The Company owns buildings containing approximately 1,426,000 square feet of office space located in Hartford, Connecticut and vicinity, serving as the home office of TIGI.
The Company also owns a building in Norcross, Georgia. TIGI's information systems department occupies the entire building which is approximately 147,000 square feet of space.
Management's narrative analysis of the results of operations is presented in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations, pursuant to General Instruction J(2)(a) of Form 10-K.
On January 3, 1995, the Company and its affiliates completed the sale of its group life and related businesses to Metropolitan Life Insurance Company (MetLife). The Company agreed to cede to MetLife 100% of its risks in the businesses sold on an indemnity reinsurance basis, effective January 1, 1995. Also, on January 3, 1995, the Company and MetLife, and certain of their affiliates, contributed their medical businesses to The MetraHealth Companies, Inc. (MetraHealth), a newly formed joint venture, in exchange for shares of common stock of MetraHealth. The Company's total contribution to MetraHealth amounted to approximately $336 million at carrying value. The Company and its affiliates and MetLife and its affiliates are equal partners in the joint venture. The Company's interest in MetraHealth was accounted for on the equity method. See Note 4 of Notes to Consolidated Financial Statements.
In December 1992, Primerica Corporation (Primerica) acquired approximately 27% of the common stock of the Company's then parent, The Travelers Corporation (the 27% Acquisition). The Acquisition was accounted for as a purchase.
Effective December 31, 1993, Primerica acquired the approximately 73% of The Travelers Corporation common stock which it did not already own, and The Travelers Corporation was merged into Primerica, which was ultimately renamed Travelers Group Inc. This was effected through the exchange of .80423 shares of Travelers common stock for each share of The Travelers Corporation common stock (the Merger). All subsidiaries of The Travelers Corporation were contributed to TIGI, an indirect subsidiary of Travelers. In conjunction with the Merger, Travelers contributed Travelers Insurance Holdings Inc. (formerly Primerica Insurance Holdings, Inc.) and its subsidiaries (TIHI) to TIGI, which in turn contributed TIHI to the Company.
TIHI is an intermediate holding company whose primary subsidiaries are Primerica Life Insurance Company (Primerica Life) and its subsidiary National Benefit Life Insurance Company (NBL). Through its subsidiaries, TIHI principally offers individual life insurance. The Company realized an increase to shareholder's equity of $2.1 billion at December 31, 1993 related to the contribution of this subsidiary. TIHI is included in Life and Annuity.
In September 1995, Travelers made a pro rata distribution to Travelers' stockholders of shares of Class A Common Stock of Transport Holdings Inc., which at the time was a wholly owned subsidiary of Travelers and was the indirect owner of the business of Transport. Immediately prior to this distribution, the Company dividended Transport, a wholly owned subsidiary of the Company, to its parent. The results of Transport through September 1995 are included in income from continuing operations.
Benefits and expenses of $2.810 billion in 1995 were level with 1994's benefits and expenses of $2.809 billion.
Net income for 1995 was $750 million, an increase of $205 million when compared to 1994. This increase in 1995 is the result of the increases in net investment income and realized investment gains as well as an increase in income from discontinued operations, primarily resulting from the gain on the sale of MetraHealth.
Separate accounts and variable deferred annuities primarily represent funds for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholders. Deposits, net investment income and realized investment gains and losses for all separate accounts and variable deferred annuities are excluded from revenue.
A net deferred tax asset valuation allowance of $100 million has been established to reduce the 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 Travelers Group commencing in 1999, or a change in circumstances which causes the recognition of the benefits to become more likely than not. There was no change in the valuation allowance during 1995.
Life and Annuity net income increased to $554 million in 1995 from $390 million in 1994. Higher realized investment gains, higher net investment income - helped by the reinvestment of proceeds from sales of underperforming real estate during the year as well as from the sale of MetraHealth - and improved productivity, propelled 1995's net income increase compared with 1994.
For individual annuities, net written premiums and deposits in 1995 were $1.713 billion, up 31% from $1.309 billion in 1994. Total policyholder account balances and benefit reserves which aggregated $12.7 billion at December 31, 1995 compared with $10.9 billion at December 31, 1994 reflected this growth in production.
Net written premiums for individual accident and health products, excluding Transport, increased to $118 million in 1995, up 23% from $96 million in 1994. These increases reflect strong growth in long-term care insurance.
In September 1995, Travelers made a pro rata distribution to its stockholders of shares of Class A Common Stock of Transport Holdings Inc., which at the time was a wholly owned subsidiary of Travelers and was the indirect owner of the business of Transport. Immediately prior to this distribution, the Company distributed Transport, an indirect wholly owned subsidiary of the Company, to its parent.
In addition, during the past year significant tax reform discussions have occurred. Some of the proposed discussions could reduce or eliminate the need for tax deferral features and thus the need for products that are currently in Life and Annuity's portfolio. New legislation could also create the need for new products or increase the demand for some existing products. At this time it is not clear what the eventual outcome of this national debate will be or what impact, if any, it may have on Life and Annuity's sales and business retention.
Statement of Financial Accounting Standards No. 121, "Accounting for Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. This statement requires the write down to fair value when long-lived assets to be held and used are impaired. It also requires long-lived assets to be disposed of (e.g., real estate held for sale) to be carried at the lower of cost or fair value less cost to sell and does not allow such assets to be depreciated. The adoption of this statement, effective January 1, 1996, did not have a material effect on results of operations, financial condition or liquidity.
We have audited the accompanying consolidated balance sheet of The Travelers Insurance Company and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations and retained earnings and cash flows for the years then ended. 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Travelers Insurance Company and Subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles.
As discussed in note 3 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.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ COOPERS & LYBRAND L.L.P. - ---------------------------- Hartford, Connecticut January 24, 1994
The Travelers Insurance Company is a wholly owned subsidiary of The Travelers Insurance Group Inc. (TIGI), which is an indirect, wholly owned subsidiary of Travelers Group Inc. (Travelers).
Individual products are primarily marketed through independent agents and through two of the Company's affiliates, The Copeland Companies and the financial consultants of Smith Barney, Inc. (Smith Barney). Group pension products and annuities are marketed by the Company's salaried staff directly to plan sponsors and are also placed through independent consultants and investment advisers.
The Company sold group life and health insurance through its Managed Care and Employee Benefits Operations (MCEBO) through 1994. See note 4.
In December 1992, Primerica Corporation (Primerica) acquired approximately 27% of the common stock of the Company's then parent, The Travelers Corporation (the 27% Acquisition). The 27% Acquisition was accounted for as a purchase. Effective December 31, 1993, Primerica acquired the approximately 73% of The Travelers Corporation common stock which it did not already own, and The Travelers Corporation was merged into Primerica, which was renamed Travelers Group Inc. This was effected through the exchange of .80423 shares of Travelers common stock for each share of The Travelers Corporation common stock (the Merger). All subsidiaries of The Travelers Corporation were contributed to TIGI. In conjunction with the Merger, Travelers contributed Travelers Insurance Holdings Inc. (formerly Primerica Insurance Holdings, Inc.) and its subsidiaries (TIHI) to TIGI, which in turn contributed TIHI to the Company.
The consolidated financial statements and the accompanying notes reflect the historical operations of the Company for the year ended December 31, 1993. The results of operations of TIHI and its subsidiaries are not included in the 1993 financial statements.
The 27% Acquisition and the Merger were accounted for as a "step acquisition", and the purchase accounting adjustments were "pushed down" as of December 31, 1993 to the subsidiaries of TIGI, including the Company, and reflect adjustments of assets and liabilities of the Company (except TIHI) to their fair values determined at each acquisition date (i.e., 27% of values at December 31, 1992 as carried forward and 73% of the values at December 31, 1993). These assets and liabilities were recorded at December 31, 1993 based upon management's then best estimate of their fair values at the respective dates. Evaluation and appraisal of assets and liabilities, including investments, the value of insurance in force, other insurance assets and liabilities and related deferred federal income taxes was completed during 1994. The excess of the 27% share of assigned value of identifiable net assets over cost at December 31, 1992, which was allocated to the Company through "pushdown" accounting, was approximately $56 million and is being amortized over ten years on a straight-line basis. 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 "pushdown" accounting, was approximately $340 million and is being amortized over 40 years on a straight-line basis.
The consolidated statements of operations and retained earnings and of cash flows and the related accompanying notes for the years ended December 31, 1995 and 1994, which are presented on a purchase accounting basis, are separated from the corresponding 1993 information, which is presented on a historical accounting basis, to indicate the difference in valuation bases.
Equity securities, which include common and nonredeemable preferred stocks, are available for sale and carried at fair value based primarily on quoted market prices. Changes in fair values of equity securities are charged or credited directly to shareholder's equity, net of income taxes.
Accrual of income is suspended on fixed maturities or mortgage loans that are in default, or on which it is likely that future payments will not be made as scheduled. Interest income on investments in default is recognized only as payment is received.
The excess of the 27% share of assigned value of identifiable assets over cost at December 31, 1992 allocated to the Company as a result of the 27% Acquisition amounted to approximately $56 million and is being amortized over 10 years on a straight-line basis. Goodwill resulting from the excess of the purchase price over the fair value of the 73% of net assets acquired related to the Merger amounted to approximately $340 million at December 31, 1993 and is being amortized over 40 years on a straight-line basis. TIHI has goodwill of $239 million.
At December 31, 1993, operating lease obligations were recorded at the value assigned at the acquisition dates and included in the consolidated balance sheet as a component of other liabilities. This liability is being amortized over the respective lease periods.
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.
On October 2, 1995, the Company and its affiliates completed the sale of their ownership in MetraHealth to United HealthCare Corporation. Gross proceeds to the Company were $708 million in cash, and could increase by up to $144 million if a contingency payment based on 1995 results is made. The gain to the Company, not including the contingency payment, was $111 million (aftertax) and was recognized in the fourth quarter of 1995.
In September 1995, Travelers made a pro rata distribution to its stockholders of shares of Class A Common Stock of Transport Holdings Inc., which at the time was a wholly owned subsidiary of Travelers and was the indirect owner of the business of Transport Life Insurance Company (Transport). Immediately prior to this distribution, the Company dividended Transport, an indirect, wholly owned subsidiary of the Company, to its parent, resulting in a reduction in additional paid-in capital of $334 million. The results of Transport through September 1995 are included in income from continuing operations.
On December 31, 1993, in conjunction with the Merger, Travelers contributed TIHI to TIGI, which TIGI then contributed to the Company at a carrying value of $2.1 billion. Through its subsidiaries, TIHI primarily offers individual life insurance and, until the dividend of Transport, specialty accident and health insurance.
Travelers, Commercial Credit Company (CCC) (an indirect wholly owned subsidiary of Travelers) and the Company have an agreement with a syndicate of banks to provide $1.0 billion of revolving credit, to be allocated to any of Travelers, CCC or the Company. The Company's participation in this agreement is limited to $250 million. The revolving credit facility consists of a five-year revolving credit facility which expires in 1999. At December 31, 1995, $125 million was allocated to the Company. Under this facility the Company is required to maintain certain minimum equity and risk-based capital levels. At December 31, 1995, the Company was in compliance with these provisions.
Statutory capital and surplus was $3.2 billion and $2.1 billion at December 31, 1995 and 1994, respectively.
The Company monitors creditworthiness of counterparties to these financial instruments by using criteria of acceptable risk that are consistent with on-balance-sheet financial instruments. The controls include credit approvals, limits and other monitoring procedures. Some transactions include the use of collateral to minimize credit risk and lower the effective cost to the borrower.
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.
The Company purchased a 5-year interest rate cap, with a notional amount of $200 million, from Travelers Group Inc. in 1995 to hedge against losses that could result from increasing interest rates. This instrument, which does not have off-balance sheet risk, gives the Company the right to receive payments if interest rates exceed specific levels at specified dates. The premium of $2 million paid for this instrument is being amortized over its life. The interest rate cap asset is reported at fair value which is $1 million at December 31, 1995.
At December 31, 1995, investments in fixed maturities had a carrying value and a fair value of $18.8 billion, compared with a carrying value and a fair value of $17.3 billion at December 31, 1994. See note 15.
At December 31, 1995, mortgage loans had a carrying value of $3.6 billion, which approximated fair value, compared with a carrying value of $4.9 billion, which approximated fair value at December 31, 1994. In estimating fair value, the Company used interest rates reflecting the higher returns required in the real estate financing market.
At December 31, 1995, contractholder funds with defined maturities had a carrying value of $2.4 billion and a fair value of $2.5 billion, compared with a carrying value of $4.2 billion and a fair value of $4.0 billion at December 31, 1994. 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 had a carrying value of $9.3 billion and a fair value of $9.0 billion at December 31, 1995, compared with a carrying value of $9.1 billion and a fair value of $8.8 billion at December 31, 1994. These contracts generally are valued at surrender value.
The Company is a defendant or codefendant in various litigation matters. Although there can be no assurances, as of December 31, 1995, 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.
The Company participates in qualified and nonqualified, noncontributory defined benefit pension plans sponsored by an affiliate 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.
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. These merger-related costs were assumed by TIGI.
The principal banking functions, including payment of salaries and expenses, for certain subsidiaries and affiliates of TIGI (excluding TIHI) are handled by the Company. Settlements for these payments between the Company and its affiliates are made regularly. The Company provides various employee benefits coverages to employees of certain subsidiaries of TIGI. The premiums for these coverages were charged in accordance with cost allocation procedures based upon salaries or census. In addition, investment advisory and management services, data processing services and claims processing services are shared with affiliated companies. Charges for these services are shared by the companies on cost allocation methods based generally on estimated usage by department.
The Company sells structured settlement annuities to its affiliates, The Travelers Indemnity Company and its subsidiaries. Such deposits were $38 million, $39 million and $50 million for 1995, 1994 and 1993, respectively.
The Company markets variable annuity products and life and accident and health insurance through its affiliate, Smith Barney. Premiums and deposits related to these products were $580 million and $161 million in 1995 and 1994, respectively.
At December 31, 1995 and 1994, TIC had an investment of $24 million and $23 million, respectively, in bonds of its affiliate, Commercial Credit Company. This is included in fixed maturities in the consolidated balance sheet.
The Company is reimbursed by affiliates of TIGI for utilization of space and equipment.
Tax benefits allocated directly to shareholder's equity for the years ended December 31, 1995 and 1994 were $7 million and $2 million, respectively.
The net deferred tax liability at December 31, 1995 and the net deferred tax asset at December 31, 1994 were comprised of the tax effects of temporary differences related to the following assets and liabilities:
Prior to December 31, 1993, fixed maturities that were intended to be held to maturity were recorded at amortized cost and classified as held for investment. Sales from the amortized cost portfolios have been made periodically. Such sales were $99 million in 1993, resulting in gross realized gains of $6 million and gross realized losses of $1 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. Sales of trading portfolio fixed maturities were $4.0 billion in 1993. Gross gains of $139 million and gross losses of $2 million were realized on those sales.
The amortized cost and market value of fixed maturities at December 31, 1995, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 1995 and 1994, the Company held CMOs with a market value of $2.3 billion and $2.2 billion, respectively. Approximately 89% of the Company's CMO holdings are fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 1995 and 1994. In addition, the Company held $917 million and $1.3 billion of GNMA, FNMA or FHLMC mortgage-backed securities at December 31, 1995 and 1994, respectively. Virtually all of these securities are rated AAA. The Company also held $1.3 billion and $927 million of securities that are backed primarily by credit card or car loan receivables at December 31, 1995 and 1994, respectively.
Proceeds from sales of equity securities were $379 million and $357 million in 1995 and 1994, respectively. Gross gains of $27 million and $24 million and gross losses of $2 million and $6 million in 1995 and 1994, respectively, were realized on those sales.
At December 31, 1995 and 1994, the Company's mortgage loan and real estate held for sale portfolios consisted of the following (in millions):
Aggregate annual maturities on mortgage loans at December 31, 1995 are as follows:
The Company participates in a short-term investment pool maintained by TIGI and its subsidiaries. See note 11.
The Company also had significant concentrations of investments, primarily fixed maturities, in the following industries:
Concentrations of mortgage loans by property type at December 31, 1995 and 1994 were as follows:
There were no investment valuation reserves at December 31, 1995 and 1994. Investment valuation reserve activity during 1994 and 1993 was as follows:
At December 31, 1993, investment valuation reserves were comprised of $67 million for securities. Increases in the investment valuation reserves were reflected as realized investment losses.
The following table reconciles net income to net cash provided by (used in) operating activities:
Significant noncash investing and financing activities include: a) the 1995 transfer of assets with a fair market value of approximately $1.5 billion and statutory reserves and other liabilities of approximately $1.5 billion to MetLife (see note 4); b) the 1995 dividend of Transport Life Insurance Company to the Company's parent (see note 4); c) the acquisition of real estate through foreclosures of mortgage loans amounting to $97 million, $229 million and $563 million in 1995, 1994 and 1993, respectively; d) the acceptance of purchase money mortgages for sales of real estate aggregating $27 million, $96 million and $190 million in 1995, 1994 and 1993, respectively; e) the 1994 exchange of $23 million of TIHI's investment in Travelers common stock for $35 million of Travelers nonredeemable preferred stock; f) the 1993 contribution of TIHI by Travelers (see note 4); g) the 1993 contribution of $400 million of bond investments by The Travelers Corporation (see note 7); h) increases in investment valuation reserves in 1993 for real estate held for sale (see note 15); and i) the 1993 transfer of $352 million of mortgage loans and bonds from the Company's general account to two separate accounts.
ASSUMPTION REINSURANCE - A transaction whereby the ceding company transfers its entire obligation under the policy to the reinsurer, who becomes directly liable to the policyholder in all respects, including collecting premiums and paying benefits. See "reinsurance."
DEPOSITS AND OTHER CONSIDERATIONS - Consist of cash value deposits and charges for mortality risk and expenses associated with universal life insurance, annuities and group pensions.
EXPERIENCE RATED CONTRACTS - Insurance contracts in which future rates and/or commissions are compiled from past experience, that is, total premiums earned and losses incurred. This can be applied by certain risk classifications or to an individual risk.
POLICY LOAN - A loan made by an insurance company to a policyholder on the security of the cash value of the policy. Policy loans offset benefits payable to policyholders.
STATUTORY CAPITAL AND SURPLUS - As determined under statutory accounting practices, the amount remaining after all liabilities, including loss reserves, are subtracted from all admitted assets. Admitted assets are assets of an insurer prescribed or permitted by a state to be taken into account in determining the insurer's financial condition for statutory purposes. Statutory surplus is also referred to as "surplus" or "surplus as regards policyholders" for statutory accounting purposes.
STRUCTURED SETTLEMENTS - Periodic payments to an injured person or survivor for a determined number of years or for life, typically in settlement of a claim under a liability policy.
SURRENDER VALUE - The amount of money, usually the legal reserve under the policy, less sometimes a surrender charge, which an insurance company will pay to a policyholder who cancels a policy. This value may be used as collateral for a loan.