In addition, as of December 31, 1995, the Company, including TIHI, leases a total of approximately 4,950,000 square feet of office space at 247 locations throughout the United States.
Management believes that these facilities are suitable and adequate for the Company's current needs. The Company is reimbursed by affiliates for their use of this space on a cost allocation method based generally on estimated usage by department.
The Company principally operates through one major business segment: Life and Annuity, which offers individual life, long-term care, annuities and investment products to individuals and small businesses, and investment products to employer-sponsored retirement and savings plans. The Company's Corporate and Other Operations segment manages the investment portfolio of the Company.
On October 2, 1995, the Company and its parent, The Travelers Insurance Group Inc. (TIGI), sold their interests in MetraHealth to United HealthCare Corporation (United). The Company and TIGI owned 41.1% and 7.15%, respectively, of MetraHealth's common stock, and received a total of $831 million in connection with the transaction. This amount includes a dividend paid by MetraHealth and amounts paid by a subsidiary of MetLife for the sale to MetLife of the Company's and TIGI's share of certain additional amounts payable under the merger agreement based on 1996 and 1997 earnings. The Company and TIGI are also entitled to receive up to an additional $169 million, based on "Company Earnings" (as defined in the merger agreement) for 1995. The Company's share of the proceeds was $708 million, and it is entitled to receive up to an additional $144 million based on 1995 Company Earnings. The sale generated an after-tax gain of $111 million which was recognized in the fourth quarter of 1995.
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES ANNUAL REPORT ON FORM 10-K For the fiscal year ended December 31, 1995
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. These operations have been accounted for as discontinued operations.
The 27% Acquisition and the Merger were accounted for as a "step acquisition", and the purchase accounting adjustments were "pushed down" to the subsidiaries of TIGI, including the Company. The consolidated balance sheet and related data at December 31, 1993 reflect adjustments of assets and liabilities of the Company to their fair values determined at each acquisition date (i.e., 27% of values at December 31, 1992 as carried forward and 73% of values at December 31, 1993).
Revenues of $3.647 billion in 1995 increased $241 million from 1994. This increase in revenues in 1995 compared to 1994 is primarily attributable to a $122 million increase in net investment income and a $93 million increase in realized investment gains. The 1995 increase in net investment income is due to the reinvestment of proceeds from sales of underperforming real estate during 1995 and 1994, and the reinvestment of proceeds from the 1995 sale of MetraHealth.
At December 31, 1995 and 1994, the Company had real estate held for sale and mortgage loan investments totaling $3.9 billion and $5.3 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. In 1995 and 1994, the Company had sales of real estate held for sale and mortgage loans of approximately $874 million and $1.258 billion, respectively.
Other revenues include mortality, surrender and administrative charges on universal life and investment contracts, administrative fees on employee benefit and other contracts and revenues of noninsurance subsidiaries.
Sales continue to be aided by the success of Vintage, the variable annuity product distributed exclusively by Smith Barney Financial Consultants, which was launched in June 1994, and now accounts for more than 40% of all individual annuity production at the Company. Vintage Life and Travelers Target Market Maturity, the first of several new products planned for Smith Barney, were introduced in September 1995. Annuity sales were also helped in part by rating agency upgrades for claims paying ability that occurred during the year, including in April 1995, A.M. Best's upgrade of the Company to an "A" rating. This rating is not a recommendation to buy, sell or hold securities, and it may be revised or withdrawn at any time.
In the group annuity business, net written premiums and deposits for the year were $1.014 billion compared with $763 million last year (excluding intercompany items). A management decision not to renew low margin guaranteed investment contracts written in prior years contributed to a reduction in policyholder account balances and benefit reserves to $10.6 billion at December 31, 1995, from $12.1 billion at December 31, 1994. Scheduled maturities for guaranteed investment contracts (GICs) for 1996, 1997, 1998, 1999 and 2000 are $1.3 billion, $367 million, $344 million, $123 million and $91 million, respectively. At December 31, 1995, the interest rates credited on GICs had a weighted average of 6.12%.
During 1995, Life and Annuity (excluding Primerica Life Insurance Company discussed below) issued $6.2 billion of face amount of individual life insurance, down from $9.2 billion during 1994, bringing total life insurance in force to $49.2 billion at year-end 1995, up from $48.4 billion at year-end 1994 (excluding Transport). The reduction in face amount issued reflects a de-emphasis on sales of certain lower-margin life insurance products. Net written premiums and deposits for individual life insurance, excluding Transport, were $269 million in 1995 compared to $282 million in 1994, reflecting the purchase of additional reinsurance coverage in 1995.
Primerica Life Insurance Company, a subsidiary of TIHI, issued 266,600 term life insurance policies totalling $53.0 billion in face amount during 1995, compared to 299,400 term life insurance policies totaling $57.4 billion in face amount during 1994. Life insurance in force at year-end 1995 reached $348.2 billion, up from $335.0 billion at year-end 1994, and continued to reflect good policy persistency (i.e., the percentage of policies that continue in force).
On January 3, 1995, the Company and its affiliates completed the sale of its group life and related businesses to 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, including certain of their affiliates, each contributed their medical businesses to MetraHealth, a newly formed joint venture, in exchange for common stock of MetraHealth.
Life and Annuity should benefit from the growth in the aging population who are becoming more focused on the need to accumulate adequate savings for retirement, to protect these savings and to plan for the transfer of wealth to the next generation. Life and Annuity is well-positioned to benefit from the favorable long-term demographic trends through its strong financial position, widespread brand name recognition and broad array of competitive life, annuity and long-term care insurance products sold through three established distribution channels. These include independent agents, Copeland and Smith Barney financial consultants.
However, competition in both product pricing and customer service is intensifying. While there has been some consolidation within the industry, other financial services organizations are increasingly involved in the sale and/or distribution of insurance products. Deregulation of the banking industry, including possible reform of restrictions on entry into the insurance business, will likely accelerate this trend. In order to strengthen its competitive position, Life and Annuity expects to maintain a current product portfolio, further diversify its distribution channels, and retain its healthy financial position through strong sales growth in a cost-efficient manner.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). This statement addresses alternative accounting treatments for stock-based compensation, such as stock options and restricted stock. FAS 123 permits either expensing the value of stock-based compensation over the period earned or disclosing in the financial statement footnotes the pro forma impact to net income as if the value of stock-based compensation awards had been expensed. The value of awards would be measured at the grant date based upon estimated fair value, using option pricing models. The requirements of this statement will be effective for 1996 financial statements, although earlier adoption is permissible if an entity elects to expense the cost of stock-based compensation. The Company, along with affiliated companies, participates in stock option and incentive plans sponsored by Travelers. The Company is currently evaluating the disclosure requirements and expense recognition alternatives addressed by this statement.
The Travelers Insurance Company and its subsidiaries (the Company) principally operates through one major business segment: Life and Annuity, which offers individual life, long-term care, annuities and investment products to individuals and small businesses, and investment products to employer-sponsored retirement and savings plans. The Company's Corporate and Other Operations segment manages the investment portfolio of the Company.
TIHI is an intermediate holding company whose primary subsidiaries are Primerica Life Insurance Company and its subsidiary National Benefit Life Insurance Company, which primarily offers individual life insurance. Through September 1995 it also sold specialty accident and health insurance through its subsidiary Transport Life Insurance Company (see note 4).
As more fully described in note 4, all of the operations comprising MCEBO are presented as a discontinued operation and, accordingly, prior year amounts have been restated.
Certain prior year amounts have been reclassified to conform with the 1995 presentation.
Mortgage loans are carried at amortized cost. For mortgage loans that are determined to be impaired, a reserve is established for the difference between the amortized cost and fair market value of the underlying collateral. Impaired loans were insignificant at December 31, 1995.
Real estate held for sale is carried at the lower of cost or fair value less estimated costs to sell. Fair value was established at time of foreclosure by appraisers, either internal or external, using discounted cash flow analyses and other acceptable techniques. Thereafter, an allowance for losses on real estate held for sale is established if the carrying value of the property exceeds its current fair value less estimated costs to sell. There was no such allowance at December 31, 1995.
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 Canadian operations are reflected directly in shareholder's equity, net of income taxes.
Realized investment gains and losses are included as a component of pretax revenues based upon specific identification of the investments sold on the trade date and, prior to the Merger, included adjustments to investment valuation reserves. These adjustments reflected changes considered to be other than temporary in the net realizable value of investments. Also included are gains and losses arising from the remeasurement of the local currency value of foreign investments to U.S. dollars, the functional currency of the Company. The foreign exchange effects of Canadian operations are included in unrealized gains and losses.
Costs of acquiring individual life insurance, annuities and health business, principally commissions and certain expenses related to policy issuance, underwriting and marketing, all of which vary with and are primarily related to the production of new business, are deferred. Acquisition costs relating to traditional life insurance and guaranteed renewable health contracts, including long-term care, are amortized over the period of anticipated premiums; universal life in relation to estimated gross profits; and annuity contracts employing a level yield method. For life insurance, a 10- to 25-year amortization period is used; for guaranteed renewable health, a 10- to 20-year period, and a 10- to 15-year period is employed for annuities. Deferred acquisition costs are 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. 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 3.8% to 8.6%. Contractholder funds also include other funds that policyholders leave on deposit with the Company.
Benefit reserves represent liabilities for future insurance policy benefits. Benefit reserves for life insurance, annuities, and accident and health policies have been computed based upon mortality, morbidity, persistency and interest assumptions applicable to these coverages, which range from 2.5% to 10.0%, including adverse deviation. These assumptions consider Company experience and industry standards and may be revised if it is determined that the future experience will differ substantially from that previously assumed. The assumptions vary by plan, age at issue, year of issue and duration. Appropriate recognition has been given to experience rating and reinsurance.
The Company, domiciled principally in Connecticut and Massachusetts, prepares statutory financial statements in accordance with the accounting practices prescribed or permitted by the insurance departments of those states. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The impact of any permitted accounting practices on statutory surplus of the Company is not material.
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 the Company's results of operations, financial condition or liquidity.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). This statement addresses alternative accounting treatments for stock-based compensation, such as stock options and restricted stock. FAS 123 permits either expensing the value of stock-based compensation over the period earned or disclosing in the financial statement footnotes the pro forma impact to net income as if the value of stock-based compensation awards had been expensed. The value of awards would be measured at the grant date based upon estimated fair value, using option pricing models. The requirements of this statement will be effective for 1996 financial statements, although earlier adoption is permissible if an entity elects to expense the cost of stock-based compensation. The Company, along with affiliated companies, participates in stock option and incentive plans sponsored by Travelers. The Company is currently evaluating the disclosures requirements and expense recognition alternatives addressed by this statement.
Effective January 1, 1995, the Company adopted 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," which describe how impaired loans should be measured when determining the amount of a loan loss accrual. These statements amended existing guidance on the measurement of restructured loans in a troubled debt restructuring involving a modification of terms. Their adoption did not have a material impact on the Company's financial condition, results of operations or liquidity.
This increase included an unrealized gain of $133 million (net of income taxes) on TIHI's investment in the common stock of Travelers. See note 15.
In December 1994, the Company and its affiliates sold their group dental insurance business to Metropolitan Life Insurance Company (MetLife) and realized a gain on the sale of $9 million (aftertax). On January 3, 1995, the Company and its affiliates completed the sale of their group life and related non-medical group insurance businesses to MetLife for $350 million and realized a gain on the sale of $20 million (aftertax). In connection with the sale, the Company ceded 100% of its risks in the group life and related businesses to MetLife on an indemnity reinsurance basis, effective January 1, 1995. In connection with the reinsurance transaction, the Company transferred assets with a fair market value of approximately $1.5 billion to MetLife, equal to the statutory reserves and other liabilities transferred.
On January 3, 1995, the Company and MetLife and certain of their affiliates formed The MetraHealth Companies, Inc. (MetraHealth) joint venture by contributing their group medical businesses to MetraHealth, in exchange for shares of common stock of MetraHealth. 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, TIGI owned 7.4% and the other 50% was owned by MetLife and its affiliates. In March 1995, MetraHealth acquired HealthSpring, Inc. for common stock of MetraHealth, resulting in a reduction in the ownership interests of the Company to 41.10%, TIGI to 7.15%, and MetLife to 48.25%.
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 came due for renewal, the risks were transferred to MetraHealth and the related operating results for this medical insurance business were reported by the Company in 1995 as part of discontinued operations.
All of the businesses sold to MetLife or contributed to MetraHealth were included in the Company's MCEBO segment in 1994. In 1995 the Company's results reflect the medical insurance business not yet transferred, plus its equity interest in the earnings of MetraHealth through the date of the sale. These operations have been accounted for as a discontinued operation. Revenues from discontinued operations for the years ended December 31, 1995, 1994 and 1993 amounted to $1.2 billion, $3.3 billion and $3.3 billion, respectively. The assets and liabilities of the discontinued operations have not been segregated in the consolidated balance sheet as of December 31, 1995 and 1994. The assets and liabilities of the discontinued operations consist primarily of investments and insurance-related assets and liabilities. At December 31, 1995, these assets and liabilities each amounted to $1.8 billion. At December 31, 1994, these assets and liabilities amounted to $3.4 billion and $3.2 billion, respectively.
The Company issues commercial paper directly to investors and had $73 million outstanding at December 31, 1995. The Company maintains unused credit availability under bank lines of credit at least equal to the amount of the outstanding commercial paper.
The Company participates in reinsurance in order to limit losses, minimize exposure to large risks, provide additional capacity for future growth and to effect business-sharing arrangements. Reinsurance is accomplished through various plans of reinsurance, primarily coinsurance, modified coinsurance and yearly renewable term. The Company remains primarily liable as the direct insurer on all risks reinsured. It is the policy of the Company to obtain reinsurance for amounts above certain retention limits on individual life policies which vary with age and underwriting classification. Generally, the maximum retention on an ordinary life risk is $1.5 million. The Company writes workers' compensation business through its Accident Department. This business is ceded 100% to an affiliate, The Travelers Indemnity Company.
Total reinsurance recoverable at December 31, 1995 includes $929 million recoverable from MetLife in connection with the sale of the Company's group life and related businesses. See note 4.
The decrease of $318 million in additional paid-in capital during 1995 is due primarily to the dividend of Transport to the Company's parent (see note 4).
The increase of $1.7 billion in additional paid-in capital during 1993 arose from a contribution of $400 million from The Travelers Corporation and the contribution of TIHI (see notes 2 and 4). This was partially offset by the impact of the initial evaluations and appraisals used to assign fair values to assets and liabilities under purchase accounting.
An analysis of the change in unrealized gains and losses on investments is shown in note 15.
Statutory net income, including TIHI, was $235 million and $100 million for the years ended December 31, 1995 and 1994, respectively. Statutory net loss, excluding TIHI, was $648 million for the year ended December 31, 1993.
The Company is currently subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid to its parent without prior approval of insurance regulatory authorities. Statutory surplus of $506 million is available in 1996 for dividend payments by the Company without prior approval of the Connecticut Insurance Department.
Dividend payments to the Company from its insurance subsidiaries are subject to similar restrictions and are limited to $16 million in 1996.
The Company uses derivative financial instruments, including financial futures, interest rate swaps and forward contracts, as a means of hedging exposure to foreign currency and/or interest rate risk on anticipated transactions 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.
These derivative financial instruments have off-balance-sheet risk. Financial instruments with off-balance-sheet risk involve, to varying degrees, elements of credit and market risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in a particular class of financial instrument. However, the maximum loss or cash flow associated with these instruments can be less than these amounts. For forward contracts and interest rate swaps, credit risk is limited to the amounts calculated to be due the Company on such contracts. For unfunded commitments to partnerships, credit exposure is the amount of the unfunded commitments. For fixed and variable rate loan commitments, credit exposure is represented by the contractual amount of these instruments.
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
Futures contracts have little credit risk since organized exchanges are the counterparties. Margin payments are required to enter a futures contract and contract gains or losses are settled daily in cash. The contract amount of futures contracts represents the extent of the Company's involvement, but not future cash requirements, as open positions are typically closed out prior to the delivery date of the contract. At December 31, 1995, the Company's futures contracts have no fair value because these contracts are marked to market and settled in cash.
The off-balance-sheet risks of interest rate swaps, financial futures contracts, forward contracts, fixed and variable rate loan commitments and unfunded commitments to partnerships were not significant at December 31, 1995 and 1994.
The Company uses various financial instruments in the normal course of its business. Fair values of financial instruments which are considered insurance contracts are not required to be disclosed and are not included in the amounts discussed.
The carrying values of $647 million and $417 million of financial instruments classified as other assets approximated their fair values at December 31, 1995 and 1994, respectively. The carrying values of $1.3 billion and $1.2 billion of financial instruments classified as other liabilities also approximated their fair values at December 31, 1995 and 1994, respectively. Fair value is determined using various methods including discounted cash flows, as appropriate for the various financial instruments.
The assets of separate accounts providing a guaranteed return had a carrying value and a fair value of $1.5 billion and $1.6 billion, respectively, at December 31, 1995, compared with a carrying value and a fair value of $1.5 billion and $1.4 billion, respectively, at December 31, 1994. The liabilities of separate accounts providing a guaranteed return had a carrying value and a fair value of $1.5 billion and $1.4 billion, respectively, at December 31, 1995, compared with a carrying value and a fair value of $1.5 billion and $1.3 billion, respectively, at December 31, 1994.
The carrying value of policy loans, which have no defined maturities, was considered to be fair value.
See note 8 for a discussion of financial instruments with off-balance-sheet risk.
The Company's share of net pension expense was not significant for 1995, 1994 and 1993.
Through plans sponsored by TIGI, 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 not significant in 1995, 1994 and 1993.
In addition to pension benefits, the Company provides certain health care and life insurance benefits for retired employees through a plan sponsored by TIGI. This plan does not include employees of TIHI. Covered employees may become eligible for these benefits if they reach retirement age while working for the Company. These retirees may elect certain prepaid health care benefit plans. Life insurance benefits generally are set at a fixed amount. The cost recognized by the Company for these benefits represents its allocated share of the total costs of the plan, net of employee contributions. The Company's share of the total cost of the plan for 1995, 1994 and 1993 was not significant.
Under the savings, investment and stock ownership plan available to substantially all employees of TIGI (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 the profitability of TIGI and its subsidiaries was added. The Company's matching obligation was not significant in 1995, 1994 and 1993.
TIGI and its subsidiaries maintain a short-term investment pool in which the Company participates. The position of each company participating in the pool is calculated and adjusted daily. At December 31, 1995 and 1994, the pool totaled approximately $2.2 billion and $1.5 billion, respectively. The Company's share of the pool amounted to $1.4 billion and $1.1 billion at December 31, 1995 and 1994, respectively, and is included in short-term securities in the consolidated balance sheet.
The Company leases new furniture and equipment from a noninsurance subsidiary of TIGI. The rental expense charged to the Company for this furniture and equipment was not significant in 1995, 1994 and 1993.
The Company has entered into various operating and capital lease agreements for office space and data processing and certain other equipment. Rental expense under operating leases was $22 million, $23 million and $26 million, in 1995, 1994 and 1993, respectively. Future net minimum rental and lease payments are estimated as follows:
At December 31, 1995, the Company has no ordinary or capital loss carryforwards.
Proceeds from sales of fixed maturities classified as available for sale were $6.8 billion and $1.3 billion in 1995 and 1994, respectively. Gross gains of $80 million and $14 million and gross losses of $124 million and $26 million in 1995 and 1994, respectively, were realized on those sales.
The cost and market values of investments in equity securities were as follows:
Underperforming assets include delinquent mortgage loans, loans in the process of foreclosure, foreclosed loans and loans modified at interest rates below market. The Company continues its strategy, adopted in conjunction with the Merger, to dispose of these real estate assets and some of the mortgage loans and to reinvest the proceeds to obtain current market yields.
At December 31, 1995 and 1994, the Company had no concentration of credit risk in a single investee exceeding 10% of consolidated shareholder's equity.
Included in fixed maturities are below investment grade assets totaling $1.0 billion and $922 million at December 31, 1995 and 1994, respectively. The Company defines its below investment grade assets as those securities rated "Ba1" or below by external rating agencies, or the equivalent by internal analysts when a public rating does not exist. Such assets include publicly traded below investment grade bonds and certain other privately issued bonds that are classified as below investment grade loans.
Below investment grade assets included in the totals above, were as follows:
At December 31, 1995 and 1994, significant concentrations of mortgage loans were for properties located in highly populated areas in the states listed below:
Other mortgage loan investments are fairly evenly dispersed throughout the United States, with no holdings in any state exceeding $332 million and $432 million at December 31, 1995 and 1994, respectively.
The Company had mortgage loans and debt securities which were restructured at below market terms totaling approximately $67 million and $259 million at December 31, 1995 and 1994, respectively. 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 $16 million in 1995 and $52 million in 1994. Interest on these assets, included in net investment income, aggregated $8 million and $17 million in 1995 and 1994, respectively.
At December 31, 1995, the Company had $22.4 billion of life and annuity deposit funds and reserves. Of that total, $11.4 billion were not subject to discretionary withdrawal based on contract terms and related market conditions. The remaining $11.0 billion were for life and annuity products that were subject to discretionary withdrawal by the contractholders. Included in the amount that were subject to discretionary withdrawal were $1.5 billion of liabilities that are surrenderable with market value adjustments. An additional $5.8 billion of the life insurance and individual annuity liabilities are subject to discretionary withdrawals with an average surrender charge of 5.2%. Another $870 million of liabilities are surrenderable at book value over 5 to 10 years. In the payout phase, these funds are credited at significantly reduced interest rates. The remaining $2.8 billion of liabilities are surrenderable without charge. Approximately 25% of these 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.
ANNUITY - A contract that pays a periodic income benefit for the life of a person (the annuitant), the lives of two or more persons or for a specified period of time.
CEDE; CEDING COMPANY - When an insurer reinsures its liability with another insurer (a "cession"), it "cedes" business and is referred to as the "ceding company."
DEFERRED ACQUISITION COSTS - Commissions and other selling expenses, which vary with and are primarily related to the production of new business, are deferred and amortized to achieve a matching of revenues and expenses when reported in financial statements prepared in accordance with GAAP.
INDEMNITY REINSURANCE - A transaction whereby the reinsurer agrees to indemnify the ceding company against all or part of the loss that the latter may sustain under the policies it issued that are being reinsured. The ceding company remains primarily liable as the direct insurer on all risks ceded. See "reinsurance."
LIFE CONTINGENCIES - Contingencies affecting the duration of life of an individual or a group of individuals.
REINSURANCE - The practice whereby one insurer, called the reinsurer, in consideration of a premium paid to such insurer, agrees to indemnify another insurer, called the ceding company, for part or all of the liability assumed by the ceding company under one or more policies or contracts of insurance which it has issued.
RETENTION - The amount of exposure an insurance company retains on any one risk or group of risks.
STATUTORY ACCOUNTING PRACTICES - The rules and procedures prescribed or permitted by United States state insurance regulatory authorities for recording transactions and preparing financial statements. Statutory accounting practices generally reflect a modified going concern basis of accounting.
UNDERWRITING - The insurer's or reinsurer's process of reviewing applications for insurance coverage, and the decision whether to accept all or part of the coverage and determination of the applicable premiums; also refers to the acceptance of such coverage.
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended December 31, 1995