UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes |X| No |_|
At February 28, 2002 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 I(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
THE TRAVELERS LIFE AND ANNUITY COMPANY
TABLE OF CONTENTS
Form 10-K
Item Number PART I Page
- ----------- ----
1. Business....................................................................................2
2. Properties..................................................................................4
3. Legal Proceedings...........................................................................4
4. Submission of Matters to a Vote of Security Holders.........................................4
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.......................5
6. Selected Financial Data.....................................................................5
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......5
7A. Quantitative and Qualitative Disclosures About Market Risk..................................8
8. Financial Statements and Supplementary Data................................................10
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......38
PART III
10. Directors and Executive Officers of the Registrant.........................................38
11. Executive Compensation.....................................................................38
12. Security Ownership of Certain Beneficial Owners and Management.............................38
13. Certain Relationships and Related Transactions.............................................38
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................39
Exhibit Index..............................................................................40
Signatures.................................................................................41
Index to Financial Statements and Financial Statement Schedules............................42
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
PART I
Item 1. Business.
GENERAL
The Travelers Life and Annuity Company (TLAC or 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 periodic reports of Citigroup
provide additional business and financial information concerning that company
and its consolidated subsidiaries. On February 4, 2002, the Travelers Insurance
Group Inc. (TIGI), TIC's parent at December 31, 2001, changed its name to
Travelers Property Casualty Corp. (TPC). TPC has filed a registration statement
on Form S-1, relating to an offering of common stock and other securities with
the Securities and Exchange Commission on February 8, 2002. At the time of such
offering, it is expected that TIC will no longer be a subsidiary of TPC, but
will remain an indirect wholly owned subsidiary of Citigroup. See Note 13 of
Notes to Financial Statements.
The Company is a stock insurance company chartered in 1973 in the State of
Connecticut and has been continuously engaged in the insurance business since
that time. The Company is licensed to conduct life and annuity insurance
business in all the states except New York. The Company is also licensed to
conduct life and annuity insurance business in the District of Columbia and
Puerto Rico.
The Company offers fixed and variable deferred annuities and individual life
insurance to individuals and small businesses. The Company commenced writing
individual life and deferred annuity business in 1995. These products are
distributed primarily through two affiliated channels, Salomon Smith Barney
(SSB) and Primerica Financial Services (Primerica), and two non-affiliated
channels, a nationwide network of independent financial professionals and
independent wirehouses and broker-dealers. In addition, the Company distributes
these products through CitiStreet Retirement Services and Citibank, N.A.
(Citibank), also 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.
The Company has assets held in a separate account related to reserves on
structured settlement contracts that provide guarantees for the contractholders
independent of the investment performance of the separate account assets. The
assets held in this separate account are owned by the Company and
contractholders do not share in their investment performance. These contracts
were purchased by the property casualty affiliates of the Company in connection
with the settlement of certain of their policyholder obligations. Effective
April 1998, the Company no longer writes structured settlement contracts.
INSURANCE REGULATIONS
Insurance Regulatory Information System
The National Association of Insurance Commissioners (NAIC) Insurance Regulatory
Information System ("IRIS") was developed to help state regulators identify
companies that may require special attention. The IRIS system consists of a
statistical phase and an analytical phase whereby financial examiners review
annual statements and financial ratios. The statistical phase consists of 12 key
financial ratios based on year-end data that are generated from the NAIC
database annually; each ratio has an established
2
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
"usual range" of results. These ratios assist state insurance departments in
executing their statutory mandate to oversee the financial condition of
insurance companies.
A ratio result falling outside the usual range of IRIS ratios is not considered
a failing result; rather, unusual values are viewed as part of the regulatory
early monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall out of the usual range for one or
more ratios because of specific transactions that are in themselves immaterial.
Generally, an insurance company will become subject to regulatory scrutiny if it
falls outside the usual ranges for four or more of the ratios. Prior to
codification of statutory accounting principles effective in 2001, 15% of the
companies included in the IRIS system were expected by the NAIC, in normal
years, to be outside the usual range on four or more ratios.
In 2000, four of the Company's IRIS ratios had fallen outside of the usual range
due to growth in sales of deferred annuities. For 2000, the regulators have been
satisfied upon follow-up that there was no solvency problem. In 2001, the same
four ratios have fallen outside of the usual range and management believes that
the resolution in the current year would be the same, however no assurances at
this time can be given that such resolution will be the same as in prior years.
This statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 8. No
regulatory action has been taken by any state insurance department or the NAIC
with respect to IRIS ratios of the Company during the two years ended December
31, 2001.
Risk-Based Capital (RBC) Requirements
In order to enhance the regulation of insurer solvency, the NAIC adopted a
formula and model law to implement RBC requirements for most life and annuity
insurance companies, which are designed to determine minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. For this purpose, an insurer's total
adjusted capital is measured in relation to its specific asset and liability
profiles. A company's risk-based capital is calculated by applying factors to
various asset, premium and reserve items, where the factor is higher for those
items with greater underlying risk and lower for less risky items.
The RBC formula for life insurers measures four major areas of risk:
o asset risk (i.e., the risk of asset default),
o insurance risk (i.e., the risk of adverse mortality and morbidity
experience),
o interest rate risk (i.e., the risk of loss due to changes in
interest rates) and
o business risk (i.e., normal business and management risk).
Under laws adopted by the states, insurers having less total adjusted capital
than that required by the RBC calculation will be subject to varying degrees of
regulatory action, depending upon the level of capital inadequacy.
The RBC law provides for four levels of regulatory action as defined by the
NAIC. The extent of regulatory intervention and action increases as the level of
total adjusted capital to RBC falls. The first level, the company action level,
requires an insurer to submit a plan of corrective actions to the regulator if
total adjusted capital falls below 200% of the RBC amount. The second level, the
regulatory action level, requires an insurer to submit a plan containing
corrective actions and requires the relevant insurance commissioner to perform
an examination or other analysis and issue a corrective order if total
3
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
adjusted capital falls below 150% of the RBC amount. The third level, the
authorized control level, authorizes the relevant commissioner to take whatever
regulatory actions are considered necessary to protect the best interest of the
policyholders and creditors of the insurer which may include the actions
necessary to cause the insurer to be placed under regulatory control, i.e.,
rehabilitation or liquidation, if total adjusted capital falls below 100% of the
RBC amount. The fourth level, the mandatory control level, requires the relevant
insurance commissioner to place the insurer under regulatory control if total
adjusted capital falls below 70% or the RBC amount.
The formulas have not been designed to differentiate among adequately
capitalized companies, which operate with higher levels of capital. Therefore,
it is inappropriate and ineffective to use the formula to rate or rank
companies. At December 31, 2001, the Company had total adjusted capital in
excess of amounts requiring company action or any level of regulatory action at
any prescribed RBC level.
Insurance Regulation Concerning Dividends
The Company is domiciled in the State of Connecticut. The insurance holding
company law of Connecticut requires notice to, and approval by, the State of
Connecticut Insurance Department for the declaration or payment of any dividend
which, together with other distributions made within the preceding twelve
months, exceeds the greater of (i) 10% of the insurer's surplus or (ii) the
insurer's net gain from operations for the twelve-month period ending on the
preceding December 31st, in each case determined in accordance with statutory
accounting practices. Such declaration or payment is further limited by adjusted
unassigned funds (surplus), as determined in accordance with statutory
accounting practices. The Company does not have surplus available to pay
dividends to TIC in 2002 without prior approval of the State of Connecticut
Insurance Department.
Item 2. Properties.
The Company's executive offices are located in Hartford, Connecticut. TIC owns
buildings containing approximately 1.4 million square feet of office space
located in Hartford serving as the home office for the Company, TIC and its
property casualty affiliates. The Company reimburses TIC for use of this space
on a cost allocation method based generally on estimated usage by department.
Management believes that these facilities are suitable and adequate for the
Company's current needs. (See Note 13 of Notes to Financial Statements for
additional information regarding these facilities).
The foregoing discussion does not include information on investment properties.
Item 3. Legal Proceedings.
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.
This statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 8.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
4
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company has 100,000 authorized shares of common stock, of which 30,000 are
issued and outstanding as of December 31, 2001. All outstanding shares of the
Company's common stock are held by TIC, and there exists no established public
trading market for the common stock of the Company. The Company did not pay
dividends in 2001 or 2000. See Note 6 of Notes to Financial Statements for
dividend restrictions.
Item 6. Selected Financial Data.
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
Item 7. 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 I(2)(a) of Form 10-K.
On February 4, 2002, the Travelers Insurance Group Inc. (TIGI), TIC's parent at
December 31, 2001, changed its name to Travelers Property Casualty Corp. (TPC).
TPC has filed a registration statement on Form S-1, relating to an offering of
common stock and other securities, with the Securities and Exchange Commission
on February 8, 2002. At the time of such offering, it is expected that TIC will
no longer be a subsidiary of TPC, but will remain an indirect wholly owned
subsidiary of Citigroup Inc. (Citigroup). See Note 13 of Notes to Financial
Statements.
Significant Accounting Policies
The financial statements contain a summary of the Company's significant
accounting policies, including a discussion of recently-issued accounting
pronouncements. Certain of these policies are considered to be important to the
portrayal of the Company's financial condition since they require management to
make difficult, complex or subjective judgements, some of which may relate to
matters that are inherently uncertain. These policies include valuation of
financial instruments where no ready market exists and insurance policy and
claims reserves. Additional information about these policies can be found in
Note 1 of Notes to Financial Statements.
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks. 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. Fixed maturities, including instruments subject to securities
lending agreements (see Note 2 of Notes to Financial Statements), 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.
5
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
Future Policy Benefits
Future policy benefits represent liabilities for future insurance policy
benefits. Benefit reserves for life insurance policies and annuities have been
computed based upon mortality, morbidity, persistency and interest assumptions
applicable to these coverages, which range from 2.5% to 7.8%, including adverse
deviation. These assumptions consider Company experience and industry standards.
The assumptions vary by plan, age at issue, year of issue and duration.
Appropriate recognition has been given to experience rating and reinsurance.
Deferred Acquisition Costs
Costs of acquiring individual life insurance and annuity business, 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, are deferred. Acquisition costs relating to traditional life
insurance, including term insurance, are amortized in relation to anticipated
premiums. Universal life costs are amortized in relation to estimated gross
profits, and annuity contracts employ a level yield method. A 15 to 20-year
amortization period is used for life insurance, and a 7 to 20-year period is
employed for annuities. Deferred acquisition costs are reviewed periodically for
recoverability to determine if any adjustment is required. Adjustments, if any,
are charged to income.
Premiums
Premiums are recognized as revenues when due.
RESULTS OF OPERATIONS ($ in millions)
For the years ended December 31, 2001 2000
-------------------------------- ---- ----
Revenues $503.9 $377.7
------ ------
Net income (1) $115.1 $ 90.9
====== ======
(1) Includes net realized investment gains (losses) of $16.9 million and
$(4.8) million in 2001 and 2000, respectively.
Net income was $115.1 million and $90.9 million in 2001 and 2000, respectively.
Operating income, defined as income before net realized gains or losses on
investments, was $98.2 million and $95.7 million in 2001 and 2000, respectively.
The year over year increase in operating income was attributable to strong
business volumes and the related investment income. The business volume growth
also contributed to the 37% increase in benefits and expenses, and in particular
interest credited to contractholders. The business volume growth in the
individual annuity and individual life business is reflected in the 36% growth
in fee income from $127.4 million in 2000 to $173.1 million in 2001. The
increases in amortization of deferred acquisition costs and in operating
expenses were also due to such business volume growth.
6
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
PREMIUMS AND DEPOSITS ($ in millions)
For the years ended December 31, 2001 2000
-------------------------------- ---- ----
Deposits
Individual Annuity $3,135 $3,280
Individual Life 299 179
Other Annuity 6 9
------ ------
Total Deposits 3,440 3,468
------ ------
Total Premiums 39 34
------ ------
Total premiums and deposits $3,479 $3,502
====== ======
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 5% in 2001 to $3.1 billion
from $3.3 billion in 2000. This decrease was driven by variable annuity sales
that declined to $1.9 billion in 2001 from $2.6 billion in the prior year. This
decline was partially offset by a 75% increase in fixed annuity sales to $1.2
billion in 2001 from $700 million in 2000. Individual annuity account balances
were $9.7 billion at December 31, 2001 up 24.3% from $7.8 billion at December
31, 2000 due to strong retention and a 178% increase in non-proprietary
broker-dealer sales.
The individual life premiums and deposits grew 62% to $335 million in 2001
versus $207 million in 2000 reflecting strong traditional agency universal and
life production. Of the December 31, 2001 premiums, 21% were attributable to
sales by SSB.
OUTLOOK
The Company is included in the Travelers Life & Annuity segment of TIC and its
outlook should be considered within that context. Travelers Life & Annuity
should benefit from growth in the aging population which is becoming more
focused on the need to accumulate adequate savings for retirement, to protect
these savings and to plan for the transfer of wealth to the next generation.
Travelers Life & Annuity is well-positioned to take advantage of the favorable
long-term demographic trends through its strong financial position, widespread
brand name recognition and broad array of competitive life, annuity and
retirement and estate planning products sold through established distribution
channels.
However, competition in both product pricing and customer service is
intensifying. While there has been some consolidation within the insurance
industry, other financial services organizations are increasingly involved in
the sale and/or distribution of insurance products. Financial services reform is
likely to have many effects on the life insurance industry and the results will
take time to assess; however, heightened competition is expected. Also, the
annuities business is interest rate and market sensitive, and swings in interest
rates and equity markets could influence sales and retention of in-force
policies. In order to strengthen its competitive position, Travelers Life &
Annuity expects to maintain a current product portfolio, further diversify its
distribution channels and retain its financial position through increased sales
growth and maintenance of an efficient cost structure. The statements above are
forward-looking
7
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
statements within the meaning of the Private Securities Litigation Reform Act.
See "Forward-Looking Statements" on this page.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to 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 and the Company's market risk as
well as the discussions of the Company's prospects under "Outlook" on page 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 2001.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.
The primary market risk to the Company's investment portfolio is interest rate
risk. The Company's exposure to equity price risk and foreign exchange risk is
not significant. The Company has no direct commodity risk.
The interest rate risk taken in the investment portfolio is managed relative to
the duration of the liabilities. The portfolio is differentiated by business
unit, with each unit's portfolio structured to meet its particular needs.
Potential liquidity needs of the business are also key factors in managing the
investment portfolio. The portfolio duration relative to the liabilities'
duration is primarily managed through cash market transactions. For additional
information regarding the Company's investment portfolio see Note 2 of Notes to
Financial Statements.
There were no significant changes in the Company's primary market risk exposures
or in how those exposures are managed compared to the year ended December 31,
2000. The Company does not anticipate significant changes in the Company's
primary market risk exposures or in how those exposures are managed in future
reporting periods based upon what is known or expected to be in effect in future
reporting periods. The statements above are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act. See
"Forward-Looking Statements" above.
8
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
Sensitivity Analysis
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near-term" means a period of time going forward up to one year from the
date of the financial statements. Actual results may differ from the
hypothetical change in market rates assumed in this report, especially since
this sensitivity analysis does not reflect the results of any actions that would
be taken by the Company to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, mortgage loans, short-term securities, cash,
investment income accrued, policy loans, contractholder funds, and derivative
financial instruments. In addition, certain non-financial instrument liabilities
have been included in the sensitivity analysis model. These non-financial
instruments include future policy benefits and policy and contract claims. The
primary market risk to the Company's market sensitive instruments is interest
rate risk. The sensitivity analysis model uses a 100 basis point change in
interest rates to measure the hypothetical change in fair value of financial
instruments and the non-financial instruments included in the model.
For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and reset
features. Portfolio durations are calculated on a market value weighted basis,
including accrued investment income, using trade date holdings as of December
31, 2001 and 2000. The sensitivity analysis model used by the Company produces a
loss in fair value of interest rate sensitive invested assets of approximately
$204 million and $141 million based on a 100 basis point increase in interest
rates as of December 31, 2001 and 2000, respectively.
Liability durations are determined consistently with the determination of
liability fair values. Where fair values are determined by discounting expected
cash flows, the duration is the percentage change in the fair value for a 100
basis point change in the discount rate. Where liability fair values are set
equal to surrender values, option-adjusted duration techniques are used to
calculate changes in fair values. The sensitivity analysis model used by the
Company produces a decrease in fair value of interest rate sensitive insurance
policy and claims reserves of approximately $176 million and $120 million based
on a 100 basis point increase in interest rates as of December 31, 2001 and
2000, respectively.
Based on the sensitivity analysis model used by the Company, the net loss in
fair value of market sensitive instruments as a result of a 100 basis point
increase in interest rates as of December 31, 2001 and 2000 is not material.
9
THE TRAVELERS LIFE AND ANNUITY COMPANY
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
----
Independent Auditors' Report...............................................11
Financial Statements:
Statements of Income for the years ended
December 31, 2001, 2000 and 1999.......................................12
Balance Sheets as of December 31, 2001 and 2000........................13
Statements of Changes in Retained Earnings and Accumulated
Other Changes in Equity from Nonowner Sources for the years
ended December 31, 2001, 2000 and 1999.................................14
Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.......................................15
Notes to Financial Statements..........................................16
10
Independent Auditors' Report
The Board of Directors and Shareholder
The Travelers Life and Annuity Company:
We have audited the accompanying balance sheets of The Travelers Life and
Annuity Company as of December 31, 2001 and 2000, and the related statements of
income, changes in retained earnings and accumulated other changes in equity
from nonowner sources, and cash flows for each of the years in the three-year
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of The Travelers Life and Annuity
Company as of December 31, 2001 and 2000, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for derivative instruments and hedging activities and for
securitized financial assets in 2001.
/s/ KPMG LLP
Hartford, Connecticut
January 17, 2002, except as to
Note 13, which is as of February 8, 2002
11
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF INCOME
($ in thousands)
For the Year Ended December 31, 2001 2000 1999
---- ---- ----
REVENUES
Premiums $ 39,222 $ 33,941 $ 25,270
Net investment income 251,054 214,174 177,179
Realized investment gains (losses) 26,144 (7,396) (4,973)
Fee income 173,113 127,378 63,722
Other revenues 14,317 9,625 4,072
- ---------------------------------------------------------------------------------------------------------------
Total Revenues 503,850 377,722 265,270
- ---------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 88,842 78,403 78,072
Interest credited to contractholders 125,880 77,579 56,216
Amortization of deferred acquisition costs 89,475 68,254 38,902
Operating expenses 23,404 14,095 11,326
- ---------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 327,601 238,331 184,516
Income before federal income taxes and cumulative effect
of change in accounting principle 176,249 139,391 80,754
Federal income taxes
Current (19,007) 11,738 21,738
Deferred 80,096 36,748 6,410
- ---------------------------------------------------------------------------------------------------------------
Total Federal Income Taxes 61,089 48,486 28,148
- ---------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting
principle 115,160 90,905 52,606
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of tax (62) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income $ 115,098 $ 90,905 $ 52,606
===============================================================================================================
See Notes to Financial Statements.
12
THE TRAVELERS LIFE AND ANNUITY COMPANY
BALANCE SHEETS
($ in thousands)
At December 31, 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value (including $102,347 and
$49,465 subject to securities lending agreements) $ 3,352,227 $ 2,297,141
Equity securities, at fair value 15,738 22,551
Mortgage loans 125,629 132,768
Short-term securities 206,759 247,377
Other invested assets 238,429 222,325
- -------------------------------------------------------------------------------------------------------------------------
Total Investments 3,938,782 2,922,162
- -------------------------------------------------------------------------------------------------------------------------
Separate accounts 7,681,791 6,802,985
Deferred acquisition costs 814,369 579,567
Premiums and fees receivable 56,207 26,184
Other assets 165,118 153,423
Deferred federal income taxes -- 11,296
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $12,656,267 $10,495,617
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Future policy benefits and claims $ 1,040,856 $ 989,576
Contractholder funds 2,624,570 1,631,611
Separate accounts 7,681,791 6,802,985
Other liabilities 261,395 211,441
Deferred federal income taxes 70,091 --
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities 11,678,703 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 541,164 426,066
Accumulated other changes in equity from nonowner sources 16,084 13,622
- -------------------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 977,564 860,004
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $12,656,267 $10,495,617
=========================================================================================================================
See Notes to Financial Statements.
13
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CHANGES IN RETAINED EARNINGS AND ACCUMULATED
OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES
($ in thousands)
For the Year Ended December 31,
- --------------------------------------------------------------------------------------------------------
Statement of Changes in Retained Earnings 2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 426,066 $ 335,161 $ 282,555
Net income 115,098 90,905 52,606
- --------------------------------------------------------------------------------------------------------
Balance, end of year $ 541,164 $ 426,066 $ 335,161
========================================================================================================
- --------------------------------------------------------------------------------------------------------
Statement of Accumulated Other Changes
In Equity From Nonowner Sources
- --------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 13,622 $ (39,312) $ 87,889
Cumulative effect of change in accounting for
derivative instruments and hedging activities, net
of tax 62 -- --
Unrealized gains (losses), net of tax (924) 52,934 (127,201)
Derivative instrument hedging activity gains,
net of tax 3,324 -- --
- --------------------------------------------------------------------------------------------------------
Balance, end of year $ 16,084 $ 13,622 $ (39,312)
========================================================================================================
- --------------------------------------------------------------------------------------------------------
Summary of Changes in Equity
From Nonowner Sources
- --------------------------------------------------------------------------------------------------------
Net Income $ 115,098 $ 90,905 $ 52,606
Other changes in equity from
nonowner sources 2,462 52,934 (127,201)
- --------------------------------------------------------------------------------------------------------
Total changes in equity from
nonowner sources $ 117,560 $ 143,839 $ (74,595)
========================================================================================================
See Notes to Financial Statements.
14
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
Increase (Decrease) In Cash
($ in thousands)
For the Years Ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 37,915 $ 33,609 $ 24,804
Net investment income received 211,179 186,362 150,107
Benefits and claims paid (103,224) (96,890) (94,503)
Interest credited to contractholders (125,880) (77,579) (50,219)
Operating expenses paid (354,506) (325,180) (235,166)
Income taxes (paid) received 45,257 (38,548) (29,369)
Other, including fee income 180,710 176,822 46,028
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (108,549) (141,404) (188,318)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 97,712 220,841 213,402
Mortgage loans 20,941 28,477 28,002
Proceeds from sales of investments
Fixed maturities 938,987 843,856 774,096
Equity securities 6,363 30,772 5,146
Mortgage loans -- 15,260 --
Real estate held for sale (36) 2,115 --
Purchases of investments
Fixed maturities (2,022,618) (1,564,237) (1,025,110)
Equity securities (2,274) (20,361) (12,524)
Mortgage loans (14,494) (17,016) (8,520)
Policy loans, net (3,395) (2,675) (5,316)
Short-term securities (purchases) sales, net 40,618 (166,259) 45,057
Other investment (purchases) sales, net (6,334) 327 (44,621)
Securities transactions in course of settlement, net 64,698 21,372 (7,033)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (879,832) (607,528) (37,421)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 1,178,421 629,138 308,953
Contractholder fund withdrawals (185,464) (115,289) (83,817)
Contribution from parent company -- 250,000 --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 992,957 763,849 225,136
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 4,576 14,917 (603)
Cash at beginning of period 14,938 21 624
- ------------------------------------------------------------------------------------------------------------------------------
Cash at December 31, $ 19,514 $ 14,938 $ 21
==============================================================================================================================
See Notes to Financial Statements.
15
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO 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 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). On February 4, 2002, the
Travelers Insurance Group Inc. (TIGI), TIC's parent at December 31, 2001,
changed its name to Travelers Property Casualty Corp. (TPC). TPC has filed
a registration statement on Form S-1, relating to an offering of common
stock and other securities, with the Securities and Exchange Commission on
February 8, 2002. At the time of such offering, it is expected that TIC
will no longer be a subsidiary of TPC, but will remain an indirect wholly
owned subsidiary of Citigroup. See Note 13 of Notes to Financial
Statements. 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, the 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 offers a variety of variable annuity products where the
investment risk is borne by the contractholder, not the Company, and the
benefits are not guaranteed. The premiums and deposits related to these
products are reported in separate accounts. The Company considers it
necessary to differentiate, for financial statement purposes, the results
of the risks it has assumed from those it has not.
Certain prior year amounts have been reclassified to conform to the 2001
presentation.
Accounting Changes
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.
16
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
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
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 shareholder's equity. During the
twelve months ending December 31, 2001, the amount the Company
reclassified from accumulated other changes in equity from nonowner
sources into realized gains (losses) related to the cumulative effect
transition adjustment reported in accumulated other changes in equity from
nonowner sources was insignificant.
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. The adoption of EITF 99-20 had no
effect on the Company's results of operations, financial condition or
liquidity.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, a replacement of FASB Statement
No. 125" (FAS 140). Provisions of FAS 140 primarily relating to transfers
of financial assets and securitizations that differ from provisions of
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (FAS 125) are effective for transfers
taking place after March 31, 2001. Special purpose entities (SPEs) used in
securitizations that are currently qualifying SPEs under FAS 125 will
continue to be treated as qualifying SPEs so long as they issue no new
beneficial interests and accept no new asset transfers after March 31,
2001, other than transfers committed to prior to that date. Under FAS 140
qualifying SPEs are not consolidated by the transferor. FAS 140 also
amends the accounting for collateral and requires new disclosures for
collateral, securitizations, and retained interests in securitizations.
These provisions are effective for financial statements for fiscal years
ending after December 15, 2000. The accounting for collateral, as amended,
requires (a) certain assets pledged as collateral to be separately
reported in the consolidated balance sheet from assets not so encumbered
and (b) disclosure of assets pledged as collateral that have not been
reclassified and separately reported. The adoption of FAS 140 did not have
a significant effect on the Company's results of operations, financial
condition or liquidity. See Note 2.
Accounting Standards not yet Adopted
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 indefinite
useful lives created by business combinations accounted for using the
purchase method of accounting. Instead, goodwill and intangible assets
deemed to have indefinite useful lives will be subject to an annual review
for impairment. Other
17
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
intangible assets that are not deemed to have indefinite useful lives will
continue to be amortized over their useful lives. The Company had no
goodwill or intangible assets with indefinite useful lives at December 31,
2001.
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 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 Company adopted FAS 144 effective January 1, 2002. The provisions of
the new standard are generally to be applied prospectively and are not
expected to significantly affect the Company's results of operations,
financial condition or liquidity.
Accounting Policies
Investments
Fixed maturities include bonds, notes and redeemable preferred stocks.
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. 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.
Fixed maturities, including instruments subject to securities lending
agreements (see Note 2), 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.
18
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
Equity securities, which include common and non-redeemable preferred
stocks, are classified as "available for sale" and are 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 current real estate financing market. Impaired loans were
insignificant at December 31, 2001 and 2000.
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.
Other invested assets include partnership investments and real estate
joint ventures accounted for on the equity method of accounting. All
changes in equity of these investments are recorded in net investment
income. Also included in other invested assets are policy loans which 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.
Accrual of investment income, included in other assets, 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.
Investments in default were insignificant.
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures contracts, interest rate swaps, options and forward contracts, as
a means of hedging exposure to interest rate changes, equity price change
and foreign currency risk. The Company does not hold or issue derivative
instruments for trading purposes. (See Note 8 for a more detailed
description of the Company's derivative use.) Derivative financial
instruments in a gain position are reported in the balance sheet in other
invested assets while derivative financial instruments in a loss position
are reported in the balance sheet in other liabilities.
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.
19
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
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 (losses), together with changes in the fair
value of the related hedged item. The Company's fair value hedges are
primarily of available-for-sale securities.
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 (losses). The Company's cash flow hedges
primarily include hedges of 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 forward 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 (losses). For the year ended
December 31, 2001 the Company did not utilize net investment hedges.
Derivatives that are used to hedge instruments that are carried at fair
value 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 a 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).
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 (losses).
20
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
Financial instruments with embedded derivatives:
The Company bifurcates an embedded derivative where a.) 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, b.) the entire instrument would not otherwise be remeasured at
fair value and c.) 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 gains
(losses). Derivatives embedded in convertible debt securities are
classified in the 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
reflected in realized investment gains (losses) consistent with the hedge
instrument. Derivatives embedded in variable annuity contracts are
classified in the 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 consistent with the
risk management strategy as follows. Derivatives used for hedging purposes
were generally accounted for using hedge accounting. To qualify for hedge
accounting the change in value of the derivative was expected to
substantially offset the changes in value of the hedged item. Hedges were
monitored to ensure that there was a high correlation between the
derivative instruments and the hedged investment. Derivatives that did not
qualify for hedge accounting were marked to market with changes in market
value reflected in the statement of income as realized gains (losses).
Payments to be received or made under interest rate swaps were accrued and
recognized in net investment income. Swaps hedging investments were
carried at fair value with unrealized gains (losses), net of taxes,
charged directly to shareholder's equity. 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
investments gains (losses). Forward contracts hedging investments were
marked to market based on changes in the spot rate with changes in market
value reflected in realized investments gains (losses) and any forward
premium or discount was recognized in net investment income over the life
of the contract.
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. Other-than-temporary declines in fair value of
investments are included in realized investment gains and losses. Also
included 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.
21
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
Separate Accounts
The Company has separate account assets and liabilities representing funds
for which investment income and investment gains and losses accrue
directly to, and investment risk is borne by, the contractholders. Each of
these accounts have specific investment objectives. The assets and
liabilities of these accounts are carried at fair value, and amounts
assessed to the contractholders for management services are included in
fee income. 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.
Deferred Acquisition Costs
Costs of acquiring individual life insurance and annuity business,
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, are deferred. Acquisition costs
relating to traditional life insurance, including term insurance, are
amortized in relation to anticipated premiums. Universal life costs are
amortized in relation to estimated gross profits, and annuity contracts
employ a level yield method. A 15 to 20-year amortization period is used
for life insurance, and a 7 to 20-year period is employed for annuities.
Deferred acquisition costs are reviewed periodically for recoverability to
determine if any adjustment is required. Adjustments, if any, are charged
to income.
Value of Insurance In Force
The value of insurance in force, reported in other assets, is an asset
recorded at the time of acquisition of an insurance company. It represents
the actuarially determined present value of anticipated profits to be
realized from annuity 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 an
interest rate of 16% for the annuity business acquired. The 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. The carrying value
at December 31, 2001 and 2000 was insignificant.
Future Policy Benefits
Future policy benefits represent liabilities for future insurance policy
benefits. Benefit reserves for life insurance policies and annuities have
been computed based upon mortality, morbidity, persistency and interest
assumptions applicable to these coverages, which range from 2.5% to 7.8%,
including adverse deviation. These assumptions consider Company experience
and industry standards. The assumptions vary by plan, age at issue, year
of issue and duration. Appropriate recognition has been given to
experience rating and reinsurance.
Contractholder Funds
Contractholder funds represent receipts from the issuance of universal
life, certain deferred annuity contracts, and structured settlement
contracts. Contractholder fund balances are increased by such receipts and
credited interest and reduced by withdrawals, mortality charges and
administrative expenses charged to the contractholders. Interest rates
credited to contractholder funds range from 3.0% to 14.0%.
22
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO 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 premiums 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, 2001 and 2000, the Company's liability for guaranty fund
assessments was not significant.
Permitted Statutory Accounting Practices
The Company, domiciled in the State of Connecticut, prepares statutory
financial statements in accordance with the accounting practices
prescribed or permitted by the State of Connecticut Insurance Department.
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 impact of any permitted
accounting practices on statutory surplus of the Company is not material.
Premiums
Premiums are recognized as revenues when due.
Fee Income
Fee income includes mortality, administrative and equity protection
charges, and management fees earned on the Universal Life and Deferred
Annuity separate account businesses.
Other Revenues
Other revenues include surrender penalties and other charges related to
annuity and universal life contracts. Also included is amortization of
deferred income.
Federal Income Taxes
The provision for federal income taxes comprises 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.
23
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
2. INVESTMENTS
Fixed Maturities
The amortized cost and fair values of investments in fixed maturities were
as follows:
Gross Gross
December 31, 2001 Amortized Unrealized Unrealized Fair
($ in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------
Available For Sale:
Mortgage-backed securities - CMOs
and pass-through securities $ 281,583 $ 4,744 $ 3,577 $ 282,750
U.S. Treasury securities and
obligations of U.S. Government and
government agencies and authorities 197,703 2,310 10,883 189,130
Obligations of states and political
subdivisions 44,587 1,903 355 46,135
Debt securities issued by foreign
governments 53,207 2,454 716 54,945
All other corporate bonds 2,112,121 62,649 25,784 2,148,986
All other debt securities 613,451 21,378 10,109 624,720
Redeemable preferred stock 6,090 365 894 5,561
-------------------------------------------------------------------------------------------------------
Total Available For Sale $3,308,742 $95,803 $52,318 $3,352,227
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Gross Gross
December 31, 2000 Amortized Unrealized Unrealized Fair
($ in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------
Available For Sale:
Mortgage-backed securities - CMOs
and pass-through securities $ 219,851 $ 7,369 $ 1,767 $ 225,453
U.S. Treasury securities and
obligations of U.S. Government and
government agencies and authorities 112,021 12,200 286 123,935
Obligations of states and political
subdivisions 30,583 2,698 329 32,952
Debt securities issued by foreign
governments 50,624 1,149 939 50,834
All other corporate bonds 1,403,941 33,326 26,904 1,410,363
All other debt securities 442,390 10,734 7,837 445,287
Redeemable preferred stock 9,007 853 1,543 8,317
-------------------------------------------------------------------------------------------------------
Total Available For Sale $2,268,417 $68,329 $39,605 $2,297,141
-------------------------------------------------------------------------------------------------------
Proceeds from sales of fixed maturities classified as available for sale
were $939 million, $844 million and $774 million in 2001, 2000 and 1999,
respectively. Gross gains of $67.0 million, $22.4
24
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
million and $24.6 million and gross losses of $33.9 million, $34.1 million
and $22.0 million in 2001, 2000 and 1999, respectively were realized on
those sales.
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
$628.2 million and $530.2 million at December 31, 2001 and 2000,
respectively.
The amortized cost and fair value of fixed maturities available for sale
at December 31, 2001, by contractual maturity, are shown below. Actual
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
-----------------------------------------------------------------------------------
Amortized Fair
($ in thousands) Cost Value
-----------------------------------------------------------------------------------
Maturity:
Due in one year or less $ 86,042 $ 86,961
Due after 1 year through 5 years 1,026,747 1,052,879
Due after 5 years through 10 years 1,212,985 1,230,435
Due after 10 years 701,385 699,202
-----------------------------------------------------------------------------------
3,027,159 3,069,477
-----------------------------------------------------------------------------------
Mortgage-backed securities 281,583 282,750
-----------------------------------------------------------------------------------
Total Maturity $3,308,742 $3,352,227
-----------------------------------------------------------------------------------
The Company makes significant 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 tranches 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 an assessment indicates a
favorable risk/return tradeoff. The Company does not purchase residual
interests in CMOs.
At December 31, 2001 and 2000, the Company held CMOs with a fair value of
$212.5 million and $189.4 million, respectively. The Company's CMO
holdings were 49.5% and 55.4% collateralized by GNMA, FNMA or FHLMC
securities at December 31, 2001 and 2000, respectively. In addition, the
Company held $64.8 million and $31.0 million of GNMA, FNMA or FHLMC
mortgage-backed pass-through securities at December 31, 2001 and 2000,
respectively. All of these securities are rated AAA.
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
25
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
reinvests in a short-term investment pool. See Note 10. The loaned
securities remain a recorded asset of the Company, however, the Company
records a liability for the amount of the collateral held, representing
its obligation to return the collateral related to these loaned
securities, and reports that liability as part of other liabilities in the
consolidated balance sheet. At December 31, 2001 and 2000, the Company
held collateral of $104.3 million and $50.7 million, respectively.
Equity Securities
The cost and fair values of investments in equity securities were as
follows:
-------------------------------------------------------------------------------------------
Gross Gross
Equity Securities: Unrealized Unrealized Fair
($ in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------
December 31, 2001
Common stocks $ 2,643 $ 97 $ 671 $ 2,069
Non-redeemable preferred stocks 13,608 439 378 13,669
-------------------------------------------------------------------------------------------
Total Equity Securities $16,251 $536 $1,049 $15,738
-------------------------------------------------------------------------------------------
December 31, 2000
Common stocks $ 2,861 $ 29 $ 845 $ 2,045
Non-redeemable preferred stocks 21,150 480 1,124 20,506
-------------------------------------------------------------------------------------------
Total Equity Securities $24,011 $509 $1,969 $22,551
-------------------------------------------------------------------------------------------
Proceeds from sales of equity securities were $6.4 million, $30.8 million
and $5.1 million in 2001, 2000 and 1999, respectively. Gross gains of $.8
million, $3.3 million and $1.5 million and gross losses of $1.9 million,
$.3 million and $.3 million were realized on those sales during 2001, 2000
and 1999, respectively.
Mortgage Loans
Underperforming assets include delinquent mortgage loans over 90 days past
due, loans in the process of foreclosure and loans modified at interest
rates below market.
At December 31, 2001 and 2000, the Company's mortgage loan portfolios
consisted of the following:
--------------------------------------------------------------------------
($ in thousands) 2001 2000
--------------------------------------------------------------------------
Current Mortgage Loans $125,131 $132,768
Underperforming Mortgage Loans 498 --
--------------------------------------------------------------------------
Total $125,629 $132,768
--------------------------------------------------------------------------
26
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
Aggregate annual maturities on mortgage loans at December 31, 2001 are as
follows:
----------------------------------------------------------------
($ in thousands)
2002 $ 9,814
2003 5,008
2004 8,028
2005 13,633
2006 14,596
Thereafter 74,550
----------------------------------------------------------------
Total $125,629
================================================================
Concentrations
There were no significant individual investment concentrations at December
31, 2001 and 2000.
The Company participates in a short-term investment pool maintained by an
affiliate. See Note 10.
Included in fixed maturities are below investment grade assets totaling
$182.3 million and $143.8 million at December 31, 2001 and 2000,
respectively. The Company defines its below investment grade assets as
those securities rated Ba1 (or its equivalent) or below by external rating
agencies, or the equivalent by internal analysts when a public rating does
not exist. Such assets include publicly traded below investment grade
bonds and certain other privately issued bonds and notes that are
classified as below investment grade.
The Company's industry concentrations of investments, primarily fixed
maturities, at fair value were as follows:
---------------------------------------------------------------------
($ in thousands) 2001 2000
---------------------------------------------------------------------
Electric Utilities $447,355 $157,401
Finance 286,824 204,994
Media 235,790 148,189
Banking 222,581 222,984
Telecommunications 213,644 167,204
---------------------------------------------------------------------
The Company held investments in foreign banks in the amount of $144
million and $139 million at December 31, 2001 and 2000, respectively,
which are included in the table above.
Below investment grade assets included in the preceding table include $38
million and $8 million in Electric Utilities and $21 million and $13
million in Media at December 31, 2001 and 2000, respectively. Other
industry categories had insignificant amounts of such assets.
27
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
Included in mortgage loans were the following group concentrations:
<Table>
<Caption>
- --------------------------------------------------------------------------------
At December 31, ($ in thousands) 2001 2000
- --------------------------------------------------------------------------------
STATE
- -----
California $43,700 $42,928
New York 23,129 23,585
- --------------------------------------------------------------------------------
PROPERTY TYPE
- -------------
Agricultural $66,459 $65,102
Office 37,243 39,504
Retail 6,173 14,941
- --------------------------------------------------------------------------------
</Table>
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, credit limits
and other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit. The Company's underwriting standards with respect
to new mortgage loans generally require loan to value ratios of 75% or
less at the time of mortgage origination.
Non-Income Producing Investments
Investments included in the December 31, 2001 and 2000 balance sheets that
were non-income producing were insignificant.
Restructured Investments
Mortgage loan and debt securities which were restructured at below market
terms at December 31, 2001 and 2000 were insignificant. The new terms of
restructured investments typically defer a portion of contract interest
payments to varying future periods. The accrual of interest is suspended
on all restructured assets, and interest income is reported only as
payment is received. Gross interest income on restructured assets that
would have been recorded in accordance with the original terms of such
assets was insignificant. Interest on these assets, included in net
investment income, was insignificant.
Net Investment Income
-----------------------------------------------------------------------------------------------------
For The Year Ended December 31,
($ in thousands) 2001 2000 1999
-----------------------------------------------------------------------------------------------------
Gross Investment Income
Fixed maturities $217,813 $163,091 $136,039
Joint ventures and partnerships 21,481 34,574 22,175
Mortgage loans 11,327 14,776 16,126
Other 3,288 4,398 4,417
-----------------------------------------------------------------------------------------------------
Total gross investment income 253,909 216,839 178,757
-----------------------------------------------------------------------------------------------------
Investment expenses 2,855 2,665 1,578
-----------------------------------------------------------------------------------------------------
Net investment income $251,054 $214,174 $177,179
-----------------------------------------------------------------------------------------------------
28
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
Realized and Unrealized Investment Gains (Losses)
Net realized investment gains (losses) for the periods were as follows:
---------------------------------------------------------------------------------------------------------
For The Year Ended December 31,
($ in thousands) 2001 2000 1999
---------------------------------------------------------------------------------------------------------
Realized
Fixed maturities $ 33,061 $(11,742) $ 2,657
Joint ventures and partnerships (4,980) (1,909) (10,450)
Mortgage Loans (707) 3,825 602
Other (1,230) 2,430 2,218
---------------------------------------------------------------------------------------------------------
Total realized investment gains (losses) $ 26,144 $ (7,396) $ (4,973)
---------------------------------------------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are included as
accumulated other changes in equity from nonowner sources in shareholder's
equity were as follows:
----------------------------------------------------------------------------------------------------------
For The Year Ended December 31,
($ in thousands) 2001 2000 1999
----------------------------------------------------------------------------------------------------------
Unrealized
Fixed maturities $ 14,761 $ 78,278 $(180,409)
Other invested assets (16,182) 3,159 (15,285)
----------------------------------------------------------------------------------------------------------
Total unrealized investment gains (losses) (1,421) 81,437 (195,694)
Related taxes (497) 28,503 (68,493)
----------------------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) (924) 52,934 (127,201)
Balance beginning of year 13,622 (39,312) 87,889
----------------------------------------------------------------------------------------------------------
Balance end of year $ 12,698 $ 13,622 $ (39,312)
----------------------------------------------------------------------------------------------------------
3. REINSURANCE
The Company uses reinsurance 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. 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
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.
29
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
Total in-force business ceded under reinsurance contracts was $23.8
billion and $17.4 billion at December 31, 2001 and 2000, including $8.8
million and $28.9 million, respectively to TIC. Total life insurance
premiums ceded were $11.9 million, $8.9 million and $6.5 million in 2001,
2000 and 1999, respectively. Ceded premiums paid to TIC were immaterial
for these same periods.
4. DEPOSIT FUNDS AND RESERVES
At December 31, 2001 and 2000, the Company had $3.7 billion and $2.6
billion of life and annuity deposit funds and reserves, respectively. Of
that total, $1.5 billion and $1.4 billion, respectively, were not subject
to discretionary withdrawal based on contract terms. The remaining amounts
were life and annuity products that were subject to discretionary
withdrawal by the contractholders. Included in the amount that is subject
to discretionary withdrawal were $1.6 billion and $.9 billion of
liabilities that are surrenderable with market value adjustments. The
remaining $.6 billion and $.3 billion of life insurance and individual
annuity liabilities are subject to discretionary withdrawals with an
average surrender charge of 4.9% and 5.4%, respectively. The life
insurance risks would have to be underwritten again if transferred to
another carrier, which is considered a significant deterrent for long-term
policyholders. Insurance liabilities that are surrendered or withdrawn
from the Company are reduced by outstanding policy loans and related
accrued interest prior to payout.
5. FEDERAL INCOME TAXES
The net deferred tax liability and asset at December 31, 2001 and 2000
were comprised of the tax effects of temporary differences related to the
following assets and liabilities:
($ in thousands) 2001 2000
----------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 180,468 $ 192,772
Other 1,904 2,510
----------------------------------------------------------------------------------------------------------
Total 182,372 195,282
----------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Investments, net (19,938) (16,956)
Deferred acquisition costs and value of insurance in force (231,454) (165,671)
Other (1,071) (1,359)
----------------------------------------------------------------------------------------------------------
Total (252,463) (183,986)
----------------------------------------------------------------------------------------------------------
Net Deferred Tax Asset (Liability) $ (70,091) $ 11,296
----------------------------------------------------------------------------------------------------------
TIC and its life insurance subsidiaries, including the Company, file a
consolidated federal income tax return. Federal income taxes are allocated
to each member on a separate return basis adjusted for credits and other
amounts required by the consolidation process. Any resulting liability has
been, and will be, paid currently to TIC. Any credits for losses have
been, and will be, paid by TIC to the extent that such credits are for tax
benefits that have been utilized in the consolidated federal income tax
return.
At December 31, 2001, the Company had no ordinary or capital loss
carryforwards.
30
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
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 $2.1 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 contemplated from
this account. At current rates the maximum amount of such tax would be
approximately $700 thousand.
6. SHAREHOLDER'S EQUITY
Shareholder's Equity and Dividend Availability
The Company's statutory net loss was $73.4 million, $66.2 million and
$23.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
Statutory capital and surplus was $407 million and $476 million at
December 31, 2001 and 2000, 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 commissioner (see Note 1, Summary
of Significant Accounting Policies, Permitted Statutory Accounting
Practices). The impact of this change on statutory capital and surplus was
not significant.
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. The Company
does not have surplus available to pay dividends to TIC in 2002 without
prior approval of the Connecticut Insurance Department.
In 2000, TIC contributed $250 million as additional paid-in capital to the
Company.
31
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
6. SHAREHOLDER'S EQUITY (continued)
Accumulated Other Changes in Equity from Nonowner Sources, Net of Tax
Changes in each component of Accumulated Other Changes in Equity from Nonowner
Sources were as follows:
Net Accumulated
Unrealized Other Changes
Gain (Loss) on Derivative In Equity from
Investment Instruments & Nonowner
($ in thousands) Securities Hedging Activities Sources
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1999 $ 87,889 $ -- $ 87,889
Unrealized loss on investment securities,
net of tax of $(70,234) (130,433) -- (130,433)
Less: reclassification adjustment for losses
included in net income, net of tax of $1,741 3,232 -- 3,232
- --------------------------------------------------------------------------------------------------------------------------------
Period change (127,201) -- (127,201)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 (39,312) -- (39,312)
Unrealized gains on investment securities,
net of tax of $25,914 48,127 -- 48,127
Less: reclassification adjustment for losses
included in net income, net of tax of $2,589 4,807 -- 4,807
- --------------------------------------------------------------------------------------------------------------------------------
Period change 52,934 -- 52,934
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 13,622 -- 13,622
Cumulative effect of change in accounting for derivative instruments
and hedging activities, net of tax of $33 -- 62 62
Unrealized gains on investment securities,
net of tax of $8,653 16,070 -- 16,070
Less: reclassification adjustment for gains
included in net income, net of tax of $(9,150) (16,994) -- (16,994)
Derivative instrument hedging activity gains, net of tax of $1,789 -- 3,324 3,324
- --------------------------------------------------------------------------------------------------------------------------------
Period change (924) 3,386 2,462
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 12,698 $ 3,386 $ 16,084
================================================================================================================================
7. BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by Citigroup. In addition, the Company provides
certain other postretirement benefits to retired employees through a plan
sponsored by TPC, TIC's direct parent (see Note 13). The Company's share
of net expense for the qualified pension and other postretirement benefit
plans was not significant for 2001, 2000 and 1999.
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 2001, 2000
and 1999.
See Note 10.
32
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
8. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivative Financial Instruments
The Company uses derivative financial instruments, including financial
futures contracts, interest rate swaps, options and forward contracts, as
a means of hedging exposure to interest rate changes, equity price change
and foreign currency risk. The Company does not hold or issue derivative
instruments for trading purposes.
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, commodity, or currency 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.
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 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.
Forward contracts are used on an ongoing basis to hedge the Company's
exposure to foreign currency exchange rates that result from 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.
Interest rate options were not significant at December 31, 2001 and 2000.
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.
33
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
Hedge ineffectiveness recognized related to fair value hedges and cash
flow hedges for the year ended December 31, 2001 was not significant. Cash
flow transaction amounts expected to be reclassified from accumulated
other changes in equity from nonowner sources into pretax earnings within
twelve months from December 31, 2001 is not significant.
During the year ended December 31, 2001 there were no discontinued
forecasted transactions.
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 interest rate swaps, currency swaps,
equity 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.
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 and
joint ventures. The notional values of loan commitments at December 31,
2001 and 2000 were $0 and $9.9 million, respectively. The notional values
of unfunded commitments were $43.8 million and $42.0 million at December
31, 2001 and 2000, respectively.
Fair Value of Certain Financial Instruments
The Company uses various financial instruments in the normal course of its
business. Fair values of financial instruments that are considered
insurance contracts are not required to be disclosed and are not included
in the amounts discussed.
At December 31, 2001, investments in fixed maturities had a carrying value
and a fair value of $3.4 billion compared with a carrying value and a fair
value of $2.3 billion at December 31, 2000. See Notes 1 and 2.
At December 31, 2001, mortgage loans had a carrying value of $125.6
million and a fair value of $131.6 million and at December 31, 2000 had a
carrying value of $132.7 million and a fair value of $134.1 million. In
estimating fair value, the Company used interest rates reflecting the
current real estate financing market.
The carrying values of short-term securities were $206.8 million and
$247.4 million in 2001 and 2000, respectively, which approximated their
fair values. Policy loans which are included in other invested assets had
carrying values of $16.3 million and $12.9 million in 2001 and 2000,
respectively, which also approximated their fair values.
34
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
The carrying values of $133.7 million and $101.4 million of financial
instruments classified as other assets approximated their fair values at
December 31, 2001 and 2000, respectively. The carrying values of $208.1
million and $173.5 million of financial instruments classified as other
liabilities also approximated their fair values at December 31, 2001 and
2000, respectively. Fair value is determined using various methods,
including discounted cash flows, as appropriate for the various financial
instruments.
At December 31, 2001, contractholder funds with defined maturities had a
carrying value of $1.9 billion and a fair value of $1.9 billion, compared
with a carrying value of $1.2 billion and a fair value of $1.2 billion at
December 31, 2000. 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
$806 million and a fair value of $675 million at December 31, 2001,
compared with a carrying value of $583 million and a fair value of $477
million at December 31, 2000. These contracts generally are valued at
surrender value.
9. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
See Note 8.
Litigation
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.
10. RELATED PARTY TRANSACTIONS
TIC handles banking functions, including payment of salaries and expenses
for the Company and some of its non-insurance affiliates. In addition,
investment advisory and management services, data processing services and
certain administrative services are provided by affiliated companies. TIC
provides various employee benefits coverages to employees of certain
subsidiaries of TPC. The premiums for these coverages were charged in
accordance with cost allocation procedures based upon salaries or census
and were immaterial for the years ended December 31, 2001 and 2000.
Charges for these services are shared by the companies on cost allocation
methods, based generally on estimated usage by department. (See Note 13).
TIC maintains a short-term investment pool in which the Company
participates. The position of each company participating in the pool is
calculated and adjusted daily. At December 31, 2001 and 2000, the pool
totaled approximately $5.6 billion and $4.4 billion, respectively. The
Company's share of the pool amounted to $90.6 million and $172.5 million
at December 31, 2001 and 2000, respectively, and is included in short-term
securities in the balance sheet.
35
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
In the normal course of business, management of both the Company and TIC
conducts reviews of the investment portfolios of each company to properly
match assets with liabilities. As a result of these reviews, the Company
sold $100 million of investments to TIC at arm's length, with a related
loss of $1.3 million in 2000.
The Company's Travelers Target Maturity (TTM) Modified Guaranteed Annuity
Contracts are subject to a limited guarantee agreement by TIC in a
principal amount of up to $450 million. TIC's obligation is to pay in full
to any owner or beneficiary of the TTM Modified Guaranteed Annuity
Contracts principal and interest as and when due under the annuity
contract to the extent that the Company fails to make such payment. In
addition, TIC guarantees that the Company will maintain a minimum
statutory capital and surplus level.
The Company sold structured settlement annuities to its property casualty
insurance affiliates. Policy reserves and contractholder fund liabilities
associated with these structured settlements were $607 million and $644
million at December 31, 2001 and 2000, respectively.
The Company distributes variable annuity products through its affiliate,
Salomon Smith Barney (SSB). Premiums and deposits related to these
products were $1.2 billion, $1.6 billion and $1.1 billion in 2001, 2000
and 1999, respectively. The Company also markets term and universal life
products through SSB. Life premiums related to such products were $74.5
million, $59.3 million and $40.8 million in 2001, 2000 and 1999,
respectively.
The Company also distributes deferred annuity products through its
affiliates Primerica Financial Services (Primerica), CitiStreet Retirement
Services and Citibank, N.A. (Citibank). Deposits received from Primerica
were $738 million, $844 million and $763 million in 2001, 2000 and 1999,
respectively. Deposits from Citibank and CitiStreet Retirement Services
were $166 million and $136 million, respectively, for 2001, and $131
million and $220 million, respectively, for 2000. Such amounts were
insignificant in 1999.
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 this
program, 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 was insignificant in
2001, 2000 and 1999.
Most leasing functions for TPC and its subsidiaries are handled by its
property casualty insurance subsidiaries. Rent expense related to these
leases is shared by the companies on a cost allocation method based
generally on estimated usage by department. The Company's rent expense was
insignificant in 2001, 2000 and 1999.
At December 31, 2001 and 2000, the Company had investments in Tribeca
Investments LLC, an affiliate of the Company, in the amounts of $34.0
million and $29.4 million, respectively.
36
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(continued)
The Company also had investments in an affiliated joint venture, Tishman
Speyer, in the amount of $40.1 million and $52.8 million at December 31,
2001 and 2000, respectively.
The Company has other affiliated investments. The individual investment
with any one affiliate was insignificant at December 31, 2001 and 2000.
11. RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES
The following table reconciles net income to net cash used in operating
activities:
-----------------------------------------------------------------------------------------------------------------------
For The Year Ended December 31, 2001 2000 1999
($ in thousands)
-----------------------------------------------------------------------------------------------------------------------
Net Income from Continuing Operations $ 115,160 $ 90,905 $ 52,606
Adjustments to reconcile net income to cash used in
operating activities:
Realized (gains) losses (26,144) 7,396 4,973
Deferred federal income taxes 80,096 36,748 6,410
Amortization of deferred policy acquisition costs 89,475 68,254 38,902
Additions to deferred policy acquisition costs (324,277) (297,733) (211,182)
Investment income accrued (39,875) (27,812) (27,072)
Insurance reserves (14,382) (18,487) (16,431)
Other 11,398 (675) (36,524)
-----------------------------------------------------------------------------------------------------------------------
Net cash used in operations $(108,549) $(141,404) $(188,318)
-----------------------------------------------------------------------------------------------------------------------
12. NON-CASH INVESTING AND FINANCING ACTIVITIES
There were no significant non-cash investing and financing activities for
2001, 2000 and 1999.
13. SUBSEQUENT EVENTS
On February 8, 2002, TPC, TIC's parent at December 31, 2001, filed a
registration statement with the Securities and Exchange Commission in
connection with the proposed offering of a minority interest in TPC.
Citigroup has announced its plan to make a tax-free distribution of a
portion of its remaining interest in TPC by year-end 2002. Prior to the
proposed offering, TIC will be distributed by TPC to TPC's immediate
parent company, so that TIC and the Company will remain indirect wholly
owned subsidiaries of Citigroup after the offering. Therefore all
retirement and post retirement plans previously provided to Company
employees by TPC will be administered by Citigroup. The Company will have
the right to continue to use the names "Travelers Life & Annuity," "The
Travelers Life and Annuity Company" and related names in connection with
the Company's business. Currently, TIC and TLAC share services with the
property casualty subsidiaries of TPC. These services, which include
leasing arrangements, facilities management, banking and financial
functions, benefit coverages, data processing services, a short-term
investment pool and others, will be phased out over a brief period of time
if the transaction is approved and completed. If the distribution does not
occur, these services will likely continue for the foreseeable future.
37
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 11. Executive Compensation.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
Item 13. Certain Relationships and Related Transactions.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
38
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed:
(1) Financial Statements. See index on page 10 of this report.
(2) Financial Statement Schedules. See index on page 42 of this report.
(3) Exhibits. See Exhibit Index on page 40.
(b) Reports on Form 8-K:
None.
39
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3. Articles of Incorporation and By-Laws
a.) 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.
b.) By-laws of the Company as amended 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.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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, on the 15th day of March,
2002.
THE TRAVELERS LIFE AND ANNUITY COMPANY
(Registrant)
By: /s/ Glenn D. Lammey
-----------------------------------
Glenn D. Lammey
Executive Vice President,
Chief Financial Officer and Chief Accounting Officer
(Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on the 15th day of March, 2002.
Signature Capacity
- --------- --------
/s/ George C. Kokulis Director, Chief Executive Officer
- -------------------------- (Principal Executive Officer)
(George C. Kokulis)
/s/ Glenn D. Lammey Director, Chief Financial Officer and Chief Accounting Officer
- -------------------------- (Principal Financial Officer and Principal Accounting Officer)
(Glenn D. Lammey)
/s/ William R. Hogan Director
- --------------------------
(William R. Hogan)
/s/ Marla Berman Lewitus Director
- --------------------------
(Marla Berman Lewitus)
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities pursuant to
Section 12 of the Act: NONE
No Annual Report to Security Holders covering the registrant's last fiscal year
or proxy material with respect to any meeting of security holders has been sent,
or will be sent, to security holders.
41
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
----
The Travelers Life and Annuity Company
Independent Auditors' Report *
Statements of Income *
Balance Sheets *
Statements of Changes in Retained Earnings and Accumulated
Other Changes in Equity from Nonowner Sources *
Statements of Cash Flows *
Notes to Financial Statements *
Independent Auditors' Report 43
Schedule I - Summary of Investments - Other than Investments in Related Parties 2001 44
Schedule III - Supplementary Insurance Information 1999-2001 45
Schedule IV - Reinsurance 1999-2001 46
All other schedules are inapplicable for this filing.
* See index on page 10.
42
Independent Auditors' Report
The Board of Directors and Shareholder
The Travelers Life and Annuity Company:
Under date of January 17, 2002, except as to Note 13 which is as of February 8,
2002, we reported on the balance sheets of The Travelers Life and Annuity
Company as of December 31, 2001 and 2000, and the related statements of income,
changes in retained earnings and accumulated other changes in equity from
nonowner sources, and cash flows for each of the years in the three-year period
ended December 31, 2001, which are included in this Form 10-K. In connection
with our audits of the aforementioned 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 financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for derivative instruments and hedging activities and for
securitized financial assets in 2001.
/s/ KPMG LLP
Hartford, Connecticut
January 17, 2002, except as to
Note 13, which is as of February 8, 2002
43
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2001
($ in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Amount Shown in
Type of Investment Cost Value Balance Sheet (1)
- ----------------------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and authorities $ 358,436 $ 349,921 $ 349,921
States, municipalities and political subdivisions 44,587 46,135 46,135
Foreign governments 53,207 54,945 54,945
Public utilities 334,007 335,835 335,835
Convertible bonds and bonds with warrants attached 29,491 29,753 29,753
All other corporate bonds 2,482,924 2,530,077 2,530,077
- ----------------------------------------------------------------------------------------------------------------------------
Total Bonds 3,302,652 3,346,666 3,346,666
Redeemable Preferred Stocks 6,090 5,561 5,561
- ----------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 3,308,742 3,352,227 3,352,227
- ----------------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Industrial, miscellaneous and all other 2,643 2,069 2,069
- ----------------------------------------------------------------------------------------------------------------------------
Total Common Stocks 2,643 2,069 2,069
Non-Redeemable Preferred Stocks 13,608 13,669 13,669
- ----------------------------------------------------------------------------------------------------------------------------
Total Equity Securities 16,251 15,738 15,738
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage Loans 125,629 125,629
Policy Loans 16,290 16,290
Short-Term Securities 206,759 206,759
Other Investments (2) (3) 182,404 163,052
- ----------------------------------------------------------------------------------------------------------------------------
Total Investments $3,856,075 $3,879,695
============================================================================================================================
(1) Determined in accordance with methods described in Notes 1 and 2 of Notes
to Financial Statements.
(2) Excludes investments in related parties of $59,087.
(3) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
44
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
1999-2001
($ in thousands)
- ------------------------------------------------------------------------------------
Future policy
Deferred policy benefits, losses, Net
Acquisition claims and loss Premium investment
costs expenses (1) revenue income
- ------------------------------------------------------------------------------------
2001 $814,369 $3,665,426 $39,222 $251,054
2000 $579,567 $2,621,187 $33,941 $214,174
1999 $350,088 $2,125,595 $25,270 $177,179
- --------------------------------------------------------------------------------------------
Benefits,
claims, losses Other
and settlement Amortization of deferred operating Premiums
expenses (2) policy acquisition costs expenses written
- --------------------------------------------------------------------------------------------
2001 $214,722 $89,475 $23,404 $39,222
2000 $155,982 $68,254 $14,095 $33,941
1999 $134,288 $38,902 $11,326 $25,270
(1) Includes contractholder funds.
(2) Includes interest credited on contractholder funds.
45
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE IV
REINSURANCE
($ in thousands)
- --------------------------------------------------------------------------------------------------------------
Percentage
Ceded to Assumed of amount
other from other Net assumed to
Gross amount companies companies amount net
- --------------------------------------------------------------------------------------------------------------
2001
Life Insurance In Force $28,793,622 $23,818,768 $ -- $4,974,854 --%
Premiums:
Annuity $ 3,319 $ -- $ -- $ 3,319
Individual life 47,826 11,923 -- 35,903
----------- ----------- --------- ----------
Total Premiums $ 51,145 $ 11,923 $ -- $ 39,222 --%
=========== =========== ========= ==========
2000
Life Insurance In Force $21,637,160 $17,355,206 $ -- $4,281,954 --%
Premiums:
Annuity $ 6,034 $ -- $ -- $ 6,034
Individual Life 36,770 8,863 -- 27,907
----------- ----------- --------- ----------
Total Premiums $ 42,804 $ 8,863 $ -- $ 33,941 --%
=========== =========== ========= ==========
1999
Life Insurance In Force $15,597,352 $12,839,072 $ -- $2,758,280 --%
Premiums:
Annuity $ 1,317 $ -- $ -- $ 1,317
Individual life 30,502 6,549 -- 23,953
----------- ----------- --------- ----------
Total Premiums $ 31,819 $ 6,549 $ -- $ 25,270 --%
=========== =========== ========= ==========
46