Stock other than Junior Stock; and (b) the Corporation shall not be in default or in arrears with respect to any sinking fund or other similar fund or agreement for the purchase, redemption or other retirement of any shares of Preferred Stock other than Junior Stock; provided, however, that any funds theretofore deposited in any sinking fund or other similar fund with respect to any Preferred Stock in compliance with the provisions of such sinking fund or other similar fund may thereafter be applied to the purchase or redemption of such Preferred Stock 60 in accordance with the terms of such sinking fund or other similar fund regardless of whether at the time of such application full cumulative dividends upon shares of Series Z Preferred Stock outstanding to the last dividend payment date shall have been paid or declared and set apart for payment by the Corporation. 10. Waiver, Modification and Amendment. Notwithstanding any other provisions relating to the Series Z Preferred Stock, any of the rights or benefits of the holders of the Series Z Preferred Stock may be waived, modified or amended with the consent of the holders of all of the then outstanding shares of Series Z Preferred Stock. Any such waiver, modification or amendment shall be deemed to have the same effect as satisfaction in full of any such right or benefit as though actually received by such holders. FIFTH: The Directors need not be elected by written ballot unless and to the extent the By-Laws so require. SIXTH: The books and records of the Corporation may be kept (subject to any mandatory requirement of law) outside the State of Delaware at such place or places as may be determined from time to time by or pursuant to authority granted by the Board of Directors or by the By-Laws. SEVENTH: (A) The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors, the exact number of directors to be determined from time to time by resolution adopted by affirmative vote of a majority of the entire Board of Directors. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. Class I directors shall be elected initially for a one-year term, Class II directors initially for a two-year term and Class III directors initially for a three-year term. At each succeeding annual meeting of stockholders beginning in 1989, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any vacancy on the Board of Directors that results from an increase in the number of directors may be filled by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring in the Board of Directors may be filled by a majority of the directors then in office, even if less than a quorum, or a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors 61 shall have the same remaining term as that of his predecessor. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article SEVENTH unless expressly provided by such terms. B. Notwithstanding any other provision of this Certificate of Incorporation, the affirmative vote of the holders of at least seventy-five percent (75%) of the voting power of the shares entitled to vote at an election of directors shall be required to amend, alter, change or repeal, or to adopt any provision as part of this Certificate of Incorporation inconsistent with the purpose and intent of, this Article SEVENTH. EIGHTH: A. In addition to any affirmative vote required by law or this Certificate of Incorporation or the By-Laws of the Corporation, and except as otherwise expressly provided in Section B of this Article EIGHTH, a Business Combination (as hereinafter defined) shall require the affirmative vote of not less than sixty-six and two-thirds percent (66 2/3%) of the votes entitled to be cast by the holders of all the then outstanding shares of Voting Stock (as hereinafter defined), voting together as a single class, excluding from such number of outstanding shares and from such required vote, Voting Stock beneficially owned by any Interested Stockholder (as hereinafter defined). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage or separate class vote may be specified, by law or in any agreement with any national securities exchange or otherwise. B. The provisions of Section A of this Article EIGHTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law or by any other provision of this Certificate of Incorporation or the By-Laws of the Corporation or otherwise, if all of the conditions specified in either of the following Paragraphs 1 or 2 are met; provided, however, that in the case of a Business Combination that does not involve the payment of consideration to the holders of the Corporation's outstanding Capital Stock (as hereinafter defined), then the provisions of Section A of this Article EIGHTH must be satisfied unless the conditions specified in the following Paragraph 1 are met: 1. The Business Combination shall have been approved (and such approval not subsequently rescinded) by a majority of the Continuing Directors (as hereinafter defined), either specifically or as a transaction which is within an approved category of transactions with an Interested Stockholder. Such approval may be given prior to or subsequent to the acquisition of, or announcement or public disclosure of the intention to acquire, beneficial ownership of the Voting Stock that caused the Interested Stockholder to become an Interested Stockholder; provided, however, that approval shall be effective for the purposes of this 62 Paragraph 1 only if obtained at a meeting at which a Continuing Director Quorum (as hereinafter defined) was present; and provided further, that such approval may be rescinded by a majority of the Continuing Directors at any meeting at which a Continuing Director Quorum is present and which is held prior to consummation of the proposed Business Combination. 2. All of the following conditions, if applicable, shall have been met: The aggregate amount of cash and the Fair Market Value (as hereinafter defined), as of the date of the consummation of the Business Combination (the "Consummation Date"), of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Capital Stock in such Business Combination shall be at least equal to the amount determined, as applicable, under Paragraph 2(a) or 2(b) below: (a) if the Fair Market Value per share of such class or series of Capital Stock on the date of the first public announcement of the proposed Business Combination (the "Announcement Date") is less than the Fair Market Value per share of such class or series of Capital Stock on the date on which the Interested Stockholder became an Interested Stockholder (the "Determination Date"), an amount (the "Premium Capital Stock Price") equal to the sum of (i) the Fair Market Value per share of such class or series of Capital Stock on the Announcement Date plus (ii) the product of the Fair Market Value per share of such class or series of Capital Stock on the Announcement Date multiplied by the highest percentage premium over the closing sale price per share of such class or series of Capital Stock paid on any day by or on behalf of the Interested Stockholder for any share of such class or series of Capital Stock in connection with the acquisition by the Interested Stockholder of beneficial ownership of shares of such class or series of Capital Stock within the two-year period immediately prior to the Announcement Date or in the transaction in which it became an Interested Stockholder; provided, however, that if the Premium Capital Stock Price as determined above is greater than the highest per share price paid by or on behalf of the Interested Stockholder for any share of such class or series of Capital Stock in connection with the acquisition by the Interested Stockholder of beneficial ownership of shares of such class or series of Capital Stock within the two-year period immediately prior to the Announcement Date, the amount required under this Paragraph 2(a) shall be the higher of (A) such highest price paid by or on behalf of the Interested Stockholder, and (B) the Fair Market Value per share of such class or series of Capital Stock on the Announcement Date (the Fair Market Value and other prices per share of such class or series of Capital Stock referred to in this Paragraph 2(a) shall be in each case appropriately adjusted for any subsequent stock split, stock 63 dividend, subdivision or reclassification with respect to such class or series of Capital Stock); or (b) if the Fair Market Value per share of such class or series of Capital Stock on the Announcement Date is greater than or equal to the Fair Market Value per share of such class or series of Capital Stock on the Determination Date, in each case as appropriately adjusted for any subsequent stock split, stock dividend, subdivision or reclassification with respect to such class or series of Capital Stock, a price per share equal to the Fair Market Value per share of such class or series of Capital Stock on the Announcement Date. The provisions of this Paragraph 2 shall be required to be met with respect to every class or series of outstanding Capital Stock which is the subject of the Business Combination whether or not the Interested Stockholder has previously acquired beneficial ownership of any shares of a particular class or series of Capital Stock. (c) After the Determination Date and prior to the Consummation Date of such Business Combination: (i) except as approved by a majority of the Continuing Directors at a meeting at which a Continuing Director Quorum is present, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) payable in accordance with the terms of any outstanding Capital Stock; (ii) there shall have been an increase in the annual rate of dividends paid on the Common Stock as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors at a meeting at which a Continuing Director Quorum is present; and (iii) such Interested Stockholder shall not have become the beneficial owner of any additional shares of Capital Stock except as part of the transaction that results in such Interested Stockholders becoming an Interested Stockholder and except in a transaction that, after giving effect thereto, would not result in any increase in the Interested Stockholder's percentage beneficial ownership of any class or series of Capital Stock. (d) After the Determination Date, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder of the Corporation), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. 64 (e) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (the "Act") (or any subsequent provisions replacing such Act, rules or regulations), shall be mailed to all stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). The proxy or information statement shall contain on the first page thereof, in a prominent place, any statement as to the advisability (or inadvisability) of the Business Combination that the Continuing Directors, or any of them, may choose to make and, if deemed advisable by a majority of the Continuing Directors, the opinion of an investment banking firm selected by a majority of the Continuing Directors as to the fairness (or not) of the terms of the Business Combination from a financial point of view to the holders of the outstanding shares of Capital Stock other than the Interested Stockholder and its Affiliates or Associates (as hereinafter defined), such investment banking firm to be paid a reasonable fee for its services by the Corporation. (f) Such Interested Stockholder shall not have made any major change in the Corporation's business or equity capital structure without the approval of at least a majority of the Continuing Directors. C. The following definitions shall apply with respect to this Article EIGHTH: 1. The term "Business Combination" shall mean: (a) any merger or consolidation of the Corporation or any Major Subsidiary (as hereinafter defined) with, or any sale, lease, exchange, transfer or other disposition of substantially all the assets or outstanding shares of capital stock of the Corporation or any Major Subsidiary with or for the benefit of, (i) any Interested Stockholder or (ii) any other company (whether or not itself an Interested Stockholder) which is or after such merger, consolidation or sale, lease, exchange, transfer or other disposition would be an Affiliate or Associate of an Interested Stockholder; or (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition or security arrangement, investment, loan, advance, guarantee, agreement to purchase, agreement to pay, extension of credit, joint venture participation or other arrangement (in one transaction or a series of transactions) with or for the benefit of any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder involving any assets, securities or 65 commitments of the Corporation, any Major Subsidiary or any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder having an aggregate Fair Market Value and/or involving aggregate commitments of Twenty-Five Million dollars ($25,000,000) or more; or (c) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries (as hereinafter defined) or any other transaction (whether or not with or otherwise involving an Interested Stockholder) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (d) any agreement, contract or other arrangement providing for any one or more of the actions specified in the foregoing clauses (a) to (d); provided, however, that no such aforementioned transaction shall be deemed to be a Business Combination subject to this Article EIGHTH if the Announcement Date of such transaction occurs more than eighteen months after the Determination Date with respect to such Interested Stockholder. 2. The term "Capital Stock" shall mean all capital stock of the Corporation authorized to be issued from time to time under Article FOURTH of this Certificate of Incorporation, including, without limitation, the Common Stock, and the term "Voting Stock" shall mean all Capital Stock which by its terms may be voted on all matters submitted to stockholders of the Corporation generally. 3. The term "person" shall mean any individual, firm, company or other entity and shall include any group comprised of any person and any other person with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Capital Stock. 4. The term "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary and other than any profit- sharing, employee stock ownership or other employee benefit plan of the Corporation or any trustee of or fiduciary with respect to any such plan when acting in such capacity) who (a) is, or has announced or publicly disclosed a plan or intention to become, the beneficial owner of Voting Stock representing twenty-five percent (25%) or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock; or (b) is an Affiliate or Associate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of Voting Stock representing twenty-five percent (25%) 66 or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock. 5. A person shall be a "beneficial owner" of any Capital Stock (a) which such person or any of its Affiliates or Associates beneficially owns directly or indirectly; (b) which such person or any of its Affiliates or Associates has, directly or indirectly, (i) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding; or (c) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Capital Stock. For the purposes of determining whether a person is an Interested Stockholder pursuant to Paragraph 4 of this Section C, the number of shares of Capital Stock deemed to be outstanding shall include shares deemed beneficially owned by such person through application of this Paragraph 5 of Section C, but shall not include any other shares of Capital Stock that may be reserved for issuance or issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 6. The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Act as in effect on the date that this Article EIGHTH is approved and adopted by the Sole Incorporator (the term "registrant" in said Rule 12b-2 meaning in this case the Corporation); provided, however, that the terms "Affiliate" and "Associate" shall not include any profit-sharing, employee stock ownership or other employee benefit plan of the Corporation or any trustee of or fiduciary with respect to any such plan when acting in such capacity. 7. The term "Subsidiary" means any company of which a majority of any class of equity security is beneficially owned by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in Paragraph 4 of this Section C, the term "Subsidiary" shall mean only a company of which a majority of each class of equity security is beneficially owned by the Corporation. 8. The term "Major Subsidiary" means a Subsidiary having assets of twenty-five million dollars ($25,000,000) or more as reflected in the most recent fiscal year-end audited, or if unavailable, unaudited, consolidated balance sheet, prepared in accordance with applicable state insurance law with respect to Subsidiaries engaged in an insurance business, and in accordance with generally accepted accounting principles with respect to Subsidiaries engaged in a business other than an insurance business. 9. The term "Continuing Director" means any member of the Board of Directors of the Corporation, while such person is a member of the Board of Directors, who is not an Affiliate or Associate or representative 67 of the Interested Stockholder and who was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director while such successor is a member of the Board of Directors, who is not an Affiliate or Associate or representative of the Interested Stockholder and who is recommended or elected to succeed the Continuing Director by a majority of the Continuing Directors; provided, however, that the term "Continuing Director" shall not include any officer of the Corporation or of any Affiliate or Associate of the Corporation. 10. The term "Fair Market Value" means (a) in the case of cash, the amount of such cash; (b) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Act on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith; and (c) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors. 11. The term "Continuing Director Quorum" means at least two (2) Continuing Directors capable of exercising the power conferred upon them under the provisions of the Certificate of Incorporation and By-Laws of the Corporation. 12. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in Paragraph 2 of Section B of this Article EIGHTH shall include the shares of Common Stock and/or the shares of any other class or series of Capital Stock retained by the holders of such shares. D. A majority of the Continuing Directors at a meeting at which a Continuing Director Quorum is present shall have the power and duty to determine the purposes of this Article EIGHTH, on the basis of information known to them after reasonable inquiry, and to determine all questions arising under this Article EIGHTH, including, without limitation, (a) whether a person is an Interested Stockholder, (b) the number of shares of Capital Stock or other securities beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another, (d) whether the assets that are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of twenty-five million dollars ($25,000,000) or 68 more as provided in Paragraph 1(b) of Section C of this Article EIGHTH and (e) whether a Subsidiary is a Major Subsidiary. Any such determination made in good faith shall be binding and conclusive on all parties. In the event a Continuing Director Quorum cannot be attained at such meeting, all such determinations shall be made by the Delaware Court of Chancery. E. Nothing contained in this Article EIGHTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. F. The fact that any Business Combination complies with the provisions of Section B of this Article EIGHTH shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Combination or recommend its adoption or approval to the stockholders of the Corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board of Directors, or any member thereof, with respect to evaluations of or actions and responses taken with respect to such Business Combination. G. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law, this Certificate of Incorporation or the By-Laws of the Corporation), the affirmative vote of the holders of not less than sixty-six and two- thirds percent (66 2/3%) of the votes entitled to be cast by the holders of all the then outstanding shares of Voting Stock, voting together as a single class, excluding Voting Stock beneficially owned by any Interested Stockholder, shall be required to amend, alter, change or repeal, or adopt any provision as part of this Certificate of Incorporation inconsistent with the purpose and intent of, this Article EIGHTH; provided, however, that this Section G shall not apply to, and such sixty-six and two-thirds percent (66 2/3%) vote shall not be required for, any amendment, repeal or adoption recommended by the affirmative vote of at least seventy-five percent (75%) of the entire Board of Directors if all of such directors voting for such recommendation are persons who would be eligible to serve as Continuing Directors within the meaning of Section C, Paragraph 9 of this Article EIGHTH. NINTH: In furtherance and not in limitation of the powers conferred upon it by the laws of the State of Delaware, the Board of Directors shall have the power to adopt, amend, alter or repeal the Corporation's By-Laws. The affirmative vote of at least sixty-six and two- thirds percent (66 2/3%) of the entire Board of Directors shall be required to adopt, amend, alter or repeal the Corporation's By-Laws. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law, this Certificate of Incorporation or the By-Laws of the Corporation), the affirmative vote of the holders of at least seventy-five percent (75%) of the voting power of the shares entitled to vote at an election of directors shall be required to adopt, amend, alter or repeal, or adopt any provision as part of this 69 Certificate of Incorporation inconsistent with the purpose and intent of, this Article NINTH. TENTH: No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. ELEVENTH: Except as provided in Articles FOURTH, SEVENTH, EIGHTH and NINTH of this Certificate of Incorporation, the Corporation reserves the right to amend and repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware, and all rights of stockholders shall be subject to this reservation. THE UNDERSIGNED, being a Senior Vice President of the Corporation, does hereby certify that the Corporation has restated its Certificate of Incorporation as set forth above, does hereby certify that such restatement has been duly adopted by the Board of Directors of the Corporation in accordance with the applicable provisions of Section 245 of the General Corporation Law of the State of Delaware, and does hereby make and file this Restated Certificate of Incorporation. Dated: March 29, 1994 /s/ Charles O. Prince, III ------------------------------- Charles O. Prince, III Senior Vice President ATTEST: /s/ Mark J. Amrhein - ---------------------------- Mark J. Amrhein Assistant Secretary 70 EX-10.02.5 3 Exhibit 10.02.5 AMENDMENT NO. 11 TO THE PRIMERICA CORPORATION STOCK OPTION PLAN I. Section 3(b) of the Option Plan shall be deleted and restated in its entirety as follows: (1) Subject to the provisions of the Plan, the Committee (or, if necessary for tax pur- poses, a subcommittee thereof) shall have exclusive power to select the officers and other key employees of the Company and its subsidiaries participating in the Plan to be granted Options under the Plan, but no Option shall be granted to any member of the Committee. (2) Subject to Section 3(c) of the Plan, and subject to adjustments of share amounts allocated hereunder pursuant to Section 7(a) of the Plan, (a) during the period from March 30, 1993 to December 31, 1993, inclusive (the "First Allocation Period"), the Committee shall not grant options (including reload options) covering more than the number of shares of Primerica Common Stock set forth below (the "First Maximum Aggregate Grant Amount") to each of the follow- ing persons (the "Designated Execu- tives"): Sanford I. Weill, 2,058,000; Frank G. Zarb, 850,000; Robert I. Lipp, 185,000; James Dimon, 451,000; and Robert F. Greenhill, 1,333,333; and (b) during the period from January 1, 1994 through September 24, 1996, inclusive (the "Second Allocation Period"), the Committee shall not grant options (including reload op- tions) covering more than 10,000,000 shares of Primerica Common Stock (the "Allocation Limit") to the group consisting of all executive officers of the Company named from time to time in the summary compensa- tion table set forth in the Company's proxy statement released to stock- holders in connection with any annual meeting during the Second Allocation Period (such group being designated herein as the "SCT Executives"). To the extent that each of the following persons shall fall within the defini- tion of SCT Executives, the Committee shall not grant options and reload options during the Second Allocation Period covering a number of shares of Primerica Common Stock in excess of the following amounts (each a "Second Maximum Aggregate Grant Amount"): Sanford I. Weill, 4,300,000; Frank G. Zarb, 520,000; Robert I. Lipp, 350,000; James Dimon, 650,000; and Robert F. Greenhill, 1,333,000. Any person who qualifies as an SCT Execu- tive who is not a Designated Execu- tive will have his or her Second Maximum Aggregate Grant Amount deter- mined by the Committee, if necessary, and, if necessary, such Amount shall be subject to the overall Allocation Limit and in no event will any SCT Executive (other than the Designated Executives) be allocated a Second Maximum Aggregate Grant Amount great- er than 1,000,000 shares. II. A new Section 3(c) shall be added, to read in its entirety as follows: If, as a result of subsequent regulations or other interpretive guidance, the Com- mittee determines that (i) the inclusion of the Allocation Limit and/or the First and/or Second Maximum Aggregate Grant Amounts (as defined herein) is not re- quired in order for Option grants to Des- ignated or SCT Executives to qualify as performance-based compensation under the provisions of Section 162(m) of the Code, or (ii) Option grants to Designated or SCT Executives can qualify as performance- based compensation even if the Allocation Limit and/or the First and/or Second Maxi- mum Aggregate Grant Amounts were made less restrictive, the Committee will be enti- tled to amend the Plan accordingly (in- cluding amendments to adjust or eliminate altogether the Allocation Limit and/or First and/or Second Maximum Aggregate Grant Amounts). 2 III. Amendment No. 11 to the Option Plan is subject to receipt of stockholder approval, and shall take effect as follows: the provisions of Sec- tions 3(b)(2) and 3(c) (as amended hereby) shall take effect immediately upon receipt of the approval of stockholders (in accordance with the requirements of applicable law and Primerica's bylaws) provided, -------- however, that if the restrictions established by ------- Section (3)(b)(2) shall not have the effect of preserving the tax deductibility of grants under the Plan to the persons designated in such Section, the Committee shall be entitled to modify such Sec- tion 3(b)(2) to meet the requirements of the tax laws or to determine that such Section 3(b)(2) shall be null and void and of no effect whatsoever, not- withstanding the receipt of stockholder approval thereof. 3 EX-10.02.6 4 Exhibit 10.02.6 AMENDMENT NO. 12 TO THE PRIMERICA CORPORATION STOCK OPTION PLAN I. The first two sentences of Section 4(b) of the Option Plan shall be deleted and restated in their entirety as follows: "There may be issued under the Plan pursu- ant to the exercise of Options an aggre- gate of 73,008,140 Common Shares, subject to adjustment as provided in Section 7(a), of which 35,000,000 shares shall be re- served for grants of reload Options in accordance with Section 9(k) of the Plan. Common Shares issued pursuant to the Plan may be either authorized but unissued shares or reacquired shares or both." II. A new Section 9(m) shall be added, to read in its entirety as follows: An optionee shall designate at the time of exercising an Option in a manner which the Committee has determined gives rise to a right to receive a reload Option whether to receive (i) unrestricted incremental Common Shares issuable upon the Option exercise, and no reload Option, or (ii) the incremental Common Shares issu- able upon Option exercise subject to a period of restriction on transferability (running from the date of Option exercise and determined by the Committee in its discretion from time to time) and a reload Option for the number of Common Shares surrendered in connection with the exer- cise of the Option. Any person subject to Section 16 of the Securities Exchange Act of 1934, as amended, shall receive only grants conforming to clause (ii) of the previous sentence. Unless the Committee in its discretion modifies or eliminates the following restrictions on transfer- ability, an optionee will be permitted to transfer restricted incremental Common Shares during such restricted period only through a charitable contribution of re- stricted incremental Common Shares or upon demonstrating to the reasonable satisfac- tion of the Senior Vice President, Human Resources of the Company, that sale or transfer of such Shares is required to meet an event of immediate and heavy fi- nancial hardship which the optionee cannot meet with other resources reasonably avai- lable to him or her. For purposes of this Plan, the following shall be deemed to be immediate and heavy financial hardships: (i) unreimbursed medical expenses as de- scribed in Section 213(d) of the Code incurred by the optionee or the optionee's spouse or any dependents, (ii) purchase (including mortgage payments) of a princi- pal residence for the optionee, (iii) pay- ment of tuition for the next semester or quarter of post-secondary education for the optionee or the optionee's children or dependents, (iv) payment of amounts neces- sary to prevent the eviction of the op- tionee from his or her principal residence or foreclosure on the mortgage of the optionee's principal residence, (v) payme- nt of funeral and other expenses incurred in connection with the death of a member of the optionee's family, or (vi) any other circumstances similar to any deemed immediate and heavy financial need set forth in Treasury Regulations or Revenue Rulings addressing determination of hard- ship for plans described in Section 401(k) of the Code. The Senior Vice President's determination of the existence of an optionee's immediate and heavy financial hardship and the number of restricted incremental shares that may be sold or transferred shall be final and binding on the optionee. 2 For purposes of the Plan, "incremental shares" shall mean those Common Shares actually issued to an optionee who exer- cises an Option by surrendering previously owned Common Shares or CAP Plan restricted stock to pay the exercise price of an Option, or by surrendering previously owned Common Shares or requesting Primerica to withhold the appropriate number of Common shares otherwise issu- able, to cover the withholding tax liabil- ity associated with Option exercise. The number of incremental shares issued shall be calculated as the number of Option shares exercised minus the number of Com- ----- mon Shares deemed "surrendered" to pay for such exercise and minus the number of ----- Common Shares used to satisfy any result- ing tax liability in connection with such exercise. III. A new Section 9(n) shall be added to read in its entirety as follows: For an optionee to receive a reload Option in connection with his or her exercise of a vested Option, the fair market value of a Common Share on the date of exercise (to be determined in the same manner as the Committee's determina- tion of fair market value for other purposes under the Plan) must equal or exceed the mini- mum market price level , expressed as a per- centage of the Option exercise price estab- lished by the Committee from time to time (the "Market Price Requirement"). If the market price does not equal or exceed the applicable Market Price Requirement, a vested Option may be exercised but no reload Option will be granted in connection with such exercise. In no event will the Market Price Requirement be less than 100% of the exercise price of any Option to which it applies. IV. Amendment No. 12 to the Option Plan is subject to receipt of stockholder approval, and shall take effect as follows: 3 (1) the provisions of Section 4(b) (as amended hereby) shall take effect immediately upon receipt of the approval of stockholders (in accordance with the requirements of applicable law and the Company's bylaws); and (2) if stockholder approval is received, Sec- tions 9(m) and 9(n) (as amended hereby) shall take effect on the date of such stockholder approval, for exercise or grants of Options and reload Options on and after such effective date. 4 EX-10.03 5 Exhibit 10.03 PRIMERICA --------- RETIREMENT BENEFIT EQUALIZATION PLAN ------------------------------------ (as amended and restated as of January 1, 1994) I. Purpose of the Plan Primeraccount consists of two parts, the Primerica Retirement Plan (the "Retirement Plan") and the Retirement Benefit Equalization Plan (the "Plan"), both sponsored by Primerica Corporation (the "Company"). For eligible employees, the Retirement Plan gives benefits calculated up to a certain limitation on compensation and benefits prescribed by the Internal Revenue Code of 1986, as amended. This Plan covers benefits in excess of those ceilings and is restated effective as of January 1, 1994. II. Administration of the Plan The Plan Administrator is the Annuity Board of the Company. The Plan Administrator has such powers as may be necessary to carry out the provisions of the Plan, including the power and discretion to determine all benefits and resolve all questions pertaining to the administration, interpretation and application of Plan provisions. III. Application of the Plan This Plan together with the Retirement Plan shall apply to any Participant of the Retirement Plan whose benefits under the Retirement Plan are reduced by the application of limitations on benefits payable under the Retirement Plan that are imposed to conform to the provisions of section 415 or section 401(a) (17) of the Code. This Plan is not open to any participant in the Retirement Plan whose participation in the Retirement Plan is attributable to his employment or indirect employment by Smith Barney Shearson Inc. (or its predecessors). IV. Benefits Payable Benefits under the Plan shall not be funded and shall be paid out of the general assets of the Company. The Plan shall pay to each covered Participant of the Retirement Plan, or beneficiaries thereunder a benefit equal to the excess of: (1) the benefit that would have been accrued and vested under the Retirement Plan (as the same may be in effect from time to time) after December 31, 1988 as if the Retirement Plan did not contain the limitations imposed by section 415 or section 401(a)(17) of the Code, over (2) the benefit actually accrued under the Retirement Plan as amended to conform to such limitations, taking into account in any case any decision made regarding early or deferred retirement or optional methods of benefit payment. Vesting occurs in accordance with the vesting schedule of the Retirement Plan. Notwithstanding the foregoing, qualifying compensation for the purposes of this Plan shall be as defined under the provisions of the Retirement Plan, but, for Plan Years beginning on or after January 1, 1994, any qualifying compensation in excess of $300,000 shall be disregarded. Additionally, any benefits accrued prior to the Effective Date (to the extent not paid to the Participant) in the retirement benefit equalization plans sponsored by the Company or its affiliates shall be converted to a benefit from in this Plan in the same fashion in the same manner as if such benefits were earned in the Retirement Plan. Benefits payable to any person hereunder shall be paid at the same time and in the same form as benefits payable to such person under the Retirement Plan, in accordance with all the terms and conditions applicable to such benefits under the Retirement Plan. Any beneficiary designation under the Retirement Plan or election of form of benefits shall be deemed to be a beneficiary designation or benefit form under this Plan. Any benefits paid under this Plan are not subject to any special tax treatment and are not eligible for rollover to any qualified plan or IRA. V. General The Plan may be amended or terminated at any time by the Board of Directors or by the Senior Vice President, Human Resources, of Primerica Corporation, except that no such amendment or termination shall adversely affect the benefits payable on account of any covered Participant of the Retirement Plan in respect of benefits earned and vested prior to such amendment or termination. The Plan shall be construed, administered and enforced according to the Employee Retirement Income Security Act of 1974 and the laws of the State of New York. EX-10.06.2 6 Exhibit 10.06.2 PRIMERICA CORPORATION ACTION OF THE SENIOR VICE PRESIDENT ----------------------------------- I, Barry L. Mannes, Senior Vice President Human Resources, Primerica Corporation (the "Corporation"), under authority granted me by the Board of Directors of the Corporation and upon advice of the General Counsel of the Corporation, hereby authorize the following actions in the name and on behalf of Primerica Corporation: (a) Section 2.11 of the Primerica Corporation Supplemental Retirement Plan (the "Plan") is amended and restated to read as follows: "Equivalent Actuarial Value" shall mean the equivalent value computed on the basis of the 1971 Group Annuity Mortality Table, blended 70% male and 30% female, and at an interest rate equal to the PBGC immediate rate at the time of the commencement of the Member's benefit under the Plan." (b) After December 31, 1993, there shall be no further accruals under the Plan. Any benefits accrued under the Plan prior to January 1, 1994, shall be frozen at the December 31, 1993 levels in accordance with the terms of the Plan. All other features of the Plan, including the earning of vesting service, shall continue. Effective Date: December 31, 1993 /s/ Barry L. Mannes ----------------------------------- Barry L. Mannes Senior Vice President - Human Resources Primerica Corporation EX-10.08.2 7 Exhibit 10.08.2 AMENDMENT NO. 8 TO THE PRIMERICA CORPORATION CAPITAL ACCUMULATION PLAN I. The first sentence of Section 4(b) of the CAP Plan shall be deleted and restated in its entirety as follows: "The maximum number of shares of Stock which may be issued under the Plan, either as Restricted Stock or pursuant to the exercise of Options, shall be not more than 31,000,000 shares of Stock, subject to adjustment as provided in Section 8, and such shares may be authorized but unissued shares, or previously issued shares reacquired by the Company, or both." EX-10.09.2 8 Exhibit 10.09.2 Assignment Agreement and Amendment No. One THIS AGREEMENT is made as of the 1st day of July, 1993, by and among Smith Barney Shearson Inc., a Delaware corporation (formerly known as Smith Barney, Harris Upham & Co. Incorporated, the "Company") Primerica Corporation, a Delaware corporation and parent corporation of the Company ("Primerica") and Frank G. Zarb (the "Executive"). RECITALS: WHEREAS, the Company, Primerica and the Executive are parties to that certain Employment Agreement dated as of December 16, 1988 (the "Employment Agreement"); and WHEREAS, the parties hereto desire to assign and amend the Employment Agreement, as provided herein. NOW THEREFORE, the parties hereto, each intending to be legally bound, do hereby agree as follows: 1. The obligations of the Company under the Employment Agreement are hereby assigned to and assumed by Primerica. The Company is fully and completely released from any obligations under the Employment Agreement. For purposes of the Employment Agreement, all references to "the Company" shall be deemed to be references to Primerica. 2. The first sentence of Section 3 of the Employment Agreement is revised to read in full as follows: "The Executive shall serve as a Vice Chairman of the Board and Group Chief Executive and shall have such responsibilities, duties and authorities as may from time to time be assigned to the Executive by the Chief Executive Officer of the Company that are consistent with his experience and position." 3. Section 12 of the Employment Agreement is deleted in its entirety and replaced with "Intentionally Omitted." 4. The separate reference to "the Company" in the notice provisions of Section 13 of the Employment Agreement is deleted. IN WITNESS WHEREOF, the parties hereto have executed this Assignment Agreement and Amendment No. One as of the date and year first above written. SMITH BARNEY SHEARSON INC. PRIMERICA CORPORATION By: /s/ By: /s/ ------------------------------ ------------------------------ EXECUTIVE By: /s/ ------------------------------ EX-10.17.2 9 Exhibit 10.17.2 FORM OF AMENDMENT TO EMPLOYMENT AGREEMENT Amendment dated as of March 29, 1994 (the "Amendment") to the Employment Agreement dated June 23, 1993 (the "Employment Agreement") by and among Smith Barney Shearson Inc., a Delaware corporation, formerly known as Smith Barney, Harris Upham & Co. Incorporated (the "Company"), The Travelers Inc., a Delaware corporation formerly known as Primerica Corporation and the sole common stockholder of the Company ("The Travelers"), and Robert F. Greenhill (the "Executive"). WHEREAS, the parties hereto have previously entered into the Employment Agreement; and WHEREAS, the parties hereto desire to amend such Employment Agreement in light of recent changes to the Internal Revenue Code of 1986, as amended. NOW, THEREFORE, the parties hereto, each intending to be legally bound, do hereby agree as follows: 1. Effective upon the mailing of the definitive proxy statement (the "Proxy Statement") for the 1994 Annual Meeting of Stockholders (the "Annual Meeting") of The Travelers (which mailing is expected to occur on or about March 29, 1994), Paragraphs 5(a) and 5(b) of the Employment Agreement are deleted. 2. Immediately upon approval by the stockholders at the Annual Meeting of The Travelers Inc. Executive Performance Compensation Plan, such Paragraphs 5(a) and 5(b) shall be replaced with new Paragraphs 5(a) and 5(b), as described in Article V of Annex B to the Proxy Statement and as set forth in Attachment A hereto, with an effective date of January 1, 1994. 3. In the event that such stockholder approval is not obtained, the Company and Executive shall enter into good faith negotiations to enter into a mutually satisfactory replacement for such Paragraphs 5(a) and 5(b). 4. Except as expressly modified by this Amendment, all terms of the Employment Agreement in effect on the date hereof shall remain in full force and effect. 5. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. SMITH BARNEY SHEARSON INC. By: ------------------------------ Name: Title: THE TRAVELERS INC. By: ------------------------------ Name: Title: --------------------------------- Robert F. Greenhill - 2 - ATTACHMENT A to Amendment to Employment Agreement dated as of March 29, 1994 (a) Compensation. During the Term, the Company ------------ shall pay or cause to be paid to the Executive (x) an annual base salary of $995,000 plus (y) a bonus (together, the "Compensation") for each fiscal year of the Company equal to the sum of (i) 2% of the After-Tax Earnings (as hereinafter defined) for such fiscal year from $49,750,000 up to and including $750,000,000 of such After-Tax Earnings, (ii) 1.5% of the After-Tax Earnings in excess of $750,000,000 up to but not exceeding $1 billion and (iii) 1% of the After-Tax Earnings in excess of $1 billion provided that if the -------- After-Tax Earnings for such fiscal year does not exceed $100 million, then Executive shall not be entitled to a bonus. The Compensation shall be subject to increases from time to time at the sole discretion of the Board of Directors of the Company. For purposes of this Agreement, "After-Tax Earnings" for any fiscal year shall mean the aggregate of (i) the consolidated after- tax net income of Smith Barney Shearson Holdings Inc. ("SBSH") and its subsidiaries, (ii) for so long as Greenwich Street Capital Partners Inc. ("GSCP") shall be a subsidiary of The Travelers and the Executive is employed by the Company, the after-tax net income of GSCP, and (iii) the after-tax net income of any other affiliate of The Travelers with which the Executive has a relationship similar to that with GSCP with respect to corporate organization, hiring of employees, setting of policies or operating guidelines (GSCP and such other entities referred to collectively as "The Travelers Entities"), in each case (except as otherwise provided in the next sentence with respect to the years 1993 and 2000) as reflected on its audited financial statements for such fiscal year prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied and certified by independent public accountants (provided that, if any of The -------- Travelers Entities shall not otherwise cause to be prepared audited financial statements, the financial statements of any such Entity included in the financial statements of The Travelers filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), shall be used for these purposes. The Company shall pay or cause to be paid to the Executive the base salary and that portion of Compensation based upon the After-Tax Earnings of SBSH and its subsidiaries, and A-1 The Travelers shall pay or cause to be paid to the Executive that portion of Compensation based upon the After-Tax Earnings of The Travelers Entities. With respect to the period from the Commencement Date to December 31, 1993 (the "1993 Stub Period") and the period from January 1, 2000 to the last day of the Term (the "2000 Stub Period"), the Compensation payable to the Executive for such periods shall be equal to one- half of the Compensation determined in accordance with the formula set forth in the first sentence of this Paragraph 5(a). For this purpose, After-Tax Earnings in such formula shall be deemed to be equal to the product of two (2) multiplied by the After-Tax Earnings for the fiscal quarters ended September 30, 1993 and December 31, 1993 (in the case of the 1993 Stub Period) and the After-Tax Earnings for the fiscal quarters ended March 31, 2000 and June 30, 2000 (in the case of the 2000 Stub Period), in each case as reflected in the interim financial statements of the relevant entities for such fiscal quarters prepared in accordance with GAAP consistently applied. For any partial fiscal year (whether preceding or following the Date of Termination (as defined in Paragraph 9(f)), the Compensation for such partial fiscal year shall be calculated by multiplying the Compensation otherwise calculated for the full fiscal year by a fraction, the numerator of which is the number of calendar months in such partial fiscal year (including, in the case of the partial fiscal year preceding the Date of Termination, the month in which the Date of Termination occurs) and the denominator of which is 12. (b) Time of Payment. The Compensation shall be paid ---------------- to the Executive as follows: (i) The Company shall pay to the Executive the base salary in monthly or more frequent installments in accordance with the payroll practices for senior executives of the Company in effect at the time of payment; and (ii) Promptly after the relevant audited financial statements are completed (but in no event later than the 90th day following the end of each year or in the case of the 1993 Stub Period and the 2000 Stub Period the applicable Stub Period, as the case may be) and following the certification by the Nominations and Compensation Committee of The Travelers Board of Directors that the applicable performance goals have been met as required by Section 162(m) of the Internal Revenue Code of 1986, as amended, the Company shall pay or cause to be paid to the Executive an amount equal to A-2 the bonus for such year calculated pursuant to Paragraph 5(a). The parties agree that, with regard to the portion of the Compensation based upon the earnings of SBSH and its subsidiaries, the financial statements included in SBSH's periodic filings under the Exchange Act shall be used for determining the Compensation under this Agreement. With regard to the portion of the Compensation based upon the earnings of The Travelers Entities, and in the event that SBSH ceases to be a reporting company during the Term, the financial statements of The Travelers Entities and SBSH and its subsidiaries included in The Travelers' financial statements filed under the Exchange Act shall be used for determining the respective portion or portions of such Compensation unless the parties agree on an alternate arrangement for providing periodic financial statements for purposes of this Paragraph. A-3 EX-10.22 10 Exhibit 10.22 December 21, 1993 Mr. Edward H. Budd The Travelers Companies One Tower Square Hartford, CT 06183 Dear Ed: This letter sets forth our agreement with respect to your continued involvement with The Travelers Corporation ("The Travelers") following the merger of The Travelers with Primerica Corporation pursuant to an Agreement and Plan of Merger dated as of September 23, 1993 (the "Merger"). Following the Merger, you will serve as Chairman of The Travelers Insurance Group Inc. at a salary equal to your current salary at a rate of $800,000 per annum. You will con- tinue to be eligible for a discretionary annual bonus and for welfare, fringe and other employee benefits on the same terms and conditions as other senior executives of the surviving company in the Merger (the "Company"). Following the Merger, you will also serve as a member of the Board of Directors (the "Board") of the Company, and as Chairman of the Executive Committee of the Board. You have previously received awards of stock options, restricted stock and performance stock pursuant to the Company's 1988 Stock Incentive Plan and 1982 Stock Option Plan. Those awards will continue outstanding, under the terms and conditions in effect on the date of this letter, except that upon the consummation of the Merger, your currently outstanding vested and unvested options (the "Rollover Options") will be assumed by the Company pursuant to the terms and conditions set forth in the Primerica Prospectus Supplement, dated December 15, 1993, as modified by the provisions of this letter. The approval of the Merger by the Company's shareholders will be treated as a "Change in Control" for purposes of your restricted stock and performance stock awards. As a result, all of your shares of "time lapse" restricted stock and 50% of your shares of "performance" re- stricted stock will vest at the time of such shareholder ap- proval. Immediately following the Merger, but in no event later than January 10, 1994, you will be granted options under the Primerica Corporation Stock Option Plan (the "New Options") to purchase 50,000 shares of common stock of the Company ("Common Stock") at an exercise price per share equal to the fair market value thereof on the date of grant (as de- termined pursuant to the rules established by the Committee administering such Plan), pursuant to the customary form of agreement under such Plan. The New Options will become ex- ercisable in five equal installments on the anniversary of the date of grant (or earlier in accordance with the terms of such Plan), and will remain exercisable through January 15, 1999 (subject to extension as described below). In addition, following the Merger, you will be granted under the Primerica Corporation Capital Accumulation Plan (the "CAP Plan"), pursuant to the customary form of agreement under the CAP Plan, an aggregate of 40,000 shares of Common Stock, which shares shall become fully vested and no longer subject to re- striction or risk of forfeiture upon December 31, 1995 (or earlier in accordance with the terms of the CAP Plan) regard- less of whether your employment with the Company terminates prior to such date, unless your employment with the Company is involuntarily terminated by the Company for "cause" (as cur- rently defined in The Travelers Severance Plan for Officers). If your employment terminates for any reason (including without limitation retirement, death, disability, voluntary termination, or involuntary termination), you will be entitled to benefits under The Travelers Severance Plan for Officers, as in effect at the time of such termination, as if you had been terminated without cause. In addition, you will be entitled to receive pension benefits under The Travelers qualified and nonqualified retirement plans for service since 1955 as an employee of The Travelers. You will also receive all benefits and amounts to which you are entitled as a result of your service as a direc- tor of The Travelers, and, additionally, as a director and chief executive officer of The Travelers with service credit to age 65. The actual amount you receive will depend on the date of your termination and the benefit form you select. You may elect to commence receiving such pension benefits im- mediately upon termination of your employment for any reason (such amounts to be determined in accordance with the plans as if you retired on such date with the service credit provided for herein). To the extent that the additional years of age and service credit and the election to commence receiving benefits referred to above are not permitted to be taken into account for purposes of any qualified retirement plans, the Company shall pay the additional amounts that would have been payable to you (or your beneficiary) under such qualified retirement plan if such additional years and such election had been permitted, at the times and in the manner that such amounts would otherwise have been paid under such plan. The payments required by the preceding sentence may be made through a nonqualified retirement plan. All New Options and Rollover Options will continue to vest in accordance with the vesting schedule and applicable plan provisions in effect immediately before the termination of your employment and will remain exercisable through January 15, 1999 (in the case of New Options) and December 31, 1998 (or, if sooner, until the final expiration date of any such Rollover Option) (in the case of Rollover Options); provided, -------- however, that if on January 15, 1999, you reasonably determine - ------- that the exercise of any New Option and/or the sale of any Common Stock issuable upon exercise thereof could subject you to liability under the federal securities laws, such January 15, 1999 date will be automatically extended until 30 days following the date on which you reasonably determine that such risk has terminated. If necessary under the terms of the applicable plan in order to permit the vesting or exercisability of New Options or Rollover Options in ac- cordance with the preceding sentence, the Company will continue to maintain your status as an employee (but such status shall not preclude your receipt of benefits under The Travelers Severance Plan for Officers and pension benefits, as set forth above). Finally, the provisions of Section XI of The Travel- ers Severance Plan for Officers (entitled "Certain Additional Payments By the Company") as in effect on the date hereof shall apply with respect to all payments, benefits, awards and distributions by The Travelers, the Company, The Travelers Insurance Group Inc., Primerica Corporation and/or any of their respective affiliates to you or for your benefit, whether pursuant to this letter or otherwise. Please indicate your acceptance of the terms and conditions set forth in this letter by signing the enclosed copy of this letter in the space provided below and returning it to me. Very truly yours, Primerica Corporation By: /s/ Charles O. Prince,III ------------------------- Name: Charles O. Prince, III Title: Senior Vice President and General Counsel AGREED TO AND ACCEPTED: /s/ Edward H. Budd - ------------------ Edward H. Budd EX-10.23 11 Exhibit 10.23 EMPLOYMENT AGREEMENT -------------------- AGREEMENT made as of December 31, 1993, by and between The Travelers Insurance Group Inc., a Connecticut corporation (the "Company") and RICHARD H. BOOTH (the "Executive"). The Company desires to employ the Executive, and the Executive is willing to serve the Company, on the terms and conditions herein provided. In order to effect the foregoing, the parties hereto wish to enter into an employment agreement on the terms and conditions set forth below. Accordingly, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment. The Company hereby agrees to employ the ---------- Executive, and the Executive hereby agrees to serve the Company, on the terms and conditions set forth herein. 2. Term. The employment of the Executive by the Company ---- as provided in Section 1 shall commence on the effective date of the proposed merger between Primerica Corporation and The Travelers Corporation (the parent company of the Company) ("Travelers"), presently expected to be on or about December 31, 1993 (the "Commencement Date"). The term of this Agreement shall expire on the third 1 anniversary of the Commencement Date unless prior to such date this Agreement shall be extended by written agreement of the parties. 3. Positions and Duties; Location. The Executive shall -------------------------------- have the title of President of the Company and shall serve as a senior executive of the Company and a member of the Office of the Chief Executive Officer of the Company (so long as such an office shall be so designated) with such responsibilities, duties and authorities consistent with his status as a senior executive of the Company as may from time to time be assigned to the Executive by the Chief Executive Officer of the Company. During the term of this Agreement, the Executive shall devote substantially all his time and best efforts during normal business hours to the business and affairs of the Company except for vacations, illness or incapacity, but nothing in this Agreement shall preclude the Executive from devoting reasonable periods required for (i) serving as a director or member of a committee of any not-for-profit organization or, with the prior approval of the Chief Executive Officer of the Company, any for-profit organization, in each case involving no conflict of interest with the Company, (ii) delivering lectures and fulfilling speaking engagements, and (iii) engaging in charitable and community activities, provided that any of such activities do not materially interfere with the 2 performance of his duties hereunder. 4. Compensation and Related Matters. --------------------------------- (a) Salary and Bonus. During the period of ----------------- the Executive's employment hereunder, the Company shall continue to pay to the Executive a base salary at the rate in effect on the date hereof, such salary to be paid in accordance with the Company's normal payment schedule. The Executive will participate in the Company's discretionary annual bonus program and shall be eligible for discretionary review of base salary in accordance with Company practice, in each case as may be in effect from time to time. Effective beginning with compensation payable with respect to 1994, the Executive shall also participate in the Primerica Corporation Capital Accumulation Plan, as in effect from time to time. During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("disability period"), the Executive shall continue to receive his full base salary until his employment is terminated pursuant 3 to Section 5(b) hereof, provided that payments so made to the Executive during such period shall be reduced by the sum of the amounts, if any, paid to the Executive under disability benefit plans of the Company or under the Social Security disability insurance program. (b) Expenses. During the term of the --------- Executive's employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable and customary expenses incurred by the Executive in performing services hereunder, including all expenses of travel and living expenses while away from home on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. (c) Other Benefits. The Executive shall be --------------- entitled to participate in all of the employee benefit plans and arrangements generally available to senior executives of the Company. (d) Stock Options; Restricted Stock. The ---------------------------------- 4 Executive has previously received awards of stock options and/or restricted stock. Such prior awards shall be governed by the provisions of the plans under which such awards were granted, including the provisions of the offer made or to be made by Primerica Corporation to holders of Company stock options providing, in general, for the conversion of existing stock options of The Travelers Corporation into Primerica Corporation stock options, as described in the prospectus supplement covering such offer and delivered separately (the "Roll-Over Offer"). The Executive hereby elects to participate fully in the Roll-Over Offer. Treatment of unvested stock options in the event of an involuntary termination of employment shall be treated as set forth in the Roll-Over Offer. If the Executive should terminate his employment for "Cause" under Section 5 (e), such termination shall be treated as a termination without "Cause" under the Roll-Over Offer. 5. Termination. The Executive's employment hereunder may ------------ be terminated under the following circumstances: (a) Death. The Executive's employment ------ 5 hereunder shall terminate upon his death. (b) Disability. If, as a result of the ----------- Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full- time basis for the entire period of six (6) consecutive months, the Company may terminate the Executive's employment hereunder on thirty (30) days' written notice of termination (which may be given before or after the end of such six (6) month period), unless the Executive shall have returned to the performance of his duties hereunder on a full-time basis before the later of the thirtieth (30th) day after such notice is given or the last day of such six (6) month period. (c) Cause. The Company may terminate the ------ Executive's employment hereunder for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder (i) upon the Executive's willful refusal to perform his duties; (ii) if the Executive has entered into unlawful acts to enrich the Executive at the Company's expense or has materially 6 violated his duties to the Company, in either case with resulting material injury to the Company; or (iii) upon the Executive's gross misconduct that is demonstrably detrimental to the Company, provided, that a termination under clause (i) by reason of the Executive's willful refusal to perform his duties shall only be effective upon the Company's written notice of termination to the Executive and the failure of the Executive to remedy such refusal promptly. (d) Without Cause. The Company may ---------------- terminate the Executive's employment hereunder without Cause provided that any such termination shall be subject to the express provisions of Section 6(c) hereof. (e) By The Executive. The Executive may ------------------ resign from employment hereunder but subject to the express provisions of Section 7 hereof. The Executive may terminate this Agreement for "Cause". For purposes of this Agreement, the Executive shall have "Cause" to terminate this Agreement upon a material breach of this Agreement by the Company, (including without limitation a reduction in his base salary without his consent). Such 7 termination for "Cause" shall only be effective upon the Executive's written notice of termination to the Company and the failure of the Company to remedy such breach promptly. (f) Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to subsection (a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and, except in the case of a voluntary resignation, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) "Date of Termination" shall mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated for disability pursuant to subsection (b) above, the later of the thirtieth (30th) day after 8 Notice of Termination or the last day of the 6-month period referred to in subsection (b) (provided that the Executive shall not have returned to the performance of his duties on a full-time basis before such later day), (iii) if the Executive's employment is terminated pursuant to subsection (c) above, the later of the date such termination becomes effective under subsection (c) and the date specified in the Notice of Termination, (iv) if the Executive's employment is terminated pursuant to subsection (e) above, the later of the date such termination becomes effective under subsection (e) and the date specified in the Notice of Termination, and (v) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given. Termination of employment shall be effective on the respective Date of Termination. 6. Compensation Upon Termination. ------------------------------ (a) If the Executive's employment is terminated by his death or on account of his disability, the Company shall pay the full base salary due to the Executive under 9 Section 4 through the Date of Termination together with a discretionary pro rata bonus for the year in which such Date of Termination occurs to the Executive or his estate or as may be directed by his legal representative or the legal representative of such estate. (b) (i) If the Executive's employment is terminated by the Company for Cause or if, during the period after the first anniversary of the Commencement Date, the Executive shall resign from his employment, the Company shall pay the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given (to the extent not already paid) and the Company shall have no further obligations to the Executive under this Agreement. (ii) If the Executive shall resign from his employment prior to the first anniversary of the Commencement Date, the Company shall continue to pay to the Executive his then current base salary, as and when otherwise due and subject to appropriate tax withholding, and shall continue to permit the Executive to participate in Company employee medical plans on terms and conditions and at 10 costs generally available from time to time to Company employees, in each case for one year following the Date of Termination. (c) If the Company shall terminate the Executive's employment without Cause or if the Executive terminates this Agreement for "Cause", the Company shall pay or provide to the Executive the following amounts or benefits: (i) if such termination is effective on or before December 31, 1994, his then current base salary through the remaining term of this Agreement, as and when otherwise due and subject to appropriate tax withholding, together with his bonus for 1994 (such bonus to be equal to his bonus for 1993, subject to appropriate tax withholding, and payable at the time such bonuses are otherwise generally paid to senior executives of the Company for the year 1994); or (ii) if such termination is effective after December 31, 1994, his then current 11 base salary, as and when otherwise due and subject to appropriate tax withholding, through the remaining term of this Agreement; and (iii) reasonably appropriate executive outplacement services; (iv) reimbursement of up to $7500 of tax and other financial planning services expenses for the year in which such Date of Termination occurs; and (v) continued participation in Company employee medical plans on terms and conditions and at costs generally available from time to time to Company employees for one year following the Date of Termination. (d) The provisions of Section XI of The Travelers Severance Plan for Officers (entitled "Certain Additional Payments By the Company") shall apply with respect to all payments, benefits, awards and distributions by the Company, Primerica, Travelers and/or any of their respective affiliates to or for the benefit of the Executive, whether pursuant to this Agreement or otherwise. 12 (e) The provisions of this Section 6 are the exclusive rights of the Executive regarding severance or termination and the Executive agrees that such provisions shall be in full satisfaction of any claims the Executive may have as a result of such termination of employment. 7. Confidentiality. During the term of this Agreement and --------------- thereafter, the Executive will not except (i) pursuant to and in the ordinary course of his employment by the Company or, (ii) with the written consent of the Company, make use of or divulge to any person, firm or corporation, any confidential business information of the Company, its affiliates or customers which the Company has previously considered to be significant. The provisions of this Section 7 shall survive the termination, for any reason, of this Agreement. In the event the Executive's employment hereunder is terminated for any reason, whether by the Company or the Executive, the Executive shall not for a period of one year following the Date of Termination, without the Company's prior written consent, personally solicit or induce any employee or agent of the Company or any of its affiliates to terminate or reduce such relationship. 8. Notice. For the purpose of this Agreement, notices, ------- 13 demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered as follows delivered to or when mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Richard H. Booth The Travelers Insurance Group Inc. One Tower Square Hartford, CT 06183 If to the Company: The Travelers Insurance Group Inc. One Tower Square Hartford, CT 06183 Attention: Chief Executive Officer or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 9. Miscellaneous. No provision of this Agreement may be -------------- 14 modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and a duly authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement shall be binding on the successors and assigns of the Company. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without regard to its conflicts of law principles. 10. Validity. The invalidity or unenforceability of any --------- provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Counterparts. This Agreement may be executed in one or ------------- more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 12. Entire Agreement. This Agreement sets forth the entire ----------------- 15 agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of either party hereto. 16 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date and year first above written. The Travelers Insurance Group Inc. By: /s/ Robert I. Lipp -------------------------- Name: Robert I. Lipp Title: Chief Executive Officer EXECUTIVE /s/ Richard H. Booth ------------------------------- Richard H. Booth Primerica Corporation hereby consents to The Travelers Insurance Group Inc. entering into the foregoing employment agreement. Primerica Corporation By: /s/ Charles O. Prince, III ---------------------------- Name: Charles O. Prince, III Title: Senior Vice President and General Counsel Date: ------------------------ 17 EX-10.24 12 Exhibit 10.24 EMPLOYMENT AGREEMENT -------------------- AGREEMENT made as of December 31, 1993, by and between The Travelers Insurance Group Inc., a Connecticut corporation (the "Company") and ROBERT W. CRISPIN (the "Executive"). The Company desires to employ the Executive, and the Executive is willing to serve the Company, on the terms and conditions herein provided. In order to effect the foregoing, the parties hereto wish to enter into an employment agreement on the terms and conditions set forth below. Accordingly, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment. The Company hereby agrees to employ the ---------- Executive, and the Executive hereby agrees to serve the Company, on the terms and conditions set forth herein. 2. Term. The employment of the Executive by the Company ---- as provided in Section 1 shall commence on the effective date of the proposed merger between Primerica Corporation and The Travelers Corporation (the parent company of the Company) ("Travelers") presently expected to be on or about December 31, 1993 (the "Commencement Date"). The term of this Agreement shall expire on the third 1 anniversary of the Commencement Date unless prior to such date this Agreement shall be extended by written agreement of the parties. 3. Positions and Duties; Location. The Executive shall -------------------------------- have the title of Vice Chairman of the Company and shall serve as a senior executive of the Company with such responsibilities, duties and authorities consistent with his status as a senior executive of the Company as may from time to time be assigned to the Executive by the Chief Executive Officer of the Company. During the term of this Agreement, the Executive shall devote substantially all his time and best efforts during normal business hours to the business and affairs of the Company except for vacations, illness or incapacity, but nothing in this Agreement shall preclude the Executive from devoting reasonable periods required for (i) serving as a director or member of a committee of any not-for-profit organization or, with the prior approval of the Chief Executive Officer of the Company, any for-profit organization, in each case involving no conflict of interest with the Company, (ii) delivering lectures and fulfilling speaking engagements, and (iii) engaging in charitable and community activities provided that any of such activities do not materially interfere with the performance of his duties hereunder. 2 4. Compensation and Related Matters. --------------------------------- (a) Salary and Bonus. During the period of ----------------- the Executive's employment hereunder, the Company shall continue to pay to the Executive a base salary at the rate in effect on the date hereof, such salary to be paid in accordance with the Company's normal payment schedule. The Executive will participate in the Company's discretionary annual bonus program and shall be eligible for discretionary review of base salary in accordance with Company practice, in each case as may be in effect from time to time. Effective beginning with compensation payable with respect to 1994, the Executive shall also participate in the Primerica Corporation Capital Accumulation Plan, as in effect from time to time. During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("disability period"), the Executive shall continue to receive his full base salary until his employment is terminated pursuant to Section 5(b) hereof, provided that payments so made to the Executive during such 3 period shall be reduced by the sum of the amounts, if any, payable to the Executive under disability benefit plans of the Company or under the Social Security disability insurance program. (b) Expenses. During the term of the --------- Executive's employment hereunder, the Executive shall be entitled to receive prompt reimbursement for all reasonable and customary expenses incurred by the Executive in performing services hereunder, including all expenses of travel and living expenses while away from home on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company. (c) Other Benefits. The Executive shall be --------------- entitled to participate in all of the employee benefit plans and arrangements generally available to senior executives of the Company. During your first five years of employment (commencing July, 1991) you will receive two years of pension credit for each completed year of service. 4 (d) Stock Options; Restricted Stock. The ---------------------------------- Executive has previously received awards of stock options and/or restricted stock. Such prior awards shall be governed by the provisions of the plans under which such awards were granted, including the provisions of the offer made or to be made by Primerica Corporation to holders of Company stock options providing, in general, for the conversion of existing stock options of The Travelers Corporation into Primerica Corporation stock options, as described in the prospectus supplement covering such offer and delivered separately (the "Roll-Over Offer"). The Executive hereby elects to participate fully in the Roll-Over Offer. Treatment of unvested stock options in the event of an involuntary termination of employment shall be treated as set forth in the Roll-Over Offer. If the Executive should terminate his employment for "Cause" under Section 5 (e), such termination shall be treated as a termination without "Cause" under the Roll-Over Offer. Treatment of unvested stock options in the event of a voluntary termination of employment shall be treated as set forth in the Roll-Over Offer, as modified by Attachment A hereto. 5 5. Termination. The Executive's employment hereunder may ------------ be terminated under the following circumstances: (a) Death. The Executive's employment ------ hereunder shall terminate upon his death. (b) Disability. If, as a result of the ----------- Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties hereunder on a full- time basis for the entire period of six (6) consecutive months, the Company may terminate the Executive's employment hereunder on thirty (30) days' written notice of termination (which may be given before or after the end of such six (6) month period), unless the Executive shall have returned to the performance of his duties hereunder on a full-time basis before the later of the thirtieth (30th) day after such notice is given or the last day of such six (6) month period. (c) Cause. The Company may terminate the ------ Executive's employment hereunder for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder (i) upon the 6 Executive's willful refusal to perform his duties; (ii) if the Executive has entered into unlawful acts to enrich the Executive at the Company's expense or has materially violated his duties to the Company, in either case with resulting material injury to the Company; or (iii) upon the Executive's gross misconduct that is demonstrably detrimental to the Company, provided, that a termination under clause (i) by reason of the Executive's willful refusal to perform his duties shall only be effective upon the Company's written notice of termination to the Executive and failure of the Executive to remedy such refusal promptly. (d) Without Cause. The Company may ---------------- terminate the Executive's employment hereunder without Cause provided that any such termination shall be subject to the express provisions of Section 6(c) hereof. (e) By The Executive. The Executive may ------------------ resign from employment hereunder but subject to the express provisions of Section 7 hereof. The Executive may terminate this Agreement for "Cause". For purposes of this Agreement, the Executive shall have "Cause" 7 to terminate this Agreement upon a material breach of this Agreement by the Company, (including without limitation a reduction in his base salary without his consent.) Such termination for "Cause" shall only be effective upon the Executive's written notice of termination to the Company and the failure of the Company to remedy such breach promptly. (f) Any termination of the Executive's employment by the Company or by the Executive (other than termination pursuant to subsection (a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and, except in the case of a voluntary resignation, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) "Date of Termination" shall mean (i) if the Executive's employment is terminated by 8 his death, the date of his death, (ii) if the Executive's employment is terminated for disability pursuant to subsection (b) above, the later of the thirtieth (30th) day after Notice of Termination or the last day of the 6-month period referred to in subsection (b) (provided that the Executive shall not have returned to the performance of his duties on a full-time basis before such later day), (iii) if the Executive's employment is terminated pursuant to subsection (c) above, the later of the date such termination becomes effective under subsection (c) and the date specified in the Notice of Termination, (iv) if the Executive's employment is terminated pursuant to subsection (e) above, the later of the date such termination becomes effective under subsection (e) and the date specified in the Notice of Termination, and (v) if the Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given. Termination of employment shall be effective on the respective Date of Termination. 6. Compensation Upon Termination. ------------------------------ 9 (a) If the Executive's employment is terminated by his death or on account of his disability, the Company shall pay the full base salary due to the Executive under Section 4 through the Date of Termination together with a discretionary pro rata bonus for the year in which such Date of Termination occurs to the Executive or his estate or as may be directed by his legal representative or the legal representative of such estate. (b) (i) If the Executive's employment is terminated by the Company for Cause or if, during the period after the first anniversary of the Commencement Date, the Executive shall resign from his employment, the Company shall pay the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given (to the extent not already paid) and the Company shall have no further obligations to the Executive under this Agreement. (ii) If the Executive shall resign from his employment prior to the first anniversary of the Commencement Date, the Company shall pay the Executive his full base salary through the Date of Termination at the rate in effect 10 at the time Notice of Termination is given (to the extent not already paid) plus the amount calculated as shown on Attachment A hereto. (c) If the Company shall terminate the Executive's employment without Cause or if the Executive terminates this Agreement for "Cause", the Company shall pay or provide to the Executive the following amounts or benefits: (i) if such termination is effective on or before December 31, 1994, his then current base salary through the remaining term of this Agreement, as and when otherwise due and subject to appropriate tax withholding, together with his bonus for 1994 (such bonus to be equal to his bonus for 1993, subject to appropriate tax withholding, and payable at the time such bonuses are otherwise generally paid to senior executives of the Company for the year 1994); or (ii) if such termination is effective 11 after December 31, 1994, his then current base salary, as and when otherwise due and subject to appropriate tax withholding, through the remaining term of this Agreement; and (iii) reasonably appropriate executive outplacement services; (iv) reimbursement of up to $7500 of tax and other financial planning services expenses for the year in which such Date of Termination occurs; (v) continued participation in Company employee medical plans on terms and conditions and at costs generally available from time to time to Company employees for one year following the Date of Termination; (vi) additional service credit for purposes of vesting and benefit determination under the Pension Plan for Salaried Employees of the Company (The "Pension Plan") such that the total of his actual and credited service is ten (10) years; and (vii) vesting in his Company 12 Contributions Account and ESOP Account under the Company Savings, Investment and Stock Option Plan (TESIP). (d) The provisions of Section XI of The Travelers Severance Plan for Officers (entitled "Certain Additional Payments By the Company") shall apply with respect to all payments, benefits, awards and distributions by the Company, Primerica, Travelers and/or any of their respective affiliates to or for the benefit of the Executive, whether pursuant to this Agreement or otherwise. To the extent the additional service credit referred to in Section 4(c) or in clause (vi) above may not be taken into account for purposes of the Pension Plan, or the vesting referred to in clause (vii) above is not permitted under the TESIP, the Company shall pay the additional amounts that would have been payable to the Executive or his beneficiary under the Pension Plan and the TESIP if such additional service credit had been taken into account and such vesting had been permitted, in the time and manner that such amounts would otherwise have been paid 13 under such plans. The payments required by the preceding sentence may be made through a nonqualified "top hat" plan. (e) The provisions of this Section 6 are the exclusive rights of the Executive regarding severance or termination and the Executive agrees that such provisions shall be in full satisfaction of any claims the Executive may have as a result of such termination of employment. 7. Confidentiality. During the term of this Agreement and --------------- thereafter, the Executive will not except (i) pursuant to and in the ordinary course of his employment by the Company or, (ii) with the written consent of the Company, make use of or divulge to any person, firm or corporation, any confidential business information of the Company, its affiliates or customers. The provisions of this Section 7 shall survive the termination, for any reason, of this Agreement. In the event the Executive's employment hereunder is terminated for any reason, whether by the Company or the Executive, the Executive shall not for a period of one year following the Date of Termination, without the Company's prior written consent, be personally involved in soliciting or otherwise inducing any employee or agent of the Company or any of its affiliates to 14 terminate or reduce such relationship. 8. Notice. For the purpose of this Agreement, notices, ------- demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered as follows delivered to or when mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Robert W. Crispin The Travelers Insurance Group Inc. One Tower Square Hartford, CT 06183 If to the Company: The Travelers Insurance Group Inc. One Tower Square Hartford, CT 06183 Attention: Chief Executive Officer or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address 15 shall be effective only upon receipt. 9. Miscellaneous. No provision of this Agreement may be -------------- modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and a duly authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement shall be binding on the successors and assigns of the Company. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware without regard to its conflicts of law principles. 10. Validity. The invalidity or unenforceability of any --------- provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Counterparts. This Agreement may be executed in one or ------------- more counterparts, each of which shall be deemed to be an original but all of which together will constitute 16 one and the same instrument. 12. Entire Agreement. This Agreement sets forth the entire ----------------- agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements (including without limitation that certain letter agreement dated July 1, 1991), promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of either party hereto. 17 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date and year first above written. The Travelers Insurance Group Inc. By: /s/ Robert I. Lipp -------------------------- Name: Robert I. Lipp Title: Chief Executive Officer EXECUTIVE /s/ Robert W. Crispin ------------------------------- Robert W. Crispin Primerica Corporation hereby consents to The Travelers Insurance Group Inc. entering into the foregoing employment agreement. Primerica Corporation By: /s/ Charles O. Prince, III -------------------------- Name: Charles O. Prince, III Title: Senior Vice President and General Counsel Date: ------------------------ 18 Attachment A ROBERT W. CRISPIN Calculation of payment pursuant to Sec.6 (b) (ii). A payment equal to the amount of the "spread" on any stock options of the surviving corporation in the merger between Primerica Corporation and The Travelers Corporation which are at the time of resignation unvested as a result of participation in the Roll-Over Offer and forfeited as a result of such resignation, as such "spread" exists on the Effective Date of the Merger. For these purposes, "spread" is the difference between the closing price of the common stock of The Travelers Corporation on the New York Stock Exchange (Composite Transactions) and the relevant option exercise price. The number of shares to be multiplied by the "spread" and the relevant option price shall be appropriately adjusted by the conversion factor in connection with the Merger but the number of shares shall not include shares scheduled to vest in January 1994 even if the resignation occurs prior to that vesting. 19 EX-10.30 13 Exhibit 10.30 THE TRAVELERS SEVERANCE PLAN FOR OFFICERS As Amended and Restated September 23, 1993 ------------------------------------------ Section I - Definitions - ----------------------- The following words and phrases shall have the meaning stated below: 1. "Company" means The Travelers Corporation and its affiliates as set forth in Appendix A. 2. "Committee" means the Employee Benefits Committee established pursuant to the provisions of the Pension Plan. 3. "Continuous Service" means the period of employment of an Employee as determined by the Company. Salaried Service with a member of The Travelers controlled group shall be taken into account in determining Continuous Service. 4. "Employee" means any officer employee or manager with a Company pay code of 30, 31 or 32 who is regularly employed on a full-time salaried basis and who is on a U.S. dollar payroll of a participating Company. Eligibility for benefits under this plan disqualify the employee from benefits under The Travelers Severance Plan (Non-Officer). 5. "Group Benefit Plan" means The Travelers Group Insurance and Health Benefit Plan. 6. "Plan" means The Travelers Severance Plan for officers as set forth herein, or in any amendment hereto. 7. "Pension Plan" means the Pension Plan for Salaried Employees of The Travelers Corporation and Certain of its Subsidiaries. 8. "Salary" means the basic salary of the Employee immediately preceding the Severance Date, as determined by the Company in accordance with its rules and entered on its records, exclusive of bonus, overtime pay, or other additional remuneration in any form paid to the Employee. 9. "Savings Plan" means The Travelers Employee Stock Ownership and Investment Plan. 10. "Severance Date" means the last date of active employment, or if later, the date for which the Employee was last paid Salary. Section II - Purpose of Plan - ---------------------------- The Plan provides for the payment of severance benefits to eligible Employees of participating Companies in the event their employment is terminated involuntarily because of the elimination of a job or the closing of an operation. Section III - Effective Date - ---------------------------- The Plan became effective September 14, 1987. Benefits payable prior to April 1, 1988 are in accordance with the terms and conditions of those benefits as announced from time-to-time. For Severance Dates on or after April 1, 1988, the severance benefit shall be determined in accordance with the terms hereunder, except as previously announced. Section IV - Eligibility for Severance Benefits - ----------------------------------------------- 1. General Eligibility ------------------- An Employee of a participating Company whose employment is terminated involuntarily, either because of the elimination of a specific position or the closing of an operation of the Company, may be eligible for a severance benefit under the Plan. However, an Employee shall not be eligible for a benefit under the Plan if a participating Company or another company affiliated with The Travelers Corporation offers a substitute position which, at the sole discretion of the Company, is deemed commensurate with the Employee's former position, and the Employee does not accept that position. 2. Effect of Sale or Other Disposition of a Participating ------------------------------------------------------ Company -------- An Employee shall not be eligible for benefits under the Plan if there is a sale or other disposition of a participating employer Company (or an operating unit or division thereof), and the Employee continues such employment after the date of sale or other disposition. If the Employee's position is eliminated subsequent to the sale or other disposition, the Employee shall not be eligible for a severance benefit under the Plan. Section V - Benefits - -------------------- 1. Amount of Severance Benefit --------------------------- An Employee who is determined eligible for benefits under the Plan shall be paid two weeks Salary for each year of Continuous Service completed with the Company, subject to a maximum of 52 weeks Salary for 26 or more years of Continuous Service. Weekly Salary shall be determined at the Salary rate in effect on the Severance Date. 2. Payment of Severance Benefit ---------------------------- The severance benefit under the Plan shall be paid either in a lump sum, or in installments no less frequently than monthly, as elected by the Employee. A lump sum, or the first installment, shall be paid on the Severance Date, or as soon thereafter as is practicable, and certain employee benefits provided by the Company shall continue to the extent provided in a. and b. below. The severance benefit shall not be paid over a time period that exceeds the number of weeks for which it is paid. a. Employee Benefit Continuation Upon Election of ---------------------------------------------- Installment Payments -------------------- If an Employee elects to have the severance benefit paid in installments, health and dental benefit coverage, but not life insurance coverage shall continue under the Group Benefit Plan during the installment payment period, unless the Employee elects to discontinue such coverage. The Company shall continue its contributions, and Employee contributions shall be offset against severance payments. The Employee shall be credited with Continuous Service under the Retirement Plan and the Savings Plan for the equivalent period for which severance payments are made. However, the Employee will not be allowed to make contributions under the Savings Plan, and the Company will not make Company contributions under that Plan on the Employee's behalf during such period. The severance payment and the period for which severance is deemed payable are not included in the calculation of Final Average Salary under the Pension Plan. b. Employee Benefit Continuation Upon Election of Lump Sum ------------------------------------------------------- If the Employee elects to have a severance benefit paid in a lump sum, the amount of the benefit shall be discounted at a 7% annual interest rate. Coverage under the Group Benefit Plan shall cease as of the Severance Date, unless the Employee is eligible for post-retirement coverage under the Group Benefit Plan, based on the employee's age and years of service. The Employee shall be credited with Continuous Service under the Pension Plan and the Savings Plan for the time period over which severance benefits would have been paid if installment payments had been elected. The severance payment is not included in the calculation of Final Average Salary under the Pension Plan. c. Death of Employee ------------------- In the event of the Employee's death, the right to payment of a severance benefit shall be determined by reference to the Employee's Severance Date. If the Employee is determined to be eligible for a severance benefit but dies prior to the Severance Date, neither the Employee nor the Employee's estate shall be entitled to benefits under this Plan. However, if the Employee dies after installment payments have begun, the Employee's estate shall be paid the full amount of the remaining installments in a lump sum. d. Return to Employment with Company --------------------------------- If the Employee is paid a severance benefit under the Plan and becomes reemployed by the Company or another participating Company before all of the installments are paid, the Employee shall not be entitled to the remaining installments. An Employee who elected a lump sum payment will be required as a condition of reemployment to return a pro rata portion of the payment based upon the number of remaining installments that would have been paid if a lump sum had not been elected. Section VI - Benefits Not Funded - -------------------------------- Except as provided in Section X, it is intended that benefits under the Plan shall be paid by the Company out of its general assets and that the Plan will be unfunded. Section VII - Administration - ---------------------------- 1. The Plan shall be administered by the Committee, which shall be the named fiduciary of the plan within the meaning of the Employee Retirement Income Security Act of 1974, in accordance with its terms and purposes. The Committee shall determine the amount and manner of payment of benefits due to or on behalf of each Employee from the Plan, and shall cause them to be paid by the Company accordingly. 2. The decisions and actions of the Committee shall be final, conclusive, and binding on all parties affected thereby, and the Committee shall not be subject to individual liability with respect to the Plan. 3. The Committee is authorized to delegate the daily management of the Plan. 4. If a written request by an Employee for the payment of any benefits hereunder has been rejected by the Committee, the Committee shall within a reasonable period of time notify the Employee of such rejection in writing, setting forth the specific reasons for such rejection. Such written explanation shall be written in a manner calculated to be understood by the Employee. 5. The Committee shall afford any Employee whose claim for benefits has been rejected a reasonable opportunity for review of such claim. Section VIII - Amendment and Termination - ---------------------------------------- The Company intends to maintain the Plan as long as deemed necessary. However, the Company reserves the right to amend or terminate it at any time for whatever reasons deemed appropriate. Section IX - Miscellaneous - -------------------------- 1. Eligibility for benefits under the Plan shall not give any Employee the right to be retained in the employment of the Company or any right or interest in the Plan. 2. No Employee shall have the right to assign, commute or encumber any benefits or payments herein provided. To the maximum extent permitted by law, the benefits or payments provided under the Plan shall not be liable to attachment, garnishment or other process, or to be seized, taken, appropriated or applied by any legal or equitable process, to pay any debt or liability of the Employee. Section X - Special Benefits Continuation - ----------------------------------------- 1. Generally --------- Notwithstanding any other provision of the Plan to the contrary, this Section shall govern eligibility for and payment of benefits under the Plan from September 23, 1993 through December 31, 1995. 2. Definitions ----------- For purposes of this Section, the following definition shall apply: "Cause" means: (i) Unlawful acts intended to result in the substantial personal enrichment of an Employee at Travelers expense. (ii) An Employee engages in a material violation of his or her responsibilities to Travelers that results in material injury to Travelers. (iii) Gross misconduct on the part of an Employee which is demonstrably detrimental to Travelers. 3. Amendment or Modification of Plan --------------------------------- Other than as necessary to implement the resolutions of the Board of Directors on September 23, 1993, from September 24, 1993 through December 31, 1995, the Plan shall not be amended, modified or adjusted in any manner that would reduce or adversely affect benefits provided under the Plan as in effect on September 23, 1993. 4. Benefits -------- a. Severance Benefit ----------------- If on or after September 23, 1993 and before January 1, 1995 an Employee's employment is terminated without Cause, the Employee shall be paid a lump sum severance benefit equal to 200 percent of the basic severance benefit determined under Section V(1). If after December 31, 1994 and before January 1, 1996 an Employee's employment is terminated without Cause, the employee shall be paid a lump sum severance benefit equal to 100 percent of the basic severance benefit determined under Section V(1). Notwithstanding the other provisions of this Plan, (i) an Employee shall be treated as having been terminated by the Company without "Cause" if the Employee terminates his or employment within 30 days after any reduction in the Employee's Salary to which the Employee has not given written consent; and (ii) in order to determine the eligibility of an Employee for a severance benefit pursuant to this Section X, and the amount of such benefit, "Salary" shall mean the higher of such Employee's (x) basic salary, as in effect on September 23, 1993, and (y) any higher amount of basic salary paid to the Employee at any time after September 23, 1993. b. Group Benefit Plan, Retirement Plan, Savings Plan ------------------------------------------------- The severance benefit determined under this Section X shall be treated for purposes of coverage under the Group Benefit Plan and for purposes of additional credit for Continuous Service under the Retirement Plan and the Savings Plan as having been paid over a period that is 200 percent and 100 percent, as the case may be, of the equivalent periods under the basic Severance Plan. Additional Continuous Service shall be credited to the Employee for the period for which the lump sum is deemed payable. However, the Employee will not be allowed to make contributions under the Savings Plan, and the Company will not make Company contributions under that Plan on the Employee's behalf during such period. The severance payment and the period for which severance is deemed payable are not included in the calculation of Final Average Salary under the Retirement Plan. An Employee who becomes entitled to a severance benefit under this Section X shall become 100% vested in the Company Contributions Account under the Savings Plan and will have a 100% vested interest in the accrued benefit under the Retirement Plan. c. An Employee who becomes entitled to a severance benefit under this Section X shall not be entitled to a basic severance benefit under the Plan. 5. Amendments ---------- Prior to September 23, 1993 and after December 31, 1995, this Section X shall be subject to amendment, suspension, modification or termination by the Company at any time, provided that no such amendment, suspension, modification or termination shall affect the rights under the Plan, including without limitation this Section X, of any Employee whose Severance Date occurs on or after September 23, 1993 and before January 1, 1996. Other than as necessary to implement the resolutions of the Board of Directors on September 23, 1993, from September 24, 1993 through December 31, 1995, the Plan shall not be amended, suspended, modified or terminated in a manner that would eliminate, reduce, or otherwise affect any Employee's rights hereunder, including the ability to earn future benefits from continuation of the Plan. 6. Enforcement of Rights --------------------- To the extent that amounts have been contributed to the Travelers Benefit Continuation Trust, any Employee (including a former Employee or beneficiary) may apply to the trustee of The Travelers Benefits Continuation Trust for assistance in enforcing any rights and pursuing any claim arising under this Section X provided, however, that any such Employee or beneficiary who applies for such assistance shall be subject and bound by any limitations and conditions that such trustee may impose. No Employee or beneficiary shall be required to notify or seek the assistance of such trustee as a condition for or prerequisite to any other action that might be taken by or on behalf of the Employee or beneficiary in order to enforce any rights or pursue any claims under the Plan, and the fees, expenses and costs that the Employee or beneficiary may incur in connection with such action shall not be the responsibility of The Travelers Corporation Benefits Continuation Trust or the trustee thereof. 7. Outplacement Services --------------------- An Employee who becomes entitled to benefits under this Section X on or after September 23, 1993 and before January 1, 1996 shall be eligible for full outplacement services, including individual counseling, resume preparation, and use of an office, telephone and secretarial support for the time period specified in the outplacement arrangement provided. Section XI. - Certain Additional Payments by the Company. - --------------------------------------------------------- (a) Anything in this Plan to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the employee (whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise, but determined without regard to any additional payments required under this Section XI) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), the employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Employee of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section XI(c), all determinations required to be made under this Section XI, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand or such other certified public accounting firm as may be designated by the Employee (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Employee within 15 business days of the receipt of notice from the Employee that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for Travelers or Primerica Corporation, the Employee shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section XI, shall be paid by the Company to the Employee within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Employee, it shall furnish the Employee with a written opinion that failure to report the Excise Tax on the Employee's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Employee. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section XI(c) and the Employee thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. (c) The Employee shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Employee is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Employee shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Employee in writing prior to the expiration of such period that it desires to contest such claim, the Employee shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Employee harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section XI(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings, and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Employee to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Employee agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Employee to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Employee, on an interest-free basis and shall indemnify and hold the Employee harmless, on an after-tax basis from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Employee with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Employee shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section XI(c), the Employee becomes entitled to receive any refund with respect to such claim, the Employee shall (subject to the Company's complying with the requirements of Section XI(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section XI(c), a determination is made that the Employee shall not be entitled to any refund with respect to such claim and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. APPENDIX A ---------- The Travelers Insurance Company The Travelers Indemnity Company The Phoenix Insurance Company The Charter Oak Fire Insurance Company The Travelers Indemnity Company of Rhode Island The Travelers Indemnity Company of Illinois The Travelers Insurance Company of Illinois The Travelers Life and Annuity Company The Travelers Investment Management Company Travelers Equities Sales, Inc. Center for Corporate Health, Inc. The Prospect Company Constitution Plaza, Inc. The Plaza Corporation Exsure, Inc. The Constitution State Insurance Company Constitution State Service Company Travelers/E.B.S., Inc. The Travelers Health Network, Inc. The Travelers Health Network of California, Inc. The Travelers Health Network of Illinois, Inc. The Travelers Health Network of Louisiana, Inc. The Travelers Health Network of New York, Inc. The Travelers Health Network CMP of Tennessee, Inc. The Travelers Health Network of Texas, Inc. EX-11.01 14 Exhibit 11.01 The Travelers Inc. and Subsidiaries Computation of Earnings Per Share (In millions, except for per share amounts)
Year ended December 31, ----------------------------------------- 1993 1992 1991 ---- ---- ---- Earnings: Net Income $916 $728 $479 Preferred dividends - series A (24) (10) - Preferred dividends - series B (4) - - --- --- ---- Income applicable to common stock 888 718 479 Interest expense related to 5 3/4% Convertible Subordinated Notes (retired in 1991), net of applicable income taxes - - 2 Interest expense (through the date of conversion) related to 4 1/2% Eurodollar Convertible Subordinated Debentures, net of applicable income taxes - 1 4 Dilution due to assumed exercise of options of subsidiary - (2) (2) --- --- ---- $888 $717 $483 === === === Average shares: Common 229 215 212 Common stock warrants - - - Assumed conversion of 5 3/4% Convertible Subordinated Notes - - 2 Assumed conversion of 4 1/2% Eurodollar Convertible Subordinated Debentures - 1 4 Assumed exercise of dilutive stock options 5 4 5 Incremental shares - Capital Accumulation Plan 4 3 4 --- --- --- 238 223 227 === === === Earnings Per Share $3.74 $3.22 $2.14 ==== ==== ====
Earnings per common share are based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect of common stock warrants and stock options, the incremental shares assumed issued under the Capital Accumulation Plan and the assumed conversion of the 4 1/2% Eurodollar Convertible Subordinated Debentures (through the date of their conversion) and the 5 3/4% Convertible Subordinated Notes. Fully diluted earnings per common share, assuming conversion of all outstanding convertible notes and debentures, the maximum dilutive effect of common stock equivalents and the 5.5% convertible preferred stock, have not been presented because the effects are not material. The fully diluted earnings per common share computation for the years ended December 31, 1993, 1992 and 1991 would entail adding the number of shares issuable on conversion of the other debentures (2.0, 4.1 and 6.0 million shares, respectively), the additional common stock equivalents (0.4, 1.1 and 3.8 million shares, respectively) and the assumed conversion of the 5.5% convertible preferred stock (1.4 million shares in 1993), to the number of shares included in the earnings per common share calculation (resulting in a total of 241.6, 228.0 and 236.3 million shares, respectively) and eliminating the after-tax interest expense related to the conversion of other debentures ($3.1, $7.0 and $8.3, respectively) and the elimination of the 5.5% convertible preferred stock dividends ($2.9 in 1993). EX-12.01 15 EXHIBIT 12.01
The Travelers Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges ALL COMPANIES CONSOLIDATED (In millions of dollars) Year ended December 31, ------------------------------------------------------------------------------------ 1993 1992 1991 1990 1989 - ---------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes, minority interests and cumulative effect of changes in accounting principle... $1,523 $1,188 $ 791 $ 602 $513 Elimination of undistributed equity earnings............. (116) (26) (5) (3) - Pre-tax minority interest........... (32) - - - - Add: Interest.......................... 707 674 876 1,027 1,001 Interest portion of rentals....... 61 38 46 43 39 ----- ----- ----- ----- ----- Income available for fixed charges.. $2,143 $1,874 $1,708 $1,669 $1,553 ===== ===== ===== ===== ===== Fixed charges: Interest.......................... $ 707 $ 674 $876 $1,027 $1,001 Interest portion of rentals....... 61 38 46 43 39 ----- ----- ----- ----- ----- Fixed charges....................... $ 768 $ 712 $ 922 $1,070 $1,040 ===== ===== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred stock dividends......................... 2.79x 2.63x 1.85x 1.56x 1.49x ==== ==== ==== ==== =====
EX-13.01 16 Exhibit 13.01 The Travelers Inc. and Subsidiaries FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (In millions of dollars, except per share amounts) Year Ended December 31, (1) 1993 1992 1991 1990 1989 - ----------------------- ------ ------ ------ ------ ------ Total revenues (2) $6,797 $5,125 $6,608 $6,194 $5,695 After-tax gains from sale of subsidiaries and affiliates $8 $135 $43 $10 - Income before cumulative effect of changes in accounting principles $951 $756 $479 $373 $289 Net income (3) $916 $728 $479 $373 $289 Net income per common share before cumulative effect of changes in accounting principles (4) $3.88 $3.34 $2.14 $1.64 $1.44 Net income per common share (4) $3.74 $3.22 $2.14 $1.64 $1.43 Dividends per common share (4) $0.490 $0.363 $0.225 $0.180 $0.145 Ratio of earnings to fixed charges 2.79x 2.63x 1.85x 1.56x 1.49x December 31, (1) - ------------ Total assets (5) $101,360 $24,151 $21,561 $19,689 $17,955 Long-term debt $6,991 $3,951 $4,327 $3,456 $3,008 Stockholders' equity $9,326 $4,229 $3,280 $2,859 $2,603 Book value per common share (4) $26.06 $17.70 $15.10 $13.20 $11.76 (1) The Travelers Inc. (the Company) was formerly Primerica Corporation (Primerica). Data relating to results of operations excludes the amounts of The Travelers Insurance Group Inc. except that results for 1993 include the Company's equity in earnings relating to the 27% purchase, and data relating to financial position excludes amounts for old Travelers for the years prior to 1993 (see Note 1 of Notes to Consolidated Financial Statements). (2) Revenues for 1989 through 1991 include those of Fingerhut Companies, Inc. (Fingerhut), which had been carried as a consolidated subsidiary (see Note 3 of Notes to Consolidated Financial Statements). (3) See Note 2 of Notes to Consolidated Financial Statement for information regarding changes in accounting principles in 1992 and 1993. (4) The Company's Board of Directors declared stock splits in the form of stock dividends (three-for-two in January 1993 and four-for-three in July 1993), which combined yield the equivalent of a two-for-one stock split. Prior years' information has been restated to reflect the stock splits. (5) Assets and liabilities for 1992 have been reclassified to conform with the 1993 presentation for the adoption, effective January 1, 1993, of Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." 1 The Travelers Inc. and Subsidiaries MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS Consolidated Results of Operations Year Ended December 31, ------------------------ (In millions, except per share amounts) 1993 1992 1991 ------------------------------------------------------------------------- Revenues $6,797 $5,125 $6,608 ===== ===== ===== Income before cumulative effect of changes in accounting principles $951 $756 $479 === === === Net income $916 $728 $479 === === === Earnings per share * Before cumulative effect of changes in accounting principles $3.88 $3.34 $2.14 ==== ==== ==== Net income $3.74 $3.22 $2.14 ==== ==== ==== Weighted average number of common shares outstanding and common stock equivalents * 237.8 222.8 226.5 ===== ===== ===== ------------------------------------------------------------------------- * Adjusted for 1993 stock splits yielding the equivalent of a two-for-one split. The Travelers Merger On December 31, 1993, Primerica Corporation (Primerica) acquired the approximately 73% it did not already own of The Travelers Corporation (old Travelers), one of the largest multi-line insurance companies in the United States. The acquisition was effected by means of a merger of old Travelers into Primerica and, concurrently with the merger, Primerica changed its name to The Travelers Inc. which together with its subsidiaries, is hereinafter referred to as the Company. The old Travelers businesses acquired are hereinafter referred to as old Travelers or The Travelers Insurance Group. As consideration for the merger, the Company issued .80423 shares of its common stock for each old Travelers common share then outstanding. The total purchase price of $3.4 billion is comprised of $3.3 billion, representing the fair value of the approximately 86 million newly issued common shares, plus the premium over book value related to the two issues of old Travelers Preference Stock exchanged in the merger and certain other acquisition costs. The acquisition has been accounted for as a purchase, and accordingly, the results of operations for periods prior to December 31, 1993 do not include those of old Travelers other than for the equity in earnings for 1993 relating to the 27% previously owned. The discussion of results of operations which follows relates only to Primerica and its subsidiaries, whereas the discussion relating to financial position at December 31, 1993 reflects the consolidation of old Travelers. The old Travelers assets acquired and liabilities assumed are reflected in the Consolidated Statement of Financial Position at December 31, 1993 at management's best estimate of their fair value. Evaluation and appraisal of the net assets is continuing, and allocation of the purchase price may be adjusted. The excess of the purchase price over the estimated fair value of the net assets of approximately $975 million will be amortized on a straight-line basis over 40 years. The Shearson Acquisition On July 31, 1993, the Company acquired the domestic retail brokerage and asset management businesses (the Shearson Businesses) of Shearson Lehman Brothers Holdings Inc. (SLB), an American Express Company (American Express) subsidiary, for approximately $2.1 billion representing $1.6 billion for the net assets acquired plus approximately $500 million of cash required to be segregated for customers under commodities regulations. The businesses acquired were combined with the operations of Smith Barney, Harris Upham & Co., Incorporated, and the combined firm has been named Smith Barney Shearson Inc. which is a subsidiary of Smith Barney Shearson Holdings Inc. (SBS). Payment for the net assets consisted of approximately $900 million in cash, $125 million in the form of convertible preferred stock of the Company, $25 million in the form of warrants to purchase common stock and the balance in notes to the seller. In addition, the Company has agreed to pay American Express additional amounts that are contingent upon the new unit's performance. Evaluation and appraisal of the net assets is continuing, and allocation of the purchase price may be adjusted. 2 Results of Operations The Company's earnings in 1993 reflect a substantial increase in the contribution of SBS, which had a record earnings year, and Consumer Finance Services, which continued to post record results. Income before the cumulative effect of changes in accounting principles for 1993 includes: - - Reported investment portfolio gains of $109 million; - - a $65 million provision for one-time expenses related to the acquisition of the Shearson Businesses; and - - a gain of $8 million from the sale of stock of subsidiaries and affiliates. Income before the cumulative effect of changes in accounting principles for 1992 includes: - - Reported investment portfolio gains of $28 million; - - a gain of $55 million from the sale of Fingerhut Companies, Inc. (Fingerhut) common stock; - - a gain of $52 million from the sale of the entire ownership interest in Margaretten & Company, Inc. (Margaretten); - - a gain of $19 million from the sale of the common stock investment in Musicland Stores Corporation (Musicland); - - a gain of $16 million from the exchange of 50% of Commercial Insurance Resources, Inc., the parent of Gulf Insurance Company (Gulf), and the exchange of certain Transport Life Insurance Company (Transport) businesses for old Travelers common stock; - - a net gain of $3 million from the divestment of securities of the Company's affiliates, Inter-Regional Financial Group, Inc. (IFG) and PennCorp Financial Group, Inc.; and - - a loss of $10 million on the sale of the Voyager group of companies (Voyager). Included in net income for 1993 is an after-tax charge of $18 million resulting from the adoption of Statement of Financial Accounting Standards No. 112 (FAS 112), "Employers' Accounting for Postemployment Benefits," and an after-tax charge of $17 million resulting from the adoption of Statement of Financial Accounting Standards No. 106 (FAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions." Included in net income for 1992 is an after-tax charge of $28 million resulting from the adoption of Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." Excluding these items, earnings for 1993 increased by $306 million, or 52%, over the 1992 period, reflecting primarily increased operating earnings from the combined SBS unit, earnings from the 27% investment in old Travelers and improved performance at Consumer Finance Services. The most significant factors in 1992's earnings growth over 1991 were increases in the contributions of Smith Barney and Consumer Finance Services as well as reduced corporate treasury expense from lower debt and interest rate levels. The most significant factors in 1991's earnings growth over 1990 also were increases in the contributions of Smith Barney and Consumer Finance Services and the benefit to corporate treasury expense of declining interest rates. Net income for 1991 includes after-tax gains of $43 million from sales of Fingerhut common stock. Also reflected in 1991 are after-tax net investment portfolio gains of $20 million in the fourth quarter and an after-tax repositioning provision of $20 million at Primerica Financial Services; an after-tax charge of $35 million related to specialty life and health operations, and an after- tax charge of $16 million related to real estate lease commitments. Revenues for 1991 include $1,428 million from Fingerhut, the operations of which were included with those of the Company on a consolidated basis through December 31, 1991. The following discussion presents in more detail each segment's performance. 3 Investment Services Year Ended December 31, ------------------------------------------------------ 1993 1992 1991 ------------------------------------------------------ Net Net Net ($ in millions) Revenues income Revenues income Revenues income --------------------------------------------------------------------------- Smith Barney $3,371 $306 $1,677 $157 $1,635 $139 Shearson (1) Mutual funds and 153 30 140 31 128 28 asset management Margaretten - - 5 3 127 17 --------------------------------------------------------------------------- Total Investment Services $3,524 $336 $1,822 $191 $1,890 $184 =========================================================================== (1) Net income for 1993 includes a $65 after-tax provision for merger related costs. The Company's Investment Services segment includes SBS - investment banking and securities brokerage; American Capital Management & Research, Inc. (American Capital) - mutual funds; a limited partnership interest in RCM Capital Management (RCM) - asset management; and through its date of sale on February 5, 1992, Margaretten - mortgage banking. SBS's earnings increased significantly to $371 million in 1993, which includes five months' results from the Shearson Businesses, before a provision for merger related costs of $65 million. This compares to $157 million reported by Smith Barney alone in the prior year. Net revenues for 1993 of the merged firm increased more than 113% over the prior year. The growth in 1992 as compared to 1991 reflects record levels of performance in almost all areas. Smith Barney Shearson Revenues Year Ended December 31, --------------------------------- ($ in millions) 1993 1992 1991 ----------------------------------------------------------------- Commissions $1,252 $ 509 $ 476 Investment banking 667 433 346 Principal trading 549 298 318 Asset management fees 319 73 59 Interest income, net* 207 101 101 Other income 100 35 24 ----------------------------------------------------------------- Net revenues* $3,094 $1,449 $1,324 ================================================================= * Net of interest expense of $277, $228 and $311 in 1993, 1992 and 1991, respectively. Revenues included in the consolidated statement of income are before deductions for interest expense. Total assets under management for the Investment Services segment were $116 billion at December 31, 1993, compared to $54 billion in the prior year. Assets under management at SBS were $75 billion at December 31, 1993 (which reflects $55 billion acquired in the Shearson Acquisition), compared to $16 billion in the prior year. Assets under management at American Capital and RCM were $41 billion at December 31, 1993, compared to $38 billion in the prior year, an 8% increase. 4 Net income from the Company's mutual funds and asset management operations decreased slightly in 1993 from the prior year due primarily to increased volume-related marketing expenses and the effect of the 1993 tax rate change on deferred tax liabilities at December 31, 1992 of $2.4 million. American Capital's mutual fund sales (at net asset value) increased to $3,061 million from $2,212 million. American Capital's net income improved in 1992 compared to 1991 primarily due to higher management fees resulting from an increase in assets under management. RCM reported higher net income in 1992 as average assets under management rose to $23 billion in 1992 from $20 billion in 1991. Outlook - SBS's business is significantly affected by the levels of activity in the securities markets, which in turn are affected by the level and trend of interest rates, the general state of the economy and the national and worldwide political environments, among other factors. An increasing interest rate environment could have some adverse impact on SBS's businesses, including commissions (which are linked in part to the economic attractiveness of securities relative to time deposits) and investment banking (which is affected by the relative benefit to corporations and public entities of issuing public debt and/or equity versus other avenues for raising capital). Such effects, however, could be at least partially offset by a strengthening U.S. economy that would include growth in the business sector -- accompanied by an increase in the demand for capital -- and an increase in the capacity of individuals to invest. SBS will continue to concentrate on building its asset management business, which tends to provide a more predictable and steady income stream than its other businesses. In addition, SBS will also benefit in 1994 from a full year's contribution from the Shearson businesses, which in 1993 contributed for five months following their acquisition. SBS continues to maintain tight expense controls that management believes will help the firm weather a downturn in market conditions, should it occur. Results of RCM and American Capital may also be affected by the interest rate environment. An increasing interest rate environment could have an adverse impact on management fees and commissions. Management fees are substantially based on assets under management which could decline in a rising interest rate environment due to a potential decline in the value of the underlying securities of the funds and increased redemptions and lower sales as investors find time deposits more attractive. Decreased sales would also reduce commission income. A strengthening U.S. economy could partially offset these effects due to an increase in the capacity of individuals to invest. In addition, American Capital's results will be affected by sales of Common Sense(R) Trust mutual funds, which are related to market conditions and, to some extent, insurance production at PFS (see further discussion under Insurance Services). Asset Quality - Total Investment Services' assets at December 31, 1993 were approximately $32 billion. Of this, SBS's assets represented approximately $31.6 billion, consisting primarily of highly liquid marketable securities and collateralized receivables. About 43% of SBS's assets were related to customer financing transactions where U.S. Government and mortgage-backed securities are bought, lent, sold and borrowed in generally offsetting amounts to generate net interest income and to facilitate trading. Another 19% represented inventories of securities primarily needed to meet customer demand. A significant portion of the remainder of SBS's assets represented receivables from brokers, dealers and customers that relate to securities transactions in the process of being settled. The carrying values of the majority of SBS's securities are adjusted daily to reflect current prices. See Notes 2, 6, 7 and 8 of Notes to Consolidated Financial Statements for a further description of these assets. At December 31, 1993 there were no "bridge" loans at SBS and exposure to high- yield positions was immaterial. At December 31, 1993 SBS's assets to equity ratio was 14.8 to 1, which management believes is a conservative leverage level for a securities broker and one that allows for future growth. SBS's assets are financed through a number of sources including long and short- term credit facilities, the customer financing transactions described above and payables to brokers, dealers and customers. 5 Consumer Finance Services Year Ended December 31, ------------------------------------------------------- 1993 1992 1991 ------------------------------------------------------- Net Net Net ($ in millions) Revenues income Revenues income Revenues income - ----------------------------------------------------------------------------- Consumer Finance Services(1) $1,193 $232 $1,158 $198 $1,150 $175 ============================================================================= (1) Net income includes $23 and $4 of reported investment portfolio gains in 1993 and 1992, respectively. Consumer Finance earnings before reported investment portfolio gains increased 8% in 1993 over the prior year. The increase primarily reflects a significant decline in loan losses and a 3% increase in average receivables outstanding. The increase in net income and revenues in 1992 compared to 1991 reflects an increase in average receivables outstanding (offset by slightly lower yields), improved operating efficiencies and some benefit from lower funding costs. Year-end receivables increased in 1993 by $554 million to end the year at $6.342 billion. The 1993 increase occurred across-the-board in real estate loans, personal loans and credit cards and also reflects the reacquisition of the remainder of a portfolio of loans collateralized by manufactured housing units amounting to $135 million at year end. While average receivables increased in 1992, year-end receivables declined reflecting an increase in early payoffs of real estate loan outstandings. This was partially offset by an increase in credit card outstandings. Seventy-three branch offices were added during 1993, bringing the total to 768 at year end. Consumer Finance borrows from the corporate treasury operations of Commercial Credit Company (CCC), a major holding company subsidiary of the Company that raises funds externally. For fixed rate loan products Consumer Finance is charged agreed-upon rates that have generally been set within a narrow range and have approximated 8% over the last three years. For variable rate loan products Consumer Finance is charged prime-based rates. CCC's actual cost of funds may be higher or lower than rates charged to Consumer Finance, with the difference reflected in Corporate and Other. The average yield on receivables outstanding decreased to 15.83% in 1993 from 16.31% in the prior year and 16.69% in 1991, due to lower yields on fixed rate second mortgages and the adjustable rate real estate-secured loan product introduced at the end of 1992. Lower yields on loans outstanding, partially offset by decreased cost of funds to Consumer Finance on variable rate loans, have resulted in a decline in net interest margins to 8.44% in 1993 from 8.66% in 1992. The allowance for losses as a percentage of net receivables was reduced to 2.64% at year-end 1993 from 2.91% at year-end 1992 due to the improved credit quality of the loan portfolio. The increase in the allowance in 1992 from 2.86% at year-end 1991 reflected the impact of the recessionary economic environment. 6 As of, and for, the Year Ended December 31, ----------------------- 1993 1992 1991 ----------------------- Allowance for losses as % of net consumer finance receivables at year end 2.64% 2.91% 2.86% Charge-off rate for the year 2.36% 2.84% 2.72% 60 + days past due on a contractual basis as % of gross consumer finance receivables at year end 2.21% 2.55% 2.80% Accounts 60+ days past due include accounts in the process of foreclosure for all periods presented. The Company's wholly owned subsidiary, American Health and Life Insurance Company (AHL), provides credit life and health insurance to Consumer Finance customers. Premiums earned were $88 million in 1993, $90 million in 1992 and $86 million in 1991. Outlook - Consumer Finance is affected by the interest rate environment and general economic conditions. In a rising interest rate environment, real estate loan liquidations may decline compared to the last two years, when potential customers refinanced their first mortgages instead of turning to the second mortgage market, or proceeds from the refinancing of first mortgages were used to pay off existing second mortgages. Lower loan liquidations would benefit the level of receivables outstanding. In addition, a rising interest rate environment could also reduce the downward pressure experienced during the last several years on the interest rates charged on new real estate-secured receivables, as well as credit cards, which are substantially based on the prime rate. However, significantly higher rates could result in an increase in the interest rates charged to Consumer Finance on the funds it borrows from CCC to reflect the Company's overall higher cost of funds. This impact could be at least partially offset by the benefits of a strengthening U.S. economy, which typically would include an increase in consumer borrowing demand. Asset Quality - Consumer Finance assets totaled approximately $7 billion at December 31, 1993, of which $6 billion, or 86%, represented the net consumer finance receivables (after accrued interest and the allowance for credit losses). These receivables were predominantly residential real estate-secured loans and personal loans. Receivable quality depends on the likelihood of repayment. The Company seeks to reduce its risks by focusing on individual lending, making a greater number of smaller-sized loans than would be practical in commercial markets, and maintaining disciplined control over the underwriting process. The Company has a geographically diverse portfolio as described in Note 9 of Notes to Consolidated Financial Statements. The Company believes that its loss reserves on the consumer finance receivables are appropriate given current circumstances. Of the remaining Consumer Finance assets, approximately $598 million were investments of AHL and its affiliates, including $352 million of fixed-income securities and $204 million of short-term investments. 7 Insurance Services Year Ended December 31, ------------------------------------------------------- 1993 1992 1991 ------------------------------------------------------- Net Net Net ($ in millions) Revenues income Revenues income Revenues income ---------------------------------------------------------------------------- Primerica Financial Services (1) $1,266 $223 $1,158 $197 $1,160 $175 Transport Life(2) 319 42 347 36 419 29 Gulf Property and Casualty (3) 315 45 316 54 257 22 Minority Interest - Gulf - (22) - - - - ---------------------------------------------------------------------------- Total Insurance Services $1,900 $288 $1,821 $287 $1,836 $226 ============================================================================== (1) Net income includes $45 and $10 of reported investment portfolio gains in 1993 and 1992, respectively. (2) Net income includes $17 and $6 of reported investment portfolio gains in 1993 and 1992, respectively. (3) Net income includes $15 and $6 of reported investment portfolio gains in 1993 and 1992, respectively, and $19 in 1992 from the sale of Musicland common stock. Results of operations of the Insurance Services segment include only the results of Primerica Financial Services (PFS), the specialty life and health operations of Transport, and the property and casualty operations of Gulf. Information relating to financial position at December 31, 1993 also includes The Travelers Insurance Group. Sales of individual term life insurance at PFS trended up in 1993. PFS issued 260,300 policies totaling $48 billion in face amount of life insurance during 1993, an increase from 252,500 policies totaling $46 billion in face amount of life insurance during 1992, but still below the 289,700 policies totaling $51 billion issued in 1991. The increase in policies issued has contributed to an increase in insurance in force, which was $309 billion at December 31, 1993, compared to $302 billion at December 31, 1992 and $309 billion at December 31, 1991. PFS continued to experience growth in sales of other financial products, primarily mutual funds through a joint venture with American Capital, and the $.M.A.R.T. (second mortgage loans) and S.A.F.E. (personal loans) products of Consumer Finance. Sales of mutual funds were $1.3 billion in 1993 compared to $1.1 billion in 1992 and $788 million in 1991. Assets under management in PFS's proprietary Common Sense(R) Trust family of funds reached $3.1 billion at year end, up 19% over 1992. PFS has traditionally offered mutual funds to customers as a way to invest the savings obtained through the purchase of relatively low-cost term life insurance as compared to traditional whole life insurance. $.M.A.R.T. and S.A.F.E. loan receivables, which are reflected in the assets of Consumer Finance, were $765 million at December 31, 1993 compared to $487 million at December 31, 1992 and $411 million at December 31, 1991. The dramatic growth in 1993 reflects the introduction at the end of 1992 of an adjustable rate real estate loan product which accounted for $246 million of the increase. During 1993 investment income at PFS declined slightly from the prior year as proceeds from sales of investments were reinvested at lower yields. Results of Transport before reported net investment portfolio gains in 1993 of $17 million and $6 million in 1992 decreased slightly, reflecting the sale of two employee benefits businesses to old Travelers effective January 1, 1993. The results of Transport's ongoing businesses, primarily supplementary accident 8 and health coverages and long-term care insurance, improved slightly over 1992. Results for 1992 were comparable with results for 1991 before portfolio gains. Transport was formerly reported with Voyager as part of Specialty Life and Health. Earnings from Gulf increased slightly compared to 1992, before old Travelers' 50% minority interest, reported net investment portfolio gains of $15 million and $6 million in 1993 and 1992, respectively, and a $19 million gain in 1992 from the sale of Musicland. Gulf's results reflect ongoing growth in its high- margin specialty businesses offset by relatively high local storm losses in the regional business in 1993. Notwithstanding a $2 million after-tax provision for losses from Hurricane Andrew in the third quarter of 1992, Gulf's 1992 earnings improved over 1991, also as a result of the growth of the specialty business. Gulf's 1993 combined ratio improved to 95.9%, from 97.6% in 1992 and 101.9% in 1991. (However, for the fourth quarter of 1993 the combined ratio increased to 97.8%, principally as a result of higher storm-related claims.) Gulf writes traditional and specialty insurance lines. In May 1993, the Company completed the sale of Voyager. The exclusion of Voyager and Transport's former employee benefits businesses has resulted in a decline compared to the 1992 period in insurance-related revenue and expense categories included in the Consolidated Statement of Income. Outlook - PFS PFS has undergone substantial changes since 1990 that have adversely impacted its results, following the rapid growth during the 1980s. Over the last few years, programs were begun that are designed to increase the number of producing agents, customer contacts and, ultimately, increase production levels. While the full impact of these programs has not yet been realized, enhanced customer service and increased customer contacts have contributed to improved persistency (i.e., the percentage of policies that continue). Also, the decline in the level of insurance in force has stopped, and the number of producing agents has stabilized. A continuation of these trends could positively impact future operations. PFS continues to expand into certain markets not previously tapped by the sales force and further expand the cross- selling with other Company subsidiaries of products such as $.M.A.R.T. and S.A.F.E. loans and Common Sense(R) Trust mutual funds. Outlook - The Travelers Insurance Group A variety of factors continue to affect the property-casualty market including inflation in the cost of medical care, litigation and losses from involuntary markets. The Travelers Insurance Group attempts to avoid exposure to high hazard liability risks through careful underwriting, extensive use of retrospective rating and reliance on financially secure reinsurance programs. In addition, the absence of needed rate relief, rising medical costs and the need for legislative reform in workers' compensation continue to have an adverse effect on profitability, particularly in business written on a guaranteed cost basis. The Travelers Insurance Group's response to these unfavorable trends is to underwrite more state-specific business, increase its use of deductibles and loss sensitive rating plans and aggressively market self-insurance programs. On December 13, 1993 the United States Supreme Court issued its decision in a case entitled John Hancock v. Harris Trust. The court ruled that John Hancock ---------------------------- was subject to the fiduciary standards of the Employee Retirement Income Security Act of 1974, as amended, with respect to the nonguaranteed benefit portion of the pension contract under review. Industry efforts to obtain regulatory or legislative relief from this decision are ongoing. The outcome and potential impacts to the Company are uncertain at this time. In the property market, the extraordinarily high level of catastrophe losses in recent periods has led to the contraction of the reinsurance market and corresponding price increases for reinsurance protection. These items have contributed to overall higher prices for commercial property policies and may result in the reduced availability of commercial insurance in some markets. 9 In an effort to reduce its exposure to catastrophic hurricane losses, The Travelers Insurance Group has stopped writing new homeowners policies in coastal areas of New York and Connecticut, and in certain counties in South Florida, reduced agent commissions on homeowners insurance in certain markets, and purchased higher amounts of catastrophe reinsurance. Recently, The Travelers Insurance Group has experienced growth in environmental claims primarily from smaller companies with lower coverage limits and has been named as a defendant in coverage cases brought by other insurers against their policyholders and the policyholders' other carriers. The Travelers Insurance Group's environmental loss and loss expense reserves at December 31, 1993 were $333 million, net of reinsurance of $11 million. Approximately 12% of the net environmental loss reserves (i.e., approximately $40 million) are case reserves for resolved claims. The remainder of the reserve is for claims in which coverage is in dispute and unreported environmental losses. The Travelers Insurance Group does not post case reserves for environmental claims in which there is a coverage dispute. In the area of asbestos claims, the industry has suffered from judicial interpretations that have attempted to maximize insurance availability from both a coverage and liability standpoint far beyond the intentions of the contracting parties. These policies generally were issued prior to the 1980s. As a result of recent developments in asbestos litigation, various classes of asbestos defendants, e.g., major product manufacturers, peripheral and regional product defendants as well as premises owners, are tendering asbestos-related claims to the industry. During 1993, the insurance industry witnessed a growth in claims against insureds brought primarily by independent labor union workers who allege exposure to asbestos while working on site at various companies. Since each insured presents different liability and coverage issues, The Travelers Insurance Group evaluates those issues on an insured-by-insured basis. The Travelers Insurance Group's asbestos loss and loss expense reserves at December 31, 1993 were $323 million, net of reinsurance of $451 million. Approximately 80% of the net asbestos reserves at December 31, 1993 represented incurred but not reported losses. For both environmental and asbestos-related claims, The Travelers Insurance Group carries on a continuing review of its overall position, its reserving techniques and reinsurance recoverable. In each of these areas of exposure, The Travelers Insurance Group has endeavored to litigate individual cases and settle claims on favorable terms. Given the vagaries of court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties, it is not presently possible to quantify the ultimate exposure represented by these claims. As a result, The Travelers Insurance Group expects that future earnings may be adversely affected by environmental and asbestos claims, although the amounts cannot be reasonably estimated. However, it is not likely these claims will have a material adverse effect on The Travelers Insurance Group's financial condition. Outlook - Industry Changes in the general interest rate environment affect the return received by the insurance subsidiaries on newly invested and reinvested funds. While a rising interest rate environment enhances the returns available, it reduces the market value of existing fixed maturity investments and the availability of gains on disposition. As required by various state laws and regulations, the Company's insurance subsidiaries are required to participate in state-administered guarantee associations established for the benefit of the policyholders of insolvent insurance companies. Management believes that payments to such associations will not have a material impact on financial condition or results of operations. 10 Certain social, economic and political issues have led to an increased number of legislative and regulatory proposals aimed at addressing the cost and availability of certain types of insurance. Some of these proposals include provisions that would adversely affect the Company's ability to write business with appropriate returns by restricting its underwriting and pricing flexibility, mandating rate roll-backs, or dictating conditions under which it can conduct business in a given state. While most of these provisions have failed to become law, these initiatives may well continue as legislators and regulators try to respond to public availability and affordability concerns. Several legislative proposals regarding health care reforms have recently been promulgated. It is not possible to determine which, if any, of these proposals may be adopted or what effect, if any, such legislation may have on the Company. The National Association of Insurance Commissioners (NAIC) adopted risk-based capital (RBC) requirements for life insurance companies in 1992, effective with reporting for 1993, and for property-casualty companies in December 1993, effective with reporting for 1994. The RBC requirements are to be used as early warning tools by the NAIC and states to identify companies that merit further regulatory action. The formulas have not been designed to differentiate among adequately capitalized companies which operate with levels of capital higher than RBC requirements. Therefore, it is inappropriate and ineffective to use the formulas to rate or to rank such companies. At December 31, 1993, all of the Company's life and property-casualty companies had adjusted capital in excess of amounts requiring any regulatory action. Asset Quality - The investment portfolio of the Insurance Services segment totaled approximately $41 billion, representing 67% of total Insurance Services' assets of approximately $61 billion. Because the primary purpose of the investment portfolio is to fund future policyholder benefits and claims payments, and in order to provide for economies of scale and tight control, it is managed centrally, employing a conservative investment philosophy. The segment's investment portfolio supports both the life and property-casualty insurance operations. In conjunction with the Travelers merger, the fixed maturity investment portfolio of The Travelers Insurance Group was classified between "available for sale" and "held for investment" and is carried at values assigned at the acquisition date. The Insurance Segment's fixed maturity portfolio totaled $28 billion, comprised of $22 billion of publicly traded fixed maturities and $6 billion of private fixed maturities. The weighted average quality ratings of the segment's publicly traded fixed maturity portfolio and private fixed maturity portfolio at December 31, 1993 were Aa2 and Baa1, respectively. Included in the fixed maturity portfolio was approximately $1.2 billion of below investment grade securities. Investments in venture capital investments, highly leveraged transactions and specialized lendings were not material in the aggregate. The Insurance Services segment makes significant investments in collateralized mortgage obligations (CMOs). CMOs typically have high credit quality, offer good liquidity, and provide a significant advantage in yield and total return compared to corporate debt securities of similar credit quality. The investment strategy of the Insurance Services segment is to purchase CMO tranches that are most protected against prepayment risk, typically planned amortization class (PAC) or targeted amortization class (TAC) tranches. Prepayment protected tranches are preferred because they provide stable cash flows in a variety of scenarios. The segment does invest in other types of CMO tranches if a careful assessment indicates a favorable risk/return tradeoff; however, it does not purchase residual interests in CMOs. At December 31, 1993, the segment held CMOs with a market value of $3.5 billion. Approximately 89% of CMO holdings are fully collateralized by GNMA, FNMA or FHLMC securities, and the balance are fully collateralized by portfolios of individual mortgage loans. Approximately 99% of CMO holdings are in PAC and similar bonds and approximately 1% are in interest-only tranches. In addition, the segment held $2.1 billion of GNMA, FNMA or FHLMC mortgage- backed securities at December 31, 1993. 11 The segment also held $1.0 billion of securities that are backed primarily by credit card or car loan receivables at December 31, 1993. Virtually all of these securities are rated AAA. At December 31, 1993, real estate and mortgage loan investments totaled $8.4 billion. Most of these investments are included in the investment portfolio of The Travelers Insurance Group and are reflected at estimated fair value at the date of the merger, December 31, 1993. Ongoing operating results of the segment will be affected by lower investment income from underperforming mortgage loan and real estate assets, which include delinquent mortgage loans, loans in the process of foreclosure, foreclosed loans and loans modified at interest rates below market. The Company has adopted a strategy to accelerate the disposition of The Travelers Insurance Group mortgage loan and real estate assets and to reinvest the proceeds to obtain current market yields. At December 31, 1993, mortgage loan and real estate portfolios consisted of the following (in millions): Current mortgage loans $6,096 Underperforming mortgage loans 1,269 ----- Total mortgage loans $7,365 ----- Foreclosed real estate $ 914 Purchased real estate 135 ----- Total real estate $1,049 ----- Total mortgage loans and real estate $8,414 ===== Included in underperforming mortgage loans above are $826 million of mortgages restructured at below market terms, of which $820 million are current under the new terms. The new terms typically defer a portion of contract interest payments to varying future periods. The accrual of interest is suspended on all restructured loans, and interest income is reported only as payment is received. For further information relating to investments see Note 5 of Notes to Consolidated Financial Statements. Corporate and Other Year Ended December 31, -------------------------------------------------------- 1993 1992 1991 -------------------------------------------------------- Net Net Net income income income ($ in millions) Revenues (expense) Revenues (expense) Revenues (expense) - -------------------------------------------------------------------------------- Net expenses(1) $(65) $(62) $(177) Equity in income of old Travelers in 1993 and Fingerhut in 1992 and 1991 152 26 28 Net gain on sale of stock of subsidiaries and affiliates 8 116 43 - -------------------------------------------------------------------------------- Total Corporate and Other $180 $95 $324 $ 80 $1,732 $(106) ================================================================================ (1) Includes $3 and $2 of reported investment portfolio gains in 1993 and 1992, respectively. 12 The Corporate and Other segment consists of unallocated expenses and earnings primarily related to interest, corporate administration and certain corporate investments. The increase in net expenses in 1993 resulted from lower income from miscellaneous investments and interest expense on borrowings to finance the acquisition of the Shearson Businesses, offset by lower interest rates. Net expenses before investment portfolio gains, includes after-tax income of $9 million, $12 million and an after-tax loss of $35 million in 1993, 1992 and 1991, respectively, related to Voyager, which had previously been presented as part of Insurance Services. Corporate and Other revenues include $260 million and $283 million in 1992 and 1991, respectively, related to Voyager. The equity in income of old Travelers includes $13 million from the Company's share of its realized portfolio gains and a tax benefit of $11 million for the cumulative effect of the recently enacted tax rate increase through December 31, 1992. The decrease in net expenses in 1992 compared to 1991 reflects lower debt levels and interest rates in 1992, as well as after-tax charges in 1991 of $35 million to restructure and exit most auto-related lines at Voyager, and $16 million related to costs for certain real estate lease commitments. Liquidity and Capital Resources The Travelers Inc. (the Parent) services its obligations (i.e., debt service and dividends) primarily with dividends and other advances that it receives from subsidiaries. The subsidiaries' dividend paying ability is limited by certain covenant restrictions in bank and/or credit agreements and/or by regulatory requirements. The Parent believes it will have sufficient funds to meet current and future commitments. Each of the Company's major operating subsidiaries finances its operations on a stand-alone basis consistent with its capitalization and ratings. The Parent The Parent issues commercial paper directly to investors and maintains unused credit availability under committed revolving credit agreements at least equal to the amount of commercial paper outstanding. As of December 31, 1993, the Parent had unused credit availability of $725 million of which up to $275 million may be accessed by either the Parent or The Travelers Insurance Company, an indirect subsidiary. The Parent may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees. During 1993, the Parent completed the following debt offerings and, as of February 28, 1994, had $800 million available for debt offerings under its shelf registration statement: - 5 3/4% Notes due April 15, 1998 . . . . . . . $250 million - 6 1/8% Notes due June 15, 2000 . . . . . . . $200 million In April 1993 the Parent sold 9,333,333 shares of newly issued common stock. See Note 14 of Notes to Consolidated Financial Statements for a description of this sale. In June 1993 the Parent sold 1,000,000 shares of newly issued common stock to a senior executive of the Company. In total these transactions generated net proceeds of $329 million. During 1993, $137 million of principal amount of the Parent's 5 1/2% Eurodollar Convertible Subordinated Debentures due 2002 was converted into 4,103,458 shares of the Parent's common stock. Commercial Credit Company (CCC) CCC also issues commercial paper directly to investors and maintains unused credit availability under committed revolving credit agreements at least equal to the amount of commercial paper outstanding. As of December 31, 1993, CCC 13 had unused credit availability of $2.295 billion. CCC may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees. During 1993, CCC completed the following debt offerings and, as of February 28, 1994, had $850 million available for debt offerings under its shelf registration statement: - 5.70% Notes due March 1, 1998 . . . . . . . $100 million - 6 1/8 Notes due March 1, 2000 . . . . . . . $100 million - 6.00% Notes due April 15, 2000 . . . . . . $150 million - 5 1/2% Notes due May 15, 1998 . . . . . . . $100 million - 6.00% Notes due June 15, 2000 . . . . . . . $100 million - 5 3/4% Notes due July 15, 2000 . . . . . . $200 million - 5.9% Notes due September 1, 2003 . . . . . $200 million CCC is limited by covenants in its revolving credit agreements as to the amount of dividends and advances that may be made to the Parent or its affiliated companies. At December 31, 1993, CCC would have been able to remit $150 million to the Parent under its most restrictive covenants or regulatory requirements. Smith Barney Shearson Holdings Inc. (SBS) SBS funds its operations through the use of its equity, long-term borrowings, commercial paper, collateralized and uncollateralized bank borrowings (both committed and uncommitted), internally generated funds, repurchase transactions, and securities lending arrangements. The volume of SBS's borrowings generally fluctuates in response to changes in the amount of reverse repurchase transactions outstanding, the level of securities inventories, customer balances and securities borrowing transactions. SBS has a commitment from a bank syndicate for an $825 million revolving credit facility, which consists of a 364-day revolving credit facility in the amount of $200 million and a 3-year revolving credit facility in the amount of $625 million, both of which were fully utilized at December 31, 1993. SBS also had unused committed and available short-term lines of credit amounting to $260 million. In addition, SBS has substantial borrowing arrangements consisting of facilities that it has been advised are available, but where no contractual lending obligation exists. SBS also issues commercial paper directly to investors. As a policy, SBS maintains sufficient borrowing power of unencumbered securities to cover unsecured borrowings and unsecured letters of credit. In addition, SBS monitors its leverage and capital ratios on a daily basis. During 1993 and in January 1994, SBS completed the following debt offerings and, as of February 28, 1994, had $400 million available for debt offerings under its shelf registration statement: - 5 3/8% Notes due June 1, 1996 . . . . . . . $150 million - 6 5/8% Notes due June 1, 2000 . . . . . . . $150 million - 5 5/8% Notes due November 15, 1998 . . . . $150 million - 5 1/2% Notes due January 15, 1999 . . . . $200 million SBS is limited by covenants in its revolving credit facility as to the amount of dividends that may be paid to the Parent. At December 31, 1993, SBS would have been able to remit approximately $392 million to the Parent under its most restrictive covenants. The Travelers Insurance Group At December 31, 1993, The Travelers Insurance Group had $25.0 billion of life and annuity product deposit funds and reserves. Of that total, $12.1 billion are not subject to discretionary withdrawal based on contract terms. The remaining $12.9 billion are for life and annuity products that are subject to discretionary withdrawal by the contractholder. Included in the amount that is 14 subject to discretionary withdrawal are $3.0 billion of liabilities that are surrenderable with market value adjustments. An additional $5.8 billion of the life insurance and individual annuity liabilities are subject to discretionary withdrawals, with an average surrender charge of 5.7%. Another $1.6 billion of liabilities are surrenderable at book value over 5 to 10 years. In the payout phase, these funds are credited at significantly reduced interest rates. The remaining $2.5 billion of liabilities are surrenderable without charge. More than half 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 from The Travelers Insurance Group are reduced by outstanding policy loans and related accrued interest prior to payout. Scheduled maturities of guaranteed investment contracts (GICs) in 1994, 1995, 1996, 1997 and 1998 are $1.5 billion, $1.3 billion, $1.0 billion, $268 million and $207 million, respectively. At December 31, 1993, the contract interest rates credited on GICs ranged from 3.4% to 17.4%, with a weighted average rate of 8.0%. The Travelers Insurance Company (TIC), a direct subsidiary of The Travelers Insurance Group Inc., issues commercial paper to investors and maintains unused committed, revolving credit facilities at least equal to the amount of commercial paper outstanding. As of December 31, 1993, TIC has unused credit availability of $275 million, all of which may be accessed by either TIC or the Parent. As part of the process of accreditation by the NAIC, state insurance regulators have been recommending the adoption of new statutory standards for the payment of dividends by insurance companies without prior approval. As part of this effort, the Connecticut General Assembly passed legislation in 1992 which is effective for dividends paid on and after December 1, 1993. Under the amended legislation, statutory surplus of The Travelers Insurance Group would not be available in 1994 for dividends to the Parent without prior approval. Recent Accounting Standards FAS 114 Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," describes how impaired loans should be measured when determining the amount of a loan loss accrual. The Statement also amends existing guidance on the measurement of restructured loans in a troubled debt restructuring involving a modification of terms. The Company has not yet determined the impact, if any, this statement will have on its financial statements. The Statement has an effective date of January 1, 1995. FAS 115 Effective January 1, 1994, the Company will adopt Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which addresses accounting and reporting for investments in equity securities that have a readily determinable fair value and for all debt securities. Those investments are to be classified in one of three categories. Debt securities that the Company has the positive intent and ability to hold to maturity are to be classified as "held for investment" and are to be reported at amortized cost. Securities that are bought and held principally for the purpose of selling them in the near term are classified as "trading securities" and are to be reported at fair value, with unrealized gains and losses included in earnings. Securities that are neither to be held to maturity nor to be sold in the near term are classified as "available for sale" and are to be reported at fair value, with unrealized gains and losses excluded from earnings and reported as a net amount in a separate component of stockholders' equity. At December 31, 1993 the market value of fixed maturities exceeded the cost by $353 million. Interpretation 39 Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts" (Interpretation 39) must be adopted by the Company for its 1994 first quarter financial statements. The general 15 principle of Interpretation 39 states that amounts due from and due to another party may not be offset in the balance sheet unless a right of setoff exists and the parties intend to exercise the right of setoff. The Company currently maintains master netting arrangements and other contracts where amounts due from customers are offset against amounts due to those customers. Implementation of Interpretation 39 is not expected to have a material impact on the Company's financial position; however, assets and liabilities will be increased by like amounts. 16 The Travelers Inc. and Subsidiaries Consolidated Statement of Income (In millions of dollars, except per share amounts) Year Ended December 31, 1993 1992 1991 - ----------------------------------------------------------------------------- Revenues Commissions and fees $1,957 $ 973 $ 944 Insurance premiums 1,480 1,694 1,783 Finance related interest and other charges 954 953 958 Interest and dividends 718 605 688 Principal transactions 549 298 318 Asset management fees 385 131 125 Equity in income of old Travelers 164 - - Other income 590 471 1,792 - ----------------------------------------------------------------------------- Total revenues 6,797 5,125 6,608 - ----------------------------------------------------------------------------- Expenses Non-insurance compensation and benefits 2,057 1,069 1,201 Policyholder benefits and claims 833 907 936 Insurance underwriting, acquisition and operating 506 674 860 Interest 707 674 876 Provision for credit losses 134 165 165 Other operating 1,050 636 1,842 - ----------------------------------------------------------------------------- Total expenses 5,287 4,125 5,880 - ----------------------------------------------------------------------------- Gain on sale of stock of subsidiaries and affiliates 13 188 63 - ----------------------------------------------------------------------------- Income before income taxes, minority interest and cumulative effect of changes in accounting principles 1,523 1,188 791 Provision for income taxes 550 432 287 - ----------------------------------------------------------------------------- Income before minority interest and cumulative effect of changes in accounting principles 973 756 504 Minority interest, net of income taxes (22) - (25) Cumulative effect of changes in accounting principles, net of income taxes (35) (28) - - ----------------------------------------------------------------------------- Net income $ 916 $ 728 $ 479 ============================================================================= Net income per share of common stock and common stock equivalents: Before cumulative effect of changes in accounting principles $ 3.88 $ 3.34 $ 2.14 Cumulative effect of changes in accounting principles (0.14) (0.12) -. - ----------------------------------------------------------------------------- Net income per share of common stock and common stock equivalents $ 3.74 $ 3.22 $ 2.14 ============================================================================= Weighted average number of common shares outstanding and common stock equivalents 237.8 222.8 226.5 ============================================================================= See Notes to Consolidated Financial Statements 17 The Travelers Inc. and Subsidiaries Consolidated Statement of Financial Position (In millions of dollars, except per share amounts) December 31, 1993 1992 - ------------------------------------------------------------------------- Assets Cash and cash equivalents (including $914 and $187 segregated under federal and other brokerage regulations) $ 2,444 $ 272 Investments: Fixed maturities: Available for sale (market $28,438 and $2,426) 28,109 2,305 Held for investment (market $201 and $94) 177 91 Equity securities, at market (cost $513 and $196) 555 209 Mortgage loans 7,365 300 Real estate held for sale 1,049 - Policy loans 1,367 170 Short-term and other 2,659 271 - ------------------------------------------------------------------------ Total investments 41,281 3,346 - ------------------------------------------------------------------------ Securities borrowed or purchased under agreements to resell 13,353 3,480 Brokerage receivables 8,167 1,650 Trading securities owned, at market value 5,863 3,785 Net consumer finance receivables 6,216 5,655 Reinsurance recoverables 4,999 637 Value of insurance in force and deferred policy acquisition costs 1,996 1,348 Cost of acquired businesses in excess of net assets 2,162 1,322 Separate and variable accounts 4,665 - Other receivables 2,310 494 Other assets 7,904 2,162 - ------------------------------------------------------------------------ Total assets $101,360 $24,151 ======================================================================== Liabilities Investment banking and brokerage borrowings $ 3,454 $ 595 Short-term borrowings 2,535 2,633 Long-term debt 6,991 3,951 Securities loaned or sold under agreements to repurchase 10,144 3,895 Brokerage payables 7,012 901 Trading securities sold not yet purchased, at market value 3,835 2,432 Contractholder funds 17,980 - Insurance policy and claims reserves 26,651 3,003 Separate and variable accounts 4,642 - Accounts payable and other liabilities 8,680 2,512 - ------------------------------------------------------------------------ Total liabilities 91,924 19,922 - ------------------------------------------------------------------------ ESOP Preferred stock - Series C 235 - Guaranteed ESOP obligation (125) - - ------------------------------------------------------------------------ 110 - - ------------------------------------------------------------------------ Stockholders' equity Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value 800 300 Common stock ($.01 par value; authorized shares: 500 million issued shares: 1993 - 368,287,709 shares and 1992 - 253,524,014 shares) 4 3 Additional paid-in capital 6,566 2,147 Retained earnings 3,140 2,363 Treasury stock, at cost (1993 - 41,155,405 shares, 1992 - 31,572,048 shares) (1,121) (540) Unearned compensation and other, net (63) (44) - ------------------------------------------------------------------------ Total stockholders' equity 9,326 4,229 - ------------------------------------------------------------------------ Total liabilities and stockholders' equity $101,360 $24,151 ======================================================================== See Notes to Consolidated Financial Statements 18 The Travelers Inc. and Subsidiaries Consolidated Statement of Changes in Stockholders' Equity (In millions of dollars, except per share amounts)
Amounts Shares (in thousands) --------------------------- ------------------------------- Year ended December 31, 1993 1992 1991 1993 1992 1991 - ---------------------------------------------------------------------------------------- ------------------------------- Preferred Stock at aggregate liquidation value Balance, beginning of year $ 300 $ - $ - 1,200 - - Issuance of preferred stock 500 300 - 10,000 1,200 - - ------------------------------------------------------------------------------------- ------------------------------- Balance, end of year 800 300 - 11,200 1,200 - ===================================================================================== =============================== Common Stock and Additional Paid-In Capital Balance, beginning of year 2,150 2,128 2,090 253,524 253,524 253,524 Issuance of common stock 329 - - 10,333 - - Travelers Merger: Common stock issued to third party stockholders 3,265 - - 85,911 - - Common stock issued to subsidiaries of the Company 595 - - 18,519 - - Premium related to preferred stock, options and other 67 - - Conversion of debentures 17 11 - Issuance of common stock warrants 25 - - Cost of issuance of preferred stock - (10) - Issuance of shares pursuant to employee benefit plans 122 21 38 - ------------------------------------------------------------------------------------- ------------------------------- Balance, end of year 6,570 2,150 2,128 368,287 253,524 253,524 - ------------------------------------------------------------------------------------- ------------------------------- Retained Earnings Balance, beginning of year 2,363 1,720 1,289 Net income 916 728 479 Common dividends (113) (78) (48) Preferred dividends (26) (7) - - ------------------------------------------------------------------------------------- Balance, end of year 3,140 2,363 1,720 - ------------------------------------------------------------------------------------- Treasury Stock (at cost) Balance, beginning of year (540) (538) (494) (31,572) (36,278) (33,830) Conversion of debentures 81 65 - 4,104 4,356 5 Issuance of shares pursuant to employee benefit plans, net of shares tendered for payment of option exercise price and withholding taxes (10) 54 43 6,175 6,583 3,471 Treasury stock acquired (58) (122) (89) (1,478) (6,307) (6,096) Common stock issued to subsidiaries of the Company (595) - - (18,519) - - Other 1 1 2 135 74 172 - ------------------------------------------------------------------------------------- ------------------------------- Balance, end of year (1,121) (540) (538) (41,155) (31,572) (36,278) - ------------------------------------------------------------------------------------- ------------------------------- Unearned Compensation and other, net Balance, beginning of year (44) (30) (26) Net issuance of restricted stock (103) (64) (38) Restricted stock amortization 64 48 32 Net appreciation of equity securities 22 7 1 Translation adjustments, net (2) (5) 1 - ------------------------------------------------------------------------------------- Balance, end of year (63) (44) (30) - ------------------------------------------------------------------------------------- Total common stockholders' equity and common shares outstanding $8,526 $3,929 $3,280 327,132 221,952 217,246 ===================================================================================== ============================== Total stockholders' equity $9,326 $4,229 $3,280 =====================================================================================
See Notes to Consolidated Financial Statements 19 The Travelers Inc. and Subsidiaries Consolidated Statement of Cash Flows (In millions of dollars)
Year ended December 31, 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Income before income taxes, minority interest and cumulative effect of changes in accounting principles $ 1,523 $ 1,188 $ 791 Adjustments to reconcile income before income taxes, minority interest and cumulative effect of changes in accounting principles to net cash provided by (used in) operating activities: Amortization of deferred policy acquisition costs and value of insurance in force 286 423 570 Additions to deferred policy acquisition costs (369) (574) (626) Depreciation and amortization 125 97 120 Provision for credit losses 134 165 165 Undistributed equity earnings (116) - - Changes in: Trading securities, net (1,082) (156) 338 Securities borrowed, loaned and repurchase agreements, net (1,591) 62 306 Brokerage receivables net of brokerage payables 863 (252) (908) Insurance policy and claims reserves 251 29 64 Other, net 713 (190) 33 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operations 737 792 853 Income taxes paid (403) (332) (266) - ---------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 334 460 587 - ---------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Loans originated or purchased (2,673) (2,067) (2,570) Loans repaid or sold 2,108 2,020 1,783 Purchases of investments (2,948) (2,094) (1,701) Proceeds from sales of investments 2,213 1,018 1,279 Proceeds from maturities of investments 237 1,025 330 Payment for purchase of SLB net assets, net of cash acquired (1,296) - - Payment for net clearing assets transferred (536) - - Cash acquired in connection with The Travelers Merger 586 - - Business acquisitions - (550) (8) Business divestments 120 571 154 Other, net (274) (90) (86) - ---------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (2,463) (167) (819) - ---------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Issuance of preferred stock - series A - 290 - Dividends paid (139) (85) (48) Issuance of common stock 329 - - Treasury stock acquired (58) (122) (89) Issuance of long-term debt 2,733 674 1,306 Payments and redemptions of long-term debt (448) (972) (441) Net change in short-term borrowings (including investment banking and brokerage borrowings) 1,934 17 (461) Other, net (50) (138) (14) - ---------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 4,301 (336) 253 - ---------------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents 2,172 (43) 21 Cash and cash equivalents at beginning of period 272 315 294 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 2,444 $ 272 $ 315 - ---------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 674 $ 669 $ 905 Value of assets exchanged for shares of old Travelers $ - $ 173 $ - ================================================================================================================
See Notes to Consolidated Financial Statements 20 The Travelers Inc. and Subsidiaries Notes to Consolidated Financial Statements (In millions of dollars, except per share amounts) 1. Business Acquisitions ---------------------- The Travelers Acquisition In December 1992, Primerica Corporation (Primerica), the predecessor to The Travelers Inc., acquired approximately 27% of the common stock of The Travelers Corporation (old Travelers) in a series of related transactions (the Acquisition). Primerica and certain of its subsidiaries paid $550 in cash and issued to old Travelers 50% of the equity of Commercial Insurance Resources, Inc. (the parent of Gulf Insurance Company), and transferred to old Travelers 100% of the preferred provider organization and third party administrator networks of Transport Life Insurance Company (a wholly owned subsidiary of Primerica). The Acquisition was accounted for as a purchase with an effective accounting date of December 31, 1992, and at December 31, 1992, the investment of $723 is reflected in the Consolidated Statement of Financial Position in "Other Assets." During 1993 this investment was accounted for on the equity method. The excess of Primerica's share of assigned value of identifiable net assets over cost amounted to $109 and is being amortized over 10 years. For the year ended December 31, 1993, old Travelers, on a historical basis, reported revenues of $10,284 and net income of $288. The Travelers Merger On December 31, 1993, Primerica acquired the approximately 73% of old Travelers common stock it did not already own (the Merger). Old Travelers was merged into Primerica, and concurrently, Primerica changed its name to The Travelers Inc. which, together with its subsidiaries, is hereinafter referred to as the Company. The old Travelers businesses acquired are hereinafter referred to as old Travelers or The Travelers Insurance Group. As consideration for the Merger, the Company issued .80423 shares of its common stock for each old Travelers common share then outstanding. The total purchase price of $3,396 is comprised of $3,265, representing the fair value of the approximately 86 million newly issued common shares, plus the premium over book value related to the two issues of old Travelers preference stock exchanged in the Merger (see Note 14) and certain other acquisition costs. The assets and liabilities of old Travelers are reflected in the Consolidated Statement of Financial Position at December 31, 1993 on a fully consolidated basis at management's best estimate of their fair values, based on currently available information. Evaluation and appraisal of assets and liabilities, including investments, the value of insurance in force, reinsurance recoverable, other insurance assets and liabilities and related deferred income tax amounts is continuing, and allocation of the purchase price may be adjusted. The excess of the purchase price over the estimated fair value of net assets is approximately $975 and will be amortized over 40 years. The Acquisition and the Merger are being accounted for as a step acquisition. The step acquisition method of purchase accounting requires that the old Travelers' assets and liabilities be recorded at the fair values determined at each acquisition date (i.e., 27% of values at December 31, 1992 as carried forward and 73% of values at December 31, 1993). The merger has been accounted for as a purchase, and accordingly, the results of operations for periods prior to December 31, 1993 do not include those of old Travelers other than for the equity in earnings relating to the 27% previously owned. 21 Notes to Consolidated Financial Statements (continued) The Shearson Acquisition On July 31, 1993, the Company acquired the domestic retail brokerage and asset management businesses (the Shearson Businesses) of Shearson Lehman Brothers Holdings Inc. (SLB), a subsidiary of American Express Company (American Express), for approximately $2,100, representing $1,600 for the net assets acquired plus approximately $500 of cash required to be segregated for customers under commodities regulations. The businesses acquired were combined with the operations of Smith Barney, Harris Upham & Co.Incorporated, and the combined firm has been named Smith Barney Shearson Inc. which is a subsidiary of Smith Barney Shearson Holdings Inc. (SBS). Following the transaction, SLB was renamed Lehman Brothers Holdings Inc. (LBI). The acquisition was accounted for under the purchase method of accounting, and the consolidated financial statements include the results of the Shearson Businesses from the date of acquisition. Payment for the net assets consisted of approximately $900 in cash, $125 in the form of convertible preferred stock of the Company, $25 in the form of warrants to purchase common stock of the Company and the balance in notes to LBI. In addition, SBS has agreed to pay American Express additional amounts that are contingent upon the new unit's performance. Evaluation and appraisal of assets and liabilities, including the value of identifiable intangible assets and liabilities assumed, is continuing, and allocation of the purchase price may be adjusted. As a result of the acquisition of the Shearson Businesses, the Company recorded a provision in the third quarter of 1993 of $65 after-tax relating primarily to the elimination of duplicate facilities, severance and other personnel-related costs. This provision is not reflected in the pro forma information below. The unaudited pro forma condensed results of operations presented below assume all of the above transactions had occurred at the beginning of each of the periods presented: Pro Forma 1993 1992 ------------------------------------------------------------ Revenues $18,585 $17,481 ====== ====== Income (loss) before cumulative effect of changes in accounting principles $1,281 $(22) ===== ==== Net income $1,246 $120 ===== === Net income (loss) per share: Before cumulative effect of changes in accounting principles $3.67 $(0.33) ==== ====== Net income $3.56 $0.12 ==== ==== The unaudited pro forma condensed financial information is not necessarily indicative either of the results of operations that would have occurred had these transactions been consummated at the beginning of the periods presented or of future operations of the combined companies. In conjunction with the acquisition of the Shearson Businesses, SBS entered into a securities clearing agreement with LBI (the Clearing Agreement) effective August 2, 1993, pursuant to which SBS has agreed to carry and clear, on a fully disclosed basis, all customer accounts introduced by LBI and, on a correspondent basis, LBI's proprietary accounts. LBI transferred at cost approximately $8,600 of assets and $7,787 of liabilities to SBS in connection with the Clearing Agreement. Payment for these net assets of $813 consisted of approximately $536 in cash and the remainder in notes to LBI. The Clearing Agreement is in effect until December 31, 1994, and may be extended for up to five months at LBI's option. Upon termination of the Clearing Agreement the net assets or liabilities related to the Clearing Agreement will be transferred to LBI. 22 Notes to Consolidated Financial Statements (continued) Supplemental Information to the Consolidated Statement of Cash Flows Relating to Acquisitions Noncash investing and financing transactions relating to the above transactions that are not reflected in the Consolidated Statement of Cash Flows are listed below. For the Year Ended December 31, 1993 Travelers Shearson ---------------------------------------------------------------- Fair value of assets acquired, excluding cash acquired $40,395 $4,811 Liabilities assumed (37,642) (2,779) Issuance of notes - (586) Equity securities issued (3,339) (150) ---------------------------------------------------------------- Cash payment (acquired) $ (586) $1,296 ================================================================ 2. Summary of Significant Accounting Policies ------------------------------------------ Changes in accounting principles FAS 106. Effective January 1, 1993, the Company implemented Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106). As required the Company changed its method of accounting for retiree benefit plans effective January 1, 1993, to accrue the Company's share of the costs of postretirement benefits over the service period rendered by employees. Previously these benefits were charged to expense when paid. The Company elected to recognize immediately the liability for postretirement benefits as the cumulative effect of a change in accounting principle. This resulted in a noncash after-tax charge to net income of $17 ($25 pre-tax) or $0.07 per share. See Note 17 for additional information relating to FAS 106. FAS 112. In the fourth quarter of 1993, the Company implemented Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (FAS 112), with retroactive application to January 1, 1993. FAS 112 establishes accounting standards for employers who provide benefits to former or inactive employees after employment, but before retirement. These benefits include, but are not limited to, salary continuation, supplemental unemployment, severance, disability-related (including workers' compensation), job training and counseling, and continuation of benefits such as health care and life insurance coverage. The statement requires employers to recognize the cost of the obligation to provide these benefits on an accrual basis, and employers must implement FAS 112 by recognizing a cumulative effect of a change in accounting principle. This resulted in a noncash after-tax charge to net income of $18 ($29 pre- tax) or $0.07 per share. See Note 17 for additional information relating to FAS 112. FAS 113. In the first quarter of 1993, the Company implemented Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" (FAS 113). FAS 113 requires the reporting of reinsurance receivables and prepaid reinsurance premiums as assets and precludes the immediate recognition of gains for all reinsurance contracts unless the liability to the policyholder has been extinguished. Implementation of FAS 113 did not have an impact on the Company's earnings; however, assets and liabilities increased by like amounts. Assets and liabilities within the Consolidated Statement of Financial Position were increased by $754 as of December 31, 1992. See Note 12 for additional reinsurance disclosures. Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of The Travelers Inc. and its subsidiaries. Data relating to results of operations excludes the amounts of The Travelers Insurance Group 23 Notes to Consolidated Financial Statements (continued) except that results for 1993 include the Company's equity in earnings relating to the 27% purchase, and data relating to financial position excludes amounts for old Travelers for years prior to 1993. Unconsolidated entities in which the Company has at least a 20% interest are accounted for on the equity method. The minority interest in 1993 represents the old Travelers' interest in Gulf Insurance Company (Gulf) and in 1991 the publicly held interest in Fingerhut Companies, Inc. (Fingerhut) (see Note 3). Significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior years' financial statements to conform to the current year's presentation. Cash and cash equivalents include cash on hand, cash and securities segregated under federal and brokerage regulations and short-term highly liquid investments with maturities of three months or less when purchased, other than those held for sale in the ordinary course of business. These short-term investments are carried at cost plus accrued interest, which approximates market value. Investments are owned principally by the insurance subsidiaries. Fixed maturities include bonds, notes and redeemable preferred stocks. In recognition of the Company's growing need to maintain flexibility to respond to such matters as changes in interest rates, prepayment risks or the yield curve, fixed maturities have been classified as follows: "held for investment" represents securities that the Company has both the ability and the intent to hold until maturity and are carried at amortized cost; all other fixed maturity securities have been classified as "available for sale" and are carried at the lower of aggregate cost or market value. Equity securities include common and non-redeemable preferred stocks and are carried at market values that are based primarily on quoted market prices. Changes in market values of equity securities are reflected as unrealized appreciation (depreciation) in stockholders' equity, net of applicable income taxes. Mortgage loans and policy loans are carried at unpaid balances, net of allowance for losses. Short-term investments are carried at cost, which approximates market. Realized gains and losses on sales of investments are included in other income on a specific identification basis. At December 31, 1993, fixed maturities amounting to $25,604, mortgage loans amounting to $7,051, real estate held for sale amounting to $1,049 and policy loans amounting to $1,212 owned by The Travelers Insurance Group are carried at the values assigned at the acquisition dates (see Note 1). Accrual of income is suspended on fixed maturities or mortgage loans that are in default, or on which it is likely that future interest payments will not be made as scheduled. Interest income on investments in default is recognized only as payment is received. The cost of acquired businesses in excess of net assets is being amortized on a straight-line basis principally over a 40-year period. Income taxes. The Company and its wholly owned domestic non-life insurance subsidiaries file a consolidated federal income tax return. All but one of the life insurance subsidiaries are included in their own consolidated federal income tax return. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their recorded amounts for financial reporting purposes. Income taxes are not provided for on the Company's life insurance subsidiaries' retained earnings designated as "policyholders' surplus" because such taxes will become payable only to the extent such retained earnings are distributed as a dividend or exceed limits prescribed by federal law. Distributions are not contemplated from this portion of the life insurance companies' retained earnings, which aggregated $971 (with a tax effect of $340) at December 31, 1993. Income taxes have been provided for in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109), which was adopted effective January 1, 1992. Prior years' 24 Notes to Consolidated Financial Statements (continued) financial statements have not been restated to apply the provisions of FAS 109. Taxes for years prior to January 1, 1992 have been provided in accordance with Accounting Principles Board Opinion No. 11, "Accounting for Income Taxes." Earnings per common share is computed after recognition of preferred stock dividend requirements and is based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect of common stock warrants and stock options, the incremental shares assumed issued under the Capital Accumulation Plan, the assumed conversion of the 4 1/2% Eurodollar Convertible Subordinated Debentures (through the date of their conversion) and of the 5 3/4% Convertible Subordinated Notes. Fully diluted earnings per common share, assuming conversion of all outstanding convertible notes and debentures, the maximum dilutive effect of common stock equivalents and the 5.5% convertible preferred stock, has not been presented because the effects are not material. The fully diluted earnings per common share computation for the years ended December 31, 1993, 1992 and 1991 would entail adding the number of shares issuable on conversion of the other debentures (2.0, 4.1 and 6.0 million shares, respectively), the additional common stock equivalents (0.4, 1.1 and 3.8 million shares respectively) and the assumed conversion of the 5.5% convertible preferred stock (1.4 million shares in 1993), to the number of shares included in the earnings per common share calculation (resulting in a total of 241.6, 228.0 and 236.3 million shares, respectively) and eliminating the after-tax interest expense related to the conversion of other debentures ($3.1, $7.0 and $8.3, respectively) and the elimination of the 5.5% convertible preferred stock dividends ($2.9 in 1993). The Company's Board of Directors declared stock splits in the form of stock dividends (three-for-two in January 1993 and four-for-three in July 1993), which combined yield the equivalent of a two-for-one stock split. Prior years' information has been restated to reflect the stock splits. Financial Instruments - Off-Balance-Sheet Risk. The Company uses financial instruments having off-balance-sheet risk in the normal course of business in order to reduce exposure to fluctuations in interest rates and market prices. Included in the Notes to Consolidated Financial Statements are various disclosures relating to financial instruments having off-balance sheet risk. These disclosures indicate the magnitude of the Company's involvement in such activities, and reflect the instruments at their face, contract or notional amounts, and are not intended to represent the much smaller credit risk of such instruments. Financial Instruments - Disclosures About Fair Value. Included in the Notes to Consolidated Financial Statements are various disclosures relating to the methods and assumptions used to estimate fair value of each material type of financial instrument. The carrying value of short-term financial instruments approximates fair value because of the relatively short period of time between the origination of the instruments and their expected realization. The carrying value of receivables and payables arising in the ordinary course of business approximates fair market value. The fair value assumptions were based upon subjective estimates of market conditions and perceived risks of the financial instruments at a certain point in time. Disclosed fair values for financial instruments do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed. Accounting standards not yet adopted FAS 114. Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," describes how impaired loans should be measured when determining the amount of a loan loss accrual. The statement also amends existing guidance on the measurement of restructured loans in a troubled debt restructuring involving a modification of terms. The Company has not yet determined the impact, if any, this statement will have on its financial statements. The statement has an effective date of January 1, 1995. 25 Notes to Consolidated Financial Statements (continued) FAS 115. Effective January 1, 1994, the Company will adopt Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which addresses accounting and reporting for investments in equity securities that have a readily determinable fair value and for all debt securities. Those investments are to be classified in one of three categories. Debt securities that the Company has the positive intent and ability to hold to maturity are to be classified as "held to maturity" and are to be reported at amortized cost. Securities that are bought and held principally for the purpose of selling them in the near term are classified as "trading securities" and are to be reported at fair value, with unrealized gains and losses included in earnings. Securities that are neither to be held to maturity nor to be sold in the near term are classified as "available for sale" and are to be reported at fair value, with unrealized gains and losses excluded from earnings and reported as a net amount in a separate component of stockholders' equity. At December 31, 1993 the market value of fixed maturities exceeded the cost by $353. Interpretation 39. Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts" (Interpretation 39), must be adopted by the Company for its 1994 first quarter financial statements. The general principle of Interpretation 39 states that amounts due from and due to another party may not be offset in the balance sheet unless a right of setoff exists and the parties intend to exercise the right of setoff. The Company currently maintains master netting arrangements and other contracts where amounts due from customers are offset against amounts due to those customers. Implementation of Interpretation 39 is not expected to have a material impact on the Company's financial position; however, assets and liabilities will be increased by like amounts. INVESTMENT SERVICES Commissions related to security transactions, underwriting revenues and related expenses are recognized in income on the trade date. Management and investment advisory fees are recorded as income for the period in which the services are performed. Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received. With respect to securities loaned, the Company receives collateral in the form of cash or financial instruments in an amount in excess of the market value of securities loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis with additional collateral obtained as necessary. Repurchase and resale agreements are treated as collateralized financing transactions and are carried at the amounts at which the securities will be subsequently reacquired or resold, including accrued interest, as specified in the respective agreements. The Company's policy is to take possession of securities purchased under agreements to resell. The market value of securities to be repurchased and resold is monitored, and additional collateral is requested where appropriate to protect against credit exposure. Trading securities are carried at market value. Included in income are realized and unrealized gains and losses on trading securities and proprietary futures, forward and option contracts. Other assets include the value of management advisory contracts, which is being amortized on the straight-line method over periods not exceeding 30 years. INSURANCE SERVICES Premiums from long-duration contracts, principally life insurance, are earned when due. Premiums from short-duration insurance contracts are earned over the related contract period. Short-duration contracts include 26 Notes to Consolidated Financial Statements (continued) primarily property and casualty, credit life and accident and health policies, including estimated ultimate premiums on retrospectively rated and reporting-form policies. Benefits and expenses are associated with premiums by means of the provision for future policy benefits, unearned premiums and the deferral and amortization of policy acquisition costs. Value of insurance in force represents the actuarially determined present value of anticipated profits to be realized from life and accident and health business on insurance in force at the date of the Company's acquisition of its insurance subsidiaries using the same assumptions that were used for computing related liabilities where appropriate. The value of insurance in force acquired prior to December 31, 1993 is amortized over the premium paying periods in relation to anticipated premiums. The value of insurance in force relating to The Travelers Insurance Group merger was the actuarially determined present value of the projected future profits discounted at interest rates ranging from 14% to 18% for the business acquired. The value of the business in force is amortized over the contract period using current interest crediting rates to accrete interest and using amortization methods based on the specified products. Traditional life insurance and annuities are amortized over the period of anticipated premiums; universal life in relation to estimated gross profits; and certain annuity contracts employing a level yield method. The value of insurance in force related to The Travelers Insurance Group merger is $363 with the remainder relating to prior acquisitions. The value of insurance in force is reviewed periodically to determine if any adjustment is required. Deferred policy acquisition costs for the life business represent the costs of acquiring new business, principally commissions, certain underwriting and agency expenses and the cost of issuing policies. Deferred policy acquisition costs for traditional life business are amortized over the premium-paying periods of the related policies, in proportion to the ratio of the annual premium revenue to the total anticipated premium revenue. Deferred policy acquisition costs of other business lines are generally amortized over the life of the insurance contract or at a constant rate based upon the present value of estimated gross profits expected to be realized. For certain property and casualty lines, acquisition costs, such as commissions, premium taxes and certain other underwriting and agency expenses, have been deferred to the extent recoverable from future earned premiums and are amortized ratably over the terms of the related policies. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income, and, if not recoverable, are charged to expense. Separate and variable accounts primarily represent funds for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholders. Each account has specific investment objectives. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. The assets of these accounts are carried at market value. Certain other separate accounts provide guaranteed levels of return or benefits, and the assets of these accounts are carried at amortized cost. At December 31, 1993, the balances of all separate accounts are recorded at the values assigned at the acquisition dates. Amounts assessed to the contractholders for management services are included in revenues. Deposits, net investment income and realized investment gains and losses for these accounts are excluded from revenues, and related liability increases are excluded from benefits and expenses. Other assets include receivables related to retrospectively rated policies on property-casualty business, net of allowance for estimated uncollectible amounts. Insurance policy and claims reserves represent liabilities for future insurance policy benefits. Insurance reserves for traditional life insurance, annuities, and accident and health policies have been computed based upon mortality, morbidity, persistency and interest assumptions applicable to these coverages, which range from 2.5% to 13%, including adverse deviation. These assumptions consider company experience and industry standards and may be revised if it is determined that future experience will differ substantially from that previously assumed. The 27 Notes to Consolidated Financial Statements (continued) insurance reserves acquired in The Travelers Insurance Group merger are recorded at the values assigned at the acquisition dates. Property-casualty reserves include (1) unearned premiums representing the unexpired portion of policy premiums, and (2) estimated provisions for both reported and unreported claims incurred and related expenses. The reserves are regularly adjusted based on experience. Included in the insurance policy and claims reserves in the Consolidated Statement of Financial Position at December 31, 1993 are $803 of property-casualty loss reserves related to workers' compensation that have been discounted using an interest rate of 5%. In determining benefit and loss reserves, the Company carries on a continuing review of its overall position, its reserving techniques and reinsurance. Reserves for property and casualty insurance losses represent the estimated ultimate unpaid cost of all incurred property and casualty claims. Since the reserves are based on estimates, the ultimate liability may be more or less than such reserves. The effects of changes in such estimated reserves are included in the results of operations in the period in which the estimates are changed. Contractholder funds represent receipts from the issuance of universal life, pension investment and certain individual annuity contracts. Such receipts are considered deposits on investment contracts that do not have substantial mortality or morbidity risk. Account balances are increased by interest credited and reduced by withdrawals, mortality charges and administrative expenses charged to the contractholders. Calculations of contractholder account balances for investment contracts reflect lapse, withdrawal and interest rate assumptions based on contract provisions, the Company's experience and industry standards. Contractholder funds also include other funds that policyholders leave on deposit with the Company. Balances at December 31, 1993 have been recorded at the values assigned at the acquisition dates using interest rate assumptions ranging from 4% to 9.5%. CONSUMER FINANCE SERVICES Finance related interest and other charges are recognized as income using the constant yield method. Allowances for losses are established by direct charges to income in amounts sufficient to maintain the allowance at a level management determines to be adequate to cover losses in the portfolio. The allowance fluctuates based upon continual review of the loan portfolio and current economic conditions. For financial reporting purposes, finance receivables are considered delinquent when they are more than 60 days contractually past due. Income stops accruing on finance receivables when they are 90 days contractually past due. If payments are made on a finance receivable that is not accruing income, and the receivable is no longer 90 days contractually past due, the accrual of income resumes. Finance receivables are charged against the allowance for losses when considered uncollectible. Personal loans are considered uncollectible when payments are six months contractually past due and six months past due on a recency of payment basis. Loans that are twelve months contractually past due regardless of recency of payment are charged off. Recoveries on losses previously charged to the allowance are credited to the allowance at the time of recovery. Consideration of whether to proceed with foreclosure on loans secured by real estate begins when a loan is 60 days past due on a contractual basis. Real estate credit losses are recognized when the title to the property is obtained. Fees received and direct costs incurred for the origination of loans are deferred and amortized over the contractual lives of the loans as part of interest income. The remaining unamortized balances are reflected in interest income at the time that the loans are paid in full, renewed or charged off. 28 Notes to Consolidated Financial Statements (continued) 3. Sales of Stock of Subsidiaries and Affiliates --------------------------------------------- During 1992 gains on sale of stock of affiliates totaled $188 pre-tax and consisted principally of the sale of Margaretten & Company, Inc. ($83 pre- tax) and the sale of a substantial portion of the Company's investment in Fingerhut ($87 pre-tax). Fingerhut's results of operations were included with those of the Company on a consolidated basis through December 31, 1991. During 1992 the remaining investment in Fingerhut was accounted for as an equity investment, with the Company's share of earnings reflected in "Other Income." In 1993 the Company sold its remaining interest in Fingerhut. 4. Business Segment Information ---------------------------- The Company is a diversified financial services company engaged in investment services, life and property and casualty insurance services and consumer finance. Data relating to results of operations excludes the amounts of old Travelers except that Corporate and Other results for 1993 include the equity earnings relating to the 27% purchase in December 1992 (see Note 1). Data relating to identifiable assets excludes amounts for old Travelers for years prior to 1993. The following table presents certain information regarding these industry segments: Revenues 1993 1992 1991 ---- ---- ---- Investment Services $ 3,524 $ 1,822 $ 1,890 Insurance Services 1,900 1,821 1,836 Consumer Finance Services 1,193 1,158 1,150 Corporate and Other* 180 324 1,732 ------ ------ ------ $ 6,797 $ 5,125 $ 6,608 ====== ====== ====== Income before income taxes, minority interest and cumulative effect of changes in accounting principles Investment Services $ 592 $ 321 $ 296 Insurance Services 493 436 345 Consumer Finance Services 360 305 271 Corporate and Other 78 126 (121) ----- ----- ------ $1,523 $1,188 $ 791 ===== ===== ====== Income before cumulative effect of changes in accounting principles Investment Services $ 336 $ 191 $ 184 Insurance Services (after minority interest of $22 in 1993) 288 287 226 Consumer Finance Services 232 198 175 Corporate and Other (after minority interest of $25 in 1991) 95 80 (106) ----- ----- ------ $ 951 $ 756 $ 479 ===== ===== ====== Identifiable assets Investment Services $ 31,864 $10,439 $ 9,291 Insurance Services 60,684 5,612 4,571 Consumer Finance Services 7,155 6,495 6,480 Corporate and Other 1,657 1,605 1,219 ------- ------ ------ $101,360 $24,151 $21,561 ======= ====== ====== * Included in 1991 are Fingerhut's revenues of $1,428. 29 Notes to Consolidated Financial Statements (continued) The Investment Services segment consists of investment banking, securities brokerage, asset management and other financial services provided through SBS and its subsidiaries, mutual fund management and distribution services provided through American Capital, investment management services provided by RCM Capital Management, and mortgage banking through Margaretten through its date of sale (see Note 3). The Insurance Services segment includes individual and group life insurance, accident and health insurance, annuities and investment products, which are offered primarily through The Travelers Insurance Company and its subsidiary and affiliated life insurance companies. Such affiliated companies now include Primerica Financial Services (PFS) and its affiliate, Primerica Life Insurance Company which primarily issues individual term life insurance, and Transport Life Insurance Company. PFS and its affiliates are also engaged in sales of mutual funds and loan products. This segment also provides property-casualty insurance, including workers' compensation, liability, automobile, property and multiple-peril to businesses and other institutions and automobile and homeowners insurance to individuals. Property and casualty insurance policies are issued primarily by The Travelers Indemnity Company and its subsidiary and affiliated property-casualty insurance companies, which now include Gulf Insurance Company. The Consumer Finance Services segment includes consumer lending (including secured and unsecured personal loans, real estate-secured loans and consumer financing) and credit cards. Also included in this segment are credit-related insurance services provided through American Health and Life Insurance Company (AHL). Corporate and Other consists of corporate staff and treasury operations, certain corporate income and expenses that have not been allocated to the operating subsidiaries, including gains and losses from the sale of stock of subsidiaries and affiliates, and the results of Fingerhut for 1992 and 1991. During 1993 this segment also included the Company's approximately 27% interest in old Travelers. Capital expenditures for property, plant and equipment and related depreciation expense are not material to any of the business segments. Intersegment sales and international operations are not significant. For gains and special charges included in each segment, see Management's Discussion and Analysis of Financial Condition and Results of Operations. 5. Investments ----------- Fair values of investments in fixed maturities are based on quoted market prices or dealer quotes or, if quoted market prices are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. 30 Notes to Consolidated Financial Statements (continued) The amortized cost and estimated market values of investments in fixed maturities were as follows:
Available for Sale Held for Investment ---------------------------------------- ------------------------------------- Amortized Gross Unrealized Market Amortized Gross Unrealized Market ------------------ ------------------ December 31, 1993 Cost Gains Losses Value Cost Gains Losses Value ----------------- ---------------------------------------- ------------------------------------- Mortgage-backed securities-principally obligations of U.S. Government agencies $ 5,754 $ 26 $ (27) $ 5,753 $118 $22 $ - $ 140 U.S. Treasury securities and obligations of U.S. Government corporations and agencies 4,556 82 (11) 4,627 20 - - 20 Obligations of states and political subdivisions 3,062 38 (1) 3,099 7 1 - 8 Debt securities issued by foreign governments 535 8 - 543 6 - - 6 Corporate securities 14,202 249 (35) 14,416 26 1 - 27 ---------------------------------------- ------------------------------------- Totals $28,109 $403 $ (74) $28,438 $177 $24 $- $201 ======================================== ===================================== Available for Sale Held for Investment ---------------------------------------- ------------------------------------- Amortized Gross Unrealized Market Amortized Gross Unrealized Market ------------------ ------------------ December 31, 1992 Cost Gains Losses Value Cost Gains Losses Value ----------------- ---------------------------------------- ------------------------------------- Mortgage-backed securities-principally obligations of U.S. Government agencies $ 614 $ 37 $ - $ 651 $1 $- $- $1 U.S. Treasury securities and obligations of U.S. Government corporations and agencies 1,066 50 (1) 1,115 28 1 - 29 Obligations of states and political subdivisions 127 4 - 131 8 1 - 9 Debt securities issued by foreign governments 39 3 - 42 9 - - 9 Corporate securities 459 29 (1) 487 45 1 - 46 ---------------------------------------- ------------------------------------- Totals $2,305 $123 $ (2) $2,426 $91 $3 $- $94 ======================================== =====================================
31 Notes to Consolidated Financial Statements (continued) The amortized cost and estimated market value at December 31, 1993 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized Market Cost Value --------- --------- Due in one year or less $ 1,201 $ 1,206 Due after one year through five years 7,240 7,271 Due after five years through ten years 8,142 8,270 Due after ten years 5,831 5,999 ------ ------ 22,414 22,746 Mortgage-backed securities 5,872 5,893 ------ ------ $28,286 $28,639 ====== ====== Realized gains and losses on fixed maturities for the year ended December 31, excluding the Company's 27% share of The Travelers Insurance Group, were as follows: 1993 1992 1991 ---- ---- ---- Realized gains Pre-tax $168 $61 $54 --- -- -- After-tax 109 40 36 --- -- -- Realized losses Pre-tax $ 2 $ 1 $10 -- -- -- After-tax 1 - 6 -- -- -- At December 31, 1993, the Company had concentrations of corporate securities in the following industries: Finance $2,234 Electric utilities $1,850 Banking* $1,607 * Includes $515 of primarily short-term investments and cash equivalents issued by foreign banks. At December 31, 1993, significant concentrations of mortgage loans and real estate were for properties located in highly populated areas in the states listed below: Mortgage Loans Real Estate -------------- ----------- California $1,471 $33 New York $836 $90 Texas $600 $192 Florida $583 $111 Illinois $517 $88 Other mortgage loan and real estate investments are dispersed throughout the United States, with no combined holdings in any other state exceeding $400. 32 Notes to Consolidated Financial Statements (continued) Aggregate annual maturities on mortgage loans are as follows: Past maturity $ 464 1994 888 1995 1,192 1996 907 1997 728 1998 934 Thereafter 2,252 ------ $7,365 ====== 6. Securities Borrowed, Loaned and Subject to Repurchase Agreements ---------------------------------------------------------------- Securities borrowed or purchased under agreements to resell, at their respective carrying values, consisted of the following at December 31: 1993 1992 ------ ----- Resale agreements (by counterparty) Brokers and dealers $ 2,340 $1,401 Banks 555 226 Municipalities 217 157 Investment advisors 394 56 Corporations 226 50 Other 549 20 ------ ----- Total resale agreements 4,281 1,910 Deposits paid for securities borrowed 9,072 1,570 ------ ----- $13,353 $3,480 ====== ===== Securities loaned or sold under agreements to repurchase, at their respective carrying values, consisted of the following at December 31: 1993 1992 --------- -------- Repurchase agreements (by counterparty) Brokers and dealers $ 1,904 $ 798 Banks 1,600 1,552 Corporations 517 126 Municipalities 301 407 Trusts 232 135 Other 721 423 ------ ------ Total repurchase agreements 5,275 3,441 Deposits received for securities loaned 4,869 454 ------ ------ $10,144 $3,895 ====== ===== The resale and repurchase agreements represent customer financing transactions used to generate net interest income and facilitate trading activity. These instruments are short-term in nature (usually 30 days or less) and are collateralized principally by U.S. Government and mortgage- backed securities. The carrying amounts of these instruments approximate fair value because of the relatively short period of time between the origination of the instruments and their expected realization. 33 Notes to Consolidated Financial Statements (continued) 7. Brokerage Receivables and Brokerage Payables -------------------------------------------- The Company has receivables and payables for financial instruments purchased from and sold to brokers and dealers and customers. The Company is exposed to risk of loss from the inability of brokers and dealers or customers to pay for purchases or to deliver the financial instrument sold, in which case the Company would have to sell or purchase the financial instruments at prevailing market prices. The Company seeks to protect itself from the risks associated with customer activities by requiring customers to maintain margin collateral in compliance with regulatory and internal guidelines. Margin levels are monitored daily, and customers are required to deposit additional collateral as required. Where customers cannot meet collateral requirements, the Company will liquidate sufficient underlying financial instruments to bring the customer into compliance with the required margin level. Exposure to credit risk is impacted by market volatility, which may impair the ability of clients to satisfy their obligations to the Company. Credit limits are established and closely monitored for customers and brokers and dealers engaged in forward and futures and other transactions deemed to be credit-sensitive. Brokerage receivables and brokerage payables, which arise in the normal course of business, consisted of the following at December 31: 1993 1992 ----- ----- Receivables from brokers and dealers $1,063 $ 269 Receivables from customers 7,104 1,381 ----- ----- Total brokerage receivables $8,167 $1,650 ===== ===== Payables to brokers and dealers $1,841 $ 125 Payables to customers 5,171 776 ----- ----- Total brokerage payables $7,012 $ 901 ===== ===== Included in payables to brokers and dealers as of December 31, 1993 is approximately $966 of payables due LBI in connection with LBI's proprietary transactions. 34 Notes to Consolidated Financial Statements (continued) 8. Trading Securities ------------------ Trading securities at market value consisted of the following at December 31:
1993 1992 -------------------------------- --------------------------------- Securities Securities Sold Sold Securities Not Yet Securities Not Yet Owned Purchased Owned Purchased -------------- -------------- --------------- -------------- Obligations of U.S. Government and agencies $2,233 $3,258 $1,930 $2,017 State and municipal obligations 839 42 548 8 Corporate debt and collateralized mortgage obligations 2,214 198 789 70 Corporate convertibles, equities and options 577 337 518 337 ----- ----- ----- ----- $5,863 $3,835 $3,785 $2,432 ===== ===== ===== =====
Carrying values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Securities sold not yet purchased must be acquired in the marketplace at prevailing prices. Accordingly, these transactions may result in market risk since the ultimate purchase price may exceed the amount recognized in the financial statements. 9. Consumer Finance Receivables ---------------------------- Consumer finance receivables, net of unearned finance charges of $613 and $535 at December 31, 1993 and 1992, respectively, consisted of the following: 1993 1992 ----- ----- Real estate-secured loans $2,706 $2,608 Personal loans 2,495 2,379 Credit cards 697 538 Sales finance and other 444 263 ------ ------ Consumer finance receivables 6,342 5,788 Accrued interest receivable 42 36 Allowance for credit losses (168) (169) ----- ----- Net consumer finance receivables $6,216 $5,655 ===== ===== 35 Notes to Consolidated Financial Statements (continued) An analysis of the allowance for credit losses on consumer finance receivables at December 31, was as follows: 1993 1992 1991 ----- ----- ----- Balance, January 1 $ 169 $ 167 $ 136 Provision for credit losses 134 165 165 Amounts written off (163) (184) (175) Recovery of amounts previously written off 23 21 21 Allowance on receivables purchased 5 - 20 ----- ----- ----- Balance, December 31 $ 168 $ 169 $ 167 ===== ===== ===== Net outstandings $6,342 $5,788 $5,825 ===== ===== ===== Ratio of allowance for credit losses to net outstandings 2.64% 2.91% 2.86% ==== ==== ==== Contractual maturities of receivables before deducting unearned finance charges and excluding accrued interest were as follows: Receivables Outstanding Due December 31, Due Due Due Due After 1993 1994 1995 1996 1997 1997 ---------- ------ ------ ------ ------ ------ Real estate-secured loans $2,770 $ 176 $ 181 $ 193 $ 198 $2,022 Personal loans 2,953 954 822 609 331 237 Credit cards 695 114 96 80 67 338 Sales finance and other 537 218 121 63 37 98 ----- ----- ----- ----- ----- ----- Total $6,955 $1,462 $1,220 $ 945 $ 633 $2,695 ===== ===== ===== ===== ===== ===== Percentage 100% 21% 18% 14% 9% 38% ===== ===== ===== ===== ===== ===== Contractual terms average 12 years on real estate-secured loans and 4 years on other personal loans. Experience has shown that a substantial amount of the receivables will be renewed or repaid prior to contractual maturity dates. Accordingly, the foregoing tabulation should not be regarded as a forecast of future cash collections. The Company has a geographically diverse consumer finance loan portfolio. At December 31, the distribution by state was as follows: 1993 1992 -------- ------ Ohio 13% 14% North Carolina 10% 9% South Carolina 7% 6% Maryland 6% 7% Pennsylvania 6% 6% California 5% 6% Texas 5% 5% All other states* 48% 47% ---- ---- Total 100% 100% ==== ==== * None of the remaining states individually accounts for more than 4% of total consumer finance receivables. The estimated fair value of the consumer finance receivables portfolio depends on the methodology selected to value such portfolio (i.e., entry value versus exit value). Entry value is determined by comparing the portfolio yields to the yield at which new loans are being originated. Under the entry value methodology, the estimated fair value of the receivables portfolio at December 31, 1993 is approximately $40 to $55 above 36 Notes to Consolidated Financial Statements (continued) the recorded carrying values. Exit value represents a valuation of the portfolio based upon sales of comparable portfolios which takes into account the value of customer relationships and the current level of funding costs. Under the exit value methodology, the estimated fair value of the receivables portfolio at December 31, 1993 is approximately $550 to $650 above the recorded carrying value. 10. Debt ---- Short-term borrowings consisted of the following at December 31: 1993 1992 ---- ---- The Travelers Inc. Commercial paper $ 329 $ 71 ----- ----- Commercial Credit Company Commercial paper 2,206 2,387 Medium-term floating rate notes - 100 ------ ----- 2,206 2,487 ----- ----- Other Subsidiaries - 75 ------ ----- $2,535 $2,633 ===== ===== The Travelers Inc. (the Parent) issues commercial paper directly to investors, as does its subsidiary, Commercial Credit Company (CCC). Each maintains unused credit availability under its respective bank lines of credit at least equal to the amount of its outstanding commercial paper. Each may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees. The Parent and CCC have agreements with certain banks whereby the Parent, with the consent of CCC, may assign certain revolving credit amounts (swing facilities) to CCC for specific periods of time. The Parent and The Travelers Insurance Company (TIC) have an agreement with certain banks whereby both the Parent and TIC may access a revolving credit facility. At December 31, 1993, the Parent had committed and available revolving credit facilities of $725, up to $275 of which may be accessed by either the Parent or TIC. In January 1994, an additional $200 was assigned to CCC reducing the Parent's revolving credit facilities to $525, of which $75 expire in 1994 and $450 expire in 1995. At December 31, 1993, CCC had committed and available revolving credit facilities of $2,295 which was increased to $2,495 in January 1994 through additional amounts assigned under the swing facilities. Also, in February 1994, a $1,825 revolving credit facility, which would have matured in August 1994, was replaced with two new revolving credit facilities totaling $2,000. With these new facilities, CCC has revolving credit facilities totaling $2,670, of which $250 expires in 1994, $920 expires in 1995 and $1,500 expires in 1997. The carrying value of short-term borrowings approximates fair value. Long-term debt, including its current portion, and final maturity dates were as follows at December 31: 37 Notes to Consolidated Financial Statements (continued) 1993 1992 ---- ---- The Travelers Inc. 8.6% Notes due 1994 $ 93 $ 93 8 3/8% Notes due 1996 100 100 7 5/8% Notes due 1997 * 185 - 5 3/4% Notes due 1998 250 - 7 3/4% Notes due 1999 100 100 6 1/8% Notes due 2000 200 - 9 1/2% Senior Notes due 2002 * 300 - 8 5/8% Debentures due 2007 100 100 Other indebtedness, 5 7/8% - 8 7/8% due 1996 - 2007 13 48 ESOP note guarantee * 125 - 5 1/2% Eurodollar Convertible Subordinated Debentures - 137 Debt premium (discount) 38 (60) ----- ---- 1,504 518 ----- ---- Commercial Credit Company 8.29% to 12.85% Medium-Term Notes due 1994-1995 55 77 9 1/8% Notes due 1993 - 100 9.15% Notes due 1993 - 100 8% Notes due 1994 100 100 12.7% Notes due 1994 15 15 6.95% Notes due 1994 200 200 8.45% Notes due 1994 100 100 9 7/8% Notes due 1995 150 150 9.2% Notes due 1995 100 100 6.25% Notes due 1995 100 100 7.7% Notes due 1995 150 150 8.1% Notes due 1995 150 150 8 3/8% Notes due 1995 150 150 6.375% Notes due 1996 200 200 7.375% Notes due 1996 150 150 8% Notes due 1996 100 100 6.75% Notes due 1997 200 200 8 1/8% Notes due 1997 150 150 5.70% Notes due 1998 100 - 5 1/2% Notes due 1998 100 - 8 1/2% Notes due 1998 100 100 6.70% Notes due 1999 150 150 10% Notes due 1999 100 100 9.6% Notes due 1999 100 100 6.00% Notes due 2000 100 - 5 3/4% Notes due 2000 200 - 6 1/8% Notes due 2000. 100 - 6.00% Notes due 2000 150 - 5.9% Notes due 2003 200 - 10% Notes due 2008 150 150 10% Debentures due 2009 100 100 38 Notes to Consolidated Financial Statements (continued) 8.7% Debentures due 2009 150 150 8.7% Debentures due 2010 100 100 ----- ----- 3,970 3,242 ----- ----- Smith Barney Shearson Revolving credit facility 825 191 5 3/8% Notes due 1996 150 - 5 5/8% Notes due 1998 150 - 6 5/8% Notes due 2000 150 - Capital Note - with LBI due 1995 100 - ----- ----- 1,375 191 ----- ----- The Travelers Insurance Group 12% GNMA/FNMA - collateralized obligations 132 - Other indebtedness 10 - ----- ----- 142 - ----- ----- $6,991 $3,951 ===== ===== *Assumed in connection with the Company's acquisition of old Travelers. The Company has guaranteed the loan obligation of its Employee Stock Ownership Plan (ESOP) (see Note 14). The minimum principal payments on the ESOP loan obligation to be made in 1994, 1995, 1996 and 1997 are $28, $30, $32 and $35, respectively. Debt discount or premium is being amortized to interest expense using the effective interest method over the remaining maturities of the related debt obligations. SBS has a commitment from a bank syndicate for an $825 revolving credit facility which consists of a 364-day revolving credit facility in the amount of $200 and a 3-year revolving credit facility in the amount of $625, both of which had been fully utilized at December 31, 1993. Aggregate annual maturities on long-term debt obligations excluding principal payments on the ESOP loan obligation and the 12% GNMA/FNMA collateralized obligations, are as follows: 1994 $753 1995 $910 1996 $1,325 1997 $535 1998 $700 The fair value of the Company's long-term debt is estimated based on the quoted market price for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. At December 31, 1993 the carrying value and the fair value of the Company's long-term debt were as follows: 39 Notes to Consolidated Financial Statements (continued) Carrying Fair Value Value -------- ------ The Travelers Inc. $1,504 $1,568 Commercial Credit 3,970 4,234 Smith Barney Shearson 1,375 1,380 The Travelers Insurance Group 142 142 ----- ----- $6,991 $7,324 ===== ===== Investment Banking and Brokerage Borrowings Investment banking and brokerage borrowings consisted of the following at December 31: 1993 1992 ---- ---- Commercial paper $1,401 $ - Secured borrowings 105 301 Unsecured borrowings 693 294 Notes to LBI 1,255 - ----- ---- $3,454 $595 ===== === Investment banking and brokerage borrowings are short-term and include commercial paper, secured and unsecured bank loans used to finance operations, including the securities settlement process, and notes issued to LBI in connection with the Shearson Businesses acquired. The secured and unsecured bank loans bear interest at fluctuating rates based primarily on the federal funds interest rate. Notes payable to LBI consist of a $586 variable rate note due January 1994 (and subsequently paid) issued as partial payment for the businesses acquired, and a $669 non-interest bearing note (the Clearing Note) outstanding in connection with LBI's activities under the Clearing Agreement. The Clearing Note, which matures upon termination of the Clearing Agreement (see Note 1), fluctuates daily based on LBI's borrowing activities. In 1993, SBS put in place a $1,500 commercial paper program that consists of both discounted and interest bearing paper. At December 31, 1993 SBS had unused committed and available short-term lines of credit amounting to $260. In addition, SBS has substantial borrowing arrangements consisting of facilities that it has been advised are available, but where no contractual lending obligation exist. At December 31, 1993, the market value of the securities pledged as collateral for short-term brokerage borrowings was $124. At December 31, 1992, the market value of securities pledged as collateral for short-term brokerage borrowings was $417, including $56 of customers' margin securities. 11. Insurance Policy and Claims Reserves ------------------------------------ Insurance policy and claims reserves consisted of the following at December 31: 1993 1992 ------- ------ Benefit and loss reserves $22,997 $2,326 Unearned premiums 2,307 473 Policy and contract claims 1,347 204 ------ ----- $26,651 $3,003 ====== ===== 40 Notes to Consolidated Financial Statements (continued) 12. Reinsurance ----------- The Company's insurance operations cede insurance in order to limit losses, minimize exposure on large risks, provide additional capacity for future growth, and effect business sharing arrangements. Life reinsurance is accomplished through various plans of reinsurance, primarily coinsurance, modified coinsurance and yearly renewable term. Property-casualty reinsurance is placed on both a quota-share and excess basis. The property- casualty insurance subsidiaries also participate as a servicing carrier for, and a member of, several pools and associations. Reinsurance ceded arrangements do not discharge the insurance subsidiaries or the Company as the primary insurer. Reinsurance amounts included in the Consolidated Statement of Income were as follows: Ceded to Gross Other Net Amount Companies Amount ------ --------- ------ Year ended December 31, 1993 ---------------------------- Premiums Life insurance $1,178 $(284) $ 894 Accident and health insurance 385 (56) 329 Warranty, property and casualty insurance 434 (177) 257 ----- ---- ----- $1,997 $(517) $1,480 ===== ==== ===== Claims $1,096 $(287) $ 809 ===== ==== ====== Year ended December 31, 1992 ---------------------------- Premiums Life insurance $1,221 $(312) $ 909 Accident and health insurance 443 (39) 404 Warranty, property and casualty insurance 562 (181) 381 ----- ---- ----- $2,226 $(532) $1,694 ===== ==== ===== Claims $1,056 $(271) $ 785 ===== ==== ===== Year ended December 31, 1991 ---------------------------- Premiums Life insurance $1,319 $(390) $ 929 Accident and health insurance 547 (58) 489 Warranty, property and casualty insurance 539 (174) 365 ----- ---- ----- $2,405 $(622) $1,783 ===== ==== ===== Claims $1,139 $(337) $ 802 ===== ==== ===== 41 Notes to Consolidated Financial Statements (continued) Reinsurance Recoverables (including amounts for The Travelers Insurance Group in 1993) at December 31 were as follows: 1993 1992 ---- ---- Reinsurance Recoverables ------------------------ Life business $ 739 $539 Property and Casualty business: Pools and associations 2,585 - Other reinsurance 1,675 98 ----- ---- Total $4,999 $637 ===== ==== 13. Income Taxes ------------ The provision for income taxes (before minority interests) for the year ended December 31 was as follows: 1993 1992 1991 ---- ---- ---- Current: Federal $406 $350 $262 Foreign 3 5 3 State 75 53 27 ---- ---- ---- 484 408 292 ---- --- ---- Deferred: Federal 64 26 (4) Foreign (2) (2) (1) State 4 - - -- ---- ---- 66 24 (5) --- ---- ---- Total $550 $432 $287 === === === Deferred income taxes at December 31 related to the following (including amounts for The Travelers Insurance Group in 1993): 1993 1992 ---- ---- Deferred tax assets: Bad debt reserves $65 $ 69 Policy reserves 1,353 35 Deferred compensation 145 39 Employee benefits 221 7 Investments 425 0 Restructuring and repositioning charges not currently deductible 96 43 Other deferred tax assets 861 113 ----- --- Gross deferred tax assets 3,166 306 ----- --- Valuation allowance 100 - ----- --- Deferred tax assets after valuation allowance 3,066 306 ----- --- 42 Notes to Consolidated Financial Statements (continued) Deferred tax liabilities: Deferred policy acquisition costs and value of insurance in force (576) (420) Investment management contracts (277) (131) Other deferred tax liabilities (355) (176) ----- ----- Gross deferred tax liabilities (1,208) (727) ------- ----- Net deferred tax asset (liability) $ 1,858 $(421) ======= ===== The provision for deferred income taxes for the year ended December 31, 1991 related to the following: Deferred policy acquisition costs and value of insurance in force $(12) Bad debt reserves 2 Policy reserves 14 Divested businesses and assets 11 Acquisition-related costs 13 Compensation and other benefits (26) Restructuring and repositioning charges, not currently deductible (23) Other, net 16 ---- Total $ (5) ==== The reconciliation of the federal statutory income tax rate to the Company's effective income tax rate for the year ended December 31 was as follows: 1993 1992 1991 ---- ---- ---- Federal statutory rate 35.0% 34.0% 34.0% Limited taxability of investment income (1.6) (.8) (1.2) State and foreign income taxes (net of federal income tax benefit) 3.4 2.9 2.5 Amortization of cost of acquired businesses in excess of net assets .9 1.1 1.8 Equity in income of old Travelers (2.2) - - Other, net .6 (.9) (.9) ---- ---- ---- Effective income tax rate 36.1% 36.3% 36.2% ==== ==== ==== Tax benefits allocated directly to stockholders' equity for the years ended December 31, 1993 and 1992 were $79 and $48, respectively. As a result of the acquisition of old Travelers, a valuation allowance of $100 has been established to reduce the net deferred tax asset on investment losses to the amount that, based upon available evidence, is more likely than not to be realized. Reversal of the valuation allowance is contingent upon the recognition of future capital gains in the life insurance group's consolidated federal income tax return, or a change in circumstances which causes the recognition of the benefits to become more likely than not. The initial recognition of any benefit produced by the reversal of the valuation allowance will be recognized by reducing goodwill. 43 Notes to Consolidated Financial Statements (continued) In management's judgement, the $1,858 net deferred tax asset as of December 31, 1993 is fully recoverable against expected future years' taxable ordinary income and capital gains. Recognition of the net deferred tax asset is supported by expected future years' taxable income, after the reversal of deductible temporary differences, of at least $1,000 annually. At December 31, 1993, the Company has no ordinary or capital loss carryforwards. 14. Preferred Stock and Stockholders' Equity ---------------------------------------- Series A On July 28, 1992 the Company sold in a public offering 12.0 million depositary shares, each representing 1/10th of a share of 8.125% Cumulative Preferred Stock, Series A (Series A Preferred), at an offering price of $25 per depositary share. The Series A Preferred has cumulative dividends payable quarterly commencing September 1, 1992 and a liquidation preference equivalent to $25 per depositary share plus accrued and accumulated unpaid dividends. On or after July 28, 1997, the Company may, at its option, redeem the Series A Preferred, in whole or in part, at any time at a redemption price of $25 per depositary share plus dividends accrued and unpaid to the redemption date. Series B In connection with the acquisition of the domestic retail brokerage and asset management businesses of SLB, the Company issued to American Express 2.5 million shares of 5.5% Convertible Preferred Stock, Series B (Series B Preferred) of the Company. Each Series B Preferred share has cumulative dividends payable quarterly and a liquidation preference of $50 per share and is convertible at any time at the option of the holder at a conversion price of $36.75 per common share. The Series B Preferred is not redeemable prior to July 30, 1996. On or after July 30, 1996, the Series B Preferred is redeemable at the Company's option, at a price of $51.925 per share if redeemed prior to July 29, 1997, and at decreasing prices thereafter to $50 per share from and after July 30, 2003, plus accrued and unpaid dividends, if any, to the redemption date. In addition, the Company issued to American Express warrants to purchase 3,749,466 shares of common stock of the Company at an exercise price of $39 per common share, exercisable until July 31, 1998. Series C In connection with the acquisition of old Travelers, the Company converted the old Travelers $4.53 Series A ESOP Convertible Preference Stock which was issued to prefund old Travelers' matching obligations under its Employee Stock Ownership Plan (ESOP) into $4.53 Series C Convertible Preferred Stock ("Series C Preferred") of the Company with a stated value and a liquidation preference of $53.25 per share. At December 31, 1993, there were 4,406,431 shares of Series C Preferred outstanding. The Series C Preferred is convertible into one share of The Travelers Inc. Common Stock for each $66.21 of stated value of Series C Preferred, subject to antidilution adjustments in certain circumstances. Dividends on the Series C Preferred are cumulative and accrue in the amount of $4.53 per annum per share. The Series C Preferred is redeemable at the option of the Company on or after January 1, 1998 (or earlier at the option of the holder in the event of a change in control, as defined, of the Company) at a redemption price of $53.25 per share plus accrued and unpaid dividends thereon to the date fixed for redemption. 44 Notes to Consolidated Financial Statements (continued) Series D Also in connection with the Company's acquisition of old Travelers, 7.5 million shares of 9 1/4% Series B Preference Stock of old Travelers were converted into 7.5 million shares of 9 1/4% Series D Preferred Stock ("Series D Preferred") of the Company with a stated value and liquidation preference of $50 per share. The Series D Preferred is held in the form of depositary shares, with two depositary shares representing each preferred share. Annual dividends of $4.625 per share ($2.3125 per depository share) are payable quarterly. Dividends are cumulative from the date of issue. The Series D Preferred is not redeemable prior to July 1, 1997. On and after July 1, 1997, the Series D Preferred is redeemable at the Company's option at a price of $50 per share (equivalent to $25 per depositary share), plus accrued and unpaid dividends, if any, to the redemption date. In the event that dividends on the series D Preferred are in arrears in an amount equal to at least six full quarterly dividends, holders of the stock would have the right to elect two additional directors to the Board of Directors of the Company. The combined insurance subsidiaries' statutory capital and surplus at December 31, 1993 and 1992 was $4,340 and $1,073, respectively (including The Travelers Insurance Group in 1993), and is subject to certain restrictions imposed by state insurance departments as to the transfer of funds and payment of dividends. The combined insurance subsidiaries' (excluding The Travelers Insurance Group) net income, determined in accordance with statutory accounting practices, for the years ended December 31, 1993, 1992 and 1991 was $204, $199 and $92, respectively. The Company's broker-dealer subsidiaries are subject to The Uniform Net Capital Rule of the Securities and Exchange Commission. At December 31, 1993, the aggregate net capital of such broker-dealer subsidiaries was $957, exceeding the net capital requirement by $789. In April 1993, the Company sold 9,333,333 shares of newly issued common stock. The offering was made exclusively to foreign investors, and shares were not offered in the United States or to United States persons, in accordance with Regulation S under the Securities Act of 1933. Therefore the shares have not been registered under such act. In June 1993, the Company sold 1,000,000 shares of newly issued common stock to a senior executive of the Company. In total these transactions generated net proceeds of $329. At December 31, 1993, 10,694,611 shares of authorized common stock were reserved for convertible securities and warrants. 15. Incentive Plans --------------- The Company's 1986 Stock Option Plan provides for the granting to officers and key employees of the Company and its participating subsidiaries of non- qualified stock options and incentive stock options. Options generally are granted at the fair market value at the time of grant for a period not in excess of ten years. They vest over five years, or in full upon a change of control of the Company, and are generally exercisable only if the optionee is employed by the Company. The plan also permits an employee exercising an option to be granted new options (reload options) in an amount equal to the number of common shares used to satisfy the exercise price and the withholding taxes due upon exercise. The maximum number of shares that may be granted under this plan is 73,008,140, of which 35,000,000 were reserved for the granting of reload options; at December 31, 1993, 30,313,391 shares were available for grant, of which 16,306,258 45 Notes to Consolidated Financial Statements (continued) were available for reload option grants. The Company also has other option plans. Information with respect to stock options granted under the Company's various option plans is as follows: Number of Price Shares Per Share ---------- ------------ Balance, at January 1, 1991 23,098,912 $ 4.19-32.03 Granted 5,774,814 11.38-17.32 Expired or canceled (1,015,550) 9.74-18.16 Exercised (6,677,068) 4.19-17.87 ----------- ----------- Balance, at December 31, 1991 21,181,108 $ 6.07-32.03 Granted 11,924,090 18.50-24.94 Expired or canceled (518,956) 9.74-21.88 Exercised (13,279,940) 6.07-21.49 ----------- ----------- Balance, at December 31, 1992 19,306,302 $ 7.82-32.03 ----------- ----------- Granted 9,593,308 24.19-49.50 Expired or canceled (679,064) 9.74-44.63 Exercised (9,898,567) 8.00-37.41 ---------- ----------- Balance, at December 31, 1993 18,321,979 $ 7.81-49.50 ========== =========== Currently exercisable, December 31, 1993 3,170,334 $ 7.81-39.47 ========== =========== In addition to the stock options listed in the table, at the time of the Merger, 7,193,486 options to purchase old Travelers common stock were outstanding. Of this amount, 2,205,204 options were forfeited or redeemed for cash, and the remaining 4,988,282 options, at a weighted average price of $33.92, were converted into options to receive 4,011,726 shares of the Company's common stock, at a weighted average price of $42.18. The Company, through its Capital Accumulation Plan (the Plan) and other restricted stock programs, has issued a total of 11,676,248 shares of the Company's common stock in the form of restricted stock to participating officers and other key employees. The restricted stock generally vests after a two-year period. The Nominations and Compensation Committee of the Board of Directors that administers the Plan has determined that the restricted period for awards made with respect to the 1994 Plan year will generally be three years. Except under limited circumstances, during this period the stock cannot be sold or transferred by the participant, who is required to render service to the Company during the restriction period. At the discretion of the Committee, participants may elect to receive part of their awards in restricted stock and part in stock options. Unearned compensation expense associated with the restricted stock grants represents the market value of the Company's common stock at the date of grant and is recognized as a charge to income ratably over the vesting period. 46 Notes to Consolidated Financial Statements (continued) 16. Employee Benefit Plans ---------------------- The Company and its subsidiaries have noncontributory defined benefit pension plans covering the majority of their U.S. employees. Benefits for the Company's principal plans are based on an account balance formula. Under this formula, each employee's accrued benefit can be expressed as an account that is credited with amounts based upon the employee's pay, length of service and a specified interest rate, all subject to a minimum benefit level. These plans are funded in accordance with the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. Certain non-U.S. employees of the Company are covered by noncontributory defined benefit plans. These plans are funded based upon local laws. The following is a summary of the components of pension expense included in the Consolidated Statement of Income for the Company's significant defined benefit plans for the year ended December 31: 1993 1992 1991 ---- ---- ---- Service cost-benefits earned during the period $34 $17 $17 Interest cost on projected benefit obligation 36 26 25 Actual return on plan assets (59) (28) (58) Net amortization and deferral 11 (10) 20 --- --- --- Net periodic pension cost $22 $ 5 $ 4 === === === The following table sets forth the funded status of the Company's significant defined benefit plans (including those of old Travelers in 1993 only) at December 31: 1993 1992 ---- ---- Actuarial present value of benefit obligation: Vested benefits $2,223 $298 Non-vested benefits 40 9 ------ ---- Accumulated benefit obligation 2,263 307 Effect of future salary increases 79 17 ------ ---- Projected benefit obligation 2,342 324 Plan assets at fair value 2,434 377 ----- ---- Plan assets in excess of projected benefit obligation 92 53 Unrecognized transition asset (3) (6) Unrecognized prior service benefit (36) (17) Unrecognized net loss (gain) 2 (24) ------ ---- Prepaid pension expense recognized in the Statement of Financial Position $ 55 $ 6 ====== ==== The projected benefit obligation at December 31, 1993 was determined using a weighted average discount rate of 7.5% and assumed rates of compensation increase of between 2% and 9%. The projected benefit obligation at December 31, 1992 was determined using a discount rate of 8.5% and an assumed rate of compensation increase of 5.5%. The expected long-term rate of return used in determining pension expense was 9.75% for 1993 and 10.0% for both 1992 and 1991. Plan assets associated with the plans of old Travelers are held primarily in various separate accounts and the general account of The Travelers Insurance Company, a subsidiary of the Company, and certain investment trusts. These 47 Notes to Consolidated Financial Statements (continued) accounts invest in stocks, bonds, mortgage loans and real estate. Plan assets for the Company's other significant pension plans are invested primarily in U.S. Government securities, corporate bonds and stocks. The Company has defined contribution plans for certain subsidiaries including various savings and stock ownership plans. The employer cost of these plans was $12, $6 and $17 for 1993, 1992 and 1991, respectively. 17. Postretirement and Postemployment Benefits ------------------------------------------ The Company provides postretirement health care, life insurance and survival income benefits to certain eligible retirees. These benefits relate primarily to former unionized employees of predecessor companies, certain employees of SBS and former employees of old Travelers. Other retirees are generally responsible for most or all of the cost of these benefits (while retaining the benefits of group coverage and pricing). As required by FAS 106, the Company changed its method of accounting for retiree benefit plans effective January 1, 1993, to accrue the Company's share of the costs of postretirement benefits over the service period rendered by an employee. Previously these benefits were charged to expense when paid. The Company elected to recognize immediately the liability for postretirement benefits as the cumulative effect of a change in accounting principle. This change resulted in a noncash after-tax charge to net income of $17 in the first quarter of 1993. The Company generally funds its share of the cost of postretirement benefits on a pay-as-you-go basis. However, the Company has made contributions to a survivor income plan, the assets of which are currently invested in a major insurance company's general long-term investment portfolio. Payments and net periodic postretirement benefit cost for 1993 were not material. The following table sets forth the funded status of the Company's postretirement benefit plans (including those of old Travelers) at December 31, 1993: Accumulated postretirement benefit obligation Retirees $418 Other fully eligible plan participants 33 Other active plan participants 53 ---- 504 Plan assets at fair value 3 ----- Accumulated postretirement benefit obligation in excess of plan assets 501 Unrecognized net loss (18) Unrecognized prior service cost (6) ---- Accrued postretirement benefit liability $ 477 ==== For measurement purposes, the annual rate of increase in the per capita cost of covered health care benefits ranged from 16.8% in 1993, decreasing gradually to 6.0% by the year 2000 and remaining at that level thereafter. The health care cost trend rate assumption affects the amounts reported. 48 Notes to Consolidated Financial Statements (continued) To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by approximately $32. The impact on net periodic postretirement benefit cost of such an increase would not be material. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. For certain plans associated with SBS and old Travelers, assumed rates of compensation increase ranging from 2% to 9% were used. For other plans, no assumptions have been made for rate of compensation increases, since active employees are responsible for the full cost of these benefits upon retirement. In accordance with the Company's early adoption of FAS 112, the Company changed its method of accounting for postemployment benefits effective January 1, 1993 to accrue the cost of postemployment benefits over the service period rendered by an employee. Previously these benefits were charged to expense when paid. For the Company these benefits are principally disability-related benefits and severance. Adoption of FAS 112 resulted in the recognition of a noncash after-tax charge to net income of $18 in 1993 for the cumulative effect of a change in accounting principle. The Company continues to fund benefits on a "pay- as-you-go" basis. Payments and annual expense for providing postemployment benefits in 1993 were not material. 18. Lease Commitments ------------------ Rentals Rental expense (principally for offices and computer equipment) was $182, $114 and $137 for the years ended December 31, 1993, 1992 and 1991, respectively. At December 31, 1993, future minimum annual rentals under noncancellable operating leases (including those of The Travelers Insurance Group) were as follows: 1994 $398 1995 325 1996 245 1997 167 1998 92 Thereafter 121 ----- $1,348 ===== Future sublease rental income of approximately $19 will partially offset these commitments. The Company and certain of SBS's subsidiaries together have an option to purchase the buildings presently leased for SBS's executive offices and New York City operations at the expiration of the lease term. 49 Notes to Consolidated Financial Statements (continued) 19. Other Financial Instruments --------------------------- The Company monitors creditworthiness of counterparties to financial instruments by using criteria of acceptable risk that are consistent with on-balance sheet financial instruments. The controls generally include credit approvals, limits and other monitoring procedures. Transactions may also include the use of collateral to minimize credit risk and lower the effective cost to the borrower. Forward and Futures Contracts Forward and futures contracts are contracts for the delayed delivery of securities in which the seller agrees to make delivery of a specified instrument at a specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in market values and interest rates. Credit risk is reduced to the extent that a clearing organization acts as a counterparty to the transaction. Forward and futures contracts used in trading activities are carried at market value. Realized and unrealized gains and losses are included in trading account profits. At December 31, 1993 and 1992, SBS had outstanding forward and futures contracts as follows: 1993 1992 ---- ---- Purchase Sell Purchase Sell -------- ---- -------- ---- Financial $8,203 $9,103 $4,095 $4,529 Foreign currency 4,654 4,499 732 734 ------ ------ ------ ------ and other $12,857 $13,602 $ 4,827 $5,263 ====== ====== ====== ===== Financial forward contracts relate primarily to mortgage-backed securities transactions. SBS also has outstanding commitments, amounting to $796 for 1993 and $673 for 1992, to underwrite variable rate municipal securities at future dates subject to certain conditions being met by the issuers. Financial Guarantees At December 31, 1993, The Travelers Insurance Group had outstanding financial guarantees of $3,016, of which $2,598 represents its participation in the Municipal Bond Insurance Association's guarantee of municipal bond obligations. The bonds are generally rated A or above and The Travelers Insurance Group's participation has been reinsured. Credit Cards The Company provides credit card services through its subsidiaries, Primerica Bank and Primerica Bank USA. These services are provided to individuals and to affinity groups nationwide. At December 31, 1993 and 1992 total credit lines available to credit cardholders were $3,916 and $3,056, of which $697 and $538 were utilized, respectively. 50 Notes to Consolidated Financial Statements (continued) Other Commitments At December 31, 1993, SBS had borrowed securities having a market value of $1,225 against which it had pledged securities having market values of $1,279. In addition, SBS had obtained letters of credit aggregating $154, of which $116 was used to satisfy various collateral and deposit requirements principally with clearing organizations. At December 31, 1992, SBS had borrowed securities having a market value of $763 against which it had pledged securities having market values of $508 and letters of credit totaling $267. The letters of credit were partially collateralized with securities owned by SBS having a market value of $90. In addition, SBS had obtained letters of credit aggregating $179, of which $131 was used to satisfy various collateral and deposit requirements principally with clearing organizations. These agreements were partially collateralized by securities with a market value of $37, including $34 of customers' margin securities. SBS and its broker-dealer subsidiary have each provided a portion of a residual value guarantee in connection with the lease of the buildings occupied by SBS's executive offices and New York operations. The amount of the guarantee is dependent upon the final build-out costs with a maximum of $485. The Travelers Insurance Group may use financial instruments from time to time with exposure to similar kinds of off-balance sheet risk. These instruments include forward contracts, financial futures contracts, unfunded commitments to partnerships, transfers of receivables with recourse and interest rate swaps. The off-balance sheet risks of these financial instruments were not considered significant at December 31, 1993. 20. Contingencies ------------- A subsidiary of The Travelers Insurance Group is in litigation with certain underwriters at Lloyd's in New York state court to enforce reinsurance contracts with respect to recoveries for certain asbestos claims. In January 1994 the court stayed litigation of this matter in favor of arbitration of the contract issues raised by old Travelers under the applicable treaties and an agreement with the Lloyd's market on coverage for asbestos-related claims. Certain of the Company's subsidiaries are involved in litigation with respect to claims arising with regard to insurance, which is taken into account in establishing benefit reserves. On insurance contracts written many years ago, old Travelers continues to receive claims asserting alleged injuries and damages from asbestos and other hazardous and toxic substances. In relation to these claims, the Company carries on a continuing review of its overall position, its reserving techniques and reinsurance recoverable. In each of these areas of exposure, the Company has endeavored to litigate individual cases and settle claims on favorable terms. Given the vagaries of court coverage decisions, plaintiff's expanded theories of liability, the risks inherent in major litigation and other uncertainties, it is not presently possible to quantify the ultimate exposure represented by these claims. As a result, the Company expects that future earnings may be adversely affected by environmental and asbestos claims, although the amounts cannot be reasonably estimated. However, it is not likely these claims will have a material adverse effect on the Company's financial condition. 51 Notes to Consolidated Financial Statements (continued) In the ordinary course of business the Company and/or its subsidiaries are defendants or co-defendants in various litigation matters. Although there can be no assurances, the Company believes, based on information currently available, that the ultimate resolution of these legal proceedings (other than environmental and asbestos claims) would not be likely to have, but may have, a material adverse effect on the results of operations. 52 Notes to Consolidated Financial Statements (continued) 21. Quarterly Financial Data (unaudited) ------------------------------------
1993 1992 ------------------------------------------- ------------------------------------------- First Second Third Fourth Total First Second Third Fourth Total ---------------------------------------------------------------------------------------- Total revenues $1,302 $1,284 $2,016 $2,195 $6,797 $1,335 $1,276 $1,245 $1,269 $5,125 Total expenses 974 987 1,576 1,750 5,287 1,061 1,044 994 1,026 4,125 Gain on sales of stock of subsidiaries and affiliates 6 - 7 - 13 78 - - 110 188 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes, and minority interest and cumulative effect of changes in accounting principle 334 297 447 445 1,523 352 232 251 353 1,188 Provision for income taxes 119 106 182 143 550 132 82 86 132 432 Minority interest, net of income taxes (8) (4) (6) (4) (22) - - - - - ----- ----- ----- ------ ----- ----- ----- ----- ----- ----- Net income before cumulative effect of changes in accounting principles 207 187 259 298 951 220 150 165 221 756 Cumulative effect of changes in accounting principles (35) - - - (35) (28) - - - (28) ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net income restated (1) $ 172 $ 187 $ 259 $ 298 $ 916 $ 192 $ 150 $ 165 $ 221 $ 728 ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== Earnings per share of common stock: Net income $ 0.89 $ 0.76 $ 1.03 $ 1.19 $ 3.88 $ 0.98 $ 0.68 $ 0.73 $ 0.97 $ 3.34 Cumulative effect of changes in accounting principles (0.15) -. -. -. (0.14) (0.13) -. -. -. (0.12) ------- ------- ------- ------- ------- ------- ------- ------ ------- ------- Net income as restated (1) $ 0.74 $ 0.76 $ 1.03 $ 1.19 $ 3.74 $ 0.85 $ 0.68 $ 0.73 $ 0.97 $ 3.22 ======= ======= ======= ======= ======= ======= ======= ====== ======= ======= Common stock price High $ 37.313 $ 39.469 $ 49.500 $ 48.625 $ 49.500 $ 21.313 $ 20.875 $ 22.250 $ 24.938 $ 24.938 Low $ 24.313 $ 31.219 $ 37.594 $ 38.000 $ 24.313 $ 18.812 $ 17.875 $ 19.063 $ 20.750 $ 17.875 Close $ 34.594 $ 39.469 $ 47.750 $ 38.875 $ 38.875 $ 20.125 $ 19.187 $ 21.875 $ 24.188 $ 24.188 Dividends per share of common stock $ .120 $ .120 $ .125 $ .125 $ .490 $ .063 $ .100 $ .100 $ .100 $ .363 Due to changes in the number of average shares outstanding, quarterly earnings per share of common stock do not add to the totals for the years. The above information has been restated to reflect the stock splits as discussed in Note 2. (1) Previously reported quarterly results for the first quarter of 1993 have been restated to reflect the Statement of Financial Accounting Standards (FAS 112) "Accounting For Postemployment Benefits," with retroactive application to January 1, 1993. This had the effect of reducing first quarter 1993 net income by $18.
53 Independent Auditors' Report KPMG Peat Marwick Certified Public Accountants 345 Park Avenue New York, New York 10154 The Board of Directors and Stockholders The Travelers Inc.: We have audited the accompanying consolidated statements of financial position of The Travelers Inc. (formerly Primerica Corporation) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Travelers Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company changed its methods of accounting for postretirement benefits other than pensions and accounting for postemployment benefits in 1993, and its method of accounting for income taxes in 1992. KPMG Peat Marwick January 24, 1994 /s/ KPMG Peat Marwick 54 EX-21 17 EXHIBIT 21 Subsidiaries of The Travelers Inc. The following list omits certain subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. The jurisdiction of incorporation of each subsidiary is included in parentheses after its name. AC Health Ventures, Inc. (Delaware) AMCO Biotech, Inc. (Delaware) Associated Madison Companies, Inc. (Delaware) American Capital Management & Research, Inc. (Delaware) Advantage Capital Corporation (New York) Advantage Capital Insurance Agency, Inc. (Missouri) Advantage Capital Insurance Agency of Alabama, Inc. (Alabama) Advantage Capital Insurance Agency of Hawaii, Inc. (Hawaii) Advantage Capital Insurance Agency of Massachusetts, Inc. (Massachusetts) American Capital Advisors, Inc. (Delaware) American Capital Asset Management, Inc. (Delaware) American Capital Exchange Corporation (California) American Capital Companies Shareholder Services, Inc. (Delaware) American Capital Contractual Services, Inc. (New York) American Capital Custodial Services, Inc. (Delaware) American Capital Marketing, Inc. (Texas) American Capital Partner, Inc. (Delaware) American Capital Services, Inc. (Delaware) American Capital Shareholder Corporation (Texas) American Capital T.A. Inc. (Delaware) American Capital Trust Company (Texas) American National Life Insurance (T & C), Ltd. (Turks and Caicos Is.) ERISA Corporation (New York) Mid-America Insurance Services, Inc. (Georgia) National Marketing Corporation (Pennsylvania) (also D/B/A American Service Associates) PFS Primerica Corporation (Delaware) ALW Media Management, Inc. (Georgia) First American Financial Services, Inc. (Georgia) Meetings & Conventions Travel, Inc. (Georgia) PFS Asset Management, Inc. (Georgia) PFS Custodial Services, Inc. (Georgia) PFS Distributors, Inc. (Georgia) PFS Investments Inc. (Georgia) PFS Services, Inc. (Georgia) Primerica Financial Services Home Mortgages, Inc. (Georgia) Primerica Payment Services, Inc. (Georgia) Primerica Financial Services, Inc. (Nevada) Primerica Financial Services Agency of New York, Inc. (New York) Primerica Financial Services Agency of Ohio, Inc. (Ohio) Primerica Financial Services Insurance Marketing of Connecticut, Inc. (Connecticut) Primerica Financial Services Insurance Marketing of Idaho, Inc. (Idaho) Primerica Financial Services Insurance Marketing of Nevada, Inc. (Nevada) Primerica Financial Services Insurance Marketing of Pennsylvania, Inc. (Pennsylvania) (also D/B/A Primerica Financial Services) Primerica Financial Services Insurance Marketing of the Virgin Islands, Inc. (U.S. Virgin Islands) Primerica Financial Services Insurance Marketing of Wyoming, Inc. (Wyoming) Primerica Financial Services Insurance Marketing, Inc. (Delaware) Primerica Financial Services of Alabama, Inc. (Alabama) Primerica Financial Services of New Mexico, Inc. (New Mexico) Primerica Insurance Agency of Massachusetts, Inc. (Massachusetts) Primerica Insurance Services of Louisiana, Inc. (Louisiana) (also D/B/A/ A.L. Williams) Primerica Insurance Services of Maryland, Inc. (Maryland) (also D/B/A Primerica Financial Service Insurance Marketing, Inc.) RCM Acquisition Inc. (Delaware) SCN Acquisitions Company (Delaware) SL&H Reinsurance, Ltd. (Turks and Caicos Is.) Southwest Service Agreements, Inc. (North Carolina) Southwest Warranty Corporation (Florida) The Travelers Insurance Group Inc. (Connecticut) Constitution Plaza, Inc. (Connecticut) Harbour Associates I, Inc. (Delaware) Deer Run II, Inc. (Delaware) Net & Twine II Corporation (Delaware) KF Corporation (Delaware) KP Properties Corporation (Massachusetts) Travelers Income Properties - I (Massachusetts) Travelers Income Properties - II (Massachusetts) KPI 85, Inc. (Massachusetts) Travelers Realty/100 L.P. (Delaware) KRA Advisers Corporation (Massachusetts) KRP Corporation (Massachusetts) Blue-Ash Associates Limited Partnership (Massachusetts) KBA 3 Limited Partnership (Massachusetts) KBA Limited Partnership (Massachusetts) La Metropole S.A. (Belgium) Resource Information Management Systems, Inc. (Illinois) Principal Financial Associates, Inc. Winter Financial Group, Inc. - 2 - The Plaza Corporation (Connecticut) Joseph A. Wynne Agency (California) The Copeland Companies (New Jersey) Copeland Administrative Services, Inc. (New Jersey) Copeland Associates, Inc. (Delaware) Copeland Associates Agency of Ohio, Inc. Copeland Associates of Alabama, Inc. (Alabama) Copeland Associates of Montana, Inc. (Montana) Copeland Benefits Management Company (New Jersey) Copeland Equities, Inc. (New Jersey) H.C. Copeland Associates, Inc. of Massachusetts (Massachusetts) University Research Associates, Inc. (Delaware) Copeland Financial Services, Inc. (New Jersey) American Odyssey Funds Management, Inc. (New Jersey) American Odyssey Funds, Inc. (Maryland) Copeland Retirement Services, Inc. (New Jersey) H.C. Copeland and Associates, Inc. of Texas (Texas) The Parker Realty and Insurance Agency, Inc. (Vermont) Travelers General Agency of Hawaii, Inc. (Hawaii) The Prospect Company (Delaware) 89th & York Avenue Corporation (New York) 979 Third Avenue Corporation (Delaware) Meadow Lane, Inc. (Georgia) Panther Valley, Inc. (New Jersey) Prospect Management Services Company (Delaware) The Travelers Asset Funding Corporation (Connecticut) Travelers Capital Funding Corporation (Connecticut) The Travelers Corporation of Bermuda Limited (Bermuda) The Travelers Indemnity Company (Connecticut) Bankers and Shippers Insurance Company (Connecticut) B & S Insurance Agency, Inc. (North Carolina) Bankers and Shippers Indemnity Company (North Carolina) Burlington Acceptance Corporation (North Carolina) Commercial Insurance Resources, Inc. (Delaware) Gulf Insurance Company (Missouri) Atlantic Insurance Company (Texas) Gulf Group Lloyds (Texas) (also D/B/A Texas Lloyd Plan) Gulf Risk Services, Inc. (Delaware) Gulf Underwriters Insurance Company (North Carolina) Penn Casualty Insurance Company (Missouri) Select Insurance Company (Texas) Countersignature Agency, Inc. (Florida) First Trenton Indemnity Company (New Jersey) - 3 - Lynch, Ryan & Associates, Inc. (Massachusetts) The Charter Oak Fire Insurance Company (Connecticut) The Phoenix Insurance Company (Connecticut) Constitution State Service Company (Montana) The Travel Indemnity Company of Illinois (Illinois) The Travelers Indemnity Company of America (Georgia) The Travelers Indemnity Company of Rhode Island (Rhode Island) The Premier Insurance Company of Massachusetts (Massachusetts) The Travelers Home & Marine Insurance Company (Indiana) The Travelers Lloyds Insurance Company (Texas) Travco Insurance Company (Indiana) Travelers Reinsurance Company of Bermuda, Limited (Bermuda) The Travelers Insurance Company (Connecticut) Applied Expert Systems Inc. (Massachusetts) Conservco, Inc. (Connecticut) Coronet Investment Company (Texas) (also D/B/A ProAmerica Network, Inc.) Delaware Windtree Realty Corporation (Delaware) Exclaim, Inc. (Connecticut) Market Funding Corporation II (Delaware) Market Funding Corporation I (Delaware) MSA 1600 B-I Inc. (Pennsylvania) MSA 1600 B-II Inc. (Pennsylvania) MSA 1600 C-I Inc. (Pennsylvania) Primerica Insurance Holdings, Inc. (Georgia) AC RE, Ltd. (Bermuda) American Financial Life Insurance Company (Texas) Transport Life Insurance Company (Texas) Continental Life Insurance Company (Texas) (also D/B/A CLIC Life Insurance Company) Federated General Life Insurance Company (Arizona) Trans Pacific Life Insurance Company (California) Voyager Reinsurance Company (Arizona) Federated General Life Insurance Company (Arizona) Primerica Life Insurance Company (Massachusetts) National Benefit Life Insurance Company (New York) Primerica Financial Services (Canada) Ltd. (Canada) PFSL Investments Canada Ltd. (Canada) Primerica Financial Services Ltd. (Canada) Primerica Life Insurance Company of Canada (Canada) ProAmerica Managed Care, Inc. (Texas) Red Oak Plaza Holding Company, Inc. (Delaware) The Center for Corporate Health, Inc. (Connecticut) The Travelers Employee Benefits Company, Inc. - 4 - The Travelers Health Company (Connecticut) The Travelers Health Network, Inc. (Delaware) Travelers Health Network of California, Inc. (California) Travelers Health Network of Georgia, Inc. (Georgia) Travelers Health Network of Illinois, Inc. (Illinois) Travelers Health Network of Louisiana, Inc. (Louisiana) Travelers Health Network of New York, Inc. (New York) Travelers Health Network of Texas, Inc. (Texas) Travelers Health Network of Virginia, Inc. (Virginia) The Travelers Life and Annuity Company (Connecticut) The Travelers Life Insurance Company of Connecticut (Connecticut) The Travelers Managed Pharmacy, Inc. (Connecticut) The Travelers Plan Administrators, Inc. (Connecticut) The Travelers Plan Administrators of Florida, Inc. (Florida) The Travelers Telebrokerage, Inc. (Illinois) Three Parkway Inc. - I (Pennsylvania) Three Parkway Inc. - II (Pennsylvania) Three Parkway Inc. - III (Pennsylvania) Travelers Employee Benefits Company, Inc. (Connecticut) U.S. Behavioral Health (California) Behavioral Health Administrators (California) U.S. Behavioral Health Plan, California (California) The Travelers Insurance Company of Illinois (Illinois) The Travelers Insurance Corporation Proprietary Limited (Australia) The Travelers Investment Management Company (Connecticut) The Travelers Marine Corporation (California) The Travelers Realty Investment Company (Connecticut) Advision, Inc. (Connecticut) Travelers Asset Management International Corporation (New York) Travelers Canada Corporation (Canada) Travelers Equities Sales, Inc. (Connecticut) Travelers Mortgage Securities Corporation (Delaware) Travelers of Ireland Limited (Ireland) Travelers Specialty Property Casualty Company, Inc. (Connecticut) Travtech, Inc. (Connecticut) Warehouse RE, Ltd. (Turks and Caicos Is.) CCC Holdings, Inc. (Delaware) Commercial Credit Company (Delaware) American Health and Life Insurance Company (Maryland) Commercial Credit Insurance Agency of Texas, Inc. (Texas) World Service Life Insurance Company of Colorado (Colorado) Brookstone Insurance Company (Vermont) CC Consumer Services of Alabama, Inc. (Alabama) CC Finance Company, Inc. (New York) - 5 - CC Financial Services, Inc. (Hawaii) CC Home Lenders Consumer Discount Company (Pennsylvania) CC Home Lenders Financial, Inc. (Georgia) CC Home Lenders Services, Inc. CC Consumer Services of Alabama, Inc. (Alabama) CC Home Lenders Consumer Discount Company (Pennsylvania) CC Home Lenders Financial Services, Inc. (North Carolina) CC Home Lenders Financial, Inc. (Georgia) CC Home Lenders, Inc. (Ohio) Commercial Credit Corporation (Texas) Commercial Credit Financial of Kentucky, Inc. (Kentucky) Commercial Credit Financial of West Virginia, Inc. (West Virginia) Commercial Credit Services of Kentucky, Inc. (Kentucky) CC Retail Services, Inc. (Delaware) Troy Textiles, Inc. (Delaware) CCC Fairways, Inc. (Delaware) City Loan Bank (Ohio) The City Loan Service Corporation (Ohio) City Loan Financial Services, Inc. (Ohio) City Loan Financial, Inc. (Ohio) Commercial Credit Banking Corporation (Oregon) Commercial Credit Consumer Services, Inc. (Minnesota) Commercial Credit Corporation (Alabama) Commercial Credit Corporation (California) Commercial Credit Corporation (Iowa) Commercial Credit Corporation (Kentucky) Certified Insurance Agency, Inc. (Kentucky) Commercial Credit Investment, Inc. (Kentucky) National Life Insurance Agency of Kentucky, Inc. (Kentucky) Union Casualty Insurance Agency, Inc. (Kentucky) Commercial Credit Corporation (Maryland) (also D/B/A Commercial Credit Corporation (MD)) Action Data Services, Inc. (Missouri) Commercial Credit Plan, Incorporated (Oklahoma) (also D/B/A Commercial Credit Consumer Services, Inc.) Commercial Credit Corporation (New Jersey) Commercial Credit Corporation (New York) Commercial Credit Corporation (South Carolina) Commercial Credit Corporation (West Virginia) Commercial Credit Corporation NC (North Carolina) Commercial Credit Europe, Inc. (Delaware) Commercial Credit Far East Inc. (Delaware) - 6 - Commercial Credit Insurance Services, Inc. (Maryland) Commercial Credit Insurance Agency (P&C) of Mississippi, Inc. (Mississippi) Commercial Credit Insurance Agency of Alabama, Inc. (Alabama) Commercial Credit Insurance Agency of Kentucky, Inc. (Kentucky) Commercial Credit Insurance Agency of Massachusetts, Inc. (Massachusetts) Commercial Credit Insurance Agency of Nevada, Inc. (Nevada) Commercial Credit Inurance Agency of New Mexico, Inc. (New Mexico) Commercial Credit International, Inc. (Delaware) Comind Leasing (Brazil) Commercial Credit International Banking Corp. (Oregon) CCC Realty Credit Limited (Canada) Commercial Credit Services do Brazil Ltda. (Brazil) Commercial Credit Services Belgium S.A. (Belgium) Commercial Credit Services Israel Limited (Israel) Industrial Leasing Services Limited (Israel) Comlease Ltd. (Israel) Commercial Credit Limited (Delaware) Commercial Credit Loan, Inc. (New York) Commercial Credit Loans, Inc. (Delaware) Commercial Credit Loans, Inc. (Ohio) Commercial Credit Loans, Inc. (Virginia) Commercial Credit Management Corporation (Maryland) Commercial Credit Plan Consumer Discount Company (Pennsylvania) Commercial Credit Plan Incorporated (Tennessee) (also D/B/A Commercial Credit Plan (TN)) Commercial Credit Plan Incorporated (Utah) Commercial Credit Plan Incorporated of Georgetown (Delaware) Commercial Credit Plan Industrial Loan Company (Virginia) Commercial Credit Plan, Incorporated (Colorado) Commercial Credit Plan, Incorporated (Delaware) Commercial Credit Plan, Incorporated (Georgia) Commercial Credit Plan, Incorporated (Missouri) Commercial Credit Savings Bank (Pennsylvania) Commercial Credit Securities, Inc. (Delaware) Commercial Insurance Resources, Inc. (Delaware) Gulf Insurance Company (Missouri) Atlantic Insurance Company (Texas) Gulf Group Lloyds (Texas) (also D/B/A Texas Lloyd Plan) Gulf Risk Services, Inc. (Delaware) Gulf Underwriters Insurance Company (North Carolina) Penn Casualty Insurance Company (Missouri) Select Insurance Company (Texas) DeAlessandro & Associates, Inc. (Delaware) - 7 - Park Tower Holdings, Inc. (Delaware) CC Retail Services, Inc. (Delaware) Troy Textiles, Inc. (Delaware) COMCRES, Inc. (Delaware) Commercial Credit Development Corporation (Delaware) Myers Park Properties, Inc. (Delaware) Penn Re, Inc. (North Carolina) Plympton Concrete Products, Inc. (Delaware) Primerica Bank (Delaware) Primerica Bank USA (Delaware) Resource Deployment, Inc. (Texas) Verochris Corporation (Delaware) AMC Aircraft Corp. (Delaware) Voyager Guaranty Insurance Company (Missouri) World Service Life Insurance Company (Colorado) Margco Holdings, Inc. (Delaware) Berg Associates (New Jersey) Berg Enterprises Realty, Inc. (New York) Dublin Escrow, Inc. (California) Farrington Realty, Inc. (New Jersey) M.K.L. Realty Corporation (New Jersey) MFC Holdings, Inc. (Delaware) MRC Holdings, Inc. (Delaware) The Berg Agency, Inc. Mirasure Insurance Company, Ltd. (Bermuda) Mirasure, Inc. (Delaware) PA/RCM Corporation (Delaware) PA/RCM LP Corporation (Delaware) Pacific Basin Investments Ltd. (Delaware) Primerica Corporation (Wyoming) Primerica Finance Corporation (Delaware) RCM Capital Trust Company (California) SBS Trust Company Smith Barney Shearson Holdings Inc. (Delaware) 250 Realty Inc. Hubert and Moore Group Inc. (Delaware) Mutual Management Corp. (New York) Smith Barney Asset Management Co., Ltd. (Japan) R-H Sports Enterprises Inc. (Georgia) SBS Software Inc. (Delaware) Smith Barney Asia Inc. (Delaware) - 8 - Smith Barney Inc. (Delaware) 1345 Media Corp. (Delaware) 1345 Realty Corporation (Delaware) Corporate Realty Income Fund I, L.P. Americas Avenue Corporation (Delaware) Corporate Realty Advisors, Inc. (Delaware) CRA Acquisition Corp. (Delaware) IPO Holdings Inc. (Delaware) Institutional Property Owners, Inc. III (New York) Institutional Property Owners, Inc. IV (Delaware) Institutional Property Owners, Inc. V (Delaware) Institutional Property Owners, Inc. VI (California) Institutional Property Owners, Inc. VII (Delaware) MLA 50 Corporation (Delaware) MLA Associates, L.P. MLA GP Corporation (Delaware) Municipal Markets Advisors Incorporated (Delaware) SB Depositary Corporation (Delaware) SBF Corp. (Delaware) (also D/B/A SB GP Company) Bridgewater, L.P. Smith Barney Funding, L.P. Smith Barney Acquisition Corporation (Delaware) Smith Barney Acquisition Fund, Inc. (Cayman Islands) Smith Barney Commercial Corp. (Delaware) Smith Barney Funding Holding Corp. (Delaware) SBF Securities Company, L.P. Smith Barney Global Capital Management, Inc. (Delaware) Smith Barney Investment, Inc. (Delaware) Smith Barney L.P. - ESC-1 Smith Barney Offshore, Inc. (Delaware) Decathlon Offshore Limited (Cayman Islands) Smith Barney Pension Advisors Corp. (Delaware) Smith Barney Realty Advisors, Inc. (Delaware) Smith Barney Real Estate Opportunity Fund, L.P. Smith Barney Realty, Inc. (Delaware) Smith Barney Risk Investors, Inc. (Delaware) Smith Barney Investors L.P. Smith Barney Venture Corp. (Delaware) First Century Company First Century Partnership II First Century Management Company First Century Partnership III Smith Barney Mortgage Capital Corp. (Delaware) - 9 - Smith Barney Mortgage Capital Group, Inc. (Delaware) Smith Barney Shearson (Chile) Corredora de Seguro Limitada (Chile) (also D/B/A SBS (Chile) Corredora de Seguros Ltda.) Smith Barney Shearson Cayman Islands, Ltd. (Cayman Islands) Smith Barney Shearson Futures Management Inc. (Delaware) Ayco Futures Fund L.P. Commodity Trend Timing Fund I Commodity Trend Timing Fund II Commodity Venture Fund F-1000 Futures Fund L.P., Series IX F-1000 Futures Fund L.P., Series VI F-1000 Futures Fund L.P., Series VIII F-1000 Guarantee Futures Fund L.P., Series IV Greenbrier Futures Fund L.P. Harbourer Fund, Ltd. Hutton Investors Futures Fund L.P. II Hutton Investors Futures Fund L.P. III Monetary Venture Fund Parnel Futures Associates, L.P. Peregrine Futures Fund, L.P. Shearson Lehman Brothers International Advisors Currency Fund L.P. Shearson Lehman Futures 1000 Plus, L.P. Shearson Lehman Select Advisors Futures Fund L.P. SLB Mid-West Futures Fund L.P. SLH Performance Partners Futures Fund L.P. Smith Barney Offshore Fund Ltd. Smith Barney Shearson Inc. (Delaware) SBHU Life Agency, Inc. (Delaware) Robinson-Humphrey Insurance Services Inc. (Georgia) Robinson-Humphrey Insurance Services of Alabama, Inc. (Alabama) SBHU Life & Health Agency, Inc. (Delaware) SBHU Life Agency of Arizona, Inc. (Arizona) SBHU Life Agency of Indiana, Inc. (Indiana) SBHU Life Agency of Utah, Inc. (Utah) SBHU Life Insurance Agency of Massachusetts, Inc. (Massachusetts) SBS Insurance Agency of Hawaii, Inc. (Hawaii) SBS Insurance Agency of Idaho, Inc. (Idaho) SBS Insurance Agency of Maine, Inc. (Maine) SBS Insurance Agency of Minnesota, Inc. (Minnesota) SBS Insurance Agency of Montana, Inc. (Montana) SBS Insurance Agency of Nevada, Inc. (Nevada) SBS Insurance Agency of North Carolina, Inc. (North Carolina) SBS Insurance Agency of Ohio, Inc. (Ohio) - 10 - SBS Insurance Agency of South Dakota, Inc. (South Dakota) SBS Insurance Agency of Woming, Inc. (Wyoming) SBS Insurance Brokerage Agency of Arkansas, Inc. (Arkansas) SBS Insurance Brokers of Arizona, Inc. (Arizona) SBS Insurance Brokers of Indiana, Inc. (Indiana) SBS Insurance Brokers of Kentucky, Inc. (Kentucky) SBS Insurance Brokers of Louisiana, Inc. (Louisiana) SBS Insurance Brokers of Missouri, Inc. (Missouri) SBS Insurance Brokers of New Hampshire, Inc. SBS Insurance Brokers of North Dakota, Inc. (North Dakota) SBS Insurance Brokers of Oklahoma, Inc. (Oklahoma) SBS Insurance Brokers of Virginia, Inc. (Virginia) SBS Life Insurance Agency of Puerto Rico, Inc. (Puerto Rico) Shearson Lehman Hutton Insurance Agency Brokers of Oklahoma, Inc. SLB Insurance Agency of Maryland, Inc. (Maryland) Smith Barney, Harris Upham Life Agency Inc. (Louisiana) Smith Barney Shearson (Hong Kong) Limited (Hong Kong) Smith Barney Shearson Europe Holdings, Ltd. (United Kingdom) Smith Barney Shearson Europe, Ltd. (United Kingdom) Smith Barney Shearson Futures, Ltd. (United Kingdom) Smith Barney Shearson International Incorporated (Oregon) Smith Barney Pacific Holdings, Inc. (British Virgin Is.) Smith Barney Shearson (Asia) Limited (Hong Kong) Smith Barney Shearson (Singapore) Pte Ltd (Singapore) Smith Barney Shearson, HG Asia (Singapore) Pte Ltd (Singapore) HG Asia (Singapore) Pte. Ltd. The Robinson-Humphrey Company, Inc. (Delaware) Smith Barney Shearson Mortgage Brokers Inc. (Delaware) Smith, Barney Advisers, Inc. (Delaware) Smith Barney Shearson Strategy Advisers Inc. E.C. Tactical Management S.A. (Luxembourg) Structured Mortgage Securities Corporation (Delaware) Thirty Fourth Street Partners L.P. Smith Barney Shearson Trust Company (New York) Smith Barney Shearson Trust Company of Florida Tinmet Corporation (Delaware) - 11 - EX-23.01 18 Exhibit 23.01 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors The Travelers Inc.: We consent to the incorporation by reference in the Registration Statements on: - - Form S-3 Nos. 33-49280, 33-55542, 33-56940, 33-68760, 33-51101 and 33-52281; and - - Form S-8 Nos. 33-32130, 33-43997, 33-59524, 33-37399, 33-28437, 33-7665, 33-28110, 33-43883, 33-21099, 33-29711, 33-47437, 33-39025, 33-40469, 33-38109, 33-50206, 33-39985, 33-51353, 33-51769, 33-51783, 33-52027 and 33-52029; and - - Form S-4 Nos. 33-37089, 33-25532, 33-63236 and 33-51201 of The Travelers Inc. (formerly Primerica Corporation), of our report dated January 24, 1994, relating to the consolidated statements of financial position of The Travelers Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1993, which report is included with the annual report on Form 10-K, for the fiscal year ended December 31, 1993, of The Travelers Inc. /s/ KPMG Peat Marwick New York, New York March 30, 1994 EX-23.02 19 Exhibit 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors of The Travelers Inc. (formerly Primerica Corporation) We consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 33-49280, 33-55542, 33-56940, 33-68760, 33-51101 and 33-52281), the Registration Statements on Form S-8 (Nos. 33-32130, 33-43997, 33-59524, 33-37399, 33-28437, 33-7665, 33-28110, 33-43883, 33-21099, 33-29711, 33-47437, 33-39025, 33-40469, 33-38109, 33-50206, 33-39985, 33-51353, 33-51769, 33-51783, 33-52027 and 33-52029) and the Registration Statements on Form S-4 (Nos. 33-37089, 33-25532, 33-63236 and 33-51201) of The Travelers Inc. (formerly Primerica Corporation), of our report dated January 24, 1994, relating to our audit of the preacquisition consolidated balance sheets of The Travelers Corporation and Subsidiaries (the "Company") as of December 31, 1993 and 1992, and the related preacquisition consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1993, which include only those accounts of the Company immediately prior to it being acquired and were prepared for the purpose of complying with the requirements of the Staff of the Securities and Exchange Commission, which report is included in the Annual Report on Form 10-K for the period ended December 31, 1993, of The Travelers Inc. These preacquisition consolidated financial statements are not intended to be a complete presentation of the Company's financial statements after its acquisition. /s/ Coopers & Lybrand Hartford, Connecticut March 29, 1994 EX-24.01 20 Exhibit 24.01 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ C. Michael Armstrong ---------------------------- C. Michael Armstrong POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Kenneth J. Bialkin ---------------------------- Kenneth J. Bialkin POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Richard H. Booth ---------------------------- Richard H. Booth POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Edward J. Budd ---------------------------- Edward J. Budd POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Joseph A. Califano, Jr. ---------------------------- Joseph A. Califano, Jr. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Robert W. Crispin ---------------------------- Robert W. Crispin POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Douglas D. Danforth ---------------------------- Douglas D. Danforth POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Robert F. Daniell ---------------------------- Robert F. Daniell POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Leslie B. Disharoon ---------------------------- Leslie B. Disharoon POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Gerald R. Ford ---------------------------- Gerald R. Ford POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Robert F. Greenhill ---------------------------- Robert F. Greenhill POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Ann Dibble Jordan ---------------------------- Ann Dibble Jordan POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Robert I. Lipp ---------------------------- Robert I. Lipp POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Dudley C. Mecum ---------------------------- Dudley C. Mecum POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Andrall E. Pearson ---------------------------- Andrall E. Pearson POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Frank J. Tasco ---------------------------- Frank J. Tasco POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Linda J. Wachner ---------------------------- Linda J. Wachner POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Joseph R. Wright, Jr. ---------------------------- Joseph R. Wright, Jr. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Arthur Zankel ---------------------------- Arthur Zankel POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned, a director of The Travelers Inc., a Delaware corporation, do hereby constitute and appoint Sanford I. Weill, James Dimon, and Charles O. Prince, III, and each of them severally, to be my true and lawful attorneys-in-fact and agents, each acting alone with full power of substitution and re-substitution, to sign my name to an Annual Report on Form 10-K of The Travelers Inc. for the fiscal year ended December 31, 1993, and all amendments thereto, and to file, or cause to be filed, the same with all exhibits thereto (including this power of attorney), and other documents in connection therewith with the Securities and Exchange Commission, provided that such Annual Report on Form 10-K in final form, and any amendment or amendments thereto and such other documents, be approved by said attorneys-in-fact, or by any one of them; and I do hereby grant unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in or about the premises, as fully and to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have subscribed these presents as of March 23, 1994. /s/ Frank G. Zarb ---------------------------- Frank G. Zarb EX-99.01 21 Exhibit 99.01
THE TRAVELERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS Pre-merger, historical accounting basis - ------------------------------------------------------------------------------------------------ (For the year ended December 31, in millions) 1993 1992 1991 - ------------------------------------------------------------------------------------------------ Revenues Premiums $ 6,584 $ 6,688 $ 7,302 Net investment income 2,600 2,799 3,228 Realized investment gains (losses) 209 (635) (2) Other, including gains and losses on dispositions 891 823 849 - ------------------------------------------------------------------------------------------------ 10,284 9,675 11,377 - ------------------------------------------------------------------------------------------------ Benefits and expenses Current and future insurance benefits 5,956 6,196 6,314 Interest credited to contractholders 1,206 1,456 1,656 Loss adjustment expenses 895 951 975 Amortization of deferred acquisition costs 531 558 569 General and administrative expenses 1,464 1,868 1,540 - ------------------------------------------------------------------------------------------------ 10,052 11,029 11,054 - ------------------------------------------------------------------------------------------------ Income (loss) before federal income taxes, extraordinary credit and cumulative effects of changes in accounting principles 232 (1,354) 323 - ------------------------------------------------------------------------------------------------ Federal income taxes Current 86 (23) 48 Deferred (142) (503) (32) - ------------------------------------------------------------------------------------------------ (56) (526) 16 - ------------------------------------------------------------------------------------------------ Income (loss) before extraordinary credit and cumulative effects of changes in accounting principles 288 (828) 307 Extraordinary credit - - 11 Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax - (258) - Cumulative effect of change in accounting for income taxes - 428 - - ------------------------------------------------------------------------------------------------ Net income (loss) 288 (658) 318 Retained earnings beginning of year 2,865 3,724 3,583 Dividends to preference shareholders (55) (38) (18) Dividends to common shareholders (231) (167) (165) Tax benefit on preference dividends 4 4 6 - ------------------------------------------------------------------------------------------------ Retained earnings end of year $ 2,871 $ 2,865 $ 3,724 - ------------------------------------------------------------------------------------------------ Per common share (in dollars) Primary Income (loss) before extraordinary credit and cumulative effects of changes in accounting principles N/A $ (8.11) $ 2.87 Extraordinary credit N/A - .10 Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax N/A (2.43) - Cumulative effect of change in accounting for income taxes N/A 4.03 - Net income (loss) N/A (6.51) 2.97 Assuming full dilution Income (loss) before extraordinary credit and cumulative effects of changes in accounting principles N/A (8.11) 2.80 Extraordinary credit N/A - .09 Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax N/A (2.43) - Cumulative effect of change in accounting for income taxes N/A 4.03 - Net income (loss) N/A (6.51) 2.89 Dividends 1.60 1.60 1.60 - ------------------------------------------------------------------------------------------------ See notes to financial statements.
THE TRAVELERS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET Pre-merger, historical accounting basis - ------------------------------------------------------------------------------------------------ (At December 31, in millions) 1993 1992 - ------------------------------------------------------------------------------------------------ Assets Fixed maturities Bonds (market, $16,832; $14,774) $ 15,887 $ 13,950 Trading portfolio securities (cost, $8,747; $8,622) 8,952 8,944 Redeemable preferred stocks (market, $39; $53) 37 52 Equity securities, at market Common stocks (cost, $88; $114) 156 151 Nonredeemable preferred stocks (cost, $164; $137) 170 138 Mortgage loans 7,490 10,072 Investment real estate, net of accumulated depreciation of $39; $54 593 826 Real estate held for sale, net of accumulated depreciation of $97; $133 806 1,332 Policy loans 1,212 1,210 Short-term securities 998 1,341 Other investments 1,226 1,313 - ------------------------------------------------------------------------------------------------ Total investments 37,527 39,329 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents 798 1,688 Investment income accrued 496 510 Premium balances receivable 1,771 1,855 Reinsurance recoverable 4,196 4,168 Deferred acquisition costs 827 791 Deferred federal income taxes 1,523 1,371 Separate and variable accounts 4,588 5,330 Other assets 2,884 2,987 - ------------------------------------------------------------------------------------------------ Total assets $ 54,610 $ 58,029 - ------------------------------------------------------------------------------------------------ Liabilities Contractholder funds $ 17,729 $ 19,276 Benefit and loss reserves 20,224 20,173 Unearned premium reserves 1,782 1,790 Policy and contract claims 1,099 1,129 Short-term debt - 64 Long-term debt 752 1,124 Current federal income taxes 175 73 Separate and variable accounts 4,485 5,251 Other liabilities 3,239 4,095 - ------------------------------------------------------------------------------------------------ Total liabilities 49,485 52,975 - ------------------------------------------------------------------------------------------------ Commitments and contingencies - note 9 ESOP Preference stock series A 235 225 Guaranteed ESOP obligation (125) (149) - ------------------------------------------------------------------------------------------------ 110 76 - ------------------------------------------------------------------------------------------------ Shareholders' equity Preference stock series B 375 375 Common stock (147 and 145 shares issued) 184 182 Additional paid-in capital 1,442 1,400 Unrealized investment gains, net of taxes 181 197 Retained earnings 2,871 2,865 Cost of common stock in treasury (38) (41) - ------------------------------------------------------------------------------------------------ Total shareholders' equity 5,015 4,978 - ------------------------------------------------------------------------------------------------ Total $ 54,610 $ 58,029 - ------------------------------------------------------------------------------------------------ Shareholders' equity per common share (in dollars) N/A $ 31.96 - ------------------------------------------------------------------------------------------------
See notes to financial statements.
THE TRAVELERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Pre-merger, historical accounting basis - ---------------------------------------------------------------------------------------------------- (For the year ended December 31, in millions) 1993 1992 1991 - ---------------------------------------------------------------------------------------------------- Cash flows from operating activities Premiums collected $ 6,333 $ 6,645 $ 7,464 Net investment income received 2,496 2,837 3,243 Other revenues received 582 615 682 Benefits and claims paid, net (6,481) (6,677) (6,916) Interest credited to contractholders (1,154) (1,404) (1,618) Operating expenses paid (2,045) (2,003) (2,289) Income taxes refunded (paid) 33 (41) (81) Trading account investments, (purchases) sales, net (998) (938) (1,973) Other 306 239 174 - ---------------------------------------------------------------------------------------------------- Net cash used in operating activities (928) (727) (1,314) - ---------------------------------------------------------------------------------------------------- Cash flows from investing activities Investment repayments Fixed maturities 3,824 3,161 2,843 Mortgage loans 1,475 1,360 994 Proceeds from investments sold Fixed maturities 1,203 1,103 3,440 Equity securities 172 839 661 Mortgage loans 344 303 198 Real estate 1,000 270 122 Investments in Fixed maturities (6,154) (5,143) (4,670) Equity securities (181) (582) (670) Mortgage loans (211) (159) (237) Real estate (92) (61) (37) Policy loans, net (2) (184) (184) Short-term securities, (purchases) sales, net 342 242 (16) Other investments, (purchases) sales, net 59 51 (47) Securities transactions in course of settlement (44) 671 (884) Proceeds from disposition of subsidiaries and other operations 48 9 122 Other (9) 65 (101) - ---------------------------------------------------------------------------------------------------- Net cash provided by investing activities 1,774 1,945 1,534 - ---------------------------------------------------------------------------------------------------- Cash flows from financing activities Issuance (redemption) of short-term debt, net (9) 64 (185) Issuance (redemption) of certificates of deposit, net 19 (136) (415) Issuance of long-term debt - 367 95 Payments of long-term debt (319) (169) (68) Contractholder fund deposits 3,159 3,048 4,101 Contractholder fund withdrawals (4,418) (5,003) (5,325) Issuance of preference stock series B - 375 - Issuance of common stock - 550 - Dividends to shareholders (278) (196) (182) Other 110 59 83 - ---------------------------------------------------------------------------------------------------- Net cash used in financing activities (1,736) (1,041) (1,896) - ---------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents $ (890) $ 177 $ (1,676) - ---------------------------------------------------------------------------------------------------- Cash and cash equivalents at December 31 $ 798 $ 1,688 $ 1,511 - ---------------------------------------------------------------------------------------------------- Interest paid $ 96 $ 140 $ 306 - ----------------------------------------------------------------------------------------------------
See notes to financial statements. THE TRAVELERS CORPORATION AND SUBSIDIARIES ------------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- 1. Summary Of Significant Accounting Policies Basis of presentation. The financial statements and the accompanying notes reflect the operations of The Travelers Corporation and its subsidiaries (the Company) for the years ended December 31, 1993, 1992 and 1991 on a historical accounting basis. On December 31, 1993, The Travelers Inc. (formerly Primerica Corporation) acquired the approximately 73% of the Company which it did not already own (the Merger). No adjustments have been made to the financial statements and the accompanying notes to reflect the merger of the Company into The Travelers Inc. or to reflect any of the capital transactions related to the Merger. For discussion of the merger see note 23. Changes in accounting principles. In the first quarter of 1993, the Company implemented Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" (FAS 113). Further disclosures relating to FAS 113 are included in note 2. In July 1993, the Financial Accounting Standards Board Emerging Issues Task Force (EITF) reached a conclusion on Issue No. 93-6 "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" (EITF No. 93-6). Further disclosures relating to EITF No. 93-6 are included in note 2. In the third quarter of 1992, the Company implemented Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pension" (FAS 106), and Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). These accounting changes were implemented with retroactive application to January 1, 1992. Further disclosures relating to FAS 106 and FAS 109 are included in note 2. As of December 31, 1992, the Company implemented the American Institute of Certified Public Accountants' Statement of Position 92-3, "Accounting for Foreclosed Assets" (SOP 92-3). This accounting change was implemented with prospective application. Further disclosures relating to SOP 92-3 are included in note 2. Principles of consolidation. The financial statements have been prepared in conformity with generally accepted accounting principles and include the Company and its insurance and significant noninsurance subsidiaries on a fully consolidated basis. Certain prior year amounts have been reclassified to conform with the 1993 presentation. Investments. The aggregate carrying values of fixed maturities, equity securities, mortgage loans and real estate are determined after deducting appropriate investment valuation reserves. Investment valuation reserves are discussed below and are presented in note 16. Fixed maturities comprise bonds and redeemable preferred stocks and the majority are carried at amortized cost, since the Company - 1 - has the ability and intention to hold those securities on a long- term basis. Trading portfolio securities, consisting of fixed maturities that are likely to be sold prior to maturity, are carried at current market value. Transfers of securities from the amortized cost portfolio to the trading portfolio result in adjustments to unrealized investment gains or losses, which are included in shareholders' equity. Equity securities, which consist of common and nonredeemable preferred stocks, are generally carried at market value as of the balance sheet date. Mortgage loans are carried at the aggregate of the unpaid balances and include in-substance foreclosures. Real estate is carried at cost less accumulated depreciation. Real estate held for sale is carried at the lower of cost or fair value less estimated costs to sell. At foreclosure, real estate is recorded at the lower of the unpaid principal balance or fair value. Fair value is established at time of foreclosure by appraisers, both internal and external, using discounted cash flow analyses and other acceptable techniques. Effective January 1, 1994, the Company will adopt Statement of Financial Accounting Standards No. 115, "Accounting for Certain Debt and Equity Securities" (FAS 115). FAS 115 addresses accounting and reporting for investments in equity securities that have a readily determinable fair value and for all debt securities. Accrual of income is suspended on fixed maturities or mortgage loans that are in default, or on which it is likely that future interest payments will not be made as scheduled, and interest income on investments in default is recognized only as payment is received. Gains or losses arising from futures contracts used to hedge investments are treated as basis adjustments and are recognized in income over the life of the hedged investments. Gains and losses arising from forward contracts used to hedge foreign investments in the Company's U.S. portfolios are a component of realized investment gains and losses. Gains and losses arising from forward contracts used to hedge investments in foreign operations (primarily Canadian) are generally reflected directly in shareholders' equity. Rate differentials on interest rate swap agreements are accrued and recognized as an adjustment to interest income from the related item. Investment gains and losses. Realized investment gains and losses are included as a component of pretax revenues based upon specific identification of the investments sold on the trade date and include adjustments to investment valuation reserves. These adjustments reflect changes considered to be other than temporary in the net realizable value of investments. Also included are gains and losses arising from the translation of the local currency value of foreign investments to U.S. dollars, the functional currency of the Company. Unrealized investment gains and losses on equity securities, trading portfolio fixed maturities and investments in foreign operations (primarily Canadian), net of related taxes, are - 2 - generally reflected directly in shareholders' equity. Policy loans. Policy loans are carried at the amount of the unpaid balances that are not in excess of the net cash surrender values of the related insurance policies. The carrying value of policy loans, which have no defined maturities, is considered to be fair value. Cash and cash equivalents. Cash equivalents include liquid investments with maturities of 90 days or less when purchased. The carrying value of these instruments approximates their fair value. Deferred acquisition costs. Commissions and premium taxes incurred in connection with property-casualty insurance are deferred and amortized pro rata over the contract periods in which the related premiums are earned. Future investment income attributable to related premiums is taken into account in assessing the carrying value of this asset. All other acquisition expenses are charged to operations as incurred. Costs of acquiring individual life insurance, annuities and accident and health business, principally commissions and certain expenses related to policy issuance, underwriting and marketing, all of which vary with and are primarily related to the production of new business, are deferred. For traditional insurance products, these costs are amortized, with interest, in proportion to the ratio of estimated annual revenues to the estimated total revenues over the contract period. For most life insurance, a 20- to 30-year amortization period is used, and a 10- to 15-year period is used for variable annuities. A 10-year period is used for guaranteed renewable health policies. Deferred acquisition costs for universal life contracts and certain annuity contracts are amortized at a constant rate based upon the present value of estimated gross profit expected to be realized over the life of the contracts, which is reevaluated annually. Separate and variable accounts. Separate and variable accounts primarily represent funds for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholders. Each account has specific investment objectives. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. The assets of these accounts are carried at market value. Certain other separate accounts provide guaranteed levels of return or benefits. The assets of these accounts are carried at amortized cost. Amounts assessed to the contractholders for management services are included in revenues. Deposits, net investment income and realized investment gains and losses for these accounts are excluded from revenues, and related liability increases are excluded from benefits and expenses. Other assets. Goodwill is being amortized over periods generally not exceeding 25 years and other intangibles over their estimated useful lives. Goodwill is included in other assets in the consolidated balance sheet and amounted to $91 million and $97 million at December 31, 1993 and 1992, respectively. - 3 - Receivables related to retrospectively rated policies on property-casualty business, net of allowance for estimated uncollectible amounts, are included in other assets. Contractholder funds. Contractholder funds represent receipts from the issuance of universal life, pension investment and certain individual annuity contracts. Such receipts are considered deposits on investment contracts that do not have substantial mortality or morbidity risk. Account balances are also increased by interest credited and reduced by withdrawals, mortality charges and administrative expenses charged to the contractholders. Calculations of contractholder account balances for investment contracts reflect lapse, withdrawal and interest rate assumptions based on contract provisions, the Company's experience and industry standards. Interest rates range from 2.90% to 17.42%. Contractholder funds also include other funds that policyholders leave on deposit with the Company. Benefit and loss reserves. Benefit reserves for traditional individual life insurance, annuities and accident and health policies have been computed based upon mortality, morbidity, lapse and interest assumptions applicable to these coverages, including provision for adverse deviations. Interest rates range from 2.00% to 14.00%, and mortality, morbidity and withdrawal assumptions reflect the Company's experience and industry standards. The assumptions vary by plan, age at issue, year of issue and duration. Traditional group life insurance, certain pension contracts and accident and health benefit reserves have been computed generally using interest rates ranging from 2.00% to 16.35%, and mortality, morbidity and withdrawal assumptions based on the Company's experience and industry standards. Appropriate recognition has been given to experience rating and reinsurance. Property-casualty reserves include (1) unearned premiums representing the unexpired portion of policy premiums, including adjustments for reinsurance, and (2) estimated provisions for both reported and unreported claims incurred and related expenses. The reserves are regularly adjusted based upon experience. Included in the benefit and loss reserves in the consolidated balance sheet at December 31, 1993 and 1992, are $796 million and $736 million, respectively, of property-casualty loss reserves that have been discounted using an interest rate of 5%. Premiums. Premiums are recognized as revenues when due. Reserves are established for the portion of premiums that will be earned in future periods and for deferred profits on limited- payment policies that are being recognized in income over the policy term. Other revenues. Other revenues include surrender, mortality and administrative charges and fees as earned on investment, universal life and other insurance contracts. Other revenues also include gains and losses on dispositions of assets other than realized investment gains and losses and revenues of noninsurance subsidiaries. - 4 - Interest credited to contractholders. Interest credited to contractholders represents amounts earned by universal life, pension investment and certain individual annuity contracts in accordance with contract provisions. Federal income taxes. The provision for federal income taxes is comprised of two components, current income taxes and deferred income taxes. Deferred federal income taxes arise from changes in the Company's deferred federal income tax asset during the year. The deferred federal income tax asset is recognized to the extent that future realization of the tax benefit is more likely than not, with a valuation allowance for the portion that is not likely to be recognized. The impact of the Omnibus Budget Reconciliation Act of 1993, the Omnibus Budget Reconciliation Act of 1990 and the Tax Reform Act of 1986 on net income is discussed in note 14. Accounting standards not yet adopted. In November 1992, the Financial Accounting Standards Board (the Board) issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (FAS 112). The Company must adopt FAS 112 for its financial statements no later than January 1, 1994. FAS 112 establishes accounting standards for employers who provide benefits to former or inactive employees after employment, but before retirement. The statement requires employers to recognize the cost of the obligation to provide these benefits on an accrual basis. Employers must implement this guidance by recognizing a cumulative catch-up adjustment. The Company estimates that the adoption of FAS 112 will have a pretax impact of $57 million. In May 1993, the Board issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (FAS 114). The Company must adopt FAS 114 for its financial statements no later than January 1, 1995. FAS 114 describes how impaired loans should be measured when determining the amount of a loan loss accrual. The Statement also amends existing guidance on the measurement of restructured loans in a troubled debt restructuring involving a modification of terms. The Company has not yet determined when it will adopt FAS 114 or the impact this statement will have on its financial statements. On January 1, 1994, the Company will adopt Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", (FAS 115) which addresses accounting and reporting for investments in equity securities that have a readily determinable fair value and for all debt securities. Those investments are to be classified in one of three categories. Debt securities that the Company has the positive intent and ability to hold to maturity are to be classified as "held to maturity" and are to be reported at amortized cost. Securities that are bought and held principally for the purpose of selling them in the near term are classified as "trading securities" and are to be reported at fair value, with unrealized gains and losses included in earnings. Securities that are neither to be held to maturity nor to be sold in the near term are classified as "available for sale" and are to be reported at fair value, with unrealized gains and losses excluded from earnings and reported as a component of - 5 - shareholders' equity. At December 31, 1993, the market value of fixed maturities exceeded the carrying value by $947 million. Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts", (Interpretation 39) must be adopted by the Company for its first quarter 1994 financial statements. The general principle of Interpretation 39 states that amounts due from and due to another party may not be offset in the balance sheet unless a right of setoff exists. The Company currently maintains contracts where amounts due from customers are offset against amounts due to others. Implementation of Interpretation 39 is not expected to have a material impact on the Company's financial position; however, assets and liabilities will be increased by like amounts. 2. Changes in Accounting Principles Accounting and reporting for reinsurance contracts. In the first quarter of 1993, the Company changed its method of reporting for reinsurance in compliance with FAS 113. FAS 113 requires the reporting of reinsurance receivables and prepaid reinsurance premiums as assets and precludes the immediate recognition of gains for all reinsurance contracts unless the liability to the policyholder has been extinguished. Implementation of FAS 113 did not have an impact on earnings, however, assets and liabilities increased by like amounts. Assets and liabilities within the consolidated balance sheet were increased by $4,427 million as of December 31, 1992. See note 15 for additional disclosures. Accounting for multiple-year retrospectively rated contracts. EITF No. 93-6 clarifies the accounting for certain reinsurance agreements with restrospectively rated features. The Company changed its method of accounting for such contracts to conform with the conclusion of the EITF. The effects of the change in method of accounting did not materially impact the Company's financial results. Postretirement benefits other than pensions. In the third quarter of 1992, the Company changed its method of accounting for the costs of its retiree benefit plans, in compliance with FAS 106. This change was made effective as of January 1, 1992. FAS 106 requires the Company to accrue the cost of postretirement benefits over the years of service rendered by an employee. Previously these costs were accounted for on a "pay-as-you-go" (cash) basis. The implementation of FAS 106 resulted in a one time noncash after-tax charge to net income of $258 million in the first quarter of 1992. See note 13 for further discussion of FAS 106. Accounting for income taxes. During the third quarter of 1992, the Company adopted FAS 109 with retroactive application to January 1, 1992. FAS 109 establishes new principles for - 6 - calculating and reporting the effects of federal income taxes in the financial statements. FAS 109 replaces the income statement orientation inherent in the prior income tax accounting standard with a balance sheet approach. Under the new approach, deferred tax assets and liabilities are generally determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. FAS 109 allows recognition of deferred tax assets if future realization of the tax benefit is more likely than not, with a valuation allowance for the portion that is not likely to be recognized. The implementation of FAS 109 resulted in a one time increase to earnings of $428 million in the first quarter of 1992. This increase in earnings was principally due to the accelerated recognition of "fresh start" tax benefits, tax rate differences and the recognition of a portion of previously unrecognized deferred tax assets. See note 14 for further discussion of FAS 109. Accounting for foreclosed assets. In February 1993, the Company announced its intent to accelerate the sale of foreclosed real estate and, effective December 31, 1992, changed its method of accounting for foreclosed assets in compliance with SOP 92-3. This guidance requires that in-substance foreclosures and foreclosed assets held for sale be carried at the lower of cost or fair value less estimated costs to sell. Previously, all foreclosed assets were carried at cost less accumulated depreciation. This accounting change resulted in a pretax charge of $437 million to realized investment losses in 1992. 3. Acquisitions and Dispositions In the third quarter of 1993, the Company sold The Massachusetts Company (TMC), its banking subsidiary, and received cash proceeds of $53 million. Consolidated assets and liabilities were reduced as a result of this disposition. TMC assets, consisting primarily of mortgage loans and fixed maturities, were $949 million at the date of sale. Liabilities, consisting primarily of customer deposits, were $896 million at the date of sale. The impact of this sale was insignificant to the consolidated financial results of the Company. In December 1992, the Company acquired a 50% interest in Commercial Insurance Resources, Inc., and acquired Transport Life Insurance Company's preferred provider and third party administrator organizations from Primerica Corporation (see note 23). In the fourth quarter of 1991, the Company sold Dillon, Read Inc. (Dillon Read), its investment banking subsidiary. The Company received cash proceeds of $122 million. Consolidated assets and liabilities were reduced as a result of this disposition. Dillon Read assets, consisting primarily of cash and cash equivalents of $2.7 billion and investments, were $4.3 billion at the date of sale. Liabilities, consisting primarily of securities sold under repurchase agreements, were $4.2 billion at the date of sale. The pretax loss on the sale of $41 million is included in other revenues. - 7 - In the fourth quarter of 1990, the Company completed the sale of its wholly owned subsidiary, the Travelers Mortgage Services, Inc. (TMSI), which originates and services home mortgage loans and operates a relocation services business. Sales proceeds of $210 million are subject to final settlement adjustments which, in the opinion of management, are not expected to be material. On an after-tax basis, the gain on this transaction was insignificant. Under the terms of the sales agreement, the Company has indemnified the purchaser for losses from certain preclosing activities and for excess losses that may be experienced on a portfolio of mortgage loans generated prior to the sale, which losses will be calculated following the third anniversary of the sale. A reserve has been established for these items based upon management's current estimate of the range of potential losses. These estimates are subject to revision as indemnifiable losses are identified and actual excess losses on the indemnified portfolio are realized. Revenues, income before federal income taxes and net income of TMC and Dillon Read are as follows: ======================================================================== TMC Dillon Read ------------------- -------------- (in millions) 1993* 1992 1991 1991* - ------------------------------------------------------------------------ Revenues $20 $26 $58 $135 Income before federal income taxes 10 10 33 9 Net income 7 7 22 5 ======================================================================== * Through the date of sale. In addition, the Company sold and/or purchased several other interests, subsidiaries and operations in 1993, 1992 and 1991. The impact of these transactions was not material to the consolidated financial results of the Company. Net losses on dispositions after related income taxes amounted to $2 million and $33 million for 1993 and 1991, respectively. Net gains on dispositions after related income taxes amounted to $3 million for 1992. 4. Selected Consolidated Quarterly and Other Financial Data Selected unaudited consolidated quarterly and other financial data for 1993 and 1992 are presented on pages 35-37. 5. Debt ============================================================= (in millions) 1993 1992 - ------------------------------------------------------------- Short-term debt Federal Home Loan Bank advances - $ 64 - ------------------------------------------------------------- Long-term debt 9 1/2% senior notes $300 $300 8.32% debentures - 194 12% GNMA/FNMA-collateralized obligations 132 188 7 5/8% notes 185 185 ESOP note guarantee 125 149 Federal Home Loan Bank advances - 90 Other 10 18 - ------------------------------------------------------------- $752 $1,124 ============================================================= - 8 - At December 31, 1993 and 1992, the estimated fair value of the Company's long-term debt was $821 million and $1.2 billion, respectively, primarily determined by quoted market prices. Senior Notes. On March 10, 1992, the Company issued $300 million of 9 1/2% senior notes which mature on March 1, 2002. No principal or sinking fund payments are required prior to maturity date. The senior notes rank equally with all other unsecured, unsubordinated obligations of the Company. On December 31, 1993, in conjunction with the Merger, these notes were assumed by The Travelers Inc. Debentures. On December 28, 1993, the Company defeased all of its 8.32% convertible subordinated debentures due 2015. The debentures will be redeemed on March 10, 1994 at a price of $1,008.30 in cash per $1,000 of principal amount. As of December 27, 1993, approximately $194 million principal amount of the debentures was outstanding. GNMA/FNMA-collateralized obligations. The 12% obligations of Travelers Mortgage Securities Corporation have a stated maturity (assuming no prepayments) of March 1, 2014. Distributions on the GNMA and FNMA certificates, together with reinvestment earnings, are used to make principal and interest payments on the obligations. Since the rate of payment of principal depends on the rate of payment (including prepayments) of the underlying GNMA and FNMA certificates, the actual annual amounts of future principal payments cannot be reasonably estimated. The approximate minimum principal payments to be made in each of the next five years, assuming no further prepayments on the GNMA and FNMA certificates, are as follows: ======================================= (in millions) --------------------------------------- 1994 $18 1995 2 1996 2 1997 2 1998 3 ======================================= Notes. The 7 5/8% notes were issued in January 1987 and mature on January 15, 1997. No principal payments are required prior to the maturity date. On December 31, 1993, in conjunction with the Merger, these notes were assumed by The Travelers Inc. ESOP note guarantee. The Company has guaranteed the loan obligation of its Employee Stock Ownership Plan (ESOP) (see note 13). The minimum principal payments to be made in 1994, 1995, 1996 and 1997 are $28 million, $30 million, $32 million and $35 million, respectively. On December 31, 1993, in conjunction with the Merger, this guarantee was assumed by The Travelers Inc. Federal Home Loan Bank advances. In 1992, the Company's banking subsidiary became a member of the Federal Home Loan Bank and participated in its Advance Program. Advances outstanding at December 31, 1992 had various maturity dates from February 1993 to April 2002 and had interest rates ranging from 3.68% to 7.91%. At December 31, 1992, $205 million of mortgage loans were pledged to collateralize these advances. The subsidiary was sold during the third quarter of 1993. Lines of credit. At December 31, 1993, the Company and its subsidiaries had approximately $275 million of unused lines of credit, all of which expires beyond December 31, 1994. - 9 - 6. Capital And Preference Stock Number of shares at December 31, 1993: ================================================================================ Issued Treasury Stock Outstanding - -------------------------------------------------------------------------------- Common stock, par value $1.25, 500,000,000 authorized 146,872,701 1,256,405 145,616,296 Preferred stock, no par value, 10,000,000 authorized - - - Preference stock, no par value, 25,000,000 authorized Series A, $53.25 stated value 4,406,431 - 4,406,431 Series B, $50 stated value 7,500,000 - 7,500,000 ================================================================================ On December 31, 1993, each outstanding share of the Company's common stock (except for shares issued and held by The Travelers Inc., shares in treasury of the Company and dissenting shares) was converted into .80423 of a share of The Travelers Inc. common stock. Common Stock. Summary of activity in common stock outstanding: ============================================================================== 1993 1992 1991 - ------------------------------------------------------------------------------ Balance beginning of year 144,020,518 104,156,082 102,170,021 Shares issued 736,388 38,026,314 - Dividend reinvestment plan 378,542 1,662,282 719,694 Accrued vacation buy-back plan - - 874,877 Exercise of options 793,397 134,074 31,397 Restricted stock awards 240,836 134,072 335,179 Acquired for treasury (367,955) (82,217) - Other (185,430) (10,089) 24,914 - ------------------------------------------------------------------------------ Balance end of year, prior to merger 145,616,296 144,020,518 104,156,082 ============================================================================== At December 31, 1993, prior to the Merger, unissued common shares were reserved for the following: ======================================================= Stock plans 8,383,316 Conversion of Series A preference shares 4,406,431 Conversion of debentures 3,776,848 Dividend reinvestment plan 744,660 Other 129,563 - ------------------------------------------------------- Total 17,440,818 ======================================================= - 10 - Common stock purchase rights. In 1986, the Company adopted a Share Purchase Rights Plan, and a dividend distribution of one common share purchase right on each outstanding share of common stock was declared and paid. The rights traded automatically with the common shares. These rights were redeemed by the Company for $.05 per right effective December 30, 1993 and payment was made by The Travelers Inc. As a result of the redemption, the Rights Plan became of no further force and effect. Series A convertible preference stock. The Company's $4.53 Series A ESOP Convertible Preference Stock was issued to prefund the Company's matching obligation under one of its benefit plans (see note 13). On December 31, 1993, in conjunction with the Merger, the $4.53 Series A ESOP Convertible Preference Stock was converted into shares of The Travelers Inc. Series C Preferred Stock with substantially similar terms as the Series A shares. Series B preference stock. In June 1992, 7,500,000 shares of the Company's 9 1/4% Series B preference stock were issued at a stated value of $50 per share. The Series B preference shares were held in the form of depositary shares, with two depositary shares representing each preference share. Annual dividends of $4.625 per share ($2.3125 per depositary share) were payable quarterly. Dividends were cumulative from the date of issue. The Series B preference stock was not redeemable prior to July 1, 1997. On and after July 1, 1997, the stock was redeemable at the Company's option, in whole or in part, at any time, at a price of $50 per share (equivalent to $25 per depositary share), plus accrued and unpaid dividends, if any, to the redemption date. In the event that dividends on the Series B preference stock were in arrears in an amount equal to at least six full quarterly dividends, holders of the stock would have the right to elect two additional directors to the Company's Board of Directors. On December 31, 1993, in conjunction with the Merger, the Series B preference stock was converted into shares of The Travelers Inc. Series D Preferred Stock with substantially similar terms as the Series B shares. Accrued vacation buy-back plan. Under the Accrued Vacation Buy-Back Plan, employees elected in 1991 either to exchange accumulated unused vacation balances as of January 1, 1991 for shares of the Company's common stock, or use such days before December 31, 1993. Under this plan, 874,877 shares of the Company's common stock were issued in June 1991. These elections resulted in after-tax income of $4 million in 1991. Additional paid-in capital. The changes in additional paid-in capital for the three years ended December 31, 1993 are primarily attributable to the issuance of common stock in connection with The Travelers Inc. investment in 1992 (see note 23), the Accrued Vacation Buy-Back Plan in 1991, and the issuance of common stock in connection with the dividend reinvestment plan, exercise of stock options and restricted stock awards in all three years. Unrealized investment gains (losses). An analysis of the change in unrealized gains and losses on investments is shown in note 16. 7. Shareholders' Equity and Dividend Availability State insurance regulatory authorities prescribe statutory accounting practices for calculating net income and capital and surplus that differ in certain respects from generally accepted accounting principles (GAAP). The significant differences relate to deferred acquisition costs, which are charged to expenses as incurred; federal income taxes, which reflect amounts that are currently taxable; postretirement benefits, which are accrued for retirees and fully eligible employees, including amortization of the transition obligation over 20 years; and benefit reserves, which are determined using mortality, morbidity and interest assumptions, and which, when considered in light of the assets supporting these reserves, adequately provide for obligations under policies and contracts. In addition, the recording of impairments in the value of investments generally lags recognition under GAAP. Statutory net income and capital and surplus also include the benefit of certain actions taken by the Company, with the approval of state insurance regulatory authorities, to strengthen its statutory capital position. - 11 - The tables below reconcile consolidated statutory net income and statutory capital and surplus computed in accordance with state insurance regulatory practices with consolidated net income and shareholders' equity as reported herein in conformity with GAAP. ============================================================================== Net income (loss) for the year ended December 31 - ------------------------------------------------------------------------------ (in millions) 1993 1992 1991 - ------------------------------------------------------------------------------ Statutory net income (loss) Life companies $(601) $ (319) $ (55) Property-casualty companies 123 (237) 258 - ------------------------------------------------------------------------------ Total (478) (556) 203 Adjustments to life and health reserves and contractholder funds (68) (2) (120) Deferred acquisition costs 36 71 35 Equity in undistributed loss of noninsurance subsidiaries (18) (19) (37) Timing of recognition of realized investment gains and losses 680 (539) 194 Deferred federal income taxes 142 503 32 Other, including certain restructuring expenses (6) (286) 11 Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax - (258) - Cumulative effect of change in accounting for income taxes - 428 - - ------------------------------------------------------------------------------ Net income (loss) $ 288 $ (658) $ 318 - ------------------------------------------------------------------------------ Shareholders' equity at end of year - ------------------------------------------------------------------------------ (in millions) 1993 1992 1991 - ------------------------------------------------------------------------------ Statutory capital and surplus Life companies $ 873 $1,571 $1,932 Property-casualty companies 1,483 1,665 1,843 - ------------------------------------------------------------------------------ Total 2,356 3,236 3,775 Adjustments to life and health reserves and contractholder funds 309 316 279 Deferred acquisition costs 827 791 720 Valuation reserves, nonadmitted and other asset adjustments 668 (85) (245) Deferred federal income taxes 1,523 1,371 353 Liability for postretirement benefits other than pensions (385) (408) - Other liability adjustments, including restructuring reserves (283) (243) (292) - ------------------------------------------------------------------------------ Shareholders' equity $5,015 $4,978 $4,590 - ------------------------------------------------------------------------------ Dividend availability. The Company is currently subject to various regulatory restrictions that limit the maximum amount of dividends available to shareholders without prior approval of insurance regulatory authorities. Under statutory accounting practices, no statutory surplus is available in 1994 for dividends to shareholders without prior approval. Dividend payments to the Company from its insurance subsidiaries are subject to similar restrictions and, absent the Merger, would be limited to $242 million in 1994. - 12 - 8. Leases The Company and its subsidiaries have entered into various operating and capital lease agreements for office space and data processing and certain other equipment. Rental expense under operating leases was $192 million, $216 million and $208 million in 1993, 1992 and 1991, respectively. Future net minimum rental and lease payments are estimated as follows: ============================================================== Minimum operating Minimum capital (in millions) rental payments lease payments - -------------------------------------------------------------- Year ending December 31, 1994 $138 $ 7 1995 116 7 1996 87 7 1997 47 4 1998 27 4 Thereafter 16 68 - -------------------------------------------------------------- $431 $ 97 ============================================================== Included in these expenses are the rentals related to the sale of certain buildings leased back under operating and capital leases with initial terms ranging from 5 to 25 years. Deferred gains arising from these sales are being amortized over the primary lease terms. At December 31, 1993 and 1992, the amount remaining to be amortized is $53 million and $59 million, respectively. The following is a summary of assets under capital leases: ======================================================= (in millions) 1993 1992 1991 - ------------------------------------------------------- Buildings $31 $31 $31 Equipment 16 18 10 - ------------------------------------------------------- 47 49 41 Less accumulated depreciation 15 12 13 - ------------------------------------------------------- Net $32 $37 $28 ======================================================= 9. Commitments and Contingencies Financial instruments with off-balance-sheet risk. The Company trades and issues financial instruments with off-balance-sheet risk in the normal course of its business. These instruments, which are used to reduce the Company's overall exposure to market risk and to enhance the Company's investment opportunities, include financial guarantees, financial futures, forward contracts, fixed rate loan commitments and variable rate loan commitments, including revolving lines of credit. Financial instruments with off-balance-sheet risk involve, to varying degrees, elements of credit and market risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in a particular class of financial instrument. However, the maximum credit loss or cash flow associated with these instruments can be less than these amounts. The Company also may use other kinds of financial instruments from time to time that expose the Company to similar kinds of off-balance- sheet risk. These instruments include unfunded commitments to partnerships, transfers of receivables with recourse and interest rate swaps. The off-balance-sheet risks of these financial instruments were not considered significant at December 31, 1993 and 1992. - 13 - The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for financial guarantees and fixed and variable rate loan commitments is represented by the contractual amount of these instruments. For financial futures contracts and forward contracts, the Company's exposure to credit loss in the event of nonperformance by the counterparty is less than the contractual or notional amount. The Company monitors creditworthiness of counterparties to these financial instruments by using criteria of acceptable risk that are consistent with on-balance-sheet financial instruments. The controls include credit approvals, limits and other monitoring procedures. Many transactions include the use of collateral to minimize credit risk and lower the effective cost to the borrower. A summary of contract or notional amounts is presented below: ============================================================= (in millions) 1993 1992 - ------------------------------------------------------------- Financial instruments whose contract amount represents credit exposure: Financial guarantees $3,016 $4,039 Fixed rate loan commitments 126 160 Variable rate loan commitments 17 278 Financial instruments whose contract amount exceeds credit exposure: Forward contracts used as hedges 279 722 Financial futures contracts 25 418 ============================================================= Financial guarantees are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. At December 31, 1993 and 1992, the fair value of financial guarantee contracts was $1 million and $7 million, respectively, which is an estimate of current replacement cost. These obligations are described more fully in note 10. Fixed rate loan commitments are obligations to make investments at fixed interest rates, including obligations to invest in fixed maturities and fixed rate mortgage loans. Variable rate loan commitments are obligations to make investments at variable interest rates, including obligations to invest in variable rate mortgage loans. At December 31, 1993 and 1992, fixed and variable rate loan commitments have no meaningful fair value because the terms of the commitments approximate market rates. The Company uses a variety of financial futures contracts to manage its sensitivity to changes in market interest rates. These contracts generally hedge the interest rate risk of other investments. Financial futures contracts are traded on recognized exchanges. Cash payments are not required to enter into financial futures contracts. Outstanding positions are marked to market and settled daily. The notional amount of futures contracts represents the extent of the Company's involvement, but not future cash requirements, as open positions are typically closed out prior to the delivery date of the contract. At December 31, 1993 and 1992, the Company's futures contracts have no fair value because these contracts are marked to market and settled in cash. The Company uses a variety of forward contracts to manage its sensitivity to changes in foreign currency exchange rates. These contracts generally act as hedges for foreign investments held by U.S. portfolios or for investments in foreign operations (primarily Canadian). Forward contracts are traded over-the-counter, generally with a financial institution. Cash payments are not required to enter into foreign currency forward contracts. Outstanding positions are marked to market; however, they are not settled in cash until maturity. The market risk attributed to either a futures contract or a forward contract is balanced by the market risk attributed to the associated hedged asset to minimize the Company's overall sensitivity to risk. At December 31, 1993 and 1992, the fair value of forward contracts used as hedges was $7 million and $9 million, respectively, which is based on quoted market prices. - 14 - Litigation. In response to the announcement in September 1993 of the anticipated merger with Primerica, a number of proposed class action lawsuits were filed in state court in Connecticut and New York against the Company, its directors and Primerica. These cases are now consolidated in Connecticut, and the consolidated amended complaint generally seeks damages on behalf of shareholders of the Company based on the alleged inadequacy of the merger consideration offered by Primerica under the terms of the merger. On January 27, 1994, the defendants, including the Company by its successor, The Travelers Inc., filed a motion to dismiss the case based on, among other things, Connecticut law limiting claims by dissenting shareholders to statutory appraisal rights. In December 1993, the Company and National Medical Enterprises, Inc. (NME) executed an agreement in principal to settle lawsuits brought by both parties arising out of alleged fraudulent practices by NME during the years 1988 through 1992. The Company will receive the settlement, including interest, in 1994. Most of the proceeds will be distributed back to the Company's customers. The Company and certain of its subsidiaries were plaintiffs in a recently settled lawsuit in Federal Court in Connecticut relating to Separate Account "R", a real estate separate account that is administered and managed by The Travelers Insurance Company. The defendant Account participants filed counterclaims alleging that the Company breached its fiduciary obligations in the management of Separate Account "R". In April 1993, the Company entered into a class action settlement agreement with all defendants, which resolved all counterclaims and, as a result, all outstanding issues with the class of Account participants. Pursuant to the final settlement, the Company paid approximately $87 million to all Account participants. In 1992, the Company established a $53 million reserve for the estimated net cost of resolving this lawsuit. The Company is pursuing a declaratory action in Federal Court in New York against its primary errors and omissions insurer in response to a denial of coverage for the Separate Account "R" settlement. In January 1994, the Company settled a claim with its excess insurer. As of December 31, 1993, the Company had a receivable of $32 million for its insurance claims which was reduced by $7 million in 1993. In February 1990, the New Jersey Department of Insurance filed an administrative action, Fortunato v. Aetna Casualty & Surety Co. et al., seeking restitution from fifteen insurance companies, including the Company, arising from their acting as servicing carriers for the New Jersey Automobile Full Insurance Underwriting Association. In June 1993, the Company resolved this action and received a Consent Order from the New Jersey Insurance Department dismissing the action with prejudice. Compliance with the terms of the settlement agreement was not material to the financial statements. In April 1989, a lawsuit was filed against the Company by the federal government alleging the Company improperly handled health benefit claims for individuals who are actively employed and eligible for Medicare coverage. In November 1992, the court ruled on cross motions for summary judgment. The court found that the Company had no liability when acting in the capacity of an administrator of claims. However, the court also recognized that, while the government's right of recovery with respect to insured claims is governed by the substantive terms of our customer's health benefit plan, the right of recovery is independent of procedural limitations in the Company's contracts. The Securities and Exchange Commission is conducting a nonpublic inquiry pursuant to an order of investigation with respect to the Company's accounting, reporting and disclosure treatment of certain matters in connection with its lending and loss recognition practices pertaining to real estate investments and related matters going back to January 1, 1988. The Company is cooperating fully with the Commission's staff. The Company is in litigation with certain underwriters at Lloyd's of London in New York state court to enforce reinsurance contracts with respect to recoveries for certain asbestos claims. In January 1994, the court stayed litigation of this matter in favor of arbitration of the contract issues raised by the Company under the applicable treaties and an agreement with the Lloyd's market on coverage for asbestos-related claims. Certain of the Company's subsidiaries are involved in litigation with respect to claims arising with regard to insurance, which is taken into account in establishing benefit reserves. On insurance contracts written many years ago, the Company continues to receive claims asserting alleged injuries and damages from asbestos and other hazardous and toxic substances. In relation to these claims, the Company carries on a continuing review of its overall position, its reserving techniques and reinsurance recoverable. In each of these areas of exposure, the Company has endeavored to litigate individual cases and settle claims on favorable terms. Given the vagaries of - 15 - court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties, it is not presently possible to quantify the ultimate exposure represented by these claims. As a result, the Company expects that future earnings may be adversely affected by environmental and asbestos claims, although the amounts cannot be reasonably estimated. However, it is not likely these claims will have a material adverse effect on the Company's financial condition. The Company and/or its subsidiaries are defendants or co-defendants in various litigation matters. Although there can be no assurances, as of December 31, 1993, the Company believes, based on information currently available, that the ultimate resolution of these legal proceedings (other than environmental and asbestos claims) would not be likely to have, but may have, a material adverse effect on the results of operations. The amount of related litigation costs for 1993, 1992 and 1991 was $44 million, $48 million and $51 million, respectively. 10. Guarantees of the Securities of Other Issuers As part of its regular insurance business in which a wide range of risks are assumed to cover possible future economic loss by third parties, the Company underwrites insurance guaranteeing the securities of certain issuers. The aggregate net amount of guarantees of principal and interest for such securities was approximately $180 million ($2.8 billion gross of reinsurance) and $2.8 billion ($3.6 billion gross of reinsurance) at December 31, 1993 and 1992, respectively. Estimated net earned premiums amounted to $5 million and $7 million in 1993 and 1992, respectively. Premiums are earned pro rata over the policy term. The related unearned premium reserve amounted to $1 million and $14 million at December 31, 1993 and 1992, respectively. The Company's participation in the Municipal Bond Insurance Association (MBIA) has been reinsured to Municipal Bond Investors Assurance Corporation, effective August 31, 1993. This accounts for the decline in aggregate net amount of guarantees of principal and interest and the reduction in the unearned premium reserves in 1993. 11. Per Share Data No earnings per share information is provided for 1993 because the Company became a wholly-owned subsidiary of The Travelers Inc. effective December 31, 1993. Primary income per common share was computed after provision for the dividend requirements on preference stocks. It is based upon the weighted average number of common shares outstanding including, if applicable, common stock equivalents. Fully diluted income per share was based on the number of shares used in the calculation of primary income per share plus shares issuable if Series A preference shares, convertible debentures and preferred shares were converted for the periods they were outstanding. In 1992 and 1990, such conversions were not assumed as the effect was antidilutive. The number of shares used in the calculation was: ============================================================== Primary Fully diluted - -------------------------------------------------------------- 1992 106,149,028 106,149,028 1991 103,022,370 111,595,983 1990 101,814,180 101,814,180 1989 102,587,596 108,336,328 ============================================================== - 16 - 12. Additional Operating Information* Results included in the table below reflect 1993 fourth quarter after-tax charges of $111 million for an addition to reserves for foreclosed properties held for sale and 1992 fourth quarter after-tax charges of $288 million for implementation of SOP 92-3 and $197 million for an addition to mortgage loan valuation reserves.
Pre-merger, historical accounting basis - ------------------------------------------------------------------------------------------------------------------------------------ Property- Property- Managed Asset Casualty Casualty Care and Management Corporate Commercial Personal Financial Employee & Pension and Other (in millions) Lines Lines Services Benefits Services Operations Consolidated - ------------------------------------------------------------------------------------------------------------------------------------ 1993 Revenues Premiums $ 2,234 $ 1,361 $ 235 $ 2,617 $ 137 - $ 6,584 Net investment income 525 152 677 294 951 $ 1 2,600 Realized investment gains (losses) 150 46 77 32 (122) 26 209 Other, including gains and losses on dispositions (7) 32 113 742 11 - 891 - ----------------------------------------------------------------------------------------------------------------------------------- Total 2,902 1,591 1,102 3,685 977 27 10,284 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before federal income taxes 7 167 173 205 (248) (72) 232 Net income (loss) 44 125 128 148 (98) (59) 288 Assets 16,393 2,745 14,319 5,049 15,764 340 54,610 - ----------------------------------------------------------------------------------------------------------------------------------- 1992 Revenues Premiums $ 2,295 $ 1,428 $ 231 $ 2,620 $ 114 - $ 6,688 Net investment income 546 156 631 328 1,180 $ (42) 2,799 Realized investment gains (losses) 78 22 (98) (18) (626) 7 (635) Other, including gains and losses on dispositions 10 27 120 657 23 (14) 823 - ----------------------------------------------------------------------------------------------------------------------------------- Total 2,929 1,633 884 3,587 691 (49) 9,675 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before federal income taxes and cumulative effects of changes in accounting principles (61) (289) (72) (70) (761) (101) (1,354) Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax (88) (37) (15) (106) (10) (2) (258) Cumulative effect of change in accounting for income taxes 57 11 36 123 191 10 428 Net income (loss) (45) (201) (20) (23) (311) (58) (658) Assets 15,770 2,656 13,021 5,309 19,514 1,759 58,029 - ----------------------------------------------------------------------------------------------------------------------------------- 1991 Revenues Premiums $ 2,726 $ 1,457 $ 249 $ 2,687 $ 183 - $ 7,302 Net investment income 595 162 641 356 1,510 $ (36) 3,228 Realized investment gains (losses) 4 9 6 14 (42) 7 (2) Other, including gains and losses on dispositions (3) 31 117 616 23 65 849 - ----------------------------------------------------------------------------------------------------------------------------------- Total 3,322 1,659 1,013 3,673 1,674 36 11,377 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before federal income taxes 242 27 56 143 (35) (110) 323 Net income (loss) 219 35 40 107 (5) (78) 318 Assets 15,118 2,547 11,922 5,057 22,209 1,122 57,975 - ----------------------------------------------------------------------------------------------------------------------------------- * Included above in Corporate and Other Operations are The Massachusetts Company which was sold in 1993, and Dillon, Read Inc., which was sold in 1991 (see note 3).
- 17 - 13. Benefit Plans Pension plans. The Company and its subsidiaries maintain defined benefit pension plans for salaried employees. The primary plan is noncontributory and was amended in 1993 to provide benefits based on the account balances of participating employees at the time of retirement. The account balances of employees are credited annually with an amount based on salary and age, and accrue interest. Vesting occurs after five years of service in compliance with the provisions of the Tax Reform Act of 1986. The Company's funding policy for qualified U.S. pension plans is to contribute, at a minimum, the equivalent of the amount required under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. Actuarially determined costs are provided for all other plans. Components of pension expense are: ======================================================== (in millions) 1993 1992 1991 - -------------------------------------------------------- U.S. plans: Service costs $30 $40 $46 Interest costs 122 128 125 Actual return on assets (201) (67) (167) Net amortization and deferral 62 (53) 7 - -------------------------------------------------------- Net pension expense $13 $48 $11 ======================================================== As a result of certain organizational restructuring initiatives (see note 20), special termination benefits of $25 million are included in the net amortization and deferral component of 1992 net pension expense. Reconciliation of the funded status of the qualified plans follows: ============================================================= (in millions) 1993 1992 1991 - ------------------------------------------------------------- Actuarial present value of vested benefit obligations $1,534 $1,399 $1,127 Actuarial present value of accumulated benefit obligations 1,548 1,418 1,153 - ------------------------------------------------------------- Plan assets at fair value $1,719 $1,624 $1,644 Actuarial present value of projected benefit obligation 1,620 1,656 1,525 - ------------------------------------------------------------- Assets in excess of (less than) projected benefit obligation 99 (32) 119 Unamortized transition asset (27) (36) (45) Unrecognized net actuarial loss 185 268 198 Unrecognized prior service benefit (101) (40) (78) - ------------------------------------------------------------- Prepaid pension expense $156 $160 $194 ============================================================= At December 31, 1993, the non-qualified plan had projected benefit obligations of $60 million, which were $4 million less than the recorded liability. At December 31, 1992, the projected benefit obligation was $6 million less than the recorded liability. At December 31, 1991, the projected benefit obligation exceeded the recorded liability by $35 million. The expected long-term rate of return on plan assets was 8.9%, 9.7% and 10.2% for 1993, 1992 and 1991, respectively. In 1993, the discount rate used in determining the projected benefit obligation was - 18 - 7.5% and the assumed rate of future annual salary increases varied between 2% and 9%, based upon employees' ages. The discount rate was 8.25% and 8.5% in 1992 and 1991, respectively, and the rate of increase in future compensation levels used in determining the projected benefit obligation was between 3% and 10% based on employees ages for 1992 and 6.5% for 1991. Changes in assumptions from period to period can result in adjustments to the accumulated and projected benefit obligations. Such changes may also affect the expense recognized and/or the unrecognized net actuarial gain or loss. Plan assets are held primarily in various separate accounts and the general account of The Travelers Insurance Company and certain investment trusts. These accounts invest in stocks, bonds, mortgage loans and real estate of entities unrelated to the Company. The Company also sponsors defined contribution pension plans for certain agents. Company contributions are primarily a function of production. The expense for these plans was $3 million in 1993 and $2 million in both 1992 and 1991. Other benefit plans. In addition to pension benefits, the Company provides certain health care and life insurance benefits for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the Company. Retirees may elect certain prepaid health care benefit plans. Life insurance benefits generally are set at a fixed amount. In the third quarter of 1992, the Company adopted FAS 106 and elected to recognize the accumulated postretirement benefit obligation (i.e., the transition obligation) as a change in accounting principle retroactive to January 1, 1992. Prior to the adoption of FAS 106, the Company accounted for these postretirement costs on a cash basis. The cost recognized by the Company for these and similar benefits provided to active employees was based upon paid claims, net of employee contributions. Total costs of the plans for retirees were $20 million in 1991. The Company made contributions to the plans in 1993 and 1992 as claims were incurred. These contributions totaled $25 million and $23 million for 1993 and 1992, respectively. Retirees' contributions to these plans vary, based upon the retiree's age and election of coverage. Generally, increases in the Company's contributions for health care will be limited to two times the current average cost per retiree. In addition, retirees' contributions will vary based upon their years of service with the Company. Components of net periodic postretirement benefit cost are: ======================================================== (in millions) 1993 1992 -------------------------------------------------------- Service costs $ 4 $ 7 Interest costs 35 33 Net amortization and deferral (1) 14 -------------------------------------------------------- Net periodic postretirement benefit cost $38 $54 ======================================================== As a result of certain organizational restructuring initiatives (see note 20), curtailment losses of $14 million in 1992 are included in the net amortization and deferral component of net periodic postretirement benefit cost in that year. The following table sets forth the plans' funded status reconciled with amounts recognized in the Company's consolidated balance sheet: ===================================================================== (in millions) 1993 1992 --------------------------------------------------------------------- Accumulated postretirement benefit obligation for: Retirees $387 $286 Other fully eligible plan participants 13 60 Other active plan participants 53 84 --------------------------------------------------------------------- Total accumulated postretirement benefit obligation 453 430 Plan assets at fair value - - --------------------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets 453 430 Unrecognized net loss from experience different from that assumed (62) (7) Unrecognized prior service benefit 45 - --------------------------------------------------------------------- Accrued postretirement benefit cost $436 $423 ===================================================================== - 19 - The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% and 8.0% for 1993 and 1992, respectively, and the assumed rate of future annual salary increases varied between 2% and 9% for 1993 and 3% and 10% for 1992 based on employees' ages. For measurement purposes, an annual rate of increase in the per capita cost of health care benefits (the health care cost trend rate) of up to 16.8% was assumed through 1994; the rate is assumed to decrease gradually to a maximum of 7.0% in 2001, and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $30 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1993 by $3 million. The Merger transaction resulted in a change in control of the Company, as defined in the applicable plans, and provisions of some employee benefit plans secured existing compensation and benefit entitlements earned prior to any change in control and provided a salary and benefit continuation floor for employees whose employment was affected. Stock plans. Stock options, stock appreciation rights (SARs) and shares of restricted stock have been granted pursuant to plans adopted by the Board of Directors and approved by shareholders at the 1982 and 1988 annual meetings. The 1988 plan provided for the award of up to 10,000,000 shares of the Company's common stock in the form of options to purchase common stock or SARs, and restricted stock. Commencing in 1988, all grants were made pursuant to the 1988 plan, although the prior plan continued to govern awards of options and SARs made pursuant to it. All outstanding options and SARs were either exercisable or became exercisable over various periods beginning one year after the date of grant and could be exercised until 10 years from the date of grant. A holder of an option with an SAR attached has the right to surrender the SAR for the appreciation in the common stock between the time of the grant and the surrender. However, the maximum value of an SAR was limited to twice the option purchase price. The exercise of an SAR canceled the option grant with which the SAR was associated, and vice versa. Shares of restricted stock were granted subject to restrictions on their transferability. These restrictions lapsed upon the expiration of a period of employment or the achievement of stated criteria, or both. The restrictions lapsed over a period of between one and ten years from the date of grant. Effective December 30, 1993, all stock options became exercisable or could be liquidated for a cash amount, all stock appreciation rights were terminated, all restrictions on time-lapse restricted stock lapsed and restrictions on 50% of the performance contingent restricted stock lapsed. In addition, The Travelers Inc. offered an alternative stock option election which option holders could choose in lieu of exercising or exchanging their options. At the time of the Merger, 7,193,486 options to purchase the Company's common stock were outstanding. Of this amount, 2,205,204 options were forfeited or liquidated and the remaining 4,988,282 options at a weighted average price of $26.94 were converted to options to receive 4,011,726 shares of The Travelers Inc. common stock at a weighted average price of $33.50. The cost related to options liquidated is approximately $8 million. In addition, the remaining outstanding restricted stock awards of 141,759 shares were converted into 113,977 restricted shares of The Travelers Inc. common stock. - 20 - Information with respect to grants follows: ================================================================================ Options outstanding ------------------------------ Shares Average available option for grant Shares price - -------------------------------------------------------------------------------- Balance, January 1, 1991 2,465,712 2,823,861 $34.79 Options: Granted (1,109,209) 1,109,209 $17.09 Exercised - (36,219) $13.91 Forfeited 64,473 (208,755) Restricted stock: Granted (330,568) - Forfeited 9,579 - - -------------------------------------------------------------------------------- Balance, December 31, 1991 1,099,987 3,688,096 $29.46 Options: Authorized 5,000,000 - Granted (2,056,100) 2,056,100 $22.38 Exercised - (190,001) $14.52 Forfeited 142,348 (231,007) Restricted stock: Granted (131,072) - Forfeited 41,767 - - -------------------------------------------------------------------------------- Balance, December 31, 1992 4,096,930 5,323,188 $27.28 Options: Granted (3,144,365) 3,144,365 $27.37 Exercised - (938,758) $19.16 Forfeited 307,124 (335,309) Restricted stock: Awarded (231,110) - Forfeited 161,251 - - -------------------------------------------------------------------------------- Balance, December 31, 1993 1,189,830 7,193,486 $28.30 ================================================================================ Options exercisable at December 31, 1993, 1992 and 1991 were 7,193,486, 2,782,576 and 1,859,359, respectively. Savings, investment and stock ownership plan. Under the savings, investment and stock ownership plan available to substantially all employees, the Company matches a portion of employee contributions. Effective April 1, 1993, the match decreased from 100% to 50% of an employee's first 5% contribution and a variable match based on the Company's profitability was added. The Company's matching obligations were $22 million in 1993 and $36 million in both 1992 and 1991. In the second quarter of 1989, the Company established an Employee Stock Ownership Plan (ESOP) to serve as the funding vehicle for its matching obligation under the savings, investment and stock ownership plan beginning in 1990. In June 1989, the ESOP purchased 3,755,869 shares of the Company's $4.53 Series A ESOP Convertible Preference Stock at $53.25 per share. The Series A preference stock is convertible into the Company's common stock at a one-to-one conversion rate. The shares may be redeemed at the option of the Company or the holder under certain circumstances. Annual dividends of $4.53 are cumulative. The Series A preference stock has a minimum liquidation value of $53.25 plus unpaid and accrued dividends. The ESOP financed the purchase of the Series A preference shares with a $200 million variable interest rate loan from a third party. The Company has guaranteed the ESOP's debt obligation, and the unpaid principal balance is included in the Company's long-term debt with a corresponding offset to the ESOP Series A preference stock. Increasing semi-annual payments that began January 1, 1990 will fully amortize the debt by July 1, 1997. - 21 - The Series A preference shares are held by the ESOP Trustee and are allocated to participants by a method that considers the debt service requirements of the ESOP. In 1993, 429,361 Series A preference shares were allocated to participants under this method. This compares with 394,044 shares in 1992 and 384,738 shares in 1991. Remaining unallocated shares are 2,061,214, 2,490,575 and 2,884,619 in 1993, 1992 and 1991, respectively. To the extent that the shares allocated by this method are not sufficient to meet the Company's matching obligation under the savings plan, additional contributions will be made. No such contribution was required to meet the 1993 obligation. In January 1993, 184,397 additional preference shares were contributed to the ESOP to meet the 1992 matching obligation. In December 1991, 320,000 additional preference shares were contributed to the ESOP to meet the estimated 1991 matching obligation. Likewise, in January 1991, 146,165 additional preference shares were contributed to the ESOP to meet the 1990 matching obligation. ESOP expense is recognized based upon the value of preference shares allocated to plan participants, giving consideration to interest incurred on the debt and credit for dividends received. The value of additional Series A preference shares, common stock or cash necessary to satisfy the matching requirement is included as a component of ESOP expense. The amount of ESOP expense recognized by the Company was $25 million in 1993, $26 million in 1992 and $29 million in 1991. Dividends of $20 million, $19 million and $17 million in 1993, 1992 and 1991, respectively, as well as contributions of $8 million in 1993 and 1992 and $10 million in 1991, were used by the ESOP to service its debt. The ESOP incurred $4 million, $5 million and $9 million of interest expense in 1993, 1992 and 1991, respectively. Effective December 31, 1993, in conjunction with the Merger, all outstanding Series A preference shares were transferred and converted to shares of The Travelers Inc. $4.53 ESOP Convertible Preferred Stock, Series C with substantially similar terms, and The Travelers Inc. assumed the guarantee of the ESOP's debt obligation. - 22 - 14. Federal Income Taxes ============================================================ (in millions) 1993 1992 1991 - ------------------------------------------------------------ Effective tax rate Income (loss) before federal income taxes $232 $(1,354) $ 323 - ------------------------------------------------------------ Statutory tax rate 35% 34% 34% - ------------------------------------------------------------ Expected federal income taxes $ 81 $ (460) $ 110 Tax effect of: Nontaxable investment income (39) (38) (44) "Fresh start" adjustments (16) (20) (50) Adjustment to benefit and other reserves (41) (9) (1) Adjustment to deferred tax asset for enacted change in tax rates from 34% to 35% (44) - - Nondeductible merger expenses 10 - - Other (7) 1 1 - ------------------------------------------------------------ Federal income taxes $ (56) $(526) $ 16 - ------------------------------------------------------------ Effective tax rate (24)% 39% 5% - ------------------------------------------------------------ Composition of federal income taxes Current: United States $ 81 $ (31) $ 46 Foreign 5 8 2 - ------------------------------------------------------------ Total 86 (23) 48 - ------------------------------------------------------------ Deferred: United States (142) (503) (32) Foreign - - - - ------------------------------------------------------------ Total (142) (503) (32) - ------------------------------------------------------------ Federal income taxes $ (56) $(526) $ 16 ============================================================ - 23 - The net deferred tax assets at December 31, 1993 and 1992 were comprised of the tax effects of the temporary differences related to the following assets and liabilities: ====================================================================== (For the year ended December 31, in millions) 1993 1992 - ---------------------------------------------------------------------- Deferred tax assets: Property-casualty loss reserves $600 $570 Benefit, reinsurance and other reserves 347 239 Contractholder funds 185 173 Investments 382 379 Reserve for postretirement benefits 153 144 Restructuring reserves 60 98 Other 221 196 - ---------------------------------------------------------------------- Total 1,948 1,799 - ---------------------------------------------------------------------- Deferred tax liabilities: Deferred acquisition costs 240 230 Accumulated depreciation 30 44 Prepaid pension expense 55 54 - ---------------------------------------------------------------------- Total 325 328 - ---------------------------------------------------------------------- Net deferred tax asset before valuation allowance 1,623 1,471 Valuation allowance for deferred tax assets (100) (100) - ---------------------------------------------------------------------- Net deferred tax asset after valuation allowance $1,523 $1,371 ====================================================================== The change in the net deferred tax asset after valuation allowance includes a $10 million change in the deferred taxes relating to unrealized investment losses. The net tax effects of significant timing differences in the deferred tax provision for 1991 were as follows: =============================================== (in millions) 1991 - ----------------------------------------------- Components of deferred taxes: Deferred acquisition costs $ (6) Benefit, reinsurance and other reserves (32) Dividends to contractholders 7 Property-casualty loss reserves (39) Prepaid pension expense 2 Compensated absences 9 Investment valuation and other reserves 17 Other 10 - ----------------------------------------------- Deferred federal income taxes $(32) =============================================== Consolidated federal income taxes. The Company files its federal income tax return on a consolidated basis. The return includes one subgroup of companies that are considered life insurers for federal income tax purposes and one subgroup of companies that are not life insurers. Certain limitations and restrictions apply to the utilization of losses generated by one subgroup against income of the other subgroup. In August 1993, the President signed into law the Omnibus Budget Reconciliation Act of 1993 (the Act). Included in the Act was a provision that raised the tax rate on corporations from 34% to 35%. Under current GAAP accounting rules, the Company was required to restate its deferred tax asset using the new 35% rate as of the enactment date of the legislation. This restatement produced a $40 million increase to the deferred tax asset (and an increase to earnings) for 1993. Upon adoption of FAS 109, a valuation allowance of $100 million was established to reduce the net deferred tax asset on investment losses to the amount that, based upon all available evidence, is more likely - 24 - than not to be realized. Reversal of the valuation allowance is contingent upon the recognition of future capital gains in the Company's federal income tax return or a change in circumstances which causes the recognition of the benefits to become more likely than not. There was no net change in the total valuation allowance during 1993. As of December 31, 1993, the Company has no ordinary or capital loss carryforwards. The Company has an alternative minimum tax (AMT) credit carryforward of $51 million as of December 31, 1993 and $63 million as of December 31, 1992. This credit will be utilized to offset the excess of regular tax over AMT in future years and has no expiration period. Extraordinary tax credits of $11 million relating to the realization of book capital loss carryforwards were recognized in 1991. In addition, $316 million of deferred tax assets, which were in excess of the amount of tax recoverable through carrybacks, were not recognized at December 31, 1991. In 1992, this amount was included in the FAS 109 cumulative effect adjustment net of the valuation allowance of $100 million. Life insurance companies. The "policyholders surplus account", which arose under prior tax law, is generally that portion of the gain from operations that has not been subjected to tax, plus certain deductions. The balance of this account, which, under provisions of the Tax Reform Act (TRA) of 1984, will not increase after 1983, is estimated to be $893 million. This amount has not been subjected to current income taxes but, under certain conditions that management considers to be remote, may become subject to income taxes in future years. At current rates, the maximum amount of such tax (for which no provision has been made in the financial statements) is approximately $313 million. Nonlife companies. Commencing in 1987, the TRA of 1986 required insurance companies to discount property-casualty loss reserves for tax purposes. Companies were, however, allowed a "fresh start" adjustment by recomputation of the opening 1987 loss reserves. This adjustment reduced 1991 taxes by $35 million. There was no 1993 or 1992 effect since the unamortized "fresh start" balance at December 31, 1991 was included in the FAS 109 cumulative effect adjustment. Starting in 1990, the Omnibus Budget Reconciliation Act of 1990 required property-casualty insurance companies to accrue estimated salvage and subrogation recoverables. Companies were, however, allowed a "fresh start" adjustment equal to 87% of the discounted opening 1990 reserve. For the Company, this amount was spread over a four-year period beginning in 1990. "Fresh start" adjustments relating to salvage and subrogation reduced 1993, 1992 and 1991 taxes by $16 million, $20 million and $15 million, respectively. 15. Reinsurance The Company, through its insurance subsidiaries, participates in reinsurance to reduce overall risks, including exposure to large losses and catastrophic events, and to effect business-sharing arrangements. Its property-casualty insurance subsidiaries also participate as a servicing carrier for and member of several pools and associations. Amounts recoverable from reinsurers of short-duration contracts are estimated in a manner consistent with the claim liability associated with the reinsured policy. The Company remains primarily liable as the direct insurer on all risks reinsured. Reinsurance recoverables are reported after allowances for uncollectible amounts. Generally, the cost of reinsurance is recognized over the period of the reinsurance contract. Prepaid reinsurance premiums are included in other assets within the consolidated balance sheet. - 25 - A summary of reinsurance financial data reflected within the consolidated statement of operations and retained earnings is presented below (in millions): ======================================================================== (For the year ended December 31, in millions) 1993 1992 1991 - ------------------------------------------------------------------------ Written Premiums: - ---------------- Direct $ 7,716 $ 7,738 $ 8,178 Assumed 425 539 539 Ceded (1,557) (1,589) (1,415) - ------------------------------------------------------------------------ Total $ 6,584 $ 6,688 $ 7,302 ======================================================================== Earned Premiums: - --------------- Direct Life business $ 3,005 $ 2,898 $ 2,978 Property-casualty business 4,510 4,936 5,256 Assumed Life business 34 127 137 Property-casualty business 383 362 402 Ceded Life business (87) (65) (20) Property-casualty business (1,452) (1,454) (1,444) - ------------------------------------------------------------------------ Total $ 6,393 $ 6,804 $ 7,309 ======================================================================== The following table reflects reinsurance recoveries (in millions): ======================================================================== (For the year ended December 31, in millions) 1993 1992 1991 - ------------------------------------------------------------------------ Reinsurance Recoveries: - ---------------------- Life business $ 85 $ 85 $ 102 Property-casualty business 1,240 1,568* 1,191 - ------------------------------------------------------------------------ Total $1,325 $ 1,653 $ 1,293 ======================================================================== * Increase in 1992 is due to Hurricane Andrew. A summary of financial data reflected within the consolidated balance sheet follows (in millions): ======================================================== (At December 31, in millions) 1993 1992 - -------------------------------------------------------- Reinsurance Recoverables: - ------------------------ Life business $ 65 $ 86 Property-casualty business: Pools and associations 2,585 2,582 Other reinsurers 1,546 1,500 - -------------------------------------------------------- 4,131 4,082 - -------------------------------------------------------- Total $ 4,196 $ 4,168 ======================================================== Included within the December 31, 1993 reinsurance recoverable balance is a current estimate of reinsurance recoverable from Lloyd's of London of $330 million. The collectibility of the reinsurance recoverable from Lloyd's relating to the arbitration (see note 9) is supported by a market agreement with Lloyd's favorable to the Company. - 26 - 16. Investments and Investment Gains (Losses) ========================================================================== (For the year ended December 31, in millions) 1993 1992 1991 - -------------------------------------------------------------------------- Realized Fixed maturities $372 $ 99 $ 103 Equity securities 43 34 43 Mortgage loans (35) (400) (103) Real estate (235) (425) - Foreign currency translation (7) (37) (32) Other 71 94 (13) - -------------------------------------------------------------------------- Realized investment gains (losses) $209 $(635) $ (2) ========================================================================== Unrealized Fixed maturities $(98) $167 $ 170 Equity securities 35 3 59 Other 35 16 27 - -------------------------------------------------------------------------- (28) 186 256 Related taxes (12) 62 65 - -------------------------------------------------------------------------- Net unrealized investment gains (losses) (16) 124 191 Balance beginning of year 197 73 (118) - -------------------------------------------------------------------------- Balance end of year $181 $197 $ 73 ========================================================================== Equity securities Unrealized ---------------- (At December 31, in millions) Cost Gains Losses - -------------------------------------------------------------------------- 1993 $252 $96 $ 23 1992 251 58 20 1991 510 80 44 ========================================================================== Fixed maturities Estimated Estimated market (At December 31, Carrying market value greater than in millions) value value carrying value ---------------------------------------------------- Amount Percent - -------------------------------------------------------------------------- 1993 $24,876 $25,823 $ 947 4 1992 22,946 23,771 825 4 1991 20,987 22,144 1,157 6 ========================================================================== Fixed maturities. Fixed maturities are valued based upon quoted market prices or, if quoted prices are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. Sales from the amortized cost portfolios have been made periodically. Such sales were $806 million, $1.1 billion and $2.6 billion in 1993, 1992 and 1991, respectively. Gross gains of $59 million, $49 million and $92 million in 1993, 1992 and 1991 respectively, and gross losses of $4 million in 1993 and $10 million in 1992 and 1991 were realized on those sales. The carrying values of the trading portfolio fixed maturities are adjusted to market value as it is likely they will be sold prior to maturity. These fixed maturities had market values of $9.0 billion at December 31, 1993 and $8.9 billion at December 31, 1992. Net unrealized gains were $205 million at December 31, 1993 and $322 million at December 31, 1992. Sales of trading portfolio fixed maturities were $9.6 billion, $4.4 billion and $3.8 billion in 1993, 1992 - 27 - and 1991, respectively. Gross gains of $317 million, $124 million and $90 million in 1993, 1992 and 1991, respectively, and gross losses of $6 million, $16 million and $13 million in 1993, 1992 and 1991, respectively, were realized on those sales. Effective January 1, 1994, the Company will adopt FAS 115. For further discussion see note 1.
========================================================================================== Fixed maturities carried at amortized cost by investment type - ------------------------------------------------------------------------------------------ Gross Gross Carrying unrealized unrealized Market (in millions) value gains losses value - ------------------------------------------------------------------------------------------ December 31, 1993 Mortgage-backed securities, CMOs and pass through securities $ 1,107 $ 64 $ 9 $ 1,162 U.S. Government and government agencies and authorities 165 11 1 175 States, municipalities and political subdivisions 2,664 89 7 2,746 Foreign governments 439 40 - 479 Public utilities 2,776 197 12 2,961 Convertible bonds 2 - - 2 All other corporate bonds 8,810* 578 81 9,307 Redeemable preferred stock 37 2 - 39 - ------------------------------------------------------------------------------------------ Total $16,000 $981 $110 $16,871 ========================================================================================== December 31, 1992 Mortgage-backed securities, CMOs and pass through securities $ 1,186 $112 $ 1,298 U.S. Government and government agencies and authorities 504 17 $ 2 519 States, municipalities and political subdivisions 1,560 43 21 1,582 Foreign governments 453 28 1 480 Public utilities 2,847 165 6 3,006 Convertible bonds 1 - - 1 All other corporate bonds 7,496* 417 25 7,888 Redeemable preferred stock 52 3 2 53 - ------------------------------------------------------------------------------------------ Total $14,099 $785 $ 57 $14,827 ==========================================================================================
* Before valuation reserves of $76 million and $97 million at December 31, 1993 and 1992, respectively. - 28 - ====================================================================== Trading portfolio securities by investment type - ---------------------------------------------------------------------- Carrying value at December 31, (in millions) 1993 1992 - ---------------------------------------------------------------------- Mortgage-backed securities - principally obligations of U.S. Government agencies $3,779 $4,005 U.S. Government and government agencies and authorities 3,472 3,168 States, municipalities and political subdivisions 14 18 Foreign governments 19 13 Public utilities 105 89 Convertible bonds 406 458 All other corporate bonds 1,157 1,193 - ---------------------------------------------------------------------- Total trading portfolio securities $8,952 $8,944 ====================================================================== The carrying value and market value of fixed maturities at December 31, 1993, by contractual maturity, are shown below. Fixed maturities subject to early or unscheduled prepayments have been included based upon their contractual maturity dates. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. ====================================================== Maturity Carrying Market (in millions) value* value - ------------------------------------------------------ One year or less $1,090 $1,118 Over 1 year through 5 years 6,769 7,020 Over 5 years through 10 years 7,488 7,883 Over 10 years 4,719 4,861 - ------------------------------------------------------ 20,066 20,882 Mortgage-backed securities 4,886 4,941 - ------------------------------------------------------ $24,952 $25,823 ====================================================== * Before valuation reserves of $76 million at December 31, 1993. Concentrations. At December 31, 1993, the Company had no concentration of investments in a single investee exceeding 10% of consolidated shareholders' equity. Included in fixed maturities is a concentration in below investment grade assets totaling $1.2 billion and $1.3 billion at December 31, 1993 and 1992, respectively. The Company defines its below investment grade assets as those securities rated "Ba1" or below by external rating agencies, or the equivalent by internal analysts when a public rating does not exist. Such assets include publicly traded below investment grade bonds, highly leveraged transactions and certain other privately issued bonds that are classified as below investment grade loans. The Company also has concentrations of investments in the following industries prior to consideration of investment valuation reserves: =============================================== (in millions) 1993 1992 - ------------------------------------------------ Electric utilities $1,715 $1,366 Banking* 1,519 1,681 Finance 1,471 1,683 ================================================ * Includes $509 million and $900 million at December 31, 1993 and 1992, respectively, of primarily short-term investments and cash equivalents issued by foreign banks. - 29 - Below investment grade assets included in the totals above were as follows: ==================================================== (in millions) 1993 1992 - ---------------------------------------------------- Electric utilities $ 81 $ 33 Finance 61 121 Banking 21 37 ==================================================== At December 31, 1993 and 1992, significant concentrations of mortgage loans were for properties located in highly populated areas in the states listed below. The amounts shown are prior to consideration of investment valuation reserves: ==================================================== (in millions) 1993 1992 - ---------------------------------------------------- California $1,307 $1,460 New York 951 1,326 Texas 647 1,010 Illinois 620 694 Florida 614 962 ==================================================== Other mortgage loan investments are fairly evenly dispersed throughout the United States, with no holdings in any other state exceeding $400 million and $600 million at December 31, 1993 and 1992, respectively. Mortgage loans by property type at December 31, 1993 and 1992 are shown below, prior to consideration of investment valuation reserves: ==================================================== (in millions) 1993 1992 - ---------------------------------------------------- Office $3,571 $4,389 Apartment 1,769 2,690 Retail 974 1,236 Hotel 566 540 Industrial 316 423 Other 141 261 - ---------------------------------------------------- Total commercial 7,337 9,539 Agricultural 650 805 Residential 1 610 - ---------------------------------------------------- Total $7,988 $10,954 ==================================================== Real estate assets at December 31, 1993 and 1992 included office properties with carrying values of $1,270 million and $1,689 million, respectively. The Company monitors creditworthiness of counterparties to all financial instruments by using controls that include credit approvals, limits and other monitoring procedures. Collateral for fixed maturities often includes pledges of assets, including stock and other assets, guarantees and letters of credit. The Company's underwriting standards with respect to new mortgage loans generally require loan to value ratios of 75% or less at the time of mortgage origination. - 30 - Investment valuation reserves. At December 31, 1993, 1992 and 1991, total investment valuation reserves, which are deducted from the applicable investment carrying values in the consolidated balance sheet, were as follows: =================================================== (in millions) 1993 1992 1991 - --------------------------------------------------- Beginning of year $1,497 $ 925 $1,046 Increase 208 883 172 Impairments, net of gains/recoveries (628) (311) (293) - --------------------------------------------------- End of year $1,077 $1,497 $ 925 =================================================== At December 31, 1993, investment valuation reserves were comprised of $498 million for mortgage loans, $495 million for real estate and $84 million for securities. Increases in the investment valuation reserves are reflected as realized investment losses. The Company continually monitors its investment portfolios, assessing status and creditworthiness of borrowers as well as other variables. The valuation reserves reflect management's judgment of the probable losses inherent in the portfolios. This judgment is based on a review of factors that include individual loan and historical loss experience and the specific industry and economic conditions. Management believes the reserves are adequate based on the current environment. Nonincome producing. Investments included in the consolidated balance sheets that were nonincome producing were as follows: ================================================ (in millions) 1993 1992 - ------------------------------------------------ Mortgage loans $ 451 $ 514 Real estate 337 699 Fixed maturities 36 16 - ------------------------------------------------ Total $ 824 $1,229 ================================================ Restructured. The Company has restructured investments totaling approximately $1.2 billion and $1.4 billion at December 31, 1993 and 1992, respectively. The new terms typically defer a portion of contract interest payments to varying future periods. The accrual of interest is suspended on all restructured loans, and interest income is reported only as payment is received. Gross interest income on restructured mortgage loans that would have been recorded in accordance with the original terms of such loans amounted to $128 million in 1993 and $166 million in 1992. Interest on these loans, included in net investment income, aggregated $56 million and $72 million in 1993 and 1992, respectively. - 31 - 17. Net Investment Income ========================================================== (For the year ended December 31, in millions) 1993 1992 1991 - ---------------------------------------------------------- Gross investment income Fixed maturities Bonds $1,969 $1,984 $2,344 Redeemable preferred stocks 5 4 6 Equity securities Common stocks 2 8 - Nonredeemable preferred stocks 8 8 7 Mortgage loans 753 983 1,238 Real estate 415 399 266 Policy loans 106 109 96 Other 1 6 72 - ----------------------------------------------------------- 3,259 3,501 4,029 - ----------------------------------------------------------- Investment expenses General investment 544 553 443 Interest, discount and expense on long-term debt 81 90 72 Other interest 34 59 286 - ----------------------------------------------------------- 659 702 801 - ----------------------------------------------------------- Net investment income $2,600 $2,799 $3,228 =========================================================== The amounts shown in the above table are net of increases in the investment income valuation reserves, which reflect estimates of amounts considered doubtful of realization. There were no such increases in 1993, 1992 and 1991. At December 31, 1993 and 1992, the reserve, which is deducted from investment income accrued in the consolidated balance sheet, amounted to $44 million and $58 million, respectively. At December 31, 1993 and 1992, the investment income valuation reserves of a noninsurance subsidiary amounted to $17 million and $27 million, respectively. 18. Fair Value Of Certain Financial Instruments The Company uses various financial instruments in the normal course of its business. Fair value information for financial instruments not presented elsewhere in these financial statements is discussed below. Fair values of financial instruments which are considered insurance contracts are not required to be disclosed and are not included in the amounts discussed. The estimated fair value of the Company's mortgage loan portfolio at December 31, 1993 and 1992 is $7.2 billion and $9.7 billion, respectively. Mortgage loans are grouped into homogeneous categories based on the Company's internal rating system. Performing loans generally are valued using either discounted cash flow analysis, reflecting market-based interest rates commensurate with the underlying risk, or, if foreclosure is deemed possible, the lower of carrying value or underlying collateral value. In arriving at estimated fair value, the Company used interest rates reflecting the higher returns required in the current real estate financing market. As the marketplace changes, these rates will be adjusted accordingly. Underperforming loans are valued at the lower of carrying value or underlying collateral value. The carrying value of $890 million and $537 million of financial instruments classified as other assets approximates their fair value at December 31, 1993 and 1992, respectively. The carrying values of $2.5 billion and $2.7 billion of financial instruments classified as other liabilities also approximate their fair values at December 31, 1993 and 1992, respectively. Fair value is determined using various methods including discounted cash flows and carrying value, as appropriate for the various financial instruments. - 32 - At December 31, 1993, contractholder funds with defined maturities have a carrying value of $4.8 billion and a fair value of $5.0 billion, compared with a carrying value of $6.0 billion and fair value of $6.2 billion at December 31, 1992. The fair value of these contracts is determined by discounting expected cash flows at an interest rate commensurate with the Company's credit risk and the expected timing of cash flows. Contractholder funds without defined maturities have a carrying value of $12.9 billion and a fair value of $12.7 billion at December 31, 1993, compared to a carrying value of $10.7 billion and a fair value of $10.4 billion at December 31, 1992. These contracts generally are valued at surrender value. The assets of separate accounts providing a guaranteed return have a carrying value and fair value of $1.1 billion and $1.2 billion, respectively, at December 31, 1993, compared to a carrying value and fair value of $711 million and $767 million, respectively, at December 31, 1992. The liabilities of separate accounts providing a guaranteed return have a carrying value and fair value of $1.1 billion and $1.3 billion, respectively, at December 31, 1993, compared to a carrying value and fair value of $632 million and $735 million, respectively, at December 31, 1992. The carrying values of short-term securities, investment income accrued and securities transactions in the course of settlement approximate their fair value. 19. Asbestos, Environmental Liabilities and Litigation Reserves In the third quarter of 1993, the Company added $325 million to its reserves for asbestos and environmental liabilities, as well as for blood-related claims for policies issued in the early 1980s. This addition to reserves resulted in an after-tax charge of $211 million. Several recent developments contributed to the decision to add to reserves. The insurance industry is witnessing a growth in claims brought by outside workers who allege exposure to asbestos while working on site at various companies. There has been an increase in the incidence of this type of claim during 1993. The Company also has experienced a growth in environmental claims primarily from smaller companies with lower coverage limits and has been named as a defendant in coverage cases brought by other insurers against their policyholders and the policyholders' other carriers. The insurance industry has been, and continues to be, involved in extensive litigation involving policy coverage and liability issues as they relate to environmental claims, as a result of various state and federal regulatory efforts aimed at environmental remediation. In addition to the regulatory pressures, certain court decisions have expanded insurance coverage beyond the original intent of the insurer and insured, frequently involving policies that were issued prior to the mid-1970s. The results of court decisions affecting the industry's coverage positions continue to be inconsistent. Accordingly, the ultimate responsibility and liability for environmental remediation costs remain uncertain. - 33 - The following table displays activity for environmental losses and loss expenses and reserves for the three years ended December 31, 1993. Approximately 12% of the net environmental loss reserve (i.e. approximately $40 million) at December 31, 1993 is case reserve for resolved claims. The Company does not post case reserves for environmental claims in which there is a coverage dispute. The remainder of the reserve is for claims in which coverage is in dispute and unreported environmental losses. Environmental Losses - ---------------------------------------------------------- (in millions) 1993 1992 1991 - ---------------------------------------------------------- Beginning reserves: Direct $194 $ 170 $ 148 Ceded - - - - ---------------------------------------------------------- Net 194 170 148 Incurred losses and loss expenses: Direct 211 70 75 Ceded (21) (3) (2) Losses paid: Direct 61 46 53 Ceded (10) (3) (2) - ---------------------------------------------------------- Ending reserves: Direct 344 194 170 Ceded (11) - - - ---------------------------------------------------------- Net $ 333 $ 194 $ 170 ========================================================== In the area of asbestos claims, the industry has suffered from judicial interpretations that have attempted to maximize insurance availability from both a coverage and liability standpoint far beyond the intentions of the contracting parties. These policies generally were issued prior to the 1980s. As a result of recent developments in asbestos litigation, various classes of asbestos defendants, e.g. major product manufacturers, peripheral and regional product defendants as well as premises owners, are tendering asbestos-related claims to the industry. Since each insured presents different liability and coverage issues, the Company evaluates those issues on an insured-by-insured basis. The following table displays asbestos losses and loss expenses and reserves for the three years ended December 31, 1993. Approximately 80% of the net asbestos reserves at December 31, 1993 represented incurred but not reported losses. Asbestos Losses - ----------------------------------------------------------- (in millions) 1993 1992 1991 - ----------------------------------------------------------- Beginning reserves: Direct $425 $ 395 $ 348 Ceded (247) (220) (167) - ----------------------------------------------------------- Net 178 175 181 Incurred losses and loss expenses: Direct 447 111 118 Ceded (218) (50) (69) Losses paid: Direct 98 81 71 Ceded (14) (23) (16) - ----------------------------------------------------------- Ending reserves: Direct 774 425 395 Ceded (451) (247) (220) - ----------------------------------------------------------- Net $ 323 $ 178 $ 175 =========================================================== - 34 - For both environmental and asbestos-related claims, the Company carries on a continuing review of its overall position, its reserving techniques and reinsurance recoverable. In each of these areas of exposure, the Company has endeavored to litigate individual cases and settle claims on favorable terms. Given the vagaries of court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties, it is not presently possible to quantify the ultimate exposure represented by these claims. As a result, the Company expects that future earnings may be adversely affected by environmental and asbestos claims, although the amounts cannot be reasonably estimated. However, it is not likely these claims will have a material adverse effect on the Company's financial condition. 20. Restructuring Costs During 1992, the Company announced a series of organizational restructuring initiatives associated with its plan to streamline its business and corporate operations. These initiatives resulted in a pretax charge of $308 million, consisting of $197 million for severance, benefits, accrued vacation and outplacement costs related to employees who will be terminated, $13 million for relocation costs due to consolidation efforts, $48 million for lease costs, $14 million for curtailment losses charged to postretirement benefit plans, $15 million for writeoff of goodwill related to identified divestitures and $21 million of miscellaneous other costs. 21. Reconciliation of Net Income (Loss) to Net Cash Used in Operating Activities In the first quarter of 1992, the Company changed its presentation of cash flows from operating activities from the indirect method to the direct method. The following table reconciles net income (loss) to net cash used in operating activities: ======================================================================= (For the year ended December 31, - ----------------------------------------------------------------------- in millions) 1993 1992 1991 - ----------------------------------------------------------------------- Net income (loss) $288 $(658) $ 318 Reconciling adjustments Trading account investments, (purchases) sales, net (998) (938) (1,973) Realized gains (127) (159) (93) Investment income accrued 9 30 67 Premium balances receivable 84 9 (9) Deferred acquisition costs (36) (71) (14) Deferred federal income taxes (142) (503) (32) Cumulative effects of changes in accounting principles - (170) - Insurance reserves and accrued expenses (36) 529 266 Restructuring reserve (122) 229 (28) Other, including investment valuation reserves 152 975 184 - ----------------------------------------------------------------------- Net cash used in operating activities $(928) $(727) $(1,314) ======================================================================= - 35 - 22. Noncash Investing and Financing Activities Significant noncash investing and financing activities include: a) acquisition of real estate through foreclosures of mortgage loans amounting to $600 million, $809 million and $861 million in 1993, 1992 and 1991, respectively; b) the 1993 transfer of $362 million of mortgage loans and bonds from the Company's general account to two separate accounts; c) acceptance of purchase money mortgages for sales of real estate aggregating $192 million, $72 million and $33 million in 1993, 1992 and 1991, respectively; d) increases in investment valuation reserves in 1993, 1992 and 1991 for securities, mortgage loans and real estate (see note 16); e) the issuance of additional Series A preference stock in 1993 and 1991 (see note 13); f) the issuance of stock under the Accrued Vacation Buy-Back Plan (see note 6); g) the 1992 acquisition of a 50% interest in Commercial Insurance Resources, Inc. and the acquisition of Transport Life Insurance Company's preferred provider and third party administrator organizations through the issuance of common stock (see note 3); and h) the 1991 transfer of $560 million of assets and liabilities supporting certain annuity businesses into a separate account. 23. Subsequent Event - Acquisition by The Travelers Inc. In December 1992, The Travelers Inc. (formerly Primerica Corporation) exchanged $550 million in cash, 50 percent of the equity of Commercial Insurance Resources, Inc. (the parent of Gulf Insurance Company), and 100 percent of the preferred provider organization and third party administrator networks of Transport Life Insurance Company (a wholly owned subsidiary of Primerica) for 38,026,314 shares of the Company's common stock issued at $19 per share. These transactions resulted in an increase in the shareholders' equity of the Company of $723 million and the ownership by The Travelers Inc. of approximately 27% of the Company's common stock. Effective December 31, 1993, The Travelers Inc. acquired the approximately 73% of the Company's common stock which it did not already own, through the exchange of .80423 shares of The Travelers Inc. common stock for each share of the Company's common stock. On December 31, 1993, The Travelers Corporation merged into The Travelers Inc. All subsidiaries of the former Travelers Corporation were contributed to The Travelers Insurance Group Inc., a second tier subsidiary of The Travelers Inc. In conjunction with the merger, The Travelers Inc. contributed Primerica Insurance Holdings, Inc. and its subsidiaries and made a cash capital contribution of $200 million to the Company, and assumed the public debt obligations of the Company. - 36 -
THE TRAVELERS CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------ SELECTED CONSOLIDATED QUARTERLY DATA (UNAUDITED) Pre-merger, historical accounting basis - ------------------------------------------------------------------------------------------------ First Second Third Fourth 1993 (in millions) Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------ Premiums $1,783 $1,652 $1,547 $1,602 Net investment income 659 653 644 644 Realized investment gains (losses) 185 (1) 63 (38) Other revenues, including gains and losses on dispositions 223 223 223 222 Federal income taxes 67 13 (124) (12) Net income (loss) 195 93 (36) 36 - ------------------------------------------------------------------------------------------------ Per common share (in dollars) Primary Net income (loss) $ 1.25 $ .55 $(.33) N/A Assuming full dilution Net income (loss) 1.22 .54 (.33) N/A Dividends .40 .40 .40 $ .40 Common stock data Price ranges High 30 3/4 33 38 7/8 38 3/8 Low 23 3/4 26 1/8 29 3/4 30 1/2 Close 27 1/2 32 37 5/8 N/A - (1) - ------------------------------------------------------------------------------------------------ (1) On December 31, 1993, all of the Company's common stock was acquired by The Travelers Inc. and, therefore, is no longer traded.
First Second Third Fourth 1992 (in millions) Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------ Premiums $1,875 $1,601 $1,668 $1,545 Net investment income 719 713 696 671 Realized investment gains (losses) (2) 12 57 (701) Other revenues, including gains and losses on dispositions 217 230 210 166 Federal income taxes 6 8 (206) (334) Income (loss) before cumulative effects of changes in accounting principles 54 66 (358) (589) Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax (258) - - - Cumulative effect of change in accounting for income taxes 428 - - - Net income (loss) 224 66 (358) (589) - ------------------------------------------------------------------------------------------------ Per common share (in dollars) Primary Income (loss) before cumulative effects of changes in accounting principles $ .49 $ .59 $ (3.54) $ (5.38) Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax (2.48) - - - Cumulative effect of change in accounting for income taxes 4.11 - - - Net income (loss) 2.12 .59 (3.54) (5.38) Assuming full dilution Income (loss) before cumulative effects of changes in accounting principles .49 .58 (3.54) (5.38) Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax (2.37) - - - Cumulative effect of change in accounting for income taxes 3.93 - - - Net income (loss) 2.05 .58 (3.54) (5.38) Dividends .40 .40 .40 .40 Common stock data Price ranges High 23 3/4 21 1/2 23 1/8 27 5/8 Low 19 1/2 19 1/2 17 1/8 21 1/2 Close 20 1/4 20 5/8 22 1/2 27 1/4 - ------------------------------------------------------------------------------------------------ Shareholders at year end 67,290 - ------------------------------------------------------------------------------------------------
- 37 -
THE TRAVELERS CORPORATION AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------------------ SELECTED CONSOLIDATED FINANCIAL DATA Pre-merger, historical accounting basis - ------------------------------------------------------------------------------------------------------------------ (in millions) 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------ Premiums $6,584 $6,688 $7,302 $7,435 $7,793 Net investment income 2,600 2,799 3,228 3,494 3,567 Realized investment gains (losses) 209 (635) (2) (616) 134 Other revenues, including gains and losses on dispositions 891 823 849 1,001 1,029 Federal income taxes (56) (526) 16 26 84 Income (loss) before extraordinary credit and cumulative effects of changes in accounting principles 288 (828) 307 (178) 424 Extraordinary credit - - 11 - 31 Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax - (258) - - - Cumulative effect of change in accounting for income taxes - 428 - - - Net income (loss) 288 (658) 318 (178) 455 Assets 54,610 58,029 57,975 61,826 62,071 Long-term debt 752 1,124 945 934 1,055 - ------------------------------------------------------------------------------------------------------------------ Per common share (in dollars) Primary Income (loss) before extraordinary credit and cumulative effects of changes in accounting principles N/A $ (8.11) $ 2.87 $ (1.85) $ 4.07 Extraordinary credit N/A - .10 - .30 Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax N/A (2.43) - - - Cumulative effect of change in accounting for income taxes N/A 4.03 - - - Net income (loss) N/A (6.51) 2.97 (1.85) 4.37 Assuming full dilution Income (loss) before extraordinary credit and cumulative effects of changes in accounting principles N/A (8.11) 2.80 (1.85) 3.99 Extraordinary credit N/A - .09 - .29 Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax N/A (2.43) - - - Cumulative effect of change in accounting for income taxes N/A 4.03 - - - Net income (loss) N/A (6.51) 2.89 (1.85) 4.28 Dividends 1.60 1.60 1.60 2.20 2.40 Shareholders' equity at year end N/A 31.96 44.06 41.44 47.09 - ------------------------------------------------------------------------------------------------------------------
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THE TRAVELERS CORPORATION AND SUBSIDIARIES - ----------------------------------------------------------------------------------------------------------------- SELECTED LINE OF BUSINESS FINANCIAL DATA Pre-merger, historical accounting basis - ----------------------------------------------------------------------------------------------------------------- (in millions) 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------------------------- Life companies Premiums $ 2,947 $ 2,833 $ 2,976 $ 3,038 $ 2,976 Net investment income 1,894 2,107 2,464 2,654 2,714 Realized investment gains (losses) (19) (746) (23) (588) 89 Other revenues, including gains and losses on dispositions 675 565 532 510 445 Income (loss) before extraordinary credit and cumulative effects of changes in accounting principles 152 (574) 105 (327) 246 Extraordinary credit - - 11 - 31 Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax - (120) - - - Cumulative effect of change in accounting for income taxes - 345 - - - Net income (loss) 152 (349) 116 (327) 277 Assets 33,986 35,838 36,756 36,639 36,429 Annual premiums on new individual life and annuity business 232 227 230 226 239 Face amount of life insurance sales 23,442 26,828 27,326 42,008 14,259 Face amount of life insurance in force 184,257 196,093 218,128 204,904 182,037 - ----------------------------------------------------------------------------------------------------------------- Property-casualty companies Premiums $3,637 $3,855 $4,326 $4,397 $4,817 Net investment income 682 673 724 731 705 Realized investment gains (losses) 223 112 17 (30) 42 Other revenues, including gains and losses on dispositions (51) 32 - 157 66 Income (loss) before cumulative effects of changes in accounting principles 97 (231) 207 147 123 Cumulative effect of change in accounting for postretirement benefits other than pensions, net of tax - (123) - - - Cumulative effect of change in accounting for income taxes - 82 - - - Net income (loss) 97 (272) 207 147 123 Assets 21,032 20,650 19,759 20,328 18,979 - ----------------------------------------------------------------------------------------------------------------- Noninsurance subsidiaries Net income (loss) $ 39 $ (37) $ (5) $ 2 $ 55 - -----------------------------------------------------------------------------------------------------------------
- 39 - EX-99.01 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors, The Travelers Corporation: We have audited the accompanying balance sheets of The Travelers Corporation and Subsidiaries (the "Company") as of December 31, 1993 and 1992, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended December 31, 1993 (the "Preacquisition Consolidated Financial Statements"). These Preacquisition Consolidated Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Preacquisition Consolidated Financial Statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Preacquisition Consolidated Financial Statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Preacquisition Consolidated Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Preacquisition Consolidated Financial Statements. We believe that our audits provide a reasonable basis for our opinion. As more fully described in Notes 1 and 23, as of the close of business on December 31, 1993, the Company was acquired in a purchase business combination by The Travelers Inc. (formerly Primerica Corporation). The accompanying Preacquisition Consolidated Financial Statements, which include only those accounts of the Company immediately prior to it being acquired, were prepared for the purpose of complying with the requirements of the Staff of the Securities and Exchange Commission for inclusion in the Form 10-K of The Travelers Inc. These Preacquisition Consolidated Financial Statements are not intended to be a complete presentation of the Company's financial statements after its acquisition. In our opinion, the Preacquisition Consolidated Financial Statements referred to above present fairly, in all material respects, the preacquisition consolidated financial position of The Travelers Corporation and Subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Notes 2, 13, 14 and 15 to the Preacquisition Consolidated Financial Statements, the Company changed its method of accounting and reporting for reinsurance in 1993 and its method of accounting for postretirement benefits other than pensions, accounting for income taxes and accounting for foreclosed assets in 1992. /s/ Coopers & Lybrand Coopers & Lybrand Hartford, Connecticut January 24, 1994 EX-99.02 23 EXHIBIT NO. 99.02 COMPANY'S FORM 8-K September 23, 1993 Pages 2 & 3 Item 5. Other Events. On September 22, 1993, Primerica and TC issued a joint press release announcing that they were engaged in discussions concerning a possible business merger. On that day, complaints with respect to seven purported class actions were filed in the Connecticut Superior Court for the Judicial District of Hartford at Hartford/ New Britain, generally naming TC, Primerica and the individual directors of TC as defendants. On September 23, 1993, complaints with respect to six purported class actions were filed with that court and two actions were brought in the Connecticut Superior Court for the Judicial District of New Haven at New Haven, and on September 24, 1993, four such complaints were filed, two in the Superior Court for the Judicial District of Hartford and two in the Superior Court for the Judicial District of New Haven. Primerica was named as a defendant in all but two of these nineteen actions. It is possible that additional actions of this nature may be filed. Each of the plaintiffs in these cases alleges, among other things, that (i) such plaintiff is a holder of TC stock; (ii) the defendants have by their wrongful acts deprived the plaintiffs of the opportunity to maximize the value of their TC Common Stock; (iii) the individual defendants have, as directors of TC, breached their fiduciary duties of good faith, fair dealing, due care and candor to the public stockholders of TC; and (iv) that the exchange ratio of Primerica Common Stock for TC Common Stock contemplated by the Merger is grossly inadequate and unfair. The plaintiffs request, in each case, certification of the action as a class action and of the plaintiffs as class representatives, and seek relief in various forms, including: declaratory judgment that the defendants have breached their fiduciary duties to the plaintiffs and other members of the class of TC's shareholders; an order that the defendants take appropriate measures to assure an open and vigorous auction for TC; to maximize shareholder value; preliminary and permanent injunctive relief against the defendants' proceeding with the merger, or alternatively if the merger shall be consummated, its rescission; compensatory damages, costs and counsel fees for the plaintiffs; and/or such other relief as the court may deem just and equitable. COMPANY'S FORM 10-Q September 30, 1993 Page 26 Item 1. Legal Proceedings. For information concerning purported class action lawsuits arising from the announcement of the proposed merger between the Company and Travelers, reference is made to the description that appears in Item 5 of the Company's Current Report on Form 8-K dated September 23, 1993. Since the filing of that report, one additional purported class action suit arising from the announcement of the proposed merger has been brought in the New York State Supreme Court. COMPANY'S FORM 8-K March 1, 1994 Page 2 Item 5. OTHER EVENTS. As previously disclosed by the Company, in response to the announcement in September 1993 of the merger between the Company and old Travelers, a number of purported class action lawsuits were filed in state court in Connecticut and New York against old Travelers, its directors and the Company and certain of its directors. For information concerning these cases, see the description that appears in the last paragraph on page 2 and the first two paragraphs on page 3 of the Company's Current Report on Form 8-K dated September 23, 1993, and the third paragraph on page 26 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 23, 1993, and the third paragraph on page 26 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1993, which descriptions are incorporated by reference herein. A copy of the pertinent paragraphs of such filings is included as Exhibit 99.01 to this Form 8-K. These cases are now consolidated in Connecticut in a case entitled Robert Brandt, IRA, et al. v. The Travelers Corporation, et al. The consolidated amended complaint generally seeks damages on behalf of shareholders of old Travelers based on the alleged inadequacy of the merger consideration offered by the Company under the terms of the merger agreement. In January 1994, the defendants filed a motion to dismiss the case based on, among other things, Connecticut law limiting claims by dissenting shareholders to statutory appraisal rights. EX-99.03 24 EXHIBIT NO. 99.03 COMPANY'S FORM 10-K December 31, 1989 Page 30 Item 3. LEGAL PROCEEDINGS Shareholder Litigation On August 29, 1988, the Company entered into an Agreement and Plan of Merger among the Company, Primerica Holdings and old Primerica, providing for the merger of old Primerica into Primerica Holdings. In late 1988, fifteen purported class actions were filed in various jurisdictions, challenging certain aspects of the merger. The plaintiffs in the various cases were purportedly shareholders of old Primerica prior to the merger. They allege that, in connection with the merger, old Primerica and/or its officers or directors and/or former officers or directors committed fraud and breached fiduciary duties. Plaintiffs allege that the proxy statement by which the shareholders' votes on the merger were solicited contained representations which were materially misleading or failed to disclose material facts. Plaintiffs seek to rescind the transaction or in the alternative to recover compensatory damages. A motion brought in one of these cases to enjoin the merger was denied. The litigation is proceeding with the designated lead case in United States District Court, Eastern District of New York, under the caption Wallerstein, et al v. --------------------- Primerica Corporation, et al. ----------------------------- EX-99.04 25 EXHIBIT NO. 99.04 COMPANY'S FORM 10-K December 31, 1989 Page 31 Item 3. LEGAL PROCEEDINGS Other Litigation Eight purported class actions were filed in late 1987 and early 1988 (two of which named SBHU as a defendant) in connection with the June 1986 initial public offering of Worlds of Wonder ("WOW") common stock, open market trading in WOW common stock, the public offering in June 1987 of $80 million in WOW convertible debentures, and open market trading in the debentures. The eight actions have been consolidated in In re Worlds of Wonder, Inc. Securities Litigation, in the --------------------------------------------------- United States District Court for the Northern District of California. SBHU acted as co-lead underwriter for the initial public offering and as sole underwriter for the debenture offering. The Complaint alleges that the prospectuses by which the initial public offering and the debenture offering were made and various press releases and public statements were materially false and misleading. Plaintiffs seek to recover the amounts paid by all purchasers in the initial public offering and in the debenture offering, as well as losses sustained by purchasers of WOW common stock or debentures in the open market between June 20, 1986 and November 9, 1987. On June 8, 1988, purchasers of approximately $12 million of the WOW convertible debentures offered in June 1987 filed an individual action naming SBHU and others as defendants, Steinhardt Partners, et al. v. Smith Barney etc., et al., in ---------------------------------------------------------- the United States District Court for the southern District of New York. These plaintiffs, who are seeking compensatory damages based on claims similar to those asserted in the consolidated class actions, have asserted that they will opt out of any class certified in the other actions and pursue their claims individually. On February 2, 1989, the Court granted defendants' joint motion to transfer the Steinhardt ---------- action to the Northern District of California. COMPANY'S FORM 10-K December 31, 1990 Page 30 Item 3. LEGAL PROCEEDINGS Other Litigation For information concerning purported class actions and an individual action against SBHU and others in connection with Worlds of Wonder common stock and convertible debentures, see the description that appears in the first, second and third paragraphs of page 31 of the Company's filing on Form 10-K for the year ended December 31, 1989, which description is incorporated by reference herein. A copy of the pertinent paragraphs of such filing is included as an exhibit to this Form 10-K. On March 26, 1990, the United States District Court for the Northern District of California certified a class of common stock purchasers and a class of debenture purchasers. EX-99.05 26 EXHIBIT NO. 99.05 COMPANY'S FORM 10-Q September 30, 1993 Page 26 Item 1. Legal Proceedings In October 1993, several purported class action lawsuits were filed in the Federal District Court for the Southern District of New York naming Smith Barney, Harris Upham & Co. Incorporated ("SBS") as defendant. The cases arise from SBS's participation as lead and co-underwriter in the initial public offerings of three separate funds managed by Hyperion Capital Management Inc. The plaintiffs have also named as defendants the funds' directors and the co-underwriters and their representatives. Plaintiffs allege that the registration statements and prospectuses by which the offerings were made between June 1992 and October 1992 were materially false and misleading, and are seeking unspecified damages in claims brought under the Federal securities laws. The Company believes it has meritorious defenses to these actions and intends to defend against them vigorously. EX-99.06 27 EXHIBIT NO. 99.06 COMPANY'S FORM 10-K December 31, 1989 Page 31 Item 3. LEGAL PROCEEDINGS Other Litigation On or about January 9, 1989, Primerica Holdings, Inc., as successor in interest to old Primerica, notified the salaried retirees of old Primerica of certain changes in their retirement benefits. On December 19, 1989, a purported class action was filed by two salaried retirees in United States District Court, District of New Jersey, under the caption Alexander, et al, v. Primerica Holdings, Inc., et al. -------------------------------------------------------------- Plaintiffs allege that their retirement benefits are not subject to material alteration, and that the 1989 revisions are improper. The complaint alleges causes of action against Primerica Holdings and its directors on various theories including promissory estoppel, breach of contract, breach of fiduciary duties, fraud, and federal ERISA violations. Plaintiffs seek permanent injunctive relief prohibiting changes in their benefits, as well as compensatory and punitive damages. COMPANY'S FORM 10-K December 31, 1991 Page 26 Item 3. LEGAL PROCEEDINGS Other Litigation and Legal Proceedings For information concerning a purported class action against Primerica Holdings and others in connection with certain changes in the retirement benefits of old Primerica retirees, see the description that appears in the fourth paragraph of page 31 of the Company's filing on Form 10-K for the year ended December 31, 1989, which description is incorporated by reference herein. A copy of the pertinent paragraph of such filing is included as an exhibit to this Form 10-K. The class was certified in May 1991, and on June 25, 1991, the United States District Court for the District of New Jersey granted summary judgment in favor of Primerica Holdings and the other defendants in the class action. Plaintiffs have appealed the decision. EX-99.07 28 EXHIBIT NO. 99.07 COMPANY'S FORM 10-K December 31, 1992 Page 26 Because of former operations of old Primerica, the Company and certain of its subsidiaries are involved in matters relating to Federal, state or local regulations or laws regulating the discharge of materials into the environment. The most significant of these matters involves the manufacturing facility at the Chemplex site in Clinton, Iowa, which was formerly operated as a joint venture by ACC Chemical Co., a former subsidiary of old Primerica, and Getty Chemical Company. In connection with the 1984 sale of its interest in this venture, old Primerica agreed to indemnify the purchaser for up to 50% of certain liabilities including liabilities relating to environmental matters prior to the date of sale. The Company and other potentially responsible parties have negotiated an agreement with the United States Environmental Protection Agency ("EPA") for remediation of groundwater contamination at the site. A consent decree for groundwater remediation was entered on November 7, 1991. A separate Remedial Investigation and Feasibility Study work plan concerning soil contamination has been prepared and EPA is in the process of selecting its preferred remedy. The majority of the remaining environmental matters relate to manufacturing operations that were sold by old Primerica prior to 1987. For the majority of the environmental sites, liability was assumed by the purchasers of the operations. The Company believes that insurance maintained by or on behalf of the Company, old Primerica or certain affiliates, indemnities in favor of the Company or such subsidiaries and contributions from other potentially responsible parties will be available to mitigate the financial exposure of the Company and its subsidiaries in these matters. The Company is using a variety of approaches to recover from each of these sources, including pursuing litigation where appropriate relating to such matters. EX-99.08 29 EXHIBIT NO. 99.08 COMPANY'S FORM 8-K March 1, 1994 Page 2 Item 5. Other Events In a case entitled United States v. Travelers Insurance Co., filed in the United States District Court for the District of Connecticut in April 1989, the federal government alleges that old Travelers improperly handled health benefit claims for individuals who are actively employed and eligible for Medicare coverage. In November 1992, the Court ruled on cross motions for summary judgment, and found that old Travelers had no liability for actions taken in its capacity as a claims administrator. However, the Court also recognized that the government's right of recovery is independent of the rights of the insured, and is not governed by procedural limitations in the plans. EX-99.09 30 EXHIBIT NO. 99.09 COMPANY'S FORM 8-K March 1, 1994 Page 2 Item 5. Other Events. In a case entitled The Travelers Insurance Company et al. v. Richard John Ratcliffe Keeling et al., filed in New York Supreme Court in June 1991, old Travelers seeks to enforce reinsurance contracts with certain underwriters at Lloyd's of London with respect to recoveries for certain asbestos claims. In January 1994, the Court stayed litigation of this matter in favor of arbitration. The issues before the arbitration panel include the underwriters' breach of contract and anticipated breach of their agreement with the Company on asbestos-related reinsurance claims. EX-99.10 31 EXHIBIT NO. 99.10 COMPANY'S FORM 10-Q September 30, 1993 Page 26 Item 1. Legal Proceedings In October 1993, a jury in a California Superior Court proceeding that had been commenced in June 1990 returned a verdict against a subsidiary of the Company in the amount of $100,000 compensatory and $25,000,000 punitive damages. The case, Norman Jensen v. Transport Life Insurance Company, et al., arose out of a hospital indemnity insurance policy issued by Transport Life Insurance Company ("Transport") in 1988. The plaintiff claimed that he was misled as to the nature of the policy and sought damages for emotional distress. The agency that had marketed the policy and was also a named defendant had filed for bankruptcy protection in 1992. Transport believes it has meritorious grounds to contest the verdict before the trial court and, if necessary, on appeal. EX-99.01 32 March 31, 1994 VIA ELECTRONIC TRANSMISSION Filer Support, EDGAR Securities and Exchange Commission Operations Center, Stop 0-7 6432 General Green Way Alexandria, VA 22312 Re: The Travelers Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1993 ------------------------------------------- Ladies and Gentlemen: Transmitted herewith on behalf of The Travelers Inc. (the "Company"), is the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (the "Annual Report"), including the exhibits thereto. Pursuant to Item 202 of Regulation S-T regarding Continuing Hardship Exemptions, Exhibit 28.01 to the Annual Report has been filed in paper under cover of Form SE. A filing fee in the amount of $250.00 has been paid. Please feel free to call me at (212) 891-8937 if you have any comments or questions regarding the Annual Report. Thank you. Very truly yours, /s/ Marla A. Berman ------------------- Marla A. Berman Assistant General Counsel -----END PRIVACY-ENHANCED MESSAGE-----