01—Abstract
Summary
Summary of the 10-K filed March 27, 1996. Cited figures are marked; the original filing is the authoritative source.
Travelers Group Inc. (NYSE: TRV) reported record 1995 results, with net income of $1.834 billiona ($5.51 per share), up from $1.326 billion ($3.86 per share) in 1994.
Income from continuing operations rose to $1.628 billionb, and management states that excluding one-time items (net gains of $74 million in 1995), continuing earnings grew 34% to $1.554 billion. Revenue grew 11% to $16.6 billion. Smith Barney was the principal driver, with record net income of $599 million, up 63% excluding the 1994 HG Asia gain, and assets under management of $96.2 billion.
Return on average common equity improved to 18.3% from 15.6%, and book value per share rose to $34.50c from $24.77. The filing is dominated by a major pending transaction and portfolio repositioning. The company agreed to acquire Aetna's domestic property-casualty operations for about $4.0 billion, to be housed in a new holding company, Travelers/Aetna Property Casualty Corp. (TAP), which is expected to close around the end of Q1 1996.
Travelers is also selling RCM Capital Management for about $300 milliond, and it completed the sale of its MetraHealth interest for $831 million. Investors should weigh these deals against risks in the core P&C business: the combined ratio was 105.4% in 1995, Commercial Lines workers' compensation pricing is deteriorating, and environmental and asbestos reserves are large and uncertain, with a possible material exposure above reserves. Consumer finance delinquencies and charge-offs are rising and are expected to keep rising in 1996.
The company's balance sheet is larger and more leveraged: total assets were $114.5 billion, long-term debt rose to $9.19 billion from $7.08 billion, and stockholders' equity reached $11.7 billion from $8.6 billion, helped by a $2.1 billion increase in unrealized gains on investments. The company also announced a 3-for-2 stock split payable May 1996, and the dividend was raised to $0.225 per share for Q1 1996 from $0.20.
02—Key points
Key Highlights
- Net income rose 38% to $1.834 billion ($5.51/share) in 1995, and income from continuing operations rose 41% to $1.628 billion; excluding one-time items, growth was 34%.
- Pending $4.0 billion acquisition of Aetna's domestic P&C operations (via TAP) is expected to close around end of Q1 1996, with a planned TAP IPO and about 83% Travelers ownership afterward.
- Smith Barney delivered record earnings of $599 million, with investment banking revenue up 25% to $847 million and assets under management of $96.2 billion.
- Property & Casualty combined ratio was 105.4% in 1995 (vs. 114.2% in 1994), but Commercial Lines workers' compensation pricing is deteriorating industry-wide and environmental/asbestos reserves ($404M and $402M net) carry material uncertainty.
- Consumer Finance credit quality is weakening: 60+ day delinquencies rose to 2.14% from 1.88%, and the charge-off rate rose to 2.28% from 2.08%, with further increases expected in 1996.
- Return on average common equity improved to 18.3% from 15.6%, and book value per share increased to $34.50 from $24.77.
- Announced a 3-for-2 stock split (payable May 1996) and a 1996 quarterly dividend increase to $0.225 from $0.20 per share.
03—Questions
Frequently Asked Questions
What is the Aetna P&C acquisition and how will it be financed?
Travelers agreed to buy Aetna's domestic property-casualty subsidiaries for about $4.0 billion in cash. The acquisition will be held by TAP, which the company expects to capitalize with about $1.1 billion from cash and borrowings, plus $525 million of private investor equity and up to $2.65 billion under a five-year bank credit facility led by Citibank, Chemical and Morgan Guaranty. TAP plans an IPO to repay part of the bank borrowings.
How strong were Smith Barney's results, and what drove them?
Smith Barney reported record 1995 net income of $599 million, up from $390 million in 1994 (63% growth excluding the 1994 gain). Growth came from higher commissions (up 12%), investment banking (up 25% to a record $847 million), principal trading (up 13%), and asset management fees (up 12%). Non-production headcount and fixed costs also declined.
Are there risks in the Property & Casualty business that investors should watch?
Yes. Industry pricing softened during 1995, and Commercial Lines workers' compensation combined ratios rose to 111.6% excluding reserve adjustments. The company has about $806 million of net asbestos and environmental reserves and says it is reasonably possible these could exceed reserves by a material amount in a future period, although it does not expect a material adverse effect on financial condition. Lloyd's of London, a major reinsurer, is restructuring, which adds uncertainty to recoverables.
What happened to the company's stock and dividend in 1995?
The stock traded from a low of $32.375 to a high of $63.875 in 1995 (pre-split), closing the year at $62.625. Quarterly dividends rose to $0.20 from $0.15 in 1994 (annual total $0.80 vs. $0.575). The Board also declared a 3-for-2 split and a $0.225 first-quarter 1996 dividend, which is still subject to the May 1996 split payment.
What are the company's main sources of funds and debt obligations?
The parent services its debt mainly with dividends from subsidiaries, which are constrained by covenants and regulation. Long-term debt grew to $9.19 billion (from $7.08 billion) after $3.5 billion of new issuances in 1995. Commercial Credit Company had $1.975 billion of unused revolving credit, and the parent had a $1.0 billion revolving facility with $400 million available. The company also reported a $3.2 billion cushion over its stockholders' equity covenant.
04—Continue