10-K 1 THE 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, 1994 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) _______________
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $ .01 per share New York Stock Exchange and Pacific Stock Exchange Depositary Shares, each representing 1/10th of a New York Stock Exchange share of 8.125% Cumulative Preferred Stock, Series A 5.50% Convertible Preferred Stock, Series B New York Stock Exchange Depositary Shares, each representing 1/2 of a New York Stock Exchange 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 10, 1995 was approximately $11.84 billion. As of March 10, 1995, 320,960,465 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, 1994 are incorporated by reference into Part II of this Form 10-K. Certain portions of the registrant's Proxy Statement for the 1995 Annual Meeting of Stockholders to be held on April 26, 1995 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, 1994 ______________________________ TABLE OF CONTENTS Form 10-K Item Number ----------- Part I ------ 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 58 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 59 4. Submission of Matters to a Vote of Security Holders . . . . 62 Part II ------- 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . 62 6. Selected Financial Data . . . . . . . . . . . . . . . . . . 63 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 63 8. Financial Statements and Supplementary Data . . . . . . . . 63 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 63 Part III -------- 10. Directors and Executive Officers of the Registrant . . . . . 63 11. Executive Compensation . . . . . . . . . . . . . . . . . . . 64 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . 64 13. Certain Relationships and Related Transactions . . . . . . . 64 Part IV ------- 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 64 Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . 66 Index to Consolidated Financial Statements and Schedules .. F-1 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. On December 31, 1993, the Company acquired the approximately 73% of the common stock of The Travelers Corporation, a Connecticut corporation ("old Travelers"), it did not already own, through the merger of old Travelers into the Company (the "Merger"). 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. See Note 1 of Notes to Consolidated Financial Statements. In December 1994, the Company sold all of the capital stock of American Capital Management & Research, Inc. ("ACMR") owned by it to The Van Kampen Merritt Companies, Inc. ("VKM") for a purchase price of approximately $430 million. See "Investment Services -- Other Operations." On January 3, 1995, the Company completed the sale of its group life and related businesses to Metropolitan Life Insurance Company ("MetLife"). The purchase price for the group life business was $350 million. In connection with the sale, the Company agreed to cede to MetLife 100% of its risks in the businesses sold on an indemnity reinsurance basis, effective January 1, 1995. Also on January 3, 1995, the Company and MetLife, and certain of their subsidiaries, contributed their medical businesses to The MetraHealth Companies, Inc. ("MetraHealth"), a newly formed joint venture, in exchange for shares of common stock of MetraHealth. The Company and MetLife are equal partners in the joint venture. The Company's total contribution to MetraHealth amounted to approximately $448 million, at carrying value. The Company owns approximately 48% of the outstanding capital stock of MetraHealth, and its investment will be accounted for on the equity method. See Note 3 of Notes to Consolidated Financial Statements and "Other Information -- MetraHealth." All of the businesses sold to MetLife or contributed to MetraHealth were included in the Company's Managed Care and Employee Benefits Operations. The periodic reports of Commercial Credit Company ("CCC"), Smith Barney Holdings Inc. ("SB Holdings"), and The Travelers Insurance Company ("TIC"), subsidiaries of the Company that make filings pursuant to the Securities Exchange Act of 1934, as 1 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. The Company plans to relocate its executive offices to 388 Greenwich Street, New York, New York 10013 during the second quarter of 1995. This discussion of the Company's business is organized as follows: (i) a description of each of the Company's four business segments; (ii) combined product line information for the property-casualty businesses; (iii) a description of the Corporate and Other Operations segment; and (iv) certain other information. A glossary of insurance terms is included beginning on page 54. INVESTMENT SERVICES This segment includes the operations of SB Holdings and its subsidiaries and, through 1994, the mutual fund and other asset management activities of ACMR and the Company's interest in RCM Capital Management, a California Limited Partnership ("RCM"). Smith Barney SB Holdings provides investment banking, asset management, brokerage and other financial services through its subsidiaries. Its principal operating subsidiary is Smith Barney Inc. ("SBI"), an investment banking, securities trading and brokerage firm that traces its origins back to 1873. In July 1993, SB Holdings acquired substantially all of the assets and certain of the liabilities of the domestic retail brokerage business and the asset management business of Shearson Lehman Brothers Holdings Inc. and its subsidiaries ("SLB") for approximately $1.6 billion (the "Shearson Acquisition"). Smith Barney has agreed to pay additional amounts based upon its performance, consisting of up to $50 million per year for three years based on revenues and 10% of after-tax profits in excess of $250 million per year over a five-year period. See Note 1 of Notes to Consolidated Financial Statements. As part of the Shearson Acquisition, The Robinson- Humphrey Company ("R-H"), a regional firm headquartered in Atlanta, Georgia, became a subsidiary of SBI. As used herein, unless the context otherwise requires, "Smith Barney" refers to SB Holdings and its consolidated subsidiaries. Smith Barney operates through approximately 475 offices throughout the United States, and 12 offices in nine foreign countries. With over 11,000 financial consultants, the Company believes that Smith Barney is the second largest brokerage firm in the United States. 2 Investment Banking and Securities Brokerage Smith Barney is an investment banking and securities trading and brokerage firm serving United States and foreign corporations, governments and institutional and individual investors. Its business includes securities, options and commodities brokerage for domestic and international institutional and individual clients; underwriting and distribution of securities; arranging for the private placement of securities; assisting in mergers and acquisitions and providing financial advisory services; market making and trading in corporate debt and equity, United States government and agency, mortgage-related and municipal securities and foreign exchange, futures and forward contracts; customer financing activities; securities lending activities; investment management and advisory services; securities research; and other related activities. Smith Barney's investment banking services include the underwriting of debt and equity issues for United States and foreign corporations and for state, local and other governmental authorities. Frequently, Smith Barney acts as managing underwriter in corporate and public securities offerings. Smith Barney also acts as a private placement agent for various clients. In this role Smith Barney helps to place securities for clients with large institutions and other eligible investors. Smith Barney also provides financial advice to investment banking clients on a wide variety of transactions including securities offerings, mergers and acquisitions and corporate restructurings. Smith Barney executes 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 and foreign government and agency securities, mortgage-related securities, whole loans, municipal and other tax-exempt securities and emerging market debt securities. The firm carries inventories of securities to facilitate sales to customers and other dealers and with a view to realizing trading gains. SBI is one of the leading dealers in municipal securities and is a "Primary Dealer" in United States government securities, as designated by the Federal Reserve Bank of New York. Its daily trading inventory positions in United States government and agency securities are financed largely through the use of repurchase agreements pursuant to which Smith Barney sells the securities and simultaneously agrees to repurchase them at a future date. Smith Barney also acts as an intermediary between borrowers and lenders of short-term funds utilizing repurchase and reverse repurchase agreements. Smith Barney uses derivative financial instruments to facilitate customer transactions and to manage exposure to interest rate, currency and market risk. On a limited basis, Smith Barney also began structuring derivative financial instruments in 1994, as part of its proprietary trading activities. In addition, for its own account Smith Barney engages in a limited manner in certain arbitrage activities, which primarily seek to benefit from temporary price discrepancies that occur with respect to related securities or to the same security on different markets. Smith Barney also engages in the borrowing and lending of securities. In June 1994, the Smith Barney network of financial consultants began selling TIC individual products, primarily variable annuities. See "Life Insurance Services -- Travelers Life and Annuities." 3 Smith Barney executes transactions in large blocks of exchange-listed stocks, usually with institutional investors, and often acts as principal to facilitate these transactions. It makes markets, buying and selling as principal, in common stocks, convertible preferred stocks, warrants and other securities traded on the NASDAQ system or otherwise in the over-the-counter market. Smith Barney also maintains trading positions in equity options, convertible securities, debt options, foreign exchange and commodities instruments. It executes significant client transactions in both listed and unlisted options and in foreign exchange, and often acts as principal to facilitate these transactions. Smith Barney also sells various types of structured securities on both a principal and an agency basis. The firm's securities trading and investment activities involve significant risk in that the values of positions carried in its trading and investment accounts are subject to market fluctuations. Smith Barney engages in a variety of financial techniques designed to manage this risk. Customer Financing Customers' securities transactions are executed on either a cash or margin basis. Federal regulations prescribe the minimum original margin that must be deposited by securities purchasers, and exchange regulations prescribe the minimum margins that must be maintained by customers. Smith Barney imposes margin maintenance requirements that are equal to or exceed those required by exchange regulations. Such requirements are intended to reduce the risk assumed by Smith Barney that a market decline will reduce the value of a customer's collateral below the amount of the customer's indebtedness before the collateral can be sold. Substantially all transactions in commodities futures contracts are on margin subject to individual exchange regulations. Margin, in the case of commodities futures contracts, is primarily funded in the form of cash or United States Treasury securities. Commodities transactions involve substantial risk, principally because of low margin requirements permitted by the exchanges. Income earned on financing customers' securities transactions provides Smith Barney with an additional source of income. Credit losses may arise as a result of this financing activity; however, such losses have not been material. Asset Management Smith Barney 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, including commodities futures contracts. The Smith Barney 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 Smith Barney TRAK(R) program provides investors with personalized investment management through a broad array of investment portfolios. SBI receives a fee, but does not have specific investment discretion, with respect to assets invested through TRAK(R). 4 Smith Barney provides asset management services to, and sponsors, 132 separate portfolios within 50 investment companies that invest in United States and foreign corporate debt and equity securities, and municipal and United States and foreign government and agency securities, including 11 taxable or tax- exempt money market portfolios. The portfolios managed by Smith Barney have various investment objectives, including growth, growth and income, income and tax-exempt income. Smith Barney also provides investment management and advisory services to four affiliated insurance company separate accounts. At December 31, 1994, Smith Barney had total assets under management of approximately $74.1 billion, consisting of approximately $28.9 billion of money market funds, $26.0 billion of other mutual funds and closed-end funds and $19.2 billion of other portfolio assets of institutional and individual clients. These amounts exclude assets held in trust by the trust companies owned directly by the Company and described under the heading "Miscellaneous Activities" below, except for the portion of such assets that are held in accounts actively managed by Smith Barney. Smith Barney also sells mutual funds sponsored by other organizations. In addition, Smith Barney'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 Smith Barney is the sole sponsor of the syndicate, consist of municipal and corporate securities. A total of $2.8 billion par value of all series of TEST and CST trusts was outstanding as of December 31, 1994. The other proprietary unit trusts, consisting primarily of equity and taxable bond trusts for which Smith Barney is the sole sponsor, have a market value of approximately $1.8 billion as of December 31, 1994. Smith Barney also participates in a syndicate that sponsors unit trusts including equity, taxable and tax-exempt fixed income trusts. Miscellaneous Activities In November 1994, Smith Barney sold its interest in HG Asia (Holdings) Limited ("HG Asia") for $55 million. HG Asia and its subsidiaries act as brokers and dealers in securities that are primarily traded in countries in Asia. Certain subsidiaries of the Company are chartered as trust companies and provide a full range of fiduciary services with a particular emphasis on personal trust services. Another subsidiary offers a broad range of trustee services for qualified retirement plans, with particular emphasis on the 401(k) plan market. Each of these trust companies is subject to the supervision of the state banking authority where it was chartered and uses the distribution network of SBI to market its services. Although these trust companies are subsidiaries of the Company and not of SB Holdings, their results are included with Smith Barney for segment reporting purposes. Smith Barney provides certain advisory and support services to the trust companies and receives fees for such services. 5 Other Operations In December 1994, the Company sold all of the capital stock of ACMR owned by it to VKM for approximately $430 million. Following the sale, ACMR was merged into a subsidiary of VKM, and the surviving entity was renamed VK/AC Holding, Inc. ("VK/AC Holding"). In connection with the transaction a subsidiary of the Company purchased common stock of VK/AC Holding, representing approximately 4.9% of the issued and outstanding common stock. The Company also has an option to purchase up to an additional 5% of the common stock of VK/AC Holding, exercisable for a two-year period beginning in December 1999. Certain subsidiaries of the Company continue to provide services to the Common Sense(R) II Funds.1 See "Life Insurance Services -- Primerica Financial Services." 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 $22.4 billion at December 31, 1994, as compared to $24.5 billion at December 31, 1993 and $23.8 billion at December 31, 1992. 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 Smith Barney. The Federal Reserve Board has substantially removed the barrier originally erected by the Glass-Steagall Act restricting investment banking activities of commercial banks and their affiliates, by permitting certain commercial banks to engage, through affiliates, in the underwriting of and dealing in certain types of securities, subject to certain limitations. Proposed legislation has been introduced in Congress that would modify certain other provisions of the Glass-Steagall Act and other laws and regulations affecting the financial services industry. The potential impact of such legislation on the Company's businesses cannot be predicted at this time. -------------------- 1 Common Sense is a registered trademark of American Capital Asset Management, Inc. ("ACAM"). 6 Competitors of the Company's mutual funds and asset management groups include a large number of mutual fund management and sales companies and asset management firms. Competition in mutual fund sales and investment management is based on investment performance, service to clients, and product design. Regulation Certain of the Company's subsidiaries are registered as broker-dealers and as investment advisers with the Securities and Exchange Commission (the "Commission") and as futures commission merchants and as a commodity pool operator with the Commodity Futures Trading Commission ("CFTC"). SBI and R-H are members of the New York Stock Exchange, Inc. (the "NYSE") and other principal United States securities exchanges, as well as the National Association of Securities Dealers, Inc. ("NASD") and the National Futures Association ("NFA"), a not-for-profit membership corporation which has been designated as a registered futures association by the CFTC. SBI and R-H are registered as broker- dealers in all 50 states, the District of Columbia and Puerto Rico, and in addition are registered as investment advisers in certain states that require such registration. SBI is also a reporting dealer to the Federal Reserve Bank of New York, a member of the principal United States futures exchanges and a registered broker-dealer in Guam. Both SBI and R-H are subject to extensive regulation, primarily for the benefit of their customers, including minimum capital requirements, which are promulgated and enforced by, among others, the Commission, the CFTC, the NFA, the NYSE, various self-regulatory organizations of which SBI and R-H are members and the securities administrators of the 50 states, the District of Columbia and Puerto Rico and, in SBI's case, Guam. The Commission and the CFTC also require certain registered broker-dealers (including SBI) to maintain records concerning certain financial and securities activities of affiliated companies that may be material to the broker-dealer, and to file certain financial and other information regarding such affiliated companies. In addition, the Investment Company Act of 1940 generally prohibits registered investment companies managed by affiliates of the Company from, among other things, entering into securities transactions on a principal basis with affiliated broker-dealers, including SBI, and restricts their ability to purchase securities in underwritings in which an affiliated broker-dealer participates as an underwriting syndicate member. Transactions between Smith Barney and RCM are also subject to certain limitations. Smith Barney's operations abroad, described in this paragraph, are conducted through various subsidiaries. Smith Barney has representative offices in Paris, Beijing and Manama, Bahrain. Its activities in the United Kingdom, which include investment banking, brokerage and asset management services, are subject to the Financial Services Act 1986, which regulates organizations that conduct investment businesses in the United Kingdom (including imposing capital and liquidity requirements), and to the rules of the Securities and Futures Authority and the Investment Management Regulatory Organisation. Smith Barney is a member of the International Petroleum Exchange, the London Metals Exchange and the 7 London International Financial Futures and Options Exchange, and as such is subject to the rules and regulations of those Exchanges. In France, Smith Barney operates as a regulated securities house, a member of the MATIF, and an authorized mutual fund manager. Smith Barney is a licensed securities company in Japan and, as such, its activities in Japan are subject to Japanese law applicable to foreign securities firms. Smith Barney 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. Smith Barney conducts securities and commodities businesses in Singapore which are regulated by the Monetary Authority of Singapore. Additionally, certain subsidiaries of SB Holdings are registered as a "dealer" and "adviser" with the Hong Kong Securities and Futures Commission, as an "international dealer" and as an "investment dealer" with the Ontario Securities Commission, as broker-dealers with the Securities Board of The Netherlands 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. SBI and R-H are members of the Securities Investor Protection Corporation ("SIPC"), which, in the event of liquidation of a broker-dealer, provides protection for customers' securities accounts held by the firm of up to $500,000 for each eligible customer, subject to a limitation of $100,000 for claims for cash balances. In addition, Smith Barney has purchased additional coverage from a subsidiary of the Company, Gulf Insurance Company, for eligible customers. As registered broker-dealers, SBI and R-H are subject to the Commission's net capital rule (Rule 15c3-1, the "Net Capital Rule") promulgated under the Exchange Act. SBI and R-H compute net capital under the alternative method of the Net Capital Rule which requires the maintenance of minimum net capital, as defined. A member of the NYSE may be required to reduce its business if its net capital is less than 4% of aggregate debit balances (as defined) and may also be prohibited from expanding its business or paying cash dividends if resulting net capital would be less than 5% of aggregate debit balances. Furthermore, the Net Capital Rule does not permit withdrawal of equity or subordinated capital if the resulting net capital would be less than 5% of such debit balances. 8 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. CONSUMER FINANCE SERVICES The Company's Consumer Finance Services segment includes consumer lending services conducted primarily under the name "Commercial Credit," as well as credit-related insurance and credit card services. CCC's predecessor was founded in 1912. Consumer Finance As of December 31, 1994, CCC maintained 828 loan offices in 42 states, and it plans to open approximately 50 additional offices in 1995. 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, both fixed and variable rate real estate-secured loans and loans to finance consumer goods purchases. Credit card loans are discussed below. CCC's loan offices are generally located in small to medium-sized communities in suburban or rural areas, and are managed by individuals who generally have considerable consumer lending experience. The primary market for CCC's consumer loans consists of households with an annual income of $20,000 to $50,000. The number of loan customers (excluding credit card customers) was approximately 1,250,000 at December 31, 1994, as compared to approximately 1,142,000 at December 31, 1993, and approximately 1,058,000 at December 31, 1992. A CCC loan program solicits applications for loans through the Primerica Financial Services sales force. At December 31, 1994, the total loans outstanding generated from this program was approximately $1.1 billion, as compared to approximately $765 9 million at December 31, 1993 and approximately $487 million at December 31, 1992. See "Life Insurance Services -- Primerica Financial Services." The average amount of cash advanced per personal loan made was approximately $4,200 in 1994 and $3,800 in each of 1993 and 1992. The average amount of cash advanced per real estate- secured loan made was approximately $28,400 in 1994, approximately $28,800 in 1993 and approximately $26,000 in 1992. The average annual yield for loans in 1994 was 15.41%, as compared to 15.83% in 1993 and 16.31% in 1992. The average annual yield for personal loans in 1994 was 20.20%, as compared to 20.11% in 1993 and 19.99% in 1992, and for real estate-secured loans it was 12.20% in 1994, as compared to 13.14% in 1993 and 14.05% in 1992. The average yield for real estate-secured loans has been affected by the introduction in 1993 of a variable rate product and by decreases generally in prevailing market interest rates. The Company's average net interest margin for loans was 8.76% in 1994, 8.44% in 1993 and 8.66% in 1992. In the late 1980's, 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 and charge-offs have improved from 1992 through 1994. See "Delinquent Receivables and Loss Experience," below. Analysis of Consumer Finance Receivables For an analysis of consumer finance receivables, net of unearned finance charges ("Consumer Finance Receivables"), see Note 9 of Notes to Consolidated Financial Statements. Delinquent Receivables and Loss Experience Due to the nature of the finance business, some customer delinquency and loss is unavoidable. The management of the consumer finance business attempts to control customer delinquencies through careful evaluation of each borrower's application and credit history at the time the loan is made or acquired, and appropriate collection activity. An account is considered delinquent for financial reporting purposes when a payment is more than 60 days past due, based on the original or extended terms of the contract. The delinquency and loss experience on real estate-secured loans is generally more favorable than on personal loans. The table on the next page 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: 10 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 ------------------ ----- ----- ----- ------- -------- 1994 2.40% 1.48% 1.05% 1.79% 1.88% 1993 2.62% 2.15% 1.03% 1.54% 2.21% 1992 3.02% 2.31% 1.87% 1.48% 2.55% __________________________ (1) The receivable balance used for these ratios is before the deduction of unearned finance charges and excludes accrued interest receivable. Receivables delinquent 60 days or more include, for all periods presented, accounts in the process of foreclosure. The following table 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 Ended Personal Secured Credit Sales Total December 31, Loans Loans Cards Finance Consumer ------------ ----- ----- ----- ------- -------- 1994 3.50% 0.82% 1.83% 2.03% 2.08% 1993 4.08% 0.84% 2.56% 1.78% 2.36% 1992 5.09% 0.74% 4.01% 2.05% 2.84% 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, ------------------ 1994 2.64% 1993 2.64% 1992 2.91% 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 11 monthly benefits during periods of covered disability. Credit property insurance covers the loss of property given as security for loans. Other insurance products offered or arranged for by AHL include accidental death and dismemberment, auto single interest and involuntary unemployment insurance. Most of AHL's products are single premium, which premiums are earned over the related contract period. See "Life Insurance Services" for information concerning life and accident 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, ----------------------- 1994 1993 1992 ---- ---- ---- Premiums written by AHL and its affiliates Writings for consumer finance: Credit life . . . . . . . . . $ 43.3 $ 36.4 $ 36.0 Credit disability and other . 69.3 49.2 $ 46.7 ------ ------ ------ Total . . . . . . . . . . . $112.6 $ 85.6 $ 82.7 ====== ====== ====== Premiums written by other insurance companies Credit property and other . . $ 52.8 $ 38.7 $ 31.0 ====== ====== ====== The increase in 1994 written premiums is primarily the result of the increase in receivables and expanded availability of certain products in additional states. Credit Card Services The Travelers Bank (formerly 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). The Travelers Bank USA, another state-chartered bank subsidiary of CCC, was formed in September 1989. The Travelers Bank USA is not subject to certain regulatory restrictions relating to growth and cross-marketing activities to which The Travelers Bank is subject. See "Regulation" below. These banks generally limit their activities to credit card operations. The table on the next page sets forth aggregate information regarding credit cards issued by The Travelers Bank and The Travelers Bank USA: 12 Credit Cardholders and Total Outstandings (outstandings in millions) As of and for the year ended December 31, ----------------------------------------- 1994 1993 1992 ---- ---- ---- Approximate total credit cardholders 621,000 534,000 423,000 Approximate gold credit cardholders 519,000 478,000 371,000 Total outstandings $712.5 $697.1 $538.2 Average annual yield 11.88% 11.66% 12.12% The primary market for the banks' credit cards consists of households with annual incomes of $40,000 and above. The banks offer deposit-taking services (which as to The Travelers Bank USA are limited to deposits of at least $100,000 per account). At December 31, 1994, deposits of unaffiliated entities were $73.3 million, as compared to $56.5 million at December 31, 1993 and $22.3 million at December 31, 1992. The increase in deposits in 1993 primarily resulted from a balance transfer promotion conducted by The Travelers Bank. 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 banks, which must undergo periodic examination, are subject to additional regulations relating to capitalization, 13 leverage, reporting, dividends and permitted asset and liability products. These banks are also covered by the Competitive Equality Banking Act of 1987 (the "Banking Act"), which, among other things, prevents the Company from acquiring or forming most types of new banks or savings and loan institutions and, with respect to The Travelers Bank, restricts cross-marketing of products by or of certain affiliates. CCC's banks are also subject to the Community Reinvestment Act, which 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. Proposed legislation has been introduced in Congress that would modify certain laws and regulations affecting the financial services industry. The potential impact of such legislation on the Company's businesses cannot be predicted at this time. LIFE INSURANCE SERVICES The businesses in the Company's Life Insurance Services segment write principally individual life insurance, annuities and pension programs. Most of these products are offered on a nationwide basis in the United States. For information concerning the Company's credit-related insurance businesses, see "Consumer Finance Services." This segment includes the operations of The Travelers Insurance Company ("TIC") and the Primerica Financial Services group of companies (collectively, "PFS"), including Primerica Life Insurance Company ("Primerica Life"). TIC was incorporated in 1863. With $40.5 billion of assets at December 31, 1994, the Company believes that TIC, Primerica Life and TIC's other subsidiaries together constitute one of the largest stock life insurance groups in the United States as measured by assets at December 31, 1994. Because the Company's interest in old Travelers in 1993 was accounted for on the equity method, the Company's results of operations for periods prior to the Merger do not include the full results of TIC's business. See Notes 1 and 4 of Notes to Consolidated Financial Statements. For informational purposes, the premium and other operational information provided below includes TIC's businesses for all periods presented. 14 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 term life insurance and certain other products of subsidiaries of the Company, including certain loans offered by the Company's consumer finance subsidiaries, and other products approved by the Company. In 1994, the PFS sales force began selling, on a test basis, certain property-casualty insurance products of The Travelers Indemnity Company. See "Property & Casualty Insurance Services -- Property-Casualty Personal Lines." 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 and its subsidiaries, Primerica Life Insurance Company of Canada and National Benefit Life Insurance Company ("NBL"), primarily offer individual term life insurance. NBL provides statutory disability benefits in New York, as well as direct response student term life insurance nationwide. Primerica Life and its subsidiaries together are licensed to sell and market term life insurance in all 50 states, the District of Columbia, Canada, Puerto Rico, Guam, the U.S. Virgin Islands and Northern Mariana Islands. For information concerning PFS Investments Inc. ("PFS Investments"), see "Mutual Funds and Asset Management," below. Premium revenues, net of reinsurance, for PFS for the years ended December 31, 1994, 1993 and 1992 were $962.4 million, $889.9 million and $862.7 million, respectively. The increase in premium revenues in recent years is primarily attributable to growth in production and in the retention of in force business. 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 life insurance in force for Primerica Life and subsidiaries, and related statistical data for 1992-1994. 15 (in millions of dollars, except as noted) Year Ended December 31, ----------------------- 1994 1993 1992 ---- ---- ---- In force beginning of year $ 317,403 $ 311,276 $ 318,793 Additions 57,389 49,300 46,867 Terminations(1) (39,820) (43,173) (54,384) -------- -------- -------- In force end of year $ 334,972 $ 317,403 $ 311,276 ======= ======= ======== The amounts in force at end of year are before reinsurance ceded in the following amounts $ 94,930 $ 82,293 $ 87,232 ======= ======= ======== At end of year: Number of policies in force PFS 2,075,600 2,003,491 1,993,686 NBL other lines 396,717 406,977 413,063 Average size of policy in force (in dollars) PFS $ 157,739 $ 154,360 $ 151,636 NBL other lines 19,079 20,011 21,696 ______________________________ (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 1994 and 1993, were 7.1% and 6.7%, respectively. Management believes that current pricing and reserves make adequate provision for AIDS- related claim experience. Mutual Funds and Asset Management PFS Investments is a registered broker-dealer and is the exclusive retail distributor of the Common Sense(R) Trust mutual funds.2 Since the Company's sale of ACMR, a number of intra- Company joint ventures, including companies that are part of PFS, continue to provide underwriting, transfer agency and custodial services to the Common Sense(R) Trust funds. For the years ended December 31, 1994, 1993 and 1992, PFS Investments' total mutual fund sales were $1,322.2 million, $1,266.4 million and $1,071.2 million, respectively, with sales of shares of the Common Sense(R) Trust funds and the -------------------- 2 Common Sense is a registered trademark of ACAM. 16 American Capital family of mutual funds collectively accounting for approximately 74%, 75% and 81%, respectively, of total sales. The overall increase in sales in recent years is primarily attributable to the economic environment and expanded marketing efforts for mutual funds. At December 31, 1994, approximately 24,000 independent agent members of the PFS sales force were also independent registered securities representatives of PFS Investments. Travelers Life and Annuities This section includes the businesses identified by old Travelers as Financial Services and Asset Management & Pension Services, as well as Transport Life Insurance Company and its affiliates ("Transport"). Transport specializes in accident and health insurance including cancer, heart/stroke and long-term care coverage, and became a subsidiary of TIC in connection with the Merger. Principal Products Travelers Life and Annuities offers individual life insurance, annuities and accident and health insurance to individuals and small businesses. It also provides group pension deposit products, including guaranteed investment contracts, and annuities to employer-sponsored retirement and savings plans. TIC views market specialization as a critical component of profitability and has updated its individual product portfolio with a range of competitively priced life, long-term care and fixed and variable annuity products for its customers. Individual life and accident and health insurance provide protection against financial loss due to death, illness or disability. Life insurance is also used to meet estate, business planning and retirement needs. Individual accumulation fixed and variable annuities are used for retirement funding purposes. Variable annuities allow the policyholder to choose to direct deposits into a number of separate accounts, each of which has a different investment strategy. Individual immediate annuities are used for structuring settlements of certain indemnity claims and making other payments to policyholders over a period of time. In recent years, TIC has increased the amount of individual variable annuities that it sells. The table on the next page sets forth written premiums, net of reinsurance, and deposits for the Travelers Life and Annuities unit. 17
Premiums and Deposits (in millions) Year Ended December 31, ---------------------------- 1994 1993 1992 ---- ---- ---- Premiums Individual life $ 124 $ 117 $ 109 Individual accident and health 361 344 362 Annuities Individual single premium 21 19 22 Group single premium 21 27 28 Group fixed 50 110 86 -------- -------- -------- Total premiums 577 617 607 -------- -------- -------- Deposits Universal life insurance 162 163 164 Annuities Individual fixed accumulation 569 577 647 Individual variable accumulation 693 392 232 Individual immediate(1) 26 34 50 Guaranteed investment contracts(2) 347 918 502 Group separate accounts and managed funds(3) 747 772 730 Other fixed funds 119 265 223 -------- -------- -------- Total deposits 2,663 3,121 2,548 -------- -------- -------- Total premiums and deposits $ 3,240 $ 3,738 $ 3,155 ======== ======== ========
______________________________ (1) Represents primarily structured settlement annuities, in which payments are currently being made to annuitants. (2) The 1992 amount includes 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. Such business was not expected to, and did not, recur. The 1994 decrease also reflects TIC's more selective approach to issuing guaranteed investment contracts. (3) The 1993 increase reflects an increase in deposits to guaranteed separate accounts offset by a decrease in deposits to indexed separate accounts. The 1994 decrease results from the decision, in the third quarter of 1993, to no longer market index funds, offset by the transfer by the Company of certain assets of one of its employee pension plans, which were previously managed externally. 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, the District of Columbia, Puerto Rico, Guam, the Bahamas and the U.S. and British Virgin Islands. Individual products are primarily marketed through three distribution channels: independent agents, H.C. Copeland and Associates, Inc. ("Copeland") and the financial consultants of SBI. Both Copeland and SBI are subsidiaries of the Company. The 18 independent agents, including a core group of approximately 450 professional life insurance general agencies, sell the majority of the individual life and accident and health insurance and, in 1994, sold 39% of individual annuity premiums and deposits. Copeland accounted for 49% of 1994's individual annuity premiums and deposits. In June 1994, Smith Barney began distributing TIC individual products, primarily variable annuities. Smith Barney accounted for 12% of total 1994 individual annuity premiums and deposits. 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. TIC has significantly reduced its writing of group pension contracts by adopting a more selective approach to the issuance of guaranteed investment contracts. Group pension products and annuities are marketed by TIC's salaried staff directly to plan sponsors and 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. Life Insurance in Force The following table provides a reconciliation of beginning and ending Travelers Life and Annuities life insurance in force and related statistical data on a statutory basis for 1992-1994. (in millions of dollars, except as noted) Year Ended December 31, -------------------------------- 1994 1993 1992 ---- ---- ---- In force beginning of year $ 44,909 $ 39,434 $ 32,590 Additions 9,265 9,944 10,503 Terminations(1) (5,176) (4,469) (3,659) -------- -------- -------- In force end of year $ 48,998 $ 44,909 $ 39,434 ========= ========= ========= The amounts in force at end of year are before reinsurance ceded in the following amounts $ 6,575 $ 5,042 $ 3,933 ========= ========= ========= At end of year: Number of policies in force 606,089 619,710 623,411 Average size of policy in force (in dollars) $ 80,843 $ 72,468 $ 63,255 ______________________________ (1) Includes terminations due to death, surrenders and lapses. 19 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 by Travelers Life and Annuities in 1994 and 1993 were 2.1% and 1.2%, respectively, as a percentage of total life claims paid, and 1.5% and 0.7%, respectively, as a percentage of total health claims paid. Management believes that current pricing and reserves make adequate provision for AIDS-related claim experience. Competition and Regulation For a description of competition and regulation relating to the Company's life insurance businesses, see "Insurance Services - General" at the end of the description of the Property & Casualty Insurance Services segment. 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"), including Gulf Insurance Company and its subsidiaries ("Gulf"). Because the Company's interest in old Travelers prior to the Merger was accounted for on the equity method, the Company's results of operations for periods prior to 1994 do not include the full results of the businesses of Travelers Indemnity. See Notes 1 and 4 of Notes to Consolidated Financial Statements. For informational purposes, the premium and other operational information provided below includes Travelers Indemnity's businesses prior to the Merger. For additional information with respect to the combined property and casualty insurance businesses of the Company, see "Combined Property-Casualty Product Line Information." 20 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"), Agency Marketing ("Agency"), and Specialty Lines ("Specialty"). 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, and includes the Company's residual market business. Agency serves small and medium-sized businesses, with a strategic emphasis on the medium-sized businesses, and individuals with commercial exposures, through a network of independent agents and brokers. Protection is afforded to customers of National and Agency 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. Commercial Lines also provides policy, loss and benefit administration through service agreements, and participates in state assigned risk pools. The primary product serviced under these agreements is workers' compensation. The Company 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. Specialty is written through Gulf and Travelers Indemnity. The principal products of Specialty include various forms of professional liability insurance, including directors' and officers' liability and medical malpractice insurance, product liability, fidelity bonds, commercial umbrella and excess insurance, excess property insurance, coverages relating to the entertainment and transportation industries, and standard commercial property and casualty products for specific niche markets. Specialty also assumes various types of reinsurance on both a proportional and a non-proportional basis. In December 1994, Travelers Indemnity acquired from CCC the 50% of Gulf's parent corporation that it did not already own, making Gulf a wholly owned subsidiary of Travelers Indemnity. As of January 1, 1995, Gulf discontinued writing regional property and casualty commercial lines of insurance and transferred all new and renewal business to Travelers Indemnity. This allows Gulf to focus on its specialty lines of business. 21 Premium equivalents, presented in the tables below, represent estimates of premiums that customers would have been charged under a fully insured arrangement. The amounts are based on expected losses associated with non-risk bearing components of each account, as determined in the pricing process. Premium equivalents do not represent actual revenues. The following tables set forth written premiums, net of reinsurance, and premium equivalents for Commercial Lines.
Premiums and Premium Equivalents (in millions) Year Ended December 31, ------------------------------------ 1994 1993 1992 ---- ---- ---- Net written premiums by market: National Net written premiums $ 566 $ 731 $ 839 Premium equivalents 2,644 2,595 2,289 -------- -------- -------- Total National 3,210 3,326 3,128 -------- -------- -------- Agency Net written premiums 1,526 1,556 1,507 Premium equivalents 334 162 89 -------- -------- -------- Total Agency 1,860 1,718 1,596 -------- -------- -------- Specialty Net written premiums 299 212 199 -------- -------- -------- Total net written premiums and premium equivalents $ 5,369 $ 5,256 $ 4,923 ======== ======== ======== Net written premiums by product line: Workers' compensation $ 907 $ 1,001 $ 1,023 Multiple-peril 304 279 291 Automobile 417 443 448 Other liability 426 478 468 Property and other 337 298 315 -------- -------- -------- Total net premiums 2,391 2,499 2,545 Premium equivalents 2,978 2,757 2,378 -------- -------- -------- Total net written premiums and premium equivalents $ 5,369 $ 5,256 $ 4,923 ======== ======== ========
Principal Markets and Methods of Distribution National markets 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 22 corporations. Each customer typically generates annual premiums of at least $1 million and generally selects products under retrospective rating plans, large self-insured retentions or some other loss-responsive arrangement. 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 premium equivalents, National constituted approximately 60% of Commercial Lines' business in 1994. These large customers are usually national in scope and highly complex in their operations. A significant portion of Commercial Lines business is written with retrospectively rated insurance policies in which the ultimate cost of insurance for a given policy year is dependent on the loss experience of the insured. This type of policy limits the insurance risk to Commercial Lines. The payment terms and long-term nature of the loss development reduces insurance risk and introduces some additional credit risk. Receivables from retrospectively rated policies totaled approximately $1.0 billion at December 31, 1994. Collateral, primarily letters of credit, is generally required for contracts that provide for deferred collection of ultimate premiums. The amount of collateral required is predicated upon the creditworthiness of the client and the nature of the insured risks. Commercial Lines continually monitors credit risk of individual accounts and the adequacy of collateral. The residual market business of Commercial Lines sells claim and policy management services to workers' compensation assigned risk pools throughout the country. Since 1993, these contracts have been awarded through a formal bid process intended to reduce the number of servicing carriers and to measure the quality of service being provided. Contracts are awarded for a term of three years and about one-third of the states are bid each year. Travelers Indemnity has thus far been successful in winning nine of 14 bids. Agency, which made up approximately 35% of Commercial Lines' business in 1994, 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 27% of Agency's 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 retrospectively rated or a large deductible 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. Agency continues to selectively streamline its distribution force as management focuses on selected markets and producers. 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 property exposures of large manufacturing plants, nuclear power plants and transporters of nuclear materials and other specialty risks. 23 Specialty products are marketed to small, medium, and large customers and are distributed primarily through wholesale brokers and other specialty producers, including underwriting managers for specific industry programs. The Company's Specialty business requires specialized underwriting and generally has better combined ratios and lower loss frequencies than traditional lines. The following table shows the distribution of Commercial Lines' 1994 premiums for the states that accounted for the majority of the premium volume. % of State Total ----- ----- New York 11.9% California 8.8 Texas 7.3 Massachusetts 6.4 Illinois 4.3 Florida 4.2 Pennsylvania 3.7 New Jersey 3.6 All others(1) 49.8 ----- 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, however, loss cost inflation has outpaced marketplace price changes. In addition, current economic conditions have constrained business growth, thereby decreasing the size of customers' workforces and consequently reducing the insurable market. A variety of factors continue to affect the casualty market. The Company attempts to avoid exposure to high hazard liability risks through careful underwriting, extensive use of retrospective rating and reliance on financially secure reinsurers. The workers' compensation line has improved dramatically across the industry over the past few years, particularly during the last two years, in part due to loss management efforts of the insureds and providers such as Travelers Indemnity. These trends are also reflected in the workers' compensation book of business at Commercial Lines, where workers' compensation combined ratios after policyholder dividends have improved from 105.6% in 1992 to 99.8% in 1994. The improvement is due to a variety of factors including, but not limited to, legislative reform, economic conditions, insurer investment, employer involvement and lower medical inflation. This business is subject to retrospective rating premium adjustments, and 24 accordingly the net impact on results of operations of the premium adjustment and loss reserve development is minimal. In addition, because of the improving trends within workers' compensation, insurers have increased their voluntary market share, thereby reducing the size of the involuntary market. Travelers Indemnity's service volume from the National Council on Compensation Insurance has declined from $638 million in 1993 to $431 million in 1994. However, its direct assignment volume has increased from $26 million for the year ended December 31, 1993 to $217 million for the year ended December 31, 1994. Under direct assignment, Travelers Indemnity acts as a third-party administrator for other insurance carriers to fulfill their involuntary pool requirement. In the commercial property market, 1994 was another difficult year for natural catastrophes. While the industry's catastrophe losses were approximately $13 billion on a pre-tax basis, Commercial Lines' catastrophe losses for 1994 totalled $33 million, pre-tax. The commercial property market capacity remained adequate during 1994, keeping downward pressure on pricing. In most lines, pricing did not improve during the past year. For Agency, the duration of the current downturn in the underwriting cycle continues to pressure the pricing of guaranteed cost products. In the small account market, which primarily buys guaranteed cost products, price increases have not exceeded loss cost inflation for several years. The focus is to retain existing profitable business and obtain new accounts where the Company can maintain its selective underwriting policy. The Company continues to adhere to strict guidelines to maintain high quality underwriting, which could affect future premium levels. Because of its large fee-for-service component, National business is less affected by pricing; however, the pricing of large account business continues to be very competitive. Customer retention levels remained high in 1994 as a result of Travelers Indemnity's continued delivery of quality service, primarily claims management focused on loss cost reduction. 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 possible 25 reauthorization of Superfund in 1995 may have some effect on the resolution of these issues, but it is not possible at the present time to determine what the potential impact, if any, will be. 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. Certain of the Company's subsidiaries are part of the industry segment affected by these issues and continue 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 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 contractual relationship between the Company and the insured; the identification of other insurers; the potential coverage available, if any; the number of years of coverage, if any; the obligation to provide a defense to insureds, if any; and the applicable law in each jurisdiction. Analysis of these and other factors on a case-by-case basis results in the ultimate reserve assessment. Environmental loss and loss expense reserves of the Company at December 31, 1994 were $471 million, net of reinsurance of $11 million. Approximately 14% of the net environmental loss reserve (i.e., approximately $65 million) is case reserve for resolved claims. The Company does not post individual case reserves for environmental claims in which there is a coverage dispute until the dispute is resolved. Until then, the estimated amounts for disputed coverage claims are carried in a bulk reserve, together with unreported environmental losses. The industry does not have a standard method of calculating claim activity for environmental losses. Generally, for environmental claims, the Company establishes a claim file for each insured on a per site, per claimant basis. If there is more than one claimant, 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. The Company 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, 1994, the Company had approximately 8,200 pending environmental-related claims and had resolved over 17,200 such claims since 1986. 26 Approximately 70% of the pending environmental-related claims in inventory represent active federal or state EPA-type claims tendered by approximately 640 insureds. The balance represents bodily injury claims alleging injury due to the discharge of insureds' waste or pollutants. To date, the Company generally 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 the liability under the policy by the Company, together with appropriate indemnities and hold harmless provisions to protect the Company. 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 with smaller limits of potential coverage. 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 defendants in a widely publicized action brought in Philadelphia regarding potential consolidation and resolution of future asbestos bodily injury claims. The cumulative effect of these claims and the judicial actions on the Company and its insureds currently is uncertain. Also 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, the Company evaluates those issues on an insured-by-insured basis. The Company's evaluations have not resulted in any meaningful data from which an average asbestos defense or indemnity payment may be determined. The varying defense and indemnity payments made by the Company on behalf of its insureds has also precluded the Company from deriving any meaningful data by which it can predict whether its defense and indemnity payments for asbestos claims (on average or in the aggregate) will remain the same or change in the future. 27 Asbestos loss and loss expense reserves of the Company at December 31, 1994 were $383 million, net of reinsurance of $319 million. Approximately 85% of the net asbestos reserves at December 31, 1994 represented incurred but not reported losses. In relation to these asbestos and environmental-related claims, the Company carries on a continuing review of its overall position, its reserving techniques and reinsurance recoverable. In each of these areas of exposure, the Company 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 or range of exposure represented by these claims to the Company's financial condition, results of operations or liquidity. The Company believes that it is reasonably possible that the outcome of the uncertainties regarding environmental and asbestos claims could result in a liability exceeding the reserves by an amount that would be material to operating results in a future period. However, it is not likely these claims will have a material adverse effect on the Company's financial condition or liquidity. For additional information regarding asbestos and environmental-related claims, see the discussion in Item 7 of this Form 10-K, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Property-Casualty Personal Lines Principal Products Property-Casualty Personal Lines ("Personal Lines") writes virtually all types of property and casualty insurance covering personal risks. The primary coverages in 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. In October 1994, Travelers Indemnity sold Bankers and Shippers Insurance Company to Integon Corporation for approximately $142 million. Bankers and Shippers Insurance Company primarily writes nonstandard private passenger automobile insurance. 28 The following table sets forth written premiums, net of reinsurance, for Personal Lines. Premiums (in millions) Year Ended December 31, ------------------------------------- 1994 1993 1992 ---- ---- ---- Automobile $ 1,187(1) $ 1,202 $ 1,153 Homeowners 209 122(2) 236 Other 37 37 39 -------- -------- -------- Total premiums $ 1,433 $ 1,361 $ 1,428 ======== ======== ======== ______________________________ (1) The written premium decline in 1994 reflects the sale of Bankers and Shippers Insurance Company in October 1994. (2) The written premium decline in 1993 reflects the purchase of additional reinsurance to reduce exposure to catastrophe losses. Principal Markets and Methods of Distribution Personal Lines business is distributed through approximately 3,000 independent agencies, 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 five years in order to improve operating and financial results, including expense reductions, the termination of 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. While these actions have reduced the overall size of the Personal Lines business, the core automobile and homeowners insurance businesses have begun to grow in terms of policy counts and premium volume. In 1994, Personal Lines began writing private passenger automobile and homeowners insurance that was marketed on a test basis by licensed members of the PFS sales force in two states. This program is expected to expand during 1995 to additional states. For 1994, Personal Lines business was concentrated in the states shown in the table on the next page. 29 % of State Total ----- ----- New York 23.1% Massachusetts 16.2 New Jersey 8.6 Florida 8.1 Pennsylvania 6.5 Connecticut 5.2 Virginia 4.6 Georgia 3.9 Texas 3.8 All others(1) 20.0 ------ Total 100.0% ===== ______________________________ (1) No one of these states accounted for as much as 3.0% of the total. In addition, approximately 49% of Personal Lines' homeowners premiums in 1994 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 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. The high level of catastrophe losses in recent periods has led to an expansion of the reinsurance market without a corresponding decrease in reinsurance costs. 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. Changes to a company's methods of marketing and underwriting in coastal areas of Florida and New 30 York are subject to state-imposed restrictions, the general effect of which is to retard an insurer's ability to withdraw from such areas. While homeowners premium volume in Florida for 1994 was substantially level with 1993, gross exposure to catastrophe loss was lower due to a decline in the number of policies written, offset by price increases. 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 A.M. Best Duff & Investor's Standard Company Phelps Corp. Service Inc. & Poor's Corp. ------- ------------ ------------ -------------- TIC A- (excellent) A+ (high) A2 (good) A+ (strong) Primerica Life A- (excellent) - - AA (excellent) Travelers Indemnity Pool(1) A (excellent) AA- (very high) A1 (good) AA- (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 Connecticut (formerly 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 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. For additional information concerning reinsurance, 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. At December 31, 1994, the Company had $4.3 billion in property-casualty reinsurance recoverable. Of this amount, $2.6 billion was ceded to pools and associations, which have the strength of the participating insurance companies supporting these cessions. 31 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, 1994 of $215 million and $142 million, respectively. Lloyd's of London is currently undergoing restructuring to seek to obtain additional capital and to segregate claims for years before 1986. The ultimate effect of this restructuring on the Company's reinsurance recoverable is not yet known. The Company does not believe that any uncollectible amounts of reinsurance recoverables would be material to its results of operations, financial condition or liquidity. See Item 3, "Legal Proceedings," for additional information regarding Lloyd's of London. Life Insurance The Company's policy is to obtain reinsurance on individual life policies for amounts above certain retention limits, which limits vary with age and underwriting classification. During 1994, certain subsidiaries of the Company increased the level of reinsurance on certain policies. Retention on life insurance risks after reinsurance varies up to a maximum of $1.5 million per insured for an ordinary life risk, depending on the subsidiary involved, the type of policy, the year of issue and the age of the insured. Other reinsurance arrangements are made from time to time to cede or assume existing blocks of business. 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 the Company 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 that 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. Catastrophe Reinsurance The Company utilizes reinsurance agreements with nonaffiliated reinsurers to control its exposure to losses resulting from one occurrence. For the accumulation of net property losses arising out of one occurrence, reinsurance coverage averages 75% of total losses between $175 million and $375 million. For multiple workers' compensation losses arising from a single occurrence, reinsurance coverage averages 100% of losses between $10 million and $160 million and for losses caused by property perils reinsurance coverage averages 75% of losses between $175 million and $345 million. 32 For Agency-produced commercial property insurance, 25% of all losses were reinsured in 1994, subject to an occurrence limitation of 200% of ceded premium or an estimated $225 million. In 1995, the quota share is 20%, with a fixed dollar occurrence limit of $225 million. For Personal Lines homeowners insurance, in 1994, 30% of losses were reinsured up to a maximum recovery of $96 million, and for 1995, 16.25% of losses will be reinsured up to a maximum recovery of $64 million per occurrence. Competition and Other Factors Affecting Growth Life Insurance The Company's life insurance businesses compete with national, regional and local insurance companies. Competition is based upon price, product design and services rendered to producers and policyholders. The insurance industry is extremely competitive, in both price and services, and no single insurer is dominant. 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 approximately 40% of the Travelers Life and Annuities individual annuity premiums and deposits were sold 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. In January 1995, the U.S. Supreme Court ruled that national banks may sell annuities. It is not clear at this time whether the decision will have a positive or negative impact upon the Company's annuity sales. Savings banks also compete directly in the sale of life insurance in Connecticut, Massachusetts and New York. Competition for the savings dollar arises from entities such as banks, investment advisers, mutual funds and other financial institutions. 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. It is subject to extensive regulation by those agencies and the securities administrators of those jurisdictions, primarily for the benefits of its customers, including minimum capital and licensing requirements. PFS Investments faces competition not only from large financial services firms offering products and services that cross traditional business boundaries, but also from insurance companies, including other subsidiaries of the Company, offering life insurance products with investment features. 33 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. 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 to 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 remained strong in 1994, and retentions remained high in both traditional insurance products and risk service programs. The bid process for selecting servicing carriers to administer the involuntary pools is ongoing and is intended to reduce the number of servicing carriers while increasing the quality of service being provided. As the number of servicing carriers is significantly reduced, the market share of the remaining carriers is likely to grow. The Company believes that a successful bid strategy will allow it to maintain a significant market presence in the face of these changes. Overhead reductions and improved efficiency through automation are key competitive issues for Agency business. During the past several years, Agency 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 products, Travelers Indemnity believes it has created significant opportunity for growth in this area. The marketplace in which Specialty competes includes small to medium-sized niche companies that focus on certain types of risk and larger companies or branches/divisions of 34 multi-line companies that offer numerous products covering various risks. Distribution of products is generally through wholesale and/or retail brokers. Specialty's underwriting responsiveness and quality are key to maintaining broker relationships. A competitive advantage resides in the cross- selling opportunities of Specialty products through Agency and National underwriters, agents and brokers. 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. The Company's Personal Lines unit operates through 3,000 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 on the independent agency distribution system, recognizing the service and underwriting advantages the agent can deliver. In addition, Personal Lines has taken advantage of complementary distribution mechanisms, including affinity groups, mortgage lenders and the independent agents of the PFS sales force, 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, reports on financial condition, recording complaints, restricting expenses, commissions and new business issued, restricting use of some underwriting criteria, regulating rates, forms and advertising, 35 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 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, 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. Certain variable life insurance and individual variable annuities and their related separate accounts are subject to regulation by the Securities and Exchange Commission. Health care reform has been at the forefront of domestic policy issues at the federal level and is a leading issue in many state legislatures in 1995. Various proposals have been introduced and a great deal of uncertainty remains regarding what the final health reform 36 package will contain or what effect it will have on the Company's businesses, including its investment in MetraHealth. 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. 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 25 through 28 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. Proposed legislation has been introduced in Congress that would modify certain laws and regulations affecting the financial services industry, including the provisions regarding affiliations among insurance companies, investment banks and commercial banks. The potential impact of such legislation on the Company's businesses cannot be predicted at this time. 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 37 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 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 45% for 1995 and to 50% by 1996). The PCRBC ratio is then calculated from data contained in the annual statement. 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 38 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, 1994, all of the Company's life and property-casualty insurance companies had adjusted capital in excess of amounts requiring regulatory action at any of the four levels. 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 1995 for dividends from The Travelers Insurance Group Inc. (the parent of TIC and Travelers Indemnity) to The Travelers Inc. without prior approval. The NAIC Insurance Regulatory Information System ("IRIS") ratios, discussed under "Combined Property-Casualty Product Line Information" on page 49, 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 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 events could occur this year, and management believes that the resolution would be the same. Reserving Methods 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. 39 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. 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, 1994, the investment holdings of the companies included in the insurance services segments were composed primarily of fixed maturities. At December 31, 1994, approximately 94.8% in total dollar amount of the fixed maturities portfolios of such companies had investment grade ratings. The remaining investments are principally mortgage loans and real estate, discussed below, policy loans and other investments. For additional information regarding these investment portfolios, see Note 5 of Notes to Consolidated Financial Statements and the discussion of Asset Quality in the 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. 40 Consistent with the nature of related contract obligations, the invested assets attributable to group insurance and individual life, accident and health and financial services are primarily long-term fixed income investments such as corporate debt securities, mortgage and asset-backed securities, and mortgage loans. A small portion of the invested assets related to these operations is in preferred and common stocks and real estate equity investments. The Company did not originate a significant amount of new real estate business in 1994 and does not plan to do so in 1995. 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 have been significantly reduced since 1992. 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 The Company is continuing its program to dispose of its real estate investments and some of its mortgage loans and to reinvest the proceeds to obtain current market yields. At December 31, 1994, the mortgage loan and real estate portfolios of the businesses included in the Company's insurance services segments consisted of approximately $5.4 billion and $418 million, respectively. At December 31, 1993, the mortgage loan and real estate portfolios 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 Company's accelerated liquidation strategy for foreclosed real estate and certain mortgage loans has mitigated the negative impact that these underperforming portfolios have had on investment income. Management anticipates that approximately half of maturing commercial mortgage loans will be refinanced, restructured, sold or foreclosed. Restructured loans are defined as loans the terms of which have been changed from the original contract generally by lowering the pay rate of interest in the early years after modification. Loans which have pay rates of interest after modification that are equal to or above market rates are not included in the underperforming mortgage loan inventory. At December 31, 1994 and 1993, approximately $511 million and $1.3 billion, or 9% and 17%, respectively, of the mortgage loan portfolio was classified as underperforming. Underperforming mortgage loans include delinquent loans, loans in the process of foreclosure and loans modified at interest rates below market. 41 For information regarding the principal balance of mortgage loans at December 31, 1994 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 $1.3 billion in 1994 and $1.0 billion in 1993. The majority of these mortgages are seven-year term loans. 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, 1994 and 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. (in millions) Property Type: Mortgage Loans Real Estate -------------- -------------- ----------- 1994 1993 1994 1993 ---- ---- ---- ---- Office $2,141 $2,875 $ 224 $ 641 Apartment 1,112 1,711 9 66 Hotel 642 782 79 77 Retail 623 938 46 137 Industrial 228 267 13 69 Other 108 116 33 41 ----- ----- ----- ----- Total commercial 4,854 6,689 404 1,031 Agricultural 562 673 14 18 Residential - 3 - - ----- ----- ----- ----- Total $5,416 $7,365 $ 418 $1,049 ===== ===== ===== ===== 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 old Travelers. The operating results of old Travelers prior to the December 31, 1993 Merger are not included in the Company's Consolidated Financial Statements, other than for the equity in earnings relating to the 27% previously owned. 42 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, 1994, 1993 and 1992, $5.9 billion, $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 39 for a more complete discussion of reserving methodology. For a reconciliation of beginning and ending reserve liability balances for 1994, 1993 and 1992, see Note 11 of Notes to Consolidated Financial Statements. The table on page 45 shows the development of the estimated reserves for the 10 years prior to 1994, and includes information for old Travelers for periods prior to the Merger. 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. The differences between the reserves for losses and LAE shown in the table on page 45, which is 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"), 43 were $(24) million, $32 million and $38 million for the years 1994, 1993 and 1992, respectively. Those differences are attributable to a certain portion of the discounting of workers' compensation reserves impacting all three years. The 1994 year was also affected by the gross-up of assets and liabilities for GAAP that were recorded on a net basis for SAP. Discounting The liability for losses for certain long-term disability payments under workers' compensation insurance has been discounted by $509 million at December 31, 1994 using a maximum interest rate of 5%. The corresponding amounts of discount for calendar years 1993 and 1992 were $610 million and $623 million, respectively. The 1994 decrease was due to more favorable experience trends anticipated on certain of these claims. 44
Analysis of Combined Property-Casualty Loss and Loss Adjustment Expense Development (excluding accident and health business) (in millions) Year Ended December 31, -------------------------------------------------------------------------------------- 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Reserves for Loss and LAE Originally Estimated $4,817 $5,475 $6,658 $7,644 $8,116 $8,947 $9,239 $9,406 $9,872 $10,190 $10,251 Cumulative Amount Paid as of ---------------------------- One year later 1,655 1,753 1,839 2,376 2,146 2,430 2,418 2,136 2,206 1,903 Two years later 2,559 2,748 3,261 3,631 3,632 3,992 3,932 3,584 3,556 Three years later 3,138 3,737 4,075 4,648 4,706 5,095 4,993 4,596 Four years later 3,795 4,258 4,760 5,402 5,487 5,878 5,755 Five years later 4,119 4,732 5,303 5,978 6,080 6,481 Six years later 4,425 5,130 5,735 6,443 6,557 Seven years later 4,717 5,459 6,109 6,831 Eight years later 4,951 5,784 6,445 Nine years later 5,128 6,086 Ten years later 5,352 Reserves Reestimated as of -------------------------- One year later 4,937 5,863 6,799 7,858 8,292 9,099 9,358 9,446 10,014 9,941 Two years later 5,261 6,135 7,078 8,051 8,497 9,220 9,470 9,756 10,116 Three years later 5,460 6,376 7,292 8,254 8,698 9,408 9,898 10,042 Four years later 5,656 6,665 7,569 8,497 8,912 9,954 10,327 Five years later 5,856 6,922 7,765 8,746 9,489 10,425 Six years later 6,097 7,136 8,021 9,334 9,974 Seven years later 6,266 7,368 8,637 9,817 Eight years later 6,464 7,951 9,079 Nine years later 6,988 8,422 Ten years later 7,383 Cumulative Deficiency (Redundancy) 2,566 2,947 2,421 2,173 1,858 1,478 1,088 636 244 (249) Gross liability - end of year $13,805 $13,872 Reinsurance recoverable 3,615 3,621 ----- ----- Net liability - end of year $10,190 $10,251 ====== ====== Gross reestimated liability - latest $13,226 Reestimated reinsurance recoverable - latest 3,285 ----- Net reestimated liability - latest $ 9,941 ====== Gross cumulative deficiency (redundancy) $ (579) =======
45 The net reserve balance at December 31, 1993 reflected above includes a $225 million purchase accounting adjustment relating to the acquisition of old Travelers. See Note 11 of Notes to Consolidated Financial Statements. 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 1984-1994 year-end reserves and the subsequent changes in those reserves. For instance, the "cumulative deficiency or redundancy" 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. Accordingly, the cumulative deficiency for a year relates only to reserves at that year end and such amounts are not additive. Expressed another way, if the original reserves at the end of 1984 included $4 million for a loss which is finally settled in 1994 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 1984-1993 shown above. A substantial portion of the cumulative deficiencies in each of the years 1984-1992 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 policy exclusions 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 45. 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. 46 Underwriting results do not include investment income which makes a significant contribution to overall property-casualty profitability. In preparing the following table, anticipated salvage and subrogation were deducted from losses. The following table and related discussions present information regarding the combined ratios of Travelers Indemnity, including Gulf and the other property-casualty insurance operations of old Travelers and its subsidiaries.
Year Ended December 31, ----------------------------- 1994 1993 1992 ---- ---- ---- Personal Lines Automobile 96.0% 101.6% 104.1% Homeowners 124.2 131.9 246.6 Total Personal Lines Losses and loss adjustment expenses 71.0 71.2 98.1 Other underwriting expenses 29.4 33.2 33.7 ------- -------- ------- Combined Personal Lines 100.4 104.4 131.8 Commercial Lines Workers' compensation 104.9 99.1 104.9 Multiple-peril 119.9 125.6 134.9 Automobile 102.6 106.8 116.0 Other liability 245.5 227.5 144.7 Property and other 107.3 93.9 144.0 Total Commercial Lines Losses and loss adjustment expenses 100.0 98.2 94.4 Other underwriting expenses 24.7 27.1 27.6 -------- -------- -------- Combined before policyholder dividends 124.7 125.3 122.0 Combined Commercial Lines 123.0 126.6 122.3 Total Personal and Commercial Lines Losses and loss adjustment expenses 88.7 88.2 95.7 Other underwriting expenses 26.5 29.2 29.8 -------- -------- -------- Combined before policyholder dividends 115.2 117.4 125.5 Combined 114.2% 118.2% 125.7%
The improvement in the combined ratio for Personal Lines in 1994 compared to 1993 is primarily attributable to improved underwriting results due to lower operating expenses and to favorable loss reserve development in 1994 on prior years' business. This improvement was partially offset by the increase in catastrophe losses, which after taxes and reinsurance increased to $26.4 million for 1994 from $13.5 million in 1993, due to the severe winter storms in the Northeast during the first quarter of 1994. 47 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 due in part to programs implemented by Travelers Indemnity to be more selective in marketing and underwriting. In 1993 and 1994, 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 1994, asbestos and environmental claims continued to negatively impact other liability lines. The combined impact from these claims added 4.6 percentage points to the total 1994 Commercial Lines combined ratio. Asbestos claims incurred totaled $51 million in 1994, $229 million in 1993 and $61 million in 1992. Environmental claims incurred were $49 million in 1994, $190 million in 1993 and $67 million in 1992. In addition, purchase accounting adjustments amounting to $225 million for asbestos and environmental claims were included in incurred losses, for statutory purposes only, in 1994. This adjustment increased the 1994 Commercial Lines combined ratio by an additional 10.5 percentage points. In the multiple-peril and property lines, the 1992 combined ratios were severely impacted by Hurricane Andrew and 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 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 table on the next page and the related discussion set forth information regarding the premium to surplus ratios of Travelers Indemnity, including Gulf and the other property- casualty insurance operations of old Travelers and its subsidiaries. 48
Schedule of Premiums to Surplus Ratios (Statutory Basis) (Including Accident and Health Business) (in millions) Year Ended December 31, ------------------------------------ 1994 1993 1992 ---- ---- ---- A. Net written premiums $ 3,862 $ 3,902 $ 4,105 B. Capital and surplus 2,062 2,454 1,868 Ratio of premiums to capital and surplus (A divided by B) 1.87 1.59 2.20
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 IRIS of the National Association of Insurance Commissioners, is 3.00 to 1 or less. The ratio deteriorated slightly in 1994 as a result of the impact of reserve increases for environmental claims, litigation and ceded reinsurance balances, partially offset by reductions in written premium volume. 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. 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 in 1993 of Voyager Group, Inc. and its affiliates ("Voyager") (1993 and 1992), and the Company's interest in Fingerhut Companies, Inc. ("Fingerhut") (1992), a direct marketing business. For additional information regarding the inclusion of Fingerhut in the Company's consolidated operating results, see Note 3 of Notes to Consolidated Financial Statements. 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. 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 49 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 5, 1995, the Company had approximately 52,000 full-time and 2,800 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. MetraHealth Upon formation of MetraHealth, the joint venture created by the combination of the medical businesses of TIC and MetLife, the Company owned 50% of MetraHealth's common stock. The Company's interest in MetraHealth will be accounted for on the equity method. See Note 3 of Notes to Consolidated Financial Statements. MetraHealth will provide group health insurance, health maintenance organizations, managed care and ancillary services throughout the United States, in Puerto Rico and in the U.S. Virgin Islands. 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. MetraHealth network products rely on contractual arrangements between it 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. 50 As of December 31, 1994, the businesses acquired by MetraHealth included health maintenance organizations in 29 network areas, with approximately 400,000 members; point-of- service operations in 72 network areas, with approximately 1.7 million members; and preferred provider organizations in 90 network areas, with approximately 2.8 million members. Covered lives using the managed care networks and covered by indemnity products, in the aggregate at December 31, 1994, were approximately 11.3 million. MetraHealth expects some decline in covered lives during 1995. In March 1995, MetraHealth acquired HealthSpring, Inc. for common stock of MetraHealth. HealthSpring builds and manages primary care physician practices and serves approximately 32,000 patients through seven sites in Pennsylvania, Ohio and Illinois. This acquisition resulted in a reduction in the participation of the Company and MetLife in the MetraHealth venture to 48.25% each. 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 10, 1995.
Officer Name Age Positions Since ---- --- --------- ------- Sanford I. Weill 61 Chairman of the Board 1986 and Chief Executive Officer* Robert I. Lipp 56 Vice Chairman of the Board and 1986 Group Chief Executive of the Company; Chief Executive Officer of The Travelers Insurance Group Inc.* James Dimon 38 President, Chief Operating Officer and 1986 Chief Financial Officer of the Company; Chief Operating Officer of SB Holdings* Joseph Plumeri, II 51 Vice Chairman and Group Chief Executive 1994 of PFS Robert F. Greenhill 58 Chairman and Chief Executive Officer of 1993 SB Holdings* Michael A. Carpenter 47 Executive Vice President 1995 Edwin M. Cooperman 51 Executive Vice President 1991 Irwin R. Ettinger 56 Senior Vice President, and Chief 1987 Accounting Officer Charles O. Prince, III 45 Senior Vice President, General Counsel 1986 and Secretary Samuel V. Miller, Jr. 49 Senior Vice President 1994
______________________________ * Member of the Office of the Chairman 51 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. 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. Upon completion of the merger with old Travelers on December 31, 1993, Mr. Lipp was named Chief Executive Officer of The Travelers Insurance Group Inc. From 1991 to 1993, he was Chairman and Chief Executive Officer of CCC. From April 1986 through September 1991, he was an Executive Vice President of the Company and its corporate predecessor. Prior to joining the Company in 1986, he was a President and a director of Chemical New York Corporation and Chemical Bank where he held senior executive positions for more than five years prior thereto. Mr. Lipp is a director of The New York City Ballet. 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 SBI from 1990 to 1991. He is also a director, the Chief Operating Officer and a member of the Executive Committee of SBI and SB Holdings. From 1986 to 1988, Mr. Dimon was Senior Vice President and Chief Financial Officer of CCC, the Company's predecessor. From 1982 to 1985, he was a Vice President of American Express Company and Assistant to the President, Sanford I. Weill. Mr. Dimon is a trustee of New York University Medical Center and Chairman of the Board of the New York Academy of Finance. Mr. Plumeri became a Vice Chairman of the Company in August 1994 and has been Group Chief Executive responsible for the operations of the PFS group of companies since October 1994. He joined the Company in August 1993, serving as President of SBI 52 from that time through July 1994. Mr. Plumeri had worked for Shearson Lehman Brothers Inc. or its predecessors for over 25 years, in various positions of increasing responsibility, until SBI acquired certain businesses from SLB. At that time, Mr. Plumeri was a Managing Partner of SLB, and from 1990 until September 1992 he served as President of SLB's Private Client Group. Mr. 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 SBI in June 1993. He also serves as Chairman and Chief Executive Officer of SB 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 and a member of the International Advisory Board of the British-American Chamber of Commerce. Mr. Carpenter joined the Company in January 1995 as Executive Vice President, and also serves as Chairman and Chief Executive Officer of Travelers Life and Annuity Company. From January 1989 to June 1994, Mr. Carpenter was Chairman of the Board, President and Chief Executive Officer of Kidder, Peabody Group, Inc., an investment banking and brokerage company that was a wholly owned subsidiary of General Electric Company. Prior thereto, he served as Executive Vice President of General Electric Capital Corporation and Vice President of General Electric Company. 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. Mr. Miller has been a Senior Vice President of the Company since March 1994, and also currently serves as Chairman of NBL and the Canadian operations of PFS. From March 1994 until October 1994, he was Chairman and Chief Executive Officer of the PFS group of companies. For ten years prior to joining the Company, Mr. Miller was President and Chief Executive Officer of AMEX Life Assurance Company, a division of American 53 Express Company. He is a member of the board of directors of the Health Insurance Association of America. 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. Assumption Reinsurance -- A transaction whereby the ceding company transfers its entire obligation under the policy to the reinsurer, who becomes directly liable to the policyholder in all respects, including collecting premiums and paying benefits. See "Reinsurance." 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. 54 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 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. Incurred But Not Reported Losses (IBNR) -- Losses that have occurred but have not been reported. Indemnity Reinsurance -- A transaction whereby the reinsurer agrees to indemnify the ceding company against all or part of the loss that the latter may sustain under the 55 policies it issued that are being reinsured. The ceding company remains primarily liable as the direct insurer on all risks ceded. See "Reinsurance." 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. 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. 56 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 (the ceding company) who has directly written the coverage. However, the legal rights of the insured generally are not affected by the reinsurance transaction. Reinsurance Pools and Associations -- Mechanisms established to aggregate insurance, and then distribute results to participants in the mechanism. The pool or association performs rating, loss adjustment and engineering services for certain exposures. In some cases, they are established to absorb business that will not be written voluntarily by insurers. Residual Market -- 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. 57 Statutory Accounting Practices -- Those accounting practices prescribed or permitted by the National Association of Insurance Commissioners or an 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, 1994, leasehold interests of Travelers Insurance included a total of approximately 5,700,000 square feet of office space at about 285 locations throughout the United States under both operating and capital leases. TIC owns buildings containing approximately 1,570,000 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. 58 SBI owns two office buildings in New York City, which total approximately 627,000 square feet. Most of SBI's other offices are located in leased premises, the leases for which expire at various times. SBI leases two buildings, including an office building located at 388 Greenwich Street, with a total of approximately 2.3 million square feet, and plans to consolidate its executive offices and certain other New York City operations at these locations. The buildings were acquired from Shearson Lehman Brothers by an independent third party and are leased by SBI through 1999. SBI has a purchase option with respect to these properties. 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, see Note 18 of Notes to Consolidated Financial Statements. Item 3. LEGAL PROCEEDINGS. This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or its subsidiaries is a party or 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. The trial court granted the defendants' motion to dismiss the case in January 1995. 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 59 Jersey state, New York state and Connecticut state courts. All of these subsequent actions are currently stayed, and the Company has reached an agreement to settle these actions, subject to approval by the court. Other Litigation and Legal Proceedings Smith Barney For information concerning purported class actions and an individual action against SBI 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 SBI and the other defendants in the class action. The judgment was affirmed by the U.S. Court of Appeals for the Ninth Circuit in September 1994. Plaintiffs have requested a rehearing en banc. For information concerning several purported class action lawsuits filed against SBI 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 again in November 1994, and the consolidated action is entitled In re: Hyperion Securities Litigation. SBI has moved to dismiss the claims. Old Primerica 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 has entered into a consent decrees with respect to both groundwater and 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 60 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 25 through 28 of this Form 10-K. Other For information concerning purported class actions and other actions relating to service fee charges and premium calculations on certain workers compensation insurance sold by subsidiaries of the Company, see the description that appears in the second paragraph of page 29 of the Company's filing on Form 10-Q for the quarter ended September 30, 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. In one of these cases, North Carolina Steel, Inc. v. National Council on Compensation Insurance, Inc., et al, the North Carolina trial court granted the Company's motion to dismiss in February 1995. 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 SBI and R-H 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. 61 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ------- Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is listed on the NYSE and the Pacific Stock Exchange under the symbol "TRV." It is also listed on the Toronto Stock Exchange under the symbol "TVG." The high and low sale prices, as reported on the consolidated transaction reporting system, for the common stock of the Company for the periods indicated, and the dividends per share, are set forth below. All amounts have been adjusted to give retroactive effect to the two stock splits effected in 1993 on the Company's common stock.
1993 1994 1995 -------------------------------------- --------------------------------------- ---- 1st Q 2nd Q 3rd Q 4th Q 1st Q 2nd Q 3rd Q 4th Q 1st Q* ----- ----- ----- ----- ----- ----- ----- ----- ----- Common Stock Price High $37.6875 $39.6563 $49.5000 $48.6250 $43.1250 $37.1250 $37.1250 $35.0000 $39.8750 Low $24.0625 $31.2188 $37.2188 $37.6250 $34.3750 $31.3125 $31.0000 $30.3750 $32.3750 Dividends per Share of Common Stock $.120 $.120 $.125 $.125 $.125 $.150 $.150 $.150 $.200
_______________________________ * Through February 28, 1995 At February 28, 1995, the Company had approximately 61,000 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." 62 Item 6. SELECTED FINANCIAL DATA. See "Five-Year Summary of Selected Financial Data" on page 29 of the Company's 1994 Annual Report to Stockholders (the "1994 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 30 of the 1994 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 67 of the 1994 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. 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 26, 1995, filed with the Securities and Exchange Commission (the "Proxy Statement"), incorporated herein by reference. For information on 63 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. 64 (b) Reports on Form 8-K: No reports on Form 8-K have been filed by the Company during the last quarter of the period covered by this report. 65 EXHIBIT INDEX ------------- Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 3.01 Restated Certificate of Incorporation of The Travelers Inc. (the "Company") and Certificate of Designation of Cumulative Adjustable Rate Preferred Stock, Series Y, incorporated by reference to Exhibit 3.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994 (File No. 1-9924) (the "Company's March 31, 1994 10-Q") 3.02 By-Laws of the Company as amended through April 27, 1994, incorporated by reference to Exhibit 3.02 to the Company's March 31, 1994 10-Q. 10.01* Employment Protection Agreement, dated as of December 31, 1987, between the Company (as successor to Commercial Credit Company ("CCC")) and Sanford I. Weill, incorporated by reference to Exhibit 10.03 to CCC's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 (File No. 1- 6594). 10.02.1* 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 Option Plan, incorporated by reference to Exhibit 10.02.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 1-9924) (the "Company's 1993 10-K"). 66 Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.02.6* Amendment No. 12 to the Company's Stock Option Plan, incorporated by reference to Exhibit 10.02.6 to the Company's 1993 10-K. 10.03* Retirement Benefit Equalization Plan of the Company (as successor to Primerica Holdings, Inc.), as amended, incorporated by reference to Exhibit 10.03 to the Company's 1993 10-K. 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 Retirement Plan, incorporated by reference to Exhibit 10.06.2 to the Company's 1993 10- K. 10.07* Long-Term Incentive Plan of the Company, as amended, incorporated by reference to Exhibit 10.08 to the Company's 1992 10-K. 10.08* Capital Accumulation Plan of the Company Electronic (the "CAP Plan"), as amended to May 16, 1994. 10.09* Agreement dated December 21, 1993 between the Company and Edward H. Budd, incorporated by reference to Exhibit 10.22 to the Company's 1993 10-K. 67 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., Smith Barney Inc. ("SBI"; formerly Smith Barney, Harris Upham & Co. Incorporated), 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. 68 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 SBI, 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* Amendment to the RFG Employment Agreement, incorporated by reference to Exhibit 10.17.2 to the Company's March 31, 1994 10-Q. 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* Employment Agreement effective January 1, Electronic 1995 between the Company and Michael A. Carpenter. 69 Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.23.1* 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"). 10.23.2* Amendment to The Travelers Corporation 1982 Electronic Stock Option Plan. 10.24.1* 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"). 10.24.2* Amendment to The Travelers Corporation 1988 Electronic Stock Incentive Plan. 10.25* 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). 10.26* 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. 10.27* 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. 10.28* The Travelers Severance Plan of Officers, as amended September 23, 1993, incorporated by reference to Exhibit 10.30 to the Company's 1993 Form 10-K. 10.29* The Travelers Corporation Directors' Deferred Compensation Plan, as amended November 7, 1986, incorporated by reference to Exhibit 10(d) to the Annual Report on Form 10-K of old Travelers for the fiscal year ended December 31, 1986 (File No. 1- 5799). 10.30* Employment Agreement dated as of December Electronic 30, 1994, between SBI and Joseph J. Plumeri II. 11.01 Computation of Earnings Per Share. Electronic 70 Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 12.01 Computation of Ratio of Earnings to Fixed Electronic Charges. 13.01 Pages 29 through 68 of the 1994 Annual Electronic Report to Stockholders of the Company (pagination of exhibit does not correspond to pagination in the 1994 Annual Report to Stockholders). 21.01 Subsidiaries of the Company. Electronic 23.01 Consent of KPMG Peat Marwick LLP, Independent Electronic Certified Public Accountants. 23.02 Consent of Coopers & Lybrand L.L.P., Electronic Independent Accountants. 24.01 Powers of Attorney. Electronic 27.01 Financial Data Schedule. Electronic 28.01 Information from Reports Furnished to State P Insurance Regulatory Authorities. Schedule Paper P of the Combined Annual Statement of The Travelers Insurance Group Inc. and its affiliated property and casualty insurers. 99.01 Consolidated balance sheets of The Travelers Electronic 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. 71 Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 99.05 The fourth paragraph of page 26 of the Electronic Company's September 30, 1993 10-Q. 99.06 The first full paragraph of page 26 of the Electronic Company's 1992 10-K. 99.07 The fourth paragraph of page 2 of the Electronic Company's March 1, 1994 8-K. 99.08 The paragraph that begins on page 2 and ends Electronic on page 3 of the Company's March 1, 1994 8-K. 99.09 The second paragraph of page 29 of the Electronic Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1994 (File No. 1-9924). 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 1994 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 1994 Annual Report on Form 10-K) to security holders who make written request therefor to Corporate Communications and Investor Relations Department, The Travelers Inc., 388 Greenwich Street, New York, New York 10013. ------------- * Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. 72 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, 1995. 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, 1995. 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 73 Signature Title --------- ----- * . . . . . . . . . . . . . . Director Edward H. Budd * . . . . . . . . . . . . . . Director Joseph A. Califano, Jr. * . . . . . . . . . . . . . . Director Douglas D. Danforth * . . . . . . . . . . . . . . Director Robert F. Daniell * . . . . . . . . . . . . . . Director Leslie B. Disharoon . . . . . . . . . . . . . . Director Gerald R. Ford * . . . . . . . . . . . . . . Director Robert F. Greenhill * . . . . . . . . . . . . . . Director Ann Dibble Jordan * . . . . . . . . . . . . . . Director Robert I. Lipp * . . . . . . . . . . . . . . Director Dudley C. Mecum 74 Signature Title --------- ----- * . . . . . . . . . . . . . . Director Andrall E. Pearson * . . . . . . . . . . . . . . Director Frank J. Tasco . . . . . . . . . . . . . . Director Linda J. Wachner * . . . . . . . . . . . . . . Director Joseph R. Wright, Jr. * . . . . . . . . . . . . . . Director Arthur Zankel /s/ James Dimon *By: . . . . . . . . . . . James Dimon Attorney-in-fact 75
The Travelers Inc. and Subsidiaries INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES* _________________________________ Incorporated By Reference from the Company's 1994 Annual Report to Page Stockholders at Herein Page Indicated ------ ------------------ Independent Auditors' Report F-2 68 Consolidated Statement of Income for the year ended December 31, 1994, 1993 and 1992 41 Consolidated Statement of Financial Position at December 31, 1994 and 1993 42 Consolidated Statement of Changes in Stockholders' Equity for the year ended December 31, 1994, 1993 and 1992 43 Consolidated Statement of Cash Flows for the year ended December 31, 1994, 1993 and 1992 44 Notes to Consolidated Financial Statements 45-67 Schedules: Schedule I - Condensed Financial Information of Registrant (Parent Company only) F-3 - F-6 Schedule III - Supplementary Insurance Information F-7 Schedule IV - Reinsurance F-8
*Schedules not listed are omitted as not applicable or not required by Regulation S-X. F - 1 Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders The Travelers Inc.: Under date of January 17, 1995, we reported on the consolidated statements of financial position of The Travelers Inc. and subsidiaries as of December 31, 1994 and 1993, 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, 1994, which are contained in the 1994 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year ended December 31, 1994. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules which are listed on 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. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities in 1994. Also, 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. /s/ KPMG Peat Marwick LLP New York, New York January 17, 1995 F-2
SCHEDULE I The Travelers Inc. (Parent Company Only) Condensed Financial Information of Registrant (In millions of dollars) Condensed Statement of Income Year Ended December 31, ----------------------- 1994 1993 1992 ---- ---- ---- Income: ------- Equity in income of old Travelers $ - $126 $ - Gain on sales of stock of subsidiaries and affiliate - 96 Other 3 6 12 ----- --- --- Total 3 132 108 ----- --- --- Expenses: --------- Interest 120 77 79 Other 87 46 58 ----- --- --- Total 207 123 137 ----- --- --- Pre-tax income (loss) (204) 9 (29) Income tax benefit 82 35 9 ----- --- --- Net (loss) income before equity in net income of subsidiaries (122) 44 (20) Equity in net income of subsidiaries 1,448 907 776 Cumulative effect of changes in accounting principles (including $17 and $28 in 1993 and 1992, respectively, applicable to subsidiaries) - (35) (28) ----- --- --- Net income $1,326 $916 $728 ===== === ===
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes to the condensed financial information of Registrant. F-3
SCHEDULE I 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, ------------ 1994 1993 ----- ---- Assets ------ Investment in subsidiaries at equity $10,592 $11,808 Advances to and receivables from subsidiaries 96 433 Cost of acquired businesses in excess of net assets 508 686 Other 39 24 ------ ------ $11,235 $12,951 ------ ------ Liabilities ----------- Short-term borrowings $ 101 $ 329 Long-term debt 1,377 1,504 Advances from and payables to subsidiaries 285 1,033 Other liabilities 433 549 ------ ------ 2,196 3,415 ------ ------ Redeemable preferred stock (held by subsidiary) 261 100 ------ ------ ESOP Preferred stock - Series C 235 235 Guaranteed ESOP obligation (97) (125) ------ ------ 138 110 ------ ------ Stockholders' equity -------------------- Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value 800 800 Common stock ($.01 par value; authorized shares: 500 million; issued shares: 1994 - 368,195,609 and 1993 - 368,287,709) 4 4 Additional paid-in capital 6,655 6,566 Retained earnings 4,199 3,140 Treasury stock, at cost (1994 - 51,684,618 shares; 1993 - 41,155,405 shares) (1,553) (1,121) Unrealized gain (loss) on investment securities and other, net (1,465) (63) ------- ------ 8,640 9,326 ------- ------ $ 11,235 $12,951 ======= ======
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes to the condensed financial information of Registrant. F-4
SCHEDULE I The Travelers Inc. (Parent Company Only) Condensed Financial Information of Registrant (In millions of dollars) Condensed Statement of Cash Flows Year ended December 31, ----------------------- 1994 1993 1992 ---- ---- ---- Cash Flows From Operating Activities ------------------------------------ Net Income $1,326 $ 916 $ 728 Adjustments to reconcile net income to cash provided by operating activities: Equity in net income of subsidiaries (1,448) (907) (776) Dividends received from subsidiaries, net 1,409 349 365 Advances (to) from subsidiaries, net (411) 45 292 Other, net 377 61 57 ------ ----- ----- Net cash provided by (used in) operating activities 1,253 464 666 ------ ----- ----- Cash Flows From Investing Activities ------------------------------------ Capital contribution to subsidiaries - (1,100) - Business acquisitions - - (485) Business divestments - - 258 ------ ------ ----- Net cash provided by (used in) investing activities - (1,100) (227) ------ ------ ----- Cash Flows From Financing Activities ------------------------------------ Issuance of preferred stock - - 290 Dividends paid (267) (139) (85) Issuance of common stock - 329 - Treasury stock acquired (543) (58) (122) Issuance of long-term debt - 450 100 Payments and redemptions of long-term debt (93) (35) (209) Net change in short-term borrowings (228) 258 (271) Redemption of redeemable preferred stock (held by subsidiary) (100) (100) (100) Other, net (22) (69) (42) ------- ------- ------ Net cash provided by (used in) financing activities (1,253) 636 (439) ------ ------ ----- Change in cash $ - $ - $ - ======= ======= ====== Supplemental disclosure of cash flow information: ------------------------------------------------- Cash paid during the period for interest $ 107 $ 68 $ 84 ====== ====== ===== Cash received during the period for taxes $ 268 $ 129 $ 65 ====== ====== =====
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto and the accompanying notes to the condensed financial information of Registrant. F-5 SCHEDULE I 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. 2. Debt ---- Aggregate annual maturities for the next five years on long- term debt obligations excluding principal payments on the ESOP loan obligation are as follows: 1995 $ - 1996 $ 100 1997 $ 185 1998 $ 250 1999 $ 100 3. Supplementary Disclosure of Non-Cash Investing and Financing ------------------------------------------------------------ Activities ---------- During 1994, the Parent issued $261 of redeemable preferred stock to various subsidiaries in exchange for an equivalent value of The Travelers Inc. common stock previously held by these subsidiaries. This activity was recorded as a non-cash capital contribution to subsidiaries by the Parent. F-6 SCHEDULE III THE TRAVELERS INC. AND SUBSIDIARIES Supplementary Insurance Information 1994 (In millions of dollars)
Value of insurance in force and Future policy deferred benefits Other policy policy losses, claims claims and Net acquisition and loss Unearned benefits Premium investment Segment costs expenses premiums payable revenue income ----------- ----------- -------------- -------- ------------ ------- ---------- Life Insurance Services $1,923 $ 9,115 $1,853 $1,248 $3,985 $1,869 P&C Insurance Services 221 14,374 103 - 3,498 644 Consumer Finance Services* 19 15 320 56 115 31 Corporate and Other (8) 9 --- - ------ ------- ------ ------ ------- ------ Total $2,163 $23,504 $2,276 $1,304 $7,590 $2,553 ====== ======= ====== ====== ======= ====== Amortization Benefits, of deferred claims policy losses acquisition costs and and value Other settlement of insurance operating Premiums Segment expenses in force expenses written ----------- ---------- ------------ --------- ----------- Life Insurance Services $4,661 $282 $1,040 $4,032 P&C Insurance Services 3,114 532 615 3,824 Consumer Finance Services* 43 4 22 172 Corporate and Other (21) 77 ------- ---- ------ ------ Total $7,797 $818 $1,754 $8,028 ======= ==== ====== ======
* Includes credit life insurance operations. F-7
SCHEDULE IV 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, 1994 ---------------------------- Life insurance in force $527,964 $(106,024) $4,284 $426,224 1.01% ======= ======== ===== ======= ===== Premiums Life insurance $1,872 $(295) $6 $1,583 0.4% Accident and health insurance 2,568 (107) 23 2,484 0.9% Property and casualty insurance 4,630 (1,529) 422 3,523 12.0% ----- ------ --- ----- $9,070 $(1,931) $451 $7,590 ===== ====== === ===== Year ended December 31, 1993 ---------------------------- Life insurance in force $502,319 $( 93,744) $5,126 $413,701 1.24% ======= ======== ===== ======= ====== Premiums Life insurance $1,176 $(284) $ 2 $ 894 0.2% Accident and health insurance 393 (56) (8) 329 (2.4)% Property and casualty insurance 417 (177) 17 257 6.6% ----- ---- --- ----- $1,986 $(517) $ 11 $1,480 ===== ==== === ===== Year ended December 31, 1992 ---------------------------- Life insurance in force $324,643 $ (90,379) $1,550 $235,814 0.7% ======= ======== ===== ======= ===== Premiums Life insurance $1,212 $(312) $ 9 $ 909 1.0% Accident and health insurance 437 (40) 7 404 1.7% Property and casualty insurance 513 (180) 48 381 12.6% ----- ---- -- ----- $2,162 $(532) $64 $1,694 ===== ==== == =====
F-8 EXHIBIT INDEX ------------- Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 3.01 Restated Certificate of Incorporation of The Travelers Inc. (the "Company") and Certificate of Designation of Cumulative Adjustable Rate Preferred Stock, Series Y, incorporated by reference to Exhibit 3.01 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994 (File No. 1-9924) (the "Company's March 31, 1994 10-Q") 3.02 By-Laws of the Company as amended through April 27, 1994, incorporated by reference to Exhibit 3.02 to the Company's March 31, 1994 10-Q. 10.01* Employment Protection Agreement, dated as of December 31, 1987, between the Company (as successor to Commercial Credit Company ("CCC")) and Sanford I. Weill, incorporated by reference to Exhibit 10.03 to CCC's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 (File No. 1- 6594). 10.02.1* 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 Option Plan, incorporated by reference to Exhibit 10.02.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (File No. 1-9924) (the "Company's 1993 10-K"). Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.02.6* Amendment No. 12 to the Company's Stock Option Plan, incorporated by reference to Exhibit 10.02.6 to the Company's 1993 10-K. 10.03* Retirement Benefit Equalization Plan of the Company (as successor to Primerica Holdings, Inc.), as amended, incorporated by reference to Exhibit 10.03 to the Company's 1993 10-K. 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 Retirement Plan, incorporated by reference to Exhibit 10.06.2 to the Company's 1993 10- K. 10.07* Long-Term Incentive Plan of the Company, as amended, incorporated by reference to Exhibit 10.08 to the Company's 1992 10-K. 10.08* Capital Accumulation Plan of the Company Electronic (the "CAP Plan"), as amended to May 16, 1994. 10.09* Agreement dated December 21, 1993 between the Company and Edward H. Budd, incorporated by reference to Exhibit 10.22 to the Company's 1993 10-K. 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., Smith Barney Inc. ("SBI"; formerly Smith Barney, Harris Upham & Co. Incorporated), 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 SBI, 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* Amendment to the RFG Employment Agreement, incorporated by reference to Exhibit 10.17.2 to the Company's March 31, 1994 10-Q. 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* Employment Agreement effective January 1, Electronic 1995 between the Company and Michael A. Carpenter. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 10.23.1* 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"). 10.23.2* Amendment to The Travelers Corporation 1982 Electronic Stock Option Plan. 10.24.1* 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"). 10.24.2* Amendment to The Travelers Corporation 1988 Electronic Stock Incentive Plan. 10.25* 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). 10.26* 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. 10.27* 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. 10.28* The Travelers Severance Plan of Officers, as amended September 23, 1993, incorporated by reference to Exhibit 10.30 to the Company's 1993 Form 10-K. 10.29* The Travelers Corporation Directors' Deferred Compensation Plan, as amended November 7, 1986, incorporated by reference to Exhibit 10(d) to the Annual Report on Form 10-K of old Travelers for the fiscal year ended December 31, 1986 (File No. 1- 5799). 10.30* Employment Agreement dated as of December Electronic 30, 1994, between SBI and Joseph J. Plumeri II. 11.01 Computation of Earnings Per Share. Electronic Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 12.01 Computation of Ratio of Earnings to Fixed Electronic Charges. 13.01 Pages 29 through 68 of the 1994 Annual Electronic Report to Stockholders of the Company (pagination of exhibit does not correspond to pagination in the 1994 Annual Report to Stockholders). 21.01 Subsidiaries of the Company. Electronic 23.01 Consent of KPMG Peat Marwick LLP, Independent Electronic Certified Public Accountants. 23.02 Consent of Coopers & Lybrand L.L.P., Electronic Independent Accountants. 24.01 Powers of Attorney. Electronic 27.01 Financial Data Schedule. Electronic 28.01 Information from Reports Furnished to State Paper Insurance Regulatory Authorities. Schedule P of the Combined Annual Statement of The Travelers Insurance Group Inc. and its affiliated property and casualty insurers. 99.01 Consolidated balance sheets of The Travelers Electronic 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. Exhibit Filing Number Description of Exhibit Method ------ ---------------------- ------ 99.05 The fourth paragraph of page 26 of the Electronic Company's September 30, 1993 10-Q. 99.06 The first full paragraph of page 26 of the Electronic Company's 1992 10-K. 99.07 The fourth paragraph of page 2 of the Electronic Company's March 1, 1994 8-K. 99.08 The paragraph that begins on page 2 and ends Electronic on page 3 of the Company's March 1, 1994 8-K. 99.09 The second paragraph of page 29 of the Electronic Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1994 (File No. 1-9924). 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 1994 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 1994 Annual Report on Form 10-K) to security holders who make written request therefor to Corporate Communications and Investor Relations Department, The Travelers Inc., 388 Greenwich Street, New York, New York 10013. ------------- * Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. EX-10.08 2 Exhibit 10.08 THE TRAVELERS INC. CAPITAL ACCUMULATION PLAN as amended to May 16, 1994 SECTION 1. Purpose of the Plan. The name of this plan is THE TRAVELERS INC. CAPITAL ACCUMULATION PLAN (the "Plan"). The purpose of the Plan is to enable THE TRAVELERS INC. (the "Company") and its Subsidiaries to attract, retain and motivate officers and other key employees, to compensate them for their contributions to the growth and profits of the Company and to encourage ownership of stock in the Company on the part of such personnel. The Plan provides incentives to participating officers and other key employees which are linked directly to increases in stockholder value and will therefore inure to the benefit of all stockholders of the Company. SECTION 2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Cause" means termination by the Company or a Subsidiary of a Participant's employment upon (i) the willful and continued failure by such Participant to substantially perform his duties with the Company or a Subsidiary (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to such Participant by the Board, which demand specifically identifies the manner in which the Board believes that such Participant has not substantially performed his duties, or (ii) the willful engaging by a Participant in conduct which is demonstrably and materially injurious to the Company or a Subsidiary, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on a Participant's part shall be deemed "willful" unless done, or omitted to be done, by such Participant not in good faith and without reasonable belief that his action or omission was in the best interest of the Company or a Subsidiary. (c) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (d) "Committee" means the Nominations and Compensation Committee of the Board, appointed by the Board from among its members and shall consist of not less than three members thereof who are and shall remain Committee members only so long as they remain "disinterested persons" as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended. (e) "Disability" means permanent and total disability as determined under the Company's long- term disability plan. (f) "Eligible Employee" means an employee of the Company or any Subsidiary as described in Section 3. (g) "Options" mean non-qualified stock options to purchase shares of Stock which are not incentive stock options under Section 422A of the Code and which are granted under Section 6 herein. (h) "Participant" means an Eligible Employee selected by the Committee, pursuant to the Committee's authority in Section 7, to receive an award of Restricted Stock. (i) "Related Employment" means the employment of an individual by an employer which is neither the Company nor a Subsidiary provided (i) such employment is undertaken by the individual at the request of the Company or a Subsidiary, (ii) immediately prior to undertaking such employment, the individual was an officer or employee of the Company or a Subsidiary, or was engaged in Related Employment as herein defined and (iii) such employment is recognized by the Committee, in its sole discretion, as Related Employment for purposes of this Plan. The death or Disability of an individual during a period of Related Employment as herein defined shall be treated, for purposes of this Plan, as if the death or onset of Disability had occurred while the individual was an officer or employee of the Company or a Subsidiary. (j) "Restricted Stock" means an award of shares of Stock that is subject to the restrictions set forth in Section 5. 1 (k) "Retirement" means retirement of a Participant from active employment with the Company or any Subsidiary with a full and unreduced pension benefit under an approved retirement program of the Company or a Subsidiary. (l) "Stock" means the common stock of the Company. (m) "Subsidiary" means any corporation (other than the Company) 50% or more of the total combined voting power of all classes of stock of which is owned, directly or indirectly, by the Company. SECTION 3. Eligibility and Participation. Officers and other key employees of the Company or its Subsidiaries who are responsible for or contribute to the management, growth and/or profitability of the Company or its Subsidiaries shall be eligible to participate in the Plan. The Participants under the Plan shall be selected from time of time by the Committee, in its sole discretion, from among Eligible Employees. SECTION 4. Amount and Form of Awards. (a) Awards under the Plan shall be determined by the Committee in its discretion. Awards will be made in lieu of cash payment of a percentage of the Participant's annual compensation and will be granted at such time as the Committee may in its sole discretion determine, and the Committee may also in its sole discretion provide for alternative methods for grants of awards. A Participant will receive such award in Restricted Stock or, alternatively, and, if so elected by the Participant and determined by the Committee pursuant to Section 6, a portion of such award may be received in Options. (b) 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. In the event Restricted Stock is forfeited, or an outstanding Option is terminated, expires or is canceled, prior to the end of the period during which the restrictions on Restricted Stock expire, or the Options can be exercised, the shares of Stock called for by such award of Restricted Stock or the unexercised portion of the Option award will become available for future awards. SECTION 5. Restricted Stock. (a) The number of shares of Restricted Stock awarded to a Participant under the Plan will be determined by a formula or formulas approved by the Committee. In order to reflect the impact of the restrictions on the value of the Restricted Stock, as well as the possibility of forfeiture of Restricted Stock, the fair market value of Stock shall be discounted at a rate of 25% in determining the number of shares of Restricted Stock to be awarded. The Committee may, where it deems appropriate, and in its sole discretion, provide for an alternative discount rate. For purpose of this Plan, the fair market value of Stock for an award will be the average of the Stock's closing prices on the Composite Tape of the New York Stock Exchange for the five trading days prior to the date of the award. The dollar value of an award will be divided by the discounted market value to determine the number of shares of Restricted Stock in an award. The value of fractional shares will be paid in cash. (b) A Participant shall not have any rights with respect to an award, unless or until such Participant has executed an agreement evidencing the award (a "Restricted Stock Award Agreement") and has delivered a fully executed copy thereof to the Company, within a period of 60 days after the date of the award (or such shorter period after the date of the award as the Committee may specify). Each Participant who is awarded Restricted Stock may, but need not, be issued a stock certificate in respect of such shares of Restricted Stock. A "book entry" (i.e., a computerized or manual entry) shall be made in the records of the Company to evidence an award of shares of Restricted Stock to a Participant where no certificate is issued in the name of the Participant. Such Company records shall, absent manifest error, be binding on the Participants. Each certificate, if any, registered in the name of a Participant shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: 2 "The transferability of the certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of The Travelers Inc. Capital Accumulation Plan and a Restricted Stock Award Agreement entered into between the registered owner and The Travelers Inc. Copies of such Plan and Agreement are on file in the offices of The Travelers Inc." The Committee shall require that any stock certificate issued in the name of a Participant evidencing shares of Restricted Stock be held in the custody of the Company until the restrictions thereon shall have lapsed, and that, as a condition of such issuance of a certificate for Restricted Stock, the Participant shall have delivered a stock power, endorsed in blank, relating to the shares covered by such certificate. (c) The shares of Restricted Stock awarded pursuant to this Section 5 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of the Plan and the Restricted Stock Award Agreements, during the two-year period (together with any extensions thereof approved as provided herein) commencing on the date of the award (the "Restricted Period"), the Participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. The Committee may, in its sole discretion, (x) initially provide for an alternative Restricted Period or alter the two-year Restricted Period for a previously granted award (provided that the Committee may not extend the Restricted Period for a previously granted award without the Participant's written consent), (y) during any extension of such Restricted Period, provide for alternative restrictions (provided that nothing contained in this clause shall grant the Committee any additional powers under the Plan with respect to awards granted to or to be granted to persons who are subject to Section 16 of the Securities Exchange Act of 1934, as amended), and (z) provide for the lapse of any such restrictions in installments and accelerate or waive any such restrictions in whole or in part based on such factors and such circumstances as the Committee may determine, in its sole discretion, including, but not limited to, the Participant's Retirement, termination, death or Disability. (ii) Unless the Committee in its sole discretion shall determine otherwise at or prior to the time of the grant of any award, the Participant shall have the right to direct the vote of his shares of Restricted Stock during the Restricted Period, in accordance with paragraph (e) of this Section 5. The Participant shall have the right to receive any regular dividends on such shares of Restricted Stock. The Committee shall in its sole discretion determine the Participant's rights with respect to extraordinary dividends on the shares of Restricted Stock. (iii) Certificates for shares of Restricted Stock shall be delivered to the Participant promptly after, and only after, the Restricted Period shall expire (or such earlier time as the restrictions may lapse in accordance with paragraph (c)(i) of this Section 5) without forfeiture in respect of such shares of Restricted Stock. (d) Subject to the provisions of paragraph (c)(i) of this Section 5, the following provisions shall apply to a Participant's shares of Restricted Stock prior to the end of the Restricted Period (including extensions and Related Employment): (i) Upon the death or Disability of a Participant, the restrictions on his or her Restricted Stock shall immediately lapse. (ii) If a Participant voluntarily terminates employment or if a Participant is involuntarily terminated for Cause, such Participant shall forfeit his or her Restricted Stock. (iii) If a Participant is involuntarily terminated without cause or retires from employment, but does not fall within the definition of Retirement, such Participant shall forfeit his or her Restricted Stock and receive in return, without interest, a cash payment equal to the portion of his or her annual compensation that had been paid in the form of such forfeited Restricted Stock. (iv) If a Participant whose total annual compensation is less than $100,000 terminates employment upon Retirement, he or she shall receive his or her Restricted Stock upon completion of the Restricted Period. If a Participant whose total annual compensation equals 3 or exceeds $100,000 terminates employment upon Retirement, he or she shall receive, in the sole discretion of the Committee, either (A) his or her Restricted Stock upon the completion of the Restricted Period, or (B) a cash payment equal to the portion of his or her annual compensation that had been paid in the form of Restricted Stock, without interest. (e) Unless the Committee in its sole discretion shall determine otherwise at or prior to the time of the grant of any award, during the Restricted Period the shares of Restricted Stock shall be voted by the Company's senior administrative officer in charge of administering the Plan, or such other person as the Committee may designate (the "Plan Administrator"), and the Plan Administrator shall vote such shares in accordance with instructions received from Participants (unless to do so would constitute a violation of the Plan Administrator's fiduciary duties). Shares as to which no instructions are received shall be voted by the Plan Administrator proportionately in accordance with instructions received from Participants in the Plan (unless to do so would constitute a violation of the Plan Administrator's fiduciary duties). SECTION 6. Election of Options. (a) At the time a Participant is notified of his or her award of Restricted Stock under the Plan, the Committee in its sole discretion may permit such Participant to elect to receive up to a maximum of one-third (1/3) of his or her award in the form of Options. The Committee in its sole discretion shall determine the number of Options to be awarded in lieu of each share of Restricted Stock given up and may alter the maximum percentage of Restricted Stock which may be exchanged for Options. Such election shall be made within a period of 60 days after the grant of the Option (or such shorter period after the date of the award as the Committee may specify). In the absence of such an election, the award will be paid entirely in shares of Restricted Stock. (b) Options will be granted with an exercise price equal to the fair market value of Stock, which will be the average of the Stock's closing prices on the Composite Tape of the New York Stock Exchange on the five trading days prior to the grant date. The Committee in its discretion shall determine the expiration date of the Options, provided that in no event shall the expiration date be later than ten years from the date of the award. Options granted under the Plan shall vest pursuant to a schedule determined by the Committee, in its sole discretion, prior to the Participant's election to receive Options. (c) Recipients of Options shall enter into a stock option agreement with the Company, in such form as the Committee shall determine, which agreement shall set forth, among other things, the exercise price of the Option, the term of the Option and provisions regarding exercisability of the Option granted thereunder. (d) Options are not transferable other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act. During the lifetime of the Participant the Options may be exercised only by the Participant. (e) An Option shall not be exercisable unless payment in full is made for the shares being acquired thereunder at the time of exercise; such payment shall be made (A) in United States dollars by cash or check, or (B) in lieu thereof, unless the Committee shall in its sole discretion determine otherwise, by tendering to the Company Stock owned by the person exercising the Option (or owned by the person exercising the Option and his or her spouse, jointly) and acquired more than six months prior to such tender, including shares of Restricted Stock awarded hereunder at least six months prior to such tender, and having a fair market value equal to the cash exercise price applicable to such Option, such fair market value to be determined in such reasonable manner as may be provided for from time to time by the Committee or as may be required in order to comply with or to conform to the requirements of any applicable or relevant laws or regulations, or (C) by a combination of United States dollars and Stock as aforesaid. (f) An Option shall not be exercisable unless the person exercising the Option has been, at all times during the period beginning with the date of grant of the Option and ending on the date of such exercise, an officer or employee of the Company or a Subsidiary, except that: 4 (i) if such person shall cease to be an officer or employee of the Company or a Subsidiary solely by reason of a period of Related Employment, he or she may, during such period of Related Employment, exercise the Option as if he or she continued to be such an officer or employee; or (ii) if such person shall cease to be such an officer or employee on account of an involuntary termination of employment (other than death or Disability) or on account of voluntary termination of employment (other than pursuant to Retirement), while holding an Option which has not expired and has not been fully exercised, such person may before the expiration of thirty (30) days after such termination (but in no event after the Option has expired under the provisions of Section 6(b) hereof) exercise the Option with respect to any shares as to which he or she could have exercised the Option on the date he or she terminated employment, except that the Committee may in its sole discretion refuse to permit a person who has voluntarily terminated his or her employment or who has been involuntarily terminated with Cause to exercise any Options after the date of termination; or (iii) if such person shall cease to be such an officer or employee by reason of death or Disability while holding an Option which has not expired and has not been fully exercised, such person (or in the case of death, his or her executors, administrators, heirs or distributees, as the case may be) may exercise the Option (but in no event after the Option has expired under the provisions of Section 6(b) hereof) with respect to any shares as to which such person could have exercised the Option on the date he or she ceased to be such an officer or employee; or (iv) if such person shall cease to be such an officer or employee by reason of Retirement while holding an Option which has not expired and has not been fully exercised, such person at any time within three years of the date he or she ceased to be such an officer or employee (but in no event after the Option has expired under the provisions of Section 6(b) hereof), may exercise the Option with respect to any shares as to which he or she could have exercised the Option on the date he or she ceased to be such an officer or employee; or (v) if within 30 days of his termination of employment for any reason, any person to whom an Option has been granted shall die or become disabled (as may be determined by the Board in its sole and absolute discretion) holding an Option which has not been fully exercised, he or she or his or her executors, administrators, heirs or distributees, as the case may be, and, at any time within one year after the date of such event (but in no event after the Option has expired under the provisions of Section 6(b) hereof), may exercise the Option with respect to any shares as to which such person could have exercised his Option at the time of his or her death or disability; or (vi) notwithstanding the foregoing provisions of this Section 6(f), the Committee shall have the authority, on a case by case basis, in its sole and absolute discretion, to extend for a period of up to two (2) years following the termination of employment of an optionee the period of vesting determined by the Committee prior to the Participant's election to receive Options and the period of exercisability, provided such extension complies with Section 6(b). (g) If an Option is exercised by a Participant, then, at the discretion of the committee administering the Company's Stock Option Plan, the Participant may receive a replacement or reload option under such Stock Option Plan in accordance with the provisions of such plan. (h) If the exercise price of an Option is paid by delivery of a number of shares of Restricted Stock, then the Participant shall receive, in connection with the exercise, an equal number of identically restricted shares of Stock; the remaining shares of Stock issued upon such exercise shall contain any applicable restrictions that are set forth in the Participant's stock option agreement and shall otherwise be unrestricted. In such event, the fair market value of shares of Restricted Stock delivered or withheld, for purposes of this Plan, shall not take into account the restrictions on such shares. 5 SECTION 7. Administration. The Plan shall be administered by the Committee which shall be appointed by the Board and which shall serve at the pleasure of the Board. The Committee shall have the power and authority to grant Restricted Stock or Options to Participants, pursuant to the terms of the Plan. In particular, the Committee shall have the authority: (i) to select those employees of the Company and its Subsidiaries who are Eligible Employees; (ii) to determine whether and to what extent Restricted Stock or Options are to be granted to Participants hereunder; (iii) to determine the number of shares of Stock to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder; and (v) to determine the terms and conditions, not inconsistent with the terms of the Plan, which shall govern all written instructions evidencing the Options and Restricted Stock. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan; and to otherwise supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and the Participants. SECTION 8. Adjustments upon a Change in Common Stock. In the event of any change in the outstanding Stock of the Company by reason of any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other similar event if such change equitably requires an adjustment in the number or kind of shares that may be issued under the Plan pursuant to Section 4(b), or in the number or kind of shares subject to, or the option price per share under, any outstanding Option which has been granted to any Participant, such adjustment shall be made by the Committee and shall be conclusive and binding for all purposes of the Plan. In no event shall the excess of the aggregate fair market value of the Stock subject to the Options immediately after any substitution, exchange or adjustment over the aggregate option price for such Stock be more than the excess of the aggregate fair market value of all of the Stock subject to the Option immediately before any such substitution, exchange or adjustment over the aggregate option price of such Stock nor shall the adjusted Option give the holder thereof any additional benefits he did not have under the old Option. SECTION 9. Amendment and Termination. The Plan may be amended or terminated at any time and from time to time by the Board, but no amendment which increases the aggregate number of shares of Stock which may be issued pursuant to the Plan (except as provided in Section 8) shall be effective unless and until the same is approved by the stockholders of the Company. Neither an amendment to the Plan nor the termination of the Plan shall adversely affect any right of any Participant with respect to any Restricted Stock or Option theretofore granted without such Participant's written consent. SECTION 10. General Provisions. (a) The Committee may require each person purchasing shares pursuant to an Option to represent and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restriction on transfer. All certificates for shares of Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, 6 and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in the Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (c) No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. (d) A Participant's rights and interest under the Plan may not be assigned or transferred in whole or in part either directly or by operation of law or otherwise (except in the event of a Participant's death) including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner and no such right or interest of any Participant in the Plan shall be subject to any obligation or liability of such Participant. (e) The Company and its Subsidiaries shall have the right to deduct from any payment made under the Plan any federal, state or local income or other taxes required by law to be withheld with respect to such payment. It shall be a condition to the obligation of the Company to issue Stock upon the lapse of restrictions on Restricted Stock or upon exercise of an Option that the Participant (or any beneficiary or person entitled to exercise the Option) pay to the Company, upon its demand, such amount as may be requested by the Company for the purpose of satisfying any liability to withhold federal, state or local income or other taxes. If the amount requested is not paid, the Company may refuse to issue shares. Unless the Committee shall in its sole discretion determine otherwise, payment for taxes required to be withheld may be made in whole or in part by an election by a Participant, in accordance with rules adopted by the Committee from time to time (A) to have the Company withhold Stock otherwise issuable pursuant to the Plan having a fair market value equal to such tax liability and/or (B) to tender to the Company shares of Stock owned by the person exercising the option and acquired more than six months prior to such tender (excluding shares of Restricted Stock awarded hereunder) and having a fair market value equal to such tax liability, such fair market value (in the case of clause (A) or (B)), to be determined in such reasonable manner as may be provided for from time to time by the Committee or as may be required in order to comply with or to conform to the requirements of any applicable or relevant laws or regulations. SECTION 11. Effective Date of Plan. The Plan shall be effective on the date it is adopted by the Board, subject to the approval of stockholders. 7 EX-10.22 3 Exhibit 10.22 PERSONAL & CONFIDENTIAL ----------------------- November 15, 1994 Mr. Michael A. Carpenter 134 Otter Rock Drive Greenwich, Connecticut 06830 Dear Mike: We are delighted that you will be joining The Travelers ("Travelers"). The purpose of this letter is to set forth our mutual understanding of the terms and conditions of your employment by Travelers. 1. Employment. Travelers hereby employs you, and you hereby accept ---------- employment, upon the terms and conditions specified in this letter agreement, effective January 1, 1995. 2. Term. Your employment is not for any specific term and may be ---- terminated by you, or by Travelers, at any time, with or without cause. 3. Compensation. ------------ (a) Base Salary. Travelers will pay you a base salary at a rate of ----------- Six Hundred Thousand Dollars ($600,000) per year (the "Base Salary"), to be paid in accordance with the customary payroll practices of Travelers. (b) Bonus. In addition to the Base Salary, with respect to each ----- calendar year of the Employment Term, you will be eligible for a bonus, the amount of which will be determined by the Compensation Committee of the Board of Directors of Travelers in its discretion. Notwithstanding the foregoing, with respect to the first calendar year of your employment, the amount of the bonus will be not less than Six Hundred Thousand Dollars ($600,000) (the "Guaranteed Bonus"); while this is the minimum for the first year, there is the opportunity for substantial improvement in this amount, depending upon your performance and that of the businesses. In each instance, Travelers will pay you the bonus consistent with its customary practices but no later than February 1 of the next succeeding calendar year, commencing February 1, 1996. Mr. Michael A. Carpenter Page Two November 15, 1994 (c) The Base Salary and bonus provided for in Paragraphs 3(a) and 3(b) will be paid in cash and restricted stock in accordance with the Travelers Capital Accumulation Plan, as in effect from time to time. 4. Duties. You will be engaged as an Executive Vice President of Travelers, ------ with responsibility for business development and planning. You will also serve as Chairman and Chief Executive Officer of Travelers Life Insurance Company and as a member of the Travelers Planning Group. 5. Extent of Service. You will devote your attention and energies on a full- ----------------- time basis to the business of Travelers and to the discharge of your duties provided that this requirement shall not preclude you from devoting --------- reasonable periods of time which do not interfere with the performance of your duties hereunder required for serving as a director of any organization involving no conflict of interest with Travelers or its affiliates or engaging in charitable or community activities. You will render your services hereunder to the best of your ability and will use your best efforts to promote the interests of Travelers. 6. Working Facilities. You will be furnished with office facilities and ------------------ services suitable to your position as an Executive Vice President and adequate for the performance of your duties. 7. Expenses. You will be reimbursed for ordinary and necessary expenses for -------- entertainment, travel and similar items, consistent with such policies as may from time to time be established by the Board of Directors. 8. Insurance and Other Employee Benefits. You will be entitled to participate ------------------------------------- in any insurance coverage maintained by Travelers for the benefit of all employees and in any retirement, profit-sharing, pension, disability, group insurance (including medical, dental and life), death benefit or other employee benefit programs maintained by Travelers. You will be entitled to vacation in accordance with Travelers' prevailing policy for its senior executives and at times consistent with the reasonable needs of the business. 9. Stock Option Grant. As further consideration for your obligations ------------------ contained herein, Travelers will grant to you, effective as of the first day of the Employment Term, an option (the "Option") to purchase One Hundred Seventy Five Thousand (175,000) shares of common stock of Travelers at the market price at the close of the market on the business day next preceding the first day of the Employment Term, as reported in The Wall Street Journal, in accordance with the provisions of the Travelers Stock Option Plan. 10. Confidentiality. You agree that during and after your Employment Term, --------------- you will hold confidential all proprietary or confidential information of Travelers and that, upon termination of the Employment Term, you will return all proprietary or confidential materials of Travelers and not retain any copies thereof. Mr. Michael A. Carpenter Page Three November 15, 1994 11. Other. This letter agreement incorporates all of the terms of our offer ----- of employment to you. Any dispute concerning the provisions of your employment shall be resolved by arbitration in accordance with the provisions of the Travelers Employment Arbitration Policy, as in effect from time to time. Mike, we are very excited about you joining our organization. Please indicate your agreement by signing on the line indicated below. Very truly yours, THE TRAVELERS INC. By: /s/ Charles O. Prince, III -------------------------- Charles O. Prince, III AGREED: /s/ Michael A. Carpenter ___________________________________ Michael A. Carpenter Dated: November 22, 1994 EX-10.23.2 4 Exhibit 10.23.2 Amendment to The Travelers Corporation 1982 Stock Option Plan, as adopted by The Travelers Inc. As used in this Amendment, all capitalized terms shall have the meanings assigned to them in the Plan, and the Corporation shall mean the surviving corporation of the merger between Primerica Corporation and The Travelers Corporation. Section 6(h) is hereby amended by adding the following at the end thereof: Notwithstanding anything to the contrary in this Section 6, the optionee's employment with the Corporation or its subsidiaries shall not be deemed to be terminated if the employment with the Corporation or any of its subsidiaries ceases by reason of the optionee's engaging in a period of Related Employment in lieu of employment with the Corporation or any of its subsidiaries. For the purposes of this Plan, Related Employment shall mean the employment of an individual by an employer which is neither the Corporation nor a subsidiary of the Corporation provided (i) such employment is undertaken by the individual at the request of the Corporation or a subsidiary of the Corporation, (ii) immediately prior to undertaking such employment, the individual was an officer or employee of the Corporation or a subsidiary of the Corporation, or was engaged in Related Employment as herein defined and (iii) such employment is recognized by the Committee, in its sole discretion, as Related Employment for purposes of this Plan. The death or disability of an individual during a period of Related Employment as herein defined shall be treated, for purposes of this Plan, as if the death or onset of the disability had occurred while the individual was an officer or employee of the Corporation or a subsidiary of the Corporation. EX-10.24.2 5 Exhibit 10.24.2 Amendment to The Travelers Corporation 1988 Stock Incentive Plan, as adopted by The Travelers Inc. As used in this Amendment, all capitalized terms shall have the meanings assigned to them in the Plan, and the Corporation shall mean the surviving corporation of the merger between Primerica Corporation and The Travelers Corporation. 1. Section 5(h) is hereby amended by adding the following at the end thereof: Notwithstanding anything to the contrary in this Section 5, the optionee's employment with the Corporation or its subsidiaries shall not be deemed to be terminated if the employment with the Corporation or any of its subsidiaries ceases by reason of the optionee's engaging in a period of Related Employment in lieu of employment with the Corporation or any of its subsidiaries. For the purposes of this Plan, Related Employment shall mean the employment of an individual by an employer which is neither the Corporation nor a subsidiary of the Corporation provided (i) such employment is undertaken by the individual at the request of the Corporation or a subsidiary of the Corporation, (ii) immediately prior to undertaking such employment, the individual was an officer or employee of the Corporation or a subsidiary of the Corporation, or was engaged in Related Employment as herein defined and (iii) such employment is recognized by the Committee, in its sole discretion, as Related Employment for purposes of this Plan. The death or disability of an individual during a period of Related Employment as herein defined shall be treated, for purposes of this Plan, as if the death or onset of the disability had occurred while the individual was an officer or employee of the Corporation or a subsidiary of the Corporation. 2. Section 7(i) is hereby amended by adding the following at the end thereof: Notwithstanding anything to the contrary in this Section 7, the optionee's employment with the Corporation or its subsidiaries shall not be deemed to be terminated if the employment ceases by reason of the optionee's engaging in a period of Related Employment in lieu of employment with the Corporation or any of its subsidiaries. EX-10.30 6 Exhibit 10.30 EMPLOYMENT AGREEMENT AGREEMENT made as of the 30th day of December, 1994, by and among Smith Barney Inc., a Delaware corporation (the "Company"), and Joseph J. Plumeri II (the "Executive"). The Board of Directors of the Company desires that the Company continue 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 term of this Agreement commenced on ---- July 30, 1994 (the "Commencement Date") and, subject to the provisions of Section 10, will end on the third anniversary of the Commencement Date unless further extended or sooner terminated as hereinafter provided. 3. Position and Duties. The Executive shall serve as Vice -------------------- Chairman of The Travelers Inc. (or if there shall be a corporate reorganization such that The Travelers Inc. is replaced by a different ultimate parent company, then of that other company("Travelers"), the indirect parent of the Company and shall report only to the Chairman of the Board of Directors, a Vice Chairman, the Chief Executive Officer or the Chief Operating Officer of Travelers. The Executive shall have such responsibilities, duties and authorities commensurate with his position as may from time to time be assigned to the Executive by the individual to whom the Executive shall then report. 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 Travelers (including the Company and other Travelers' subsidiaries) except for vacations, illness or incapacity. Nothing in this Agreement shall preclude the Executive, subject to compliance with such other policies and procedures that may be in effect at the Travelers, from devoting reasonable periods required for (i) serving as a director or member of a committee of any organization 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 such activities do not materially interfere with the performance of his duties hereunder. 4. Place of Performance. In connection with the Executive's -------------------- employment by the Company, the Executive shall be based at the principal executive offices of Travelers in the City of New York, except for required travel on business. 5. Compensation and Related Matters. -------------------------------- (a) Compensation. During the period of the Executive's ------------ employment hereunder, the Company shall pay to the Executive a base salary (i) during the period from the Commencement Date through July 30, 1996 at a rate of $950,000 per year and (ii) thereafter during the employment term at a rate to be determined within the discretion of the Company. In addition, the Executive shall be entitled to consideration for an annual discretionary bonus under the Travelers Inc. Executive Performance Compensation Plan. Notwithstanding the foregoing, in the event Sanford I. Weill is, at any time during the employment term, no longer the Chief Executive Officer of Travelers, then, during any remaining portion of the employment term, the compensation payable to the Executive, in addition to the other items specified herein, shall be, as specified on Attachment A hereto (or, in the event of a termination of employment, in accordance with the provisions of Section 7), including without limitation, the payment of any Additional Payments specified in Attachments A or B hereto for the calendar year in which such event occurs or the prior calendar year if discretionary bonuses for senior executives of Travelers for the applicable calendar year in question have not been determined as of the date that Mr. Weill is no longer the Chief Executive Officer of Travelers. The compensation shall be paid in accordance with the Company's normal payroll practices, as in effect from time to time and any bonus for 1997 shall, subject to the other provisions of this Agreement, be paid when 1997 bonuses are generally paid by the Company notwithstanding whether or not Executive is then employed by the Company. (b) Expenses. During the period 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, 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 Travelers (including without limitation each retirement plan, supplemental and excess retirement plans, annual and long-term incentive compensation plans, stock option and purchase plans, group life insurance (presently group universal life insurance) and accident plan, medical and dental insurance plans, financial planning and disability plan). The Executive shall participate in the Travelers Supplemental Retirement Plan through maintenance of the existing frozen benefit and, if and to the extent that it shall be reopened to participation generally by senior officers of the Company or of Travelers, accrual of future benefits, all in accordance with the plan provisions as in effect from time to time except that the Executive's service at Shearson will be counted for the purpose of vesting only. During the period of the Executive's employment hereunder, the Company will reimburse the Executive for annual premium to purchase a term life insurance policy from Primerica Financial Services ("PFS") carrying a death benefit of up to $1,500,000. 2 (d) Capital Accumulation Plan. The Executive shall -------------------------- participate in the Travelers Capital Accumulation Plan ("CAP"), and any successor or replacement plan generally applicable to senior executives of the Company (provided that (i) the deferred compensation specified in Section 5 (i) hereof and (ii) any amounts payable under Section 7 at or following a termination of employment, shall not be subject to CAP). The provisions of such plan, as in effect from time to time, shall govern the participation by the Executive except as provided in Attachment C hereto. (e) Vacations. The Executive shall be entitled to no less --------- than the number of vacation days in each calendar year determined in accordance with the Company's vacation policy. The Executive shall also be entitled to all paid holidays and personal days given by the Company to its executives. (f) Services Furnished. The Company shall cause Travelers ------------------ to furnish the Executive with office space, secretarial assistance and such other facilities and services as shall be suitable to the Executive's position and adequate for the performance of his duties as set forth in Section 3 hereof. (g) Stock Option. As of the date hereof, the Executive ------------ holds options to purchase 300,000 shares of common stock of Travelers pursuant to the provisions of the Travelers Stock Option Plan, including 100,00 shares granted on September 28, 1994 (the 200,000 shares granted prior to September 28, 1994 being referred to herein as the "Original Grant"). In the event of (i) the termination of this Agreement on account of the death or disability of the Executive or by the Company without Cause or by the Executive for Good Reason, the Executive shall be entitled to two (2) years of additional vesting and exercise of all such stock options, or any longer periods of vesting and exercise provided for in the Stock Option Plan, or (ii) the termination of this Agreement by the Executive but without Good Reason, the Executive shall be entitled to the remainder (if any) of a two (2) year period of vesting and exercise for the Original Grant ending on July 30, 1996, in both cases subject to the other provisions of the Stock Option Plan. (h) The Executive shall be entitled to have, at the Company's expense, a car and driver at the level similar to other senior executives of Travelers. (i) Deferred Compensation --------------------- (A) The Executive shall receive a deferred compensation payment hereunder in the amount set forth in (B) below. Such payment shall be made in a lump sum thirty (30) days after the Executive ceases to be employed by the Company or its affiliates for any reason whatsoever, including death, disability, termination by the Company with or without Cause or termination by the Executive with or without Good Reason (but each portion of such lump sum shall not be payable earlier than the date from which "earnings" are to be measured). Such payments shall be made without counterclaims, offset or setoff (other than legally required withholding). 3 (B) The deferred compensation amount shall be the sum of the following amounts: (I) $2,000,000 with "earnings" from July 30, 1996; (ii) $2,000,000 with "earnings" from July 30, 1997; and (iii) provided the Executive has not voluntarily terminated employment prior to March 1, 1996 (other than for Good Reason or death) and provided the Executive has not been involuntarily terminated for Cause prior to March 1, 1996, $1,400,000 with "earnings" from July 30, 1997. (C) Earnings shall be measured by the published ninety (90) day T bill rate as in effect at the beginning of each calendar quarter during the relevant period and shall be compounded quarterly. 6. 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, and within thirty (30) days after written notice of termination is given (which may occur before or after the end of such six (6) months period) shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate the Executive's employment hereunder. (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 upon the Executive's willful refusal to perform his properly assigned duties, or if the Executive shall be convicted of or plead guilty or nolo contendre to conduct constituting a felony, or in the event of a material violation of Section 10(a) of this Agreement. Such termination for 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 Executive's failure within ten (10) days following such notice to cure the breach specified in such notice. (d) 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 12. 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 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. (e) "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 pursuant to subsection 4 (b) above, the later to expire of thirty (30) days after Notice of Termination is given pursuant to subsection (b) above or the six (6) month disability period (provided that the Executive shall not have returned to the performance of his duties on a full- time basis prior to expiration of the thirty (30) day notice period or the six (6) month disability period, whichever shall expire later) (iii) if the Executive's employment is terminated pursuant to subsection (c) above, the date specified in the Notice of Termination, and (iv) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (or, if no date is so specified, on the date on which a Notice of Termination is given). (f) Good Reason. The Executive may terminate his ----------- employment hereunder for Good Reason. For purposes of this Agreement, the Executive shall have "Good Reason" to terminate his employment if the Company shall materially breach its obligations under this Agreement as to position, reporting relationship, responsibilities, duties, authority or place of performance, as specified in Sections 3 and 4. Such termination for Good Reason shall only be effective upon the Executive's written notice of termination to the Company and the Company's failure within ten (10) days following such notice to cure the breach specified in such notice. (g) The Executive may terminate his employment hereunder without Good Reason. Such termination shall only be effective upon receipt of Executive's written notice of termination to the Company. In such event, the Company's obligations with regard to compensation shall be as provided in Section 7. Except as otherwise provided for herein, the provisions of the Stock Option Plan, the Capital Accumulation Plan and other employee plans will govern as to participation in such plans. Such a termination shall not affect the Executive's other obligations under this Agreement, including without limitation Section 10. (h) In the event the Executive shall terminate his employment with or without Good Reason or if the Company shall terminate the Executive's employment other than for Cause, the Company shall furnish to the Executive appropriate office space, his then administrative assistant (if employed by the Company or Travelers or, if not, other appropriate secretarial assistance) and his existing car and driver until the earlier of his commencing other employment or six (6) months after such date of termination. 7. Severance Payments Upon Termination. ----------------------------------- (a) 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 at the rate then in effect until his employment is terminated pursuant to Section 6(b) hereof (provided that payments so made to the Executive during the disability period shall be reduced by the sum of the amounts, if any, payable to the Executive at or prior to the time of any such payment under disability benefit plans of the Company and which amounts were not previously applied to reduce any such payment). If the Executive's employment is terminated (i) by the Executive but not for Good Reason and with an effective date on or prior to February 29, 1996, or (ii) by the Company for 5 Cause, the Company shall pay to the Executive the amounts, if any, to be paid following such date of termination, as set forth in Attachment B, including, without limitation, the payment of any Additional Payments specified therein for the calendar year in which such date of termination occurs or the prior calendar year if discretionary bonuses for senior executives of Travelers for the applicable calendar year in question have not been determined as of such date of termination. In addition, Executive shall retain his rights, if any, under any deferred compensation (including under Section 5 (i) hereof )or other benefit plans in which he participates as specifically provided herein, or, if not otherwise specifically provided for in this Agreement, as provided in such plan and any other unpaid amounts required to be paid hereunder and the Company shall have no further obligations to the Executive under this Agreement. (b) If the Executive's employment is terminated on account of disability or by his death, the Company shall pay to the Executive or his estate or as may be directed by the legal representatives of such estate, the amounts, if any, to be paid following such date of termination, as set forth in Attachment A, including, without limitation, the payment of any Additional Payments specified therein for the calendar year in which such date of termination occurs or the prior calendar year if discretionary bonuses for senior executives of Travelers for the applicable calendar year in question have not been determined as of such date of termination. In addition, the Executive shall retain his rights, if any, under any deferred compensation (including under Section 5 (i) hereof) or other benefit plans in which he participates as specifically provided herein or, if not otherwise specifically provided for in this Agreement, as provided in such plan and any other unpaid amounts required to be paid hereunder and the Company shall have no further commitments under this Agreement. (c) [Intentionally Omitted]. (d) If the Executive's employment is terminated (i) by the Company other than for Cause (ii) by the Executive for Good Reason, or (iii) by the Executive but not for Good Reason and with an effective date after February 29, 1996 then the Company shall pay the Executive the amounts, if any, to be paid following such date of termination, as set forth in Attachment A (provided, that in the event of a termination under clause (iii) of this sentence, the payment of base salary shall be made for the remaining employment term in accordance with Attachment B rather than in accordance with Attachment A or Section 5(a)), including, without limitation, the payment of any Additional Payments specified therein for the calendar year in which such date of termination occurs or the prior calendar year if discretionary bonuses for senior executives of Travelers for the applicable calendar year in question have not been determined as of such date of termination. In addition, the Executive shall retain his rights, if any, under any deferred compensation (including under Section 5 (i) hereof) or other benefit plans in which he participates as specifically provided herein or, if not otherwise specifically provided for in this Agreement, as provided in such plan and any other unpaid amounts required to be paid hereunder and the Company shall have no further obligations to the Executive under this Agreement. 6 (e) The provisions of this Section 7 (together with (i) the provisions of any vacation, deferred compensation or other benefit plans in which he participates and which are not otherwise specifically provided for in this Agreement, (ii) the provisions of the CAP and Stock Option Plans as in effect from time to time and as specifically provided for in this Agreement in the event of a termination and (iii) the continuation of services provision set forth in Section 6(h)) are the exclusive rights of the Executive regarding a severance or termination occurring prior to expiration of the employment term. The rights of the Executive regarding a severance or termination occurring after expiration of the employment term shall be governed exclusively by the Company's regular severance policies as in effect at such time, except as otherwise specifically provided for herein. 8. Mitigation. The Executive shall not be required to mitigate ---------- amounts payable pursuant to Section 7 hereof by seeking other employment or otherwise and any amounts received from other employment shall not reduce any amounts due under Section 7. 9. [Intentionally Omitted] 10. Confidentiality and Non-Solicitation. ------------------------------------ (a) Confidentiality. During the employment term of this --------------- Agreement and thereafter, the Executive will not, without the written consent of the Company, make use of or divulge to any person, firm or corporation, any trade or business secret which may be disclosed to him by the Company or Travelers or as a result of his employment with the Company hereunder or his position with Travelers excepting only such information which shall be made public without the fault of the Executive and such information as the Executive shall be obligated to disclose pursuant to legal process. In addition, the foregoing provision shall not impair the ability of the Executive to exercise his good faith judgment as to disclosures in connection with his duties hereunder. (b) Non-Solicitation. In the event the Executive's ---------------- employment hereunder is terminated for any reason the Executive (i) shall not be personally involved, directly or indirectly, in hiring any employee of the Company or Travelers or any of their subsidiaries who either is a financial consultant (or similar position) for the Company or whose annual compensation is in excess of $100,000 or any independent representative of the Company or Travelers or any of its subsidiaries who is intended to act as a full-time representative (e.g., at Primerica Financial Services, a sales force designation of RVP or higher ) (any of the foregoing being a "Protected Person") unless the Company or Travelers shall agree in writing to such hiring, and (ii) shall not be personally involved, directly or indirectly, in soliciting any Protected Person to leave their employment or terminate their relationship (it being agreed that simply responding to a request for a reference will not be deemed direct or indirect solicitation), in either case until the latest to occur of the following: _ one year after termination of employment (but not longer than July 30, 1998). 7 _ the date the last payment of base salary or bonus actually payable to the Executive is due and payable under the provisions of Section 7. _ the later of the date the last payment actually payable to the Executive is due and payable under Attachment B and July 30, 1997. _ in the event the Executive shall voluntarily terminate his employment but without Good Reason, July 30, 1996 (notwithstanding the fact that such date may be more than one year after such termination of employment). (c) The provisions of this Section 10 shall survive the termination, for any reason, or expiration of this Agreement. 11. Indemnification. Both during and after the employment term, --------------- the Company shall indemnify the Executive to the full extent permitted by law for all expenses, costs, liabilities and legal fees which the Executive may incur by reason of entering into this Agreement and in the discharge of all his duties hereunder, other than for any such expenses, costs, liabilities or legal fees incurred resulting from the Executive's bad faith or gross negligence. The provisions of this Section shall be in addition to, and not in lieu of, any other rights of indemnification available to the Executive and shall apply to the Executive when serving in other capacities at the written request of the Company. Legal fees covered by this indemnification shall be advanced as incurred. The provisions of this Section 11 shall survive the termination, for any reason, or expiration of this Agreement. 12. Notice. For the purposes 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 delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Joseph J. Plumeri II 1461 Martine Avenue Scotch Plains, New Jersey 07076 With a copy to: Michael S. Sirkin, Esq. Proskauer Rose Goetz & Mendelsohn 1585 Broadway New York, New York 10036 If to the Company: 333 West 34th Street New York, New York 10001 8 Attention: General Counsel with a copy to: The Travelers Inc. 65 East 55th Street New York, New York 10022 Attention: General Counsel or to such other address 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. 13. 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 of 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 not be assignable by the Executive. This Agreement shall not be assignable by the Company except in connection with the sale of all or substantially all of the retail brokerage business of the Company, in which case it shall be assumed by Travelers, all references to the Company shall be deemed thereafter to be references to Travelers and the obligations of the Company hereunder shall cease; thereafter it shall not be assignable by Travelers except in connection with the sale of all or substantially all of the assets of Travelers. This Agreement shall be binding on the successors and permitted 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. In the event the Company breaches this Agreement by non- payment of any amounts due to the Executive hereunder, the Executive shall be entitled to recover his costs of collection. Whenever in this Agreement reference is made to a pro rata portion of an amount, it shall be calculated by multiplying an annual amount by a fraction, the numerator of which is the number of elapsed days in a period (e.g., the number of days in a calendar year prior to a termination of employment) and the denominator of which is 365. 14. 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. 15. 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. 16. Arbitration. Any controversy or claim arising out of or ----------- relating to this Agreement, whether arising before or after the expiration or other termination of this Agreement, shall be settled by arbitration in New York City in accordance with the commercial rules of the American Arbitration Association, except to the extent specifically described in a document signed by both of the parties hereto and 9 which specifically refers to this Section. Any decision by the arbitrators shall be final and binding on the parties and may be entered into in any court of competent jurisdiction. 17. 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, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, express or implied, by any officer, employee or representative of either party hereto, including without limitation the prior employment agreements between the parties dated as of July 30, 1993 and July 30, 1994, except to the extent specifically described in a document signed by both of the parties hereto and which specifically refers to this Section. 10 EX-11.01 7
Exhibit 11.01 The Travelers Inc. and Subsidiaries Computation of Earnings Per Share (In millions, except for per share amounts) Year ended December 31, ----------------------------------------- 1994 1993 1992 ---- ---- ---- Earnings: Net Income $1,326 $916 $728 Preferred dividends - series A (24) (24) (10) Preferred dividends - series B (7) (4) - Preferred dividends - series C (17) - - Preferred dividends - series D (35) - - ----- ---- ---- Income applicable to common stock 1,243 888 718 Interest expense (through the date of conversion) related to 4 1/2% Eurodollar Convertible Subordinated Debentures, net of applicable income taxes - - 1 Dilution due to assumed exercise of options of subsidiary - - (2) ----- ---- ---- $1,243 $ 888 $ 717 ===== ==== ==== Average shares: Common 315 229 215 Assumed conversion of 4 1/2% Eurodollar Convertible Subordinated Debentures - - 1 Assumed exercise of dilutive stock options 3 5 4 Incremental shares - Capital Accumulation Plan 4 4 3 ----- ---- ---- 322 238 223 ===== ==== ==== Earnings Per Share $ 3.86 $3.74 $3.22 ===== ==== ====
Earnings per common share is computed after recognition of preferred stock dividend requirements and is based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect of common stock warrants and stock options and the incremental shares assumed issued under the Capital Accumulation Plan and other restricted stock plans. Fully diluted earnings per common share, assuming conversion of all outstanding convertible notes and debentures, the maximum dilutive effect of common stock equivalents and conversion of 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, 1994, 1993 and 1992 would entail adding the number of shares issuable on conversion of the other debentures (zero and 2 million and 4 million shares, respectively), the additional common stock equivalents (2 million, zero and 1 million shares respectively) and the assumed conversion of the 5.5% convertible preferred stock (3 million, 2 million, and zero shares, respectively) to the number of shares included in the earnings per common share calculation (resulting in a total of 327 million, and 242 million and 228 million shares, respectively) and eliminating the after-tax interest expense related to the conversion of other debentures (zero, $3 million and $7 million, respectively) and the elimination of the 5.5% convertible preferred stock dividends ($7 million, $3 million, and zero, respectively). EX-12.01 8
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, ----------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ----- Income from continuing operations before income taxes, minority interests and cumulative effect of changes in accounting principle . . $2,149 $1,523 $1,188 $ 791 $ 602 Elimination of undistributed equity earnings . . . . . . . . . . - (116) (26) (5) (3) Pre-tax minority interest . . . . . . - (32) - - - Add: Interest . . . . . . . . . . . . . 1,284 707 674 876 1,027 Interest portion of rentals . . . . 134 61 38 46 43 ----- ----- ----- ----- ----- Income available for fixed charges . $3,567 $2,143 $1,874 $1,708 $1,669 ===== ===== ===== ===== ===== Fixed charges: Interest . . . . . . . . . . . . . $1,284 $ 707 $ 674 $876 $1,027 Interest portion of rentals . . . . 134 61 38 46 43 ----- ----- ----- ----- ----- Fixed charges . . . . . . . . . . . . $1,418 $ 768 $ 712 $ 922 $1,070 ===== ===== ===== ===== ===== Ratio of earnings to fixed charges 2.52x 2.79x 2.63x 1.85x 1.56x ==== ==== ==== ==== ====
EX-13.01 9
Exhibit 13.01 The Travelers Inc. and Subsidiaries FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (In millions of dollars, except per share amounts) 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- Year Ended December 31, (1) ----------------------- Total revenues (2) $ 18,465 $ 6,797 $ 5,125 $ 6,608 $ 6,194 After-tax gains from sale of subsidiaries and affiliates $ 88 $ 8 $ 135 $ 43 $ 10 Income before cumulative effect of changes in accounting principles $ 1,326 $ 951 $ 756 $ 479 $ 373 Net Income (3) $ 1,326 $ 916 $ 728 $ 479 $ 373 Return on average common equity (4) 15.6% 18.4% 20.6% 15.7% 13.7% December 31, (1) ------------- Total assets $115,297 $101,290 $24,151 $ 21,561 $19,689 Long-term debt $ 7,075 $ 6,991 $ 3,951 $ 4,327 $ 3,456 Stockholders' equity (5) $ 8,640 9,326 $ 4,229 $ 3,280 $ 2,859 Per common share data: --------------------- Income before cumulative effect of changes in accounting principles $ 3.86 $ 3.88 $ 3.34 $ 2.14 $ 1.64 Net income $ 3.86 $ 3.74 $ 3.22 $ 2.14 $ 1.64 Dividends per common share $ 0.575 $ 0.490 $ 0.363 $ 0.225 $ 0.180 Book value per common share $ 24.77 $ 26.06 $ 17.70 $ 15.10 $ 13.20 Other data: ----------- Average number of common shares and equivalents (millions) 322.0 237.8 222.8 226.5 231.8 Year-end common shares outstanding (millions) 316.5 327.1 222.0 217.2 216.5 Number of full-time employees 52,000 60,000 16,000 15,800 23,600
(1) The Travelers Inc. (the Company) was formerly Primerica Corporation. Results of operations prior to 1994 exclude the amounts of The Travelers Insurance Group Inc. except that results for 1993 include the Company's equity in earnings relating to the 27% interest purchased in December 1992. Results of operations include amounts related to the Shearson Businesses from July 31, 1993, the date of acquisition. Data relating to financial position for the years prior to 1993 exclude amounts for The Travelers Insurance Group Inc. and the Shearson Businesses. (see Note 1 of Notes to Consolidated Financial Statements). (2) Revenues for 1991 and 1990 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 Statements for information regarding changes in accounting principles in 1993 and 1992. (4) The return on average common stockholders' equity is calculated using income before cumulative effect of changes in accounting principles. (5) Stockholders' equity at December 31, 1994 reflects $1.3 billion of net unrealized losses on investment securities pursuant to the adoption of FAS No. 115 in 1994 (See Note 2 of Notes to Consolidated Financial Statements). 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) 1994 1993 1992 -------------------------------------------------------------------------------------------------------------- Revenues $18,465 $6,797 $5,125 ====== ===== ===== Income before cumulative effect of changes in accounting principles $ 1,326 $951 $756 ====== === === Net income $ 1,326 $916 $728 ====== === === Earnings per share Income before cumulative effect of changes in accounting principles $3.86 $3.88 $3.34 ==== ==== ==== Net income $3.86 $3.74 $3.22 ==== ==== ==== Weighted average number of common shares outstanding and common stock equivalents (millions) 322.0 237.8 222.8 ===== ===== ===== --------------------------------------------------------------------------------------------------------------
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. 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 related to the 27% previously owned. (See Note 1 of Notes to Consolidated Financial Statements.) 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., an American Express Company (American Express) subsidiary. The businesses acquired were combined with the operations of Smith Barney, Harris Upham & Co. Incorporated, and the combined firm has been named Smith Barney Inc. which is a subsidiary of Smith Barney Holdings Inc. (Smith Barney). 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. (See Note 1 of Notes to Consolidated Financial Statements.) Results of Operations Results of operations for 1994 reflect the full year impact of both the Travelers Merger and the Shearson Acquisition. Results of operations for 1993 include earnings from the Shearson Businesses for five months and reflect the equity in the earnings relating to the Company's 27% interest in old Travelers. Included in income before cumulative effect of changes in accounting principles for the years ended December 31, 1994, 1993 and 1992 are net after-tax gains of $5 million, $52 million and $163 million, respectively, as follows: 1994 ---- - $39 million gain on the sale of American Capital Management & Research Inc. to Van Kampen Merritt Companies in December for $430 million; - $21 million gain on the sale of Smith Barney's interest in HG Asia Holdings Ltd. for $55 million; - $19 million gain on the sale of Bankers and Shippers Insurance Company, a subsidiary of The Travelers Indemnity Company, to Integon Corporation in October for $142 million; - $9 million gain on the sale of the group dental insurance business of The Travelers Insurance Company (TIC) to Metropolitan Life Insurance Company (in conjunction with the sale of the group life business completed in January 1995) for $52 million; and - $83 million of reported investment portfolio losses. 1993 ---- - a $65 million provision for one-time expenses related to the acquisition of the Shearson Businesses; - $8 million gain on the sale of stock of subsidiaries and affiliates; and - $109 million of reported investment portfolio gains. 1992 ---- - $116 million gain on the sale of stock of subsidiaries and affiliates; and - reported investment portfolio gains of $47 million, including $19 million from the sale of the common stock investment in Musicland Stores Corporation (Musicland). Excluding these items, income before cumulative effect of changes in accounting principles for 1994 increased $422 million to $1.321 billion, or 47%, over 1993, reflecting primarily an earnings increase at Consumer Finance due to an increase in receivables outstanding, an increase in Primerica Financial Services' earnings as a result of improvements in life sales and persistency as well as increases in $.M.A.R.T. and S.A.F.E. Loans; and the inclusion of the earnings from the additional 73% investment in The Travelers Insurance Group. On the same basis, income before cumulative effect of changes in accounting principles for 1993 increased by $306 million, or 52%, over 1992, reflecting primarily increased operating earnings from the combined Smith Barney 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. Included in net income for 1993 is an after-tax charge of $18 million resulting from the adoption of Statement of Financial Accounting Standards (FAS) No. 112, "Employers' Accounting for Postemployment Benefits," and an after-tax charge of $17 million resulting from the adoption of FAS No. 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 FAS No. 109, "Accounting for Income Taxes." The following discussion presents in more detail each segment's operating performance and net income before the effects of changes in accounting principles, which were not material to any of the business segments. Investment Services
Year Ended December 31, ------------------------------------------------------------------ 1994 1993 1992 ------------------------------------------------------------------ Net Net Net (millions) Revenues Income Revenues Income Revenues Income -------------------------------------------------------------------------------------------------------------- Smith Barney (1) $5,534 $390 $3,371 $306 $1,677 $157 Mutual funds and asset management and other 156 32 153 30 145 34 -------------------------------------------------------------------------------------------------------------- Total Investment Services $5,690 $422 $3,524 $336 $1,822 $191 ==============================================================================================================
(1) Net income for 1994 includes a $21 after-tax gain from the sale of the interest in HG Asia and net income for 1993 includes a $65 after-tax provision for merger-related costs. 2 The Company's Investment Services segment includes Smith Barney - investment banking and securities brokerage; a limited partnership interest in RCM Capital Management (RCM) - asset management; and American Capital Management & Research, Inc. (American Capital) - mutual funds, through its date of sale in December 1994. Smith Barney A difficult operating environment in the securities markets combined with the effect of increased expenses related to the acquisition of the Shearson Businesses contributed to a slight decline in Smith Barney's earnings when compared to 1993, excluding the $21 million gain in 1994 and the $65 million provision in 1993 referenced above. Smith Barney Revenues Year Ended December 31, ----------------------------------------------------------- (millions) 1994 1993 1992 ----------------------------------------------------------- Commissions $1,964 $1,252 $509 Investment banking 680 667 433 Principal trading 900 549 298 Asset management fees 725 319 73 Interest income, net* 314 207 101 Other income 181 100 35 ----------------------------------------------------------- Net revenues* $4,764 $3,094 $1,449 =========================================================== * Net of interest expense of $770, $277 and $228 in 1994, 1993 and 1992, respectively. Revenues included in the consolidated statement of income are before deductions for interest expense. The securities industry experienced a widespread slowdown in activity, revenues and profitability in 1994 compared to 1993. While Smith Barney was significantly affected by this industry-wide slowdown, the inclusion of the Shearson Businesses for the full year in 1994 versus five months in 1993 resulted in substantial increases in revenues from commissions, principal trading, asset management fees and net interest income. Investment banking revenues rose slightly over 1993, in the face of a poor environment for stock and bond issuances and lower new issue volume in the securities markets generally during 1994, reflecting the increased commitment of the firm to this area. Expenses also increased substantially due to the inclusion of the Shearson Businesses for the full year 1994. Employee compensation and benefits were $2.953 billion in 1994 and $1.810 billion in 1993, reflecting additional production-related financial consultant compensation, as well as increased staffing levels resulting from the acquisition of the Shearson Businesses. Communications, occupancy and equipment expenses in 1994 were $574 million as compared to $323 million in 1993, reflecting higher office rental and related expenses resulting from the acquisition of the Shearson Businesses. Excluding interest and the provision in 1993 for merger-related costs, total expenses increased to $4.118 billion in 1994 from $2.448 in 1993. In addition to the general staffing and occupancy costs resulting from the acquisition, Smith Barney has made major investments in the systems, infrastructure, research, trading and investment banking resources and staffing needed to service a much greater number of financial consultants. The investment spending in research, capital markets and investment banking has essentially leveled off during 1994 while the upgrade of systems and infrastructure is continuing at a reduced pace. Smith Barney's return on equity declined from 26.7% for 1993, excluding the $65 million merger-related provision, to 16.4% for 1994 excluding the $21 million gain on HG Asia, on a higher equity base, and is still among the highest of its industry peer group. 3 Mutual Funds and Asset Management Performance in this segment was essentially flat year-over-year. American Capital's mutual fund sales (at net asset value) were $2.698 billion in 1994, $3.061 billion in 1993 and $2.212 billion in 1992. Assets Under Management (excluding American Capital) At December 31, --------------------- (billions) 1994 1993 ----------------------------------------------------------- Smith Barney $ 74.1 $ 74.8 RCM Capital Management 22.4 24.5 Travelers Life and Annuities (1) 19.2 21.7 ----------------------------------------------------------- Total Assets Under Management $115.7 $121.0 =========================================================== (1) Part of the Life Insurance Services segment. Outlook - Smith Barney's business is significantly affected by the levels of activity in the securities markets, which in turn are affected by the level and trend of interest rates, the general state of the economy and the national and worldwide political environments, among other factors. Continuance of the increasing interest rate environment could have further adverse impact on Smith Barney's businesses, including commissions (which are linked in part to the economic attractiveness of securities relative to time deposits) and investment banking (which is affected by the relative benefit to corporations and public entities of issuing public debt and/or equity versus other avenues for raising capital). Such effects, however, could be at least partially offset by a strengthening U.S. economy that would include growth in the business sector -- accompanied by an increase in the demand for capital -- and an increase in the capacity of individuals to invest. A decline in interest rates from present levels could favorably impact Smith Barney's business. Smith Barney will continue to concentrate on building its asset management business, which tends to provide a more predictable and steady income stream than its other businesses. Notwithstanding the investment spending referred to above, which is now essentially completed, Smith Barney is maintaining tight expense controls that management believes will help the firm weather periodic downturns in market conditions. Asset Quality - Total Investment Services' assets at December 31, 1994 were approximately $45.6 billion, consisting primarily of highly liquid marketable securities and collateralized receivables. About 56% of these assets were related to collateralized financing transactions where U.S. Government and mortgage-backed securities are bought, borrowed, sold and lent in generally offsetting amounts. Another 15% represented inventories of securities primarily needed to meet customer demand. A significant portion of the remainder of the assets represented receivables from brokers, dealers and customers that relate to securities transactions in the process of being settled. The carrying values of the majority of Smith Barney's securities inventories are adjusted daily to reflect current prices. See Notes 2, 6, 7 and 8 of Notes to Consolidated Financial Statements for a further description of these assets. See Note 19 of Notes to Consolidated Financial Statements for a description of Smith Barney's activities in derivative financial instruments which are used primarily to facilitate customer transactions. At December 31, 1994 there were no "bridge" loans at Smith Barney and exposure to high-yield positions was not material. Smith Barney's assets to equity ratio at December 31, 1994 was 19.7 to 1, which management believes is a conservative leverage level for a securities broker and one that allows for future growth. Smith Barney's assets are financed through a number of sources including long and short-term credit facilities, the financing transactions described above and payables to brokers, dealers and customers. 4 Consumer Finance Services
Year Ended December 31, ------------------------------------------------------------------------ 1994 1993 1992 ------------------------------------------------------------------------ Net Net Net (millions) Revenues Income Revenues Income Revenues Income -------------------------------------------------------------------------------------------------------- Consumer Finance Services(1) $1,239 $227 $1,193 $232 $1,158 $198 ========================================================================================================
(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 1994 over the prior year. The increase primarily reflects an 11% increase in average receivables outstanding and an improvement in net interest margins. The increase in net income and revenues in 1993 compared to 1992 reflects a 3% increase in average receivables outstanding and a significant decline in loan losses. Receivables increased in 1994 by $543 million to end the year at $6.885 billion. The increase occurred across-the-board and was highlighted by a 15% increase in personal loans. Sixty branch offices were added, bringing the total to 828 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 approximated 8% in 1992 and 1993 and 7.2% in 1994. For variable rate loan products Consumer Finance is charged rates based on prevailing short term rates. CCC's actual cost of funds may be higher or lower than rates charged to Consumer Finance, with the difference reflected in Corporate and Other. The average yield on receivables outstanding decreased to 15.41% in 1994 from 15.83% in the prior year and 16.31% in 1992, due to lower yields on fixed rate second mortgages and the adjustable rate real estate-secured loan product introduced at the end of 1992. Decreased cost of funds has resulted in an improvement in net interest margins to 8.76% in 1994 from 8.44% in 1993 and 8.66% in 1992. The allowance for losses as a percentage of net receivables was 2.64% at year-end 1994 and 1993 compared to 2.91% at year-end 1992 reflecting the improved credit quality of the loan portfolio. As of, and for, the Year Ended December 31, ---------------------------- 1994 1993 1992 ---------------------------- Allowance for losses as % of net consumer finance receivables at year end 2.64% 2.64% 2.91% Charge-off rate for the year 2.08% 2.36% 2.84% 60 + days past due on a contractual basis as % of gross consumer finance receivables at year end 1.88% 2.21% 2.55% Subsidiaries of the Company provide credit life, health and property insurance to Consumer Finance customers. Premiums earned were $115 million in 1994, $88 million in 1993 and $90 million in 1992. The increase in 1994 premiums is the result of the increase in receivables and expanded availability of certain products in additional states, as well as the reinsurance by the Company in 1994 of business previously insured by non-affiliated companies. 5 Outlook - Consumer Finance is affected by the interest rate environment and general economic conditions. In a rising interest rate environment, net 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. Asset Quality - Consumer Finance assets totaled approximately $7.7 billion at December 31, 1994, of which $6.7 billion, or 87%, 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 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 $555 million were investments of insurance subsidiaries, including $463 million of fixed-income securities and $61 million of short-term investments with a weighted average quality rating of Aa2. Life Insurance Services
Year Ended December 31, -------------------------------------------------------------------------------- 1994 1993 1992 ---------------------------------------------------------------------------------------------------------------- Net Net Net (millions) Revenues Income Revenues Income Revenues Income ---------------------------------------------------------------------------------------------------------------- Primerica Financial Services(1) $1,290 $210 $1,266 $223 $1,158 $197 Travelers Life and Annuities(2) 2,198 211 319 42 347 36 Managed Care and Employee Benefits(3) 3,522 169 - - - - ---------------------------------------------------------------------------------------------------------------- Total Insurance Services $7,010 $590 $1,585 $265 $1,505 $233 ================================================================================================================
(1) Net income includes $7, $45 and $10 of reported investment portfolio gains in 1994, 1993 and 1992, respectively. (2) Net income includes $1, $17 and $6 of reported investment portfolio gains in 1994, 1993 and 1992, respectively. (3) Net income includes $9 gain from the sale of the group dental insurance business in 1994. The Life Insurance Services segment includes the results of Primerica Financial Services (PFS) for all periods presented and, for 1994 only, the results of the Travelers Life and Annuities and the Managed Care and Employee Benefits segments of old Travelers which were acquired on December 31, 1993. The 1993 and 1992 amounts reflected for Travelers Life and Annuities represent the businesses of Primerica now included in this segment. Certain 1993 production statistics related to old Travelers' businesses are included for comparison purposes only and are not reflected in 1993 revenues or operating results. Primerica Financial Services Before reported portfolio gains and a 1993 after-tax charge of $11 million for the cumulative effect of a tax rate increase through December 31, 1992, PFS's 1994 earnings increased 7% over the prior year. The increase was a 6 result of improved life insurance sales and persistency (i.e. the percentage of policies that continue in force) as well as increases in sales of other financial products, primarily mutual funds and the loan products of the Consumer Finance segment. Sales of individual term life insurance continued an upward trend in 1994. PFS issued 299,400 policies totaling $57.4 billion in face amount during 1994, an increase from 260,300 policies totaling $49.3 billion in face amount in 1993 and 252,500 policies totaling $47.3 billion in face amount in 1992. The increase in face amount issued has contributed to an increase in insurance in force, which was $335 billion at December 31, 1994, compared to $317 billion at December 31, 1993. 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 $1.32 billion in 1994 compared to $1.27 billion in 1993 and $1.07 billion in 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 $1.107 billion at December 31, 1994 compared to $765 million at December 31, 1993 and $487 million at December 31, 1992. Travelers Life and Annuities Travelers Life and Annuities consists of annuity, life and health products marketed under the Travelers name (the Financial Services individual business and the Asset Management & Pension Services group annuity business of old Travelers) and the individual accident and health operations of Transport Life Insurance Company. Among the range of individual products are fixed and variable annuities; term, universal and whole life insurance; and accident and health coverages. These products are primarily marketed through 450 core independent agents, The Copeland Companies (Copeland), a wholly owned subsidiary of The Travelers Insurance Group Inc. (Travelers Insurance), and Smith Barney financial consultants. During 1994, $9.2 billion of face amount of individual life insurance was issued bringing total life insurance in force to $49 billion. Individual life insurance net premiums and deposits totaled $287 million in 1994 compared to $279 million in 1993. Individual annuity production was strong during 1994 compared to 1993 primarily reflecting increased sales of variable annuities. In late June a variable annuity product was introduced for distribution by Smith Barney financial consultants and is expected to contribute to annuity production in future periods. Sales of this product amounted to $158 million in 1994. Net written premiums and deposits for individual annuities during 1994 totaled $1.309 billion compared to $1.023 billion in 1993 bringing total policyholder account balances and benefit reserves to $10.9 billion at the end of 1994. Annuity sales activity has been helped by the ratings upgrades that accompanied the merger of Primerica and old Travelers. In the group annuity business, net written premiums and deposits for 1994 were $1.284 billion and were down significantly from $2.092 billion in 1993. The decline reflects the Company's more selective approach to issuance of guaranteed investment contracts and a decision in the third quarter of 1993 to no longer market index funds and was partially offset by a non-recurring transfer in-house of old Travelers pension plan assets amounting to $512 million which were previously managed externally. Policyholder account balances and benefit reserves totaled $12.2 billion at year-end 1994 down from $13.6 billion at year-end 1993. Net written premiums for individual accident and health products, primarily long-term care and supplementary products, totaled $334 million in 1994, about even with the 1993 period. 7 Managed Care and Employee Benefits Managed Care and Employee Benefits consists of the old Travelers businesses that market group accident and health and life insurance, managed health care programs, and administrative services associated with employee benefit plans to customers ranging from large multinational corporations to small local employers. As discussed in Note 3 of Notes to Consolidated Financial Statements, the group life and related businesses have been sold to Metropolitan Life Insurance Company and in January 1995, the group medical component was exchanged for a 50% interest in The MetraHealth Companies, Inc. Total group life insurance in force amounted to $144.1 billion at year-end 1994, down from $149.9 billion at year- end 1993. Face amount of group life insurance issued during 1994 was $11.4 billion versus $13.6 billion in 1993. Net written premiums, deposits and equivalents totaled $592 million for 1994 compared to $665 million in 1993. In the group health business, net written premiums, deposits and equivalents were $9.2 billion in 1994 compared to $9.7 billion in 1993. Equivalents represent benefits under administration, which together with deposits are estimates of premiums that fee-based customers would have been charged under a fully insured arrangement and do not represent actual revenues. Total lives covered by medical plans declined to 5.0 million at December 31, 1994 from 5.9 million at year-end 1993, although participation in the managed care component rose 21%. These declines reflect the Company's emphasis on increasing margins to improve profitability; improvements in underwriting designed to reduce financial risk rather than emphasize growth; and uncertainties during the period relating to proposed healthcare legislation. Property & Casualty Insurance Services
Year Ended December 31, ------------------------------------------------------------------- (millions) 1994 1993 1992 ----------------------------------------------------------------------------------------------------------------- Net Net Net Revenues Income Revenues Income Revenues Income ----------------------------------------------------------------------------------------------------------------- Commercial (1) $3,058 $146 $315 $45 $316 $54 Minority Interest - Gulf - - - (22) - - Personal (2) 1,480 103 - - - - ----------------------------------------------------------------------------------------------------------------- Total Property & Casualty Insurance Services $4,538 $249 $315 $23 $316 $54 =================================================================================================================
(1) Net income includes $73 of reported investment portfolio losses in 1994 and $15 and $6 of reported investment portfolio gains in 1993 and 1992, respectively, and $19 in 1992 from the sale of Musicland common stock. (2) Net income in 1994 includes $18 of reported investment portfolio losses and a $19 gain from the sale of Bankers and Shippers Insurance Company. The Property & Casualty Insurance Services segment consists of the business lines of old Travelers as well as Gulf Insurance Group (Gulf). Segment operating results for 1993 include only the 50% of Gulf then owned by old Primerica and 1992 includes Gulf only. Certain 1993 production statistics related to old Travelers' businesses are included for comparison purposes only and are not reflected in 1993 revenues or operating results. Commercial Lines Commercial Lines net written premiums for 1994 totaled $2.391 billion compared to $2.499 billion in 1993. Equivalents for 1994 totaled $2.978 billion compared to $2.757 billion in 1993. Equivalents, which are associated largely with national accounts, represent estimates of premiums that customers would have been charged under a fully insured arrangement and do not represent revenues. 8 A significant component of Commercial Lines is the National Accounts division (National), which provides insurance coverages and services, primarily workers' compensation, to large corporations. National premium volume of $437 million in 1994 declined $141 million or 24% from 1993. National equivalents of $1.996 billion for the year ended December 31, 1994 were $64 million above the same period of 1993. For the year ended December 31, 1994 new business, including both premiums and equivalents, was $325 million compared to $407 million in 1993. Renewed business, including both premiums and equivalents, was $1.997 billion in 1994 compared to $1.983 billion in 1993, reflecting efforts to help customers control their loss costs, which has helped build a better than 88% customer retention ratio. The shift to fee-based service products from insurance products continued in 1994. Premiums assumed from industry assigned pools of $129 million for the year ended December 31, 1994 were $24 million less than the 1993 levels. Equivalents associated with Travelers acting as a servicing carrier of these industry involuntary pools totaled $648 million in 1994, a decrease of $15 million from 1993. The decrease in premiums and equivalents relative to the prior year is due to the depopulation of involuntary workers' compensation pools and the formation of alternative involuntary workers' compensation funding mechanisms in which Travelers has no obligation to participate. Commercial Lines Agency Marketing (Agency) business serves small and mid-sized businesses through brokers and approximately 2,500 independent agents. Agency net written premiums of $1.526 billion for the year ended December 31, 1994 were $30 million below 1993 premium levels. Agency equivalents grew to $334 million, $172 million above 1993 levels. New business volume in the old Travelers mid-size segment, which is a strategic point of business emphasis, was up $80 million or 26% from the same period in 1993; while the old Travelers small business segment increased by $18 million, or 19%. The retention for this mid-size business is slightly higher than 1993 levels while this small business ratio declined by 2% reflecting soft market conditions and tighter underwriting. Agency continues to focus on the retention of existing business and maximization of product pricing while maintaining its selective underwriting policy. Specialty Lines premiums of $299 million for the year ended December 31, 1994 were $87 million higher than for the year ended December 31, 1993. This increase is primarily attributable to an increase in property, primary liability and specialty auto writings, and assumed reinsurance. Catastrophe losses, net of tax and reinsurance, were $30 million and $21 million for the years ended December 31, 1994 and 1993, respectively. The increase in catastrophe losses was due to winter storms in the first quarter of 1994. The 1994 full year combined ratio was 124.7% and includes reserve increases for environmental claims and a reduction of ceded reinsurance balances amounting to $225 million that were charged against income on a statutory basis (but not for GAAP reporting due to purchase accounting adjustments related to the acquisition of old Travelers). The 1993 full year combined ratio of old Travelers and Gulf combined was 125.3% and includes $325 million of special reserve strengthening for environmental and asbestos-related claims recorded by old Travelers in the third quarter of 1993. The combined ratios excluding such special charges were 114.2% for 1994 and 111.2% for old Travelers and Gulf combined for 1993. The 1994 ratio also includes the impact of winter storm losses in Agency in the first quarter of 1994, partly offset by favorable loss development in certain workers' compensation lines and residual markets. In addition, 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. Personal Lines Net written premiums for 1994 were $1.433 billion compared to $1.361 billion in 1993. Included in 1994 are after-tax catastrophe losses of $26 million net of reinsurance compared to $13 million in 1993. The combined ratio for Personal Lines for the full year 1994 was 100.4% compared to 104.4% in 1993. This improvement is primarily attributable to improved underwriting results due to lower operating expenses, favorable loss reserve development in 1994 on prior years' business in the automobile line of business and a favorable resolution in 1994 of the New Jersey Market Transition Facility deficit. 9 On October 18, 1994, The Travelers Indemnity Company, a subsidiary of The Travelers Insurance Group Inc., consummated the sale of its subsidiary, Bankers and Shippers Insurance Company (B&S), to Integon Corporation for $142 million in cash, and recognized an after-tax gain of $19 million on the sale. B&S primarily writes non- standard personal automobile insurance. Outlook - PFS 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. Enhanced customer service and increased customer contacts have contributed to improved sales and persistency (i.e., the percentage of policies that continue in force). Insurance in force has begun to grow and the number of producing agents has stabilized. A continuation of these trends could positively impact future operations. PFS continues to expand cross-selling with other Company subsidiaries of products such as loans and mutual funds. Outlook - Travelers Life and Annuities The insurance industry is extremely competitive on both price and service and no single issuer is dominant. Consolidations are occurring in the life insurance industry and other financial services organizations are becoming involved in the sale and/or distribution of life insurance products. This increases the pressure on the Company to remain current as to market trends. Also, the annuities business is interest sensitive and swings in interest rates could impact sales and retention of in force policies. On January 18, 1995, the U.S. Supreme Court in Nationsbank of North -------------------- Carolina, NA. et. al. v. Variable Annuity Life Insurance Co., et. al. --------------------------------------------------------------------- ruled unanimously that national banks may sell annuities. At this time, it is not clear what impact, if any, this will have on the Company's annuity sales. Currently, the Company's methods of distribution of annuities are primarily through Copeland, independent insurance agents and financial consultants of Smith Barney. Outlook - MetraHealth Upon formation of MetraHealth, the joint venture created by the combination of the medical businesses of TIC and its affiliates and Metropolitan Life Insurance Company (MetLife), the Company owned 50% of Metrahealth's common stock. The Company's interest in MetraHealth will be accounted for on the equity method. See Note 3 of Notes to Consolidated Financial Statements. MetraHealth will provide group health insurance, health maintenance organizations, managed care and ancillary services throughout the United States, in Puerto Rico and in the U.S. Virgin Islands. 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. MetraHealth network products rely on contractual arrangements between it 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. As of December 31, 1994, the businesses acquired by MetraHealth included health maintenance organizations in 29 network areas, with approximately 400,000 members; point-of-service operations in 72 network areas, with approximately 1.7 million members; and preferred provider organizations in 90 network areas, with approximately 2.8 million members. Covered lives using the managed care networks and covered by indemnity products, in the aggregate at December 31, 1994, were approximately 11.3 million. MetraHealth expects some decline in covered lives during 1995. In March 1995, MetraHealth acquired HealthSpring, Inc. for common stock of Metrahealth. HealthSpring builds and manages primary care physician practices and serves approximately 32,000 patients through seven sites in Pennsylvania, Ohio and Illinois. This acquisition resulted in a reduction in the participation of the Company and MetLife in the MetraHealth venture to 48.25% each. 10 Outlook - Property & Casualty A variety of factors continue to affect the property-casualty market including inflation in the cost of medical care and litigation and losses from involuntary markets. In most lines, pricing did not improve during the past year. For Agency, the duration of the current downturn in the underwriting cycle continues to pressure the pricing of guaranteed cost products. In the small account market, which primarily buys guaranteed cost products, price increases have not exceeded loss cost inflation for several years. The focus is to retain existing profitable business and obtain new accounts where the Company can maintain its selective underwriting policy. The Company continues to adhere to strict guidelines to maintain high quality underwriting, which could affect future premium levels. National business is less affected by pricing; however, the pricing of large account business continues to be very competitive. Customer retention levels remained high in 1994 as a result of Travelers Indemnity's continued delivery of quality service, primarily claims management focused on loss cost reduction. In Personal Lines, increasing loss costs in 1994 resulted in pressure on current underwriting margins. Personal Lines management strategy includes underwriting more state-specific business, a reduction of exposure to catastrophe losses and control of operating expenses to improve competitiveness and profitability. In an effort to reduce its exposure to catastrophic hurricane losses, Travelers Insurance 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. 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 possible reauthorization of Superfund in 1995 may have some effect on the resolution of these issues, but it is not possible at the present time to determine what the potential impact, if any, will be. 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 Insurance 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 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 Insurance and the insured; the identification of other insurers; the potential coverage available, if any; the number of years of coverage, if any; the obligation to provide a defense to insureds, if any, and the applicable law in each jurisdiction. Analysis of these and other factors on a case-by-case basis results in the ultimate reserve assessment. The following table displays activity for environmental losses and loss expenses and reserves for 1994. Approximately 14% of the net environmental loss reserve (i.e. approximately $65 million) is case reserve for resolved claims. Travelers Insurance does not post individual case reserves for environmental claims in which there is a coverage dispute until the dispute is resolved. Until then, the estimated amounts for disputed coverage claims are carried in a bulk reserve, together with unreported environmental losses. 11 Environmental Losses -------------------- (millions) 1994 ---- Beginning reserves: Direct $504* Ceded (13) ---- Net 491 Incurred losses and loss expenses: Direct 54 Ceded (5) Losses paid: Direct 76 Ceded (7) ---- Ending reserves: Direct 482 Ceded (11) ---- Net $ 471 ==== * Includes $155 relating to the purchase accounting allocation for the acquisition of old Travelers. Amounts prior to 1994 relate to Gulf only and are not material. The industry does not have a standard method of calculating claim activity for environmental losses. Generally, for environmental claims, Travelers Insurance 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 Insurance 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, 1994, Travelers Insurance had approximately 8,200 pending environmental-related claims and had resolved over 17,200 such claims since 1986. Approximately 70% of the pending claims in inventory represent Federal or state EPA-type claims tendered by approximately 725 insureds. The balance represents bodily injury claims alleging injury due to the discharge of insureds' waste or pollutants. To date, Travelers Insurance generally has been successful in its coverage litigation and continues to reduce its potential exposure through favorable settlements with certain insureds. These settlement agreements with certain insureds are based on the variables presented in each piece of coverage litigation. Generally the settlement dollars paid in disputed coverage claims are a percentage of the total coverage sought by such insureds. In addition, with respect to many of the environmental claims there is a "buy-back" of future environmental liability risks by Travelers Insurance, together with appropriate indemnities and hold harmless provisions to protect Travelers Insurance. Asbestos Claims In the area of asbestos, the industry has suffered from judicial interpretations that have attempted to maximize insurance availability from both a coverage and liability standpoint far beyond the intent of the contracting parties. These policies generally were issued prior to the 1980s. Originally the cases involved mainly plant workers and traditional asbestos manufacturers and distributors. However, in the mid-1980s, a new group of plaintiffs, whose exposure to asbestos was less direct and whose injuries were often speculative, began to file lawsuits in increasing numbers against the traditional defendants as well as peripheral defendants who had produced products that may have contained small amounts of some form of encapsulated asbestos. These claims continue to arise and on an individual basis generally involve smaller companies with smaller limits of potential coverage. 12 Also, there has emerged a group of non-product claims by plaintiffs, mostly independent labor union workers, against companies, alleging exposure to asbestos while working at these companies' premises. In addition, various insurers, including Travelers Insurance, remain defendants in a widely publicized action brought in Philadelphia regarding potential consolidation and resolution of future asbestos bodily injury claims. The cumulative effect of these judicial actions on Travelers Insurance and its insureds currently is uncertain. Also, 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, Travelers Insurance evaluates those issues on an insured-by-insured basis. Travelers Insurance's evaluations have not resulted in any meaningful average asbestos defense or indemnity payment. The varying defense and indemnity payments made by Travelers Insurance on behalf of its insureds have also precluded the Company from deriving any meaningful data by which it can predict whether its defense and indemnity payments for asbestos claims (on average or in the aggregate) will remain the same or change in the future. The following table displays activity for asbestos losses and loss expenses and reserves for 1994. Approximately 85% of the net asbestos reserves at December 31, 1994 represented incurred but not reported losses. Asbestos Losses --------------- (millions) 1994 ---- Beginning reserves: Direct $775 Ceded (381)* ----- Net 394 Incurred losses and loss expenses: Direct 67 Ceded (16) Losses paid: Direct 140 Ceded (78) ---- Ending reserves: Direct 702 Ceded (319) ----- Net $383 ==== * After reflecting a reduction of $70 relating to the purchase accounting allocation for the acquisition of old Travelers. Amounts prior to 1994 relate to Gulf only and are not material . The largest reinsurer of Travelers Insurance asbestos risks is Lloyd's of London (Lloyds). Lloyds is currently undergoing restructuring to seek to obtain additional capital and to segregate claims for years before 1986. The ultimate effect of this restructuring on reinsurance recoverable from Lloyds is not yet known. The Company does not believe that any uncollectible amounts of reinsurance recoverables would be material to its results of operations, financial condition or liquidity. In relation to these asbestos and environmental-related claims, Travelers Insurance carries on a continuing review of its overall position, its reserving techniques and reinsurance recoverable. In each of these areas of exposure, Travelers Insurance has endeavored to litigate individual cases and settle claims on favorable terms. Given the 13 vagaries of court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties, it is not presently possible to quantify the ultimate exposure or range of exposure represented by these claims to the Company's financial condition, results of operations or liquidity. The Company believes that it is reasonably possible that the outcome of the uncertainties regarding environmental and asbestos claims could result in a liability exceeding the reserves by an amount that would be material to operating results in a future period. However, it is not likely these claims will have a material adverse affect on the Company's financial condition or liquidity. 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 such payments will not have a material impact on the Company's results of operations, financial condition or liquidity. Certain social, economic and political issues have led to an increased number of legislative and regulatory proposals aimed at addressing the cost and availability of certain types of insurance. While most of these provisions have failed to become law, these initiatives may continue as legislators and regulators try to respond to public availability and affordability concerns and the resulting laws, if any, could adversely affect the Company's ability to write business with appropriate returns. The National Association of Insurance Commissioners (NAIC) adopted risk-based capital (RBC) requirements for life insurance companies 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, 1994 and 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 which includes both Life and Property & Casualty totaled approximately $38.5 billion, representing 63% 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, management employs a conservative investment philosophy. The investment portfolio supports both the life and property-casualty insurance operations. The insurance segment's fixed maturity portfolio totaled $27 billion, comprised of $21 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, 1994 were Aa3 and Baa1, respectively. Included in the fixed maturity portfolio was approximately $1.4 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). Such CMOs typically have high credit quality, offer good liquidity, and provide a significant advantage in yield and total return compared to treasury securities. 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) 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. 14 At December 31, 1994, the segment held CMOs with a market value of $2.9 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. In addition, the segment held $1.9 billion of GNMA, FNMA or FHLMC mortgage-backed securities at December 31, 1994. Virtually all of these securities are rated AAA. The segment also held $1.0 billion of securities that are backed primarily by credit card or car loan receivables at December 31, 1994. At December 31, 1994, real estate and mortgage loan investments totaled $5.8 billion. Most of these investments are included in the investment portfolio of The Travelers Insurance Group. The Company is continuing its strategy to dispose of these real estate assets and some of the mortgage loans and to reinvest the proceeds to obtain current market yields. At December 31, mortgage loan and real estate portfolios consisted of the following: (millions) 1994 1993 ---- ---- Current mortgage loans $4,905 $6,096 Underperforming mortgage loans 511 1,269 ----- ----- Total mortgage loans 5,416 7,365 ----- ----- Real estate held for sale 418 1,049 ----- ----- Total mortgage loans and real estate $5,834 $8,414 ===== ===== Included in underperforming mortgage loans above are $270 million of mortgages restructured at below market terms, of which $265 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. Of the total real estate held for sale $383 million is under- performing. For further information relating to investments, see Note 5 of Notes to Consolidated Financial Statements. Corporate and Other
Year Ended December 31, -------------------------------------------------------------------------- 1994 1993 1992 -------------------------------------------------------------------------- Net Net Net Income Income Income (millions) Revenues (Expense) Revenues (Expense) Revenues (Expense) ------------------------------------------------------------------------------------------------------------- Net expenses(1) $(201) $(65) $(62) Equity in income of old Travelers in 1993 and Fingerhut in 1992 - 152 26 Net gain on sale of stock of subsidiaries and affiliates 39 8 116 ------------------------------------------------------------------------------------------------------------- Total Corporate and Other $(12) $(162) $180 $95 $324 $ 80 =============================================================================================================
(1) Includes $3 and $2 of reported investment portfolio gains in 1993 and 1992, respectively. 15 Corporate and Other consists of corporate staff and treasury operations, certain corporate income and expenses that have not been allocated to the operating subsidiaries and certain intersegment eliminations. The increase in net expenses in 1994 is primarily attributable to the assumption of old Travelers corporate debt and certain corporate expenses, the full year impact of financing the Shearson Acquisition and a rise in commercial paper borrowing costs of approximately 117 basis points. 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. The equity in income of old Travelers in 1993 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 a tax rate increase through December 31, 1992. Liquidity and Capital Resources The Travelers Inc. (the Parent) services its obligations primarily with dividends and other advances that it receives from subsidiaries. The subsidiaries' dividend paying ability is limited by certain covenant restrictions in 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. During 1994 the Parent, CCC and TIC entered into an agreement with a syndicate of banks to provide $1.5 billion of revolving credit, to be allocated to any of the Parent, CCC or TIC. The participation of TIC in this agreement is limited to $300 million. The revolving credit facility consists of a 364-day revolving credit facility in the amount of $300 million and a 5-year revolving credit facility in the amount of $1.2 billion. At December 31, 1994, $650 million was allocated to CCC and $200 million to TIC. Under this facility the Company is required to maintain a certain level of consolidated stockholders' equity (as defined in the agreement). At December 31, 1994, the Company exceeded this requirement by approximately $2.7 billion. As of December 31, 1994, the Parent had unused credit availability of $650 million consisting of $520 million under the 5-year revolving credit facility and $130 million under the 364-day revolving credit facility. The Parent may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees. As of March 3, 1995, the Parent had $800 million available for debt offerings under its shelf registration statements. Commercial Credit Company (CCC) CCC also issues commercial paper directly to investors and maintains unused credit availability under committed revolving credit agreements at least equal to the amount of commercial paper outstanding. As of December 31, 1994, CCC had unused credit availability of $3.01 billion consisting of $2.280 billion under 5-year revolving credit facilities and $730 million under 364-day revolving credit facilities. CCC may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees. 16 During 1994 and through March 3, 1995, CCC completed the following debt offerings leaving $950 million available for debt offerings under its shelf registration statement: - 7 7/8% Notes due July 15, 2004 $200 million - 8 1/4% Notes due November 1, 2001 $300 million - 7 7/8% Notes due February 1, 2025 $200 million - 7 3/4% Notes due March 1, 2005 $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, 1994, CCC would have been able to remit $270 million to the Parent under its most restrictive covenants or regulatory requirements. Smith Barney Holdings Inc. (Smith Barney) Smith Barney funds its day to day operations through the use of commercial paper, collateralized and uncollateralized bank borrowings (both committed and uncommitted), internally generated funds, repurchase transactions, and securities lending arrangements. The volume of Smith Barney's borrowings generally fluctuates in response to changes in the amount of reverse repurchase transactions outstanding, the level of securities inventories, customer balances and securities borrowing transactions. In May of 1994, Smith Barney renegotiated its three-year revolving credit agreement (the "Agreement") with a bank syndicate. The amendment to the Agreement extended the term by one year until May 1997 and increased the amount of the facility from $625 million to $1 billion. As of December 31, 1994, $400 million was borrowed under the Agreement. In addition, in May 1994, Smith Barney entered into a $750 million, 364-day revolving credit agreement with a bank syndicate. As of December 31, 1994, there were no borrowings outstanding under this facility. Smith Barney also has substantial borrowing arrangements consisting of facilities that it has been advised are available, but where no contractual lending obligation exists. Smith Barney, through its subsidiary Smith Barney Inc., issues commercial paper directly to investors. As a policy, Smith Barney maintains sufficient borrowing power of unencumbered securities to cover unsecured borrowings and unsecured letters of credit. In addition, Smith Barney monitors its leverage and capital ratios on a daily basis. During 1994 and through March 3, 1995 Smith Barney completed the following debt offerings leaving $600 million available for debt offerings under its shelf registration statement: - 5 1/2% Notes due January 15, 1999 . . . $200 million - 6% Notes due March 15, 1997 . . . . . . $200 million - 7 7/8% Notes due October 1, 1999 . . . . $150 million - 7.4% Notes due November 17, 1996 (Medium-Term Notes) . . . . . . . . . . $ 50 million - 7.98% Notes due March 1, 2000 . . . . . $200 million Smith Barney 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, 1994, Smith Barney would have been able to remit approximately $500 million to the Parent under its most restrictive covenants. The Travelers Insurance Group At December 31, 1994, The Travelers Insurance Group had $23.3 billion of life and annuity product deposit funds and reserves. Of that total, $11.6 billion are not subject to discretionary withdrawal based on contract terms. The remaining $11.7 billion are for life and annuity products that are subject to discretionary withdrawal by the contractholder. Included in the amount subject to discretionary withdrawal are $1.9 billion of liabilities that are surrenderable with market value adjustments. An additional $5.7 billion of the life insurance and individual annuity liabilities are subject to discretionary withdrawals, with an average surrender charge of 5.5%. Another $1.4 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 $2.6 billion of liabilities are surrenderable without charge. Approximately 30% 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 17 policyholders. Insurance liabilities 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 1995, 1996, 1997, 1998 and 1999 are $1.4 billion, $1.0 billion, $279 million, $256 million and $200 million, respectively. At December 31, 1994, the interest rates credited on GICs had a weighted average rate of 5.96%. 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, 1994, TIC has unused credit availability of $200 million consisting of $160 million under the 5-year revolving credit facility and $40 million under the 364-day revolving credit facility. Under Connecticut law the statutory capital and surplus of The Travelers Insurance Group, which amounted to $4.2 billion at December 31, 1994, is not available in 1995 for dividends to its Parent without prior approval of the Connecticut Insurance Department. Deferred Income Taxes The Company has a net deferred tax asset which relates to temporary differences that are expected to reverse as net ordinary deductions, except for a deferred tax asset of $723 million which relates to the unrealized loss on fixed maturity investments. Management has the intent and the ability not to realize the unrealized loss except to the extent of offsetting capital gains. The Company will have to generate approximately $4.6 billion of taxable income, before the reversal of the temporary differences, primarily over the next 10 to 15 years, to realize the remainder of the deferred tax asset, exclusive of the unrealized loss on fixed maturity investments. Management expects to realize the remainder of the deferred tax asset based upon its expectation of future taxable income, after the reversal of these deductible temporary differences, of at least $1 billion annually. Accounting Standards Not Yet Adopted FAS 114 and FAS 118 Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," describe how impaired loans should be measured when determining the amount of a loan loss accrual. These Statements also amend existing guidance on the measurement of restructured loans in a troubled debt restructuring involving a modification of terms. The adoption of these Statements effective January 1, 1995 will not have a material effect on the Company's results of operations or financial position. 18 The Travelers Inc. and Subsidiaries Consolidated Statement of Income (In millions of dollars, except per share amounts) Year Ended December 31, 1994 1993 1992 ---------------------------------------------------------------------- Revenues Insurance premiums $7,590 $1,480 $1,694 Commissions and fees 2,691 1,957 973 Interest and dividends 3,637 718 605 Finance related interest and other charges 1,030 954 953 Principal transactions 900 549 298 Asset management fees 795 385 131 Equity in income of old Travelers - 164 - Other income 1,822 590 471 ---------------------------------------------------------------------- Total revenues 18,465 6,797 5,125 ---------------------------------------------------------------------- Expenses Policyholder benefits and claims 7,797 833 907 Non-insurance compensation and benefits 3,241 2,057 1,069 Insurance underwriting, acquisition and operating 2,572 506 674 Interest 1,284 707 674 Provision for credit losses 152 134 165 Other operating 1,524 1,050 636 ---------------------------------------------------------------------- Total expenses 16,570 5,287 4,125 ---------------------------------------------------------------------- Gain on sale of subsidiaries and affiliates 254 13 188 ---------------------------------------------------------------------- Income before income taxes, minority interest and cumulative effect of changes in accounting principles 2,149 1,523 1,188 Provision for income taxes 823 550 432 ---------------------------------------------------------------------- Income before minority interest and cumulative effect of changes in accounting principles 1,326 973 756 Minority interest, net of income taxes - (22) - Cumulative effect of changes in accounting principles, net of income taxes - (35) (28) ---------------------------------------------------------------------- Net income $1,326 $ 916 $ 728 ====================================================================== Net income per share of common stock and common stock equivalents: Before cumulative effect of changes in accounting principles $ 3.86 $ 3.88 $ 3.34 Cumulative effect of changes in accounting principles - (0.14) (0.12) ---------------------------------------------------------------------- Net income per share of common stock and common stock equivalents $ 3.86 $ 3.74 $ 3.22 ====================================================================== Weighted average number of common shares outstanding and common stock equivalents (in millions) 322.0 237.8 222.8 ====================================================================== See Notes to Consolidated Financial Statements. 20
The Travelers Inc. and Subsidiaries Consolidated Statement of Financial Position (In millions of dollars) December 31, 1994 1993 -------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents (including $816 and $914 segregated under federal and other brokerage regulations) $ 1,227 $ 1,526 Investments: Fixed maturities: Available for sale, at market value in 1994 and amortized cost in 1993 27,192 28,109 Held to maturity, at amortized cost 96 177 Equity securities, at market value 510 555 Mortgage loans 5,416 7,365 Real estate held for sale 418 1,049 Policy loans 1,581 1,367 Short-term and other 3,907 3,577 -------------------------------------------------------------------------------------------------------------------- Total investments 39,120 42,199 -------------------------------------------------------------------------------------------------------------------- Securities borrowed or purchased under agreements to resell 25,655 13,353 Brokerage receivables 8,238 8,167 Trading securities owned, at market value 6,945 5,863 Net consumer finance receivables 6,746 6,216 Reinsurance recoverables 5,026 4,929 Value of insurance in force and deferred policy acquisition costs 2,163 1,996 Cost of acquired businesses in excess of net assets 2,045 2,162 Separate and variable accounts 5,162 4,665 Other receivables 4,018 4,624 Other assets 8,952 5,590 -------------------------------------------------------------------------------------------------------------------- Total assets $115,297 $101,290 ==================================================================================================================== Liabilities Investment banking and brokerage borrowings $ 4,374 $ 3,454 Short-term borrowings 2,480 2,535 Long-term debt 7,075 6,991 Securities loaned or sold under agreements to repurchase 21,620 10,144 Brokerage payables 7,807 7,012 Trading securities sold not yet purchased, at market value 4,345 3,835 Contractholder funds 16,392 17,980 Insurance policy and claims reserves 27,084 26,806 Separate and variable accounts 5,127 4,642 Accounts payable and other liabilities 10,215 8,455 -------------------------------------------------------------------------------------------------------------------- Total liabilities 106,519 91,854 -------------------------------------------------------------------------------------------------------------------- ESOP Preferred stock - Series C 235 235 Guaranteed ESOP obligation (97) (125) -------------------------------------------------------------------------------------------------------------------- 138 110 -------------------------------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock ($1.00 par value; authorized shares: 30 million), at aggregate liquidation value 800 800 Common stock ($.01 par value; authorized shares: 500 million issued shares: 1994 - 368,195,609 and 1993 - 368,287,709) 4 4 Additional paid-in capital 6,655 6,566 Retained earnings 4,199 3,140 Treasury stock, at cost (1994 - 51,684,618 shares and 1993 - 41,155,405 shares) (1,553) (1,121) Unrealized gain (loss) on investment securities and other, net (1,465) (63) -------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 8,640 9,326 -------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $115,297 $101,290 ====================================================================================================================
See Notes to Consolidated Financial Statements. 21
The Travelers Inc. and Subsidiaries Consolidated Statement of Changes in Stockholders' Equity (In millions of dollars) Amounts Shares (in thousands) ------------------------ ----------------------------- Year Ended December 31, 1994 1993 1992 1994 1993 1992 ------------------------ ----------------------------- Preferred Stock at aggregate liquidation value Balance, beginning of year $ 800 $ 300 $ - 11,200 1,200 - Issuance of preferred stock 500 300 10,000 1,200 ----------------------------------------------------------------------------------- ----------------------------- Balance, end of year 800 800 300 11,200 11,200 1,200 =================================================================================== ============================= Common Stock and Additional Paid-In Capital Balance, beginning of year 6,570 2,150 2,128 368,287 253,524 253,524 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 85 122 21 Other 4 (91) ----------------------------------------------------------------------------------- ----------------------------- Balance, end of year 6,659 6,570 2,150 368,196 368,287 253,524 ----------------------------------------------------------------------------------- ----------------------------- Retained Earnings Balance, beginning of year 3,140 2,363 1,720 Net income 1,326 916 728 Common dividends (181) (113) (78) Preferred dividends (86) (26) (7) ------------------------------------------------------------------------------------ Balance, end of year 4,199 3,140 2,363 ------------------------------------------------------------------------------------ Treasury Stock (at cost) Balance, beginning of year (1,121) (540) (538) (41,155) (31,572) (36,278) Conversion of debentures 81 65 4,104 4,356 Issuance of shares pursuant to employee benefit plans, net of shares tendered for payment of option exercise price and withholding taxes 111 (10) 54 5,318 6,175 6,583 Treasury stock acquired (543) (58) (122) (15,876) (1,478) (6,307) Common stock issued to subsidiaries of the Company (595) (18,519) Other 1 1 28 135 74 ----------------------------------------------------------------------------------- ----------------------------- Balance, end of year (1,553) (1,121) (540) (51,685) (41,155) (31,572) ------------------------------------------------------------------------------------ ------------------------------ Unrealized Gain (Loss) on Investment Securities and Other Balance, beginning of year (63) (44) (30) Net change in unrealized gains and losses on investment securities (1,349) 22 7 Net issuance of restricted stock (190) (103) (64) Restricted stock amortization 136 64 48 Translation adjustments, net 1 (2) (5) ------------------------------------------------------------------------------------ Balance, end of year (1,465) (63) (44) ------------------------------------------------------------------------------------ Total common stockholders' equity and common shares outstanding $7,840 $8,526 $3,929 316,511 327,132 221,952 =================================================================================== ============================= Total stockholders' equity $8,640 $9,326 $4,229 ===================================================================================
See Notes to Consolidated Financial Statements. 22
The Travelers Inc. and Subsidiaries Consolidated Statement of Cash Flows (In millions of dollars) Year Ended December 31, 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Income before income taxes, minority interest and cumulative effect of changes in accounting principles $2,149 $ 1,523 $1,188 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 818 286 423 Additions to deferred policy acquisition costs (1,005) (369) (574) Depreciation and amortization 349 125 97 Provision for credit losses 152 134 165 Undistributed equity earnings - (116) - Changes in: Trading securities, net (572) (1,082) (156) Securities borrowed, loaned and repurchase agreements, net (826) (1,591) 62 Brokerage receivables net of brokerage payables 724 863 (252) Insurance policy and claims reserves 278 251 29 Other, net (1,171) 522 (190) --------------------------------------------------------------------------------------------------------------------- Net cash provided by operations 896 546 792 Income taxes paid (378) (403) (332) --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 518 143 460 --------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Consumer loans originated or purchased (2,789) (2,673) (2,067) Consumer loans repaid or sold 2,094 2,108 2,020 Purchases of fixed maturities and equity securities (9,231) (2,794) (2,014) Proceeds from sales of investments and real estate: Fixed maturities available for sale and equity securities 4,219 2,485 1,658 Mortgage loans 415 5 8 Real estate and real estate joint ventures 955 - - Proceeds from maturities of investments: Fixed maturities 3,576 231 312 Mortgage loans 1,372 6 3 Other investments, primarily short-term, net (598) (631) (18) Payment for purchase of the Shearson Businesses (69) (1,296) - Payment for net clearing assets transferred - (536) - Cash acquired in connection with The Travelers Merger - 59 - Business acquisitions - - (550) Business divestments 679 120 571 Other, net (284) (274) (90) --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 339 (3,190) (167) --------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Issuance of preferred stock - series A - - 290 Dividends paid (267) (139) (85) Issuance of common stock - 329 - Treasury stock acquired (543) (58) (122) Issuance of long-term debt 1,150 2,733 674 Payments and redemptions of long-term debt (1,033) (448) (972) Net change in short-term borrowings (including investment banking and brokerage borrowings) 865 1,934 17 Contractholder fund deposits 2,205 - - Contractholder fund withdrawals (3,529) - - Other, net (4) (50) (138) --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (1,156) 4,301 (336) --------------------------------------------------------------------------------------------------------------------- Change in cash and cash equivalents (299) 1,254 (43) Cash and cash equivalents at beginning of period 1,526 272 315 --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $1,227 $ 1,526 $ 272 --------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the period for interest $1,227 $ 674 $ 669 Value of assets exchanged for shares of old Travelers $ - $ - $ 173 =====================================================================================================================
See Notes to Consolidated Financial Statements. 23 The Travelers Inc. and Subsidiaries Notes to Consolidated Financial Statements 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) (the Acquisition). During 1993 this investment was accounted for on the equity method. 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 $3.398 billion is comprised of $3.265 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 (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 then best estimate of their fair values. 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 was completed during 1994. The excess of the purchase price over the estimated fair value of net assets was $917 million and is being 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. 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. (LBI), a subsidiary of American Express Company (American Express), 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 Inc. which is a subsidiary of Smith Barney Holdings Inc. (Smith Barney). 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 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 of the Company and the balance in notes to LBI. In addition, Smith Barney has agreed to pay American Express additional amounts that are contingent upon the new unit's performance, consisting of up to $50 million per year for three years based on Smith Barney's revenues and 10% of Smith Barney's after tax profits in excess of $250 million per year over a five year period. Additional consideration paid during 1994 amounted to $69 million and Smith Barney expects to pay approximately $50 million in the first quarter of 1995. The contingent consideration will be accounted for prospectively, as 24 Notes to Consolidated Financial Statements (continued) additional purchase price, which will result in amortization over periods of up to 20 years. Evaluation and appraisal of assets and liabilities, including the value of identifiable intangible assets and liabilities assumed, was completed during 1994. As a result of the acquisition of the Shearson Businesses, the Company recorded a provision in the third quarter of 1993 of $65 million after-tax relating primarily to the elimination of duplicate facilities, severance and other personnel-related costs. In conjunction with the acquisition of the Shearson Businesses, Smith Barney entered into a securities clearing agreement with LBI (the Clearing Agreement) effective August 2, 1993, pursuant to which Smith Barney 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 $8.6 billion of assets and $7.787 billion of liabilities to Smith Barney in connection with the Clearing Agreement. Payment for these net assets of $813 million consisted of approximately $536 million in cash and the remainder in notes to LBI. The Clearing Agreement is terminating in early 1995, and assets and liabilities related to the Clearing Agreement are being transferred to LBI in exchange for cash equal to the net assets. At December 31, 1994, $11.855 billion of assets and $10.428 billion of liabilities related to the Clearing Agreement are included in the Consolidated Statement of Financial Position. 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 for the year ended December 31, 1993 are listed below. (millions) Travelers Shearson --------- --------- Fair value of assets acquired, $40,922 $4,811 excluding cash acquired Liabilities assumed (37,642) (2,779) Issuance of notes - (586) Equity securities issued (3,339) (150) ------- ------ Cash payment (acquired) $ (59) $1,296 ======= ====== 2. Summary of Significant Accounting Policies ------------------------------------------ Changes in Accounting Principles FAS 115. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (FAS) 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. Debt securities that the Company has the positive intent and ability to hold to maturity have been classified as "held to maturity" and have been reported at amortized cost. Investment securities that are not classified as "held to maturity" have been classified as "available for sale" and are reported at fair value, with unrealized gains and losses, net of income taxes, charged or credited directly to stockholders' equity. Previously, securities classified as available for sale were carried at the lower of aggregate cost or market value. Initial adoption of this standard resulted in a net increase of $214 million (net of taxes) to net unrealized gains on investment securities which is included in stockholders' equity. FAS 106. In 1993, the Company adopted FAS 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 for 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 25 Notes to Consolidated Financial Statements (continued) 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 million ($25 million pre-tax) or $0.07 per share. See Note 17 for additional information relating to FAS 106. FAS 112. In 1993, the Company adopted FAS 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. For the Company these benefits are principally disability-related benefits and severance. 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 million ($29 million pre-tax) or $0.07 per share. FAS 113. In the first quarter of 1993, the Company adopted FAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts". 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. Adoption of FAS 113 did not have an impact on the Company's earnings; however, assets and liabilities increased by like amounts. See Note 12 for additional reinsurance disclosures. Interpretations 39 and 41. Effective January 1, 1994, the Company adopted Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts" (Interpretation 39). 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. In December 1994, the Financial Accounting Standards Board issued Interpretation No. 41 "Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements" (Interpretation 41). This Interpretation modifies Interpretation 39 to permit offsetting in the statement of financial position of payables and receivables that represent repurchase agreements and reverse repurchase agreements that meet certain conditions. Implementation of Interpretations 39 and 41 did not have a material impact on the Company's financial position. Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of The Travelers Inc. and its subsidiaries. Results of operations prior to 1994 exclude the amounts of The Travelers Insurance Group except that results for 1993 include the Company's equity in earnings related to the 27% purchase. 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). 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. Equity securities include common and non-redeemable preferred stocks. Fixed maturities classified as "held to maturity" represent securities that the Company has both the ability and the 26 Notes to Consolidated Financial Statements (continued) intent to hold until maturity and are carried at amortized cost. Fixed maturity securities classified as "available for sale" and equity securities are carried at market values that are based primarily on quoted market prices. The difference between amortized cost and market values of such securities net of applicable income taxes is reflected as a component of stockholders' equity. Real estate held for sale is carried at the lower of cost or fair value. Fair values are established by appraisers, both internal and external, using discounted cash flow analyses and other acceptable techniques. Mortgage loans are carried at amortized cost. Policy loans are carried at unpaid balances which do not exceed the net cash surrender value of the related insurance policies. Short-term investments are carried at cost, which approximates market. Realized gains and losses on sales of investments and unrealized losses considered to be other than temporary, determined on a specific identification basis, are included in other income. Accrual of income is suspended on fixed maturities or mortgage loans that are in default, or on which it is likely that future interest payments will not be made as scheduled. Interest income on investments in default is recognized only as payment is received. 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 have been provided for in accordance with the provisions of FAS No. 109, "Accounting for Income Taxes" (FAS 109), which was adopted effective January 1, 1992. 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 million (subject to a tax effect of $340 million) at December 31, 1994. Earnings per common share is computed after recognition of preferred stock dividend requirements and is based on the weighted average number of shares outstanding during the period after consideration of the dilutive effect of common stock warrants and stock options and the incremental shares assumed issued under the Capital Accumulation Plan and other restricted stock plans. Fully diluted earnings per common share, assuming conversion of all outstanding convertible notes and debentures, the maximum dilutive effect of common stock equivalents and conversion of 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, 1994, 1993 and 1992 would entail adding the number of shares issuable on conversion of the other debentures (zero and 2 million and 4 million shares, respectively), the additional common stock equivalents (2 million, zero and 1 million shares respectively) and the assumed conversion of the 5.5% convertible preferred stock (3 million, 2 million, and zero shares, respectively) to the number of shares included in the earnings per common share calculation (resulting in a total of 327 million, and 242 million and 228 million shares, respectively) and eliminating the after-tax interest expense related to the conversion of other debentures (zero, $3 million and $7 million, respectively) and the elimination of the 5.5% convertible preferred stock dividends ($7 million, $3 million, and zero, respectively). Financial Instruments - Disclosures. Included in the Notes to Consolidated Financial Statements are various disclosures relating to financial instruments having off-balance sheet risk. These disclosures indicate the magnitude of the Company's involvement in such activities, and reflect the instruments at their face, contract or notional amounts. The Notes to Consolidated Financial Statements also include various disclosures 27 Notes to Consolidated Financial Statements (continued) relating to the methods and assumptions used to estimate fair value of each material type of financial instrument. The carrying value of short-term financial instruments approximates fair value because of the relatively short period of time between the origination of the instruments and their expected realization. The carrying value of receivables and payables arising in the ordinary course of business approximates fair market value. The fair value assumptions were based upon subjective estimates of market conditions and perceived risks of the financial instruments at a certain point in time. Disclosed fair values for financial instruments do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed. Derivative Financial Instruments. Information concerning derivative financial instruments and the accounting policies related thereto is included in Note 19 of Notes to Consolidated Financial Statements. Accounting Standards Not Yet Adopted FAS 114 and FAS 118. FAS No. 114, "Accounting by Creditors for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," describe how impaired loans should be measured when determining the amount of a loan loss accrual. These Statements also amend existing guidance on the measurement of restructured loans in a troubled debt restructuring involving a modification of terms. The adoption of these statements, effective January 1, 1995, will not have a material effect on results of operations or financial position. 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 ranging from twelve to thirty years. 28 Notes to Consolidated Financial Statements (continued) INSURANCE SERVICES Premiums from long-duration contracts, principally life insurance, are earned when due. Premiums from short-duration insurance contracts are earned over the related contract period. Short- duration contracts include primarily property and casualty, credit life and accident and health policies, including estimated ultimate premiums on retrospectively rated 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 is amortized over the period of anticipated premiums; universal life in relation to estimated gross profits; and annuity contracts employing a level yield method. The value of insurance in force is reviewed periodically for recoverability to determine if any adjustment is required. Deferred policy acquisition costs for the life business represent the costs of acquiring new business, principally commissions, certain underwriting and agency expenses and the cost of issuing policies. Deferred policy acquisition costs for traditional life business are amortized over the premium-paying periods of the related policies, in proportion to the ratio of the annual premium revenue to the total anticipated premium revenue. Deferred policy acquisition costs of other business lines are generally amortized over the life of the insurance contract or at a constant rate based upon the present value of estimated gross profits expected to be realized. For certain property and casualty lines, acquisition costs, 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 receivables include receivables related to retrospectively rated policies on property-casualty business, net of allowance for estimated uncollectible amounts. Insurance policy and claims reserves represent liabilities for future insurance policy benefits. Insurance reserves for traditional life insurance, annuities, and accident and health policies have been computed based upon mortality, morbidity, persistency and interest assumptions applicable to these coverages, which range 29 Notes to Consolidated Financial Statements (continued) from 2.5% to 12%, including adverse deviation. These assumptions consider company experience and industry standards and may be revised if it is determined that future experience will differ substantially from that previously assumed. Property-casualty reserves include (1) unearned premiums representing the unexpired portion of policy premiums, and (2) estimated provisions for both reported and unreported claims incurred and related expenses. The reserves are regularly adjusted based on experience. Included in the insurance policy and claims reserves in the Consolidated Statement of Financial Position at December 31, 1994 and 1993 are $793 million and $803 million, respectively, 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-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 (ranging from 3.4% to 8%) 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. Permitted Statutory Accounting Practices. The Travelers Insurance Group Inc. and its subsidiaries, domiciled principally in Connecticut and Massachusetts, prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the insurance departments of those states. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The impact of any permitted accounting practices on statutory surplus is not material. CONSUMER FINANCE SERVICES Finance related interest and other charges are recognized as income using the constant yield method. Allowances for losses are established by direct charges to income in amounts sufficient to maintain the allowance at a level management determines to be adequate to cover losses in the portfolio. The allowance fluctuates based upon continual review of the loan portfolio and current economic conditions. For financial reporting purposes, finance receivables are considered delinquent when they are 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. 30 Notes to Consolidated Financial Statements (continued) 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. 3. Sales of Subsidiaries and Affiliates ------------------------------------ During 1994, gains on sale of subsidiaries and affiliates totaled $254 million pre-tax and consisted of the sale in December of American Capital Management & Research Inc. (American Capital) ($162 million), the sale in November of Smith Barney's investment in HG Asia Holdings Ltd. ($34 million), the sale in October of Bankers and Shippers Insurance Company ($30 million), and the sale in December of the group dental insurance business of The Travelers Insurance Company (TIC) ($28 million). During 1992, gains on sale of stock of subsidiaries and affiliates totaled $188 million pre-tax and consisted principally of the sale of Margaretten & Company, Inc. ($83 million) and the sale of a substantial portion of the Company's investment in Fingerhut Companies, Inc. (Fingerhut) ($87 million 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. On January 3, 1995, the Company completed the sale of its group life and related businesses to Metropolitan Life Insurance Company (MetLife), and completed the formation of The MetraHealth Companies, Inc. (MetraHealth), a joint venture of the medical businesses of TIC and MetLife. The Company sold its group life business as well as related non- medical group insurance businesses to MetLife for $350 million. The assets transferred included customer lists, books and records, and furniture and equipment. In connection with the sale, TIC ceded 100% of its risks in the group life and related businesses to MetLife on an indemnity reinsurance basis, effective January 1, 1995. In connection with the reinsurance transaction, TIC transferred assets with a fair market value of approximately $1.5 billion to MetLife, equal to the statutory reserves and other liabilities transferred. On January 3, 1995, TIC and MetLife, and certain of their affiliates formed the MetraHealth joint venture by contributing their medical businesses to MetraHealth, in exchange for shares of common stock of MetraHealth. The assets transferred included cash, fixed assets, customer lists, books and records, certain trademarks and other assets used exclusively or primarily in the medical businesses. TIC also contributed all of the capital stock of its wholly owned subsidiary, The Travelers Employee Benefits Company, to MetraHealth. The total contribution amounted to $448 million at carrying value on the date of contribution. No gain was recognized upon the formation of the joint venture. Upon formation of the joint venture TIC and its affiliates owned 50% of the outstanding capital stock of MetraHealth, and the other 50% was owned by MetLife and its affiliates. In connection with the formation of the joint venture, the transfer of the fee based medical business (Administrative Services Only) and other noninsurance business to MetraHealth was completed on January 3, 1995. As the medical insurance business of The Travelers Insurance Group comes due for renewal, and after obtaining regulatory approvals, the risks will be transferred to MetraHealth. In the interim the related operating results for this medical insurance business will be reported by The Travelers Insurance Group. All of the businesses sold to MetLife or contributed to MetraHealth were included in the Company's Managed Care and Employee Benefits Operations (MCEBO). Revenues and net income from MCEBO for the year ended 1994 amounted to $3.522 billion and $169 million, respectively. Beginning in 1995 the 31 Notes to Consolidated Financial Statements (continued) Company's results will reflect the medical insurance business not yet transferred, plus its equity interest in the earnings of MetraHealth. 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 prior to 1994 exclude the amounts of old Travelers except that Corporate and Other results for 1993 include the equity earnings relating to the 27% purchase of old Travelers in December 1992 (see Note 1). Data relating to identifiable assets in 1992 exclude amounts for old Travelers. The following table presents certain information regarding these industry segments:
(millions) 1994 1993 1992 ---- ---- ---- Revenues Investment Services $5,690 $3,524 $1,822 Life Insurance Services 7,010 1,585 1,505 Property & Casualty Insurance Services 4,538 315 316 Consumer Finance Services 1,239 1,193 1,158 Corporate and Other (12) 180 324 ------ ----- ----- $18,465 $6,797 $5,125 ====== ===== ===== Income before income taxes, minority interest and cumulative effect of changes in accounting principles Investment Services $ 732 $ 592 $ 321 Life Insurance Services 926 428 356 Property & Casualty Insurance Services 307 65 80 Consumer Finance Services 356 360 305 Corporate and Other (172) 78 126 ----- ----- ----- $ 2,149 $1,523 $1,188 ===== ===== ===== Income before cumulative effect of changes in accounting principles Investment Services $ 422 $ 336 $ 191 Life Insurance Services 590 265 233 Property & Casualty Insurance Services (after minority interest of $22 in 1993) 249 23 54 Consumer Finance Services 227 232 198 Corporate and Other (162) 95 80 ------ ----- ----- $1,326 $ 951 $ 756 ====== ===== ===== Identifiable assets Investment Services $ 45,618 $ 31,864 $10,439 Life Insurance Services 38,473 40,300 4,727 Property & Casualty Insurance Services 22,663 20,515 885 Consumer Finance Services 7,729 7,155 6,495 Corporate and Other 814 1,456 1,605 -------- -------- ------ $115,297 $101,290 $24,151 ======= ======= ======
32 Notes to Consolidated Financial Statements (continued) The Investment Services segment consists of investment banking, securities brokerage, asset management and other financial services provided through Smith Barney and its subsidiaries, investment management services provided by RCM Capital Management and mutual fund management and distribution services provided through American Capital (sold in December 1994, see Note 3). The Life Insurance Services segment includes individual and group life insurance, accident and health insurance, annuities and investment products, which are offered primarily through The Travelers Insurance Company and Primerica Financial Services (PFS). The Property & Casualty Insurance Services segment 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-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, the Company's approximately 27% interest in old Travelers during 1993 and the results of Fingerhut for 1992. Cumulative effect of changes in accounting principles, and capital expenditures for property, plant and equipment and related depreciation expense are not material to any of the business segments. Intersegment sales and international operations are not significant. For gains and special charges included in each segment, see Management's Discussion and Analysis of Financial Condition and Results of Operations. 5. Investments ----------- Fair values of investments in fixed maturities are based on quoted market prices or dealer quotes or, if these are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. 33 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 to Maturity --------------------------------------------- --------------------------------------------- Amortized Gross Unrealized Market Amortized Gross Unrealized Market --------------------- --------------------- December 31, 1994 Cost Gains Losses Value Cost Gains Losses Value ----------------- --------------------------------------------- --------------------------------------------- (millions) Mortgage-backed securities-principally obligations of U.S. Government agencies $ 5,227 $ 3 $(401) $ 4,829 $84 $12 $ - $ 96 U.S. Treasury securities and obligations of U.S. Government corporations and agencies 4,652 4 (426) 4,230 - - - - Obligations of states and political subdivisions 4,093 5 (369) 3,729 6 - - 6 Debt securities issued by foreign governments 562 1 (32) 531 - - - - Corporate securities 14,724 22 (873) 13,873 6 - - 6 --------------------------------------------- --------------------------------------------- Totals $29,258 $35 $(2,101) $27,192 $96 $12 $ - $108 ============================================= ============================================= Available for Sale Held to Maturity --------------------------------------------- --------------------------------------------- Amortized Gross Unrealized Market Amortized Gross Unrealized Market --------------------- --------------------- December 31, 1993 Cost Gains Losses Value Cost Gains Losses Value ----------------- --------------------------------------------- --------------------------------------------- (millions) 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 ============================================= =============================================
34 Notes to Consolidated Financial Statements (continued) The amortized cost and estimated market value at December 31, 1994 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated (millions) Amortized Market Cost Value -------- -------- Due in one year or less $ 1,508 $ 1,484 Due after one year through five years 6,977 6,643 Due after five years through ten years 8,342 7,758 Due after ten years 7,216 6,490 ------ ------ 24,043 22,375 Mortgage-backed securities 5,311 4,925 ------ ------ $29,354 $27,300 ====== ====== Realized gains and losses on fixed maturities for the years ended December 31, were as follows: (millions) 1994 1993 1992 ---- ---- ---- Realized gains Pre-tax $ 52 $168 $ 61 --- --- --- After-tax $ 34 $109 $ 40 --- --- --- Realized losses Pre-tax $201 $ 2 $ 1 --- --- --- After-tax $131 $ 1 $ - --- --- ---- Net realized gains on equity securities and other investments, after-tax, amounted to $18 million, $14 million and $25 million for the years ended December 31, 1994, 1993 and 1992, respectively. Net unrealized gains (losses) on equity securities at December 31, 1994 and 1993 were $(6) million and $42 million, respectively. The Company had industry concentrations of corporate bonds and fixed income securities at December 31 as follows: (millions) 1994 1993 ------ ------ Finance $2,040 $2,234 Banking* $1,718 $1,607 Electric utilities $1,676 $1,850 * Includes $547 million in 1994 and $515 million in 1993 of primarily short-term investments and cash equivalents issued by foreign banks. At December 31, significant concentrations of mortgage loans and real estate were for properties located in highly populated areas in the states listed below: Mortgage Loans Real Estate ------------------------- ------------------------- (millions) 1994 1993 1994 1993 ---- ---- ---- ---- California $1,246 $1,471 $ 11 $ 33 New York $ 589 $ 836 $129 $ 90 Texas $ 395 $ 600 $ 79 $ 192 Florida $ 435 $ 583 $ 15 $ 111 Illinois $ 375 $ 517 $ 48 $ 88 35 Notes to Consolidated Financial Statements (continued) Other mortgage loan and real estate investments are dispersed throughout the United States, with no combined holdings in any other state exceeding $400 million. Aggregate annual maturities on mortgage loans are as follows: (millions) Past maturity $ 219 1995 734 1996 508 1997 590 1998 671 1999 640 Thereafter 2,054 ------ $5,416 ====== 6. Securities Borrowed, Loaned and Subject to Repurchase Agreements ---------------------------------------------------------------- Securities borrowed or purchased under agreements to resell, at their respective carrying values, consisted of the following at December 31: (millions) 1994 1993 ------- ------- Resale agreements (by counterparty) Brokers and dealers $ 3,703 $ 2,340 Commercial banks, foreign banks and savings and loans 2,799 555 Other 1,804 1,386 ------- ------- Total resale agreements 8,306 4,281 Deposits paid for securities borrowed 17,349 9,072 ------- ------- $25,655 $13,353 ======= ======= 36 Notes to Consolidated Financial Statements (continued) Securities loaned or sold under agreements to repurchase, at their respective carrying values, consisted of the following at December 31: (millions) 1994 1993 -------- ------- Repurchase agreements (by counterparty) Brokers and dealers $ 4,910 $ 1,904 Commercial banks, foreign banks and savings and loans 2,852 1,600 Municipalities 3,023 301 Corporations 1,145 517 Other 2,692 953 ------ ------ Total repurchase agreements 14,622 5,275 Deposits received for securities loaned 6,998 4,869 ------ ------ $21,620 $10,144 ====== ====== The resale and repurchase agreements represent collateralized financing transactions used to generate net interest income and facilitate trading activity. These instruments are short-term in nature (usually 30 days or less) and are collateralized principally by U.S. Government and mortgage-backed securities. The carrying amounts of these instruments approximate fair value because of the relatively short period of time between the origination of the instruments and their expected realization. 7. Brokerage Receivables and Brokerage Payables -------------------------------------------- The Company has receivables and payables for financial instruments purchased from and sold to brokers and dealers and customers. The Company is exposed to risk of loss from the inability of brokers and dealers or customers to pay for purchases or to deliver the financial instrument sold, in which case the Company would have to sell or purchase the financial instruments at prevailing market prices. The Company seeks to protect itself from the risks associated with customer activities by requiring customers to maintain margin collateral in compliance with regulatory and internal guidelines. Margin levels are monitored daily, and customers deposit additional collateral as required. Where customers cannot meet collateral requirements, the Company will liquidate sufficient underlying financial instruments to bring the customer into compliance with the required margin level. 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. 37 Notes to Consolidated Financial Statements (continued) Brokerage receivables and brokerage payables, which arise in the normal course of business, consisted of the following at December 31:
(millions) 1994 1993 ---- ----- Receivables from brokers and dealers $ 736 $1,063 Receivables from customers 7,502 7,104 ----- ----- Total brokerage receivables $8,238 $8,167 ===== ===== Payables to brokers and dealers $1,159 $1,841 Payables to customers 6,648 5,171 ----- ----- Total brokerage payables $7,807 $7,012 ===== =====
Included in payables to brokers and dealers as of December 31, 1994 and 1993 is approximately $338 million and $966 million, respectively, of payables due LBI in connection with LBI's proprietary transactions. 8. Trading Securities ------------------ Trading securities at market value consisted of the following at December 31:
1994 1993 ---------------------------------- ---------------------------------- Securities Securities Sold Sold Securities Not Yet Securities Not Yet (millions) Owned Purchased Owned Purchased -------------- ---------------- ------------- ----------------- Obligations of U.S. Government and agencies $3,670 $3,658 $2,233 $3,258 State and municipal obligations 978 16 839 42 Corporate debt and collateralized mortgage obligations 1,688 424 2,214 198 Corporate convertibles, equities and other securities 609 247 577 337 ----- ----- ----- ----- $6,945 $4,345 $5,863 $3,835 ===== ===== ===== =====
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. 38 Notes to Consolidated Financial Statements (continued) 9. Consumer Finance Receivables ---------------------------- Consumer finance receivables, net of unearned finance charges of $674 million and $613 million at December 31, 1994 and 1993, respectively, consisted of the following: (millions) 1994 1993 ---- ----- Real estate-secured loans $2,845 $2,706 Personal loans 2,875 2,495 Credit cards 712 697 Sales finance and other 453 444 ----- ------ Consumer finance receivables 6,885 6,342 Accrued interest receivable 43 42 Allowance for credit losses (182) (168) ----- ------ Net consumer finance receivables $6,746 $6,216 ===== ====== An analysis of the allowance for credit losses on consumer finance receivables at December 31, was as follows: (millions) 1994 1993 1992 ---- ----- ---- Balance, January 1 $168 $ 169 $ 167 Provision for credit losses 152 134 165 Amounts written off (163) (163) (184) Recovery of amounts previously written off 25 23 21 Allowance on receivables purchased - 5 - ----- ------ ------ Balance, December 31 $ 182 $ 168 $ 169 ===== ===== ===== Net outstandings $6,885 $6,342 $5,788 ===== ===== ===== Ratio of allowance for credit losses to net outstandings 2.64% 2.64% 2.91% ==== ==== ==== Contractual maturities of receivables before deducting unearned finance charges and excluding accrued interest were as follows:
Receivables Outstanding Due (millions) December 31, Due Due Due Due After 1994 1995 1996 1997 1998 1998 ----------- ------ ------ ------ ------ ------ Real estate-secured loans $2,908 $ 185 $ 191 $ 200 $ 206 $2,126 Personal loans 3,400 1,046 931 717 414 292 Credit cards 711 62 57 52 47 493 Sales finance and other 540 245 133 67 36 59 ----- ----- ----- ----- ----- ----- Total $7,559 $1,538 $1,312 $1,036 $ 703 $2,970 ===== ===== ===== ===== ===== ===== Percentage 100% 20% 18% 14% 9% 39% ===== ===== ===== ===== ===== =====
Contractual terms average 12 years on real estate-secured loans and 4 years on personal loans. Experience has shown that a substantial amount of the receivables will be renewed or repaid prior to contractual maturity dates. Accordingly, the foregoing tabulation should not be regarded as a forecast of future cash collections. 39 Notes to Consolidated Financial Statements (continued) The Company has a geographically diverse consumer finance loan portfolio. At December 31, the distribution by state was as follows: 1994 1993 ---- ------ Ohio 13% 13% North Carolina 10% 10% South Carolina 7% 7% Pennsylvania 6% 6% Maryland 5% 6% California 5% 5% Texas 5% 5% All other states* 49% 48% ---- ---- 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., exit value versus entry value). Exit value represents a valuation of the portfolio based upon sales of comparable portfolios which takes into account the value of customer relationships and the current level of funding costs. Under the exit value methodology, the estimated fair value of the receivables portfolio at December 31, 1994 is approximately $618 million above the recorded carrying value. Entry value is determined by comparing the portfolio yields to the yield at which new loans are being originated. Under the entry value methodology, the estimated fair value of the receivables portfolio at December 31, 1994 is approximately equal to the aggregate carrying value due to the increase in variable rate receivables whose rates are periodically reset and the fact that the average yield on fixed rate receivables is approximately equal to that on new fixed rate loans made at year end 1994. Fair values included in Note 20 are based on the exit value methodology. 10. Debt ---- Investment banking and brokerage borrowings consisted of the following at December 31: (millions) 1994 1993 ---- ---- Commercial paper $2,455 $1,401 Secured borrowings 185 105 Unsecured borrowings 1,141 693 Notes to LBI 593 1,255 ----- ----- $4,374 $3,454 ===== ===== Weighted average interest rate at end of period, excluding non-interest bearing balances 5.8% 3.3% ===== ==== Investment banking and brokerage borrowings are short-term and include commercial paper, secured and unsecured bank loans used to finance Smith Barney's operations, including the securities settlement process, and notes issued to LBI inconnection 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 at December 31, 1994 represent a 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. Notes payable to LBI at December 31, 1993 also included a $586 million variable rate note which was issued as partial payment for the businesses acquired and was repaid in January 1994. In 1993, Smith Barney put in place a commercial paper program that consists of both discounted and interest 40 Notes to Consolidated Financial Statements (continued) bearing paper and is currently authorized up to $2.5 billion. Smith Barney also has substantial borrowing arrangements consisting of facilities that it has been advised are available, but where no contractual lending obligation exists. At December 31, 1994 and 1993, the market value of the securities pledged as collateral for short-term brokerage borrowings was $229 million and $124 million, respectively, including $163 million of customer margin securities at December 31, 1994. At December 31, short-term borrowings consisted of commercial paper outstanding with weighted average interest rates as follows:
(millions) 1994 1993 -------------------------- ---------------------------- Outstanding Interest Rate Outstanding Interest Rate ----------- ------------- ----------- ------------- The Travelers Inc. $ 101 5.83% $329 3.43% Commercial Credit Company 2,305 5.89% 2,206 3.34% The Travelers Insurance Company 74 6.02% - ----- ----- $2,480 $2,535 ===== =====
The Travelers Inc. (the Parent), Commercial Credit Company (CCC) and The Travelers Insurance Company (TIC) issue commercial paper directly to investors. Each maintains unused credit availability under its respective bank lines of credit at least equal to the amount of its outstanding commercial paper. Each may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees. In 1994 the Parent, CCC and TIC entered into an agreement with a syndicate of banks to provide $1.5 billion of revolving credit, to be allocated to any of the Parent, CCC or TIC. The participation of TIC in this agreement is limited to $300 million. The revolving credit facility consists of a 364-day revolving credit facility in the amount of $300 million and a 5-year revolving credit facility in the amount of $1.2 billion. At December 31, 1994, $650 million was allocated to the Parent, $650 million was allocated to CCC and $200 million was allocated to TIC. Under this facility the Company is required to maintain a certain level of consolidated stockholders' equity (as defined in the agreement). At December 31, 1994, the Company exceeded this requirement by approximately $2.7 billion. At December 31, 1994, CCC also had committed and available revolving credit facilities on a stand alone basis of $2.360 billion, of which $600 million expires in 1995 and $1.760 billion expires in 1999. 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, 1994, CCC would have been able to remit $270 million to the Parent under its most restrictive covenants or regulatory requirements. The carrying value of short-term borrowings approximates fair value. 41 Notes to Consolidated Financial Statements (continued) Long-term debt, including its current portion, and final maturity dates were as follows at December 31: (millions) 1994 1993 ---- ---- The Travelers Inc. 8.6% Notes due 1994 $ - $ 93 8 3/8% Notes due 1996 100 100 7 5/8% Notes due 1997 185 185 5 3/4% Notes due 1998 250 250 7 3/4% Notes due 1999 100 100 6 1/8% Notes due 2000 200 200 9 1/2% Senior Notes due 2002 300 300 8 5/8% Debentures due 2007 100 100 Other indebtedness, 5 7/8% - 8 7/8% due 1996 - 2007 13 13 ESOP note guarantee 97 125 Debt premium (discount), net 32 38 ----- ----- 1,377 1,504 ----- ----- Commercial Credit Company 8.29% to 12.85% Medium-Term Notes due 1994-1995 10 55 8% Notes due 1994 - 100 12.7% Notes due 1994 - 15 6.95% Notes due 1994 - 200 8.45% Notes due 1994 - 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 100 100 5 1/2% Notes due 1998 100 100 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 100 100 5 3/4% Notes due 2000 200 200 6 1/8% Notes due 2000 100 100 6.00% Notes due 2000 150 150 8.25% Notes due 2001 300 - 5.9% Notes due 2003 200 200 42 Notes to Consolidated Financial Statements (continued) 7.875% Notes due 2004 200 - 10% Notes due 2008 150 150 10% Debentures due 2009 100 100 8.7% Debentures due 2009 150 150 8.7% Debentures due 2010 100 100 ----- ----- 4,010 3,970 ----- ----- Smith Barney Revolving credit facility 400 825 7.4% Medium-Term Notes due 1996 50 - 5 3/8% Notes due 1996 150 150 6.0% Notes due 1997 200 - 5 5/8% Notes due 1998 150 150 5 1/2% Notes due 1999 200 - 7 7/8% Notes due 1999 150 - 6 5/8% Notes due 2000 150 150 Capital Note with LBI due 1995 150 100 ----- ----- 1,600 1,375 ----- ----- The Travelers Insurance Group 12% GNMA/FNMA - collateralized obligations 88 132 Other indebtedness - 10 ----- ----- 88 142 ----- ----- $7,075 $6,991 ===== ===== 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 1995, 1996 and 1997 are $30 million, $32 million and $35 million, 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. In May 1994, Smith Barney renegotiated its three-year revolving credit agreement (the "Agreement") with a bank syndicate. The amendment to the Agreement extended the term by one year until May 1997 and increased the amount of the facility from $625 million to $1.0 billion. As of December 31, 1994, $400 million was borrowed under the Agreement. In addition, in May 1994, Smith Barney entered into a $750 million, 364-day revolving credit agreement with a bank syndicate. As of December 31, 1994, there were no borrowings outstanding under this new facility. Smith Barney 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, 1994, Smith Barney would have been able to remit approximately $500 million to the Parent under its most restrictive covenants. 43 Notes to Consolidated Financial Statements (continued) Aggregate annual maturities for the next five years on long-term debt obligations excluding principal payments on the ESOP loan obligation and the 12% GNMA/FNMA collateralized obligations, are as follows: (millions) 1995 $960 1996 $750 1997 $1,135 1998 $700 1999 $800 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, 1994 the carrying value and the fair value of the Company's long-term debt were: (millions) Carrying Fair Value Value -------- ------ The Travelers Inc. $1,377 $1,314 Commercial Credit 4,010 3,926 Smith Barney 1,600 1,531 The Travelers Insurance Group 88 96 ----- ----- $7,075 $6,867 ===== ===== 11. Insurance Policy and Claims Reserves ------------------------------------ Insurance policy and claims reserves consisted of the following at December 31: (millions) 1994 1993 ---- ---- Benefit and loss reserves: Property-casualty $13,872 $13,805 Accident and health 1,029 857 Life and annuity 8,603 8,490 Unearned premiums 2,276 2,307 Policy and contract claims 1,304 1,347 ------ ------ $27,084 $26,806 ====== ====== 44 Notes to Consolidated Financial Statements (continued) The table below is a reconciliation of beginning and ending property- casualty reserve balances for loss and loss adjustment expenses (LAE) for the years ended December 31, 1994, 1993 and 1992. Loss provisions and payments for 1993 and 1992 reflect only the activity of Gulf Insurance Company.
(millions) 1994 1993 1992 ---- ---- ---- Losses and LAE at beginning of year $13,805 $ 313 $ 296 Less reinsurance recoverables on unpaid losses 3,615 85 74 ------ ------- ------- Net balance at beginning of year 10,190 228 222 ------ ------- ------- Provision for losses and LAE for claims arising in the current year 3,201 185 185 Estimated losses and LAE for claims arising in prior years (248) (6) Increase for purchase of old Travelers 9,938 -------- ------ -------- Total increases 2,953 10,123 179 ------ ------ ------ Losses and LAE payments for claims arising in: Current year 989 67 80 Prior years 1,903 94 93 ------ ------- ------- Total payments 2,892 161 173 ------ ------- ------- Net balances at end of year 10,251 10,190 228 Plus reinsurance recoverables on unpaid losses 3,621 3,615 85 ------ ------ ------- Losses and LAE at end of year $13,872 $13,805 $ 313 ------ ------ -------
In 1994, estimated losses and LAE for claims arising in prior years includes favorable loss development in Personal Lines automobile and homeowners coverage of $100 million, offset by unfavorable development of $100 million for Commercial Lines asbestos and environmental claims from 1985 and prior. In addition, in 1994 Commercial Lines experienced favorable prior year loss development in workers' compensation, other liability and commercial automobile product lines in its National business for post-1985 accident years. This favorable development amounted to $261 million, however, since the business to which it relates is subject to retrospective rating premium adjustments, the net impact on results of operations is minimal. The increase for purchase of old Travelers includes a purchase accounting adjustment of $225 million. The adjustment reflects appellate court decisions that resolved issues concerning obligations of insurers for environmental claims under liability policies in certain jurisdictions, and the measurement of amounts recoverable for asbestos claims from reinsurers based upon commutation of reinsurers' liabilities at a discount. The $225 million was included in other liabilities at December 31, 1993. The property-casualty loss and LAE reserves include $854 million and $885 million for asbestos and environmental related claims net of reinsurance at December 31, 1994 and 1993, respectively. Travelers Insurance carries on a continuing review of its overall position, its reserving techniques and reinsurance recoverable. However, the industry does not have a standard method of calculating claim activity for environmental and asbestos losses. In each of these areas of exposure, Travelers Insurance has endeavored to litigate individual cases and settle claims on favorable terms. Given the vagaries of court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties, it is not presently possible to quantify the ultimate exposure or range of exposure represented by these claims to the Company's financial condition, results of operations or liquidity. The Company believes that it is reasonably possible that the outcome of the uncertainties regarding environmental and asbestos claims 45 Notes to Consolidated Financial Statements (continued) could result in a liability exceeding the reserves by an amount that would be material to operating results in a future period. However, it is not likely these claims will have a material adverse effect on the Company's financial condition or liquidity. 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: Ceded to (millions) Gross Other Net Amount Companies Amount ------ --------- ------ Year ended December 31, 1994 ---------------------------- Premiums Life insurance $1,878 $(295) $1,583 Accident and health insurance 2,591 (107) 2,484 Property-casualty insurance 5,052 (1,529) 3,523 ----- ------ ----- $9,521 $(1,931) $7,590 ===== ====== ===== Claims $8,126 $(1,357) $6,769 ===== ====== ===== Year ended December 31, 1993 ---------------------------- Premiums Life insurance $1,178 $(284) $ 894 Accident and health insurance 385 (56) 329 Property-casualty insurance 434 (177) 257 ----- ---- ----- $1,997 $(517) $1,480 ===== ==== ===== Claims $1,096 $(287) $ 809 ===== ==== ====== 46 Notes to Consolidated Financial Statements (continued) Ceded to Gross Other Net (millions) Amount Companies Amount ------ --------- ------ Year ended December 31, 1992 ---------------------------- Premiums Life insurance $1,221 $(312) $ 909 Accident and health insurance 443 (39) 404 Property-casualty insurance 562 (181) 381 ----- ---- ----- $2,226 $(532) $1,694 ===== ==== ===== Claims $1,056 $(271) $ 785 ===== ==== ===== Reinsurance recoverables at December 31 include amounts recoverable on unpaid losses, paid losses and unearned premiums and were as follows: (millions) 1994 1993 ---- ---- Reinsurance Recoverables ------------------------ Life business $ 758 $ 739 Property and Casualty business: Pools and associations 2,524 2,585 Other reinsurance 1,744 1,605 ----- ----- Total $5,026 $4,929 ===== ===== 13. Income Taxes ------------ The provision for income taxes (before minority interest) for the years ended December 31 was as follows: (millions) 1994 1993 1992 ---- ---- ---- Current: Federal $378 $406 $350 Foreign 22 3 5 State 80 75 53 --- --- --- 480 484 408 --- --- --- Deferred: Federal 334 64 26 Foreign 1 (2) (2) State 8 4 - ---- --- --- 343 66 24 ---- --- --- Total $823 $550 $432 === === === 47 Notes to Consolidated Financial Statements (continued) Deferred income taxes at December 31 related to the following:
(millions) 1994 1993 ---- ---- Deferred tax assets: Differences in computing policy reserves $1,288 $1,353 Deferred compensation 214 145 Employee benefits 213 221 Investments 1,074 432 Other deferred tax assets 765 1,015 ----- ----- Gross deferred tax assets 3,554 3,166 ----- ----- Valuation allowance 100 100 ----- ----- Deferred tax assets after valuation allowance 3,454 3,066 ----- ----- Deferred tax liabilities: Deferred policy acquisition costs and value of insurance in force (608) (576) Investment management contracts (244) (277) Other deferred tax liabilities (273) (355) ------- ------- Gross deferred tax liabilities (1,125) (1,208) ------- ------- Net deferred tax asset $ 2,329 $ 1,858 ======= =======
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: 1994 1993 1992 ---- ---- ---- Federal statutory rate 35.0% 35.0% 34.0% Limited taxability of investment income (3.5) (1.6) (.8) State and foreign income taxes (net of federal income tax benefit) 2.7 3.4 2.9 Sale of subsidiaries 2.9 - (.3) Equity in income of old Travelers - (2.2) - Other, net 1.2 1.5 .5 ---- ---- ---- Effective income tax rate 38.3% 36.1% 36.3% ==== ==== ==== Tax benefits allocated directly to stockholders' equity for the years ended December 31, 1994 and 1993 were $35 million and $79 million, respectively. As a result of the acquisition of old Travelers, a valuation allowance of $100 million was established in 1993 to reduce the net deferred tax asset on investment losses to the amount that, based upon available evidence, is more likely than not to be realized. The $100 million valuation allowance is sufficient to cover any capital losses on investments that may exceed the capital gains able to be generated in the life insurance group's consolidated federal income tax return based upon management's best estimate of the character of the reversing temporary differences. Reversal of the valuation allowance is contingent upon the recognition of future capital gains or a change in circumstances which causes 48 Notes to Consolidated Financial Statements (continued) the recognition of the benefits to become more likely than not. The initial recognition of any benefit produced by the reversal of the valuation allowance will be recognized by reducing goodwill. The net deferred tax asset, after the valuation allowance of $100 million, relates to temporary differences that are expected to reverse as net ordinary deductions, except for a deferred tax asset of $723 million which relates to the unrealized loss on fixed maturity investments. Management has the intent and the ability not to realize the unrealized loss except to the extent of offsetting capital gains. The Company will have to generate approximately $4.6 billion of taxable income, before the reversal of the temporary differences, primarily over the next 10-15 years, to realize the remainder of the deferred tax asset, exclusive of the unrealized loss on fixed maturity investments. Management expects to realize the remainder of the deferred tax asset based upon its expectation of future taxable income, after the reversal of these deductible temporary differences, of at least $1 billion annually. The Company has reported pre-tax financial statement income exceeding $1.6 billion, on average, over the last three years and has incurred taxable income of approximately $1 billion, on average, over the same period of time. At December 31, 1994, the Company has no ordinary or capital loss carryforwards. 14. Preferred Stock and Stockholders' Equity ---------------------------------------- Preferred Stock The following table sets forth the Company's preferred stock outstanding at December 31, 1994 and 1993: Liquidation Number Preference Carrying of Shares Per Share Value --------- ---------- -------- (millions) Series A 1,200,000 $250 $300 Series B 2,500,000 $50 125 Series D 7,500,000 $50 375 ---------- --- 11,200,000 $800 ========== === Series C 4,406,431 $53.25 $235 ========== === Series A In July 1992 the Company sold in a public offering 12.0 million depositary shares, each representing 1/10th of a share of 8.125% Cumulative Preferred Stock, Series A (Series A Preferred), at an offering price of $25 per depositary share. The Series A Preferred has cumulative dividends payable quarterly 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 Shearson Acquisition 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 49 Notes to Consolidated Financial Statements (continued) 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. Both the Series B Preferred and the warrant are publicly traded. 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. 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. 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. Stockholders' Equity The combined insurance subsidiaries' statutory capital and surplus at December 31, 1994 and 1993 was $4.342 billion and $4.340 billion, respectively, and is subject to certain restrictions imposed by state insurance departments as to the transfer of funds and payment of dividends. The combined insurance subsidiaries' (including The Travelers Insurance Group for 1994 only) net income, determined in accordance with statutory accounting practices, for the years ended December 31, 1994, 1993 and 1992 was $228 million, $204 million and $199 million, respectively. Under Connecticut law, the statutory capital and surplus of The Travelers Insurance Group Inc., which amounted to $4.218 billion at December 31, 1994 is not available in 1995 for dividends to its Parent without prior approval of the Connecticut Insurance Department. The Company's broker-dealer subsidiaries are subject to The Uniform Net Capital Rule of the Securities and Exchange Commission. At December 31, 1994, the aggregate net capital of such broker-dealer subsidiaries was $1.313 billion, exceeding the net capital requirement by $1.119 billion. See Note 10 for additional restrictions on stockholders' equity. 50 Notes to Consolidated Financial Statements (continued) 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 million. At December 31, 1994, 10,694,740 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-qualifiedstock 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, 1994, 26,265,245 shares were available for grant, of which 15,011,009 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, 1992 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 Converted upon the Merger 4,011,726 15.54-62.02 Expired or canceled (679,064) 9.74-44.63 Exercised (9,898,567) 8.00-37.41 ----------- ----------- Balance, at December 31, 1993 22,333,705 $ 7.82-62.02 ----------- ----------- Granted 6,132,850 31.00-42.88 Expired or canceled (1,387,428) 9.74-62.02 Exercised (2,905,346) 7.81-40.13 ----------- ----------- Balance at December 31, 1994 24,173,781 $ 9.74-62.02 ----------- ----------- Currently exercisable, December 31, 1994 8,449,283 $ 9.74-62.02 =========== =========== 51 Notes to Consolidated Financial Statements (continued) 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 15,464,592 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. 16. Pension 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 years ended December 31: (millions) 1994 1993 1992 ---- ---- ---- Service cost $105 $34 $17 Interest cost 173 36 26 Actual return on plan assets (66) (59) (28) Net amortization and deferral (161) 11 (10) ---- --- --- Net periodic pension cost $51 $22 $ 5 ==== === === 52 Notes to Consolidated Financial Statements (continued) The following table sets forth the funded status of the Company's significant defined benefit plans at December 31: (millions) 1994 1993 ---- ---- Actuarial present value of benefit obligation: Vested benefits $2,091 $2,223 Non-vested benefits 49 40 ------ ------ Accumulated benefit obligation 2,140 2,263 Effect of future salary increases 46 79 ----- ----- Projected benefit obligation 2,186 2,342 Plan assets at fair value 2,335 2,434 ----- ----- Plan assets in excess of projected benefit obligation 149 92 Unrecognized transition asset (3) (3) Unrecognized prior service cost (benefit) 2 (36) Unrecognized net (gain) loss (145) 2 ----- ------ Prepaid pension cost recognized in the Statement of Financial Position $ 3 $ 55 ==== ===== Actuarial Assumptions: Weighted average discount rate 8.75% 7.5% Weighted average rate of compensation increase 4.5% 4.5% Expected long-term rate of return on plan assets 9.5% 9.75% 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 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. 17. Postretirement Benefits ----------------------- The Company provides postretirement health care, life insurance and survival income benefits to certain eligible retirees. These benefits relate primarily to former unionized employees of predecessor companies, certain employees of SmithBarney 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 million in 1993. 53 Notes to Consolidated Financial Statements (continued) The Company generally funds its share of the cost of postretirement benefits on a pay-as-you-go basis. However, the Company has made contributions to a survivor income plan, the assets of which are currently invested in a major insurance company's general investment portfolio. Payments and net periodic postretirement benefit cost for 1993 were not material. The following is a summary of the components of net periodic postretirement benefit cost for the year ended December 31, 1994: (millions) Service cost $ 3 Interest cost 33 Actual return on plan assets - Net amortization and deferral - --- Net periodic postretirement benefit cost $ 36 === The following table sets forth the funded status of the Company's postretirement benefit plans at December 31: (millions) 1994 1993 ---- ---- Accumulated postretirement benefit obligation Retirees $363 $418 Other fully eligible plan participants 32 33 Other active plan participants 18 53 --- ---- 413 504 Plan assets at fair value 4 3 --- ----- Accumulated postretirement benefit obligation in excess of plan assets 409 501 Unrecognized net gain (loss) 79 (18) Unrecognized prior service cost (5) (6) --- --- Accrued postretirement benefit liability $483 $477 === === For measurement purposes, the annual rate of increase in the per capita cost of covered health care benefits ranged from 16% in 1995, decreasing gradually to 5.5% by the year 2003 and remaining at that level thereafter. The health care cost trend rate assumption affects the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by approximately $14 million. The impact on net periodic postretirement benefit cost of such an increase would not be material. The weighted average discount rates used in determining the accumulated postretirement benefit obligation were 8.75% and 7.5% at December 31, 1994 and 1993, respectively. For certain plans associated with Smith Barney and old Travelers, the weighted average assumed rate of compensation increase was approximately 3.5% for both 1994 and 1993. 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. 54 Notes to Consolidated Financial Statements (continued) 18. Lease Commitments ------------------ Rentals Rental expense (principally for offices and computer equipment) was $403 million, $182 million and $114 million for the years ended December 31, 1994, 1993 and 1992, respectively. At December 31, 1994, future minimum annual rentals under noncancellable operating leases were as follows: (millions) 1995 $ 323 1996 277 1997 221 1998 155 1999 127 Thereafter 138 ----- $1,241 ===== Future sublease rental income of approximately $31 million will partially offset these commitments. The Company and certain of Smith Barney's subsidiaries together have an option to purchase the buildings presently leased for Smith Barney's executive offices and New York City operations at the expiration of the lease term. 19. Derivative Financial Instruments -------------------------------- The Company uses derivative financial instruments in the normal course of business for end user and, in the case of Smith Barney, trading purposes. Derivatives are financial instruments, which include forwards, futures, options and swaps, whose value is based upon an underlying asset, index or reference rate. A derivative contract may be traded on an exchange or over-the-counter (OTC). Exchange-traded derivatives are standardized and include futures and certain option contracts listed on exchanges. OTC derivative contracts are individually negotiated between contracting parties and include forwards, swaps, and certain options including interest rate caps, floors and swaptions. Derivatives are subject to various risks similar to those related to the underlying financial instruments, including market, credit and liquidity risk. The risks of derivatives should not be viewed in isolation but rather should be considered on an aggregate basis along with risks related to the Company's non-derivative trading and other activities. The Company manages derivative and non-derivative risks on an aggregate basis as part of its firm-wide risk management policies. Forwards represent commitments to exchange currencies or to purchase or sell other financial instruments at specified prices on specified future dates. Futures contracts are similar to forwards, however, major exchanges act as intermediaries and require daily cash settlement and collateral deposits. As a writer of certain option contracts, Smith Barney receives a fee to become obligated to buy or sell financial instruments at a specified price for a period of time at the holder's option. As a writer of interest rate options, Smith Barney receives a fee to become obligated to pay the holder at specified future dates the amount, if any, by which specified market interest rates exceed or fall below specified reference rates applied to a notional amount. In the case of swaptions, Smith Barney is obligated to enter into an interest rate swap at specified terms or cancel an existing swap, at the holder's option. Purchased options give Smith Barney the right, but not the obligation, to buy or sell financial instruments at a specified price for a period of time. Interest rate swaps require the exchange of periodic cash payments based on a notional principal amount and 55 Notes to Consolidated Financial Statements (continued) agreed-upon fixed or floating rates. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Market Risk. Market risk is the potential for changes in the value of derivative financial instruments due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. Credit Risk. Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. At any point in time, the credit risk for derivative contracts is limited to the unrealized gains for each counterparty to the extent not offset under any master netting agreements or collateral arrangements. There is no credit risk associated with written options as the counterparty pays a cash premium up front. Credit risk is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transaction. For significant transactions, the Company's credit review process includes an evaluation of the counterparty's creditworthiness, periodic review of credit standing and obtaining collateral and various credit enhancements in certain circumstances. Smith Barney establishes credit limits for its trading derivative counterparties by product type, taking into account the perceived risk associated with each product. The usage and resultant exposure from these credit limits are then monitored regularly by management. Liquidity Risk. Liquidity risk is the possibility that the Company may not be able to rapidly adjust the size of its derivative positions in times of high volatility and financial stress at a reasonable cost. The liquidity of derivative products is highly related to the liquidity of the underlying cash instrument. As with non-derivative financial instruments, the Company's valuation policies for derivatives include consideration of liquidity factors. Trading Activity All derivatives used for trading purposes relate to Smith Barney, and are primarily used to facilitate customer transactions. Smith Barney also uses derivatives to limit its net exposure to loss from market risk related to derivative and non-derivative inventory positions. On a limited basis, Smith Barney also began structuring derivative instruments in 1994, primarily OTC foreign currency options and interest rate options and swaps, as part of its proprietary trading activities. The level of this activity may expand in the future. To the extent that activities are related to servicing customer business, the objective is to minimize market risk as much as possible. Smith Barney's derivative contracts are generally short-term, with a weighted average maturity of approximately three months at December 31, 1994 and 1993. The notional or contractual amounts of these instruments do not represent the exposure to possible loss or future cash payments, but rather reflect the extent of the Company's involvement in these instruments. At December 31, 1994 and 1993, Smith Barney had outstanding trading derivatives with notional values as follows: 56 Notes to Consolidated Financial Statements (continued)
Contract or Notional Amount Contract or Notional Amount (millions) 1994 1993 ----------------------------- ---------------------------- Purchase Sell Purchase Sell -------- ---- -------- ---- "To be announced" mortgage-backed securities $15,016 $15,747 $7,402 $7,499 Forward and futures contracts: Foreign currency forwards 5,136 6,076 4,237 4,110 Foreign currency futures 865 6 701 854 Financial futures 50 2,661 100 750 Precious metals and other commodities 339 357 417 389 ------ ------ ------ ------ $21,406 $24,847 $12,857 $13,602 ====== ====== ====== ====== (millions) Purchased Written Purchased Written --------- ------- --------- ------- Options: Foreign currency $1,353 $1,340 $ - $ - Financial futures 50 2,150 - - Interest rate caps, floors and swaptions - 725 - - Other securities and commodities 34 22 127 74 ----- ----- ------ ----- $1,437 $4,237 $ 127 $ 74 ===== ===== ====== ===== (millions) Open Contracts Open Contracts -------------- -------------- Interest rate swaps $135 $ - === ===
"To be Announced" Mortgage-Backed Securities. Smith Barney trades --------------------------------------------- mortgage-backed "to be announced" mortgage pools ("TBAs") to facilitate customer transactions and as hedges of proprietary inventory positions. At December 31, 1994, over $13.2 billion each of purchase and sale positions represent offsetting purchases and sales of the same security, and over 95% of the contract values were for settlement within 60 days. Net revenue from TBAs in 1994 was a loss of $10 million. Foreign Currency Contracts. In its role as a market intermediary, Smith ---------------------------- Barney acts as a principal in foreign currency forward and options contracts, primarily to facilitate customer transactions. These transactions expose the firm to foreign exchange rate risk, which is generally hedged by entering into foreign currency forward, futures and options 57 Notes to Consolidated Financial Statements (continued) contracts with inverse market risk profiles. At December 31, 1994, approximately 87% of the contract values of foreign currency derivative instruments were for settlement within 90 days, and related primarily to major European currencies and the Japanese yen. Written foreign currency options consist of $733 million and $607 million of put and call contracts, respectively, at December 31, 1994. Net revenues from foreign currency contracts in aggregate were $19 million in 1994. Financial Futures and Options on Financial Futures Contracts. Smith ------------------------------------------------------------ Barney trades financial futures contracts and options on financial futures, primarily to hedge other proprietary inventory positions. Written financial futures options consist of $1.075 billion of put contracts and $1.075 billion of call contracts written on the same underlying futures contracts. Net revenues from these transactions were $9 million in 1994. Precious Metals Contracts. Forward precious metals contracts are ------------------------- entered into to facilitate customer transactions, and are transacted in the "Loco London" Bullion Market, which is used globally for hedging and trading purposes. Smith Barney may use precious metals futures as hedges of its forward inventory to reduce market risk. Net revenues from precious metals contracts were $2 million in 1994. Interest Rate Products. Smith Barney enters into interest rate swaps, ----------------------- caps, floors and swaptions as part of its proprietary trading strategy, which it hedges with financialfutures and options on financial futures. Net revenues from interest rate swap products were $3 million in 1994. Trading derivative instruments are carried at market value, primarily based on quoted market prices, with changes in market value reported in principal transactions revenues in the Statement of Income. The trading gains and losses on these derivative financial instruments, should not be viewed on an individual basis, but rather as a component of the Company's overall trading results, as these instruments are frequently hedges of, or hedged by, other on-or off-balance-sheet financial instruments. The fair value of Smith Barney's trading derivative instruments as recorded in the Statement of Financial Position at December 31, 1994 and the average fair value for the year based on month end balances are presented below. 58 Notes to Consolidated Financial Statements (continued)
Ending Fair Value Average Fair Value ------------------------ ----------------------- (millions) Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- "To be announced" mortgage-backed securities $29 $28 $54 $54 Forward and futures contracts: Foreign currency forwards 92 98 87 92 Foreign currency futures 2 3 4 3 Financial futures 7 2 3 2 Precious metals and other commodities 1 2 3 3 Options: Foreign currency 5 8 7 8 Financial futures 2 6 1 1 Interest rate caps, floors and swaptions - 5 - 5 Other securities and commodities 1 1 3 5 Interest rate swaps 1 - 1 - --- --- --- --- $140 $153 $163 $173 === === === ===
End User Activity In the normal course of business the Company also employs certain derivative financialinstruments as an end user to manage various risks. At December 31, 1994 the notional and fair values of end user derivatives were as follows. Fair values were determined by reference to quoted market prices or, for interest rate swaps, estimated based upon the payments either party would have to make to terminate the swap.
Notional Value Fair Value ---------------------- ----------------------- (millions) Open Contracts Asset Liability -------------- ----- --------- Interest rate swaps: Pay a fixed rate, receive a floating rate $712 Pay a floating rate, receive a fixed rate 70 --- $782 $ 43 $ 6 === === === Purchase Sell -------- ---- Foreign currency forwards $47 $183 15 7 Financial futures 13 - - - ---- ----- --- --- $60 $183 $ 15 $ 7 === ==== === ===
59 Notes to Consolidated Financial Statements (continued) Certain of the Company's subsidiaries employ swap contracts to manage interest rate risk related to variable rate obligations, limiting the Company s net exposure to interest rate movements to an acceptable level. Under these swaps the Company has fixed $590 million of its short term or variable rate obligations at an average rate of 5.94%. The swaps are accounted for as hedges of the related liabilities and unrealized gains and losses are not recorded in the Statement of Financial Position. Periodic receipts or payments are accrued as adjustments to expense. In addition, Travelers Insurance Group utilizes swaps to manage the differing interest rate risk profiles of its insurance liabilities and related fixed income investment portfolio. These swaps are marked to market and recorded as other assets with changes in value recorded as an adjustment to stockholders' equity where unrealized gains and losses on the related debt securities are recorded. Travelers Insurance Group employs forwards to hedge its exposure to foreign exchange rate risk related to the net investment in foreign branches and foreign currency denominated investments. These forwards are marked to market and recorded as other assets or liabilities in the Statement of Financial Position. Changes in value related to forwards hedging the net investment in foreign subsidiaries are recorded as an adjustment to stockholders' equity where related translation adjustments are recorded. Changes in value related to forwards hedging foreign investments in U.S. portfolios, amounting to a net loss of $3 million in 1994, are recorded as other income where the related translation adjustments to the underlying investments are recorded. Travelers Insurance Group hedges expected cash flows related to certain customer deposits and investment maturities, redemptions and sales against adverse changes in market interest rates with financial futures contracts. These contracts are marked to market and recorded as other assets or liabilities in the Statement of Financial Position. Realized gains or losses are recorded as an adjustment to the cost basis of the related asset when acquired. 20. Fair Value of Financial Instruments ----------------------------------- The following table summarizes the fair value and carrying amount of the Company's financial instruments at December 31, 1994 and 1993. Contractholder funds amounts exclude certain insurance contracts not covered by FAS 107 "Disclosure About Fair Value of Financial Instruments." The fair value assumptions were based upon subjective estimates of market conditions and perceived risks of the financial instruments at a certain point in time as disclosed further in various Notes to the Consolidated Financial Statements. Disclosed fair values for financial instruments do not reflect any premium or discount that could result from offering for sale at one time the 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. 60 Notes to Consolidated Financial Statements (continued)
1994 1993 ------------------------------ ----------------------------- (millions) Carrying Amount Fair Value Carrying Amount Fair Value --------------- ---------- --------------- ---------- Assets: Investments $39,120 $39,092 $42,199 $42,223 Securities borrowed or purchased under agreements to resell 25,655 25,655 13,353 13,353 Trading securities owned 6,945 6,945 5,863 5,863 Net consumer finance receivables 6,746 7,364 6,216 6,831 Separate accounts with guaranteed returns 1,483 1,379 1,508 1,593 Derivatives: Trading 142 142 95 95 End user 15 58 7 7 Liabilities: Long-term debt 7,075 6,867 6,991 7,324 Securities loaned or sold under agreements to repurchase 21,620 21,620 10,144 10,144 Trading securities sold not yet purchased 4,345 4,345 3,835 3,835 Contractholder funds: With defined maturities 4,219 4,047 5,022 5,046 Without defined maturities 9,159 8,875 12,894 12,733 Separate accounts with guaranteed returns 1,465 1,331 1,506 1,674 Derivatives: Trading 153 153 98 98 End User 8 13 2 20
21. Commitments ----------- Financial Guarantees At December 31, 1994 and 1993 The Travelers Insurance Group had outstanding financial guarantees of $2.236 billion and $3.016 billion, respectively, of which $2.086 billion and $2.598 billion, respectively, represented its participation in the Municipal Bond Insurance Association's guarantee of municipal bond obligations. The bonds guaranteed are generally rated A or above and The Travelers Insurance Group's participation has been reinsured. 61 Notes to Consolidated Financial Statements (continued) Credit Cards The Company provides bank and private label credit card services through CCC and its subsidiaries. These services are provided to individuals and to affinity groups nationwide. At December 31, 1994 and 1993 total credit lines available to credit cardholders were $5.423 billion and $4.263 billion, of which $820 million and $790 million were utilized, respectively. Other Commitments At December 31, 1994, and 1993 Smith Barney had borrowed securities having a market value of $1.505 billion and $1.225 billion, respectively, against which it had pledged securities having a market value of $1.589 billion and $1.279 billion, respectively. In addition, Smith Barney had obtained letters of credit aggregating $192 million and $154 million at December 31, 1994 and 1993, respectively, of which $147 million and $116 million, respectively, was used to satisfy various collateral and deposit requirements principally with clearing organizations. Smith Barney also trades certain fixed income securities on a "when issued" basis. At December 31, 1994 Smith Barney had commitments to purchase $309 million and to sell $1.122 billion of certain fixed income securities when issued. At December 31, 1993, Smith Barney had commitments to sell $9 million of such securities when issued. Smith Barney 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 Smith Barney's executive offices and New York operations. The amount of the guarantee is dependent upon the final build-out costs with a maximum of $625 million. The Travelers Insurance Group makes unfunded commitments to partnerships and transfers receivables to third parties with recourse from time to time. The off-balance sheet risks of these financial instruments were not considered significant at December 31, 1994 or 1993. 22. Contingencies ------------- A subsidiary of The Travelers Insurance Group is in litigation with certain underwriters at Lloyds of London (Lloyd's) in New York state court to enforce reinsurance contracts with respect to recoveries for certain asbestos claims. The dispute involves the ability of old Travelers to aggregate asbestos products claims with asbestos premises claims under a market agreement between Lloyd's and old Travelers or under the applicable reinsurance treaties. In January 1994 the court stayed litigation of this matter in favor of arbitration of the contract issues raised by old Travelers. With respect to environmental and asbestos claims, see Note 11. In the ordinary course of business the Company and/or its subsidiaries are defendants or co-defendants in various litigation matters, other than environmental and asbestos claims. Although there can be no assurances, the Company believes, based on information currently available, that the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on its results of operations, financial condition or liquidity. 62 Notes to Consolidated Financial Statements (continued) 23. Quarterly Financial Data (unaudited) ------------------------------------
1994 ---------------------------------------------------- (in millions except per share amounts) First Second Third Fourth Total ---------------------------------------------------- Total revenues $4,769 $4,601 $4,714 $4,381 $18,465 Total expenses 4,231 4,111 4,212 4,016 16,570 Gain on sales of stock of subsidiaries and affiliates - - - 254 254 ----- ----- ----- ----- ----- Income before income taxes, and minority interest and cumulative effect of changes in accounting principles 538 490 502 619 2,149 Provision for income taxes 198 170 170 285 823 Minority interest, net of income taxes - - - - - ----- ----- ----- ----- ----- Net income before cumulative effect of changes in accounting principles 340 320 332 334 1,326 Cumulative effect of changes in accounting principles - - - - - ----- ----- ----- ----- ----- Net income $ 340 $ 320 $ 332 $ 334 $1,326 ===== ===== ===== ===== ===== Earnings per share of common stock: Net income before cumulative effect of changes in accounting principles $ 0.98 $ 0.93 $ 0.97 $ 0.99 $ 3.86 Cumulative effect of changes in accounting principles -. -. -. -. -. ------- ------- ------- ------- ------- Net income $ 0.98 $ 0.93 $ 0.97 $ 0.99 $ 3.86 ======= ======= ======= ======= ======= Common stock price High $ 42.875 $ 36.375 $ 36.875 $ 35.000 $42.875 Low $ 34.500 $ 32.000 $ 31.000 $ 31.000 $31.000 Close $ 35.250 $ 32.250 $ 32.875 $ 32.375 $32.375 Dividends per share of common stock $ .125 $ .150 $ .150 $ .150 $ .575 1993 ---------------------------------------------------- (in millions except per share amounts) First Second Third Fourth Total ---------------------------------------------------- Total revenues $1,302 $1,284 $2,016 $2,195 $6,797 Total expenses 974 987 1,576 1,750 5,287 Gain on sales of stock of subsidiaries and affiliates 6 - 7 - 13 ----- ----- ----- ----- ----- Income before income taxes, and minority interest and cumulative effect of changes in accounting principle 334 297 447 445 1,523 Provision for income taxes 119 106 182 143 550 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 Cumulative effect of changes in accounting principles (35) - - - (35) ----- ----- ----- ----- ----- Net income $ 172 $ 187 $ 259 $ 298 $ 916 ===== ===== ===== ===== ===== Earnings per share of common stock: Net income before cumulative effect of changes in accounting principles $ 0.89 $ 0.76 $ 1.03 $ 1.19 $ 3.88 Cumulative effect of changes in accounting principles (0.15) -. -. -. (0.14) ------- ------- ------- ------- ------- Net income $ 0.74 $ 0.76 $ 1.03 $ 1.19 $ 3.74 ======= ======= ======= ======= ======= Common stock price High $ 37.313 $ 39.469 $ 49.500 $ 48.625 $49.500 Low $ 24.313 $ 31.219 $ 37.594 $ 38.000 $24.313 Close $ 34.594 $ 39.469 $ 47.750 $ 38.875 $38.875 Dividends per share of common stock $ .120 $ .120 $ .125 $ .125 $ .490 Fourth quarter 1994 gain on sales of stock of subsidiaries and affiliates amounted to $88 million after-tax. Fourth quarter 1994 results also include $88 million of after-tax portfolio losses. Results of operations prior to 1994 exclude the amounts of The Travelers Insurance Group Inc. except that results for 1993 include the Company's equity in earnings relating to the 27% interest purchased in December 1992. Results of operations include amounts related to the Shearson Business from July 31, 1993, the date of acquisition. 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.
63 Independent Auditors' Report The Board of Directors and Stockholders The Travelers Inc.: We have audited the accompanying consolidated statements of financial position of The Travelers Inc. and subsidiaries as of December 31, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities in 1994. Also, 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. /s/ KPMG Peat Marwick LLP New York, New York January 17, 1995 EX-21.01 10 Exhibit 21.01 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 National Life Insurance (T & C), Ltd. (Turks and Caicos Islands) - ERISA Corporation (New York) - Mid-America Insurance Services, Inc. (Georgia) - National Marketing Corporation (Pennsylvania) (also D/B/A American Service Associates) - PFS Custodial Services, Inc. (Georgia) - PFS Distributors, Inc. (Georgia) - PFS Investments Inc. (Georgia) - PFS Services, Inc. (Georgia) - Primerica Finance Corporation (Delaware) - American Capital Custodial Services, Inc. (Delaware) - American Capital T.A., Inc. (Delaware) - Primerica Financial Services Home Mortgages, Inc. (Georgia) - Primerica Financial Services, Inc. (Nevada) - Primerica Financial Services Agency of New York, Inc. (New York) - Primerica Financial Services 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. (United States 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 Marketing Services of Puerto Rico, Inc. (Puerto Rico) - 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.) - Primerica Services, Inc. (Georgia) - RCM Acquisition Inc. (Delaware) - SCN Acquisitions Company (Delaware) - SL&H Reinsurance, Ltd. (Turks and Caicos Islands) - Southwest Service Agreements, Inc. (North Carolina) - Southwest Warranty Corporation (Florida) - The Travelers Insurance Group Inc. (Connecticut) - Harbour Associates I, Inc. (Delaware) - Deer Run II, Inc. (Delaware) - Net & Twine II Corporation (Delaware) - KP Properties Corporation (Massachusetts) - KPI 85, Inc. (Massachusetts) - KRA Advisers Corporation (Massachusetts) - KRP Corporation (Massachusetts) - La Metropole S.A. (Belgium) - The Plaza Corporation (Connecticut) - Joseph A. Wynne Agency (California) - The Copeland Companies (New Jersey) - American Odyssey Funds Management, Inc. (New Jersey) - American Odyssey Funds, Inc. (Maryland) - Copeland Administrative Services, Inc. (New Jersey) - Copeland Associates, Inc. (Delaware) - Copeland Associates Agency of Ohio, Inc. (Ohio) - 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) - Copeland Financial Services, Inc. (New Jersey) - Copeland Healthcare 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) - 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) - Laramia Insurance Agency, Inc. (North Carolina) - Lynch, Ryan & Associates, Inc. (Massachusetts) - The Charter Oak Fire Insurance Company (Connecticut) - The Exchange Agency, Inc. (Delaware) 2 - The Phoenix Insurance Company (Connecticut) - Constitution State Service Company (Montana) - The Travelers Indemnity Company of America (Georgia) - The Travelers Indemnity Company of Connecticut (Connecticut) - The Travelers Indemnity Company of Illinois (Illinois) - The Premier Insurance Company of Massachusetts (Massachusetts) - The Travelers Home and Marine Insurance Company (Indiana) - The Travelers Lloyds Insurance Company (Texas) - TI Home Mortgage Brokerage, Inc. (Delaware) - TravCo Insurance Company (Indiana) - Travelers Medical Management Services Inc. (Delaware) - The Travelers Insurance Company (Connecticut) - Delaware Windtree Realty Corporation (Delaware) - Market Funding Corporation I (Delaware) - Market Funding Corporation II (Delaware) - Travelers 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 CLIA Life Insurance Company) - Travelers 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) - Red Oak Plaza Holding Company, Inc. (Delaware) - The Travelers Life and Annuity Company (Connecticut) - The Travelers Insurance Corporation Proprietary Limited (Australia) - The Travelers Marine Corporation (California) - The Travelers Realty Investment Company (Connecticut) - AdVision, Inc. (Connecticut) - Constitution Plaza, 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) CCC Holdings, Inc. (Delaware) - Commercial Credit Company (Delaware) - American Health and Life Insurance Company (Maryland) - Brookstone Insurance Company (Vermont) - CC Finance Company, Inc. (New York) - CC Financial Services, Inc. (Hawaii) - CCC Fairways, Inc. (Delaware) - City Loan Financial Services, Inc. (Ohio) - Commercial Credit Banking Corporation (Oregon) - Commercial Credit Consumer Services, Inc. (Minnesota) 3 - Commercial Credit Corporation (Alabama) - Commercial Credit Corporation (California) - Commercial Credit Corporation (Iowa) (also D/B/A Commercial Credit Corporation (IA) - 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) - 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 Insurance Agency of Ohio, Inc. (Ohio) - Commercial Credit Insurance Agency of New Mexico, Inc. (New Mexico) - Commercial Credit International, Inc. (Delaware) - Commercial Credit International Banking Corporation (Oregon) - Commercial Credit Corporation CCC 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 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) 4 - Commercial Credit Plan, Incorporated (Delaware) - Commercial Credit Plan, Incorporated (Georgia) - Commercial Credit Plan, Incorporated (Missouri) - Commercial Credit Securities, Inc. (Delaware) - DeAlessandro & Associates, Inc. (Delaware) - 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) - Resource Deployment, Inc. (Texas) - The Travelers Bank (Delaware) - The Travelers Banks USA (Delaware) - Travelers Home Equity, Inc. - CC Consumer Services of Alabama, Inc. (Alabama) - 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 Plan Consumer Discount Company (Pennsylvania) - Commercial Credit Services of Kentucky, Inc. (Kentucky) - Travelers Home Equity Services, Inc. (North Carolina) - Verochris Corporation (Delaware) - AMC Aircraft Corp. (Delaware) - Voyager Guaranty Insurance Company (Missouri) - World Service Life Insurance Company (Colorado) D.I.R.E.C.T. Resources, Inc. (Delaware) Greenwich Street Capital Partners, Inc. (Delaware) Greenwich Street Investments, Inc. (Delaware) - Greenwich Street Offshore Holdings, Inc. (British Virgin Islands) Margco Holdings, Inc. (Delaware) - Berg Associates (New Jersey) - Berg Enterprises Realty, Inc. (New York) - Dublin Escrow, Inc. (California) - M.K.L. Realty Corporation (New Jersey) - MFC Holdings, Inc. (Delaware) - MRC Holdings, Inc. (Delaware) - The Berg Agency, Inc. (New Jersey) Mirasure Insurance Company, Ltd. (Bermuda) PA/RCM Corporation (Delaware) PA/RCM LP Corporation (Delaware) Pacific Basin Investments Ltd. (Delaware) Primerica Corporation (Wyoming) Primerica, Inc. (Delaware) RCM Capital Trust Company (California) Smith Barney Corporate Trust Company 5 Smith Barney Holdings Inc. (Delaware) - Mutual Management Corp. (New York) - Smith Barney Asset Management Co., Ltd. (Japan) - R-H Sports Enterprises Inc. (Georgia) - SB Cayman Holdings I Inc. (Delaware) - SB Cayman Holdings II Inc. (Delaware) - SBS Software Inc. (Delaware) - Smith Barney (Delaware) Inc. (Delaware) - 1345 Media Corp. (Delaware) - Americas Avenue Corporation (Delaware) - Corporate Realty Advisors, Inc. (Delaware) - CRA Acquisition Corp. (Delaware) - IPO Holdings Inc. (Delaware) - MLA 50 Corporation (Delaware) - MLA GP Corporation (Delaware) - Municipal Markets Advisors Incorporated (Delaware) - SBF Corp. (Delaware) (also D/B/A SB GP Company) - Smith Barney Acquisition Corporation (Delaware) - Smith Barney Commercial Corp. (Delaware) - Smith Barney Funding Holding Corp. (Delaware) - Smith Barney Global Capital Management, Inc. (Delaware) - Smith Barney Investment, Inc. (Delaware) - Smith Barney Offshore, Inc. (Delaware) - Decathlon Offshore Limited (Cayman Islands) - Smith Barney Pension Advisors Corp. (Delaware) - Smith Barney Realty Advisors, Inc. (Delaware) - Smith Barney Realty, Inc. (Delaware) - Smith Barney Risk Investors, Inc. (Delaware) - Smith Barney Venture Corp. (Delaware) - Smith Barney Asia Inc. (Delaware) - Smith Barney Asset Management Group (Asia) Pte. Ltd. (Singapore) - Smith Barney Canada Inc. (Canada) - Smith Barney Capital Services Inc. (Delaware) - Smith Barney Cayman Islands, Ltd. (Cayman Islands) - Smith Barney Commercial Corporation Asia Limited (Hong Kong) - Smith Barney Europe Holdings, Ltd. (United Kingdom) - Smith Barney Europe, Ltd. (United Kingdom) - Smith Barney Shearson Futures, Ltd. (United Kingdom) - Smith Barney Futures Management Inc. (Delaware) - Smith Barney Inc. (Delaware) - SBHU Life Agency, Inc. (Delaware) - Robinson-Humphrey Insurance Services Inc. (Georgia) - Robinson-Humphrey Insurance Services of Alabama, Inc. (Alabama) - SBHU Life & 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) 6 - SBS Insurance Agency of Idaho, Inc. (Idaho) - SBS Insurance Agency of Maine, Inc. (Maine) - SBS Insurance Agency of Montana, Inc. (Montana) - SBS Insurance Agency of Nevada, Inc. (Nevada) - SBS Insurance Agency of North Carolina, Inc. (North Carolina) - SBS Insurance Agency of Ohio, Inc. (Ohio) - SBS Insurance Agency of South Dakota, Inc. (South Dakota) - SBS Insurance Agency of Wyoming, Inc. (Wyoming) - SBS Insurance Brokerage Agency of Arkansas, Inc. (Arkansas) - SBS Insurance Brokers of Arizona, Inc. (Arizona) - SBS Insurance Brokers of Kentucky, Inc. (Kentucky) - SBS Insurance Brokers of Louisiana, Inc. (Louisiana) - SBS Insurance Brokers of New Hampshire, Inc. (New Hampshire) - SBS Insurance Brokers of North Dakota, Inc. (North Dakota) - SBS Life Insurance Agency of Puerto Rico, Inc. (Puerto Rico) - SLB Insurance Agency of Maryland, Inc. (Maryland) - Smith Barney Life Agency Inc. (Louisiana) - Smith Barney (France) S.A. (France) - Smith Barney (Hong Kong) Limited (Hong Kong) - Smith Barney (Netherlands) Inc. (Delaware) - Smith Barney International Incorporated (Oregon) - Smith Barney Pacific Holdings, Inc. (British Virgin Islands) - 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. (Singapore) - The Robinson-Humphrey Company, Inc. (Delaware) - Smith Barney Mortgage Brokers Inc. (Delaware) - Smith Barney Mortgage Capital Corp. (Delaware) - Smith Barney Mortgage Capital Group, Inc. (Delaware) - Smith Barney Mutual Funds Management Inc. (Delaware) - Smith Barney Strategy Advisers Inc. - E.C. Tactical Management S.A. (Luxembourg) - Smith Barney Private Trust Company (Cayman) Limited (Cayman Islands) - Smith Barney S.A. (France) - Smith Barney Shearson (Chile) Corredora de Seguro Limitada (Chile) (also D/B/A SBS (Chile) Corredora de Seguros Ltda.) - Smith Barney Shearson (Ireland) Limited (Ireland) - Structured Mortgage Securities Corporation (Delaware) - The Travelers Investment Management Company (Connecticut) Smith Barney Private Trust Company (New York) Smith Barney Private Trust Company of Florida (Florida) Tinmet Corporation (Delaware) Travelers Services Inc. (Delaware) TRV Employees Investments, Inc. (Delaware) 7 EX-23.01 11 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, 33-52281 and 33-54093; 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 and 33-51201 of The Travelers Inc., of our report dated January 17, 1995, relating to the consolidated statements of financial position of The Travelers Inc. and subsidiaries as of December 31, 1994 and 1993, 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, 1994, which report is included with the annual report on Form 10-K for the year ended December 31, 1994, of The Travelers Inc. Our report refers to: a change in the method of accounting for certain investments in debt and equity securities in 1994; changes in the methods of accounting for postretirement benefits other than pensions and accounting for postemployment benefits in 1993; and a change in the method of accounting for income taxes in 1992. /s/ KPMG Peat Marwick LLP New York, New York March 29, 1995 EX-23.02 12 Exhibit 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- The Board of Directors of 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, 33-52281 and 33-54093), 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, and 33-51201) of The Travelers Inc., 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, 1994, 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 L.L.P. Hartford, Connecticut March 28, 1995 EX-24.01 13 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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /s/ Edward H. Budd ------------------ Edward H. 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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /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, 1994, 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 22, 1995. /s/ Arthur Zankel ----------------- Arthur Zankel EX-27.01 14
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1994 FINANCIAL STATEMENTS OF THE TRAVELERS INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1994 DEC-31-1994 1,227 71,720 19,002 0 0 0 0 0 115,297 0 13,929 4 138 800 7,836 115,297 0 18,465 0 16,570 0 152 1,284 2,149 823 1,326 0 0 0 1,326 3.86 0.00 Includes the following items from the financial statements: total investments $39,120; securities borrowed or purchased under agreements to resell $25,655; and trading securities owned, at market value $6,945 Includes the following items from the financial statements: brokerage receivables $8,238; net consumer finance receivables $6,746 and other receivables $4,018. Items which are inapplicable relative to the underlying financial statements are indicated with a zero as required. Includes the following items from the financial statements: investment banking and brokerage borrowings $4,374; short-term borrowings $2,480 and long-term debt $7,075. Includes the following items from the financial statements: additional paid-in capital $6,655; retained earnings $4,199; treasury stock $(1,553); and unrealized gain (loss) on investment securities and other, $(1,465). Included in total costs and expenses applicable to sales and revenues.
EX-99.01 15 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 ------------------------------------------------------------------------------------------------
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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 - 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 16 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 17 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 18 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 19 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 20 EXHIBIT NO. 99.06 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-99.07 21 EXHIBIT NO. 99.07 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-99.08 22 EXHIBIT NO. 99.08 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-99.09 23 EXHIBIT 99.09 COMPANY'S FORM 10-Q September 30, 1994 Page 29 A number of cases have been filed against subsidiaries of the Company, other insurance companies and industry organizations relating to service fee charges and premium calculations on certain workers compensation insurance. Subsidiaries of the Company are defendants in an action filed by the Attorney General of South Carolina in August 1994 in the Court of Common Pleas, County of Greenville, South Carolina, and a purported class action filed in September 1994 in the Circuit Court for Bullock County, Alabama. Certain of the Company's subsidiaries have also been named as defendants in a purported class action filed in 1993 in the Superior Court Division of the General Court of Justice, Wake County, North Carolina, and, in April 1994, were named as additional defendants in a purported class action pending in the 116th District of Dallas County, Texas. The plaintiffs in these cases generally allege that the workers compensation carriers in the state have conspired to collect excessive or improper service fees or premiums in violation of state antitrust laws and/or state unfair trade practices laws. The plaintiffs seek monetary damages and possible injunctive relief. The Company believes it has meritorious defenses and intends to contest the allegations.