Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1998, for Travelers Group Inc. (TRV). The Company is a diversified financial services organization operating through major segments including Investment Services (Salomon Smith Barney), Consumer Finance, Life Insurance, and Property & Casualty Insurance. A material event during this period was the shareholder approval on July 22, 1998, of a merger with Citicorp to form Citigroup Inc., expected to close in the third quarter of 1998.
Key Financial Metrics
| Metric | Three Months Ended June 30, 1998 | Six Months Ended June 30, 1998 |
|---|---|---|
| Total Revenues | $10,096 million | $20,464 million |
| Net Income | $1,141 million | $2,234 million |
| Diluted Earnings Per Share | $0.95 | $1.87 |
| Total Assets | $420,076 million | (Balance Sheet Item) |
| Total Liabilities | $394,524 million | (Balance Sheet Item) |
| Stockholders' Equity | $22,427 million | (Balance Sheet Item) |
| Cash and Cash Equivalents | $4,895 million | (Balance Sheet Item) |
| Long-Term Debt | $30,551 million | (Balance Sheet Item) |
Segment Performance (Three Months Ended June 30, 1998):
- Investment Services: Net income of $601 million (includes $191 million restructuring credit).
- Consumer Finance: Net income of $69 million.
- Life Insurance: Net income of $256 million.
- Property & Casualty: Net income of $261 million.
Material Changes vs. Prior Period
Compared to the same periods in 1997, the Company reported significant growth in profitability and revenue:
- Net Income: Increased 29% for the quarter ($1,141 million vs. $883 million) and 32% for the six-month period ($2,234 million vs. $1,698 million).
- Revenues: Increased 10% for the quarter and 14% for the six-month period.
- Restructuring Credit: The second quarter 1998 results included a $191 million after-tax credit due to a reduction in the restructuring reserve related to the 1997 Salomon merger, primarily driven by favorable sub-lease negotiations for the Seven World Trade Center lease.
- Investment Gains: The six-month period included $114 million in investment portfolio gains, compared to $15 million in 1997.
- Principal Transactions: Revenues in this category declined sharply ($315 million in Q2 1998 vs. $709 million in Q2 1997) due to losses in global arbitrage and commodities trading.
Outlook, Risks, and Management Commentary
Merger with Citicorp: The merger is expected to be accounted for as a pooling of interests. Upon completion, TRV will become a bank holding company, subject to the Bank Holding Company Act (BHCA). The Company has a two-year compliance period to divest or restructure insurance underwriting activities if necessary, though management does not expect a material adverse effect on current operations.
Strategic Alliances: TRV announced a global strategic alliance with The Nikko Securities Co., Ltd., involving a joint venture in Japan and a $1.5 billion investment in Nikko stock and convertible bonds.
Risks and Contingencies:
- Environmental and Asbestos Claims: Reserves are estimated based on known facts but are subject to significant uncertainty regarding future court decisions and legislation. The Company states it is not likely these claims will have a material adverse effect on financial condition, though additional liabilities could arise.
- Accounting Standards: The Company is evaluating the impact of FAS No. 133 (Derivatives), effective 2000, which may significantly change the accounting treatment of derivative instruments and affect reported earnings.
- Liquidity: The Company maintains substantial unused credit facilities (e.g., $1.0 billion for TRV/CCC/TIC, $5.0 billion for Salomon Smith Barney) and believes it has sufficient funds to meet commitments.
Investor Verification Checklist
- Merger Closing Conditions: Verify the status of regulatory approvals required for the Citicorp merger and the timeline for the BHCA compliance period.
- Restructuring Reserve Adjustments: Confirm the sustainability of the $191 million credit and monitor future adjustments to the Salomon merger restructuring reserve.
- Principal Trading Volatility: Assess the risk profile of the U.S. fixed income arbitrage and commodities trading units following the reported losses and announced restructuring.
- Insurance Reserve Adequacy: Review the assumptions behind the $1.01 billion environmental and $1.085 billion asbestos reserves, given the stated uncertainty in legal outcomes.
- Debt Covenants: Verify continued compliance with debt covenants, particularly the consolidated adjusted net worth requirements for Salomon Smith Barney and stockholders' equity requirements for TRV subsidiaries.