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<SEC-DOCUMENT>0001005477-98-000860.txt : 19980325
<SEC-HEADER>0001005477-98-000860.hdr.sgml : 19980325
ACCESSION NUMBER: 0001005477-98-000860
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 16
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980324
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TRAVELERS GROUP INC
CENTRAL INDEX KEY: 0000831001
STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331]
IRS NUMBER: 521568099
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-09924
FILM NUMBER: 98571728
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-K405
<SEQUENCE>1
<DESCRIPTION>FORM 10-K405
<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, 1997
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>
<S> <C>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $ .01 per share New York Stock Exchange and Pacific Exchange
Depositary Shares, each representing 1/5th of a share of New York Stock Exchange
6.365% Cumulative Preferred Stock, Series F
Depositary Shares, each representing 1/5th of a share of New York Stock Exchange
6.213% Cumulative Preferred Stock, Series G
Depositary Shares, each representing 1/5th of a share of New York Stock Exchange
6.231% Cumulative Preferred Stock, Series H
Depositary Shares, each representing 1/20th of a share of New York Stock Exchange
8.08% Cumulative Preferred Stock, Series J
Depositary Shares, each representing 1/20th of a share of New York Stock Exchange
8.40% Cumulative Preferred Stock, Series K
7 3/4% Notes Due June 15, 1999 New York Stock Exchange
1998 Warrants to Purchase Common Stock New York Stock Exchange
8% Trust Preferred Securities of Subsidiary Trust (and New York Stock Exchange
registrant's guaranty with respect thereto)
7 3/4% Trust Preferred Securities of Subsidiary Trust (and New York Stock Exchange
registrant's guaranty with respect thereto)
7 5/8% Trust Preferred Securities of Subsidiary Trust (and New York Stock Exchange
registrant's guaranty with respect thereto)
6.850% Trust Preferred Securities (TRUPS(R)) of Subsidiary New York Stock Exchange
Trust (and registrant's guaranty with respect thereto)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
[Cover page 1 of 2 pages.]
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.|X|
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 4, 1998 was approximately $61.5 billion.
As of March 4, 1998, 1,152,647,587 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1997 are incorporated by reference into Part II
of this Form 10-K.
Certain portions of the registrant's Proxy Statement for the 1998 Annual Meeting
of Stockholders to be held on April 22, 1998 are incorporated by reference into
Part III of this Form 10-K.
[Cover page 2 of 2 pages.]
<PAGE>
TRAVELERS GROUP INC.
Annual Report on Form 10-K
For Fiscal Year Ended December 31, 1997
------------------------------
TABLE OF CONTENTS
Form 10-K
Item Number Page
- ----------- ----
Part I
------
1. Business........................................................... 1
2 Properties......................................................... 70
3. Legal Proceedings.................................................. 71
4. Submission of Matters to a Vote of Security Holders................ 72
Part II
-------
5. Market for Registrant's Common Equity and
Related Stockholder Matters...................................... 72
6. Selected Financial Data............................................ 73
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 73
7A. Quantitative and Qualitative Disclosures About Market Risk......... 73
8. Financial Statements and Supplementary Data........................ 73
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 73
Part III
--------
10. Directors and Executive Officers of the Registrant................. 74
11. Executive Compensation............................................. 74
12. Security Ownership of Certain Beneficial Owners
and Management................................................... 74
13. Certain Relationships and Related Transactions..................... 74
Part IV
-------
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K...................................................... 74
Exhibit Index...................................................... 76
Signatures......................................................... 80
Index to Consolidated Financial Statements and Schedules........... F-1
<PAGE>
PART I
------
Item 1. BUSINESS.
THE COMPANY
Travelers Group Inc. (the "Company") is a diversified financial services
holding company engaged, through its subsidiaries, principally in four business
segments: (i) Investment Services (primarily through Salomon Smith Barney
Holdings Inc. and its subsidiaries), including Asset Management; (ii) Consumer
Finance Services (primarily through Commercial Credit Company and its
subsidiaries); (iii) Property & Casualty Insurance Services (primarily through
Travelers Property Casualty Corp. and its subsidiaries); and (iv) Life Insurance
Services (primarily through The Travelers Insurance Company and its subsidiaries
and the Primerica Financial Services group of companies).
On November 28, 1997, a newly formed wholly owned subsidiary of the
Company was merged (the "Merger") into Salomon Inc ("Salomon"). Under the terms
of the Merger, approximately 188.5 million shares of Company common stock were
issued in exchange for all of the outstanding shares of Salomon common stock,
based on an exchange ratio of 1.695 shares of Company common stock for each
share of Salomon common stock, for a total value of approximately $9 billion.
Each of Salomon's series of preferred stock outstanding was exchanged for a
corresponding series of Company preferred stock having substantially identical
terms, except that the Company preferred stock issued in conjunction with the
Merger has certain voting rights. Thereafter, Smith Barney Holdings Inc. ("SB
Holdings"), a wholly owned subsidiary of the Company, was merged into Salomon to
form Salomon Smith Barney Holdings Inc. ("SSBH"), which is the primary vehicle
through which the Company engages in investment banking, securities and
commodities trading, brokerage, asset management and other financial services
activities. The Merger constituted a tax-free exchange and was accounted for
under the pooling of interests method. This method of accounting requires the
restatement of all periods presented as if the Company and Salomon had always
been combined. For additional information about the Merger, see Note 2 of Notes
to Consolidated Financial Statements.
On July 31, 1997, Commercial Credit Company ("CCC") acquired Security
Pacific Financial Services from BankAmerica Corporation for a purchase price of
approximately $1.6 billion. The purchase included approximately $1.2 billion of
net consumer finance receivables. The excess of the purchase price over the
estimated fair value of net assets was $380 million and is being amortized over
25 years. The purchase price for the transaction was financed entirely by CCC,
except for an equity contribution by the Company of $520 million to CCC.
During 1997, the Company continued and expanded the marketing of its
products through the various distribution channels offered by its subsidiaries,
primarily the independent agents of Primerica Financial Services (the "PFS sales
force") and the Financial Consultants of Salomon Smith Barney. The PFS sales
force distributes an array of financial products offered by other subsidiaries
of the Company, including mutual funds offered by Salomon Smith Barney, personal
lines property-casualty insurance (TRAVELERS SECURE(R)) offered by The Travelers
Indemnity Company ("Travelers Indemnity"), a subsidiary of Travelers Property
Casualty Corp. ("TAP"), and mortgage and personal loans ($.M.A.R.T. loan(R) and
$.A.F.E.(R) loan) underwritten by CCC.
<PAGE>
Qualified Salomon Smith Barney Financial Consultants offer individual insurance
products, primarily variable annuities, of Travelers Life and Annuity. For more
information on cross-marketing by the PFS sales force and Salomon Smith Barney,
see "Life Insurance Services -- Primerica Financial Services" and "Investment
Services -- Salomon Smith Barney." Travelers Group Diversified Distribution
Services, Inc., a subsidiary of the Company, offers a bundled group of the
Company's products for sale to employees of other companies through a directed
sales effort and also facilitates the cross-marketing of the Company's products
by its subsidiaries.
The periodic reports of CCC, SSBH, TAP, The Travelers Insurance Company
and The Travelers Life and Annuity Company, subsidiaries of the Company that
make filings pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), provide additional business and financial information
concerning those companies and their consolidated subsidiaries.
The principal executive offices of the Company are located at 388
Greenwich Street, New York, New York 10013; telephone number 212-816-8000.
This discussion of the Company's business is organized as follows: (i) a
description of each of the Company's four business segments; (ii) a description
of the Corporate and Other Operations segment; and (iii) certain other
information.(1)
INVESTMENT SERVICES
The Company's Investment Services segment includes the operations of SSBH
and its subsidiaries. As used herein, unless the context otherwise requires,
"Salomon Smith Barney" refers to SSBH and its consolidated subsidiaries.
Investment banking and securities trading activities are principally conducted
by Salomon Brothers Holding Company Inc ("SBHC") and its subsidiaries and Smith
Barney Inc. ("Smith Barney") and its subsidiaries and affiliated companies.
Salomon Smith Barney provides capital raising, advisory, research and brokerage
services to its customers, and executes proprietary trading strategies on its
own behalf. Salomon Smith Barney Asset Management provides its services
principally through Mutual Management Corp. (formerly Smith Barney Mutual Funds
Management Inc) ("MMC"), Smith Barney and Salomon Brothers Asset Management Inc
("Salomon Brothers Asset Management"). Salomon Smith Barney's commodities
trading business is conducted principally by Phibro Inc. and its subsidiaries
(collectively, "Phibro").
- ----------
(1) Certain items in this Form 10-K, including certain matters discussed under
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" (the "MD&A"), are forward-looking statements. The matters
referred to in such statements could be affected by the risks and uncertainties
involved in the Company's business, including the effect of economic and market
conditions, the level and volatility of interest rates and currency values, the
impact of current or pending legislation and regulation and the other risks and
uncertainties detailed in the Results of Operations section under the heading
"Outlook" for each business segment, and in the Forward-Looking Statements
section of the MD&A.
2
<PAGE>
Salomon Smith Barney
Salomon Smith Barney is a global investment bank and broker-dealer that
operates through over 450 offices throughout the United States and 45 offices in
26 foreign countries. Its principal U.S. operating companies for the investment
banking, brokerage and trading operations are Smith Barney and Salomon Brothers
Inc ("SBI") in New York, as well as SBHC and Salomon Swapco Inc ("Swapco") in
New York, which act as counterparties for many of the derivative transactions to
which Salomon Smith Barney is a party, and The Robinson-Humphrey Company, LLC
("R-H"), a regional broker-dealer based in Atlanta. Salomon Forex Inc acts as
counterparty in many foreign exchange transactions. With approximately 10,300
Financial Consultants and approximately 875 institutional brokers, Salomon Smith
Barney believes that it is currently the second largest brokerage firm in the
United States.
Salomon Smith Barney also maintains branches, subsidiaries, representative
offices or other operations in Australia, Bahrain, Canada, the Cayman Islands,
China, France, Germany, Hong Kong, India, Ireland, Israel, Italy, Japan,
Republic of Korea, Mexico, the Netherlands, Russia, Singapore, Spain,
Switzerland, Taiwan, Thailand and the United Kingdom, and affiliates in
Argentina, Brazil, Indonesia and Republic of Korea. The principal operating
companies for these international operations are Salomon Brothers International
Limited ("SBIL"), Salomon Brothers Asia Limited ("SBAL"), Salomon Brothers Hong
Kong Limited ("SBHK") and Salomon Brothers AG ("SBAG"). SBIL is based in London
and primarily acts as a dealer and market maker in fixed income and equity
securities and related products, including derivative instruments, in the
international capital markets, as well as an underwriter and provider of
corporate finance services. SBAL, based in Tokyo, and SBHK, based in Hong Kong,
act as agent and for their own account in trading of fixed income and equity
securities, primarily in securities of issuers based in Japan and the Asia
Pacific region, respectively. SBAG, a German bank based in Frankfurt with
branches in Tokyo and Milan, acts as a broker and dealer in primarily domestic
German fixed income and equity securities and related products, including
derivative instruments, as well as an underwriter and provider of corporate
finance advisory services to international clients.
Investment Banking and Trading
Salomon Smith Barney's global investment banking services encompass a full
range of capital market activities, including the underwriting and distribution
of debt and equity securities for United States and foreign corporations and for
state, local and other governmental and government sponsored authorities.
Salomon Smith Barney frequently acts as an underwriter or private placement
agent in corporate and public securities offerings and provides alternative
financing options through bank and bridge loans. It also provides financial
advice to investment banking clients on a wide variety of transactions including
mergers and acquisitions, divestitures, leveraged buyouts, financial
restructurings and a variety of cross-border transactions.
Salomon Smith Barney executes securities and commodity futures brokerage
transactions on all major United States securities and futures exchanges and
major international exchanges on behalf of customers and for its own account.
Salomon Smith Barney's significant capital base and
3
<PAGE>
extensive distribution capabilities also enable it to provide liquidity to
investors across a broad range of markets and financial instruments, and to
execute capital-intensive transactions on behalf of its customers and for its
own account. It executes transactions in large blocks of exchange-listed stocks,
usually with institutional investors, and often acts as principal to facilitate
these transactions. It makes markets, buying and selling as principal, in over
1,550 equity securities traded on the NASDAQ system. Additionally, the firm
makes markets in convertible and preferred stocks, warrants and other equity
securities.
Salomon Smith Barney also engages in principal transactions in fixed
income securities. Through its subsidiaries, it is a major dealer in government
securities in New York, London, Frankfurt and Tokyo. Salomon Smith Barney makes
inter-dealer markets and trades as principal in corporate debt and equity
securities, including those of United States and foreign corporate issuers,
United States and foreign government and agency securities, mortgage-related
securities, whole loans, municipal and other tax-exempt securities, commercial
paper and other money market instruments as well as emerging market debt
securities and foreign exchange. Salomon Smith Barney also enters into
repurchase and reverse repurchase agreements to provide financing for itself and
its customers, and engages in securities lending and borrowing transactions.
Salomon Smith Barney is a major participant in the over-the-counter
("OTC") market for derivative instruments involving a wide range of products,
including interest rate, equity and currency swaps, caps and floors, options,
warrants and other derivative products. It also creates and sells various types
of structured securities. Salomon Smith Barney's ability to execute transactions
is enhanced by its established presence in international capital markets, its
use of information technology and quantitative risk management tools, its
research capabilities, and its knowledge and experience in various derivative
markets.
Salomon Smith Barney also trades for its own account in various markets
throughout the world, and uses many different strategies involving a broad
spectrum of financial instruments and derivative products. Historically, these
trading strategies have primarily involved the fixed income securities of the
G-7 countries, but they also involve the trading of fixed income securities
globally (including emerging markets) as well as currencies and equities.
Because these trading strategies are often designed with time horizons of one
year or more, profits or losses reported in interim periods can be volatile and
may not reflect the ultimate success or failure of these strategies. For a
discussion of certain of the risks involved in Salomon Smith Barney's securities
trading and investment activities, and the firm's strategies to manage these
risks, see Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Investment Services -- Risk Management."
Retail Brokerage and Related Services
The Private Client Division provides investment advice and financial
planning and brokerage services for over five million client accounts, primarily
through the network of Salomon Smith Barney Financial Consultants. A significant
portion of Salomon Smith Barney's revenues is generated from the commissions
that it earns as a broker for its clients in the purchase and sale of
4
<PAGE>
securities. Financing customers' securities transactions provides Salomon Smith
Barney with an additional source of income. While credit losses may arise as a
result of this financing activity, to date such losses have not been material.
The Financial Consultants also sell proprietary mutual funds and a large number
of mutual funds sponsored and managed by unaffiliated entities, and Salomon
Smith Barney receives commissions and other sales and services revenues from
these activities.
Qualified Salomon Smith Barney Financial Consultants also offer individual
insurance products, primarily variable annuities. These products include, among
others, Travelers Life and Annuity's Vintage Life(R) and Vintage Annuity(R),
single premium variable annuity and universal life products, 401(k) Blueprint(R)
and Travelers Target Maturity(R), a market value-adjusted fixed annuity.
Salomon Smith Barney's Corporate Client Group provides retirement plan
services and stock plan services to a wide variety of corporations. These
services involve the management of defined benefit and defined contribution plan
products such as 401(k) plans, as well as the administration of stock option and
other stock-based plans.
In addition to more traditional brokerage services, Salomon Smith Barney
Financial Consultants also deliver the programs and services offered by Salomon
Smith Barney's Consulting Group ("CG"). CG, which has become an area of
specialization for many Salomon Smith Barney Financial Consultants, provides a
variety of investment management and consulting services to institutional and
individual clients. CG sponsors a number of different "wrap fee" programs, in
which CG and Salomon Smith Barney typically provide a range of services, such as
an analysis of the client's financial situation, investment needs and risk
tolerance; a recommendation and ongoing monitoring of the performance and
suitability of the investment manager(s) retained; and securities execution,
custody, reporting and recordkeeping. In such programs, the client generally
pays a single bundled fee for these services. CG also offers "wrap fee" programs
in which separate accounts are managed by selected, specially trained Salomon
Smith Barney Financial Consultants. Assets in the Financial Consultant managed
programs at December 31, 1997, totaled $11.6 billion, as compared to $7.9
billion and $5.6 billion at year-end 1996 and 1995, respectively. In addition,
CG provides traditional investment management consulting services to
institutions, including assisting clients in formulating investment objectives
and policies and in selecting investment management firms for the day-to-day
management of client portfolios. As of December 31, 1997, Salomon Smith Barney
provided consulting services with respect to externally managed client assets
aggregating approximately $49.2 billion, excluding the TRAK(R) program described
below, as compared to approximately $37.5 billion at December 31, 1996 and
approximately $30.5 billion at December 31, 1995.
Salomon Smith Barney's TRAK(R) program provides clients with
non-discretionary asset allocation advice based on the client's identification
of investment objectives and risk tolerances. TRAK(R) clients include both
individuals and institutions, including participant-directed 401(k) plans.
Clients can choose to allocate assets among the CG Capital Markets funds, a
series of 13 mutual funds each corresponding to a particular asset class and
investment style, or from among the selected fund offerings of 37 no-load or
load-waived mutual fund families (including Smith Barney
5
<PAGE>
proprietary funds) corresponding to the same asset class and investment style
criteria. At December 31, 1997, TRAK(R) assets exceeded $10.5 billion, as
compared to approximately $6.6 billion at December 31, 1996 and approximately
$4.8 billion at December 31, 1995. Salomon Smith Barney also offers a separate
offshore TRAK(R) program to non-resident alien clients, which includes client
investment in a series of asset class/investment style funds domiciled outside
the United States.
Salomon Smith Barney Asset Management
Salomon Smith Barney provides discretionary and non-discretionary asset
management services to a wide array of mutual funds and institutional and
individual investors, with respect to domestic and foreign equity and debt
securities, municipal bonds, money market instruments, and related options and
futures contracts. Salomon Smith Barney receives ongoing fees, generally stated
as a percentage of the client's assets, from asset management clients. At
December 31, 1997, client assets managed by Salomon Smith Barney Asset
Management were approximately $152.5 billion, as compared to approximately
$126.5 billion at December 31, 1996 and approximately $107.1 billion at December
31, 1995. These amounts include separately managed accounts with assets of
approximately $54.1 billion at December 31, 1997, $44.5 billion at December 31,
1996 and $35.2 billion at December 31, 1995.
The table below shows the aggregate assets in, and number of, mutual funds
managed by Salomon Smith Barney Asset Management at December 31 for each of the
last three years.
Mutual Fund Assets Under Management
December 31,
1997 1996 1995
----------- ----------- -----------
(Dollars in billions)
No. of No. of No. of
Funds Assets Funds Assets Funds Assets
----- ------ ----- ------ ----- ------
Money market 15 $46.5 13 $41.6 13 $35.8
Mutual funds 124 48.7 120 38.1 121 34.3
Annuities 26 3.2 25 2.3 26 1.8
-- ------- -- ----- -- -------
Total 165 $98.4 158 $82.0 160 $71.9
=== ======= === ======= === =======
Smith Barney Asset Management
At December 31, 1997, Smith Barney sponsored 68 mutual funds (open-end
investment companies), including taxable and tax-exempt money market funds,
equity funds, taxable fixed income funds and tax-exempt fixed income funds
distributed primarily through Salomon Smith Barney Financial Consultants and the
PFS sales force, affiliates of the Company. MMC serves as the primary investment
manager to these mutual funds, as well as to eleven closed-end investment
companies, the shares of which are listed for trading on one or more securities
exchanges. In addition, at December 31, 1997, Salomon Smith Barney managed 26
mutual fund portfolios serving as funding vehicles for variable annuity
contracts, including certain variable annuities and other
6
<PAGE>
individual products of the Company's Travelers Life and Annuity unit (see "Life
Insurance Services"), which are sold by Salomon Smith Barney Financial
Consultants. Smith Barney Asset Management also sponsors and manages ten mutual
funds domiciled outside the United States, which are offered to Salomon Smith
Barney's non-resident alien client base as well as to the general public.
In December 1997, Salomon Smith Barney acquired the mutual fund advisory
contracts for the Common Sense(R) Trust from Van Kampen American Capital. This
series of mutual funds is marketed exclusively by the PFS sales force, and had
$5.9 billion in assets at December 31, 1997. In January 1998 the name of these
funds was changed to Concert Investment Series(sm).
Smith Barney Asset Management also provides separate account discretionary
and non-discretionary investment management services to a wide variety of
individual and institutional clients, including private and public retirement
plans, endowments, foundations, banks, central banks, insurance companies, other
corporations and governmental agencies. Client relationships may be introduced
either through Salomon Smith Barney's network of Financial Consultants or
independently of that network.
Smith Barney Asset Management also sponsors and oversees the portfolios of
a large number of unit investment trusts, which are unmanaged investment
companies, the portfolios of which are generally static. Such unit investment
trusts may hold domestic and foreign equity and debt securities, including
municipal bonds. Certain trusts are sponsored and overseen solely by Smith
Barney Asset Management; other trusts are jointly sponsored through a syndicate
of major broker-dealers of which Smith Barney is a member. At December 31, 1997,
outstanding unit trust assets held by Smith Barney's clients were approximately
$11.8 billion, as compared to approximately $8.6 billion at December 31, 1996
and approximately $7.2 billion at December 31, 1995.
Salomon Brothers Asset Management
Salomon Brothers Asset Management provides separate account discretionary
and non-discretionary investment management services to pension funds,
investment companies, endowments, foundations, banks, central banks, insurance
companies, other corporations, governmental agencies and individuals. Client
relationships may be introduced through traditional independent consultant
evaluations as well as through the individual and institutional client
relationships of SBI.
At December 31, 1997, Salomon Brothers Asset Management sponsored 18
mutual funds, including taxable and tax-exempt money market funds, equity funds,
taxable fixed income funds and tax-exempt fixed income funds distributed
primarily through dealer agreements with a variety of national and regional
brokerage firms, including Smith Barney. Salomon Brothers Asset Management
serves as investment manager to these mutual funds, as well as to 16 closed-end
investment companies, the shares of which are listed for trading on one or more
securities exchanges. Salomon Brothers Asset Management also manages 16 mutual
funds domiciled outside the United States, which are offered to Salomon Smith
Barney's non-resident alien client base as well as to the general public.
7
<PAGE>
Trust Services
Certain subsidiaries of the Company are chartered as trust companies and
provide a full range of fiduciary services with a particular emphasis on
personal trust services. Another subsidiary of the Company offers a broad range
of trustee services for qualified retirement plans, with particular emphasis on
the 401(k) plan market. Each of these trust companies is subject to the
supervision of the state banking authority where it was chartered and uses the
distribution network of Salomon Smith Barney to market its services. Salomon
Smith Barney provides certain advisory and support services to the trust
companies and receives fees for such services. Certain subsidiaries of SSBH also
operate a private trust services business that is licensed as a bank and trust
company in the Cayman Islands.
Phibro and Other
Phibro conducts a global commodities dealer business through its principal
offices in Westport (Connecticut), London and Singapore. Commodities traded
include crude oil, refined oil products, natural gas, electricity, metals and
various soft commodities. In December 1997, Phibro began implementing a
downsizing plan that will significantly reduce the scope of some of its
activities. In 1996, Phibro discontinued trading coal, coke and fertilizers.
Phibro makes extensive use of futures markets and is a participant in the OTC
derivatives market. Its principal competitors are major integrated oil
companies, other commodity trading companies, certain investment banks and other
financial institutions.
As a dealer, Phibro's strategy is to focus on taking positions in
commodities on a longer-term horizon while also engaging in counterparty flow
business on a short-term basis. Phibro's operating results are subject to a high
degree of volatility, particularly on a quarterly basis, due to the predominance
of directional positions in commodities that have a longer-term horizon until
realization. Thus, results are better evaluated over the longer term.
For a summary of Salomon Smith Barney's operations by geographic area, see
Note 4 of Notes to Consolidated Financial Statements.
Derivatives and Risk Management
Derivative instruments are contractual commitments or payment exchange
agreements between counterparties that "derive" their value from some underlying
asset, index, interest rate or exchange rate. Salomon Smith Barney enters into
various bilateral financial contracts involving future settlement, which are
based upon a predetermined principal or par value (referred to as the "notional"
amount). Such instruments include swaps, swap options, caps and floors, futures
contracts, forward purchase and sale agreements, option contracts and warrants.
Derivatives activities, like Salomon Smith Barney's other ongoing business
activities, give rise to market, credit and operational risks, although Salomon
Smith Barney also uses derivative instruments to manage these risks in its other
businesses. For a more complete discussion of Salomon Smith Barney's use
8
<PAGE>
of derivative financial instruments and certain of the related risks, see Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 1, 5, 11 and 20 of Notes to Consolidated Financial
Statements.
Competition
The businesses in which Salomon Smith Barney is engaged are highly
competitive. The principal factors affecting competition in the investment
banking and brokerage industry are the quality and ability of professional
personnel and the relative prices of services and products offered. In addition
to competition from other investment banking firms, both domestic and
international, and securities brokerage companies and discount securities
brokerage operations, including regional firms in the United States, there has
been increasing competition from other sources, such as commercial banks,
insurance companies and other major companies that have entered the investment
banking and securities brokerage industry, in many cases through acquisitions.
Certain of those competitors may have greater capital and other resources than
Salomon Smith Barney. The Federal Reserve Board has substantially removed the
barrier originally erected by the Glass-Steagall Act restricting investment
banking activities of commercial banks and their affiliates, by permitting
certain commercial banks to engage, through affiliates, in the underwriting of
and dealing in certain types of securities, subject to certain limitations.
Proposed legislation has been introduced in Congress from time to time that
would modify certain other provisions of the Glass-Steagall Act and other laws
and regulations affecting the financial services industry. The potential impact
of such legislation on Salomon Smith Barney's businesses cannot be predicted at
this time.
Competitors of the Salomon Brothers and Smith Barney mutual funds and
asset management groups include a large number of mutual fund management and
sales companies, asset management firms and banks. Competition in mutual fund
sales and investment management is based on investment performance, service to
clients and product design.
Regulation
Certain U.S. and non-U.S. subsidiaries are subject to various securities
and commodities regulations and capital adequacy requirements promulgated by the
regulatory and exchange authorities of the jurisdictions in which they operate.
SSBH's principal regulated subsidiaries are discussed below.
Certain of SSBH's subsidiaries are registered as broker-dealers and as
investment advisers with the U.S. Securities and Exchange Commission (the "SEC")
and as futures commission merchants and as commodity pool operators with the
Commodity Futures Trading Commission ("CFTC"). SBI, Smith Barney and R-H are
members of the New York Stock Exchange, Inc. (the "NYSE") and other principal
United States securities exchanges, as well as the National Association of
Securities Dealers, Inc. ("NASD") and the National Futures Association ("NFA"),
a not-for-profit membership corporation designated as a registered futures
association by the CFTC. SBI, Smith Barney and R-H are registered as
broker-dealers in all 50 states, the District of Columbia and Puerto Rico, and
in addition are registered as investment advisers in certain states that require
such
9
<PAGE>
registration. Smith Barney is also a registered broker-dealer in Guam. Smith
Barney and SBI are also reporting dealers to the Federal Reserve Bank of New
York and members of the principal United States futures exchanges. SBI, Smith
Barney and R-H are subject to extensive regulation, primarily for the benefit of
their customers, including minimum capital requirements, which are promulgated
and enforced by, among others, the SEC, the CFTC, the NFA, the NYSE, various
self-regulatory organizations of which these subsidiaries are members and the
securities administrators of the 50 states, the District of Columbia and Puerto
Rico and, in Smith Barney's case, Guam. The SEC and the CFTC also require
certain registered broker-dealers (including SBI and Smith Barney) to maintain
records concerning certain financial and securities activities of affiliated
companies that may be material to the broker-dealer, and to file certain
financial and other information regarding such affiliated companies.
Salomon Smith Barney's operations abroad are conducted through various
subsidiaries, principally SBIL in London, SBAL in Tokyo and SBAG in Frankfurt.
Its activities in the United Kingdom, which include investment banking, trading,
brokerage and asset management services, are subject to the Financial Services
Act 1986, which regulates organizations that conduct investment businesses in
the United Kingdom (including imposing capital and liquidity requirements), and
to the rules of the Securities and Futures Authority and the Investment
Management Regulatory Organisation. SBAL is a licensed foreign securities
company in Japan and, as such, its activities in Japan are subject to Japanese
law applicable to non-Japanese securities firms and are regulated by the
Japanese Ministry of Finance. SBAG is a German bank, principally engaged in
securities trading and investment banking and is regulated by Germany's Banking
Supervisory Authority. These and other subsidiaries of SSBH are also members of
various securities and commodities exchanges and are subject to the rules and
regulations of those exchanges. Salomon Smith Barney's other offices are also
subject to the jurisdiction of local financial services regulatory authorities.
In connection with the mutual funds business, SSBH and its subsidiaries
must comply with regulations of a number of regulatory agencies and
organizations, including the SEC, the NASD and regulatory agencies in the United
Kingdom and Germany. SSBH is the direct or indirect parent of investment
advisers registered and regulated under the Investment Advisers Act of 1940, and
of companies that distribute shares of mutual funds pursuant to distribution
agreements subject to regulation under the Investment Company Act of 1940. Under
those Acts, the advisory contracts between SSBH's investment adviser
subsidiaries and the mutual funds they serve ("Affiliated Funds"), as well as
the mutual fund distribution agreements, would automatically terminate upon an
assignment of such contracts by the investment adviser or the fund distribution
company, as the case may be. Such an assignment would be presumed to have
occurred if any party were to acquire more than 25% of the Company's voting
securities. In that event, consent to the assignment from the shareholders of
the Affiliated Funds involved would be needed for the advisory and distribution
relationships to continue. In addition, Smith Barney, SBI, MMC, Salomon Brothers
Asset Management and the Affiliated Funds are subject to certain restrictions in
their dealings with each other. For example, Smith Barney or SBI may act as
broker to an Affiliated Fund in a transaction involving an exchange-traded
security only when that fund maintains procedures that govern, among other
things, the execution price of the transaction and the commissions paid; it may
not, however, conduct principal transactions with an Affiliated Fund. Further,
an Affiliated Fund may acquire
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<PAGE>
securities during the existence of an underwriting where Smith Barney or SBI is
a principal underwriter only in certain limited situations.
SBI, Smith Barney and R-H are members of the Securities Investor
Protection Corporation ("SIPC"), which, in the event of liquidation of a
broker-dealer, provides protection for customers' securities accounts held by
the firm of up to $500,000 for each eligible customer, subject to a limitation
of $100,000 for claims for cash balances. In addition, SSBH has purchased
additional coverage of up to $150 million for eligible customers, approximately
$50 million of which is from a subsidiary of the Company.
President Clinton's recent budget proposal (the "Budget Proposal")
contains a number of tax provisions that could adversely impact Salomon Smith
Barney, including provisions relating to tax-exempt interest obligations and
variable annuities. The Budget Proposal, which is in its early stages of
consideration, has not yet been introduced as part of any legislation in
Congress but has engendered considerable opposition from the public and members
of Congress.
Capital Requirements
As registered broker-dealers, SBI, Smith Barney and R-H are subject to the
SEC's net capital rule, Rule 15c3-1 (the "Net Capital Rule"), promulgated under
the Exchange Act. These companies compute net capital under the alternative
method of the Net Capital Rule, which requires the maintenance of minimum net
capital, as defined. A member of the NYSE may be required to reduce its business
if its net capital is less than 4% of aggregate debit balances (as defined) and
may also be prohibited from expanding its business or paying cash dividends if
resulting net capital would be less than 5% of aggregate debit balances.
Furthermore, the Net Capital Rule does not permit withdrawal of equity or
subordinated capital if the resulting net capital would be less than 5% of such
debit balances.
The Net Capital Rule also limits the ability of broker-dealers to transfer
large amounts of capital to parent companies and other affiliates. Under the Net
Capital Rule, equity capital cannot be withdrawn from a broker-dealer without
the prior approval of the SEC in certain circumstances, including when net
capital after the withdrawal would be less than (i) 120% of the minimum net
capital required by the Net Capital Rule, or (ii) 25% of the broker-dealer's
securities position "haircuts," i.e., deductions from capital of certain
specified percentages of the market value of securities to reflect the
possibility of a market decline prior to disposition. In addition, the Net
Capital Rule requires broker-dealers to notify the SEC and the appropriate
self-regulatory organization two business days before a withdrawal of excess net
capital if the withdrawal would exceed the greater of $500,000 or 30% of the
broker-dealer's excess net capital, and two business days after a withdrawal
that exceeds the greater of $500,000 or 20% of excess net capital. Finally, the
Net Capital Rule authorizes the SEC to order a freeze on the transfer of capital
if a broker-dealer plans a withdrawal of more than 30% of its excess net capital
and the SEC believes that such a withdrawal would be detrimental to the
financial integrity of the firm or would jeopardize the broker-dealer's ability
to pay its customers.
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<PAGE>
Compliance with the Net Capital Rule could limit those operations of the
Company that require the intensive use of capital, such as underwriting and
trading activities and the financing of customer account balances, and also
could restrict SSBH's ability to withdraw capital from its broker-dealer
subsidiaries, which in turn could limit SSBH's ability to pay dividends and make
payments on its debt. See Note 15 of Notes to Consolidated Financial Statements.
At December 31, 1997, SBI and Smith Barney had net capital, computed in
accordance with the Net Capital Rule, of $1.047 billion and $1.086 billion,
respectively, which exceeded the minimum net capital requirement by $974 million
and $884 million, respectively. The net capital of R-H was $66 million above its
minimum requirement.
SBAL, SBIL and SBAG are also subject to regulation in the countries in
which they do business. Such regulations include requirements to maintain
specified levels of net capital or its equivalent. At December 31, 1997, SBAL's
regulatory capital was $307 million above the minimum required by Japan's
Ministry of Finance. SBIL's regulatory capital was $699 million above the
minimum required by the Securities and Futures Authority, and SBAG's regulatory
capital was $32 million above the minimum required by Germany's Banking
Supervisory Authority.
In addition, in order to maintain its triple-A rating, Swapco, an indirect
wholly owned subsidiary of SSBH, must maintain minimum levels of capital in
accordance with agreements with its rating agencies. At December 31, 1997,
Swapco was in compliance with all such agreements. Swapco's capital requirements
are dynamic, varying with the size and concentration of its counterparty
receivables.
CONSUMER FINANCE SERVICES
The Company's Consumer Finance Services segment includes consumer lending
services conducted primarily under the name "Commercial Credit," as well as
credit-related insurance and credit card services. CCC's predecessor was founded
in 1912.
Consumer Finance
As of December 31, 1997, CCC maintained 1,026 loan offices in 45 states,
including 24 servicing centers for loans sold through the PFS sales force. This
includes a net increase of approximately 175 loan offices from the July 1997
acquisition of Security Pacific Financial Services. CCC owns one state-chartered
bank and one federally chartered savings bank, each headquartered in Newark,
Delaware.
Loans to consumers include both fixed and variable rate real
estate-secured loans, both fixed and variable rate unsecured and partially
secured personal loans and fixed rate loans to finance consumer goods purchases.
Travelers Bank & Trust, fsb (formerly The Travelers Bank), a federal savings
bank and a subsidiary of CCC, and The Travelers Bank USA, also a subsidiary of
CCC (together, the "Banks"), provide credit card loans as discussed below. CCC's
loan offices are generally located in small to medium-sized communities in
suburban or rural areas, and are managed by individuals who generally have
considerable consumer lending experience. The primary market
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<PAGE>
for consumer loan customers consists of households with an annual income of
$20,000 to $50,000. The number of active loan customers (excluding credit card
customers) was approximately 1,924,000 at December 31, 1997, as compared to
approximately 1,333,000 at December 31, 1996 and approximately 1,275,000 at
December 31, 1995. CCC also operates an agency that performs appraisals, sells
title insurance and provides other closing-related services for CCC's real
estate loans.
The $.M.A.R.T. loan(R) and $.A.F.E.(R) loan programs involve the
solicitation of applications for mortgage and personal loans exclusively through
the PFS sales force. At December 31, 1997, the total loans outstanding generated
from this program were $2.264 billion, or approximately 21% of total loans
outstanding, as compared to $1.524 billion, or approximately 19%, at December
31, 1996 and $1.258 billion, or approximately 17%, at December 31, 1995. See
"Life Insurance Services -- Primerica Financial Services." Since early 1998, all
new $.M.A.R.T. loan(R) business is being written through Travelers Bank & Trust,
fsb.
The average amount of cash advanced per real estate-secured loan made was
approximately $44,700 in 1997, $35,800 in 1996 and $26,300 in 1995. The average
amount of cash advanced per personal loan made was approximately $4,400 in 1997,
$4,250 in 1996 and $4,200 in 1995. The average real estate-secured loan size
increased in 1997 and 1996 due to marketing initiatives that attracted customers
for higher balance loans, particularly in first mortgage programs. The average
annual yield for loans in 1997 was 14.58%, as compared to 15.24% in 1996 and
15.64% in 1995. The average annual yield for real estate-secured loans in 1997
was 11.73%, as compared to 12.13% in 1996 and 12.33% in 1995, and for personal
loans it was 19.66% in 1997, as compared to 19.95% in 1996 and 20.23% in 1995.
The average yield for real estate-secured loans has been affected by the normal
run-off of older, higher yielding loans and growth in lower yielding, higher
quality loans, while the average yield for personal loans has been affected by a
shift in the portfolio to loans partially secured by real estate (classified as
personal loans) as well as the industry trends associated with a high level of
personal bankruptcies. Consumer Finance Services' average net interest margin
for loans was 8.14% in 1997, 8.64% in 1996 and 8.79% in 1995.
As a result of the Security Pacific acquisition, charge-offs in the second
half of 1997 reflect a short-term benefit largely from the transition of that
portfolio to CCC's charge-off policies. As a result, the Company expects the
charge-off rate to increase somewhat in the first half of 1998. See "--
Delinquent Receivables and Loss Experience."
Analysis of Consumer Finance Receivables
For an analysis of consumer finance receivables, net of unearned finance
charges ("Consumer Finance Receivables"), see Note 10 of Notes to Consolidated
Financial Statements.
13
<PAGE>
Delinquent Receivables and Loss Experience
Due to the nature of the finance business, some customer delinquency and
loss is unavoidable. The management of the consumer finance business attempts to
control customer delinquencies through careful evaluation of each borrower's
application and credit history at the time the loan is made or acquired, and
appropriate collection activity. An account is considered delinquent for
financial reporting purposes when a payment is more than 60 days past due, based
on the original or extended terms of the contract. The delinquency and loss
experience on real estate-secured loans is generally more favorable than on
personal loans.
The following table sets forth the ratio of receivables delinquent for 60
days or more on a contractual basis (i.e., more than 60 days past due) to gross
receivables outstanding:
Ratio of Receivables Delinquent 60 Days or More to Gross
Receivables Outstanding (1)
Real
Estate-
Personal Secured Credit Sales Total
As of December 31, Loans Loans Cards Finance Consumer
- ------------------ ----- ----- ----- ------- --------
1997 3.41% 1.61% 1.41% 2.49% 2.35%
1996 3.42% 1.50% 1.44% 2.27% 2.38%
1995 2.89% 1.42% 1.40% 2.17% 2.14%
- ----------
(1) The receivable balance used for these ratios is before the deduction of
unearned finance charges and excludes accrued interest receivable.
Receivables delinquent 60 days or more include, for all periods presented,
accounts in the process of foreclosure.
The following table sets forth the ratio of net charge-offs to average
Consumer Finance Receivables. For all periods presented, the ratios shown give
effect to all deferred origination costs.
Ratio of Net Charge-Offs to Average Consumer Finance Receivables
Real
Estate-
Year Ended Personal Secured Credit Sales Total
December 31, Loans Loans Cards Finance Consumer
- ------------ ----- ----- ----- ------- --------
1997 5.39% 0.41% 2.66% 2.86% 2.65%
1996 5.46% 0.50% 2.75% 3.34% 2.91%
1995 4.01% 0.64% 2.04% 2.46% 2.28%
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The following table sets forth information regarding the ratio of
allowance for losses to Consumer Finance Receivables:
Ratio of Allowance For Losses to Consumer Finance Receivables
As of December 31,
------------------
1997 2.91%
1996 2.97%
1995 2.66%
Credit-Related Insurance
American Health and Life Insurance Company ("AHL"), a subsidiary of CCC,
underwrites or arranges for credit-related insurance, which is offered to
customers of the consumer finance business. AHL has an A+ (superior) rating from
A.M. Best Company ("A.M. Best"), whose ratings may be revised or withdrawn at
any time. At a minimum, credit life insurance covers the declining balance of
unpaid indebtedness. Credit disability insurance provides monthly benefits
during periods of covered disability. Credit property insurance covers the loss
of property given as security for loans. Other insurance products offered or
arranged for by AHL primarily include auto single interest and involuntary
unemployment insurance. Most of AHL's products are single premium, which
premiums are earned over the related contract period. See "Life Insurance
Services" for information concerning life insurance other than credit-related
insurance.
The following table sets forth gross written insurance premiums, net of
refunds, for consumer finance customers:
Consumer Finance Insurance Premiums Written
(In millions)
Year Ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
Premiums written by AHL and its affiliates
Writings for consumer finance:
Credit life $ 65.4 $ 42.7 $ 41.8
Credit disability and other 91.0 63.1 63.6
Credit property and other 51.5 18.0 4.1
-------- -------- --------
Total $ 207.9 $ 123.8 $ 109.5
======== ======== ========
Premiums written by other insurance companies
Credit property and other $ 26.9 $ 42.9 $ 51.6
======== ======== ========
The increase in premiums year-over-year is the result of growth in
receivables and expanded availability of certain products in additional states.
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Credit Card and Other Services
Travelers Bank & Trust, fsb ("Travelers Bank & Trust") is a federally
chartered savings bank located in Newark, Delaware, which provides credit card
services, including upper market gold credit card services, to individuals and
to affinity groups (such as nationwide professional associations and fraternal
organizations). Travelers Bank & Trust was granted a federal savings bank
charter on November 25, 1997, upon conversion of The Travelers Bank, a Delaware
state-chartered bank. The Travelers Bank USA is a state-chartered bank located
in Newark, Delaware, which also provides credit card services and loans to
finance consumer goods purchases. Although the Banks have historically limited
their activities to credit card operations, since early 1998, all new $.M.A.R.T.
loan(R) business is being written through Travelers Bank & Trust.
The following table sets forth aggregate information regarding credit
cards issued by the Banks.
Credit Cardholders and Total Outstandings
(Dollars in millions)
As of, or for the year ended, December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
Approximate total credit cardholders 984,000 791,000 753,000
Approximate gold credit cardholders 792,000 642,000 615,000
Total outstandings $1,164.6 $907.1 $761.8
Average annual yield 10.81% 11.82% 12.51%
The decrease in the average annual yield in 1997 and 1996 primarily
resulted from the offering of promotional rates in both years to encourage the
transfer of credit card balances to the Banks. The primary market for the Banks'
credit cards consists of households with annual incomes of $40,000 and above.
The Banks offer deposit-taking services (which as to The Travelers Bank
USA are limited to deposits of at least $100,000 per account). At December 31,
1997, deposits of unaffiliated entities were $45.0 million, as compared to $81.9
million at December 31, 1996 and $97.9 million at December 31, 1995.
In March 1998, the Banks entered into a securitized transaction pursuant
to which they transferred approximately $356.5 million of their credit card
receivables to an affiliated special purpose corporation, which transferred such
receivables to a trust. The trust then sold to the public $227.5 million of
securities securitized by such receivables.
Competition
The consumer finance business competes with banks, savings and loan
associations, credit unions, credit card issuers and other consumer finance
companies. Additionally, substantial national
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<PAGE>
financial services networks have been formed by major brokerage firms, insurance
companies, retailers and bank holding companies. Some competitors have
substantial local market positions; others are part of large, diversified
organizations. Deregulation of banking institutions has greatly expanded the
consumer lending products permitted to be offered by these institutions, and
because of their long-standing insured deposit base, many of them are able to
offer financial services on very competitive terms. The Company believes that it
is able to compete effectively with such institutions. In particular, the
Company believes that the diversity and features of the products it offers,
personal service, and cultivation of repeat and referral business support and
strengthen its competitive position in its consumer finance businesses.
Regulation
Most consumer finance activities are subject to extensive federal and
state regulation, including examination and review by state authorities of
consumer finance offices. Personal loan, real estate-secured loan and sales
finance laws generally require licensing of the lender, limitations on the
amount, duration and charges for various categories of loans, adequate
disclosure of certain contract terms and limitations on certain collection
practices and creditor remedies. Federal consumer credit statutes primarily
require disclosure of credit terms in consumer finance transactions. The
Travelers Bank USA, a credit card bank, must undergo periodic examination by the
Delaware State Bank Commissioner and the Federal Deposit Insurance Corporation.
Travelers Bank & Trust is subject to regulation and examination by the Office of
Thrift Supervision. The Banks are subject to additional regulations relating to
capitalization, leverage, reporting, dividends and permitted asset and liability
products. The Banks are also subject to the Community Reinvestment Act, which
assesses the records of the Banks in helping to meet the credit needs in the
delineated community of the Banks, including low and moderate income
neighborhoods, consistent with a safe and sound banking operation. In addition,
a number of federal and state consumer protection laws and regulations are
applicable to the Banks including the Truth in Lending Act, which requires
disclosure to the consumer of the cost of credit and governs billing dispute
resolution, the Equal Credit Opportunity Act, which prohibits discrimination in
any aspect of a credit transaction based on race, color, national origin,
gender, marital status, age, income from public assistance programs or exercise
of rights under the Consumer Protection Act, and the Fair Credit Reporting Act,
which is aimed at ensuring the accuracy and fairness of the mechanism by which
consumer credit and other information about consumers is assembled and
evaluated. Travelers Bank & Trust is also covered by the Home Mortgage
Disclosure Act, which requires disclosure of customer demographics, including
race, gender and age. The Banks are also subject to certain regulatory
restrictions relating to transactions with affiliates. See "Insurance Services -
General -- Regulation" at the end of the description of the Life Insurance
Services segment for a discussion of the regulatory factors governing the
insurance businesses of CCC.
Proposed legislation has been introduced in Congress that would modify
certain laws and regulations affecting the financial services industry. The
potential impact of such legislation on the Company's consumer finance
businesses cannot be predicted at this time.
17
<PAGE>
PROPERTY & CASUALTY INSURANCE SERVICES
This segment includes the operations of TAP and its subsidiary and
affiliated property-casualty insurance companies, all of which are collectively
referred to herein as "TAP." TAP provides a wide range of commercial and
personal property and casualty insurance products and services to businesses,
government units, associations and individuals. On April 2, 1996, TAP, an
indirect majority-owned subsidiary of the Company, purchased from Aetna
Services, Inc. (formerly Aetna Life and Casualty Company) ("Aetna") all of the
outstanding capital stock of Travelers Casualty and Surety Company (formerly The
Aetna Casualty and Surety Company) ("Travelers Casualty") and The Standard Fire
Insurance Company ("Standard Fire"), Aetna's property and casualty insurance
subsidiaries (collectively, "Aetna P&C"), for approximately $4.2 billion in cash
(the "Acquisition"). The Acquisition was treated as a purchase and, accordingly,
the Company's consolidated financial statements include the results of Aetna
P&C's, operations only from the date of the Acquisition. The Company currently
owns approximately 83.4% of TAP's outstanding common stock. See Note 2 of Notes
to Consolidated Financial Statements for additional information about the
Acquisition and related transactions. For informational purposes, the premium
and certain other operational information provided below includes Aetna P&C's
businesses prior to the Acquisition.
Commercial Lines
TAP is the third largest writer of commercial lines insurance in the
United States based on 1996 direct written premiums published by A.M. Best
Company ("A.M. Best"). TAP's Commercial Lines offers a broad array of property
and casualty insurance and insurance-related services. Commercial Lines is
organized into four marketing and underwriting groups that are designed to focus
on a particular client base or industry segment to provide products and services
that specifically address customers' needs: National Accounts, primarily serving
large national corporations; Commercial Accounts, serving mid-size businesses;
Select Accounts, serving small businesses and individuals with commercial
exposures; and Specialty Accounts, providing a variety of specialty coverages.
TAP also has a dedicated group within Commercial Accounts that serves the
construction industry. TAP distributes its commercial products through
approximately 5,200 brokers and independent agencies located throughout the
United States. In 1997, Commercial Lines generated net written premiums of $4.8
billion.
Selected Product and Market Information
The following table sets forth by product line and market net written
premiums for Commercial Lines for the periods indicated. For a description of
the product lines and markets referred to in the table, see "-- Product Lines"
and "-- Principal Markets and Methods of Distribution," respectively.
Many National Accounts customers often demand service-type products,
primarily for workers' compensation coverage and to a lesser extent in general
liability and commercial automobile coverages. These types of products include
risk management services such as claims
18
<PAGE>
settlement, loss control and engineering. Many of these products generate fee
income rather than net written premiums, and are not reflected in the following
table.
Because the Acquisition occurred on April 2, 1996, the Company's results
of operations for periods prior to April 2, 1996 do not include the results of
Aetna P&C. Accordingly, premium and other operational information provided for
TAP's combined businesses prior to such time has been included below for
informational purposes only. As used herein, unless the context otherwise
requires, "combined" refers to the operations of both Travelers P&C and Aetna
P&C, without regard to the date of the Acquisition.
Combined Net Written Premiums
Percentage of Total
Net Written Premiums
Year Ended December 31, Year Ended
---------------------- December 31,
1997 1996 1995 1997
---- ---- ---- ----
(Dollars in millions)
Net written premiums by product
line:
Workers' compensation $1,176 $1,223 $1,312 24.7%
Commercial multi-peril 1,037 1,223 1,188 21.8
General liability 931 836 815 19.6
Commercial automobile 866 806 888 18.2
Property 383 342 457 8.1
Fidelity and surety 201 215 233 4.2
Other 163 45 251 3.4
------ ------ ------ ------
Total Commercial Lines (1) $4,757 $4,690 $5,144 100.0%
====== ====== ====== ======
Net written premiums by market:
National Accounts (2) $ 657 $ 874 $1,192 13.8%
Commercial Accounts 1,986 1,725 1,862 41.8
Select Accounts 1,432 1,412 1,466 30.1
Specialty Accounts 682 679 624 14.3
------ ------ ------ ------
Total Commercial Lines (1) $4,757 $4,690 $5,144 100.0%
====== ====== ====== ======
- ----------
(1) 1997 includes a $142 million increase due to a change to conform the Aetna
P&C method of recording certain net written premiums to the method
employed by Travelers P&C.
(2) The decreases in National Accounts net written premiums during the periods
shown primarily reflect the highly competitive marketplace and TAP's
selective underwriting practices.
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The following table sets forth service fee income by market for Commercial
Lines for the periods indicated and includes information with respect to Aetna
P&C only from the date of the Acquisition.
Commercial Lines Service Fee Income
Year Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
(Dollars in millions)
Service fee income by market:
National Accounts $346 $382 $424
Commercial Accounts 19 10 8
---- ---- ----
Total Commercial Lines $365 $392 $432
==== ==== ====
Product Lines
TAP writes a broad range of commercial property and casualty insurance for
risks of all sizes. The core products in TAP's Commercial Lines are as follows:
Workers' Compensation provides coverage for employers' liability for
injuries to employees under common law as well as the obligation of an employer
under state or federal law to provide its employees with specified benefits for
work-related injuries, deaths and diseases, regardless of fault. In addition to
the liability exposure that may arise under common law, there are typically four
types of benefits payable under workers' compensation policies: medical
benefits, disability benefits, death benefits and vocational rehabilitation
benefits. Workers' compensation policies are often written in conjunction with
other commercial policies. TAP offers three types of workers' compensation
products: (i) guaranteed cost insurance products in which policy premiums
charged are fixed and do not vary as a result of the insured's loss experience,
(ii) loss sensitive insurance products, including retrospectively rated
policies, in which premiums are adjusted based on actual loss experience of the
insured during the policy period, and large deductible plans, in which the
customer bears the insurance risk up to its deductible amount, and (iii) service
programs, which are generally sold to TAP's larger national accounts, where TAP
receives fees for providing loss prevention, risk management, claim
administration and benefit administration services to organizations pursuant to
service agreements. TAP also participates in state assigned risk pools servicing
workers' compensation policies as a servicing carrier and pool participant. The
Company emphasizes managed care cost containment strategies (which involve
employers, employees and care providers in a cooperative effort that focuses on
the injured employee's early return to work), cost-effective quality care, and
customer service in this market. Workers' compensation comprehensive claim and
managed care cost containment services are integrated through TAP's claims
management system to maximize cost savings on both service delivery and loss
payout.
Commercial Multi-Peril provides a combination of property and liability
coverage for businesses and business property for damages such as that caused by
fire, wind, hail, water, theft and vandalism, and protects businesses from
financial loss due to business interruption. It also
20
<PAGE>
insures businesses against third-party liability from accidents occurring on
their premises or arising out of their operations, such as injuries sustained
from products sold.
General Liability provides coverage for liability exposures including
bodily injury and property damage arising from products sold and general
business operations. General liability also includes coverage for directors' and
officers' liability arising in their official capacities, employment practices
liability insurance, fiduciary liability for trustees and sponsors of pension,
health and welfare, and other employee benefit plans, errors and omissions
insurance for employees, agents, professionals and others arising from acts or
failures to act under specified circumstances, as well as medical malpractice,
umbrella and excess insurance.
Commercial Automobile provides coverage for businesses against losses
incurred from personal bodily injury, bodily injury to third parties, property
damage to an insured's vehicle, and property damage to other vehicles and other
property resulting from the ownership, maintenance or use of automobiles and
trucks in a business.
Property provides coverage for loss or damage to buildings, inventory and
equipment from natural disasters, including hurricanes, windstorms, earthquakes,
hail, explosions, severe winter weather and other events such as theft and
vandalism, fires and storms and financial loss due to business interruption
resulting from property damage. Property also includes inland marine, which
provides coverage for goods in transit and unique, one-of-a-kind exposures.
Fidelity and Surety provides fidelity insurance coverage which protects an
insured for loss due to embezzlement or misappropriation of funds by an
employee. Surety is a three-party agreement whereby the insurer agrees to pay a
second party or make complete an obligation in response to the default, acts or
omissions of a third party. Surety is generally provided for construction
performance, legal matters such as appeals, trustees in bankruptcy and probate
and other performance bonds.
Other coverages include boiler and machinery insurance, which provides
coverage for loss or damage resulting from the malfunction of boilers and
machinery, as well as miscellaneous assumed reinsurance.
Principal Markets and Methods of Distribution
TAP's Commercial Lines are organized into four marketing groups that are
designed to focus on a particular client base or industry segment to provide
products and services that specifically address customers' needs: National
Accounts, primarily serving large national corporations; Commercial Accounts,
primarily serving mid-size businesses; Select Accounts, serving small
businesses; and Specialty Accounts, providing a variety of specialty coverages.
The Company also has a dedicated group within Commercial Accounts that serves
the construction industry.
TAP distributes its commercial products primarily through approximately
5,200 brokers and independent agencies located throughout the United States that
are serviced by 98 field offices. TAP seeks to establish relationships with
well-established, independent insurance agencies and
21
<PAGE>
brokers. In selecting new independent agencies and brokers to distribute TAP's
products, TAP considers each agency's or broker's profitability, financial
stability, staff experience and strategic fit with TAP's operating and marketing
plans. Once an agency or broker is appointed, the Company carefully monitors its
performance.
National Accounts
TAP's National Accounts provides a variety of casualty products to large
companies, as well as employee groups, associations and franchises. TAP's
National Accounts also includes TAP's alternative market business (the
"Alternative Market"), which primarily covers workers' compensation products and
services to voluntary and involuntary state pools. National Accounts customers
generally select products under retrospectively rated plans, large self-insured
retentions or some other loss-responsive arrangement. Customers are usually
national in scope and range in size from businesses with sales of approximately
$10 million per year to Fortune 2000 corporations. Products are marketed through
national brokers and regional agents with offices throughout the United States.
National Accounts customers often demand risk service programs where the
ultimate cost is based on their own loss experience. Programs offered by TAP
include claims settlement, loss control and risk management services and are
generally offered in connection with a retrospectively rated insurance policy, a
large deductible plan or a self-insured program. Workers' compensation accounted
for approximately 69% of the products sold in 1997 to National Accounts
customers, based on net written premiums and service fee income.
The Alternative Market business of TAP's National Accounts sells claims
and policy management services to workers' compensation and automobile assigned
risk plans, self-insurance pools throughout the United States and to niche
voluntary markets. Since 1993, most state assigned workers' compensation risk
plan contracts have been awarded through a formal state-by-state bid process.
Contracts, which are generally for three-year terms, are awarded by state
agencies based on quality of service and price. TAP has emerged as the largest
workers' compensation assigned risk plan servicing insurer in the industry with
approximately 25% share of the market in 1997. Assigned risk plan contracts
generated approximately $75 million in service fee income in 1997 for TAP.
TAP also services self-insurance groups, sells excess workers'
compensation coverage to these groups and markets various workers' compensation
specialty programs. Self-insurance groups and these specialty programs generated
net written premiums of $43 million and service fee income of $4 million in
1997. National Accounts also participates in various involuntary assigned risk
pools, which provide insurance coverage to individuals or other entities that
otherwise are unable to purchase such coverage in the voluntary market.
Participation in these pools in most states is generally in proportion to
voluntary writings of related lines of business in that state.
22
<PAGE>
Commercial Accounts
TAP's Commercial Accounts sells a broad range of property and casualty
insurance products through a large network of independent agents and brokers.
Commercial Accounts casualty products target businesses with 75 to 1,000
employees, while its property products target both large and medium sized
businesses. TAP offers a full line of products to its Commercial Accounts
customers, with an emphasis on guaranteed cost products.
Commercial Accounts targets certain industries in which TAP has claims,
engineering and underwriting expertise and to which TAP has established
dedicated operations. Industry segments include from the manufacturing sector:
advanced technology, metal products, mineral products, plastic and rubber
products and wood products. Also targeted are colleges and universities, food,
retail, financial, property management and the wholesale industries. TAP
continues to develop new industry-targeted programs both on a national and local
level. Specific industry knowledge enables TAP to select, as customers, better
managed companies in an industry segment, to tailor specialized coverages for
those companies, and to link price to the individual exposure and to control
risk. Instead of relying on rating bureaus to establish rates for products, TAP
generally uses its proprietary data, which it has compiled from many years of
extensive underwriting and pricing experience. Accordingly, subject to
applicable state insurance regulations, prices are derived from those
proprietary rates and numerous variables that apply to specific risks. TAP
believes that relying on extensive proprietary data to assess individual risk
characteristics, rather than relying on data from industry rating bureaus,
provides it with a competitive advantage in pricing and underwriting commercial
risks. TAP uses components of this approach specifically in connection with loss
control and claims management processing. Through a network of field offices,
TAP's marketing and underwriting specialists, who have point of sale authority,
work closely with local brokers and agents to tailor insurance coverage to
individual customer needs.
Construction. TAP has established dedicated operations that exclusively
target the construction industry, providing insurance and risk management
services for virtually all areas of construction, including general contractors,
heavy construction (including street and road) and special trade contractors,
except artisan or smaller trade contractors. TAP offers all product lines to
midsize and national customers in the construction market, including both
guaranteed cost and loss-responsive products, and wrap-up insurance programs,
with general liability, workers' compensation, commercial auto, commercial
property and inland marine coverages. The dedicated construction operations
provide specialized service and underwriting, with local market expertise and
national capability, that enable TAP to tailor specialized coverages, have
competitive pricing and control risk. This includes local underwriters who
understand their states' laws and claim climates, engineering and loss control
specialists, professional claim management and legal personnel with extensive
construction experience. Construction's products are distributed through
independent agents and brokers throughout the United States. Construction
operations contributed approximately 22% of the Commercial Accounts
premium-based business in 1997. Additionally, construction operations
service-based business contributed $6 million of service fees to TAP in 1997.
23
<PAGE>
Select Accounts
Select Accounts serves individuals who have commercial exposures and firms
typically with one to 75 employees. Products offered to Select Accounts are
generally guaranteed cost policies, often a packaged product covering property
and liability exposures. Products are sold through independent agents, who are
often the same agents that sell TAP's Commercial Accounts and Personal Lines
products.
Personnel in TAP's field offices and other points of local service, which
are located throughout the United States, work closely with agents to ensure a
strong local presence in the marketplace. TAP utilizes a marketing and
underwriting approach based on agency automation and defined underwriting
criteria. Agency automation allows agents access to TAP's price quotation and
policy issuance systems and enables agents to provide faster and more
cost-effective service to customers with supervision and underwriting control.
Agents that do not utilize the automated quotation and policy issuance systems
work with TAP's sales and marketing representatives who have point of sale
authority. Agents serving Select Accounts are given greater control and
discretion over underwriting decisions, within predefined parameters, than
brokers selling to larger accounts. Because underwriting criteria and pricing
tend to be more standardized for smaller businesses, Select Accounts uses a
standard industry classification (S.I.C.) based process to allow agents and
field marketing representatives to make underwriting and pricing decisions
within predetermined classifications. Business in other classifications is
subject to consultative review by in-house underwriters. TAP believes that its
breadth of products, highly qualified field staff and its technology offer
distinct competitive advantages.
Specialty Accounts
Specialty Accounts markets products to national, midsize and small
customers, as well as individuals, and distributes them through both wholesale
brokers and retail agents and brokers throughout the United States. TAP's fast
response time on underwriting decisions, industry expertise, broad range of
products and quality service are important to maintaining relationships with
Specialty Accounts insureds and producers. TAP believes that it has a
competitive advantage with respect to many of these products based on its
reputation for clear, timely decision-making, underwriting and industry
expertise and strong producer and customer relationships as well as its ability
to cross-sell with National Accounts, Commercial Accounts and Select Accounts.
TAP has two separate marketing and underwriting groups within Specialty
Accounts:
Gulf Specialty focuses on many non-traditional lines of business with a
particular emphasis on the financial services market. Products include
directors' and officers' liability insurance, errors and omissions coverage for
bankers, investment counselors and mutual fund advisors, and fidelity and surety
coverage for related classes. In addition, Gulf Specialty offers errors and
omissions coverage for professionals and non-professionals such as lawyers,
architects and engineers, insurance agents, podiatrists and chiropractors
medical malpractice, primary and excess property, and various coverages that
target the transportation industry. Gulf Specialty also writes umbrella coverage
for various industries, provides insurance products to the entertainment
industry and to municipalities
24
<PAGE>
and provides insurance products for other industry specific programs. In
addition, Gulf Specialty has developed a book of excess and surplus lines
business through Gulf Underwriters Insurance Company. Effective January 1, 1998,
TAP's former Travelers Specialty unit has been combined with Gulf Specialty, and
it is anticipated that during 1998 and 1999 renewal policies within the former
Travelers Specialty unit will be written as Gulf Specialty policies.
Bond Specialty's range of products includes fidelity and surety bonds,
directors' and officers' and other professional liability insurance, employment
practices liability insurance, fiduciary liability insurance and other related
coverages. The customer base ranges from large financial services companies and
commercial entities to small businesses and individuals. Products and services
are distributed primarily through agents and brokers. Bond Specialty is
organized around three broad customer segments: Financial Services, Construction
and Commercial Risk and one specialized product niche: National Commercial
Surety.
Pricing and Underwriting
Pricing levels for property and casualty insurance products by TAP's
Commercial Lines are generally developed based upon the frequency and severity
of estimated losses, the expenses of producing business and administering
claims, and a reasonable allowance for profit. TAP's strategy emphasizes a
profit-oriented approach rather than a premium volume or market share-oriented
approach to underwriting. TAP's National Accounts business sells primarily risk
management services and loss sensitive products. Commercial Accounts and Select
Accounts primarily sell guaranteed cost products. The market conditions for all
Commercial Lines products are characterized by difficult pricing and increased
competition.
A significant portion of Commercial Lines business is written with
retrospectively rated insurance policies as well as large deductible policies in
which the ultimate cost of insurance for the insured is dependent on the loss
experience of the insured. Retrospectively rated policies are primarily used in
workers' compensation coverage. Although the retrospectively rated feature of
the policy substantially reduces insurance risk to TAP, it introduces credit
risk to TAP. Receivables on unpaid losses from holders of retrospectively rated
policies totaled approximately $502 million at December 31, 1997. Collateral,
primarily letters of credit and, to a lesser extent, cash collateral, is
generally requested for contracts that provide for deferred collection of
ultimate premiums. The amount of collateral requested is predicated upon the
creditworthiness of the customer and the nature of the insured risks. Commercial
Lines continually monitors the credit exposure on individual accounts and the
adequacy of collateral.
Under certain workers' compensation insurance contracts with deductible
features, TAP is obligated to pay the claimant the full amount of the claim. TAP
is subsequently reimbursed by the contractholder for the deductible amount, and
is subject to credit risk until such reimbursement is made. At December 31,
1997, contractholder receivables and payables on unpaid losses were each
approximately $1.9 billion.
25
<PAGE>
TAP has developed an underwriting methodology that incorporates
underwriting, claims, engineering, actuarial and product development disciplines
for particular industries. This approach is designed to maintain high quality
underwriting and pricing discipline. This approach utilizes proprietary data
gathered and analyzed by TAP with respect to its Commercial Lines business over
many years. The underwriters and engineers use this information to assess and
evaluate risks prior to quotation. This information provides specialized
knowledge about industry segments and catastrophe management and helps analyze
risk based on account characteristics and pricing parameters designed to ensure
that TAP does not compromise its underwriting integrity. This process is linked
with strong underwriting interaction and review at TAP's local offices and
agents' locations.
TAP is also a member of and participates in the underwriting operations of
insurance and reinsurance pools and associations, several of which make
independent underwriting decisions on behalf of their members. These pools
insure specialized risks such as exposures related to the aviation and nuclear
power industries.
TAP continually reviews its exposure to catastrophic losses and attempts
to mitigate such exposure. See "Insurance Services - General -- Reinsurance."
TAP uses sophisticated computer modeling techniques to assess underwriting risks
and renewal of business in catastrophe-prone areas.
Geographic Distribution
The following table shows the distribution of Commercial Lines' direct
written premiums for the states that accounted for the majority of premium
volume for the year ended December 31, 1997:
State % of Total
----- ----------
New York 12.6%
California 8.0
Texas 6.4
Massachusetts 6.4
Pennsylvania 4.5
Florida 4.3
New Jersey 4.0
Connecticut 3.8
Illinois 3.7
North Carolina 3.3
All Others (1) 43.0
--------
Total 100.0%
========
- ----------
(1) No other single state accounted for 3.0% or more of the total direct written
premiums written in 1997 by TAP.
26
<PAGE>
Personal Lines
TAP is the second largest writer of personal lines insurance through
independent agents and the eighth largest writer of personal lines insurance
overall in the United States based on 1996 direct written premiums published by
A.M. Best. In 1997, Personal Lines generated net written premiums of
approximately $3.1 billion. Personal Lines primarily offers personal automobile
and homeowners insurance.
Personal Lines distributes products primarily through approximately 5,000
independent agencies located throughout the United States. TAP is also marketing
its Personal Lines products through alternative distribution channels, including
sponsoring organizations such as employee and affinity groups, joint marketing
arrangements with other insurers and through the PFS sales force. The
property-casualty licensed PFS agents market Personal Lines products under the
name TRAVELERS SECURE(R) in 39 states. At the end of 1997, approximately 8,700
members of the PFS sales force were licensed to sell TRAVELERS SECURE(R)
products and approximately 10,000 new automobile and homeowners policies are now
being sold through this program each month. Approximately one-third of Personal
Lines new business originated from alternative distribution channels in 1997.
Selected Product Information
The following table sets forth by product line net written premiums for
Personal Lines for the periods indicated. For a description of the product lines
referred to in the table below, see "-- Product Lines."
Because the Acquisition occurred on April 2, 1996, the Company's results
of operations for periods prior to April 2, 1996 do not include the results of
Aetna P&C. Accordingly, premium and other operational information provided for
TAP's combined businesses prior to such time is for informational purposes only.
Combined Net Written Premiums
<TABLE>
<CAPTION>
Percentage of Total
Net Written Premiums
Year Ended December 31, Year Ended
------------------------------ December 31,
1997 1996 1995 1997
------- ------- ------- -------
(Dollars in millions)
Net written premiums by product
line:
<S> <C> <C> <C> <C>
Personal automobile $ 1,950 $ 1,851 $ 1,822 63.4%
Homeowners and other 1,124 824 721 36.6
------- ------- ------- -------
Total Personal Lines $ 3,074(1) $ 2,675 $ 2,543 100.0%
======= ======= ======= =======
</TABLE>
- ----------
(1) In 1997, $371 million of Personal Lines net written premiums were generated
by alternative distribution channels.
27
<PAGE>
Product Lines
TAP writes virtually all types of property and casualty insurance covering
personal risks. Personal Lines had approximately 4.4 million policies in force
at December 31, 1997. The primary coverages in Personal Lines are personal
automobile and homeowners insurance sold to individuals.
Personal Automobile provides coverage for liability to others for both
bodily injury and property damage and for physical damage to an insured's own
vehicle from collision and various other perils. In addition, many states
require policies to provide first-party personal injury protection, frequently
referred to as no-fault coverage. In 1997, TAP introduced a nonstandard
automobile product in Texas and Alabama, distributed through independent agents.
In February 1998, TAP expanded its nonstandard auto product into New York, and
later this year it plans to further expand such product into its larger markets,
including Pennsylvania, Florida and Connecticut.
Homeowners and Other provides protection against losses to dwellings and
contents from a wide variety of perils, as well as coverage for liability
arising from ownership or occupancy. TAP writes homeowners insurance for
dwellings, condominiums, mobile homes and rental property contents. Other
products include coverage for boats, personal articles such as jewelry, and
umbrella liability protection.
Principal Markets and Methods of Distribution
TAP's Personal Lines products are distributed primarily through
approximately 5,000 independent agencies located throughout the United States,
supported by a network of 15 field marketing offices and five customer service
centers. Personal Lines also markets through affinity groups, the PFS sales
force and under joint marketing arrangements with other insurers. While TAP's
principal markets for Personal Lines insurance are in states along the East
Coast, in the South, and Texas, Personal Lines is expanding its geographical
presence across the United States. In the states of Florida, New Jersey and
Massachusetts, TAP operates stand-alone domestic companies to enhance its
competitive capability in these highly regulated markets. In addition, in
October 1997, TAP commenced operations in its California domestic companies,
which sell personal automobile policies.
Insurance companies generally market personal automobile and homeowners
insurance through one of two distribution systems: independent agents or direct
writing. The independent agents that distribute TAP's Personal Lines products
usually represent several unrelated property and casualty companies. In
contrast, direct writing companies operate either by mail or through exclusive
agents or sales representatives. Due in part to the expense advantage that
direct writers may have relative to companies using independent agents, the
direct writing companies have gradually expanded their market share in recent
years.
TAP's Personal Lines continues to distribute its products through the
independent agency distribution system, recognizing the service and underwriting
advantages the agent can deliver. In addition to its agency distribution system,
TAP has broadened its distribution channels for Personal
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<PAGE>
Lines products to include sponsoring organizations such as employee and affinity
groups, joint marketing arrangements with other insurers and sales through
members of the PFS sales force, who primarily sell life insurance products
issued by affiliates of TAP, as well as mutual funds and other products of the
Company. This program is available in 39 states. In general, members of the PFS
sales force contact potential customers directly, and then transmit information
about the customer to one of four regional telemarketing centers. An authorized
telemarketing sales representative contacts the customer to underwrite, sell and
ultimately process new business.
In 1995, Aetna P&C entered into a marketing agreement with GEICO to write
the majority of GEICO's homeowners business, and to receive referrals from GEICO
for new homeowners business. This agreement added historically profitable
business and helped geographically diversify the homeowners line of business.
New business referrals began in July 1995 and, on January 1, 1996, Aetna P&C
began writing renewal policies. This marketing agreement provided for limits on
Personal Lines' obligation to write new and renewal business in certain
catastrophe-prone areas.
TAP believes that its focus on service and development of long-term
relationships with individual agents gives it a competitive advantage in the
Personal Lines market. TAP believes that its expense management practices,
including prompt and efficient claims handling and high level of automation,
allow it to offer a competitively priced product. In addition, TAP is leveraging
its service, claims handling and automation experience in the expansion of the
distribution of Personal Lines products through its alternative channels.
Pricing and Underwriting
Pricing for personal automobile insurance is driven by changes in the
relative frequency of claims and by inflation in the cost of automobile repairs,
medical care and litigation of liability claims. As a result, the profitability
of the business is largely dependent on promptly identifying and rectifying
disparities between premium levels and expected claim costs, and obtaining
approval of the state regulatory authorities for indicated rate increases.
Premiums charged for physical damage coverage reflect insured car values and,
accordingly, premium levels are somewhat related to the volume of new car sales.
Pricing in the homeowners business is also driven by changes in the
frequency of claims and by inflation in building supplies, labor costs and
household possessions. Most homeowners policies offer (but do not require)
automatic increases in coverage to reflect growth in replacement costs and
property values. In addition to the normal risks associated with any multiple
peril coverage, the profitability and pricing of homeowners insurance is
affected by the incidence of natural disasters, particularly hurricanes, winter
storms, earthquakes and tornadoes. In order to reduce its exposure to
catastrophe losses, TAP has limited the writing of new homeowners business and
selectively non-renewed existing homeowners business in certain markets,
tightened underwriting standards and implemented price increases in certain
catastrophe-prone areas, subject to restrictions imposed by insurance regulatory
authorities. In California, TAP introduced in 1996 an endorsement that reduces
its exposure to catastrophic earthquake claims by increasing the deductible and
limiting other policy coverages in the event of an earthquake loss. TAP uses
computer
29
<PAGE>
modeling techniques to assess its level of exposure to loss in catastrophe-prone
areas. Changes to methods of marketing and underwriting in coastal areas of
Florida and New York, and in California are subject to state-imposed
restrictions, the general effect of which is to make it more difficult for an
insurer to reduce exposures.
Insurers writing property-casualty policies are generally unable to
increase rates until some time after the costs associated with coverage have
increased, primarily as a result of state insurance rate regulation laws. The
pace at which an insurer can change rates in response to competition or to
increased costs depends, in part, on whether the applicable rate regulation law
requires prior approval of a rate increase or notification to the regulator
either before or after a rate increase is imposed. In states having prior
approval laws, a rate must be approved by the regulator before it may be used by
the insurer. In states having "file-and-use" laws, the insurer must file the
rate with the regulator, but does not need to wait for approval before using it.
A "use-and-file" law requires an insurer to file rates within a certain period
of time after the insurer begins using the new rate. Approximately one-half of
the states, including New York and New Jersey, require prior approval of most
rate increases.
Underwriting of Personal Lines products is conducted primarily by
independent agents. Agents underwrite Personal Lines policies under strict
underwriting guidelines established and monitored by TAP. Each agent is assigned
to a specific employee of TAP or team of employees responsible for working with
the agent on business plan development, marketing, and overall growth and
profitability. TAP uses agency level management information to analyze and
understand results and to identify problems and opportunities.
Geographic Distribution
The following table shows the distribution of Personal Lines' direct
written premiums for the states that accounted for the majority of premium
volume for the year ended December 31, 1997:
State % of Total
----- ----------
New York 22.0%
New Jersey 9.4
Texas 9.2
Pennsylvania 8.7
Florida 7.2
Connecticut 5.9
Massachusetts 5.7
Virginia 3.8
Georgia 3.2
All others (1) 24.9
---------
Total 100.0%
=========
- ----------
(1) No other single state accounted for 3.0% or more of the total direct written
premiums written in 1997 by TAP.
30
<PAGE>
Claim Administration
TAP employs approximately 8,200 claim adjusters, appraisers,
investigators, staff attorneys, system specialists and training, management and
support personnel in the claim department. These employees manage over 90% of
TAP's claims. Approved external vendors, such as claim adjusters, appraisers,
investigators and attorneys, are used only when the geographic location or
unique issues raised by a claim warrant such use. To be approved, these vendors
must have a proven record and have demonstrated cost-consciousness and relevant
technical skills.
TAP is dedicated to providing outstanding service standards to its
customers while seeking to reach optimal levels of losses and loss adjustment
expenses. During 1997, TAP reorganized the claim department to more effectively
meet these goals. The new structure features seven operating regions, and grants
to the regions wider authority to address the needs of local customers,
underwriters, agents and brokers across Commercial Lines and Personal Lines. In
addition, the home office and legal personnel created teams around technical
specialties to better support the regional operations. This streamlined
structure of the claim department permits TAP to maintain the economies of scale
of a larger, established company while enjoying the flexibility of a smaller
company that can more quickly respond to the needs of its customers,
underwriters, agents and brokers. The home office continues to monitor adherence
to claims policies and procedures, the adequacy of case reserves, loss and
expense controls and productivity and service standards.
In 1997, TAP also introduced TravComp, a workers' compensation claim and
medical management program that assists adjusters in promptly investigating,
validating or rejecting workers' compensation claims. New medical management
workstations also permit nurse professionals to access additional information
that supports TAP's emphasis on early return to work strategies for these
claims. These new technologies, together with better matching of professional
skills and authority to specific claim issues, have resulted in workers'
compensation cases closing faster and with lower losses and loss adjustment
expenses. A new, loss and analytical reporting tool made possible by the
implementation of the new workers' compensation process is now available to
employers.
Environmental, asbestos and cumulative injury claims are separately
managed by TAP's Special Liability Group. This group is comprised of dedicated
legal, claim, finance and engineering professionals. See "-- Environmental,
Asbestos and Cumulative Injury Claims."
Reserves
Property and casualty claim reserves are established to account for the
estimated ultimate costs of claims and claim adjustment expenses for claims that
have been reported but not yet settled and claims that have been incurred but
not reported. TAP establishes reserves by line of business, coverage and year.
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<PAGE>
The process of estimating claim reserves is imprecise due to a number of
variables. These variables are affected by both internal and external events
such as changes in claims handling procedures, inflation, judicial trends and
legislative changes. Many of these items are not directly quantifiable,
particularly on a prospective basis. Additionally, there may be significant
reporting lags between the occurrence of the insured event and the time it is
actually reported to the insurer. TAP continually refines reserve estimates in a
regular ongoing process as experience develops and further claims are reported
and settled. TAP reflects adjustments to reserves in the results of operations
in the periods in which the estimates are changed. In establishing reserves, TAP
takes into account estimated recoveries for reinsurance, salvage and
subrogation.
TAP derives estimates for unreported claims and development on reported
claims principally from actuarial analyses of historical patterns of claims
development by accident year for each line of business and market segment.
Similarly, TAP derives estimates of unpaid claim adjustment expenses principally
from actuarial analyses of historical development patterns of the relationship
of claim adjustment expenses to losses for each line of business and market
segment. For a description of TAP's reserving methods for environmental and
asbestos claims, see "-- Environmental, Asbestos and Cumulative Injury Claims."
Discounting. The liability for losses for certain long-term disability
payments under workers' compensation insurance and workers' compensation excess
insurance has been discounted using a maximum interest rate of 5%. At December
31, 1997, 1996 and 1995 the combined amounts of discount for TAP were $912
million, $1.012 billion and $1.206 billion, respectively.
For a reconciliation of beginning and ending property and casualty
insurance claims and claim adjustment expense reserves of the Company for each
of the last three years, see Note 12 of Notes to Consolidated Financial
Statements.
The following table sets forth the year-end reserves from 1987 through
1997 and the subsequent changes in those reserves, presented on a historical
basis for TAP. Accordingly, the original estimates, cumulative amounts paid and
reestimated reserves in the table for the years 1987-1995 have not been restated
to include Aetna P&C. Beginning in 1996, the table includes the reserve activity
of Aetna P&C. The data in the table are presented in accordance with reporting
requirements of the SEC. Care must be taken to avoid misinterpretation by those
unfamiliar with such information or familiar with other data commonly reported
by the insurance industry. The following data is not accident year data, but
rather a display of 1987-1997 year-end reserves and the subsequent changes in
those reserves.
For instance, the "cumulative deficiency or redundancy" shown in the
following table for each year represents the aggregate amount by which original
estimates of reserves as of that year-end have changed in subsequent years.
Accordingly, the cumulative deficiency for a year relates only to reserves at
that year-end and such amounts are not additive. Expressed another way, if the
original reserves at the end of 1987 included $4 million for a loss that is
finally settled in 1997 for $5 million, the $1 million deficiency (the excess of
the actual settlement of $5 million over the original
32
<PAGE>
estimate of $4 million) would be included in the cumulative deficiencies in each
of the years 1987-1996 shown in the following table.
Certain factors may distort the re-estimated reserves and cumulative
deficiency or redundancy shown in the following table. For example, a
substantial portion of the cumulative deficiencies in each of the years
1987-1997 arises from claims on policies written prior to the mid-1970s
involving liability exposures such as environmental, asbestos and cumulative
injury claims. In the post-1984 period, the Company has developed more stringent
underwriting standards and policy exclusions and has significantly contracted or
terminated the writing of such risks. See "--Environmental, Asbestos and
Cumulative Injury Claims." General conditions and trends that have affected the
development of these liabilities in the past will not necessarily recur in the
future.
Other factors that affect the data in the following table include the
discounting of workers' compensation reserves and the use of retrospectively
rated insurance policies. To the extent permitted under applicable accounting
practices, workers' compensation reserves are discounted to reflect the time
value of money, due to the relatively long time period over which these claims
are to be paid. Apparent deficiencies will continue to occur as the discount on
these workers' compensation reserves is accreted at the appropriate interest
rates. Also, a significant portion of National Accounts business is underwritten
with retrospectively rated insurance policies in which the ultimate loss
experience is primarily borne by the insured. Increases in loss experience
result in an increase in reserves, and an offsetting increase in amounts
recoverable from insureds. Likewise, decreases in loss experience result in a
decrease in reserves, and an offsetting decrease in amounts recoverable from
insureds. These amounts recoverable mitigate the impact of the cumulative
deficiencies or redundancies but are not reflected in the following table.
Retrospective rating is particularly significant for National Accounts business
for workers' compensation, and to a lesser extent in general liability and
commercial automobile coverages. This mechanism affords TAP significant
financial protection against adverse development on a large block of net
reserves.
Because of these and other factors, it is difficult to develop meaningful
extrapolation of estimated future redundancies or deficiencies in loss reserves
from the data in the following table.
The differences between the reserves for claims and claim adjustment
expenses shown in the following table, which is prepared in accordance with
GAAP, and those reported in the annual statements of TAP filed with state
insurance departments, which are prepared in accordance with statutory
accounting practices, were: $31 million, $14 million and $(7) million for the
years 1997, 1996 and 1995 respectively.
33
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1987(a) 1988(a) 1989(a) 1990(a) 1991(a)
------- ------- ------- ------- -------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Reserves for Loss and Loss Adjustment
Expense Originally Estimated: $ 7,644 $ 8,116 $ 8,947 $ 9,239 $ 9,406
Cumulative amounts paid as of
One year later 2,376 2,147 2,430 2,419 2,135
Two years later 3,631 3,632 3,992 3,932 3,584
Three years later 4,648 4,706 5,095 4,993 4,594
Four years later 5,402 5,487 5,878 5,755 5,375
Five years later 5,978 6,080 6,479 6,351 5,851
Six years later 6,443 6,555 6,966 6,746 6,547
Seven years later 6,829 6,963 7,304 7,325
Eight years later 7,176 7,262 7,822
Nine years later 7,445 7,736
Ten years later 7,899
Reserves re-estimated as of
One year later 7,858 8,292 9,099 9,358 9,446
Two years later 8,051 8,497 9,220 9,470 9,755
Three years later 8,254 8,698 9,408 9,897 10,038
Four years later 8,497 8,912 9,953 10,325 10,154
Five years later 8,746 9,488 10,421 10,478 10,251
Six years later 9,333 9,970 10,616 10,614 10,495
Seven years later 9,813 10,150 10,755 10,870
Eight years later 9,966 10,306 11,019
Nine years later 10,131 10,598
Ten years later 10,457
Cumulative deficiency (redundancy) 2,813 2,482 2,072 1,631 1,089
Gross liability--end of year
Reinsurance recoverables
Net liability--end of year
Gross reestimated liability--latest
Reestimated reinsurance recoverables--latest
Net reestimated liability--latest
Gross cumulative deficiency (redundancy)
<CAPTION>
Year Ended December 31,
1992(a) 1993(a) 1994(a) 1995(a) 1996(b) 1997(b)
c
<S> <C> <C> <C> <C> <C> <C>
(Dollars in millions)
Reserves for Loss and Loss Adjustment
Expense Originally Estimated: $9,873 $10,190 $ 10,251 $ 10,102 $ 21,816 $ 21,406
Cumulative amounts paid as of
One year later 2,206 1,900 1,852 1,521 3,704
Two years later 3,554 3,221 2,888 2,809
Three years later 4,561 3,988 4,055
Four years later 5,160 4,941
Five years later 5,963
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Reserves re-estimated as of
One year later 10,013 10,151 9,942 9,848 21,345
Two years later 10,112 10,116 9,766 9,785
Three years later 10,142 9,990 9,851
Four years later 10,148 10,153
Five years later 10,364
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative deficiency (redundancy) 491 (37) (400) (317) (471)
Gross liability--end of year $ 13,805 $ 13,872 $ 14,715 $ 29,967 $ 29,343
Reinsurance recoverables 3,615 3,621 4,613 8,151 7,937
-------- -------- -------- -------- --------
Net liability--end of year $ 10,190 $ 10,251 $ 10,102 $ 21,816 $ 21,406
======== ======== ======== ======== ========
Gross reestimated liability--latest $ 13,862 $ 13,837 $ 14,381 $ 29,502
Reestimated reinsurance recoverables--latest 3,709 3,986 4,596 8,157
-------- -------- -------- --------
Net reestimated liability--latest $ 10,153 $ 9,851 $ 9,785 $ 21,345
======== ======== ======== ========
Gross cumulative deficiency (redundancy) $ 57 $ (35) $ (334) $ (465)
======== ======== ======== ========
</TABLE>
- ----------
(a) Reflects reserves of Travelers P&C, excluding Aetna P&C reserves which
were acquired on April 2, 1996. Accordingly, the reserve development (net
reserves for loss and Loss Adjustment Expense recorded at the end of the
year, as originally estimated, less net reserves reestimated as of
subsequent years) relates only to losses recorded by Travelers P&C and
does not include reserve development recorded by Aetna P&C.
(b) Includes Aetna P&C gross reserves of $16,775 million and net reserves of
$11,752 million acquired on April 2, 1996 and subsequent development
recorded by Aetna P&C.
Statutory Combined Ratio and Other Information
The following table sets forth the statutory loss and LAE ratios,
underwriting expense ratios and combined ratios for the periods indicated for
the Company.
The statutory combined ratio is an industry measurement of the results of
property and casualty insurance underwriting. This ratio is the sum of the ratio
of incurred losses and loss
34
<PAGE>
adjustment expenses to net premiums earned (the "loss and LAE ratio"), the ratio
of underwriting expenses incurred to net premiums written (the "underwriting
expense ratio") and, where applicable, the ratio of dividends to policyholders
to net premiums earned. A combined ratio under 100% generally indicates an
underwriting profit; a combined ratio over 100% generally indicates an
underwriting loss. However, investment income, federal income taxes and other
non-underwriting income or expenses are not reflected in the statutory combined
ratio. The profitability of property and casualty insurance companies depends on
income from underwriting, investment and service operations. Lines of business
where claims are paid out over a longer period of time, such as workers'
compensation ("long-tail"), also provide investment income over a longer period
of time and therefore can be profitable at higher combined ratios than lines
where claims are paid out over a shorter period ("short-tail"). Insurers with a
high proportion of long-tail policies will generally have higher combined ratios
than insurers with more short-tail business.
The ratios shown in the table below are computed based upon statutory
accounting practices, not generally accepted accounting principles ("GAAP"). For
information on GAAP combined ratios, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Statutory Combined Ratios
Year Ended December 31,
-------------------------
1997 1996 1995
---- ---- ----
Commercial Lines:
Loss and LAE ratio 78.4% 96.2% 80.6%
Underwriting expense ratio 30.6 32.7 24.4
Combined ratio before
policyholder dividends 109.0 128.9(1) 105.0
Combined ratio 111.0 129.6 106.3
Personal Lines:
Loss and LAE ratio 63.5 68.7 74.5
Underwriting expense ratio 28.7 28.9 29.9
Combined ratio 92.2 97.6(2) 104.4
Total:
Loss and LAE ratio 72.4 85.5 78.2
Underwriting expense ratio 29.9 31.3 26.4
Combined ratio before
policyholder dividends 102.3 116.8 104.6
Combined ratio 103.5 117.2 105.4
- ----------
(1) Includes the effect of charges associated with the Acquisition and also
includes statutory charges made to conform accounting policies and Company
strategies in connection with the Acquisition (but not for GAAP reporting
purposes due to purchase accounting). Excluding such charges, the combined
ratio before policyholder dividends was 110.0%.
(2) Includes the effect of TAP's review of reserves associated with the
Acquisition. The combined ratio excluding this item was 100.1%.
35
<PAGE>
The following table sets forth information regarding the premium to
surplus ratios of TAP. For informational purposes only, the table includes Aetna
P&C for all periods presented.
Schedule of Premium to Surplus Ratios (Statutory Basis)
Year Ended December 31,
-----------------------
1997 1996 1995
------ ------ ------
(Dollars in millions)
Net written premiums $7,832 $7,343 $7,701
Capital and surplus 6,188 5,423 5,231
Ratio of net written premiums to capital
and surplus 1.27x 1.35x 1.47x
Environmental, Asbestos and Cumulative Injury Claims
Environmental, asbestos and cumulative injury claims are segregated from
other claims and are handled separately by TAP's Special Liability Group, a
special unit staffed by dedicated legal, claim, finance and engineering
professionals.
Environmental Claims
As a result of various state and federal regulatory efforts aimed at
environmental remediation, the insurance industry has been, and continues to be,
involved in extensive litigation involving policy coverage and liability issues.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") was first enacted in 1980, and significantly expanded in 1984. CERCLA
enables private parties and the federal and state governments to take action
with respect to releases and threatened releases of hazardous substances and to
recover their response costs from certain liable parties or such parties may be
ordered to undertake remedial action directly. Liability under CERCLA may be
joint and several with other responsible persons. In addition to the regulatory
pressures, TAP believes that certain court decisions have expanded insurance
coverage beyond the original intent of the insurers and insureds, frequently
involving policies that were issued prior to the mid-1970s. The results of court
decisions affecting the industry's coverage positions continue to be
inconsistent. Accordingly, the ultimate responsibility and liability for
environmental remediation costs remain uncertain.
TAP continues to receive claims alleging liability exposures arising out
of insureds' alleged disposition of toxic substances. These claims when
submitted rarely indicate the monetary amount being sought by the claimant from
the insured and TAP does not keep track of the monetary amount being sought in
those few claims which indicated such a monetary amount.
TAP's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of TAP's
environmental claims that are in the dispute process, until the dispute is
resolved. This bulk reserve is established and adjusted based upon the
36
<PAGE>
aggregate volume of in-process environmental claims and TAP's experience in
resolving such claims. Environmental loss and loss expense reserves of TAP at
December 31, 1997 were $1.119 billion, net of reinsurance of $74 million.
Approximately 17% of such loss and loss expense reserves (i.e., approximately
$192 million) were case reserves for resolved claims. The balance, approximately
83% of the net aggregate reserve (i.e., approximately $927 million), is carried
in a bulk reserve and includes incurred but not reported environmental claims
for which TAP has not received any specific claims.
TAP's reserving methodology is preferable to one based on "identified
claims" since the resolution of environmental exposures by TAP generally occurs
on an insured-by-insured basis as opposed to a claim-by-claim basis. The nature
of the resolution often is through coverage litigation, which often pertains to
more than one claim, as well as through a settlement with an insured. Generally,
the settlement between TAP and the insured extinguishes any obligation the
Company may have under any policy issued to the insured for past, present and
future environmental liabilities. This form of settlement is commonly referred
to as a "buy-back" of policies for future environmental liability. Additional
provisions of these agreements include the appropriate indemnities and hold
harmless provisions to protect TAP. TAP's general purpose in executing such
agreements is to reduce its potential environmental exposure and eliminate both
the risks presented by coverage litigation with the insured and the cost of such
litigation.
The reserving methodology includes an analysis by TAP of the exposure
presented by each insured and the anticipated cost of resolution, if any, for
each insured. This analysis is completed by TAP on a quarterly basis. In the
course of its analysis, an assessment of the probable liability, available
coverage, judicial interpretations and historical value of similar exposures is
considered by TAP. In addition, due consideration is given to the many variables
presented, such as the nature of the alleged activities of the insured at each
site; the allegations of environmental damage at each site; the number of sites;
the total number of potentially responsible parties at each site; the nature of
environmental harm and the corresponding remedy at each site; the nature of
government enforcement activities at each site; the ownership and general use of
each site; the overall nature of the insurance relationship between TAP and the
insured; the identification of other insurers; the potential coverage available,
if any, including number of years of coverage, if any; and the applicable law in
each jurisdiction. Analysis of these and other factors, including the potential
for future claims, results in the establishment of the bulk reserve.
The duration of TAP's investigation and review of such claims and the
extent of time necessary to determine an appropriate estimate, if any, of the
value of the claim to the Company, varies significantly and is dependent upon a
number of factors. These factors include, but are not limited to, the
cooperation of the insured in providing claim information, the pace of
underlying litigation or claim processes, the pace of coverage litigation
between the insured and the Company and the willingness of the insured and TAP
to negotiate, if appropriate, a resolution of any dispute between them
pertaining to such claims. Since the foregoing factors vary from claim to claim
and insured by insured, TAP cannot provide a meaningful average of the duration
of an environmental claim. However, based upon TAP's experience in resolving
such claims, the duration may vary from months to several years.
37
<PAGE>
The property and casualty insurance industry does not have a standard
method of calculating claim activity for environmental losses. Generally for
environmental (Superfund remediation type) claims, TAP establishes a claim file
for each insured on a per site, per claimant basis. If there is more than one
claimant such as a federal and a state agency, this method will result in two
claims being set up for a policyholder at that one site. TAP adheres to this
method of calculating claim activity on all environmental-related claims,
whether such claims are tendered on primary, excess or umbrella policies. Since
the implementation of the claim system conversion in 1997, TAP's method of
establishing claims in the foregoing manner now applies to claims tendered under
the Travelers P&C and Aetna P&C policies.
In addition, TAP establishes claim files for bodily injury or property
damage claims brought by individual claimants who allege injury or damage as a
result of the discharge of wastes or pollutants. As it pertains to such claims
tendered on policies issued by Travelers P&C, TAP establishes a claim file on a
per claim, per insured, per site basis. For example, if one hundred claimants
file a lawsuit against five policyholders alleging bodily injury and property
damage as a result of the discharge of wastes or pollutants, one thousand claims
(five hundred for the bodily injury claims and five hundred for the property
damage claims) would be established.
As it pertains to the bodily injury and property damage claims tendered on
Aetna P&C policies, TAP's claim system conversion has not been completed to
permit the establishment of such claims in a manner consistent with
establishment of Travelers P&C bodily injury and property damage claims. As it
pertains to such claims tendered on policies issued by Aetna P&C, TAP currently
establishes a claim file on a per insured basis, per site basis. For example, if
one hundred claimants file a lawsuit against five policyholders alleging bodily
injury and property damage as a result of the discharge of wastes or pollutants,
five claims would be established for all the bodily injury claims and five
claims would be established for all of the property damage claims.
As of December 31, 1997, calculated as described above, TAP had
approximately 40,300 pending environmental-related claims tendered by 1,400
active policyholders. Of the total pending environmental-related claims, 29,800
claims relate to Travelers P&C policies tendered by 569 policyholders and 10,500
claims relate to Aetna P&C policies tendered by 961 policyholders. Approximately
130 of these Aetna P&C policyholders are also included in the 569 Travelers P&C
policyholders' count. The pending environmental-related claims represent federal
or state EPA-type claims as well as plaintiffs' claims alleging bodily injury
and property damage due to the discharge of waste or pollutants.
To date, TAP generally has been successful in resolving its coverage
litigation and continues to reduce its potential exposure through favorable
settlements with certain insureds. These settlement agreements with certain
insureds are based on the variables presented in each piece of coverage
litigation. Generally the settlement dollars paid in disputed coverage claims
are a percentage of the total coverage sought by such insureds. Based upon TAP's
reserving methodology and the experience of its historical resolution of
environmental exposures, it believes that the environmental reserve position is
appropriate. As of December 31, 1997, TAP, for approximately
38
<PAGE>
$1.16 billion, has resolved the environmental liabilities presented by 3,931 of
the 5,331 policyholders who have tendered environmental claims to TAP. This
resolution comprises 74% of the policyholders who have tendered such claims. TAP
has reserves of approximately $800 million included in its bulk reserve relating
to the remaining 1,400 policyholders (26% of the total) with unresolved
environmental claims, as well as for any other policyholder which may tender an
environmental claim in the future.
Asbestos Claims
In the area of asbestos claims, TAP believes that the property and
casualty insurance industry has suffered from judicial interpretations that have
attempted to maximize insurance availability from both a coverage and liability
standpoint far beyond the intent of the contracting parties. These policies
generally were issued prior to the 1980s. TAP continues to receive asbestos
claims alleging insureds' liability from claimants' asbestos-related injuries.
These claims, when submitted, rarely indicate the monetary amount being sought
by the claimant from the insured and TAP does not keep track of the monetary
amount being sought in those few claims which indicated such a monetary amount.
Originally the cases involved mainly plant workers and traditional asbestos
manufacturers and distributors. However, in the mid-1980s, a new group of
plaintiffs, whose exposure to asbestos was less direct and whose injuries were
often speculative, began to file lawsuits in increasing numbers against the
traditional defendants as well as peripheral defendants who had produced
products that may have contained small amounts of some form of encapsulated
asbestos. These claims continue to arise and on an individual basis generally
involve smaller companies with smaller limits of potential coverage. Also, there
has emerged a group of non-product claims by plaintiffs, mostly independent
labor union workers, mainly against companies, alleging exposure to asbestos
while working at these companies' premises. TAP continues to receive this type
of asbestos claim.
In summary, various classes of asbestos defendants, such as major product
manufacturers, peripheral and regional product defendants as well as premises
owners, are tendering asbestos-related claims to the industry. Because each
insured presents different liability and coverage issues, TAP evaluates those
issues on an insured-by-insured basis.
TAP's evaluations have not resulted in any meaningful data from which an
average asbestos defense or indemnity payment may be determined. The varying
defense and indemnity payments made by TAP on behalf of its insureds have also
precluded TAP from deriving any meaningful data by which it can predict whether
its defense and indemnity payments for asbestos claims (on average or in the
aggregate) will remain the same or change in the future. Based upon TAP's
experience with asbestos claims, the duration period of an asbestos claim from
the date of submission to resolution is approximately two years.
At December 31, 1997, asbestos claims reserves of TAP were $1.114 billion,
net of reinsurance of $249 million. Approximately 24% of the net aggregate
reserve (i.e., approximately $266 million) is for pending asbestos claims. The
balance, approximately 76% (i.e., approximately
39
<PAGE>
$848 million), of the net asbestos reserve represents incurred but not reported
losses for which TAP has not received any specific claims.
Uncertainty Regarding Adequacy of Environmental and Asbestos Reserves
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are not
used to estimate such reserves.
For environmental claims, TAP estimates its financial exposure and
establishes reserves based upon an analysis of its historical claim experience
and the facts of the individual underlying claims. The unique facts presented in
each claim are evaluated individually and collectively. Due consideration is
given to the many variables presented in each claim, as discussed above.
The following factors are evaluated in projecting the ultimate reserve for
asbestos-related claims: available insurance coverage; limits and deductibles;
an analysis of each policyholder's potential liability; jurisdictional
involvement; past and projected future claim activity; past settlement values of
similar claims; allocated claim adjustment expense; potential role of other
insurance, and applicable coverage defenses, if any. Once the gross ultimate
exposure for indemnity and allocated claim adjustment expense is determined for
a policyholder by policy year, a ceded projection is calculated based on any
applicable facultative and treaty reinsurance and past ceded experience. In
addition, a similar review is conducted for asbestos property damage claims.
However, due to the relatively minor claim volume, these reserves have remained
at a constant level.
As a result of these processes and procedures, the reserves carried for
environmental and asbestos claims at December 31, 1997 are the Company's best
estimate of ultimate claims and claim adjustment expenses based upon known facts
and current law. However, the conditions surrounding the final resolution of
these claims continues to change. Currently, it is not possible to predict
changes in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. Such development will be
affected by future court decisions and interpretations and changes in Superfund
and other legislation. Because of these future unknowns, additional liabilities
may arise for amounts in excess of the current reserves. These additional
amounts, or a range of these additional amounts, cannot now be reasonably
estimated, and could result in a liability exceeding reserves by an amount that
would be material to the Company's operating results in a future period.
However, the Company believes that it is not likely that these claims will have
a material adverse effect on the Company's financial condition or liquidity.
Cumulative Injury Other Than Asbestos
Cumulative injury other than asbestos ("CIOTA") claims are generally
submitted to TAP under general liability policies and often involve an
allegation by a claimant against an insured that the claimant has suffered
injuries as a result of long-term or continuous exposure to potentially harmful
products or substances. Such potentially harmful products or substances include,
but are not
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<PAGE>
limited to, lead paint, pesticides, pharmaceutical products, silicone-based
personal products, solvents and other deleterious substances.
Due to claimants' allegations of long-term bodily injury in CIOTA claims,
numerous complex issues regarding such claims are presented. The claimants'
theories of liability must be evaluated, evidence pertaining to a causal link
between injury and exposure to a substance must be reviewed, the potential role
of other causes of injury must be analyzed, the liability of other defendants
must be explored, an assessment of a claimant's damages must be made and the law
of the jurisdiction must be applied. In addition, TAP must review the number of
policies issued by TAP to the insured and whether such policies are triggered by
the allegations, the terms and limits of liability of such policies, the
obligations of other insurers to respond to the claim, and the applicable law in
each jurisdiction.
To the extent disputes exist between TAP and a policyholder regarding the
coverage available for CIOTA claims, TAP resolves the disputes, where feasible,
through settlements with the policyholder or through coverage litigation.
Generally, the terms of a settlement agreement set forth the nature of TAP's
participation in resolving CIOTA claims, the scope of coverage to be provided by
TAP and contain the appropriate indemnities and hold harmless provisions to
protect TAP. These settlements generally eliminate uncertainties for TAP
regarding the risks extinguished, including the risk that losses would be
greater than anticipated due to evolving theories of tort liability or
unfavorable coverage determinations. TAP's approach also has the effect of
determining losses at a date earlier than would have occurred in the absence of
such settlement agreements. On the other hand, in cases where future
developments are favorable to insurers, this approach could have the effect of
resolving claims for amounts in excess of those that would ultimately have been
paid had the claims not been settled in this manner. No inference should be
drawn that because of TAP's method of dealing with CIOTA claims, its reserves
for such claims are more conservatively stated than those of other insurers.
Prior to the Acquisition, Aetna P&C did not distinguish CIOTA from other
general liability claims or treat CIOTA claims as a special class of claims. In
addition, there were substantial differences in claim approach and resolution
between TAP and Aetna P&C regarding CIOTA claims. During the second quarter of
1996, TAP completed its review of Aetna P&C's exposure to CIOTA claims in order
to determine an appropriate level of reserves using TAP's approach as described
above. Based on the results of that review, TAP's general liability insurance
reserves were increased $360 million, net of reinsurance ($234 million after
tax).
At December 31, 1997, CIOTA claims reserves of TAP were $1.088 billion,
net of reinsurance of $432 million. Approximately 18% of the net aggregate
reserve (i.e., approximately $195 million) is for pending CIOTA claims. The
balance, approximately 82% (i.e., approximately $893 million), of the net CIOTA
reserve represents incurred but not reported losses for which TAP has not
received any specific claims.
41
<PAGE>
Insurance Pools
Most of TAP's insurance subsidiaries are members of one of two separate
intercompany property and casualty reinsurance pooling arrangements: the
Travelers Property Casualty pool and the Gulf pool. Each of these insurance
pools permits the participating companies to rely on the capacity of the entire
pool rather than on its own capital and surplus. Under the arrangements of each
insurance pool, the members share substantially all insurance business that is
written and prorate the combined premiums, losses and expenses. Travelers
Casualty and Surety Company of America ("Travelers C&S of America") does not
participate in either pool and is dedicated to the Bond Specialty business.
Competition and Regulation
For a description of competition and regulation relating to the Company's
property and casualty insurance business, see "Insurance Services - General" at
the end of the description of the Life Insurance Services segment.
Investments
For information on the investment portfolios of the Company's property and
casualty insurance business, see "Insurance Services - General" at the end of
the description of the Life Insurance Services segment.
LIFE INSURANCE SERVICES
The Company's Life Insurance Services segment includes the operations of
The Travelers Insurance Company ("TIC"), which was incorporated in 1863, The
Travelers Life and Annuity Company ("TLAC" and together with TIC, "Travelers
Life and Annuity") and the Primerica Financial Services group of companies
("PFS"), including Primerica Life Insurance Company ("Primerica Life"). With
$50.0 billion of assets and $422 billion of life insurance in force at December
31, 1997, the Company believes that TIC, TLAC and Primerica Life together
constitute one of the largest stock life insurance groups in the United States
as measured by these criteria. For information concerning the Company's
credit-related insurance businesses, see "Consumer Finance Services."
Primerica Financial Services
Principal Markets and Methods of Distribution
The business operations of PFS involve the sale of life insurance, mutual
funds and other financial products. PFS consists of an affiliated group of
companies engaged in (i) the underwriting and administration of individual term
life insurance throughout the United States and in Canada, (ii) securities
brokerage, consisting primarily of mutual fund sales, and (iii) the sale of
other products approved by the Company, including personal lines
property-casualty insurance (TRAVELERS
42
<PAGE>
SECURE(R)) of TAP and mortgage and personal loans ($.M.A.R.T. loan(R) and
$.A.F.E.(R) loan) underwritten by CCC. The PFS sales force is composed of
approximately 80,000 independent agents. A great majority of the domestic
licensed sales force works on a part-time basis.
The PFS sales force is one of the principal distribution arms for the
Company's cross-marketing efforts. Sales of Salomon Smith Barney funds,
predominantly The Concert Series(R), by the PFS sales force were $690.2 million
and $558.1 million in 1997 and 1996, respectively. The PFS sales force is also
the exclusive distributor of Concert Investment Series(sm), an additional group
of mutual funds advised by Salomon Smith Barney. Within PrimElite(TM), a
variable annuity product offered by the PFS sales force, $214.9 million and $
44.9 million were invested in Salomon Smith Barney funds in 1997 and 1996,
respectively. Beginning in 1998, the PrimElite(TM) product will be underwritten
by Travelers Life and Annuity. In addition, approximately 8,700 members of the
PFS sales force are now licensed to sell automobile and homeowners insurance
products under the TRAVELERS SECURE(R) name. This program, which began in 1994
and continues to experience growth in applications and policies, is now
available in 39 states. Finally, the $.M.A.R.T. loan(R) and $.A.F.E.(R) loan
programs, under which members of the PFS sales force solicit applications for
mortgage and personal loans underwritten by CCC, had net receivables outstanding
of over $2.2 billion and $1.5 billion at December 31, 1997 and 1996,
respectively.
Primerica Life and its subsidiaries, Primerica Life Insurance Company of
Canada and National Benefit Life Insurance Company ("NBL"), primarily offer
individual term life insurance. NBL provides statutory disability benefits law
insurance, primarily in New York, as well as direct response student term life
insurance nationwide. Primerica Life and its subsidiaries together are licensed
to sell and market term life insurance in all 50 states, the District of
Columbia, Canada, Puerto Rico, Guam, the U.S. Virgin Islands and the Northern
Mariana Islands.
For information concerning PFS Investments Inc. ("PFS Investments"), see
"-- Mutual Funds and Asset Management" below.
Premium revenues, net of reinsurance, for PFS for the years ended December
31, 1997, 1996 and 1995 were $1.035 billion, $1.030 billion and $1.012 billion,
respectively. See "Insurance Services - General -- Reinsurance" for a discussion
of reinsurance.
In 1996, PFS began utilizing the Financial Needs Analysis ("FNA"), a
diagnostic tool that enhances its ability to address client needs. During 1997,
more than 483,000 FNAs were submitted.
43
<PAGE>
Life Insurance in Force
The following table provides a reconciliation of beginning and ending life
insurance in force for Primerica Life and subsidiaries, and related statistical
data for 1995-1997.
Year Ended December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
(In millions of dollars, except as noted)
In force beginning of year $ 359,878 $ 348,169 $ 334,972
Additions 52,598 52,039 53,045
Terminations(1) (42,605) (40,330) (39,848)
----------- ----------- -----------
In force end of year $ 369,871 $ 359,878 $ 348,169
=========== =========== ===========
The amounts in force at end of
year are before reinsurance ceded
in the following amounts $ 152,899 $ 134,330 $ 117,647
=========== =========== ===========
At end of year:
Number of policies in force
PFS 2,146,200 2,141,800 2,115,600
NBL other individual lines 427,908 418,437 398,988
Average size of policy
in force (in dollars)
PFS $ 169,093 $ 164,694 $ 161,125
NBL other individual lines 16,264 17,055 18,154
- ----------
(1) Includes terminations due to death, surrenders and lapses.
AIDS-related claims, net of reinsurance, as a percentage of total net life
claims paid by Primerica Life in 1997, 1996 and 1995, were 3.2%, 5.9% and 7.1%,
respectively. Management believes that current pricing and reserves make
adequate provision for AIDS-related claim experience.
Mutual Funds and Asset Management
PFS Investments is a registered broker-dealer through which the PFS sales
force markets mutual funds and variable annuities. For the years ended December
31, 1997, 1996 and 1995, PFS' total mutual fund sales were $2.689 billion,
$2.327 billion and $1.551 billion, respectively. The PFS sales force began
marketing Smith Barney mutual funds through a separate distribution arrangement
with PFS Distributors, Inc. in mid-1995 and in March 1996 began selling The
Concert Series(R). The Concert Series(R) is a group of mutual funds that invests
in various Smith Barney mutual funds instead of directly in stocks, bonds or
other securities. Sales of Smith Barney mutual funds accounted for approximately
26%, 24% and 2%, respectively, of PFS' total mutual fund sales in 1997, 1996 and
1995. At December 31, 1997, approximately 27,500 independent agent members of
the PFS sales force (including approximately 3,000 licensed in Canada only) were
also independent registered securities representatives of PFS Investments and/or
PFSL Investments Canada Ltd.
44
<PAGE>
PFS Investments is also the exclusive retail distributor of Concert
Investment Series(sm) mutual funds (formerly Common Sense(R) Trust mutual
funds), and certain of the Company's subsidiaries provide underwriting, transfer
agency and custodial services to these funds. Sales of shares of Concert
Investment Series(sm) accounted for approximately 23%, 27% and 39%,
respectively, of total mutual funds sales by PFS for 1997, 1996 and 1995. In
December 1994, the Company sold American Capital Management & Research, Inc., a
mutual fund company and also the co-sponsor of Concert Investment Series(sm), to
The Van Kampen Merritt Companies, Inc. ("VKM"). In December 1997, the Company
repurchased the advisory contracts for this series of mutual funds from an
affiliate of VKM.
Travelers Life and Annuity
Principal Products
Travelers Life and Annuity offers fixed and variable deferred annuities,
payout annuities and term, universal and variable life and long-term care
insurance to individuals and small businesses. It also provides group pension
products, including guaranteed investment contracts, and group annuities to
employer-sponsored retirement and savings plans. Travelers Life and Annuity
views market specialization and distribution diversification as critical
components of profitability. It has updated its individual product portfolio to
include a range of competitively priced fixed, indexed and variable annuity,
term, universal and variable life and long-term care insurance products for its
customers.
Individual accumulation fixed and variable annuities, group annuities and
pension plan products are used for retirement funding purposes. Variable
annuities permit policyholders to direct retirement funds into a number of
separate accounts which offer various investment options. Payout annuities are
used for structuring settlements of certain indemnity claims and making other
payments to policyholders over a period of time.
Guaranteed investment contracts, which provide a guaranteed return on
investment, continue to be a popular investment choice for employer-sponsored
retirement and savings plans. Group annuities purchased by employer sponsored
plans fulfill retirement obligations to individual employees.
Individual life insurance provides protection against financial loss due
to death. Life insurance is also used to meet estate, business planning and
retirement needs.
Long-term care insurance provides income and asset protection against the
high costs of care associated with home health, assisted living and nursing home
care.
45
<PAGE>
The following table sets forth written premiums, net of reinsurance, and
deposits for the Travelers Life and Annuity unit.
Premiums and Deposits
Year Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In millions)
Premiums
Individual life $ 116 $ 122 $ 124
Long-term care 184 128 88
Individual accident and health(1) 16 24 200
Payout annuities 229 76 90
------ ------ ------
Total premiums 545 350 502
------ ------ ------
Deposits
Universal life insurance 172 169 149
Annuities
Individual fixed accumulation 779 621 692
Individual variable accumulation(2) 1,775 1,370 956
Payout annuities 102 86 88
Guaranteed investment contracts 1,816 764 681
Group separate accounts and managed funds(3) 557 276 362
Other fixed funds 68 186 115
Corporate-owned life insurance(4) 7 30 91
------ ------ ------
Total deposits 5,276 3,502 3,134
------ ------ ------
Total premiums and deposits $5,821 $3,852 $3,636
====== ====== ======
- ----------
(1) The decline in 1996 reflects the Company's distribution of Transport
Holdings Inc., the indirect parent of Transport Life Insurance Company, to
the Company's stockholders in September 1995.
(2) The increase in individual variable accumulation deposits reflects
successful introduction of variable annuities in the Salomon Smith Barney
distribution network and other distribution and product development
initiatives.
(3) The 1997, 1996 and 1995 deposits include $353 million, $146 million and
$200 million, respectively, of deposits relating to the transfer in house
of pension fund assets previously managed externally.
(4) TIC is not currently marketing corporate-owned life insurance. Deposits
are attributable to contracts previously issued by the Company's Managed
Care and Employee Benefits Operations ("MCEBO") (which were sold in 1995)
and transferred to Travelers Life and Annuity effective January 1, 1995.
For information about reinsurance, see "Insurance Services - General --
Reinsurance."
Principal Markets and Methods of Distribution
TIC is licensed to sell and market its individual products in all 50
states, the District of Columbia, Puerto Rico, Guam, the Bahamas and the U.S.
and British Virgin Islands. TLAC is licensed in 47 states and the District of
Columbia to sell and market life insurance and is licensed in 46 states and the
District of Columbia to sell and market variable annuity products.
46
<PAGE>
Individual products are primarily marketed through The Copeland Companies
("Copeland"), an indirect wholly owned subsidiary of TIC, Salomon Smith Barney
Financial Consultants and a nationwide network of independent agencies. Copeland
is a captive sales organization of personal retirement planning specialists
focused primarily on the qualified periodic deferred annuity marketplace, and
accounted for approximately 41% of total individual deferred annuity production
in 1997 and approximately 39% in each of 1996 and 1995. Copeland account
executives also sell Smith Barney mutual funds. Salomon Smith Barney's Financial
Consultants distribute Travelers Life and Annuity's non-qualified deferred
annuities and individual life and long-term care products. Salomon Smith
Barney's share of Travelers Life and Annuity's total individual deferred annuity
production was 38% in each of 1997 and 1996 and 33% in 1995. The nationwide
network of independent agencies sold the majority of the individual life and
long term care business in each of 1997, 1996 and 1995 and accounted for 21%,
23% and 27%, respectively, of individual annuity premiums and deposits in each
of those years. Tower Square Securities, Inc. ("Tower Square Securities"), a
wholly owned subsidiary of TIC, is an introducing broker-dealer offering a full
line of brokerage services. Tower Square Securities facilitates the sale of
individual variable life and annuity insurance products by the independent
agents of TIC.
TIC has also been expanding the sale of its individual life and long-term
care products through other distribution networks. To accomplish this, TIC has
entered into strategic alliances with a select number of established producers
including Travelers Net Plus, a long-term care specialty distributor that
markets primarily through targeted direct mailing, and TowerMark, a joint
venture focused on recruiting and supporting agencies serving high-end estate
planning customers. In March 1997, Copeland further broadened its distribution
channels through its acquisition of Donald F. Smith & Associates, a regional
provider of tax-sheltered annuity programs in the healthcare marketplace.
Group pension products and annuities are marketed by Travelers Life and
Annuity's salaried staff directly to plan sponsors and are also placed through
independent consultants and investment advisers. The major factors affecting the
pricing of these contracts are the economics of the capital markets, primarily
the interest rate environment, the availability of appropriate investments and
surplus required to support this business. The pricing of products and services
also reflects charges for expenses, mortality, profit and other relevant
financial factors such as credit risk.
47
<PAGE>
Life Insurance in Force
The following table provides a reconciliation of beginning and ending
Travelers Life and Annuity life insurance in force and related statistical data
on a statutory basis for 1995 through 1997.
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(In millions of dollars, except as noted)
In force beginning of year $ 50,409 $ 49,179 $ 48,998
Additions 6,476 6,566 6,153
Terminations(1) (5,240) (5,336) (5,972)
--------- --------- ---------
In force end of year $ 51,645 $ 50,409 $ 49,179
========= ========= =========
The amounts in force at end of
year are before reinsurance ceded
in the following amounts $ 22,863 $ 19,474 $ 16,806
========= ========= =========
At end of year:
Number of policies in force(2) 528,273 545,682 563,286
Average size of policy
in force (in dollars) $ 97,761 $ 92,371 $ 87,307
- ----------
(1) Includes terminations due to death, surrenders and lapses. 1995
terminations also include policy terminations attributable to the
distribution of Transport Holdings Inc. to the Company's stockholders.
(2) The declines reflect the gradual run-off of old whole life policies
written several years ago at relatively low levels of per policy insurance
coverage. This was partially offset by the sale of term and universal life
policies with significantly higher levels of insurance coverage.
Insurance Reserves and Contractholder Funds
As life, long-term care and disability income insurance and annuity
premiums are received, Travelers Life and Annuity establishes policy benefit
reserves that reflect the present value of expected future obligations, net of
the present value of expected future net premiums. These reserves generally
reflect long-term fixed obligations to policyholders and are based on
assumptions as to interest rates, future mortality, morbidity, persistency and
expenses, with provision for adverse deviation. Policy benefit reserves, which
give appropriate recognition to reinsurance, are established based on factors
derived from past experience.
Contractholder funds arise from the issuance of individual life contracts
that include an identifiable investment component, individual deferred annuities
and certain individual payout annuity contracts. Contractholder funds generally
are equal to deposits received and interest credited less withdrawals, mortality
charges and administrative expenses. Contractholder funds also include receipts
from the issuance of pension investment contracts.
48
<PAGE>
AIDS-related claims paid by Travelers Life and Annuity in 1997, 1996 and
1995 were 0.3%, 0.7% and 1.6%, respectively, as a percentage of total life
claims paid, and 0.3%, 0.4% and 0.3%, respectively, as a percentage of total
health claims paid. Management believes that current pricing and reserves make
adequate provision for AIDS-related claim experience.
Competition and Regulation
For a description of competition and regulation relating to the Company's
life insurance businesses, see "Insurance Services - General."
Investments
For information on the investment portfolios of the Company's life
insurance businesses, see "Insurance Services - General."
INSURANCE SERVICES - GENERAL
Ratings
Insurance companies are rated by rating agencies to provide both industry
participants and insurance consumers with meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and a
strong ability to pay claims. These ratings are based upon factors relevant to
policyholders and are not directed toward protection of investors. Such ratings
are neither a rating of securities nor a recommendation to buy, hold or sell any
security and may be revised or withdrawn at any time. Rating agencies focus
primarily on the following factors: capital resources, financial strength,
demonstrated management expertise in the insurance business, credit analysis,
systems development, market segment position and growth opportunities,
marketing, sales conduct practices, investment operations, minimum
policyholders' surplus requirements and capital sufficiency to meet projected
growth, as well as access to such traditional capital as may be necessary to
continue to meet standards for capital adequacy.
49
<PAGE>
The following table summarizes the current claims-paying and financial
strength ratings of the Company's subsidiaries, including Travelers C&S of
America, and insurance pools by A.M. Best, Duff & Phelps Corp., Moody's
Investor's Service Inc. and Standard & Poor's Ratings Group. The table also
presents the position of each rating in the applicable agency's rating scale.
<TABLE>
<CAPTION>
Moody's
A.M. Best Duff & Investor's Standard
Company Phelps Corp. Service Inc. & Poor's
------- ------------ ------------ --------
<S> <C> <C> <C> <C>
TIC A+ (2nd of 15) AA (3rd of 18) Aa3 (4th of 19) AA- (4th of 18)
TLAC A+ (2nd of 15) AA (3rd of 18) Aa3 (4th of 19) AA- (4th of 18)
Primerica Life A (3rd of 15) AA (3rd of 18) Aa3 (4th of 19) AA (3rd of 18)
Travelers Property Casualty
pool(1) A (3rd of 15) AA- (4th of 18) Aa3 (4th of 19) A+ (5th of 18)
Gulf pool(2) A+ (2nd of 15) - - AA (3rd of 18)
Travelers C&S of America A+ (2nd of 15) AA- (4th of 18) Aa3 (4th of 19) A+ (5th of 18)
</TABLE>
- ----------
(1) The Travelers Property Casualty pool consists of The Travelers Indemnity
Company, Travelers Casualty and Surety Company, The Phoenix Insurance
Company, The Standard Fire Insurance Company, Travelers Casualty and
Surety Company of Illinois, Farmington Casualty Company, The Travelers
Indemnity Company of Connecticut, The Automobile Insurance Company of
Hartford, Connecticut, The Charter Oak Fire Insurance Company, The
Travelers Indemnity Company of America, The Travelers Indemnity Company of
Missouri, Travelers Casualty Company of Connecticut, Travelers Commercial
Insurance Company, The Travelers Indemnity Company of Illinois, Travelers
Property Casualty Insurance Company, TravCo Insurance Company, The
Travelers Home and Marine Insurance Company, Travelers Personal Security
Insurance Company, Travelers Property Casualty Insurance Company of
Illinois and Travelers Excess and Surplus Lines Company.
(2) The Gulf pool consists of Gulf Insurance Company, Gulf Insurance Company
U.K. Limited, Gulf Underwriters Insurance Company, Select Insurance
Company, Atlantic Insurance Company and Gulf Group Lloyds.
Reinsurance
The Company reinsures a portion of the risks it underwrites in an effort
to control its exposure to losses, stabilize earnings and protect capital
resources. The Company cedes to reinsurers a portion of these risks and pays
premiums based upon the risk and exposure of the policies subject to such
reinsurance. Reinsurance involves credit risk and is subject to aggregate loss
limits. Although the reinsurer is liable to the Company to the extent of the
reinsurance ceded, the Company remains primarily liable as the direct insurer on
all risks reinsured. Reinsurance recoverables are reported after allowances for
uncollectible amounts. The Company also holds collateral, including escrow funds
and letters of credit, under certain reinsurance agreements. The Company
monitors the financial condition of reinsurers on an ongoing basis, and reviews
its reinsurance arrangements periodically. Reinsurers are selected based on
their financial condition, business practices and the price of their product
offerings. For additional information concerning reinsurance, see Note 13 of
Notes to Consolidated Financial Statements.
Property and Casualty Insurance
TAP utilizes a variety of reinsurance agreements to control its exposure
to large property and casualty losses. TAP utilizes the following types of
reinsurance: (i) facultative reinsurance, in which reinsurance is provided for
all or a portion of the insurance provided by a single policy and
50
<PAGE>
each policy reinsured is separately negotiated; (ii) treaty reinsurance, in
which reinsurance is provided for a specified type or category of risks; and
(iii) catastrophe reinsurance, in which TAP is indemnified for an amount of loss
in excess of a specified retention with respect to losses resulting from a
catastrophic event.
The following presents TAP's top five reinsurers (excluding Lloyd's of
London ("Lloyd's") which is discussed in more detail below) by reinsurance
recoverable at December 31, 1997 (in millions):
<TABLE>
<CAPTION>
Reinsurance
Reinsurer Recoverable A.M. Best Rating of Reinsurer
--------- ----------- -----------------------------
<S> <C> <C>
General Reinsurance Corporation $444 A++ highest of 15 ratings
American Re-Insurance Company 428 A+ 2nd highest of 15 ratings
Executive Risk Indemnity Inc. 182 A 3rd highest of 15 ratings
Employers Reinsurance Corporation 97 A++ highest of 15 ratings
New England Reinsurance Corporation 77 NR-3 rating not applicable because
(Subsidiary of The Hartford Insurance Group) company is in run-off
</TABLE>
As of December 31, 1997, TAP had ceded insurance losses and loss
adjustment expenses to Lloyd's of $352 million. In 1996, Lloyd's restructured
its operations with respect to claims for years prior to 1993 and reinsured
these into Equitas Limited ("Equitas"). Approximately $266 million of TAP's
Lloyd's reinsurance recoverable at year end relates to Equitas liabilities and
is currently unrated. The remaining recoverables of $86 million is from Lloyd's
continuing market which was recently rated A (3rd highest of 15 ratings) by A.M.
Best, whose ratings may be revised or withdrawn at any time.
The impact of the Lloyd's restructuring on the collectibility of amounts
recoverable by TAP from Lloyd's cannot be quantified at this time. The Company
believes that it is not likely that the outcome could have a material adverse
effect on the Company's operating results, financial condition or liquidity.
TAP participates in pools with other insurers to provide capacity for
unique and high-valued risks such as exposures related to the aviation and
nuclear power industries. TAP's maximum net exposure to this type of business at
December 31, 1997 was $15 million per risk.
At December 31, 1997, TAP had $8.2 billion in reinsurance recoverables. Of
this amount, $3.4 billion is for pools and associations that relate primarily to
workers' compensation service business and have the strength of the
participating insurance companies on a joint basis supporting these cessions.
Also, $1.3 billion is attributable to structured settlements relating primarily
to personal injury claims for which TAP has purchased an annuity and remains
contingently liable in the event of a default by the company issuing the
annuity. Of the remaining $3.5 billion ceded to reinsurers at December 31, 1997,
$755 million was environmental, asbestos and cumulative injury-related and the
remainder principally reflects reinsurance in support of ongoing business. In
addition, at December 31, 1997, $397 million of reinsurance recoverables were
collateralized by letters of credit.
51
<PAGE>
Net Retention Policy. The descriptions below relate to reinsurance
arrangements of TAP in effect at January 1, 1998. For third-party liability,
including automobile no-fault, the reinsurance agreements used by Commercial
Accounts and Select Accounts limit the net retention to a maximum of $4 million
per insured, per occurrence. Gulf Specialty utilizes various reinsurance
mechanisms and has limited its net retention to $4.5 million per risk for any
line of business. For commercial property insurance, there is a $5 million
maximum retention per risk with 100% reinsurance coverage for risks with higher
limits. The reinsurance agreement in place for workers' compensation policies
written by Commercial Accounts and Select Accounts and some segments of
Alternative Markets and Gulf Specialty covers 100% of each loss between $1
million and $10 million. For National Accounts, reinsurance arrangements are
typically tiered, or layered, such that only levels of risk acceptable to TAP
are retained. The reinsurance agreement in place for Personal Lines umbrella
policies covers 100% of each loss between $1 million and $5 million. For
personal property insurance, there is a $6 million maximum retention per risk.
For directors' and officers' liability, employment practices liability and
blended insurance, Bond Specialty retains up to $5 million per risk. For surety
protection, Bond Specialty has reinsurance coverage for 95% of up to $50 million
of liability in excess of $50 million of liability. In addition, Bond
Specialty's accident year results are protected by an aggregate excess of loss
treaty that provides 100% of approximately $53 million of reinsurance coverage
in excess of a $122 million retention.
Catastrophe Reinsurance. TAP utilizes reinsurance agreements with
nonaffiliated reinsurers to control its exposure to losses resulting from one
occurrence. For the accumulation of net property losses arising out of one
occurrence, reinsurance agreements cover 40% of total losses between $250
million and $750 million. For multiple workers' compensation losses arising from
a single occurrence, reinsurance agreements cover 100% of losses between $10
million and $250 million and, for workers' compensation losses caused by
property perils, reinsurance agreements cover 40% of losses between $250 million
and $750 million.
For commercial property insurance sold through Commercial Accounts and
certain National Accounts, 10% of all losses are reinsured in 1998, subject to
an occurrence limitation of $200 million. For Personal Lines homeowners
insurance, in 1998, 25% of losses in states along the East Coast are reinsured
up to a maximum recovery of $187 million per occurrence. The covered territory
of this Homeowners Quota Share includes Maine, New Hampshire, Massachusetts,
Rhode Island, Connecticut, New York, New Jersey, Delaware, Maryland, Virginia,
North Carolina, South Carolina, Georgia, Florida and Washington, D.C.
For the accumulation of net casualty losses arising out of one occurrence,
a casualty clash agreement covers 95% of losses between $10 million and $50
million.
Reinsurance Fund
TAP also participates in the Florida Hurricane Catastrophe Fund ("FHCF"),
which is a state-mandated catastrophe reinsurance fund. FHCF is primarily funded
by premiums from insurance companies that write residential property business in
Florida and, if insufficient, assessments on insurance companies that write
other property and casualty insurance, excluding
52
<PAGE>
workers' compensation. FHCF's resources are limited to these contributions and
to its borrowing capacity at the time of a significant catastrophe. There can be
no assurance that these resources will be sufficient to meet the obligations of
FHCF.
The Company's recovery of less than contracted amounts from FHCF could
have a material adverse effect on the Company's results of operations in the
event of a significant catastrophe in Florida. However, the Company believes
that it is not likely that the Company's recovery of less than contracted
amounts from FHCF would have a material adverse effect on the Company's
financial condition or liquidity.
Life Insurance
The Company's policy is to obtain reinsurance on individual life policies
for amounts above certain retention limits, which limits vary with age and
underwriting classification. During 1997, new universal life business was
reinsured under an 80%/20% quota share reinsurance program and new term life
business was reinsured under a 90%/10% quota share reinsurance program.
Retention on life insurance risks after reinsurance remains up to a maximum of
$1.5 million per insured for an ordinary life risk, depending on the subsidiary
involved, the type of policy, the year of issue and the age of the insured.
Other reinsurance arrangements are made from time to time to cede or assume
existing blocks of business.
Competition and Other Factors Affecting Growth
Property and Casualty Insurance
The property and casualty insurance industry is highly competitive in the
areas of price, service, product offerings, agent relationships and, in the case
of personal property and casualty business, method of distribution (i.e., use of
independent agents, captive agents and/or salaried employees). There are
approximately 1,140 property-casualty organizations in the United States,
comprised of approximately 2,400 property-casualty companies. Of those
organizations, the top 200 account for over 90% of the consolidated industry's
total net written premiums. In addition, an increasing amount of commercial
risks are covered by purchaser self-insurance, large deductibles,
risk-purchasing groups, risk-retention groups and captive companies.
Commercial Lines. The insurance industry is represented in the commercial
lines marketplace by many insurance companies of varying size. The industry is
comprised of small local firms, large regional firms and large national firms,
as well as self-insurance programs or captive insurers. Market competition works
to set the price charged for insurance products and the level of service
provided within the insurance regulatory framework. Growth is driven by a
company's ability to provide insurance and services at a price that is
reasonable and acceptable to the customer. In addition, the marketplace is
affected by available capacity of the insurance industry as measured by
policyholders' surplus. Surplus expands and contracts primarily in conjunction
with profit levels generated by the industry. Growth in premium and service
business is also measured by a company's ability to retain existing customers
and to attract new customers.
53
<PAGE>
The National Accounts market is highly competitive. Competition is based
primarily on price and breadth of products and services. National Accounts
business is generally written through national brokers and regional agents. The
Company also competes for state contracts to provide claims and policy
management services. These contracts, which generally have three-year terms, are
selected by state agencies through a bid process based on quality of service and
price. The Company has emerged as the largest assigned risk plan service insurer
in the industry with approximately 25% of the market in 1997.
The Commercial Accounts market is highly competitive. Commercial Accounts
business has historically been written through independent agents and brokers,
although some companies use direct writing. Competitors in this market are
primarily national property-casualty insurance companies willing to write most
classes of business using traditional products and pricing and, to a lesser
extent, regional insurance companies and companies that have developed niche
programs for specific industry segments. Companies compete on price, product
offerings, response time in policy issuance and claim and loss prevention
services. Additionally, reduced overhead and improved efficiency through
automation and response time to customer needs are key to success in this
market. The construction market has become a focused industry segment for
several large insurance companies. Construction market business is written
through agents and brokers. Insurance companies compete in this market based
upon price, product offering and claim and risk management service. The Company
utilizes its specialized underwriters, engineers, auditors and claim handlers
who have extensive experience and knowledge of the construction industry to work
with agents and brokers to compete effectively in this market.
The Select Accounts market is highly competitive and is typically written
through independent agents and, to a lesser extent, regional brokers. Both
national and regional property-casualty insurance companies compete in the
Select Accounts market which is generally comprised of low risk, "main street"
business customers. Risks are underwritten and priced using standard industry
practices and a combination of proprietary and standard industry product
offerings. Competition in this market is primarily based on price, product
offerings and response time in policy services. The Company has established a
strong marketing relationship with its distribution network and has provided it
with defined underwriting policies, competitive prices and efficient automated
environments.
The market in which Specialty Accounts competes includes small to
mid-sized niche companies that target certain lines of insurance and larger,
multi-line companies that focus on various segments of the Specialty Accounts
market. Specialty Accounts business is generally written through wholesale
brokers and retail agents and brokers throughout the United States. Gulf
Specialty derives a competitive advantage through its underwriting practices,
low expense levels and broad product offering base. Bond Specialty's reputation
for clear, timely decision-making, a nationwide network of local underwriting
and industry experts and strong producer and customer relationships as well as
its ability to offer its customers a full range of financial services products,
enable it to compete effectively. Its ability to cross-sell Bond Specialty's
products to customers of National Accounts, Commercial Accounts, Select Accounts
and through other Company units provides further competitive advantages for the
Company.
54
<PAGE>
Personal Lines. Personal lines insurance is written by hundreds of
insurance companies of varying sizes. Although national companies write the
majority of the business, the Company also faces competition from local or
regional companies which often have a competitive advantage because of their
knowledge of the local marketplace and their relationship with local independent
agents. The Company believes that the principal competitive factors are price,
service, perceived stability of the insurer and name recognition. The Company
also competes for business within each of the independent agencies representing
it, because these agencies also offer policies of competing independent agency
companies. At the agency level, the Company believes that competition is
primarily based on price and the level of service, including claims handling, as
well as the level of automation and the development of long-term relationships
with the individual agents. The Company also competes with insurance companies
that use captive agents or salaried employees to sell their products. Because
these companies generally pay lower commissions than independent agency
companies, they may be able to generate business at a lower cost than the
Company. Due to this expense advantage, the direct writing companies have
gradually expanded their market share in recent years. However, in addition to
its traditional independent agency distribution, Personal Lines has broadened
its distribution channels for Personal Lines products to include marketing
through the PFS sales force, marketing to sponsoring organizations including
employee and affinity groups and establishment of joint marketing arrangements
with other insurers. The Company believes that its continued focus on expense
management practices enables it to price its products competitively in all of
its distribution channels.
Life Insurance
The Company's life insurance businesses compete with national, regional
and local insurance companies. Competition is based upon price, product design
and services rendered to producers and policyholders. The insurance industry is
extremely competitive, in both price and services, and no single insurer is
dominant. The recent trend of consolidations in the industry has added to the
competitive environment. Travelers Life and Annuity believes that its focus on
market specialization and its diversified distribution network help it to
compete effectively. PFS competes in the market by focusing on supplying an
integrated range of financial products to the middle-income market through a
formalized needs-based sales program.
Savings banks also compete directly in the sale of life insurance in
Connecticut, Massachusetts and New York. Competition for the savings dollar
arises from entities such as banks, investment advisors, mutual funds and other
financial institutions.
PFS Investments is registered as a broker-dealer with the SEC, and in all
50 states, the District of Columbia, Puerto Rico, the Northern Mariana Islands,
the U.S. Virgin Islands and Guam. Tower Square Securities is registered as a
broker-dealer with the SEC, and in all 50 states, Puerto Rico and the District
of Columbia. Similarly, Copeland Equities, Inc., a subsidiary of Copeland, is
registered as a broker-dealer with the SEC, in 49 states and the District of
Columbia. Each is subject to extensive regulation by those agencies and the
securities administrators of those jurisdictions, primarily for the benefits of
its customers, including minimum capital and licensing requirements. PFS
Investments faces competition not only from large financial services firms
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offering products and services that cross traditional business boundaries, but
also from insurance companies, including other subsidiaries of the Company,
offering life insurance products with investment features.
Regulation
State Regulation
The Company's insurance subsidiaries are subject to regulation in the
various states and jurisdictions in which they transact business. The extent of
regulation varies but generally has its source in statutes that delegate
regulatory, supervisory and administrative authority to a department of
insurance in each state. The regulation, supervision and administration relate,
among other things, to the standards of solvency that must be met and
maintained, the licensing of insurers and their agents, the nature of and
limitations on investments, premium rates, restrictions on the size of risks
that may be insured under a single policy, reserves and provisions for unearned
premiums, losses and other obligations, deposits of securities for the benefit
of policyholders, approval of policy forms and the regulation of market conduct
including the use of credit information in underwriting as well as other
underwriting and claims practices. In addition, many states have enacted
variations of competitive rate-making laws which allow insurers to set certain
premium rates for certain classes of insurance without having to obtain the
prior approval of the state insurance department. State insurance departments
also conduct periodic examinations of the affairs of insurance companies and
require the filing of annual and other reports relating to the financial
condition of companies and other matters.
At the present time, the Company's insurance subsidiaries are collectively
licensed to transact insurance business in all states, the District of Columbia,
Guam, Puerto Rico, and the U.S. Virgin Islands, as well as Canada, the United
Kingdom and the Northern Mariana Islands.
Although the Company is not regulated as an insurance company, it is the
owner of the capital stock of its insurance subsidiaries and as such is subject
to state insurance holding company statutes, as well as certain other laws, of
each of the states of domicile of its insurance subsidiaries. All holding
company statutes, as well as certain other laws, require disclosure and, in some
instances, prior approval of material transactions between an insurance company
and an affiliate. The holding company statutes, as well as certain other laws,
also require, among other things, prior approval of an acquisition of control of
a domestic insurer and the payment of extraordinary dividends or distributions.
The Company's insurance subsidiaries are subject to various state
statutory and regulatory restrictions in each company's state of domicile, which
limit the amount of dividends or distributions by an insurance company to its
stockholders. The ability of TIC and subsidiaries of TAP to pay dividends to the
Company in the future will depend on their statutory surplus, future earnings
and regulatory restrictions. A maximum of $551 million of statutory surplus is
available in 1998 for dividends from TIC to its parent without prior approval of
the Connecticut Insurance Department.
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Dividend payments to TAP from its insurance subsidiaries are limited to $805
million in 1998 without prior approval of the Connecticut Insurance Department.
The Company's principal insurance subsidiaries are domiciled in
Connecticut and Massachusetts. The insurance holding company law of Connecticut
requires notice to, and approval by, the state insurance commissioner for the
declaration or payment of any dividend, which together with other distributions
made within the preceding twelve months, exceeds the greater of (i) 10% of the
insurer's surplus or (ii) the insurer's net income for the twelve-month period
ending the preceding December 31st, in each case determined in accordance with
statutory accounting practices. Such declaration or payment is further limited
by adjusted unassigned funds (surplus), as determined in accordance with
statutory accounting practices. The insurance holding company laws of other
states in which the Company's insurance subsidiaries are domiciled generally
contain similar (although in certain instances somewhat more restrictive)
limitations on the payment of dividends.
Virtually all states require insurers licensed to do business in their
state to bear a portion of the loss suffered by certain insureds as a result of
the insolvency of other insurers. Depending upon state law, insurers can be
assessed an amount that is generally equal to between 1% and 2% of premiums
written for the relevant lines of insurance in that state each year to pay the
claims of an insolvent insurer. Most of these payments are recoverable through
premium rates, premium tax credits or policy surcharges. Significant increases
in assessments could limit the ability of the Company's insurance subsidiaries
to recover such assessments through tax credits. In addition, there have been
some legislative efforts to limit or repeal the tax offset provisions, which
efforts, to date, have been generally unsuccessful. These assessments may
increase or decrease in the future depending upon the rate of insolvencies of
insurance companies.
The Company also participates in FHCF, which is a state-mandated
catastrophe reinsurance fund that provides reimbursement to insurers for a
portion of their future catastrophic hurricane losses. FHCF is primarily funded
by premiums from the insurance companies that write residential property
business in Florida and, if insufficient, assessments on insurance companies
that write other property and casualty insurance in Florida, excluding workers'
compensation. FHCF's resources are limited to these contributions and to its
borrowing capacity at the time of a significant catastrophe in Florida.
The Company's property and casualty insurance subsidiaries are also
required to participate in various involuntary assigned risk pools, principally
involving workers' compensation and automobile insurance, which provide various
insurance coverages to individuals or other entities that otherwise are unable
to purchase such coverage in the voluntary market. Participation in these pools
in most states is generally in proportion to voluntary writings of related lines
of business in that state. Earned premiums related to such pools and assigned
risks for the Company were $226 million, $379 million and $315 million in 1997,
1996 and 1995, respectively. The related underwriting losses for the Company
were $16 million, $39 million and $152 million in 1997, 1996 and 1995,
respectively.
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Proposed legislation and regulatory changes have been introduced in the
states from time to time that would modify certain laws and regulations
affecting the financial services industry, including the provisions governing
relationships among insurance companies and agents, investment banks and
commercial banks. The potential impact of such legislation on the Company's
insurance businesses cannot be predicted at this time.
In addition to state insurance laws, the Company's insurance subsidiaries
are also subject to general business and corporation laws, state securities
laws, consumer protection laws, fair credit reporting acts and other laws. The
insurance industry generally is exempt from federal antitrust laws because of
the application of the McCarran-Ferguson Act.
Insurance Regulations Concerning Change of Control
Many state insurance regulatory laws intended primarily for the protection
of policyholders contain provisions that require advance approval by state
agencies of any change in control of an insurance company that is domiciled (or,
in some cases, having such substantial business that it is deemed to be
commercially domiciled) in that state. The Company owns, directly or indirectly,
certain property and casualty insurance companies domiciled in the States of
California, Connecticut, Florida, Illinois, Indiana, Massachusetts, Missouri,
New Jersey and Texas and certain life insurance companies domiciled in
Connecticut, Massachusetts and Georgia. "Control" is generally presumed to exist
through the ownership of 10% or more of the voting securities of a domestic
insurance company or of any company that controls a domestic insurance company.
Any purchaser of shares of Common Stock representing 10% or more of the voting
power of the Company will be presumed to have acquired control of the Company's
domestic insurance subsidiaries unless, following application by such purchaser
in each insurance subsidiary's state of domicile, the relevant Insurance
Commissioner determines otherwise. In addition, many state insurance regulatory
laws contain provisions that require prenotification to state agencies of a
change in control of a nondomestic admitted insurance company in that state.
While such prenotification statutes do not authorize the state agency to
disapprove the change of control, such statutes do authorize issuance of a cease
and desist order with respect to the nondomestic admitted insurer if certain
conditions exist such as undue market concentration. Any future transactions
that would constitute a change in control of the Company would generally require
prior approval by the insurance departments of the states in which the Company's
insurance subsidiaries are domiciled or commercially domiciled and may require
preacquisition notification in those states that have adopted preacquisition
notification provisions and in which such insurance subsidiaries are admitted to
transact business.
Such requirements may deter, delay or prevent certain transactions
affecting the control of or the ownership of Common Stock, including
transactions that could be advantageous to the stockholders of the Company.
Insurance Regulatory Information System
The NAIC has developed a set of financial relationships or "tests" called
the Insurance Regulatory Information System ("IRIS") that were designed for
early identification of companies
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that may require special attention by insurance regulatory authorities. These
tests were developed primarily to assist state insurance departments in
executing their statutory mandate to oversee the financial condition of
insurance companies. Insurance companies submit data on an annual basis to the
NAIC, which in turn analyzes the data using ratios covering twelve categories of
financial data with defined "usual ranges" for each category.
Falling outside the usual range of IRIS ratios is not considered a failing
result; rather, unusual values are viewed as part of the regulatory early
monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges of four or more of the ratios. In normal years,
15% of the companies included in the IRIS system are expected by the NAIC to be
outside the usual range on four or more ratios.
In each of the last three years certain of the Company's insurance
subsidiaries have been outside of the usual range for certain IRIS ratios. In
all such instances, the regulators have been satisfied upon follow-up that there
is no solvency problem. It is possible that similar events could occur this
year, and management believes that the resolution would be the same. No
regulatory action has been taken by any state insurance department or the NAIC
with respect to IRIS ratios of any of the Company's insurance subsidiaries for
the three years ended December 31, 1997.
For 1997, Travelers Indemnity was outside the usual range for the
liabilities to liquid assets ratio. Travelers Indemnity is the lead company for
the Travelers Property Casualty pool and is also the parent of 19 insurance
companies and several other non-insurance entities. As a result, this ratio is
distorted because all of the liabilities are included in the calculation while
Travelers Indemnity's significant investment in affiliates, which increased in
1997, is excluded from liquid assets. For 1996, both the two-year overall
operating ratio and the two-year reserve development to surplus ratios were
outside the usual range for Travelers Casualty and Standard Fire because of
actions taken during 1996 and 1995 to strengthen reserves for environmental and
asbestos-related claims. In addition, the change in writings ratio produced an
unusual value for Standard Fire and the estimated current reserve deficiency to
surplus ratio was outside the usual range for Travelers C&S of America, both as
a result of a decision in 1995 to combine its two intercompany pooling
arrangements (one for Personal Lines and one for Commercial Lines) into one
pool. If these two ratios were recalculated to have all items reflect the new
agreement, the ratios would not produce unusual values. Concurrent with the
change in the intercompany pooling arrangements, capital was reallocated among
Aetna P&C insurers, which resulted in an unusual value in the change in surplus
ratio for Standard Fire.
Risk-Based Capital (RBC) Requirements
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement RBC requirements for life insurance
companies and most property and casualty insurance companies, which is designed
to assess minimum capital requirements and to raise
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the level of protection that statutory surplus provides for policyholder
obligations. The RBC requirements are to be used as early warning tools by the
NAIC and states to identify companies that merit further regulatory action. For
these purposes, an insurer's surplus is measured in relation to its specific
asset and liability profiles. A company's risk-based capital is calculated by
applying factors to various asset, premium and reserve items, where the factor
is higher for those items with greater underlying risk and lower for less risky
items.
The RBC formula for property-casualty insurance companies measures four
major areas of risk facing property and casualty insurers: (i) underwriting,
which encompasses the risk of adverse loss developments and inadequate pricing;
(ii) declines in asset values arising from credit risk; (iii) declines in asset
values arising from investment risks; and (iv) off-balance sheet risk arising
from adverse experience from non-controlled assets, guarantees for affiliates or
other contingent liabilities and reserve and premium growth. Pursuant to the
law, insurers having less statutory surplus than that required by the RBC
calculation will be subject to varying degrees of regulatory action, depending
on the level of capital inadequacy.
The RBC formula for life insurance companies calculates baseline life
risk-based capital as a mathematical combination of amounts for the following
four categories of risk: (i) asset risk (i.e., the risk of asset default); (ii)
insurance risk (i.e., the risk of adverse mortality and morbidity experience);
(iii) interest rate risk (i.e., the risk of loss due to changes in interest
rates); and (iv) business risk (i.e., normal business and management risk).
The RBC law provides for four levels of regulatory action. The extent of
regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the Company Action Level (as defined by the NAIC),
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing corrective
actions and permits the relevant Insurance Commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) allows the relevant Insurance Commissioner to rehabilitate or liquidate an
insurer in addition to the aforementioned actions if surplus falls below 100% of
the RBC amount. The fourth action level is the Mandatory Control Level (as
defined by the NAIC) which requires the relevant Insurance Commissioner to
rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC
amount. Based on the foregoing formula, at December 31, 1997, the RBC ratios of
the Company's insurance subsidiaries were in excess of levels that would require
company or regulatory action.
The formulas have not been designed to differentiate among adequately
capitalized companies which operate with higher levels of capital. Therefore, it
is inappropriate and ineffective to use the formulas to rate or to rank such
companies. At December 31, 1997, all of the Company's life and property-casualty
insurance companies had adjusted capital in excess of amounts requiring
regulatory action at any of the four levels.
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Federal Regulation
Although the federal government does not directly regulate the business of
insurance, other than flood insurance, federal initiatives often have an impact
on the insurance industry and on insurance products, some of which are also
securities under the federal securities laws. Legislation has been introduced in
Congress during the past several sessions that, if enacted, would result in
substantially greater federal regulation of the insurance business. Current and
proposed federal measures that may affect the property and casualty industry may
include: possible changes to CERCLA and the tax laws governing property and
casualty insurance companies; proposals regarding natural disaster protection,
tort reform (including limits to product liability lawsuits) and the use of
credit history; and the enforcement of territorial underwriting in Personal
Lines. In addition, proposed legislation has been introduced in Congress from
time to time that would modify certain laws and regulations affecting the
financial services industry, including the provisions regarding affiliations
among insurance companies, investment banks and commercial banks.
The Budget Proposal, as described in "Investment Services -- Regulation,"
may also adversely impact the Company's insurance businesses.
It is not possible to predict whether any of the proposed legislation
discussed above will be enacted, what form such legislation might take when
enacted, or the potential effects of such legislation on the Company and its
competitors.
Certain variable life insurance and individual and group variable
annuities, as well as modified guaranteed annuities, and their related separate
accounts are subject to regulation by the SEC.
Investments
This section discusses the investment portfolios of the businesses
described in the Company's insurance services segments.
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities, mortgage
loans, real estate and certain other investments.
At December 31, 1997, the investment holdings of the companies included in
the insurance services segments were composed primarily of fixed maturities. At
December 31, 1997, approximately 96% in total dollar amount of the fixed
maturities portfolios of such companies had investment grade ratings. The
remaining investments are principally mortgage loans and real estate, discussed
below, policy loans and other investments. For additional information regarding
these investment portfolios, see Note 6 of Notes to Consolidated Financial
Statements and the discussion
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of Asset Quality in the Property & Casualty Insurance Services Segment
discussion in Item 7 of this Form 10-K, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Consistent with the nature of related contract obligations, the invested
assets attributable to group insurance and individual life, accident and health
and financial services are primarily long-term fixed income investments such as
corporate debt securities, mortgage-backed and asset-backed securities and
mortgage loans. A small portion of the invested assets related to these
operations is in preferred and common stocks and real estate equity investments.
The property-casualty fixed maturities portfolios (principally bonds) are
shifted from time to time to respond to the changing economic outlook, insurance
underwriting results and the resultant changes in the federal income tax
position of the Company and its subsidiaries.
Cash available for investment is principally derived from operating
activities and investment income. In addition, cash becomes available for
investment from prepayment, maturity and sale of investments. In recent years,
the underperforming mortgage loan and real estate portfolios have been
significantly reduced. See "-- Mortgage Loans and Real Estate Held for Sale."
Different investment policies have been developed for various lines of business
based on the product requirements, the type and term of the liabilities
associated with these products, regulatory requirements and tax treatment of the
businesses in which each company is engaged.
Joint Venture
In October 1997, TIC and Tishman Speyer Properties ("Tishman"), a
worldwide real estate owner, developer and manager, formed a joint real estate
venture with an initial equity commitment of $792 million. TIC and certain of
its affiliates committed $420 million in real estate equity and $100 million in
cash while Tishman committed $272 million in properties and cash. Both companies
are serving as asset managers for the venture and Tishman is primarily
responsible for the venture's real estate acquisition and development efforts.
Mortgage Loans and Real Estate Held for Sale
At December 31, 1997, 1996 and 1995, the mortgage loan portfolio of the
businesses included in the Company's insurance services segments consisted of
approximately $3.6 billion, $3.8 billion and $4.0 billion, respectively. At
December 31, 1997, 1996 and 1995, the real estate held for sale portfolio
consisted of approximately $237 million, $459 million and $321 million,
respectively. The Company has continued a program of disposing of its
underperforming real estate investments, expediting the payoff of certain
mortgage loans and reinvesting the proceeds to obtain current market yields. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for additional information.
The Company's accelerated liquidation strategy for underperforming real
estate and certain mortgage loans has mitigated the negative impact that these
underperforming portfolios have had on the Company's investment income. As a
result of this strategy and improved real estate markets, the
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underperforming loans have declined to less than 1% of the portfolio. At
December 31, 1997, 1996 and 1995, approximately $19 million, $91 million and
$252 million or 0.5%, 2% and 6%, respectively, of the combined mortgage loan
portfolio of the Company was classified as underperforming. Underperforming
mortgage loans include delinquent loans, loans in the process of foreclosure and
loans modified at interest rates below market.
For information regarding the principal balance of mortgage loans at
December 31, 1997 by contractual maturity, see Note 6 of Notes to Consolidated
Financial Statements. Actual maturities will differ from contractual maturities
because borrowers may have the right to prepay loans with or without prepayment
premiums. Unscheduled payments and sales of mortgage loans were $770 million in
1997 and $1.0 billion in each of 1996 and 1995. The average remaining life of
these mortgages is six years.
Real estate management evaluates the portfolio on an ongoing basis,
assessing the probabilities of loss with respect to a comprehensive series of
projections, including a host of variables relating to the borrower, the
property, the term of the loan, the tenant composition, rental rates, other
supply and demand factors, and overall economic conditions.
The following table summarizes by property type the mortgage loan
portfolio and real estate held for sale included in the investment portfolios of
the Company as of December 31, 1997, 1996 and 1995. For information summarizing
the geographic distribution of the mortgage loan portfolio and real estate
assets, see Note 6 of Notes to Consolidated Financial Statements.
Property Type: Mortgage Loans Real Estate
- -------------- -------------- -----------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
(In millions)
Commercial:
Office $1,751 $1,698 $1,551 $ 45 $ 190 $ 177
Apartment 317 467 654 24 68 8
Hotel 208 244 594 81 63 47
Retail 341 518 449 48 60 42
Industrial 114 158 181 1 31 9
Other 54 41 45 27 34 26
------ ------ ------ ------ ------ ------
Total commercial 2,785 3,126 3,474 226 446 309
Agricultural 777 686 574 11 13 12
------ ------ ------ ------ ------ ------
Total $3,562 $3,812 $4,048 $ 237 $ 459 $ 321
====== ====== ====== ====== ====== ======
Derivatives
See the section entitled "End User Activity" in Note 20 of Notes to
Consolidated Financial Statements for a discussion of the policies and
transactions related to the derivatives activity of the Company.
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CORPORATE AND OTHER OPERATIONS
In addition to its four business segments, the Company's Corporate and
Other segment consists of unallocated expenses and earnings primarily related to
interest, corporate administration, and certain corporate investments. In 1995
and through the date of sale in June 1996, this segment also includes the
Company's interest in RCM Capital Management, a California Limited Partnership.
In May 1997, SSBH sold all of the outstanding stock of Basis Petroleum,
Inc. ("Basis") to Valero Energy Corporation. Basis owned and operated three oil
refineries in the U.S. Gulf Coast region. Basis is presented as a discontinued
operation in the Company's Consolidated Financial Statements. The loss on sale
was recorded in the fourth quarter of 1996. See Note 2 of Notes to Consolidated
Financial Statements.
In January 1995, the Company sold its group life and related businesses to
Metropolitan Life Insurance Company ("MetLife") for $350 million. In connection
with the sale, the Company agreed to cede to MetLife 100% of its risks in the
businesses sold on an indemnity reinsurance basis, effective January 1, 1995. In
January 1995, The MetraHealth Companies, Inc. was formed as a joint venture of
the group medical insurance businesses of the Company and MetLife and was
subsequently sold in October 1995. These operations have been accounted for as a
discontinued operation. In 1995 and 1996 the Company's discontinued operations
reflect the medical insurance business not yet transferred, the gains from the
sales of these businesses and, in 1995, its equity interest in the earnings of
MetraHealth. See Note 3 of Notes to Consolidated Financial Statements.
OTHER INFORMATION
General Business Factors
In the judgment of the Company, no material part of the business of the
Company and its subsidiaries is dependent upon a single customer or group of
customers, the loss of any one of which would have a materially adverse effect
on the Company, and no one customer or group of affiliated customers accounts
for as much as 10% of the Company's consolidated revenues.
At December 31, 1997, the Company had approximately 65,600 full-time and
3,300 part-time employees.
Source of Funds
For a discussion of the Company's sources of funds and maturities of the
long-term debt of the Company's subsidiaries, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources," and Note 11 of Notes to Consolidated Financial
Statements.
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Taxation
For a discussion of tax matters affecting the Company and its operations,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and Notes 1 and 14 of Notes to Consolidated Financial
Statements.
Financial Information about Industry Segments
For financial information regarding industry segments of the Company, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and Note 4 of Notes to Consolidated Financial Statements.
Executive Officers of the Company
The current executive officers of the Company are indicated below. Periods
of offices held include offices with the Company's predecessor, CCC. Ages are
given as of March 4, 1998.
Officer
Name Age Positions Since*
- ---- --- --------- ------
Sanford I. Weill 64 Chairman of the Board and Chief 1986
Executive Officer of the Company
James Dimon 41 President and Chief Operating Officer of 1986
the Company; Co-Chairman and Co-Chief
Executive Officer of Salomon Smith Barney
Michael A. Carpenter 50 Vice Chairman of the Company; 1995
Chairman, President and Chief Executive
Officer of TIC and TLAC
Thomas W. Jones 48 Vice Chairman of the Company; 1997
Chief Executive Officer of the
Company's Asset Management division
Jeffrey B. Lane 55 Vice Chairman of the Company 1992
Robert I. Lipp 59 Vice Chairman of the Company; Chairman 1986
of the Board, President and Chief
Executive Officer of TAP
Jon C. Madonna 54 Vice Chairman of the Company; 1997
Vice Chairman of TAP
Deryck C. Maughan 50 Vice Chairman of the Company; 1997
Co-Chairman and Co-Chief Executive
Officer of Salomon Smith Barney
Joseph J. Plumeri II 54 Vice Chairman of the Company; Chief 1993
Executive Officer of PFS
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Officer
Name Age Positions Since*
- ---- --- --------- ------
Robert B. Willumstad 52 Vice Chairman of the Company; Chairman 1993
and Chief Executive Officer of CCC
Irwin Ettinger 59 Executive Vice President and Chief 1987
Accounting Officer of the Company
Charles O. Prince, III 48 Executive Vice President, General Counsel 1986
and Secretary of the Company
Steven D. Black 45 Vice Chairman of Salomon Smith Barney 1996
Charles J. Clarke 62 Vice Chairman of TAP; Chairman-- 1995
Commercial Lines of TAP
Donald R. Cooper 57 Chief Actuary of the Company 1995
Peter M. Dawkins 59 Chairman, President and Chief Executive 1992
Officer of Travelers Group Diversified
Distribution Services, Inc.
Jay S. Fishman 45 Senior Vice President of the Company; 1991
Vice Chairman of TAP and President and
Chief Executive Officer--Commercial Lines
of TAP
Marjorie Magner 48 President and Chief Operating Officer 1996
of CCC
Heidi G. Miller 44 Senior Vice President and Chief Financial 1992
Officer of the Company
Marc P. Weill 41 Senior Vice President and Chief 1991
Investment Officer of the Company
- ----------
* Indicates the earlier of the date that such officer became an officer of
the Company or the Company's predecessor and the date that such officer
became a member of the Company's Planning Group.
Sanford I. Weill has been a director of the Company since 1986. He has
been Chairman of the Board and Chief Executive Officer of the Company and its
predecessor, CCC, since 1986; he was also its President from 1986 until 1991. He
was President of American Express Company from 1983 to 1985; Chairman of the
Board and Chief Executive Officer of American Express Insurance Services, Inc.
from 1984 to 1985; Chairman of the Board and Chief Executive Officer, or a
principal executive officer, of Shearson Lehman Brothers Inc. from 1965 to 1984;
Chairman of the Board of Shearson Lehman Brothers Holdings Inc. from 1984 to
1985; and a founding partner of Shearson's predecessor partnership from 1960 to
1965. Mr. Weill has been a director of TAP since 1996. Mr. Weill's son, Marc P.
Weill, is a Senior Vice President and an executive officer of the Company. Mr.
Weill is a member of the Business Roundtable and the Business Council. Mr. Weill
is Chairman of the Board of Trustees of Carnegie Hall, and a director of the
Baltimore Symphony Orchestra. Mr. Weill is a member of the Board of Governors of
New York Hospital, Chairman of the Board of Overseers of Cornell University
Medical College and a member of the Joint Board of
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New York Hospital - Cornell University Medical College. He is on the Board of
Overseers of Memorial Sloan-Kettering Cancer Center and is a director of The New
York and Presbyterian Hospitals Care Network, Inc. He is a member of Cornell
University's Johnson Graduate School of Management Advisory Board and a Board of
Trustees Fellow Emeritus of Cornell University. Mr. Weill is Chairman of the
National Academy Foundation, whose member programs include the Academy of
Finance, the Academy of Travel and Tourism and the Academy of Public Service.
Mr. Weill is a member of the United States Treasury Department's Working Group
on Child Care.
Mr. Dimon has been a director of the Company since September 1991. He is
President and Chief Operating Officer of the Company. Since the Company's
acquisition of Salomon in November 1997, he has also served as Co-Chairman of
the Board and Co-Chief Executive Officer of Salomon Smith Barney. From January
1996 until November 1997, Mr. Dimon was Chairman of the Board and Chief
Executive Officer of Smith Barney. Mr. Dimon has been a director of TAP since
1996. Mr. Dimon joined the Company in 1986 and since such time has served the
Company and certain of its subsidiaries in various positions of increasing
responsibility. From 1982 to 1985, Mr. Dimon was a Vice President of American
Express Company and Assistant to the President, Sanford I. Weill. Mr. Dimon is a
trustee of New York University Medical Center and a director of the Center on
Addiction and Substance Abuse, the National Association of Securities Dealers,
Inc. and Tricon Global Restaurants, Inc. and a member of the Nominating
Committee of the New York Stock Exchange, Inc.
Mr. Carpenter serves as Chairman, Chief Executive Officer and President of
TIC and TLAC and has been a Vice Chairman of the Company since February 1998.
From July 1995 until February 1998 he served as an Executive Vice President of
the Company. From January 1989 to June 1994, Mr. Carpenter was Chairman of the
Board, President and Chief Executive Officer of Kidder, Peabody Group, Inc., an
investment banking and brokerage company that was a wholly owned subsidiary of
General Electric Company. Mr. Carpenter is a director of General Signal
Corporation, ProSource Inc. and the New York City Investment Fund.
Mr. Jones has been a director of the Company since April 1997 and is a
Vice Chairman of the Company. He is also the Chief Executive Officer of the
Company's Asset Management division. He was, from January 1995 until August
1997, Vice Chairman and a director of the Teachers Insurance and Annuity
Association - College Retirement Equities Fund ("TIAA-CREF"). From January 1993
to August 1997, he was President and Chief Operating Officer of TIAA-CREF. From
1989 to 1993, Mr. Jones was Executive Vice President and Chief Financial Officer
of TIAA-CREF. Mr. Jones is a director of Freddie Mac (Federal Home Loan Mortgage
Corp.) and Thomas & Betts Corporation and a director and Deputy Chairman of the
Federal Reserve Bank of New York. He is a trustee of Cornell University,
Brookings Institution and Educational Broadcasting Corporation (Thirteen/WNET).
Mr. Lane has been a Vice Chairman of the Company since January 1996. He
has served as a director of Smith Barney from January 1991 through March 1996
and as a director of SB Holdings from November 1993. Mr. Lane served as Vice
Chairman of Smith Barney from January 1991 through January 1996 and as Vice
Chairman of SB Holdings from November 1993 through January
67
<PAGE>
1996. He joined the Company in 1990. Prior to joining the Company in 1990, Mr.
Lane was President and Chief Operating Officer of Shearson Lehman Brothers Inc.
Mr. Lipp has been a director of the Company since 1991 and is a Vice
Chairman of the Company. Mr. Lipp has been Chairman of the Board, Chief
Executive Officer and President of TAP since January 1996. Mr. Lipp has been
Chairman of the Board and Chief Executive Officer of The Travelers Insurance
Group Inc. since December 1993. From 1991 to 1993, he was Chairman and Chief
Executive Officer of CCC. From April 1986 through September 1991, he was an
Executive Vice President of the Company and its corporate predecessor. Prior to
joining the Company in 1986, he was a President and a director of Chemical New
York Corporation and Chemical Bank where he held senior executive positions for
more than five years prior thereto. Mr. Lipp is a director of The New York City
Ballet, Wadsworth Atheneum and the Massachusetts Museum of Contemporary Art and
Chairman of Dance-On Inc., a private foundation.
Mr. Madonna joined the Company in February 1997 as Vice Chairman, and also
serves as Vice Chairman of TAP. Prior to joining the Company, Mr. Madonna was
Chairman of KPMG International since October 1995. From 1990 to 1996, he was
Chairman and Chief Executive Officer of KPMG Peat Marwick LLP.
Mr. Maughan has been a director and a Vice Chairman of the Company since
December 1997. He is also Co-Chairman of the Board and Co-Chief Executive
Officer of Salomon Smith Barney. He was, until the consummation of the Merger in
November 1997, Chairman and Chief Executive Officer of SBI and an Executive Vice
President of Salomon. He had served in such capacities since 1992 and 1993,
respectively. Mr. Maughan is Vice Chairman of the New York Stock Exchange, Inc.
He is a member of the Trilateral Commission, a trustee of Carnegie Hall, a
director of the New York City Investment Fund and a member of the Stanford
University Graduate School of Business Advisory Council.
Mr. Plumeri has been Chairman and Chief Executive Officer of PFS since
April 1996 and has been a Vice Chairman of the Company since July 1994. He
joined the Company in August 1993, serving as President of Smith Barney from
that time through July 1994. Mr. Plumeri had worked for Shearson Lehman Brothers
Inc. or its predecessors for over 25 years, in various positions of increasing
responsibility, until Smith Barney acquired certain businesses from Shearson
Lehman Brothers Holdings Inc. ("SLB"). At that time, Mr. Plumeri was a Managing
Partner of SLB, and from 1990 until September 1992 he served as President of
SLB's Private Client Group.
Mr. Willumstad has been Chairman and Chief Executive Officer of CCC since
June 1993 and has been with that company since 1987. In February 1998, he also
became a Vice Chairman of the Company. From 1989 until June 1993, he served as
President of the Consumer Finance Services unit of the Company. Mr. Willumstad
is a member of the U.S. Region Board of Directors of MasterCard International.
68
<PAGE>
Mr. Ettinger has been an Executive Vice President of the Company since
January 1996. Prior to joining CCC as Senior Vice President in October 1987, he
was Partner in charge of the Tax Department of Arthur Young and Company's New
York office.
Mr. Prince has been General Counsel of the Company or its predecessor
since 1983, and served as a Senior Vice President from 1986 until January 1996,
when he became an Executive Vice President.
Mr. Black has been Vice Chairman and a director of Salomon Smith Barney
since November 1997 and Vice Chairman of Smith Barney since July 1993. He was
Vice Chairman of SB Holdings from November 1993 until November 1997 and was
Chief Operating Officer of SB Holdings from January 1996 until November 1997.
Mr. Black has served as the head of Smith Barney's Capital Markets Division from
1991 to January 1996, and has served in several positions at Smith Barney since
1974.
Mr. Clarke has been a Vice Chairman of TAP since January 1998. He has been
Chairman of Commercial Lines since 1990, and served as Chief Executive Officer
of TAP's Commercial Lines from January 1996 through January 1998. Prior thereto,
Mr. Clarke was Senior Vice President of the National Accounts and the
Reinsurance business units of Travelers P&C. Mr. Clarke has served in various
positions at Travelers P&C since 1958.
Mr. Cooper has been Chief Actuary of the Company since March 1995 and has
been Vice Chairman of Travelers Insurance Holdings Inc. since October 1990. He
also serves as Chairman of the Board of both AHL and Resource Deployment, Inc.,
subsidiaries of the Company.
Mr. Dawkins has been Chairman, President and Chief Executive Officer of
Travelers Group Diversified Distribution Services, Inc. since August 1996. In
addition, he has been a director of Travelers Group Exchange, Inc. since
September 1996 and became its Chief Executive Officer in January 1997. Mr.
Dawkins joined the Company in 1991 as Chairman and Chief Executive Officer of
Primerica Financial Services, Inc., and served in that capacity until August
1996.
Mr. Fishman was named Chief Executive Officer of TAP's Commercial Lines in
January 1998, and has been President of TAP's Commercial Lines since October
1996. From October 1996 through January 1998, he also served as Chief Operating
Officer of TAP's Commercial Lines. Mr. Fishman has been a Vice Chairman of TAP
since January 1996, and from January 1996 through January 1998 he was TAP's
Chief Administrative Officer. Mr. Fishman has also served as Vice Chairman of
The Travelers Insurance Group Inc. since September 1995, and has been Chief
Financial Officer and Chief Administrative Officer of that company since
December 1993 and June 1996, respectively. Mr. Fishman has also served as Senior
Vice President of the Company since October 1991, and served as Treasurer of the
Company from 1991 to December 1993. From 1989 to 1991, he held various other
positions with the Company and its subsidiaries.
69
<PAGE>
Ms. Magner has been President of CCC since June 1993 and became its Chief
Operating Officer in December 1995. Ms. Magner joined CCC in May 1987, and
served as Chief Administrative Officer from 1993 to 1996. From 1991 to 1993, she
was Executive Vice President, Marketing and Operations of CCC.
Ms. Miller has been Chief Financial Officer and Senior Vice President of
the Company since June 1995. Ms. Miller joined the Company in February 1992 as a
Vice President. Prior thereto, she was a Managing Director in the Emerging
Markets Division of Chemical Bank, a position she held from 1987 to 1992.
Marc P. Weill has been a Senior Vice President and Chief Investment
Officer of the Company since January 1992. He also serves as a director and
Chairman of the Board of Travelers Asset Management International Corporation, a
registered investment advisor. Mr. Weill has held various other positions with
the Company and its subsidiaries since January 1991. He is the son of Sanford I.
Weill.
Item 2. PROPERTIES.
The Company's executive offices are located in New York City. Offices and
other properties used by the Company's subsidiaries are located throughout the
United States. Several subsidiaries have offices located in foreign countries.
Most office locations and other properties are leased on terms and for durations
which are reflective of commercial standards in the communities where such
offices and other properties are located.
As of December 31, 1997, leasehold interests of the Company's
property-casualty insurance subsidiaries included a total of approximately
5,890,000 square feet of office space at about 248 locations throughout the
United States. In addition, TIC owns buildings containing approximately
1,500,000 square feet of office space located in Hartford, Connecticut and
vicinity, serving as the home office for TIC and TAP, and TAP leases
approximately 1,030,000 square feet of such office space under a ten-year lease
that expires on April 1, 2006. TAP also rents from Aetna approximately 373,000
square feet of office space at CityPlace, located in Hartford, Connecticut,
under an eight-year sublease that expires in 2004. The Company's life insurance
units also lease approximately 656,000 square feet of office space at about 16
locations throughout the United States, under various leases. TIC and/or TIGI
lease two other buildings in Hartford, Connecticut with an aggregate of
approximately 707,500 square feet, most of which is subleased to third parties.
TIC also owns a building in Norcross, Georgia that is occupied by its
information systems department.
Salomon Smith Barney owns two office buildings in New York City, which
total approximately 627,000 square feet. Salomon Smith Barney also owns an
office building in Rutherford, New Jersey, totaling approximately 249,000 square
feet and an office building in Tampa, Florida, totaling approximately 135,000
square feet. In addition, Salomon Smith Barney owns an office building in
London, England, that contains approximately 212,760 net square feet. The
building is subject to a mortgage that becomes due in 2007, but which may be
prepaid without
70
<PAGE>
premium at any time with notice. Most of Salomon Smith Barney's other offices
are located in leased premises, the leases for which expire at various times.
Salomon Smith Barney leases two buildings located at 388 and 390 Greenwich
Street in New York City and totaling approximately 2,300,000 square feet,
through 1999. Salomon Smith Barney expects to extend the lease term to 2003.
Salomon Smith Barney has a purchase option with respect to these properties.
Salomon Smith Barney also leases approximately 1,018,000 square feet of office
space at Seven World Trade Center in New York City, through 2010.
A few other offices and certain warehouse space are owned, none of which
is material to the Company's financial condition or operations. The Company owns
26 acres of land in North Castle, New York, on which it has constructed an
executive conference and planning center.
The Company believes its properties are adequate and suitable for its
business as presently conducted and are adequately maintained. For further
information concerning leases, see Note 19 of Notes to Consolidated Financial
Statements.
Item 3. LEGAL PROCEEDINGS.
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which the Company or
its subsidiaries is a party or to which any of their property is subject.
Certain additional matters may be described in the periodic reports filed under
the Exchange Act by certain subsidiaries of the Company. As a result of the
Company's acquisition of Salomon in November 1997, certain matters previously
reported by Salomon are described herein and certain other pending matters
previously reported by the Company are no longer required to be disclosed
herein.
Pursuant to Rule 12b-23 under the Exchange Act, certain matters described
under the caption "Legal Proceedings" in the Annual Report on Form 10-K of SSBH
for the year ended December 31, 1997 (File No. 1-4346) (the "SSBH Form 10-K")
and in the Annual Report on Form 10-K of TAP for the year ended December 31,
1997 (File No. 1-14328) (the "TAP Form 10-K") are incorporated by reference
herein. Specifically, the descriptions that appear in the fifth through sixth
and the eighth through sixteenth paragraphs under the caption "Legal
Proceedings" beginning on page 13 of the SSBH Form 10-K and the descriptions
that appear in the second through sixth paragraphs under the caption "Legal
Proceedings" beginning on page 53 of the TAP Form 10-K are incorporated by
reference herein. Copies of the foregoing descriptions are included as exhibits
to this Form 10-K.
Subsidiaries of the Company have also been named as defendants in
various matters incident to and typical of the businesses in which they are
engaged. These include numerous civil actions, arbitration proceedings and other
matters in which the Company's broker-dealer subsidiaries have been named,
arising in the normal course of business out of activities as a broker and
dealer in securities, as an underwriter of securities, as an investment banker
or otherwise. These also include numerous matters in which the Company's
insurance subsidiaries are named, arising in the normal
71
<PAGE>
course of their business. In the opinion of the Company's management, none of
these actions is expected to have a material adverse effect on the consolidated
financial condition of the Company and its subsidiaries.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the NYSE and the Pacific Exchange
under the symbol "TRV." The high and low sale prices, as reported on the
consolidated transaction reporting system, for the common stock of the Company
for the periods indicated, and the dividends per share, are set forth below.
In October 1997, the Company's Board of Directors declared a three-for-two
split in the Company's common stock, paid in the form of a 50% stock dividend in
November 1997. All amounts have been adjusted to give retroactive effect to the
stock split effected in 1997.
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------- ------------------------------------- ----
1st Q 2nd Q 3rd Q 4th Q 1st Q 2nd Q 3rd Q 4th Q 1st Q*
----- ----- ----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock
Price
High $23.500 $22.875 $24.937 $31.667 $38.922 $44.078 $49.078 $57.375 $56.375
Low $19.000 $18.833 $19.375 $24.563 $29.172 $30.828 $42.000 $43.125 $45.125
Dividends per
Share of
Common Stock $ .075 $ .075 $ .075 $ .075 $ .10 $ .10 $ .10 $ .10 $ .125
</TABLE>
- ----------
* Through March 4, 1998.
At March 4, 1998, the Company had approximately 55,600 common stockholders
of record. This figure does not represent the actual number of beneficial owners
of common stock because shares are frequently held in "street name" by
securities dealers and others for the benefit of individual owners who may vote
the shares.
72
<PAGE>
For information on dividend restrictions in certain long-term loan and
credit agreements of the Company and its subsidiaries, as well as restrictions
on the ability of certain of the Company's subsidiaries to transfer funds to the
Company in the form of cash dividends or otherwise, see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Item 6. SELECTED FINANCIAL DATA.
See "Five-Year Summary of Selected Financial Data" on page 32 of the
Company's 1997 Annual Report to Stockholders (the "1997 Annual Report"),
included as part of Exhibit 13 to this Form 10-K and incorporated herein by
reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 33 of the 1997 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 33 of the 1997 Annual Report, included
as part of Exhibit 13 to this Form 10-K and incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page F-1
hereof. There is also incorporated by reference herein in response to this Item
the material under the caption "Selected Quarterly Financial Data (unaudited)"
on page 91 of the 1997 Annual Report, which material is included as part of
Exhibit 13 to this Form 10-K, and the Independent Auditors' Report filed as
Exhibit 99.02 herewith.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
73
<PAGE>
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information on the directors of the Company, see the material under
the caption "Election of Directors," in the definitive Proxy Statement for the
Company's Annual Meeting of Stockholders to be held on April 22, 1998, filed
with the SEC (the "Proxy Statement"), incorporated herein by reference. For
information on executive officers, see Item 1, "Business -- Other Information --
Executive Officers of the Company" herein.
Item 11. EXECUTIVE COMPENSATION.
See the material under the caption "Executive Compensation" of the Proxy
Statement, incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the material under the captions "Voting Rights," "Security Ownership
of Certain Beneficial Owners" and "Security Ownership of Management" of the
Proxy Statement, incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the material under the captions "Election of Directors" and "Executive
Compensation" of the Proxy Statement, incorporated herein by reference.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as a part of the report:
(1) Financial Statements. See Index to Consolidated
Financial Statements and Schedules on page F-1 hereof.
(2) Financial Statement Schedules. See Index to Consolidated
Financial Statements and Schedules on page F-1 hereof.
(3) Exhibits:
See Exhibit Index.
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<PAGE>
(b) Reports on Form 8-K:
On October 7, 1997, the Company filed a Current Report on Form
8-K, dated October 3, 1997, filing certain exhibits under Item
7 thereof relating to the offer and sale of the Company's
5.864% Cumulative Preferred Stock, Series M, $1.00 par value
per share.
On October 20, 1997, the Company filed a Current Report on
Form 8-K, dated October 13, 1997, reporting under Item 5
thereof the results of its operations for the three and nine
months ended September 30, 1997, and certain other selected
financial data.
On October 28, 1997, the Company filed a Current Report on
Form 8-K/A (which amended the Form 8-K filed on September 25,
1997), filing under Item 7 thereof certain pro forma financial
information.
On November 28, 1997, the Company filed a Current Report on
Form 8-K, dated November 28, 1997, reporting under Item 2
thereof the consummation of the transaction with Salomon Inc,
reporting under Item 5 thereof certain material pending legal
proceedings and filing under Item 7 thereof certain financial
statements and exhibits.
No other reports on Form 8-K were filed during the fourth
quarter of 1997; however, on January 8, 1998, the Company
filed a Current Report on Form 8-K, dated January 6, 1998,
filing certain exhibits under Item 7 thereof relating to the
offer and sale of the Company's 6 5/8% Notes due January 15,
2028; on January 28, 1998, the Company filed a Current Report
on Form 8-K, dated January 26, 1998, reporting under Item 5
thereof the results of its operations for the quarter and year
ended December 31, 1997, and certain other selected financial
data; and on February 19, 1998, the Company filed a Current
Report on Form 8-K, dated February 17, 1998, filing certain
exhibits under Item 7 thereof relating to the offer and sale
of the Company's 6 7/8% Notes due February 15, 2098.
75
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.01 Restated Certificate of Incorporation of Travelers Group Inc.
(the "Company"), Certificate of Amendment to the Restated
Certificate of Incorporation, filed April 26, 1995,
Certificate of Amendment to the Restated Certificate of
Incorporation, filed, April 24, 1996, Certificate of Amendment
to the Restated Certificate of Incorporation, filed April 23,
1997, Certificate of Designation of 6.365% Cumulative
Preferred Stock, Series F, Certificate of Designation of
6.213% Cumulative Preferred Stock, Series G, Certificate of
Designation of 6.231% Cumulative Preferred Stock, Series H,
Certificate of Designation of Series I Cumulative Convertible
Preferred Stock, Certificate of Designation of 8.08%
Cumulative Preferred Stock, Series J, Certificate of
Designation of 8.40% Cumulative Preferred Stock, Series K,
Certificate of Designation of 9.50% Cumulative Preferred
Stock, Series L, Certificate of Designation of 5.864%
Cumulative Preferred Stock, Series M, and Certificate of
Designation of Cumulative Adjustable Rate Preferred Stock,
Series Y, incorporated by reference to Exhibit 99.01 to the
Form 8-A/A of Salomon Smith Barney Holdings Inc. and SI
Financing Trust I (File No. 1-04346).
3.02 By-Laws of the Company, as amended through April 23, 1997,
incorporated by reference to Exhibit 3.02 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1997 (File No. 1-9924).
10.01* Employment Protection Agreement, dated as of December 31,
1987, between the Company (as successor to Commercial Credit
Company ("CCC")) and Sanford I. Weill, incorporated by
reference to Exhibit 10.03 to CCC's Annual Report on Form 10-K
for the fiscal year ended December 31, 1987 (File No. 1-6594).
10.02.1* Travelers Group Stock Option Plan (as amended and restated as
of April 24, 1996), incorporated by reference to Exhibit
10.02.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 1-9924) (the
"Company's 1996 10-K").
10.02.2* Amendment No. 14 to the Travelers Group Stock Option Plan,
incorporated by reference to Exhibit 10.01 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996 (File No. 1-9924) (the "Company's September
30, 1996 10-Q").
10.02.3* Amendment No. 15 to the Travelers Group Stock Option Plan
(effective July 23, 1997), incorporated by reference to
Exhibit 10.04 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1997 (File No.
1-9924) (the "Company's September 30, 1997 10-Q").
76
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.03* Travelers Group 1996 Stock Incentive Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.03 to
the Company's September 30, 1997 10-Q.
10.04* Travelers Group Retirement Benefit Equalization Plan (as
amended and restated as of January 1, 1994), incorporated by
reference to Exhibit 10.03 to the Company's 1996 10-K.
10.05* Letter Agreement, dated December 14, 1988, between Joseph A.
Califano, Jr. and the Company, incorporated by reference to
Exhibit 10.21.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988 (File No. 1-9924).
10.06* Travelers Group Inc. Amended and Restated Compensation Plan
for Non-Employee Directors, incorporated by reference to
Exhibit 10.02 to the Company's September 30, 1996 10-Q.
10.07.1* Supplemental Retirement Plan of the Company, incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (File
No. 1-9924).
10.07.2* Amendment to the Company's Supplemental Retirement Plan,
incorporated by reference to Exhibit 10.06.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1993 (File No. 1-9924) (the "Company's 1993 10-K").
10.08* The Travelers Inc. Executive Performance Compensation Plan
(effective April 27, 1994), incorporated by reference to
Exhibit 10.07 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (File No. 1-9924).
10.09* Travelers Group Capital Accumulation Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.02 to
the Company's September 30, 1997 10-Q.
10.10* Agreement, dated December 21, 1993, between the Company and
Edward H. Budd, incorporated by reference to Exhibit 10.22 to
the Company's 1993 10-K.
10.11* The Travelers Inc. Deferred Compensation and Partnership
Participation Plan, incorporated by reference to Exhibit 10.31
to the Company's Annual Report on Form 10-K/A-1 for the fiscal
year ended December 31, 1994 (File No. 1-9924).
77
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.12* The Travelers Corporation 1984 Management Incentive Plan (as
amended effective January 1, 1991), incorporated by reference
to Exhibit 10(c) to the Annual Report on Form 10-K of The
Travelers Corporation ("old Travelers") for the fiscal year
ended December 31, 1990 (File No. 1-5799).
10.13* The Travelers Corporation Supplemental Benefit Plan (effective
December 20, 1992), incorporated by reference to Exhibit 10(d)
to the Annual Report on Form 10-K of old Travelers for the
fiscal year ended December 31, 1992 (File No. 1-5799).
10.14*+ The Travelers Insurance Deferred Compensation Plan (formerly
The Travelers Corporation TESIP Restoration and Non-Qualified
Savings Plan) (as amended and restated through January 1,
1997).
10.15* The Travelers Corporation Directors' Deferred Compensation
Plan (as amended November 7, 1986), incorporated by reference
to Exhibit 10(d) to the Annual Report on Form 10-K of old
Travelers for the fiscal year ended December 31, 1986 (File
No. 1-5799).
10.16* Travelers Property Casualty Corp. Capital Accumulation Plan
(as amended through July 23, 1997), incorporated by reference
to Exhibit 10.01 to the Quarterly Report on Form 10-Q of
Travelers Property Casualty Corp. for the fiscal quarter ended
September 30, 1997 (File No. 1-14328).
10.17* Letter Agreement, dated as of August 14, 1997, between the
Company and Thomas W. Jones, incorporated by reference to
Exhibit 10.01 to the Company's September 30, 1997 10-Q.
10.18 Agreement and Plan of Merger, dated as of September 24, 1997,
among the Company, Diamonds Acquisition Corp. and Salomon Inc,
incorporated by reference to Exhibit 2.01 to the Company's
Current Report on Form 8-K/A-1, dated September 24, 1997 (File
No. 1-9924).
10.19*+ Salomon Inc Equity Partnership Plan for Key Employees (as
amended through March 19, 1997).
12.01+ Computation of Ratio of Earnings to Fixed Charges.
13.01+ Pages 32 through 92 of the 1997 Annual Report to Stockholders
of the Company (pagination of exhibit does not correspond to
pagination in the 1997 Annual Report to Stockholders).
21.01+ Subsidiaries of the Company.
23.01+ Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
78
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
23.02+ Consent of Arthur Andersen LLP, Independent Certified Public
Accountants.
24.01+ Powers of Attorney.
27.01+ Financial Data Schedule.
27.02+ Restated Financial Data Schedule - 1996.
27.03+ Restated Financial Data Schedule - 1995.
99.01+ Glossary of Insurance Terms.
99.02+ Independent Auditors' Report.
99.03+ The fifth through sixth and the eighth through sixteenth
paragraphs under the caption "Legal Proceedings" beginning on
page 13 of the Annual Report on Form 10-K of Salomon Smith
Barney Holdings Inc. for the fiscal year ended December 31,
1997 (File No. 1-4346).
99.04+ The second through sixth paragraphs under the caption "Legal
Proceedings" beginning on page 53 of the Annual Report on
From 10-K of Travelers Property Casualty Corp. for the fiscal
year ended December 31, 1997 (File No. 1-14328).
The total amount of securities authorized pursuant to any instrument
defining rights of holders of long-term debt of the Company does not
exceed 10% of the total assets of the Company and its consolidated
subsidiaries. The Company will furnish copies of any such instrument to
the SEC upon request.
The financial statements required by Form 11-K for 1997 for the Company's
employee savings plan will be filed as an exhibit by amendment to this
Form 10-K pursuant to Rule 15d-21 of the Securities Exchange Act of 1934,
as amended.
Copies of any of the exhibits referred to above will be furnished at a
cost of $.25 per page (although no charge will be made for the 1997 Annual
Report on Form 10-K) to security holders who make written request therefor
to Corporate Communications and Investor Relations Department, Travelers
Group Inc., 388 Greenwich Street, New York, New York 10013.
- ----------
* Denotes a management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
+ Filed herewith.
79
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 24th day of
March, 1998.
TRAVELERS GROUP INC.
(Registrant)
By: /s/ Sanford I. Weill
--------------------------------------
Sanford I. Weill, Chairman of
the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on the 24th day of March, 1998.
Signature Title
--------- -----
/s/ Sanford I. Weill
- ------------------------ Chairman of the Board, Chief Executive Officer
Sanford I. Weill (Principal Executive Officer) and Director
/s/ Heidi G. Miller
- ------------------------ Senior Vice President and Chief Financial
Heidi G. Miller Officer (Principal Financial Officer)
/s/ Irwin Ettinger
- ------------------------ Executive Vice President and Chief Accounting
Irwin Ettinger Officer (Principal Accounting Officer)
*
- ------------------------
Judith Arron Director
- ------------------------
C. Michael Armstrong Director
80
<PAGE>
Signature Title
--------- -----
*
- ------------------------
Kenneth J. Bialkin Director
*
- ------------------------
Edward H. Budd Director
*
- ------------------------
Joseph A. Califano, Jr. Director
*
- ------------------------
Douglas D. Danforth Director
/s/ James Dimon
- ------------------------
James Dimon Director
*
- ------------------------
Leslie B. Disharoon Director
*
- ------------------------
Gerald R. Ford Director
*
- ------------------------
Thomas W. Jones Director
*
- ------------------------
Ann Dibble Jordan Director
81
<PAGE>
Signature Title
--------- -----
*
- ------------------------
Robert I. Lipp Director
*
- ------------------------
Michael T. Masin Director
*
- ------------------------
Deryck C. Maughan Director
- ------------------------
Dudley C. Mecum Director
*
- ------------------------
Andrall E. Pearson Director
*
- ------------------------
Frank J. Tasco Director
*
- ------------------------
Linda J. Wachner Director
*
- ------------------------
Joseph R. Wright, Jr. Director
82
<PAGE>
Signature Title
--------- -----
*
- ------------------------
Arthur Zankel Director
/s/ James Dimon
*By:
------------------------
James Dimon
Attorney-in-fact
83
<PAGE>
Travelers Group Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES*
---------------------------------
Incorporated
By Reference from
the Company's 1997
Annual Report to
Page Stockholders at
Herein Page Indicated
------ --------------
Independent Auditors' Report F-2 92
Consolidated Statement of Income
for the year ended December 31,
1997, 1996 and 1995 58
Consolidated Statement of
Financial Position at December 31,
1997 and 1996 59
Consolidated Statement of Changes
in Stockholders' Equity for the
year ended December 31, 1997, 1996
and 1995 60
Consolidated Statement of Cash
Flows for the year ended December
31, 1997, 1996 and 1995 61
Notes to Consolidated Financial
Statements 62-91
Schedules:
Schedule I - Condensed Financial
Information of Registrant (Parent
Company only) F-3 - F-6
Schedule III - Supplementary
Insurance Information F-7
Schedule IV - Reinsurance F-8
* Schedules not listed are omitted as not applicable or not
required by Regulation S-X.
F-1
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Travelers Group Inc.:
Under date of January 26, 1998, we reported on the consolidated statement of
financial position of Travelers Group Inc. and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, as contained in the 1997 annual report to
stockholders. These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for the year ended
December 31, 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits. We did not audit the separate consolidated statement of
financial condition of Salomon Inc and subsidiaries or the parent company only
condensed statement of financial condition of Salomon Inc as of December 31,
1996, or the related consolidated statements of income, changes in stockholders'
equity and cash flows or the parent company only condensed statements of income
and cash flows for each of the years ended December 31, 1996 and 1995, which
parent company only condensed financial statements reflect total assets of
$19,964 million and total liabilities of $14,687 million as of December 31,
1996, and net income of $617 million and $457 million for the years ended
December 31, 1996 and 1995, respectively. Those consolidated financial
statements and parent company only condensed financial statements, which are
included in the restated and combined December 31, 1996 and 1995 consolidated
financial statements and financial statement schedules (parent company only) of
Travelers Group Inc. that resulted from the November 28, 1997 pooling of
interests transaction described in Note 1 to the consolidated financial
statements, were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Salomon
Inc and subsidiaries and Salomon Inc (parent company only) for such periods, is
based solely on the report of such other auditors.
In our opinion, based on our audits and the report of other auditors, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
New York, New York
January 26, 1998
F-2
<PAGE>
SCHEDULE I
Travelers Group Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Income
Year Ended December 31,
--------------------------------
1997 1996 1995
------- ------- -------
Revenues $ 1 $ 1 $ (5)
------- ------- -------
Expenses:
Interest 171 162 129
Other 143 126 104
------- ------- -------
Total 314 288 233
------- ------- -------
Pre-tax loss (313) (287) (238)
Income tax benefit 112 103 85
------- ------- -------
Loss before equity in net income
of subsidiaries (201) (184) (153)
Equity in net income of subsidiaries
from continuing operations 3,305 3,466 2,294
Equity in net income of subsidiaries
from discontinued operations -- (334) 150
------- ------- -------
Net income $ 3,104 $ 2,948 $ 2,291
======= ======= =======
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-3
<PAGE>
SCHEDULE I
Travelers Group Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Financial Position
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Assets
Investment in subsidiaries at equity $ 24,073 $ 21,018
Advances to and receivables from subsidiaries 80 88
Cost of acquired businesses in excess of net assets 422 436
Other-principally investments 430 650
-------- --------
$ 25,005 $ 22,192
======== ========
Liabilities
Junior Subordinated Debentures, held by subsidiary Trusts $ 1,026 $ 1,026
Long-term debt 1,695 1,903
Advances from and payables to subsidiaries 29 --
Other liabilities 721 546
-------- --------
3,471 3,475
-------- --------
Redeemable preferred stock, held by subsidiary 226 226
-------- --------
Redeemable preferred stock - Series I 280 420
-------- --------
ESOP Preferred stock - Series C 153 164
Guaranteed ESOP obligation (18) (35)
-------- --------
135 129
-------- --------
Stockholders' equity
Preferred stock ($1.00 par value; authorized shares: 30 million), at
aggregate liquidation value 1,450 1,125
Common stock ($.01 par value; authorized shares:
1.5 billion; issued shares: 1997 - 1,234,204,094 and
1996 -1,384,665,499) 12 14
Additional paid-in capital 5,368 7,806
Retained earnings 15,451 12,934
Treasury stock, at cost (1997 - 89,136,729 shares;
1996 - 243,643,475 shares) (2,183) (4,123)
Unrealized gain (loss) on investment securities 1,157 469
Other, principally unearned compensation (362) (283)
-------- --------
20,893 17,942
-------- --------
$ 25,005 $ 22,192
======== ========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-4
<PAGE>
SCHEDULE I
Travelers Group Inc.
(Parent Company Only)
Condensed Financial Information of Registrant
(In millions of dollars)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,104 $ 2,948 $ 2,291
Adjustments to reconcile net income to
cash provided by operating activities:
Equity in net income of subsidiaries (3,305) (3,132) (2,444)
Dividends received from subsidiaries, net 1,324 1,808 508
Advances (to) from subsidiaries, net 37 (83) 132
Other, net 1,078 316 217
------- ------- -------
Net cash provided by (used in) operating activities 2,238 1,857 704
------- ------- -------
Cash flows from investing activities
Capital contribution to subsidiary (521) (1,140) --
Other investments, primarily short-term, net 240 (408) (198)
------- ------- -------
Net cash provided by (used in) investing activities (281) (1,548) (198)
------- ------- -------
Cash flows from financing activities
Dividends paid (587) (518) (478)
Issuance of preferred stock 1,000 250 --
Redemption of preferred stock (675) (112) --
Redemption of Series I redeemable preferred stock -- -- (140)
Redemption of redeemable preferred stock (held by
subsidiary) -- -- (35)
Stock tendered for payment of withholding taxes (384) (201) (94)
Treasury stock acquired (1,188) (642) (420)
Issuance of long-term debt -- -- 700
Issuance of junior subordinated debentures -- 1,026 --
Payments and redemptions of long-term debt (185) (100) --
Net change in short-term borrowings -- -- (101)
Other, net 62 (12) 62
------- ------- -------
Net cash provided by (used in) financing activities (1,957) (309) (506)
------- ------- -------
Change in cash $ -- $ -- $ --
------- ------- -------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 180 $ 157 $ 112
======= ======= =======
Cash received during the period for taxes $ 569 $ 263 $ 155
======= ======= =======
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes
to the condensed financial information of Registrant.
F-5
<PAGE>
SCHEDULE I
Notes to Condensed Financial Statements of Registrant
1. Basis of Presentation
The accompanying financial statements include the accounts of Travelers
Group Inc. (the Parent) and on an equity basis its subsidiaries and
affiliates and should be read in conjunction with the Consolidated
Financial Statements and notes thereto.
2. Supplementary Disclosure of Non-Cash Investing and Financing Activities
During 1994, the Parent issued $261 million of redeemable preferred stock
to various subsidiaries in exchange for an equivalent value of Travelers
Group Inc. common stock previously held by these subsidiaries. This
activity was recorded as a non-cash capital contribution to subsidiaries
by the Parent. During 1995, $35 million of this redeemable preferred stock
was repurchased and retired.
F-6
<PAGE>
SCHEDULE III
TRAVELERS GROUP INC. AND SUBSIDIARIES
Supplementary Insurance Information
(In millions of dollars)
<TABLE>
<CAPTION>
Value of
insurance in
force and Future policy
deferred benefits, Other policy
policy losses, claims claims and Net
Segment acquisition and loss Unearned benefits Premium investment
1997 costs expenses premiums payable Revenue income
- -------- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Life Insurance Services $2,306 $ 9,728 $ 8 $ 378 $1,579 $2,038
P&C Insurance Services 501 29,344 3,867 -- 7,225 2,051
Consumer Finance Services* 5 11 392 54 177 45
Corporate and Other -- -- -- -- 14 31
--------------------------------------------------------------------------------------
Total $2,812 $39,083 $4,267 $ 432 $8,995 $4,165
======================================================================================
1996
Life Insurance Services $2,127 $ 9,263 $ 9 $ 536 $1,404 $1,888
P&C Insurance Services 426 30,175 3,554 -- 6,050 1,658
Consumer Finance Services* 10 12 346 49 155 41
Corporate and Other -- -- -- -- 24 37
--------------------------------------------------------------------------------------
Total $2,563 $39,450 $3,909 $ 585 $7,633 $3,624
======================================================================================
1995
Life Insurance Services $1,953 $ 8,035 $ 9 $ 496 $1,537 $1,836
P&C Insurance Services 202 14,758 1,827 - 3,300 744
Consumer Finance Services* 17 16 330 51 139 38
Corporate and Other - 1,323 - 75 1 7
-------------------------------------------------------------------------------------
Total $2,172 $24,132 $2,166 $ 622 $4,977 $2,625
=====================================================================================
<CAPTION>
Amortization
Benefits, of deferred
claims, policy
losses acquisition costs
and and value Other
Segment settlement of insurance operating Premiums
1997 expenses in force expenses written
- -------- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Life Insurance Services $2,173 $ 292 $ 385 $1,596
P&C Insurance Services 5,484 1,127 1,385 7,832
Consumer Finance Services* 62 5 21 235
Corporate and Other (5) - 21 -
-----------------------------------------------------------
Total $7,714 $1,424 $1,812 $9,663
===========================================================
1996
Life Insurance Services $2,002 $ 280 $ 345 $1,416
P&C Insurance Services 5,283 905 1,406 6,360
Consumer Finance Services* 50 7 21 182
Corporate and Other 31 - 49 4
-----------------------------------------------------------
Total $7,366 $1,192 $1,821 $7,962
===========================================================
1995
Life Insurance Services $2,173 $283 $ 406 $1,367
P&C Insurance Services 2,806 512 632 3,607
Consumer Finance Services* 51 8 2 161
Corporate and Other (13) - 69 132
-----------------------------------------------------------
Total $5,017 $803 $1,109 $5,267
===========================================================
</TABLE>
* Includes credit life insurance operations.
F-7
<PAGE>
SCHEDULE IV
Travelers Group Inc. and Subsidiaries
Reinsurance
(In millions of dollars)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
--------
% of
Ceded to Assumed Amount
Gross Other From other Net Assumed
Year ended December 31, 1997 Amount Companies Companies Amount To Net
- ---------------------------- ------ --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
Life insurance in force $ 424,815 $(175,910) $ 145 $ 249,050 0.06%
========= ========= ========= ========= =========
Premiums
Life insurance $ 1,667 $ (279) $ 2 $ 1,390 0.1%
Accident and health insurance 371 (62) 2 311 0.6%
Property and casualty insurance 8,268 (1,751) 777 7,294 10.7 %
--------- --------- --------- ---------
$ 10,306 $ (2,092) $ 781 $ 8,995
========= ========= ========= =========
Year ended December 31, 1996
- ----------------------------
Life insurance in force $ 413,351 $(154,021) $ 150 $ 259,480 0.06%
========= ========= ========= ========= =========
Premiums
Life insurance $ 1,523 $ (296) $ 6 $ 1,233 0.5%
Accident and health insurance 400 (98) 2 304 0.7%
Property and casualty insurance 7,239 (1,806) 663 6,096 10.9%
--------- --------- --------- ---------
$ 9,162 $ (2,200) $ 671 $ 7,633
========= ========= ========= =========
Year ended December 31, 1995
- ----------------------------
Life insurance in force $ 400,622 $(134,828) $ 139 $ 265,933 0.05%
========= ========= ========= ========= =========
Premiums
Life insurance $ 1,496 $ (272) $ 1 $ 1,225 0.1%
Accident and health insurance 497 (87) 2 412 0.5%
Property and casualty insurance 4,302 (1,412) 450 3,340 13.5%
--------- --------- --------- ---------
$ 6,295 $ (1,771) $ 453 $ 4,977
========= ========= ========= =========
</TABLE>
F-8
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.01 Restated Certificate of Incorporation of Travelers Group Inc.
(the "Company"), Certificate of Amendment to the Restated
Certificate of Incorporation, filed April 26, 1995,
Certificate of Amendment to the Restated Certificate of
Incorporation, filed, April 24, 1996, Certificate of Amendment
to the Restated Certificate of Incorporation, filed April 23,
1997, Certificate of Designation of 6.365% Cumulative
Preferred Stock, Series F, Certificate of Designation of
6.213% Cumulative Preferred Stock, Series G, Certificate of
Designation of 6.231% Cumulative Preferred Stock, Series H,
Certificate of Designation of Series I Cumulative Convertible
Preferred Stock, Certificate of Designation of 8.08%
Cumulative Preferred Stock, Series J, Certificate of
Designation of 8.40% Cumulative Preferred Stock, Series K,
Certificate of Designation of 9.50% Cumulative Preferred
Stock, Series L, Certificate of Designation of 5.864%
Cumulative Preferred Stock, Series M, and Certificate of
Designation of Cumulative Adjustable Rate Preferred Stock,
Series Y, incorporated by reference to Exhibit 99.01 to the
Form 8-A/A of Salomon Smith Barney Holdings Inc. and SI
Financing Trust I (File No. 1-04346).
3.02 By-Laws of the Company, as amended through April 23, 1997,
incorporated by reference to Exhibit 3.02 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1997 (File No. 1-9924).
10.01* Employment Protection Agreement, dated as of December 31,
1987, between the Company (as successor to Commercial Credit
Company ("CCC")) and Sanford I. Weill, incorporated by
reference to Exhibit 10.03 to CCC's Annual Report on Form 10-K
for the fiscal year ended December 31, 1987 (File No. 1-6594).
10.02.1* Travelers Group Stock Option Plan (as amended and restated as
of April 24, 1996), incorporated by reference to Exhibit
10.02.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (File No. 1-9924) (the
"Company's 1996 10-K").
10.02.2* Amendment No. 14 to the Travelers Group Stock Option Plan,
incorporated by reference to Exhibit 10.01 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996 (File No. 1-9924) (the "Company's September
30, 1996 10-Q").
10.02.3* Amendment No. 15 to the Travelers Group Stock Option Plan
(effective July 23, 1997), incorporated by reference to
Exhibit 10.04 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1997 (File No.
1-9924) (the "Company's September 30, 1997 10-Q").
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.03* Travelers Group 1996 Stock Incentive Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.03 to
the Company's September 30, 1997 10-Q.
10.04* Travelers Group Retirement Benefit Equalization Plan (as
amended and restated as of January 1, 1994), incorporated by
reference to Exhibit 10.03 to the Company's 1996 10-K.
10.05* Letter Agreement, dated December 14, 1988, between Joseph A.
Califano, Jr. and the Company, incorporated by reference to
Exhibit 10.21.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988 (File No. 1-9924).
10.06* Travelers Group Inc. Amended and Restated Compensation Plan
for Non-Employee Directors, incorporated by reference to
Exhibit 10.02 to the Company's September 30, 1996 10-Q.
10.07.1* Supplemental Retirement Plan of the Company, incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (File
No. 1-9924).
10.07.2* Amendment to the Company's Supplemental Retirement Plan,
incorporated by reference to Exhibit 10.06.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1993 (File No. 1-9924) (the "Company's 1993 10-K").
10.08* The Travelers Inc. Executive Performance Compensation Plan
(effective April 27, 1994), incorporated by reference to
Exhibit 10.07 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (File No. 1-9924).
10.09* Travelers Group Capital Accumulation Plan (as amended through
July 23, 1997), incorporated by reference to Exhibit 10.02 to
the Company's September 30, 1997 10-Q.
10.10* Agreement, dated December 21, 1993, between the Company and
Edward H. Budd, incorporated by reference to Exhibit 10.22 to
the Company's 1993 10-K.
10.11* The Travelers Inc. Deferred Compensation and Partnership
Participation Plan, incorporated by reference to Exhibit 10.31
to the Company's Annual Report on Form 10-K/A-1 for the fiscal
year ended December 31, 1994 (File No. 1-9924).
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.12* The Travelers Corporation 1984 Management Incentive Plan (as
amended effective January 1, 1991), incorporated by reference
to Exhibit 10(c) to the Annual Report on Form 10-K of The
Travelers Corporation ("old Travelers") for the fiscal year
ended December 31, 1990 (File No. 1-5799).
10.13* The Travelers Corporation Supplemental Benefit Plan (effective
December 20, 1992), incorporated by reference to Exhibit 10(d)
to the Annual Report on Form 10-K of old Travelers for the
fiscal year ended December 31, 1992 (File No. 1-5799).
10.14*+ The Travelers Insurance Deferred Compensation Plan (formerly
The Travelers Corporation TESIP Restoration and Non-Qualified
Savings Plan) (as amended and restated through January 1,
1997).
10.15* The Travelers Corporation Directors' Deferred Compensation
Plan (as amended November 7, 1986), incorporated by reference
to Exhibit 10(d) to the Annual Report on Form 10-K of old
Travelers for the fiscal year ended December 31, 1986 (File
No. 1-5799).
10.16* Travelers Property Casualty Corp. Capital Accumulation Plan
(as amended through July 23, 1997), incorporated by reference
to Exhibit 10.01 to the Quarterly Report on Form 10-Q of
Travelers Property Casualty Corp. for the fiscal quarter ended
September 30, 1997 (File No. 1-14328).
10.17* Letter Agreement, dated as of August 14, 1997, between the
Company and Thomas W. Jones, incorporated by reference to
Exhibit 10.01 to the Company's September 30, 1997 10-Q.
10.18 Agreement and Plan of Merger, dated as of September 24, 1997,
among the Company, Diamonds Acquisition Corp. and Salomon Inc,
incorporated by reference to Exhibit 2.01 to the Company's
Current Report on Form 8-K/A-1, dated September 24, 1997 (File
No. 1-9924).
10.19*+ Salomon Inc Equity Partnership Plan for Key Employees (as
amended through March 19, 1997).
12.01+ Computation of Ratio of Earnings to Fixed Charges.
13.01+ Pages 32 through 92 of the 1997 Annual Report to Stockholders
of the Company (pagination of exhibit does not correspond to
pagination in the 1997 Annual Report to Stockholders).
21.01+ Subsidiaries of the Company.
23.01+ Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants.
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
23.02+ Consent of Arthur Andersen LLP, Independent Certified Public
Accountants.
24.01+ Powers of Attorney.
27.01+ Financial Data Schedule.
27.02+ Restated Financial Data Schedule - 1996.
27.03+ Restated Financial Data Schedule - 1995.
99.01+ Glossary of Insurance Terms.
99.02+ Independent Auditors' Report.
99.03+ The fifth through sixth and the eighth through sixteenth
paragraphs under the caption "Legal Proceedings" beginning on
page 13 of the Annual Report on Form 10-K of Salomon Smith
Barney Holdings Inc. for the fiscal year ended December 31,
1997 (File No. 1-4346).
99.04+ The second through sixth paragraphs under the caption "Legal
Proceedings" beginning on page 53 of the Annual Report on
From 10-K of Travelers Property Casualty Corp. for the fiscal
year ended December 31, 1997 (File No. 1-14328).
The total amount of securities authorized pursuant to any instrument
defining rights of holders of long-term debt of the Company does not
exceed 10% of the total assets of the Company and its consolidated
subsidiaries. The Company will furnish copies of any such instrument to
the SEC upon request.
The financial statements required by Form 11-K for 1997 for the Company's
employee savings plan will be filed as an exhibit by amendment to this
Form 10-K pursuant to Rule 15d-21 of the Securities Exchange Act of 1934,
as amended.
Copies of any of the exhibits referred to above will be furnished at a
cost of $.25 per page (although no charge will be made for the 1997 Annual
Report on Form 10-K) to security holders who make written request therefor
to Corporate Communications and Investor Relations Department, Travelers
Group Inc., 388 Greenwich Street, New York, New York 10013.
- ----------
* Denotes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of Form
10-K.
+ Filed herewith.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.14
<SEQUENCE>2
<DESCRIPTION>THE TRAVELERS INSURANCE DEFERRED COMPENSATION PLAN
<TEXT>
Exhibit 10.14
THE TRAVELERS INSURANCE
DEFERRED COMPENSATION PLAN
[FORMERLY THE TRAVELERS TESIP
RESTORATION AND NON-QUALIFIED SAVINGS PLAN]
ARTICLE 1
PURPOSE
The purpose of The Travelers Insurance Deferred Compensation Plan (the
"Plan") is to provide a means whereby The Travelers Insurance Group Inc. (the
"Company"), as successor to The Travelers Corporation, may restore the
tax-deferral savings opportunities to employees of The Travelers Insurance
Company and The Travelers Indemnity Company and certain of their affiliates who
are treated as "highly compensated employees" under the Internal Revenue Code of
1986, as amended (the "Code"), and as such are restricted in the level of
participation under 401(k) and similar plans as are afforded non-highly
compensated employees and to offer improved flexibility for retirement, tax and
estate planning to a select group of key management employees of the Company and
its subsidiaries (including, at the Committee's option, subsidiaries the
employees of which are not eligible to participate in TESIP) who have rendered
and continue to render valuable services to the Company.
The Plan incorporates and replaces the TESIP Restoration Plan which was
effective as of January 1, 1990 and The Travelers TESIP Restoration and
Non-Qualified Savings Plan which was effective as of January 1, 1991. The Plan
includes the rollover of non-qualified balances for Transferred Employees that
had previously been part of Aetna Life and Casualty Company's Incentive Deferral
Plan and Aetna Life and Casualty Company's Supplemental Incentive Savings Plan
("SISP"). The Plan set forth herein is amended and restated as of January 1,
1997.
ARTICLE 2
DEFINITIONS AND CERTAIN PROVISIONS
Beneficiary. "Beneficiary" means the person or persons designated as such
in accordance with Article 6.
Board. "Board" means the Board of Directors of the Company.
Committee. "Committee" means the Plans Administration Committee of
Travelers Group Inc.
Fixed Income Declared Rate. "Fixed Income Declared Rate" means the fixed
interest rate expressed as an effective annual yield for the Plan Year for Fund
2 under TESIP which is invested in a group annuity contract. The Fixed Income
Declared Rate will be determined annually at the beginning of each Plan Year and
credited monthly as of the last business day of the month.
Deferral Account. "Deferral Account" means the account maintained on the
books of account of the Company for each Participant for each Deferral Account
Cycle pursuant to Section 4.2.
<PAGE>
Deferral Account Cycle. "Deferral Account Cycle" means a period of five
(5) Plan Years as determined by the Committee over which a Participant defers
Salary and/or Incentive Award. The first Deferral Account Cycle covers the Plan
Years 1990 through 1994.
Disability. "Disability" means any disability as defined under the terms
of The Travelers Group Long-Term Disability Plan.
Eligible Employee. "Eligible Employee" means any Employee of the Company
or any designated subsidiary who is considered by the Company to be a key
management employee, including employees of a subsidiary which does not
participate in TESIP and employees who have not yet met the TESIP service
requirements.
Employee. "Employee" means any person employed by an Employer on a regular
full-time salaried basis, including officers of the Employer.
Employer. "Employer" means the Company and any of its subsidiaries.
Enrollment Agreement. "Enrollment Agreement" means the authorization form
which an Eligible Employee files with the Company to participate in the Plan.
Enrollment Period. "Enrollment Period" means the period from 10/31 to
12/31 of the calendar year preceding the Plan Year or for newly hired employees,
within 30 days of employment and otherwise as determined by the Committee.
Incentive Award. "Incentive Award" means with respect to a Participant for
any Plan Year the incentive award paid to the Participant for such Plan Year
under an annual incentive plan.
Participant. "Participant" means an Eligible Employee who has filed a
completed and executed Enrollment Agreement with the Committee and is
participating in the Plan in accordance with the provisions of Article 4.
Plan Year. "Plan Year" means the calendar year beginning January 1 and
ending December 31.
Retirement. "Retirement" means the termination of a Participant's
employment with an Employer for reasons other than death or disability on or
after attaining age 55 with 5 or more years of Continuous Service, as determined
under The Travelers Pension Plan, or termination of employment on or after
attaining age 50 with 5 or more years of continuous service under circumstances
where the Participant is separated from service and entitled to payments under
the terms of The Travelers Separation Pay Plan. Retirement also means, where
applicable, the termination of a Participant's employment with the ability to
begin receiving benefits following such termination under the Retirement Plan
for Employees of Aetna Life and Casualty Company, however, in such event,
certain payments may not commence until a participant reaches age 62 in
accordance with elections made at the time of deferral.
2
<PAGE>
Salary. "Salary" means with respect to a Participant for any Plan Year
such Participant's annual base salary, as established on the books and records
of the participating employers.
TESIP. "TESIP" means the Travelers Group 401(k) Savings Plan, as successor
plan to The Travelers Savings, Investment and Stock Ownership Plan, as amended
from time to time.
The Travelers Pension Plan means The Pension Plan for Salaried Employees
of The Travelers Insurance Company and certain affiliates and any successor plan
thereto as amended from time to time.
ARTICLE 3
ADMINISTRATION OF THE PLAN
The Plan is administered by the Committee which is responsible for
overseeing the operation of the Plan and has the power to interpret provisions
of the plan. The Committee shall have all of the powers vested in it pursuant to
the terms of the Plan, including but not limited to the power and authority to
establish and modify eligibility criteria for participation and to modify the
terms and provisions of the Plan.
Members of the Committee are appointed by the Board of Directors of
Travelers Group Inc. ("Travelers") for indefinite terms, may resign or be
removed at any time and serve without compensation for their services. Travelers
indemnifies such members to the fullest extent permitted by law and the By-Laws
of Travelers. Members of the Committee currently are officers or employees of
Travelers or its subsidiaries. The Committee maintains an office at 388
Greenwich Street, 36th Floor, New York, New York 10013. Correspondence to the
Committee should be sent to such address c/o Travelers Group Inc., Attention:
Plans Administration Committee.
The Committee has delegated the day-to-day operations of the Plan which
are managed by the Corporate Compensation Department. Corporate Compensation can
be reached by dialing (860) 954-4099.
Additional information about the Plan, the Committee and its members may
be obtained upon written request to Travelers Group Inc., Attn: Corporation
Compensation Department, 388 Greenwich Street, 36th Floor, New York, New York
10013 or by calling (212) 816-2577.
ARTICLE 4
PARTICIPATION
4.1 Election to Participate. Any Eligible Employee may elect to
participate in the Plan effective as of the first day of the Plan Year by filing
during the Enrollment Period a completed and fully executed Enrollment Agreement
with the Committee prior to the beginning of such Plan Year. A separate
Enrollment Agreement must be completed for each Plan Year in which a Participant
makes deferrals under the Plan.
3
<PAGE>
For any Plan Year an Eligible Employee may elect to defer a percentage of
Salary (not to exceed 50% of the Participant's Salary at the rate in effect
during the Plan Year, or for newly hired eligible employees 50% of their initial
annual salary prorated for the remaining months of the Plan Year) and/or a
percentage of an Incentive Award (up to 70% of the Participant's cash Incentive
Award). This plan is offered in addition to the Travelers Group Capital
Accumulation Plan (CAP), Travelers Property Casualty Corp. Capital Accumulation
Plan (TAP CAP), and the Greenwich Street Capital Partners, L.P. (GSP). Incentive
deferrals to this plan will be made subsequent to any deferrals which may apply
due to voluntary or automatic participation in CAP, TAP CAP, or GSP.
The Committee may establish minimum or maximum individual or aggregate
deferral amounts for each Plan Year. The Company reserves the right to make a
reduction in individual deferral amounts if the individual or aggregate
deferrals exceed a Company-determined dollar threshold. The Committee may
establish a minimum account value for continued participation in the plan and
may pay to participants the value of accounts below the minimum.
4.2 Deferral Accounts. The Company shall establish and maintain a separate
Deferral Account for each Participant for each Deferral Account Cycle. The
amount by which a Participant's Salary or Incentive Award is reduced pursuant to
Section 4.1 shall be credited to the Participant's Deferral Account no later
than the first day of the month following the month in which such compensation
would otherwise have been paid. The Deferral Account shall be debited by the
amount of any such payments made to the Participant or the Participant's
Beneficiary with respect to such Deferral Account pursuant to this Plan.
(a) Company Contributions. Prior to the 1997 Plan Year, the Plan
provided that certain eligible Participants received Company
Contributions. For 1990, the Company made contributions in accordance with
Appendix A hereto. For 1991 to 1993 the Company made contributions in
accordance with Appendix B hereto. For 1994 and 1995 the Company made
contributions in accordance with Appendix C hereto. For 1996 the Company
made contributions in accordance with Appendix D hereto for participants
in Aetna Life and Casualty Company's Incentive Deferral Plan and Aetna
Life and Casualty Company's Supplemental Incentive Savings Plan.
(b) Interest on Deferral Accounts. Prior to 1996 two types of
returns were credited on Deferral Accounts prior to commencement of
payment of benefits depending on the Declared Rate option which a
Participant chose. These options were the Fixed Income Declared Rate and
Equity Simulator Declared Rate.
Under the Fixed Income Declared Rate interest will be credited
monthly to Deferral Accounts in the same manner as interest is credited on
Fund 2 under TESIP. Under the Equity Simulator Declared Rate in effect
prior to 1996, a rate of return (which may be positive or negative) was
credited as of the end of each month at the same rate which was credited
on Fund 1 under TESIP. After 1995 all Deferral Accounts are credited with
the Fixed Income Declared Rate.
A Participant's Deferral Account will continue to be credited with
the Fixed Income Declared Rate after benefit payments from such Deferral
Account commence.
4
<PAGE>
4.3 Valuation of Accounts. The value of a Deferral Account as of any date
shall equal the amounts theretofore credited to such account, plus the interest
deemed to be earned on such account in accordance with Section 4.2 through the
valuation date, less the amounts theretofore debited to such account. Any
valuation shall be made as of the last business day of the month.
4.4 Statement of Accounts. The Committee shall submit to each Participant,
within one hundred twenty (120) days after the close of each Plan Year, a
statement in such form as the Committee deems desirable setting forth the
balance standing to the credit of each Participant in each of his or her
Deferral Accounts.
ARTICLE 5
BENEFITS
5.1 Retirement Benefit. A Participant is eligible for a Retirement Benefit
under this Plan when he or she has satisfied all of the requirements for
Retirement (as defined in Article 2). The Retirement Benefit for a Deferral
Account will be based on the total value of the Deferral Account.
The Retirement Benefit for a Deferral Account will be paid beginning
approximately 30 days of the date and in the manner which the Participant elects
when he or she enrolls in the Deferral Account. After the Participant elects the
commencement date and the form of payment, he or she may not change the
election. At the time of enrollment a Participant may elect to receive a
Retirement Benefit for a Deferral Account at Retirement or at age 65, if later,
in either a lump sum or annual installments over 5, 10 or 15 years. The lump-sum
payment will be made or annual installment payments will commence approximately
30 days after Retirement or approximately 30 days following the date on which
the Participant attains age 65, according to the Participant's enrollment
agreement. The account valuation will be as of the last business day of the
month preceding the payment date.
If a Participant elects to receive his or her Retirement Benefit in
installment payments, the account will be valued on the last business day of the
month in which the Participant is deemed to be retired, or attained age 65 if
applicable. Retirements are deemed to be the first of a month following the
termination of employment. The payments will be determined annually by dividing
the Participant's then current Deferral Account balance at commencement and on
each anniversary of the valuation year by the number of remaining years in the
payment period based on the Participant's retirement payment election. The Fixed
Income Declared Rate will be credited during any payment year on the unpaid
Deferral Account balance. After the Participant's death, interest earned during
the payment period will instead be distributed in full.
The Committee may, in its discretion, permit alternative payment elections
for future deferrals and may permit the form and timing of payments elected by
participants (in accordance with the terms and provisions of a plan then in
effect) with respect to balances transferred into the Plan when such transfers
are authorized by the Company or the Employer in connection with a merger,
acquisition or other business combination.
5.2 Disability. If a Participant becomes disabled, Participant deferrals
that otherwise would have been credited to the Participant's Deferral Accounts
will cease during such Disability. The Participant's Deferral Accounts will
continue to earn interest at the Declared Rate. The Participant's Deferral
Account balances will be distributed as a Retirement Benefit or Survivor
5
<PAGE>
Benefit, whichever is applicable, beginning on the date and in the form which
the Participant elected in his Enrollment Agreement, but in no event beginning
earlier than 12 months after the date of the Participant's Disability. In the
sole discretion of the Committee, the Company may commence payments on an
earlier date.
5.3 Termination Benefit. Notwithstanding other provisions of this plan if
a Participant (i) ceases to be an Employee for any reason other than death,
Disability or Retirement, or (ii) fails to return to the status of an Active
Employee within sixty (60) days following recovery from a Disability prior to
Retirement, the Company shall pay to the Participant in one lump sum an amount
(the "Termination Benefit") equal to the value of the Participant's Deferral
Accounts as provided in Section 4.3.
The account valuation will be as of the last business day of the month of
termination of employment (or the end of the 60-day period following the end of
a disability).
5.4 Survivor Benefits.
If a Participant dies, a Survivor Benefit will be paid to his Beneficiary
in a lump sum in the month following the Participant's death. The Survivor
Benefit will be equal to the Deferral Account balance(s) of the Participant.
The account valuation will be as of the last business day of the month of
the death.
5.5 Emergency Benefit. In the event that the Committee, upon written
petition of the Participant or beneficiary of such Participant, determines in
its sole discretion that the Participant has suffered an unforeseeable financial
emergency, the Employer shall pay to the Participant, as soon as practicable
following such determination, an amount necessary to meet the emergency.
Participants who suffer an emergency prior to commencement of benefit payments
would receive an amount not in excess of the Deferral Account balance to which
such Participant would have been entitled pursuant to Section 5.3 if he or she
had a termination of employment on the date of such determination and received a
lump sum payment (the "Emergency Benefit"). Participants in the process of
receiving installment payments would receive an amount not in excess of the
present value of the remaining installment payments. For purposes of this Plan,
an unforeseeable financial emergency is an unexpected need for cash arising from
an illness, casualty loss, sudden financial reversal, or other such
unforeseeable occurrence. The amount of the benefits otherwise payable under the
Plan shall thereafter be adjusted to reflect the early payment of the Emergency
Benefit.
5.6 Small Benefit. In the event the Committee determines that the balance
of a Participant's Deferral Account is less than $10,000 at the time of
commencement of payment of his or her Retirement Benefit, or the portion of the
balance of the Participant's Deferral Account payable to any Beneficiary is less
than $10,000 at the time of commencement of payment of a Survivor Benefit to
such Beneficiary, the Company may pay the benefit in the form of a lump-sum
payment, notwithstanding any provision of this Article 5 to the contrary. Such
lump-sum payment shall be equal to the balance of the Participant's Deferral
Account or the portion thereof payable to a Beneficiary.
6
<PAGE>
5.7 Withholding; Unemployment Taxes. To the extent required by the law in
effect at the time payments are made, the Company shall withhold from any
amounts deferred under the Plan or from payments made hereunder the taxes
required to be withheld by the federal or any state or local government.
ARTICLE 6
BENEFICIARY DESIGNATION
Each Participant shall have the right, at any time, to designate any
person or persons as Beneficiary or Beneficiaries to whom payments under this
Plan shall be made in the event of the Participant's death prior to complete
distribution to the Participant of the benefits due under the Plan. Each
Beneficiary designation shall become effective only when filed in writing with
the Committee on a form prescribed or accepted by the Committee.
Any Participant shall have the right to designate a new Beneficiary at any
time by filing with the Committee a written request for such change, but any
such change shall become effective only upon receipt of such request by the
Committee. Upon receipt by the Committee of such request, the change shall
relate back to and take effect as of the date the Participant signs such request
whether or not the Participant is living at the time the Committee receives such
request.
To the extent a Participant designates a beneficiary other than a spouse,
the administrative rules under the Travelers Group 401(k) Savings Plan apply. If
there is no designated Beneficiary living at the death of the Participant when
any payment hereunder shall be payable to a Beneficiary, then such payment shall
be made as follows:
To such Participant's wife or husband, if living and if not living, to
such Participant's then living lineal descendants, in equal shares, per
stirpes; if none survives, to such Participant's surviving parents,
equally; if neither survives, to such Participant's executors or
administrators.
ARTICLE 7
AMENDMENT AND TERMINATION OF PLAN
7.1 Amendment. The Senior Vice President, Human Resources of Travelers
Group Inc. or the Board may at any time amend the Plan in whole or in part;
provided, however, that no such amendment shall be effective to decrease the
benefits accrued by any Participant prior to the date of such amendment and any
change in the definitions of the Declared Rates shall be effective only as to
Plan Years beginning after the date of such amendment. Written notice of any
amendment shall be given to each current or former Employee then participating
in the Plan.
7.2 Termination.
(a) Company's Right to Terminate. The Senior Vice President, Human
Resources of Travelers Group Inc. or the Board may at any time terminate
the Plan, if in his or her or its judgment, the continuance of the Plan
would not be in the best interests of Travelers Group Inc., the Company or
its affiliates.
(b) Payments Upon Termination. Upon termination of the Plan under
this Section 7.2, the Participants will be deemed to have voluntarily
terminated their participation
7
<PAGE>
under the Plan as of the date of such termination. Salary and Incentive
Awards shall cease to be deferred, and the Company will pay to each
Participant the value of each of the Participant's Deferral Accounts,
determined as if each Participant had terminated employment on the date of
such termination of the Plan, at such times and pursuant to such terms and
conditions as the Committee in its sole discretion shall determine.
Participants or Beneficiaries receiving Retirement Benefit installments
shall receive a lump sum payment equal to the remaining, unpaid Deferred
Account balance.
ARTICLE 8
MISCELLANEOUS
8.1 Unsecured General Creditor. Participants and their Beneficiaries,
heirs, successors, and assigns shall have no legal or equitable rights, claims,
or interests in any specific property or assets of the Company, nor shall they
be beneficiaries of, or have any rights, claims, or interests in any life
insurance policies, annuity contracts, or the proceeds therefrom owned or which
may be acquired by the Company ("Policies"). Such Policies or other assets of
the Company shall not be held under any trust for the benefit of Participants,
their Beneficiaries, heirs, successors, or assigns (other than a grantor trust
established to assist the Company in meeting its obligations hereunder and the
assets of which are available to general creditors if the Company becomes
insolvent), or held as collateral security for the fulfilling of the obligation
of the Company under this Plan. Any and all of the Company's assets and Policies
shall be, and remain, the general, unpledged, unrestricted assets of the
Company. The Company's obligation under the Plan shall be merely that of an
unfunded and unsecured promise of the Company to pay money in the future.
8.2 Obligations to Company. If a Participant becomes entitled to a
distribution of benefits under the Plan, and if at such time the Participant has
outstanding any debt, obligation, or other liability representing an amount
owing to the Company or its affiliates, then the Company may offset such amount
owed to it against the amount of benefits otherwise distributable. Such
determination shall be made by the Committee.
8.3 Nonassignability. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage
or otherwise encumber, hypothecate or convey in advance of actual receipt the
amounts, if any, payable, hereunder, or any part thereof, or interest therein
which are, and all rights to which are, expressly declared to be unassignable
and non-transferable. No part of the amounts payable shall, prior to actual
payment, be subject to seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by a Participant or any other
person, nor be transferable by operation of law in the event of a Participant's
or any other person's bankruptcy or insolvency.
8.4 Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed as a contract of employment or as
giving any Employee any right to be retained in the employ of the Company or its
affiliates.
8.5 Protective Provisions. Each Participant shall cooperate with the
Company by furnishing any and all information requested by the Company in order
to facilitate the payment of benefits hereunder, by taking such physical
examinations as the Company may deem necessary and by taking such other relevant
action as may be requested by the Company. If a Participant refuses to
cooperate, the Company shall have no further obligation to the Participant under
the Plan, other than payment to such Participant of the cumulative reductions in
Salary and Incentive Awards theretofore made pursuant to this Plan.
8
<PAGE>
8.6 Gender, Singular & Plural. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as the identity
of the person or persons may require. As the context may require, the singular
may be read as the plural and the plural as the singular.
8.7 Captions. The captions of the articles, sections, and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
of construction of any of its provisions.
8.8 Validity. In the event any provision of this Plan is held invalid,
void, or unenforceable, the same shall not affect, in any respect, whatsoever,
the validity of any other provision of this Plan.
8.9 Notice. Any notice or filing required or permitted to be given to the
Committee under the Plan shall be sufficient if in writing and hand delivered,
or sent by registered or certified mail, to the Company, directed to the
attention of the Plans Administration Committee of the Company, Attention:
Administrator, at the address set forth in Article 3. Such notice shall be
deemed given as to the date of delivery or, if delivery is made by mail, as of
the date shown on the postmark on the receipt for registration or certification.
8.10 Applicable Law. This Plan shall be governed and construed in
accordance with the laws of the State of Connecticut.
8.11 Trust Fund. The Company shall be responsible for the payment of all
benefits provided under the Plan. At its discretion, the Company may establish
one or more trusts, with such trustees as the Board or the Committee may
approve, for the purpose of providing for the payment of such benefits. Such
trust or trusts may be irrevocable, but the assets thereof shall be subject to
the claims of the Company's creditors. To the extent any benefits provided under
the Plan are actually paid from any such trust, the Company shall have no
further obligation with respect thereto, but to the extent not so paid, such
benefits shall remain the obligation of, and shall be paid by, the Company.
8.12 Ineligible Participant. Notwithstanding any other provisions of this
Plan to the contrary, if any Participant is determined not to be a "management
or highly compensated employee" within the meaning of ERISA or Regulations
thereunder, such Participant will not be eligible to participate in this Plan
and shall receive an immediate lump-sum payment equal to the amounts standing
credited to his or her Deferral Accounts. Upon such payment, no survivor benefit
or other benefit shall thereafter be payable under this Plan either to the
Participant or any Beneficiary of the Participant.
9
<PAGE>
APPENDIX A
TESIP RESTORATION PLAN
The TESIP Restoration Plan was effective only for 1990. Deferral Accounts
under the TESIP Restoration Plan were converted to Deferral Accounts under The
Travelers TESIP Restoration and Non-Qualified Savings Plan effective January 1,
1991.
Eligible Employees were permitted to make Salary deferrals for the period
from July through December 1990 and were permitted to defer Incentive Awards
paid in 1990. The maximum deferral permitted was 17% of compensation (year-end
1989 Salary plus last paid Incentive Award) minus the TESIP Offset ($10,480 for
1990).
For 1990 the Company contributed to the Deferral Account of a Participant
the following amounts:
(a) Company Matching Contribution. The Company made a matching
contribution of 100% of the amount of compensation the Participant
deferred (up to a maximum of the first 5% of compensation), less the TESIP
Offset of $10,480.
(b) TESIP Restoration Contribution. The Company also made an
additional contribution if participation in the TESIP Restoration Plan
reduced the Participant's Company contribution under TESIP.
The Fixed Income Declared Rate was credited during 1990 on all Deferral
Accounts under the TESIP Restoration Plan.
10
<PAGE>
APPENDIX B
1991 - 1993
o Deferral of up to 50% of salary and up to 100% of incentive plan
award (eg., MIP) on a pre-tax basis.
o Restore matching contributions from The Travelers up to a full 5% of
compensation.
o Earn tax-deferred interest based on either a fixed rate of return or
a simulated equity rate of return, eg., S&P 500 Index.
11
<PAGE>
APPENDIX C
1994 and 1995
o Deferral of up to 50% of salary and up to 100% of eligible incentive
plan awards on a pre-tax basis.
o Restore matching contributions from The Travelers up to 2.5% of
compensation plus a variable matching contribution in the event such
a contribution is made under TESIP.
o Earn tax-deferred interest based on either a fixed rate of return or
a simulated equity rate of return, e.g., S&P 500 Index.
12
<PAGE>
APPENDIX D
Pursuant to section 4.2 of the Plan, the Company allows the tax deferred
rollover of non-qualified balances that had previously been part of Aetna's
Incentive Deferral Plan and Aetna's Supplemental Incentive Savings Plan (SISP)
and will credit to Deferral Accounts any amounts deferred during 1996 and
Company Contributions made pursuant to Aetna's Incentive Deferral Plan and
Aetna's SISP during 1996.
Distribution Elections
For all balances transferred from Aetna's Incentive Deferral plan, the payment
elections that were made under Aetna's Plan will continue to govern the
distribution of those balances.
For all balances transferred from Aetna's SISP, participants will make a payment
election based on choices that are similar to those that existed under Aetna's
Incentive Deferral Plan. The Company reserves the right to require participants
to provide new payment elections consistent with those then available under the
Plan. Elections for payment upon retirement for balances transferred from
Aetna's SISP plan commence by definition under such plan on or after age 62.
13
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.19
<SEQUENCE>3
<DESCRIPTION>EQUITY PARTNERSHIP PLAN
<TEXT>
Exhibit 10.19
================================================================================
SALOMON INC
EQUITY PARTNERSHIP PLAN
FOR
KEY EMPLOYEES
================================================================================
Adopted as of June 6, 1990
Amended and Restated as of January 1, 1996
Unless Otherwise Stated Herein
March 19, 1997
<PAGE>
SALOMON INC
EQUITY PARTNERSHIP PLAN
FOR KEY EMPLOYEES
Page
----
1. Purpose of the Plan......................................................1
2. Definitions..............................................................1
3. Election by a Company to Participate in the Plan.........................9
4. Stock Subject to the Plan................................................9
5. Administration of the Plan..............................................10
6. Eligibility.............................................................10
7. Awards and Rollovers under the Plan.....................................11
(a) Awards.............................................................11
(b) Rollovers..........................................................13
(c) Vesting of Awards and Rollovers....................................14
(d) Simultaneous Occurrence of Realization Event and Termination of
Employment.......................................................17
8. Funding of the Plan.....................................................17
9. Maintenance of Accounts.................................................21
(a) Stock Account......................................................21
(b) Rollover Account...................................................22
(c) Cash Account.......................................................23
10. Long-Term Investment Election...........................................24
11. Payments under the Plan.................................................24
12. Securities Matters......................................................29
<PAGE>
13. Voting and Tender of Salomon Stock......................................30
(a) Voting Rights......................................................30
(b) Tender Rights......................................................31
(c) Tender Prior to Allocation.........................................32
(d) Notices and Information Statements.................................32
(e) Confidentiality of Voting and Tender Directions....................32
14. Adjustment of Accounts in Certain Events................................32
15. Certain Divestitures....................................................33
(a) Company with Publicly Traded Stock That No Longer is a 50%
Affiliate......................................................33
(b) Company with Publicly Traded Stock That Remains a 50% Affiliate ...34
(c) Satisfaction of Obligations After a Divestiture....................35
16. No Special Employment Rights..........................................35
17. Payroll and Withholding Taxes.........................................35
18. Termination and Amendment.............................................36
19. Payments upon the Death of a Participant..............................38
20. Shareholder Approval Required.........................................39
21. Effect of Revocation Event............................................39
22. Miscellaneous.........................................................40
ii
<PAGE>
APPENDIX A................................................................A-1
Award Schedule for 1996 and Thereafter....................................A-1
Award Schedule for 1995...................................................A-2
Award Schedule for Phibro Division Effective 1993 and 1994................A-3
Award Schedule for 1991--1994.............................................A-4
Award Schedule for 1990...................................................A-5
iii
<PAGE>
SALOMON INC
EQUITY PARTNERSHIP PLAN
FOR KEY EMPLOYEES
1. PURPOSE OF THE PLAN
This Equity Partnership Plan for Key Employees is designed to provide
participants, as compensation in respect of past services rendered, with a
continuing long-term investment in common stock of Salomon Inc, the realization
of which will be deferred to a future date. By placing participants in the
position of long-term shareholders of Salomon Inc, participants are expected to
have the same motivations and interests as other shareholders of Salomon Inc,
such as controlling costs (including compensation costs) and seeking to maximize
the return on equity of Salomon Inc and its subsidiaries and affiliates, and are
expected to analyze the activities in which they personally are involved in
terms of the overall benefit of such activities to Salomon Inc and its
affiliates and subsidiaries, as well as the effect that such activities will
have on the participants' individual departments or direct compensation. This
plan is intended to be an unfunded "bonus program" (within the meaning of 29 CFR
Part 2510.3-2(c)) designed primarily to provide deferred bonuses to a select
group of highly compensated or management employees.
2. DEFINITIONS
As used in the Plan, the following definitions apply to the terms indicated
below:
(a) "Accounts" shall mean a Participant's Cash Account, Rollover Account
and Stock Account.
(b) "Affiliate" shall mean any corporation (other than a Company) which is
a member of a "controlled group of corporations" (as that term is defined in
Section 4l4(b) of the Code) of which a Company is a member and any trade or
business (whether or not incorporated) under "common control" (as that term is
defined in Section 414(c) of the Code) with a Company.
(c) "Average Cost Per Share" shall mean a cost per share of Salomon Stock
calculated as follows:
(i) After each purchase (or deemed purchase) of shares made in
connection with or in anticipation of an award under an Equity Partnership
Plan, the Average Cost Per Share shall be recalculated and shall equal (A)
the Total Cost of Net Shares immediately after such purchase, divided by
(B) the total number of Net Shares immediately after such purchase.
<PAGE>
(ii) After each allocation of shares from the Suspense Account in
respect of Salomon Inc's 17.65% contribution obligation with respect to
dividends (or deemed dividends) as provided in Section 8 or under another
Equity Partnership Plan, the Average Cost Per Share shall be recalculated
and shall equal (A) the Total Cost of Net Shares immediately after such
allocation, divided by (B) the total number of Net Shares held immediately
after such allocation.
(iii) Contributions of Salomon Stock to the trusts under the Equity
Partnership Plans by Salomon Inc shall be treated as purchases in
anticipation of awards under the Equity Partnership Plans at the Daily
Value as of the date of the contribution.
(iv) Forfeitures under the Equity Partnership Plans (other than
forfeitures with respect to Rollovers from the Partnership Pool Plan that
are described in Section 7(c)(ii)) shall be treated as purchases for the
Equity Partnership Plans at the Daily Value as of the date of forfeiture
of the number of shares forfeited. Restored forfeitures shall be treated
as allocations as of the forfeiture date.
(v) If, on any date that shares of Salomon Stock are purchased for
the Equity Partnership Plans, any Awards, Rollovers or dividends paid on
Salomon Stock allocated to Participants' Accounts are awaiting investment,
such purchases shall be deemed to be purchases to satisfy such Awards,
Rollovers and dividends, pro rata based on the dollar amounts of such
Awards, Rollovers and dividends. Any shares that are purchased in excess
of the shares necessary to satisfy such uninvested Awards, Rollovers and
dividends shall be held in the Suspense Account and shall be deemed to be
purchased in anticipation of awards under the Equity Partnership Plans.
(vi) Effective as of June 6, 1990, in the event that there are any
shares of Salomon Stock remaining in the Suspense Account on January 1 of
any calendar year that were purchased or deemed to have been purchased in
a prior calendar year, the Average Cost Per Share of such shares shall be
deemed to be the Daily Value on the last trading day immediately preceding
such January 1.
(vii) Shares of Salomon Stock withheld in accordance with Section
17(c) hereof that Salomon Inc directs the Trustee to continue to hold in
the Suspense Account pursuant to Section 17(c) shall be treated as
purchases in anticipation of awards under the Equity Partnership Plans at
the Daily Value on the distribution date with respect to which such shares
were withheld.
(d) "Award" shall mean, with respect to each Participant, an award granted
to such Participant with respect to a calendar year by the Committee pursuant to
Section 7. An Award shall be deemed to have been made with respect to the
calendar year
2
<PAGE>
within which ends the compensation year by reference to which the year-end bonus
related to the Award is calculated and in which a Company would, in the absence
of the Plan, have accrued a compensation expense for accounting purposes for the
cash value of the Award.
(e) "Beneficiary" shall mean the person or entity determined to be a
Participant's beneficiary pursuant to Section 19 hereof.
(f) "Board of Directors" shall mean the Board of Directors of Salomon Inc.
(g) "Cash Account" shall mean (i) a book account maintained by Salomon Inc
reflecting, (A) with respect to tendered shares of Salomon Stock credited to a
Participant's Accounts and (B) with respect to amounts described in Section
11(d) of the Plan, the cash amount to be distributed to a Participant upon a
Realization Event and (ii) an account in the Trust reflecting (A) the
consideration received as a result of tendering shares of Salomon Stock credited
to a Participant's Accounts, adjusted to reflect gains and losses resulting from
the Trustee's investment of such amount and (B) the amount described in Section
11(d) of the Plan.
(h) "Cause" shall mean, when used in connection with the termination of a
Participant's employment, the termination of the Participant's employment by a
Company or an Affiliate on account of (i) the willful violation by the
Participant of (A) any federal or state law, (B) any rule of any Company or
Affiliate or (C) any rule or regulation of any regulatory body to which any
Company or Affiliate is subject, including, without limitation, the New York
Stock Exchange or any other exchange or contract market of which any Company or
Affiliate is a member and the National Association of Securities Dealers, Inc.,
which violation would materially reflect on the Participant's character,
competence or integrity, (ii) a breach by a Participant of the Participant's
duty of loyalty to the Companies and Affiliates in contemplation of the
Participant's termination of the Participant's employment, such as the
Participant's pre-termination of employment solicitation of customers or
employees of any Company or Affiliate or (iii) the Participant's unauthorized
removal from the premises of any Company or Affiliate of any document (in any
medium or form) relating to any Company or Affiliate or the customers of any
Company or Affiliate. Any rights a Company or an Affiliate may have hereunder in
respect of the events giving rise to Cause shall be in addition to the rights
the Company or Affiliate may have under any other agreement with the employee or
at law or in equity. If, subsequent to a Participant's voluntary termination of
employment or involuntary termination of employment without Cause, it is
discovered that the Participant's employment could have been terminated for
Cause, such Participant's employment shall, at the election of the Committee in
its sole discretion, be deemed to have been terminated for Cause.
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(i) "Change in Control" shall mean:
(i) The acquisition by any person (including a group within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than
Salomon Inc or any of its subsidiaries or Berkshire Hathaway, Inc. or any
of its subsidiaries or affiliates (as defined in Rule 12b-2 promulgated
under the Exchange Act), without the prior written approval of the Board
of Directors, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either the then
outstanding shares of Salomon Stock or the combined voting power of
Salomon Inc's then outstanding voting securities in a transaction or
series of transactions not approved by a vote of at least a majority of
the Continuing Directors (as hereinafter defined); or
(ii) A change in the composition of the Board of Directors of
Salomon Inc such that individuals who, as of January 1, 1988, constitute
the Board of Directors of Salomon Inc (generally the "Directors" and as of
January 1, 1988 the "Continuing Directors") cease for any reason to
constitute at least a majority thereof, provided that any person becoming
a Director subsequent to January 1, 1988 whose nomination for election was
approved by a vote of at least a majority of the Continuing Directors
(other than a nomination of an individual whose initial assumption of
office is in connection with an actual or threatened election contest
relating to the election of the Directors of Salomon Inc, as such terms
are used in Rule 14a-11 of Regulation 14A under the Exchange Act) shall be
deemed to be a Continuing Director.
(j) "Code" shall mean the Internal Revenue Code of 1986.
(k) "Committee" shall mean such committee as the Board of Directors shall
appoint from time to time to administer the Plan. The Committee shall consist of
two or more persons, each of whom shall be (i) prior to August 15, 1996, a
"disinterested person" and (ii) on or after August 15, 1996, a "non-employee
director," in each case within the meaning of Rule 16b-3 promulgated under
Section 16 of the Exchange Act.
(1) "Companies" shall mean Salomon Inc and its subsidiaries and affiliates
that have adopted the Plan pursuant to Section 3(a) hereof, while such companies
remain subsidiaries or affiliates of Salomon Inc.
(m) "Company" shall mean Salomon Inc or any of its subsidiaries or
affiliates that have adopted the Plan pursuant to Section 3(a) hereof, while any
such company remains a subsidiary or affiliate of Salomon Inc.
(n) "Compensation" shall mean, with respect to a calendar year, the sum of
the dollar amounts of an employee's (i) base salary, (ii) night differential,
(iii) overtime,
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(iv) year-end bonus, (v) effective with respect to Awards granted on or January
1, 1997, any bonus payable pursuant to a special incentive compensation
agreement or arrangement and (vi) Award, resulting from services rendered to the
Companies, before giving effect to (A) any "compensation reduction election"
under the Retirement Plan (as that term is defined in the Retirement Plan) or to
any similar compensation reduction election made in connection with a plan
within the meaning of Code Section 401(k), (B) any compensation reduction
election made in connection with a "cafeteria plan" within the meaning of Code
Section 125 and (C) any compensation reduction election made in connection with
an "employee stock purchase plan" within the meaning of Code Section 423.
Compensation shall not include the amount of any 17.65% contribution made
pursuant to Section 8 hereof or the amount of any up front or "sign-on" bonus
paid to any individual.
(o) "Daily Value" shall mean, with respect to a share of Salomon Stock,
the average of the high and low reported sales price regular way per share of
Salomon Stock on the New York Stock Exchange Composite Tape, or if Salomon Stock
is not traded on such stock exchange, the principal national securities exchange
on which Salomon Stock is traded, or if not so traded, the mean between the
highest bid and lowest asked quotation on the over-the-counter market as
reported by the National Quotations Bureau, or any similar organization, on any
relevant date, or if not so reported, as determined by the Committee in a manner
consistently applied.
(p) "Disability" shall mean any physical or mental condition that would
qualify a Participant for a disability benefit under the long-term disability
plan maintained by any Company and applicable to the Participant.
(q) "Equity Partnership Plans" shall mean the Plan, the Salomon Inc Equity
Partnership Plan for Professional and Other Highly Compensated Employees and any
other equity plan maintained by any Company and designated by the Committee as
an Equity Partnership Plan.
(r) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
(s) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(t) "Investment Period" shall mean, with respect to an Award or a Rollover
from a Prior Incentive Plan, the later of (i)(A) with respect to Awards or such
Rollovers made prior to January 1, 1996, the expiration of the 5-year period
beginning on the date as of which such Award is granted or such Rollover is made
and (B) with respect to Awards made on or after January 1, 1996, the expiration
of the 3-year period beginning on the date as of which such Award is granted or
(ii) the expiration of any
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period determined pursuant to any Long-Term Investment Election made by a
Participant. In addition to the foregoing, the Investment Period with respect to
an Award or a Rollover from a Prior Incentive Plan shall end upon the
Participant's Permissive Retirement that occurs prior to the date on which the
Investment Period otherwise would end if the Participant so elects in writing
within 45 days after the date such Award is granted or such Rollover is made or
simultaneously with the filing of a Long-Term Investment Election with respect
to such Award or Rollover. The Investment Period of a Rollover from another
Equity Partnership Plan shall be determined as if such Rollover were an Award
under the Plan as of the date on which the related award was granted under such
other Equity Partnership Plan.
(u) "Long-Term Investment Election" shall mean a Participant's irrevocable
written election pursuant to Section 10 hereof.
(v) "Minimum Eligible Compensation" shall mean: (i) $300,000 with respect
to 1990; (ii) effective as of January 1, 1991, with respect to each calendar
year after 1990 and before 1995, 1.5 multiplied by the compensation limitation
in effect under Section 401(a)(17) of the Code for the immediately preceding
calendar year; and (iii) with respect to each calendar year beginning in 1995
and thereafter, 2.4 multiplied by the compensation limitation in effect under
Section 401(a)(17) for the immediately preceding calendar year.
(w) "Net Shares" shall mean the number of shares purchased or deemed to
have been purchased with respect to or in anticipation of Awards and awards
under the other Equity Partnership Plans, excluding purchases or deemed
purchases with respect to dividends paid on Salomon Stock credited to
Participants' Accounts, less the number of shares credited to Participants'
Accounts (and not theretofore forfeited) from the Suspense Account.
(x) "Participant" shall mean a key employee, including an officer or
director, of any Company who is determined by the Committee to be eligible to
participate in the Plan and who is designated a Participant pursuant to Section
6 hereof.
(y) "Partnership Pool Plan" shall mean the 1988 Managing Directors'
Partnership Pool.
(z) "Permissive Retirement" shall mean a Participant's termination of
employment with the Companies and Affiliates, other than by reason of death or
Disability and other than for Cause, on or after the earliest to occur of: (i)
the December 31st following the date the Participant attains age 55 and
completes 10 years of service determined pursuant to the Retirement Plan; (ii)
the Participant's 65th birthday; (iii) the December 31st following the date the
Participant completes 25 years of service determined pursuant to the Retirement
Plan; or (iv) the later of the date the
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Participant has completed at least 10 years of service determined pursuant to
the Retirement Plan and the December 31st following the date the Participant
attains an age which, when added to the Participant's number of years of service
determined pursuant to the Retirement Plan, equals 75. The Committee may
consider an extended leave of absence to be a termination of employment even
though the Participant may render limited services to the Companies or
Affiliates during such leave.
(aa) "Plan" shall mean the Salomon Inc Equity Partnership Plan for Key
Employees.
(ab) "Prior Incentive Plan" shall mean the Partnership Pool Plan or the
Special Bonus Plan.
(ac) "Realization Event" shall mean, with respect to an Award or a
Rollover, the first to occur of (i) the expiration of the Investment Period with
respect to such Award or Rollover, (ii) the occurrence of a Change in Control,
(iii) the termination of the Plan pursuant to Section 18 hereof, (iv) the
Participant's termination of employment with a Company or Affiliate as a result
of the Participant's Disability or (v) the Participant's death.
(ad) "Retirement Plan" shall mean the Salomon Inc Retirement Plan, as
amended from time to time, and its predecessors and successors.
(ae) "Revocation Event" shall mean a determination by the Board of
Directors in its sole discretion that any of the following has occurred or is
likely to occur:
(i) A determination by the Department of Labor or a court of
competent jurisdiction that the assets of the Trust are subject to Part 4
of Subtitle B of Title I of ERISA.
(ii) A determination by the Department of Labor or a court of
competent jurisdiction that the Plan is a "pension plan" (within the
meaning of Section 3(2) of ERISA) subject to Parts 2, 3 and 4 of Subtitle
B of Title I of ERISA.
(iii) A determination by the Internal Revenue Service or a court of
competent jurisdiction that any amount deposited in the Trust is taxable
to any Participant or Beneficiary prior to the distribution to the
Participant or Beneficiary of such amount.
(iv) A determination by Salomon Inc's independent public accountants
that the accounting expense to the Companies of maintaining the Accounts
under the Plan (other than a Participant's Accounts with respect to an
Award credited with 100 shares of Salomon Stock or less that may be
distributed in the form of
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cash) is based on a value of the shares of Salomon Stock other than such
value (A) on the date shares of Salomon Stock are acquired by the Trust or
(B) on the date the shares of Salomon Stock are credited to a
Participant's Accounts.
(af) "Rollover" shall mean an amount transferred to the Plan from another
Equity Partnership Plan or from a Prior Incentive Plan pursuant to Section 7(b).
(ag) "Rollover Account" shall mean a book account maintained by Salomon
Inc and an account maintained in the Trust reflecting, with respect to a
Rollover, the number of shares of Salomon Stock to be distributed to a
Participant upon a Realization Event.
(ah) "Rollover Election" shall mean a written election by a Participant to
transfer to the Plan amounts credited to the Participant's accounts from another
Equity Partnership Plan or a Prior Incentive Plan pursuant to Section 7(b).
(ai) "Salomon Stock" shall mean the common stock of Salomon Inc or any
successor thereto.
(aj) "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.
(ak) "Special Bonus Plan" shall mean the Salomon Brothers Inc Special
Bonus Plan, adopted effective as of January 1, 1986.
(al) "Stock Account" shall mean a book account maintained by Salomon Inc
and an account maintained in the Trust reflecting, with respect to each Award,
the number of shares of Salomon Stock to be distributed to each Participant upon
a Realization Event.
(am) "Suspense Account" shall mean an account in the Trust in which
unallocated shares of Salomon Stock are held.
(an) "Total Cost of Net Shares" immediately after a purchase (or deemed
purchase) made in connection with or in anticipation of an award under the
Equity Partnership Plans or an allocation shall mean the Average Cost Per Share
immediately, preceding the purchase or allocation, as the case may be,
multiplied by the number of Net Shares immediately preceding the purchase or
allocation, as the case may be (i) in the case of a purchase, plus (A) the
number of such shares purchased multiplied by (B) the amount paid per share,
excluding brokerage commissions, for such shares or (ii) in the case of an
allocation, minus (A) the number of shares allocated multiplied by (B) the Daily
Value on the date of the allocation.
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(ao) "Trust" shall mean any trust established in connection with the Plan.
(ap) "Trustee" shall mean the trustee of the Trust.
(aq) "Voluntary Award Election" shall mean, with respect to a Participant
described in Section 7(a)(iii), an election made pursuant to Section 7(a)(iii)
to reduce the Participant's Compensation by a percentage of such Compensation
(determined without reference to the Voluntary Award Election) and have the
amount by which the Participant's Compensation is so reduced converted to an
Award.
3. ELECTION BY A COMPANY TO PARTICIPATE IN THE PLAN
(a) By appropriate corporate action, subject to the approval of the Board
of Directors, any subsidiary or affiliate of Salomon Inc may adopt the Plan.
Such subsidiary or affiliate may recommend to the Committee which of its
employees should be eligible to participate in the Plan.
(b) By appropriate corporate action, a Company may terminate its
participation in the Plan.
(c) No affiliate or subsidiary of Salomon Inc that participates in the
Plan shall have any power with respect to the Plan except as specifically
provided in the Plan.
(d) As a condition of participation in the Plan, Salomon Inc shall require
any subsidiary or affiliate to enter into an agreement or agreements to obligate
such subsidiary or affiliate to pay to Salomon Inc or to the Trust, in cash, the
appropriate value, as determined by the Board of Directors, of any Salomon Stock
that Salomon Inc contributes to the Trust in respect of the Participants
employed by such subsidiary or affiliate. In addition, Salomon Inc may require
any subsidiary or affiliate to enter into such other agreement or agreements as
it shall deem necessary to obligate such subsidiary or affiliate to reimburse
Salomon Inc or the Trust for any other amounts paid hereunder, directly or
indirectly, in respect of such subsidiary's or affiliate's employees.
4. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 14 hereof, shares of Salomon
Stock may be allocated to Participants' accounts under the Equity Partnership
Plans in an amount that, in the aggregate since the inception of the Equity
Partnership Plans in 1990, does not exceed 40,000,000 shares. In the event that
any shares of Salomon Stock allocated to a Participant's accounts under the
Equity Partnership Plans are
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forfeited for any reason, the number of shares of Salomon Stock forfeited shall
again be available for allocation under the Equity Partnership Plans.
5. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee. The Committee shall have
full authority, consistent with the Plan, to administer the Plan, including
authority to interpret and construe any provision of the Plan and to adopt such
rules and regulations for administering the Plan and such forms of elections as
it may deem necessary or appropriate. Decisions of the Committee shall be final
and binding on all parties. Committee decisions shall be made by a majority of
its members present at a meeting (which meeting may be held by telephone) at
which a quorum is present. Any decision reduced to writing and signed by all of
the members of the Committee shall be as fully effective as if it had been made
at a meeting duly held. All expenses of the Plan shall be borne by Salomon Inc.
No member of the Committee shall be liable for any action, omission or
determination relating to the Plan, and the Companies shall indemnify and hold
harmless each member of the Committee and each other director or employee of the
Companies to whom any duty or power relating to the administration or
interpretation of the Plan has been delegated, against any cost, expense
(including counsel fees, which fees shall be paid as incurred) or liability
(including any sum paid in settlement of a claim with the approval of the Board
of Directors) arising out of any action, omission or determination relating to
the Plan, if such action, omission or determination was taken or made by such
member, director or employee in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Companies, and
with respect to any criminal action or proceeding, such member had no reasonable
cause to believe his conduct was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the Companies, and, with respect
to any criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
6. ELIGIBILITY
(a) Effective as of January 1, 1991, the persons who shall be eligible to
participate in the Plan with respect to a calendar year shall be such employees
or classes of employees of the Companies (i) (A) whose principal work location
during such calendar year is within the United States of America or (B) who are
citizens of the United States of America, whose principal work location during
such calendar year is outside of the United States of America and who do not
participate in a plan maintained
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by their employer during such calendar year that the Committee determines to be
comparable to the Plan, (ii)(A) with respect to an individual who did not
participate in the Plan in the immediately preceding year, whose Compensation
with respect to such calendar year is at least equal to the Minimum Eligible
Compensation or (B) with respect to an individual who did participate in the
Plan in the immediately preceding year, whose Compensation with respect to such
calendar year is at least equal to the compensation limitation under Section
401(a)(17) of the Code and who would have been eligible for an Award under the
Salomon Inc Equity Partnership Plan for Professional and Other Highly
Compensated Employees for such calendar year and (iii) who are designated as
eligible to participate in the Plan by the Committee.
(b) Notwithstanding Paragraph (a) of this Section, the Committee may from
time to time add or exclude from participation one or more individuals or
classes of individuals. Each eligible individual shall become a Participant
effective on the date as of which the individual (or class of individuals
including such individual) is designated as a Participant.
7. AWARDS AND ROLLOVERS UNDER THE PLAN
(a) Awards
(i) Subject to Paragraphs (ii) and (iv) of this Section, the
Committee shall grant Awards to Participants pursuant to the schedule
attached hereto as Appendix A. The Committee may from time to time and in
its sole discretion amend the schedule contained in Appendix A. Any such
schedule shall provide for Awards based on a percentage of a Participant's
Compensation (or, in the Committee's discretion, with respect to any
Participant whose year-end bonus constitutes "performance-based
compensation" under Section 162(m)(4)(C) of the Code, such Participant's
year-end bonus) with respect to a calendar year, and will reduce the
Participant's cash bonus that would otherwise be payable with respect to
such calendar year.
(ii) Notwithstanding the schedule attached hereto as Appendix A or
any amendment thereto, subject to Section 7(a)(iii), no Award to a
Participant with respect to a calendar year will exceed the lesser of
(A)(1) for the 1991 calendar year, 50% of the Participant's Compensation
for such calendar year and (2) for each calendar year after 1991, 50% of
the Participant's Compensation or such greater percentage of Compensation
as shall be determined by the Committee in its sole discretion, (B) the
dollar amount of the bonus (excluding the amount of any up-front or
sign-on bonus) payable to such Participant with respect to such calendar
year, before reduction for any Award with respect to such calendar year,
but reduced by the portion of the bonus (other than an up-front or sign-on
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bonus) contributed by the Companies pursuant to the Participant's salary
reduction election to (1) the Retirement Plan or any similar plan, (2) a
"cafeteria plan" within the meaning of Code Section 125 or (3) an
"employee stock purchase plan" within the meaning of Code Section 423 or
(C) any additional limit determined by the Committee and included as part
of an Award schedule attached as Exhibit A.
(iii) Effective as of January 1, 1994, any Participant whom the
Committee determines may be a "covered employee" within the meaning of
Section 162(m) of the Code in a calendar year (other than a Participant
whose year-end bonus constitutes "performance-based compensation" and
whose Award under Section 7(a)(i) is determined solely on the basis of the
Participant's year-end bonus) shall be permitted to receive an additional
Award for a calendar year based on the Participant's Voluntary Award
Election for such calendar year. Each Voluntary Award Election (A) shall
state the percentage of the Participant's Compensation (determined without
reference to the Voluntary Award Election) by which the Participant's
Compensation shall be reduced and converted to an Award hereunder, (B)
shall be made in such form as may be required by the Committee and (C)
shall be delivered to the Committee no later than December 31 of the
calendar year immediately preceding the calendar year for which the
Voluntary Award Election is made (or, with respect to Voluntary Award
Elections for the 1994 calendar year, no later than the date 30 days after
the Plan, as amended and restated as of January 1, 1994, is approved by
Salomon Inc's shareholders). Notwithstanding any Voluntary Award Election,
the amount by which the Participant's Compensation shall be reduced and
which shall be converted to an Award hereunder shall not exceed the lesser
of (1) the excess, if any, of (I) the Participant's Compensation after
reduction for any Award granted pursuant to Section 7(a)(i) over (II) $1
million, and (2) the dollar amount of the bonus (excluding the amount of
any up-front or sign-on bonus) payable to such Participant with respect to
such calendar year, after reduction for any Award granted pursuant to
Section 7(a)(i) with respect to such calendar year and further reduced by
the portion of the bonus (other than an up-front or sign-on bonus)
contributed by the Companies pursuant to the Participant's salary
reduction election to (A) the Retirement Plan or any similar plan, (B) a
"cafeteria plan" within the meaning of Code Section 125 or (C) an
"employee stock purchase plan" within the meaning of Code Section 423.
(iv) Notwithstanding the foregoing, effective as of January 1, 1991
with respect to calendar years beginning prior to January 1, 1996, unless
the Committee determines otherwise in its sole discretion, the following
individuals
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shall not be entitled to receive an Award for a calendar year (whether or
not Awards already have been allocated to Participants for such calendar
year):
(A) an individual who, prior to December 31 of such calendar
year, has notified the applicable Company or Affiliate that the
individual intends to terminate employment with the Companies and
Affiliates effective in such calendar year or the next succeeding
calendar year;
(B) an individual who, prior to December 31 of such calendar
year, has been notified by the applicable Company or Affiliate that
the individual's employment with the Companies and Affiliates will
be terminated effective in such calendar year or the next succeeding
calendar year; or
(C) an individual whose employment with the Companies and
Affiliates terminates prior to the end of such calendar year.
(v) Notwithstanding the foregoing, effective as of January 1, 1996,
unless the Committee otherwise determines in its sole discretion, an
individual who, prior to December 31 of such calendar year, has been
notified by the applicable Company or Affiliate that the individual's
employment with the Companies and Affiliates will be terminated effective
in such calendar year or the next succeeding calendar year shall not be
entitled to receive an Award for a calendar year (whether or not Awards
already have been allocated to Participants for such calendar year). An
individual who, prior to December 31 of such calendar year, has notified
the applicable Company or Affiliate that the individual intends to
terminate employment with the Companies and Affiliates effective in such
calendar year or the next succeeding calendar year shall receive an Award
for the calendar year unless otherwise determined by the Committee in its
sole discretion (which determination may be made after Awards already have
been allocated to Participants for such calendar year).
(b) Rollovers
(i) A Participant shall be permitted to make a Rollover with respect
to a percentage, up to 100%, of the amount credited to such Participant's
accounts under the Partnership Pool Plan as of December 31, 1990 by
delivering to the Committee, on or before December 31, 1990, a Rollover
Election indicating the percentage of each such amount to be rolled over.
(ii) A Participant shall be permitted to make a Rollover with
respect to a percentage, up to 100%, of the amount credited to such
Participant's accounts under the Special Bonus Plan as of December 31,
1990 by delivering to the
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Committee, on or before December 31, 1990, a Rollover Election indicating
the percentage of each such amount to be rolled over.
(iii) To the extent a Participant elects to roll over a portion of
the Participant's accounts under the Partnership Pool Plan or the Special
Bonus Plan, the Participant's rights under the Plan with respect to any
such amount shall be in lieu of all rights the Participant would have had
under either such Prior Incentive Plan.
(iv) Upon becoming eligible to participate in the Plan, all amounts
credited to the Participant's accounts under the Equity Partnership Plans
(other than the Plan) shall be transferred to the Plan as a Rollover.
(v) No Rollover shall be given effect with respect to a Participant
whose employment with the Companies terminates prior to the effective date
of such Rollover.
(c) Vesting of Awards and Rollovers
(i) Subject to Sections 7(a)(iv) and 11, with respect to Awards
granted and Rollover Elections made prior to January 1, 1996, each Award
and Rollover shall be 100% vested in each Participant, except as follows:
(A) a Participant shall forfeit any Award or Rollover if the
Participant's employment with a Company or an Affiliate is (or is
deemed to have been) terminated by such Company or Affiliate for
Cause on or prior to the Realization Event for that Award or
Rollover;
(B) a Participant shall forfeit any shares of Salomon Stock
attributable to a Rollover from the Partnership Pool Plan if, prior
to the earlier of January 1, 1992 and the Realization Event for that
Rollover, the Participant's employment with the Companies and
Affiliates terminates (whether or not for Cause); and
(C) a Participant shall forfeit 20% of the shares of Salomon
Stock attributable to a Rollover from the Special Bonus Plan if,
prior to the earliest of (1) January 1, 1992, (2) the date the
Participant would be entitled to Permissive Retirement as a result
of the criteria described in Sections 2(z)(i), (ii) or (iii), (3)
the date the Participant has completed 10 years of service under the
Retirement Plan in the capacity of Managing Director and/or as a
General Partner of Salomon Brothers Inc, regardless of the
Participant's age at the time of termination and (4) the Realization
Event for that Rollover, the Participant's employment with the
Companies
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and Affiliates terminates (whether or not for Cause), provided,
however, that a Participant who otherwise would achieve full vesting
as a result of Clauses (2) or (3) of this Paragraph nevertheless
shall forfeit 20% of the shares of Salomon Stock attributable to a
Rollover from the Special Bonus Plan if the Participant joins a
"competitor organization" prior to the Realization Event for that
Rollover.
(ii) Subject to Sections 7(a)(iv), 7(a)(v) and 11, with respect to
Awards granted on or after January 1, 1996, each Award and Rollover shall
be subject to forfeiture only as follows:
(A) A Participant shall forfeit the entire amount attributable
to any Award or Rollover if the Participant's employment is (or is
deemed to have been) terminated by such Company or Affiliate for
Cause on or prior to the Realization Event for that Award or
Rollover;
(B) Subject to Paragraph (ii)(A), a Participant shall forfeit
a portion of the amount attributable to any Award or Rollover (other
than an Award resulting from a Voluntary Award Election) as follows
in the event the Participant voluntarily terminates employment with
the Company or Affiliate and joins a "competitor organization" prior
to the Realization Event for the Award or Rollover (without taking
into account any Long-Term Investment Election):
(I) if the termination occurs prior to the expiration of one year
after the Award or (or, in the case of a Rollover, the award
to which the Rollover was related) was granted, the
Participant shall forfeit 100% of the amount attributable to
the Award or Rollover;
(II) if the termination occurs on or after the expiration of one
year, but prior to the expiration of two years after the Award
(or, in the case of a Rollover, the award to which the
Rollover was related) was granted, the Participant shall
forfeit 73-1/3% of the amount attributable to the Award or
Rollover; and
(III) if the termination occurs on or after the expiration of the
two years, but prior to the expiration of three years after
the Award (or, in the case of a Rollover, the award to which
the Rollover was related) was granted, the Participant shall
forfeit 46-2/3% of the amount attributable to the Award or
Rollover;
(C) Subject to Paragraphs (ii)(A), (ii)(B) and (ii)(D) of this
Section, a Participant shall forfeit 20% of the amount attributable
to an
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Award or Rollover (other than an Award resulting from a Voluntary
Award Election) if, prior to the Realization Event for the Award or
Rollover (without taking into account any Long-Term Investment
Election), the Participant's employment with the Companies and
Affiliates terminates for any reason;
(D) Subject to Paragraph (ii)(A) of this Section, a
Participant whose employment with a Company or an Affiliate is
involuntarily terminated as a result of a downsizing or general
reduction in work force at the Company or Affiliate prior to the
Realization Event for an Award or Rollover (without taking into
account any Long-Term Investment Election) shall forfeit a portion
of the amount attributable to the Award or Rollover (other than an
Award resulting from of a Voluntary Award Election) as follows:
(I) if the termination occurs prior to the expiration of one year
after the Award (or, in the case of a Rollover, the award to
which the Rollover was related) was granted, the Participant
shall forfeit 20% of the amount attributable to the Award or
Rollover;
(II) if the termination occurs on or after one year, but prior to
the expiration of two years after the Award (or, in the case
of a Rollover, the award to which the Rollover was related)
was granted, the Participant shall forfeit 13-1/3% of the
amount attributable to the Award or Rollover; and
(III) if the termination occurs on or after two years, but prior to
the expiration or three years after the Award (or, in the case
of a Rollover, the award to which the Rollover was related)
was granted, the Participant shall forfeit 6-2/3% of the
amount attributable to the Award or Rollover.
Except as provided in this Section 7(c)(ii) and Section 11, a Participant shall
not forfeit any portion of the balance credited to the Participant's Accounts
attributable to Awards (or, in the case of a Rollover, the award to which the
Rollover was related) made on or after January 1, 1996.
(iii) For purposes of this Section 7(c), whether a participant's
termination of employment shall be considered voluntary or involuntary and
whether or not a termination is deemed to be as a result of a downsizing
or general reduction in work force shall be determined by Salomon Inc in
its sole discretion. For purposes of this Section 7(c), the term
"competitor organization" shall mean an organization
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that is determined by the Committee to be a competitor of Salomon Inc
and/or its Affiliates.
(iv) In the case of any Participant who forfeits all or a portion of
their Account by reason of Section 7(c)(ii)(B), (C) or (D) and who again
becomes employed by a Company or an Affiliate within a reasonable time
determined by the Committee, the Committee may, in its sole discretion,
elect to restore to the Participant's Accounts part or all of the amounts
forfeited.
(d) Simultaneous Occurrence of Realization Event and Termination of
Employment
In the event of the simultaneous occurrence of a Realization Event
described in Section 2(ac)(iv) or 2(ac)(v) with respect to a Rollover from the
Partnership Pool Plan or the Special Bonus Plan and the termination of the
Participant's employment with the Companies and Affiliates, for purposes of
determining whether a Participant will forfeit any amount of such Rollover
pursuant to Section 7(c)(i), such Realization Event shall be deemed to have
occurred prior to such termination of the Participant's employment.
8. FUNDING OF THE PLAN
The Plan shall be unfunded. Benefits under the Plan shall be paid from the
general assets of Salomon Inc. Salomon Inc shall establish the Trust, which
shall be intended to be a "grantor trust" within the meaning of Section 671 of
the Code, pursuant to a trust agreement, to assist Salomon Inc in meeting its
obligations hereunder. Such trust agreement shall provide that the Trust shall
be invested primarily in Salomon Stock.
The trust agreement creating the Trust shall contain procedures to the
following effect:
(a) In the event of the insolvency of any Company, the assets of the Trust
shall be available to pay the claims of any creditor of such Company to whom a
distribution may be made in accordance with state and federal bankruptcy laws. A
Company shall be deemed to be "insolvent" if such Company is subject to a
pending proceeding as a debtor under the Federal Bankruptcy Code (or any
successor federal statute) or any state bankruptcy code. In the event a Company
becomes insolvent, the Board of Directors and the Chief Executive Officer of
Salomon Inc shall notify the Trustee of the event as soon as practicable. Upon
receipt of such notice, or if the Trustee receives other written allegations of
such Company's insolvency from a third party considered by the Trustee to be
reliable and responsible, the Trustee shall cease making payments of benefits
from the assets of the Trust, shall hold the assets in the Trust for the benefit
of such Company's creditors and shall take such steps as are necessary to
determine within a reasonable
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period of time whether such Company is insolvent. In making such determination,
the Trustee may rely upon a certificate of the Board of Directors and the Chief
Executive Officer of Salomon Inc or a determination by a court of competent
jurisdiction that such Company is or is not insolvent. In the case of the
Trustee's determination of such Company's insolvency, the Trustee will deliver
assets of the Trust to satisfy claims of such Company's creditors pursuant to a
final order of a court of competent jurisdiction.
(b) The assets of the Trust shall be available to pay any claim or claims
of any judgment creditor or judgment creditors of any Company to the extent such
claim or claims are then payable and the Company otherwise shall fail to pay
such claim or claims. The Board of Directors and the Chief Executive Officer of
Salomon Inc shall notify the Trustee as soon as practicable in the event of any
such failure of any Company to pay a judgment creditor. Upon receipt of such
notice, or if the Trustee receives other written allegations of any Company's
such failure to pay a judgment creditor or judgment creditors from a third party
considered by the Trustee to be reliable and responsible, the Trustee shall, to
the extent of such failure, hold the assets of the trusts under the Equity
Partnership Plans for the benefit of such judgment creditor or judgment
creditors and shall take such steps as are necessary to determine within a
reasonable period of time whether such creditors are entitled to payment. In
making such determination, the Trustee may rely upon a certificate of the Board
of Directors and the Chief Executive Officer of Salomon Inc or a determination
by a court of competent jurisdiction that such creditors are or are not entitled
to payment. In the case of the Trustee's determination of any such Company's
failure to pay a judgment creditor or judgment creditors, the Trustee will
deliver assets of the trusts under the Equity Partnership Plans to satisfy
claims of such Company's judgment creditors as directed pursuant to a final
order of a court of competent jurisdiction. In the event that the Trustee is
required to hold any assets of the trusts under the Equity Partnership Plans for
the benefit of any judgment creditor, Participants' Accounts shall be ratably
reduced by such amount.
(c) In the event the Trustee ceases making payments of benefits as a
result of a Company's insolvency, the Trustee shall resume making payments of
benefits only after the Trustee has determined that no Company is then insolvent
or upon receipt of an order of a court of competent jurisdiction requiring the
payment of benefits. In the event the Trustee holds any assets in the trusts
under the Equity Partnership Plans for the benefit of a judgment creditor of a
Company, the Trustee shall, if the Trustee determines that no Company then owes
any such amount to a judgment creditor, allocate the then remaining amounts that
had been held for the benefit of any such judgment creditor to the Participants'
Accounts that were reduced, pro rata in proportion to the excess of the
reduction in each such Participant's Accounts over the amounts paid by Salomon
Inc to each such Participant as a result of such reduction. No Participant shall
receive a restoration that exceeds the amount of the reduction
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together with the earnings that would have accrued had no reduction been
effected, less amounts paid to the Participant by Salomon Inc as a result of the
reduction. Notwithstanding the provisions of this Section 8(c), the Trustee
shall restore Participants' Accounts in accordance with an order of a court of
competent jurisdiction. In the event the amount available for restoration
exceeds the amount required to be restored to Participants' Accounts, such
excess shall be allocated to the Suspense Account and shall be treated as a
purchase for the Plans at the Daily Value as of the date of such allocation. In
making any determination under this Section, the Trustee may rely upon a
certificate of the Board of Directors and the Chief Executive Officer of Salomon
Inc.
(d) The Trustee shall reinvest all dividends paid on Salomon Stock held in
the Trust in Salomon Stock as follows:
(i)(A) Subject to Paragraph (d)(i)(B) of this Section, solely with
respect to Awards and Rollovers made prior to January 1, 1996, as soon as
practicable after the payment date for dividends paid (or deemed paid) on
Salomon Stock credited (or deemed to be credited) to Participants'
Accounts, other than Salomon Stock credited to Participants' Rollover
Accounts with respect to a Rollover from a Prior Incentive Plan, Salomon
Inc shall contribute to the Trust, as compensation to Participants, an
amount equal to 17.65% of such dividends (or deemed dividends) (less
required withholding taxes, if any). As soon as practicable after receipt
of such dividends (or deemed dividends) and any such 17.65% contribution,
the Trustee shall use such dividends (or deemed dividends) and
contribution to purchase Salomon Stock. With respect to Awards and
Rollovers made on or after January 1, 1996, no such 17.65% contribution
shall be required.
(B) If and to the extent that the Committee elects by notice to the
Trustee, Salomon Inc's 17.65% contribution obligation shall be satisfied
out of the Suspense Account. Effective as of January 1, 1991, if the
Committee makes such an election, the contribution obligation shall be
satisfied (1) first from the dividends paid on shares of Salomon Stock
held in the Suspense Account and (2) second from shares of Salomon Stock
held in the Suspense Account, based on the Daily Value of the shares on
the relevant payment date. Any such share shall be deemed to have been
purchased at such Daily Value for allocation purposes.
(C) Shares of Salomon Stock purchased or deemed purchased pursuant
to this Section 8(d)(i) shall be allocated to the Participant's Accounts
with respect to which they were purchased.
(ii) Subject to Paragraph (d)(iv) of this Section, as soon as
practicable after the payment date for dividends paid on Salomon Stock
credited to Participants' Rollover Accounts as of the record date for such
dividends with respect to a
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Rollover from a Prior Incentive Plan, the Trustee shall use the amount of
such dividends to purchase Salomon Stock. Shares of Salomon Stock
purchased pursuant to this Section 8(d)(ii) shall be allocated to the
Participant's Rollover Account with respect to which they were purchased.
(iii) Subject to Paragraph (d)(iv) of this Section, as soon as
practicable after receipt of dividends paid on Salomon Stock held in the
Suspense Account, the Trustee shall use the amount of such dividends to
purchase Salomon Stock. Shares of Salomon Stock purchased pursuant to this
Section 8(d)(iii) (other than with dividends used to satisfy Salomon Inc's
contribution obligation pursuant to Paragraph (d)(i)(B)) shall be held in
the Suspense Account.
(iv) (A) Notwithstanding the foregoing, effective as of October 12,
1995, the Committee may, in its sole discretion, elect by notice to the
Trustee to direct the Trustee to satisfy allocations in respect of
dividends paid on shares of Salomon Stock credited to Participants'
Accounts out of shares of Salomon Stock held in the Suspense Account based
on the Daily Value of Salomon Stock on the dividend payment date. In such
a case, the dividends paid on shares allocated to a Participant's Stock
Account shall be transferred to the Suspense Account.
(B) To the extent the Committee elects to satisfy allocations under
the Equity Partnership Plans in respect of dividends paid on shares of
Salomon Stock credited to Participants' Accounts out of shares of Salomon
Stock held in the Suspense Account or otherwise at the election of the
Committee, dividends paid on Salomon Stock held by the Trusts shall not be
reinvested in Salomon Stock but instead shall be held in the Suspense
Account and, unless the Board of Directors otherwise directs the Trustee,
shall be invested in accordance with the investment guidelines applicable
to assets held in the Trusts and credited to a Participant's Cash Account.
(e) Notwithstanding any other provision hereunder, Salomon Inc may, at any
time, by notice to the Trustee, substitute for part or all of the assets held by
the Trust other assets of equal fair market value at the time of such
substitution. The fair market value of any shares of Salomon Stock being
substituted shall be the Daily Value of such shares of Salomon Stock on the day
as of which the substitution is to be effected. The Trustee shall distribute to
Salomon Inc the assets to be substituted as soon as practicable after receipt of
a notice of substitution, but in no case later than 7 days thereafter, provided,
however, that in the event Salomon Inc elects to substitute Salomon Stock held
in the Trust within 90 days prior to the record date of a meeting of the
shareholders of Salomon Inc or on or after the commencement of a tender offer
with respect to Salomon Stock, the Trustee shall continue to hold the Salomon
Stock to be substituted and shall make voting decisions at such meeting and
shall make tender decisions with respect to such Salomon Stock pursuant to
Section 13 of the Plan. As
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soon as practicable after the conclusion of such meeting or the expiration of
such tender offer, as the case may be, the Trustee shall distribute such shares
of Salomon Stock from the Trust to Salomon Inc.
Notwithstanding the foregoing, the Committee shall be permitted to modify
or eliminate the provisions described in Sections 8(a), (b), (c), (d) and (e) if
and to the extent it determines that such action is appropriate based on advice
of counsel.
9. MAINTENANCE OF ACCOUNTS
(a) Stock Account
(i) If, on November 30 of any calendar year, the number of shares
held in the Suspense Account is at least equal to (A) with respect to
Awards granted for the 1990 calendar year, 80% of the amount of shares
necessary to satisfy the total amount of Awards granted for such calendar
year and (B) with respect to Awards granted for each calendar year
thereafter, 90% of the amount of shares necessary to satisfy the total
amount of Awards granted for such calendar year, each Participant's Stock
Account shall be credited with a number of shares of Salomon Stock equal
to the dollar amount of such Participant's Award divided by the product of
(A) with respect to Awards granted prior to January 1, 1996, .85
multiplied by the Average Cost Per Share of Salomon Stock on November 30
of the calendar year for which the Award was granted to such Participant,
and (B) with respect to Awards granted on or after January 1, 1996, .80
multiplied by the Average Cost Per Share of Salomon Stock on November 30
of the calendar year for which the Award was granted to such Participant.
In the event that on any such November 30 the number of shares held in the
Suspense Account is less than 80% or 90%, as the case may be, of the
number of shares necessary to satisfy the total amount of Awards granted
for such calendar year, each Participant's Stock Account shall be credited
with a number of shares of Salomon Stock equal to the dollar amount of
such Participant's Award divided by the product of (1) with respect to
Awards granted prior to January 1, 1996, .85 multiplied by the Average
Cost Per Share of Salomon Stock on the date on which the shares are
credited to such Participant's Stock Account and (2) with respect to
Awards granted on or after January 1, 1996, .80 multiplied by the Average
Cost Per Share of Salomon Stock on the date on which the shares are
credited to such Participant's Stock Account.
(ii) If, as of the date an Award is granted, the number of shares
held in the Suspense Account is insufficient to satisfy such Award, the
date on which Salomon Stock in respect of such Award is credited to a
Participant's Stock Account shall
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be deferred until such date as the number of shares held in the Suspense
Account equals or exceeds the number of shares with respect to such Award.
(iii) If the date as of which Awards are granted for a calendar year
is on or prior to the record date for the dividends payable on Salomon
Stock but the number of shares held in the Suspense Account is
insufficient to satisfy such Awards, (A) for purposes of Sections 8(d) and
9(a)(iv), the shares held in the Suspense Account shall be treated as held
in each Participant's Stock Account pro rata in proportion to each
Participant's Award for such calendar year and (B) Salomon Inc shall make
a contribution to the Trust equal to the difference between (1) the
dividends that would have been paid on shares in respect of Awards for
such calendar year had the Suspense Account held sufficient shares to
satisfy the Awards for such calendar year and (2) the dividends actually
paid on the shares held in the Suspense Account. For purposes of Sections
8(d) and 9(a)(iv), the Salomon Inc contribution described in Clause (B) of
this Section shall be treated as a dividend paid on Salomon Stock held in
a Participant's Stock Account, pro rata in proportion to each
Participant's Award for such calendar year.
(iv) As of the payment date for dividends paid (or deemed paid) on
Salomon Stock held (or deemed held) in a Participant's Stock Account as of
the record date for such dividends, each such Participant's Stock Account
shall be credited with the number of shares of Salomon Stock that are in
fact purchased or deemed to have been purchased with such dividends and,
solely with respect to Awards granted prior to January 1, 1996, the
additional 17.65% compensation contribution made in respect of such
dividends, as determined pursuant to Section 8(d).
(v) Each Participant's Stock Account shall be reduced by the number
of shares of Salomon Stock distributed to the Participant in respect of an
Award, whether such shares are distributed from the Trust or directly from
Salomon Inc.
(b) Rollover Account
(i) With respect to a Participant who has an automatic Rollover of
his accounts from another Equity Partnership Plan to the Plan pursuant to
Section 7(b)(iv), the Committee shall maintain such Participant's Rollover
Account as follows:
(A) Each such Participant's Rollover Account shall be credited
with a number of shares of Salomon Stock that were credited to the
Participant's accounts under the Equity Partnership Plans
immediately prior to the Rollover.
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(B) All assets held in such Participant's accounts under any
trust maintained in connection with another Equity Partnership Plan
immediately prior to the Rollover shall be transferred to the
Participant's corresponding accounts under the Trust on the date as
of which the Rollover occurs.
(C) As of the payment date for dividends paid on Salomon Stock
held in a Participant's Rollover Account as of the record date for
such dividends, each such Participant's Rollover Account shall be
credited with the number of shares of Salomon Stock purchased or
deemed to have been purchased with such dividends and, solely with
respect to Rollovers related to awards granted prior to January 1,
1996, the additional 17.65% compensation contribution made in
respect of such dividends, as determined pursuant to Section 8(d).
(ii) With respect to a Participant who makes a Rollover Election
with respect to benefits under a Prior Incentive Plan, the Committee shall
maintain such Participant's Rollover Account as follows:
(A) Each such Participant's Rollover Account shall be credited
as of January 1, 1991 with the number of shares of Salomon Stock
purchased with the dollar amount rolled over from a Prior Incentive
Plan.
(B) As of the payment date for dividends paid on Salomon Stock
held in a Participant's Rollover Account as of the record date for
such dividends, each such Participant's Rollover Account shall be
credited with the number of shares of Salomon Stock purchased with
such dividends.
(iii) Each Participant's Rollover Account shall be reduced by the
number of shares of Salomon Stock distributed to the Participant in
respect of a Rollover, whether such shares are distributed from the Trust
or directly from Salomon Inc.
(c) Cash Account
In the event that a Participant shall elect to tender shares of Salomon
Stock held in the Participant's Accounts pursuant to Section 13(b)(i), the
number of shares of Salomon Stock credited to such Participant's Accounts that
are tendered shall be converted to a dollar amount per share equal to the
consideration received in respect of such tender. Such dollar amount shall
thereafter be credited to the Participant's Cash Account and shall be credited
with interest during the period beginning on the date as of which such shares
were tendered and ending on the last day of the month immediately preceding the
month in which such amounts are paid to the Participant at a
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rate which, through the end of the first calendar month in such period, shall
equal the London Interbank Offered Rate ("LIBOR") for 1-month deposits that
appears in The Wall Street Journal on the date immediately preceding the date
that such shares were tendered, and which shall be recalculated for each
successive 1-month period based on LIBOR for 1-month deposits published in The
Wall Street Journal on the last day of each preceding calendar month. If such
rate does not appear in The Wall Street Journal on any date as provided above,
then such rate shall be the last such rate that appeared in The Wall Street
Journal prior to the date of determination set forth above.
10. LONG-TERM INVESTMENT ELECTION
To the extent permitted by the Committee, each Participant who (a) is
employed by a Company or an Affiliate and (b) earned the Minimum Eligible
Compensation in the immediately preceding calendar year, shall be entitled to
make a Long-Term Investment Election with respect to an Award or Rollover. Any
such Long-Term Investment Election shall be delivered to the Committee no later
than a date 2 years prior to any date a Participant's Investment Period
otherwise would expire pursuant to the first sentence of Section 2(t) hereof.
The effect of a Long-Term Investment Election will be to defer the realization
of an Award until the earlier of the expiration of an additional 3-year period
beginning on the date the Participant's Investment Period otherwise would expire
or, if the Participant so elects at the time the Participant makes the Long-Term
Investment Election, the Participant's Permissive Retirement that occurs during
such additional 3-year period. The Committee may limit the ability of any
Participant to make a Long-Term Investment Election pursuant to uniform rules
adopted by it. No Participant shall be permitted to make more than two Long-Term
Investment Elections with respect to any Award or Rollover.
11. PAYMENTS UNDER THE PLAN
(a) Subject to Paragraphs (b), (d) and (e) of this Section, within 30
business days after the occurrence of a Realization Event with respect to an
Award or a Rollover, Salomon Inc shall deliver or cause to be delivered to the
Participant (i) certificates for a number of shares of Salomon Stock equal to
the number of whole shares of Salomon Stock credited to such Participant's
Accounts as of the Realization Event as a result of such Award or Rollover
(including shares reflecting the reinvestment of dividends paid thereon), and
cash with respect to any fractional shares of Salomon Stock credited to such
Participant's Accounts in an amount equal to the Daily Value of such fractional
shares as of the Realization Event, and (ii) with respect to a Participant who
has directed the Trustee to tender shares of Salomon Stock allocated to the
Participant's Accounts, the dollar amount credited to the Participant's Cash
Account as of the Realization Event in respect of such Award or Rollover. In the
event that shares of Salomon Stock that are allocated to a Participant's
Accounts as of the record date for a dividend are to be
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distributed to the Participant prior to the payment date for such dividend,
Salomon Inc shall deliver or cause to be delivered from the Suspense Account to
the Participant a number of shares of Salomon Stock equal to the number of whole
shares, and cash with respect to that number of fractional shares, of Salomon
Stock that could have been purchased with the amount of such unpaid dividends,
plus, solely with respect to Awards granted and Rollover Elections made prior to
January 1, 1996, 17.65% thereof, at the Daily Value as of the Realization Event.
Notwithstanding the fact that Salomon Inc establishes the Trust for the purpose
of assisting it in meeting its obligations under the Plan, Salomon Inc shall
remain obligated to pay the amounts credited to the Participants' Accounts.
Nothing shall relieve Salomon Inc of its liabilities under the Plan except to
the extent amounts are paid to Participants or Beneficiaries from assets of the
Trust.
(b) Notwithstanding the foregoing, with respect to shares of Salomon Stock
allocated to Participants' Accounts in respect of Awards granted in 1990, 1991
and 1992:
(i) On or before December 31, 1992, Salomon Inc shall deliver or
cause to be delivered to Participants selected by the Committee,
certificates for a number of shares of Salomon Stock equal to 60% of the
number of whole shares of such Salomon Stock allocated to such
Participant's Accounts (including shares reflecting the reinvestment of
dividends paid thereon), and cash with respect to 60% of any fractional
shares of such Salomon Stock allocated to such Participant's Accounts in
an amount equal to the Daily Value of such fractional shares as of the
distribution date. Such distributions shall be made to a Participant only
if and to the extent the Committee determines in its sole discretion that
such distributions would not impair the rights of such Participant in any
Award or Rollover theretofore granted or made or any earnings with respect
thereto within the meaning of Section 18 of the Plan. Subject to Section
11(b)(iii), the stock certificates so distributed to such Participants
shall be restricted as to transferability and shall remain subject to
Sections 7(c) and 11(c)(ii) of the Plan until the date that a Realization
Event would have occurred with respect to such shares had they not been
distributed to the Participant, and each such stock certificate shall bear
the following legend:
The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and
conditions contained in the Salomon Inc Equity Partnership Plan for
Key Employees (the violation of which may result in forfeiture). A
copy of the Plan is on file in the office of the Secretary of
Salomon Inc, Seven World Trade Center, New York, New York 10048.
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Any shares remaining in the Participants' Accounts in respect of the
1990, 1991 and 1992 Awards after the distribution of the shares pursuant
to this Section 11(b)(i) shall be distributed to Salomon Inc in exchange
for Salomon Inc's undertaking to pay the amounts set forth in Section
11(b)(ii).
(ii) On or before December 31, 1992, Salomon Inc shall pay each
Participant who receives a distribution under Paragraph (b)(i) of this
Section cash equal to the following amounts:
(A) the Daily Value on December 9, 1992 of 36.24% of the
shares allocated to the Accounts of such Participant in respect of
Awards granted in 1990;
(B) the Daily Value on December 9, 1992 of 35.11% of the
shares allocated to the Account of such Participant in respect of
Awards granted in 1991; and
(C) 40% of the dollar amount of such Participant's 1992
Awards.
Notwithstanding Section 17 hereunder, in order to meet all federal,
state, local and other withholding tax requirements, if any, attributable
to a distribution described in Section 11(b), Salomon Inc shall withhold
from any distribution under this Section 11(b)(ii) cash equal to the
amount the Committee determines to be sufficient to satisfy the minimum
federal, state, local and other withholding tax requirements under
applicable law.
(iii) Notwithstanding Section 11(b)(i), the Committee may, in its
sole discretion, waive the restrictions on transferability and other
restrictions applicable to shares distributed pursuant to Section
11(b)(i). The Committee may impose such conditions on any such waiver,
including, without limitation, requiring a forfeiture of any portion of
such shares, as the Committee may determine in its sole discretion.
(c) The Plan's principal purpose is to provide Participants with a
continuing long-term investment in Salomon Stock. In order to accomplish that
principal purpose, it is imperative that Participants generally be required to
remain invested in the Salomon Stock allocated to their Accounts until the
occurrence of a Realization Event with respect to such Salomon Stock.
Accordingly:
(i) In the event that a court of competent jurisdiction finally
determines that Salomon Inc is obligated to distribute to a Participant,
Beneficiary or any other person certificates representing any shares of
Salomon Stock allocated to a
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Participant's Accounts prior to the occurrence of a Realization Event with
respect to such shares, the stock certificates so distributed to such
Participant, Beneficiary or other person shall be restricted as to
transferability until the date that a Realization Event would have
occurred with respect to such shares had they not been distributed to the
Participant, Beneficiary or other person and remained subject to the Plan,
and each such stock certificate shall bear the following legend:
The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and
conditions contained in the Salomon Inc Equity Partnership Plan for
Key Employees (the violation of which may result in forfeiture). A
copy of the Plan is on file in the office of the Secretary of
Salomon Inc, Seven World Trade Center, New York, New York 10048.
(ii) Effective with respect to distributions of Salomon Stock
allocated to Participants' Accounts with respect to awards under the
Equity Partnership Plans on or after March 4, 1992, prior to receiving any
distribution of such shares, each Participant shall be required to certify
in a form acceptable to the Committee that at no time after March 4, 1992
and before the occurrence of the Realization Event with respect to which
the distribution is to be made has the Participant, directly or
indirectly, held any equity or derivative security position with respect
to Salomon Stock, such as a short sale, a long put option or a short call
option, that increases in value as the value of Salomon Stock decreases.
If the Participant does not make the certification required by this
Paragraph, the Participant shall receive a distribution with respect to
such Award or Rollover equal to the number of shares of Salomon Stock
otherwise to be distributed as of the Realization Event reduced by (A)
with respect to Awards granted and Rollover Elections made prior to
January 1, 1996, .15, and (B) with respect to Awards granted and Rollover
Elections made on or after January 1, 1996, .20, multiplied by the number
of shares of Salomon Stock otherwise to be distributed, and the number of
shares by which the distribution is reduced shall be forfeited as of the
Realization Event. In the event that a Participant makes a false
certification, the Participant shall forfeit all of the shares allocated
to his Accounts in respect of awards under the Equity Partnership Plans on
or after March 4, 1992 as of such Realization Event. All amounts forfeited
hereunder shall be treated as purchases for the Equity Partnership Plans
at the Daily Value as of the date of forfeiture of the number of shares
forfeited pursuant to Section 2(c)(iv) hereof. For purposes of applying
this Section 11(c)(ii) to shares of Salomon Stock distributed to
Participants pursuant to Sections 11(b)(i) and 18(a), the Realization Date
with respect to such Salomon Stock shall be deemed
27
<PAGE>
to occur on the date as of which the restrictions under Section 11(b)(i)
or 18(a), as the case may be, are to be removed and the removal of such
restrictions shall be deemed to be distributions under this Section.
(d) Effective with respect to Awards granted on or after December 1, 1993,
notwithstanding any other provision hereunder, if and to the extent that the
Committee determines any Company's or Affiliate's Federal tax deduction in
respect of a distribution under the Plan may be limited as a result of Section
162(m) of the Code, the Committee may delay such distribution as provided below.
In the event the Committee determines to delay a distribution, the Committee
shall convert the shares of Salomon Stock to a dollar amount equal to the
product of (i) the Daily Value of Salomon Stock on the date such shares
otherwise would have been distributed to the Participant multiplied by (ii) the
number of shares of Salomon Stock that otherwise would have been distributed to
the Participant in the absence of this Section 11(d). Such amount shall then be
credited to the Participant's Cash Account. The amount so credited to the
Participant's Cash Account shall, subject to the second succeeding sentence, be
credited with interest during the period beginning on the date on which the
distribution would have been made in the absence of this Section 11(d) and
ending on the last day of the month immediately preceding the month in which
such amount is paid to the Participant, at a rate which, through the end of the
first calendar month in such period, shall equal LIBOR for 1-month deposits that
appears in The Wall Street Journal on the date immediately preceding the date on
which the distribution would have been made in the absence of this Section, and
which shall be recalculated for each successive 1-month period based on LIBOR
for 1-month deposits published in The Wall Street Journal on the last day of
each preceding calendar month. If such rate does not appear in The Wall Street
Journal on any date as provided above, then such rate shall be the last such
rate that appeared in The Wall Street Journal prior to the date of determination
set forth above. The Committee may, in its discretion, elect not to credit
interest to the Participant's Cash Account at LIBOR as described above, but
instead to adjust the amount so credited to the Participant's Cash Account to
reflect gains and losses that would have resulted from the investment of such
amount in any investment vehicle or vehicles selected by the Committee. Part or
all of the amount credited to the Participant's Cash Account hereunder shall be
paid to the Participant at such times as shall be determined by the Committee,
if and to the extent the Committee determines that a Company's or an Affiliate's
deduction for any such payment will not be reduced by Section 162(m) of the
Code. Notwithstanding the foregoing, the entire balance credited to the
Participant's Cash Account hereunder shall be paid to the Participant within 30
business days after the earlier of (A) the date the Participant ceases to be a
"covered employee" within the meaning of Section 162(m) of the Code or (B) the
occurrence of a Change in Control.
(e) Notwithstanding Paragraph (a)(i) of this Section, effective as of
October 12, 1995, any Participant who has credited to his Accounts with respect
to an Award 100 shares of Salomon Stock or less on the Realization Date for such
Award shall, unless the
28
<PAGE>
Participant otherwise elects at such time and in such form as may be acceptable
to the Committee, receive, in lieu of a distribution of certificates for the
number of whole shares of Salomon Stock credited to the Participant's Accounts
as of the Realization Date as a result of such Award, a distribution in cash
equal to the Daily Value on the distribution date of the number of whole shares
of Salomon Stock allocated to the Participant's Accounts as a result of such
Award.
12. SECURITIES MATTERS
(a) Subject to Sections 11 and 18, with respect to shares of Salomon Stock
allocated to Participants' Accounts in respect of Awards or Rollovers granted or
made on or before December 31, 1992, Salomon Inc shall use its best efforts to
assure that any securities distributed to Participants hereunder are marketable
at the time of distribution, including, to the extent required under applicable
law, effecting the registration pursuant to the Securities Act of any shares of
Salomon Stock to be distributed hereunder or effecting similar compliance under
any state laws.
(b) Subject to Section 11, with respect to shares of Salomon Stock
allocated to Participants' Accounts in respect of Awards or Rollovers granted or
made after December 31, 1992, Salomon Inc shall use its best efforts to assure
that any securities distributed to Participants hereunder on or after the
Realization Date for the Award or Rollover with respect to which the
distribution is made are marketable at the time of distribution, including, to
the extent required under applicable law, effecting the registration pursuant to
the Securities Act of any shares of Salomon Stock to be distributed hereunder or
effecting similar compliance under any state laws.
(c) Notwithstanding anything herein to the contrary, Salomon Inc shall not
be obligated to cause to be issued or delivered any certificates evidencing
shares of Salomon Stock pursuant to the Plan unless and until Salomon Inc is
advised by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of the New York Stock Exchange and any other securities
exchange on which shares of Salomon Stock are traded. The Committee may require,
as a condition of the issuance and delivery of certificates evidencing shares of
Salomon Stock pursuant to the terms hereof, the recipient of such shares to make
such covenants, agreements and representations, and that such certificates bear
such legends, as the Committee, in its sole discretion, deems necessary or
desirable.
(d) Without limitation on the Committee's powers pursuant to Paragraph (c)
of this Section, if and to the extent required by Rule 16b-3 promulgated under
Section l6(b) of the Exchange Act or by any comparable or successor exemption
under which the Board of Directors believes it is appropriate for the Plan to
qualify, the Committee may (i) restrict a Participant's ability to sell any
shares of Salomon Stock distributed to such Participant hereunder until the
expiration of 6 months (or such other period as the
29
<PAGE>
Committee deems appropriate) after the date as of which such shares were
allocated to the Participant's Accounts, (ii) in lieu of distributing shares of
Salomon Stock that were allocated to a Participant's Accounts within 6 months
(or such other period as the Committee deems appropriate) prior to the
Realization Event, distribute a cash amount equal to the Daily Value of such
Salomon Stock as of the Realization Event or (iii) impose such other conditions
on the exercise of any election under the Plan or in connection with any
distribution under the Plan as the Committee deems appropriate.
13. VOTING AND TENDER OF SALOMON STOCK
(a) Voting Rights
(i) Each Participant shall be entitled to direct the Trustee, and
the Trustee shall have no discretion, as to the manner in which Salomon
Stock that is entitled to vote and is allocated to such Participant's
Accounts is to be voted. The Trustee shall vote combined fractional
shares, to the extent possible, to reflect the directions of the
Participants holding such shares.
(ii) The Trustee shall have no discretion as to the voting of (A)
any Salomon Stock allocated to any Participant's Accounts for which the
Trustee does not receive affirmative and valid Participant voting
directions and (B) any Salomon Stock held in the Suspense Account. The
Trustee shall vote such Salomon Stock in the same proportions as Salomon
Stock held in the Trust for which the Trustee receives affirmative and
valid Participant voting instructions under the Equity Partnership Plans.
(iii) Notwithstanding any other provision of this Section, the
Trustee shall vote the shares of Salomon Stock held in the Accounts of any
Participant with respect to whom counsel to Salomon Inc advises the
Participant would be taxed on the value of the Participant's Accounts if
the Participant were permitted to direct the voting of such shares, in the
same proportions as Salomon Stock held in the Trust for which the Trustee
receives affirmative and valid Participant voting instructions under the
Equity Partnership Plans.
(b) Tender Rights
(i) If any person shall commence a tender or exchange offer or any
similar transaction with respect to Salomon Stock, each Participant shall
be entitled to direct the Trustee, and the Trustee shall have no
discretion, as to whether the Salomon Stock allocated to such
Participant's Accounts is to be tendered and whether such tender is to be
revoked (to the extent such a revocation is permitted by the terms of such
tender or exchange offer or applicable law). The Trustee shall tender
shares of Salomon Stock allocated to any Participant's Accounts for which
30
<PAGE>
the Trustee shall have received affirmative and valid Participant
directions to tender (except to the extent such directions are revoked
prior to such tender); the Trustee shall revoke the tender of shares of
Salomon Stock allocated to any Participant's Accounts for which the
Trustee shall have received affirmative and valid Participant directions
to revoke such tender.
(ii) The Trustee shall have no discretion as to whether or not to
tender, or whether to revoke tenders with respect to any Salomon Stock
held in the Suspense Account. The Trustee shall tender or not and shall
revoke tenders with respect to shares of Salomon Stock held in the
Suspense Account in the same proportions as the shares of Salomon Stock
held in the Trust for which the Trustee receives affirmative and valid
Participant directions under the Equity Partnership Plans whether or not
to tender and whether to revoke such tender.
(iii) The Trustee shall not tender, or revoke the tender of, shares
allocated to Participants' Accounts for which the Trustee does not receive
affirmative and valid Participant directions.
(iv) To the extent that a Participant elects to tender shares of
Salomon Stock held in the Participant's Accounts, the Trustee shall
transfer the consideration the Trustee receives as a result of such tender
to the Participant's Cash Account.
(v) Notwithstanding any other provision of this Section, the Trustee
shall tender or not and shall revoke tenders with respect to shares of
Salomon Stock held in the Accounts of Participants with respect to whom
counsel to Salomon Inc advises that the Participant would be taxed on the
value of the Participant's Accounts if the Participant were permitted to
direct the tender of shares, in the same proportions as the shares of
Salomon Stock held in the Trust for which the Trustee receives affirmative
and valid Participant directions whether or not to tender and whether to
revoke such tender.
(c) Tender Prior to Allocation
In the event the Trustee is required to make any tender decision prior to
the date on which any shares of Salomon Stock are allocated to any Participant's
Accounts, the Trustee shall poll the participants under the Equity Partnership
Plans (other than the Participants described in Paragraph (b)(v) of this
Section) and shall tender or revoke tenders with respect to shares in proportion
to the number of tender or revocation directions received by such participants.
Each such participant shall have one vote.
(d) Notices and Information Statements
31
<PAGE>
Salomon Inc shall provide the Trustee and each Participant with notices
and information statements (including proxy statements) when voting rights are
to be exercised, and with respect to tender, exchange or similar offers, at the
same time and in the same manner (except to the extent the Exchange Act requires
otherwise) as such notices and information statements (including proxy
statements) are provided to shareholders of Salomon Inc generally.
(e) Confidentiality of Voting and Tender Directions
The Trustee shall devise and implement a procedure that is designed to
assure the confidentiality of any Participant's voting or tender directions so
that in directing the Trustee to vote or tender any shares of Salomon Stock,
Participants are in fact rendering independent decisions without influence from
any Company. Salomon Inc shall cooperate with the Trustee in devising and
implementing such procedures to the extent the Trustee so requests.
14. ADJUSTMENT OF ACCOUNTS IN CERTAIN EVENTS
(a) Unless the Committee otherwise determines, a Participant's Accounts
shall be adjusted to reflect any securities, cash and other property received
with respect to shares of Salomon Stock credited to such Participant's Accounts
as a result of any stock dividend or split, recapitalization, extraordinary
dividend, merger, consolidation, combination or exchange of shares or similar
change or any other event that the Committee, in its sole discretion, deems
appropriate. The purpose of this adjustment is to treat Participants as if they
were shareholders of Salomon Stock with respect to the number of shares credited
to their Accounts. However, the Committee may, in its sole discretion, convert
any securities, cash or other property that would have been received in respect
of shares of Salomon Stock credited to a Participant's Accounts into an
equivalent number of equity securities of Salomon Inc or any successor company
or into cash or other property of equivalent value.
(b) In the event of any change in the number of shares of Salomon Stock
outstanding by reason of any stock dividend or split, recapitalization,
extraordinary dividend, merger, consolidation, combination or exchange of shares
or similar corporate change or any other event that the Committee, in its sole
discretion, deems appropriate, the maximum aggregate number of shares of Salomon
Stock subject to the Equity Partnership Plans shall be appropriately adjusted by
the Committee. In the event of any change in the number of shares of Salomon
Stock outstanding by reason of any other event or transaction, the Committee
may, but need not, make such adjustments in the number and class of shares of
Salomon Stock subject to the Equity Partnership Plans as the Committee may deem
appropriate.
32
<PAGE>
(c) Except as is expressly provided in this Section, a Participant shall
have no rights as a result of any stock dividend or split, recapitalization,
extraordinary dividend, merger, consolidation, combination or exchange of shares
or similar corporate change.
15. CERTAIN DIVESTITURES
(a) Company with Publicly Traded Stock That No Longer is a 50% Affiliate
In the event of any transaction immediately after which any Company both
ceases to be a member of a "controlled group of corporations" (as that term is
defined in Section 4l4(b) of the Code but substituting the phrase "at least 50%"
for the phrase "at least 80%" in each place that it appears in Section 1563 (a)
of the Code) of which Salomon Inc is a member and either has stock that is
publicly traded or is a member of a "controlled group of corporations" (as that
term is defined in Section 4l4(b) of the Code) with any trades or businesses,
one or more members of which have publicly traded stock as a result of the
transaction:
(i) the Salomon Stock credited to the Accounts of (A) Participants
who are employed by such Company immediately after the transaction and (B)
terminated Participants who are not so employed, but who were employed by
such Company on the date that their employment with the Companies and
Affiliates terminated, shall be converted to equivalent amounts of such
publicly traded stock based on the relative values of such publicly traded
stock and Salomon Stock immediately after the transaction. Thereafter,
each such Participant's Accounts shall be maintained in such publicly
traded stock and such Company shall cease to participate in the Plan with
respect to future Awards;
(ii) the Board of Directors of the affected Company shall succeed to
the powers of the Committee and the Board of Directors under the Plan with
respect to the Participants described in Section 15(a)(i); and
(iii) a separate trust containing the Accounts of such Participants
shall be created to hold the stock credited to the Participants' Accounts.
Such trust shall be substantially the same as the Trust and shall be
created pursuant to a trust agreement between the affected Company and the
Trustee.
(b) Company with Publicly Traded Stock That Remains a 50% Affiliate
In the event that a public market develops for the stock of any Company
and immediately after such public market develops such Company remains a member
of a "controlled group of corporations" (as that term is defined in Section
4l4(b) of the Code but substituting the phrase "at least 50%" for the phrase "at
least 80%" in each place that it appears in Section 1563(a) of the Code) of
which Salomon Inc is a member, the
33
<PAGE>
Salomon Stock credited to the Accounts of (i) the Participants who are employed
by such Company immediately after such public market develops and (ii)
terminated Participants who are not so employed, but who were employed by such
Company on the date that their employment with the Companies and Affiliates
terminated, shall be converted to equivalent amounts of the publicly traded
stock of such Company based on the principles described in Section 15(a)(i), or
its economic equivalent, as the Committee deems appropriate, unless the
Committee and the Company determine that such a conversion would be financially
detrimental to any Company or Affiliate or such Participants. Thereafter, each
such Participant's Accounts shall be maintained in such publicly traded stock or
its economic equivalent, as the case may be, and such Company shall cease to
participate in the Plans with respect to future Awards.
(c) Satisfaction of Obligations After a Divestiture
In the event of a divestiture described in this Section 15, any
distributions in respect of the shares credited to the affected Participants'
Accounts as of the date of the divestiture shall be deemed to be payments in
respect of Salomon Inc's obligations under the Plan, except to the extent such
obligations are assumed and discharged by the affected Company.
16. NO SPECIAL EMPLOYMENT RIGHTS
Nothing contained in the Plan shall confer upon any Participant any right
with respect to the continuation of the Participant's employment by any Company
or Affiliate or interfere in any way with the right of any Company or Affiliate
at any time to terminate such employment or to increase or decrease the
compensation of the Participant. Nothing in the Plan shall be deemed to give any
employee of any Company or Affiliate any right to participate in the Plan.
17. PAYROLL AND WITHHOLDING TAXES
All federal, state, local and other withholding tax requirements, if any,
attributable to a distribution shall be met pursuant to the following
procedures:
(a) The Companies and Affiliates shall have the right to withhold
from any cash amounts payable to a Participant (including salary, bonus or
any other amounts payable from any Company or Affiliate to the
Participant) an amount sufficient to satisfy such federal, state, local
and other withholding tax requirements, prior to the delivery of any
certificate or certificates for such shares of Salomon Stock or other
payments under the Plan; or
(b) Salomon Inc shall have the right to require Participants to
remit to Salomon Inc in cash an amount sufficient to satisfy such federal,
state, local and
34
<PAGE>
other withholding tax requirements, prior to the delivery of any
certificate or certificates for such shares of Salomon Stock or other
payments under the Plan; or
(c) Salomon Inc (or, if a distribution is to be made from the Trust,
the Trustee) shall have the right to withhold a number of such shares of
Salomon Stock, the Daily Value of which on the date the shares of Salomon
Stock are to be distributed to the Participant the Committee determines to
be sufficient to satisfy the minimum federal, state, local and other
withholding tax requirements under applicable law. In the event that the
Trustee withholds shares of Salomon Stock pursuant to this Paragraph, the
Trustee shall, as directed by Salomon Inc, (i) distribute such shares of
Salomon Stock from the Trust to Salomon Inc or (ii) continue to hold such
shares in the Suspense Account and, in either case, Salomon Inc shall make
or shall cause to be made from the Trust, as the case may be, to the
appropriate governmental entity the appropriate withholding tax payments.
18. TERMINATION AND AMENDMENT
The Plan may be terminated with respect to any or all Participants at any
time by the Board of Directors. Subject to Section 21 hereof, upon such
termination: (i) with respect to each affected Participant who is not employed
by a Company or Affiliate on the date such termination occurs, the amounts
credited the Participant's Accounts, other than amounts forfeited in accordance
Section 7 or 11 hereof, shall be distributed to each such Participant; and (ii)
with respect to each affected Participant who is employed by a Company or an
Affiliate on the date such termination occurs, the amounts credited the
Participant's Accounts, other than amounts that would have been forfeited in
accordance Section 7(c)(ii)(D) hereof had the Participant's employment with the
Companies and Affiliates been involuntarily terminated as a result of a
downsizing or general reduction in work force immediately prior to the
termination (which amounts shall be treated as forfeitures hereunder) or 11,
shall be distributed to each such Participant in order to meet the entire
benefit obligations under the Plan with respect to each such Participant. With
respect to any termination effected on or before December 31, 1992, if and to
the extent that the Committee determines in its sole discretion that the
following distribution method would not impair the rights of any such
Participant in any Award or Rollover theretofore granted or made or any earnings
with respect thereto within the meaning of this Section 18, the benefit
obligation under the Plan shall be satisfied in the following manner:
(a) Salomon Inc shall deliver or cause to be delivered to
Participants with respect to whom the Plan is terminated certificates for
a number of shares of Salomon Stock equal to 60% of the number of whole
shares of Salomon Stock allocated to such Participant's Accounts in
respect of Awards (including shares reflecting the reinvestment of
dividends paid thereon), and cash with respect to 60% of any fractional
shares of Salomon Stock allocated to such Participant's Accounts in
respect of Awards in an amount equal to the Daily
35
<PAGE>
Value of such fractional shares as of the distribution date. The stock
certificates so distributed to such Participants shall be restricted as to
transferability and shall remain subject to Section 7(c) and 11(c)(ii) of
the Plan until the date that a Realization Event would have occurred with
respect to such shares had they not been distributed to the Participant,
and each such stock certificate shall bear the following legend:
The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and
conditions contained in the Salomon Inc Equity Partnership Plan for
Key Employees (the violation of which may result in forfeiture). A
copy of the Plan is on file in the office of the Secretary of
Salomon Inc, Seven World Trade Center, New York, New York 10048.
Any shares remaining in the Participants' Accounts in respect of the 1990, 1991
and 1992 Awards after the distribution of the shares pursuant to this Section
18(a) shall be distributed to Salomon Inc in exchange for Salomon Inc's
undertaking to pay the amounts set forth in Section 18(b).
(b) On or before December 31, 1992, Salomon Inc shall pay each Participant
who receives a distribution under Paragraph (a) of this Section cash equal to
the following amounts:
(i) the Daily Value on December 9, 1992 of 36.24% of the shares
allocated to the Account of such Participant in respect of Awards granted
in 1990;
(ii) the Daily Value on December 9, 1992 of 35.11% of the shares
allocated to the Accounts of such Participants in respect of Awards
granted in 1991; and
(iii) 40% of the dollar amount of such Participant's 1992 Awards.
Notwithstanding Section 17 hereunder, in order to meet all federal, state,
local and other withholding tax requirements, if any, attributable to a
termination on or before December 31, 1992 described in Paragraphs (a) and (b)
of this Section, Salomon Inc shall withhold from any distribution under this
Paragraph (b) cash equal to the amount the Committee determines to be sufficient
to satisfy the minimum federal, state, local and other withholding tax
requirements under applicable law.
(c) In the event the entire Plan is terminated, the remaining assets, if
any, in the Trust after the payment of such benefits shall be paid to Salomon
Inc. In the event of a partial termination of the Plan, the assets, if any,
remaining in any terminated Accounts
36
<PAGE>
shall be held in the Suspense Account and may be used to satisfy Salomon Inc's
contribution requirements hereunder; provided, however, that (i) with respect to
a termination described in Paragraphs (a) and (b) of this Section, and (ii) in
the event of a partial termination of the Plan involving 40% or more of the
amounts payable under the Plan immediately prior to such termination, the Board
of Directors may elect that any such remaining assets be distributed to Salomon
Inc.
(d) The Plan may be amended by the Board of Directors from time to time in
any respect, provided, however, that if and to the extent required by Rule 16b-3
promulgated under Section 16(b) of the Exchange Act or by any comparable or
successor exemption under which the Board of Directors believes it is
appropriate for the Plan to qualify, no amendment shall be effective without the
approval of the shareholders of Salomon Inc that (a) except as provided in
Section 14 hereof, increases the number of shares of Salomon Stock that may be
distributed under the Plan, (b) materially increases the benefits accruing to
individuals under the Plan or (c) materially modifies the requirements as to
eligibility for participation in the Plan. No amendment or termination shall be
made that would impair the rights of any Participant in any Award or Rollover
theretofore granted or made, or any earnings with respect thereto, without such
Participant's prior written consent; provided, however, that Salomon Inc may
amend the Plan and the Trust from time to time in such a manner as may be
necessary to prevent the trust agreement pursuant to which the Trust is created,
the Equity Partnership Plans or the Trust from becoming subject to ERISA and to
avoid the current taxation of the assets held in the trusts established in
connection with the Equity Partnership Plans to Participants. Neither a
Participant's incurring any income tax liability nor the loss of an investment
opportunity as a result of the termination of, or, with respect to amounts
allocated to Participants' Accounts on or after December 31, 1992, any amendment
to, the Plan shall be considered an impairment of the rights of a Participant.
19. PAYMENTS UPON THE DEATH OF A PARTICIPANT
Each Participant shall have the right to designate in writing from time to
time a Beneficiary by filing a written notice of such designation with the
Committee. A Participant's designation of a Beneficiary may be revoked by filing
with the Trustee an instrument of revocation or a later designation. Any
designation or revocation shall be effective when received by the Trustee. In
the event of the death of a Participant, any payment required to be made
hereunder to such Participant shall be made to such Participant's Beneficiary.
Unless the Participant's Beneficiary designation provides otherwise, no person
shall be entitled to benefits upon the death of the Participant unless such
person survives the Participant. If the Beneficiary designated by a Participant
does not survive the Participant or if the Participant has not made a valid
Beneficiary designation, such Participant's Beneficiary shall be such
Participant's estate. If the Participant's Beneficiary is the Participant's
estate, no payment shall be made unless the
37
<PAGE>
Committee shall have been furnished with such evidence as the Committee may deem
necessary to establish the validity of the payment.
20. SHAREHOLDER APPROVAL REQUIRED
The Plan, as amended and restated as of January 1, 1996, is subject to
approval by the shareholders of Salomon Inc at their annual meeting in May, 1996
in accordance with applicable law, the rules of the New York Stock Exchange and
the requirements of Rule 16b-3 promulgated under Section 16(b) of the Exchange
Act. If the Plan is not so approved, then the Plan shall remain in full force
and effect without regard to the amendments adopted effective as of January 1,
1996.
21. EFFECT OF REVOCATION EVENT
Upon the occurrence of a Revocation Event, the Board of Directors may, in
its sole discretion, elect to terminate the Plan, the Trust, or any
Participant's Accounts. In the event that the Board of Directors elects to so
terminate the Plan, the Trust or any Participant's Accounts as a result of a
Revocation Event, in consideration of and as soon as practicable after Salomon
Inc's providing the Trustee with a written undertaking to pay to Participants
the amount required to be paid under this Section, all amounts held in the Trust
(or if the entire Trust is not terminated, any terminated Accounts) shall be
distributed to Salomon Inc. Salomon Inc shall, in its sole discretion, (a) pay
to each Participant whose Accounts are terminated, as soon as practicable after
the date of such termination, a lump sum in cash equal to the Daily Value
multiplied by the number of shares of Salomon Stock and cash amounts reflected
in each Participant's Accounts as of the date of such termination, (b)
distribute to each Participant whose Accounts are terminated, as soon as
practicable after the date of such termination, that number of shares of Salomon
Stock that would have been distributable to such Participant under the Plan and
pay to such Participant at such time any cash allocated to the Participant's
Cash Account or (c) distribute to each Participant whose Accounts are terminated
that number of shares of Salomon Stock and that amount of cash that would have
been distributable to such Participant at such time as shares and cash would
have been distributable to such Participant under the Plan, had the Plan
continued. If it is finally determined in a proceeding that Salomon Inc either
controls or was offered the right to control and declines, that the
Participant's interest in the Trust was taxable to the Participant,
notwithstanding any termination of such Participant's Accounts in the Trust,
Salomon Inc shall pay or distribute the Participant's interest (whether or not
the Board of Directors has previously elected to terminate the Plan, the Trust
or the Participant's Accounts) in accordance with either Clause (a) or (b) of
the preceding sentence.
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<PAGE>
22. MISCELLANEOUS
(a) No transfer (other than any transfer made by will or by the laws of
descent and distribution) by a Participant of any right to any payment
hereunder, whether voluntary or involuntary, by operation of law or otherwise,
shall vest the transferee with any interest or right in or with respect to such
payment, and the transfer shall be of no force and effect.
(b) The Plan and all rights hereunder shall be subject to and interpreted
in accordance with the laws of the State of New York, without reference to the
principles of conflicts of law.
39
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.01
<SEQUENCE>4
<DESCRIPTION>COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TEXT>
Exhibit 12.01
Travelers Group Inc. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
ALL COMPANIES CONSOLIDATED
(In millions of dollars)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income from continuing operations before
income taxes, minority interests and
cumulative effect of accounting changes...... $ 5,012 $ 5,008 $ 3,320 $ 1,025 $ 3,034
Elimination of undistributed equity earnings... -- -- -- -- (116)
Pre-tax minority interest...................... -- -- -- -- (32)
Other adjustments.............................. -- 1 -- -- 22
Add:
Interest..................................... 11,443 8,927 9,378 7,626 6,821
Interest portion of rentals.................. 142 132 135 159 105
---------- ---------- ---------- ---------- ----------
Income available for fixed charges............. $ 16,597 $ 14,068 $ 12,833 $ 8,810 $ 9,834
========== ========== ========== ========== ==========
Fixed charges:
Interest..................................... $ 11,443 $ 8,927 $ 9,378 $ 7,626 $ 6,821
Interest portion of rentals.................. 142 132 135 159 105
---------- ---------- ---------- ---------- ----------
Fixed charges.................................. $ 11,585 $ 9,059 $ 9,513 $ 7,785 $ 6,926
========== ========== ========== ========== ==========
Ratio of earnings to fixed charges............. 1.43x 1.55x 1.35x 1.13x 1.42x
========== ========== ========== ========== ==========
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.01
<SEQUENCE>5
<DESCRIPTION>FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TEXT>
Exhibit 13.01
Travelers Group Inc. and Subsidiaries
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In millions of dollars, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, (1)
- ---------------------------
Total revenues $37,609 $32,414 $27,287 $22,719 $16,964
========= ========= ========= ========= =========
Income from continuing operations (1) $3,104 $3,282 $2,141 $747 $1,843
Discontinued operations -- (334) 150 180 (28)
Cumulative effect of accounting
changes (2) -- -- -- -- (72)
--------- --------- --------- --------- ---------
Net income $3,104 $2,948 $2,291 $927 $1,743
========= ========= ========= ========= =========
Return on average common
stockholders' equity (3) 16.6% 18.0% 16.3% 6.6% 19.9%
At December 31,(1)
- ------------------
Total assets $386,555 $345,948 $302,344 $287,093 $286,125
Long-term debt:
Parent company $1,695 $1,903 $2,042 $1,377 $1,504
Consolidated $28,352 $24,696 $22,235 $22,277 $18,683
Redeemable preferred securities:
Parent company obligated $1,280 $1,420 $560 $700 $700
Consolidated $2,525 $2,665 $560 $700 $700
Stockholders' equity $20,893 $17,942 $15,853 $12,432 $13,872
Per common share data (4):
Basic earnings per share
Income from continuing operations $2.69 $2.84 $1.81 $0.53 $2.02
========= ========= ========= ========= =========
Net income $2.69 $2.53 $1.94 $0.69 $1.91
========= ========= ========= ========= =========
Diluted earnings per share
Income from continuing operations $2.54 $2.71 $1.74 $0.53 $1.92
========= ========= ========= ========= =========
Net income $2.54 $2.42 $1.86 $0.68 $1.81
========= ========= ========= ========= =========
Cash dividends per common share (4) $0.400 $0.300 $0.267 $0.192 $0.163
Book value per common share (4) $16.98 $14.74 $13.06 $10.03 $10.92
Other data (shares in millions):
- --------------------------------
Weighted average common shares
outstanding (Basic) (4) 1,102.6 1,097.6 1,099.4 1,127.1 873.4
Adjusted weighted average common
shares outstanding (Diluted) (4) 1,179.9 1,170.6 1,184.4 1,157.0 944.1
Year-end common shares outstanding (4) 1,145.1 1,141.0 1,128.9 1,128.7 1,168.8
Number of full-time employees 65,600 64,800 56,000 61,000 68,500
</TABLE>
(1) On November 28, 1997, Travelers Group Inc. completed the merger with Salomon
Inc in a transaction accounted for as a pooling of interests and,
accordingly, current and prior year information has been restated. As a
result of the merger, Salomon Smith Barney recorded an after-tax
restructuring charge of $496 million, primarily for severance and costs
related to excess or unused office space, facilities and other assets, which
is included in income from continuing operations and net income. The results
of Aetna P&C are included only from the date of acquisition, April 2, 1996.
(See Note 2 of Notes to Consolidated Financial Statements). Results of
operations prior to 1994 exclude the amounts of The Travelers Corporation
(old Travelers), except that results for 1993 include the Company's equity
in earnings relating to the 27% interest purchased in December 1992. Results
of operations include the Shearson Businesses from July 31, 1993, the date
of acquisition.
(2) Cumulative effect of accounting changes in 1993 represents a change in
accounting for postretirement benefits other than pensions and a change in
accounting for postemployment benefits.
(3) The return on average common stockholders' equity is calculated using income
before the cumulative effect of accounting changes after deducting preferred
stock dividend requirements. Excluding portfolio gains and losses, gains and
losses on sale of subsidiaries, restructuring charges and other
non-operating items, return on average common stockholders' equity was 18%
in 1997, 19% in 1996, 15% in 1995, 7% in 1994 and 19% in 1993.
(4) On October 22, 1997, the Company declared a three-for-two stock split that
was paid on November 19, 1997. All amounts presented herein have been
restated to reflect the stock split.
1
<PAGE>
Travelers Group Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION
and RESULTS of OPERATIONS
Consolidated Results of Operations
Year Ended December 31,
----------------------------------
(In millions, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------
Revenues $37,609 $ 32,414 $ 27,287
======= ========== ==========
Income from continuing operations $ 3,104 $ 3,282 $ 2,141
Income (loss) from discontinued operations -- (334) 150
------- ---------- ----------
Net income $ 3,104 $ 2,948 $ 2,291
======= ========== ==========
Income (loss) per share*:
Basic
Continuing operations $ 2.69 $ 2.84 $ 1.81
Discontinued operations -- (0.31) 0.13
------- ---------- ----------
Net income $ 2.69 $ 2.53 $ 1.94
======= ========== ==========
Diluted
Continuing operations $ 2.54 $ 2.71 $ 1.74
Discontinued operations -- (0.29) 0.12
------- ---------- ----------
Net income $ 2.54 $ 2.42 $ 1.86
======= ========== ==========
Weighted average common shares
outstanding (Basic) 1,102.6 1,097.6 1,099.4
======= ========== ==========
Adjusted weighted average common
shares outstanding (Diluted) 1,179.9 1,170.6 1,184.4
======= ========== ==========
* On October 22, 1997, the Company declared a three-for-two stock split that
was paid on November 19, 1997. All amounts presented herein have been
restated to reflect the stock split.
Basis of Presentation
On November 28, 1997, a newly formed wholly owned subsidiary of Travelers Group
Inc. merged with and into Salomon Inc (Salomon) (the Merger). Under the terms of
the Merger, approximately 188.5 million shares of Travelers Group Inc. (TRV)
common stock were issued in exchange for all of the outstanding shares of
Salomon common stock, based on an exchange ratio of 1.695 shares of TRV common
stock for each share of Salomon common stock, for a total value of approximately
$9 billion. Shares of each of Salomon's series of preferred stock outstanding
were exchanged for a corresponding series of TRV preferred stock having
substantially identical terms, except that the TRV preferred stock issued in
conjunction with the Merger has certain voting rights. Thereafter, Smith Barney
Holdings Inc. (Smith Barney), a wholly owned subsidiary of TRV, was merged with
and into Salomon to form Salomon Smith Barney Holdings Inc. (Salomon Smith
Barney), which is the primary vehicle through which TRV engages in investment
banking, proprietary trading, retail brokerage and asset management. The Merger
constituted a tax-free exchange and was accounted for under the pooling of
interests method. As a result of the Merger, Salomon Smith Barney recorded an
after-tax restructuring charge of $496 million, primarily for severance and
costs related to excess or unused office space, facilities and other assets,
which is included in income from continuing operations and net income.
2
<PAGE>
On April 2, 1996, Travelers Property Casualty Corp. (TAP), an indirect
majority-owned subsidiary of TRV, acquired the domestic property and casualty
insurance subsidiaries of Aetna Services, Inc. (Aetna P&C) for approximately
$4.2 billion in cash. This acquisition was financed in part by the issuance by
TAP of common stock resulting in a minority interest in TAP of approximately
18%. The acquisition was accounted for under the purchase method of accounting
and, accordingly, the consolidated financial statements include the results of
Aetna P&C's operations only from the date of acquisition. TAP also owns The
Travelers Indemnity Company (Travelers Indemnity). TAP's insurance subsidiaries
are the primary vehicles through which the Company engages in the property and
casualty insurance business. On June 23, 1997, TAP repurchased an aggregate of
approximately 6.6 million shares of its Class A Common Stock held by four
private investors for approximately $240.8 million. This repurchase increased
TRV's ownership of TAP to approximately 83.4%.
Results of Operations
Consolidated results of operations include the accounts of TRV and its
subsidiaries, including Salomon and its subsidiaries (collectively, the
Company). Income from continuing operations for the year ended December 31, 1997
was $3.104 billion compared to $3.282 billion in 1996 and $2.141 billion in
1995. Included in income from continuing operations for the years ended December
31, 1997, 1996 and 1995 are net after-tax gains (losses) of $(255) million, $101
million and $74 million, respectively, as follows:
1997
- ----
o $496 million restructuring charge related to the acquisition of Salomon
Inc; and
o $241 million (after minority interest) of reported investment portfolio
gains.
1996
- ----
o $346 million (after minority interest) charge for reserve adjustments and
restructuring costs related to the acquisition of Aetna P&C;
o $363 million gain from the sale of Class A Common Stock by TAP;
o $31 million gain from the sale of The Mortgage Corporation Limited;
o $26 million net gain from the disposition of investment advisory
affiliates; and
o $27 million (after minority interest) of reported investment portfolio
gains.
1995
- ----
o $13 million provision for loss on disposition of an affiliate; and
o $87 million of reported investment portfolio gains.
Excluding these items, income from continuing operations for 1997 increased $178
million to $3.359 billion, or 6%, over 1996, primarily reflecting improved
performance in the Property & Casualty and Life Insurance segments, offset by
lower earnings at Salomon Smith Barney reflecting a decline in revenues from
principal transactions.
On the same basis, income from continuing operations for 1996 increased $1.114
billion to $3.181 billion, or 54%, over 1995, primarily reflecting improved
performance at Salomon Smith Barney, the inclusion of the property and casualty
business acquired from Aetna Services Inc. and increased earnings in the Life
Insurance segment.
3
<PAGE>
The following discussion presents in more detail each segment's operating
performance.
Investment Services
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1997 1996 1995
----------------------------------------------------------
Net Net Net
(millions) Revenues Income Revenues Income Revenues Income
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salomon Smith Barney (1) (2) $21,507 $ 1,151 $18,871 $ 1,871 $17,512 $ 1,112
=========================================================================================
</TABLE>
(1) Net income in 1997 includes a $496 million after-tax restructuring charge
related to the acquisition of Salomon Inc. Net income for 1996 includes a
$31 million after-tax gain on the sale of The Mortgage Corporation
Limited.
(2) Excludes results of Basis Petroleum, which are classified as discontinued
operations.
Salomon Smith Barney
Salomon Smith Barney's earnings have been restated as a result of the Merger to
include Salomon for all periods presented. As previously indicated, in 1997
Salomon Smith Barney recorded an after-tax restructuring charge of $496 million
($838 million before tax), primarily for severance and costs related to excess
or unused office space, facilities and other assets. Salomon Smith Barney's 1996
income includes a $31 million after-tax gain ($48 million before tax) related to
the sale of The Mortgage Corporation Limited (TMC), which originated and
serviced residential mortgages in the United Kingdom. Pre-tax profit margin
before the restructuring charge and the gain on the sale of TMC was 24.3% in
1997 compared to 28.3% in 1996 and 20.9% in 1995.
Salomon Smith Barney Revenues
Year Ended December 31,
- --------------------------------------------------------------------------------
(millions) 1997 1996 1995
- --------------------------------------------------------------------------------
Commissions $2,967 $2,612 $2,376
Investment banking 2,118 2,001 1,318
Principal transactions 2,504 3,027 2,140
Asset management and
administration fees 1,715 1,390 1,087
Interest income, net* 1,513 1,488 1,645
Other income 160 178 149
- --------------------------------------------------------------------------------
Net revenues* $10,977 $10,696 $8,715
================================================================================
* Net of interest expense of $10,530 million, $8,175 million and $8,797
million in 1997, 1996 and 1995, respectively. Revenues included in the
consolidated statement of income are before deductions for interest
expense.
Net revenues in 1997 were $11.0 billion, a 3% improvement over $10.7 billion in
1996, primarily reflecting increases in commissions and asset management and
administration fees offset by a decline in principal transaction revenues from
equities, fixed income and commodities trading. Net revenues in 1996 reflect
improvements over 1995 in most businesses, including fixed income trading,
investment banking, asset management and retail sales, and were partially offset
by a decrease in revenues from equities trading.
4
<PAGE>
Commission revenues increased 14% in 1997 to $2.97 billion, from $2.61 billion
in 1996 and $2.38 billion in 1995. The 1997 and 1996 increases reflect growth
in sales of listed and over-the-counter (OTC) securities as well as increased
insurance and annuity sales. The 1997 increase, also reflects higher commissions
from mutual funds activity.
Investment banking revenues were $2.12 billion in 1997 compared to $2.00 billion
in 1996 and $1.32 billion in 1995. The 6% increase in 1997 reflects revenue
growth in unit trusts, public finance, high yield and high grade debt
underwritings, and mergers and acquisitions. This was offset somewhat by a
decline in equity underwritings. For 1997, Salomon Smith Barney was ranked #1 in
the industry in municipal and mortgage debt underwritings, and #2 in both
domestic and global debt and equity underwriting, according to Securities Data
Corp. The 52% increase in 1996 was attributable to significant improvements in
equity and debt underwriting, combined with a higher level of advisory fees.
Principal transaction revenues from fixed income were $1.88 billion in 1997
compared to $2.05 billion in 1996 and $900 million in 1995. The 8% decrease in
1997 was the result of a decrease in revenues from long-term trading strategies,
partially offset by an increase in customer sales and trading. The 128% increase
in 1996 reflects strong performances in customer sales and trading, favorable
market conditions, and excellent results from long-term trading strategies.
Principal transaction revenues from equities were $397 million in 1997 compared
to $576 million in 1996 and $995 million in 1995. The 31% decrease in 1997
reflects the volatility in the global equity markets and a loss on a risk
arbitrage position in British Telecommunications PLC and MCI Communications
Corporation, partially offset by improved results in long-term equity
strategies. The 42% decrease in 1996 primarily reflects losses associated with
long-term equity strategies.
Principal transaction revenues from commodities were $218 million in 1997
compared with $393 million in 1996 and $238 million in 1995.
Asset management and administration fees were $1.72 billion in 1997 compared to
$1.39 billion in 1996 and $1.09 billion in 1995. The 23% increase in 1997
reflects broad growth in all recurring fee-based products, led by a 36% increase
in managed accounts, a 28% increase in externally managed Consulting Group
revenues, and an 11% increase in money market and mutual fund revenues.
Internally managed assets reached $164.1 billion, and total assets under
fee-based management were $223.8 billion at the end of 1997, representing
increases of 22% and 25%, respectively, compared with the prior year. The 28%
increase in asset management and administration fees in 1996 is due to growth in
assets under management, as well as bringing in-house all of the administrative
functions for Smith Barney proprietary mutual funds and money funds in the third
quarter of 1995.
Assets Under Fee-Based Management
Total assets under fee-based management at December 31, were as follows:
(billions) 1997 1996 1995
- --------------------------------------------------------------------------------
Money market funds $ 46.5 $ 41.6 $ 35.8
Mutual funds 51.9 40.4 36.1
Managed accounts 54.1 44.5 35.2
- --------------------------------------------------------------------------------
Salomon Smith Barney Asset Management 152.5 126.5 107.1
Financial Consultant managed accounts 11.6 7.9 5.6
- --------------------------------------------------------------------------------
Total internally managed accounts 164.1 134.4 112.7
Consulting Group externally managed assets 59.7 44.1 35.3
- --------------------------------------------------------------------------------
Total assets under fee-based management $223.8 $178.5 $148.0
================================================================================
5
<PAGE>
Net interest and dividends were $1.51 billion in 1997 compared to $1.49 billion
in 1996 and $1.64 billion in 1995. The 10% decrease in 1996 is primarily due to
a decrease in average net inventory balances partially offset by increased
margin lending to clients.
Total expenses, excluding interest and the Merger-related restructuring charge,
were $8.31 billion in 1997 compared to $7.67 billion in 1996 and $6.89 billion
in 1995. The 8% increase in 1997 and 11% increase in 1996 primarily reflect an
increase in production-related compensation and employee benefits expense,
reflecting increased revenues, as well as higher floor brokerage and other
production related costs. Compensation and employee-related expenses as a
percentage of revenues, net of interest expense was 55% in 1997, compared with
52% in 1996 and 56% in 1995. The ratio of non-compensation expenses (before the
restructuring charge) to revenues, net of interest expense was 21% in 1997, 20%
in 1996 and 23% in 1995. Salomon Smith Barney continues to maintain its focus on
controlling fixed expenses.
Asset Quality -- Salomon Smith Barney's assets at December 31, 1997 were
approximately $277 billion, consisting primarily of highly liquid marketable
securities and collateralized receivables. Approximately 51% of these assets
represent trading securities, commodities and derivatives used for proprietary
trading and to facilitate customer transactions and approximately 40% of these
assets were related to collateralized financing transactions where securities
are bought, borrowed, sold and lent in generally offsetting amounts. A
significant portion of the remainder of the assets represented receivables from
brokers, dealers, clearing organizations and customers that relate to securities
transactions in the process of being settled. The carrying values of the
majority of Salomon Smith Barney's securities inventories are adjusted daily to
reflect current prices. See Notes 1, 7, 8, 9 and 20 of Notes to Consolidated
Financial Statements for a further description of these assets.
Salomon Smith Barney's activities include trading securities that are less than
investment grade, characterized as "high yield." High yield securities include
corporate debt, convertible debt and preferred and convertible preferred equity
securities rated lower than "triple B-" by internationally recognized rating
agencies, unrated securities with market yields comparable to entities rated
below "triple B-," as well as sovereign debt issued by certain countries in
currencies other than their local currencies and which are not collateralized by
U.S. government securities. For example, high yield securities exclude the
collateralized portion of Salomon Smith Barney's holdings of "Brady Bonds," but
include such securities to the extent they are not collateralized. The trading
portfolio of high yield securities owned is carried at market or fair value and
totaled $6.8 billion at December 31, 1997; the largest high yield exposure to
one counterparty was $785 million.
Salomon Smith Barney's assets are financed through a number of sources including
long and short-term unsecured borrowings, the financing transactions described
above and payables to brokers, dealers and customers.
Outlook -- Salomon Smith Barney's business is significantly affected by the
levels of activity in the securities markets, which in turn are influenced by
the level and trend of interest rates, the general state of the global economy
and the national and worldwide political environments, among other factors.
As Salomon's operations are integrated with the existing operations of Smith
Barney, management expects to achieve, by the end of a two-year period,
annualized after-tax cost savings in excess of $200 million from the reduction
of overhead expenses, changes in corporate infrastructure and the elimination of
redundant expenses. There can be no assurance that these projected cost savings
will be achieved.
The following is a discussion of derivatives and risk management as they relate
to the operations of Salomon Smith Barney.
6
<PAGE>
Derivative Instruments
Derivatives are an integral element of the world's financial and commodity
markets. Globalization of economic activity has brought more market participants
in contact with foreign exchange and interest rate risk at a time when market
volatility has increased. Salomon Smith Barney has developed many techniques
using derivatives to enhance the efficiency of capital and trading risk
management.
Derivative instruments - overview -- Derivative instruments are contractual
commitments or payment exchange agreements between counterparties that "derive"
their value from some underlying asset, index, interest rate or exchange rate.
The markets for these instruments have grown tremendously over the past decade.
A vast increase in the types of derivative users and their motivations in using
these products has resulted in an expansion of geographic coverage, transaction
volume and liquidity, and the number of underlying products and instruments.
Derivatives have been used quite successfully by multinational corporations to
hedge foreign currency exposure, by financial institutions to manage gaps in
maturities between assets and liabilities, by investment companies to reduce
transaction costs and take positions in foreign markets without assuming
currency risk, and by non-financial companies to fix the prices of inputs into
the manufacturing process or prices of the products they sell. Derivatives are
also used by investors when, considering such factors as taxes, regulations,
capital, and liquidity, they provide the most efficient means of taking a
desired market position. These are just a few of the business objectives for
which derivatives are used. The list of objectives is large and continues to
grow rapidly.
Derivatives are accounted for and settled differently than cash instruments and
their use requires special management oversight. Such oversight should ensure
that management understands the transactions to which it commits the firm and
that the transactions are executed in accordance with sensible corporate risk
policies and procedures.
Derivatives activities, like Salomon Smith Barney's other ongoing business
activities, give rise to market, credit, and operational risks. Market risk
represents the risk of loss from adverse market price movements. While market
risk relating to derivatives is clearly an important consideration for
intermediaries such as Salomon Smith Barney, such risk represents only a
component of overall market risk, which arises from activities in non-derivative
instruments as well. Consequently, the scope of Salomon Smith Barney's market
risk management procedures extends beyond derivatives to include all financial
instruments and commodities. Credit risk is the loss that Salomon Smith Barney
would incur if counterparties failed to perform pursuant to their contractual
obligations. While credit risk is not a principal consideration with respect to
exchange-traded instruments, it is a major factor with respect to
non-exchange-traded OTC instruments. Whenever possible, Salomon Smith Barney
uses industry master netting agreements to reduce aggregate credit exposure.
Swap and foreign exchange agreements are documented utilizing counterparty
master netting agreements supplemented by trade confirmations. Over the past
several years, Salomon Smith Barney has enhanced the funding and risk management
of its derivatives activities through the increased use of bilateral security
agreements. Salomon Smith Barney, in particular, has been an industry leader in
promoting the use of this risk reduction technique. Based on notional amounts,
at December 31, 1997 and 1996, respectively, approximately 80% of Salomon Smith
Barney's swap portfolio was subject to the bilateral exchange of collateral.
This initiative, combined with the success of Salomon Swapco Inc, Salomon Smith
Barney's triple-A rated derivatives subsidiary, has greatly strengthened the
liquidity profile of Salomon Smith Barney's derivative trading activities. See
"Risk Management" for discussions of Salomon Smith Barney's management of
market, credit, and operational risks.
Nature and Terms of Derivative Instruments -- Salomon Smith Barney and its
subsidiaries enter into various bilateral financial contracts involving future
settlement, which are based upon a predetermined principal or par value
(referred to as the "notional" amount). Such instruments include swaps, swap
options, caps and floors, futures contracts, forward purchase and sale
agreements, option contracts and warrants. Transactions are conducted either
through organized exchanges or OTC. For a discussion of the nature and terms of
these instruments see Note 20 of Notes to Consolidated Financial Statements.
7
<PAGE>
Salomon Smith Barney's Use of Derivative Instruments -- Salomon Smith Barney's
use of derivatives can be broadly classified between trading and non-trading
activities. The vast majority of Salomon Smith Barney's derivatives use is in
its trading activities, which include market-making activities for customers and
the execution of proprietary trading strategies. Salomon Smith Barney's
derivative counterparties consist primarily of other major derivative dealers,
financial institutions, insurance companies, pension funds and investment
companies, and other corporations. The scope of permitted derivatives activities
both for trading and non-trading purposes for each of Salomon Smith Barney's
businesses is defined by senior management.
Trading Activities
A fundamental activity of Salomon Smith Barney is to provide market liquidity to
its customers across a broad range of financial instruments, including
derivatives. Salomon Smith Barney also seeks to generate returns by executing
proprietary trading strategies which are generally longer term in nature. By
their very nature, trading activities represent the assumption of risk. However,
trading positions are constructed in a manner that seeks to define and limit
risk taking only to those risks that Salomon Smith Barney intends to assume. The
most significant derivatives-related activity conducted by Salomon Smith Barney
is in fixed-income derivatives, which includes interest rate swaps, financial
futures, swap options, and caps and floors. Other derivative transactions, such
as currency swaps, forwards and options as well as derivatives linked to
equities, are also regularly executed by Salomon Smith Barney. Salomon Smith
Barney generally earns a spread from market-making transactions involving
derivatives, as it generally does from its market-making activities for
non-derivative transactions. Salomon Smith Barney also utilizes derivatives to
manage the market risk inherent in the securities inventories and derivative
portfolios it maintains for market-making purposes as well as its "book" of swap
agreements and related transactions with customers. Salomon Smith Barney
conducts its commodities dealer activities in organized futures exchanges as
well as in OTC forward markets. Salomon Smith Barney executes transactions
involving commodities options, forwards and swaps, much in the same manner as it
does in the financial markets.
Non-Trading Activities
Salomon Smith Barney also makes use of financial derivatives for non-trading, or
end user, purposes. As an end user, these instruments provide Salomon Smith
Barney with added flexibility in the management of its capital and funding
costs. Interest rate swaps are utilized to effectively convert the majority of
Salomon Smith Barney's fixed-rate term debt and a portion of its short-term
borrowings to variable-rate obligations. Cross-currency swaps and forward
currency contracts are utilized to effectively convert a portion of its non-U.S.
dollar-denominated term debt to U.S. dollar-denominated obligations and to
minimize the variability in equity otherwise attributable to exchange rate
movements.
Risk Management
Effective management of the risks inherent in Salomon Smith Barney's businesses
is critical. The following section discusses certain of the risks inherent in
Salomon Smith Barney's businesses, procedures in place to manage such risks, and
initiatives underway to continue to enhance Salomon Smith Barney's management of
risk.
Market Risk
Market risk represents the potential loss Salomon Smith Barney may incur as a
result of absolute and relative price movements in financial instruments,
commodities and contractual commitments, due to price volatility, changes in
yield curves, currency fluctuations and changes in market liquidity. Salomon
Smith Barney manages aggregate market risk across both on- and off-balance sheet
products and therefore separate discussion of market risk for individual
products, including derivatives, is not meaningful. The distinguishing risks
relative to derivatives are credit risk and funding (liquidity) risk, which is
roughly equivalent to the risk of margin calls. Each type of risk can be
increased or decreased by market movements. See "Risk Management - Credit Risk -
Credit Exposure from Derivative Activities."
Within Salomon Smith Barney's trading businesses, sound management of market
risk has always been a critical consideration. The sections that follow discuss
organizational elements of market risk management, as well as specific risk
management tools and techniques. Salomon Smith Barney has sought to
institutionalize these elements
8
<PAGE>
across all its businesses. Efforts to further strengthen Salomon Smith Barney's
management of market risk are ongoing and the enhancement of risk management
systems and reporting, including the development and utilization of quantitative
tools, is of major importance. Nevertheless, the basis for strong risk
management is the expertise and judgment of Salomon Smith Barney's trading
professionals and senior management, and open lines of communication.
Salomon Smith Barney's Risk Management Control Framework -- is based upon the
ongoing participation of senior management, business unit managers and the
coordinated efforts of various support units throughout the firm.
Salomon Smith Barney's risk management capabilities meet or exceed the risk
management requirements of the major regulatory and reporting bodies. These
requirements include the establishment of appropriate market and credit risk
controls, policies and procedures; appropriate senior management risk oversight
with thorough risk analysis and reporting; and independent risk management with
capabilities to evaluate and monitor risk limits.
Valuation and Control of Trading Inventory -- With regard to Salomon Smith
Barney's trading inventory (financial instruments, commodities and contractual
commitments), the Chairmen and Chief Executive Officers determine the
appropriate risk profile of Salomon Smith Barney with assistance from the other
members of the Risk Management Committee. This committee also includes senior
business managers, the Chief Financial Officer, the Chief Risk Officer and the
Global Risk Manager and reviews and recommends appropriate levels of risk,
reviews risk capital allocations, balance sheet and regulatory capital usage by
business units and recommends overall risk policies and controls. Lastly, an
independent Global Risk Management Group provides technical and quantitative
analysis of the market risk associated with inventory to the Chairmen and Chief
Executive Officers and members of the Risk Management Committee on a frequent
basis.
Trading inventory is necessary for an active market maker, but can be a major
source of liquidity risk. Monitoring Salomon Smith Barney's trading inventory
levels and composition and oversight for pricing is the responsibility of the
Global Risk Management Group and various support units, which monitor trading
inventory on a position by position level, and employ specific risk models to
track inventory exposure in credit markets, emerging markets and the mortgage
market. Salomon Smith Barney also provides for liquidity risk by imposing
markdowns as the age of the inventory increases. Inventory event risk, both for
issuer credit and emerging markets, is analyzed with the involvement of senior
traders, economists and credit department personnel. Market scenarios for the
major emerging markets are maintained and updated to reflect the event risk for
the emerging market inventory. In addition, Salomon Smith Barney, as a dealer of
securities in the global capital markets, has risk to issuers of fixed income
securities for the timely payment of principal and interest. Principal risk is
reviewed by the Global Risk Management Group, which identifies and reports major
risks undertaken by the trading businesses. The Credit Department combines
principal risk positions with credit risks resulting from market and delivery
risk to review aggregate exposures by counterparty, industry and country.
Risk Limits -- Salomon Smith Barney's trading businesses have implemented
business unit limits on exposure to risk factors. These limits, which are
intended to enforce the discipline of communicating and gaining approval for
higher risk positions, are periodically reviewed by the Global Risk Management
Group. Business units may not exceed risk limits without the approval of the
appropriate member of the Risk Management Committee.
Theoretical Revenue Reconciliation -- The trading units of Salomon Smith Barney,
the Global Risk Management Group and various support units perform periodic
revenue reconciliations, comparing actual revenues with the revenue outcome that
would have been expected based on risk factor exposures. A discrepancy between
the expected revenue impact for a given market event and the actual revenues may
indicate an unexplained dimension of market risk. Comparing the two thus
provides a fundamental check that risk management is capturing all the material
market risk factors and that the sources of trading risk and trading revenue are
consistent with the realized revenue.
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Tools for Risk Management and Reporting -- Salomon Smith Barney's market risk
measurement begins with the identification of relevant market risk factors.
These core risk factors vary from market to market, and region to region. Risk
factors are used in three types of analysis: stress analysis, scenario analysis
and value-at-risk analysis.
Stress Analysis. Salomon Smith Barney performs stress analysis by repricing
inventory positions for specified upward and downward moves in risk factors, and
computing the revenue implications of these repricings. Stress analysis is a
useful tool for identifying exposures that appear to be relatively small in the
current environment but grow more than proportionately with changes in risk
factors. Such risk is typical of a number of derivative instruments, includin