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 33-58677
THE TRAVELERS LIFE AND ANNUITY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-0904249
(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 30,000 shares of common stock, par
value $100 per share, of the registrant, all of which were owned by The
Travelers Insurance Company, an indirect wholly owned subsidiary of Citigroup
Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
THE TRAVELERS LIFE AND ANNUITY COMPANY
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Statement of Income for the Three and
Nine Months Ended September 30, 2001 and 2000 (unaudited)....................... 3
Condensed Balance Sheet as of September 30, 2001 (unaudited) and
December 31, 2000............................................................... 4
Condensed Statements of Changes in Retained Earnings and
Accumulated Other Changes in Equity from Nonowner Sources
for the Three and Nine Months Ended September 30, 2001 and 2000 (unaudited)..... 5
Condensed Statement of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 (unaudited)....................... 6
Notes to Condensed Financial Statements (unaudited)............................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................... 12
SIGNATURES...................................................................... 13
2
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED STATEMENT OF INCOME
(UNAUDITED)
($ in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
REVENUES
Premiums $ 10,236 $ 8,583 $ 28,422 $ 25,168
Net investment income 60,867 50,737 179,287 155,362
Realized investment gains/(losses) (2,659) (1,914) 18,495 (94)
Fee income 44,984 46,090 125,279 114,316
Other revenues 3,385 2,189 11,272 6,507
--------- --------- --------- ---------
Total Revenues 116,813 105,685 362,755 301,259
--------- --------- --------- ---------
BENEFITS AND EXPENSES
Current and future insurance benefits 21,145 19,839 63,887 60,559
Interest credited to contractholders 33,489 20,598 88,845 54,675
Amortization of deferred acquisition costs 25,690 17,761 66,282 48,092
Operating expenses 4,651 4,085 15,847 11,150
--------- --------- --------- ---------
Total Benefits and Expenses 84,975 62,283 234,861 174,476
--------- --------- --------- ---------
Income before federal income taxes and
cumulative effect of change in accounting
principle 31,838 43,402 127,894 126,783
Federal income taxes 10,715 15,177 44,186 44,332
--------- --------- --------- ---------
Income before cumulative effect of change
in accounting principle 21,123 28,225 83,708 82,451
Cumulative effect of change in accounting
for derivative instruments and hedging
activities, net of tax -- -- (62) --
--------- --------- --------- ---------
Net income $ 21,123 $ 28,225 $ 83,646 $ 82,451
========= ========= ========= =========
See Notes to Condensed Financial Statements.
3
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED BALANCE SHEET
($ in thousands)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
(UNAUDITED)
- -----------------------------------------------------------------------------------------
ASSETS
Investments (including $64,965 and $49,465
subject to securities lending agreements) $ 3,639,941 $ 2,922,162
Separate accounts 6,621,223 6,802,985
Deferred acquisition costs 747,709 579,567
Other assets 279,918 190,903
----------- -----------
Total Assets $11,288,791 $10,495,617
----------- -----------
LIABILITIES
Future policy benefits $ 1,059,643 $ 989,576
Contractholder funds 2,300,146 1,631,611
Separate accounts 6,621,223 6,802,985
Other liabilities 321,257 211,441
----------- -----------
Total Liabilities 10,302,269 9,635,613
----------- -----------
SHAREHOLDER'S EQUITY
Common stock, par value $100; 100,000 shares
authorized, 30,000 issued and outstanding 3,000 3,000
Additional paid-in capital 417,316 417,316
Retained earnings 509,712 426,066
Accumulated other changes in equity from
nonowner sources 56,494 13,622
Total Shareholder's Equity ----------- -----------
986,522 860,004
----------- -----------
Total Liabilities and Shareholder's Equity $11,288,791 $10,495,617
=========== ===========
See Notes to Condensed Financial Statements.
4
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED STATEMENTS OF CHANGES IN RETAINED EARNINGS AND ACCUMULATED
OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES
(UNAUDITED)
($ in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
STATEMENT OF CHANGES IN RETAINED EARNINGS 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------
Balance, beginning of period $488,589 $ 389,387 $426,066 $ 335,161
Net income 21,123 28,225 83,646 82,451
-------- --------- -------- ---------
Balance, end of period $509,712 $ 417,612 $509,712 $ 417,612
-------- --------- -------- ---------
- -------------------------------------------------------------------------------------------------------------
STATEMENT OF ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- --------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 12,598 $ (36,916) $ 13,622 $ (39,312)
Cumulative effect of change in accounting for
derivative instruments and hedging activities,
net of tax -- -- 62 --
Unrealized gains, net of tax 39,417 19,921 37,898 22,317
Derivative instrument hedging activity gains,
net of tax 4,479 -- 4,912 --
-------- --------- -------- ---------
Balance, end of period $ 56,494 $ (16,995) $ 56,494 $ (16,995)
-------- --------- -------- ---------
- -------------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- -------------------------------------------------------------------------------------------------------------
Net income $ 21,123 $ 28,225 $ 83,646 $ 82,451
Other changes in equity from nonowner sources 43,896 19,921 42,872 22,317
-------- --------- -------- ---------
Total changes in equity from nonowner sources $ 65,019 $ 48,146 $126,518 $ 104,768
======== ========= ======== =========
See Notes to Condensed Financial Statements.
5
THE TRAVELERS LIFE AND ANNUITY COMPANY
CONDENSED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
($ in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
- -----------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES $ (122,333) $(102,988)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 68,728 167,956
Mortgage loans 15,798 19,258
Proceeds from sales of investments
Fixed maturities 679,852 741,015
Equity securities 6,253 27,158
Mortgage loans -- 15,260
Real estate held for sale (36) 2,115
Purchases of investments
Fixed maturities (1,428,928) (1,286,107)
Equity securities (2,150) (17,763)
Mortgage loans (368) (10,010)
Policy loans, net (3,585) (2,296)
Short-term securities sales (purchases), net 89,515 (211,397)
Other investment sales (purchases), net 348 (3,133)
Securities transactions in course of
settlement, net 32,623 54,100
----------- ---------
Net cash used in investing activities (541,950) (503,844)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 791,306 448,906
Contractholder fund withdrawals (122,771) (76,778)
Contribution by parent company -- 250,000
----------- ---------
Net cash provided by financing activities 668,535 622,128
----------- ---------
Net increase in cash 4,252 15,296
Cash at beginning of period 14,938 21
----------- ---------
Cash at end of period $ 19,190 $ 15,317
----------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes (received) paid $ (20,911) $ 31,081
=========== =========
See Notes to Condensed Financial Statements.
6
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The Travelers Life and Annuity Company (the Company) is a wholly owned
subsidiary of The Travelers Insurance Company (TIC), 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 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. In the opinion of management, the interim financial
statements reflect all adjustments necessary (all of which were normal
recurring adjustments) for a fair presentation of results for the
periods reported. The accompanying condensed financial statements
should be read in conjunction with the 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. As a result of adopting FAS 133, the Company recorded a
charge of $62 thousand after tax, reflected as a cumulative catch-up
adjustment in the condensed statement of income and a benefit of $62
thousand after tax, reflected as a cumulative catch-up adjustment in
the accumulated other changes in equity from nonowner sources section
of stockholder's equity.
7
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND RETAINED
INTERESTS IN SECURITIZED FINANCIAL ASSETS
In April 2001, the Company adopted the FASB Emerging Issues Task Force
(EITF) EITF 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained 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 to be recorded as a
cumulative catch-up adjustment. Interest income on beneficial interest
falling within the scope of EITF 99-20 was to be recognized
prospectively. EITF 99-20 had no effect on the Company's 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.
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.
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.
8
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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 $476 million at
December 31, 2000. The Company is subject to various regulatory
restrictions that limit the maximum amount of dividends available to be
paid to its parent without prior approval of insurance regulatory
authorities. The Company does not have surplus available to pay
dividends to TIC in 2001 without prior approval of the Connecticut
Insurance Department.
4. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is a defendant or
co-defendant in various litigation matters incidental to and typical of
the businesses in which it is engaged. In the opinion of the Company's
management, the ultimate resolution of these legal proceedings would
not be likely to have a material adverse effect on its results of
operations, financial condition or liquidity.
9
\ THE TRAVELERS LIFE AND ANNUITY COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's narrative analysis of the results of operations is
presented in lieu of Management's Discussion and Analysis of Financial
Condition and Results of Operations, pursuant to General Instruction
H(2)(a) of Form 10-Q.
RESULTS OF OPERATIONS ($ in millions)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000
---- ----
Revenues $362.8 $301.3
Net income (1) $83.6 $82.4
(1) Includes net realized investment gains/(losses) of $12.0
million and $(.1) million in 2001 and 2000, respectively.
The Travelers Life and Annuity Company (the Company) offers fixed and
variable deferred annuities and individual life insurance to
individuals and small businesses. These products are distributed
primarily through Salomon Smith Barney (SSB), Primerica Financial
Services (Primerica), affiliates of the Company, and a nationwide
network of independent financial professionals. In addition, the
Company distributes these products through CitiStreet Retirement
Services and Citibank, N.A. (Citibank), affiliates of the Company. The
majority of the annuity business and a substantial portion of the
individual life business written by the Company are accounted for as
investment contracts, with the result that the deposits collected from
contractholders are reported as liabilities and are not included in
revenues.
Net income for the nine months ended September 30, 2001 was $83.6
million, compared to $82.4 million for the nine months ended September
30, 2000. Operating income, defined as income before net realized gains
or losses on investments, decreased 14% to $71.7 million for the first
nine months of 2001 from $82.5 million for the same period in the prior
year. This decrease in operating earnings was attributable to interest
credited to contractholders which increased 62% to $88.8 million in
2001 versus $54.7 million in 2000, partially offset by increased
investment income and fee revenue. Deferred acquisition cost
amortization, which increased 38% to $66.3 million from $48.1 million
in 2000, was due to the rapid increase in business volume over the last
two years.
The cashflows of the Company continue to be affected by the volume
growth. Net cash provided by contractholder funds activity increased
80% to $668.5 million in the nine months ended September 30, 2001 from
$372.1 million in the nine months ended September 30, 2000, which was
then used in investing activities. Also, net cash used in operations
grew 19% to $122.3 million in the nine months ended September 30, 2001
from $103.0 million in the nine months ended September 30, 2000 related
to first year commission growth and other first year expenses.
Realized investment gains and losses fluctuate based upon market
conditions and investment portfolio yield considerations. Gross
realized gains/(losses) for the nine months ended September 30, 2001
and 2000 were $18.5 million and $(.1) million, respectively.
10
THE TRAVELERS LIFE AND ANNUITY COMPANY
PREMIUMS AND DEPOSITS ($ in millions)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 2000
----- ----
Individual Annuity $2,328 $2,421
Individual Life 223 143
Other Annuity 5 8
------ ------
Total $2,556 $2,572
====== ======
The majority of the annuity business and a substantial portion of the
individual life business written by the Company are accounted for as
investment contracts, with the result that the deposits collected from
contractholders are reported as liabilities and are not included in
revenues.
Individual annuity premiums and deposits decreased 4% related to
variable annuity market conditions. Cross-selling initiatives at
Citigroup continue with 40% and 24% of the September 30, 2001 amounts
attributable to SSB and Primerica, respectively.
The individual life premiums and deposits grew 56% to $223 million in
2001 versus $143 million in 2000 reflecting strong traditional agency
universal and life production. Of the September 30, 2001 premiums, 21%
were attributable to SSB.
Strong retention margins and steady sales, despite declining market
conditions, drove policyholder benefit reserves, contractholder funds
and separate account reserves to $10.0 billion at September 30, 2001,
up from $9.4 billion at December 31, 2000.
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. The Company does not have surplus available to pay
dividends to its parent in 2001 without prior approval of the
Connecticut Insurance Department. The Company did not pay any dividends
to its parent during the nine months ended September 30, 2001 and 2000.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 2 of Notes to Condensed 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, the resolution of legal proceedings.
11
THE TRAVELERS LIFE AND ANNUITY COMPANY
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
3.01 Charter of The Travelers Life and Annuity Company (the
"Company"), as amended on April 10, 1990, incorporated
herein by reference to Exhibit 6(a) to the Registration
Statement on Form N-4, File No. 33-58131, filed on
March 17, 1995.
3.02 By-laws of the Company, as amended on October 20, 1994,
incorporated herein by reference to Exhibit 6(b) to the
Registration Statement on Form N-4, File No. 33-58131,
filed on March 17, 1995.
(b) REPORTS ON FORM 8-K.
None.
12
THE TRAVELERS LIFE AND ANNUITY COMPANY
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 LIFE AND ANNUITY 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)
13