UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-33691
THE TRAVELERS INSURANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-0566090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(Address of principal executive offices) (Zip Code)
(860) 277-0111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of the date hereof, there were outstanding 40,000,000 shares of common stock,
par value $2.50 per share, of the registrant, all of which were owned by The
Travelers Insurance Group Inc., an indirect wholly owned subsidiary of Citigroup
Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statement of Income for the
Three and Nine Months Ended September 30, 2001 and 2000 (unaudited)..................3
Condensed Consolidated Balance Sheet as of September 30, 2001 (unaudited) and
December 31, 2000....................................................................4
Condensed Consolidated Statements of Changes in Retained Earnings and
Accumulated Other Changes in Equity from Nonowner Sources
for the Three and Nine Months Ended September 30, 2001 and 2000 (unaudited)..........5
Condensed Consolidated Statement of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 (unaudited)............................6
Notes to Condensed Consolidated Financial Statements (unaudited).....................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................20
SIGNATURES..........................................................................21
2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENT OF INCOME
(UNAUDITED)
($ in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- --------------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
REVENUES
Premiums $421 $428 $1,477 $1,475
Net investment income 671 662 2,132 2,020
Realized investment gains (losses) 91 20 192 (113)
Fee income 126 124 376 380
Other revenues 28 45 109 91
------ ------ ------ ------
Total Revenues 1,337 1,279 4,286 3,853
------ ------ ------ ------
BENEFITS AND EXPENSES
Current and future insurance benefits 375 367 1,308 1,296
Interest credited to contractholders 298 264 884 757
Amortization of deferred acquisition costs 95 90 281 263
General and administrative expenses 78 128 283 373
------ ------ ------ ------
Total Benefits and Expenses 846 849 2,756 2,689
------ ------ ------ ------
Income from operations before federal
income taxes and cumulative effects of
changes in accounting principles 491 430 1,530 1,164
Federal income taxes 160 144 507 387
------ ------ ------ ------
Income before cumulative effects of changes in
accounting principles 331 286 1,023 777
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 $331 $286 $1,014 $777
====== ====== ====== ======
See Notes to Condensed Consolidated Financial Statements
3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
($ in millions)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
ASSETS
Investments (including $1,389 and $1,494 subject to securities
lending agreements) $41,790 $37,233
Separate and variable accounts 22,401 24,006
Reinsurance recoverable 4,113 3,977
Deferred acquisition costs 3,332 2,989
Other assets 3,111 2,088
------- -------
Total Assets $74,747 $70,293
------- -------
LIABILITIES
Contractholder funds $22,082 $19,394
Future policy benefits and claims 13,901 13,300
Separate and variable accounts 22,401 23,994
Other liabilities 7,205 5,211
------- -------
Total Liabilities 65,589 61,899
------- -------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized,
issued and outstanding 100 100
Additional paid-in capital 3,859 3,848
Retained earnings 4,884 4,342
Accumulated other changes in equity from nonowner sources 315 104
------- -------
Total Shareholder's Equity 9,158 8,394
------- -------
Total Liabilities and Shareholder's Equity $74,747 $70,293
======= =======
See Notes to Condensed Consolidated Financial Statements.
4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
AND ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES
(UNAUDITED)
($ in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
STATEMENT OF CHANGES IN RETAINED EARNINGS
Balance, beginning of period $4,710 $4,250 $4,342 $4,099
Net income 331 286 1,014 777
Dividends to parent (157) (170) (472) (510)
------ ------ ------ ------
Balance, end of period $4,884 $4,366 $4,884 $4,366
====== ====== ====== ======
STATEMENT OF ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
Balance, beginning of period $105 $(295) $104 $(398)
Cumulative effect of accounting for derivative
instruments and hedging activities, net of tax -- -- (29) --
Unrealized gains, net of tax 310 185 342 288
Derivative instrument hedging activity losses,
net of tax (100) -- (102) --
------ ------ ------ ------
Balance, end of period $315 $(110) $315 $(110)
====== ====== ====== ======
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
Net income $331 $286 $1,014 $777
Other changes in equity from nonowner sources 210 185 211 288
------ ------ ------ ------
Total changes in equity from nonowner sources $541 $471 $1,225 $1,065
====== ====== ====== ======
See Notes to Condensed Consolidated Financial Statements.
5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
($ in millions)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 984 $ 1,139
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 2,498 3,364
Mortgage loans 310 266
Proceeds from sales of investments
Fixed maturities 10,678 8,643
Equity securities 90 371
Real estate held for sale 2 207
Purchases of investments
Fixed maturities (16,290) (14,140)
Equity securities (35) (242)
Mortgage loans (145) (220)
Policy loans, net 27 9
Short-term securities purchases, net (765) (977)
Other investment sales (purchases), net 161 (204)
Securities transactions in course of settlement, net 303 1,054
------ ------
Net cash used in investing activities (3,166) (1,869)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 6,473 4,665
Contractholder fund withdrawals (3,809) (3,323)
Dividends to parent company (472) (510)
------ ------
Net cash provided by financing activities 2,192 832
------ ------
Net increase in cash 10 102
Cash at beginning of period 150 85
------ ------
Cash at end of period $ 160 $ 187
===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 278 $ 319
===== =====
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 The Travelers Insurance Group
Inc. (TIGI), an indirect wholly owned subsidiary of Citigroup Inc.
(Citigroup). Citigroup is a diversified 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 footnotes of the Company are prepared in conformity with
accounting principles generally accepted in the United States of America
(GAAP) and are unaudited. The condensed consolidated financial statements
include the accounts of the Company and its insurance and non-insurance
subsidiaries on a fully consolidated basis. In the opinion of management,
the interim financial statements reflect all adjustments necessary (all of
which were normal recurring adjustments) for a fair presentation 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, 2000.
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 2001
presentation.
2. CHANGES IN ACCOUNTING PRINCIPLES AND ACCOUNTING STANDARDS NOT YET ADOPTED
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133).
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the consolidated balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
recognized asset or liability or of a forecasted transaction, or (c) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security,
or a foreign-currency-denominated forecasted transaction. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting
designation.
The Company uses derivative financial instruments, including financial
futures contracts, interest rate swaps, currency swaps, equity swaps,
options and forward contracts, as a means of hedging exposure to interest
rate, equity price change and foreign currency risk. The Company, through
Tribeca Investments LLC, a subsidiary that is a broker/dealer, holds and
issues derivative instruments for trading purposes.
To qualify as a hedge, 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.
7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
For fair value hedges, changes in the fair value of derivatives are
reflected in realized investment gains (losses), together with changes in
the fair value of the related hedged item. The net amount is reflected in
current earnings under the new rules and is substantially similar to the
amounts under the previous accounting practice.
For cash flow hedges, the accounting treatment depends on the effectiveness
of the hedge. To the extent these 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. 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. At September 30,
2001, the amount that is expected to be reclassified into pretax earnings
over the next twelve months to adjust these variable cash flows is
approximately $150 million loss. To the extent these derivatives are not
effective, changes in their fair values are immediately included in
realized investment gains (losses). The Company's cash flow hedges
primarily include hedges of foreign denominated funding agreements and
floating rate available-for-sale securities. While the earnings impact of
cash flow hedges are similar to the previous accounting practice, the
amounts included in the accumulated other changes in equity from nonowner
sources will vary depending on market conditions.
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 forward premium or discount, is reflected in the accumulated other
changes in equity from nonowner sources as part of the foreign currency
translation adjustment. For the nine months ended September 30, 2001, the
amount included in the accumulated other changes in equity from nonowner
sources was $.7 million. The ineffective portion is reflected in realized
investment gains (losses).
Derivatives that are either hedging instruments that are not designated or
do not qualify as hedges under the new rules are also carried at fair value
with changes in value reflected in realized investment gains (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 hedge and any excess gains or losses attributable to
such ineffectiveness as well as subsequent changes in fair value are
recognized in realized investment gains (losses). During the first nine
months of 2001 the amount of hedge ineffectiveness that was recognized in
realized investment gains (losses) was ($10.2) million, ($1.7) million for
fair value hedges and ($8.5) million for cash flow hedges.
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 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 was 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
(losses). During the first nine months of 2001 there were no such
discontinued forecasted transactions.
8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
As a result of adopting FAS 133, the Company recorded a charge of $6
million after tax, reflected as a cumulative catch-up adjustment in the
condensed consolidated statement of income and a charge of $29 million
after tax, reflected as cumulative catch-up adjustment in the accumulated
other changes in equity from nonowner sources section of stockholder's
equity.
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND RETAINED
BENEFICIAL INTERESTS IN SECURITIZED FINANCIAL ASSETS
In April 2001, the Company adopted the FASB Emerging Issues Task Force
(EITF) 99-20, "Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial Assets" (EITF
99-20). EITF 99-20 establishes guidance on the recognition and measurement
of interest income and impairment on certain investments, e.g., certain
asset-backed securities. The recognition of impairment resulting from the
adoption of EITF 99-20 was recorded as a cumulative catch-up adjustment.
Interest income on beneficial interest falling within the scope of EITF
99-20 is to be recognized prospectively. As a result of adopting EITF
99-20, the Company recorded a charge of $3 million after tax, reflected as
a cumulative catch-up adjustment in the condensed consolidated statement of
income. The implementation of this EITF did not have a significant impact
on results of operations, financial condition or liquidity.
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the FASB issued 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. The Company will apply the new rules on accounting for goodwill and
other intangible assets in the first quarter of 2002 and for purchase
business combinations consummated after June 30, 2001, which will have no
impact in 2001.
Upon adoption, the Company will stop amortizing goodwill. Based on the
current levels of goodwill, this would reduce general and administrative
expenses and increase net income by approximately $3 million in 2002. In
addition, the Company is in the process of evaluating certain intangible
assets to determine whether they are deemed to have an indefinite useful
life. During 2002, the Company will perform the required impairment test of
goodwill and indefinite lived intangible assets as of January 1, 2002 and
has not yet determined what the effect of these tests will be on its
results of operations, financial condition or liquidity.
9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). FAS 143
changes the measurement of an asset retirement obligation from a
cost-accumulation approach to a fair value approach, where the fair value
(discounted value) of an asset retirement obligation is recognized as a
liability in the period in which it is incurred and accretion expense is
recognized using the credit-adjusted risk-free interest rate in effect when
the liability was initially recognized. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived
asset and subsequently amortized into expense. The pre-FAS 143 prescribed
practice of reporting a retirement obligation as a contra-asset will no
longer be allowed. The Company is in the process of assessing the impact of
the new standard that will take effect on January 1, 2003.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
In August 2001, the FASB issued 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, and 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 spinoff 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 Company will adopt FAS 144 effective January 1, 2002. The provisions of
the new standard are generally to be applied prospectively and are not
expected to materially affect the Company's results of operations,
financial condition or liquidity.
3. SHAREHOLDER'S EQUITY
Statutory capital and surplus of the Company was $5.16 billion at December
31, 2000. 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. A maximum of
$984 million is available by the end of the year 2001 for such dividends
without prior approval of the Connecticut Insurance Department. The Company
paid $472 million and $510 million in dividends to its parent during the
nine months ended September 30, 2001 and 2000, respectively.
4. COMMITMENTS AND CONTINGENCIES
The Company is a defendant or co-defendant in various litigation matters in
the normal course of business. Although there can be no assurances, as of
September 30, 2001, the Company believes, based on information currently
available, that the ultimate resolution of these legal proceedings would
not be likely to have a material adverse effect on its results of
operations, financial condition or liquidity.
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 common 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 The Travelers Life and Annuity
Company (TLAC) principally under the Travelers 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 (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, 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 National Benefit Life Insurance Company. The Primerica Life
Insurance business segment offers individual life products, primarily term
insurance, to customers through a nationwide sales force of approximately
93,000 full and part-time licensed Personal Financial Analysts.
11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
BUSINESS SEGMENT INFORMATION:
FOR THE THREE MONTHS ENDED TRAVELERS LIFE & PRIMERICA LIFE
SEPTEMBER 30, 2001 ($ in millions) ANNUITY INSURANCE TOTAL
BUSINESS VOLUME:
Premiums $134 $287 $421
Deposits 3,159 -- 3,159
----- ------- -----
Total business volume 3,293 287 3,580
Net investment income 598 73 671
Interest credited to contractholders 298 -- 298
Amortization of deferred acquisition costs 44 51 95
Total expenditures for deferred acquisition costs 126 72 198
Federal income taxes on Operating Income 77 51 128
Operating Income (1) $174 $98 $272
Segment Assets $66,779 $7,968 $74,747
------- ------ -------
FOR THE THREE MONTHS ENDED TRAVELERS LIFE & PRIMERICA LIFE
SEPTEMBER 30, 2000 ($ in millions) ANNUITY INSURANCE TOTAL
BUSINESS VOLUME:
Premiums $153 $275 $428
Deposits 3,048 -- 3,048
----- -------- -----
Total business volume 3,201 275 3,476
Net investment income 591 71 662
Interest credited to contractholders 264 -- 264
Amortization of deferred acquisition costs 45 45 90
Total expenditures for deferred acquisition costs 127 68 195
Federal income taxes on Operating Income 87 50 137
Operating Income (1) $178 $94 $272
Segment Assets $63,218 $7,382 $70,600
------- ------ -------
(1) Excludes realized gains or losses, net of tax and the cumulative effect of
the changes in accounting principles, net of tax.
12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
BUSINESS SEGMENT RECONCILIATION:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30 ($ in millions) 2001 2000
INCOME:
Total operating income of segments $272 $272
Realized investment gains, net of tax 59 14
---- ----
Net Income $331 $286
==== ====
13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
BUSINESS SEGMENT INFORMATION:
FOR THE NINE MONTHS ENDED TRAVELERS LIFE & PRIMERICA LIFE
SEPTEMBER 30, 2001 ($ in millions) ANNUITY INSURANCE TOTAL
BUSINESS VOLUME:
Premiums $621 $856 $1,477
Deposits 10,154 -- 10,154
------ ------- ------
Total business volume 10,775 856 11,631
Net investment income 1,907 225 2,132
Interest credited to contractholders 884 -- 884
Amortization of deferred acquisition costs 129 152 281
Total expenditures for deferred acquisition costs 403 221 624
Federal income taxes on Operating Income 287 153 440
Operating Income (1) $605 $293 $898
Segment Assets $66,779 $7,968 $74,747
------- ------ -------
FOR THE NINE MONTHS ENDED TRAVELERS LIFE & PRIMERICA LIFE
SEPTEMBER 30, 2000 ($ in millions) ANNUITY INSURANCE TOTAL
BUSINESS VOLUME:
Premiums $652 $823 $1,475
Deposits 8,830 -- 8,830
----- -------- -----
Total business volume 9,482 823 10,305
Net investment income 1,810 210 2,020
Interest credited to contractholders 757 -- 757
Amortization of deferred acquisition costs 126 137 263
Total expenditures for deferred acquisition costs 379 198 577
Federal income taxes on Operating Income 279 148 427
Operating Income (1) $570 $280 $850
Segment Assets $63,218 $7,382 $70,600
------- ------ -------
(1) Excludes realized gains or losses, net of tax and the cumulative effect of
the changes in accounting principles, net of tax.
14
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
BUSINESS SEGMENT RECONCILIATION:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30 ($ in millions) 2001 2000
INCOME:
Total operating income of segments $898 $850
Realized investment gains (losses), net of tax 125 (73)
Cumulative effect of change in accounting for
Derivative instruments and hedging activity,
net of tax (6) --
Cumulative effect of change in accounting for
Securitized financial assets, net of tax (3) --
------ ----
Net Income $1,014 $777
====== ====
15
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction H(2)(a) of Form 10-Q.
CONSOLIDATED OVERVIEW ($ in millions)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
2001 2000 2001 2000
Revenues $1,337 $1,279 $4,286 $3,853
====== ====== ====== ======
Net income $ 331 $ 286 $1,014 $ 777
====== ====== ====== ======
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company), is comprised of two business segments, Travelers Life & Annuity and
Primerica Life Insurance. Operating income, defined as income before net
realized investment gains or losses and cumulative effect of changes in
accounting principles, was $272 million for the quarter ended September 30,
2001, level with the prior year quarter and $898 million for the nine months
ended September 30, 2001, up from $850 million for the 2000 comparable period.
Revenues increased 5% and 11% to $1.3 billion and $4.3 billion for the quarter
and nine months, respectively, driven by realized gains and strong business
volume. The increased business volume also drove the increase in insurance
benefits and interest credited, offset by reduced general and administrative
expenses for the nine months ended September 30, 2001 versus the same period in
2000.
The following discussion presents in more detail each business segment's
performance.
TRAVELERS LIFE & ANNUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000
($ in millions)
Revenues $941 $912
==== ====
Net income (1) $225 $192
==== ====
(1) Includes net realized investment gains of $51 million and $14 million in
2001 and 2000, respectively.
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 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 (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, with the result that the
deposits collected are reported as liabilities and are not included in revenues.
16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
Operating income was $174 million in the third quarter of 2001 compared to $178
million in the third quarter of 2000. The 2% decline in 2001 reflects lower
investment margins and the $10 million reserve impact of the terrorist attack
on September 11th, mostly offset by growth in group annuity and life business
volumes and savings due to continued expense management. The Company does not
anticipate any further adverse effects from the events of September 11th. During
the third quarter of 2001, TLA achieved double-digit business volume growth in
group annuity account balances over the account balances in the prior year
quarter, reflecting growth in retirement savings and estate planning products.
Total operating expenses decreased in the third quarter of 2001 compared to 2000
due to continued expense management and the absence of expenses related to the
long-term care insurance business sold during the third quarter of 2000. This
transaction also reduced the growth in revenues.
The cross-selling of TLA products through CitiStreet Retirement Services,
Primerica Financial Services (Primerica), Citibank and Salomon Smith Barney
(SSB) distribution channels, along with improved sales through a nationwide
network of independent financial professionals and strong group sales through
various intermediaries, reflect ongoing efforts to build market share by
strengthening relationships in key distribution channels.
Decreased individual variable annuity sales, partially offset by increased
individual fixed annuity sales, and declining market values brought account
balances to $26.4 billion at September 30, 2001, compared to $28.0 billion at
December 31, 2000 and $28.7 billion at September 30, 2000. Premiums and
deposits decreased 13% in the third quarter of 2001 to $1.4 billion from $1.6
billion in the third quarter of 2000. Sales continue to reflect the
cross-selling initiatives at the Citigroup affiliates, and also reflect
continued penetration into outside broker/dealer channels.
Group annuity account balances and benefit reserves reached $20.2 billion at
September 30, 2001, up 21% from $16.7 billion at September 30, 2000. The group
annuity businesses experienced continued strong sales momentum in all products,
particularly fixed and variable rate GICs. Net premiums and deposits (excluding
Citigroup's employee pension plan deposits) of $1.7 billion in the third quarter
of 2001 were up 13% from $1.5 billion in the comparable period of 2000.
Direct periodic premiums for individual life insurance and COLI of $126.7
million in the third quarter of 2001 were down 7% from $135.8 million in the
comparable period of 2000. New periodic and single premium life insurance sales,
excluding COLI, were $66.4 million for the three months ended September 30, 2001
versus $47.3 million in the comparable period of 2000, reflecting strong core
agency results. Life insurance in force was $73.0 billion at September 30, 2001,
up from $68.3 billion at December 31, 2000.
PRIMERICA LIFE INSURANCE
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 2000
($ in millions)
Revenues $396 $367
==== ====
Net income (1) $106 $ 94
==== ====
(1) Includes realized investment gains of $8 million and $0 million in 2001 and
2000, respectively.
17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
The Primerica Life business segment offers individual life products, primarily
term insurance, to customers through a nationwide sales force of approximately
93,000 full and part-time licensed Personal Financial Analysts.
Operating income was $98 million in the third quarter of 2001 compared to $94
million in the third quarter of 2000. The 4% improvement in 2001 reflects growth
in life insurance in force and consistent net investment income, partially
offset by less favorable mortality rates than the prior period.
Earned premiums net of reinsurance were $287 million in the third quarter of
2001 compared to $275 million in the prior year period, including $271 million
and $259 million, respectively, for Primerica individual term life policies.
Total life insurance in force reached $427.7 billion at September 30, 2001, up
from $412.7 billion at December 31, 2000, reflecting good policy persistency and
stable sales. The face amount of new term life insurance sales was $17.6 billion
for the three-month period ended September 30, 2001, compared to $16.8 billion
for the prior year period.
TRAVELERS LIFE & ANNUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000
($ in millions)
Revenues $3,068 $2,802
====== ======
Net income (1) $ 680 $ 530
====== ======
(1) Includes realized investment gains of $83 million and a $(8) million charge
from the cumulative effects of changes in accounting principles in 2001,
and net realized investment losses of $(40) million in 2000.
Operating income increased 6% to $605 million in the nine months ended September
30, 2001, compared to $570 million in the nine months ended September 30, 2000.
Earnings growth was driven by business volume and a higher capital base,
partially offset by lower investment yields.
For individual annuities, net written premiums and deposits were $4.6 billion in
the first nine months of 2001, level with the comparable period of 2000.
Group annuity net premiums and deposits were $5.6 billion in the first nine
months of 2001, up 27% from $4.4 billion in the prior year period.
For individual life insurance and COLI, direct periodic premiums were $456
million for the first nine months of 2001, up 25% from $366 million in the prior
year period. The face amount of individual life insurance issued during the
first nine months of 2001 was $9.7 billion, up from $8.8 billion in the prior
period of 2000.
18
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
PRIMERICA LIFE INSURANCE
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000
($ in millions)
Revenues $1,218 $1,051
====== ======
Net income (1) $334 $247
====== ======
(1) Includes realized investment gains of $42 million and a $(1) million charge
from the cumulative effect of change in accounting principle in 2001, and
net realized investment losses of $33 million in 2000.
Earnings before gains on investments for the first nine months of 2001 increased
5% to $293 million, compared to $280 million in the first nine months of 2000,
related to volume growth. The face amount of new term life insurance sales was
$52.5 billion in the first nine months of 2001, up from $50.3 billion in the
prior year period.
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, 2000, 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 $984
million is available by the end of 2001 for such dividends without prior
approval of the Connecticut Insurance Department. The Company paid $472 million
and $510 million in dividends to its parent during the nine months ended
September 30, 2001 and 2000, respectively.
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, proposed legislation, the resolution of legal
proceedings and the impact of the terrorist attack on September 11th.
19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
3.01 Charter of The Travelers Insurance Company (the
"Company"), as effective October 19, 1994, incorporated
by reference to Exhibit 3.01 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
September 30, 1994 (File No. 33-33691) (the "Company's
September 30, 1994 10-Q").
3.02 By-laws of the Company, as effective October 20, 1994,
incorporated by reference to Exhibit 3.02 to the
Company's September 30, 1994 10-Q.
(b) REPORTS ON FORM 8-K
None
20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TRAVELERS INSURANCE COMPANY
(Registrant)
Date November 14, 2001 /s/ Glenn D. Lammey
______________________________________
Glenn D. Lammey
Executive Vice President,
Chief Financial Officer and Chief
Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
21