Filed Pursuant to Rule 424(B)(3)
File No. 333-103909
The Travelers Insurance Company
Fixed Annuity
The Travelers Insurance Company’s Fixed Annuity is a flexible premium group deferred annuity Contract (“the Contract and/or Certificates”) which provides a guaranteed fixed rate of return for your investment. We offer the Contract to employers for use with retirement plans and programs that qualify for favorable federal tax treatment. Where permitted by state law, we reserve the right to restrict purchase payments into the Contract. If you surrender your Contract, your Cash Value may be subject to a market adjusted value calculation and surrender charges.
This prospectus explains:
- the Contract and Certificate;
- The Travelers Insurance Company;
- the Interest Rates;
- Surrenders and Partial Surrenders;
- Surrender Charges;
- Market Adjusted Value;
- Death Benefit;
- Annuity Payments;
- other aspects of the Contract.
The group annuity contracts may be issued to employers on an unallocated or allocated basis. This Contract is issued by The Travelers Insurance Company. The Company is located at One Cityplace, Hartford, Connecticut 06103-3415. Travelers Distribution LLC, One Cityplace, Hartford, Connecticut 06103-3415 is the principal underwriter and distributor of the Contracts.
This prospectus is accompanied by a copy of The Travelers Insurance Company’s annual report on Form 10-K for the period ended December 31, 2002 and a copy of The Travelers Insurance Company’s un-audited quarterly report on Form 10-Q for the period ended September 30, 2003.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Mutual funds, annuities and insurance products are not deposits of any bank, and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Prospectus dated February 20, 2004.
TABLE OF CONTENTS
Page | |
Special Terms | 1 |
Summary | 3 |
The Insurance Companies | 4 |
The Contract | 4 |
Application and Purchase Payments | 4 |
Interest Periods | 4 |
Establishment of Interest Rates | 5 |
Surrenders | 5 |
Transfers | 5 |
Charges and Deductions | 5 |
Surrender Charge | 6 |
Contract Discontinuation and Market Adjusted Value | 7 |
Premium Taxes | 8 |
Reductions of Charges | 8 |
Death Benefit | 9 |
Distribution Rules | 9 |
Annuity Options | 9 |
Election of Maturity Date and Settlement | 9 |
Change of Maturity Date or Annuity Option | 10 |
Annuity Options | 10 |
Investments by the Company | 11 |
Annual Statement | 11 |
Amendment of the Contracts | 11 |
Distribution of the Contracts | 11 |
Federal Tax Considerations | 12 |
General | 12 |
Section 403(b) Plans and Arrangements | 12 |
Qualified Pension and Profit-Sharing Plans | 12 |
The Employee Retirement Income Security Act of 1974 | 13 |
Federal Income Tax Withholding | 13 |
Tax Advice | 14 |
Available Information | 14 |
Financial Statements | 14 |
Legal Opinion | 15 |
Experts | 15 |
Appendix A | 16 |
Appendix B | F-1 |
Appendix C | 3 |
Special Terms
In this prospectus, the following terms have the indicated meanings:
Annuitant - The person upon whose life the Contract is issued.
Annuity - Payment of income for a stated period or amount.
Approved Products - Products approved by the Travelers Insurance Company.
Beneficiary(ies) - Beneficiary of this Contract is the Plan Trustee, unless the Plan provides otherwise.
Cash Surrender Value - The Cash Value less surrender charges.
Cash Value - the value of Purchase Payments less any applicable Premium Tax in Your Account or an Individual Account less the amount of any surrenders, plus interest, sometimes referred to as “Account Value.”
Certificate Date - The date on which a certificate is issued, as shown on the Certificate Specifications page.
Certificate of Participation - A certificate stating the benefits to which each Participant is entitled under this Contract if issued.
Certificate Year - A twelve-month period beginning on the Certificate Date and each anniversary thereof. This may or may not coincide with the Plan year.
Code – The Internal Revenue Code of 1986, as amended, and all related laws and regulations, which are in effect during the term of this Contract.
Company (We, Us, Our) - The Travelers Insurance Company.
Due Proof of Death - (i) A copy of a certified death certificate; (ii) a copy of a certified decree of a court of competent jurisdiction as to the finding of death, (iii) a written statement by a medical doctor who attended the deceased; or (iv) any other proof satisfactory to Us.
Excess Plan Contributions - Plan contributions including excess deferrals, excess contributions, excess aggregate contributions, excess annual additions, and excess nondeductible contributions that require correction by the Plan Administrator, excluding reversions upon Plan Termination.
Fixed Account - Part of the general account of the Company, which may invest in stocks, bonds, money market investments, real estate mortgages, real estate and other investments.
Fixed Annuity - An Annuity with payments that remain fixed as to dollar amount throughout the payment period.
Individual Account - Account Value/Cash Value credited to a Participant or Beneficiary under this Contract.
Maturity Date - The date on which Annuity payments begin.
Our Office - The home offices of The Travelers Insurance Company located at One Cityplace, Hartford Connecticut 06103-3415. Please send all correspondence to P.O. Box 99009, Hartford, Connecticut 06199-0009.
Participant - An eligible person who is a member in Your Plan.
Plan - The Plan or the arrangement under Section 403(b) of the Code used in a retirement plan or program whereby the Purchase Payments and any gains are intended to qualify under Sections 401, 403, or 457 of the Code. We are not a party to the Plan. We do not assume the responsibilities of the Plan Administrator, nor are We bound by the terms of the Plan. All records pertaining to the Plan will be open for inspection by Us.
Plan Administrator - The corporation or other entity so specified on the application or purchase order. If none is specified, the Plan Trustee is the Plan Administrator.
Plan Termination - Termination of Your Plan, including partial Plan Termination, as determined by Us.
Plan Trustee - The trustee specified in the Contract Specifications.
Premium Tax - The amount of tax, if any, charged by the state or municipality. Generally, We will deduct any applicable Premium Tax from the Cash Value either upon Surrender, annuitization, death, or at the time a Purchase Payment is made, but no earlier than when We have the liability under state law.
Purchase Payments - Payments of premium You make on behalf of the Participants under this Contract.
Separation from Service - The termination or permanent severance of a Participant’s employment with the employer for any reason that is a separation from service within the meaning of the Plan. However, termination of a Participant’s employment with the employer as a result of the sale of all or part of the employer’s business (including divisions or subsidiaries of the employer) will not be considered Separation from Service unless the Participant actually loses his/her job or is not immediately included in a pension or profit sharing plan of the successor employer.
Surrender - Funds distributed from the Contract or certificate for retirement, Separation from Service, loans, hardship withdrawals, death, disability, return of Excess Plan Contributions, payment of certain Plan expenses as mutually agreed upon, Contract Discontinuance, or transfers to other Plan funding vehicles. Such surrender may or may not be subject to surrender charges and the market adjusted value calculations.
Surrender Date - The date We receive Your Written Request or a Participant’s Written Request if so authorized, for a Surrender.
Valuation Date - A date on which the Contract is valued.
Written Request – Written information including requests for Contract, Beneficiary, ownership transfers, surrenders or other changes sent to Us in a written form satisfactory to Us and received in good order at Our Office. Requests for changes are subject to any action taken prior to Our receipt of the written information.
You, Your - The Contract owner.
Your Account – Cash Value attributed to Purchase Payments plus interest credited to You under this Contract.
Summary
The Travelers Insurance Company Fixed Annuity is a flexible premium group deferred fixed annuity contract available to certain types of retirement plans and programs that receive favorable tax treatment under the Code such as qualified pension and profit sharing plans, tax deferred annuity plans (for public school teachers and employees and employees of certain other tax-exempt and qualifying employers) and deferred compensation plans of state and local governments.
This prospectus describes both the Contract and the Certificate. The Contract and Certificate have similar features and provisions. An employer as the Contract Owner purchases the Contract to fund its Qualified Plan. The employer can purchase the Contract on an allocated or unallocated basis. If the employer purchases the Contract on an allocated basis, the employee participating in the Qualified Plan (“Participant”) will be issued a Certificate. Generally, allocated contracts are issued to tax deferred annuity plans. If the employer purchases the Contract on an unallocated basis, the employer will be responsible for any accounts for the Participant and no Certificates will be issued by us. Generally, unallocated contracts are issued to qualified pension and profit sharing plans and deferred compensation plans of state and local governments.
The Contract is offered by The Travelers Insurance Company. It is an indirect wholly owned subsidiary of Citigroup Inc. The Contract is available only in those states where it has been approved for sale.
We deposit your Purchase Payments in Our Fixed Account. For each Purchase Payment, We establish an interest rate “period ” and guarantee a rate of interest for that Purchase Payment for twelve months. At the end of the twelve months, We will establish a renewal rate of interest. (See “Guaranteed Interest Rates”).
You may surrender your Contract at any time before the Maturity Date, but the Cash Value may be subject to a surrender charge and/or Our market adjusted value calculations. You may also take partial surrenders from your Contract; partial surrenders may be subject to a surrender charge. However, if your Contract was issued as part of a tax deferred annuity plan, deferred compensation plan or combined qualified plan/tax deferred annuity plan, You or a Participant, if authorized, may take partial surrenders after the first Contract/Certificate Year annually of up to 10% of the Cash Value of Your Account/Individual Account as of the first Valuation Date of any given Contract/Certificate Year without the imposition of a surrender charge. We may waive surrender charges in certain instances. (See “Surrenders”). We also may deduct any applicable premium taxes from the amounts You surrender. A Participant may be subject to income tax and a 10% penalty tax if he or she is younger t han 59½ at the time of the full or partial surrender, and the full or partial surrender may also be subject to income tax withholding. (See “Federal Tax Considerations”).
The market adjusted value calculations reflect the relationship between the interest rate on new deposits for this class of contracts on the date of surrender and the interest rate credited to amounts in Your Contract on the date of surrender. The Company has no specific formula for determining initial interest rates or renewal interest rates. However, such determination will generally reflect interest rates available on the types of debt instruments in which the Company intends to invest the amounts invested in the Contract. In addition, the Company’s management may also consider various other factors in determining these rates for a given period, including regulatory and tax requirements; sales commission and administrative expenses borne by the Company; general economic trends; and competitive factors. (See Investments by the Company.) It is possible that the amount You receive upon surrender may be less than Your Purchase Payments if interest rates increase. It is also po ssible that if interest rates decrease, the amount You receive upon surrender may be Your net Purchase Payments plus accrued interest. On the Maturity Date You specified, the Company will make either a lump sum payment or start to pay a series of payments based on the Annuity Options you select. (See “Annuity Period”).
If a Participant dies before the Maturity Date, the Contract provides for a death benefit which is the Cash Value of the Participant’s Individual Account, less any applicable premium tax as of the date We receive Due Proof of Death. (See “Death Benefit”).
We will deduct any applicable premium taxes from Cash Value either upon death, surrender, annuitization, or at the time You make a Purchase Payment to the Contract. (See “Surrenders Premium Taxes”).
The terms and conditions of the Plan govern what is available to Participants. Participants should carefully consider the features of their employer’s Plan, which may be different from the Contract and Certificate described in this prospectus. In addition, certain features described in this prospectus may vary from your Contract because of differences in applicable state law.
We offer a variety of fixed and variable annuity contracts. They offer features, including variable investment options, fees and/or charges that are different from those described in this prospectus. Upon request, Your agent can provide You with more information about those Contracts.
The Insurance Company
The Travelers Insurance Company is a stock insurance company chartered in 1863 in the state of Connecticut and has been continuously engaged in the insurance business since that time. The Company is licensed to conduct life insurance business in all states of the United States, the District of Columbia, Puerto Rico, Guam, the U.S. and British Virgin Islands, and the Bahamas. The Company is an indirect wholly owned subsidiary of Citigroup Inc. The Company’s home office is located at One Cityplace, Hartford, Connecticut 06103-3415.
The Contract
Application and Purchase Payments
You may purchase a Contract through an authorized agent. The agent will send Your completed application or order to purchase, along with a minimum Purchase Payment of at least $1,000 for the Contract and $20 for each certificate to Us, and We will determine whether to accept or reject your application or order to purchase. If We accept your application or order to purchase, one of Our legally authorized officers will prepare and execute a Contract within two business days after We receive that application or order. We then will send the Contract to you through your sales representative.
We may:
- accept Purchase Payments up to $3 million without prior approval;
- contact You or Your agent if the application or order form is not properly completed; and/ or
- return your entire application or order form and Purchase Payment within thirty days if not properly completed.
We sell the Contract for use with certain qualified retirement plans. Please be aware that the Contract includes features such as tax deferral on accumulated earnings. Qualified retirement plans provide their own tax deferral benefit. Please consult a tax adviser to determine whether this Contract is an appropriate investment for You. See Appendix A for information concerning qualified plans.
You may make additional Purchase Payments of at least $1,000 ($20 per Certificate) at any time before the Maturity Date. We will apply any subsequent net Purchase Payment You make within two Business Days after We receive it.
Interest Periods
We deposit each net Purchase Payment (i.e., a Purchase Payment less any applicable Premium Tax charge) in our Fixed Account where We credit the Payment with interest daily at an effective annual interest rate between 1.0% and 3.0% for allocated contracts and 1.0% for unallocated contracts, depending on applicable states’ statutory minimum requirements. We may, however, in our sole discretion, credit interest above the statutory minimum requirements. The actual minimum interest rate for your Contract will be on the Contract Specifications page. This rate will not change for the life of the Contract and will apply to any Certificates issues under the Contract.
The amount of interest We credit to a particular net Purchase Payment varies with that Purchase Payment’s interest rate “period”. We establish an interest rate “period ” for each net Purchase Payment, and guarantee that rate for twelve months. At the end of that twelve-month guarantee period, We will determine and credit a renewal interest rate. We guarantee that renewal rate until the end of the current calendar year. After that, We will declare the second and all future renewal rates each subsequent January 1 and guarantee such rates through December 31 of each year.
Establishment of Interest Rates
When you purchase Your Contract, You will know the initial interest rate for your Purchase Payment. The Company has no specific formula for determining interest rates in the future. The interest rates will be declared from time to time as market conditions dictate. (See “Investments by the Company”). The Company may consider various factors in determining interest rates for a given period, including regulatory and tax requirements, sales commissions, administrative expenses, general economic trends, and competitive factors. The Company’s management will make the final determination as to any declared interest rates and any interest in excess of the minimum interest rate allowed under state law. The Company cannot predict nor guarantee the rates of any future declared interest in excess of the minimum rate.
The Company will make the final determination as to guaranteed interest rates to be declared. We cannot predict nor can We guarantee future interest rates.
Surrenders
There are two sets of rules when considering surrenders or partial surrenders from Your Contract. The first are rules and procedures that apply to surrenders and partial surrenders under the Contract; We discuss these provisions in this prospectus. The second are rules specific to Your Plan. Please consult Your Plan for information as to those provisions.
The Contract allows You to make a full or partial surrender by Written Request before the Maturity Date, subject to the surrender charges and in some instances, adjusted market value calculations. In addition, Participants, if so authorized, may make partial surrenders. We may discontinue the Contract or terminate a Participant’s Individual Account under certain circumstances.
We will determine Your Cash Surrender Value (or Cash Surrender Value in an Individual Account) as of the next Valuation Date following Our receipt of a Written Request by You or the Participant, if so authorized. We may defer payment of any surrender up to six months from the date We receive Your notice of surrender, or such lesser period if required by state law. State law requires that if We defer payment for more than 30 days, We will pay the state required annual interest rate on the amount that we defer.
For the purposes of processing partial surrenders, We will take the amount surrendered from the most recent “period” first, and then from each subsequent “period” in descending order on a last-in, first out basis. Upon request, We will inform You of the amount payable upon a full or partial surrender. Any full or partial surrender may be subject to ordinary income tax and, if a Participant is younger than age 59½ at the time of the full or partial surrender, a 10% penalty tax may apply. A full or partial surrender may also be subject to income tax withholding. A Participant may not be able to take partial surrenders from his or her Individual Account before age 59½.. A Participant should discuss his or her options with a qualified tax advisor. (See “Federal Tax Considerations”.)
Transfers
You may transfer amounts from the Fixed Account to products within Your Plan and to Approved Products not issued by Us. If you transfer Cash Value to Approved Products not issued by Us, Your transfers may not exceed 20% per Contract/Certificate Year of the Cash Value in the Fixed Account valued on each Contract/Certificate Year anniversary. We reserve the right to modify the amount available for transfer to Approved Products and to products not issued by Us.
Charges and Deductions
We will deduct the charges described below to cover our costs and expenses, the services provided, and our risks assumed under the Contracts. We incur certain costs and expenses for the distribution and administration of the Contract and for providing the benefits payable thereunder. Our administrative services and risks may include:
- processing applications for and issuing the Contracts and certificates thereunder;
- maintaining Contract owner and Participant records;
- administering Annuity payments;
- furnishing accounting services;
- reconciling and depositing cash receipts;
- providing Contract confirmations and periodic statements;
- providing toll-free inquiry services; and
- the risk that our costs in providing the services will exceed our revenues from Contract charges (which cannot be changed).
The amount of the charge may not necessarily correspond to the costs associated with providing the services or benefits stated in the Contract. We may realize a profit on one or more of the charges, and may use any such profit for any corporate purpose.
Surrender Charge
We do not assess front-end sales charges. We may, however, assess a surrender charge on full and partial surrenders made before the end of the eighth Contract/Certificate Year. The surrender charge for an allocated Contract is calculated based on the age of each Certificate. The surrender charge for an unallocated Contract is calculated based on the age of the Contract. The surrender charge is computed as a percentage of the Cash Value being surrendered and is as follows:
Contract/Certificate Year | Charge as a Percentage of Cash Value | |
1-2 | 5% | |
3-4 | 4% | |
5-6 | 3% | |
7 | 2% | |
8 | 1% | |
9+ | 0% |
We will not assess a surrender charge on:
transfers to Approved Products within Your Plan; and
certain benefit distributions that become payable under the terms of a Plan and other distributions, including:
- retirement, death, or disability of a Participant (as defined by Code section 72(m)(7));
- Separation from Service;
- hardship withdrawals as defined by the Code;
- minimum distributions as defined by the Code;
- return on Excess Plan Contributions;
- certain Plan expenses as mutually agreed upon between You and Us;
- transfers to an employer stock fund as mutually agreed upon between You and Us; and
- annuitization under this Contract.
If the market adjusted value is greater than the Cash Value of the Contract as of the date of discontinuance, and You chose the Cash Value of the Contract in equal installments over a 5-year period.
Unless payment of surrender charges are provided in a different manner, We will reduce your requested distribution by any applicable surrender charges.
In addition, for Contracts issued to tax deferred annuity plans, deferred compensation plans or combined qualified plans/tax deferred annuity plans, We may allow You or a Participant, if authorized, after the first Contract/Certificate Year to take partial surrenders annually of up to 10% of the Cash Value in Your Account/Individual Account as of the first Valuation Date of any given Contract Year without the imposition of a surrender charge. The free withdrawal allowance does not apply to full surrenders transferred directly to annuity contracts issued by other financial institutions. We reserve the right to modify the free withdrawal amount.
We reserve the right to modify the surrender charge provisions for Contracts issued in the future. This will not affect Your Contract if the Contract is in effect before the modification to the surrender charge is effective.
Contract Discontinuation and Market Adjusted Value
Under certain circumstances, We may discontinue the Contract.
You may discontinue this Contract by Written Request at any time for any reason.
If the Contract is discontinued, any Certificates issued under the Contract will be discontinued.
We reserve the right to discontinue this Contract if:
- the Cash Value of Your Contract is less than the termination amount shown on your Contract Specifications page. We state a termination amount on your Contract Specifications page. In general, this amount is $2,000 of the Cash Value of a Participant’s Individual Account (the amount is $2,000 per Account for an allocated Contract and $20,000 per unallocated Contract). If the Cash Value in a Participant’s Individual Account is less than that stated termination amount, We reserve the right to terminate that Account and move the Cash Value of that Participant’s Individual Account to Your Account. We will move to Your Account at Your direction any Cash Value to which a Participant is not entitled under the Plan upon termination;
- We determine within Our sole discretion and judgment that the Plan or administration of the Plan is not in conformity with applicable law; or
- We receive notice that is satisfactory to Us of Plan Termination.
If you discontinue this Contract because of Plan Termination and the Plan certifies to Us that the Plan Termination is the result of the dissolution or liquidation of the employer under US Code Title 11 procedures, We will distribute the Cash Surrender Value directly to the employees entitled to share in such distributions in accordance with the Plan relating to Plan Termination. Distribution may be in the form of cash payments, Annuity options, or deferred annuities.
The following events will not trigger a market adjusted value:
- retirement, death, or disability of a Participant (as defined by Code section 72(m)(7));
- Separation from Service;
- hardship withdrawals as defined by the Code;
- minimum distributions as defined by the Code;
- return on Excess Plan Contributions;
- certain Plan expenses as mutually agreed upon between You and Us;
- transfers to an employer stock fund as mutually agreed upon between You and Us; and
- annuitization under this Contract.
However, if you discontinue this Contract for any other reason than the events described immediately above or because of Our exercise of Our right to discontinue the Contract, We will determine the market adjusted value of the
Contract. The market adjusted value is the current value as of the date of discontinuance and reflects the relationship between the rate of interest credited to funds on deposit under the Contract at the time of discontinuance to the rate of interest credited on new deposits for this class of contracts at the time of discontinuance. The market adjusted value may be greater than or less than the Cash Value of the Contract.
If the market adjusted value is less than the Cash Value of your Contract as of the date of discontinuance, We will pay You Your choice of:
(a) | the market adjusted value, less any amounts deducted on surrender, in one lump sum within 60 days of the date of discontinuance; or | ||
(b) | the Cash Surrender Value of the Contract in equal installments over a 5-year period. We determine the amount deducted on surrender, if any, as of the date of discontinuance and will apply that amount to all installment payments. We will credit interest to the remaining Cash Value during this installment period at a fixed effective annual interest rate of not less than the interest rate required under state insurance law. We will make the first payment no later than 60 days following Our mailing the written notice to You at the most current address available on Our records. We will mail the remaining payments on each anniversary of the discontinuance date for 4 years. Allowable distributions shown of Your Contract Specifications page are not allowed during the 5-year installment period. |
If the market adjusted value is greater than the Cash Value of the Contract as of the date of discontinuance, We will pay You Your Choice of:
(a) | the Cash Surrender Value of the Contract within 60 days of the date of discontinuance; or | ||
(b) | the Cash Value of the Contract in equal installments over a 5-year period. We will credit interest on the remaining Cash Value of the Contract during the installment period at a fixed annual rate of interest of not less than the interest rate required under state insurance law. We will make the first payment no later than 60 days following Our mailing of the written notice to You at the most current address available on Our records. We will mail the remaining payments on each anniversary of the discontinuance date for 4 years. We do not allow the allowable distributions shown on Your Contract Specifications page during the 5-year installment period. |
Market Adjusted Value Formula: Payment on a partial or full surrender may be adjusted up or down by the application of the market adjusted value calculation. The market adjusted value formula is:
Market Adjusted Value = Cash Value x (1+RO)5 / (1+R1+.0025)5
Where:
RO is the average interest rate credited to amounts in the Contract on the date of discontinuance, and
R1 is the interest rate on new deposits for this class of contracts on the date of discontinuance.
Premium Taxes
Certain state and local governments impose premium taxes. These taxes currently range from 0% to 5.0%, depending upon the jurisdiction. The Company is responsible for paying these taxes and will determine the method used to recover premium tax expenses incurred. The Company will deduct any applicable premium taxes from the Cash Value either upon death, surrender, annuitization, or at the time the Purchase Payment is made to the Contract, but no earlier than when the Company has a tax liability under state law.
Reductions of Charges
We may reduce or eliminate certain charges or alter the manner in which the particular charge is deducted. Generally, these types of changes will be based on our anticipation of lower sales expenses or perform fewer sales services due to:
- the size of the group participating in the Contract;
- an existing relationship to the contract owner;
- use of mass enrollment procedures; or
- performance of sales functions by a third party which We would otherwise perform.
Please see your Contract for any reduction of charges provisions applicable to You.
Death Benefit
If applicable under Your Plan, We may pay a death benefit in a single sum to the Beneficiary if a Participant dies before the Maturity Date. We also may pay a death benefit under certain circumstances if the Annuitant dies on or after the Maturity Date.
The death benefit before the Maturity Date equals the Cash Value of a Participant’s Individual Account less any applicable premium tax as of the date We receive Due Proof of Death. If the Annuitant dies on or after the Maturity Date, the death benefit will consist of any benefit remaining under the Annuity option then in effect.
We will pay interest on death proceeds of a Participant’s Individual Account in accordance with regulation in effect by the state whose laws apply to the Contract.
Distribution Rules
The distributions required by federal tax law differ for qualified plans depending on the type of Plan. Upon receipt of Due Proof of Death, the Beneficiary will instruct us how to treat the proceeds, subject to the distribution rules discussed below.
In general, the Beneficiary will receive any remaining contractual benefits upon the death of the Participant. The Beneficiary may receive the remaining benefits in a single sum or elect one of the settlement options. If the Participant dies after any mandatory distribution has begun but before his or her entire interest has been distributed, the remaining interest must be paid out at least as rapidly as it was being paid out under the method of payment in effect at the time of death. If the Participant dies before the distribution of his or her entire interest has begun, the entire interest must be distributed within five years after the Participant’s death or an Annuity payable over no longer than life or life expectancy must be distributed to an electing Beneficiary starting within one year of the Participant’s death. A spousal designated Beneficiary may elect to defer distributions until the Participant would have attained the age of 70½.
Please see Your Contract and Your tax advisor for more information.
Annuity Options
Election of Maturity Date and Settlement Options
You can select a Maturity Date when you apply for the Contract and/or when We issue a certificate thereunder; if You do not, the default age for certificate maturity is when a Participant reaches age 70½.
You may elect to have all or a portion of the Cash Surrender Value of an Individual Account paid in a lump sum, or You may elect to have Your Cash Surrender Value or a portion thereof, distributed under any of the Annuity options described below. In addition, any amount payable from the Contact may be applied to an Annuity option. A Participant, if authorized, may apply any proceeds payable from his or her Individual Account to an Annuity Option.
To elect an Annuity option, You must send a Written Request to Our Office at least 30 days before such election is to become effective. If no option is elected for qualified Contracts, We will apply the Cash Surrender Value to Option 4 to provide a Joint and Last Survivor Life Annuity.
You must provide Us with the following information when you elect an Annuity option:
- the Participant’s name, address, date of birth, and social security number;
- the amount to be distributed in the form of an Annuity option;
- the Annuity option which is to be purchased;
- the date the Annuity option payments are to begin;
- if the form of the Annuity provides a death benefit in the event of the Participant’s death, the name, relationship, and address of the Beneficiary as designated by You; and
- any other data We may require.
Change of Maturity Date or Annuity Option
You may change the Maturity Date at any time as long as such change is made in writing and is received by Us at least 30 days before the scheduled Maturity Date or date the Annuity option is scheduled to become effective. Once an Annuity option has begun, it may not be changed.
Annuity Options
You or a Participant, if authorized, may elect any one of the following Annuity options. Annuity payments may be available on a monthly, quarterly, semiannual, or annual basis. The minimum amount that may be applied to Annuity options is $2,000 unless We consent to a smaller amount. If any periodic payments due are less than $100, We reserve the right to make payments at less frequent intervals.
We use the Life Annuity Tables to determine the first monthly payment. They show the dollar amount of the first monthly Annuity payment which can be purchased with each $1,000 applied. The amount applied to an Annuity will be the Cash Surrender Value attributable to a Participant’s Individual Account as of 14 days before the Maturity Date. We reserve the right to require satisfactory proof of age of any person on whose life We base Annuity payments before making the first payment under any of these options.
Any Cash Surrender Value We apply to an Annuity option will provide payments at least equal to those provided if the same amount was applied to purchase a single premium immediate Annuity We offer at that time for the same class of contracts. If it would produce a larger payment, We agree that We will determine the Annuity payment using the Life Annuity Tables in effect on the Maturity Date.
As provided in your Contract, We may adjust the age used to determine Annuity payments, and We may deduct premium taxes from Annuity payments.
Option 1 — Life Annuity — No Refund: The Company will make Annuity payments during the lifetime of the Annuitant ending with the last monthly payment before death. This option offers the maximum periodic payment, since there is no assurance of a minimum number of payments or provision for a death benefit for Beneficiaries.
Option 2—Life Annuity With 120, 180, or 240 Monthly Payments Assured: The Company will make monthly Annuity payments during the lifetime of the Annuitant, with the agreement that if, at the death of that person, payments have been made for less than 120,180, or 240 months as elected, We will continue making payments to the Beneficiary during the remainder of the period.
Option 3 — Joint And Last Survivor Life Annuity: The Company will make monthly annuity payments during the joint lifetime of the Annuitant and a second person. On the death of either person, We will continue making payments to the survivor. No further payments will be made following the death of the survivor.
Option 4 – Joint and Last Survivor Life Annuity – Annuity Reduced on Death of Primary Payee: The Company will make monthly Annuity payments during the joint lifetime of two persons on whose lives We base the payments. We will designate one of the two persons as the primary payee. We will designate the other person as the secondary payee. On the death of the secondary payee, if survived by the primary payee, We will continue to make monthly Annuity payments to the primary payee in the same amount that would have been payable during the joint lifetime of the two persons.
On the death of the primary payee, if survived by the secondary payee, We will continue to make monthly Annuity payments to the secondary payee in an amount equal to 50% of the payments, which would have been made during the lifetime of the primary payee.
No further payments will be made following the death of the survivor.
Option 5 — Payments For A Fixed Period: The Company will make monthly payments for the period selected. If at the death of the Annuitant payments have been made for less than the period selected, the Company will continue to make payments to the Beneficiary during the remainder of that period.
Option 6 — Other Annuity Options: The Company will make other arrangements for Annuity payments as may be mutually agreed upon by You and Us.
Investments by the Company
We must invest our assets according to applicable state laws regarding the nature, quality and diversification of investments that may be made by life insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages, real estate and certain other investments.
In establishing interest rates, the Company will consider the yields on fixed income securities that are part of the Company’s current investment strategy for the Contracts at the time that the interest rates are established. (See “Establishment of Interest Rates”.) The current investment strategy for the Contracts is to invest in fixed income securities, including public bonds, privately placed bonds, and mortgages, some of which may be zero coupon securities. While this generally describes our investment strategy, We are not obligated to follow any particular strategy except as may be required by federal and state laws.
Annual Statement
After the end of each calendar year, You will receive a statement that will show:
- Your Cash Value as of the end of the preceding year;
- all transactions regarding Your Contract during the year;
- Your Cash Value at the end of the current year; and
- the interest credited to Your Contract.
Amendment of the Contracts
We reserve the right to amend the Contracts to comply with applicable federal or state laws or regulations. We will notify You in writing of any such amendments.
Distribution of the Contracts
Travelers Distribution LLC (“TDLLC”) an affiliate of the Company, is the principal underwriter of the Contracts. TDLLC is registered with the Securities and Exchange Commission under the Act as a broker-dealer, and is a member of the National Association of Securities Dealers, Inc. The Contract is offered through both affiliated and non-affiliated broker dealers.
The principal underwriter enters into selling agreements with certain broker-dealers registered under the Act. Under the selling agreements such broker-dealers may offer Contracts to persons who have established an account with the broker-dealer. In addition, the Company may offer certificates to members of certain other eligible groups. The Company will pay a maximum commission of 6% of the Purchase Payment for the sale of a Contract. Tower Square Securities, Inc., an affiliate of the Company, receives greater compensation for selling the contract than nonaffiliated broker-dealers.
From time to time, the Company may offer customers of certain broker-dealers special interest rates and negotiated commissions. In addition, the Company may offer Contracts to members of certain other eligible groups through trusts or otherwise.
Federal Tax Considerations
General
The Company is taxed as a life insurance company under Subchapter L of the Code. Generally, amounts credited to a contract are not taxable until received by the contract owner, participant or beneficiary, either in the form of annuity payments or other distributions. Tax consequences and limits are described further below for each annuity program.
Note to participants in qualified plans including 401, 403(b), and 457:
While annual plan contribution limits may be increased from time to time by Congress and the IRS for federal income tax purposes, these limits must be adopted by each state for the higher limits to be effective at a state income tax level. In other words, permissible contribution limit for income tax purposes may be different at the federal level from your state’s income tax laws. Please consult your employer or tax adviser regarding this issue.
Section 403(b) Plans and Arrangements
Purchase Payments for a tax deferred annuity contract (including salary reduction contributions) may be made by an employer for employees under annuity plans adopted by public educational organizations and certain organizations which are tax exempt under Section 501(c)(3) of the Code. Within statutory limits, such payments are not currently includable in the gross income of the participants. Increases in the value of the Contract attributable to these Purchase Payments are similarly not subject to current taxation. Instead, both the contributions to the tax sheltered annuity and the income in the Contract are taxable as ordinary income when distributed.
An additional tax of 10% will apply to any taxable distribution received by the participant before the age of 59½, except when due to death, disability, or as part of a series of payments for life or life expectancy, or made after the age of 55 with separation from service. There are other statutory exceptions which may apply in certain situations.
Amounts attributable to salary reductions made to a tax sheltered annuity and income thereon may not be withdrawn prior to attaining the age of 59½, separation from service, death, total and permanent disability, or in the case of hardship as defined by federal tax law and regulations. Hardship withdrawals are available only to the extent of the salary reduction contributions and not from the income attributable to such contributions. These restrictions do not apply to assets held generally as of December 31, 1988.
Distributions must begin by April 1st of the calendar year following the later of the calendar year in which the participant attains the age of 70½ or the calendar year in which the Participant retires. Certain other mandatory distribution rules apply at the death of the participant.
To the extent an eligible rollover distribution is not directly rolled over to another 403(b) contract, an IRA or eligible qualified contract, 20% of the taxable amount must be withheld. In addition, current tax may be avoided on eligible rollover distributions which Were not directly transferred to a qualified retirement program if the participant makes a rollover to a qualified retirement plan or IRA within 60 days of the distribution.
Certain distributions, including most partial or full redemptions or “term-for-years” distributions of less than 10 years, are eligible for direct rollover to another 403 (b) contract, certain qualified plans or to an Individual Retirement Arrangement (IRA) without federal income tax withholding.
Qualified Pension and Profit-Sharing Plans
Under a qualified pension or profit-sharing trust described in Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code, a Purchase Payment made by an employer (including salary reduction contributions) is not currently taxable to the participant and increases in the value of a contract are not subject to taxation until received by a participant or beneficiary.
Distributions in the form of annuity payments are taxable to the participant or beneficiary as ordinary income in the year of receipt, except that any distribution that is considered the participant’s “investment in the contract” is treated as a return of capital and is not taxable. Certain eligible rollover distributions including most partial and full surrenders or term-for-years distributions of less than 10 years are eligible for direct rollover to an eligible retirement plan or to an IRA without federal income tax withholding.
If a distribution that is eligible for rollover is not directly rolled over to another qualified retirement plan or IRA, 20% of the taxable amount must be withheld. In addition, current tax may be avoided on eligible rollover distributions which Were not directly transferred to a qualified retirement program if the participant makes a rollover contribution to a qualified retirement plan or IRA within 60 days of the distribution.
Distributions must begin by April 1st of the calendar year following the later of the calendar year in which you attain age 70½ or the calendar year in which you retire, except that if you are a 5% owner as defined in Code Section 416(i)(1)(B), distributions must begin by April 1st of the calendar year following the calendar year in which you attain age 70½. Certain other mandatory distribution rules apply on the death of the participant.
An additional tax of 10% will apply to any taxable distribution received by the participant before the age of 59½, except by reason of death, disability or as part of a series of payments for life or life expectancy, or at early retirement at or after the age of 55. There are other statutory exceptions which may apply in certain situations.
The Employee Retirement Income Security Act of 1974
Under the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended, certain special provisions may apply to the Contract if the owner of a Section 403(b) plan Contract or the owner of a contract issued to certain qualified plans requests that the Contract be issued to conform to ERISA or if the Company has notice that the Contract was issued pursuant to a plan subject to ERISA.
ERISA requires that certain Annuity options, withdrawals or other payments and any application for a loan secured by the Contract may not be made until the Participant has filed a Qualified Election with the plan administrator. Under certain plans, ERISA also requires that a designation of a beneficiary other than the participant’s spouse be deemed invalid unless the participant has filed a Qualified Election.
A Qualified Election must include either the written consent of the Participant’s spouse, notarized or witnessed by an authorized plan representative, or the participant’s certification that there is no spouse or that the spouse cannot be located.
The Company intends to administer all contracts to which ERISA applies in a manner consistent with the direction of the plan administrator regarding the provisions of the plan, in accordance with applicable law. Because these requirements differ according to the plan, a person contemplating the purchase of an annuity Contract should consider the provisions of the plan.
Federal Income Tax Withholding
The portion of a distribution which is taxable income to the recipient will be subject to federal income tax withholding, generally pursuant to Section 3405 of the Code. The application of this provision is summarized below.
1. | Eligible Rollover Distribution From Section 403(b) Plans or Arrangements, From Qualified Pension and Profit-Sharing Plans, or from 457 Plans Sponsored by Governmental Entities | ||
There is a mandatory 20% tax withholding for plan distributions that are eligible for rollover to an IRA or to another retirement plan but that are not directly rolled over. A distribution made directly to a participant or beneficiary may avoid this result if: |
(a) | a periodic settlement distribution is elected based upon a life or life expectancy calculation , or | ||
(b) | a complete term-for-years settlement distribution is elected for a period of ten years or more, payable at least annually, or | ||
(c) | a minimum required distribution as defined under the tax law is taken after the attainment of the age of 70½ or as otherwise required by law. |
A distribution including a rollover that is not a direct rollover will require the 20% withholding, and a 10% additional tax penalty may apply to any amount not added back in the rollover. The 20% withholding may be recovered when the participant or beneficiary files a personal income tax return for the year if a rollover was completed within 60 days of receipt of the funds, except to the extent that the participant or spousal beneficiary is otherwise under withheld or short on estimated taxes for that year. |
2. | Other Non-Periodic Distributions (full or partial redemptions) | ||
To the extent not described as requiring 20% withholding in 1 above, the portion of a nonperiodic distribution which constitutes taxable income will be subject to federal income tax withholding, to the extent such aggregate distributions exceed $200 for the year, unless the recipient elects not to have taxes withheld. If an election out is not provided, 10% of the taxable distribution will be withheld as federal income tax. Election forms will be provided at the time distributions are requested. This form of withholding applies to all annuity programs. | |||
3. | Periodic Distributions (distributions payable over a period greater than one year) | ||
The portion of a periodic distribution which constitutes taxable income will be subject to federal income tax withholding under the wage withholding tables as if the recipient were married claiming three exemptions. A recipient may elect not to have income taxes withheld or have income taxes withheld at a different rate by providing a completed election form. Election forms will be provided at the time distributions are requested. This form of withholding applies to all annuity programs. As of January 1, 2002, a recipient receiving periodic payments (e.g., monthly or annual payments under an Annuity Option) which total $15,360 or less per year, will generally be exempt from the withholding requirements. |
Recipients who elect not to have withholding made are liable for payment of federal income tax on the taxable portion of the distribution. All recipients may also be subject to penalties under the estimated tax payment rules if withholding and estimated tax payments are not sufficient.
Recipients who do not provide a social security number or other taxpayer identification number will not be permitted to elect out of withholding. Additionally, United States citizens residing outside of the country, or U.S. legal residents temporarily residing outside the country, are subject to different withholding rules and cannot elect out of withholding.
Tax Advice
Because of the complexity of the law and the fact that the tax results will vary according to the factual status of the individual involved, tax advice may be needed by a person contemplating purchase of an annuity contract and by an Owner, participant or beneficiary who may make elections under a contract. It should be understood that the foregoing description of the federal income tax consequences under these contracts is not exhaustive and that special rules are provided with respect to situations not discussed here. It should be understood that if a tax benefited plan loses its exempt status, employees could lose some of the tax benefits described. For further information, a qualified tax adviser should be consulted.
Available Information
The Company files reports and other information with the Securities and Exchange Commission (“Commission”), as required by law. You may read and copy this information and other information at the public reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. You may also review this information by accessing the Commission’s website at http://www.sec.gov.
Under the Securities Act of 1933, each Company has filed with the Commission a registration statement (the “Registration Statement”) relating to the Contracts offered by this prospectus. This prospectus has been filed as a part of the Registration Statement and does not contain all of the information set forth in the Registration Statement and the exhibits, and reference is hereby made to such Registration Statement and exhibits for further information relating to the Company and the Contracts. The Registration Statement and the exhibits may be inspected and copied as described above. Although the Company furnishes certificate and contract owners with the Annual Reports on Form 10-K for the year ended December 31, 2002 the Company does not plan to furnish subsequent financial reports.
Financial Statements
The Company’s latest annual report on Form 10-K and the latest quarterly report on Form 10-Q have been filed with the Commission.
The Form 10-K for the period ended December 31, 2002 contains additional information about the Company, including audited financial statements for the Company’s latest fiscal year. The Company filed its Form 10-K on March
15, 2003 via Edgar File No. 33-33691. The Company filed its Form 10-Q on November 14, 2003 via Edgar File No. 33-03094.
If requested, the Company will furnish, without charge, a copy of any and all of the documents incorporated by reference, other than exhibits to those documents (unless such exhibits are specifically incorporated by reference in those documents). You may direct your requests to the Company at P.O. Box 99009, Hartford, CT 06199-0009, Attention: Annuity Services. The telephone number is (860) 422-3985. You may also obtain copies of any documents, incorporated by reference into this prospectus by accessing the SEC’s Website (http://www.sec.gov).
Legal Opinion
Legal matters in connection with federal laws and regulations affecting the issue and sale of the Contracts described in this prospectus and the organization of the Company, its authority to issue such Contracts under Connecticut law and the validity of the forms of the Contracts under Connecticut law have been passed on by the Deputy General Counsel of the Company.
Experts
The consolidated financial statements and schedules of The Travelers Insurance Company and subsidiaries as of December 31, 2002 and 2001, and for each of the years in the three-year period ended December 31, 2002, have been incorporated herein in reliance upon the reports of KPMG LLP, independent accountants, also incorporated herein, and upon the authority of said firm as experts in accounting and auditing. The audit reports covering the December 31, 2002 financial statements and schedules refer to changes in the Company’s methods of accounting for goodwill and other intangible assets in 2002, and for derivative instruments and hedging activities and for securitized financial assets in 2001.
Appendix A
Plans eligible to purchase the Contract are pension and profit sharing plans qualified under §401 (a) of the Internal Revenue Code, Section 403 (b) ERISA plans, and eligible state deferred compensation plans under §457 of the Code (“Qualified Plans”). Trustees should consider whether the Plan permits the investment of Plan assets in the Contract, the distribution of such an annuity and payment of death benefits in accordance with the requirements of the federal income tax rules. Assuming continued Plan qualification and operation, earnings on Plan assets will accumulate value on a tax-deferred even if the Plan is not funded by this Contract. Trustees therefore should consider features of the Contract other than tax-deferral before investing in the Contract. In addition, because required minimum distributions must generally begin for annuitants after age 70½, trustees should consider whether that the Contract may not be an appropriate purchase for annuitants approaching or over age 70½.
To apply for this Contract, the trustee or other applicant must complete an application or purchase order for the Group Annuity Contract and make a Purchase Payment. A Group Annuity Contract will then be issued to the applicant. While certificates may or may not be issued, each Purchase Payment is confirmed to the contract owner. Surrenders under the Group Annuity Contract may be made at the election of the contract owner, from the Account established under the Contract. Account surrenders are subject to the same limitations, adjustments and charges as surrenders made under a certificate (see “Surrenders”). Cash Surrender Values may be taken in cash or applied to purchase annuities for the Contract Owners’ Qualified Plan participants.
Because there might not be individual participant accounts, the qualified Group Annuity Contract issued in connection with a Qualified Plan may not provide for death benefits. Annuities purchased for Qualified Plan participants may provide for a payment upon the death of the Annuitant depending on the option chosen (see “Annuity Options”). Additionally, since there might not be Annuitants prior to the actual purchase of an Annuity by the contract owner, the provisions regarding the Maturity Date may not be applicable.
APPENDIX B
The Travelers Insurance Company
Annual Report on Form 10-K
for the period ended December 31, 2002.
INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholder The Travelers Insurance Company: We have audited the accompanying consolidated balance sheets of The Travelers Insurance Company and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in shareholder's equity, and cash flows for each of the years in the three-year period ended December 31, 2002. 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. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002, and its methods of accounting for derivative instruments and hedging activities and for securitized financial assets in 2001. /s/ KPMG LLP Hartford, Connecticut January 21, 2003 F-1THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ($ IN MILLIONS) FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000 ---- ---- ---- REVENUES Premiums $1,924 $2,102 $1,966 Net investment income 2,936 2,831 2,730 Realized investment gains (losses) (322) 125 (77) Fee income 560 537 528 Other revenues 136 107 107 - -------------------------------------------------------------------------------------------------------------------- Total Revenues 5,234 5,702 5,254 - -------------------------------------------------------------------------------------------------------------------- BENEFITS AND EXPENSES Current and future insurance benefits 1,711 1,862 1,752 Interest credited to contractholders 1,220 1,179 1,038 Amortization of deferred acquisition costs 393 379 347 General and administrative expenses 407 371 463 - -------------------------------------------------------------------------------------------------------------------- Total Benefits and Expenses 3,731 3,791 3,600 - -------------------------------------------------------------------------------------------------------------------- Income from operations before federal income taxes and cumulative effects of changes in accounting principles 1,503 1,911 1,654 - -------------------------------------------------------------------------------------------------------------------- Federal income taxes Current 236 471 462 Deferred 185 159 89 - -------------------------------------------------------------------------------------------------------------------- Total Federal Income Taxes 421 630 551 - -------------------------------------------------------------------------------------------------------------------- Income before cumulative effects of changes in accounting principles 1,082 1,281 1,103 Cumulative effect of change in accounting for derivative instruments and hedging activities, net of tax -- (6) -- Cumulative effect of change in accounting for securitized financial assets, net of tax -- (3) -- - -------------------------------------------------------------------------------------------------------------------- Net Income $1,082 $1,272 $1,103 ==================================================================================================================== See Notes to Consolidated Financial Statements. F-2 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ IN MILLIONS) AT DECEMBER 31, 2002 2001 - -------------------------------------------------------------------------------- ASSETS Fixed maturities, available for sale at fair value (including $2,687 and $2,330 subject to securities lending agreements) (cost $35,428; $31,730) $36,434 $32,072 Equity securities, at fair value (cost $328; $471) 332 472 Mortgage loans 1,985 1,995 Real estate 36 55 Policy loans 1,168 1,208 Short-term securities 4,414 3,053 Trading securities, at fair value 1,531 1,880 Other invested assets 4,909 2,485 - -------------------------------------------------------------------------------- Total Investments 50,809 43,220 - -------------------------------------------------------------------------------- Cash 186 146 Investment income accrued 525 487 Premium balances receivable 151 137 Reinsurance recoverables 4,301 4,163 Deferred acquisition costs 3,936 3,461 Separate and variable accounts 21,620 24,837 Other assets 1,467 1,415 - -------------------------------------------------------------------------------- Total Assets $82,995 $77,866 - -------------------------------------------------------------------------------- LIABILITIES Contractholder funds $26,634 $22,810 Future policy benefits and claims 15,009 14,221 Separate and variable accounts 21,620 24,837 Deferred federal income taxes 1,448 409 Trading securities sold not yet purchased, at fair value 598 891 Other liabilities 6,051 5,518 - -------------------------------------------------------------------------------- Total Liabilities 71,360 68,686 - -------------------------------------------------------------------------------- SHAREHOLDER'S EQUITY Common stock, par value $2.50; 40 million shares authorized, issued and outstanding 100 100 Additional paid-in capital 5,443 3,864 Retained earnings 5,638 5,142 Accumulated other changes in equity from nonowner sources 454 74 - -------------------------------------------------------------------------------- Total Shareholder's Equity 11,635 9,180 - -------------------------------------------------------------------------------- Total Liabilities and Shareholder's Equity $82,995 $77,866 ================================================================================ See Notes to Consolidated Financial Statements. F-3 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY ($ IN MILLIONS) FOR THE YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------- COMMON STOCK 2002 2001 2000 - ------------------------------------------------------------------------------------- Balance, beginning of year $100 $100 $100 Changes in common stock -- -- -- - ------------------------------------------------------------------------------------- Balance, end of year $100 $100 $100 ===================================================================================== - ------------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL - ------------------------------------------------------------------------------------- Balance, beginning of year $3,864 $3,843 $3,819 Stock option tax benefit (expense) (17) 21 24 Capital contributed by parent 1,596 -- -- - ------------------------------------------------------------------------------------- Balance, end of year $5,443 $3,864 $3,843 ===================================================================================== - ------------------------------------------------------------------------------------- RETAINED EARNINGS - ------------------------------------------------------------------------------------- Balance, beginning of year $5,142 $4,342 $4,099 Net income 1,082 1,272 1,103 Dividends to parent (586) (472) (860) - ------------------------------------------------------------------------------------- Balance, end of year $5,638 $5,142 $4,342 ===================================================================================== - ------------------------------------------------------------------------------------- ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES - ------------------------------------------------------------------------------------- Balance, beginning of year $74 $104 $(398) Cumulative effect of accounting for derivative instruments and hedging activities, net of tax -- (29) -- Unrealized gains, net of tax 455 68 501 Foreign currency translation, net of tax 3 (3) 1 Derivative instrument hedging activity losses, net of tax (78) (66) -- - ------------------------------------------------------------------------------------- Balance, end of year $454 $ 74 $104 ===================================================================================== - ------------------------------------------------------------------------------------- SUMMARY OF CHANGES IN EQUITY FROM NONOWNER SOURCES - ------------------------------------------------------------------------------------- Net income $1,082 $1,272 $1,103 Other changes in equity from nonowner sources 380 (30) 502 - ------------------------------------------------------------------------------------- Total changes in equity from nonowner sources $1,462 $1,242 $1,605 ===================================================================================== - ------------------------------------------------------------------------------------- TOTAL SHAREHOLDER'S EQUITY - ------------------------------------------------------------------------------------- Changes in total shareholders' equity $2,455 $ 791 $ 769 Balance, beginning of year 9,180 8,389 7,620 - ------------------------------------------------------------------------------------- Balance, end of year $11,635 $9,180 $8,389 ===================================================================================== See Notes to Consolidated Financial Statements. F-4 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH ($ IN MILLIONS) FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000 - --------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Premiums collected $ 1,917 $ 2,109 $ 1,986 Net investment income received 2,741 2,430 2,489 Other revenues received 384 867 865 Benefits and claims paid (1,218) (1,176) (1,193) Interest credited to contractholders (1,220) (1,159) (1,046) Operating expenses paid (1,022) (1,000) (970) Income taxes paid (197) (472) (490) Trading account investments (purchases), sales, net 76 (92) (143) Other (393) (227) (258) - --------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 1,068 1,280 1,240 - --------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investments Fixed maturities 4,459 3,706 4,257 Mortgage loans 374 455 380 Proceeds from sales of investments Fixed maturities 15,472 14,110 10,840 Equity securities 945 112 397 Real estate held for sale 26 6 244 Purchases of investments Fixed maturities (23,623) (22,556) (17,836) Equity securities (867) (50) (7) Mortgage loans (355) (287) (264) Policy loans, net 39 41 9 Short-term securities purchases, net (1,320) (914) (810) Other investments (purchases), sales, net (69) 103 (461) Securities transactions in course of settlement, net 529 1,086 944 - --------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (4,390) (4,188) (2,307) - --------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Contractholder fund deposits 8,505 8,308 6,022 Contractholder fund withdrawals (4,729) (4,932) (4,030) Capital contribution by parent 172 -- -- Dividends to parent company (586) (472) (860) - --------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 3,362 2,904 1,132 - --------------------------------------------------------------------------------------------- Net increase (decrease) in cash 40 (4) 65 Cash at December 31, previous year 146 150 85 - --------------------------------------------------------------------------------------------- Cash at December 31, current year $ 186 $ 146 $ 150 ============================================================================================= See Notes to Consolidated Financial Statements. F-5 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies used in the preparation of the accompanying financial statements follow. BASIS OF PRESENTATION The Travelers Insurance Company (TIC, together with its subsidiaries, the Company), is a wholly owned subsidiary of Citigroup Insurance Holding Corporation (CIHC), an indirect wholly owned subsidiary of Citigroup Inc. (Citigroup), a diversified global financial services holding company whose businesses provide a broad range of financial services to consumer and corporate customers around the world. The consolidated financial statements include the accounts of the Company and its insurance and non-insurance subsidiaries on a fully consolidated basis. The primary insurance entities of the Company are TIC and its subsidiaries, The Travelers Life and Annuity Company (TLAC), Primerica Life Insurance Company (Primerica Life), and its subsidiaries, Primerica Life Insurance Company of Canada, CitiLife Financial Limited (CitiLife) and National Benefit Life Insurance Company (NBL). Significant intercompany transactions and balances have been eliminated. At December 31, 2001, the Company was a wholly owned subsidiary of The Travelers Insurance Group, Inc. (TIGI). On February 4, 2002, TIGI changed its name to Travelers Property Casualty Corp. (TPC). TPC completed its initial public offering (IPO) on March 27, 2002 and on August 20, 2002 Citigroup made a tax-free distribution of the majority of its remaining interest in TPC, to Citigroup's stockholders. Prior to the IPO, the common stock of TIC was distributed by TPC to CIHC so that TIC would remain an indirect wholly owned subsidiary of Citigroup. See Note 15. The financial statements and accompanying footnotes of the Company are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and benefits and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the 2002 presentation. ACCOUNTING CHANGES BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted the Financial Accounting Standards Board (FASB) Statements of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other Intangible Assets" (FAS 142). These standards change the accounting for business combinations by, among other things, prohibiting the prospective use of pooling-of-interests accounting and requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life created by business combinations accounted for using the purchase method of accounting. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. Other intangible assets that are not deemed to have an indefinite useful life will continue to be amortized over their useful lives. See Note 6. F-6 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company stopped amortizing goodwill on January 1, 2002. During 2001, the Company reversed $8 million of negative goodwill. Net income adjusted to exclude the impact of goodwill amortization for the twelve months ended December 31, 2001 is as follows: Twelve Months Ended ($ IN MILLIONS) December 31, 2001 ----------------- Net income: Reported net income $1,272 Negative goodwill reversal (8) Goodwill amortization 7 ------ Adjusted net income $1,271 ====== IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS Effective January 1, 2002, the Company adopted the FASB Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144 establishes a single accounting model for long-lived assets to be disposed of by sale. A long-lived asset classified as held for sale is to be measured at the lower of its carrying amount or fair value less cost to sell. Depreciation (amortization) is to cease. Impairment is recognized only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value of the asset. Long-lived assets to be abandoned, exchanged for a similar productive asset, or distributed to owners in a spin-off are considered held and used until disposed of. Accordingly, discontinued operations are no longer to be measured on a net realizable value basis, and future operating losses are no longer recognized before they occur. The provisions of the new standard are to be applied prospectively. There has been no impact as of December 31, 2002 on the Company's results of operations, financial condition or liquidity due to this standard. The Company does not expect the impact of this standard to be significant in future reporting periods. ACCOUNTING STANDARDS NOT YET ADOPTED COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES On January 1, 2003, the Company adopted the FASB Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146). FAS 146 requires that a liability for costs associated with exit or disposal activities, other than in a business combination, be recognized when the liability is incurred. Previous generally accepted accounting principles provided for the recognition of such costs at the date of management's commitment to an exit plan. In addition, FAS 146 requires that the liability be measured at fair value and be adjusted for changes in estimated cash flows. The provisions of the new standard are effective for exit or disposal activities initiated after December 31, 2002. It is not expected that FAS 146 will materially affect the Company's consolidated financial statements. F-7 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STOCK BASED COMPENSATION On January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (FAS 123), prospectively for all awards granted, modified, or settled after December 31, 2002. The prospective method is one of the adoption methods provided for under FAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," issued in December 2002. FAS 123 requires that compensation cost for all stock awards be calculated and recognized over the service period (generally equal to the vesting period). This compensation cost is determined using option pricing models, intended to estimate the fair value of the awards at the grant date. Similar to APB 25, the alternative method of accounting, an offsetting increase to stockholders' equity under FAS 123 is recorded equal to the amount of compensation expense charged. Had the Company applied FAS 123 in accounting for Citigroup stock options, net income would have been the pro forma amounts indicated below: ----------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2002 2001 2000 ($ IN MILLIONS) ----------------------------------------------------------------------------- Net income, as reported $1,082 $1,272 $1,103 FAS 123 pro forma adjustments, after tax (9) (15) (19) ----------------------------------------------------------------------------- Net income, pro forma $1,073 $1,257 $1,084 ----------------------------------------------------------------------------- The assumptions used in applying FAS 123 to account for Citigroup stock options were as follows: ----------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2002 2001 2000 ----------------------------------------------------------------------------- Expected volatility of Citigroup Stock 36.98% 38.31% 41.5% Risk-free interest rate 3.65% 4.42% 6.23% ----------------------------------------------------------------------------- Expected annual dividend per Citigroup share $0.92 $0.92 $0.78 ----------------------------------------------------------------------------- Expected annual forfeiture rate 7% 5% 5% ----------------------------------------------------------------------------- The adoption of this change in accounting principle will not have a significant impact on the Company's results of operations, financial condition or liquidity. CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the FASB released FASB Interpretation No. 46 "Consolidation of Variable Interest Entities" (FIN 46). This Interpretation changes the method of determining whether certain entities should be included in the Company's Consolidated Financial Statements. An entity is subject to FIN 46 and is called a variable interest entity (VIE) if it has (1) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) equity investors that cannot make significant decisions about the entity's operations, or that do not absorb the expected losses or receive the expected returns of the entity. All other entities are evaluated for consolidation under FAS No. 94, "Consolidation of All Majority-Owned Subsidiaries." A VIE is consolidated by its primary beneficiary, which is the party involved with the VIE that has a majority of the expected losses or a majority of the expected residual returns or both. F-8 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The provisions of FIN 46 are to be applied immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. For VIEs in which an enterprise holds a variable interest that it acquired before February 1, 2003, FIN 46 applies in the first fiscal period beginning after June 15, 2003. For any VIEs that must be consolidated under FIN 46 that were created before February 1, 2003, the assets, liabilities and noncontrolling interest of the VIE would be initially measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46 first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. FIN 46 also mandates new disclosures about VIEs, some of which are required to be presented in financial statements issued after January 31, 2003. The Company has investments in entities that may be considered to be variable interests. The carrying value of these investments is approximately $1.3 billion and primarily consists of interests in security and real estate investment funds, and below investment grade asset-backed and mortgage-backed securities, and a collateralized bond obligation. The Company is evaluating the impact of applying FIN 46 to existing VIEs in which it has variable interests and has not yet completed this analysis. However, at this time, it is anticipated that the effect on the Company's Consolidated Balance Sheets could be an increase of less than $1 billion to assets and liabilities. As the Company continues to evaluate the impact of applying FIN 46, additional entities may be identified that would need to be consolidated. ACCOUNTING POLICIES INVESTMENTS Fixed maturities include bonds, notes and redeemable preferred stocks. Fixed maturities, including instruments subject to securities lending agreements (see Note 4), are classified as "available for sale" and are reported at fair value, with unrealized investment gains and losses, net of income taxes, credited or charged directly to shareholder's equity. Fair values of investments in fixed maturities are based on quoted market prices or dealer quotes. If quoted market prices are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment are used to record fair value. Changes in assumptions could affect the fair values of fixed maturities. Impairments are realized when investment losses in value are deemed other-than-temporary. The Company conducts regular reviews to assess whether other-than-temporary impairments exist. Changing economic conditions - global, regional, or related to specific issuers or industries - could adversely affect these values. Also included in fixed maturities are loan-backed and structured securities, which are amortized using the retrospective method. The effective yield used to determine amortization is calculated based upon actual historical and projected future cash flows, which are obtained from a widely accepted securities data provider. Equity securities, which include common and non-redeemable preferred stocks, are classified as "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. Mortgage loans are carried at amortized cost. A mortgage loan is considered impaired when it is probable that the Company will be unable to collect principal and interest amounts due. 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. In estimating fair value, the Company uses interest rates reflecting the higher returns required in the current real estate financing market. F-9 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Real estate held for sale is carried at the lower of cost or fair value less estimated cost to sell. Fair value of foreclosed properties is established at the time of foreclosure by internal analysis or external appraisers, using discounted cash flow analyses and other accepted 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, 2002 and 2001. Policy loans are carried at the amount of the unpaid balances that are not in excess of the net cash surrender values of the related insurance policies. The carrying value of policy loans, which have no defined maturities, is considered to be fair value. Short-term securities, consisting primarily of money market instruments and other debt issues purchased with a maturity of less than one year, are carried at amortized cost, which approximates fair value. Trading securities and related liabilities are normally held for periods less than six months. These investments are marked to market with the change recognized in net investment income during the current period. Other invested assets include partnership investments and real estate joint ventures accounted for on the equity method of accounting. Undistributed income is reported in net investment income. Also included in other invested assets is an investment in Citigroup Preferred Stock. See Note 14. 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. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments, including financial futures contracts, swaps, options and forward contracts, as a means of hedging exposure to interest rate changes, equity price change and foreign currency risk. The Company also uses derivative financial instruments to enhance portfolio income and replicate cash market investments. The Company, through Tribeca Citigroup Investments Ltd., holds and issues derivative instruments in conjunction with these funding strategies. (See Note 12 for a more detailed description of the Company's derivative use.) Derivative financial instruments in a gain position are reported in the consolidated balance sheet in other assets, derivative financial instruments in a loss position are reported in the consolidated balance sheet in other liabilities and derivatives purchased to offset embedded derivatives on variable annuity contracts are reported on other invested assets. To qualify for hedge accounting, the hedge relationship is designated and formally documented at inception detailing the particular risk management objective and strategy for the hedge which includes the item and risk that is being hedged, the derivative that is being used, as well as how effectiveness is being assessed. A derivative has to be highly effective in accomplishing the objective of offsetting either changes in fair value or cash flows for the risk being hedged. For fair value hedges, in which derivatives hedge the fair value of assets and liabilities, changes in the fair value of derivatives are reflected in realized investment gains and losses, together with changes in the fair value of the related hedged item. The Company primarily hedges available-for-sale securities. F-10 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For cash flow hedges, the accounting treatment depends on the effectiveness of the hedge. To the extent that derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives' fair value will not be included in current earnings but are reported in the accumulated other changes in equity from nonowner sources in shareholder's equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the variability of the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in realized investment gains and losses. The Company primarily hedges foreign denominated funding agreements and floating rate available-for-sale securities. For net investment hedges, in which derivatives hedge the foreign currency exposure of a net investment in a foreign operation, the accounting treatment will similarly depend on the effectiveness of the hedge. The effective portion of the change in fair value of the derivative, including any premium or discount, is reflected in the accumulated other changes in equity from nonowner sources as part of the foreign currency translation adjustment in shareholder's equity. The ineffective portion is reflected in realized investment gains and losses. Derivatives that are used to hedge instruments that are carried at fair value, do not qualify or are not designated as hedges, are also carried at fair value with changes in value reflected in realized investment gains and losses. The effectiveness of these hedging relationships is evaluated on a retrospective and prospective basis using quantitative measures of correlation. If a hedge relationship is found to be ineffective, it no longer qualifies as a hedge and any gains or losses attributable to such ineffectiveness as well as subsequent changes in fair value are recognized in realized investment gains and losses. For those hedge relationships that are terminated, hedge designations removed, or forecasted transactions that are no longer expected to occur, the hedge accounting treatment described in the paragraphs above will no longer apply. For fair value hedges, any changes to the hedged item remain as part of the basis of the asset or liability and are ultimately reflected as an element of the yield. For cash flow hedges, any changes in fair value of the end-user derivative remain in the accumulated other changes in equity from nonowner sources in shareholder's equity and are included in earnings of future periods when earnings are also affected by the variability of the hedged cash flow. If the hedged relationship is discontinued because a forecasted transaction will not occur when scheduled, any changes in fair value of the end-user derivative are immediately reflected in realized investment gains and losses. FINANCIAL INSTRUMENTS WITH EMBEDDED DERIVATIVES: The Company bifurcates an embedded derivative where the economic characteristics and risks of the embedded instrument are not clearly and closely related to the economic characteristics and risks of the host contract, the entire instrument would not otherwise be remeasured at fair value and a separate instrument with the same terms of the embedded instrument would meet the definition of a derivative under FAS 133. The Company purchases investments that have embedded derivatives, primarily convertible debt securities. These embedded derivatives are carried at fair value with changes in value reflected in realized investment gains and losses. Derivatives embedded in convertible debt securities are classified in the consolidated balance sheet as fixed maturity securities, consistent with the host instruments. The Company markets certain insurance contracts that have embedded derivatives, primarily variable annuity contracts with put options. These embedded derivatives are carried at fair value with changes in value F-11 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) reflected in realized investment gains and losses. Derivatives embedded in variable annuity contracts are classified in the consolidated balance sheet as future policyholder benefits and claims. Prior to the adoption of FAS 133 on January 1, 2001, end-user derivatives designated as qualifying hedges were accounted for consistently with the associated risk management strategy. Derivatives used for hedging purposes were generally accounted for using hedge accounting. Changes in value of the derivatives which were expected to substantially offset the changes in value of the hedged items qualified for hedge accounting. Hedges were monitored to ensure that there was a high correlation between the derivative instrument and the hedged investment. Derivatives that did not qualify for hedge accounting were marked to market with changes in market value reflected in the consolidated statement of income as realized gains and losses. Payments to be received or made under interest rate swaps were accrued and recognized in net investment income. Swaps hedging available for sale securities were carried at fair value with unrealized gains and losses, net of taxes, charged directly to shareholder's equity. Interest rate and currency swaps hedging liabilities were treated as off-balance sheet instruments. Gains and losses arising from financial future contracts were used to adjust the basis of hedged investments and were recognized in net investment income over the life of the investment. Gains and losses arising from equity index options were marked to market with changes in market value reflected in realized investment gains and losses. Forward contracts hedging investments were marked to market based on changes in the spot rate with changes in market value reflected in realized investment gains and losses and any forward premium or discount was recognized in net investment income over the life of the contract. Gains and losses from forward contracts hedging foreign operations were carried at fair value with unrealized gains and losses, net of taxes, charged directly to shareholder's equity. INVESTMENT GAINS AND LOSSES Realized investment gains and losses are included as a component of pre-tax revenues based upon specific identification of the investments sold on the trade date. Impairments are realized when investment losses in value are deemed other-than-temporary. The Company conducts regular reviews to assess whether other-than-temporary impairments exist. Changing economic conditions - global, regional, or related to specific issuers or industries - could adversely affect these investments. Also included in pre-tax revenues 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. DEFERRED ACQUISITION COSTS Costs of acquiring traditional life and health insurance, universal life, corporate owned life insurance (COLI), deferred annuities and payout annuities are deferred. These deferred acquisition costs (DAC) include 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. The method for determining amortization of deferred acquisition costs varies by product type based upon three different accounting pronouncements: Statement of Financial Accounting Standards No. 60, "Accounting and Reporting by Insurance Enterprises" (FAS 60), Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" (FAS 91) and Statement of Financial Accounting Standards No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long Duration Contracts and for Realized Gains and Losses from the Sale of Investments" (FAS 97). F-12 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DAC for deferred annuities, both fixed and variable, and payout annuities are amortized employing a level effective yield methodology per FAS 91 as permitted by AICPA Practice Bulletin 8. An amortization rate is developed using the outstanding DAC balance and projected account balances and is applied to actual account balances to determine the amount of DAC amortization. The projected account balances are derived using a model that contains assumptions related to investment returns and persistency. The model rate is evaluated periodically, at least annually, and the actual rate is reset in the following quarter and applied prospectively. A new amortization pattern is developed so that the DAC balances will be amortized over the remaining estimated life of the business. DAC for these products is currently being amortized over 10-15 years. DAC for universal life and COLI are amortized in relation to estimated gross profits from surrender charges, investment, mortality, and expense margins per FAS 97. Actual profits can vary from management's estimates, resulting in increases or decreases in the rate of amortization. Re-estimates of gross profits result in retrospective adjustments to earnings by a cumulative charge or credit to income. DAC for these products is currently being amortized over 16-25 years. DAC relating to traditional life, including term insurance, and health insurance are amortized in relation to anticipated premiums per FAS 60. Assumptions as to the anticipated premiums are made at the date of policy issuance or acquisition and are consistently applied over the life of the policy. DAC for these products is currently being amortized over 5-20 years. DAC is reviewed to determine if it is recoverable from future income, including investment income, and if not recoverable, is charged to expenses. All other acquisition expenses are charged to operations as incurred. See Note 6. VALUE OF INSURANCE IN FORCE The value of insurance in force is an asset that was recorded in 1993 at the time of acquisition of the Company by Citigroup's predecessor. It represents the actuarially determined present value of anticipated profits to be realized from life insurance and annuities contracts at the date of acquisition using the same assumptions that were used for computing related liabilities where appropriate. The value of insurance in force was the actuarially determined present value of the projected future profits discounted at interest rates ranging from 14% to 18%. Traditional life insurance is amortized in relation to anticipated premiums; universal life is amortized in relation to estimated gross profits; and annuity contracts are amortized employing a level yield method. The value of insurance in force, which is included in other assets, is reviewed periodically for recoverability to determine if any adjustment is required. Adjustments, if any, are charged to income. See Note 6. SEPARATE AND VARIABLE ACCOUNTS 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 fair value. Certain other separate accounts provide guaranteed levels of return or benefits and the assets of these accounts are primarily carried at fair value. F-13 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Amounts assessed to the separate account 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. GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets are included in other assets. Prior to the adoption of FASB Statements of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other Intangible Assets" (FAS 142) in the first quarter of 2002, goodwill was being amortized on a straight-line basis principally over a 40-year period. The carrying amount of goodwill and other intangible assets is regularly reviewed for indication of impairment in value that in the view of management would be other-than-temporary. If it is determined that goodwill and other intangible assets are unlikely to be recovered, impairment is recognized on a discounted cash flow basis. See Note 6. Upon adoption of FAS 141 and FAS 142, the Company stopped amortizing goodwill and intangible assets deemed to have an infinite useful life. Instead, these assets are subject to an annual review for impairment. Other intangible assets that are not deemed to have an indefinite useful life will continue to be amortized over their useful lives. See Note 1, Summary of Significant Accounting Policies, Accounting Changes. CONTRACTHOLDER FUNDS Contractholder funds represent receipts from the issuance of universal life, COLI, pension investment, guaranteed investment contracts (GIC), and certain deferred annuity contracts. For universal life and COLI contracts, contractholder fund balances are increased by receipts for mortality coverage, contract administration, surrender charges and interest accrued, where one or more of these elements are not fixed or guaranteed. These balances are decreased by withdrawals, mortality charges and administrative expenses charged to the contractholder. Interest rates credited to contractholder funds related to universal life and COLI range from 4.1% to 6.6%, with a weighted average interest rate of 4.5%. Pension investment, GICs and certain annuity contracts do not contain significant insurance risks and are considered investment-type contracts. Contractholder fund balances are increased by receipts and credited interest, and reduced by withdrawals and administrative expenses charged to the contractholder. Interest rates credited to those investment type contracts range from 1.45% to 10.0% with a weighted average interest rate of 4.9%. FUTURE POLICY BENEFITS Future policy benefits represent liabilities for future insurance policy benefits. The annuity payout reserves are calculated using the mortality and interest assumptions used in the actual pricing of the benefit. Mortality assumptions are based on Company experience and are adjusted to reflect deviations such as substandard mortality in structured settlement benefits. The interest rates range from 2.0% to 9.0% with a weighted average of 7.1% for these products. Traditional life products include whole life and term insurance. Future policy benefits for traditional life products are estimated on the basis of actuarial assumptions as to mortality, persistency and interest, established at policy issue. Interest assumptions applicable to traditional life products range from 2.5% to 7.0%, with a weighted average of 3.6%. Assumptions established at policy issue as to mortality and persistency are based on the Company's experience, which, together with interest assumptions, include a margin for adverse deviation. Appropriate recognition has been given to experience rating and reinsurance. F-14 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GUARANTY FUND AND OTHER INSURANCE RELATED ASSESSMENTS Included in other liabilities is the Company's estimate of its liability for guaranty fund and other insurance-related assessments. State guaranty fund assessments are based upon the Company's share of premium written or received in one or more years prior to an insolvency occurring in the industry. Once an insolvency has occurred, the Company recognizes a liability for such assessments if it is probable that an assessment will be imposed and the amount of the assessment can be reasonably estimated. At December 31, 2002 and 2001, the Company had a liability of $22.6 million and $22.3 million, respectively, for guaranty fund assessments and a related premium tax offset recoverable of $4.2 million and $4.3 million, respectively. The assessments are expected to be paid over a period of three to five years and the premium tax offsets are expected to be realized over a period of 10 to 15 years. PERMITTED STATUTORY ACCOUNTING PRACTICES The Company's insurance subsidiaries, domiciled principally in Connecticut and Massachusetts, prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the insurance departments of the states of domicile. Prescribed statutory accounting practices are those practices that are incorporated directly or by reference in state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state. Permitted statutory accounting practices include practices not prescribed by the domiciliary state, but allowed by the domiciliary state regulatory authority. The Company does not have any permitted statutory accounting practices. PREMIUMS Premiums are recognized as revenue when due. Premiums for contracts with a limited number of premium payments, due over a significantly shorter period than the period over which benefits are provided, are considered income when due. The portion of premium which is not required to provide for benefits and expenses is deferred and recognized in income in a constant relationship to insurance benefits in force. FEE INCOME Fee income is recognized on deferred annuity and universal life contracts for mortality, administrative and equity protection charges according to contract due dates. Fee income is recognized on variable annuity and universal life separate accounts either daily, monthly, quarterly or annually as per contract terms. OTHER REVENUES Other revenues include surrender penalties collected at the time of a contract surrender, and other miscellaneous charges related to annuity and universal life contracts recognized when received. Also included are revenues from unconsolidated non-insurance subsidiaries. Amortization of deferred income related to reinsured blocks of business are recognized in relation to anticipated premiums and are reported in other revenues. CURRENT AND FUTURE INSURANCE BENEFITS Current and future insurance benefits represent charges for mortality and morbidity related to fixed annuities, universal life, term life and health insurance benefits. F-15 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INTEREST CREDITED TO CONTRACTHOLDERS Interest credited to contractholders represents amounts earned by universal life, COLI, pension investment, GICS and certain deferred annuity contracts in accordance with contract provisions. FEDERAL INCOME TAXES The provision for federal income taxes is comprised of two components, current income taxes and deferred income taxes. Deferred federal income taxes arise from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities. STOCK-BASED COMPENSATION Prior to January 1, 2003, the Company applied Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its stock-based compensation plans. Under APB 25, there is generally no charge to earnings for employee stock option awards because the options granted under these plans have an exercise price equal to the market value of the underlying common stock on the grant date. Alternatively, FAS No. 123, "Accounting for Stock-Based Compensation" (FAS 123), allows companies to recognize compensation expense over the related service period based on the grant date fair value of the stock award. 2. BUSINESS DISPOSITION Effective July 1, 2000, the Company sold 90% of its individual long-term care insurance business to General Electric Capital Assurance Company and its subsidiary in the form of indemnity reinsurance arrangements. The proceeds were $410 million, resulting in a deferred gain of approximately $150 million after-tax. The deferred gain is amortized in relation to anticipated premiums. After-tax amortization amounted to $20 million, $21 million and $5 million in 2002, 2001 and 2000, respectively. Earned premiums were $24 million, $25 million and $138 million in 2002, 2001 and 2000, respectively. 3. OPERATING SEGMENTS The Company has two reportable business segments that are separately managed due to differences in products, services, marketing strategy and resource management. The business of each segment is maintained and reported through separate legal entities within the Company. The management groups of each segment report separately to the common ultimate parent, Citigroup Inc. TRAVELERS LIFE & ANNUITY (TLA) core offerings include individual annuity, individual life, COLI and group annuity insurance products distributed by TIC and TLAC principally under the Travelers Life & Annuity name. Among the range of individual products offered are fixed and variable deferred annuities, payout annuities and term, universal and variable life insurance. The COLI product is a variable universal life product distributed through independent specialty brokers. The group products include institutional pensions, including GICs, payout annuities, group annuities sold to employer-sponsored retirement and savings plans and structured finance transactions. The majority of the annuity business and a substantial portion of the life business written by TLA are accounted for as investment contracts, F-16 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) with the result that the deposits collected are reported as liabilities and are not included in revenues. The PRIMERICA LIFE INSURANCE business segment consolidates the business of Primerica Life, Primerica Life Insurance Company of Canada, CitiLife and NBL. The Primerica Life Insurance business segment offers individual life products, primarily term insurance, to customers through a sales force of approximately 107,000 representatives. A great majority of the domestic licensed sales force works on a part-time basis. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1), except that management also includes receipts on long-duration contracts (universal life-type and investment contracts) as deposits along with premiums in measuring business volume. The amount of investments in equity method investees and total expenditures for additions to long- lived assets other than financial instruments, long-term customer relationships of a financial institution, mortgage and other servicing rights, and deferred tax assets, were not material. F-17 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) BUSINESS SEGMENT INFORMATION: - ------------------------------------------------------------------------------------------------------- AT AND FOR THE YEAR ENDED DECEMBER 31, 2002 TRAVELERS LIFE & PRIMERICA LIFE ($ IN MILLIONS) ANNUITY INSURANCE TOTAL - ------------------------------------------------------------------------------------------------------- Business Volume: Premiums $ 730 $ 1,194 $ 1,924 Deposits 11,906 -- 11,906 ------- ------- ------- Total business volume $12,636 $ 1,194 $13,830 Net investment income 2,646 290 2,936 Interest credited to contractholders 1,220 -- 1,220 Amortization of deferred acquisition costs 174 219 393 Total expenditures for deferred acquisition costs 556 323 879 Federal income taxes (FIT) on operating income 325 209 534 Operating income (excludes realized gains or losses and the related FIT) $ 884 $ 407 $ 1,291 Segment Assets $74,562 $ 8,433 $82,995 - ------------------------------------------------------------------------------------------------------- BUSINESS SEGMENT INFORMATION: - ------------------------------------------------------------------------------------------------------- AT AND FOR THE YEAR ENDED DECEMBER 31, 2001 TRAVELERS LIFE & PRIMERICA LIFE ($ IN MILLIONS) ANNUITY INSURANCE TOTAL - ------------------------------------------------------------------------------------------------------- Business Volume: Premiums $ 957 $ 1,145 $ 2,102 Deposits 13,067 -- 13,067 ------- ------- ------- Total business volume $14,024 $ 1,145 $15,169 Net investment income 2,530 301 2,831 Interest credited to contractholders 1,179 -- 1,179 Amortization of deferred acquisition costs 171 208 379 Total expenditures for deferred acquisition costs 553 298 851 Federal income taxes (FIT) on operating income 377 209 586 Operating income (excludes realized gains or losses and the related FIT) $ 801 $ 399 $ 1,200 Segment Assets $69,836 $ 8,030 $77,866 - ------------------------------------------------------------------------------------------------------- F-18 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------------------------------------- AT AND FOR THE YEAR ENDED DECEMBER 31, 2000 TRAVELERS LIFE & PRIMERICA LIFE ($ IN MILLIONS) ANNUITY INSURANCE TOTAL - ------------------------------------------------------------------------------------------------------- Business Volume: Premiums $ 860 $ 1,106 $ 1,966 Deposits 11,536 -- 11,536 ------- ------- ------- Total business volume $12,396 $ 1,106 $13,502 Net investment income 2,450 280 2,730 Interest credited to contractholders 1,038 -- 1,038 Amortization of deferred acquisition costs 166 181 347 Total expenditures for deferred acquisition costs 520 272 792 Federal income taxes (FIT) on operating income 381 197 578 Operating income (excludes realized gains or losses and the related FIT) $ 777 $ 376 $ 1,153 Segment Assets $62,771 $ 7,522 $70,293 - ------------------------------------------------------------------------------------------------------- F-19 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ---------------------------------------------------------------------------------------------- BUSINESS SEGMENT RECONCILIATION: ($ IN MILLIONS) AT AND FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------- BUSINESS VOLUME AND REVENUES 2002 2001 2000 - ---------------------------------------------------------------------------------------------- Total business volume $ 13,830 $ 15,169 $ 13,502 Other revenues, including fee income 696 644 635 Elimination of deposits (11,906) (13,067) (11,536) -------- -------- -------- Revenue from external sources 2,620 2,746 2,601 Net investment income 2,936 2,831 2,730 Realized investment gains (losses) (322) 125 (77) ============================================================================================== Total revenues $ 5,234 $ 5,702 $ 5,254 ============================================================================================== OPERATING INCOME - ---------------------------------------------------------------------------------------------- Total operating income of business segments $ 1,291 $ 1,200 $ 1,153 Realized investment gains (losses), net of tax (209) 81 (50) Cumulative effect of change in accounting for derivative instruments and hedging activities, net of tax -- (6) -- Cumulative effect of change in accounting for securitized financial assets, net of tax -- (3) -- - ---------------------------------------------------------------------------------------------- Income from continuing operations $ 1,082 $ 1,272 $ 1,103 ============================================================================================== ASSETS - ---------------------------------------------------------------------------------------------- Total assets of business segments $ 82,995 $ 77,866 $ 70,293 ============================================================================================== BUSINESS VOLUME AND REVENUES - ---------------------------------------------------------------------------------------------- Individual Annuities $ 6,307 $ 7,166 $ 7,101 Group Annuities 7,285 8,383 6,563 Individual Life and Health Insurance and COLI 3,116 2,970 2,550 Other (a) 432 250 576 Elimination of deposits (11,906) (13,067) (11,536) - ---------------------------------------------------------------------------------------------- Total revenue $ 5,234 $ 5,702 $ 5,254 ============================================================================================== (a) Other represents revenue attributable to unallocated capital and run-off businesses. The Company's revenue was derived almost entirely from U.S. domestic business. Revenue attributable to foreign countries was insignificant. The Company had no transactions with a single customer representing 10% or more of its revenue. F-20 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS FIXED MATURITIES The amortized cost and fair value of investments in fixed maturities were as follows: - -------------------------------------------------------------------------------------------------------- GROSS GROSS DECEMBER 31, 2002 AMORTIZED UNREALIZED UNREALIZED FAIR ($ IN MILLIONS) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE: Mortgage-backed securities - CMOs and pass-through securities $ 6,975 $ 434 $ 2 $ 7,407 U.S. Treasury securities and obligations of U.S. Government and government agencies and 2,402 39 19 2,422 authorities Obligations of states, municipalities and political subdivisions 297 22 0 319 Debt securities issued by foreign governments 365 30 2 393 All other corporate bonds 20,894 982 608 21,268 Other debt securities 4,348 229 66 4,511 Redeemable preferred stock 147 1 34 114 - -------------------------------------------------------------------------------------------------------- Total Available For Sale $35,428 $ 1,737 $ 731 $36,434 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- GROSS GROSS DECEMBER 31, 2001 AMORTIZED UNREALIZED UNREALIZED FAIR ($ IN MILLIONS) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE: Mortgage-backed securities - CMOs and pass-through securities $ 6,654 $ 116 $ 57 $ 6,713 U.S. Treasury securities and obligations of U.S. Government and government agencies and authorities 1,677 8 63 1,622 Obligations of states, municipalities and political subdivisions 108 4 1 111 Debt securities issued by foreign governments 810 46 5 851 All other corporate bonds 17,904 482 260 18,126 Other debt securities 4,406 154 86 4,474 Redeemable preferred stock 171 12 8 175 - -------------------------------------------------------------------------------------------------------- Total Available For Sale $31,730 $ 822 $ 480 $32,072 - -------------------------------------------------------------------------------------------------------- F-21 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Proceeds from sales of fixed maturities classified as available for sale were $15.5 billion, $14.1 billion and $10.8 billion in 2002, 2001 and 2000, respectively. Gross gains of $741 million, $633 million and $213 million and gross losses of $309 million, $273 million and $407 million in 2002, 2001 and 2000, respectively, were realized on those sales. Additional losses of $639 million, $153 million and $25 million in 2002, 2001 and 2000, respectively, were realized due to other-than-temporary losses in value. Impairment activity increased significantly beginning in the fourth quarter of 2001 and continued throughout 2002. Impairments were concentrated in telecommunication and energy company investments. Fair values of investments in fixed maturities are based on quoted market prices or dealer quotes or, if these are not available, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment. The fair value of investments for which a quoted market price or dealer quote is not available amounted to $5.1 billion and $4.6 billion at December 31, 2002 and 2001, respectively. The amortized cost and fair value of fixed maturities at December 31, 2002, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. --------------------------------------------------------------------------- AMORTIZED ($ IN MILLIONS) COST FAIR VALUE --------------------------------------------------------------------------- MATURITY: Due in one year or less $2,572 $2,605 Due after 1 year through 5 years 10,162 10,430 Due after 5 years through 10 years 8,591 8,768 Due after 10 years 7,128 7,224 --------------------------------------------------------------------------- 28,453 29,027 --------------------------------------------------------------------------- Mortgage-backed securities 6,975 7,407 --------------------------------------------------------------------------- Total Maturity $35,428 $36,434 --------------------------------------------------------------------------- The Company makes investments in collateralized mortgage obligations (CMOs). CMOs typically have high credit quality, offer good liquidity, and provide a significant advantage in yield and total return compared to U.S. Treasury securities. The Company's investment strategy is to purchase CMO tranches which are protected against prepayment risk, including planned amortization class and last cash flow tranches. Prepayment protected tranches are preferred because they provide stable cash flows in a variety of interest rate scenarios. The Company does invest in other types of CMO tranches if a careful assessment indicates a favorable risk/return tradeoff. The Company does not purchase residual interests in CMOs. At December 31, 2002 and 2001, the Company held CMOs classified as available for sale with a fair value of $4.7 billion and $4.5 billion, respectively. Approximately 35% and 38%, respectively, of the Company's CMO holdings are fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 2002 and 2001. In addition, the Company held $2.6 billion and $2.1 billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities at December 31, 2002 and 2001, respectively. All of these securities are rated AAA. F-22 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. The Company generally receives cash collateral from the borrower, equal to at least the market value of the loaned securities plus accrued interest, and reinvests it in short-term securities. The loaned securities remain a recorded asset of the Company, however, the Company records a liability for the amount of the cash collateral held, representing its obligation to return the cash collateral related to these loaned securities, and reports that liability as part of other liabilities in the consolidated balance sheet. At December 31, 2002 and 2001, the Company held cash collateral of $2.8 billion and $2.4 billion, respectively. EQUITY SECURITIES The cost and fair values of investments in equity securities were as follows: --------------------------------------------------------------------------------------------- EQUITY SECURITIES: GROSS UNREALIZED GROSS UNREALIZED FAIR ($ IN MILLIONS) COST GAINS LOSSES VALUE --------------------------------------------------------------------------------------------- DECEMBER 31, 2002 Common stocks $48 $9 $7 $50 Non-redeemable preferred stocks 280 8 6 282 --------------------------------------------------------------------------------------------- Total Equity Securities $328 $17 $13 $332 --------------------------------------------------------------------------------------------- DECEMBER 31, 2001 Common stocks $96 $11 $6 $101 Non-redeemable preferred stocks 375 8 12 371 --------------------------------------------------------------------------------------------- Total Equity Securities $471 $19 $18 $472 --------------------------------------------------------------------------------------------- Proceeds from sales of equity securities were $945 million, $112 million and $397 million in 2002, 2001 and 2000, respectively. Gross gains of $8 million, $10 million and $107 million and gross losses of $4 million, $13 million and $9 million in 2002, 2001 and 2000, respectively, were realized on those sales. Additional losses of $19 million, $96 million and $7 million in 2002, 2001 and 2000, respectively, were realized due to other-than-temporary losses in value. MORTGAGE LOANS AND REAL ESTATE At December 31, 2002 and 2001, the Company's mortgage loan and real estate portfolios consisted of the following: ---------------------------------------------------------------------------- ($ IN MILLIONS) 2002 2001 ---------------------------------------------------------------------------- Current Mortgage Loans $1,941 $1,976 Underperforming Mortgage Loans 44 19 ---------------------------------------------------------------------------- Total Mortgage Loans 1,985 1,995 ---------------------------------------------------------------------------- Real Estate - Foreclosed 17 42 Real Estate - Investment 19 13 ---------------------------------------------------------------------------- Total Real Estate 36 55 ---------------------------------------------------------------------------- Total Mortgage Loans and Real Estate $2,021 $2,050 ============================================================================ Underperforming mortgage loans include delinquent mortgage loans over 90 days past due, loans in the process of foreclosure and loans modified at interest rates below market. F-23 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Aggregate annual maturities on mortgage loans at December 31, 2002 are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties. ----------------------------------------------------------- YEAR ENDING DECEMBER 31, ($ IN MILLIONS) ----------------------------------------------------------- Past Maturity $13 2003 183 2004 156 2005 123 2006 198 2007 135 Thereafter 1,177 ----------------------------------------------------------- Total $1,985 =========================================================== TRADING SECURITIES Trading securities of the Company are held in Tribeca Citigroup Investments Ltd. The assets and liabilities are valued at fair value as follows: ($ IN MILLIONS) Fair value as of Fair value as of - --------------- December 31, 2002 December 31, 2001 ----------------- ----------------- ASSETS Trading securities Convertible bond arbitrage $1,442 $1,798 Merger arbitrage 47 80 Other 42 2 ------ ------ $1,531 $1,880 ====== ====== LIABILITIES Trading securities sold not yet purchased Convertible bond arbitrage $ 520 $ 836 Merger arbitrage 13 51 Other 65 4 ------ ------ $ 598 $ 891 ====== ====== The Company's trading portfolio investments and related liabilities are normally held for periods less than six months. See Note 12. F-24 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OTHER INVESTED ASSETS Other invested assets are composed of the following: -------------------------------------------------------------------------- ($ IN MILLIONS) 2002 2001 -------------------------------------------------------------------------- Investment in Citigroup preferred stock $3,212 $987 Partnership investments 1,269 949 Real estate joint ventures 390 520 Other 38 29 -------------------------------------------------------------------------- Total $4,909 $2,485 -------------------------------------------------------------------------- CONCENTRATIONS At December 31, 2002 and 2001, the Company had an investment in Citigroup Preferred Stock of $3.2 billion and $987 million, respectively. See Note 14. The Company maintains a short-term investment pool for its insurance affiliates in which the Company also participates. See Note 14. The Company had concentrations of investments, excluding those in federal and government agencies, primarily fixed maturities at fair value, in the following industries: -------------------------------------------------------------------------- ($ IN MILLIONS) 2002 2001 -------------------------------------------------------------------------- Electric Utilities $3,979 $3,883 Finance 3,681 1,633 Banking 1,900 1,944 -------------------------------------------------------------------------- The Company held investments in foreign banks in the amount of $869 million and $954 million at December 31, 2002 and 2001, respectively, which are included in the table above. The Company defines its below investment grade assets as those securities rated Ba1 by Moody's Investor Services (or its equivalent) 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 and notes that are classified as below investment grade. Below investment grade assets included in the categories of the preceding table include $878 million and $358 million in Electric Utilities at December 31, 2002 and 2001, respectively, and total below investment grade assets were $3.8 billion and $2.3 billion at December 31, 2002 and 2001, respectively. Included in mortgage loans were the following group concentrations: -------------------------------------------------------------------------- ($ IN MILLIONS) 2002 2001 -------------------------------------------------------------------------- STATE California $788 $788 PROPERTY TYPE Agricultural $1,212 $1,131 F-25 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company monitors creditworthiness of counterparties to all financial instruments by using controls that include credit approvals, credit limits and other monitoring procedures. Collateral for fixed maturities often includes pledges of assets, including stock and other assets, guarantees and letters of credit. The Company's underwriting standards with respect to new mortgage loans generally require loan to value ratios of 75% or less at the time of mortgage origination. NON-INCOME PRODUCING INVESTMENTS Investments included in the consolidated balance sheets that were non-income producing amounted to $58.5 million and $27.7 million at December 31, 2002 and 2001, respectively. RESTRUCTURED INVESTMENTS The Company had mortgage loans and debt securities that were restructured at below market terms at December 31, 2002 and 2001. The balances of the restructured investments were insignificant. The new terms typically defer a portion of contract interest payments to varying future periods. Gross interest income on restructured assets that would have been recorded in accordance with the original terms of such loans was insignificant in 2002 and 2001. Interest on these assets, included in net investment income, was also insignificant in 2002 and 2001. NET INVESTMENT INCOME ----------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000 ($ IN MILLIONS) ----------------------------------------------------------------------------- GROSS INVESTMENT INCOME Fixed maturities $2,359 $2,328 $2,061 Mortgage loans 167 210 223 Trading 9 131 208 Joint ventures and partnerships 203 71 150 Citigroup preferred stock 178 53 53 Other, including policy loans 104 165 184 ----------------------------------------------------------------------------- Total gross investment income 3,020 2,958 2,879 ----------------------------------------------------------------------------- Investment expenses 84 127 149 ----------------------------------------------------------------------------- Net investment income $2,936 $2,831 $2,730 ----------------------------------------------------------------------------- REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) Net realized investment gains (losses) for the periods were as follows: ----------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000 ($ IN MILLIONS) ----------------------------------------------------------------------------- REALIZED INVESTMENT GAINS (LOSSES) Fixed maturities $(207) $207 $(219) Equity securities (15) (99) 91 Mortgage loans -- 5 27 Real estate held for sale 8 3 25 Derivatives (77) 14 -- Other (31) (5) (1) ----------------------------------------------------------------------------- Total realized investment gains (losses) $(322) $125 $(77) ----------------------------------------------------------------------------- F-26 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Changes in net unrealized investment gains (losses) that are reported in accumulated other changes in equity from nonowner sources were as follows: ------------------------------------------------------------------------------ FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000 ($ IN MILLIONS) ------------------------------------------------------------------------------ UNREALIZED INVESTMENT GAINS (LOSSES) Fixed maturities $664 $85 $891 Equity securities 3 40 (132) Other 31 (20) 13 ------------------------------------------------------------------------------ Total unrealized investment gains (losses) 698 105 772 ------------------------------------------------------------------------------ Related taxes 243 37 271 ------------------------------------------------------------------------------ Change in unrealized investment gains (losses) 455 68 501 Balance beginning of year 171 103 (398) ------------------------------------------------------------------------------ Balance end of year $626 $171 $103 ------------------------------------------------------------------------------ 5. REINSURANCE Reinsurance is used 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 yearly renewable term coinsurance and modified coinsurance. Reinsurance involves credit risk and the Company monitors the financial condition of these reinsurers on an ongoing basis. The Company remains primarily liable as the direct insurer on all risks reinsured. Since 1997 universal life business has been reinsured under an 80%/20% quota share reinsurance program and term life business has been reinsured under a 90%/10% quota share reinsurance program. Maximum retention of $2.5 million is generally reached on policies in excess of $12.5 million for universal life, and in excess of $25.0 million for term insurance. For other plans of insurance, it is the policy of the Company to obtain reinsurance for amounts above certain retention limits on individual life policies, which limits vary with age and underwriting classification. Generally, the maximum retention on an ordinary life risk is $2.5 million. Total in-force business ceded under reinsurance contracts is $321.9 billion and $285.7 billion at December 31, 2002 and 2001. Effective July 1, 2000 the Company sold 90% of its individual long-term care insurance business to General Electric Capital Assurance Company and its subsidiary in the form of indemnity reinsurance arrangements. Written premiums ceded per these arrangements were $231.8 million and $233.3 million in 2002 and 2001, respectively, and earned premiums ceded were $233.8 million and $240.1 million in 2002 and 2001, respectively. The Company also reinsures the guaranteed minimum death benefit (GMDB) on its variable annuity product. Total variable annuity account balances with GMDB is $19.1 billion, of which $12.4 billion or 65% is reinsured at December 31, 2002. GMDB is payable upon the death of a contractholder. When the benefit payable is greater than the account value of the variable annuity, the difference is called the net amount at risk (NAR). NAR totals $4.6 billion at December 31, 2002, of which $3.8 billion or 82% is reinsured. During 2002, substantially all new contracts written were not reinsured. Through TIC, the Company writes workers' compensation business. This business is reinsured through a 100% quota-share agreement with the insurance subsidiaries of TPC. F-27 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of reinsurance financial data reflected within the consolidated statements of income and balance sheets is presented below ($ in millions): FOR THE YEARS ENDING DECEMBER 31, WRITTEN PREMIUMS 2002 2001 2000 - ------------------------------------------------------------------------------- Direct $ 2,610 $ 2,848 $ 2,634 Assumed from: Non-affiliated companies -- 1 -- Ceded to: Travelers Indemnity Company (83) (146) (195) Non-affiliated companies (614) (591) (465) - ------------------------------------------------------------------------------- Total Net Written Premiums $ 1,913 $ 2,112 $ 1,974 =============================================================================== EARNED PREMIUMS 2002 2001 2000 - ------------------------------------------------------------------------------- Direct $ 2,652 $ 2,879 $ 2,644 Assumed from: Non-affiliated companies -- 1 -- Ceded to: Travelers Indemnity Company (109) (180) (216) Non-affiliated companies (619) (598) (462) - ------------------------------------------------------------------------------- Total Net Earned Premiums $ 1,924 $ 2,102 $ 1,966 =============================================================================== Travelers Indemnity Company was an affiliate in 2001, 2000 and for part of 2002. See Note 15. Reinsurance recoverables at December 31, 2002 and 2001 include amounts recoverable on unpaid and paid losses and were as follows ($ in millions): REINSURANCE RECOVERABLES 2002 2001 ----------------------------------------------------------------------------- Life and Accident and Health Business: Non-affiliated companies $2,589 $2,282 Property-Casualty Business: Travelers Indemnity Company 1,712 1,881 ----------------------------------------------------------------------------- Total Reinsurance Recoverables $4,301 $4,163 ============================================================================= Reinsurance recoverables for the life and accident and health business include $1,351 million and $1,060 million from General Electric Capital Assurance Company, and also include $472 million and $500 million, from The Metropolitan Life Insurance Company at December 31, 2002 and 2001, respectively. 6. DEFERRED ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE The Company has two intangible, amortizable assets, DAC and the value of insurance in force. The following is a summary of capitalized DAC by type. F-28 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred & Payout UL & Traditional Life IN MILLIONS OF DOLLARS Annuities COLI & Other Total ------------------------------------------------------------------------------- ------------------------------------------------- Balance December 31, 2000 $ 896 $299 $1,794 $2,989 ------------------------------------------------- Deferred expenses and other 385 142 324 851 Amortization expense (144) (11) (224) (379) ------------------------------------------------- Balance December 31, 2001 1,137 430 1,894 3,461 Deferred expenses and other 348 172 348 868 Amortization expense (132) (24) (237) (393) ------------------------------------------------- Balance December 31, 2002 $1,353 $578 $2,005 $3,936 ------------------------------------------------------------------------------- The value of insurance in force totaled $130 milllion and $144 million at December 31, 2002 and 2001, respectively, and is included in other assets. Amortization expense on the value of insurance in force was $25 million and $26 million for the twelve months ended December 31, 2002 and 2001, respectively. Amortization expense related to the value of insurance in force is estimated to be $20 million in 2003, $18 million in 2004, $16 million in 2005, $13 million in 2006 and $12 million in 2007. In 2002 there was an opening balance sheet reclassification between DAC and the value of insurance in force in the amount of $11 million. This had no impact on results of operations or shareholder's equity. 7. DEPOSIT FUNDS AND RESERVES At December 31, 2002 and 2001, the Company had $38.8 billion and $34.1 billion of life and annuity deposit funds and reserves, respectively. Of that total, $21.8 billion and $19.1 billion is not subject to discretionary withdrawal based on contract terms. The remaining $17.0 billion and $15.0 billion is for life and annuity products that are subject to discretionary withdrawal by the contractholder. Included in the amounts that are subject to discretionary withdrawal is $5.7 billion and $4.2 billion of liabilities that are surrenderable with market value adjustments. Also included are an additional $5.5 billion and $5.0 billion of life insurance and individual annuity liabilities which are subject to discretionary withdrawals, and have an average surrender charge of 4.7% and 4.7%, respectively. In the payout phase, these funds are credited at significantly reduced interest rates. The remaining $5.8 billion and $5.8 billion of liabilities are surrenderable without charge. Approximately 10.0% and 10.2% of these relate to individual life products for 2002 and 2001, respectively. These risks would have to be underwritten again if transferred to another carrier, which is considered a significant deterrent against withdrawal by long-term policyholders. Insurance liabilities that are surrendered or withdrawn are reduced by outstanding policy loans and related accrued interest prior to payout. Included in contractholder funds and in the preceding paragraph are GICs totaling $10.9 billion. The scheduled maturities for these GICs, including interest, are $4.5 billion, $1.5 billion, $1.3 billion, $1.4 billion and $4.0 billion in 2003, 2004, 2005, 2006 and thereafter. These GICs have a weighted average interest rate of 4.81% at December 31, 2002. F-29 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. FEDERAL INCOME TAXES EFFECTIVE TAX RATE ($ IN MILLIONS) --------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000 --------------------------------------------------------------------------- Income before federal income taxes $1,503 $1,911 $1,654 Statutory tax rate 35% 35% 35% --------------------------------------------------------------------------- Expected federal income taxes 526 669 579 Tax effect of: Non-taxable investment income (62) (20) (19) Tax reserve release (43) (18) (12) Other, net -- (1) 3 --------------------------------------------------------------------------- Federal income taxes $421 $630 $551 =========================================================================== Effective tax rate 28% 33% 33% --------------------------------------------------------------------------- COMPOSITION OF FEDERAL INCOME TAXES Current: United States $217 $424 $429 Foreign 19 47 33 --------------------------------------------------------------------------- Total 236 471 462 --------------------------------------------------------------------------- Deferred: United States 182 166 96 Foreign 3 (7) (7) --------------------------------------------------------------------------- Total 185 159 89 --------------------------------------------------------------------------- Federal income taxes $421 $630 $551 =========================================================================== Additional tax benefits (expense) attributable to employee stock plans allocated directly to shareholder's equity for the years ended December 31, 2002, 2001 and 2000 were $(17) million, $21 million and $24 million, respectively. F-30 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The net deferred tax liabilities at December 31, 2002 and 2001 were comprised of the tax effects of temporary differences related to the following assets and liabilities: - -------------------------------------------------------------------------------- ($ IN MILLIONS) 2002 2001 - -------------------------------------------------------------------------------- Deferred Tax Assets: Benefit, reinsurance and other reserves $422 $539 Operating lease reserves 57 62 Employee benefits 199 104 Other 289 158 - -------------------------------------------------------------------------------- Total 967 863 - -------------------------------------------------------------------------------- Deferred Tax Liabilities: Deferred acquisition costs and value of insurance in force (1,097) (968) Investments, net (1,180) (215) Other (138) (89) - -------------------------------------------------------------------------------- Total (2,415) (1,272) - -------------------------------------------------------------------------------- Net Deferred Tax Liability $(1,448) $(409) - -------------------------------------------------------------------------------- The Company and its subsidiaries file a consolidated federal income tax return with Citigroup Inc. Federal income taxes are allocated to each member of the consolidated group, according to the Tax Sharing Agreement, on a separate return basis adjusted for credits and other amounts required by the Agreement. At December 31, 2002 and 2001, the Company had no ordinary or capital loss carryforwards. The policyholders' surplus account, which arose under prior tax law, is generally that portion of the gain from operations that has not been subjected to tax, plus certain deductions. The balance of this account is approximately $932 million. Income taxes are not provided for on this amount because under current U.S. tax rules such taxes will become payable only to the extent such amounts are distributed as a dividend or exceed limits prescribed by federal law. Distributions are not currently contemplated from this account. At current rates the maximum amount of such tax would be approximately $326 million. F-31 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SHAREHOLDER'S EQUITY SHAREHOLDER'S EQUITY AND DIVIDEND AVAILABILITY The Company's statutory net income, which includes the statutory net income of all insurance subsidiaries, was $256 million, $330 million and $981 million for the years ended December 31, 2002, 2001 and 2000, respectively. The Company's statutory capital and surplus was $6.9 billion and $5.1 billion at December 31, 2002 and 2001, respectively. Effective January 1, 2001, the Company began preparing its statutory basis financial statements in accordance with the National Association of Insurance Commissioners' ACCOUNTING PRACTICES AND PROCEDURES MANUAL - VERSION EFFECTIVE JANUARY 1, 2001, subject to any deviations prescribed or permitted by its domicilary insurance commissioners (see Note 1, Summary of Significant Accounting Policies, Permitted Statutory Accounting Practices). The impact of this change on the Company's statutory capital and surplus was not significant. The impact of this change on statutory net income was $119 million in 2001, related to recording equity method investment earnings as unrealized gains versus net investment income. 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. A maximum of $966 million is available by the end of the year 2003 for such dividends without prior approval of the State of Connecticut Insurance Department, depending upon the amount and timing of the payments. TLAC may not pay a dividend to TIC without such approval. Primerica Life may pay up to $148 million to TIC in 2003 without prior approval of the Massachusetts Insurance Department. The Company paid dividends of $586 million, $472 million and $860 million in 2002, 2001 and 2000, respectively. In connection with the TPC IPO and distribution, the Company's additional paid-in capital increased $1,596 million during 2002 as follows: ($ IN MILLIONS) --------------- Citigroup Series YYY Preferred Stock $2,225 TLA Holdings LLC 142 Cash and other assets 189 Pension, post-retirement, and post- employment benefits payable (279) Deferred tax assets 98 Deferred tax liabilities (779) ------ $1,596 See Note 15. F-32 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. SHAREHOLDER'S EQUITY (CONTINUED) Accumulated Other Changes in Equity from Nonowner Sources, Net of Tax Changes in each component of Accumulated Other Changes in Equity from Nonowner Sources were as follows: NET UNREALIZED ACCUMULATED OTHER GAIN (LOSS) ON FOREIGN CURRENCY DERIVATIVE CHANGES IN EQUITY ($ IN MILLIONS) INVESTMENT TRANSLATION INSTRUMENTS AND FROM NONOWNER SECURITIES ADJUSTMENTS HEDGING ACTIVITIES SOURCES - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 $(397) $ (1) $ -- $(398) Unrealized gains on investment securities, net of tax of $297 451 -- -- 451 Reclassification adjustment for losses included in net income, net of tax of $(27) 50 -- -- 50 Foreign currency translation adjustment, net of tax of $1 -- 1 -- 1 - ----------------------------------------------------------------------------------------------------------------------------- PERIOD CHANGE 501 1 -- 502 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 104 -- -- 104 Cumulative effect of change in accounting for derivative instruments and hedging activities, net of tax of $(16) 14 -- (43) (29) Unrealized gains on investment securities, net of tax of $80 149 -- -- 149 Reclassification adjustment for gains included in net income, net of tax of $44 (81) -- -- (81) Foreign currency translation adjustment, net of tax of $(2) -- (3) -- (3) Derivative instrument hedging activity losses, net of tax of $(35) -- -- (66) (66) - ----------------------------------------------------------------------------------------------------------------------------- PERIOD CHANGE 82 (3) (109) (30) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 186 (3) (109) 74 Unrealized gains on investment securities, net of tax of $132 246 -- -- 246 Reclassification adjustment for losses included in net income, net of tax of $(113) 209 -- -- 209 Foreign currency translation adjustment, net of tax of $2 -- 3 -- 3 Derivative instrument hedging activity losses, net of tax of $(42) -- -- (78) (78) - ----------------------------------------------------------------------------------------------------------------------------- PERIOD CHANGE 455 3 (78) 380 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2002 $ 641 $ -- $(187) $ 454 - ----------------------------------------------------------------------------------------------------------------------------- F-33 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. BENEFIT PLANS PENSION AND OTHER POSTRETIREMENT BENEFITS The Company participates in a qualified, noncontributory defined benefit pension plan sponsored by Citigroup. The Company's share of the expense related to this plan was insignificant in 2002, 2001 and 2000. The Company also participates in a non-qualified, noncontributory defined benefit pension plan sponsored by Citigroup. During 2002, the Company assumed TPC's share of the non-qualified pension plan related to inactive employees of the former Travelers Insurance entities as part of the TPC spin-off. The Company's share of net expense for this plan was $10 million in 2002, and insignificant in 2001 and 2000. In addition, the Company provides certain other postretirement benefits to retired employees through a plan sponsored by Citigroup. The Company assumed TPC's share of the postretirement benefits related to inactive employees of the former Travelers Insurance entities during 2002 as part of the TPC spin-off. The Company's share of net expense for the other postretirement benefit plans was $18 million in 2002 and not significant for 2001 and 2000. 401(k) SAVINGS PLAN Substantially all of the Company's employees are eligible to participate in a 401(k) savings plan sponsored by Citigroup. The Company's expenses in connection with the 401(k) savings plan were not significant in 2002, 2001 and 2000. See Note 14. 11. LEASES Most leasing functions for the company are administered by a Citigroup subsidiary at December 31, 2002. Net rent expense for the Company was $24 million, $26 million, and $26 million in 2002, 2001 and 2000, respectively. - -------------------------------------------------------------------------------- YEAR ENDING DECEMBER 31, MINIMUM OPERATING MINIMUM CAPITAL ($ IN MILLIONS) RENTAL PAYMENTS RENTAL PAYMENTS - -------------------------------------------------------------------------------- 2003 $ 43 $ 5 2004 42 5 2005 47 5 2006 54 5 2007 54 6 Thereafter 131 24 - -------------------------------------------------------------------------------- Total Rental Payments $371 $50 ================================================================================ Future sublease rental income of approximately $66 million will partially offset these commitments. Also, the Company will be reimbursed for 50% of the rental expense for a particular lease, totaling $164 million, by an affiliate. F-34 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments, including financial futures contracts, swaps, options and forward contracts, as a means of hedging exposure to interest rate changes, equity price changes and foreign currency risk. The Company also uses derivative financial instruments to enhance portfolio income and replicate cash market investments. The Company, through Tribeca Citigroup Investments Ltd., holds and issues derivative instruments in conjunction with these funding strategies. The Company uses exchange traded financial futures contracts to manage its exposure to changes in interest rates that arise from the sale of certain insurance and investment products, or the need to reinvest proceeds from the sale or maturity of investments. To hedge against adverse changes in interest rates, the Company enters long or short positions in financial futures contracts, which offset asset price changes resulting from changes in market interest rates until an investment is purchased, or a product is sold. Futures contracts are commitments to buy or sell at a future date a financial instrument, at a contracted price, and may be settled in cash or through delivery. The Company uses equity option contracts to manage its exposure to changes in equity market prices that arise from the sale of certain insurance products. To hedge against adverse changes in the equity market prices, the Company enters long positions in equity option contracts with major financial institutions. These contracts allow the Company, for a fee, the right to receive a payment if the Standard and Poor's 500 Index falls below agreed upon strike prices. Currency option contracts are used on an ongoing basis to hedge the Company's exposure to foreign currency exchange rates that result from the Company's direct foreign currency investments. To hedge against adverse changes in exchange rates, the Company enters contracts that give it the right, but not the obligation, to sell the foreign currency within a limited time at a contracted price that may also be settled in cash, based on differentials in the foreign exchange rate. These contracts cannot be settled prior to maturity. The Company enters into interest rate swaps in connection with other financial instruments to provide greater risk diversification and better match assets and liabilities. 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 upon notional principal amount. The Company also enters into basis swaps in which both legs of the swap are floating with each based on a different index. 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. The Company enters into currency swaps in connection with other financial instruments to provide greater risk diversification and better match assets purchased in U.S. Dollars with a corresponding liability originated in a foreign currency. Under currency swaps, the Company agrees with other parties to exchange, at specified intervals, foreign currency for U.S. Dollars. Generally, there is an exchange of foreign currency for U.S. Dollars at the outset of the contract based upon prevailing foreign exchange rates. Swap agreements are not exchange traded so they are subject to the risk of default by the counterparty. F-35 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Forward contracts are used on an ongoing basis to hedge the Company's exposure to foreign currency exchange rates that result from the net investment in the Company's Canadian Operations as well as direct foreign currency investments. To hedge against adverse changes in exchange rates, the Company enters into contracts to exchange foreign currency for U.S. Dollars with major financial institutions. These contracts cannot be settled prior to maturity. At the maturity date the Company must purchase the foreign currency necessary to settle the contracts. The Company enters into credit default swaps in conjunction with a fixed income investment to reproduce the investment characteristics of a different permissible investment. Under credit default swaps, the Company agrees with other parties to receive, at specified intervals, fixed or floating rate interest amounts calculated by reference to an agreed notional principal amount in exchange for the credit default risk of a specified bond. Swap agreements are not exchange traded so they are subject to the risk of default by the counterparty. The Company monitors the 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, credit limits and other monitoring procedures. The following table summarizes certain information related to the Company's hedging activities for the years ended December 31, 2002 and 2001: Year Ended Year Ended In millions of dollars December 31, 2002 December 31, 2001 ----------------------------------------------------------------------------- Hedge ineffectiveness recognized related to fair value hedges $(18.3) $(4.1) Hedge ineffectiveness recognized related to cash flow hedges 14.8 (6.2) Net gain recorded in accumulated other changes in equity from nonowner sources related to net investment hedges (8.4) 0.8 During the year ended December 31, 2002 the Company recorded a gain of $.3 million from discontinued forecasted transactions. During the year ended December 31, 2001 there were no discontinued forecasted transactions. The amount expected to be reclassified from accumulated other changes in equity from nonowner sources into pre-tax earnings within twelve months from December 31, 2002 is $(27.2) million. In 2000, these derivative financial instruments were treated as off-balance sheet instruments. 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 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 of cash flow associated with these instruments can be less than these amounts. For swaps, options and forward contracts, credit risk is limited to the amount that it would cost the Company to replace the contracts. Financial futures contracts and purchased listed option contracts have very little credit risk since organized exchanges are the counterparties. F-36 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Company issues fixed and variable rate loan commitments and has unfunded commitments to partnerships. All of these commitments are to unaffiliated entities. The off-balance sheet risk of fixed and variable rate loan commitments was $240.9 million and $212.2 million at December 31, 2002 and 2001, respectively. The Company had unfunded commitments of $630.0 million and $661.5 million to these partnerships at December 31, 2002 and 2001, respectively. FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS The Company uses various financial instruments in the normal course of its business. Certain insurance contracts are excluded by Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments," and therefore are not included in the amounts discussed. At December 31, 2002 and 2001, investments in fixed maturities had a carrying value and a fair value of $36.4 billion and $32.1 billion, respectively. See Notes 1 and 4. At December 31, 2002, mortgage loans had a carrying value of $2.0 billion and a fair value of $2.2 billion and at year-end 2001 had a carrying value of $2.0 billion and a fair value of $2.1 billion. In estimating fair value, the Company used interest rates reflecting the current real estate financing market. Included in other invested assets are 2,225 shares of Citigroup Cumulative Preferred Stock Series YYY, carried at cost of $2,225 million at December 31, 2002, acquired as a contribution from TPC. This Series YYY preferred stock pays cumulative dividends at 6.767%, has a liquidation value of $1 million per share and has perpetual duration, is not subject to a sinking fund or mandatory redemption but may be optionally redeemed by Citigroup at any time on or after February 27, 2022. Dividends totaling $125 million were received in 2002. There is no established market for this investment and it is not practicable to estimate the fair value of the preferred stock. Included in other invested assets are 987 shares of Citigroup Cumulative Preferred Stock Series YY, carried at cost of $987 million at December 31, 2002 and 2001. This series YY preferred stock pays cumulative dividends at 5.321%, has a liquidation value of $1 million per share, and has perpetual duration, is not subject to a sinking fund or mandatory redemption but may be optionally redeemed by Citigroup at any time on or after December 22, 2018. Dividends totaling $53 million were received during 2002, 2001 and 2000, respectively. There is no established market for this investment and it is not practicable to estimate the fair value of the preferred stock. At December 31, 2002, contractholder funds with defined maturities had a carrying value of $12.5 billion and a fair value of $13.3 billion, compared with a carrying value and a fair value of $9.5 billion and $10.0 billion at December 31, 2001. 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 $11.1 billion and a fair value of $10.7 billion at December 31, 2002, compared with a carrying value of $10.6 billion and a fair value of $10.3 billion at December 31, 2001. These contracts generally are valued at surrender value. The carrying values of $321 million and $495 million of financial instruments classified as other assets approximated their fair values at December 31, 2002 and 2001, respectively. The carrying value of $1.5 billion of financial instruments classified as other liabilities at both December 31, 2002 and 2001 also approximated their fair values at both December 31, 2002 and 2001. Fair value is determined using various methods, including discounted cash flows, as appropriate for the various financial instruments. F-37 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The assets of separate accounts providing a guaranteed return had a carrying value and a fair value of $511 million at December 31, 2002, compared with a carrying value and a fair value of $507 million at December 31, 2001. The liabilities of separate accounts providing a guaranteed return had a carrying value and a fair value of $511 million at December 31, 2002, compared with a carrying value and a fair value of $507 million at December 31, 2001. The carrying values of cash, trading securities and trading securities sold not yet purchased are carried at fair value. The carrying values of short-term securities and investment income accrued approximated their fair values. The carrying value of policy loans, which have no defined maturities, is considered to be fair value. 13. COMMITMENTS AND CONTINGENCIES LITIGATION TIC and its subsidiaries are defendants or co-defendants in various litigation matters in the normal course of business. These include civil actions, arbitration proceedings and other matters arising in the normal course of business out of activities as an insurance company, a broker and dealer in securities or otherwise. In the opinion of the Company's management, the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on the Company's results of operations, financial condition or liquidity. 14. RELATED PARTY TRANSACTIONS Citigroup and certain of its subsidiaries provide investment management and accounting services, payroll, internal auditing, benefit management and administration, property management and investment technology services to the Company as of December 31, 2002. At December 31, 2001 the majority of these services were provided by either Citigroup and its subsidiaries or TPC. The Company paid Citigroup and its subsidiaries $56.9 million and $43.6 million in 2002 and 2001, respectively, for these services. The Company paid TPC $33.6 million and $30.0 million in 2002 and 2001, respectively, for these services. The amounts due from affiliates related to these services, included in other assets at December 31, 2002, were insignificant and in 2001 were $88.2 million. See Note 15. The Company maintains a short-term investment pool in which its insurance affiliates participate. The position of each company participating in the pool is calculated and adjusted daily. At December 31, 2002 and 2001, the pool totaled approximately $4.2 billion and $5.6 billion, respectively. The Company's share of the pool amounted to $3.8 billion and $2.6 billion at December 31, 2002 and 2001, respectively, and is included in short-term securities in the consolidated balance sheets. F-38 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2002 and 2001 the Company had outstanding loaned securities to SSB for $267.1 million and $413.5 million, respectively. Included in other invested assets is a $3.2 billion and $987 million investment in Citigroup preferred stock at December 31, 2002 and 2001, respectively, carried at cost. Dividends received on these investments were $178 million in 2002, and $53 million in each of 2001 and 2000. The Company had investments in an affiliated joint venture, Tishman Speyer, in the amount of $186.1 million and $310.9 million at December 31, 2002 and 2001, respectively. Income of $99.7 million, $65.5 million and $67.0 million was earned on these investments in 2002, 2001 and 2000, respectively. The Company also had an investment in Greenwich Street Capital Partners I, an affiliated private equity investment, in the amount of $21.6 million at both December 31, 2002 and 2001. Income (loss) of $0, $(41.6) million and $8.1 million were earned on this investment in 2002, 2001 and 2000, respectively. In the ordinary course of business, the Company purchases and sells securities through affiliated broker-dealers. These transactions are conducted on an arm's-length basis. The Company markets deferred annuity products and life insurance through its affiliate, Salomon Smith Barney (SSB). Annuity deposits related to these products were $1.0 billion, $1.5 billion, and $1.8 billion in 2002, 2001 and 2000, respectively. Life premiums were $109.7 million, $96.5 million and $77.0 million in 2002, 2001 and 2000, respectively. The Company also markets individual annuity and life insurance through CitiStreet Retirement Services LLC, a division of CitiStreet, a joint venture between Citigroup and State Street Bank. Deposits received from CitiStreet Retirement Services, LLC were $1.6 billion in each of 2002 and 2001 and $1.8 billion in 2000. The Company markets individual annuity products through an affiliate Citibank, N.A. (Citibank). Deposits received from Citibank were $303 million, $564 million and $392 million in 2002, 2001 and 2000, respectively. Primerica Financial Services (PFS), an affiliate, is a distributor of products for TLA. PFS sold $787 million, $901 million and $1.03 billion of individual annuities in 2002, 2001 and 2000, respectively. Primerica Life has entered into a General Agency Agreement with PFS that provides that PFS will be Primerica Life's general agent for marketing all insurance of Primerica Life. In consideration of such services, Primerica Life agreed to pay PFS marketing fees of no less than $10 million per year based upon U.S. gross direct premiums received by Primerica Life. In each of 2002, 2001, and 2000 the fees paid by Primerica Life were $12.5 million. The Company sells structured settlement annuities to the property casualty subsidiaries of TPC. See Note 15. F-39 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company participates in a stock option plan sponsored by Citigroup that provides for the granting of stock options in Citigroup common stock to officers and other employees. To further encourage employee stock ownership, Citigroup introduced the WealthBuilder stock option program during 1997 and the Citigroup Ownership Program in 2001. Under these programs, all employees meeting established requirements have been granted Citigroup stock options. During 2000 and 2001, Citigroup introduced the Citigroup 2000 Stock Purchase Plan and Citigroup 2001 Stock Purchase Program for new employees, which allowed eligible employees of Citigroup, including the Company's employees, to enter into fixed subscription agreements to purchase shares at the market value on the date of the agreements. Enrolled employees are permitted to make one purchase prior to the expiration date. The Company's charge to income for these plans was insignificant in 2002, 2001 and 2000. The Company also participates in the Citigroup Capital Accumulation Program. Participating officers and other employees receive a restricted stock award in the form of Citigroup common stock. These restricted stock awards generally vest after a three-year period and, except under limited circumstances, the stock can not be sold or transferred during the restricted period by the participant, who is required to render service to the Company during the restricted period. The Company's charge to income for this program was insignificant in 2002, 2001 and 2000. Unearned compensation expense associated with the Citigroup restricted common stock grants, which represents the market value of Citigroup's common stock at the date of grant, is included with other assets in the Consolidated Balance Sheet and is recognized as a charge to income ratably over the vesting period. The Company's charge to income was insignificant during 2002, 2001 and 2000. The Company applies Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations in accounting for stock options. Since stock options under the Citigroup plans are issued at fair market value on the date of award, no compensation cost has been recognized for these awards. FAS 123 provides an alternative to APB 25 whereby fair values may be ascribed to options using a valuation model and amortized to compensation cost over the vesting period of the options. F-40 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. TRAVELERS PROPERTY CASUALTY SPIN-OFF On March 27, 2002, Travelers Property Casualty Corp. (TPC), the Company's parent at December 31, 2001, completed its initial public offering (IPO). On August 20, 2002, Citigroup made a tax-free distribution to its stockholders of a majority portion of its remaining interest in TPC. Prior to the IPO the following transactions occurred: o The common stock of the Company was distributed by TPC to CIHC so the Company would remain an indirect wholly owned subsidiary of Citigroup. o The Company sold its home office buildings in Hartford, Connecticut and a building housing TPC's information systems in Norcross, Georgia to TPC for $68 million. o TLA Holdings LLC, a non-insurance subsidiary valued at $142 million, was contributed to the Company by TPC. o The Company assumed pension, post-retirement and post-employment benefits payable to all inactive employees of the former Travelers Insurance entities and received $189 million of cash and other assets from TPC to offset these benefit liabilities. o The Company received 2,225 shares of Citigroup's 6.767% Cumulative Preferred Stock, Series YYY, with a par value of $1.00 per share and a liquidation value of $1 million per share as a contribution from TPC. At December 31, 2001, TPC and its subsidiaries were affiliates of the Company and provided certain services to the Company. These services included data processing, facilities management, banking and financial functions, benefits administration and others. During 2002, the Company began phasing out these services. At December 31, 2002, the Company still receives certain services from TPC on a contract basis. The Company paid TPC $33.6 million and $30.0 million in 2002 and 2001, respectively, for these services. The Company sells structured settlement annuities to the property casualty insurance subsidiaries of TPC. Such premiums and deposits were $159 million, $194 million and $191 million for 2002, 2001 and 2000, respectively. The Company has a license from TPC to use the names "Travelers Life & Annuity," "The Travelers Insurance Company," "The Travelers Life and Annuity Company" and related names in connection with the Company's business. F-41 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES The following table reconciles net income to net cash provided by operating activities: - ----------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000 ($ IN MILLIONS) - ----------------------------------------------------------------------------------------- Net Income $ 1,082 $ 1,281 $ 1,103 Adjustments to reconcile net income to net cash provided by operating activities: Realized (gains) losses 322 (125) 77 Deferred federal income taxes 185 159 89 Amortization of deferred policy acquisition costs 393 379 347 Additions to deferred policy acquisition costs (878) (851) (792) Investment income (119) (493) (384) Premium balances (7) 7 20 Insurance reserves and accrued expenses 493 686 559 Other (403) 237 221 - ---------------------------------------------------------------------------------------- Net cash provided by operations $ 1,068 $ 1,280 $ 1,240 - ---------------------------------------------------------------------------------------- 17. NON-CASH INVESTING AND FINANCING ACTIVITIES Significant non-cash investing and financing activities include the contribution of $2,225 million of Citigroup YYY preferred stock and related deferred tax liability of $779 million; a $17 million COLI asset and $98 million deferred tax asset related to the transfer of $279 million of pension and postretirement benefits, transferred for $172 million cash; and the contribution of a non-insurance company, TLA Holdings, LLC, for $142 million. F-42 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGE The Travelers Insurance Company and Subsidiaries Independent Auditors' Report F-1 Consolidated Statements of Income F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Changes In Shareholder's Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 Independent Auditors' Report F-44 Schedule I - Summary of Investments - Other than Investments in Related Parties 2002 F-45 Schedule III - Supplementary Insurance Information 2000-2002 F-46 Schedule IV - Reinsurance 2000-2002 F-47 All other schedules are inapplicable for this filing. F-43 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholder The Travelers Insurance Company: Under date of January 21, 2003, we reported on the consolidated balance sheets of The Travelers Insurance Company and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in shareholder's equity, and cash flows for each of the years in the three-year period ended December 31, 2002, which are included in this Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002, and its methods of accounting for derivative instruments and hedging activities and for securitized financial assets in 2001. /s/ KPMG LLP Hartford, Connecticut January 21, 2003 F-44 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE I SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2002 ($ IN MILLIONS) - ------------------------------------------------------------------------------------------------------ TYPE OF INVESTMENT AMOUNT SHOWN IN COST VALUE BALANCE SHEET(1) - ------------------------------------------------------------------------------------------------------ Fixed Maturities: Bonds: U.S. Government and government agencies and Authorities $ 6,416 $ 6,658 $ 6,658 States, municipalities and political subdivisions 297 319 319 Foreign governments 365 393 393 Public utilities 3,261 3,149 3,149 Convertible bonds and bonds with warrants attached 263 269 269 All other corporate bonds 24,679 25,532 25,532 - ------------------------------------------------------------------------------------------------------ Total Bonds 35,281 36,320 36,320 Redeemable preferred stocks 147 114 114 - ------------------------------------------------------------------------------------------------------ Total Fixed Maturities 35,428 36,434 36,434 - ------------------------------------------------------------------------------------------------------ Equity Securities: Common Stocks: Banks, trust and insurance companies 10 10 10 Industrial, miscellaneous and all other 38 40 40 - ------------------------------------------------------------------------------------------------------ Total Common Stocks 48 50 50 Nonredeemable preferred stocks 280 282 282 - ------------------------------------------------------------------------------------------------------ Total Equity Securities 328 332 332 - ------------------------------------------------------------------------------------------------------ Mortgage Loans 1,985 1,985 Real Estate Held For Sale 36 36 Policy Loans 1,168 1,168 Short-Term Securities 4,414 4,414 Trading Securities 1,531 1,531 Other Investments(2,3,4) 1,382 1,382 - ------------------------------------------------------------------------------------------------------ Total Investments $46,272 $47,282 ====================================================================================================== (1) Determined in accordance with methods described in Notes 1 and 4 of the Notes to Consolidated Financial Statements. (2) Excludes $3.2 billion of Citigroup Inc. preferred stock. See Note 14 of Notes to Consolidated Financial Statements. (3) Also excludes $315 million fair value of investment in affiliated partnership interests. (4) Includes derivatives marked to market and recorded at fair value in the balance sheet. F-45 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION ($ IN MILLIONS) - ---------------------------------------------------------------------------------------------------------------------------------- FUTURE POLICY DEFERRED BENEFITS, OTHER POLICY POLICY LOSSES, CLAIMS CLAIMS AND NET BENEFITS, ACQUISITION AND LOSS BENEFITS PREMIUM INVESTMENT CLAIMS AND COSTS EXPENSES(1) PAYABLE REVENUE INCOME LOSSES(2) - ---------------------------------------------------------------------------------------------------------------------------------- 2002 ---- Travelers Life & Annuity $2,043 $37,774 $461 $ 730 $2,646 $2,404 Primerica Life 1,893 3,261 147 1,194 290 527 - ---------------------------------------------------------------------------------------------------------------------------------- Total $3,936 $41,035 $608 $1,924 $2,936 $2,931 ================================================================================================================================== 2001 ---- Travelers Life & Annuity $1,672 $33,475 $368 $ 957 $2,530 $2,534 Primerica Life 1,789 3,044 144 1,145 301 507 - ---------------------------------------------------------------------------------------------------------------------------------- Total $3,461 $36,519 $512 $2,102 $2,831 $3,041 ================================================================================================================================== 2000 ---- Travelers Life & Annuity $1,291 $29,377 $321 $ 860 $2,450 $2,294 Primerica Life 1,698 2,856 140 1,106 280 496 - ---------------------------------------------------------------------------------------------------------------------------------- Total $2,989 $32,233 $461 $1,966 $2,730 $2,790 ================================================================================================================================== - ---------------------------------------------- AMORTIZATION OF DEFERRED POLICY OTHER ACQUISITION OPERATING PREMIUMS COSTS EXPENSES WRITTEN - ---------------------------------------------- $174 $190 $ 729 219 217 1,184 - ---------------------------------------------- $393 $407 $1,913 ============================================== $171 $154 $ 955 208 217 1,157 - ---------------------------------------------- $379 $371 $2,112 ============================================== $166 $233 $ 859 181 230 1,115 - ---------------------------------------------- $347 $463 $1,974 ============================================== (1) Includes contractholder funds. (2) Includes interest credited to contractholders. F-46 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE IV REINSURANCE ($ IN MILLIONS) - -------------------------------------------------------------------------------------------------------- ASSUMED PERCENTAGE CEDED TO FROM OF AMOUNT GROSS OTHER OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET - -------------------------------------------------------------------------------------------------------- 2002 - ---- Life Insurance In Force $549,066 $321,940 $ 3,568 $230,694 1.5% Premiums: Life insurance $ 2,227 377 $ -- $ 1,850 -- Accident and health insurance 316 242 -- 74 -- Property casualty 109 109 -- -- -- -------- -------- -------- -------- ---- Total Premiums $ 2,652 $ 728 $ -- $ 1,924 -- ======== ======== ======== ======== ==== 2001 - ---- Life Insurance In Force $510,457 $285,696 $ 3,636 $228,397 1.6% Premiums: Life insurance $ 2,378 $ 352 $ -- $ 2,026 -- Accident and health insurance 321 246 1 76 -- Property casualty 180 180 -- -- -- -------- -------- -------- -------- ---- Total Premiums $ 2,879 $ 778 $ 1 $ 2,102 -- ======== ======== ======== ======== ==== 2000 - ---- Life Insurance In Force $480,958 $252,498 $ 3,692 $232,152 1.6% Premiums: Life insurance $ 2,106 $ 330 $ -- $ 1,776 -- Accident and health insurance 322 132 -- 190 -- Property casualty 216 216 -- -- -- -------- -------- -------- -------- ---- Total Premiums $ 2,644 $ 678 $ -- $ 1,966 -- ======== ======== ======== ======== ==== F-47 Appendix C The Travelers Insurance Company Un-audited quarterly report on Form 10-Q for the period ended September 30, 2003. THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) ($ IN MILLIONS) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, - ------------------------------------------------------------------------------------------------------------------------------------ 2003 2002 2003 2002 ---- ---- ---- ---- REVENUES Premiums $741 $497 $1,707 $1,457 Net investment income 782 717 2,297 2,142 Realized investment gains (losses) 43 (161) 45 (317) Fee income 158 129 447 414 Other revenues 40 40 96 94 - ------------------------------------------------------------------------------------------------------------------------------------ Total Revenues 1,764 1,222 4,592 3,790 - ------------------------------------------------------------------------------------------------------------------------------------ BENEFITS AND EXPENSES Current and future insurance benefits 683 450 1,537 1,300 Interest credited to contractholders 311 316 933 899 Amortization of deferred acquisition costs 128 97 373 270 General and administrative expenses 115 101 337 296 - ------------------------------------------------------------------------------------------------------------------------------------ Total Benefits and Expenses 1,237 964 3,180 2,765 - ------------------------------------------------------------------------------------------------------------------------------------ Income from operations before federal income taxes 527 258 1,412 1,025 - ------------------------------------------------------------------------------------------------------------------------------------ Federal income taxes 155 61 364 285 - ------------------------------------------------------------------------------------------------------------------------------------ Net Income $372 $197 $1,048 $740 ==================================================================================================================================== See Notes to Condensed Consolidated Financial Statements. 3 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ($ IN MILLIONS) SEPTEMBER 30, 2003 DECEMBER 31, 2002 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Investments (including $2,334 and $2,687 subject to securities lending agreements) $55,923 $50,809 Separate and variable accounts 24,652 21,620 Reinsurance recoverable 4,428 4,301 Deferred acquisition costs 4,244 3,936 Other assets 2,711 2,329 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $91,958 $82,995 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Contractholder funds $29,734 $26,634 Future policy benefits and claims 15,707 15,009 Separate and variable accounts 24,652 21,620 Deferred federal income taxes 2,004 1,448 Other liabilities 6,523 6,649 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 78,620 71,360 - ------------------------------------------------------------------------------------------------------------------------------------ SHAREHOLDER'S EQUITY Common stock, par value $2.50; 40 million shares authorized, issued and outstanding 100 100 Additional paid-in capital 5,444 5,443 Retained earnings 6,406 5,638 Accumulated other changes in equity from nonowner sources 1,388 454 - ------------------------------------------------------------------------------------------------------------------------------------ Total Shareholder's Equity 13,338 11,635 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Shareholder's Equity $91,958 $82,995 ==================================================================================================================================== See Notes to Condensed Consolidated Financial Statements. 4 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED) ($ IN MILLIONS) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of period $100 $100 $100 $100 Changes in common stock - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of period $100 $100 $100 $100 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONAL PAID-IN CAPITAL - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of period $5,444 $5,471 $5,443 $3,869 Stock option tax benefit - - 1 6 Capital contributed by parent - - - 1,596 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of period $5,444 $5,471 $5,444 $5,471 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ RETAINED EARNINGS - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of period $6,151 $5,257 $5,638 $5,142 Net income 372 197 1,048 740 Dividends to parent (117) (158) (280) (586) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of period $6,406 $5,296 $6,406 $5,296 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of period $1,598 $(2) $454 $74 Foreign currency translation, net of tax - 2 2 4 Unrealized gains (losses), net of tax (242) 380 870 300 Derivative instrument hedging activity gains (losses), net of tax 32 (96) 62 (94) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of period $1,388 $284 $1,388 $284 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ SUMMARY OF CHANGES IN EQUITY FROM NONOWNER SOURCES - ------------------------------------------------------------------------------------------------------------------------------------ Net income $372 $197 $1,048 $740 Other changes in equity from nonowner sources (210) 286 934 210 - ------------------------------------------------------------------------------------------------------------------------------------ Total changes in equity from nonowner sources $162 $483 $1,982 $950 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDER'S EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of period $13,293 $10,826 $11,635 $9,185 Changes in nonowner sources 162 483 1,982 950 Dividends (117) (158) (280) (586) Changes in additional paid-in capital - - 1 1,602 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of period $13,338 $11,151 $13,338 $11,151 ==================================================================================================================================== See Notes to Condensed Consolidated Financial Statements. 5 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH (UNAUDITED) ($ IN MILLIONS) NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 - ---------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES $476 $751 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investments Fixed maturities 5,300 3,101 Equity securities 28 19 Mortgage loans 273 161 Proceeds from sales of investments Fixed maturities 9,957 11,484 Equity securities 121 937 Real estate held for sale 5 15 Purchases of investments Fixed maturities (18,249) (17,980) Equity securities (178) (871) Mortgage loans (193) (197) Policy loans, net 20 30 Short-term securities sales, net 45 1,170 Other investment sales (purchases), net 112 (16) Securities transactions in course of settlement, net (543) (1,568) - ---------------------------------------------------------------------------------------------------------- Net cash used in investing activities (3,302) (3,715) - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Contractholder fund deposits 6,647 6,966 Contractholder fund withdrawals (3,588) (3,575) Capital contribution by parent - 172 Dividends to parent company (280) (586) - ---------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 2,779 2,977 - ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (47) 13 Cash at beginning of period 186 146 - ---------------------------------------------------------------------------------------------------------- Cash at end of period $139 $159 ========================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $1 $2 Income taxes paid $305 $265 ========================================================================================================= See Notes to Condensed Consolidated Financial Statements. 6 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The Travelers Insurance Company (TIC, together with its subsidiaries, the Company), is a wholly owned subsidiary of Citigroup Insurance Holding Corporation (CIHC), an indirect wholly owned subsidiary of Citigroup Inc. (Citigroup). Citigroup is a diversified global financial services holding company whose businesses provide a broad range of financial services to consumer and corporate customers around the world. The condensed consolidated financial statements and accompanying condensed footnotes of the Company are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and are unaudited. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and benefits and expenses during the reporting period. Actual results could differ from those estimates. The Company's two reportable business segments are Travelers Life & Annuity and Primerica Life Insurance. The primary insurance entities of the Company are TIC and its subsidiaries The Travelers Life and Annuity Company (TLAC), included in the Travelers Life & Annuity segment, and Primerica Life Insurance Company (Primerica Life) and its subsidiaries, Primerica Life Insurance Company of Canada, CitiLife Financial Limited (CitiLife) and National Benefit Life Insurance Company (NBL), included in the Primerica Life Insurance segment. The condensed consolidated financial statements include the accounts of the insurance entities of the Company and Tribeca Citigroup Investments Ltd., among others, on a fully consolidated basis. In the opinion of management, the interim financial statements reflect all adjustments necessary for a fair presentation of results for the periods reported. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The condensed consolidated balance sheet as of December 31, 2002 was derived from the audited balance sheet included in the Form 10-K. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted. Certain prior year amounts have been reclassified to conform to the 2003 presentation. 2. ACCOUNTING STANDARDS CHANGES IN ACCOUNTING PRINCIPLES CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). The provisions of FIN 46 are to be applied immediately to variable interest entities (VIEs) created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. In October 2003, the FASB announced that the effective date of FIN 46 was deferred from July 1, 2003 to periods ending after December 15, 2003 for VIEs created prior to February 1, 2003. The Company elected to adopt the remaining provisions of FIN 46 in the third quarter of 2003. FIN 46 changes the method of determining whether certain entities, including securitization 7 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) entities, should be included in the Company's consolidated financial statements. An entity is subject to FIN 46 and is called a VIE if it has (1) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) equity investors that cannot make significant decisions about the entity's operations, or that do not absorb the expected losses or receive the expected returns of the entity. All other entities are evaluated for consolidation under Statement of Financial Accounting Standards (SFAS) No. 94, "Consolidation of All Majority-Owned Subsidiaries" (SFAS 94). A VIE is consolidated by its primary beneficiary, which is the party involved with the VIE that absorbs a majority of the expected losses, receives a majority of the expected residual returns, or both. For any VIEs that must be consolidated under FIN 46 that were created before February 1, 2003, the assets, liabilities and noncontrolling interest of the VIE are initially measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46 first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. The implementation of FIN 46 on July 1, 2003 resulted in the consolidation of VIEs increasing both total assets and total liabilities by approximately $407 million. The FASB continues to provide additional guidance on implementing FIN 46 through FASB staff positions. In addition, a draft interpretation of FIN 46 has been issued for comment. As this guidance is finalized, the Company will continue to review the status of VIEs it is involved with. As a result of changes in the guidance, additional VIEs may ultimately be required to be consolidated. See Note 4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003 and did not have a significant impact on the Company's consolidated financial statements. COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires that a liability for costs associated with exit or disposal activities, other than in a business combination, be recognized when the liability is incurred. Previous generally accepted accounting principles provided for the recognition of such costs at the date of management's commitment to an exit plan. In addition, SFAS 146 requires that the liability be measured at fair value and be adjusted for changes in estimated cash flows. The provisions of the new standard are effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not affect the Company's consolidated financial statements. 8 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) STOCK-BASED COMPENSATION On January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), prospectively for all awards granted, modified, or settled after January 1, 2003. The prospective method is one of the adoption methods provided for under SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," issued in December 2002. SFAS 123 requires that compensation cost for all stock awards be calculated and recognized over the service period (generally equal to the vesting period). This compensation cost is determined using option pricing models, intended to estimate the fair value of the awards at the grant date. Similar to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," the alternative method of accounting, an offsetting increase to stockholders' equity under SFAS 123 is recorded equal to the amount of compensation expense charged. Had the Company applied SFAS 123 in accounting for Citigroup stock option plans for all options granted, net income would have been the pro forma amounts indicated below: THIRD QUARTER YEAR-TO-DATE ------------- ------------ IN MILLIONS OF DOLLARS 2003 2002 2003 2002 ---- ---- ---- ---- Compensation expense related to As reported $ 1 $ - $ 1 $ - stock option plans, net of tax Pro forma 2 2 5 7 Net income As reported 372 197 1,048 740 Pro forma 371 195 1,044 733 ACCOUNTING STANDARDS NOT YET ADOPTED ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS In July 2003, Statement of Position 03-01, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" (SOP 03-01) was released. SOP 03-01 provides guidance on accounting and reporting by insurance enterprises for separate account presentation, accounting for an insurer's interest in a separate account, transfers to a separate account, valuation of certain liabilities, contracts with death or other benefit features, contracts that provide annuitization benefits, and sales inducements to contract holders. SOP 03-01 is effective for financial statements for fiscal years beginning after December 15, 2003. The Company is currently evaluating the impact that SOP 03-01 will have on its consolidated financial statements. 3. INVESTMENTS The Company participates in dollar roll repurchase transactions as a way to generate investment income. These transactions involve the sale of mortgage-backed securities with the agreement to repurchase substantially the same securities from the same counterparty. Cash is received from the sale, which is invested in the Company's short-term money market pool. The cash is returned at the end of the roll period when the mortgage-backed securities are repurchased. The Company will generate additional investment income based upon the difference between the sale and repurchase prices. This transaction is recorded as a secured borrowing. The mortgage-backed securities remain recorded as assets. The cash proceeds are reflected in short-term investments and a liability is established to reflect the 9 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Company's obligation to repurchase the securities at the end of the roll period. The collateral amount is classified as Other Liabilities in the condensed consolidated balance sheets and fluctuates based upon the timing of the repayments. The balances were $111 million, $1,012 million and $.5 million at September 30, 2003, June 30, 2003 and December 31, 2002, respectively. 4. VARIABLE INTEREST ENTITIES In January 2003, the FASB released FIN 46, which changes the method of determining whether certain entities, including securitization entities, should be included in the Company's consolidated financial statements. The implementation of FIN 46 encompassed a review of numerous entities to determine the impact of adoption and considerable judgment was used in evaluating whether or not a VIE should be consolidated. The FASB continues to provide additional guidance on implementing FIN 46 through FASB staff positions. In addition, a draft interpretation of FIN 46 has been issued for comment. As this guidance is finalized, the Company will continue to review the status of VIEs it is involved with. As a result of changes in the guidance, additional VIEs may ultimately be required to be consolidated. The following table represents the carrying amounts and classification of consolidated assets that are collateral for VIE obligations. The assets in this table represent two investment vehicles that the Company was involved with prior to February 1, 2003. These two VIEs are a collateralized debt obligation and a real estate joint venture: IN MILLIONS OF DOLLARS SEPTEMBER 30, 2003 ------------------------------------------------------------------ Cash $ 3 Investments 396 Other 8 ------------------------------ Total assets of consolidated VIEs $407 ------------------------------------------------------------------ The debt holders of these VIEs have no recourse to the Company. The Company's maximum exposure to loss is limited to its investment of approximately $8 million. The Company regularly becomes involved with VIEs through its investment activities. This involvement is generally restricted to small passive debt and equity investments. In addition to the VIEs that are consolidated in accordance with FIN 46, the Company has no significant variable interests in other VIEs that are not consolidated because the Company is not the primary beneficiary. 10 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. OPERATING SEGMENTS The Company has two reportable business segments that are separately managed due to differences in products, services, marketing strategy and resource management. The business of each segment is maintained and reported through separate legal entities within the Company. The management groups of each segment report separately to the Company's ultimate parent, Citigroup. TRAVELERS LIFE & ANNUITY (TLA) core offerings include individual annuity, individual life, corporate owned life insurance (COLI) and group annuity insurance products distributed by TIC and TLAC principally under the Travelers Life & Annuity name. Among the range of individual products offered are fixed and variable deferred annuities, payout annuities and term, universal and variable life insurance. The COLI product is a variable universal life product distributed through independent specialty brokers. The group products include institutional pensions, including guaranteed investment contracts, payout annuities, group annuities sold to employer-sponsored retirement and savings plans, structured settlements and funding agreements. The majority of the annuity business and a substantial portion of the life business written by TLA are accounted for as investment contracts, with the result that the deposits collected are reported as liabilities and are not included in revenues. The PRIMERICA LIFE INSURANCE business segment consolidates primarily the business of Primerica Life, Primerica Life Insurance Company of Canada, CitiLife and NBL. The Primerica Life Insurance business segment offers individual life products, primarily term insurance, to customers through a sales force of approximately 107,000 agents. A great majority of the domestic licensed sales force works on a part-time basis. NBL also provides statutory disability benefit insurance and other insurance, primarily in New York, as well as direct response student term life insurance nationwide. CitiLife was established in September 2000 to underwrite insurance in Europe. 11 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) BUSINESS SEGMENT INFORMATION: - --------------------------------------------------------------------------------------------------------------------- AT AND FOR THE THREE MONTHS ENDED TRAVELERS LIFE PRIMERICA LIFE SEPTEMBER 30, 2003 ($ IN MILLIONS) & ANNUITY INSURANCE TOTAL - --------------------------------------------------------------------------------------------------------------------- Premiums $428 $313 $741 Net investment income 706 76 782 Interest credited to contractholders 311 - 311 Amortization of deferred acquisition costs 68 60 128 Total expenditures for deferred acquisition costs 156 90 246 Federal income taxes 100 55 155 Net income $265 $107 $372 Segment assets $82,746 $9,212 $91,958 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- AT AND FOR THE THREE MONTHS ENDED TRAVELERS LIFE PRIMERICA LIFE SEPTEMBER 30, 2002 ($ IN MILLIONS) & ANNUITY INSURANCE TOTAL - --------------------------------------------------------------------------------------------------------------------- Premiums $197 $300 $497 Net investment income 645 72 717 Interest credited to contractholders 316 - 316 Amortization of deferred acquisition costs 41 56 97 Total expenditures for deferred acquisition costs 132 74 206 Federal income taxes 12 49 61 Net income $101 $96 $197 Segment assets $71,266 $8,369 $79,635 - --------------------------------------------------------------------------------------------------------------------- The majority of the annuity business and a substantial portion of the life business written by TLA are accounted for as investment contracts, with the result that the deposits collected are reported as liabilities and are not included in revenues. Deposits represent a statistic integral to managing TLA operations, which management uses for measuring business volumes, and may not be comparable to similarly captioned measurements used by other life insurance companies. For the three months ended September 30, 2003 and 2002, deposits collected amounted to $3.5 billion and $2.7 billion, respectively. 12 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) BUSINESS SEGMENT INFORMATION: - --------------------------------------------------------------------------------------------------------------------- FOR THE NINE MONTHS ENDED TRAVELERS LIFE PRIMERICA LIFE SEPTEMBER 30, 2003 ($ IN MILLIONS) & ANNUITY INSURANCE TOTAL - --------------------------------------------------------------------------------------------------------------------- Premiums $780 $927 $1,707 Net investment income 2,065 232 2,297 Interest credited to contractholders 933 - 933 Amortization of deferred acquisition costs 200 173 373 Total expenditures for deferred acquisition costs 406 276 682 Federal income taxes 197 167 364 Net income $725 $323 $1,048 Segment assets $82,746 $9,212 $91,958 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- FOR THE NINE MONTHS ENDED TRAVELERS LIFE PRIMERICA LIFE SEPTEMBER 30, 2002 ($ IN MILLIONS) & ANNUITY INSURANCE TOTAL - --------------------------------------------------------------------------------------------------------------------- Premiums $567 $890 $1,457 Net investment income 1,927 215 2,142 Interest credited to contractholders 899 - 899 Amortization of deferred acquisition costs 106 164 270 Total expenditures for deferred acquisition costs 426 236 662 Federal income taxes 135 150 285 Net income $448 $292 $740 Segment assets $71,266 $8,369 $79,635 - --------------------------------------------------------------------------------------------------------------------- The majority of the annuity business and a substantial portion of the life business written by TLA are accounted for as investment contracts, with the result that the deposits collected are reported as liabilities and are not included in revenues. Deposits represent a statistic integral to managing TLA operations, which management uses for measuring business volumes, and may not be comparable to similarly captioned measurements used by other life insurance companies. For the nine months ended September 30, 2003 and 2002, deposits collected amounted to $9.2 billion and $9.7 billion, respectively. 13 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. SHAREHOLDER'S EQUITY Statutory capital and surplus of the Company was $6.9 billion at December 31, 2002. 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. A maximum of $966 million is available by the end of the year 2003 for such dividends without prior approval of the State of Connecticut Insurance Department, depending upon the amount and timing of the payments. TLAC may not pay a dividend to TIC without such approval. Primerica Life may pay up to $148 million in dividends to TIC in 2003 without prior approval of the Massachusetts Insurance Department. Primerica Life paid $88 million and $165 million in dividends to TIC during the nine months ended September 30, 2003 and 2002, respectively. The Company paid $280 million and $586 million in dividends to its parent during the nine months ended September 30, 2003 and 2002, respectively. 7. COMMITMENTS AND CONTINGENCIES The Company is a defendant or co-defendant in various litigation matters in the normal course of business. These include civil actions, arbitration proceedings and other matters arising in the normal course of business out of activities as an insurance company, a broker and dealer in securities or otherwise. In the opinion of the Company's management, the ultimate resolution of these legal proceedings would not be likely to have a material adverse effect on the Company's consolidated results of operations, financial condition or liquidity. The Company is a member of the Federal Home Loan Bank of Boston (the "Bank"), and in this capacity has entered into a funding agreement (the "agreement") with the Bank where a blanket-lien has been granted to collateralize the Bank's deposits. The Company maintains control of these assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The agreement further states that upon any event of default, the Bank's recovery is limited to the amount of the member's outstanding funding agreement. The amount of the Company's liability for funding agreements with the Bank as of September 30, 2003 is $1 billion, included in contractholder funds. 14 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's narrative analysis of the results of operations is presented in lieu of Management's Discussion and Analysis of Financial Condition and Results of Operations, pursuant to General Instruction H(2)(a) of Form 10-Q. The Company's Annual Report on Form 10-K, its quarterly reports on Form 10-Q and any current reports on Form 8-K, and all amendments to these reports, are available on the Citigroup website at http://www.citigroup.com by selecting the "Investor Relations" page and selecting "SEC Filings." CONSOLIDATED OVERVIEW ($ IN MILLIONS) FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 2003 2002 2003 2002 ---- ---- ---- ---- Revenues $1,764 $1,222 $4,592 $3,790 Insurance benefits and interest credited 994 766 2,470 2,199 Operating expenses 243 198 710 566 ------ ------ ------ ------ Income before taxes 527 258 1,412 1,025 Income taxes 155 61 364 285 ------ ------ ------ ------ Net income $ 372 $ 197 $1,048 $ 740 ====== ====== ====== ====== The Travelers Insurance Company (TIC, together with its subsidiaries, the Company), is comprised of two business segments, Travelers Life & Annuity and Primerica Life Insurance. Net income increased 89% to $372 million for the quarter ended September 30, 2003 from $197 million in the prior year quarter, primarily related to increased revenues due to higher investment income, higher individual annuity account balances, group annuity account balances and net written individual life premiums (business volumes) and better after-tax realized investment gain (loss) activity, partially offset by higher deferred acquisition costs (DAC) amortization. Net income included net after-tax realized investment gains of $28 million in the third quarter of 2003, which included after-tax impairment losses of $12 million, compared to net after-tax realized investment losses of $107 million in the third quarter of 2002. The third quarter 2002 losses were primarily related to the impairments of investments in the energy and communications sectors. Net income for the nine months ended September 30, 2003 increased 42% to $1,048 million, from $740 million in the prior year period, primarily related to better after-tax realized investment gain (loss) activity and a $39 million tax benefit related to an adjustment to the Dividends Received Deduction (DRD) in the first quarter of 2003, partially offset by higher DAC amortization. Net after-tax realized investment gains were $29 million for the nine months ended September 30, 2003 and losses were $209 million for the prior year period, primarily related to the third quarter 2002 energy sector impairments and to the second quarter 2002 impairment of investments in debt securities of WorldCom Inc. in the amount of $126 million, after-tax. 15 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES The following discussion presents in more detail each business segment's performance. TRAVELERS LIFE & ANNUITY - ------------------------ FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 2002 ($ IN MILLIONS) ---- ---- Revenues $1,352 $839 Insurance benefits and interest credited 859 635 Operating expenses 128 91 ------ ---- Income before taxes 365 113 Income taxes 100 12 ------ ---- Net income $ 265 $101 ====== ==== Travelers Life & Annuity (TLA) core offerings include individual annuity, individual life, corporate owned life insurance (COLI) and group annuity insurance products distributed by TIC and The Travelers Life and Annuity Company (TLAC) principally under the Travelers Life & Annuity name. The Company has a license from Travelers Property Casualty Corp. to use the names "Travelers Life & Annuity," The Travelers Insurance Company," "The Travelers Life and Annuity Company" and related names in connection with the Company's business. Among the range of individual products offered are fixed and variable deferred annuities, payout annuities and term, universal and variable life insurance. These products are primarily distributed through CitiStreet Retirement Services, Smith Barney, Primerica Financial Services, Citibank, and a nationwide network of independent agents and the growing outside broker dealer channel. The COLI product is a variable universal life product distributed through independent specialty brokers. The group products include institutional pensions, including guaranteed investment contracts (GICs), payout annuities, group annuities sold to employer-sponsored retirement and savings plans, structured settlements and funding agreements. The majority of the annuity business and a substantial portion of the life business written by TLA are accounted for as investment contracts, with the result that the deposits collected are reported as liabilities and are not included in revenues. TLA's business is significantly affected by movements in the U.S. equity and fixed income credit markets. U.S. equity and credit market events can have both positive and negative effects on the deposit, revenue and policy retention performance of the business. A sustained weakness in the equity markets will decrease revenues and earnings in variable products. Declines in credit quality of issuers will have a negative effect on earnings. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on page 21. Net income of $265 million in the third quarter of 2003 increased 162% from $101 million, primarily related to increased revenues due to higher investment income, favorable business volumes and better after-tax realized investment gain (loss) activity, partially reduced by higher DAC amortization. Included in net income are current year after-tax realized investment gains of $29 million and prior year investment losses of $102 million for the third quarter of 2003 and 2002, respectively, primarily related to the third quarter 2002 impairments of investments in the energy and communication sectors of the fixed maturity portfolio. Net investment income (NII) increased 9% to $706 million and $645 million for the three months ended September 30, 2003 and 2002, respectively. This increase was driven by a larger invested asset base from increased business volumes, and higher equity investment returns as a result of risk arbitrage activity in the Company's trading portfolio. 16 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES The following table shows net written premiums and deposits by product type for the quarters ended September 30, 2003 and 2002. The majority of the annuity business and a substantial portion of the life business written by TLA are accounted for as investment contracts, such that the premiums are considered deposits and are not included in revenues. Deposits represent a statistic integral to managing TLA operations, which management uses for measuring business volumes, and may not be comparable to similarly captioned measurements used by other life insurance companies. FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 2002 IN MILLIONS OF DOLLARS PREMIUMS DEPOSITS PREMIUMS DEPOSITS --------- -------- -------- -------- Individual annuities Fixed $ - $ 115 $ - $ 324 Variable - 1,097 - 949 Individual payout 5 6 7 7 ----- ------- ----- ------- Total individual annuities 5 1,218 7 1,280 Group annuities 389 2,020 154 1,243 Individual life insurance: Direct periodic premiums & deposits 35 168 34 110 Single premium deposits - 125 - 64 Reinsurance (10) (26) (7) (22) ----- ------- ----- ------- Total individual life insurance 25 267 27 152 Other 9 - 9 - ----- ------- ----- ------- Total $428 $3,505 $197 $2,675 ===== ======= ===== ======= Individual annuity deposits in the third quarter of 2003 decreased 5% from the third quarter of 2002, reflecting a decline in fixed annuity production due to competitive pressures and the current low interest rate environment, partially offset by higher variable annuity production due to the increase in equity market conditions and competitive product features. Individual annuity account balances increased 17% to $30.8 billion at September 30, 2003, from $26.4 billion at September 30, 2002, reflecting market appreciation of variable annuity investments in the second and third quarters of 2003, and improved in-force retention related to lower surrender rates and positive net sales. Group Annuity written premiums increased 153% primarily related to strong current quarter production. Deposits (excluding Citigroup's employee pension plan deposits) in the third quarter of 2003 were up 63% from the comparable period of 2002, which reflects strong variable GIC sales, an additional $200 million funding agreement sold to the Federal Home Loan Bank of Boston and the sale of a group pension close out contract of $290 million. Group Annuity account balances and benefit reserves reached $24.9 billion at September 30, 2003, up 10% from $22.7 billion at September 30, 2002. This volume growth reflects strong 2003 first quarter fixed GIC production and continued strong retention in all products. Deposits for the life insurance business in the third quarter of 2003 were up 76% from the comparable period of 2002, driven by very strong single premium sales and higher direct periodic deposits. Life insurance in force was $87.1 billion at September 30, 2003, up from $82.3 billion at December 31, 2002. In the third quarter of 2003, TLA operating expenses increased 41% from the prior year quarter primarily due to volume-related insurance expenses, and an increase of $27 million in DAC amortization. The amortization of capitalized DAC is a significant component of TLA expenses. TLA's recording of DAC varies based upon product type. DAC for deferred annuities, both fixed and variable, and payout annuities employs a level yield methodology. DAC for universal life and COLI are amortized in relation to estimated gross profits, with traditional life, including term insurance and other products, amortized in relation to anticipated premiums. Amortization expense has primarily increased due to a higher amortization rate resulting from the 2002 decrease in market value of individual annuity account balances. 17 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES PRIMERICA LIFE INSURANCE - ------------------------ FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 2002 ($ IN MILLIONS) ---- ---- Revenues $412 $383 Insurance benefits 135 131 Operating expenses 115 107 ---- ---- Income before taxes 162 145 Income taxes 55 49 ---- ---- Net income $107 $ 96 ==== ==== The Primerica Life Insurance business segment offers individual life products, primarily term insurance, to customers through a sales force of approximately 107,000 agents. A great majority of the domestic licensed sales force works on a part-time basis. Net income of $107 million in the third quarter of 2003 increased 11% from $96 million, primarily related to growth in life insurance in force and volume-related investment income. Included in net income are net after-tax realized investment losses of $1 million and $6 million in the third quarter of 2003 and 2002, respectively. The prior year losses were primarily due to impairments of investments in the energy sector of the fixed maturity portfolio. Total life insurance in force reached $494.2 billion at September 30, 2003, up from $466.8 billion at December 31, 2002, reflecting good in-force policy retention and higher volume of sales. The face amount of new term life insurance sales was $20.3 billion for the three-month period ended September 30, 2003, compared to $19.6 billion for the prior year period. NII increased 6% to $76 million in the third quarter of 2003 from the prior year quarter, primarily related to a larger invested asset base, offset by lower yields. The amortization of capitalized DAC, which increased to $60 million in the third quarter of 2003 from $56 million in the third quarter of 2002, is a significant component of Primerica Life's expenses. All of Primerica Life's DAC is associated with term insurance products, which are amortized in relation to anticipated premiums. Amortized DAC has remained level as a percentage of direct premiums. The increase in the amount of amortization over 2002 is associated with growth in sales and in-force business. Earned premiums net of reinsurance were $313 million in the third quarter of 2003 compared to $300 million in the prior year period, including $297 million and $283 million, respectively, for Primerica Life individual term life policies. TRAVELERS LIFE & ANNUITY - ------------------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 ($ IN MILLIONS) ---- ---- Revenues $3,359 $2,625 Insurance benefits and interest credited 2,070 1,805 Operating expenses 367 237 ------ ------ Income before taxes 922 583 Income taxes 197 135 ------ ------ Net income $ 725 $ 448 ====== ====== 18 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES Net income for the nine months ended September 30, 2003 increased 62% to $725 million from $448 million from the prior year period, primarily related to better after-tax realized investment gain (loss) activity and a $39 million tax benefit related to an adjustment to the DRD in the first quarter of 2003, partially offset by higher DAC amortization. Net income included current year realized investment gains of $26 million and prior year investment losses of $202 million for the nine months ended September 30, 2003 and 2002, respectively, primarily related to the third quarter 2002 energy sector impairments and second quarter 2002 impairment of investments in debt securities of WorldCom Inc. in the amount of $122 million, after tax. The DRD benefit reduced the effective tax rate from 23% for the prior year nine month period ended September 30, 2002 to 21% in the current year nine month period ended September 30, 2003. NII was $2.1 billion and $1.9 billion for the nine months ended September 30, 2003 and 2002, respectively. NII includes dividends from Citigroup Inc. Series YY and Series YYY preferred stock totaling $137 million and $112 million in 2003 and 2002, respectively. Excluding these dividends NII increased 6% to $1.9 billion for the nine months ended September 30, 2003 compared to $1.8 million in the prior year period. This increase was driven by a larger invested asset base from increased business volumes, and higher equity investment returns as a result of risk arbitrage activity in the Company's trading portfolio. The following table shows net written premiums and deposits by product type for the nine months ended September 30, 2003 and 2002. The majority of the annuity business and a substantial portion of the life business written by TLA are accounted for as investment contracts, such that the premiums are considered deposits and are not included in revenues. Deposits represent a statistic integral to managing TLA operations, which management uses for measuring business volumes, and may not be comparable to similarly captioned measurements used by other life insurance companies. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 IN MILLIONS OF DOLLARS PREMIUMS DEPOSITS PREMIUMS DEPOSITS -------- -------- -------- -------- Individual annuities Fixed $ - $ 431 $ - $1,099 Variable - 2,853 - 3,148 Individual payout 20 22 19 21 ---- ------ ---- ------ Total individual annuities 20 3,306 19 4,268 Group annuities 658 5,223 439 4,833 Individual life insurance: Direct periodic premiums & deposits 104 494 102 452 Single premium deposits - 254 - 212 Reinsurance (28) (72) (21) (62) ---- ------ ---- ------ Total individual life insurance 76 676 81 602 Other 26 - 28 - ---- ------ ---- ------ Total $780 $9,205 $ 567 $9,703 ==== ====== ===== ====== Individual annuity deposits in the first nine months of 2003 decreased 23% from the prior year period, reflecting a decline in fixed annuity production due to competitive pressures and the current low interest rate environment, and lower variable annuity production due to declining equity market conditions in the first six months of the year, partially offset by competitive product features. Group Annuity written premiums increased 50% for the first nine months of 2003, compared to the 2002 period, primarily related to strong third quarter production. Deposits (excluding Citigroup's employee pension plan deposits) of $5.2 billion in the first nine months of 2003 were up 8% from $4.8 billion in the comparable period of 2002, driven by $1 billion in funding agreements sold to the Federal Home Loan Bank of Boston. 19 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES Deposits for the life insurance business in the first nine months of 2003 were up 12% from the comparable period of 2002, driven by very strong single premium sales and higher direct periodic deposits. For the first nine months of 2003, TLA operating expenses increased 55% from the comparable prior year nine- month period, primarily due to an increase of $94 million of DAC amortization. Amortization has primarily increased due to a higher amortization rate resulting from the 2002 decrease in market value of individual annuity account balances. Also, during the first quarter of 2002, TLA had a one-time decrease in DAC amortization of $22 million related to changes in the underlying lapse and interest rate assumptions in the individual annuity business. PRIMERICA LIFE INSURANCE - ------------------------ FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 ($ IN MILLIONS) ---- ---- Revenues $1,233 $1,165 Insurance benefits 400 394 Operating expenses 343 329 ------ ------ Income before taxes 490 442 Income taxes 167 150 ------ ------ Net income $ 323 $ 292 ====== ====== Net income for the nine months ended September 30, 2003 increased 11% to $323 million from $292 million for the nine months ended September 30, 2002. Included in net income are net after-tax realized investment gains (losses) of $3 million and $(7) million for the 2003 and 2002 nine-month periods, respectively. NII increased 8% to $232 million for the nine months of 2003 from the prior year, primarily related to a larger invested asset base, offset by lower yields. The amortization of capitalized DAC increased to $173 million in the first nine months of 2003 from $164 million in the prior year period. Amortized DAC has remained level as a percentage of direct premiums. The increase in the amount of amortization over 2002 is associated with growth in sales and in-force business. Earned premiums net of reinsurance were $927 million in the first nine months of 2003 compared to $890 million in the prior year period, including $879 million and $842 million, respectively, for Primerica Life individual term life policies. INSURANCE REGULATIONS Risk-based capital requirements are used as minimum capital requirements by the National Association of Insurance Commissioners and the states to identify companies that merit further regulatory action. At December 31, 2002, the Company had adjusted capital in excess of amounts requiring any regulatory action. The Company is 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 in the state of domicile. A maximum of $966 million is available by the end of 2003 for such dividends without prior approval of the State of Connecticut Insurance Department, depending upon the amount and timing of the payments. TLAC may not pay a dividend to TIC without such approval. Primerica Life may pay up to $148 million in dividends to TIC without prior approval of the Massachusetts Insurance Department. Primerica Life paid $88 million and $165 million in dividends to TIC during the nine months ended September 30, 2003 and 2002, respectively. The Company paid $280 million and $586 million in dividends to its parent during the nine months ended September 30, 2003 and 2002, respectively. 20 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES LEGISLATIVE DEVELOPMENTS In May 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 was enacted into law. This act makes various changes in individual tax rates. Most significantly, the legislation extends the 15% maximum capital gains tax rate to corporate dividends received by individuals, including dividends received by mutual funds and passed through to mutual fund shareholders. The legislation also lowers the capital gains tax rate and accelerates the individual income tax rate reductions enacted in 2001. These changes could have a negative impact on demand for life and annuity products. This statement is a forward-looking statement within the meaning of the Private Securities Litigation Reform Act. See "Forward-Looking Statements" on this page. FUTURE APPLICATIONS OF ACCOUNTING STANDARDS See Note 2 of Notes to Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements. FORWARD-LOOKING STATEMENTS Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The Company's actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by the words "believe," "expect," "anticipate," "intend," "estimate," "may increase," "may fluctuate," and similar expressions, or future or conditional verbs such as "will," "should," "would," and "could." These forward-looking statements involve risks and uncertainties including, but not limited to, regulatory matters, the resolution of legal proceedings, the impact that the adoption of recent legislation may have on the demand for life and annuity products and the potential impact of a decline in credit quality of investments on earnings. 21 THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. INTERNAL CONTROL OVER FINANCIAL REPORTING There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 22
The Travelers Insurance Company
Fixed Annuity
L-23159 | 02/2004 |