In addition, as of December 31, 1994, the Company, including TIHI, leases a total of approximately 5,700,000 square feet of office space at 284 locations throughout the United States under both operating and capital leases. The Company is reimbursed by affiliates for their use of this space.
The Company writes principally individual life insurance, annuities, accident and health insurance, and pension programs. The Company was incorporated in 1863. With $40.5 billion of assets at December 31, 1994, the Company believes that it is one of the largest stock life insurance groups in the United States as measured by assets at December 31, 1994.
Substantially all of the businesses sold to MetLife or contributed to MetraHealth were included in the Company's Managed Care and Employee Benefits Operations (MCEBO) which marketed group health insurance, managed health care programs and administrative services associated with employee benefit plans.
Premiums of $3.9 billion in 1994 increased $1.1 billion from 1993. The 1994 total includes premiums of $1.2 billion related to TIHI. Premium revenues continue to be replaced by service fee income as more corporate clients are selecting fee-for-service products. The related revenues are lower from these service contracts than comparable insurance products because the Company has decreased the traditional insurance risks it assumes.
Net investment income was $1.8 billion in 1994, which decreased $35 million from 1993. The 1994 total includes $189 million related to TIHI which was more than offset by the amortization of purchase accounting adjustments and reductions in the asset base due to decreased group annuity business.
At December 31, 1994 and 1993, the Company had real estate and mortgage loan investments totaling $5.3 billion and $7.8 billion, respectively. The Company is continuing its strategy to dispose of these real estate assets and some of the mortgage loans and to reinvest the proceeds to obtain current market yields. Underperforming assets include delinquent mortgage loans, loans in the process of foreclosure, foreclosed loans and loans modified at interest rates below market.
A net deferred tax asset valuation allowance of $100 million has been established to reduce the net deferred tax asset on investment losses to the amount that, based upon available evidence, is more likely than not to be realized.
Reversal of the valuation allowance is contingent upon the recognition of future capital gains in the Company's consolidated life insurance company federal income tax return through 1998, and the consolidated federal income tax return of The Travelers Inc. commencing in 1999 or a change in circumstances which causes the recognition of the benefits to become more likely than not. There was no net change in the valuation allowance during 1994.
Individual annuity production was strong during 1994 compared to 1993 primarily reflecting increased sales of variable annuities. In late June a variable annuity product was introduced for distribution by Smith Barney financial consultants and is expected to contribute to annuity production in future periods. Sales of this product amounted to $158 million in 1994. Net written premiums and deposits for individual annuities totaled $1,309 million in 1994, up from $1,023 million in 1993.
Life and Annuities' profit margins are relatively thin, reflecting a highly competitive environment. As a result, market specialization is a critical factor in achieving profitability. The Company continually updates its product portfolio by designing competitively priced products for target customers. The Company's strategy for individual annuities is to increase sales by providing high-quality customer service and to distribute products through Smith Barney financial consultants, The Copeland Companies (a wholly owned subsidiary of TIG), and other annuity specialists. Life and health products are targeted to meet the needs of small business owners and other affluent individuals, accessed by Smith Barney financial consultants and a sales force of independent agents. This strategy is supplemented by marketing term life insurance to middle-income families through other specialized distribution channels.
Policyholder account balances and benefit reserves related to individual life, annuity and group pension business of old Travelers decreased by approximately 2% to $25.2 billion at December 31, 1994 from $25.7 billion at December 31, 1993. This decline reflects the maturing of certain group pension general account business sold in prior years, predominantly GICs, which is not being fully replaced with new business. These decreases have been partially offset by continued growth in individual annuity, individual term life and universal life businesses. Production levels and the retention of in-force contracts have been helped by the rating upgrades that accompanied the Merger.
In connection with the formation of the joint venture, the transfer of the fee-based medical business (Administrative Services Only) and other noninsurance business to MetraHealth was completed on January 3, 1995. As the medical insurance business of the Company comes due for renewal, and after obtaining regulatory approvals, the risks will be transferred to MetraHealth. In the interim, the operating results for this medical business will be reported by the Company.
All of the businesses sold to MetLife or contributed to MetraHealth were included in the Company's Managed Care and Employee Benefits Operations ("MCEBO"). Beginning in 1995, the Company's results will reflect the runoff medical insurance business, plus its equity interest in the earnings of MetraHealth.
MCEBO written premiums decreased $41 million in 1994 to $2.4 billion. MCEBO written premiums, deposits and equivalents in 1994 decreased $515 million to $9.7 billion. Deposits and equivalents are included with premiums to allow for more appropriate comparisons of business volumes from year to year but do not represent actual revenues to the Company. Instead they represent estimates of the amount that fee-based customers would have been charged if their group health plans had been fully insured. Deposits and equivalents consist of cash value deposits and charges for mortality risk, expenses and taxes associated with group universal life insurance. Fees associated with these products are reflected in other revenues.
The declines in 1994 reflect the Company's emphasis on increasing margins to improve profitability; improvements in underwriting designed to reduce financial risk rather than emphasize growth; and uncertainties during the period relating to proposed healthcare legislation.
On January 18, 1995, the U.S. Supreme Court in Nationsbank of North Carolina, NA. et. al. v. Variable Annuity Life Insurance Co., et. al. ruled unanimously that national banks may sell annuities. At this time, it is not clear what impact, if any, this will have on the Company's annuity sales. Currently, the Company's methods of distribution of annuities are primarily through Copeland, independent insurance agents and financial consultants of Smith Barney.
As of December 31, 1994, the businesses acquired by MetraHealth included health maintenance organizations in 29 network areas, with approximately 400,000 members; point-of-service operations in 72 network areas, with approximately 1.7 million members; and preferred provider organizations in 90 network areas, with approximately 2.8 million members. Covered lives using the managed care networks and covered by indemnity products, in the aggregate at December 31, 1994, were approximately 11.3 million. MetraHealth expects some decline in covered lives during 1995.
In March 1995, MetraHealth acquired HealthSpring, Inc. for common stock of MetraHealth. HealthSpring, Inc. builds and manages primary care physician practices and serves approximately 32,000 patients through seven sites in Pennsylvania, Ohio and Illinois. This acquisition resulted in a reduction in the ownership percentage of the Company in the MetraHealth venture to 41.1%.
As required by various state laws and regulations, the Company is required to participate in state-administered guaranty associations established for the benefit of the policyholders of insolvent insurance companies. Management believes that payments to such associations will not have a material impact on financial condition or results of operations.
Several legislative proposals regarding health care reforms have recently been promulgated. It is not possible to determine which, if any, of these proposals may be adopted or what effect, if any, such legislation may have on the Company.
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES FORM 10-K For the fiscal year ended December 31, 1994
The Board of Directors and Shareholder of The Travelers Insurance Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of The Travelers Insurance Company and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations and retained earnings and cash flows for the year ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
As discussed in Note 2 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", in 1994.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of The Travelers Insurance Company and Subsidiaries for the year ended December 31, 1993 in conformity with generally accepted accounting principles.
We have audited the consolidated statements of operations and retained earnings and cash flows for The Travelers Insurance Company and Subsidiaries for the year ended December 31, 1992. These consolidated financial statements are the responsibility of Company management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of The Travelers Insurance Company and Subsidiaries for the year ended December 31, 1992 in conformity with generally accepted accounting principles.
/S/ COOPERS & LYBRAND Hartford, Connecticut February 9, 1993, except for Notes 2 and 5, as to which the date is January 24, 1994
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Increase (Decrease) in Cash
The Travelers Insurance Company and its subsidiaries (the Company) is a wholly owned subsidiary of The Travelers Insurance Group Inc. (TIG). TIG is an indirect wholly owned subsidiary of The Travelers Inc. Significant accounting policies used in the preparation of the accompanying financial statements follow.
In December 1992, Primerica Corporation (Primerica) acquired approximately 27% of the common stock of the Company's then parent, The Travelers Corporation (the Acquisition). The Acquisition was accounted for as a purchase. In connection with the Acquisition, Primerica transferred 100% of the preferred provider organization and third party administrator networks of Transport Life Insurance Company (a wholly owned subsidiary of Primerica) to The Travelers Corporation, which contributed them to the Company. The Company realized an increase to shareholder's equity of $23 million related to this contribution.
The excess of the purchase price of the common stock over the fair value of the 73% of net assets acquired at December 31, 1993, which was allocated to the Company through the "pushdown" basis of accounting, was approximately $340 million and is being amortized over 40 years on a straight-line basis.
The consolidated statement of operations and retained earnings, the consolidated statement of cash flows and the related accompanying notes for the year ended December 31, 1994, which are presented on a purchase accounting basis, are separated from the corresponding 1993 and 1992 information, which is presented on a historical accounting basis, to indicate the difference in valuation bases.
The financial statements have been prepared in conformity with generally accepted accounting principles and include the Company and its significant insurance and noninsurance subsidiaries. Certain prior year amounts have been reclassified to conform with the 1994 presentation.
Fixed maturities include bonds, notes and redeemable preferred stocks. Fixed maturities are valued based upon quoted market prices, 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. Securities are classified as "available for sale" and are reported at fair value, with unrealized investment gains and losses, net of income taxes, charged or credited directly to shareholder's equity. As of December 31, 1993, in conjunction with the Merger, the majority of fixed maturities were classified as "available for sale" and recorded at the lower of aggregate cost or market value. Fixed maturities classified as "held for investment" were carried at amortized cost.
Accrual of income is suspended on fixed maturities or mortgage loans that are in default, or on which it is likely that future interest payments will not be made as scheduled. Interest income on investments in default is recognized only as payment is received.
Gains or losses arising from futures contracts used to hedge investments are treated as basis adjustments and are recognized in income over the life of the hedged investments.
Gains and losses arising from forward contracts used to hedge foreign investments in the Company's U.S. portfolios are a component of realized investment gains and losses. Gains and losses arising from forward contracts used to hedge investments in foreign operations (primarily Canadian) are reflected directly in shareholder's equity, net of income taxes.
Interest rate swaps are used to manage interest rate risk in the investment portfolio and are marked to market with unrealized gains and losses recorded as a component of shareholder's equity, net of income taxes. Rate differentials on interest rate swap agreements are accrued between settlement dates and are recognized as an adjustment to interest income from the related investment.
Policy loans are carried at the amount of the unpaid balances that are not in excess of the net cash surrender values of the related insurance policies. The carrying value of policy loans, which have no defined maturities, is considered to be fair value.
The value of insurance in force represents the actuarially determined present value of anticipated profits to be realized from life insurance, annuities and health contracts at the date of the Merger using the same assumptions that were used for computing related liabilities where appropriate. The value of insurance in force was the actuarially determined present value of the projected future profits discounted at interest rates ranging from 14% to 18% for the business acquired. The value of the business in force is amortized over the contract period using current interest crediting rates to accrete interest and using amortization methods based on the specified products. Traditional life insurance and guaranteed renewable health policies are amortized over the period of anticipated premiums; universal life is amortized in relation to estimated gross profits; and annuity contracts are amortized employing a level yield method. The value of insurance in force is reviewed periodically for recoverability to determine if any adjustment is required.
Separate and variable accounts primarily represent funds for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholders. Each account has specific investment objectives. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. The assets of these accounts are carried at market value. Certain other separate accounts provide guaranteed levels of return or benefits and the assets of these accounts are carried at amortized cost, except at December 31, 1993 the assets and liabilities of these accounts were recorded at the value assigned at the acquisition dates. Amounts assessed to the contractholders for management services are included in revenues. Deposits, net investment income and realized investment gains and losses for these accounts are excluded from revenues, and related liability increases are excluded from benefits and expenses.
Contractholder funds represent receipts from the issuance of universal life, pension investment and certain individual annuity contracts. Such receipts are considered deposits on investment contracts that do not have substantial mortality or morbidity risk. Account balances are also increased by interest credited and reduced by withdrawals, mortality charges and administrative expenses charged to the contractholders. Calculations of contractholder account balances for investment contracts reflect lapse, withdrawal and interest rate assumptions based on contract provisions, the Company's experience and industry standards. Interest rates credited to contractholder funds range from 3.4% to 8.0%. Contractholder funds also include other funds that policyholders leave on deposit with the Company.
The provision for federal income taxes is comprised of two components, current income taxes and deferred income taxes. Deferred federal income taxes arise from changes in the Company's deferred federal income tax asset during the year. The deferred federal income tax asset is recognized to the extent that future realization of the tax benefit is more likely than not, with a valuation allowance for the portion that is not likely to be recognized.
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115), which addresses accounting and reporting for investments in equity securities that have a readily determinable fair value and for all debt securities. Investment securities 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 shareholder'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 an increase of approximately $232 million (net of taxes) to net unrealized gains which is included in shareholder's equity. This increase included an unrealized gain of $133 million (net of income taxes) on TIHI's investment in the common stock of The Travelers Inc. See note 15 for additional disclosures.
In the first quarter of 1993, the Company implemented Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" (FAS 113). FAS 113 requires the reporting of reinsurance receivables and prepaid reinsurance premiums as assets and precludes the immediate recognition of gains for all reinsurance contracts unless the liability to the policyholder has been extinguished. Implementation of FAS 113 did not have an impact on the Company's earnings, however, assets and liabilities increased by like amounts. See note 5 for additional reinsurance disclosures.
The implementation of FAS 109 resulted in a one time increase to earnings of $350 million in the first quarter of 1992. This increase in earnings was principally due to tax rate differences and the recognition of a portion of previously unrecognized deferred tax assets. See note 13 for further discussion of FAS 109.
In February 1993, The Travelers Corporation announced its intent to accelerate the sale of foreclosed real estate and, effective December 31, 1992, changed its method of accounting for foreclosed assets in compliance with the American Institute of Certified Public Accountants' Statement of Position 92-3, "Accounting for Foreclosed Assets" (SOP 92-3). This guidance requires that in-substance foreclosures and foreclosed assets held for sale be carried at the lower of cost or fair value less estimated costs to sell. Previously, all foreclosed assets were carried at cost less accumulated depreciation. This accounting change resulted in a pretax charge of $412 million to realized investment losses in 1992.
On January 3, 1995, the Company and MetLife and certain of their affiliates formed the MetraHealth joint venture by contributing their group medical businesses to MetraHealth, in exchange for shares of common stock of MetraHealth. The assets transferred included cash, fixed assets, customer lists, books and records, certain trademarks and other assets used exclusively or primarily in the medical businesses. The Company also contributed all of the capital stock of its wholly owned subsidiary, The Travelers Employee Benefits Company, to MetraHealth. The total contribution by the Company amounted to $336 million at carrying value on the date of contribution. No gain was recognized upon the formation of the joint venture. Upon formation of the joint venture the Company owned 42.6% of the outstanding capital stock of MetraHealth, TIG owned 7.4% and the other 50% was owned by MetLife and its affiliates.
In connection with the formation of the joint venture, the transfer of the fee based medical business (Administrative Services Only) and other noninsurance business to MetraHealth was completed on January 3, 1995. As the medical insurance business of the Company comes due for renewal and after obtaining regulatory approvals, the risks will be transferred to MetraHealth. In the interim the related operating results for this medical insurance business will be reported by the Company.
On December 31, 1993, in conjunction with the Merger, The Travelers Inc. contributed TIHI to TIG, which TIG then contributed to the Company at a carrying value of $2.1 billion. Through its subsidiaries TIHI primarily offers individual life insurance and specialty accident and health insurance.
In December 1992, in conjunction with the Acquisition, The Travelers Corporation acquired Transport Life Insurance Company's preferred provider and third party administrator organizations from Primerica Corporation (see note 1), and on December 30, 1992 contributed these businesses to the Company.
Statutory capital and surplus was $2.1 billion and $1.8 billion at December 31, 1994 and 1993, respectively.
The Company is currently subject to various regulatory restrictions that limit the maximum amount of dividends available to TIG without prior approval of insurance regulatory authorities. Under statutory accounting practices, there is no statutory surplus available in 1995 for dividends to TIG without prior approval of the Connecticut Insurance Department.
The Company has segmented its business by major product lines. TIHI was contributed to the Company on December 31, 1993, and its assets at that date and subsequent and its operations for the year ended December 31, 1994 are included in the following table in the Life and Annuities segment. Transport Life Insurance Company's preferred provider and third party administrator organizations were contributed to the Company in December 1992 and are included in the Managed Care and Employee Benefits segment.
Results included in the table below reflect 1993 fourth quarter after-tax charges of $103 million for an addition to reserves for foreclosed properties held for sale and 1992 fourth quarter after-tax charges of $272 million for implementation of SOP 92-3 and $193 million for an addition to mortgage loan valuation reserves.
The Company uses derivative financial instruments, including financial futures, interest rate swaps and forward contracts, as a means of prudently hedging exposure to price, foreign currency and/or interest rate risk on anticipated investment purchases or existing assets and liabilities. Also, in the normal course of business, the Company has fixed and variable rate loan commitments and unfunded commitments to partnerships. The Company does not hold or issue derivative instruments for trading purposes.
The Company may occasionally enter into interest rate swaps in connection with other financial instruments to provide greater risk diversification and better match an asset with a corresponding liability. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating rate interest amounts calculated by reference to an agreed notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. A single net payment is usually made by one counterparty at each due date. Swap agreements are not exchange traded so they are subject to the risk of default by the counterparty. In all cases, counterparties under these agreements are major financial institutions with the risk of non-performance considered remote. At December 31, 1994 and 1993, the Company had entered into interest rate swaps with contract values of $145 million and $153 million, respectively. At both December 31, 1994 and 1993, the fair value of interest rate swaps was $1 million (loss position) which is determined using a discounted cash flow method.
The off-balance-sheet risks of financial futures contracts, forward contracts, fixed and variable rate loan commitments and unfunded commitments to partnerships were not considered significant at December 31, 1994 and 1993.
At December 31, 1994, mortgage loans have a carrying value of $4.9 billion, which approximates fair value, compared with a carrying value and a fair value of $6.8 billion at December 31, 1993. In estimating fair value, the Company used interest rates reflecting the higher returns required in the current real estate financing market.
The carrying value of $417 million and $320 million of financial instruments classified as other assets approximates fair values at December 31, 1994 and 1993, respectively. The carrying value of $1.2 billion and $878 million of financial instruments classified as other liabilities also approximates their fair values at December 31, 1994 and 1993, respectively. Fair value is determined using various methods including discounted cash flows and carrying value, as appropriate for the various financial instruments.
At December 31, 1994, contractholder funds with defined maturities have a carrying value of $4.2 billion and a fair value of $4.0 billion, compared with a carrying value and a fair value of $5.0 billion at December 31, 1993. The fair value of these contracts is determined by discounting expected cash flows at an interest rate commensurate with the Company's credit risk and the expected timing of cash flows. Contractholder funds without defined maturities have a carrying value of $9.1 billion and a fair value of $8.8 billion at December 31, 1994, compared with a carrying value of $13.0 billion and a fair value of $12.7 billion at December 31, 1993. These contracts generally are valued at surrender value.
8. DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
See Note 8 for a discussion of financial instruments with off-balance-sheet risk.
The Company participates in qualified and nonqualified, noncontributory defined benefit pension plans covering the majority of the Company's U.S. employees. Benefits for the qualified plan 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. This plan is funded in accordance with the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. For the nonqualified plan, contributions are based on benefits paid.
Certain subsidiaries of TIHI participate in a noncontributory defined benefit plan sponsored by their ultimate parent, The Travelers Inc.
Through plans sponsored by TIG, the Company also provides defined contribution pension plans for certain agents. Company contributions are primarily a function of production. The expense for these plans was $2 million in 1994, 1993 and 1992. Certain non-U.S. employees of TIHI are covered by noncontributory defined benefit plans. These plans are funded based upon local laws.
The Merger resulted in a change in control of The Travelers Corporation as defined in the applicable plans, and provisions of some employee benefit plans secured existing compensation and benefit entitlements earned prior to the change in control, and provided a salary and benefit continuation floor for employees whose employment was affected. The costs related to these changes have been assumed by TIG.
Under the savings, investment and stock ownership plan available to substantially all employees of TIG (except TIHI), the Company matches a portion of employee contributions. Effective April 1, 1993, the match decreased from 100% to 50% of an employee's first 5% contribution and a variable match based on TIG's profitability was added. The Company's matching obligations were $7 million, $10 million and $16 million in 1994, 1993 and 1992, respectively.
At December 31, 1994 and 1993, TIC has an investment of $23 million and $27 million, respectively, in bonds of its affiliate, Commercial Credit Company. This is included in fixed maturities in the consolidated balance sheet.
The net carrying value of the assets is recorded at amortized cost and at the value assigned at the acquisition dates at December 31, 1994 and 1993, respectively.
Starting in 1994 and continuing for at least five years, the Company and its life insurance subsidiaries will file a consolidated federal income tax return. Federal income taxes are allocated to each member of the consolidated return on a separate return basis adjusted for credits and other amounts required by the consolidation process. Any resulting liability will be paid currently to the Company. Any credits for losses will be paid by the Company to the extent that such credits are for tax benefits that have been utilized in the consolidated federal income tax return. The Company has no receivable for unreimbursed credits from its previous allocation agreement with The Travelers Corporation.
A net deferred tax asset valuation allowance of $100 million has been established to reduce the net deferred tax asset on investment losses to the amount that, based upon available evidence, is more likely than not to be realized. Reversal of the valuation allowance is contingent upon the recognition of future capital gains in the Company's consolidated life insurance company federal income tax return through 1998, and the consolidated federal income tax return of The Travelers Inc. commencing in 1999 or a change in circumstances which causes the recognition of the benefits to become more likely than not. There was no net change in the valuation allowance during 1994. The initial recognition of any benefit produced by the reversal of the valuation allowance will be recognized by reducing goodwill.
The "policyholders surplus account", which arose under prior tax law, is generally that portion of the gain from operations that has not been subjected to tax, plus certain deductions. The balance of this account, which, under provisions of the Tax Reform Act of 1984, will not increase after 1983, is estimated to be $932 million. This amount has not been subjected to current income taxes but, under certain conditions that management considers to be remote, may become subject to income taxes in future years. At current rates, the maximum amount of such tax (for which no provision has been made in the financial statements) is approximately $326 million.
Prior to December 31, 1993, the carrying values of the trading portfolio fixed maturities were adjusted to market value as it was likely they would be sold prior to maturity. At December 31, 1992, these fixed maturities had market values of $4.8 billion. Sales of trading portfolio fixed maturities were $4.0 billion and $642 million in 1993 and 1992, respectively. Gross gains of $165 million and $24 million in 1993 and 1992, respectively, and gross losses of $2 million and $4 million in 1993 and 1992, respectively, were realized on those sales.
The Company makes significant investments in collateralized mortgage obligations (CMOs). CMOs typically have high credit quality, offer good liquidity, and provide a significant advantage in yield and total return compared to U.S. Treasury securities. The Company's investment strategy is to purchase CMO tranches which are protected against prepayment risk, primarily planned amortization class (PAC) tranches. Prepayment protected tranches are preferred because they provide stable cash flows in a variety of scenarios. The Company does invest in other types of CMO tranches if a careful assessment indicates a favorable risk/return tradeoff. The Company does not purchase residual interests in CMOs.
Proceeds from sales of equity securities were $359 million in 1994, resulting in gross realized gains of $24 million and gross realized losses of $6 million.
Included in fixed maturities are below investment grade assets totaling $922 million and $814 million at December 31, 1994 and 1993, respectively. The Company defines its below investment grade assets as those securities rated "Ba1" or below by external rating agencies, or the equivalent by the internal analysts when a public rating does not exist. Such assets include publicly traded below investment grade bonds, highly leveraged transactions and certain other privately issued bonds that are classified as below investment grade loans.
The Company also has significant concentrations of investments in the following industries:
Other mortgage loan investments are fairly evenly dispersed throughout the United States, with no holdings in any state exceeding $273 million and $324 million at December 31, 1994 and 1993, respectively.
Concentrations of mortgage loans by property type at December 31, 1994 and 1993 are shown below:
Real estate investments are dispersed throughout the United States, with no holdings in any state exceeding $111 million or $191 million at December 31, 1994 or 1993, respectively.
Real estate assets at December 31, 1994 and 1993 included office properties with carrying values of $205 million and $568 million, respectively.
At December 31, 1994, 1993 and 1992, total investment valuation reserves, which are deducted from the applicable investment carrying values in the consolidated balance sheet, were as follows:
At December 31, 1993, investment valuation reserves were comprised of $67 million for securities. Increases in the investment valuation reserves are reflected as realized investment losses.
The Company has mortgage loans and debt securities which were restructured at below market terms totaling approximately $259 million and $796 million at December 31, 1994 and 1993, respectively. At December 31, 1993, the Company's restructured assets are recorded at purchase accounting value. The new terms typically defer a portion of contract interest payments to varying future periods. The accrual of interest is suspended on all restructured assets, and interest income is reported only as payment is received. Gross interest income on restructured assets that would have been recorded in accordance with the original terms of such loans amounted to $52 million in 1994 and $121 million in 1993. Interest on these assets, included in net investment income, aggregated $17 million and $52 million in 1994 and 1993, respectively.
At December 31, 1994, the Company has $23.2 billion of life and annuity deposit funds and reserves. Of that total, $11.6 billion are not subject to discretionary withdrawal based on contract terms and related market conditions. The remaining $11.6 billion are for life and annuity products that are subject to discretionary withdrawal by the contractholder. Included in the amount that is subject to discretionary withdrawal are $1.9 billion of liabilities that are surrenderable with market value adjustments. An additional $5.7 billion of the life insurance and individual annuity liabilities are subject to discretionary withdrawals with an average surrender charge of 5.5%. Another $1.4 billion of liabilities are surrenderable at book value over 5 to 10 years. In the payout phase, these funds are credited at significantly reduced interest rates. The remaining $2.6 billion of liabilities are surrenderable without charge. Approximately 30% of these liabilities relate to individual life products. These risks would have to be underwritten again if transferred to another carrier, which is considered a significant deterrent for long-term policyholders. Insurance liabilities that are surrendered or withdrawn from the Company are reduced by outstanding policy loans and related accrued interest prior to payout.
During 1992, the Company announced a series of organizational restructuring initiatives associated with its plan to streamline its business and corporate operations. These initiatives have been substantially completed. These initiatives resulted in a pretax charge in 1992 of $151 million, consisting of $96 million for severance, benefits, accrued vacation and outplacement costs, $5 million for relocation costs due to consolidation efforts, $19 million for lease costs, $15 million for writeoff of goodwill related to identified divestitures and $16 million of miscellaneous other costs.
In the first quarter of 1992, the Company changed its presentation of cash flows from operating activities from the indirect method to the direct method. The following table reconciles net income (loss) to net cash provided by operating activities:
ASSUMED REINSURANCE - Business received as reinsurance from another company. See "Reinsurance".
BENEFITS UNDER ADMINISTRATION, INCLUDING FEES - Estimates of amounts that fee-based Managed Care and Employee Benefits customers would have been charged if their group health plans had been fully insured.
CLAIM - Request by an insured for indemnification by an insurance company for loss incurred from an insured peril.
CONTRACTHOLDER FUNDS - Receipts from the issuance of universal life, pension investment and certain individual annuity contracts. Such receipts are considered deposits on investment contracts that do not have substantial mortality or morbidity risks.
DEFINED BENEFIT PLANS - Type of pension plan under which benefits are fixed in advance by formula, and contributions vary.
HEALTH MAINTENANCE ORGANIZATION (HMO) - A group of medical care entities organized to provide defined health care services to members in return for fixed periodic premiums paid in advance (usually monthly).
INSURANCE - Mechanism for contractually shifting burdens of a number of risks by pooling them.
MANAGED HEALTH CARE PROGRAMS - A method to curb rising medical costs by favorably influencing provider practice patterns and making employees knowledgeable health care consumers by identifying inappropriate care, providing a managed structure in which medical services are offered, and maintaining integrated management information systems to encourage quality and cost-effective use of medical care.
MORBIDITY - The rate at which people become diseased, mentally or physically, or physically impaired.
REINSURANCE - The acceptance by one or more insurers, called reinsurers, of all or a portion of the risk underwritten by another insurer who has directly written the coverage. However, the legal rights of the insured generally are not affected by the reinsurance transaction and the insurance enterprise issuing the insurance contract remains liable to the insured for payment of policy benefits.
SEPARATE ACCOUNTS - Funds for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholders. The assets of these separate accounts are legally segregated and not subject to claims that arise out of any other business of the insurance company.
STATUTORY ACCOUNTING PRACTICES - Those accounting practices prescribed or permitted by the National Association of Insurance Commissioners or an insurer's domiciliary state insurance regulator for purposes of financial reporting to regulators.