The Company owns buildings containing approximately 1,535,000 square feet of office space located in Hartford, Connecticut and vicinity, serving as the home office of The Travelers Insurance Group Inc. and subsidiaries ("TIG").
The Company also owns a building in Norcross, Georgia which is occupied by TIG's information systems department. TIG occupies a total of approximately 147,000 square feet in this building.
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.
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 The Travelers Inc. This was effected through the exchange of .80423 shares of The Travelers Inc. common stock for each share of The Travelers Corporation common stock then outstanding (the "Merger"). All subsidiaries of The Travelers Corporation were contributed to The Travelers Insurance Group Inc. ("TIG"), an indirect subsidiary of The Travelers Inc. In conjunction with the Merger, The Travelers Inc. contributed Travelers Insurance Holdings Inc. (formerly Primerica Insurance Holdings, Inc.) and its subsidiaries ("TIHI") to TIG, 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"), and Transport Life Insurance Company ("Transport"). Through its subsidiaries, TIHI principally offers individual life insurance and specialty accident and health 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 the Life and Annuities segment.
Evaluation and appraisal of assets and liabilities, including investments, the value of insurance in force, reinsurance recoverable, other insurance assets and liabilities and related deferred income tax was completed during 1994. The Acquisition and the Merger are being accounted for as a "step acquisition." The step acquisition method of purchase accounting requires that the Company's assets and liabilities be recorded at the 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). 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 the "pushdown" basis of 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 estimated 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. Under purchase accounting, the total purchase price is allocated to the Company's assets and liabilities based on their relative fair values.
This management's narrative analysis of the results of operations reflects 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 for the year ended December 31, 1993. Balance sheet related data since December 31, 1993 includes TIHI. The Acquisition and the Merger have been accounted for as a "step acquisition." The consolidated balance sheet and related data at December 31, 1993 reflect adjustments of assets and liabilities of the Company (except TIHI) to their fair values determined at each acquisition date (purchase accounting value, i.e., 27% of values at December 31, 1992 as carried forward and 73% of the values at December 31, 1993).
Net income for 1994 was $545 million, an increase of $404 million when compared to 1993. This increase results from the addition in 1994 of net income related to TIHI of $215 million, higher retained investment income and underwriting margins in the Life and Annuities segment and reduced operating expenses, which have been partially offset by lower realized investment gains. Excluding the after-tax impacts of a $103 million addition to reserves for foreclosed properties held for sale and a $25 million benefit relating to the increase in the tax rate on corporations from 34% to 35%, net income would have been $219 million for 1993.
During 1993, the Company added $158 million to its real estate valuation reserves for foreclosed properties held for sale, which resulted in an after-tax charge of $103 million. This addition was based on a review of properties in the held for sale portfolio in light of actual experience on properties already sold and in the process of being sold.
In 1994 and 1993, the Company disposed of approximately $1.9 and $1.8 billion, respectively, of primarily foreclosed real estate and underperforming commercial mortgage loans.
The Company has a net deferred tax asset which relates to temporary differences that are expected to reverse as net ordinary deductions except for a deferred tax asset of $319 million (after reduction by the valuation allowance) which relates to the unrealized loss on fixed maturity investments. Management does not intend to realize the unrealized loss on the fixed maturity investments except to the extent of offsetting capital gains. The Company will have to generate approximately $1.8 billion of taxable income, before reversal of these temporary differences, primarily over the next 10 to 15 years, to realize the remainder of the deferred tax asset, exclusive of the unrealized loss on fixed maturity investments. Management expects to realize the remainder of the deferred tax asset based upon its expectation of future positive taxable income, after the reversal of these deductible temporary differences, in the consolidated life insurance company federal income tax return through 1998, and the consolidated federal income tax return of The Travelers Inc. commencing in 1999. The taxable income of The Travelers Inc. consolidated return, after reversal of the deductible temporary differences, is expected to be at least $1 billion annually.
The Life & Annuities segment includes the results of the Travelers Life & Annuities segment of the old Travelers for all periods presented and, for 1994 only, the results of TIHI, which was contributed to the Company on December 31, 1993. Certain 1993 production statistics related to TIHI are included for comparison purposes only and are not reflected in 1993 revenues or operating results.
During 1994, $9.2 billion of face amount of individual life insurance was issued in old Travelers bringing total life insurance in force to $49 billion. Individual life insurance net premiums and deposits totaled $287 million in 1994 compared to $279 million in 1993. Deposits are estimates of premiums that fee-based customers would have been charged under a fully insured arrangement and do not represent actual revenues.
Primerica Life Insurance Company, a subsidiary of TIHI, issued 299,400 term life insurance policies totaling $57.4 billion in face amount during 1994, an increase from 260,300 policies totaling $49.3 billion in face amount in 1993. The increase in face amount issued has contributed to an increase in insurance in force, which was $335 billion at December 31, 1994 compared to $317 billion at December 31, 1993. The increase was a result of improved life insurance sales and persistency (i.e. the percentage of policies that continue in force).
In the group annuity business, net written premiums and deposits for 1994 were $1,284 million, down significantly from $2,092 million in 1993. The decline reflects the Company's more selective approach to issuance of guaranteed investment contracts and a decision in the third quarter of 1993 to no longer market index funds, partially offset by a transfer of $512 million of TIG's pension plan assets which were previously managed externally. Policyholder account balances and benefit reserves totaled $12.2 billion at December 31, 1994, down from $13.6 billion at December 31, 1993.
Net written premiums for individual accident and health products, primarily long-term care and supplementary products, totaled $334 million in 1994, about even with 1993.
Net investment income remained constant at $1.6 billion in 1994 compared with 1993. Net investment income for 1994 includes net investment income from PIHI of $189 million offset by a reduced asset base reflecting decreases in group annuity business, as well as the amortization of purchase accounting adjustments. Life and Annuities' emphasis on separate account and variable deferred annuity production has also contributed to the decline in net investment income in recent years. 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.
Life and Annuities' net income increased $373 million in 1994, compared with 1993, to $392 million. This increase is attributable to net income from PIHI of $215 million for 1994, higher retained investment income, improved underwriting margins and reduced operating expenses, all of which have been partially offset by lower realized investment gains and an increase in the effective tax rate.
As discussed in Note 3 of Notes to Consolidated Financial Statements, 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), and completed the formation of The MetraHealth Insurance Companies, Inc. (MetraHealth), a joint venture of the medical businesses of the Company and MetLife and their affiliates.
Group life written premiums, deposits and equivalents decreased $71 million in 1994 from $662 million in 1993 to $591 million in 1994. Total group life insurance in force amounted to $143.1 billion at December 31, 1994, down from $147.6 billion at December 31, 1993. Face amount of group life insurance issued during 1994 was $11.4 billion versus $13.4 billion in 1993. Group health written premiums and equivalents decreased $444 million in 1994 from $9.6 billion in 1993 to $9.1 billion in 1994. The total lives covered by medical plans declined to 4.9 million at December 31, 1994 from 5.8 million at December 31, 1993, although participation in the managed care component rose 21%. New sales revenues of life and health business were $453 million in 1994, down 34% from 1993.
Net investment income declined $19 million in 1994 to $246 million as a result of the Company's current investment strategy, a lower asset base and the amortization of purchase accounting adjustments.
Excluding the after-tax gain of $9 million from the sale of the group dental insurance business of the Company to MetLife (in conjunction with the sale of the group life and non-medical group business as mentioned above), earnings were $148 million for 1994. Likewise, excluding the after-tax impacts of a $23 million addition to reserves for foreclosed properties held for sale and a $9 million benefit relating to the 1% tax rate change on the deferred tax asset, earnings were $137 million for 1993. The increase in 1994 was attributable to reduced operating expenses resulting from cost reduction initiatives and improved underwriting. The 1994 increase in earnings was partially offset by lower realized investment gains.
The insurance industry is extremely competitive on both price and service and no single issuer is dominant. Consolidations are occurring in the life insurance industry and other financial services organizations are becoming involved in the sale and/or distribution of life insurance products. This increases the pressure on the Company to remain current as to market trends. Also, the annuities business is interest sensitive and swings in interest rates could impact sales and retention of in force policies.
Upon formation of MetraHealth, the joint venture created by the combinaton of the medical businesses of the Company and MetLife, the Company owned 42.6% of MetraHealth's common stock. The Company and its affiliates and MetLife and its affiliates are equal partners in the joint venture. The Company's interest in MetraHealth will be accounted for on the equity method. See Note 3 of Notes to Consolidated Financial Statements.
MetraHealth will provide group health insurance, health maintenance organizations, managed care and ancillary services throughout the United States, in Puerto Rico and in the U.S. Virgin Islands. The range of services provided by these products includes programs to maintain health and wellness, as well as to promote patient education and to manage health care through networks of providers of medical/surgical, mental health and pharmaceutical services. MetraHealth network products rely on contractual arrangements between it and providers of health care to deliver services to covered individuals at negotiated reimbursement levels as well as to participate in utilization and quality management programs.
Statement of Financial Accounting Standards ("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan", and FAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures", describe how impaired loans should be measured when determining the amount of a loan loss accrual. These statements also amend existing guidance on the measurement of restructured loans in a troubled debt restructuring involving a modification of terms. The adoption of these statements effective January 1, 1995 will not have a material effect on the Company's results of operations or financial position.
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, 1994 and 1993, and the results of their operations and their cash flows for the year ended December 31, 1994, in conformity with generally accepted accounting principles.
To the Board of Directors and Shareholder of The Travelers Insurance Company and Subsidiaries:
We have audited the consolidated statements of operations and retained earnings and cash flows of The Travelers Insurance Company and Subsidiaries for the year ended December 31, 1993. 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 audit.
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.
As discussed in Notes 2, 5, 10 and 13 to the consolidated financial statements, the Company changed its method of accounting for postretirement benefits other than pensions, accounting for income taxes and accounting for foreclosed assets in 1992.
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 The Travelers Inc. This was effected through the exchange of .80423 shares of The Travelers Inc. common stock for each share of The Travelers Corporation common stock (the Merger). All subsidiaries of The Travelers Corporation were contributed to TIG. In conjunction with the Merger, The Travelers Inc. contributed Travelers Insurance Holdings Inc. (formerly Primerica Insurance Holdings, Inc.) and its subsidiaries (TIHI) to TIG, 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), and Transport Life Insurance Company (Transport). Through its subsidiaries, TIHI primarily offers individual insurance and specialty accident and health insurance. The Company realized an increase to shareholder's equity of $2.1 billion at December 31, 1993 related to the contribution of TIHI. At December 31, 1993 and subsequent, TIHI is included in the Life and Annuities segment.
The consolidated financial statements and the accompanying notes reflect the historical operations of the Company for the years ended December 31, 1993 and 1992. The results of operations of TIHI and its subsidiaries are not included in the 1993 and 1992 financial statements. The Company's consolidated balance sheet and related data at December 31, 1994 and 1993 include TIHI on a fully consolidated basis. The Acquisition and the Merger are being accounted for as a "step acquisition." The consolidated balance sheet and related data at December 31, 1993 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 are reflected in the consolidated balance sheet at December 31, 1993 based upon management's then best estimate of their fair values. Evaluation and appraisal of assets and liabilities, including investments, the value of insurance in force, reinsurance recoverable, other insurance assets and liabilities and related deferred income taxes were 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 the "pushdown" basis of accounting, was approximately $56 million and is being amortized over ten years on a straight-line basis.
Mortgage loans are carried at amortized cost. 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, both internal and external, using discounted cash flow analyses and other acceptable techniques.
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 translation of the local currency value of foreign investments to U.S. dollars, the functional currency of the Company.
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 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 $246 million.
Benefit reserves represent liabilities for future insurance policy benefits. Benefit reserves for traditional 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 12.0%, 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.
At December 31, 1993, operating leases 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 average lease period.
Premiums are recognized as revenues when due. Reserves are established for the portion of premiums that will be earned in future periods and for deferred profits on limited-payment policies that are being recognized in income over the policy term. At December 31, 1993, the deferred profits on limited-payment policies were recorded at the values assigned at the acquisition dates.
Other revenues include surrender, mortality and administrative charges and fees as earned on investment, universal life and other insurance contracts. Other revenues also include gains and losses on dispositions of assets and operations other than realized investment gains and losses, revenues of noninsurance subsidiaries, and the pretax operating results of real estate joint ventures.
Interest credited to contractholders represents amounts earned by universal life, pension investment and certain individual annuity contracts in accordance with contract provisions.
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (FAS 118), and Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (FAS 114), describe how impaired loans should be measured when determining the amount of a loan loss accrual. These statements also amend existing guidance on the measurement of restructured loans in a troubled debt restructuring involving a modification of terms. The adoption of these statements, effective January 1, 1995, will not have a material effect on results of operations or financial position.
Effective January 1, 1994, the Company adopted Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts" (Interpretation 39). The general principle of Interpretation 39 states that amounts due from and due to another party may not be offset in the consolidated balance sheet unless a right of setoff exists and the parties intend to exercise the right of setoff. Implementation of Interpretation 39 did not have a material impact on the Company's financial position; however, assets and liabilities were both increased by $68 million as of December 31, 1994.
In the third quarter of 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109) with retroactive application to January 1, 1992. FAS 109 establishes new principles for calculating and reporting the effects of federal income taxes in financial statements. FAS 109 replaces the income statement orientation inherent in the prior income tax accounting standard with a balance sheet approach. Under the new approach, deferred tax assets and liabilities are generally determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. FAS 109 allows recognition of deferred tax assets if 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.
In December 1994, the Company and its affiliates sold its 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 its group life and related businesses to MetLife, and completed the formation of The MetraHealth Companies, Inc. (MetraHealth), a joint venture of the medical businesses of the Company and its affiliates and MetLife.
The Company and its affiliates sold its group life business as well as related non-medical group insurance businesses to MetLife for $350 million. The assets transferred included customer lists, books and records, and furniture and equipment. In connection with the sale, the Company and its affiliates agreed to cede 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 and its affiliates transferred assets with a fair market value of approximately $1.5 billion to MetLife, equal to the statutory reserves and other liabilities transferred.
All of the businesses sold to MetLife or contributed to MetraHealth were included in the Company's Managed Care and Employee Benefits Operations (MCEBO). Revenues and net income from MCEBO for the year ended 1994 amounted to $3.5 billion and $157 million, respectively. Beginning in 1995 the Company's results will reflect the runoff medical insurance business, plus its equity interest in the earnings of MetraHealth.
In 1994, The Travelers Inc., Commercial Credit Company (an indirect wholly owned subsidiary of The Travelers Inc.) and the Company entered into an agreement with a syndicate of banks to provide $1.5 billion of revolving credit, to be allocated to any of the above-indicated companies. The revolving credit facility consists of a 364-day revolving credit in the amount of $300 million and a 5-year revolving credit in the amount of $1.2 billion. The participation of the Company in this facility is limited to $300 million, and at December 31, 1994, the Company's allocation was $200 million, all of which was unused.
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 the Travelers Indemnity Company.
Reinsurance recoverables at December 31 include amounts recoverable on unpaid and paid losses and were as follows (in millions):
The increase of $273 million in additional paid-in capital during 1994 is due primarily to the finalization of the evaluations and appraisals used to assign fair values to assets and liabilities under purchase accounting.
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 1 and 3). 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.
The increase in additional paid-in capital during December 31, 1992 arose from a contribution of $500 million in 1992 from The Travelers Corporation and the contribution of Transport Life Insurance Company's preferred provider and third party administrator organizations in 1992 (see note 3).
The statutory net income, including TIHI, was $100 million for the year ended December 31, 1994. The statutory net loss, excluding TIHI, was $648 million and $346 million for the years ended December 31, 1993 and 1992, respectively.
8. DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
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 credit 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.
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. Many transactions include the use of collateral to minimize credit risk and lower the effective cost to the borrower.
At December 31, 1994 and 1993, investments in fixed maturities have a fair value of $17.3 billion and $18.3 billion, respectively. See note 15.
The assets of separate accounts providing a guaranteed return have a carrying value and a fair value of $1.5 billion and $1.4 billion, respectively, at December 31, 1994, compared with a carrying value and a fair value of $1.5 billion and $1.6 billion, respectively, at December 31, 1993. The liabilities of separate accounts providing a guaranteed return have a carrying value and a fair value of $1.5 billion and $1.3 billion, respectively, at December 31, 1994, compared with a carrying value and a fair value of $1.5 billion and $1.7 billion, respectively, at December 31, 1993.
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
The carrying values of cash, short-term securities and investment income accrued approximate their fair values.
In April 1989, a lawsuit was filed against the Company by the federal government alleging the Company improperly handled health benefit claims for individuals who are actively employed and eligible for Medicare coverage. In November 1992, the court ruled on cross motions for summary judgment. The court found that the Company had no liability when acting in the capacity of an administrator of claims. However, the court also recognized that, while the government's right of recovery with respect to insured claims is governed by the substantive terms of our customers' health benefit plan, the right of recovery is independent of procedural limitations in the Company's contracts.
The Company is a defendant or codefendant in various litigation matters. Although there can be no assurances, as of December 31, 1994, 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's share of net pension expense was $6 million, $8 million and $22 million for 1994, 1993 and 1992, respectively.
In addition to pension benefits, the Company provides certain health care and life insurance benefits for retired employees through a plan sponsored by TIG. 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 principal banking functions for certain subsidiaries and affiliates of TIG, and salaries and expenses for TIG and its insurance subsidiaries (excluding TIHI), are handled by the Company. Settlements for these functions between the Company and its affiliates are made regularly. The Company provides various insurance coverages, principally life and health, to employees of certain subsidiaries of TIG. The premiums for these coverages were charged in accordance with normal cost allocation procedures. In addition, investment advisory and management services, data processing services and claims processing services are provided by affiliated companies.
TIG and its subsidiaries maintain short-term investment pools in which the Company participates. The positions of each company participating in the pools are calculated and adjusted daily. At December 31, 1994 and 1993, the pools totaled approximately $1.5 billion and $1.3 billion, respectively. The Company's share of the pools amounted to $1.1 billion and $439 million at December 31, 1994 and 1993, 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 TIG. The rental expense charged to the Company for this furniture and equipment was $9 million, $10 million and $9 million in 1994, 1993 and 1992, respectively.
TIHI has an investment of $231 million and $110 million in common stock of The Travelers Inc. at December 31, 1994 and 1993, respectively. This is carried at fair value at December 31, 1994 and at cost at December 31, 1993. At December 31, 1994, TIHI has an investment of $35 million in redeemable preferred stock of The Travelers Inc. which is carried at fair value. TIHI has notes receivable from The Travelers Inc. of $30 million at December 31, 1994 and 1993, which are carried at cost. These assets are included in other investments in the consolidated balance sheet.
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 $99 million, $113 million and $122 million in 1994, 1993 and 1992, respectively. Future net minimum rental and lease payments are estimated as follows:
The Company is reimbursed by affiliates of TIG for utilization of space and equipment.
The net deferred tax assets at December 31, 1994 and 1993 were comprised of the tax effects of the temporary differences related to the following assets and liabilities:
See note 2 for a discussion of the implementation of new principles for accounting for income taxes.
Proceeds from sales of fixed maturities classified as available for sale were $1.4 billion in 1994, resulting in gross realized gains of $15 million and gross realized losses of $27 million. There were no sales of fixed maturities classified as available for sale in 1993 or 1992 as, in conjunction with the Merger, fixed maturities were first classified as "available for sale" effective December 31, 1993.
The amortized cost and market value of investments in fixed maturities were as follows:
The amortized cost and market value of fixed maturities at December 31, 1994, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 1994 and 1993, the Company held CMOs with a market value of $2.2 billion and $2.5 billion, respectively. Approximately 88% of the Company's CMO holdings are fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 1994 and 1993. The majority of these are GNMA-backed securities. In addition, the Company held $1.3 billion and $1.9 billion of GNMA, FNMA or FHLMC mortgage-backed securities at December 31, 1994 and 1993, respectively. Virtually all of these securities are rated AAA. The Company also held $927 million and $899 million of securities that are backed primarily by credit card or car loan receivables at December 31, 1994 and 1993, respectively.
At December 31, 1994 and 1993, 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, 1994 are as follows:
At December 31, 1994 and 1993, the Company had no concentration of credit risk in a single investee exceeding 10% of consolidated shareholder's equity.
The Company participates in two short-term investment pools maintained by TIG and its subsidiaries. These pools are discussed in note 11.
Below investment grade assets included in the totals above, are as follows:
At December 31, 1994 and 1993, significant concentrations of mortgage loans were for properties located in highly populated areas in the states listed below. The amounts are shown below:
Investments included in the consolidated balance sheets that were nonincome producing for the preceding 12 months were as follows:
18. RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Significant noncash investing and financing activities include: a) the 1994 exchange of $23 million of TIHI's investment in The Travelers Inc. common stock for $35 million of The Travelers Inc. nonredeemable preferred stock; b) the acquisition of real estate through foreclosures of mortgage loans amounting to $229 million, $563 million and $753 million in 1994, 1993 and 1992, respectively; c) the acceptance of purchase money mortgages for sales of real estate aggregating $96 million, $190 million and $72 million in 1994, 1993 and 1992, respectively; d) the 1993 contribution of TIHI by The Travelers Inc. (see note 3); e) the 1993 contribution of $400 million of bond investments by The Travelers Corporation (see note 6); f) increases in investment valuation reserves in 1993 and 1992 for securities, mortgage loans and/or investment real estate (see note 15); g) the 1993 transfer of $352 million of mortgage loans and bonds from the Company's general account to two separate accounts; and h) the contribution in 1992 of Transport Life Insurance Company's preferred provider and third party administrator organizations by The Travelers Corporation (see note 3).
CEDED REINSURANCE - Risks transferred to another company as reinsurance. See "Reinsurance".
DEFERRED ACQUISITION COSTS - Commissions and other selling expenses which vary with and are directly related to the production of business. These acquisition costs are deferred and amortized to achieve a matching of revenues and expenses when reported in financial statements prepared in conformity with GAAP.
GENERAL ACCOUNT - All of an insurer's assets other than those allocated to separate accounts.
GUARANTEED INVESTMENT CONTRACTS (GICs) - Group contracts sold to pension plans, profit sharing plans and funding agreements that guarantee a stated interest rate for a specified period of time.
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."
LONG-TERM CARE - Coverage for extended stays in a nursing home or home health services.
UNDERWRITING - The assumption of risk for designated loss or damage in consideration of receiving a premium. Also includes the process of examining, accepting or rejecting insurance risks, and determining the proper premium.