-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
IWhtn2yPYewqQRrXph2KDm/VfLj20TdZ07exek0ViiLYORqSwy3Dycupi1nj6Kvx
Xp1Ck2cJde2pdNODq526Ww==
<SEC-DOCUMENT>0000950112-96-000929.txt : 19960328
<SEC-HEADER>0000950112-96-000929.hdr.sgml : 19960328
ACCESSION NUMBER: 0000950112-96-000929
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 19
CONFORMED PERIOD OF REPORT: 19951231
FILED AS OF DATE: 19960327
SROS: NYSE
SROS: PSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TRAVELERS GROUP INC
CENTRAL INDEX KEY: 0000831001
STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141]
IRS NUMBER: 521568099
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-09924
FILM NUMBER: 96538902
BUSINESS ADDRESS:
STREET 1: 388 GREENWICH ST
STREET 2: LEGAL DEPT 20TH FLOOR
CITY: NEW YORK
STATE: NY
ZIP: 10013
BUSINESS PHONE: 2128168000
MAIL ADDRESS:
STREET 1: 388 GREENWICH ST
STREET 2: LEGAL DEPT 20TH FLOOR
CITY: NEW YORK
STATE: NY
ZIP: 10013
FORMER COMPANY:
FORMER CONFORMED NAME: TRAVELERS INC
DATE OF NAME CHANGE: 19940103
FORMER COMPANY:
FORMER CONFORMED NAME: PRIMERICA CORP /NEW/
DATE OF NAME CHANGE: 19920703
FORMER COMPANY:
FORMER CONFORMED NAME: COMMERCIAL CREDIT GROUP INC
DATE OF NAME CHANGE: 19890102
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<TEXT>
UNITED STATES
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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
--------------------
Commission file number 1-9924
--------------------
TRAVELERS GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1568099
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
(212) 816-8000
(Registrant's telephone number, including area code)
_______________
Securities registered pursuant to Section 12(b) of the Act:
<TABLE><CAPTION>
Title of each class Name of each exchange on which registered
------------------- ----------------------------------------
<S> <C>
Common Stock, par value $ .01 per share New York Stock Exchange and Pacific Stock Exchange
Depositary Shares, each representing New York Stock Exchange
1/10th of a share of 8.125% Cumulative Preferred
Stock, Series A
5.50% Convertible Preferred Stock, Series B New York Stock Exchange
Depositary Shares, each representing 1/2 New York Stock Exchange
of a share of 9.25% Preferred Stock, Series D
7 3/4% Notes Due June 15, 1999 New York Stock Exchange
7 5/8% Notes Due January 15, 1997 New York Stock Exchange
1998 Warrants to Purchase Common Stock New York Stock Exchange
</TABLE>
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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 6, 1996 was approximately $21 billion.
As of March 6, 1996, 319,082,544 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, 1995 are incorporated by reference into Part II
of this Form 10-K.
Certain portions of the registrant's Proxy Statement for the 1996 Annual Meeting
of Stockholders to be held on April 24, 1996 are incorporated by reference into
Part III of this Form 10-K.
<PAGE>
TRAVELERS GROUP INC.
Annual Report on Form 10-K
For Fiscal Year Ended December 31, 1995
______________________________
TABLE OF CONTENTS
Form 10-K
Item Number
- -----------
Part I
------
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 66
Part II
-------
5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . 67
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . 68
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . 68
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . 68
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . 68
Part III
--------
10. Directors and Executive Officers of the Registrant . . . . . . . . . . . 68
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 69
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
13. Certain Relationships and Related Transactions . . . . . . . . . . . . . 69
Part IV
-------
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Index to Consolidated Financial Statements and Schedules . . . . . . . F-1
<PAGE>
PART I
------
Item 1. BUSINESS.
THE COMPANY
Travelers Group Inc. (the "Company") is a financial services holding
company engaged, through its subsidiaries, principally in four business
segments: (i) Investment Services; (ii) Consumer Finance Services; (iii) Life
Insurance Services; and (iv) Property & Casualty Insurance Services.
On November 28, 1995, a subsidiary of the Company agreed to acquire the
domestic property and casualty insurance subsidiaries of Aetna Life and Casualty
Company ("Aetna"). A newly formed holding company called Travelers/Aetna
Property Casualty Corp. ("TAP") will purchase all of the outstanding capital
stock of The Aetna Casualty and Surety Company and The Standard Fire Insurance
Company (together with their subsidiaries, the "Aetna P&C Businesses") for a
purchase price of $4 billion, subject to certain adjustments. The acquisition
is subject to regulatory approvals and is expected to be completed around the
end of the first quarter of 1996. TAP has filed a registration statement with
the Securities and Exchange Commission (the "Commission") relating to an initial
public offering of shares of its common stock. See "Property & Casualty
Insurance Services--Pending Acquisition."
In December 1995, Dresdner Bank AG agreed to acquire all of the interests
in RCM Capital Management, a California Limited Partnership ("RCM"), and RCM
Trust Company for $300 million, subject to certain adjustments. The Company
expects to receive approximately $192 million from the transaction, which is
subject to regulatory approvals and is expected to be completed in mid-1996.
See "Corporate and Other Operations."
In September 1995, the Company distributed all of the outstanding shares
of common stock of Transport Holdings Inc., the indirect parent of Transport
Life Insurance Company ("Transport"), to the Company's stockholders. Transport
specializes in accident and health insurance including cancer and heart/stroke
insurance. See Note 3 of Notes to Consolidated Financial Statements.
On October 3, 1995, the Company completed the sale to United HealthCare
Corporation of its 48.25% interest in The MetraHealth Companies, Inc.
("MetraHealth"). MetraHealth was formed in January 1995 as a joint venture of
the medical insurance businesses of the Company and Metropolitan Life Insurance
Company ("MetLife"). The Company received $831 million in cash from the sale of
its interest in MetraHealth and may receive up to an additional $169 million if
a contingency payment based on 1995 results is made.
1
<PAGE>
On January 3, 1995, the Company completed the sale of its group life and
related businesses to MetLife. The purchase price for the group life business
was $350 million. In connection with the sale, the Company agreed to cede to
MetLife 100% of its risks in the businesses sold on an indemnity reinsurance
basis, effective January 1, 1995. All of the businesses sold to MetLife or
contributed to MetraHealth were included in the Company's Managed Care and
Employee Benefits Operations in 1994, and in 1995 the Company's results reflect
the medical insurance business not yet transferred plus its equity interest in
the earnings of MetraHealth. These operations have been accounted for as a
discontinued operation. See Note 3 of Notes to Consolidated Financial
Statements.
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% interest previously owned. See Note 1 of
Notes to Consolidated Financial Statements.
The periodic reports of Commercial Credit Company ("CCC"), Smith Barney
Holdings Inc. ("SB Holdings"), The Travelers Insurance Company ("TIC") and The
Travelers Life and Annuity Company ("TLAC"), subsidiaries of the Company that
make filings pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), provide additional business and financial information
concerning those companies and their consolidated subsidiaries.
The principal executive offices of the Company are located at 388
Greenwich Street, New York, New York 10013; telephone number 212-816-8000.
This discussion of the Company's business is organized as follows: (i) a
description of each of the Company's four business segments; (ii) 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
60.
INVESTMENT SERVICES
This segment includes the operations of SB Holdings and its subsidiaries.
Smith Barney
SB Holdings provides investment banking, asset management, brokerage and
other financial services through its subsidiaries. Its principal operating
subsidiary is Smith Barney Inc. ("SBI"), an investment banking, securities
trading and brokerage firm that traces its origins back to 1873.
2
<PAGE>
Smith Barney operates through approximately 460 offices throughout the
United States, and 16 offices in 13 foreign countries. With approximately
10,700 Financial Consultants, the Company believes that Smith Barney is the
second largest domestic brokerage firm in the United States.
In July 1993, SB Holdings acquired substantially all of the assets and
certain of the liabilities of the domestic retail brokerage and asset management
businesses of Shearson Lehman Brothers Holdings Inc. and its subsidiaries
("SLB") 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 "Shearson
Acquisition"). Smith Barney agreed to pay additional amounts based upon its
performance, consisting of up to $50 million per year for three years based upon
the level of revenues and 10% of after-tax profits in excess of $250 million per
year over a five-year period. As of December 31, 1995, Smith Barney has paid an
aggregate of $145 million pursuant to these agreements. See Note 2 of Notes to
Consolidated Financial Statements. As part of the Shearson Acquisition, The
Robinson-Humphrey Company ("R-H"), an investment banking and financial services
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.
Investment Banking and Securities Brokerage
Smith Barney is an investment banking and securities trading and
brokerage firm serving United States and foreign corporations, governments and
institutional and individual investors. Its business includes securities,
options and commodities brokerage for domestic and international institutional
and individual clients; underwriting and distribution of securities; arranging
for the private placement of securities; assisting in mergers and acquisitions
and providing other financial advisory services; market making and trading in
corporate debt and equity, United States government and agency, mortgage-related
and municipal securities and foreign exchange, futures and forward contracts;
customer financing activities; securities lending activities; investment
management and advisory services; securities research; and other related
activities.
Smith Barney's investment banking services include the underwriting of
debt and equity issues for United States and foreign corporations and for state,
local and other governmental and government sponsored authorities. Smith Barney
frequently acts as managing underwriter in corporate and public securities
offerings. Smith Barney also acts as a private placement agent for various
clients, and as such helps to place securities for clients with large
institutions and other 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
3
<PAGE>
and trades as principal in corporate debt and equity securities primarily of
United States corporate issuers, United States and foreign government and agency
securities, mortgage-related securities, whole loans, municipal and other tax-
exempt securities, commercial paper and other money market instruments 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. 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. Since June 1994, the Smith Barney network of Financial Consultants
has been selling Travelers Life and Annuity individual products, primarily
variable annuities. See "Life Insurance Services -- Travelers Life and
Annuity."
Smith Barney executes transactions in large blocks of exchange-listed
stocks, usually with institutional investors, and often acts as principal to
facilitate these transactions. It makes markets, buying and selling as
principal, in common stocks, convertible preferred stocks, warrants and other
securities traded on the NASDAQ system or otherwise in the over-the-counter
market. Smith Barney also maintains trading positions in equity options,
convertible securities, debt options, foreign exchange and commodities
instruments. It executes significant client transactions in both listed and
unlisted options and in foreign exchange, and often acts as principal to
facilitate these transactions. Smith Barney also sells various types of
structured securities on both a principal and an agency basis. The firm's
securities trading and investment activities involve significant risk in that
the values of positions carried in its trading and investment accounts are
subject to market fluctuations. Smith Barney engages in a variety of financial
techniques designed to manage this risk.
Customer Financing
Customers' securities transactions are executed on either a cash or
margin basis. Federal regulations prescribe the minimum original margin that
must be deposited by securities purchasers, and exchange regulations prescribe
the minimum margins that must be maintained by customers. Smith Barney imposes
margin maintenance requirements that are equal to or exceed those required by
exchange regulations. Such requirements are intended to reduce the risk assumed
by Smith Barney that a market decline will reduce the value of a customer's
collateral below the amount of the customer's indebtedness before the collateral
can be sold. Substantially all transactions in commodities futures contracts
are on margin
4
<PAGE>
subject to individual exchange regulations. Margin, in the case of commodities
futures contracts, is primarily funded in the form of cash or United States
Treasury securities. Commodities transactions involve substantial risk,
principally because of low margin requirements permitted by the exchanges.
Income earned on financing customers' securities transactions provides
Smith Barney with an additional source of income. Credit losses may arise as a
result of this financing activity; however, to date, such losses have not been
material.
Asset Management
Smith Barney provides discretionary and non-discretionary asset
management and consulting services to a wide array of mutual funds and
institutional and individual investors, with respect to domestic and foreign
equity and debt securities, municipal bonds, money market instruments, and
related options and futures contracts. Smith Barney typically receives ongoing
fees from its asset management and consulting clients, generally stated as a
percentage of the client s assets with respect to which Smith Barney's services
are rendered. At December 31, 1995, such client assets in the aggregate
exceeded $96.2 billion.
At December 31, 1995, Smith Barney sponsored 63 mutual funds (open-end
investment companies) with aggregate assets of approximately $61.6 billion
distributed through its sales force of Financial Consultants. Of these, 10 are
taxable and tax-exempt money market funds, with assets of approximately $35.6
billion. Smith Barney Mutual Funds Management Inc. ("SBMFM"), a wholly owned
subsidiary of SB Holdings, serves as investment manager to these mutual funds,
as well as to 12 closed-end investment companies, the shares of which are listed
for trading on one or more securities exchanges; assets of these closed-end
funds at year-end 1995 aggregated approximately $2.8 billion. The open-end and
closed-end funds sponsored by Smith Barney and managed by SBMFM have various
investment objectives, including growth, growth and income, taxable income and
tax-exempt income, which they seek by investing in a broad variety of securities
and other financial instruments. In addition, at December 31, 1995, SBMFM
managed 17 mutual fund portfolios serving as funding vehicles for variable
annuity contracts, with aggregate assets of approximately $631 million. Smith
Barney also sponsors, and SBMFM manages, 12 mutual funds domiciled outside the
U.S. which are offered to Smith Barney s non-resident alien client base; these
off-shore funds had aggregate assets of approximately $980 million at December
31, 1995.
In addition to these proprietary funds, Smith Barney also sells through
its Financial Consultants a large number of mutual funds sponsored and managed
by unaffiliated entities. Smith Barney receives commissions and other sales and
service revenues from this activity.
Smith Barney's asset management units provide discretionary investment
management services to a wide variety of institutional clients, including
private and public retirement plans, endowments, municipalities and other
institutions. Client relationships may
5
<PAGE>
be introduced through Smith Barney's network of Financial Consultants or
independent from such network, e.g., through traditional pension plan
consultants unaffiliated with the Company. Institutional assets under Smith
Barney's management exceeded $14.5 billion at the end of 1995.
Smith Barney's Consulting Services Division ("CSD") provides a variety of
investment management and consulting services to institutional and individual
clients. CSD sponsors a number of different "wrap fee" programs, in which CSD
and Smith Barney typically provide: an analysis of the client's financial
situation, investment needs and risk tolerance; a recommendation that the client
retain one or more investment management firms (which may be affiliated or
unaffiliated with Smith Barney); ongoing monitoring of the performance and
suitability of the investment manager(s) retained; securities execution and
custody; and client reporting and recordkeeping. In such programs, the client
generally pays a single bundled fee for some or all of these services. CSD also
provides traditional investment management consulting services to institutions,
including assisting clients in formulating investment objectives and policies
and in selecting investment management firms for the day-to-day management of
client portfolios. CSD's programs and services generally are delivered through
Smith Barney Financial Consultants, many of whom specialize in such programs and
services. As of December 31, 1995, Smith Barney provided consulting services
with respect to client assets aggregating approximately $39.1 billion, excluding
the TRAK(R) program described below.
Smith Barney's TRAK(R) program involves the provision to clients by Smith
Barney of non-discretionary asset allocation advice with respect to a series of
13 mutual funds, each corresponding to a particular asset class and investment
style. Such advice is based on the client s identification of investment
objectives and risk tolerances, and is supported by specially designed software
and other tools. In addition to providing investment advice at the client
level, Smith Barney also selects the investment managers of the mutual funds
(these managers are unaffiliated with Smith Barney) and oversees the services
provided by such firms. TRAK(R) clients include both individuals and
institutions, including participant-directed 401(k) plans. At December 31,
1995, TRAK(R) assets aggregated approximately $4.8 billion. In 1995, Smith
Barney began offering a separate TRAK(R) program to non-resident alien clients,
which includes client investment in a series of asset class/investment style
funds domiciled outside the United States.
In addition, Smith Barney sponsors and oversees the portfolios of a large
number of unit investment trusts, which are unmanaged investment companies, the
portfolios of which are generally static. Such unit investment trusts may hold
domestic and foreign equity and debt securities, including municipal bonds.
Certain trusts are sponsored and overseen solely by Smith Barney; other trusts
are jointly sponsored through a syndicate of major broker-dealers of which Smith
Barney is a member. Outstanding unit trust assets held by Smith Barney clients
at year-end 1995 were approximately $7.2 billion.
6
<PAGE>
Miscellaneous Activities
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.
General
Competition
The businesses in which Smith Barney is engaged are highly competitive.
The principal factors affecting competition in the investment banking and
securities brokerage industry are the quality and ability of professional
personnel and the relative prices of services and products offered. In addition
to competition from other investment banking firms, both domestic and
international, and securities brokerage companies and discount securities
brokerage operations, including regional firms in the United States, there has
been increasing competition from other sources, such as commercial banks,
insurance companies and other major companies that have entered the investment
banking and securities brokerage industry, in many cases through acquisitions.
Certain of those competitors may have greater capital and other resources than
Smith Barney. The Federal Reserve Board has substantially removed the barrier
originally erected by the Glass-Steagall Act restricting investment banking
activities of commercial banks and their affiliates, by permitting certain
commercial banks to engage, through affiliates, in the underwriting of and
dealing in certain types of securities, subject to certain limitations.
Proposed legislation has been introduced in Congress from time to time that
would modify certain other provisions of the Glass-Steagall Act and other laws
and regulations affecting the financial services industry. The potential impact
of such legislation on the Company's businesses cannot be predicted at this
time.
Competitors of Smith Barney's asset management operations include a large
number of mutual fund management and sales companies and asset management firms.
Competition in mutual fund sales and investment management is based on
investment performance, service to clients and product design.
Regulation
Certain of the Company's subsidiaries are registered as broker-dealers
and as investment advisers with the Commission and as futures commission
merchants and as a commodity pool operator with the Commodity Futures Trading
Commission ("CFTC"). SBI
7
<PAGE>
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 have also been subject to certain limitations.
Smith Barney's operations abroad, described in this paragraph, are
conducted through various subsidiaries. Its activities in the United Kingdom,
which include investment banking, trading, brokerage and asset management
services, are subject to the Financial Services Act 1986, which regulates
organizations that conduct investment businesses in the United Kingdom
(including imposing capital and liquidity requirements), and to the rules of the
Securities and Futures Authority and the Investment Management Regulatory
Organisation. Smith Barney is a member of the International Petroleum Exchange,
the London Metals Exchange and the 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 the Osaka Futures Exchange,
therefore, its activities in Japan are subject to the rules and regulations of
those Exchanges. Smith Barney conducts securities and commodities businesses in
Singapore and Hong Kong that are regulated by the Monetary Authority of
Singapore and the Hong Kong Securities and Futures Commission, respectively.
Smith Barney is also a "B license holder" with the Zurich Stock Exchange.
Additionally, certain subsidiaries of SB Holdings are licensed as an
"international dealer" and as an "investment dealer" with the Ontario
8
<PAGE>
Securities Commission, and as broker-dealers with the Securities Board of The
Netherlands. Smith Barney's representative offices in Mexico City, Mexico;
Paris, France; Beijing, People's Republic of China; Manama, Bahrain and Taipei,
Taiwan are also subject to the jurisdiction of local financial services
regulatory authorities. Smith Barney also operates a private trust services
business that is licensed as a bank and trust company in the Cayman Islands, and
is subject to the regulation of the Director of Financial Services, Banks &
Trust Companies Supervision Department of the Cayman Islands.
In connection with the mutual funds business, Smith Barney must comply
with regulations of a number of regulatory agencies and organizations, including
the Commission and the NASD. The Company 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.
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
9
<PAGE>
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, 1995, CCC maintained 850 loan offices in 43 states.
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 both
fixed and variable rate secured and unsecured personal loans and real estate-
secured loans and fixed rate loans to finance consumer goods purchases. Credit
card loans are discussed below. CCC's loan offices are generally located in
small to medium-sized communities in suburban or rural areas, and are managed by
individuals who generally have considerable consumer lending experience. The
primary market for CCC's consumer loans consists of households with an annual
income of $20,000 to $50,000. The number of loan customers (excluding credit
card customers) was approximately 1,408,000 at December 31, 1995, as compared to
approximately 1,306,000 at December 31, 1994 and approximately 1,142,000 at
December 31, 1993. A CCC loan program solicits applications for loans through
the Primerica Financial Services sales force. At December 31, 1995, the total
loans outstanding generated from this program were $1.258 billion, as compared
to $1.107 billion at December 31, 1994 and $765 million at December 31, 1993.
See "Life Insurance Services -- Primerica Financial Services." During 1996, CCC
plans to convert approximately 25 of its loan offices to servicing centers for
the PFS loan products.
The average amount of cash advanced per personal loan made was approxi-
mately $4,200 in each of 1995 and 1994 and approximately $3,800 in 1993. The
average amount of cash advanced per real estate-secured loan made was approxi-
mately $26,300 in 1995, $28,400 in 1994 and $28,800 in 1993. The average annual
yield for loans in 1995 was 15.64%, as compared to 15.41% in 1994 and 15.83% in
1993. The average annual yield for
10
<PAGE>
personal loans in 1995 was 20.23%, as compared to 20.20% in 1994 and 20.11% in
1993 and for real estate-secured loans it was 12.33% in 1995, as compared to
12.20% in 1994 and 13.14% in 1993. The average yield for real estate-secured
loans has been affected by the availability of a variable rate product and by
decreases generally in prevailing market interest rates. The Company's average
net interest margin for loans was 8.79% in 1995, 8.76% in 1994 and 8.44% in
1993.
CCC's delinquency and charge-off rates reached historically low levels in
1994 and rose in 1995, consistent with recent industry trends. CCC expects this
upward trend to continue in 1996. 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 below shows the ratio of receivables delinquent for 60 days or
more on a contractual basis (i.e., more than 60 days past due) to gross
receivables outstanding:
Ratio of Receivables Delinquent 60 Days or More to Gross Receivables
Outstanding(1)
Real
Estate-
Personal Secured Credit Sales Total
As of December 31, Loans Loans Cards Finance Consumer
- ------------------ ----- ----- ----- ------- --------
1995 2.89% 1.42% 1.40% 2.17% 2.14%
1994 2.40% 1.48% 1.05% 1.79% 1.88%
1993 2.62% 2.15% 1.03% 1.54% 2.21%
__________________________
(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.
11
<PAGE>
The table below shows the ratio of net charge-offs to average Consumer
Finance Receivables. For all periods presented, the ratios shown give effect to
all deferred origination costs.
Ratio of Net Charge-Offs to Average Consumer Finance Receivables
Real
Estate-
Year Ended Personal Secured Credit Sales Total
December 31, Loans Loans Cards Finance Consumer
- ------------ ----- ----- ----- ------- --------
1995 4.01% 0.64% 2.04% 2.46% 2.28%
1994 3.50% 0.82% 1.83% 2.03% 2.08%
1993 4.08% 0.84% 2.56% 1.78% 2.36%
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,
------------------
1995 2.66%
1994 2.64%
1993 2.64%
Credit-Related Insurance
American Health and Life Insurance Company ("AHL"), a subsidiary of CCC,
underwrites or arranges for credit-related insurance, which is offered to
customers of the consumer finance business. AHL has an A+ (superior) rating
from the A.M. Best Company, whose ratings may be revised or withdrawn at any
time. Credit life insurance covers the declining balance of unpaid
indebtedness. Credit disability insurance provides monthly benefits during
periods of covered disability. Credit property insurance covers the loss of
property given as security for loans. Other insurance products offered or
arranged for by AHL primarily include auto single interest and involuntary
unemployment insurance. Most of AHL's products are single premium, which
premiums are earned over the related contract period. See "Life Insurance
Services" for information concerning life insurance other than credit-related
insurance.
12
<PAGE>
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,
------------------------
1995 1994 1993
---- ---- ----
Premiums written by AHL and its affiliates
Writings for consumer finance:
Credit life . . . . . . . . . . . . . . . $41.8 $43.3 $36.4
Credit disability and other . . . . . . . 65.5 69.7 49.2
---- ---- ----
Total . . . . . . . . . . . . . . . . $107.3 $113.0 $85.6
====== ====== =====
Premiums written by other insurance companies
Credit property and other . . . . . . . . $51.6 $52.8 $38.7
===== ===== =====
Net premiums written were relatively flat in 1995 compared to 1994 primarily
due to slower growth in loan receivables. The increase in 1994 written
premiums over 1993 is primarily the result of the increase in receivables and
expanded availability of certain products in additional states.
Credit Card Services
The Travelers Bank, a subsidiary of CCC, is a state-chartered bank located
in Newark, Delaware, which provides credit card services, including upper market
gold credit card services, to individuals and to affinity groups (such as
nationwide professional associations and fraternal organizations). The
Travelers Bank USA, another state-chartered bank subsidiary of CCC, 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 below sets forth aggregate information regarding credit cards
issued by The Travelers Bank and The Travelers Bank USA.
Credit Cardholders and Total Outstandings
(outstandings in millions)
As of and for the year ended December 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
Approximate total credit cardholders 753,000 621,000 534,000
Approximate gold credit cardholders 615,000 519,000 478,000
Total outstandings $761.8 $712.5 $697.1
Average annual yield 12.51% 11.88% 11.66%
13
<PAGE>
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,
1995, deposits of unaffiliated entities were $97.9 million as compared to $73.3
million at December 31, 1994 and $56.5 million at December 31, 1993.
Competition
The consumer finance business competes with banks, savings and loan
associations, credit unions, credit card issuers and other consumer finance
companies. Additionally, substantial national financial services networks have
been formed by major brokerage firms, insurance companies, retailers and bank
holding companies. Some competitors have substantial local market positions;
others are part of large, diversified organizations. Deregulation of banking
institutions has greatly expanded the consumer lending products permitted to be
offered by these institutions, and because of their long-standing insured
deposit base, many of them are able to offer financial services on very
competitive terms. The Company believes that it is able to compete effectively
with such institutions. In particular, the Company believes that the diversity
and features of the products it offers, personal service, and cultivation of
repeat and referral business support and strengthen its competitive position in
its Consumer Finance Services businesses.
Regulation
Most consumer finance activities are subject to extensive federal and
state regulation, including examination and review by state authorities of
consumer finance offices. Personal loan, real estate-secured loan and sales
finance laws generally require licensing of the lender, limitations on the
amount, duration and charges for various categories of loans, adequate
disclosure of certain contract terms and limitations on certain collection
practices and creditor remedies. Federal consumer credit statutes primarily
require disclosure of credit terms in consumer finance transactions. CCC's
banks, which must undergo periodic examination, are subject to additional
regulations relating to capitalization, leverage, reporting, dividends and
permitted asset and liability products. These banks are also covered by the
Competitive Equality Banking Act of 1987 (the "Banking Act"), which, 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 assesses the bank's
record in helping to meet the credit needs of low and moderate income 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.
14
<PAGE>
The Real Estate Settlement Procedures Act of 1974 ("RESPA") covers 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"), The Travelers Life and Annuity Company ("TLAC") and the Primerica
Financial Services group of companies (collectively, "PFS"), including Primerica
Life Insurance Company ("Primerica Life"). TIC was incorporated in 1863. With
$42.3 billion of assets at December 31, 1995, the Company believes that TIC,
TLAC and Primerica Life together constitute one of the largest stock life
insurance groups in the United States as measured by assets.
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.
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. The domestic PFS
sales force also sells certain property-casualty insurance products of The
Travelers Indemnity Company. See "Property & Casualty Insurance Services --
Property-Casualty Personal
15
<PAGE>
Lines." Because the great majority of the domestic licensed sales force works
on a part-time basis, a substantial portion of the sales force is inactive from
time to time.
Primerica Life and its subsidiaries, Primerica Life Insurance Company of
Canada and National Benefit Life Insurance Company ("NBL"), primarily offer
individual term life insurance. NBL provides statutory disability benefits in
New York, as well as direct response student term life insurance nationwide.
Primerica Life and its subsidiaries together are licensed to sell and market
term life insurance in all 50 states, the District of Columbia, Canada, Puerto
Rico, Guam, the U.S. Virgin Islands and 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, 1995, 1994 and 1993 were $1.012 billion, $962.4 million and $889.9
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 1993-1995.
16
<PAGE>
(in millions of dollars, except as noted)
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
In force beginning of year $ 334,972 $ 317,403 $ 311,276
Additions 53,045 57,389 49,300
Terminations(1) (39,848) (39,820) (43,173)
-------- -------- --------
In force end of year $348,169 $334,972 $317,403
======= ======= =======
The amounts in force at end of
year are before reinsurance ceded
in the following amounts $117,647 $94,930 $82,293
======= ====== ======
At end of year:
Number of policies in force
PFS 2,115,600 2,075,600 2,003,491
NBL other lines 444,117 450,424 474,624
Average size of policy
in force (in dollars)
PFS $160,774 $157,739 $154,630
NBL other lines 18,092 18,955 19,732
______________________________
(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 1995, 1994 and 1993, were 7.1%, 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.1 Since the Company's
sale of American Capital Management & Research, Inc. ("ACMR") in December 1994,
certain of the Company's subsidiaries continue to provide underwriting, transfer
agency and custodial services to the Common Sense(R) Trust funds. See
"Corporate and Other Operations" for additional information about ACMR. For
the years ended December 31, 1995, 1994 and 1993, PFS'
- ---------------------------------
1 Common Sense is a registered trademark of Van Kampen/American Capital
Asset Management, Inc. ("VK/ACAM").
17
<PAGE>
total mutual fund sales were $1.551 billion, $1.622 billion and $1.473 billion,
respectively, with sales of shares of the Common Sense(R) Trust funds and the
Smith Barney family of mutual funds collectively accounting for approximately
41%, 42% and 52%, respectively, of total sales. In mid-1995, the PFS sales
force began marketing Smith Barney mutual funds through a separate distribution
arrangement with PFS Distributors, Inc. At December 31, 1995, approximately
26,400 independent agent members of the PFS sales force (including approximately
2,400 licensed in Canada only) were also independent registered securities
representatives of PFS Investments and/or PFSL Investments Canada Ltd.
Travelers Life and Annuity
This section includes the businesses previously identified by old
Travelers as Financial Services and Asset Management & Pension Services, as well
as Transport Life Insurance Company and its affiliates through the third quarter
of 1995.
Principal Products
Travelers Life and Annuity offers individual life insurance, annuities
and long-term care 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.
Travelers Life and Annuity views market specialization as a critical component
of profitability and has updated its individual product portfolio with a range
of competitively priced term, universal and variable life insurance, long-term
care insurance and fixed and variable annuity products for its customers.
Individual life and long-term care 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, group annuities and
pension plan products are used for retirement funding purposes. Variable
annuities permit policyholders to choose to direct deposits into a number of
separate accounts which have differing investment options. Individual payout
annuities are used for structuring settlements of certain indemnity claims and
making other payments to policyholders over a period of time. In recent years,
the amount of individual variable annuities sold by TIC and TLAC has increased,
primarily through the additional distribution network provided by the Smith
Barney Financial Consultants.
Guaranteed investment contracts, which provide a guaranteed return on
investment, continue to be a popular investment choice for employer sponsored
retirement and savings plans. Annuities purchased by employer-sponsored plans
fulfill retirement obligations to individual employees.
18
<PAGE>
The table below sets forth written premiums, net of reinsurance, and
deposits for the Travelers Life and Annuity unit.
Premiums and Deposits
(in millions)
Year Ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
Premiums
Individual life $ 124 $ 124 $ 117
Individual accident and health(1) 288 334 344
Payout annuities 90 92 156
------ ------ ------
Total premiums 502 550 617
------ ------ ------
Deposits
Universal life insurance 149 162 163
Annuities
Individual fixed accumulation 692 569 577
Individual variable accumulation(2) 956 693 392
Individual payout 38 26 34
Guaranteed investment contracts(3) 681 347 918
Group separate accounts and managed funds(4) 362 747 772
Other fixed funds 115 119 265
Corporate-owned life insurance(5) 91 - -
------ ------ ------
Total deposits 3,084 2,663 3,121
------ ------ ------
Total premiums and deposits $ 3,586 $ 3,213 $ 3,738
====== ====== ======
______________________________
(1) The 1995 decline from 1994 reflects the Company's distribution of
Transport Holdings Inc., the indirect parent of Transport Life Insurance
Company, to the Company's stockholders.
(2) The increase in individual variable accumulation deposits reflects
successful introduction of variable annuities in the Smith Barney
distribution network.
(3) In 1994, TIC decided not to renew low margin guaranteed investment
contracts written in prior years and adopted a more selective approach to
issuing new contracts. This resulted in a decline in deposits compared
to 1993. The 1995 increase reflects successful implementation of the new
strategy with both existing and new customers, and also was helped by
ratings upgrades during the year.
(4) The 1995 and 1994 deposits, excluding $200 million and $512 million,
respectively, of deposits relating to the transfer in house of old
Travelers pension fund assets previously managed externally, amounted to
$162 million and $235 million. The significant decrease in 1994 results
from the decision, in the third quarter of 1993, to cease marketing index
funds to employer sponsored retirement and savings plans.
(5) Effective January 1, 1995, the corporate-owned life insurance business
previously managed by the Company's Managed Care and Employee Benefits
Operations was transferred to Travelers Life and Annuity. For 1994 and
1993, the premiums and deposits on this business were $187 million and
$218 million, respectively.
For information about reinsurance, see "Insurance Services - General --
Reinsurance" at the end of the description of the Property & Casualty Insurance
Services segment.
19
<PAGE>
Principal Markets and Methods of Distribution
TIC is licensed to sell and market its individual products in all 50
states, the District of Columbia, Puerto Rico, Guam, the Bahamas and the U.S.
and British Virgin Islands. TLAC is licensed to sell and market life and
annuity products in 43 states and the District of Columbia.
Individual products are primarily marketed through three distribution
channels: the Financial Consultants of SBI, H.C. Copeland and Associates, Inc.
("Copeland") and independent agents. Both SBI and Copeland are subsidiaries of
the Company. In June 1994, Smith Barney began distributing Travelers Life and
Annuity's individual products, primarily variable annuities. Smith Barney,
which accounted for 33% of total 1995 individual annuity premiums and deposits,
as compared to 12% in 1994, accounted for over 40% of total individual annuity
premiums and deposits in the fourth quarter of 1995. This growth has decreased
the share of annuities sold through other channels. Copeland, a captive sales
organization of personal retirement planning specialists, accounted for 40% of
1995's individual annuity premiums and deposits, as compared to 49% in 1994.
The independent agents, including a core group of over 500 professional life
insurance general agencies, sell the majority of the individual life insurance,
and in 1995 and 1994, sold 27% and 39%, respectively, of individual annuity
premiums and deposits.
Group pension products and annuities are marketed by Travelers Life and
Annuity's salaried staff directly to plan sponsors and are also placed through
independent consultants and investment advisers. The major factors affecting
the pricing of these contracts are the economics of the capital markets,
primarily the interest rate environment, the availability of appropriate
investments and surplus required to support this business. The pricing of
products and services also reflects charges for expenses, mortality, profit
and other relevant financial factors such as credit risk.
In January 1996, Travelers Life and Annuity began operating Tower Square
Securities, Inc. ("Tower Square Securities"), a subsidiary of The Travelers
Insurance Group Inc., as an additional distributor of the unit's products.
Tower Square Securities is a full-line broker-dealer that distributes mutual
funds, general securities and variable insurance products, written by both
Travelers Life and Annuity and non-affiliated companies, primarily through
independent agents who are registered representatives of Tower Square
Securities.
Life Insurance in Force
The following table provides a reconciliation of beginning and ending
Travelers Life and Annuity life insurance in force and related statistical data
on a statutory basis for 1993-1995.
20
<PAGE>
(in millions of dollars, except as noted)
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
In force beginning of year $48,998 $44,909 $39,434
Additions(1) 6,153 9,265 9,944
Terminations(2) (5,972) (5,176) (4,469)
------- ------- -------
In force end of year $49,179 $48,998 $44,909
====== ====== ======
The amounts in force at end of
year are before reinsurance ceded
in the following amounts $16,806 $6,575 $5,042
====== ===== =====
At end of year:
Number of policies in force(1) 563,286 606,089 619,710
Average size of policy
in force (in dollars) $87,307 $80,843 $ 72,468
______________________________
(1) The 1995 decline reflects the de-emphasis on sales of certain lower-margin
life insurance products.
(2) Includes terminations due to death, surrenders, lapses and in 1995, the
distribution of Transport Holdings Inc. to the Company's stockholders.
Insurance Reserves and Contractholder Funds
As life, accident and health insurance and annuity premiums are received,
Travelers Life and Annuity establishes policy benefit reserves that reflect the
present value of expected future obligations, net of the present value of
expected future net premiums. These reserves generally reflect long-term fixed
obligations to policyholders and are based on assumptions as to interest rates,
future mortality, morbidity, persistency and expenses, with provision for
adverse deviation. Policy benefit reserves, which give appropriate recognition
to reinsurance, are established based on factors derived from past experience.
Contractholder funds arise from the issuance of individual life contracts
that include an investment component, deferred annuities and certain individual
payout annuity investment contracts. Contractholder funds generally are equal
to deposits received and interest credited less withdrawals, mortality charges
and administrative expenses. Contractholder funds also include receipts from
the issuance of pension investment contracts.
AIDS-related claims paid by Travelers Life and Annuity in 1995, 1994 and
1993 were 1.6%, 2.1% and 1.2%, respectively, as a percentage of total life
claims paid, and 0.3%, 1.5% and 0.7%, respectively, as a percentage of total
health claims paid.
21
<PAGE>
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"). The operations of the Aetna P&C Businesses are not included in this
discussion. See "Pending Acquisition" below.
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."
Property-Casualty Commercial Lines
Principal Products
Property-Casualty Commercial Lines ("Commercial Lines") writes a broad
range of commercial property and casualty insurance for risks of all sizes. The
core products in Commercial Lines are as follows:
Workers' compensation provides coverage for the obligation of an employer
under state law to provide its employees with specified benefits for work-
related injuries, deaths and diseases, regardless of fault. There are typically
four types of benefits payable under workers' compensation policies: medical
benefits, disability benefits, death benefits and vocational rehabilitation
benefits. Workers' compensation policies are often written in conjunction with
other commercial policies. Commercial Lines offers three types of workers'
compensation products: (i) guaranteed cost products, in which policy premiums
charged are fixed and do not vary as a result of the insured's loss experience;
(ii) retrospectively rated policies, which are adjusted based on actual loss
experience of the insured during the policy period; and (iii) service programs,
which are generally sold to the
22
<PAGE>
Company's larger National Accounts, where the Company receives fees for
providing policy service, loss prevention, risk management, claims
administration and benefit administration to organizations pursuant to service
agreements. Workers' compensation products are designed to maximize cost
savings on service delivery efficiency and to minimize loss payout through
effective use of managed care. Managed care is a strategy involving employer,
employee and care providers in a cooperative effort that focuses on cost-
effective quality care.
General liability provides coverage for liability exposures including
bodily injury and property damage arising from products sold and general
business operations. General liability also includes coverage for directors'
and officers' liability arising in their official capacities, errors and
omissions insurance for employees, agents, professionals and others arising from
acts or failures to act under specified circumstances, as well as medical
malpractice, commercial umbrella and excess insurance.
Multiple peril provides coverage for businesses against third-party
liability from accidents occurring on their premises or arising out of their
operations, such as injuries sustained from products sold. It also insures
business property for damage, such as that caused by fire, wind, hail, water,
theft and vandalism and protects businesses from financial loss due to business
interruption.
Commercial automobile provides coverage for businesses against losses
incurred from personal bodily injury, bodily injury to third parties, property
damage to an insured's vehicle, and property damage to other vehicles and other
property resulting from the ownership, maintenance or use of automobiles and
trucks in a business.
Property provides coverage for loss or damage to buildings, inventory and
equipment from various events such as natural disasters, including hurricanes,
windstorms, earthquakes, hail, explosions, severe winter weather and other
events such as theft and vandalism, fires and storms and financial loss due to
business interruption. Property also includes inland marine, which provides
coverage for goods in transit and unique, one-of-a-kind exposures.
Premium equivalents, presented in the following tables, 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 premium revenues.
23
<PAGE>
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,
---------------------------
1995 1994 1993
---- ---- ----
Net written premiums by product line:
Workers' compensation(1) $ 743 $ 907 $1,001
General liability 412 426 478
Multiple-peril 308 304 279
Automobile 418 417 443
Property and other 428 337 298
------ ------ ------
Total net premiums 2,309 2,391 2,499
Premium equivalents(1) 2,821 2,990 2,757
------ ------ ------
Total net written premiums and
premium equivalents $ 5,130 $5,381 $5,256
====== ===== =====
Net written premiums by market:
National Accounts
Net written premiums $ 703 $ 835 $1,053
Premium equivalents 2,780 2,959 2,757
------ ------ ------
Total National Accounts(1) 3,483 3,794 3,810
------ ------ ------
Commercial Accounts
Net written premiums 730 791 744
Premium equivalents 41 31 0
------ ------ ------
Total Commercial Accounts 771 822 744
------ ------ ------
Select Accounts
Net written premiums 542 466 490
Specialty Accounts
Net written premiums 334 299 212
------ ------ ------
Total net written premiums and
premium equivalents $ 5,130 $ 5,381 $ 5,256
====== ====== ======
______________________________
(1) The decrease in 1995 is primarily attributable to the depopulation of the
involuntary pools as insureds move to the voluntary markets.
Principal Markets and Methods of Distribution
Commercial Lines is organized to serve the needs of its customer base by
market: National Accounts ("National"), Commercial Accounts, Select Accounts
("Select") and Specialty Accounts ("Specialty"). Each marketing and
underwriting area targets specific
24
<PAGE>
segments of the marketplace based upon key risk characteristics including size
of business, risk profile and specific customer needs. National serves large
organizations, as well as employee groups, associations and franchises, and
includes the Company's alternative market business, which primarily covers
workers' compensation products and services. Commercial Accounts focuses on
medium-sized businesses, while Select serves small businesses and individuals
with commercial exposures.
National customers typically generate annual direct written premiums
(including premium equivalents) of over $1 million and generally select products
under retrospectively rated plans, large self-insured retentions or some other
loss-responsive arrangement. National programs involve both insurance (i.e.,
risk transfer) and risk service (i.e., claims settlement, loss control and risk
management). Customers are usually national in scope and range in size from
businesses with sales of approximately $10 million per year to Fortune 2000
corporations. Products are currently distributed through approximately 20 major
national brokers with offices throughout the United States. Based on net
written premiums and premium equivalents of $3.483 billion, National constituted
approximately 68% of the Commercial Lines business in 1995.
National customers often demand risk service programs where the ultimate
cost is based on their own loss experience. Programs offered by the Company
include claim settlement, loss control and risk management services and are
generally offered in connection with a retrospectively rated insurance policy or
a self-insured program. This type of policy limits the insurance risk to
Commercial Lines.
The alternative market business of Commercial Lines sells claim and
policy management services to workers' compensation assigned risk plans, self-
insurance pools and niche voluntary markets throughout the United States. Since
1993, state assigned risk plan contracts have been awarded through a formal
state-by-state bid process. Contracts, which are generally for three-year
terms, are awarded by state agencies based on quality of service and price. The
Company has emerged from these bids as the largest assigned risk plan servicing
insurer in the industry, with a 35% share of the market. The Company also
services self-insurance groups, sells excess workers' compensation coverage to
these groups and markets various programs to other insurers and niche market
employers.
Commercial Accounts sells a broad range of property and casualty
insurance products through a network of independent agents and brokers.
Commercial Accounts generally targets businesses with 75 to 1,000 employees and
generating between $50,000 and $1 million in annual direct written premiums and
premium equivalents. Commercial Accounts offers a full line of products to its
customers, with an emphasis on guaranteed cost products. It also offers
retrospectively rated or large deductible programs to its customers. Based on
net written premiums and premium equivalents of $771 million, Commercial
Accounts constituted approximately 15% of the Company's Commercial Lines
business in 1995.
25
<PAGE>
Commercial Accounts has been increasing its "program marketing," which
offers businesses in certain targeted industries specialized coverages and
highly competitive pricing. Commercial Accounts is currently targeting the
manufacturing industry, including metal products, industrial machinery
manufacturing, food processing, advanced technology, mineral products, wood
products and plastics and rubber products manufacturing. Specific industry
knowledge enables the Company to select better managed companies in an industry
segment, to tailor specialized coverages for these companies and to link price
to the exposures and controls of an individual risk through the use of a
proprietary rating program. Instead of relying on rating bureaus to establish
prices for products, the Company uses its proprietary data, which contains many
years of data from its extensive underwriting and pricing experience.
Accordingly, subject to applicable state regulations, prices are derived from
numerous variables that apply to specific risks, as well as factors related to
the insured. The Company believes that relying on extensive data bases, rather
than relying on data from industry rating bureaus, provides a competitive
advantage to the Company in pricing and underwriting individual risks. The
Company uses components of this specialized business approach in its other lines
of business, specifically in connection with loss control and processing
efficiencies.
Select serves individuals who have commercial exposures and firms with
one to 75 employees, typically generating up to $50,000 in annual direct written
premiums. Products offered to Select customers are generally guaranteed cost
policies, often a packaged product covering property and general liability
exposures. Products are sold through independent agents, who are often the same
agents that sell the Company's Commercial Accounts and Personal Lines products.
Based on net written premiums of $542 million, Select constituted approximately
11% of the Company's Commercial Lines business in 1995.
Specialty markets to small, medium, and large customers and distributes
primarily through specialty producers and retail and wholesale brokers
throughout the United States. The Company's Specialty business requires
specialized underwriting and generally has better combined ratios and lower loss
frequencies than traditional lines.
Specialty business is written through Gulf and Travelers Indemnity. The
principal products of Travelers Specialty include general liability for select
product liability risks, commercial umbrella and excess liability, medical
malpractice, various forms of professional liability insurance, errors and
omissions liability, excess property, and various coverages that target the
transportation industry. Gulf Specialty focuses on many non-traditional lines
of business with a particular focus on the financial services market. Products
include directors and officers liability insurance, errors and omissions
coverage for bankers, investment counselors and mutual fund advisors, and
fidelity and surety coverage for related classes. In addition, Gulf Specialty
offers errors and omissions coverage for non-professionals and professionals
such as lawyers, architects and engineers, insurance agents, podiatrists and
chiropractors. Gulf Specialty also writes umbrella coverage for various
industries and provides insurance products to the entertainment industry.
Travelers and Gulf Specialty also assume various types of reinsurance on both a
proportional and a non-proportional basis.
26
<PAGE>
Based on net written premiums of $334 million, Specialty constituted
approximately 6% of the Company's Commercial Lines business in 1995.
The following table shows the distribution of Commercial Lines' 1995
premiums for the states that accounted for the majority of the premium volume.
% of
State Total
----- -----
New York 12.8%
Texas 8.0
California 6.3
Massachusetts 6.2
Florida 4.8
Illinois 4.7
New Jersey 4.6
Pennsylvania 4.2
Tennessee 3.2
Missouri 3.1
Michigan 3.0
All others(1) 39.1
----
Total 100.0%
=====
______________________________
(1) No one of these states accounted for as much as 3.0% of the total.
Pricing and Underwriting
Pricing levels for the Company's property and casualty insurance products
are generally developed based upon frequency and severity of estimated losses,
the expenses of producing business and administering claims, and a reasonable
allowance for profit. National account business is less affected by pricing
because a significant portion of the business is fee-for-service. However,
pricing continues to be very competitive. Commercial Accounts and Select
primarily sell guaranteed cost products. Price increases for such guaranteed
cost products have not kept pace with loss cost inflation in recent years. The
softness in Commercial Accounts business was partially offset by continued
growth in industry-specific programs and in retrospectively rated policies and
other loss-responsive products.
A significant portion of the Commercial Lines business is written with
retrospectively rated insurance policies as well as high deductible policies in
which the ultimate cost of insurance for a given policy year is dependent on the
loss experience of the insured. Retrospectively rated policies are primarily
used in workers' compensation coverage. Although the payment terms and long-
term nature of the loss development reduces insurance risk, it introduces some
additional credit risk. Receivables from holders of
27
<PAGE>
retrospectively rated policies totaled approximately $740 million at December
31, 1995. Collateral, primarily letters of credit, and, to a lesser extent,
cash collateral, is generally requested for contracts that provide for deferred
collection of ultimate premiums. The amount of collateral requested is
predicated upon the creditworthiness of the client and the nature of the insured
risks. Commercial Lines continually monitors credit exposure of individual
accounts and the adequacy of collateral.
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, large deductibles and
reliance on financially secure reinsurers. The workers' compensation line has
improved dramatically across the industry over the past few years, in part due
to loss management efforts of the insureds and providers such as Travelers
Indemnity. Legislative reform, economic conditions, insurer investment,
employer involvement and lower medical inflation have all contributed to this
positive impact. During 1995, in reaction to the improvement, industry rates
have fallen and insurer price competition has accelerated. The resulting price
deterioration has exceeded loss cost improvement causing combined ratios to
increase three to four points for the industry. Excluding the impact of
retrospective premium reserve and loss reserve adjustments in both 1994 and
1995, Commercial Lines workers' compensation combined ratios increased from
110.2% in 1994 to 111.6% in 1995, indicative of the emerging pricing
environment. This business is subject to retrospective rating premium
adjustments, and accordingly the net impact on results of operations of the
premium adjustment and loss reserve development is minimal. In addition,
because of the improving industry trends within workers' compensation, insurers
have increased their voluntary market share, thereby reducing the size of the
involuntary market. As a result, Travelers Indemnity's service volume from the
National Council on Compensation Insurance has declined from $431 million in
1994 to $323 million in 1995. However, its direct assignment volume has
increased from $217 million for 1994 to $243 million for 1995. 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, catastrophe losses, net of taxes and
reinsurance, were $7 million in 1995 compared to $30 million in 1994. The
commercial property market capacity remained adequate during 1995, keeping
downward pressure on pricing.
Commercial Lines has developed an underwriting methodology that
incorporates underwriting, claims, engineering, actuarial and product
development disciplines for particular industries. This approach utilizes
proprietary data gathered and analyzed by Commercial Lines over many years. The
underwriters and engineers use this information to assess and evaluate risks
prior to quotation. This information provides specialized knowledge about
industry segments and catastrophe management and helps analyze risk based on
account characteristics and pricing parameters designed to ensure that the
Company does not compromise its underwriting integrity. This process is linked
with strong underwriting interaction and review at the Company's and agents'
locations. Travelers Indemnity is also a
28
<PAGE>
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 aviation, nuclear power plants and
transportation of energy materials and other specialty risks.
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. In addition to the regulatory pressures, the
Company believes that certain court decisions have expanded insurance coverage
beyond the original intent of the insurers and insureds, frequently involving
policies that were issued prior to the mid-1970s. The results of court
decisions affecting the industry's coverage positions continue to be
inconsistent. Accordingly, the ultimate responsibility and liability for
environmental remediation costs remain uncertain.
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 overall nature of the insurance 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.
29
<PAGE>
Environmental loss and loss expense reserves of the Company at December
31, 1995 were $404 million, net of reinsurance of $50 million. Approximately
24% of such loss and loss expense reserves (approximately $95 million) were case
reserves 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 property and casualty 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, 1995, the Company had approximately 10,500 pending
environmental-related claims and had resolved over 20,600 such claims since
1986. Approximately 65% of the pending environmental-related claims in
inventory represent active federal or state EPA-type claims tendered by
approximately 700 insureds. The balance represents bodily injury claims
alleging injury due to the discharge of insureds' waste or pollutants.
The Company generally has been successful in resolving its coverage
litigation and continues to reduce its potential exposure through favorable
settlements with certain insureds. These settlement agreements with certain
insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds. In addition,
with respect to settlement of many of the environmental claims there is a "buy-
back" of the future environmental liability risks by the Company, together with
appropriate indemnities and hold harmless provisions to protect the Company.
Asbestos Claims
In the area of asbestos claims, the Company believes that the property
and casualty insurance industry has suffered from judicial interpretations that
have attempted to maximize insurance availability from both a coverage and
liability standpoint far beyond the 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.
30
<PAGE>
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 an action brought
in Philadelphia regarding potential consolidation and resolution of future
asbestos bodily injury claims. The cumulative effect of these 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 insurance industry.
Because each insured presents different liability and coverage issues, the
Company evaluates those issues on an insured-by-insured basis.
The Company's evaluations have not resulted in any meaningful data from
which an average asbestos defense or indemnity payment may be determined. The
varying defense and indemnity payments made by the Company on behalf of its
insureds 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.
Asbestos loss and loss expense reserves of the Company at December 31,
1995 were $402 million, net of reinsurance of $293 million. Approximately 82%
of the net asbestos reserves at December 31, 1995 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 recoverables. 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 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, the Company believes that 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."
31
<PAGE>
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 personal automobile and homeowners insurance
sold to individuals, which accounted for 97% of the net written premium
generated by Personal Lines in 1995. The Company has approximately 1.8 million
auto and homeowners policies in force in 1995 and has ranked among the five
largest providers of personal insurance among agency companies.
Personal 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 provides protection against losses to dwellings and contents
from a wide variety of perils, as well as coverage for liability arising from
ownership or occupancy. Personal Lines writes homeowners insurance for
dwellings, condominiums, mobile homes and rental property contents. The Company
also offers a range of other products providing umbrella liability coverage and
protection for boats and personal articles such as jewelry.
The following table sets forth written premiums, net of reinsurance, for
Personal Lines.
Premiums
(in millions)
Year Ended December 31,
-------------------------------
1995 1994 1993
---- ---- ----
Automobile(1) $1,008 $1,187 $1,202
Homeowners 253 209 122(2)
Other 37 37 37
---- ---- ----
Total premiums $1,298 $1,433 $1,361
===== ===== =====
______________________________
(1) The written premium decline in 1994 and in 1995 reflects the sale of
Bankers and Shippers Insurance Company in October 1994. Bankers and
Shippers Insurance Company primarily writes nonstandard private passenger
automobile insurance.
(2) Homeowners written premiums in 1993 were reduced by 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
32
<PAGE>
centers. The principal markets for Personal Lines insurance are in states along
the East coast, in the South, and in the Midwest.
Insurance companies generally market personal automobile and homeowners
insurance through one of two distribution systems: independent agents or direct
writing. The independent agents that distribute the Company's Personal Lines
products usually represent several unrelated property-casualty companies. In
contrast, direct writing companies operate either by mail or through exclusive
agents or sales representatives. Due in part to the expense advantage that
direct writers typically have relative to companies using independent agents,
the direct writing companies have expanded 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 to its agency distribution system, the Company has pursued
a number of initiatives to broaden its distribution of Personal Lines products,
by developing special products for affinity groups, employee groups and other
sponsoring organizations and co-marketing arrangements with other insurers. In
1994, Personal Lines began writing private passenger automobile and homeowners
insurance marketed by licensed members of the PFS sales force in order to
broaden the distribution of its Personal Lines products. This program has
expanded to 14 states as of December 31, 1995, and is expected to reach
approximately 75% of all states by the end of 1996.
For 1995, Personal Lines business was concentrated in the states shown in
the table below.
% of
State Total
----- -----
New York 21.9%
Massachusetts 15.1
New Jersey 9.1
Florida 8.0
Pennsylvania 6.2
Connecticut 4.8
Virginia 4.7
Georgia 4.7
Texas 3.5
All others(1) 22.0
------
Total 100.0%
======
______________________________
(1) No one of these states accounted for as much as 3.0% of the total.
In addition, approximately 47% of Personal Lines' homeowners premiums in
1995 was in New York, Florida, Massachusetts and New Jersey.
33
<PAGE>
Pricing and Underwriting
Pricing for personal automobile insurance is driven by changes in the
relative frequency of claims and by inflation in the cost of automobile repairs,
medical care and litigation of liability claims. As a result, the profitability
of the business is largely dependent on promptly identifying and rectifying
disparities between premium levels and expected claim costs, and obtaining
approval of the state regulatory authority for 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.
Pricing in the homeowners business is also driven by changes in the
frequency of claims and by inflation in building supplies, labor costs and
household possessions. Most homeowners' policies offer automatic increases in
coverage to reflect growth in replacement costs and property values. In
addition to the normal risks associated with any multiple peril coverage, the
profitability and pricing of homeowners insurance is affected by the incidence
of natural disasters, particularly tornadoes and hurricanes. The high level of
catastrophe losses in recent periods has resulted in a reduced availability of
homeowners insurance and has led to higher prices for homeowners policies in
some markets. In order to reduce its exposure to catastrophic hurricane losses,
Travelers Indemnity has limited its writing of homeowners policies in certain
hurricane-prone areas. Changes to methods of marketing and underwriting in
coastal areas of Florida and New York are subject to state-imposed restrictions,
the general effect of which is to retard an insurer's ability to withdraw from
such areas.
Insurers writing property liability policies are generally unable to
increase rates until sometime after the costs associated with coverage have
increased, primarily as a result of state insurance rate regulation laws. The
pace at which an insurer can change rates in response to competition or to
increased costs depends, in part, on whether the applicable rate regulation law
requires prior approval of a rate increase or notification to the regulator
either before or after a rate increase is imposed. In states having prior
approval laws, a rate must be approved by the regulator before it may be used by
the insurer. In states having "file-and-use" laws, the insurer must file the
rate with the regulator, but does not need to wait for approval before using it.
A "use-and-file" law requires an insurer to file rates within a certain period
of time after the insurer begins using the new rate. Approximately one-half of
the states, including New York, require prior approval of rate increases.
Underwriting of Personal Lines products is conducted primarily by
independent agents. Agents underwrite Personal Lines policies under strict
underwriting guidelines established and monitored by Personal Lines. Each agent
is assigned to a specific employee of Personal Lines responsible for working
with the agent on business plan development, marketing, and overall growth and
profitability. Personal Lines' agency level management information enables
quick understanding of results and identification of problems and opportunities.
34
<PAGE>
Personal Lines has implemented various programs over the past several
years in order to improve 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 compared to prior periods, the core
automobile and homeowners insurance businesses grew in 1995 in areas targeted
for growth, in terms of the number of policies and premium volume.
Pending Acquisition
The Acquisition Agreement
Pursuant to the Stock Purchase Agreement dated as of November 28, 1995
between The Travelers Insurance Group Inc. ("TIGI") and Aetna (the "Stock
Purchase Agreement"), TIGI agreed to purchase all of the outstanding capital
stock of The Aetna Casualty and Surety Company and The Standard Fire Insurance
Company for a purchase price of $4 billion, subject to certain adjustments.
TIGI assigned its rights under the Stock Purchase Agreement to Travelers/Aetna
Property Casualty Corp. ("TAP"). The transaction, which is subject to various
regulatory approvals, is expected to be completed around the end of the first
quarter of 1996.
Aetna has agreed that for a period of five years from the closing under
the Stock Purchase Agreement, it will not engage in any business in the United
States, Canada or the United Kingdom that competes with any of the Aetna P&C
Businesses as conducted in such countries as of the closing, with certain
limited exceptions. Aetna has entered into a license agreement with The Aetna
Casualty and Surety Company and The Standard Fire Insurance Company that permits
those companies and their subsidiaries to use the Aetna name, in connection with
and for the purpose of identifying the property and casualty insurance services
rendered by such entities, through December 31, 1998. Aetna has also agreed not
to license the Aetna name to anyone else for use in a property and casualty
insurance business until after December 31, 2001. TAP is required to remove the
Aetna name from its corporate name by December 31, 1997.
Financing
TAP is a new holding company that will own the property and casualty
subsidiaries purchased from Aetna and the existing property and casualty
subsidiaries of Travelers Indemnity. The Company expects to capitalize TAP
initially by contributing approximately $1.1 billion to its capital, from a
combination of cash on hand and borrowings by the Company. The Company may
provide additional funds in the form of temporary capital in order to finance
the transaction. In addition, it is anticipated that TAP will finance the
acquisition with an aggregate of $525 million in equity investments from a small
group of private investors, and borrowings under a five-year revolving credit
facility in the aggregate
35
<PAGE>
principal amount of up to $2.65 billion provided by a syndicate of banks
led by Citibank, N.A., Chemical Bank and Morgan Guaranty Trust Company.
TAP has filed a registration statement with the Commission covering
shares of its common stock. Upon the completion of the offering contemplated by
that registration statement, the Company will own approximately 83% of TAP's
common stock. It is anticipated that the proceeds of the offering will be used
by TAP to repay a portion of the borrowings under the credit facility referred
to above. In addition, following its common stock offering, TAP expects to
offer debt and trust preferred securities to the public, the proceeds of which
will be used for general corporate purposes, which may include repayment of
other acquisition-related indebtedness.
Businesses to be Acquired
The following description of the property and casualty operations of
Aetna appears in Aetna's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995: "Commercial and personal coverages accounted for 70% and
30%, respectively, of Aetna's 1995 property-casualty net written premiums.
Commercial coverages are sold for risks of all sizes and include fire and allied
lines, multiple peril, marine, workers' compensation, general liability
(including product liability), commercial automobile, certain professional
liability, and fidelity and surety bonds. In addition, Aetna offers various
services to businesses that choose to self-insure certain exposures. Aetna also
reinsures various property and liability risks, primarily through agreements
with nonaffiliated insurers, on both a treaty and facultative basis. Personal
coverages include auto and homeowners insurance."
36
<PAGE>
INSURANCE SERVICES - GENERAL
- -----------------------------
The following table summarizes the current financial strength and claims-
paying ratings of the Company's 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) AA- (very high) A1 (good) A+ (good)
Primerica Life A- (excellent) - - AA (excellent)
TLAC A (excellent) - - A+ (good)
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, The Travelers Indemnity Company of
Connecticut and The Travelers Indemnity Company of Missouri. Effective
January 1, 1996, TravCo Insurance Company and The Travelers Home and
Marine Insurance Company joined the pool.
(2) The Gulf pool consists of Gulf Insurance Company, Gulf Underwriters
Insurance Company, Select Insurance Company, Atlantic Insurance Company
and Gulf Group Lloyds.
In November 1995, in connection with the proposed acquisition of the
Aetna P&C Businesses, the Travelers Indemnity pool was put on credit watch by
Standard & Poor's Corporation with a negative outlook.
Reinsurance
The Company reinsures a portion of the risks it underwrites in an effort
to control its exposure to losses, stabilize earnings and protect surplus. The
Company cedes to reinsurers a portion of these risks and pays premiums based
upon the risk and exposure of the policies subject to such reinsurance.
Reinsurance is subject to collectibility in all cases and to aggregate loss
limits in certain cases. Although the reinsurer is liable to the Company to the
extent of the reinsurance ceded, the Company remains primarily liable as the
direct insurer on all risks reinsured. Reinsurance recoverables are reported
after allowances for uncollectible amounts. The Company also holds collateral,
including escrow funds and letters of credit, under certain reinsurance
agreements. The Company monitors the financial condition of reinsurers on an
ongoing basis, and reviews its reinsurance arrangements periodically.
Reinsurers are selected based on their financial condition and business
practices. For additional information concerning reinsurance, see Note 12 of
Notes to Consolidated Financial Statements.
At December 31, 1995, the Company had $4.7 billion in property-casualty
reinsurance recoverables. Of this amount, $2.8 billion was ceded to industry
pools and
37
<PAGE>
associations, which have the strength of the participating insurance companies
supporting these cessions, and the remainder is due from reinsurers. Two of the
Company's largest reinsurers, Lloyd's of London and General Reinsurance
Corporation, had assumed losses from the Company at December 31, 1995 of $289
million and $169 million, respectively. Lloyd's of London is currently
undergoing restructuring to seek to obtain additional capital and to segregate
claims for years 1992 and prior. The ultimate effect of this restructuring on
the Company's reinsurance recoverables 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. Most new business is now reinsured under an
80%/20% quota share reinsurance program. In addition, effective January 1,
1995, numerous universal life policies issued before 1995 were also ceded
under an 80%/20% quota share reinsurance program. Retention on life insurance
risks after reinsurance remains up to a maximum of $1.5 million per insured
for an ordinary life risk, depending on the subsidiary involved, the type of
policy, the year of issue and the age of the insured. Other reinsurance
arrangements are made from time to time to cede or assume existing blocks of
business.
Property and Casualty Insurance
The Company uses a variety of reinsurance agreements, primarily with non-
affiliated reinsurers, to control its exposure to large property and casualty
losses. The agreements include: (i) facultative reinsurance, in which
reinsurance is provided for all or a portion of the insurance provided by a
single policy and each policy reinsured is separately negotiated; (ii) treaty
reinsurance, in which reinsurance is provided for a specified type or category
of risks; and (iii) catastrophe reinsurance, in which the ceding company is
indemnified for an amount of loss in excess of a specified retention with
respect to losses resulting from a catastrophic event. These agreements, which
renew at various dates, are generally reviewed and renegotiated annually. The
Company expects to reevaluate its reinsurance needs after its acquisition of the
Aetna P&C Businesses. The reinsurance arrangements described below are those in
force as of December 31, 1995.
Currently, for third-party liability, including automobile no-fault, the
reinsurance agreements used by the Commercial Accounts and Select divisions of
Commercial Lines limit their net retention to a maximum of $5 million per
insured, per occurrence. For commercial property insurance, there is a $5
million retention per risk with 100% reinsurance coverage for risks with higher
limits. For National, reinsurance arrangements are typically tiered, or
layered, such that only levels of risk acceptable to the Company are retained.
The
38
<PAGE>
reinsurance agreements in place for Personal Lines umbrella policies cover 90%
of each loss between $1 million and $5 million.
In addition to traditional reinsurance agreements that serve to control
its exposure to loss, Travelers Indemnity and its affiliates act as servicing
carriers for many pools and associations, such as state workers' compensation
pools. See "Property & Casualty Insurance Services -- Property-Casualty
Commercial Lines." 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 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 74% of total
losses between $175 million and $375 million. For multiple workers'
compensation losses arising from a single occurrence, reinsurance covers 100% of
losses between $10 million and $160 million and for losses caused by property
perils, reinsurance coverage averages 74% of losses between $175 million and
$345 million. The Commercial Accounts and Select business units purchased an
agreement covering workers' compensation losses that reinsures 100% of
occurrences between $2 million and $10 million.
For commercial property insurance sold through Commercial Accounts and
Select, 20% of all losses were reinsured in 1995, subject to a fixed dollar
occurrence limitation of $225 million. For Personal Lines homeowners insurance
16.25% of losses were reinsured up to a maximum recovery per occurrence of 150%
of ceded premium or approximately $68 million.
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. The recent trend of consolidations in the industry has added to the
competitive environment. 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 27% of the Travelers Life and Annuity individual annuity
premiums and deposits were sold through independent agents in 1995. 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.
39
<PAGE>
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 advisors, mutual funds and other
financial institutions.
PFS Investments is registered as a broker-dealer with the Commission, in
all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and
Guam. Tower Square Securities is registered as a broker-dealer with the
Commission, in 49 states, Puerto Rico and the District of Columbia. Similarly,
Copeland Equities, Inc., a subsidiary of Copeland, is registered as a broker-
dealer with the Commission, in 47 states and the District of Columbia. Each is
subject to extensive regulation by those agencies and the securities
administrators of those jurisdictions, primarily for the benefits of its
customers, including minimum capital and licensing requirements. PFS
Investments faces competition not only from large financial services firms
offering products and services that cross traditional business boundaries, but
also from insurance companies, including other subsidiaries of the Company,
offering life insurance products with investment features. The major role of
Copeland Equities, Inc. and Tower Square Securities is to facilitate the sale of
variable life and annuity products issued by Travelers Life and Annuity.
Property and Casualty Insurance
Property-casualty insurance is highly competitive in the areas of price,
service, agent relationships and, in the case of personal property-casualty
business, method of distribution (i.e., use of independent agents, captive
agents and/or employees). There are approximately 3,900 property-casualty
insurance companies in the United States. Of these companies, approximately 900
operate in all or most states and write the vast majority of the business in the
industry while over 2,300 offer one or more personal property-casualty products
similar to those marketed by the Company. In addition, an increasing amount of
commercial risks are covered by purchaser self-insurance, high deductibles,
risk-purchasing groups, risk-retention groups and captive companies.
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 works to set the price charged
for insurance products and the level of service provided, within the insurance
regulatory framework. Growth is driven by a company's ability to provide
insurance and services at a price that is reasonable and acceptable to the
customer. In addition, the marketplace is affected by available capacity of the
insurance industry as measured by policyholders' surplus. Surplus expands and
contracts primarily in conjunction with profit levels generated by the industry.
Growth in premium and service
40
<PAGE>
business is also measured by a company's ability to retain existing customers
and to attract new customers.
The National market is highly competitive on the basis of quality of
service provided and, to a lesser extent, on the basis of price. National
business is generally written through national brokers and regional agents.
National also competes for state contracts to provide claim and policy
management services in the alternative market. These contracts, which generally
have three-year terms, are selected by state agencies based on quality of
service and price.
The Commercial Accounts market is highly competitive and this business
has historically been written through independent agents and brokers, although
some companies use direct writing. Competitors in this market are primarily the
national property-casualty insurance companies willing to write most classes of
business using traditional products and pricing and, to a lesser extent,
companies that have developed niche programs for specific industry segments.
Companies compete on price, product offerings and response time in policy
issuance and claim service. As a result, reduced overhead and improved
efficiency through automation to drive down costs are key to success in this
market. A competitive advantage resides in local representation and
underwriting authority.
The Select market is highly competitive and is written directly through
agents. Both national and regional property-casualty insurance companies
compete in the small accounts market. The target market is generally low risk,
"main street" business, underwritten and priced using standard industry
practices. The Company has established marketing relationships with its
distribution network and has provided its agents with defined underwriting
policies, competitive prices and automated environments.
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 multi-line companies that offer numerous products
covering various risks.
41
<PAGE>
Personal lines insurance is written by hundreds of insurance companies of
varying sizes. Although national companies write the majority of the business,
Personal Lines also faces competition from local or regional companies in
various markets because of their expense structure or because they specialize in
providing coverage to particular risk groups. The Company believes that the
principal competitive factors are price, service, perceived stability of the
insurer and name recognition. Personal Lines also competes with other
independent agency companies for business in each of the agencies representing
it who also offer policies of competing companies. At the agency level, the
Company believes that competition is primarily based on the level of service,
including claims handling, level of automation and the development of long-term
relationships with the individual agents. Personal Lines also competes with
insurance companies that use captive agents or salaried employees to sell their
products. Because these companies generally do not pay commissions, they may be
able to obtain business at a lower cost than Personal Lines, which sells its
products primarily through independent agents and brokers. Due to the expense
advantage, the direct writing companies have gradually been able to expand their
market share.
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. Awareness of the catastrophe exposure in
certain personal lines homeowners markets 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 extent of
regulation varies but generally has its source in statutes that delegate
regulatory, supervisory and administrative authority to a department of
insurance. 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 market conduct surveys, recording complaints,
restricting expenses, commissions and new business issued, restricting use of
some underwriting criteria, regulating rates, forms and advertising, specifying
what might constitute unfair practices, fixing maximum interest rates on policy
loans and establishing minimum reserve requirements and minimum policy surrender
values. Such powers also extend to premium rate regulation, which varies from
open competition to limited review upon implementation, to requirements for
prior approval for rate changes. State regulation may also cover capital and
surplus and actuarial reserve maintenance, setting solvency standards, mandating
loss ratios for certain kinds of insurance, limiting the grounds for
42
<PAGE>
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 intercompany transfers of assets, service
arrangements and dividend payments from insurance subsidiaries. State insurance
departments also conduct periodic examinations of the affairs of insurance
companies and require the filing of annual and other reports relating to
financial condition of companies and other matters.
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 condi-
tion 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.
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. Some lines of business,
such as commercial automobile and workers' compensation, experience rate
inadequacies in certain 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.
In addition to state insurance laws, the Company's insurance subsidiaries
are also subject to general business and corporation laws, state securities
laws, consumer protection laws, fair credit reporting acts and other laws. The
insurance industry generally is exempt from federal antitrust laws because of
the application of the McCarran-Ferguson Act.
Connecticut legislation requires notice to and prior approval by the
Connecticut Insurance Department for the declaration or payment of any dividend
which, together with other distributions made within the preceding twelve
months, exceeds the greater of (i) ten
43
<PAGE>
percent of an insurer's surplus or (ii) net gain from operations (for life
companies) or net income (for non-life companies), in each case determined in
accordance with statutory accounting practices. Such declaration or payment is
further limited by adjusted unassigned funds (surplus), as determined in
accordance with statutory accounting practices.
Under the legislation, a maximum of $580 million of statutory surplus is
available in 1996 for dividends from TIGI, the parent of TIC and Travelers
Indemnity, to Travelers Group Inc. without prior approval of the Connecticut
Insurance Department.
Certain variable life insurance and individual and group variable
annuities, as well as modified guaranteed annuities, and their related separate
accounts are subject to regulation by the Commission.
Congress has considered and continues to consider several proposals to
revise the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA" or "Superfund"). It is not possible to predict whether such proposed
legislation will be enacted, what form such legislation might take when enacted,
or the potential effects of such legislation on the Company and its competitors.
See "Property-Casualty Commercial Lines -- Hazardous Substances" on pages
29 to 31 for a discussion of the effect on the Company of various state and
federal regulatory efforts aimed at environmental remediation.
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. In May 1995, the legislature extended the
RPCJUA to provide property and casualty insurance to condominium associations
and owners of apartment buildings and similar types of property. 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 the Florida Hurricane
Catastrophe Fund ("FHCF") to provide reimbursement to insurers for a portion of
their future catastrophic hurricane losses. The FHCF is partially funded by
premiums from the insurance companies that write residential property business
in Florida and assessments on insurance companies that write other property and
casualty insurance in Florida, excluding workers' compensation. FHCF's resources
are limited to these contributions and to its borrowing capacity existing at the
time of a significant catastrophe in Florida.
Proposed legislation has been introduced in Congress from time to time
that would modify certain laws and regulations affecting the financial services
industry, including the provisions regarding affiliations among insurance
companies, investment banks and commercial banks. The potential impact of such
legislation on the Company's businesses cannot be predicted at this time.
44
<PAGE>
Risk-Based Capital Requirements
The NAIC has approved formulas and model laws to implement risk-based
capital ("RBC") requirements for life insurance companies and for property-
casualty insurance companies. The RBC requirements are to be used as early
warning tools by the NAIC and states to identify companies that merit further
regulatory action.
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-five percent of the baseline PCRBC calculation is defined as
Authorized Control Level RBC for 1995 (this percentage was 40% in 1994, and will
increase to 50% for 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," which requires an
insurer to submit a plan of corrective action (an "RBC plan") to the regulator
if surplus falls below 200% but is greater than 150% of the RBC amount. The
"regulatory action level" requires an insurer to submit an RBC plan, and permits
the relevant Insurance Commissioner to perform an examination or other analysis
and issue a corrective order, if surplus falls below 150% but is greater than
100% of the RBC amount. The third level is the "authorized control level,"
which allows the relevant
45
<PAGE>
Insurance Commissioner to rehabilitate or liquidate an insurer in addition to
the aforementioned actions if surplus falls below 100% but is greater than 70%
of the RBC amount. The fourth level is the "mandatory control level," which
requires the relevant Insurance Commissioner to rehabilitate or liquidate the
insurer if surplus falls below 70% of the RBC amount.
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, 1995, 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.
Insurance Regulatory Information System
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.
In each of the last three years certain of the Company's subsidiaries
have 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.
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 that 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.
46
<PAGE>
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, 1995, the investment holdings of the companies included
in the insurance services segments were composed primarily of fixed maturities.
At December 31, 1995, approximately 95.3% 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.
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 1995 and does
not plan to do so in 1996. The property-casualty fixed maturities portfolios
47
<PAGE>
(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 Held for Sale
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, 1995, the mortgage loan and real
estate held for sale portfolios of the businesses included in the Company's
insurance services segments consisted of approximately $4.0 billion and $321
million, respectively. At December 31, 1994 and 1993, the mortgage loan
portfolio consisted of approximately $5.4 billion and $7.4 billion,
respectively, and the real estate held for sale portfolio consisted of
approximately $418 million 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. At December 31, 1995, 1994 and 1993, approximately $252 million,
$511 million and $1.3 billion, or 6%, 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. 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.
For information regarding the principal balance of mortgage loans at
December 31, 1995 by contractual maturity, see Note 5 of Notes to Consolidated
Financial Statements. Actual maturities will differ from contractual maturities
because borrowers may have the right to prepay loans with or without prepayment
premiums. Unscheduled payments and sales of mortgage loans were $1.0 billion in
1995, $1.3 billion in 1994 and $1.0 billion in 1993. The average life of these
mortgages is seven years.
48
<PAGE>
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 held for sale included in the
investment portfolios as of December 31, 1995, 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
- -------------- -------------- -----------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
Office $1,551 $2,141 $2,875 $ 177 $ 224 $ 641
Apartment 654 1,112 1,711 8 9 66
Hotel 594 642 782 47 79 77
Retail 449 623 938 42 46 137
Industrial 181 228 267 9 13 69
Other 45 108 116 26 33 41
------ ------ ------ ------ ----- -----
Total commercial 3,474 4,854 6,689 309 404 1,031
Agricultural 574 562 673 12 14 18
Residential - - 3 - - -
------ ------ ------ ------ ----- -----
Total $ 4,048 $ 5,416 $ 7,365 $ 321 $ 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. 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. The operations of the
Aetna P&C Businesses are not included in this discussion. See "Property &
Casualty Insurance Services - Pending Acquisition."
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
49
<PAGE>
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.
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
regularly 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 46
for a more complete discussion of reserving methodology.
For a reconciliation of beginning and ending reserve liability balances
for 1995, 1994 and 1993, see Note 11 of Notes to Consolidated Financial
Statements. The table on page 51 shows the development of the estimated
reserves for the 10 years prior to 1995, 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 51, 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"), were $(5) million, $(24) million and $32
million for the years 1995, 1994 and 1993, respectively.
Discounting
The liability for losses for certain long-term disability payments under
workers' compensation insurance has been discounted by $528 million at
December 31, 1995 using a maximum interest rate of 5%. The corresponding
amounts of discount for calendar years 1994 and 1993 were $509 million and $610
million, respectively.
50
<PAGE>
<TABLE><CAPTION>
Analysis of Combined Property-Casualty Loss and Loss Adjustment
Expense Development (excluding accident and health business)
(in millions)
Year Ended December 31,
-----------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Reserves for Claims and Claim Adjustment Expenses
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Originally Estimated $5,475 $6,658 $7,644 $8,116 $8,947 $9,239 $9,406 $9,872 $10,190 $10,251 $10,102
Cumulative Amount Paid as of
- ----------------------------
One year later 1,753 1,839 2,376 2,146 2,430 2,418 2,136 2,206 1,903 1,852
Two years later 2,748 3,261 3,631 3,632 3,992 3,932 3,584 3,556 3,221
Three years later 3,737 4,075 4,648 4,706 5,095 4,993 4,596 4,562
Four years later 4,258 4,760 5,402 5,487 5,878 5,755 5,375
Five years later 4,732 5,303 5,978 6,080 6,481 6,349
Six years later 5,130 5,735 6,443 6,557 6,966
Seven years later 5,459 6,109 6,831 6,963
Eight years later 5,784 6,445 7,170
Nine years later 6,086 6,752
Ten years later 6,367
Reserves Reestimated as of
- --------------------------
One year later 5,863 6,799 7,858 8,292 9,099 9,358 9,446 10,014 9,941 10,024
Two years later 6,135 7,078 8,051 8,497 9,220 9,470 9,756 10,116 9,890
Three years later 6,376 7,292 8,254 8,698 9,408 9,898 10,042 10,142
Four years later 6,665 7,569 8,497 8,912 9,954 10,327 10,153
Five years later 6,922 7,765 8,746 9,489 10,425 10,475
Six years later 7,136 8,021 9,334 9,974 10,615
Seven years later 7,368 8,637 9,817 10,149
Eight years later 7,951 9,079 9,959
Nine years later 8,422 9,245
Ten years later 8,540
Cumulative Deficiency
(Redundancy) 3,065 2,587 2,315 2,033 1,668 1,236 747 270 (300) (227)
Gross liability - end of year $13,872 $14,715
Reinsurance recoverable 3,621 4,613
----- -----
Net liability - end of year $10,251 $10,102
====== ======
Gross reestimated liability - latest $14,014
Reestimated reinsurance recoverable - latest 3,990
-----
Net reestimated liability - latest $10,024
======
Gross cumulative deficiency (redundancy) $142
===
</TABLE>
51
<PAGE>
The data in the above table is presented in accordance with reporting
requirements of the Commission. Care must be taken to avoid misinterpretation
by those unfamiliar with such information or familiar with other data commonly
reported by the insurance industry. The above data is not "accident year" data,
but rather a display of 1985-1995 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 1985 included $4 million for a loss which is finally settled in
1995 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 1985-1994 shown above.
A substantial portion of the cumulative deficiencies in each of the years
1985-1993 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.
See "Property & Casualty Insurance Services--Property-Casualty Commercial
Lines."
General conditions and trends that have affected the development of these
liabilities in the past will not necessarily recur in the future; however,
deficiencies will occur in the future due to the discount on the workers'
compensation reserves. Therefore, it would be difficult to develop meaningful
extrapolation of estimated future redundancies or deficiencies in loss reserves
from the data in the table on page 51.
A significant portion of National business is underwritten with
retrospectively rated insurance policies in which the ultimate cost of insurance
for a given year is dependent on the loss experience of the insured. The above
table 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 ($2.6 billion) of net reserves.
Statutory Combined Ratios
Statutory combined ratios are a measure of property-casualty underwriting
results. The combined ratio is the sum of (i) the ratio of incurred losses and
loss adjustment expenses to net premiums earned, (ii) the ratio of underwriting
expenses incurred to net premiums written and, where applicable, the ratio of
dividends to policyholders to net premiums earned. The
52
<PAGE>
ratios are computed based on statutory accounting practices, not generally
accepted accounting principles. A combined ratio under 100% generally indicates
an underwriting profit; a combined ratio over 100% generally indicates an
underwriting loss. However, investment income, federal income taxes and other
non-underwriting income or expenses are not reflected in the combined ratio.
The profitability of property-casualty insurance companies depends on income
from underwriting, investment and service operations. Lines of business where
claims are paid our over a longer period of time, such as workers'
compensation, also provide investment income over a longer period of time and
therefore can be profitable at higher combined ratios than lines where claims
are paid out over a shorter period. Insurers with a high proportion of long-
tail policies will generally have higher combined ratios than insurers with
more short-tail business.
The 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,
-----------------------
1995 1994 1993
---- ---- ----
Personal Lines
Losses and loss adjustment expenses 74.5 71.0 71.2
Other underwriting expenses 29.9 29.4 33.2
---- ---- ----
Combined Personal Lines 104.4 100.4 104.4
Commercial Lines
Losses and loss adjustment expenses 80.6 100.0 98.2
Other underwriting expenses 24.4 24.7 27.1
---- ---- ----
Combined before policyholder dividends 105.0 124.7 125.3
Combined Commercial Lines 106.3 123.0 126.6
Total Personal and Commercial Lines
Losses and loss adjustment expenses 78.2 88.7 88.2
Other underwriting expenses 26.4 26.5 29.2
---- ---- ----
Combined before policyholder dividends 104.6 115.2 117.4
Combined 105.4% 114.2% 118.2%
The increase in the combined ratio for Personal Lines in 1995 compared to
1994 is primarily attributable to the favorable resolution of the New Jersey
Market Transition Facility deficit in 1994, the sale of Bankers and Shippers
Insurance Company in October 1994 and to favorable loss reserve development in
1994 on prior years' business. 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. Catastrophe losses after
taxes and net of reinsurance were $12 million in 1995, $26 million in 1994, and
$14 million in 1993. Effective April 1, 1995, the Company increased the
threshold of losses incurred to qualify a specific event as a catastrophe.
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. Personal Lines has implemented various programs over the past several
years in order to improve financial results, including expense reductions, the
termination of contracts of underperforming agents and the
53
<PAGE>
withdrawal from markets where Personal Lines had a small market share or saw
little potential for long-term profitable growth.
In 1993, 1994 and 1995, 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.
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 1995, asbestos and environmental claims continued to negatively
impact other liability lines. The combined impact from these claims added 4.9,
4.6 and 20.3 percentage points to the total 1995, 1994 and 1993 Commercial Lines
combined ratio, respectively. Asbestos claims incurred totaled $43 million in
1995, $51 million in 1994 and $229 million in 1993. Environmental claims
incurred were $56 million in 1995, $49 million in 1994 and $190 million in 1993.
The 1994 combined ratio includes statutory reserve increases for environmental
claims and a reduction of ceded reinsurance balances amounting to $225 million.
In 1993, reserve strengthening for environmental and asbestos-related claims
amounted to $325 million and was included in incurred losses. These adjustments
increased the 1994 Commercial Lines combined ratio by an additional 10.5
percentage points and increased the 1993 ratio by 14.1 percentage points.
Excluding the effects of the adjustment, the 1995 combined ratio improvement as
compared to 1994 is attributable to improved loss trends, principally in the
workers' compensation line of business.
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 following table 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.
54
<PAGE>
Schedule of Premiums to Surplus Ratios (Statutory Basis)
(Including Accident and Health Business)
(in millions)
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
A. Net written premiums $3,621 $3,862 $3,902
B. Capital and surplus 2,661 2,062 2,454
Ratio of premiums to capital and surplus
(A divided by B) 1.36 1.87 1.59
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
improvement in the 1995 ratio primarily reflects the higher statutory capital
and surplus level, which is due to improved statutory earnings and unrealized
investment gains.
CORPORATE AND OTHER OPERATIONS
In addition to its four business segments, the Company's Corporate and
Other segment consists of unallocated expenses and earnings primarily related to
interest, corporate administration, and certain corporate investments. In 1995,
this segment also includes the Company's interest in RCM. This segment has also
included the Company's 27% equity interest in old Travelers (1993) and lines of
business retained from the sale in 1993 of Voyager Group, Inc. and its
affiliates ("Voyager") (1993).
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 $26.2 billion at December 31, 1995 as compared to $22.5 billion at
December 31, 1994, and $24.5 billion at December 31, 1993. Pursuant to an
agreement dated as of December 13, 1995, the Company has agreed to sell 100% of
its interest in RCM. The closing of the sale is subject to regulatory and other
approvals and is expected to occur in mid-1996.
In December 1994, the Company sold American Capital Management &
Research, Inc., a mutual fund company, to The Van Kampen Merritt Companies, Inc.
("VKM"). In connection with the transaction, a subsidiary of the Company
purchased approximately 4.9% of the issued and outstanding common stock of VK/AC
Holding, Inc. ("VK/AC Holding"), the parent company of VKM. 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
55
<PAGE>
beginning in December 1999. Certain subsidiaries of the Company continue to
provide services to the Common Sense(R) II Funds.2 See "Life Insurance
Services -- Primerica Financial Services."
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 any one of which would have a materially adverse effect
on the Company, and no one customer or group of affiliated customers accounts
for as much as 10% of the Company's consolidated revenues.
At December 31, 1995, the Company had approximately 47,600 full-time and
2,400 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 1 and 13 of Notes to Consolidated Financial
Statements.
Financial Information about Industry Segments
For financial information regarding industry segments of the Company, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and Note 4 of Notes to Consolidated Financial Statements.
- --------------------------------------
2 Common Sense is a registered trademark of VK/ACAM.
56
<PAGE>
Executive Officers of the Company
The current executive officers of the Company are indicated below.
Periods of offices held include offices with the Company's predecessor, CCC.
Ages are given as of March 6, 1996.
<TABLE><CAPTION>
Officer
Name Age Positions Since
---- --- --------- -----
<S> <C> <C> <C>
Sanford I. Weill 62 Chairman of the Board 1986
and Chief Executive Officer
James Dimon 39 President and Chief Operating Officer of 1986
the Company; Chairman and Chief
Executive Officer of SB Holdings and SBI
Jeffrey B. Lane 53 Vice Chairman 1996
Robert I. Lipp 57 Vice Chairman of the Company; Chief 1986
Executive Officer of TAP and of TIGI
Joseph Plumeri, II 52 Vice Chairman of the Company; Chief 1994
Executive Officer of PFS
Michael A. Carpenter 48 Executive Vice President; Chairman, Chief 1995
Executive Officer and President
of TLAC; President and Chief Executive
Officer of TIC
Irwin R. Ettinger 57 Executive Vice President and Chief 1987
Accounting Officer
Charles O. Prince, III 46 Executive Vice President, General Counsel 1986
and Secretary
Jay S. Fishman 43 Senior Vice President of the Company; 1991
Vice Chairman and Chief Administrative
Officer of TAP; Vice Chairman of TIGI
Heidi G. Miller 42 Senior Vice President and Chief Financial 1992
Officer
Marc P. Weill 39 Senior Vice President and Chief Investment 1991
Officer
Donald R. Cooper 55 Chief Actuary 1995
</TABLE>
Sanford I. Weill has been a director of the Company since 1986. He has
been Chairman of the Board and Chief Executive Officer of the Company and its
predecessor, CCC, since 1986; he was also its President from 1986 until 1991.
He was President of American Express Company from 1983 to 1985; Chairman of the
Board and Chief Executive Officer of American Express Insurance Services, Inc.
from 1984 to 1985; Chairman of the Board and Chief Executive Officer, or a
principal executive officer, of Shearson Lehman Brothers Inc. from 1965 to 1984;
Chairman of the Board of Shearson Lehman Brothers Holdings Inc. from 1984 to
1985; and a founding partner of Shearson's predecessor
57
<PAGE>
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 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 on
the Board of Overseers of Memorial Sloan-Kettering Cancer Center. He is a
member of Cornell University's Johnson Graduate School of Management Advisory
Board and a Board of Trustees Fellow. Mr. Weill is Chairman of the National
Academy Foundation. He has served as Chairman of the Joint Mayoral/City Council
Commission on Early Child and Child Care Programs during the Dinkins
Administration.
Mr. Dimon has been a director and the President of the Company since
September 1991. He has been the Chief Operating Officer of the Company since
January 1994, and in January 1996 he became Chief Executive Officer of SB
Holdings and SBI. He is also a director, Chairman of the Board and member of
the executive committee of SBI. He served as Chief Financial Officer of the
Company from May 1988 to June 1995, and as Chief Operating Officer of SB
Holdings and SBI from March 1994 to January 1996. From May 1988 to September
1991, Mr. Dimon was Executive Vice President of the Company, and he was Senior
Executive Vice President and Chief Administrative Officer of SBI from 1990 to
1991. From 1986 to 1988, Mr. Dimon served as 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. Lane became a Vice Chairman of the Company in January 1996. He has
served as a Director of SBI from January 1991 through March 1996 and as a
Director of SB Holdings from November 1993. Mr. Lane served as Vice Chairman of
SBI from January 1991 through January 1996 and as Vice Chairman of SB Holdings
from November 1993 through January 1996. He joined the Company in 1990. Prior
to joining the Company in 1990, Mr. Lane was President and Chief Operating
Officer of Shearson Lehman Brothers Inc.
Mr. Lipp has been a director of the Company since 1991, and is a Vice
Chairman of the Company. 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., and in 1996 he became Chairman of the Board, Chief
Executive Officer and a director of TAP. 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.
58
<PAGE>
Mr. Plumeri became a Vice Chairman of the Company in August 1994 and has
been Chief Executive Officer of PFS since October 1994. He joined the Company
in August 1993, serving as President of SBI from that time through July 1994.
Mr. Plumeri had worked for Shearson Lehman Brothers Inc. or its predecessors for
over 25 years, in various 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. Carpenter joined the Company in January 1995 as Executive Vice
President, and also serves as Chairman, Chief Executive Officer and President of
TLAC and President and Chief Executive Officer of TIC. From January 1989 to
June 1994, Mr. Carpenter was Chairman of the Board, President and Chief
Executive Officer of Kidder, Peabody Group, Inc., an investment banking and
brokerage company that was a wholly owned subsidiary of General Electric
Company. Prior thereto, he served as Executive Vice President of General
Electric Capital Corporation and Vice President of General Electric Company.
Mr. Ettinger became an Executive Vice President in January 1996. Prior
to joining CCC as Senior Vice President in October 1987, he was Partner in
charge of the Tax Department of Arthur Young and Company's New York offices.
Mr. Prince has been General Counsel of the Company or its predecessor
since 1983, and served as a Senior Vice President from 1986 until January 1996,
when he became an Executive Vice President.
Mr. Fishman has been Senior Vice President of the Company since October
1991. He has also served as Vice Chairman of The Travelers Insurance Group Inc.
since September 1995 and as Chief Financial Officer of that company since
December 1993. In January 1996, he became Vice Chairman and Chief
Administrative Officer of TAP. Mr. Fishman was Treasurer of the Company from
October 1991 to December 1993. Prior thereto, he held various other positions
with the Company and its subsidiaries from October 1989, when he joined the
Company from Shearson Lehman Brothers Inc., where he was Senior Vice President
of Merchant Banking.
Ms. Miller has been Chief Financial Officer and Senior Vice President of
the Company since June 1995. She also serves as Chief Credit Officer of SBI, a
position she has held since September 1994. Ms. Miller joined the Company in
February 1992 as a Vice President. Prior thereto, she was a Managing Director
in the Emerging Markets Division of Chemical Bank, a position she held from 1987
to 1992.
Marc P. Weill has been Senior Vice President and Chief Investment Officer
of the Company since January 1992. He also serves as a director, Chairman of
the Board and President of Travelers Asset Management International Corporation,
a registered investment advisor. Mr. Weill has held various other positions
with the Company and its subsidiaries since January 1991. He is the son of
Sanford I. Weill.
59
<PAGE>
Mr. Cooper has been Chief Actuary of the Company since March 1995 and has
been Vice Chairman of Travelers Insurance Holdings Inc. since October 1990. He
also serves as Chairman of the Board of both American Health and Life Insurance
Co. and Resource Deployment, Inc., subsidiaries of the Company.
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."
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 statutory underwriting
results. The combined ratio is the sum of (a) Loss Ratio -- the ratio of losses
and loss adjustment expenses to net earned premiums, and (b) Expense Ratio --
the ratio of underwriting expenses to net written premiums. When the combined
ratio is under 100%, underwriting results are generally profitable; when the
ratio is over 100%, underwriting results are generally unprofitable.
Underwriting results do not include investment income, which may make a
significant contribution to overall profitability.
Contractholder Funds -- Receipts from the issuance of universal life,
pension investment and certain individual annuity contracts. Such receipts are
considered deposits on investment contracts that do not have substantial
mortality or morbidity risks.
Deductible -- The amount of loss that an insured retains.
Deferred Acquisition Costs -- Commissions and other selling expenses that
vary with and are directly related to the production of business. These
acquisition costs are deferred and amortized to achieve a matching of revenues
and expenses when reported in financial statements prepared in conformity with
GAAP.
60
<PAGE>
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."
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 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 (alternative market) -- Risks that are not insurable
in the voluntary market due to either the level of risk or pricing. Alternative
markets are largest for lines in which state governments or other agencies
mandate coverage such as workers' compensation. Generally states provide
residual market plans that are designed to allocate
61
<PAGE>
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.
Mortality -- The rate at which people die.
Policy Loan -- A loan made by an insurance company to a policyholder on
the security of the cash value of the policy. Policy loans offset benefits
payable to policyholders.
Pool -- Syndicate or association of insurance companies organized to
underwrite a particular risk, usually with high limits of exposure. Each member
shares in premiums, losses and expenses, according to a predetermined agreement.
Reinsurance -- The acceptance by one or more insurers, called reinsurers,
of all or a portion of the risk underwritten by another insurer (the ceding
company) who has directly written the coverage. However, the legal rights of
the insured generally are not affected by the reinsurance transaction.
Premium Equivalents -- Premium equivalents represent estimates of premiums
that customers would have been charged under a fully insured arrangement, based
on expected losses associated with non-risk-bearing components of each account,
as determined in the pricing process. Premium equivalents are indicative of the
volume of business handled by an insurer in servicing relationships. Premium
equivalents do not represent actual premium revenues.
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.
62
<PAGE>
In some cases, they are established to absorb business that will not be written
voluntarily by insurers.
Retention -- The amount of exposure an insurance company retains on any
one risk or group of risks.
Retrospective Rating -- A plan or method which permits adjustment of the
final premium or commission on the basis of the actual loss experience, subject
to certain minimum and maximum limits.
Salvage -- Amount received by an insurer from the sale of property
(usually damaged) on which the insurer has paid a total loss to the insured.
For example, when an insurer has paid the insured the actual cash value of an
automobile damaged (usually extensively) by collision, then the insurer takes
title to and sells the damaged automobile for its own account. Salvage is
applied by insurance companies to reduce the amount of loss paid.
Self-Insured Retentions -- That portion of the risk retained by a person
for its own account. Generally, that person retains an amount of first loss for
its own account and purchases an excess of loss cover to protect itself for
losses above its retention.
Separate Accounts -- Funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
contractholders. The assets of these separate accounts are legally segregated
and not subject to claims that arise out of any other business of the insurance
company.
Servicing Carrier -- An insurance company that provides various services
including policy issuance, claims adjusting and customer service for insureds in
a reinsurance pool, for a fee.
Statutory Accounting Practices -- Those accounting practices prescribed or
permitted by the National Association of Insurance Commissioners or an 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
63
<PAGE>
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.
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.
As of December 31, 1995, leasehold interests of Travelers Insurance
included a total of approximately 4,950,000 square feet of office space at about
247 locations throughout the United States. TIC owns buildings containing
approximately 1,426,000 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.
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, located at 388 and 390 Greenwich Street, with a
total of approximately 2.3 million square feet. 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 obligation expires in December 1996.
64
<PAGE>
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.
Smith Barney
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.
The actions were consolidated under the title In re: Hyperion Securities
Litigation. SBI's motion to dismiss the claims was granted in July 1995. In
August 1995, an appeal was filed in the U.S. Court of Appeals for the Second
Circuit. The Company is awaiting a decision on the appeal.
For information concerning actions filed against a number of broker-
dealers, including SBI, relating to trading practices on the National
Association of Securities Dealers Automated Quotation system, see the
description that appears in the third paragraph of page 16 of the Quarterly
Report on Form 10-Q of Smith Barney Holdings Inc. for the quarter ended
September 30, 1994, which description is incorporated by reference herein. A
copy of the pertinent paragraph is included as an exhibit to this Form 10-K. A
consolidated amended complaint was filed in December 1994. In August 1995, the
defendants' motion to dismiss was granted with leave to replead, and a
consolidated amended complaint was filed.
Travelers Insurance
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. Hearings
before a panel of the American Arbitration Association are scheduled to begin in
May 1996.
65
<PAGE>
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. An appeal has been filed in the North Carolina Court of Appeals.
Certain of the subsidiaries that the Company acquired in the Merger are
involved in defending against claims asserting alleged injuries and damages from
asbestos and other hazardous and toxic substances. For additional information
with respect to these claims, reference is made to the discussion of asbestos
and environmental claims contained on pages 29 through 31 of this Form 10-K.
Other
For information concerning a purported class action against Primerica
Inc. and others in connection with the purchase of oil and gas rights owned by
Basic Energy and Affiliated Resources Inc. ("BEAR"), see the description that
appears in the second paragraph of page 30 of the Company's filing on Form 10-Q
for the quarter ended September 30, 1995, 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 filed a motion to dismiss this
action.
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. These also include numerous
matters in which the Company's insurance subsidiaries are named, arising in the
normal course of their business. In the opinion of the Company's management,
none of these actions is expected to have a material adverse effect on the
consolidated financial condition of the Company and its subsidiaries.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
66
<PAGE>
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.
In January 1996, the Company's Board of Directors declared a
three-for-two split in the Company's common stock, in the form of a 50% stock
dividend, payable in May 1996 contingent upon approval by the Company's
stockholders of an increase in the Company's common share authorization to 1.5
billion shares at the 1996 Annual Meeting. The amounts below do not reflect
the stock split.
<TABLE><CAPTION>
1994 1995 1996
---------------------------------- --------------------------------- -----
1st Q 2nd Q 3rd Q 4th Q 1st Q 2nd Q 3rd Q 4th Q 1st Q*
----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock
Price
High $43.125 $37.125 $37.125 $35.000 $39.875 $45.000 $53.375 $63.875 $70.500
Low $34.375 $31.750 $31.000 $30.375 $32.375 $37.875 $44.000 $48.875 $57.000
Dividends per
Share of
Common Stock $.125 $.150 $.150 $.150 $.20 $.20 $.20 $.20 $.225
_______________________________
* Through March 1, 1996.
</TABLE>
At March 6, 1996, the Company had approximately 57,200 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."
67
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
See "Five-Year Summary of Selected Financial Data" on page 30 of the
Company's 1995 Annual Report to Stockholders (the "1995 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 31 of the 1995 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page F-1
hereof. There is also incorporated by reference herein in response to this Item
the material under the caption "Selected Quarterly Financial Data (unaudited)"
on page 69 of the 1995 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 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 24, 1996, filed
with the Securities and Exchange Commission (the "Proxy Statement"),
incorporated herein by reference. For information on executive officers, see
Item 1, "Business -- Other Information -- Executive Officers of the Company"
herein.
68
<PAGE>
Item 11. EXECUTIVE COMPENSATION.
See the material under the caption "Executive Compensation" of the Proxy
Statement, incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
See the material under the captions "Voting Rights" and "Security
Ownership of Management" of the Proxy Statement, incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the material under the captions "Election of Directors" and
"Executive Compensation" of the Proxy Statement, incorporated herein by
reference.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated Financial
Statements and Schedules on page F-1 hereof. Also filed as a
part of this report are the preacquisition consolidated balance
sheets of The Travelers Corporation and Subsidiaries as of
December 31, 1993 and 1992, and the related consolidated
statements of operations and retained earnings and cash flows
for each of the three years in the period ended December 31,
1993, together with the notes thereto and the related report of
Independent Accountants. See Exhibit 99.01.
(2) Financial Statement Schedules. See Index to Consolidated
Financial Statements and Schedules on page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On October 12, 1995, the Company filed a Current Report on Form 8-K
dated October 2, 1995, reporting under Item 2 thereof the disposition
of its interest in The MetraHealth Companies, Inc.
69
<PAGE>
On December 4, 1995, the Company filed a Current Report on Form 8-K
dated November 28, 1995, reporting under Item 5 thereof its agreement
to purchase the domestic property and casualty insurance operations of
Aetna.
No other reports on Form 8-K were filed during the fourth quarter of
1995; however, on January 19, 1996, the Company filed a Current Report
on Form 8-K dated January 19, 1996 (which was amended by a Form 8-K/A-
1 filed February 6, 1996), including under Item 5 thereof certain
financial information related to the domestic property and casualty
insurance operations to be acquired by the Company from Aetna; and on
January 23, 1996, the Company filed a Current Report on Form 8-K dated
January 16, 1996, reporting under Item 5 thereof the results of its
operations for the three months and twelve months ended December 31,
1995 and certain other selected financial data.
70
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
3.01 Restated Certificate of Incorporation of
Travelers Group Inc. (formerly The
Travelers Inc.), (the "Company") and
Certificate of Designation of Cumulative
Adjustable Rate Preferred Stock, Series
Y, and Certificate of Amendment to the
Restated Certificate of Incorporation,
incorporated by reference to Exhibit 3.01
to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March
31, 1995 (File No. 1-9924) (the
"Company's March 31, 1995 10-Q").
3.02 By-Laws of the Company as amended through Electronic
January 24, 1996.
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* Stock Option Plan of the Company, as
amended through September 27, 1995,
incorporated by reference to Exhibit
10.01 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended
September 30, 1995 (File No. 1-9924) (the
"Company's September 30, 1995 10-Q").
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 Annual Report on Form 10-K for
the fiscal year ended December 31, 1993
(File No. 1-9924) (the "Company's 1993
10-K).
10.04* 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.
71
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
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
Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (File No. 1-
9924) (the "Company's 1992 10-K").
10.06.1* 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* The Travelers Inc. Executive Performance Electronic
Compensation Plan, effective April 27,
1994.
10.08.1* Capital Accumulation Plan of the Company Electronic
(the "CAP Plan"), as amended to November
30, 1995.
10.08.2* Amendment No. 9 to the CAP Plan. Electronic
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.
10.10* The Travelers Inc. Deferred Compensation
and Partnership Participation Plan,
incorporated by reference to Exhibit
10.31 to the Company's Annual Report on
Form 10-K/A-1 for the fiscal year ended
December 31, 1994 (File No. 1-9924).
10.11 Stock Purchase Agreement dated as of
November 28, 1995, between The Travelers
Insurance Group Inc. and Aetna Life and
Casualty Company, incorporated by
reference to Exhibit 10.1 to Aetna Life
and Casualty Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1995 (File No. 1-5704).
72
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.12.1* 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").
10.12.2* Amendment to the RFG Employment
Agreement, incorporated by reference to
Exhibit 10.17.2 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").
10.13* 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.
10.14* 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.
10.15* 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.
10.16* Employment Agreement effective January 1,
1995 between the Company and Michael A.
Carpenter, incorporated by reference to
Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 1-9924)
(the "Company's 1994 10-K").
10.17.1* 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").
73
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.17.2* Amendment to The Travelers Corporation
1982 Stock Option Plan, incorporated by
reference to Exhibit 10.23.2 to the
Company's 1994 10-K.
10.18.1* 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").
10.18.2* Amendment to The Travelers Corporation
1988 Stock Incentive Plan, incorporated
by reference to Exhibit 10.24.2 to the
Company's 1994 10-K.
10.19* 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).
10.20* 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.
10.21* 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.
10.22* The Travelers Severance Plan of Officers,
as amended September 23, 1993,
incorporated by reference to Exhibit
10.30 to the Company's 1993 10-K.
10.23* 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).
10.24* Employment Agreement dated as of December
30, 1994, between SBI and Joseph J.
Plumeri II, incorporated by reference to
Exhibit 10.30 to the Company's 1994 10-K.
74
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
11.01 Computation of Earnings Per Share. Electronic
12.01 Computation of Ratio of Earnings to Fixed Electronic
Charges.
13.01 Pages 30 through 70 of the 1995 Annual Electronic
Report to Stockholders of the Company
(pagination of exhibit does not
correspond to pagination in the 1995
Annual Report to Stockholders).
21.01 Subsidiaries of the Company. Electronic
23.01 Consent of KPMG Peat Marwick LLP, Electronic
Independent 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 P
State Insurance Regulatory Authorities. Paper
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 Electronic
Travelers Corporation and Subsidiaries as
of December 31, 1993 and 1992, and the
related consolidated statements of
operations and retained earnings and cash
flows for each of the three years in the
period ended December 31, 1993, together
with the notes thereto and the related
report of Independent Accountants.
99.02 The fourth paragraph of page 26 of the Electronic
Company's September 30, 1993 10-Q (File
No. 1-9924).
99.03 The third paragraph of page 16 of the Electronic
Quarterly Report on Form 10-Q of Smith
Barney Holdings Inc. for the fiscal
quarter ended September 30, 1994 (File
No. 1-12484).
99.04 The paragraph that begins on page 2 and Electronic
ends on page 3 of the Company's Current
Report on Form 8-K dated March 1, 1994
(File No. 1-9924).
75
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
99.05 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 10-Q (File No. 1-9924).
99.06 The second paragraph of page 30 of the Electronic
Company's September 30, 1995 10-Q (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 1995 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 (although no charge will be made for the 1995
Annual Report on Form 10-K) to security holders who make written request
therefor to Corporate Communications and Investor Relations Department,
Travelers Group Inc., 388 Greenwich Street, New York, New York 10013.
- -------------------
* Denotes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of Form
10-K.
76
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day of
March, 1996.
TRAVELERS GROUP INC.
(Registrant)
By: /s/ Sanford I. Weill
. . . . . . . . . . . . . . . . . . . .
Sanford I. Weill, Chairman of
the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on the 27th day of March, 1996.
Signature Title
--------- -----
/s/ Sanford I. Weill
. . . . . . . . . . . . . . Chairman of the Board, Chief Executive
Sanford I. Weill Officer (Principal Executive Officer) and
Director
/s/ Heidi G. Miller
. . . . . . . . . . . . . . Senior Vice President and Chief Financial
Heidi G. Miller Officer (Principal Financial Officer)
/s/ Irwin R. Ettinger
. . . . . . . . . . . . . . Executive Vice President and Chief
Irwin R. Ettinger Accounting Officer (Principal Accounting
Officer)
. . . . . . . . . . . . . . Director
C. Michael Armstrong
*
. . . . . . . . . . . . . . Director
Kenneth J. Bialkin
77
<PAGE>
Signature Title
--------- -----
*
. . . . . . . . . . . . . . Director
Edward H. Budd
*
. . . . . . . . . . . . . . Director
Joseph A. Califano, Jr.
*
. . . . . . . . . . . . . . Director
Douglas D. Danforth
*
. . . . . . . . . . . . . . Director
Robert F. Daniell
/s/ James Dimon
. . . . . . . . . . . . . . Director
James Dimon
*
. . . . . . . . . . . . . . Director
Leslie B. Disharoon
*
. . . . . . . . . . . . . . Director
Gerald R. Ford
*
. . . . . . . . . . . . . . Director
Ann Dibble Jordan
*
. . . . . . . . . . . . . . Director
Robert I. Lipp
*
. . . . . . . . . . . . . . Director
Dudley C. Mecum
78
<PAGE>
Signature Title
--------- -----
*
. . . . . . . . . . . . . . Director
Andrall E. Pearson
*
. . . . . . . . . . . . . . Director
Frank J. Tasco
. . . . . . . . . . . . . . Director
Linda J. Wachner
*
. . . . . . . . . . . . . . Director
Joseph R. Wright, Jr.
*
. . . . . . . . . . . . . . Director
Arthur Zankel
*By: /s/ James Dimon
. . . . . . . . . . . .
James Dimon
Attorney-in-fact
79
<PAGE>
Travelers Group Inc. and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES*
_________________________________
<TABLE><CAPTION>
Incorporated
By Reference from
the Company's 1995
Annual Report to
Page Stockholders at
Herein Page Indicated
------ ------------------
<S> <C> <C>
Independent Auditors' Report F-2 70
Consolidated Statement of Income for the year ended
December 31, 1995, 1994 and 1993 44
Consolidated Statement of Financial Position at
December 31, 1995 and 1994 45
Consolidated Statement of Changes in Stockholders'
Equity for the year ended December 31, 1995, 1994 and 1993 46
Consolidated Statement of Cash Flows for the year ended
December 31, 1995, 1994 and 1993 47
Notes to Consolidated Financial Statements 48-69
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
</TABLE>
*Schedules not listed are omitted as not applicable or not required by
Regulation S-X.
F-1
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Travelers Group Inc.:
Under date of January 16, 1996, we reported on the consolidated statements of
financial position of Travelers Group Inc. (formerly The Travelers Inc.) and
subsidiaries as of December 31, 1995 and 1994, 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, 1995, as contained in
the 1995 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, 1995. In connection with
our audits of the aforementioned consolidated financial statements, we also
audited the related financial statement schedules as listed in the
accompanying index. These financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for certain investments in debt and equity
securities in 1994 and its methods of accounting for postretirement benefits
other than pensions and accounting for postemployment benefits in 1993.
/s/ KPMG Peat Marwick LLP
New York, New York
January 16, 1996
F-2
<PAGE>
SCHEDULE I
Travelers Group Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Income
<TABLE><CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income:
- -------
Equity in income of old Travelers $ - $ - $126
Other (principally realized investment
gains (losses)) (5) 3 6
----- ----- ---
Total (5) 3 132
----- ----- ---
Expenses:
- ---------
Interest 129 120 77
Other 104 87 46
----- ----- ---
Total 233 207 123
----- ----- ---
Pre-tax income (loss) (238) (204) 9
Income tax benefit 85 82 35
----- ----- ---
Income (loss) before equity in net income of subsidiaries (153) (122) 44
Equity in net income of subsidiaries from continuing operations 1,781 1,279 907
Equity in net income of subsidiaries from
discontinued operations 206 169 -
Cumulative effect of changes in accounting principles
(including $17 in 1993 applicable to subsidiaries) - - (35)
----- ----- ---
Net income $1,834 $1,326 $916
===== ===== ===
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-3
<PAGE>
SCHEDULE I
Travelers Group Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Financial Position
<TABLE><CAPTION>
December 31,
-----------------------
1995 1994
----- ----
Assets
- ------
<S> <C> <C>
Investment in subsidiaries at equity $13,743 $10,592
Advances to and receivables from subsidiaries 220 96
Cost of acquired businesses in excess of net assets 493 508
Other (principally investments in 1995) 237 39
------ ------
$14,693 $11,235
------ ------
Liabilities
- -----------
Short-term borrowings $ - $ 101
Long-term debt 2,042 1,377
Advances from and payables to subsidiaries 262 285
Other liabilities 285 433
------ ------
2,589 2,196
------ ------
Redeemable preferred stock (held by subsidiary) 226 261
------ ------
ESOP Preferred stock - Series C 235 235
Guaranteed ESOP obligation (67) (97)
------ ------
168 138
------ ------
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: 1995 - 368,171,649 and
1994 - 368,195,609) 4 4
Additional paid-in capital 6,785 6,655
Retained earnings 5,503 4,199
Treasury stock, at cost (1995 - 51,924,410 shares;
1994 - 51,684,618 shares) (1,835) (1,553)
Unrealized gain (loss) on investment securities and other, net 453 (1,465)
----- -------
11,710 8,640
------ -------
$14,693 $ 11,235
====== =======
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-4
<PAGE>
SCHEDULE I
Travelers Group Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Cash Flows
<TABLE><CAPTION>
Year Ended December 31,
---------------------------------------
1995 1994 1993
---- ---- ----
Cash flows from operating activities
- ------------------------------------
<S> <C> <C> <C>
Net income $1,834 $1,326 $ 916
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in net income of subsidiaries (1,987) (1,448) (907)
Dividends received from subsidiaries, net 508 1,409 349
Advances (to) from subsidiaries, net (147) (411) 45
Other, net 19 377 61
----- ------ -----
Net cash provided by (used in) operating activities 227 1,253 464
----- ------ -----
Cash flows from investing activities
- ------------------------------------
Capital contribution to subsidiaries - - (1,100)
----- ------ ------
Net cash provided by (used in) investing activities - - (1,100)
----- ------ ------
Cash flows from financing activities
- ------------------------------------
Dividends paid (341) (267) (139)
Issuance of common stock - - 329
Treasury stock acquired (418) (543) (58)
Issuance of long-term debt 700 - 450
Payments and redemptions of long-term debt - (93) (35)
Net change in short-term borrowings (101) (228) 258
Redemption of redeemable preferred stock
(held by subsidiary) (35) (100) (100)
Other, net (32) (22) (69)
------ ------- -------
Net cash provided by (used in) financing activities (227) (1,253) 636
------ ------ ------
Change in cash $ - $ - $ -
======= ======= =======
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the period for interest $ 112 $ 102 $ 68
====== ====== ======
Cash received during the period for taxes $ 155 $ 268 $ 129
====== ====== ======
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying
notes to the condensed financial information of Registrant.
F-5
<PAGE>
SCHEDULE I
Notes to Condensed Financial Statements of Registrant
1. Principles of Consolidation
---------------------------
The accompanying financial statements include the accounts of Travelers
Group Inc. (the Parent) and on an equity basis its subsidiaries and
affiliates and should be read in conjunction with the Consolidated
Financial Statements and notes thereto.
2. 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:
(millions)
1996 $ 100
1997 $ 185
1998 $ 250
1999 $ 100
2000 $ 200
3. Supplementary Disclosure of Non-Cash Investing and Financing Activities
-----------------------------------------------------------------------
During 1994, the Parent issued $261 million of redeemable preferred stock to
various subsidiaries in exchange for an equivalent value of Travelers Group
Inc. common stock previously held by these subsidiaries. This activity was
recorded as a non-cash capital contribution to subsidiaries by the Parent.
During 1995, $35 million of this redeemable preferred stock was repurchased
and retired.
F-6
<PAGE>
SCHEDULE III
TRAVELERS GROUP INC. AND SUBSIDIARIES
Supplementary Insurance Information
(In millions of dollars)
<TABLE><CAPTION>
Value of Amortization
insurance in Benefits, of deferred
force and Future policy claims, policy
deferred benefits, Other policy losses acquisition costs
policy losses, claims claims and Net and and value
acquisition and loss Unearned benefits Premium investment settlement of insurance
Segment costs expenses premiums payable revenue income expenses in force
- ----------- ----------- -------------- -------- ------------ ------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
----
Life Insurance Services $1,953 $ 8,035 $ 9 $496 $1,537 $1,836 $2,173 $283
P&C Insurance Services 202 14,758 1,827 3,300 744 2,806 512
Consumer Finance Services* 17 16 330 51 139 38 51 8
Corporate and Other 1,323 75 1 7 (13)
--------------------------------------------------------------------------------------------------------
Total $2,172 $24,132 $2,166 $622 $4,977 $2,625 $5,017 $803
========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994
----
Life Insurance Services $1,923 $ 9,115 $ 103 $1,248 $1,539 $1,617 $2,091 $276
P&C Insurance Services 221 14,374 1,853 3,498 644 3,114 532
Consumer Finance Services* 19 15 320 56 115 31 43 4
Corporate and Other (8) 9 (21)
--------------------------------------------------------------------------------------------------------
Total $2,163 $23,504 $2,276 $1,304 $5,144 $2,301 $5,227 $812
========================================================================================================
<CAPTION>
Other
operating Premiums
Segment expenses written
- ----------- ---------- ---------
<S> <C> <C>
1995
----
Life Insurance Services $ 406 $1,367
P&C Insurance Services 632 3,607
Consumer Finance Services* 2 161
Corporate and Other 69 132
------------------------
Total $1,109 $5,267
========================
<S> <C> <C>
1994
----
Life Insurance Services $ 341 $1,539
P&C Insurance Services 615 3,824
Consumer Finance Services* 22 172
Corporate and Other 77
------------------------
Total $1,055 $5,535
========================
</TABLE>
* Includes credit life insurance operations.
F-7
<PAGE>
SCHEDULE IV
Travelers Group Inc. and Subsidiaries
Reinsurance
(In millions of dollars)
<TABLE><CAPTION>
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
% of
Ceded to Assumed Amount
Gross Other From Other Net Assumed
Amount Companies Companies Amount To Net
------ --------- --------- ------ -------
Year ended December 31, 1995
- ----------------------------
<S> <C> <C> <C> <C> <C>
Life insurance in force $400,622 $(134,828) $139 $265,933 0.05%
======= ======== === ======= ======
Premiums
Life insurance $1,496 $ (272) $ 1 $1,225 0.1%
Accident and health insurance 497 (87) 2 412 0.5%
Property and casualty insurance 4,302 (1,412) 450 3,340 13.5%
------ ------ --- ------
$6,295 $(1,771) $453 $4,977
===== ====== === =====
Year ended December 31, 1994
- ----------------------------
Life insurance in force $527,964 $(106,024) $4,284 $426,224 1.01%
======= ======== ===== ======= =====
Premiums
Life insurance $1,484 $ (288) $ - $1,196 - %
Accident and health insurance 513 (89) 1 425 0.2%
Property and casualty insurance 4,630 (1,529) 422 3,523 12.0%
----- ------ --- -----
$6,627 $(1,906) $423 $5,144
===== ====== === =====
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
===== ==== === =====
</TABLE>
F-8
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
3.01 Restated Certificate of Incorporation of
Travelers Group Inc. (formerly The
Travelers Inc.), (the "Company") and
Certificate of Designation of Cumulative
Adjustable Rate Preferred Stock, Series
Y, and Certificate of Amendment to the
Restated Certificate of Incorporation,
incorporated by reference to Exhibit 3.01
to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March
31, 1995 (File No. 1-9924) (the
"Company's March 31, 1995 10-Q").
3.02 By-Laws of the Company as amended through Electronic
January 24, 1996.
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* Stock Option Plan of the Company, as
amended through September 27, 1995,
incorporated by reference to Exhibit
10.01 to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended
September 30, 1995 (File No. 1-9924) (the
"Company's September 30, 1995 10-Q").
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 Annual Report on Form 10-K for
the fiscal year ended December 31, 1993
(File No. 1-9924) (the "Company's 1993
10-K).
10.04* 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.
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
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
Annual Report on Form 10-K for the fiscal
year ended December 31, 1992 (File No. 1-
9924) (the "Company's 1992 10-K").
10.06.1* 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* The Travelers Inc. Executive Performance Electronic
Compensation Plan, effective April 27,
1994.
10.08.1* Capital Accumulation Plan of the Company Electronic
(the "CAP Plan"), as amended to November
30, 1995.
10.08.2* Amendment No. 9 to the CAP Plan. Electronic
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.
10.10* The Travelers Inc. Deferred Compensation
and Partnership Participation Plan,
incorporated by reference to Exhibit
10.31 to the Company's Annual Report on
Form 10-K/A-1 for the fiscal year ended
December 31, 1994 (File No. 1-9924).
10.11 Stock Purchase Agreement dated as of
November 28, 1995, between The Travelers
Insurance Group Inc. and Aetna Life and
Casualty Company, incorporated by
reference to Exhibit 10.1 to Aetna Life
and Casualty Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1995. (File No. 1-5704).
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.12.1* 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").
10.12.2* Amendment to the RFG Employment
Agreement, incorporated by reference to
Exhibit 10.17.2 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").
10.13* 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.
10.14* 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.
10.15* 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.
10.16* Employment Agreement effective January 1,
1995 between the Company and Michael A.
Carpenter, incorporated by reference to
Exhibit 10.22 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1994 (File No. 1-9924)
(the "Company's 1994 10-K").
10.17.1* 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").
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
10.17.2* Amendment to The Travelers Corporation
1982 Stock Option Plan, incorporated by
reference to Exhibit 10.23.2 to the
Company's 1994 10-K.
10.18.1* 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").
10.18.2* Amendment to The Travelers Corporation
1988 Stock Incentive Plan, incorporated
by reference to Exhibit 10.24.2 to the
Company's 1994 10-K.
10.19* 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).
10.20* 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.
10.21* 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.
10.22* The Travelers Severance Plan of Officers,
as amended September 23, 1993,
incorporated by reference to Exhibit
10.30 to the Company's 1993 10-K.
10.23* 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).
10.24* Employment Agreement dated as of December
30, 1994, between SBI and Joseph J.
Plumeri II, incorporated by reference to
Exhibit 10.30 to the Company's 1994 10-K.
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
11.01 Computation of Earnings Per Share. Electronic
12.01 Computation of Ratio of Earnings to Fixed Electronic
Charges.
13.01 Pages 30 through 70 of the 1995 Annual Electronic
Report to Stockholders of the Company
(pagination of exhibit does not
correspond to pagination in the 1995
Annual Report to Stockholders).
21.01 Subsidiaries of the Company. Electronic
23.01 Consent of KPMG Peat Marwick LLP, Electronic
Independent 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 P
State Insurance Regulatory Authorities. Paper
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 Electronic
Travelers Corporation and Subsidiaries as
of December 31, 1993 and 1992, and the
related consolidated statements of
operations and retained earnings and cash
flows for each of the three years in the
period ended December 31, 1993, together
with the notes thereto and the related
report of Independent Accountants.
99.02 The fourth paragraph of page 26 of the Electronic
Company's September 30, 1993 10-Q (File
No. 1-9924).
99.03 The third paragraph of page 16 of the Electronic
Quarterly Report on Form 10-Q of Smith
Barney Holdings Inc. for the fiscal
quarter ended September 30, 1994 (File
No. 1-12484).
99.04 The paragraph that begins on page 2 and Electronic
ends on page 3 of the Company's Current
Report on Form 8-K dated March 1, 1994
(File No. 1-9924).
<PAGE>
Exhibit Filing
Number Description of Exhibit Method
------ ---------------------- ------
99.05 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 10-Q (File No. 1-9924).
99.06 The second paragraph of page 30 of the Electronic
Company's September 30, 1995 10-Q (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 1995 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 (although no charge will be made for the 1995
Annual Report on Form 10-K) to security holders who make written request
therefor to Corporate Communications and Investor Relations Department,
Travelers Group Inc., 388 Greenwich Street, New York, New York 10013.
- -------------------
* Denotes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of Form
10-K.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.02
<SEQUENCE>2
<TEXT>
EXHIBIT 3.02
BY-LAWS
OF
TRAVELERS GROUP INC.
EFFECTIVE JANUARY 24, 1996
<PAGE>
BY-LAWS
OF
TRAVELERS GROUP INC.
ARTICLE I
LOCATION
SECTION 1. The location of the registered office of the Company in
Delaware shall be in the City of Wilmington, County of New Castle, State of
Delaware.
SECTION 2. The Company shall, in addition to the registered office
in the State of Delaware, establish and maintain an office within or without the
State of Delaware or offices in such other places as the Board of Directors may
from time to time find necessary or desirable.
ARTICLE II
CORPORATE SEAL
SECTION 1. The corporate seal of the Company shall have inscribed
thereon the name of the Company and the year of its creation (1988) and the
words "Incorporated Delaware."
ARTICLE III
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of the stockholders, or any special
meeting thereof, shall be held either in the City of Baltimore, State of
Maryland, or at such other place as may be designated by the Board of Directors
or by the Executive Committee, or by the officer or group of Directors calling
any special meeting.
SECTION 2. Stockholders entitled to vote may vote at all meetings
either in person or by proxy in writing. All proxies shall be filed with the
Secretary of the meeting before being voted upon.
<PAGE>
SECTION 3. A majority in amount of the stock issued, outstanding and
entitled to vote represented by the holders in person or by proxy shall be
requisite at all meetings to constitute a quorum for the election of Directors
or for the transaction of other business except as otherwise provided by law, by
the Certificate of Incorporation or by these By-laws. If at any annual or
special meeting of the stockholders, a quorum shall fail to attend, a majority
in interest attending in person or by proxy may adjourn the meeting from time to
time, not exceeding sixty days in all, without notice other than by announcement
at the meeting (except as otherwise provided herein) until a quorum shall attend
and thereupon any business may be transacted which might have been transacted at
the meeting originally called had the same been held at the time so called. If
the adjournment is for more than 30 days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
SECTION 4. The annual meeting of the stockholders shall be held on
such date and at such time as the Board of Directors or the Executive Committee
may determine by resolution. Except as otherwise set forth in the Certificate of
Incorporation of the Company, each holder of voting stock shall be entitled to
one vote for each share of such stock standing registered in his or her name.
All annual meetings shall be general meetings.
SECTION 5. The business to be transacted at the annual meeting shall
include the election of Directors, consideration and action upon the reports of
officers and Directors, the acts, contracts, transactions and proceedings of the
officers, Directors, Executive Committee, and all other Committees of the Board
and any other matters within the power of the Company which may be brought
before the meeting.
SECTION 6. Notice of the annual meeting shall be mailed by the
Secretary to each stockholder entitled to vote, at his or her last known post
office address, at least ten days but not more than sixty days prior to the
meeting.
SECTION 7. Special meetings of the stockholders may be called by the
Chairman of the Board. A special meeting shall be called at the request, in
writing, of a majority of the Board of Directors or of the Executive Committee,
or by the vote of the Board of Directors or of the Executive Committee.
SECTION 8. Notice of each special meeting, indicating briefly the
object or objects thereof, shall be mailed by the Secretary to each stockholder
entitled to vote at his or her last known post office address, at least ten days
but not more than sixty days prior to the meeting.
SECTION 9. If the entire Board of Directors becomes vacant, any
stockholder may call a special meeting in the same manner that the Chairman of
the Board may call such
-2-
<PAGE>
meeting, and Directors for the unexpired term may be elected at said special
meeting in the manner provided for their election at annual meetings.
ARTICLE IV
DIRECTORS
SECTION 1. The affairs, property and business of the Company shall
be managed and controlled by a Board of Directors, with the exact number of
directors to be determined from time to time by resolution adopted by
affirmative vote of a majority of the entire Board of Directors. The directors
shall be divided into three classes, designated Class I, Class II and Class III,
as provided in the Certificate of Incorporation of the Company. The election and
term of directors shall be as provided in the Certificate of Incorporation, as
amended, from time to time.
SECTION 2. Vacancies in the Board of Directors shall be filled as
provided in the Certificate of Incorporation of the Company, as amended from
time to time.
ARTICLE V
POWERS OF THE DIRECTORS
SECTION 1. The Board of Directors shall have the management of the
business of the Company, and, in addition to the powers and authorities by these
By-laws expressly conferred upon them, may exercise all such powers and do all
such acts and things, as may be exercised or done by the Company, but subject,
nevertheless, to the provisions of the laws of the State of Delaware, of the
Certificate of Incorporation and of these By-laws.
SECTION 2. The Directors and members of the Executive Committee and
other committees appointed by the Board of Directors or by the Executive
Committee as such shall not receive any stated salary for their services except
where authorized by the Board of Directors, but, by resolution of the Board, a
fixed sum and reasonable expenses may be allowed for attendance at each regular
or special meeting, provided nothing herein contained shall be construed to
preclude a Director or member of a committee from serving in any other capacity
and receiving compensation therefor, but if he shall serve as an officer or
employee of the Company or of any subsidiary company, receiving a salary, he
shall be paid the actual expenses for attending meetings, but no other sums,
except by the express order of the Board of Directors.
SECTION 3. The Company shall indemnify, to the fullest extent
permissible under the General Corporation Law of the State of Delaware, or the
indemnification provisions of
-3-
<PAGE>
any successor statute, any person, and the heirs and personal representatives of
such person, against any and all judgments, fines, amounts paid in settlement
and costs and expenses, including attorneys' fees, actually and reasonably
incurred by or imposed upon such person in connection with, or resulting from
any claim, action, suit or proceeding (civil, criminal, administrative or
investigative) in which such person is a party or is threatened to be made a
party by reason of such person being or having been a director, officer or
employee of the Company, or of another corporation, joint venture, trust or
other organization in which such person serves as a director, officer, employee
or agent at the request of the Company, or by reason of such person being or
having been an administrator or a member of any board or committee of this
Company or of any such other organization, including, but not limited to, any
administrator, board or committee related to any employee benefit plan.
The Company may advance expenses incurred in defending a civil or
criminal action, suit or proceeding to any such director, officer, employee or
agent upon receipt of an undertaking by or on behalf of the director, officer,
employee or agent to repay such amount, if it shall ultimately be determined
that such person is not entitled to indemnification by the Company.
The foregoing right of indemnification and advancement of expenses
shall in no way be exclusive of any other rights of indemnification to which any
such person may be entitled, under any by-law, agreement, vote of shareholders
or disinterested directors or otherwise, and shall inure to the benefit of the
heirs and personal representatives of such person.
SECTION 4. Each Director and officer and each member of any
committee designated by the Board of Directors shall, in the performance of his
duties, be fully protected in relying in good faith upon the books of account or
other records of the Company or of any of its subsidiaries, or upon reports made
to the Company or any of its subsidiaries by any officer of the Company or of a
subsidiary or by an independent certified public accountant or by an appraiser
selected with reasonable care by the Board of Directors or by any such
committee.
-4-
<PAGE>
ARTICLE VI
MEETINGS OF THE DIRECTORS
SECTION 1. The Board of Directors shall meet as soon as convenient
after the annual meeting of stockholders in the City of Baltimore, State of
Maryland, or at such other place as may be designated by the Board of Directors
or the Executive Committee, for the purpose of organization and the transaction
of any other business which may properly come before the meeting.
SECTION 2. Regular meetings of the Directors may be held without
notice at such time and place as may be determined from time to time by
resolution of the Board.
SECTION 3. One-third of the total number of Directors shall
constitute a quorum except when the Board of Directors consists of one Director,
then one Director shall constitute a quorum for the transaction of business, but
the Directors present, though fewer than a quorum, may adjourn the meeting to
another day. The vote of the majority of the Directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.
SECTION 4. Special meetings of the Board may be called by the Board,
the Executive Committee or the Chairman of the Board , on one day's notice, or
other reasonable notice, to each Director, either personally, by mail or by
wire, and may be held at such time as the Board of Directors, the Executive
Committee or the officer calling said meeting may determine. Special meetings
may be called in like manner on the request in writing of three Directors. If
the Board of Directors or the Executive Committee so determine, such special
meetings may be held at some place other than at the office of the Company in
the City of Baltimore.
SECTION 5. In the absence of both the Secretary and an Assistant
Secretary, the Board of Directors shall appoint a secretary to record all votes
and the minutes of its proceedings.
SECTION 6. Any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if a written consent to such action be signed by all of the
members of the Board of Directors or committee as the case may be, and such
written consent be filed with the minutes of the proceedings of the Board of
Directors or such committee.
ARTICLE VII
STANDING COMMITTEES
SECTION 1. The Board of Directors may designate from their number
standing committees and may invest them with all their own powers, except as
otherwise provided in the General Corporation Law of the State of Delaware,
subject to such conditions as they may prescribe, and all committees so
appointed shall keep regular minutes of their transactions and
-5-
<PAGE>
shall cause them to be recorded in books kept for that purpose in the office of
the Company, and shall report the same to the Board of Directors at their
regular meeting.
ARTICLE VIII
EXECUTIVE COMMITTEE
SECTION 1. The Board of Directors may designate an Executive
Committee of not more than ten nor fewer than two persons from among their own
number. One-third of the members of the Executive Committee shall constitute a
quorum except when the Executive Committee consists of two, then one member
shall constitute a quorum. Any vacancy on the Executive Committee shall be
filled by the Board of Directors.
SECTION 2. The Executive Committee shall exercise all powers of the
Board of Directors between the meetings of said Board except as otherwise
provided in the General Corporation Law of the State of Delaware. No action of
the Executive Committee shall become operative unless it has the affirmative
vote of at least a majority of the members of the Executive Committee present
and voting.
SECTION 3. Regular meetings of the Executive Committee shall be held
without notice at such time and place as may be determined from time to time by
resolution of the Executive Committee. Special meetings of the Executive
Committee may be called at any time upon one day's notice, or other reasonable
notice, either personally, by mail or by wire, by the Chairman of the Board, the
Chairman of the Executive Committee, or by any two members of the Executive
Committee.
SECTION 4. In the absence of both the Secretary and an Assistant
Secretary, the Executive Committee shall appoint a secretary who shall keep
regular minutes of the actions of the said Committee and report the same to the
Board of Directors, which thereupon shall take action thereon.
SECTION 5. The Board of Directors may designate from the members of
the Executive Committee a Chairman of the Executive Committee. If the Board of
Directors should not make such designation, the Executive Committee may
designate a Chairman of the Executive Committee.
-6-
<PAGE>
ARTICLE IX
OFFICERS OF THE COMPANY
SECTION 1. The officers of the Company shall consist of a Chairman
of the Board of Directors, a President, one or more Vice Presidents, a
Controller, a Secretary and a Treasurer. There also may be such other officers
and assistant officers as, from time to time, may be elected or appointed by the
Board of Directors or by the Executive Committee.
ARTICLE X
OFFICERS - HOW CHOSEN
SECTION 1. At the first meeting after the annual meeting of
stockholders, the Directors shall elect annually from among their own number a
Chairman of the Board and a President. They shall also elect the several Vice
Presidents, a Controller, a Secretary and a Treasurer, to hold office for one
year or until others are elected and qualify in their stead or until their
earlier resignation or removal.
SECTION 2. The Directors or the Executive Committee shall also elect
or appoint such other officers and assistant officers as from time to time they
may determine, and who shall hold office during the pleasure of the Board or of
the Executive Committee.
ARTICLE XI
CHAIRMAN OF THE BOARD
SECTION 1. The Chairman of the Board shall be the Chief Executive
Officer of the Company, and shall have general supervision and direction over
the business and policies of the Company, and over all the other officers of the
Company and shall see that their duties are properly performed. He shall have
all the powers conferred upon the President by these By-laws, except such as by
the laws of the State of Delaware can be exercised only by the President or a
Vice President.
SECTION 2. He shall be ex-officio a member of all standing
committees, shall have the general powers and duties of the direction,
supervision and management usually vested in the Chief Executive Officer of a
corporation, and shall preside at all meetings of the Board of Directors. He
shall see that all orders and resolutions of the Board of Directors and
Executive Committee are carried into effect.
SECTION 3. He shall submit reports of the current operations of the
Company to the Board of Directors and Executive Committee at their regular
meetings, and annual reports to the stockholders.
-7-
<PAGE>
ARTICLE XII
PRESIDENT
SECTION 1. The President shall be the Chief Operating Officer of the
Company, and, if the President shall not also be the Chairman of the Board,
shall be subordinate to the Chairman of the Board, shall have general
supervision and direction over the business and policies of the Company, and
over all the other officers of the Company, and shall see that their duties are
properly performed.
SECTION 2. The President shall preside at all meetings of the Board
of Directors in the absence of the Chairman of the Board.
SECTION 3. The President shall be ex-officio a member of all
standing committees, and, in the absence of the Chairman of the Board, shall
have the general powers and duties of the Chairman of the Board and of the
supervision, direction and management usually vested in the office of a
president or chief executive officer of a corporation.
ARTICLE XIII
VICE PRESIDENTS
SECTION 1. Each Vice President shall have such powers and perform
such duties as may be assigned to him by the Board of Directors or Executive
Committee, or, subject to Section 2 of Article XVII, by the Chairman of the
Board or the President. The Board of Directors may add to the title of any Vice
President such distinguishing designation as may be deemed desirable, which
designation may reflect seniority, duties, or responsibilities of such Vice
President. In the absence of the President, any Vice President designated by the
Chairman of the Board may perform the duties and exercise the powers of the
President.
ARTICLE XIV
CONTROLLER
SECTION 1. The Controller shall have charge of and supervise all
accounting matters, the preparation of all accounting reports and statistics of
the Company and its subsidiaries, and shall perform the duties usually incident
to the office of the Controller. He shall submit such reports and records to the
Board of Directors or the Executive Committee as may be requested by them, or by
the Chairman of the Board or by the President.
-8-
<PAGE>
ARTICLE XV
SECRETARY
SECTION 1. The Secretary shall attend all sessions of the Board of
Directors and of the Executive Committee, and act as clerk thereof and record
all votes and the minutes of all proceedings in a book to be kept for that
purpose, and shall perform like duties for the Standing Committees when
required.
SECTION 2. He shall see that proper notice is given of all meetings
of the stockholders of the Company, of the Board of Directors and of the
Executive Committee. In his absence, or in case of his failure or inability to
act, an Assistant Secretary or a secretary pro-tempore shall perform his duties
and such other duties as may be prescribed by the Board of Directors.
SECTION 3. He shall keep account of certificates of stock or other
receipts and securities representing an interest in or to the capital of the
Company, transferred and registered in such form and manner and under such
regulations as the Board of Directors may prescribe.
SECTION 4. He shall keep in safe custody the contracts, books and
such corporate records as are not otherwise provided for, and the seal of the
Company. He shall affix the seal to any instrument requiring the same and the
seal, when so affixed, shall be attested by the signature of the Secretary, an
Assistant Secretary, Treasurer or an Assistant Treasurer.
ARTICLE XVI
TREASURER
SECTION 1. The Treasurer shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall deposit
all money in the name of, for the account of or to the credit of the Company in
such depositories as may be designated by the Board of Directors or by the
Executive Committee, and shall keep all securities and other valuable effects in
a safe place designated by the Board of Directors or the Executive Committee.
-9-
<PAGE>
SECTION 2. He shall perform such other duties as the Board of
Directors or the Executive Committee may from time to time prescribe or require.
ARTICLE XVII
DUTIES OF OFFICERS
SECTION 1. In addition to the duties specifically enumerated in the
By-laws, all officers and assistant officers of the Company shall perform such
other duties as may be assigned to them from time to time by the Board of
Directors, the Executive Committee, or by their superior officers.
SECTION 2. The Board of Directors or Executive Committee may change
the powers or duties of any officer or assistant officer, or delegate the same
to any other officer, assistant officer or person.
SECTION 3. Every officer and assistant officer of the Company shall
from time to time report to the Board of Directors, the Executive Committee or
to his superior officers all matters within his knowledge which the interests of
the Company may require to be brought to their notice.
-10-
<PAGE>
ARTICLE XVIII
CERTIFICATES OF STOCK, SECURITIES, NOTES, ETC.
SECTION 1. Certificates of stock, or other receipts and securities
representing an interest in or to the capital of the Company, shall bear the
signature of the Chairman of the Board, the President or any Vice President and
bear the countersignature of the Secretary or any Assistant Secretary or the
Treasurer or any Assistant Treasurer.
SECTION 2. Nothing in this Article XVIII shall be construed to limit
the right of the Company, by resolution of its Board of Directors or Executive
Committee, to authorize, under such conditions as such Board or Committee may
determine, the facsimile signature by any properly authorized officer of any
instrument or document that said Board of Directors or Executive Committee may
determine.
SECTION 3. In case any officer, transfer agent or registrar who
shall have signed or whose facsimile signature shall have been used on any
certificates of stock, notes or securities shall cease to be such officer,
transfer agent or registrar of this Company, whether because of death,
resignation or otherwise, before the same shall have been issued by this
Company, such certificates of stock, notes and securities may nevertheless be
adopted by this Company and be issued and delivered as though the person or
persons who signed the same or whose facsimile signature or signatures shall
have been used thereon had not ceased to be such officer, transfer agent or
registrar of this Company, and such adoption of said certificates of stock,
notes and securities shall be evidenced by a resolution of the Board of
Directors or Executive Committee to that effect.
SECTION 4. All transfers of the stock of the Company shall be made
upon the books of the Company by the owners of the shares in person or by their
legal representatives.
SECTION 5. Certificates of stock shall be surrendered and canceled
at the time of transfer.
SECTION 6. The Company shall be entitled to treat the holder of
record of any share or shares of stock as the holder in fact thereof, and
accordingly shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, save as expressly provided by the
laws of the State of Delaware.
-11-
<PAGE>
SECTION 7. In the case of a loss or the destruction of a certificate
of stock, another may be issued in its place upon satisfactory proof of such
loss or destruction and the giving of a bond of indemnity, unless waived,
approved by the Board of Directors or by the Executive Committee.
ARTICLE XIX
CHECKS, LOANS, COMMERCIAL PAPER, CONTRACTS, ETC.
SECTION 1. Any two of the following officers who are authorized by
the Board of Directors or Executive Committee, to wit, the Chairman of the
Board, the President, the Vice Presidents, the Secretary or the Treasurer, not
being the same person, or any of them together with an Assistant Vice President,
an Assistant Secretary or an Assistant Treasurer, shall have the authority to
sign and execute on behalf of the Company as maker, drawer, acceptor, guarantor,
endorser, assignor or otherwise, all notes, collateral trust notes, debentures,
drafts, bills of exchange, acceptances, securities and commercial paper of all
kinds.
SECTION 2. The Chairman of the Board, the President, any Vice
President, the Secretary, the Treasurer or any other person, when such officer
or other person is authorized by the Board of Directors or Executive Committee,
shall have authority, on behalf of and for the account of the Company, (a) to
borrow money against duly executed obligations of the Company; (b) to sell,
discount or otherwise dispose of notes, collateral trust notes, debentures,
drafts, bills of exchange, acceptances, securities, obligations of the Company
and commercial paper of all kinds; (c) to sign orders for the transfer of money
to affiliated or subsidiary companies, and (d) to execute contracts.
SECTION 3. The Board of Directors or the Executive Committee may
either in the absence of any of said officers or persons, or for any other
reason, appoint some other officer or some other person to exercise the powers
and discharge the duties of such officer or person under this Article, and the
officer or person so appointed shall have all the power and authority hereby
conferred upon the officer for whom he may be appointed so to act.
SECTION 4. Commercial paper, in the form of short term promissory
notes, of the Company issued by arrangement with a bank duly authorized by the
Board of Directors or Executive Committee of this Company shall be issued under
the manual signature of one of the officers of the Company and manually
co-signed on behalf of the Company by an employee of the bank approved by the
Company; provided however, that the Board of Directors or Executive Committee
may, by resolution, provide, with such protective measures as they may
prescribe, that, in lieu of the manual signature of an officer of this Company
on any such commercial paper of the Company issued by an authorized bank as
aforesaid, the facsimile signature of an officer of this Company may be used
thereon, and said facsimile signature, when placed thereon, shall have
-12-
<PAGE>
the same effect as though said commercial paper had been manually signed by
an officer of this Company.
ARTICLE XX
FISCAL YEAR
SECTION 1. The fiscal year of the Company shall begin the first day
of January and terminate on the thirty-first day of December in each year.
ARTICLE XXI
NOTICE
SECTION 1. Whenever under the provisions of the laws of the State of
Delaware or these By-laws notice is required to be given to any Director, member
of the Executive Committee, officer or stockholder, it shall not be construed to
mean personal notice, but such notice may be given by wire or in writing by
depositing the same in the post office or letter box in a post paid, sealed
wrapper, addressed to such Director, member of the Executive Committee, officer
or stockholder at his or her address as the same appears in the books of the
Company; and the time when the same shall be mailed shall be deemed to be the
time of the giving of such notice.
ARTICLE XXII
WAIVER OF NOTICE
SECTION 1. Any stockholder, Director or member of the Executive
Committee may waive in writing any notice required to be given under these
By-laws.
ARTICLE XXIII
AMENDMENT OF BY-LAWS
SECTION 1. The Board of Directors, at any meeting, may alter or
amend these By-laws, and any alteration or amendments so made may be repealed by
the Board of Directors or by the stockholders at any meeting duly called.
-13-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.07
<SEQUENCE>3
<TEXT>
Exhibit 10.07
THE TRAVELERS INC.
EXECUTIVE PERFORMANCE COMPENSATION PLAN
ARTICLE I
PURPOSE
Section 1.1 The purpose of The Travelers Inc. (the "Company") Executive
Performance Compensation Plan (the "Plan") is to establish certain performance
criteria for determining the maximum amount of any bonus that may be paid under
the Plan including that portion of the bonus paid in the form of restricted
stock under the Company's Capital Accumulation Plan, for those executive
officers who, on the last day of the Company's taxable year, consist of the
chief executive officer and the four other most highly compensated executive
officers of the Company or its subsidiaries named in the Summary Compensation
Table in the Company's proxy statement from time to time.
The Plan is intended to address certain limitations on the deductibility of
executive compensation under Section 162(m) of the Internal Revenue Code of
1986, as amended by the Omnibus Budget Reconciliation Act of 1993 (the "Revenue
Act"). The Revenue Act limits the deductibility of certain compensation in
excess of $1 million per year paid by a publicly traded corporation to Covered
Employees (as defined in such Act).
ARTICLE II
DEFINITIONS
Section 2.1 The following words and phrases shall have the meanings
indicated for the purpose of the Plan unless the context clearly indicates
otherwise:
(a) Adjusted Net Income shall mean the Net Income (i) reduced by the
aggregate amount of dividends on the Company's preferred stock,
and (ii) increased or reduced by the after-tax earnings impact of
each of the following items if they occur during a Bonus Year:
(i) realized investment gains and losses, including those
resulting from the sale of subsidiaries and affiliates, for the Bonus
Year;
(ii) the cumulative effect to the beginning of the year of
changes in accounting principles for the Bonus Year required by the
Financial Accounting Standards Board, the Securities and Exchange
Commission or any other governing body that sets accounting standards
as set forth in the Consolidated Statement of Income or the Notes
thereto as reported in the Annual Report;
(iii) the cumulative effect to the beginning of the year of
changes in the tax law occurring during the Bonus Year as set forth in
the Consolidated Statement of Income or the Notes thereto as reported
in the Annual Report; and
(iv) extraordinary items, as defined under generally accepted
accounting principles, during the Bonus Year as set forth in the
Consolidated Statement of Income as reported in the Annual Report.
Extraordinary items would not include such items as catastrophic
insurance losses or restructuring charges.
(b) Annual Report shall mean the Annual Report to Stockholders of the
Company containing the audited financial statements of the
Company.
(c) Board shall mean the Board of Directors of The Travelers Inc.
(d) Bonus Pool shall mean total maximum amount available to be paid
as bonus compensation to all Covered Employees for each Bonus
Year, whether paid in cash or restricted stock under the CAP
Plan. If, however, the Segment Executive is a Covered Employee,
the Bonus Pool shall be the total amount available to all Covered
Employees other than the Segment Executive.
(e) Bonus Year shall mean the annual period corresponding to a
calendar year for which the calculation of a bonus award is to be
made.
B-1
<PAGE>
(f) CAP Plan shall mean the Company's Capital Accumulation Plan, as
the same shall be in effect from time to time.
(g) Chief Executive Officer shall mean the Chief Executive Officer of
the Company or the individual acting in such capacity.
(h) Code shall mean the Internal Revenue Code of 1986, as amended.
(i) Committee shall mean the Nominations and Compensation Committee
of the Board, or any subcommittee thereof.
(j) Common Equity shall mean the common stockholders' equity
appearing on the Consolidated Statements of Changes in
Stockholders' Equity in the Company's Annual Report as of the
beginning of the Bonus Year.
(k) Company shall mean The Travelers Inc. and its successors. Where
the context requires, the "Company" shall mean The Travelers Inc.
and its consolidated subsidiaries.
(l) Covered Employee shall mean the Chief Executive Officer of the
Company (or the individual acting in such capacity) and the four
other most highly compensated executive officers of the Company
as determined on the last day of the taxable year and in
accordance with Section 162(m) of the Code.
(m) Defined After-Tax Earnings shall mean the aggregate of (i) the
consolidated after-tax net income of Smith Barney Shearson
Holdings Inc. and its subsidiaries and (ii) the after-tax net
income of those additional subsidiaries of the Company designated
in the employment agreement between SBS and Mr. Greenhill dated
June 24, 1993, and all amendments thereto as filed with the
Securities and Exchange Commission as exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993 and to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, in each case as reflected on its audited
financial statements for such year, prepared in accordance with
generally accepted accounting principles consistently applied
and certified by independent public accountants.
(n) Exchange Act shall mean the Securities Exchange Act of 1934, as
amended.
(o) MD&A shall mean Management's Discussion and Analysis of Financial
Condition and Results of Operations as reported in the Company's
Annual Report.
(p) Measurement Period shall mean any period other than the calendar
year determined by the Committee pursuant to Section 6.1.
(q) Net Income shall mean the consolidated net income of the Company
as disclosed in the Consolidated Statement of Income as reported
in the Company's Annual Report for the Bonus Year.
(r) Outside Director shall mean a member of the Board who falls
within the definition of an "outside director" under Section
162(m) of the Code and any regulations promulgated thereunder,
including any transition or interim rules for such definition.
(s) Performance Goal shall mean the financial measurements of
corporate performance that must be met in order for a Covered
Employee to receive a payment under this Plan.
(t) Return on Equity shall mean the percentage equivalent to the
fraction resulting from dividing (i) Adjusted Net Income by (ii)
Common Equity.
B-2
<PAGE>
(u) SBS shall mean Smith Barney Shearson Inc.
(v) Segment Executive shall mean Mr. Robert F. Greenhill.
ARTICLE III
ADMINISTRATION OF THE PLAN
Section 3.1 The Plan shall be administered by the Committee. If, however,
the Committee shall fail to be composed solely of Outside Directors, then those
members of the Committee that are Outside Directors shall act as the Committee.
Section 3.2 The Plan shall be interpreted and construed in accordance with
Section 162(m) of the Code and the regulations issued thereunder. Any specific
action by the Committee that would be violative of Section 162(m) of the Code
and the regulations thereunder shall be void. Otherwise the Committee shall
have full and exclusive authority, power and discretion to construe and
interpret the Plan (subject to the advice of the Company's General Counsel with
respect to any question of law), and generally to determine any and all
questions arising under the Plan. The Committee shall have the authority to
reduce the bonus of any Covered Employee (other than the Segment Executive)
earned under this Plan even if the Performance Goals applicable to maximum bonus
awards to such Employee have been met. The Committee shall not have any
authority hereunder to increase any bonus compensation calculated in accordance
with this Plan.
Section 3.3 The Committee shall be responsible for certifying in writing
to the Company that the applicable Performance Goals have been met before any
bonus payments are made under this Plan. If permitted under Section 162(m) of
the Code, such certification may be based upon reasonably estimated financial
information available prior to the end of the Bonus Year.
ARTICLE IV
CALCULATION OF BONUS AMOUNTS FOR COVERED EMPLOYEES
(OTHER THAN THE SEGMENT EXECUTIVE)
Section 4.1 As soon as practicable following the certificates described in
Section 3.3 above, and subject to the Committee's discretion to reduce bonuses
under Section 3.2, Covered Employees (other than the Segment Executive) shall be
entitled to receive for the Bonus Year a maximum bonus (whether paid in cash or
restricted stock under the CAP Plan) not exceeding the following percentages of
the Bonus Pool:
The Chief Executive Officer ............................... 31%
Each other Covered Employee (other than the Segment
Executive)............................................... 23%
Section 4.2 The Bonus Pool for any Bonus Year shall be equal to a
percentage of the Adjusted Net Income for such Bonus Year. Adjusted Net Income
shall be calculated without giving effect to the
B-3
<PAGE>
payment of bonuses provided for under the Plan. The percentage shall based upon
the Return on Equity, as follows:
If the Return on Equity is: The maximum amount of the
-------------------------- -------------------------
Bonus Pool shall be:
-------------------
less than 10% (A) = 0%
10% (B) = 1.4% of Adjusted Net Income
greater than 10% up to and (C) = the amount determined
including 12.5% under (B) plus 2.4% of the
amount by which Adjusted Net
Income exceeds 10% of Common
Equity
greater than 12.5% up to and (D) = the amount determined under
including 15% (C) plus 3.4% of the amount by
which Adjusted Net Income
exceeds 12.5% of Common Equity
greater than 15% (E) = the amount determined under
(D) plus 3.8% of the amount by
which Adjusted Net Income
exceeds 15% of Common Equity
In the event that any of the Covered Employees (other than the Segment
Executive) does not qualify as a Covered Employee for a particular Bonus Year,
percentage share of the Bonus Pool otherwise allocable to such person shall be
allocated to the executive officer who replaces him or her as a Covered Employee
for such Bonus Year. In the event that an individual (other than the Segment
Executive) is added to the Covered Employees, the calculation of the Bonus Pool
will be made without taking such additional individual into account and the
Bonus Pool will then be increased by the dollar amount for any one of the
Covered Employees (other than the chief executive officer or the Segment
Executive) for such Bonus Year. Such increase will represent the maximum
share of the Bonus Pool allocated to such Covered Employee. In the event one
of the Covered Employees (other than the Segment Executive), or his or her
replacement, becomes the chief executive officer of the Company, such Covered
Employee shall be allocated the percentage share allocated to the chief
executive officer.
Section 4.3 Any portion (up to $3 million) of a share of the Bonus Pool
calculated for any Covered Employee (other than the Segment Executive) for a
particular Bonus Year may be awarded by the Committee to such Covered Employee
in a succeeding year to the extent not awarded for the Bonus Year; provided that
such award by the Committee will only be made to reward extraordinary
performance by any such Covered Employee.
ARTICLE V
CALCULATION OF BONUS AMOUNTS FOR THE SEGMENT EXECUTIVE
Section 5.1 If one of the Covered Employees is the Segment Executive, his
bonus in any Bonus Year shall be equal to a percentage of Defined After-Tax
Earnings, but only if Defined After-Tax Earnings are at least $100,000,000, as
follows:
Defined After-Tax Earnings Bonus Percentage
-------------------------- ----------------
up to $49,750,000. . . . . . . . . . . . . . 0
$49,750,000 to $750,000,000. . . . . . . . . 2.0%
$750,000,001 to $1 billion . . . . . . . . . 1.5%
in excess of $1 billion . . . . . . . . . . 1.0%
Section 5.2 If any of the entities whose after-tax net income is included
in "Defined After-Tax Earnings" should have a short fiscal year or if the
Segment Executive is employed by SBS for less than a full calendar year, the
Defined After-Tax Earnings on the financial statements for such short period
shall be annualized in order to apply the above calculations. The bonus paid
shall be prorated by multiplying the number obtained on an annualized basis by a
fraction the numerator of which shall be
B-4
<PAGE>
the number of months in such short period and the denominator of which is 12.
Such bonus shall be paid notwithstanding that the Segment Executive may no
longer be a Covered Employee under the Code.
Section 5.3 No payments shall be made to the Segment Executive hereunder
until after certification by the Committee of achievement of the relevant
Performance Goals, in accordance with Section 3.3 hereof.
ARTICLE VI
CHANGE OF MEASUREMENT PERIOD
Section 6.1 If permitted by Section 162(m) of the Code, the Committee (as
constituted in Section 3.1 of the Plan) may establish a Measurement Period other
than the calendar year for determining the Bonus Pool if the Committee concludes
that all or a portion of the Bonus Pool for any Bonus Year should be paid to
Covered Employees (other than the Segment Executive) before the end of any
calendar year. Any such change will be made before the new Measurement Period
begins. In such event all relevant criteria will be based upon the books and
records of the Company for the Measurement Period in a manner consistent with
the terms of this Plan.
ARTICLE VII
STOCKHOLDER APPROVAL AND AMENDMENT
Section 7.1 This Plan shall become effective as of January 1, 1994,
subject, however, to the approval of the Company's stockholders at the 1994
Annual Meeting of the Stockholders of the Company.
Section 7.2 The Plan applicable to Covered Employees (other than the
Segment Executive) may be amended at any time by the Committee which shall act
in accordance with Section 3.1 of the Plan. In the event that subsequent
guidance under Section 162(m) is substantially different, with the effect that
the Plan fails to ensure the deductibility of the compensation payable
hereunder, the Committee shall retain the right to modify the Plan for Covered
Employees (other than the Segment Executive) to the extent necessary to conform
any provisions hereof to bring them into compliance, including but not limited
to deletion of any non-conforming provision, or to discontinue the Plan
altogether. No amendment shall be made without approval of the stockholders of
the Company if such approval is required in order for the Plan to continue to
meet the requirements of Section 162(m) of the Code.
B-5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.08(1)
<SEQUENCE>4
<TEXT>
EXHIBIT 10.08.1
TRAVELERS GROUP
CAPITAL ACCUMULATION PLAN
as amended to November 30, 1995
SECTION 1. Purpose of the Plan.
The name of this plan is TRAVELERS GROUP CAPITAL ACCUMULATION PLAN (the
"Plan"). The purpose of the Plan is to enable TRAVELERS GROUP INC. (the
"Company") and its Subsidiaries to attract, retain and motivate officers and
certain other 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 certain other 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
A-1
<PAGE>
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 (the "1934 Act").
(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 422 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.
(k) "Retirement" means no longer being occupied in one's business or
profession and terminating active employment with the Company or a Subsidiary
after either (i) reaching age 65, or (ii) reaching age 60 and having 30 years of
employment with the Company or a Subsidiary.
(l) "Section 16(a) Person" means any officer or director of the Company or
any Subsidiary who is subject to the reporting requirements of Section 16(a) of
the 1934 Act.
(m) "Stock" means the common stock of the Company.
(n) "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 certain other 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-2
<PAGE>
(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. In the
event the Committee provides for alternative methods for grants of awards, the
Committee, in its sole discretion, may provide for alternative methods of
determining the fair market value of Stock for such awards, and may also provide
for alternative forfeiture provisions, so long as the alternative methods or
provisions do not (i) materially increase the benefits, (ii) materially increase
the number of shares of Restricted Stock or Options issued or (iii) materially
modify the eligibility requirements applicable to Section 16(a) Persons.
(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
A-3
<PAGE>
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:
"The transferability of the certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the Travelers Group Capital Accumulation Plan and a
Restricted Stock Award Agreement entered into between the registered
owner and Travelers Group Inc. Copies of such Plan and Agreement are
on file in the offices of Travelers Group 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 Section 16(a) Persons), 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.
A-4
<PAGE>
(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 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 award (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.
A-5
<PAGE>
(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. 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 at least 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:
(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 (which
voluntary termination is not considered to be "retirement" as provided in
subsection (v) below or "Retirement" as defined above), 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
A-6
<PAGE>
(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 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 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); or
(v) if such person is not a Section 16(a) Person and such person shall
cease to be an officer or employee because he or she has "retired" from
employment (i.e., such person is no longer occupied within his or her
business or profession and has terminated active employment with the
Company or a Subsidiary after reaching age 55 and having completed at
least five years of employment with the Company or a Subsidiary) but has
not met the definition of "Retirement", while holding an Option which has
not expired and has not been fully exercised, such person 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 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); or
(vi) if within 30 days of his or her 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
(vii) 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.
A-7
<PAGE>
(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.
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
A-8
<PAGE>
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 stop transfer orders and other restrictions as the Committee may
deem advisable under the rules, regulations, 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
A-9
<PAGE>
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.
(f) The Plan is intended to comply with all applicable conditions of Rule
16b-3 of the 1934 Act or any successor statute, rule or regulation. All
transactions involving any Section 16(a) Person shall be subject to the
conditions set forth in Rule 16b-3, regardless of whether such conditions are
expressly set forth in the Plan. Any provision of the Plan which is contrary to
Rule 16b-3 shall not apply to Section 16(a) Persons.
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.
A-10
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.08(2)
<SEQUENCE>5
<TEXT>
EXHIBIT 10.08.2
AMENDMENT NO. 9 to the
TRAVELERS GROUP CAPITAL ACCUMULATION PLAN
(effective as of April 24, 1996)
The Travelers Group Capital Accumulation Plan is hereby amended in the following
respects:
1. The definition of "Cause" which appears in Section 2(b) is hereby deleted
in its entirety and replaced with the following:
"(b) "Cause" shall mean (1) failure by a Participant to perform
substantially his or her duties with the Company or a Subsidiary, after
reasonable notice to the Participant of such failure; (2) conduct by a
Participant that is in material competition with the Company or a
Subsidiary or (3) conduct by a Participant that breaches his or her duty of
loyalty to the Company or a Subsidiary, or that is materially injurious to
the Company or a Subsidiary, monetarily or otherwise, which conduct shall
include, but not be limited to (i) disclosing or misusing any confidential
information pertaining to the Company or a Subsidiary; (ii) any attempt,
directly or indirectly to induce any employee, agent, insurance agent,
insurance broker or broker-dealer of the Company or any Subsidiary to be
employed or perform services elsewhere or (iii) any attempt by a
Participant directly or indirectly to solicit the trade of any customer or
supplier or prospective customer or supplier of the Company or any
Subsidiary or (iv) disparaging the Company, any Subsidiary or any of their
respective officers or directors. The determination of whether any conduct,
action or failure to act constitutes "Cause" shall be made by the
Committee."
2. The definition of "Disability" which appears in Section 2(e) is hereby
deleted in its entirety and replaced with the following:
"(e) "Disability" shall mean a disability that renders an individual unable
to be occupied within his or her business or profession for a specified
period of time, as determined by the Committee, or its designee."
3. The following new definition is hereby inserted and the subsequent
definition sections shall be renumbered accordingly:
(g) "Incremental Shares" shall have the meaning set forth in Section
6(i).
4. The definition of "Subsidiary" which appears in Section 2(o) is hereby
deleted in its entirety and replaced with the following:
"(o) "Subsidiary" means any entity at least one-half of whose outstanding
voting stock, or beneficial ownership for entities other than corporations, is
owned, directly or
1
<PAGE>
indirectly, by the Company, or which is otherwise controlled directly or
indirectly by the Company."
5. Section 5(b) is hereby amended to delete the word "Participant" from the
beginning of the first sentence thereof, and by substituting in its place the
words "Section 16(a) Person". Section 5(b) is further amended by adding the
following new sentence after the first sentence of such Section: "Unless the
Committee determines otherwise, a Participant who is not a Section 16(a) Person
shall not have any rights with respect to an award, unless or until such
Participant has executed a Restricted Stock Award Agreement and has delivered a
fully executed copy thereof to the Company."
6. Section 5(c)(ii) is hereby amended to add the words "or distributions"
after the word dividends in the last sentence of such Section.
7. Section 5(d)(i) is hereby amended to delete the words "or Disability" from
such Section and to add the following sentence at the end of such Section:
"In the event of a Participant's Disability prior to the termination of
employment, awards of Restricted Stock shall continue to vest as
originally scheduled, provided (a) the Participant continues to meet
the conditions prescribed by the Committee for determination of Disability
and has not otherwise terminated his or her employment or (b) the
Disability is discontinued and the Participant resumes employment upon
the discontinuance of the Disability or, if applicable, the completion
of any related leave of absence as permitted under the Company's policies
governing family and medical leave."
8. Section 5(d)(ii) is hereby amended by adding the following words to the
end of such Section:
"as well as that portion of his or her annual compensation that had been
paid in the form of Restricted Stock."
9. Section 5(d)(iv) is hereby deleted in its entirety and replaced with
the following:
"(iv) Upon Retirement, a Participant shall receive his or her Restricted
Stock upon completion of the Restricted Period, unless the Committee
determines that such Participant shall receive instead, a cash payment
equal to the portion of his or her annual compensation that had been paid
in Restricted Stock, without interest."
10. Section 5 is hereby amended by adding the following new Subsection 5(f):
"(f) In any instance where the vesting of an award of Restricted Stock or
the vesting and/or exercisability of an Option or reload option extends
past the date of termination of a Participant's employment, either pursuant
to the terms of the Plan or by action of
2
<PAGE>
the Committee, the Restricted Stock as well as any rights of continued
vesting and exercisability with respect to Options and reload options shall
be forfeited, if, in the determination of the Committee, the Participant,
at any time within any such remaining period of continued vesting or
exercisability engages in any of the conduct described in subparagraphs (2)
or (3) of the definition of "Cause" under this Plan. In addition, if, in
the determination of the Committee, the Participant engages in any of the
conduct described in subparagraph (3) of the definition of "Cause" under
this Plan, while holding any Incremental Shares which remain subject to
restrictions on transferability, at the option of the Committee, the
Participant shall forfeit such Incremental Shares and receive instead a
cash payment, without interest, equal to the original exercise price for
the Option or reload option under which the Incremental Shares were issued,
multiplied by the number of Incremental Shares forfeited.
11. Section 6(c) is hereby amended by deleting the words "Recipients of Options
shall" at the beginning of the first sentence thereof and adding the following
in replacement thereof:
"In order to evidence the acceptance of an Option, the Committee may
require, Recipients of Options to"
12. Section 6(f)(ii) is hereby deleted in its entirety and replaced with
the following:
"(ii) if such person shall cease to be such an officer or employee on
account of an involuntary termination of employment for Cause, or on
account of a voluntary termination of employment (which voluntary
termination of employment is not considered to be "retirement" as provided
in subsection (v) below or "Retirement" as defined above), all unvested and
unexercised Options shall be forfeited on the last day of employment. If
such person shall cease to be such an officer or employee on account of an
involuntary termination (other than for Cause, and which is not considered
to be "retirement" or "Retirement"), while holding a vested Option which
has not expired and has not been exercised, such person may, for a period
of thirty (30) days following termination of employment, but in no event
after the Option has expired under the provisions of 6(b) hereof) exercise
such 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;"
13. Section 6(f)(v) is hereby amended to add the following words after the
words "with the Company or a Subsidiary" inside the first parenthetical of such
Section:
", or, with respect to persons who are not Section 16(a) Persons, after
reaching a certain age and completing a certain number of years of service,
as determined by the Committee."
14. Section 6(f)(vi) is hereby deleted in its entirety and replaced with
the following:
3
<PAGE>
"(vi) If a Participant shall die or become Disabled within thirty (30) days
of his or her involuntary termination of employment other than for Cause,
vested Options (or vested portions thereof) which have not been exercised
and have not expired or been forfeited may be exercised by the Participant
or his or her executors, administrators, heirs or distributees, as the case
may be, at any time within one (1) year after the date of such event, but
in no event after the Option has expired;"
15. Section 6(h) is hereby amended by deleting the words "remaining shares"
from the first sentence thereof and replacing them with the words "Incremental
Shares", and by deleting the words "and shall otherwise be unrestricted" and
replacing them with the words "and/or in the Plan".
16. The following new Section 6(i) is hereby added:
"The Incremental Shares issued as a result of the exercise of an Option
may not be sold, assigned, pledged, hypothecated or otherwise transferred
by the Participant, except as specifically permitted pursuant to
Section 6(d) above, for a period of one (1) year following the date of
exercise if no reload option is granted in connection with such exercise,
or for a period of two (2) years if a reload option is granted in
connection with such exercise, or such other shorter or longer periods of
restriction on transferability as may be determined by the Committee. For
purposes of the Plan, the term "Incremental Shares" shall mean those shares
of Stock actually issued to a Participant upon the exercise of an Option.
The number of Incremental Shares will equal the number of Option shares
exercised minus the sum of (a) the number of shares of Stock surrendered by
the Participant or sold by the Company on behalf of the Participant to pay
the exercise price and (b) the number of shares of Stock withheld by the
Company, at the Participant's election to pay the applicable withholding
taxes arising as a result of the Option exercise."
17. The following sentence is hereby added to the end of Section 7:
"The Committee may delegate some or all of its authority over the
administration of the Plan to any other committee, with approval by the
Board, but only with respect to persons who are not Section 16(a) Persons."
18. Section 8 is hereby amended to insert the word "distribution" after the
word "dividend" in the first sentence thereof.
19. The following sentence is hereby added to the end of Section 9:
"Subject to the foregoing limitations, the Committee shall have the
authority to amend certain Plan provisions to the extent necessary to
permit participation in the Plan by employees who are employed outside of
the United States on terms and conditions which are comparable to those
afforded to employees located within the United States."
4
<PAGE>
20. Section 10(d) is hereby amended to insert the words "or as provided in
Section 6(d) above" within the parenthetical, after the words "except in the
event of a Participant's death".
21. Section 10(e) is hereby amended to add the words "the Participant or"
immediately before the words "the person exercising the Option" in clause (B) of
the fourth sentence thereof.
22. The following new Sections 10(g), 10(h), 10(i), 10(j) and 10(k) are
hereby added:
"(g) Notwithstanding anything to the contrary contained herein, upon a
"Change of Control" (defined below), the restrictions on each award of
Restricted Stock shall immediately lapse, and all outstanding Options and
reload options shall become immediately exercisable with respect to one
hundred percent (100%) of the Stock subject thereto. "Change of Control"
shall mean the occurrence of any of the following, unless such occurrence
shall have been approved or ratified by at least a two-thirds (2/3) vote of
the Continuing Directors (defined below): (A) any person within the meaning
of Sections 13(d) and 14(d) of the 1934 Act, shall have become the
beneficial owner, within the meaning of Rule 13d-3 under the 1934 Act, of
shares of stock of the Company having twenty five percent (25%) or more of
the total number of votes that may be cast for election of the directors of
the Company, or (B) there shall have been a change in the composition of
the Board such that at any time a majority of the Board shall have been
members of the Board for less than twenty-four (24) months, unless the
election of each new director who was not a director at the beginning of
the period was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who were directors at the beginning of such
period, or who were approved as directors pursuant to the provisions of
this paragraph (the "Continuing Directors")."
"(h) All claims and disputes between a Participant and the Company or any
Subsidiary arising out of the Plan or any award granted hereunder shall be
submitted to arbitration in accordance with the then current arbitration
policy of the Company or the Subsidiary with whom the Participant is
employed. Notice of demand for arbitration shall be given in writing to the
other party and shall be made within a reasonable time after the claim or
dispute has arisen. The award rendered by the arbitrator shall be made in
accordance with the provisions of the Plan, shall be final, and judgment
may be entered upon it in accordance with applicable law in any court
having jurisdiction thereof. The provisions of this Section 10(h) shall be
specifically enforceable under applicable law in any court having
jurisdiction thereof."
"(i) The validity, construction, interpretation, administration and effect
of the Plan and of its rules and regulations, and rights relating to the
Plan, shall be determined solely in accordance with the laws of the State
of Delaware."
"(j) No Stock or other securities shall be issued hereunder unless counsel
for the Company shall be satisfied that such issuance will be in compliance
with all applicable
5
<PAGE>
Federal, state and international securities statutes, rules and
regulations. The appropriate officers of the Company or its Subsidiaries
shall cause to be filed any reports, returns or other information regarding
awards or Stock issued under the Plan as may be required by Section 13 or
15(d) of the 1934 Act or any other applicable statute, rule or regulation."
"(k) If any term or provision of this Plan or the application thereof to
any person or circumstances shall, to any extent, be invalid or
unenforceable, then the remainder of the Plan, or the application of such
term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby, and
each term and provision hereof shall be valid and be enforced to the
fullest extent permitted by applicable law."
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-11.01
<SEQUENCE>6
<TEXT>
EXHIBIT 11.01
<TABLE><CAPTION>
Travelers Group Inc. and Subsidiaries
Computation of Earnings Per Share
(In millions, except for per share amounts)
Year Ended December 31,
---------------------------------------
1995 1994 1993
---- ---- ----
<S> <S> <C> <C>
Earnings:
Income from continuing operations $1,628 $1,157 $ 951
Discontinued operations 206 169 -
Cumulative effect of accounting changes - - (35)
------ ------ ------
Net income $1,834 $1,326 $ 916
Preferred dividends - series A (24) (24) (24)
Preferred dividends - series B (7) (7) (3)
Preferred dividends - series C (18) (17) -
Preferred dividends - series D (35) (35) -
------ ------ ------
(84) (83) (27)
Income applicable to common stock $1,750 $1,243 $ 889
===== ===== ======
Average shares:
Common 306.4 315.4 228.7
Warrants .6 - -
Assumed exercise of dilutive stock options 4.5 3.1 4.9
Incremental shares - Capital Accumulation Plan 5.9 3.5 4.2
------- ------ ------
317.4 322.0 237.8
====== ===== =====
Earnings per share:
Continuing operations $ 4.86 $ 3.34 $ 3.88
Discontinued operations 0.65 0.52 -
Cumulative effect of accounting changes - - (0.14)
------- ------ -----
$ 5.51 $ 3.86 $ 3.74
====== ===== ======
</TABLE>
Earnings per common share is computed after recognition of preferred stock
dividend requirements and is based on the weighted average number of shares
outstanding during the period after consideration of the dilutive effect of
common stock warrants and stock options and the incremental shares assumed
issued under the Capital Accumulation Plan and other restricted stock plans.
Fully diluted earnings per common share, assuming conversion of all outstanding
convertible preferred stock, notes, debentures and the maximum dilutive effect
of common stock equivalents 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,
1995, 1994 and 1993 would entail adding the number of shares issuable on
conversion of the other debentures (2 million shares in 1993 only), the
additional common stock equivalents (5.2 million and 1.5 million and .4 million
shares respectively) and the assumed conversion of the convertible preferred
stock (7.0 million, 3.4 million and 1.4 million shares, respectively) to the
number of shares included in the earnings per common share calculation
(resulting in a total of 329.6 million and 326.9 million and 241.6 million
shares, respectively) and eliminating the after-tax interest expense related to
the conversion of other debentures ($3 million in 1993 only) and the elimination
of the preferred stock dividends ($21 million, $7 million and $3 million
respectively).
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.01
<SEQUENCE>7
<TEXT>
EXHIBIT 12.01
<TABLE><CAPTION>
Travelers Group Inc. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
ALL COMPANIES CONSOLIDATED
(In millions of dollars)
Year Ended December 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes, minority
interests and cumulative effect of
accounting changes . . . . . . . . . . . . . $2,521 $1,874 $1,523 $1,188 $ 791
Elimination of undistributed
equity earnings . . . . . . . . . . . . . . . - - (116) (26) (5)
Pre-tax minority interest . . . . . . . . . . . - - (32) - -
Add:
Interest . . . . . . . . . . . . . . . . . . 1,956 1,284 707 674 876
Interest portion of rentals . . . . . . . . . 104 134 61 38 46
----- ----- ----- ----- -----
Income available for fixed charges . . . . . . $4,581 $3,292 $2,143 $1,874 $1,708
===== ===== ===== ===== =====
Fixed charges:
Interest . . . . . . . . . . . . . . . . . . $1,956 $1,284 $ 707 $ 674 $876
Interest portion of rentals . . . . . . . . . 104 134 61 38 46
----- ----- ----- ----- -----
Fixed charges . . . . . . . . . . . . . . . . . $2,060 $1,418 $ 768 $ 712 $ 922
===== ===== ===== ===== =====
Ratio of earnings to fixed charges 2.22x 2.32x 2.79x 2.63x 1.85x
==== ==== ==== ==== ====
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.01
<SEQUENCE>8
<TEXT>
EXHIBIT 13.01
<TABLE><CAPTION>
Travelers Group Inc. and Subsidiaries
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In millions of dollars, except per share amounts)
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, (1)
- -----------------------
Total revenues (2) $ 16,583 $ 14,943 $ 6,797 $ 5,125 $ 6,608
======= ======== ======== ======= ======
Income from continuing operations $ 1,628 $ 1,157 $ 951 $ 756 $ 479
Discontinued operations 206 169 - - -
Cumulative effect of accounting changes(3) - - (35) (28) -
-------- -------- -------- -------- ------
Net income $ 1,834 $ 1,326 $ 916 $ 728 $ 479
======== ======== ======== ======== ======
Return on average common equity (4) 18.3% 15.6% 18.4% 20.6% 15.7%
At December 31, (1)
- ----------------
Total assets $ 114,475 $ 115,297 $ 101,290 $24,151 $ 21,561
Long-term debt $ 9,190 $ 7,075 $ 6,991 $ 3,951 $ 4,327
Stockholders' equity (5) $ 11,710 $ 8,640 $ 9,326 $ 4,229 $ 3,280
Per common share data:
- ---------------------
Income from continuing operations $ 4.86 $ 3.34 $ 3.88 $ 3.34 $ 2.14
Discontinued operations 0.65 0.52 - - -
Cumulative effect of accounting changes - - (0.14) (0.12) -
-------- --------- -------- ------- --------
Net income $ 5.51 $ 3.86 $ 3.74 $ 3.22 $ 2.14
======== ======== ======== ======= =======
Cash dividends per common share $ 0.800 $ 0.575 $ 0.490 $ 0.363 $ 0.225
Book value per common share $ 34.50 $ 24.77 $ 26.06 $ 17.70 $ 15.10
Book value per common share, excluding
FAS 115 adjustment $ 32.11 $ 28.94
Other data:
- -----------
Average number of common shares
and equivalents (millions) 317.4 322.0 237.8 222.8 226.5
Year-end common shares
outstanding (millions) 316.2 316.5 327.1 222.0 217.2
Number of full-time employees 47,600 52,000 60,000 16,000 15,800
</TABLE>
(1) 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.
(2) As more fully described in Note 3 of Notes to Consolidated Financial
Statements, all of the operations comprising Managed Care and
Employee Benefits Operations (MCEBO) are presented as a discontinued
operation and, accordingly, prior year amounts have been restated.
Revenues for 1991 include those of Fingerhut Companies, Inc.
(Fingerhut), which had been carried as a consolidated subsidiary.
(3) See Note 1 of Notes to Consolidated Financial Statements for
information regarding accounting changes in 1993. Included in net
income for 1993 is an after-tax charge of $17 million resulting from
the adoption of Statement of Financial Accounting Standards No. 106,
and an after-tax charge of $18 million resulting from the adoption of
Statement of Financial Accounting Standards No. 112. Included in net
income for 1992 is an after-tax charge of $28 million resulting from
the adoption of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
(4) The return on average common stockholders' equity is calculated using
income before the cumulative effect of accounting changes after
deducting preferred stock dividend requirements.
(5) Stockholders' equity at December 31, 1995 and 1994 reflects $756
million of net unrealized gains on investment securities and $1.3
billion of net unrealized losses on investment securities,
respectively, pursuant to the adoption of FAS No. 115 in 1994
(see Note 1 of Notes to Consolidated Financial Statements).
21
<PAGE>
Travelers Group Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
Consolidated Results of Operations
Year Ended December 31,
-------------------------
(In millions, except per share amounts) 1995 1994 1993
- ----------------------------------------------------------------------------
Revenues $16,583 $14,943 $6,797
====== ====== =====
Income from continuing operations $1,628 $ 1,157 $ 951
Income from discontinued operations 206 169 -
Cumulative effect of accounting changes - - (35)
------- ------ -----
Net income $1,834 $1,326 $ 916
======= ====== =====
Earnings per share:
Continuing operations $ 4.86 $ 3.34 $ 3.88
Discontinued operations 0.65 0.52 -
Cumulative effect of accounting changes - - (0.14)
------ ------ ------
Net income $ 5.51 $ 3.86 $ 3.74
====== ====== ======
Weighted average number of common shares
outstanding and
common stock equivalents (millions) 317.4 322.0 237.8
====== ====== ======
Overview
Consolidated results of operations include the accounts of Travelers Group
Inc. (formerly The Travelers Inc.) and its subsidiaries (the Company). In
December 1992, the Company acquired approximately 27% of the common stock
of The Travelers Corporation (old Travelers). During 1993 this investment
was accounted for on the equity method. On December 31, 1993, the Company
acquired the approximately 73% of old Travelers common stock it did not
already own (the Merger) through the merger of old Travelers into the
Company. 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% interest previously owned. The old Travelers
businesses acquired are hereinafter referred to as old Travelers or The
Travelers Insurance Group Inc. (TIGI). On July 31, 1993, the Company
acquired the domestic retail brokerage and asset management businesses (the
Shearson Businesses) of Shearson Lehman Brothers Holdings Inc. The
Shearson Businesses were combined with the operations of Smith Barney
Holdings Inc. (Smith Barney). Results of operations include the results of
the Shearson Businesses from the date of acquisition. (See Note 1 of Notes
to Consolidated Financial Statements.)
Results of Operations
Income from continuing operations for the year ended December 31, 1995 was
$1.628 billion compared to $1.157 billion in 1994 and $951 million in 1993.
Results of operations for 1995 and 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 from continuing operations
for the years ended December 31, 1995, 1994 and 1993 are net after-tax
gains (losses) of $74 million, $(4) million and $52 million, respectively,
as follows:
<PAGE>
1995
- ----
- - a $13 million provision for loss on disposition of an affiliate; and
- - $87 million of reported investment portfolio gains.
1994
- ----
- - $39 million gain on the sale of American Capital Management & Research
Inc.;
- - $21 million gain on the sale of Smith Barney's interest in HG Asia
Holdings Ltd. (HG Asia);
- - $19 million gain on the sale of Bankers and Shippers Insurance
Company, a subsidiary of The Travelers Indemnity Company; 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.
Excluding these items, income from continuing operations for 1995 increased
$393 million to $1.554 billion, or 34%, over 1994, reflecting improved
performance at all operating units, particularly at Smith Barney.
On the same basis, income from continuing operations for 1994 increased by
$262 million, or 29%, 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 insurance sales and policy persistency, as well as
increases in $.M.A.R.T. and $.A.F.E. loans; and the inclusion of the
earnings from the additional 73% investment in old Travelers.
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."
The following discussion presents in more detail each segment's operating
performance and net income before accounting changes, the effect of which
was not material to any of the business segments.
2
<PAGE>
Investment Services
Year Ended December 31,
-----------------------------------------------------
1995 1994 1993
-----------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
- ------------------------------------------------------------------------------
Smith Barney (1) $6,808 $599 $5,534 $390 $3,371 $306
Mutual funds and asset
management - - 156 32 153 30
- ------------------------------------------------------------------------------
Total Investment
Services $6,808 $599 $5,690 $422 $3,524 $336
- ------------------------------------------------------------------------------
(1) Net income for 1994 includes a $21 million after-tax gain from the sale
of the interest in HG Asia and net income for 1993 includes a $65
million after-tax provision for merger-related costs.
Mutual funds and asset management included in 1994 and 1993, the limited
partnership interest in RCM Capital Management (RCM) and the operations of
American Capital Management & Research, Inc. (American Capital) through its
date of sale in December 1994. RCM is reported as part of Corporate and
Other in 1995.
Smith Barney
Significant strength in the financial markets during 1995 contributed to
Smith Barney's record earnings for the year. Excluding the $21 million
gain in 1994, Smith Barney's 1995 earnings increased 63% over the prior
year. A difficult operating environment in the securities markets during
1994, combined with the effect of increased expenses in 1994 related to the
acquisition of the Shearson Businesses, contributed to a slight decline in
Smith Barney's 1994 earnings when compared to 1993, excluding the $21
million gain in 1994 and the $65 million provision in 1993.
Smith Barney Revenues
Year Ended December 31,
------------------------------------------------------
(millions) 1995 1994 1993
------------------------------------------------------
Commissions $2,008 $1,800 $1,108
Investment banking 847 680 667
Principal trading 1,016 900 549
Asset management fees 1,052 941 489
Interest income, net* 377 329 211
Other income 134 114 70
------------------------------------------------------
Net revenues* $5,434 $4,764 $3,094
------------------------------------------------------
* Net of interest expense of $1,374 million, $770 million and $277
million in 1995, 1994 and 1993, respectively. Revenues included in
the consolidated statement of income are before deductions for
interest expense.
Revenues, net of interest expense, increased 14% compared to 1994,
reflecting increases in all categories. Commission revenues increased by
12% to $2.008 billion in 1995 compared to $1.800 billion in 1994. The
increase reflects higher activity in listed and over-the-counter securities
and options markets, offset by declines in futures and mutual funds.
Investment banking revenues increased 25% to a record $847 million in 1995
compared to $680 million in 1994, reflecting strong volume in equity, unit
trust, high yield and high grade corporate debt
3
<PAGE>
underwritings, as well as merger and acquisition fees. Smith Barney's
market share in a number of categories, particularly equity IPOs, continued
to advance during the year. Principal trading revenues increased 13% to
$1.016 billion in 1995 compared to $900 million in 1994, with particularly
strong results in equities and taxable fixed income offset by a decline in
municipal trading. Asset management fees were $1.052 billion in 1995
compared to $941 million in 1994. At December 31, 1995, Smith Barney had
assets under management of $96.2 billion, up from $78.0 billion a year ago.
The increase in asset management revenues also reflects fees associated
with bringing in-house all the administrative functions for proprietary
mutual funds and money funds during the latter part of 1995. Net interest
income was $377 million in 1995, up from $329 million in 1994, as a result
of higher levels of interest-earning net assets.
Total expenses, excluding interest, increased 7% to $4.406 billion in 1995
as compared to $4.118 billion in 1994. This increase was driven by higher
production-related Financial Consultant compensation and other employee
compensation and benefits expense, which increased 8% to $3.193 billion in
the 1995 period, as compared to $2.953 billion in 1994. Expenses other
than interest and employee compensation and benefits were $1.213 billion in
the 1995 period compared to $1.165 billion in 1994. However, the number of
non-production employees and the level of fixed expenses continued the
downward trend that began in the fourth quarter of 1994.
Smith Barney's return on equity was 24.7% for 1995 compared to 16.4% for
1994, excluding the $21 million gain on HG Asia, and continues to be among
the highest of its industry peer group.
Assets Under Management
At December 31,
---------------
(billions) 1995 1994
------------------------------------------------------
Smith Barney $ 96.2 $ 78.0
Travelers Life and Annuity (1) 22.1 19.2
------------------------------------------------------
Total Assets Under Management (2) $118.3 $97.2
------------------------------------------------------
(1) Part of the Life Insurance Services segment.
(2) Excludes assets under management at RCM Capital Management of $26.2
billion in 1995 and $22.5 billion in 1994.
Outlook - Smith Barney's business is significantly affected by the levels
of activity in the securities markets, which in turn are influenced by the
level and trend of interest rates, the general state of the economy and the
national and worldwide political environments, among other factors. An
increase in interest rates could have an adverse impact on Smith Barney's
businesses, including commissions (which are linked in part to the economic
attractiveness of securities relative to time deposits) and investment
banking (which is affected by the relative benefit to corporations and
public entities of issuing public debt and/or equity versus other avenues
for raising capital). These factors, however, could be at least partially
offset by a strengthening U.S. economy that might include growth in the
business sector -- accompanied by a rise 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 influence 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. Smith Barney is continuing to
maintain tight expense controls that management believes will help the firm
withstand periodic downturns in market conditions.
Asset Quality - Total Investment Services' assets at December 31, 1995 were
approximately $41.0 billion, consisting primarily of highly liquid
marketable securities and collateralized receivables. About 48% 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 22% represented inventories
of securities primarily needed to meet customer demand. A significant
portion of the remainder of the assets represented receivables from
4
<PAGE>
brokers, dealers and customers that relate to securities transactions in
the process of being settled. The carrying values of the majority of Smith
Barney's securities inventories are adjusted daily to reflect current
prices. See Notes 1, 6, 7 and 8 of Notes to Consolidated Financial
Statements for a further description of these assets. See Note 19 of Notes
to Consolidated Financial Statements for a description of Smith Barney's
activities in derivative financial instruments, which it uses primarily to
facilitate customer transactions.
At December 31, 1995 there were no "bridge" loans held by Smith Barney, and
exposure to high-yield positions was not material. Smith Barney's assets
to equity ratio at December 31, 1995 was 16.6 to 1, which management
believes is a conservative leverage level for a securities broker and one
that enhances the prospects for future growth.
Smith Barney's assets are financed through a number of sources including
long and short-term credit facilities, the financing transactions described
above and payables to brokers, dealers and customers.
Consumer Finance Services
<TABLE><CAPTION>
Year Ended December 31,
----------------------------------------------------
1995 1994 1993
----------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenue Income
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consumer Finance Services(1) $1,354 $246 $1,239 $227 $1,193 $232
</TABLE>
(1) Net income includes $23 million of reported investment portfolio gains
in 1993.
Consumer Finance net income in 1995 increased by 9% over the prior year.
The increase primarily reflects a 7% increase in average receivables
outstanding. The rise in average receivables outstanding was highlighted
by an 11% increase in personal loan average receivables outstanding, which
is the highest margin product line. Receivables growth has been at a
somewhat slower pace than in 1994, and was adversely affected by increasing
first mortgage refinancings in the latter part of 1995. Proceeds of such
refinancings are sometimes used by the borrowers to pay off second
mortgages in the consumer finance portfolio. Earnings before reported
investment portfolio gains increased 8% in 1994 over 1993, reflecting both
an 11% increase in average receivables outstanding and an improvement in
net interest margins.
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 generally have been set
within a narrow range and approximated 8% in 1993; and 7.0% in 1994 and
1995. For variable rate loan products, Consumer Finance is charged rates
based on prevailing short term rates. CCC's actual cost of funds may be
higher or lower than rates charged to Consumer Finance, with the difference
reflected in Corporate and Other.
The average yield on receivables outstanding rose to 15.64% in 1995
compared with 15.41% in 1994, and net interest margins rose to 8.79% in
1995 from 8.76% in 1994, as a result of improved yields, offset by higher
funding costs. The average yield on receivables outstanding decreased to
15.41% in 1994 from 15.83% in 1993, due to lower yields on fixed rate
second mortgages and the adjustable rate real estate-secured loan product
introduced at the end of 1992. Lower cost of funds resulted in an
improvement in net interest margins to 8.76% in 1994 from 8.44% in 1993.
Delinquencies in excess of 60 days rose to 2.14% at December 31, 1995,
versus historically low levels of 1.88% in 1994, and 2.21% in 1993.
Correspondingly, the charge-off rate, which had been at record low levels
in 1994, moved higher in 1995 -- reaching 2.28% versus 2.08% in 1994 and
2.36% in 1993. This increase in delinquencies and charge-offs, which to
some extent reflects industry trends associated with personal bankruptcies,
is expected to continue during 1996.
5
<PAGE>
The allowance for credit losses as a percentage of net outstandings was
2.66% at year-end 1995, compared to 2.64% at year-end 1994 and 1993.
The total number of offices at year-end 1995 stood at 850, up from 828 at
year-end 1994. During 1995, Commercial Credit added 50 branches. This
increase was offset by consolidating 28 branches during the fourth quarter
in anticipation of a new structure designed to better serve the company's
growing business of underwriting second mortgage ($.M.A.R.T.) loans for
Primerica Financial Services (PFS).
As of, and for, the
Year Ended December 31,
-------------------------
1995 1994 1993
-------------------------
Allowance for credit losses as a %
of net outstandings 2.66% 2.64% 2.64%
Charge-off rate for the year 2.28% 2.08% 2.36%
60 + days past due on a contractual
basis as a % of gross consumer
finance reivables at year-end 2.14% 1.88% 2.21%
Insurance subsidiaries of the Company provide credit life, health and
property insurance to Consumer Finance customers. Premiums earned were
$139 million in 1995, $115 million in 1994, and $88 million in 1993. The
increase in premiums year-over-year is the result of growth in receivables
and expanded availability of certain products in additional states, as well
as the assumption through reinsurance by affiliates of the Company in 1994
of business previously insured by non-affiliated companies.
Outlook - Consumer Finance is affected by the interest rate environment and
general economic conditions. Although the declining interest rate
environment, should it continue, is not expected to have a material effect
on Consumer Finance yields, it has resulted in modest downward pressure on
interest rates charged on new receivables secured by real estate. For the
Company overall, however, these trends would be offset by the lower costs
of funds in such an environment. The low mortgage rate environment has
had, and may continue to have, some adverse impact on Consumer Finance
second mortgage loan volume and liquidations, as potential customers
refinance their first mortgages instead of turning to the second mortgage
market, or use proceeds from the refinancings of first mortgages to pay
down existing second mortgages. Continued lower interest rates could
result in a reduction of the interest rates that CCC charges Consumer
Finance on borrowed funds.
Asset Quality - Consumer Finance assets totaled approximately $8.1 billion
at December 31, 1995, of which $7.1 billion, or 87%, represented the net
consumer finance receivables (including accrued interest and the allowance
for credit losses). These receivables were predominantly residential real
estate-secured loans and personal loans. Receivable quality depends on the
likelihood of repayment. The Company seeks to reduce its risks by focusing
on individual lending, making a greater number of smaller loans than would
be practical in commercial markets, and maintaining disciplined control
over the underwriting process. The Company has a geographically diverse
portfolio as described in Note 9 of Notes to Consolidated Financial
Statements. The Company believes that its loss reserves on the consumer
finance receivables are appropriate given current circumstances. If the
charge-off and delinquency rates continue to increase, the Company would
anticipate increasing the loss reserves.
Of the remaining Consumer Finance assets, approximately $690 million were
investments of insurance subsidiaries, including $591 million of fixed
income securities and $59 million of short-term investments with a weighted
average quality rating of A1.
6
<PAGE>
Life Insurance Services
Year Ended December 31,
----------------------------------------------------
1995 1994 1993
---------------------------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenue Income
---------------------------------------------------------------------------
Primerica Financial
Services(1) $1,356 $251 $1,290 $210 $1,266 $223
Travelers Life and
Annuity(2) 2,502 330 2,198 211 319 42
---------------------------------------------------------------------------
Total Life Insurance
Services $3,858 $581 $3,488 $421 $1,585 $265
---------------------------------------------------------------------------
(1) Net income includes $20 million, $7 million and $45 million of
reported investment portfolio gains in 1995, 1994 and 1993, respectively.
(2) Net income includes $48 million, $1 million and $17 million of
reported investment portfolio gains in 1995, 1994 and 1993, respectively.
Travelers Life and Annuity includes the results of Transport Life Insurance
Company through September 29, 1995 (date of spin-off) and, for 1995 and
1994 only, the results of the Travelers Life and Annuity segment of old
Travelers which was acquired on December 31, 1993. Certain 1993 production
statistics related to old Travelers' businesses are included for comparison
purposes only in the following discussion and are not reflected in 1993
revenues or operating results.
The Managed Care and Employee Benefits Operations of old Travelers was
previously included in the Life Insurance Services segment. This business
marketed 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, this business is being accounted for as a
discontinued operation and, accordingly, 1994 amounts have been restated.
Primerica Financial Services
Earnings before portfolio gains for 1995 increased 14% over 1994,
reflecting continued growth in life insurance in force, improving life
insurance margins as well as favorable mortality results. 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 8% over the prior year. The increase was a 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 loan products of the
Consumer Finance segment.
New term life insurance sales were $53.0 billion in face amount for 1995,
compared to $57.4 billion in 1994, and $49.3 billion in 1993. The number
of policies issued was 266,600 in 1995, compared to 299,400 in 1994, and
260,300 in 1993. Life insurance in force at year-end 1995 reached $348.2
billion, up from $335.0 billion at year-end 1994, and continued to reflect
good policy persistency.
PFS has traditionally offered mutual funds to customers as a means to
invest the relative savings realized through the purchase of term life
insurance as compared to traditional whole life insurance. Sales of mutual
funds were $1.551 billion in 1995 compared to $1.622 billion in 1994 and
$1.473 billion in 1993 (including $253 million, $300 million and $207
million, respectively, of sales in Canada). Loan receivables from the
$.M.A.R.T. (second mortgage loans) and $.A.F.E. (personal loans) products
of Consumer Finance, which are reflected in the assets of Consumer Finance,
continued to advance during the year and were $1.258 billion at December
31, 1995 compared to $1.107 billion at December 31, 1994, and $765 million
at December 31, 1993. PFS's SECURE property and casualty insurance product
(automobile and homeowners insurance) -- issued through The Travelers
Indemnity Company and rolled out in 1995 in 14 states -- continues to
experience healthy growth in applications.
7
<PAGE>
Outlook - Over the last few years, programs including sales and product
training were begun that are designed to maintain high compliance
standards, increase the number of producing agents and customer contacts
and, ultimately, increase production levels. Additionally increased effort
has been made to provide all PFS customers full access to all PFS marketed
lines. Insurance in force is continuing to grow and the number of
producing agents has stabilized. A continuation of these trends could
positively influence future operations. PFS continues to expand cross-
selling with other Company subsidiaries of products such as loans, mutual
funds and, most recently, property and casualty insurance (automobile and
homeowners).
Travelers Life and Annuity
Travelers Life and Annuity 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 (Transport Life) (through the date of
spin-off). Among the range of individual products are fixed and variable
annuities; term, universal and whole life insurance; and long-term care and
other accident and health coverages. These products are primarily marketed
through a core group of over 500 independent agencies, the Copeland
Companies (Copeland), an indirect wholly-owned subsidiary of TIGI, and
Smith Barney Financial Consultants. Vintage Life and Travelers Target
Maturity, the first of several new products planned for Smith Barney, were
introduced in September 1995.
Earnings before portfolio gains increased 34% to $282 million in 1995,
compared to $210 million in 1994. Higher investment margins and improved
productivity accounted for the earnings growth. Investment margins
continue to be helped by the reinvestment of proceeds from sales over the
past year of underperforming real estate. Results for 1995 also include
investment income attributable to the reinvestment in the fourth quarter of
the proceeds from the sale of the Company's interest in The MetraHealth
Companies Inc. (see Note 3 of Notes to Consolidated Financial Statements),
but exclude Transport Life earnings subsequent to the date of spin-off.
Results for 1993 include only the operations of Transport Life.
For individual annuities, net written premiums and deposits were $1.713
billion in 1995, up 31% from $1.309 billion in 1994. Total individual
annuity policyholder account balances and benefit reserves at year-end 1995
were $12.7 billion compared to $10.9 billion at year-end 1994. Sales
continue to be strengthened by the success of Vintage, the variable annuity
product distributed exclusively by Smith Barney Financial Consultants,
which was launched in June 1994 and now accounts for more than 40% of all
individual annuity production. Annuity sales were also helped in part by
rating agency upgrades for claims paying ability that occurred during the
year, including, in April 1995, A.M. Best's upgrade of The Travelers
Insurance Company to an "A" rating. This rating is not a recommendation to
buy, sell or hold securities, and it may be revised or withdrawn at any
time.
In the group annuity business, net written premiums and deposits were
$1.021 billion in 1995, compared to $772 million in 1994, excluding
deposits of $200 million and $512 million, respectively, related to the
transfer in-house of old Travelers pension fund assets previously managed
externally. A management decision not to renew low margin guaranteed
investment contracts written in prior years accounted for a reduction in
group annuity policyholder account balances and benefit reserves to $10.6
billion at year-end 1995, down from $12.2 billion at year-end 1994.
Face amount of individual life insurance issued, excluding Transport Life,
during 1995 was $6.2 billion, down from $9.2 billion in 1994, bringing
total life insurance in force to $49.2 billion at year-end 1995. The
reduction in face amount issued reflects a de-emphasis on sales of certain
lower-margin life insurance products. Net written premiums and deposits
for individual life insurance, excluding Transport Life, were $269 million
in 1995, compared to $282 million in 1994. The year-over-year decline
reflects the purchase of additional reinsurance coverage in 1995.
Net written premiums for health-related lines, excluding Transport Life,
were $133 million in 1995, up 19% from $111 million in 1994. This increase
reflects strong growth in long-term care insurance.
Outlook - Travelers Life and Annuity should benefit from growth in the
aging population who are becoming more focused on the need to accumulate
adequate savings for retirement, to protect these savings and to plan for
the
8
<PAGE>
transfer of wealth to the next generation. Travelers Life and Annuity is
well-positioned to take advantage of the favorable long-term demographic
trends through its strong financial position, widespread brand name
recognition and broad array of competitive life, annuity and long-term care
insurance products sold through three established distribution channels.
These include independent agents, Copeland, and Smith Barney Financial
Consultants.
However, competition in both product pricing and customer service is
intensifying. While there has been some consolidation within the industry,
other financial services organizations are increasingly involved in the
sale and/or distribution of insurance products. Deregulation of the
banking industry, including possible reform of restrictions on entry into
the insurance business, will likely accelerate this trend. Also, the
annuities business is interest sensitive, and swings in interest rates
could influence sales and retention of in force policies. In order to
strengthen its competitive position, Travelers Life and Annuity expects to
maintain a current product portfolio, further diversify its distribution
channels, and retain its healthy financial position through strong sales
growth and maintenance of an efficient cost structure.
In addition, during the past year significant tax reform discussions have
occurred. Some of the proposed discussions could reduce or eliminate the
need for tax deferral features and thus the need for products that are
currently in Travelers Life and Annuity's portfolio. New legislation could
also create the need for new products or increase the demand for some
existing products. At this time it is not clear what the eventual outcome
of this national debate will be or what impact, if any, it may have on
Travelers Life and Annuity's sales and business retention.
Property & Casualty Insurance Services
Year Ended December 31,
---------------------------------------------------
(millions) 1995 1994 1993
- -------------------------------------------------------------------------------
Net Net Net
Revenue Income Revenues Income Revenues Income
-------------------------------------------------------------------------------
Commercial (1) $3,063 $343 $3,058 $146 $315 $45
Minority Interest - Gulf - - - - - (22)
Personal (2) 1,482 110 1,480 103 - -
-------------------------------------------------------------------------------
Total Property & Casualty
Insurance Services $4,545 $453 $4,538 $249 $315 $23
===============================================================================
(1) Net income includes $36 million of reported investment
portfolio gains in 1995 and $73 million of reported investment
portfolio losses in 1994 and $15 million of reported investment
portfolio gains in 1993.
(2) Net income includes $6 million of reported investment portfolio
gains in 1995 and $18 million of reported investment portfolio
losses in 1994 and also in 1994 a $19 million gain from the
sale of Bankers and Shippers Insurance Company.
The Property & Casualty Insurance Services segment consists of the property
and casualty 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 the Company. Certain 1993 production statistics related
to old Travelers' businesses are included for comparison purposes only in
the following discussion and are not reflected in 1993 revenues or
operating results.
On November 28, 1995, TIGI, an indirect wholly-owned subsidiary of the
Company, entered into an agreement with Aetna Life and Casualty Company
(Aetna) to purchase Aetna's domestic property and casualty insurance
operations for approximately $4.0 billion in cash, subject to certain
adjustments. The agreement, which is subject to various regulatory
approvals, provides for the purchase, by TIGI or a subsidiary, of all of
the outstanding capital stock of The Aetna Casualty and Surety Company and
The Standard Fire Insurance Company. The transaction is expected to be
completed around the end of the first quarter of 1996. (See Liquidity and
Capital Resources.)
9
<PAGE>
Commercial Lines
Earnings before portfolio gains/losses increased 40% to $307 million in
1995 compared to $219 million in 1994. The improvement relative to 1994
primarily resulted from an increase in net investment income and improved
loss trends in the workers' compensation line.
Commercial Lines net written premiums were $2.309 billion in 1995, compared
to $2.391 billion in 1994 and $2.499 billion in 1993. Premium equivalents
for 1995 were $2.821 billion compared to $2.990 billion in 1994 and $2.757
billion in 1993. Premium equivalents, which are associated largely with
National Accounts, represent estimates of premiums that customers would
have been charged under a fully insured arrangement and do not represent
actual premium revenues.
A significant component of Commercial Lines is National Accounts, which
works with national brokers and regional agents providing insurance
coverages and services, primarily workers' compensation, mainly to large
corporations. National Accounts also includes the alternative market
business which primarily covers workers' compensation products and
services. National Accounts' net written premiums for 1995 were $703
million compared to $835 million in 1994. National Account premium
equivalents of $2.780 billion for 1995 were $179 million below 1994. The
1995 decline reflects selective renewal activity in response to the
competitive pricing environment as well as continued success in lowering
workers' compensation losses of customers (which reduces premiums and
equivalents). The decrease in premium equivalents in 1995 compared to 1994
primarily reflects a depopulation of involuntary pools as the loss
experience of workers' compensation improved and insureds moved to
voluntary markets. For 1995, new premium and equivalent business was $444
million compared to $325 million for 1994. Retention ratios dropped to 84%
in 1995 from 88% in 1994, reflecting selective renewal activity in response
to the competitive pricing environment.
Commercial Accounts serves mid-sized businesses through a network of
independent agencies and brokers. Commercial Accounts' net written
premiums were $730 million in 1995 compared to $791 million in 1994,
reflecting continued softness in the guaranteed cost products of Commercial
Accounts business and was partly offset by continued growth in
industry-specific programs and in retrospectively rated policies and other
loss-responsive products. Commercial Account premium equivalents grew to
$41 million in 1995, $10 million above the 1994 level. This increase
reflects a shift from guaranteed cost products to fee-for-service business.
For 1995, new premium and equivalent business in Commercial Accounts was
$470 million compared to $381 million in 1994. The Commercial Accounts
business retention ratio was 73% in 1995 compared to 79% in 1994.
Commercial Accounts continues to focus on the retention of existing
business while maintaining its product pricing standards and its selective
underwriting policy.
Select Accounts serves small businesses through a network of independent
agencies. Select Accounts net written premiums of $542 million for 1995
were $76 million above 1994 premium levels, due primarily to an increase in
new business. New premium business in Select Accounts was $131 million in
1995 compared to $112 million in 1994. The Select Accounts business
retention ratio was 75% in 1995 compared to 73% in 1994.
Specialty Accounts net written premiums of $334 million in 1995 increased
12% compared to $299 million in 1994. This growth is primarily
attributable to an increase in the writing of assumed reinsurance business.
Catastrophe losses, net of tax and reinsurance, were $7 million in 1995
compared to $30 million in 1994. The 1994 catastrophe losses were due to
winter storms in the first quarter of 1994. Effective April 1, 1995, the
threshold of losses incurred to qualify a specific event as a catastrophe
was increased.
The 1995 and 1994 full year statutory combined ratios were 105.0% and
124.7%, respectively. The 1994 statutory combined ratio included a
statutory charge of $225 million for reserve increases for environmental
claims and for a reduction of ceded reinsurance balances. The 1993 full
year statutory combined ratio of old Travelers and Gulf combined was 125.3%
and included $325 million of reserve strengthening predominantly for
asbestos and environmental liabilities recorded by old Travelers in the
third quarter of 1993. The 1994 and 1993 statutory combined ratios
excluding these reserve charges were 114.2% for 1994 and 111.2% for old
Travelers and Gulf
10
<PAGE>
combined for 1993. The improvement in the 1995 statutory combined ratio
compared to the adjusted 1994 statutory combined ratio was due to the first
quarter 1994 catastrophe losses and favorable loss development in certain
workers' compensation lines and residual markets in 1995.
Personal Lines
Expense reduction initiatives and strong net investment income contributed
to a small improvement in earnings in 1995. In addition, 1994 benefitted
from a one-time contribution of $9 million, which resulted from the
favorable resolution of the New Jersey Market Transition Facility (MTF)
deficit as well as earnings from Bankers and Shippers Insurance Company
(which was sold in October 1994). Earnings continue to reflect strong
performance in the agency network in targeted markets and aggressive
expense reduction initiatives. This was partially offset by start-up costs
of the SECURE program - a PFS sales initiative whereby automobile and
homeowners insurance is being marketed in selected states by the PFS sales
force.
Net written premiums for 1995 were $1.298 billion, compared to $1.433
billion in 1994. The 1995 decline of $135 million compared to 1994 was
attributable to the sale of Bankers and Shippers in October 1994. However,
excluding Bankers and Shippers business, net written premiums for 1995 were
up approximately 8% from 1994, reflecting reduced reinsurance ceded and
targeted growth in sales through independent agents.
Catastrophe losses, net of taxes and reinsurance, were $12 million in 1995,
compared to $26 million in 1994. The increase in catastrophe losses in
1994 was due to severe winter storms in the Northeast during the first
quarter. Effective April 1, 1995, the threshold of losses incurred to
qualify a specific event as a catastrophe was increased.
The statutory combined ratio for Personal Lines for the full year 1995 was
104.4% compared to 100.4% in 1994. The lower ratio in 1994 was due to the
benefit of favorable loss reserve development and the favorable resolution
of the MTF deficit.
Outlook - Property & Casualty
A variety of factors continue to affect the property and casualty insurance
market, including inflation in the cost of medical care and litigation and
losses from involuntary markets.
In most of Commercial Lines, pricing did not improve in 1995. For
Commercial Accounts and Select Accounts, the duration of the current
downturn in the underwriting cycle continues to place pressure on the
pricing of guaranteed cost products, as 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 Accounts business, although primarily
fee-for-service, continues to be very competitive on price.
In Personal Lines, inflation in the cost of automobile repairs, medical
care and litigation of liability claims in 1995 resulted in pressure on
current underwriting margins. Personal Lines management strategy includes
the control of operating expenses to improve competitiveness and
profitability, growth in sales through independent agents in target markets
and other distribution channels and a reduction of exposure to catastrophe
losses.
In an effort to reduce its exposure to catastrophic hurricane losses, the
Company has reduced agent commissions on homeowners insurance in certain
markets, strengthened underwriting standards and implemented price
increases in certain hurricane - prone areas, subject to restrictions
imposed by insurance regulatory authorities.
Environmental Claims
TIGI 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 historical 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
11
<PAGE>
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 TIGI 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 1995 and 1994. At December 31, 1995,
approximately 24% of the net environmental loss reserve (i.e.,
approximately $95 million) is case reserve for resolved claims. TIGI does
not post 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.
Environmental Losses(1)
--------------------
(millions) 1995 1994
---- ----
Beginning reserves:
Direct $482 $504
Ceded (11) (13)
---- ----
Net 471 491
Incurred losses and loss expenses:
Direct 117 54
Ceded (61) (5)
Losses paid:
Direct 145 76
Ceded (22) (7)
--- ----
Ending reserves:
Direct 454 482
Ceded (50) (11)
---- ----
Net $ 404 $ 471
==== ====
(1) 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, TIGI
establishes a claim file for each insured on a per site, per claimant
basis. If there is more than one claimant, such as a federal and a state
agency, this method will result in two claims being set up for a
policyholder at that one site. TIGI 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, 1995, TIGI had approximately 10,500 pending
environmental-related claims and had resolved more than 20,600 such claims
since 1986. Approximately 65% of the pending environmental-related claims
in inventory represented federal or state EPA-type claims tendered by
approximately 700 insureds. The balance represented bodily injury claims
alleging injury due to the discharge of insureds' waste or pollutants.
To date, TIGI generally has been successful in resolving its coverage
litigation and continues to reduce its potential exposure through favorable
settlements with certain insureds. These settlement agreements with
certain insureds are based on the variables presented in each piece of
coverage litigation. Generally the settlement dollars paid in disputed
coverage claims are a percentage of the total coverage sought by such
insureds. In addition, with respect to settlement of many of the
environmental claims, there is a "buy-back" from the insured, of the future
environmental liability risks under the policy by TIGI, together with
appropriate indemnities and hold harmless provisions to protect TIGI.
12
<PAGE>
In 1995, Congress considered the "Superfund Reform Act of 1995" and certain
other proposals, which seek to effect improvements in remediation of
hazardous waste sites listed on the National Priorities List (NPL), and to
achieve certain other reforms of Superfund. It is not possible to predict
whether proposed legislation will be enacted, what form such legislation
might take when enacted, or the potential effects such legislation may have
on the Company and its competitors.
Asbestos Claims
In the area of asbestos claims, the Company believes that the property and
casualty insurance industry has suffered from judicial interpretations that
have attempted to maximize insurance availability from both a coverage and
liability standpoint far beyond the intent of the contracting parties.
These policies generally were issued prior to the 1980s. Originally the
cases involved mainly plant workers and traditional asbestos manufacturers
and distributors. However, in the mid-1980s, a new group of plaintiffs,
whose exposure to asbestos was less direct and whose injuries were often
speculative, began to file lawsuits in increasing numbers against the
traditional defendants as well as peripheral defendants who had produced
products that may have contained small amounts of some form of encapsulated
asbestos. These claims continue to arise and on an individual basis
generally involve smaller companies with smaller limits of potential
coverage.
Also, there has emerged a group of non-product claims by plaintiffs, mostly
independent labor union workers, mainly against companies alleging exposure
to asbestos while working at these companies' premises. In addition,
various insurers, including TIGI, remain defendants in an action brought in
Philadelphia regarding potential consolidation and resolution of future
asbestos bodily injury claims. The cumulative effect of these claims and
judicial actions on TIGI and its insureds currently is uncertain.
In addition, various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as
premises owners, are tendering asbestos-related claims to the industry.
Because each insured presents different liability and coverage issues, TIGI
evaluates those issues on an insured-by-insured basis.
TIGI'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 TIGI on behalf of its
insureds also have precluded TIGI 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 1995 and 1994. At December 31, 1995, approximately 82% of
the net asbestos reserves represented incurred but not reported losses.
Asbestos Losses(1)
---------------
(millions) 1995 1994
---- ----
Beginning reserves:
Direct $702 $775
Ceded (319) (381)
----- -----
Net 383 394
Incurred losses and loss expenses:
Direct 109 67
Ceded (66) (16)
Losses paid:
Direct 116 140
Ceded (92) (78)
----- ----
Ending reserves:
Direct 695 702
Ceded ( 293) (319)
----- ----
Net $402 $383
==== ====
(1) Amounts prior to 1994 relate to Gulf only and are not material.
13
<PAGE>
The largest reinsurer of TIGI's asbestos risks is Lloyd's of London
(Lloyd's). Lloyd's is currently undergoing a restructuring to solidify its
capital base and to segregate claims for years before 1993. The ultimate
effect of this restructuring on reinsurance recoverable from Lloyd's 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, TIGI
carries on a continuing review of its overall position, its reserving
techniques and reinsurance recoverables. In each of these areas of
exposure, TIGI 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
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.
Outlook - Industry
Changes in the general interest rate environment affect the return received
by the insurance subsidiaries on newly invested and reinvested funds.
While a rising interest rate environment enhances the returns available, it
reduces the market value of existing fixed maturity investments and the
availability of gains on disposition. A decline in interest rates reduces
the returns available on investment of funds but could create the
opportunity for realized investment gains on disposition of fixed maturity
investments.
As required by various state laws and regulations, the Company's insurance
subsidiaries are required to participate in state-administered guaranty
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 that
operate with levels of capital higher than RBC requirements. Therefore, it
is inappropriate and ineffective to use the formulas to rate or to rank
such companies. At December 31, 1995 and 1994, all of the Company's life
and property & casualty companies had adjusted capital in excess of amounts
that would require regulatory action.
Asset Quality - The investment portfolio of the Insurance Services segment
which includes both Life Insurance and Property & Casualty Insurance
totaled approximately $40 billion, representing 65% of total Insurance
Services' assets of approximately $62 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 segment's fixed maturity portfolio totaled $30 billion, comprised of
$24 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, 1995 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.
14
<PAGE>
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 U.S. treasury securities.
The investment strategy of the Insurance Services segment is to purchase
CMO tranches that are protected against prepayment risk, primarily planned
amortization class (PAC) tranches. Prepayment protected tranches are
preferred because they provide stable cash flows in a variety of scenarios.
The segment does invest in other types of CMO tranches if a careful
assessment indicates a favorable risk/return tradeoff; however, it does not
purchase residual interests in CMOs.
At December 31, 1995, the segment held CMOs with a market value of $3.7
billion. Approximately 89% of CMO holdings are fully collateralized by
GNMA, FNMA or FHLMC securities, and the balances are fully collateralized
by portfolios of individual mortgage loans. In addition, the segment held
$2.1 billion of GNMA, FNMA or FHLMC mortgage-backed securities. Virtually
all of these securities are rated AAA. The segment also held $1.6 billion
of securities that are backed primarily by credit card or car loan
receivables.
At December 31, 1995, real estate and mortgage loan investments totaled
$4.4 billion. Most of these investments are included in the investment
portfolio of TIGI. 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) 1995 1994
---- ----
Current mortgage loans $3,796 $4,905
Underperforming mortgage loans 252 511
----- -----
Total mortgage loans 4,048 5,416
----- -----
Real estate held for sale 321 418
----- -----
Total mortgage loans and real estate $4,369 $5,834
===== =====
Included in underperforming mortgage loans above are $55 million of
mortgages restructured at below market terms, all of which 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, $232
million is underperforming.
For further information relating to investments, see Note 5 of Notes to
Consolidated Financial Statements.
15
<PAGE>
<TABLE><CAPTION>
Corporate and Other
Year Ended December 31,
-------------------------------------------------------------
1995 1994 1993
-------------------------------------------------------------
<S> <C> <C> <C>
Net Net Net
Income Income Income
(millions) Revenues (Expense) Revenues (Expense) Revenues (Expense)
----------------------------------------------------------------------------------
Net expenses(1) $(238) $(201) $(65)
Equity in income of
old Travelers in 1993 - - 152
Net gain (loss) on
sale of stock of
subsidiaries and
affiliates (13) 39 8
----------------------------------------------------------------------------------
Total Corporate and
Other $ 18 $(251) $(12) $(162) $180 $ 95
----------------------------------------------------------------------------------
</TABLE>
(1) Includes $23 million of reported investment portfolio losses in 1995
and $3 million of reported investment portfolio gains in 1993.
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 (before reported portfolio losses) in 1995
over 1994 is primarily attributable to increased interest costs borne at
the corporate level resulting from higher average short-term borrowing
rates in 1995 when compared to 1994 as well as a shift in debt mix to
higher levels of senior long-term debt over the course of 1995.
The increase in net expenses in 1994 over 1993 is primarily attributable to
the assumption of old Travelers corporate debt and certain corporate
expenses, the full year impact of financing the acquisition of the Shearson
Businesses, and a rise in commercial paper 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.
Discontinued Operations
Year Ended
December 31,
----------------------
(millions) 1995 1994
----------------------------------------------------------
Net Income Net Income
----------------------------------------------------------
Operations $ 76 $ 160
Gain on disposition 130 9
----------------------------------------------------------
Total discontinued operations $206 $169
----------------------------------------------------------
As discussed in Note 3 of Notes to Consolidated Financial Statements, all
of the businesses sold to Metropolitan Life Insurance Company (MetLife) or
contributed to The MetraHealth Companies Inc. (MetraHealth) were included
in the Company's Managed Care and Employee Benefits Operations (MCEBO)
segment in 1994. In 1995, the
16
<PAGE>
Company's results reflect the medical business not yet transferred, plus
its equity interest in the earnings of MetraHealth. These operations have
been accounted for as a discontinued operation.
Gain on disposition in 1995 represents a gain of $20 million from the sale
in January of the Company's group life insurance business to MetLife, and a
gain of $110 million (not including a contingency payment based on 1995
results which could be received by the Company in 1996) from the sale in
October of the Company's interest in MetraHealth to United HealthCare
Corporation. Gain on disposition in 1994 represents the gain from the sale
in December of the group dental insurance business to MetLife.
Liquidity and Capital Resources
Travelers Group Inc. (the Parent) services its obligations primarily with
dividends and other funds 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.
On January 24, 1996, the Company announced that its Board of Directors will
recommend shareholder approval, at the Company's Annual Meeting on April
24, 1996, of an increase in the Company's common share authorization to 1.5
billion shares. Contingent upon shareholder approval in April of that
increase in authorized shares, the Board of Directors has declared a
3-for-2 split in the Company's common stock, in the form of a 50% stock
dividend, payable on May 24, 1996 to shareholders of record on May 6,
1996.
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. The Parent, CCC
and TIC have an agreement with a syndicate of banks to provide $1.0 billion
of revolving credit, to be allocated to any of the Parent, CCC or TIC. The
participation of TIC in this agreement is limited to $250 million. The
revolving credit facility consists of a five-year revolving credit facility
which expires in 1999. At December 31, 1995, $400 million was allocated to
the Parent, $475 million was allocated to CCC, and $125 million to TIC. At
December 31, 1995 there were no borrowings outstanding under this facility.
Under this facility the Company is required to maintain a certain level of
consolidated stockholders' equity (as defined in the agreement), and the
Company exceeded this requirement by approximately $3.2 billion at December
31, 1995.
As of December 31, 1995, the Parent had unused credit availability of $400
million under the five-year revolving credit facility. In addition to the
five-year revolving credit facility, the Parent on January 17, 1996 entered
into a 364-day revolving credit and bid loan agreement with a bank to
provide $1.0 billion of revolving credit. The Parent may borrow under its
revolving credit facilities at various interest rate options and
compensates the banks for the facilities through commitment fees.
During 1995 and through March 5, 1996 the Parent completed the following
long-term debt offerings, leaving $1.0 billion available for debt offerings
under its shelf registration statements:
- 7 7/8% Notes due May 15, 2025 ........... $200 million
- 6 7/8% Notes due June 1, 2025 ........... $150 million
- 6 5/8% Notes due September 15, 2005 ..... $150 million
- 6 1/4% Notes due December 1, 2005 ....... $100 million
- 7% Notes due December 1, 2025 ........... $100 million
In December 1995, the Parent through a private placement, issued $100
million of 6 1/4% Notes due December 1, 2005, and $100 million of 7% Notes
due December 1, 2025 (the Debt Securities). In the first quarter of 1996,
Travelers Group Inc. filed a registration statement with respect to an
offer to exchange the Debt Securities for notes
17
<PAGE>
(the Exchange Notes) substantially identical in all material respects
(including principal amount, interest rate and maturity) to the terms of
the Debt Securities, except that the Exchange Notes will be registered
under the Securities Act of 1993 and therefore will be freely transferable
by holders.
Pending Acquisition
The Company expects that a subsidiary, Travelers/Aetna Property Casualty
Corp. (TAP), will own both the property and casualty operations purchased
from Aetna and the Company's existing property and casualty operations.
The Company expects to capitalize TAP initially by contributing
approximately $1.1 billion from a combination of cash on hand and
borrowings by the Company. The Company may provide additional funds in the
form of temporary capital in order to finance the transaction. In
addition, it is anticipated that TAP will finance the acquisition with an
aggregate of $525 million in equity securities issued to a small group of
private investors, and borrowings under a five-year revolving credit
facility in the amount of up to $2.65 billion provided by a syndicate of
banks led by Citibank, N.A., Chemical Bank and Morgan Guaranty Trust
Company. It is anticipated that subsequent to the acquisition, TAP will
raise additional capital through private and/or public debt and equity
offerings with the proceeds from such offerings being used principally to
repay the borrowings under the five-year revolving credit facility.
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,
1995, CCC had unused credit availability of $1.975 billion under five-year
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.
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, 1995, CCC would have been able to
remit $225 million to the Parent under its most restrictive covenants or
regulatory requirements.
During 1995 and through March 5, 1996 CCC completed the following long-term
debt offerings, leaving $950 million available for debt offerings under its
shelf registration statement:
- 7 7/8% Notes due February 1, 2025 ..... $200 million
- 7 3/4% Notes due March 1, 2005 ........ $200 million
- 7 3/8% Notes due March 15, 2002 ....... $200 million
- 7 3/8% Notes due April 15, 2005 ....... $200 million
- 6 7/8% Notes due May 1, 2002 .......... $200 million
- 6 3/4% Notes due May 15, 2000 ......... $200 million
- 6 5/8% Notes due June 1, 2015 ......... $200 million
- 6 1/2% Notes due June 1, 2005 ......... $200 million
- 6 3/8% Notes due September 15, 2002 ... $200 million
- 6 1/8% Notes due December 1, 2005 ..... $200 million
- 5 7/8% Notes due January 15, 2003 ..... $200 million
- 5.55% Notes due February 15, 2001 ..... $200 million
Smith Barney Holdings Inc. (Smith Barney)
Smith Barney funds its day-to-day operations through the use of commercial
paper, collateralized and uncollateralized bank borrowings (both committed
and uncommitted), internally generated funds, repurchase transactions, and
securities lending arrangements. The volume of Smith Barney's borrowings
generally fluctuates in response to changes in the amount of reverse
repurchase transactions outstanding, the level of securities inventories,
customer balances and securities borrowing transactions. Smith Barney has
a $1.0 billion revolving credit agreement with a bank syndicate that
extends through May 1998, and has a $750 million, 364-day revolving credit
agreement with a bank syndicate that extends through May 1996. As of
December 31, 1995, there were no borrowings outstanding under either
facility. Smith Barney also has substantial borrowing arrangements
consisting of facilities that it has been advised are available, but where
no contractual lending obligation exists.
18
<PAGE>
Smith Barney, through its subsidiary Smith Barney Inc., issues commercial
paper directly to investors. As a policy, Smith Barney maintains
sufficient borrowing power of unencumbered securities to cover
uncollateralized borrowings and uncollateralized letters of credit. In
addition, Smith Barney monitors its leverage and capital ratios on a daily
basis.
Smith Barney is limited by covenants in its revolving credit facility as to
the amount of dividends that may be paid to the Parent. At December 31,
1995, Smith Barney would have been able to remit approximately $452 million
to the Parent under its most restrictive covenants.
During 1995 and through March 5, 1996 Smith Barney completed the following
long-term debt offerings leaving $725 million available for debt offerings
under its shelf registration statement:
- 7.98% Notes due March 1, 2000 ....... $200 million
- 7 1/2% Notes due May 1, 2002 ........ $150 million
- 7% Notes due May 15, 2000 ........... $150 million
- 6 7/8% Notes due June 15, 2005 ...... $175 million
- 6 1/2% Notes due October 15, 2002 ... $150 million
- 5 7/8% Notes due February 1, 2001 ... $250 million
Securities Borrowed, Loaned and Subject to Repurchase Agreements
Smith Barney engages in "matched book" transactions in government and
mortgage-backed securities as well as "conduit" transactions in corporate
equity and debt securities. These transactions are similar in nature. A
"matched book" transaction involves a security purchased under an agreement
to resell (i.e., reverse repurchase transaction) and simultaneously sold
under an agreement to repurchase (i.e., repurchase transaction). A
"conduit" transaction involves the borrowing of a security from a
counterparty and the simultaneous lending of the security to another
counterparty. These transactions are reported gross in the Consolidated
Statement of Financial Position and typically yield relatively small
interest spreads, generally ranging from 10 to 30 basis points. The
interest spread results from the net of interest received on the reverse
repurchase or security borrowed transaction and the interest paid on the
corresponding repurchase or security loaned transaction. Interest rates
charged or credited in these activities are usually based on current
Federal Funds rates but can fluctuate based on security availability and
other market conditions. The size of balance sheet positions resulting
from these activities can vary significantly, depending primarily on levels
of activity in the bond markets, but would have a relatively smaller impact
on net income.
The Travelers Insurance Group Inc. (TIGI)
At December 31, 1995, TIGI had $20.4 billion of life and annuity product
deposit funds and reserves. Of that total, $9.6 billion are not subject to
discretionary withdrawal based on contract terms. The remaining $10.8
billion are for life and annuity products that are subject to discretionary
withdrawal by the contractholder. Included in the latter amount are $1.5
billion of liabilities that are surrenderable with market value
adjustments. An additional $5.6 billion of the life insurance and
individual annuity liabilities are subject to discretionary withdrawals,
with an average surrender charge of 5.2%, and $900 million 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 $2.8 billion of liabilities are surrenderable without charge.
Approximately 25% of these relate to individual life products. These risks
would have to be underwritten again if transferred to another carrier,
which is considered a significant deterrent against withdrawal by long-term
policyholders. Insurance liabilities surrendered or withdrawn from TIGI
are reduced by outstanding policy loans and related accrued interest prior
to payout.
Scheduled maturities of guaranteed investment contracts (GICs) in 1996,
1997, 1998, 1999 and 2000 are $1.3 billion, $367 million, $344 million,
$123 million and $91 million, respectively. At December 31, 1995, the
interest rates credited on GICs had a weighted average rate of 6.12%.
The Travelers Insurance Company (TIC), a direct subsidiary of TIGI issues
commercial paper to investors and maintains unused committed, revolving
credit facilities at least equal to the amount of commercial paper
outstanding.
19
<PAGE>
As of December 31, 1995, TIC has unused credit availability of $125 million
under the five-year revolving credit facility.
The Travelers Insurance Group Inc. is subject to various regulatory
restrictions that limit the maximum amount of dividends available to its
Parent without prior approval of the Connecticut Insurance Department. A
maximum of $580 million of statutory surplus is available in 1996 for such
dividends without Department approval.
Deferred Income Taxes
The Company has a net deferred tax asset which relates to temporary
differences that are expected to reverse as net ordinary deductions. The
Company will have to generate approximately $3.1 billion of taxable income,
before the reversal of the temporary differences, primarily over the next
10 to 15 years, to realize the remainder of the deferred tax asset.
Management expects to realize the remainder of the deferred tax asset
based upon its expectation of future taxable income, after the reversal of
these deductible temporary differences, of at least $1 billion annually.
<PAGE>
Future Application of Accounting Standards
FAS 121. In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" (FAS 121). This statement establishes accounting standards for the
impairment of long-lived assets and certain identifiable intangibles to be
disposed of. This statement requires a write down to fair value when
long-lived assets to be held and used are impaired. The statement also
requires long-lived assets to be disposed of (e.g., real estate held for
sale) to be carried at the lower of cost or fair value less cost to sell,
and does not allow such assets to be depreciated. The adoption of this
statement effective January 1, 1996 will not have a material effect on
results of operations, financial condition or liquidity.
FAS 123. In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). This statement addresses alternative
accounting treatments for stock-based compensation, such as stock options
and restricted stock. FAS 123 permits either expensing the value of
stock-based compensation over the period earned, or disclosing in the
financial statement footnotes the pro forma impact to net income as if the
value of stock-based compensation awards had been expensed. The value of
awards would be measured at the grant date based upon estimated fair value,
using established option pricing models. The requirements of this
statement will be effective for 1996 financial statements, although earlier
adoption is permissible if an entity elects to expense the cost of
stock-based compensation. The Company is currently evaluating the
disclosure requirements and expense recognition alternatives addressed by
this statement.
20
<PAGE>
<TABLE><CAPTION>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Income
(In millions of dollars, except per share amounts)
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Insurance premiums $4,977 $5,144 $1,480
Commissions and fees 2,874 2,526 1,813
Interest and dividends 4,355 3,401 722
Finance related interest and other charges 1,119 1,030 954
Principal transactions 1,016 900 549
Asset management fees 1,052 1,010 555
Equity in income of old Travelers - - 164
Other income 1,190 932 560
- ---------------------------------------------------------------------------------------------------
Total revenues 16,583 14,943 6,797
- ---------------------------------------------------------------------------------------------------
Expenses
Policyholder benefits and claims 5,017 5,227 833
Non-insurance compensation and benefits 3,442 3,241 2,057
Insurance underwriting, acquisition and operating 1,912 1,867 506
Interest 1,956 1,284 707
Provision for credit losses 171 152 134
Other operating 1,544 1,524 1,050
- ---------------------------------------------------------------------------------------------------
Total expenses 14,042 13,295 5,287
- ---------------------------------------------------------------------------------------------------
Gain (loss) on sale of subsidiaries and affiliates (20) 226 13
- ---------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 2,521 1,874 1,523
Provision for income taxes 893 717 550
Minority interest, net of income taxes - - (22)
- ---------------------------------------------------------------------------------------------------
Income from continuing operations 1,628 1,157 951
- ---------------------------------------------------------------------------------------------------
Discontinued operations, net of income taxes:
Income from operations (net of taxes of $17 and $87) 76 160 -
Gain on disposition (net of taxes of $66 and $19) 130 9 -
- ---------------------------------------------------------------------------------------------------
Income from discontinued operations 206 169 -
- ---------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes 1,834 1,326 951
Cumulative effect of accounting changes
(net of taxes of $19) - - (35)
- ---------------------------------------------------------------------------------------------------
Net income $1,834 $1,326 $ 916
===================================================================================================
Net income per share of common stock
and common stock equivalents:
Continuing operations $ 4.86 $ 3.34 $ 3.88
Discontinued operations 0.65 0.52 -
Cumulative effect of accounting changes - - (0.14)
- ---------------------------------------------------------------------------------------------------
Net income per share of common stock
and common stock equivalents $ 5.51 $ 3.86 $ 3.74
===================================================================================================
Weighted average number of common shares outstanding
and common stock equivalents (in millions) 317.4 322.0 237.8
===================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
<TABLE><CAPTION>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Financial Position
(In millions of dollars)
December 31, 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents
(including $1,072 and $816 segregated under federal and other brokerage regulations) $ 1,866 $ 1,227
Investments:
Fixed maturities, primarily available for sale at market value 30,712 27,288
Equity securities, at market value 856 510
Mortgage loans 4,048 5,416
Real estate held for sale 321 418
Policy loans 1,888 1,581
Short-term and other 3,140 3,752
- -------------------------------------------------------------------------------------------------------------------
Total investments 40,965 38,965
- --------------------------------------------------------------------------------------------------------------------
Securities borrowed or purchased under agreements to resell 19,601 25,655
Brokerage receivables 6,559 8,238
Trading securities owned, at market value 8,984 6,945
Net consumer finance receivables 7,092 6,746
Reinsurance recoverables 6,461 5,026
Value of insurance in force and deferred policy acquisition costs 2,172 2,163
Cost of acquired businesses in excess of net assets 1,928 2,045
Separate and variable accounts 6,949 5,162
Other receivables 3,564 4,018
Other assets 8,334 9,107
- --------------------------------------------------------------------------------------------------------------------
Total assets $114,475 $115,297
====================================================================================================================
Liabilities
Investment banking and brokerage borrowings $ 2,955 $ 4,374
Short-term borrowings 1,468 2,480
Long-term debt 9,190 7,075
Securities loaned or sold under agreements to repurchase 20,619 22,083
Brokerage payables 4,403 7,807
Trading securities sold not yet purchased, at market value 4,563 4,345
Contractholder funds 14,535 16,392
Insurance policy and claims reserves 26,920 27,084
Separate and variable accounts 6,916 5,127
Accounts payable and other liabilities 11,028 9,752
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 102,597 106,519
- --------------------------------------------------------------------------------------------------------------------
ESOP Preferred stock - Series C 235 235
Guaranteed ESOP obligation (67) (97)
- --------------------------------------------------------------------------------------------------------------------
168 138
- --------------------------------------------------------------------------------------------------------------------
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: 1995 - 368,171,649 and 1994 - 368,195,609) 4 4
Additional paid-in capital 6,785 6,655
Retained earnings 5,503 4,199
Treasury stock, at cost (1995 - 51,924,410 shares and 1994 - 51,684,618 shares) (1,835) (1,553)
Unrealized gain (loss) on investment securities and other, net 453 (1,465)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,710 8,640
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $114,475 $115,297
====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
<TABLE><CAPTION>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(In millions of dollars)
Amounts Shares (in thousands)
----------------------- ---------------------------
Year Ended December 31, 1995 1994 1993 1995 1994 1993
------------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock at aggregate liquidation value
Balance, beginning of year $ 800 $ 800 $ 300 11,200 11,200 1,200
Issuance of preferred stock 500 10,000
- ----------------------------------------------------------------------------------- -----------------------------
Balance, end of year 800 800 800 11,200 11,200 11,200
=================================================================================== =============================
Common stock and additional paid-in capital
Balance, beginning of year 6,659 6,570 2,150 368,196 368,287 253,524
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
Issuance of common stock warrants 25
Issuance of shares pursuant to employee benefit plans 130 85 122
Other 4 (24) (91)
- ----------------------------------------------------------------------------------- -------------------------------
Balance, end of year 6,789 6,659 6,570 368,172 368,196 368,287
- ----------------------------------------------------------------------------------- -------------------------------
Retained earnings
Balance, beginning of year 4,199 3,140 2,363
Net income 1,834 1,326 916
Common dividends (255) (181) (113)
Preferred dividends (86) (86) (26)
Distribution of Transport Holdings Inc. shares (189)
- -----------------------------------------------------------------------------------
Balance, end of year 5,503 4,199 3,140
- -----------------------------------------------------------------------------------
Treasury stock (at cost)
Balance, beginning of year (1,553) (1,121) (540) (51,685) (41,155) (31,572)
Conversion of debentures 81 4,104
Issuance of shares pursuant to employee benefit plans,
net of shares tendered for payment of option exercise
price and withholding taxes 136 111 (10) 8,964 5,318 6,175
Treasury stock acquired (418) (543) (58) (9,204) (15,876) (1,478)
Common stock issued to subsidiaries of the Company (595) (18,519)
Other 1 28 135
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year (1,835) (1,553) (1,121) (51,925) (51,685) (41,155)
- ------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on investment securities and other
Balance, beginning of year (1,465) (63) (44)
Net change in unrealized gains and (losses) on
investment securities, net of tax 2,075 (1,349) 22
Net issuance of restricted stock (221) (190) (103)
Restricted stock amortization 175 136 64
Adjustment for minimum pension liability, net of tax (114)
Net translation adjustments, net of tax 3 1 (2)
- -----------------------------------------------------------------------------------
Balance, end of year 453 (1,465) (63)
- -----------------------------------------------------------------------------------
Total common stockholders' equity and common
shares outstanding 10,910 7,840 8,526 316,247 316,511 327,132
=================================================================================== ===============================
Total stockholders' equity $11,710 $8,640 $9,326
===================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE>
<TABLE><CAPTION>
Travelers Group Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(In millions of dollars)
Year Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C>
Cash flows from operating activities
Income from continuing operations before income taxes, minority interest and
cumulative effect of accounting changes $2,521 $1,874 $ 1,523
Adjustments to reconcile income from continuing operations before income taxes,
minority interest and cumulative effect of accounting changes to net cash
provided by (used in) operating activities:
Amortization of deferred policy acquisition costs and value of insurance in force 803 812 286
Additions to deferred policy acquisition costs (858) (994) (369)
Depreciation and amortization 304 330 125
Provision for credit losses 171 152 134
Undistributed equity earnings - - (116)
Changes in:
Trading securities, net (1,821) (572) (1,082)
Securities borrowed, loaned and repurchase agreements, net 4,590 (363) (1,591)
Brokerage receivables net of brokerage payables (1,725) 724 863
Insurance policy and claims reserves 686 350 251
Other, net (508) (1,740) 522
Net cash flows provided by (used in) operating activities of discontinued operations (415) 323 -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 3,748 896 546
Income taxes paid (563) (378) (403)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,185 518 143
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Consumer loans originated or purchased (2,748) (2,789) (2,673)
Consumer loans repaid or sold 2,245 2,094 2,108
Purchases of fixed maturities and equity securities (18,123) (9,057) (2,794)
Proceeds from sales of investments and real estate:
Fixed maturities available for sale and equity securities 12,864 4,149 2,485
Mortgage loans 739 402 5
Real estate and real estate joint ventures 256 955 -
Proceeds from maturities of investments:
Fixed maturities 2,723 3,319 231
Mortgage loans 693 1,301 6
Other investments, primarily short-term, net (408) (58) (631)
Payment for purchase of the Shearson Businesses (76) (69) (1,296)
Payment for net clearing assets transferred - - (536)
Cash acquired in connection with The Travelers Merger - - 59
Business divestments - 679 120
Other, net (236) (284) (274)
Net cash flows provided by (used in) investing activities of discontinued operations 1,623 (303) -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (448) 339 (3,190)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Dividends paid (341) (267) (139)
Issuance of common stock - - 329
Treasury stock acquired (418) (543) (58)
Issuance of long-term debt 3,525 1,150 2,733
Payments and redemptions of long-term debt (1,375) (1,033) (448)
Net change in short-term borrowings (including investment banking and brokerage borrowings) (2,431) 865 1,934
Contractholder fund deposits 2,707 1,958 -
Contractholder fund withdrawals (3,755) (3,358) -
Other, net (10) (12) (50)
Net cash flows provided by financing activities of discontinued operations - 84 -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,098) (1,156) 4,301
- ---------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 639 (299) 1,254
Cash and cash equivalents at beginning of period 1,227 1,526 272
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,866 $1,227 $ 1,526
- ---------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $1,930 $1,227 $ 674
=====================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
Travelers Group Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
------------------------------------------
Basis of Presentation
Principles of Consolidation. The consolidated financial statements include
the accounts of Travelers Group Inc. (formerly The Travelers Inc.) and
its subsidiaries (the Company). In December 1992, the Company 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. On December 31, 1993, the Company acquired the
approximately 73% of old Travelers common stock it did not already own (the
Merger) through the merger of old Travelers into the Company. The
Acquisition and the Merger were accounted for as a step acquisition and
accordingly, old Travelers' assets and liabilities were recorded at 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 was 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%
interest previously owned. The old Travelers businesses acquired are
hereinafter referred to as old Travelers or The Travelers Insurance Group
Inc. (TIGI). 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). The acquisition was accounted for as a
purchase, and the consolidated financial statements include the results
of the Shearson Businesses from the date of acquisition.
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
As more fully described in Note 3, all of the operations comprising Managed
Care and Employee Benefits Operations (MCEBO), are presented as a
discontinued operation and, accordingly, prior year amounts have been
restated.
Certain reclassifications have been made to prior years' financial
statements to conform to the current year's presentation.
Accounting Changes
FAS 114 and FAS 118. Effective January 1, 1995, the Company adopted
Statement of Financial Accounting Standards (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,"
which describe how impaired loans should be measured when determining the
amount of a loan loss accrual. These statements amended existing
guidance on the measurement of restructured loans in a troubled debt
restructuring involving a modification of terms. The adoption of these
standards did not have a material impact on the Company's financial
condition, results of operations or liquidity.
FAS 115. Effective January 1, 1994, the Company adopted 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
26
<PAGE>
Notes to Consolidated Financial Statements (continued)
the Company has the positive intent and ability to
hold to maturity are classified as "held to maturity" and are reported at
amortized cost. Investment securities that are not classified as "held to
maturity" are 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
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 required
employers to recognize the cost of the obligation to provide these
benefits on an accrual basis, and implementation 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.
Accounting Policies
Cash and cash equivalents include cash on hand, cash segregated under
federal and brokerage regulations and short-term highly liquid investments
with maturities of three months or less when purchased, other than those
held for sale in the ordinary course of business. These short-term
investments are carried at cost plus accrued interest, which approximates
market value.
Investments are owned principally by the insurance subsidiaries. Fixed
maturities include bonds, notes and redeemable preferred stocks. Equity
securities include common and non-redeemable preferred stocks. Fixed
maturities classified as "held to maturity" represent securities that the
Company has both the ability and the intent to hold until maturity and are
carried at amortized cost. Fixed maturity securities classified as
"available for sale" and equity securities are carried at market values
that are based primarily on quoted market prices. The difference between
amortized cost and market values of such securities net of applicable
income taxes is reflected as a component of stockholders' equity. Real
estate held for sale is carried at the lower of cost or fair value less
estimated costs to sell. Fair values are established by appraisers, both
internal and external, using discounted cash flow analyses and other
acceptable techniques. Thereafter, an allowance for losses on real estate
held for sale is established if the carrying value of the property exceeds
its current fair value less estimated costs to sell. There was no such
allowance at December 31, 1995. Mortgage loans are carried at amortized
cost. For mortgage loans that are determined to be impaired, a reserve is
established for the difference between the amortized cost and fair market
value of the underlying collateral. Impaired loans were insignificant at
December 31, 1995. Policy loans are carried at unpaid balances which do
not exceed the net cash surrender value of the related insurance policies.
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with a maturity of less than one year, are
carried at cost 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.
27
<PAGE>
Notes to Consolidated Financial Statements (continued)
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