Annual Report (Form 10-K), fiscal year 1994

Item 1. BUSINESS.
THE COMPANY
Commercial Credit Company (the "Company") is a financial services holding company engaged, through its subsidiaries, principally in consumer finance services. The Company's predecessor was founded in 1912. The Company is a wholly owned subsidiary of The Travelers Inc. ("Travelers"), a financial services holding company engaged, through its subsidiaries, principally in four business segments: (i) Investment Services; (ii) Consumer Finance Services (through the Company); (iii) Life Insurance Services; and (iv) Property & Casualty Insurance Services. The periodic reports of Travelers provide additional business and financial information concerning that company and its consolidated subsidiaries.
On December 30, 1994, the Company sold its 50% interest in Commercial Insurance Resources, Inc. ("CIRI"), the parent of Gulf Insurance Company ("Gulf"), to an affiliate, The Travelers Indemnity Company ("Travelers Indemnity"), for $150 million. Travelers Indemnity had acquired the other 50% of CIRI in 1992, in connection with Travelers' acquisition of approximately 27% of the common stock of The Travelers Corporation ("old Travelers"). At that time, the Company acquired 8,947,367 shares of old Travelers common stock. See Note 2 of Notes to Consolidated Financial Statements. The Company's Consolidated Financial Statements include the results of operations of Gulf for all periods presented, and Travelers Indemnity's interest in Gulf in 1993 and 1994 is shown as minority interest. Gulf's businesses are not described in this Item 1; however, certain information regarding those businesses is included in the Annual Report on Form 10-K of Travelers.
The principal executive offices of the Company are located at 300 St. Paul Place, Baltimore, Maryland 21202; telephone number 410-332-3000.
CONSUMER FINANCE SERVICES
The Company's Consumer Finance Services segment includes consumer lending services conducted primarily under the name "Commercial Credit," as well as credit-related insurance and credit card services.
Consumer Finance
As of December 31, 1994, the Company maintained 828 loan offices in 42 states, and it plans to open approximately 50 additional loan offices in 1995. The Company
owns two state-chartered banks headquartered in Newark, Delaware, which generally limit their activities to offering credit card services nationwide. Total consumer finance receivables of this segment at December 31, 1994, 1993 and 1992 were approximately $6.9 billion, $6.3 billion, and $5.8 billion, respectively. For an analysis of consumer finance receivables, net of unearned finance charges ("Consumer Finance Receivables"), see Note 5 of Notes to Consolidated Financial Statements.
Loans to consumers by the Consumer Finance Services unit include secured and unsecured personal loans, both fixed and variable rate real estate-secured loans and loans to finance consumer goods purchases. Credit card loans are discussed below. The Company's loan offices are located throughout the United States. They are generally located in small to medium-sized communities in suburban or rural areas, and are managed by individuals who generally have considerable consumer lending experience. The primary market for the Company's consumer loans consists of households with an annual income of $20,000 to $50,000. The number of loan customers (excluding credit card customers) was approximately 1,250,000 at December 31, 1994, as compared to approximately 1,142,000 at December 31, 1993 and approximately 1,058,000 at December 31, 1992. A loan program of the Company solicits applications for loans through the sales force of the Primerica Financial Services group of companies, which are subsidiaries of Travelers. At December 31, 1994, the total loans outstanding generated from this program was approximately $1.1 billion, as compared to approximately $765 million at December 31, 1993 and approximately $487 million at December 31, 1992.
The average amount of cash advanced per personal loan made was approximately $4,200 in 1994 and $3,800 in each of 1993 and 1992. The average amount of cash advanced per real estate-secured loan made was approximately $28,400 in 1994, approximately $28,800 in 1993 and approximately $26,000 in 1992. The average annual yield for loans in 1994 was 15.41%, as compared to 15.83% in 1993 and 16.31% in 1992. The average annual yield for personal loans in 1994 was 20.20%, as compared to 20.11% in 1993 and 19.99% in 1992, and for real estate-secured loans it was 12.20% in 1994, as compared to 13.14% in 1993 and 14.05% in 1992. The average yield for real estate-secured loans has been affected by the introduction in 1993 of a variable rate product and by decreases generally in prevailing market interest rates. The Company's average net interest margin for loans was 8.76% in 1994, 8.44% in 1993 and 8.66% in 1992.
In the late 1980's, both delinquencies and charge-offs had increased, reflecting the recessionary economic environment. The Company took steps to combat this trend, by tightening the credit criteria used for making new loans and placing a greater emphasis on collection policies and practices. As a result of these measures and recent economic trends, delinquency rates generally have improved from 1992 through 1994. See "Delinquent Receivables and Loss Experience," below.
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 delinquency through careful evaluation of each borrower's application and credit history at the time the loan is made or acquired, and appropriate collection activity. An account is considered delinquent for financial reporting purposes when a payment is more than 60 days past due, based on the original or extended terms of the contract. The delinquency and loss experience on real estate- secured loans is generally more favorable than on personal loans.
The table on the following page shows the ratio of receivables delinquent for 60 days or more on a contractual basis (i.e., more than 60 days past due) to gross receivables outstanding:
Ratio of Receivables Delinquent 60 Days or More to Gross Receivables Outstanding (1)
Real Estate- Personal Secured Credit Sales Total Loans Loans Cards Finance Consumer ----- ----- ------ ------- -------- As of December 31, ------------------ 1994 2.40% 1.48% 1.05% 1.79% 1.88% 1993 2.62% 2.15% 1.03% 1.54% 2.21% 1992 3.02% 2.31% 1.87% 1.48% 2.55% __________________________ (1) The receivable balance used for these ratios is before the deduction of unearned finance charges and excludes accrued interest receivable. Receivables delinquent 60 days or more include, for all periods presented, accounts in the process of foreclosure.
The following table shows the ratio of net charge-offs to average Consumer Finance Receivables. For all periods presented, the ratios shown below give effect to all deferred origination costs.
Ratio of Net Charge-Offs to Average Consumer Finance Receivables
Real Estate- Personal Secured Credit Sales Total Loans Loans Cards Finance Consumer ----- ----- ------ ------- -------- Year Ending December 31, ------------ 1994 3.50% 0.82% 1.83% 2.03% 2.08% 1993 4.08% 0.84% 2.56% 1.78% 2.36% 1992 5.09% 0.74% 4.01% 2.05% 2.84%
The following table sets forth information regarding the ratio of allowance for losses to Consumer Finance Receivables.
Ratio of Allowance For Losses to Consumer Finance Receivables
As of December 31, ------------------ 1994 2.64% 1993 2.64% 1992 2.91%
Credit-Related Insurance
American Health and Life Insurance Company ("AHL"), a subsidiary of the Company, underwrites or arranges for credit-related insurance, which is offered to customers of the consumer finance business. AHL has an A+ (superior) rating from the A.M. Best Company, whose ratings may be revised or withdrawn at any time. Credit life insurance covers the declining balance of unpaid indebtedness. Credit disability insurance provides monthly benefits during periods of covered disability. Credit property insurance covers the loss of property given as security for loans. Other insurance products offered or arranged for by AHL include accidental death and dismemberment, auto single interest, and involuntary unemployment insurance. Most of AHL's products are single premium, which premiums are earned over the related contract period.
The following table sets forth gross written insurance premiums, net of refunds, for consumer finance customers:
Consumer Finance Insurance Premiums Written (in millions)
Year Ended December 31, ----------------------- 1994 1993 1992 ---- ---- ---- Premiums written by AHL and its affiliates(1) Writings for consumer finance: Credit life . . . . . . . . . $ 43.3 $ 36.4 $ 36.0 Credit disability and other . 69.3 49.2 $ 46.7 ------ ------ ------ Total . . . . . . . . . . . $112.6 $ 85.6 $ 82.7 ====== ====== ====== Premiums written by other insurance companies(2) Credit property and other . . $ 52.8 $ 38.7 $ 31.0 ====== ====== ====== _________________________ (1) Premiums are written by AHL and other subsidiaries of Travelers. (2) Premiums are written by nonaffiliated insurers for consumer finance customers.
The increase in 1994 written premiums is primarily the result of the increase in receivables and expanded availability of certain products in additional states.
See Note 7 of Notes to Consolidated Financial Statement for information regarding reinsurance activities.
Investments
The investment holdings of the insurance companies at December 31, 1994 were composed primarily of fixed income securities. At December 31, 1994, approximately 97% in total dollar amount of the fixed income securities portfolios of the Company's insurance subsidiaries had investment grade ratings. The remaining investments are principally issues of utilities and private placement securities that are not subject to investment rating. State insurance laws prescribe the types, quality and diversity of permissible investments for insurance companies. See Note 4 of Notes to Consolidated Financial Statements for additional information regarding the investment portfolios.
Credit Card Services
The Travelers Bank, a subsidiary of the Company, is a state-chartered bank located in Newark, Delaware, which provides credit card services, including upper market gold credit card services, to individuals and to affinity groups (such as nationwide professional associations and fraternal organizations). The Travelers Bank USA, another state-chartered bank subsidiary of the Company, was formed in September 1989. The Travelers Bank USA is not subject to certain regulatory restrictions relating to growth and cross-marketing activities to which The Travelers Bank is subject. See "Regulation" below. These banks generally limit their activities to credit card operations.
The following table sets forth aggregate information regarding credit cards issued by The Travelers Bank and The Travelers Bank USA:
Credit Cardholders and Total Outstandings (outstandings in millions of dollars)
As of and for the year ended December 31, ----------------------------------------- 1994 1993 1992 ---- ---- ---- Approximate total credit cardholders 621,000 534,000 423,000 Approximate gold credit cardholders 519,000 478,000 371,000 Total outstandings $712.5 $697.1 $538.2 Average annual yield 11.88% 11.66% 12.12%
The primary market for the banks' credit cards consists of households with annual incomes of $40,000 and above.
The banks offer deposit-taking services (which as to The Travelers Bank USA are limited to deposits of at least $100,000 per account). At December 31, 1994, deposits of unaffiliated entities were $73.5 million, as compared to $56.7 million at December 31, 1993 and $22.4 million
at December 31, 1992. The increase in deposits in 1993 supported a balance transfer promotion conducted by The Travelers Bank during 1993.
Competition
The consumer finance business competes with banks, savings and loan associations, credit unions, credit card issuers and other consumer finance companies. Additionally, substantial national financial services networks have been formed by major brokerage firms, insurance companies, retailers and bank holding companies. Some competitors have substantial local market positions; others are part of large, diversified organizations. Deregulation of banking institutions has greatly expanded the consumer lending products permitted to be offered by these institutions, and because of their long-standing insured deposit base, many of them are able to offer financial services on very competitive terms. The Company believes that it is able to compete effectively with such institutions. In particular, the Company believes that the diversity and features of the products it offers, personal service and cultivation of repeat and referral business support and strengthen its competitive position in its Consumer Finance Services businesses.
Regulation
Most consumer finance activities are subject to extensive federal and state regulation. 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 Company's banks, which must undergo periodic examination, are subject to additional regulations relating to capitalization, leverage, reporting, dividends and permitted asset and liability products. These banks are also covered by the Competitive Equality Banking Act of 1987 (the "Banking Act"), which, among other things, prevents the Company from acquiring or forming most types of new banks or savings and loan institutions and, with respect to The Travelers Bank, restricts cross-marketing of products by or of certain affiliates. The Company's banks are also subject to the Community Reinvestment Act, which requires a bank to provide equal credit opportunity to all persons in such bank's delineated community. The Company believes that it complies in all material respects with applicable regulations.
The Real Estate Settlement Procedures Act of 1974 ("RESPA") has been extended to cover real estate-secured loans that are subordinated to other mortgage loans. Generally, RESPA requires disclosure of certain information to customers and regulates the receipt or payment of fees or charges for services performed.
The Company's insurance subsidiaries are subject to considerable regulation and supervision by insurance departments or other authorities in each state or other jurisdiction in
which they transact business. The laws of the various jurisdictions establish supervisory and regulatory agencies with broad administrative powers. The purpose of such regulation and supervision is primarily to provide safeguards for policyholders, rather than to protect the interests of the insurers' stockholders. State laws also regulate transactions and dividends between an insurance company and its parent or affiliates, and require prior approval or notification of any change in control of an insurance subsidiary. In addition, under insurance holding company legislation, most states regulate affiliated groups with respect to intercorporate transfers of assets, service arrangements and dividend payments from insurance subsidiaries.
Proposed legislation has been introduced in Congress that would modify certain laws and regulations affecting the financial services industry, including the provisions regarding affiliations among insurance companies, investment banks and commercial banks. The potential impact of such legislation on the Company's businesses cannot be predicted at this time.
The insurance industry generally is exempt from federal antitrust laws because of the application of the McCarran-Ferguson Act. In recent years, legislation has been introduced to modify or repeal the McCarran- Ferguson Act. The effect of any such modification or repeal cannot currently be determined.
CORPORATE AND OTHER OPERATIONS
The Corporate and Other segment consists of corporate staff and treasury operations, corporate investments and certain corporate income and expenses that have not been allocated to the operating subsidiaries. During 1993, this segment also included the Company's share of equity income of old Travelers. See Notes 3 and 4 of Notes to Consolidated Financial Statements.
Investment in Travelers
On December 31, 1993, Travelers acquired the approximately 73% it did not already own of old Travelers, by means of a merger of old Travelers into Travelers. As a result of the merger, the Company's investment in the common stock of old Travelers, which through that date had been carried on the equity basis of accounting, was exchanged for 7.2 million shares of common stock of Travelers at a ratio of 0.80423 of a share of Travelers common stock for each share of old Travelers common stock. During 1994, all of the Company's shares of Travelers common stock were exchanged for 2,655 shares of Cumulative Adjustable Rate Preferred Stock, Series Y, of Travelers, with a liquidation value of $100,000 per share, which is redeemable at the option of the holder at certain times and callable by Travelers at certain times. The preferred stock had a value equal to the market
value of the common shares at the time the exchange was agreed upon. Subsequently 550 shares of preferred stock were distributed to Travelers as a dividend.
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, 1994, the Company had approximately 5,000 full- time employees. The Company also employs part-time employees.
OTHER INFORMATION
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 6 of Notes to Consolidated Financial Statements.
The following table sets forth information concerning annual weighted average interest rates on the Company's borrowed funds:
Annual Weighted Average Interest Rates
Years ended December 31, ------------------------ 1994 1993 1992 ---- ---- ---- Certificates of deposit 4.6% 4.4% 5.4% Short-term borrowings (1) 4.4% 3.2% 3.8% Long-term borrowings (2) 7.7% 8.0% 8.4% Total borrowings 6.4% 6.3% 6.6%
____________________ (1) Includes all commercial paper and short-term bank loans; does not include cost of maintaining bank credit lines. (2) Includes current maturities of long-term debt and amortization of long-term debt expenses.
Taxation
For a discussion of tax matters affecting the Company and its operations, see Notes 1 and 8 of Notes to Consolidated Financial Statements.
Financial Information about Industry Segments
For financial information regarding industry segments of the Company, see Note 3 of Notes to Consolidated Financial Statements.
Item 2.



Item 2. PROPERTIES.
The Company is engaged in the business of providing services that are generally not dependent upon their physical plant. In 1989, a subsidiary of the Company completed the sale of the Company's headquarters office building in Baltimore, Maryland, and the lease back of a portion of the space therein, which is used by the Company as its executive offices. Offices and other properties used by the Company's subsidiaries are located throughout the United States. One subsidiary owns and uses office space in Tel Aviv, Israel. Most office locations and other properties are leased on terms and for durations that are reflective of commercial standards in the communities where such offices and other properties are located. A few offices are owned, none of which is material to the Company's financial condition or operations.
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 12 of Notes to Consolidated Financial Statements.
Item 3.

Item 3. LEGAL PROCEEDINGS.
For information concerning Gallagher, et. al. v. American Health and Life Insurance Company, et. al., a purported class action relating to annuity policies that were transferred by the defendants to an unaffiliated insurance company that is now insolvent, see the description that appears in the second paragraph of page 2 of the Company's filing on Form 8-K dated July 28, 1992, which description is incorporated by reference herein. A copy of the pertinent paragraph of such filing is included as an exhibit to this Form 10-K. The Company has reached a settlement, which has been tentatively approved by the court, with respect to all of these claims. The settlement will not have a material effect on the Company's financial condition, results of operations or liquidity.
For information concerning certain purported class action lawsuits filed against the Company and certain of its subsidiaries in May and June 1994, see the description that appears in the second paragraph of page 2 of the Company's filing on Form 8-K dated
July 13, 1994, which description is incorporated by reference herein. A copy of the pertinent paragraph of such filing is included as an exhibit to this Form 10-K. The Lawrence case is stayed pending a decision by the Supreme Court of Alabama in a case raising similar issues regarding credit life insurance. The Erkins case was dismissed without prejudice in March 1995, and claims relating only to nonfiling insurance have been restated in an amended complaint filed in March 1995 in the Nobels action.
Because the nature of the businesses of the Company and its subsidiaries involves the collection of numerous accounts, the validity of liens, accident and other damage or loss claims under many types of insurance, and the construction and interpretation of contracts, the Company and its subsidiaries are plaintiffs and defendants in numerous legal proceedings. 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.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Pursuant to General Instruction J of Form 10-K, the information required by Item 4 is omitted.
PART II -------
Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the outstanding common stock of the Company is owned by CCC Holdings, Inc., which is a wholly owned subsidiary of Travelers.
Item 6.

Item 6. SELECTED FINANCIAL DATA.
--------------------------------------------
(1) Included in 1993 results are $34.9 of equity in the income of The Travelers Corporation (old Travelers) and after-tax investment portfolio gains of $30.3. Included in 1992 results are after-tax gains of $7.1 from the sale of stock of subsidiaries and affiliates and $22.7 from the sale of a common stock investment in Musicland Stores Corporation.
(2) See Note 1 of Notes to Consolidated Financial Statements for information regarding changes in accounting principles in 1992 and 1993.
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
Commercial Credit Company's (the Company) earnings for 1994, include $7.3 million of dividend income from the securities of The Travelers Inc. (Parent) that were exchanged for the Company's investment (excluding shares held by American Health and Life Insurance Company) in The Travelers Corporation (old Travelers). Earnings for 1993 include $34.9 million of equity in the income of old Travelers and reported after-tax net investment portfolio gains of $22.7 million in the Consumer Finance Segment and $7.6 million (after minority interest) at Gulf Insurance Company (Gulf). Also included in earnings for 1993, is an after-tax charge of $3.4 million resulting from the adoption of Statement of Financial Accounting Standards No. 112 (FAS 112), "Employers' Accounting for Postemployment Benefits," and an after-tax charge of $2.4 million resulting from the adoption of Statement of Financial Accounting Standards No. 106 (FAS 106). "Employers' Accounting for Postretirement Benefits Other Than Pensions." Excluding these items, earnings for 1994 decreased by $12.0 million from the 1993 period, reflecting primarily higher net interest costs in the Corporate segment, offset in part by higher earnings in the Consumer Finance and Insurance segments.
Earnings for 1992 include reported investment portfolio gains of $10.3 million; a gain of $22.7 million from the sale of the common stock investment in Musicland Stores Corporation (Musicland); a gain of $11.1 million from the exchange of 50% of Commercial Insurance Resources, Inc. (CIRI), the parent of Gulf Insurance Company (Gulf), for The Travelers Corporation (old Travelers) common stock; a net loss of $4.0 million from the divestment of securities of the Company's affiliate, Inter- Regional Financial Group, Inc. (IFG); and an after-tax charge of $18.1 million resulting from the adoption of Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes."
The most significant factors in 1993's earnings growth over 1992 were improved performance of Consumer Finance Services and the 1993 contribution to earnings from the equity investment in old Travelers. These were partially offset by the 1993 minority interest in Gulf and higher corporate expenses.
The following discussion presents in more detail each segment's performance.
Consumer Finance Services
(1) Net income includes $22.7 and $4.3 of reported investment portfolio gains in 1993 and 1992, respectively.
Consumer Finance earnings before reported investment portfolio gains increased 8% in 1994 over the prior year. The increase primarily reflects an 11% increase in average receivables outstanding and an improvement in net interest margins. The increase in net income and revenues in 1993 compared to 1992 reflects a 3% increase in average receivables outstanding and a significant decline in loan losses.
Receivables increased in 1994 by $543.6 million to end the year at $6.885 billion. The increase occurred across-the-board and was highlighted by a 15% increase in personal loans. Sixty branch offices were added, bringing the total to 828 at year end.
Consumer Finance borrows from the Company's corporate treasury operations which raises funds externally. For fixed rate loan products Consumer Finance is charged agreed upon rates that have generally been set within a narrow range and approximated 8% in 1992 and 1993 and 7.2% in 1994. For variable rate loan products Consumer Finance is charged rates based on prevailing short term rates. The Company's actual cost of funds may be higher or lower than rates charged to Consumer Finance, with the difference reflected in Corporate and Other.
The average yield on receivables outstanding decreased to 15.41% in 1994 from 15.83% in the prior year end and 16.31% in 1992, due to lower yields on fixed rate second mortgages and the adjustable rate real estate-secured loan product introduced at the end of 1992. Decreased cost of funds has resulted in an improvement in net interest margins to 8.76% in 1994 from 8.44% in 1993 and 8.66% in 1992.
The allowance for losses as a percentage of net receivables was 2.64% at year-end 1994 and 1993 compared to 2.91% at year-end 1992 reflecting the improved credit quality of the loan portfolio.
As of, and for, the Year Ended December 31, ------------------------- 1994 1993 1992 ------------------------- Allowance for losses as % of net consumer finance receivables at year end 2.64% 2.64% 2.91%
Charge-off rate for the year 2.08% 2.36% 2.84%
60 + days past due on a contractual basis as % of gross consumer finance receivables at year end 1.88% 2.21% 2.55%
Subsidiaries of the Company provide credit life, health and property insurance to Consumer Finance customers. Premiums earned were $111.6 million in 1994, $84.8 million in 1993 and $86.1 million in 1992. The increase in 1994 premiums is the result of the increase in receivables and expanded availability of certain products in additional states, as well as the
reinsurance by the Company in 1994 of business previously insured by non- affiliated companies.
Outlook - Consumer Finance is affected by the interest rate environment and general economic conditions. In a rising interest rate environment, net real estate loan liquidations may decline compared to the last two years, when potential customers refinanced their first mortgages instead of turning to the second mortgage market, or proceeds from the refinancing of first mortgages were used to pay off existing second mortgages. Lower loan liquidations would benefit the level of receivables outstanding. In addition, a rising interest rate environment could also reduce the downward pressure experienced during the last several years on the interest rates charged on new real estate-secured receivables, as well as credit cards, which are substantially based on the prime rate. However, significantly higher rates could result in an increase in the interest rates charged to Consumer Finance on the funds it borrows from CCC to reflect the Company's overall higher cost of funds.
Asset Quality - Consumer Finance assets totaled approximately $7.7 billion at December 31, 1994, of which $6.7 billion, or 87%, represented the net consumer finance receivables (after accrued interest and the allowance for credit losses). These receivables were predominantly residential real estate-secured loans and personal loans. Receivable quality depends on the likelihood of repayment. The Company seeks to reduce its risks by focusing on individual lending, making a greater number of smaller loans than would be practical in commercial markets, and maintaining disciplined control over the underwriting process. The Company has a geographically diverse portfolio as described in Note 5 of Notes to Consolidated Financial Statements. The Company believes that its loss reserves on the consumer finance receivables are appropriate given current circumstances.
Of the remaining Consumer Finance assets, approximately $555 million were investments of insurance subsidiaries, including $463 million of fixed- income securities and $61 million of short-term investments with a weighted average quality rating of Aa2.
Insurance Services
(1) Net income includes $15.2 and $6.0 of reported investment portfolio gains in 1993 and 1992, respectively and $22.7 from the sale of Musicland common stock in 1992.
The Insurances Services segment includes the operations of Gulf and the non-affiliated insurance business of AHL. As discussed in Note 2 of Notes to Consolidated Financial Statements on December 30, 1994 the Company sold its 50% interest in Commercial Insurance Resources, Inc. (CIRI), the parent of Gulf Insurance Company (Gulf), to an affiliate, The Travelers Indemnity Company for $150 million.
Operating earnings (before reported portfolio gains) for the 1994 period for Gulf remained about even with the prior year period, and continue to reflect emphasis on the higher margin specialty businesses, which include directors' and officers', errors and omissions, fidelity bonds and contingent liability coverages, as well as coverages relating to the entertainment industry and other specialty markets. Gulf's combined ratio was 99.1% for 1994 versus 95.9% in 1993.
Earnings from Gulf in 1993 increased slightly compared to 1992, before old Travelers' 50% minority interest, reported net investment portfolio gains of $15.2 million and $6.0 million in 1993 and 1992, respectively, and a $22.7 million gain in 1992 from the sale of Musicland. Notwithstanding a $2 million after-tax provision for losses from Hurricane Andrew in the third quarter of 1992, Gulf's 1992 earnings improved over 1991, as a result of the growth of the specialty business.
Corporate and Other
The decline in Corporate and Other net income in 1994 compared to 1993 is primarily attributable to increases in interest costs borne at the corporate level.
Corporate and Other in 1993 reflects lower income from miscellaneous investments, somewhat higher corporate expenses and lower net interest income reflecting an increase in the proportion of variable rate loans in the Consumer Finance receivables portfolio. These factors were partially offset by lower interest rates on debt in 1993 compared to 1992.
The 1993 equity in income of old Travelers of $34.9 million includes $3.0 million from the Company's share of old Travelers' realized portfolio gains. The 1992 net gain on sale of stock of an affiliate represents a gain of $11.1 million from the exchange of 50% of CIRI, the parent of Gulf, for old Travelers common stock and an after-tax loss of $4.0 million relating to the sale of Inter-Regional Financial Group, Inc. common stock.
Liquidity and Capital Resources
The Company issues commercial paper directly to investors and maintains unused credit availability under committed revolving credit agreements at least equal to the amount of commercial paper outstanding. As of December 31, 1994, the Company had unused credit availability of $3.010 billion consisting of $2.280 billion under 5-year revolving credit facilities and $730 million under 364-day revolving credit facilities. The Company may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees.
During 1994 the Parent, the Company and The Travelers Insurance Company (TIC) entered into an agreement with a syndicate of banks to provide $1.5 billion of revolving credit, to be allocated to any of the Parent, the Company or TIC. The participation of TIC in this agreement is limited to $300 million. The revolving credit facility consists of a 364-day revolving credit facility in the amount of $300 million and a 5-year revolving credit facility in the amount of $1.2 billion. At December 31, 1994, $650 million was allocated to the Company and $200 million to TIC.
During 1994 and through March 3, 1995, CCC completed the following debt offerings leaving $950 million available for debt offerings under its shelf registration statement:
- 7 7/8% Notes due July 15, 2004 $200 million - 8 1/4% Notes due November 1, 2001 $300 million - 7 7/8% Notes due February 1, 2025 $200 million - 7 3/4% Notes due March 1, 2005 $200 million
The Company is limited by covenants in its revolving credit agreements as to the amount of dividends and advances that may be made to the Parent or its affiliated companies. At December 31, 1994, the Company would have been able to remit $270.3 million to the Parent under its most restrictive covenants or regulatory requirements.
Recent Accounting Standards
FAS 114 and FAS 118 Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," describe how impaired loans should be measured when determining the amount of a loan loss accrual. These Statements also amend existing guidance on the measurement of restructured loans in a troubled debt restructuring involving a modification of terms. The adoption of these Statements effective January 1, 1995 will not have a material effect on the Company's results of operations or financial position.
Item 8.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements and Schedules on page hereof. There is also incorporated by reference herein in response to this Item the Company's Consolidated Financial Statements and the notes thereto and the material under the caption "Quarterly Financial Data (Unaudited)" set forth in the Consolidated Financial Statements.
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III --------
Item 10.



Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction J of Form 10-K, the information required by Item 10 is omitted.
Item 11.

Item 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction J of Form 10-K, the information required by Item 11 is omitted.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction J of Form 10-K, the information required by Item 12 is omitted.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction J of Form 10-K, the information required by Item 13 is omitted.
PART IV -------
Item 14.

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 hereof.
(2) Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedules on page hereof.
(3) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
On October 31, 1994, the Company filed a Current Report on Form 8-K, dated October 31, 1994, reporting under Item 5 thereof the results of its operations for the three months and nine months ended September 30, 1994, and certain other selected financial data.
On November 8, 1994, the Company filed a Current Report on Form 8-K, dated November 3, 1994, filing certain exhibits under Item 7 thereof relating to the sale of the Company's 8 1/4% Notes due November 1, 2001.
On December 7, 1994, the Company filed a Current Report on Form 8-K, dated November 30, 1994, reporting under Item 5 thereof the proposed sale of the Company's interest in the parent of Gulf Insurance Company to The Travelers Indemnity Company.
No other reports on Form 8-K have been filed by the Company during the last quarter of the period covered by this report; however, on January 18, 1995, the Company filed a Current Report on Form 8-K, dated January 17, 1995, reporting under Item 5 thereof the results of its operations for the three months and year ended December 31, 1994, and certain other
selected financial data; on January 20, 1995, the Company filed a Current Report on Form 8-K, dated January 18, 1995, filing certain exhibits under Item 7 thereof relating to the Company's Medium-Term Note Program; on February 7, 1995, the Company filed a Current Report on Form 8-K, dated February 3, 1995, filing certain exhibits under Item 7 thereof relating to the sale of the Company's 7 7/8% Notes due February 1, 2025; on February 27, 1995, the Company filed a Current Report on Form 8-K, dated February 23, 1995, filing certain exhibits under Item 7 thereof relating to the sale of the Company's 7 3/4% Notes due March 1, 2005; and on March 16, 1995, the Company filed a Current Report on Form 8-K, dated March 14, 1995, filing certain exhibits under Item 7 thereof relating to the sale of the Company's 7 3/8% Notes due March 15, 2002.
Copies of any of the exhibits referred to above will be furnished at a cost of $.25 per page to security holders who make written request therefor to Patricia A. Rouzer, Corporate Communications and Investor Relations, Commercial Credit Company, 300 St. Paul Place, Baltimore, Maryland 21202.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March, 1995.
COMMERCIAL CREDIT COMPANY (Registrant)
By: /s/ Robert B. Willumstad . . . . . . . . . . . . . . Robert B. Willumstad, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on the 30th day of March, 1995.
Signature Title --------- -----
/s/ Robert B. Willumstad . . . . . . . . . . . . . . Chairman of the Board, Chief Robert B. Willumstad Executive Officer (Principal Executive Officer) and Director
/s/ William R. Hofmann . . . . . . . . . . . . . . Vice President and Chief William R. Hofmann Financial Officer (Principal Financial Officer)
/s/ Irwin R. Ettinger . . . . . . . . . . . . . . Senior Vice President, Chief Irwin R. Ettinger Accounting Officer (Principal Accounting Officer) and Director
/s/ James Dimon . . . . . . . . . . . . . . Director James Dimon
/s/ Jerome T. Fadden . . . . . . . . . . . . . . Director Jerome T. Fadden
/s/ Robert I. Lipp . . . . . . . . . . . . . . Director Robert I. Lipp
COMMERCIAL CREDIT COMPANY and SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES*
Page Herein ------ Independent Auditors' Report
Consolidated Statement of Income for the year ended December 31, 1994, 1993 and 1992
Consolidated Statement of Financial Position at December 31, 1994 and 1993
Consolidated Statement of Changes in Stockholder's Equity for the year ended December 31, 1994, 1993 and 1992
Consolidated Statement of Cash Flows for the year ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements -
Schedules:
Schedule I - Condensed Financial Information of Registrant (Parent Company only) -
*Schedules not listed are omitted as not applicable or not required by Regulation S-X.
Independent Auditors' Report ----------------------------
The Board of Directors and Stockholder Commercial Credit Company:
We have audited the consolidated financial statements of Commercial Credit Company and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commercial Credit Company and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for certain investments in debt and equity securities in 1994. Also, as discussed in Note 1 to the consolidated financial statements, the Company changed its methods of accounting for postretirement benefits other than pensions and accounting for postemployment benefits in 1993, and its method of accounting for income taxes in 1992.
/s/ KPMG Peat Marwick LLP New York, New York January 17, 1995
See Notes to Consolidated Financial Statements.
COMMERCIAL CREDIT COMPANY and SUBSIDIARIES Notes to Consolidated Financial Statements (In millions of dollars)
1. Summary of Significant Accounting Policies ------------------------------------------
Basis of Presentation
Commercial Credit Company (the Company) is a wholly owned subsidiary of CCC Holdings, Inc. which is a wholly owned subsidiary of The Travelers Inc. (formerly Primerica Corporation) which is hereinafter referred to as the Parent.
Changes in Accounting Principles
FAS 115. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which addresses accounting and reporting for investments in equity securities that have a readily determinable fair value and for all debt securities. Debt securities that the Company has the positive intent and ability to hold to maturity have been classified as "held to maturity" and have been reported at amortized cost. Investment securities that are not classified as "held to maturity" have been classified as "available for sale" and are reported at fair value, with unrealized gains and losses, net of income taxes, charged or credited directly to stockholder's equity. Previously, securities classified as available for sale were carried at the lower of aggregate cost or market value. Initial adoption of this standard resulted in a net increase of $80.8 (net of taxes) to net unrealized gains on investment securities which is included in stockholder's equity.
FAS 106. In 1993, the Company adopted FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FAS 106). As required, the Company changed its method of accounting for retiree benefit plans effective January 1, 1993, to accrue the Company's share of the costs of postretirement benefits over the service period rendered by employees. Previously these benefits were charged to expense when paid. The Company elected to recognize immediately the liability for postretirement benefits as the cumulative effect of a change in accounting principle. This resulted in a noncash after-tax charge to net income of $2.4 ($3.7 pre-tax). Ongoing net periodic postretirement benefit costs are not material.
FAS 112. In 1993, the Company adopted FAS No. 112, "Employers' Accounting for Postemployment Benefits" (FAS 112), with retroactive application to January 1, 1993. FAS 112 establishes accounting standards for employers who provide benefits to former or inactive employees after employment, but before retirement. For the Company these benefits are principally disability-related benefits and severance. The statement requires employers to recognize the cost of the obligation to provide these benefits on an accrual basis, and employers must implement FAS 112 by recognizing a cumulative effect of a change in accounting principle. This resulted in a noncash after-tax charge to net income of $3.4 ($5.3 pre-tax).
FAS 113. In the first quarter of 1993, the Company adopted FAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long- Duration Contracts" (FAS 113). FAS 113
Notes to Consolidated Financial Statements (continued)
requires the reporting of reinsurance receivables and prepaid reinsurance premiums as assets and precludes the immediate recognition of gains for all reinsurance contracts unless the liability to the policyholder has been extinguished. Adoption of FAS 113 did not have an impact on the Company's earnings; however, assets and liabilities increased by like amounts. See Note 7 for additional reinsurance disclosures.
Accounting Policies
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries. Unconsolidated entities in which the Company has at least a 20% interest are accounted for on the equity method. The minority interest in 1994 and 1993 represents the old Travelers' interest in Gulf Insurance Company (Gulf). Significant intercompany transactions and balances have been eliminated.
Certain reclassifications have been made to prior years' financial statements to conform to current year's presentation.
Cash and cash equivalents include cash on hand and short-term highly liquid investments with original maturities of three months or less, other than those held for sale in the ordinary course of business. These short-term investments are carried at cost plus accrued interest, which approximates market value.
Investments are owned principally by the insurance subsidiaries. Fixed maturities include bonds, notes and redeemable preferred stocks. Equity securities include common and non-redeemable preferred stocks. Fixed maturities classified as "held to maturity" represent securities that the Company has both the ability and the intent to hold until maturity and are carried at amortized cost. Fixed maturity securities classified as "available for sale" and equity securities are carried at market values that are based primarily on quoted market prices. The difference between amortized cost and market values of such securities net of applicable income taxes is reflected as a component of stockholders' equity. Provisions are made to write down the value of fixed maturity securities for declines in value that are other than temporary. Mortgage loans and short-term investments are carried at cost, which approximates fair value. Realized gains and losses on sales of investments are included in other income on a specific identification basis.
At December 31, 1993 noninsurance entities carried investments at the lower of aggregate cost or quoted market value.
The cost of acquired businesses in excess of net assets is being amortized on a straight-line basis principally over a 40-year period.
Income taxes have been provided for in accordance with the provisions of FAS No. 109, "Accounting for Income Taxes" (FAS 109), which was adopted effective January 1, 1992. The Company and its wholly owned domestic non-life insurance subsidiaries file a consolidated federal income tax return with the Parent. A life insurance subsidiary files a separate federal income tax return. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and their recorded amounts for financial reporting purposes.
Income taxes are not provided for on the Company's life insurance subsidiary's retained earnings designated as "policyholders' surplus," because such taxes will become payable only to the extent
Notes to Consolidated Financial Statements (continued)
such retained earnings are distributed as a dividend or exceed limits prescribed by federal law. Distributions are not contemplated from this portion of the life insurance companies' retained earnings, which aggregated $39.5 (subject to a tax effect of $13.8) at December 31, 1994.
Financial Instruments - Disclosures About Fair Value - Included in the Notes to Consolidated Financial Statements are various disclosures relating to the methods and assumptions used to estimate fair value of each material type of financial instrument. The carrying value of short-term financial instruments approximates fair value because of the relatively short period of time between the origination of the instruments and their expected realization. The carrying value of receivables and payables arising in the ordinary course of business approximates fair market value. The fair value assumptions were based upon subjective estimates of market conditions and perceived risks of the financial instruments at a certain point in time. Disclosed fair values for financial instruments do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.
Accounting Standards Not Yet Adopted
FAS 114 and FAS 118 FAS No. 114, "Accounting by Creditors for Impairment of a Loan," and FAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," describe how impaired loans should be measured when determining the amount of a loan loss accrual. These Statements also amend existing guidance on the measurement of restructured loans in a troubled debt restructuring involving a modification of terms. The adoption of these statements effective January 1, 1995, will not have a material effect on results of operations or financial position.
CONSUMER FINANCE SERVICES
Finance related interest and other charges are recognized as income using the constant yield method. Allowances for losses are established by direct charges to income in amounts sufficient to maintain the allowance at a level management determines to be adequate to cover losses in the portfolio. The allowance fluctuates based upon continual review of the loan portfolio and current economic conditions. For financial reporting purposes, finance receivables are considered delinquent when they are more than 60 days contractually past due. Income stops accruing on finance receivables when they are 90 days contractually past due. If payments are made on a finance receivable that is not accruing income, and the receivable is no longer 90 days contractually past due, the accrual of income resumes. Finance receivables are charged against the allowance for losses when considered uncollectible. Personal loans are considered uncollectible when payments are six months contractually past due and six months past due on a recency of payment basis. Loans that are twelve months contractually past due regardless of recency of payment are charged off. Recoveries on losses previously charged to the allowance are credited to the allowance at the time of recovery. Consideration of whether to proceed with foreclosure on loans secured by real estate begins when a loan is 60 days past due on a contractual basis. Real estate credit losses are recognized when the title to the property is obtained.
Fees received and direct costs incurred for the origination of loans are deferred and amortized over
Notes to Consolidated Financial Statements (continued)
the contractual lives of the loans as part of interest income. The remaining unamortized balances are reflected in interest income at the time that the loans are paid in full, renewed or charged off.
INSURANCE SERVICES
Premiums from short-duration insurance contracts are earned over the related contract period. Short-duration contracts include primarily property and casualty, credit life and accident and health credit policies. Benefits and expenses are associated with premiums by means of the provision for future policy benefits, unearned premiums and the deferral and amortization of policy acquisition costs.
Deferred policy acquisition costs represent the costs of acquiring new business, principally commissions, certain underwriting and agency expenses and the cost of issuing policies. Acquisition costs of the life insurance subsidiary are amortized over the premium-paying periods of the related policies, in proportion to the ratio of the annual premium revenue to the total anticipated premium revenue. For certain property and casualty lines, acquisition costs such as commissions, premium taxes and certain other underwriting and agency expenses have been deferred to the extent recoverable from future earned premiums and anticipated investment income and are amortized ratably over the terms of the related policies. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income, and if not recoverable are charged to expense.
Insurance policy and claims reserves represent liabilities for future insurance policy benefits. Reserves for losses of the life insurance company are based on claims experience, actual claims reported and estimates of claims incurred but not reported. Assumptions are based on historical company experience, adjusted to provide for possible adverse deviation. These estimates are periodically reviewed and compared with actual experience and industry standards, and may be revised if it is determined that future experience will differ substantially from that previously assumed. Policy and contract claims include provisions for reported and unreported losses. Reserves for property and casualty insurance losses represent the estimated ultimate unpaid cost of all incurred property and casualty claims. Since the reserves are based on estimates, the ultimate liability may be more or less than such reserves. The effects of changes in such estimated reserves are included in the results of operations in the period in which the estimates are changed.
2. Sales of Stock of Subsidiaries and Affiliates ---------------------------------------------
On December 30, 1994 the Company sold its 50% interest in Commercial Insurance Resources, Inc. (CIRI), the parent of Gulf Insurance Company (Gulf), to an affiliate, The Travelers Indemnity Company for $150 million. This amount exceeded the Company's investment by $10.2 and such excess was treated as an adjustment to additional-paid-in capital.
In December 1992, the Parent acquired approximately 27% of The Travelers Corporation (old Travelers) common stock. As a part of the transaction, the Company acquired 8,947,367 shares of old Travelers common stock in exchange for 50% of the common stock of CIRI and $20 cash. As a result of the exchange of CIRI stock the Company recorded an after-tax gain of $11.1 ($17.0 pre-tax), which is reflected in the 1992 Consolidated Statement of Income. Also during 1992, the
Notes to Consolidated Financial Statements (continued)
Company sold all of its ownership interest in Inter-Regional Financial Group, Inc., resulting in an after-tax loss of $4.0 ($5.0 pre-tax). Proceeds to the Company were approximately $30.4 after expenses.
3. Business Segment Information ----------------------------
The Company, through its subsidiaries, is primarily engaged in the following businesses: Consumer Finance Services and Insurance Services.
The Consumer Finance Services segment includes consumer lending (including secured and unsecured personal loans, real estate-secured loans and consumer financing) and credit cards. Also included in this segment are credit-related insurance services provided through American Health and Life Insurance Company (AHL) and its affiliates.
Insurance Services includes the operations of Gulf through its sale on December 30, 1994 (See Note 2). Gulf provides property-casualty insurance (automobile liability and physical damage, workers' compensation, other liability, fire and related homeowners' insurance and commercial multiple peril insurance) as well as directors' and officers' and errors and omissions policies. Also included in the segment is the non-affiliated insurance business of AHL.
Notes to Consolidated Financial Statements (continued)
Corporate and Other consists of corporate staff and treasury operations, a hotel mortgage investment included in mortgage loans, the Company's investment in the Parent's securities and certain corporate income and expenses that have not been allocated to the operating subsidiaries, including gains and losses from the sale of subsidiary and affiliate. During 1993 this segment also included the Company's share of equity income of old Travelers.
Cumulative effect of changes in accounting principles, and capital expenditures for property, plant and equipment and related depreciation expense are not material to any of the business segments. Intersegment sales and international operations are not significant.
For gains and special charges included in each segment see, Management's Discussion and Analysis of Financial Condition and Results of Operations.
4. Investments -----------
Fair values of investments in fixed maturities are based on quoted market prices or dealer quotes or, if quoted market prices are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment.
On December 31, 1993, the Parent acquired the approximately 73% it did not already own of old Travelers, by means of a merger of old Travelers into the Parent. As a result of the merger, the Company's investment in the common stock of old Travelers, (see Note 2) which through that date had been carried on the equity basis of accounting, was exchanged for 7.2 million shares of common stock of the Parent at a ratio of 0.80423 of a share of the Parent common stock for each share of old Travelers common stock. At December 31, 1993, the investment was reflected at a carrying amount of $211.3 and included in "equity securities". During 1994, all of the Company's shares of the Parent's common stock were exchanged for 2,655 shares of Cumulative Adjustable Rate Preferred Stock Series Y of the Parent, with a liquidation value of $100,000 per share, which is redeemable at the option of the holder at certain times and callable by the Parent at certain times. The preferred stock had a value equal to the market value of the common shares at the time the exchange was agreed upon. The market value exceeded the Company's carrying value by $58.6 and such excess was treated as an adjustment to additional-paid-in capital. Subsequently 550 shares of preferred stock were distributed to the Parent as a dividend. At December 31, 1994, this investment is included in "fixed maturities - available for sale" and is reflected at a carrying amount of $210.5. During 1994 the Company recorded $8.7 of dividend income from these investments in common and preferred stock.
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated market values of investments in fixed maturities were as follows:
The amortized cost and estimated market value at December 31, 1994 by contractual maturity are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or pre-payment penalties.
Notes to Consolidated Financial Statements (continued)
Estimated Amortized Market Cost Value ---------- --------- Due in one year or less $ 11.8 $ 10.9 Due after one year through five years 59.0 56.7 Due after five years through ten years 146.1 133.8 Due after ten years 108.6 97.9 ----- ----- 325.5 299.3 Mortgage-backed securities 177.6 163.6 Investment in Series Y Preferred Stock of the Parent 210.5 210.5 ----- ----- $713.6 $673.4 ===== ===== Realized gains and losses on fixed maturities for the year ended December 31 were as follows:
1994 1993 1992 ---- ---- ---- Realized gains Pre-tax $ 3.1 $67.3 $22.2 ---- ---- ---- After-tax 2.0 43.7 14.7 ---- ---- ----
Realized losses Pre-tax $ .4 $0.2 $0.2 ---- --- --- After-tax .3 0.1 0.1 ---- --- ---
5. Consumer Finance Receivables ----------------------------
Consumer finance receivables, net of unearned finance charges of $673.7 and $613.0 at December 31, 1994 and 1993, respectively, consisted of the following:
1994 1993 ---- -------- Real estate-secured loans $2,844.7 $2,705.8 Personal loans 2,874.7 2,495.2 Credit cards 712.5 697.1 Sales finance and other 453.5 443.7 ------- -------- Consumer finance receivables 6,885.4 6,341.8 Accrued interest receivable 42.3 41.3 Allowance for credit losses (181.9) (167.5) ------- ------- Net consumer finance receivables $6,745.8 $6,215.6 ======= =======
Notes to Consolidated Financial Statements (continued)
An analysis of the allowance for credit losses on consumer finance receivables at December 31, was as follows:
Contractual maturities of receivables before deducting unearned finance charges and excluding accrued interest were as follows:
The Company issues commercial paper directly to investors and maintains unused credit availability under its bank lines of credit at least equal to the amount of its outstanding commercial paper. The Company may borrow under its revolving credit facilities at various interest rate options and compensates the banks for the facilities through commitment fees.
In 1994 the Parent, the Company and The Travelers Insurance Company (TIC) entered into an agreement with a syndicate of banks to provide $1,500 of revolving credit, to be allocated to any of the Parent, the Company or TIC. The participation of TIC in this agreement is limited to $300. The revolving credit facility consists of a 364-day revolving credit facility in the amount of $300 and a 5-year revolving credit facility in the amount of $1,200. At December 31, 1994, $650 was allocated to the Parent, $650 was allocated to the Company and $200 was allocated to TIC.
At December 31, 1994, the Company also had committed and available revolving credit facilities on a stand alone basis of $2,360, of which $600 expires in 1995 and $1,760 expires in 1999.
The Company is limited by covenants in its revolving credit agreements as to the amount of dividends and advances that may be made to the Parent or its affiliated companies. At December 31, 1994, the Company would have been able to remit $270.3 to the Parent under its most
Notes to Consolidated Financial Statements (continued)
restrictive covenants or regulatory requirements.
The carrying value of short-term borrowings approximates fair value.
Long-term debt, including its current portion, and final maturity dates were as follows at December 31:
1994 1993 ---- ---- 8.29% to 12.85% Medium-Term Notes due 1994-1995 $ 10.0 $ 54.8 8% Notes due 1994 - 100.0 12.7% Notes due 1994 - 15.0 6.95% Notes due 1994 - 200.0 8.45% Notes due 1994 - 100.0 9 7/8% Notes due 1995 150.0 150.0 9.2% Notes due 1995 100.0 100.0 6.25% Notes due 1995 100.0 100.0 7.7% Notes due 1995 150.0 150.0 8.1% Notes due 1995 150.0 150.0 8 3/8% Notes due 1995 150.0 150.0 6.375% Notes due 1996 200.0 200.0 7.375% Notes due 1996 150.0 150.0 8% Notes due 1996 100.0 100.0 6.75% Notes due 1997 200.0 200.0 8 1/8% Notes due 1997 150.0 150.0 5.70% Notes due 1998 100.0 100.0 5 1/2% Notes due 1998 100.0 100.0 8 1/2% Notes due 1998 100.0 100.0 6.70% Notes due 1999 150.0 150.0 10% Notes due 1999 100.0 100.0 9.6% Notes due 1999 100.0 100.0 6.00% Notes due 2000 100.0 100.0 5 3/4% Notes due 2000 200.0 200.0 6 1/8% Notes due 2000 100.0 100.0 6.00% Notes due 2000 150.0 150.0 8.25% Notes due 2001 300.0 - 5.9% Notes due 2003 200.0 200.0 7.875% Notes due 2004 200.0 - 10% Notes due 2008 150.0 150.0 10% Debentures due 2009 100.0 100.0 8.7% Debentures due 2009 150.0 150.0 8.7% Debentures due 2010 100.0 100.0 ------- ------- $4,010.0 $3,969.8 ======= =======
Notes to Consolidated Financial Statements (continued)
Principal payments due on debt for the next five years are as follows:
1995 $810 1996 $450 1997 $350 1998 $300 1999 $350
The fair value of the Company's long-term debt is estimated based on the quoted market price for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. At December 31, 1994 these fair values were approximately $3,926.
7. Reinsurance -----------
The Company's insurance subsidiaries cede portions of certain insurance business in order to limit losses, to reduce exposure on large risks and to provide additional capacity for future growth. This is accomplished through various plans of reinsurance, primarily coinsurance, modified coinsurance and yearly renewable term. Reinsurance ceded arrangements do not discharge the insurance subsidiaries or the Company as the primary insurer. Reinsurance amounts included in the Condensed Consolidated Statement of Income were as follows:
Notes to Consolidated Financial Statements (continued)
8. Income Taxes ------------
Income taxes have been provided in accordance with the provisions of FAS 109, which was adopted effective January 1, 1992.
The provision for income taxes (before minority interest) for the year ended December 31 was as follows:
1994 1993 1992 ----- ----- ----- Current: Federal $121.4 $128.7 $113.6 Foreign 4.6 2.5 2.0 State 8.9 7.1 6.0 ----- ----- ----- 134.9 138.3 121.6 ----- ----- ----- Deferred: Federal (2.4) 18.0 27.2 Foreign (4.4) (2.2) (1.8) State (0.9) (0.5) 0.6 ----- ----- ----- (7.7) 15.3 26.0 ----- ----- ----- Total $127.2 $153.6 $147.6 ===== ===== =====
Deferred income taxes at December 31 related to the following:
1994 1993 ---- ---- Deferred tax assets: Bad debt reserves $65.3 $ 62.8 Differences in computing policy reserves 14.7 24.0 Investments 13.2 2.4 Other deferred tax assets 25.2 22.3 ----- ----- 118.4 111.5 ----- ----- Deferred tax liabilities: Israeli leasing transactions (3.9) (9.3) Fixed asset depreciation (13.8) (11.7) Deferred policy acquisition costs (4.5) (7.8) Other deferred tax liabilities (29.3) (28.1) ----- ----- (51.5) (56.9) ----- ----- Total $ 66.9 $ 54.6 ===== =====
The Company and its wholly owned domestic non-life insurance subsidiaries join with the Parent in filing a consolidated federal income tax return. Under a tax sharing agreement with the Parent, the Company is entitled to a current tax benefit if it incurs losses which are utilized in the Parent's consolidated return. The Parent's consolidated tax return group has reported large amounts of taxable income in recent years and can, more likely than not, expect to have significant taxable income in the future thereby enabling utilization of the Company's deferred tax asset.
Notes to Consolidated Financial Statements (continued)
The reconciliation of the federal statutory income tax rate to the Company's effective income tax rate for the year ended December 31 was as follows:
1994 1993 1992 ---- ---- ----
Federal statutory rate 35.0% 35.0% 34.0% Equity in income of old Travelers - (1.6) - Other, net (0.1) (0.6) 0.4 ---- ---- ---- Effective income tax rate 34.9% 32.8% 34.4% ==== ==== ====
9. Stockholder's Equity --------------------
Certain long-term loan credit agreements restrict the payment of dividends with such restrictions based on cumulative net earnings, as defined. Additionally, a minimum net worth restriction, as defined, contained in such agreements, imposes an additional constraint on dividends. At December 31, 1994 the Company would be able to remit $270.3 in dividends to its parent under the most restrictive debt covenants.
The Company's share of the combined insurance subsidiaries' statutory stockholder's equity at December 31, 1994 and 1993 was $154.1 and $242.7, respectively, and is subject to certain restrictions imposed by state insurance departments as to the transfer of funds and payment of dividends. The combined insurance subsidiaries' net income determined in accordance with statutory accounting practices and after minority interest in 1994 and 1993, for the years ended December 31, 1994, 1993 and 1992 was $58.0, $64.4 and $107.4, respectively.
10. Pension Plans -------------
The Company along with affiliated companies, participates in a noncontributory defined benefit pension plan sponsored by the Parent (the Plan) covering the majority of U.S. employees. Benefits are based on an account balance formula. Under this formula, each employee's accrued benefit can be expressed as an account that is credited with amounts based upon the employee's pay, length of service and a specified interest rate, all subject to a minimum benefit level. The Plan is funded in accordance with the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. Pension cost allocated to the Company from the Plan was $2.7, $2.1 and $1.3 in 1994, 1993 and 1992, respectively.
The Company also has an unfunded noncontributory supplemental retirement plan that covers certain executives and key employees. Pension cost related to this plan was $1.0, $1.2 and $0.8 in 1994, 1993 and 1992, respectively.
11. Fair Value of Financial Instruments -----------------------------------
The following table summarizes the fair value and carrying amount of the Company's financial instruments at December 31, 1994 and 1993. The fair value assumptions were based upon subjective estimates of market conditions and perceived risks of the financial instruments at a certain point in time as disclosed further in various Notes to the Consolidated Financial Statements. Disclosed fair values for financial instruments do not reflect any premium or discount that could
Notes to Consolidated Financial Statements (continued)
result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.
12. Lease Commitments and Other Financial Instruments -------------------------------------------------
Rentals
Rental expense (principally for offices and computer equipment) was $32.8, $33.7 and $35.0 for the years ended December 31, 1994, 1993 and 1992, respectively.
At December 31, 1994, future minimum annual rentals under noncancellable operating leases were as follows:
1995 $16.4 1996 13.4 1997 8.6 1998 5.2 1999 3.1 Thereafter 4.1 ----- $50.8 ====
Credit Cards
The Company provides bank and private label credit card services through its subsidiaries. These services are provided to individuals and to affinity groups nationwide. At December 31, 1994 and 1993 total credit lines available to credit cardholders were $5,423 and $4,263, of which $820 and $790 were utilized, respectively.
13. Related Party Transactions --------------------------
During the fourth quarter of 1994, an affiliate acquired for cash a $50.0 interest in a real estate mortgage loan held by the Company; the transfer was made at the Company's recorded carrying value of the mortgage loan.
Notes to Consolidated Financial Statements (continued)
In addition to the securities of the Parent discussed in Note 4 included in other assets at December 31, 1993 is an investment in the Series Z Redeemable Preferred Stock of the Parent amounting to $100.0. The Company recorded $1.5, $4.0 and $8.0 for the years ended December 31, 1994, 1993 and 1992, respectively, of dividend income from the Parent on this investment of which $100.0 was repurchased in each of the years 1994, 1993 and 1992, respectively.
To facilitate cash management the Company has entered into an agreement with the Parent under which the Company or the Parent may borrow from the other party at any time an amount up to the greater of $50.0 or 1% of the Company's consolidated assets up to a maximum of $100.0. The agreement may be terminated by either party at any time. The interest rate to be charged on borrowings outstanding will be equivalent to an appropriate market rate.
14. Contingencies -------------
In the ordinary course of business the Company and/or its subsidiaries are defendants or co-defendants in various litigation matters. Although there can be no assurances, the Company believes, based on information currently available, that the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on its results of operations, financial condition or liquidity.
Notes to Consolidated Financial Statements (continued)
14. Quarterly Financial Data (unaudited) ------------------------------------
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto.
Copies of any of the exhibits referred to above will be furnished at a cost of $.25 per page to security holders who make written request therefor to Patricia A. Rouzer, Corporate Communications and Investor Relations, Commercial Credit Company, 300 St. Paul Place, Baltimore, Maryland 21202.