Filed Pursuant to Rule 424b3
File No: 33-33691
T-MARK
PROSPECTUS
T-Mark Contracts are group or individual modified guaranteed annuities
("Contracts") which provide a guaranteed fixed rate of return for your
investment if you do not surrender your Contract before the Guarantee Period
ends. Generally, if you do surrender your Contract before the Guarantee Period
ends, your Contract Value paid to you will be subject to a market value
adjustment and surrender charges.
This prospectus explains:
o the Contract (single Purchase Payment)
o the Travelers Insurance Company and Separate Account MGA
o the Guarantee Periods and Interest Rates
o Surrenders
o Surrender Charges
o Market Value Adjustment
o Death Benefit
o Annuity Payments
o other aspects of the Contract
The Travelers Insurance Company, One Cityplace, Hartford, Connecticut
06103-3415, is the issuer of the Contracts; Travelers Distribution LLC, One
Cityplace, Hartford, Connecticut 06103-3415, is the principal underwriter and
distributor of the Contracts.
THIS PROSPECTUS IS ACCOMPANIED BY A COPY OF THE COMPANY'S LATEST ANNUAL REPORT
ON FORM 10- K FOR THE PERIOD ENDED DECEMBER 31, 2003, WHICH CONTAINS ADDITIONAL
INFORMATION ABOUT THE COMPANY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
MUTUAL FUNDS, ANNUITIES AND INSURANCE PRODUCTS ARE NOT DEPOSITS OF ANY BANK, AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY.
PROSPECTUS DATED MAY 3, 2004.
TABLE OF CONTENTS
Special Terms................................................. Special Terms-1
Prospectus Summary............................................ 1
The Insurance Company......................................... 2
The Contracts................................................. 2
Application and Purchase Payment.............................. 2
Right to Cancel............................................... 2
Guarantee Periods............................................. 3
Establishment of Guaranteed Interest Rates.................... 4
Surrenders.................................................... 4
General....................................................... 4
Surrender Charge.............................................. 4
Market Value Adjustment....................................... 5
Waiver of Surrender Charge.................................... 5
Premium Taxes................................................. 6
Death Benefit................................................. 6
Annuity Period................................................ 6
Election of Annuity Commencement Date and Form of Annuity..... 6
Change of Annuity Commencement Date or Annuity Option......... 6
Annuity Options............................................... 6
Annuity Payment............................................... 7
Death of Annuitant After Annuity Commencement Date............ 7
Income Options................................................ 7
Investments by the Company.................................... 8
Amendment of the Contracts.................................... 8
Assignment of the Contracts................................... 8
Distribution of the Contracts................................. 8
Federal Tax Considerations.................................... 9
General....................................................... 9
Section 403 (b) Plans and Arrangements........................ 9
Qualified Pension and Profit-Sharing Plans.................... 9
Individual Retirement Annuities............................... 10
Roth IRAs..................................................... 10
Section 457 Plans............................................. 11
Nonqualified Annuities........................................ 11
The Employee Retirement Income Security Act of 1974........... 12
Federal Income Tax Withholding................................ 12
Tax Advice.................................................... 13
Available Information......................................... 13
Incorporation of Certain Documents by Reference............... 13
Legal Opinion................................................. 14
Experts....................................................... 14
Appendix A.................................................... A-1
Financial Statements..........................................
SPECIAL TERMS
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In this Prospectus the following terms have the indicated meanings:
ACCOUNT -- An Account is the Cash Value or Cash Surrender Value credited to a
Participant or Owner.
ACCUMULATED VALUE -- The Purchase Payment plus all interest earned, minus all
surrenders, surrender charges and applicable premium tax previously deducted.
ANNUITANT -- The person upon whose life the Contract is issued.
ANNUITY COMMENCEMENT DATE -- The date on which annuity payments are to start.
The date may be designated in the Contract or elected by the Owner.
BENEFICIARY -- The person entitled to receive benefits under the Contract in
case of the death of the Annuitant or the Owner, or joint Owner, as applicable.
CASH SURRENDER VALUE -- The Cash Value less surrender charges and any applicable
premium tax.
CASH VALUE -- The Maturity Value of a Deposit on the Maturity Date or the Market
Adjusted Value before the Maturity Date of that Deposit.
CERTIFICATE -- Evidence of a participating interest under a Group Contract. Any
reference in this Prospectus to Certificate includes the underlying Group
Contract.
COMPANY (WE, US, OUR)-- The Travelers Insurance Company.
CONTRACT -- For a group Contract, the certificate evidencing a participating
interest in the group annuity Contract. Any reference in this Prospectus to
Contract includes the underlying group annuity Contract. For an individual
Contract, the individual annuity Contract.
CONTRACT DATE -- The effective date of participation under the group annuity
Contract as designated in the certificate, or the date of issue of an individual
annuity Contract.
CONTRACT YEAR -- A continuous twelve-month period beginning on the Contract Date
and each anniversary thereof.
DEPOSIT -- The premium payment applied to the Contract less premium taxes if
applicable.
FREE INTEREST -- The interest credited in the previous Contract Year which is
not subject to a surrender charge or a Market Value Adjustment.
GUARANTEE PERIOD -- The period for which either an initial or subsequent
Guaranteed Interest Rate is credited.
GUARANTEED INTEREST RATE -- The annual effective interest rate credited during
the Guarantee Period.
HOME OFFICE -- The principal executive offices of The Travelers Insurance
Company located at One Cityplace, Hartford, Connecticut 06103-3415 (Attention:
Annuity Services).
MARKET VALUE ADJUSTMENT -- The Market Value Adjustment reflects the
relationship, at the time of surrender, between the then-current Guaranteed
Interest Rate for a Guarantee Period equal to the duration left in your
Guarantee Period, and the Guaranteed Interest Rate that applies to your
Contract.
MATURITY VALUE -- The accumulated value of a Purchase Payment at the Guaranteed
Interest Rate at the end of the Guarantee Period selected, minus all surrenders,
surrender charges and premium taxes previously deducted.
OWNER (YOU, YOURS) -- For an individual Contract, the person or entity to whom
the individual Contract is issued. For a group Contract, the person or entity to
whom the certificate under a group annuity Contract is issued.
Special Terms-1
PROSPECTUS SUMMARY
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The Travelers Insurance Company (the "Company", "We", "Us"), an indirect wholly
owned subsidiary of Citigroup Inc., is offering group and individual modified
guaranteed annuity contracts to eligible individuals. If a group contract is
purchased, we issue certificates to the individual participants. Where we refer
to "you", we are referring to the individual contract owner or to the group
participant, as applicable. For convenience, this prospectus refers to Contracts
and Certificates as "Contracts". Modified Guaranteed Annuities offer a
guaranteed fixed rate of return on your principal investment if you do not
surrender your Contract before the Guarantee Period ends. If you do surrender
your Contract before the end of the Guarantee Period, generally your Cash Value
is subject to a Market Value Adjustment and Surrender Charge (if applicable).
You may select an initial Guarantee Period from those available from the
Company. Currently, we offer Guarantee Periods up to ten years. Interest on the
Purchase Payment is credited on a daily basis and so compounded in the
Guaranteed Interest Rate. (See "Accumulation Period -- Guarantee Periods" and
"Establishment of Guaranteed Interest Rates".)
At the end of each Guarantee Period, a subsequent Guarantee Period of seven days
will automatically begin unless you elect another duration within thirty days
before the Guarantee Period ends.
You may surrender your Contract, but the Cash Value may be subject to a
Surrender Charge and/or a Market Value Adjustment. A full or partial surrender
made prior to the end of a Guarantee Period will be subject to a Market Value
Adjustment. The surrender charge will be assessed as a percentage of the Cash
Value withdrawn as follows:
YEARS SINCE SURRENDER
DEPOSIT MADE CHARGE
------------------ -------------------
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 or more 0%
The surrender charges listed above apply to full or partial surrenders,
regardless of the length of the Guarantee Period selected. The surrender charge
will apply if a surrender occurs at the expiration date of the Guarantee Period
for Deposits in the contract less than five years.
There is no Market Value Adjustment if you surrender at the end of a guarantee
period. Any such surrender request must be in writing and received by us within
30 days before the Guarantee Period ends. You may request any interest that has
been credited during the prior Contract Year. No surrender charge or Market
Value Adjustment will be imposed on such interest payments; however, all
applicable premium taxes will be deducted. Any such surrender may also be
subject to federal and state taxes. (See Surrenders and Federal Tax
Considerations.)
The Market Value Adjustment reflects the relationship between the current
Guaranteed Interest Rate for the time left in the Guarantee Period at surrender
and the Guaranteed Interest Rate that applies to your Contract. The Market Value
Adjustment amount primarily depends on the interest rates the Company receives
on its investments when the current Guaranteed Interest Rates are established.
The Market Value Adjustment is sensitive, therefore, to changes in interest
rates. It is possible that the amount you receive upon surrender may be less
than your original Purchase Payment if interest rates increase. It is also
possible that if interest rates decrease, the amount you receive upon surrender
may be more than your original Purchase Payment plus accrued interest.
On the Annuity Commencement Date specified by you, the Company will make either
a lump sum payment or start to pay a series of payments based on the annuity
options you select. (See Annuity Period.)
1
If a Participant under a group contract or an annuitant under an individual
Contract dies before the Annuity Commencement Date, we will pay a death benefit
to the beneficiary. This death benefit equals (a) the greater of the Cash Value
or the Accumulated Value of the Contract if death occurs before age 65 or (b)
the Cash Value of the Contract if death occurs on or after age 65, less any
applicable premium tax.
We will deduct any applicable premium taxes from the Cash Value either upon
death, surrender, annuitization, or at the time the Purchase Payment is made to
the Contract. (See Surrenders -- Premium Taxes.)
THE INSURANCE COMPANY
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The Travelers Insurance Company is a stock insurance company chartered in 1864
in the state of Connecticut and has been continuously engaged in the insurance
business since that time. The Company is licensed to conduct life insurance
business in all states of the United States, the District of Columbia, Puerto
Rico, Guam, the U.S. and British Virgin Islands and the Bahamas. The Company is
an indirect wholly owned subsidiary of Citigroup Inc. The Company's home office
is located at One Cityplace, Hartford, Connecticut 06103-3415.
THE CONTRACTS
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APPLICATION AND PURCHASE PAYMENT
For the Company to issue a Contract to you, you must:
o Complete an application or an order to purchase
o Include your minimum Purchase Payment of at least $5,000 and
o Submit both to our Home Office for approval.
The Company may:
o Accept Purchase Payments up to $1 million within a 12 month period
without prior approval
o Contact you or your agent if the application or order form is not
properly completed
o Return your entire application or order form and Purchase Payment if
not properly completed
RIGHT TO CANCEL
You may return your Contract to us at our Home Office within 10 days of your
original Purchase Payment in most states. Refer to your Contract for any
state-specific information.
2
GUARANTEE PERIODS
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You will select the duration of the Guarantee Period and corresponding
Guaranteed Interest Rate. Your Purchase Payment will earn interest at the
Guaranteed Interest Rate during the entire Guarantee Period. All interest earned
will be credited daily; this compounding effect is reflected in the Guaranteed
Interest Rate.
EXAMPLE OF COMPOUNDING AT THE GUARANTEED INTEREST RATE
Beginning Account Value: $50,000
Guarantee Period: 5 years
Guaranteed Interest Rate: 5.50% Annual Effective Rate
END OF CONTRACT YEAR
-----------------------------------------------------------------------
YEAR I YEAR 2 YEAR 3 YEAR 4 YEAR 5
- ------------------------------------------------ ------------ ------------- ------------- ------------ -------------
Beginning Account Value $ 50,000.00
X (1 + Guaranteed Interest Rate) 1.055
-----------
$ 52,750.00
===========
Account Value at end of Contract Year 1 $ 52,750.00
X (I + Guaranteed Interest Rate) 1.055
------------
$ 55,651.25
============
Account Value at end of Contract Year 2 $ 55,651.25
X (I + Guaranteed Interest Rate) 1.055
------------
$ 58,712.07
============
Account Value at end of Contract Year 3 $ 58,712.07
X (1 + Guaranteed Interest Rate) 1.055
------------
$ 61,941.23
============
Account Value at end of Contract Year 4 $ 61,941.23
X (1 + Guaranteed Interest Rate) 1.055
------------
$ 65,348.00
============
Account Value at end of Guarantee Period (i.e.
Maturity Value) $ 65,348.00
============
Total Interest Credited in Guarantee Period -- $65,348.00 - 50,000.00 = $15,348.00
Account Value at end of Guarantee Period -- $50,000.00 + 15,348.00 = $65,348.00
THE ABOVE EXAMPLE ASSUMES NO SURRENDERS, DEDUCTIONS FOR PREMIUM TAXES, OR PRE-
AUTHORIZED PAYMENT OF INTEREST DURING THE ENTIRE FIVE-YEAR PERIOD. A MARKET
VALUE ADJUSTMENT OR SURRENDER CHARGE MAY APPLY TO ANY SUCH INTERIM SURRENDER
(SEE "SURRENDERS" BELOW). THE HYPOTHETICAL GUARANTEED INTEREST RATES ARE
ILLUSTRATIVE ONLY AND ARE NOT INTENDED TO PREDICT FUTURE GUARANTEED INTEREST
RATES TO BE DECLARED UNDER THE CONTRACT. ACTUAL GUARANTEED INTEREST RATES
DECLARED FOR ANY GIVEN TIME MAY BE MORE OR LESS THAN THOSE SHOWN.
We will notify you about subsequent Guarantee Periods near the end of your
current Guarantee Period. At the end of a Guarantee Period:
o You may elect a subsequent Guarantee Period by telephone or in writing
o Your Account Value will be transferred to the new Guarantee Period at
the Guaranteed Interest Rate offered at that time
o If you do not make any election, we will automatically transfer the
Account Values into a 7 day Guarantee Period, which you may transfer
out of into a new Guarantee Period with no transfer, surrender or
Market Value Adjustment charge
In no event may subsequent Guarantee Periods extend beyond the Annuity
Commencement Date then in effect.
3
ESTABLISHMENT OF GUARANTEED INTEREST RATES
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When you purchase your Contract, you will know the Guaranteed Interest Rate for
the Guarantee Period you choose. We will send you a confirmation showing the
amount of your Purchase Payment and the applicable Guaranteed Interest Rate.
After the end of each calendar year, we will send you a statement that will
show:
o your Account Value as of the end of the preceding year
o all transactions regarding your Contract during the year
o your Account Value at the end of the current year
o the Guaranteed Interest Rate being credited to your Contract
The Company has no specific formula for determining Guaranteed Interest Rates in
the future. The Guaranteed Interest Rates will be declared from time to time as
market conditions dictate. (See Investments by the Company.) In addition, the
Company may also consider various other factors in determining Guaranteed
Interest Rates for a given period, including regulatory and tax requirements,
sales commissions, administrative expenses, general economic trends and
competitive factors.
THE COMPANY WILL MAKE THE FINAL DETERMINATION AS TO GUARANTEED INTEREST RATES TO
BE DECLARED. WE CANNOT PREDICT NOR CAN WE GUARANTEE FUTURE GUARANTEED INTEREST
RATES.
SURRENDERS
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GENERAL
You may make a full or partial surrender at any time, subject to certain tax law
and retirement plan restrictions, and surrender charges described below. In the
case of all surrenders, the Cash Value and Maturity Value will be reduced.
Upon request, we will inform you of the amount payable upon a full or partial
surrender. Any full, partial or special surrender may be subject to tax. (See
Federal Tax Considerations.)
Participants in Section 403 (b) tax-deferred annuity plans may not make
surrenders from certain amounts before the earliest of age 59 1/2, separation
from service, death, disability or hardship. (See Federal Tax Considerations --
Section 403/ (b) Plans and Arrangements.)
SURRENDER CHARGE
There are no front-end sales charges. A surrender charge may be assessed on
surrenders made before the end of the fifth year since your Purchase Payment was
made. The surrender charge is computed as a percentage of the Cash Value being
surrendered.
YEARS SINCE CHARGE AS A
PERCENTAGE OF CASH
DEPOSIT WAS MADE VALUE
------------------------ ---------------------
I or less 7%
2 6%
3 5%
4 4%
5 3%
Thereafter 0%
The surrender charges listed above will apply to full or partial surrenders,
regardless of the length of the Guarantee Period selected. For example, assume a
Guarantee Period of four years. In this case, any surrenders made during the
fourth year, even on the Maturity Date, will be subject to a 4% Surrender
Charge.
4
MARKET VALUE ADJUSTMENT
The amount payable on a full or partial surrender made before the end of any
Guarantee Period may be adjusted up or down by the Market Value Adjustment.
The Market Value Adjustment is the relationship between the then-current
Guaranteed Interest Rate for a Guarantee Period equal to the time left in your
Guarantee Period, and the Guaranteed Interest Rate that applies to your
Contract.
Generally, if your Guaranteed Interest Rate is lower than the applicable current
Guaranteed Interest Rate, then the Market Value Adjustment will result in a
lower payment upon surrender. Conversely, if your Guaranteed Interest Rate is
higher than the applicable current Guaranteed Interest Rate, the Market Value
Adjustment will result in a higher payment upon surrender.
The Market Value Adjustment amount primarily depends on the level of interest
rates on the Company's investments when the current Guaranteed Interest Rates
are established. The Market Adjusted Value is sensitive, therefore, to changes
in current interest rates. It is possible that the amount you receive upon
surrender would be less than the original Purchase Payment if interest rates
increase. It is also possible that if interest rates decrease, the amount you
receive upon surrender may be more than the original Purchase Payment plus
accrued interest.
Appendix A shows the formula for calculating the Market Value Adjustment as well
as an additional illustration of the application of the Market Value Adjustment.
WAIVER OF SURRENDER CHARGE
The surrender charge may be waived if:
o an annuity payout is begun
o a level Income Option of at least three years' duration is begun
after the first Certificate Year or Contract Year, as applicable
o the Participant of a Group Contract, or Annuitant of an Individual
Contract becomes disabled (as defined by the Internal Revenue
Service) subsequent to purchase of the Certificate or Contract
o the Participant of a Group Contract, or Annuitant of an Individual
Contract dies
o the Participant of a Group Contract, or Annuitant of an Individual
Contract under a tax deferred annuity plan (403(b) plan) retires
after age 55, provided the Certificate or Contract has been in effect
five years or more and the proceeds are paid by check made payable to
the owner of the Group Contract
o the Participant of a Group Contract, or Annuitant of an Individual
Contract under an IRA plan reaches age 70 1/2, -provided the
Certificate or Contract, as applicable, has been in effect five years
or more
o the Participant of a Group Contract, or Annuitant of an Individual
Contract under a qualified pension or profit-sharing plan, including
a 401 (k) plan, retires at or after age 59 1/2, provided the
Certificate or Contract, as applicable has been in effect five years
or more; or if refunds are made to satisfy the anti-discrimination
test; (for Participants or Annuitants under contracts issued before
May 1, 1992, the surrender charge will also be waived if he or she
retires at normal retirement age (as defined by the plan), provided
the Certificate or Contract has been in effect one year or more) or
o the Participant of a Group Contract, or Annuitant of an Individual
Contract under a Section 457 deferred compensation plan retires and
the Certificate or Contract has been in effect five years or more, or
if a financial hardship or disability withdrawal has been allowed by
the plan administrator under applicable IRS rules
In addition, for individuals under a 403(b) annuity, a pension or profit-sharing
plan, or a Section 457 deferred compensation plan, there is a 10% free
withdrawal allowance for partial surrenders prior to the Annuity Commencement
Date. An individual under an IRA plan who is over age 59 1/2 has a 20% free
withdrawal allowance. This means that, each Certificate or Contract Year after
the first such year, for the first partial surrender made in that year, 10% (20%
for IRA plans) of his or her Cash Value may be withdrawn without a
5
surrender charge. All Cash Values withdrawn will reflect any applicable Market
Value Adjustment. Full surrenders are not eligible for the free withdrawal
allowance. Failure to use all or part of the free withdrawal allowance in any
Certificate or Contract Year forfeits the balance of the allowance for that
year. For 403 (b) plan participants, partial and full surrenders may be subject
to restrictions. (See "Section 403(b) Plans and Arrangements.")
PREMIUM TAXES
Certain state and local governments impose premium taxes. These taxes currently
range from 0% to 5.0%, depending upon jurisdiction. The Company is responsible
for paying these taxes and will determine the method used to recover premium tax
expenses incurred. The Company will deduct any applicable premium taxes from the
Cash Value either upon death, surrender, annuitization, or at the time the
Purchase Payment is made to the Contract, but no earlier than when the Company
has a tax liability under state law.
RESTRICTIONS ON FINANCIAL TRANSACTIONS
Federal laws designed to counter terrorism and prevent money laundering might,
in certain circumstances, require us to block a contract owner's ability to make
certain transactions and thereby refuse to accept any request for withdrawals,
surrenders, or death benefits, until the instructions are received from the
appropriate regulator. We may also be required to provide additional information
about you and your contract to government regulators.
DEATH BENEFIT
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If a Participant under a group Contract, or an Annuitant under an individual
Contract dies before his or her Annuity Commencement Date, the Death Benefit
payable to the Beneficiary will equal (a) the greater of the Cash Value or the
Accumulated Value of the Contract, if death occurs before age 65; or (b) the
Cash Value of the Contract, if death occurs on or after age 65 less any
applicable premium tax.
ANNUITY PERIOD
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ELECTION OF ANNUITY COMMENCEMENT DATE AND FORM OF ANNUITY
You can select an Annuity Commencement Date at the time you apply for a
Contract. If no date is elected, for nonqualified Contracts, the automatic
default age is 75 (or ten years after the date of purchase, if later). For
qualified Contracts, the automatic default age is 70. Within 30 days before your
Annuity Commencement Date, you may elect to have all or a portion of your Cash
Surrender Value paid in a lump sum on your Annuity Commencement Date. Or, at
least 30 days before the Annuity Commencement Date, you may elect to have your
Cash Value or a portion thereof (less applicable premium taxes, if any)
distributed under any of the Annuity Options described below.
If no option is elected and you do not have a spouse on the Annuity Commencement
Date, the Cash Value will be applied on the Annuity Commencement Date under the
Second Option to provide a life annuity with 120 monthly payments certain. If
you do have a spouse, the Cash Value will be applied to Option 4, to provide a
joint and Last Survivor Life Annuity.
CHANGE OF ANNUITY COMMENCEMENT DATE OR ANNUITY OPTION
You may change the Annuity Commencement Date at any time as long as such change
is made in writing and is received by us at least 30 days prior to the scheduled
Annuity Commencement Date. Once an Annuity Option has begun, it may not be
changed.
6
ANNUITY OPTIONS
Any one of the following Annuity Options may be elected. Annuity payments may be
available on a monthly, quarterly, semiannual or annual basis. The minimum
amount that may be applied to Annuity Options is $5,000 unless we consent to a
smaller amount.
Option 1 -- Life Annuity -- No Refund: The Company will make annuity payments
during the lifetime of the annuitant ending with the last payment before death.
This option offers the maximum periodic payment, since there is no assurance of
a minimum number of payments or provision for a death benefit for beneficiaries.
Option 2 -- Life Annuity With 120,180 Or 240 Monthly Payments Assured: The
Company will make monthly annuity payments during the lifetime of the annuitant,
with the agreement that if, at the death of that person, payments have been made
for less than 120, 180 or 240 months as elected, we will continue making
payments to the beneficiary during the remainder of the period.
Option 3 -- Cash Refund Life Annuity: The Company will make monthly annuity
payments during the lifetime of the Annuitant. Upon the death of the Annuitant,
the Beneficiary will receive a payment equal to the Cash Value applied to this
option on the Annuity Commencement Date minus the dollar amount of annuity
payments already paid.
Option 4 -- Joint And Last Survivor Life Annuity -- No Refund: The Company will
make regular annuity payments during the lifetime of the annuitant and a second
person. When either person dies, we will continue making payments to the
survivor. No further payments will be made following the death of the survivor.
Option 5 -- Other Annuity Options: An annuity payable as is mutually agreed on
by the Company and the Annuitant or Owner, as provided in the Plan, if any.
The Tables in the Contract reflect guaranteed dollar amounts of monthly payments
for each $1,000 applied under the first five Annuity Options listed above. Under
Option 1, 2 or 3, the amount of each payment will depend upon the age (and, for
nonqualified Contracts, sex) of the Annuitant at the time the first payment is
due. Under Option 4, the amount of each payment will depend upon the payees'
ages at the time the first payment is due (and, for nonqualified Contracts, the
sex of both payees).
The Tables for Options 1, 2, 3 and 4 are based on the Progressive Annuitant
Table (assuming births in the year 1900) with age set back two years and a net
investment rate of 3.5% per annum. If mortality appears more favorable and
interest rates so justify, at our discretion, we may apply other tables that
will result in higher payments for each $1,000 applied under one or more of the
first four Annuity Options.
ANNUITY PAYMENT
The first payment under any Annuity Option will be made on the first day of the
month following the Annuity Commencement Date. Subsequent payments will be made
in accordance with the manner of payment selected and are based on the first
payment date.
The option elected must result in a payment at least equal to the minimum
payment amount according to Company rules then in effect. If at any time
payments are less than the minimum payment amount, the Company has the right to
change the frequency to an interval resulting in a payment at least equal to the
minimum. If any amount due is less than the minimum per year, the Company may
make other arrangements that are equitable to the Annuitant.
Once annuity payments have begun, no surrender of the annuity benefit can be
made for the purpose of receiving a lump-sum settlement.
DEATH OF ANNUITANT AFTER ANNUITY COMMENCEMENT DATE
If the Annuitant dies after the Annuity Commencement Date, any amount payable as
a death benefit will be distributed at least as rapidly as under the method of
distribution in effect.
7
INCOME OPTIONS
Instead of one of the Annuity Options described above, and subject to the
conditions described under Election of Options, all or part of the Cash
Surrender Value of the Contract may be paid under one or more of the following
Income Options, provided that they are consistent with federal tax law
qualification requirements. Payments under the Income Options may be elected on
a monthly, quarterly, semiannual or annual basis:
Option I -- Payments of a Fixed Amount. The Company will make equal payments of
the amount elected until the Cash Value applied under this option has been
exhausted. The final payment will include any amount insufficient to make
another full payment.
Option 2 -- Payments for a Fixed Period. The Company will make payments for the
period selected. The payment will be based on a minimum net investment rate of
3.5% per annum.
Option 3 -- Other Income Options. The Company will make any other arrangements
for Income Payments as may be mutually agreed upon.
The amount applied to effect an Income Option will be the Cash Value as of the
date Income Payments commence, less any applicable premium taxes not previously
deducted and any applicable surrender charge. The Income Options differ from
Annuity Options in that the amount of the payments made under Income Options are
unrelated to the length of life of any person. Thus, the Annuitant may outlive
the payment period.
INVESTMENTS BY THE COMPANY
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We must invest our assets according to applicable state laws regarding the
nature, quality and diversification of investments that may be made by life
insurance companies. In general, these laws permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, real estate and certain other investments. Purchase Payments made to
the Contracts are invested in Separate Account MGA, a non-unitized separate
account and are not chargeable with liabilities arising out of any other
business that the Company may conduct. Owners do not share in the investment
performance of assets allocated to Separate Account MGA. The obligations under
the Contract are independent of the investment performance of Separate Account
MGA and are the obligations of the Company.
In establishing Guaranteed Interest Rates, the Company will consider the yields
on fixed income securities that are part of the Company's current investment
strategy for the Contracts at the time that the Guaranteed Interest Rates are
established. (See Establishment of Guaranteed Interest Rates.) The current
investment strategy for the Contracts is to invest in fixed income securities,
including public bonds, privately placed bonds, and mortgages, some of which may
be zero coupon securities. While this generally describes our investment
strategy, we are not obligated to follow any particular strategy except as may
be required by federal and state laws.
AMENDMENT OF THE CONTRACTS
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We reserve the right to amend the Contracts to comply with applicable federal or
state laws or regulations. We will notify you in writing of any such amendments.
ASSIGNMENT OF THE CONTRACTS
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Our rights as evidenced by a Contract may be assigned as permitted by applicable
law. An assignment will not be binding upon us until we receive notice from you
in writing. Ownership of Contracts issued in connection with Section 401 (a),
401 (k), 403 (c), 403 (b), 408, 414 (d) or 457 plans may not generally be
assigned. We assume no responsibility for the validity or effect of any
assignment. You should consult your tax adviser regarding the tax consequences
of an assignment.
8
DISTRIBUTION OF THE CONTRACTS
- --------------------------------------------------------------------------------
Travelers Distribution LLC ("TDLLC"), as affiliated Company, is the principal
underwriter of the Contracts. TDLLC is registered with the Securities and
Exchange Commission under the 1934 Act as a broker-dealer, and is a member of
the National Association of Securities Dealers, Inc.
The principal underwriter enters into selling agreements with certain
broker-dealers registered under the 1934 Act. Under the selling agreements such
broker-dealers may offer Contracts to persons who have established an account
with the broker-dealer. In addition, the Company may offer certificates to
members of certain other eligible groups. The Company will pay a maximum
commission of 7% of the Purchase Payment for the sale of a Contract.
From time to time, the Company may offer customers of certain broker-dealers
special Guaranteed Interest Rates and negotiated commissions. In addition, the
Company may offer Contracts to members of certain other eligible groups through
trusts or otherwise.
FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
GENERAL
The Company is taxed as a life insurance company under Subchapter L of the Code.
Generally, amounts credited to a contract are not taxable until received by the
Contract Owner, participant or beneficiary, either in the form of annuity
payments or other distributions. Tax consequences and limits are described
further below for each annuity program.
NOTE TO PARTICIPANTS IN QUALIFIED PLANS INCLUDING 401, 403(b), 457 AS WELL AS
IRA OWNERS:
While annual plan contribution limits may be increased from time to time by
Congress and the IRS for federal income tax purposes, these limits must be
adopted by each state for the higher limits to be effective at a state income
tax level. In other words, permissible contribution limit for income tax
purposes may be different at the federal level from your state's income tax
laws. Please consult your employer or tax adviser regarding this issue.
SECTION 403 (b) PLANS AND ARRANGEMENTS
Purchase Payments for a tax deferred annuity contract (including salary
reduction contributions) may be made by an employer for employees under annuity
plans adopted by public educational organizations and certain organizations
which are tax exempt under Section 501 (c) (3) of the Code. Within statutory
limits, such payments are not currently includable in the gross income of the
participants. Increases in the value of the Contract attributable to these
Purchase Payments are similarly not subject to current taxation. Instead, both
the contributions to the tax sheltered annuity and the income in the Contract
are taxable as ordinary income when distributed.
An additional tax of 10% will apply to any taxable distribution received by the
participant before the age of 59 1/2, except when due to death, disability, or
as part of a series of payments for life or life expectancy, or made after the
age of 55 with separation from service. There are other statutory exceptions
which may apply in certain situations.
Amounts attributable to salary reductions made to a tax sheltered annuity and
income thereon may not be withdrawn prior to attaining the age of 59 1/2,
separation from service, death, total and permanent disability, or in the case
of hardship as defined by federal tax law and regulations. Hardship withdrawals
are available only to the extent of the salary reduction contributions and not
from the income attributable to such contributions. These restrictions do not
apply to assets held generally as of December 31, 1988.
Distributions must begin by April 1st of the calendar year following the later
of the calendar year in which the participant attains the age of 70 1/2 or the
calendar year in which the Participant retires. Certain other mandatory
distribution rules apply at the death of the participant.
Certain distributions, including most partial or full redemptions or
"term-for-years" distributions of less than 10 years, are eligible for direct
rollover to another 403 (b) contract, certain qualified plans or to an
Individual Retirement Arrangement (IRA) without federal income tax withholding.
9
To the extent an eligible rollover distribution is not directly rolled over to
another 403(b) contract, an IRA or eligible qualified contract, 20% of the
taxable amount must be withheld. In addition, current tax may be avoided on
eligible rollover distributions which were not directly transferred to a
qualified retirement program if the participant makes a rollover to a qualified
retirement plan or IRA within 60 days of the distribution.
Distributions in the form of annuity payments are taxable to the participant or
Beneficiary as ordinary income in the year of receipt, except that any
distribution that is considered the participant's "investment in the Contract"
is treated as a return of capital and is not taxable.
QUALIFIED PENSION AND PROFIT-SHARING PLANS
Like most other contributions made under a qualified pension or profit-sharing
trust described in Section 401 (a) of the Code and exempt from tax under Section
501 (a) of the Code, a Purchase Payment made by an employer (including salary
reduction contributions under Section 401(k) of the Code) is not currently
taxable to the participant and increases in the value of a contract are not
subject to taxation until received by a participant or beneficiary.
Distributions in the form of annuity payments are taxable to the participant or
beneficiary as ordinary income in the year of receipt, except that any
distribution that is considered the participant's "investment in the contract"
is treated as a return of capital and is not taxable. Certain eligible rollover
distributions including most partial and full surrenders or term-for-years
distributions of less than 10 years are eligible for direct rollover to an
eligible retirement plan or to an IRA without federal income tax withholding.
If a distribution that is eligible for rollover is not directly rolled over to
another qualified retirement plan or IRA, 20% of the taxable amount must be
withheld. In addition, current tax may be avoided on eligible rollover
distributions that were not directly transferred to a qualified retirement
program if the participant makes a rollover contribution to a qualified
retirement plan or IRA within 60 days of the distribution.
Distributions must begin by April Ist of the calendar year following the later
of the calendar year in which you attain age 70 1/2 or the calendar year in
which you retire, except that if you are a 5% owner as defined in Code Section
416(i) (1) (B), distributions must begin by April Ist of the calendar year
following the calendar year in which you attain age 70 1/2. Certain other
mandatory distribution rules apply on the death of the participant.
An additional tax of 10% will apply to any taxable distribution received by the
participant before the age of 59 1/2, except by reason of death, disability or
as part of a series of payments for life or life expectancy, or at early
retirement at or after the age of 55. There are other statutory exceptions which
may apply in certain situations.
INDIVIDUAL RETIREMENT ANNUITIES
To the extent of earned income for the year and not exceeding the applicable
limit for the taxable year, an individual may make deductible contributions to
an individual retirement annuity (IRA). The applicable limit ($2,000 per year
prior to 2002) has been increased by the Economic Growth and Tax Relief
Reconciliation Act of 2001 ("EGTRRA"). The limit is $3,000 for calendar years
2002-2004, $4,000 for calendar years 2005-2007, and will be indexed for
inflation in years subsequent to 2008. (Note: The minimum Purchase Payment
allowed for this Contract is $5,000.) There are certain limits on the deductible
amount based on the adjusted gross income of the individual and spouse based on
their participation in a retirement plan. If an individual is married and the
spouse is not employed, the individual may establish IRAs for the individual and
spouse. Purchase Payments may then be made annual into IRAs for both spouses in
the maximum amount of 100% of earned income up to a combined limit of based on
the individual limits outlined above.
Partial or full distributions are treated as ordinary income, except that
amounts contributed after 1986 on a non-deductible basis are not includable in
income when distributed. An additional tax of 10% will apply to any taxable
distribution from the IRA that is received by the participant before the age of
59 1/2 except by reason of death, disability or as part of a series of payments
for life or life expectancy. Distributions must commence by April 1st of the
calendar year after the close of the calendar year in which the individual
attains the age of 70 1/2. Certain other mandatory distribution rules apply on
the death of the individual. The individual must maintain personal and tax
return records of any non-deductible contributions and distributions.
10
Section 408 (k) of the Code provides for the purchase of a Simplified Employee
Pension (SEP) plan. A SEP is funded through an IRA with an annual employer
contribution limit of $40,000 for each participant.
ROTH IRAs
Effective January 1, 1998, Section 408A of the Code permits certain individuals
to contribute to a Roth IRA. Eligibility to make contributions is based upon
income, and the applicable limits vary based on marital status and/or whether
the contribution is a rollover contribution from another IRA or an annual
contribution. Contributions to a Roth IRA, which are subject to certain
limitations, (similar to the annual limits for traditional IRAs), are not
deductible and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A conversion of "traditional" IRA to a Roth IRA may be
subject to tax and other special rules apply. You should consult a tax adviser
before combining any converted amounts with other Roth IRA contributions,
including any other conversion amounts from other tax years.
Qualified distributions from a Roth IRA are tax-free. A qualified distribution
requires that the Roth IRA has been held for at least 5 years, and the
distribution is made after age 59 1/2, on death or disability of the owner, or
for a limited amount ($10,000) for a qualified first time home purchase for the
owner or certain relatives. Income tax and a 10% penalty tax may apply to
distributions made (1) before age 59 1/2 (subject to certain exceptions) or (2)
during five taxable years starting with the year in which the first contribution
is made to the Roth IRA.
SECTION 457 PLANS
Section 457 of the Code allows employees and independent contractors of state
and local governments and tax-exempt organizations to defer a portion of their
salaries or compensation to retirement years without paying current income tax
on either the deferrals or the earnings on the deferrals.
The Owner of contracts issued under Section 457 plans by non-governmental
employers is the employer or a contractor of the participant and amounts may not
be made available to participants (or beneficiaries) until separation from
service, retirement or death or an unforeseeable emergency as determined by
Treasury Regulations. The proceeds of annuity contracts purchased by Section 457
plans are subject to the claims of general creditors of the employer or
contractor. A different rule applies with respect to Section 457 plans that are
established by governmental employers. The contract must be for the exclusive
benefit of the plan participants (and their beneficiaries), and the governmental
employer (and their creditors) must have no claim on the contract.
Distributions must begin by April 1st of the calendar year following the later
of the calendar year in which the participant attains the age of 70 1/2 or the
calendar year in which the participant retires. Certain other mandatory
distribution rules apply upon the death of the participant.
All distributions from plans that meet the requirements of Section 457 of the
Code are taxable as ordinary income in the year paid or made available to the
participant or beneficiary.
NONQUALIFIED ANNUITIES
Individuals may purchase tax-deferred annuities without any limits. The Purchase
Payment receives no tax benefit, deduction or deferral, but taxes on the
increases in the value of the Contract are generally deferred until
distribution. Generally, if an annuity is owned other than by an individual, the
owner will be taxed each year on the increase in the value of the Contract. An
exception applies for Purchase Payments made before March 1, 1986. In addition,
for Contracts issued after April 22, 1987, all deferred increases in value will
be includable annually in the income of an Owner when that Owner transfers the
Contract without adequate considerations.
The federal tax law requires nonqualified annuity contracts issued on or after
January 19, 1985 to meet minimum mandatory distribution requirements upon the
death of the Contract Owner. Failure to meet these requirements will cause the
succeeding Contract Owner or beneficiary to lose the tax benefits associated
with annuity contracts, i.e., primarily the tax deferral prior to distribution.
The distribution required depends upon whether an Annuity Option is elected or
whether the succeeding Owner is the surviving spouse. Contracts will be
administered by the Company in accordance with these rules.
If two or more nonqualified annuity contracts are purchased from the same
insurer within the same calendar year, such annuity contracts will be aggregated
for federal income tax purposes. As a result, distributions from any of them
will be taxed based upon the amount of income in all of the same calendar year
series of annuities. This will generally have the effect of causing taxes to be
paid sooner on the deferred gain in the contracts.
11
Those receiving partial distributions made before annuitization of a contract
will generally be taxed on an income-first basis to the extent of income in the
Contract. Certain pre-August 14, 1982 deposits into a nonqualified annuity
contract that have been placed in the Contract by means of a tax-deferred
exchange under Section 1035 of the Code may be withdrawn first without income
tax liability. This information on deposits must be provided to the Company by
the other insurance company at the time of the exchange. There is income in the
Contract generally to the extent the Cash Value exceeds the investment in the
Contract. The investment in the Contract is equal to the amount of premiums paid
less any amount received previously that was excludable from gross income. Any
direct or indirect borrowing against the value of the Contract or pledging of
the Contract as security for a loan will be treated as a cash withdrawal under
the tax law.
With certain exceptions, the law will impose an additional tax if a Contract
Owner makes a withdrawal of any amount under the Contract that is allocable to
an investment made after August 13, 1982. The amount of the additional tax will
be 10% of the amount includable in income by the Contract Owner because of the
withdrawal. The additional tax will not be imposed if the amount is received on
or after the Contract Owner reaches the age of 59 1/2, of if the amount is one
of a series of substantially equal periodic payments made for life or life
expectancy of the taxpayer. The additional tax will not be imposed if the
withdrawal or partial surrender follows the death or disability of the Contract
Owner.
THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974
Under the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended,
certain special provisions may apply to the Contract if the Owner of a Section
403 (b) plan Contract or the owner of a contract issued to certain qualified
plans requests that the Contract be issued to conform to ERISA or if the Company
has notice that the Contract was issued pursuant to a plan subject to ERISA.
ERISA requires that certain Annuity Options, withdrawals or other payments and
any application for a loan secured by the Contract may not be made until the
Participant has filed a Qualified Election with the plan administrator. Under
certain plans, ERISA also requires that a designation of a beneficiary other
than the participant's spouse be deemed invalid unless the participant has filed
a Qualified Election.
A Qualified Election must include either the written consent of the
Participant's spouse, notarized or witnessed by an authorized plan
representative, or the participant's certification that there is no spouse or
that the spouse cannot be located.
The Company intends to administer all contracts to which ERISA applies in a
manner consistent with the direction of the plan administrator regarding the
provisions of the plan, in accordance with applicable law. Because these
requirements differ according to the plan, a person contemplating the purchase
of an annuity Contract should consider the provisions of the plan.
FEDERAL INCOME TAX WITHHOLDING
The portion of a distribution that is taxable income to the recipient will be
subject to federal income tax withholding, generally pursuant to Section 3405 of
the Code. The application of this provision is summarized below.
1. ELIGIBLE ROLLOVER DISTRIBUTION FROM SECTION 403(b) PLANS OR
ARRANGEMENTS, FROM QUALIFIED PENSION AND PROFIT-SHARING PLANS, OR
FROM 457 PLANS SPONSORED BY GOVERNMENTAL ENTITIES
There is a mandatory 20% tax withholding for plan distributions
that are eligible for rollover to an IRA or to another retirement
plan but that are not directly rolled over. A distribution made
directly to a participant or beneficiary may avoid this result if:
(a) a periodic settlement distribution is elected based upon a
life or life expectancy calculation, or
(b) a complete term-for-years settlement distribution is elected
for a period of ten years or more, payable at least annually,
or
(c) a minimum required distribution as defined under the tax law
is taken after the attainment of the age of 70 1/2 or as
otherwise required by law.
A distribution including a rollover that is not a direct rollover
will require the 20% withholding, and the 10% additional tax
penalty on premature withdrawals may apply to any
12
amount not added back in the rollover. The 20% withholding may be
recovered when the participant or beneficiary files a personal
income tax return for the year if a rollover was completed within
60 days of receipt of the funds, except to the extent that the
participant or spousal beneficiary is otherwise underwithheld or
short on estimated taxes for that year.
2. OTHER NON-PERIODIC DISTRIBUTIONS (FULL OR PARTIAL REDEMPTIONS)
To the extent not subject to the 20% mandatory 20% withholding as
described in (1) above, the portion of a nonperiodic distribution
which constitutes taxable income will be subject to federal income
tax withholding, to the extent such aggregate distributions exceed
$200 for the year, unless the recipient elects not to have taxes
withheld. If an election to opt out of withholding is not provided,
10% of the taxable portion of the distribution will be withheld as
federal income tax; provided that the recipient may elect any other
percentage. Election forms will be provided at the time
distributions are requested. This form of withholding applies to
all annuity programs.
3. PERIODIC DISTRIBUTIONS (DISTRIBUTIONS PAYABLE OVER A PERIOD GREATER
THAN ONE YEAR)
The portion of a periodic distribution that constitutes taxable
income will be subject to federal income tax withholding under the
wage withholding tables as if the recipient were married claiming
three exemptions. A recipient may elect not to have income taxes
withheld or have income taxes withheld at a different rate by
providing a completed election form. Election forms will be
provided at the time distributions are requested. This form of
withholding applies to all annuity programs.
Recipients who elect not to have withholding made are liable for payment of
federal income tax on the taxable portion of the distribution. All recipients
may also be subject to penalties under the estimated tax payment rules if
withholding and estimated tax payments are not sufficient.
Recipients who do not provide a social security number or other taxpayer
identification number will not be permitted to elect out of withholding.
Additionally, United States citizens residing outside of the country, or U.S.
legal residents temporarily residing outside the country, are subject to
different withholding rules and cannot elect out of withholding.
TAX ADVICE
Because of the complexity of the law and the fact that the tax results will vary
according to the factual status of the individual involved, a person
contemplating purchase of an annuity contract and/or an Owner, participant or
beneficiary who may make elections under a contract should consult with a
qualified tax or legal adviser prior to such purchase or the making of an
election. It should be understood that the foregoing description of the federal
income tax consequences under these contracts is not exhaustive and that special
rules are provided with respect to situations not discussed here. It should be
understood that if a tax benefited plan loses its exempt status, employees could
lose some of the tax benefits described. For further information, a qualified
tax adviser should be consulted.
AVAILABLE INFORMATION
- --------------------------------------------------------------------------------
The Company files reports and other information with the Securities and Exchange
Commission ("Commission"), as required by law. You may read and copy this
information and other information at the following locations:
o public reference facilities of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C.
o the Commission's Regional Offices located at 233 Broadway, New York,
New York 10279,
o the Commission's Regional Offices located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Under the Securities Act of 1933, the Company has filed with the Commission a
registration statement (the "Registration Statement") relating to the Contracts
offered by this Prospectus. This Prospectus has been filed as a part of the
Registration Statement and does not contain all of the information set forth in
the Registration
13
Statement and the exhibits, and reference is hereby made to such Registration
Statement and exhibits for further information relating to the Company and the
Contracts. The Registration Statement and the exhibits may be inspected and
copied as described above. Although the Company does furnish the Annual Report
on Form 10-K for the year ended December 31, 2003 to owners of contracts or
certificates, the Company does not plan to furnish subsequent annual reports
containing financial information to the owners of contracts or certificates
described in this Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- --------------------------------------------------------------------------------
The Company's latest Annual Report on Form 10-K has been filed with the
Commission. It is incorporated by reference into this Prospectus and a copy must
accompany this Prospectus.
The Form 10-K for the fiscal year ended December 31, 2003 contains additional
information about the Company, including audited financial statements for the
Company's latest fiscal year. It was filed on March 22, 2004 via Edgar; File No.
33-03094.
If requested, the Company will furnish, without charge, a copy of any and all of
the documents incorporated by reference, other than exhibits to those documents
(unless such exhibits are specifically incorporated by reference in those
documents). You may direct your requests to The Travelers Insurance Company, One
Cityplace, Hartford, Connecticut 06103-3415, Attention: Annuity Services. The
telephone number is (800) 842-9368. You may also obtain copies of any documents,
incorporated by reference into this prospectus by accessing the SEC's website
(http://www.sec.gov).
LEGAL OPINION
- --------------------------------------------------------------------------------
Legal matters in connection with federal laws and regulations affecting the
issue and sale of the Contracts described in this Prospectus and the
organization of the Company, its authority to issue such Contracts under
Connecticut law and the validity of the forms of the Contracts under Connecticut
law have been passed on by the General Counsel of the Company.
EXPERTS
- --------------------------------------------------------------------------------
The consolidated financial statements and schedules of The Travelers Insurance
Company and subsidiaries as of December 31, 2003 and 2002, and for each of the
years in the three-year period ended December 31, 2003, have been incorporated
by reference herein in reliance upon the reports of KPMG LLP, independent
accountants, also incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing. The audit reports covering the
December 31, 2003, consolidated financial statements and schedules refer to
changes in the Company's methods of accounting for variable interest entities in
2003, for goodwill and intangible assets in 2002, and for derivative instruments
and hedging activities and for securitized financial assets in 2001.
14
APPENDIX A
- --------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENT
The application of a Market Value Adjustment may adjust up or down you account
value. The following describes the amount the Market Value Adjustment applies
to:
t/365
Maturity Value = [(CURRENT ACCOUNT VALUE - FI) X (I+iG) ]
1
Market Adjusted Value = [(MATURITY VALUE) X ------------------- ]
t/365
(I+iC+0.005)
where: "FI" is the available free interest credited for the
Previous Certificate Year, "iG" is the Guaranteed Credited
rate as stated on the contract specification page, "iC" is
the Guaranteed Interest Rate for a Guarantee period of "t"
days, where "t" is the number of days remaining in the
Guarantee Period adjusted for leap years.
The total amount available to customers, prior to any charges or premium taxes,
is:
Market Adjusted Value + Free Interest
The current Guaranteed Interest Rate is declared periodically by the Company and
is the rate (straight line interpolation between whole years) which the Company
is then paying on premiums paid under this class of Contracts with the same
maturity date as the Purchase Payment to which the formula is being applied.
ILLUSTRATION OF A MARKET VALUE ADJUSTMENT
Purchase Payment: $50,000.00
Guarantee Period: 5 Years
Guaranteed Interest Rate: 5.50% Effective Annual Rate
The following examples illustrate how the Market Value Adjustment may affect the
values of your Contract. In these examples, a Purchase Payment of $50,000 was
made to the Contract. After one year of the guarantee period, the Account Value
(i.e., the Purchase Payment plus accumulated interest) would be $52,750.
The Market Adjusted Value is calculated based on your then Current Account Value
less any available free interest, and is based on a rate the Company is
crediting at the time on new Purchase Payments of the same term-to-maturity as
the time remaining in your Guarantee Period. One year after the Purchase Payment
was made, you would have four years remaining in the five-year Guarantee Period.
EXAMPLE OF A NEGATIVE MARKET VALUE ADJUSTMENT
A negative Market Value Adjustment results when interest rates have increased
since the date the Purchase Payment was made. Assume interest rates have
increased one year after the Purchase Payment and the Company is crediting 7%
for a four-year Guarantee Period.
The Maturity Value would be:
15
4
$61,941.23 = ($52,750.00 - $2,750) X (1 + .055)
The Market Adjusted Value would be:
1
$46,381.63 = [($61,941.23) X ---------------- ]
4
(1+.07+.005)
Total amount available, prior to charges and premium taxes:
$49,131.63 = $46,381.63 + $2,750.00
EXAMPLE OF A POSITIVE MARKET VALUE ADJUSTMENT
A positive Market Value Adjustment results when interest rates have decreased
since the date the Purchase Payment was made. Assume interest rates have
decreased one year after the Purchase Payment and the Company is crediting 3.50%
for a four-year Guarantee Period.
The Maturity Value would be:
4
$61,941.23 = ($52,750.00 - $2,750) X (1 + .055)
The Market Adjusted Value would be:
1
$52,947.62 = [($61,941.23) X ----------------- ]
4
(1+.035+0.005)
Total amount available, prior to charges and premium taxes:
$55,697.62 = $52,947.62 + $2,750.00
These examples illustrate what may happen when interest rates increase or
decrease from the beginning of a Guarantee Period. A particular Market Value
Adjustment may have a greater or lesser impact than that shown in these
examples, depending on how much interest rates have changed since the beginning
of a Guarantee Period and the amount of time remaining to maturity. In addition,
a surrender charge may be assessed on surrenders made before the Purchase
Payment has been under the Contract for five years.
16
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, 2003
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 33-03094
----------------------
THE TRAVELERS INSURANCE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-0566090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE CITYPLACE, HARTFORD, CONNECTICUT 06103-3415
(Address of principal executive offices) (Zip Code)
(860) 308-1000
(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
----------- -----------
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2).
Yes No X
----------- -----------
As of the date hereof, there were outstanding 40,000,000 shares of common stock,
par value $2.50 per share, of the registrant, all of which were owned by
Citigroup Insurance Holding Corporation, 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 INSURANCE COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER PART I PAGE
1. Business...................................................................................................2
A. General.................................................................................................2
B. Business by Segment
Travelers Life & Annuity...........................................................................2
Primerica..........................................................................................4
C. Insurance Regulations...................................................................................4
2. Properties.................................................................................................6
3. Legal Proceedings..........................................................................................6
4. Submission of Matters to a Vote of Security Holders........................................................7
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters......................................7
6. Selected Financial Data....................................................................................7
7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................7
7A. Quantitative and Qualitative Disclosures About Market Risk................................................15
8. Financial Statements and Supplementary Data...............................................................18
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................64
9A. Controls and Procedures...................................................................................64
PART III
10. Directors and Executive Officers of the Registrant........................................................64
11. Executive Compensation....................................................................................64
12. Security Ownership of Certain Beneficial Owners and Management............................................64
13. Certain Relationships and Related Transactions............................................................64
14. Principal Accountant Fees and Services....................................................................64
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................................66
Exhibit Index.............................................................................................67
Signatures................................................................................................68
Index to Financial Statements and Financial Statement Schedules...........................................69
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS.
GENERAL
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company), is a wholly owned subsidiary of Citigroup Insurance Holding
Corporation (CIHC), an indirect wholly owned subsidiary of Citigroup Inc.
(Citigroup). Citigroup is a diversified global financial services holding
company whose businesses provide a broad range of financial services to consumer
and corporate customers around the world. The periodic reports of Citigroup
provide additional business and financial information concerning it and its
consolidated subsidiaries. TIC was incorporated in 1863.
The Company's two reportable business segments are Travelers Life & Annuity and
Primerica. The primary insurance entities of the Company are TIC and its
subsidiaries The Travelers Life and Annuity Company (TLAC), included in the
Travelers Life & Annuity segment, and Primerica Life Insurance Company
(Primerica Life) and its subsidiaries, Primerica Life Insurance Company of
Canada, CitiLife Financial Limited (CitiLife) and National Benefit Life
Insurance Company (NBL), included in the Primerica segment. The consolidated
financial statements include the accounts of the insurance entities of the
Company and Tribeca Citigroup Investments Ltd., among others, on a fully
consolidated basis.
At December 31, 2001, the Company was a wholly owned subsidiary of The Travelers
Insurance Group, Inc. (TIGI). On February 4, 2002, TIGI changed its name to
Travelers Property Casualty Corp. (TPC). TPC completed its initial public
offering (IPO) on March 27, 2002 and on August 20, 2002 Citigroup made a
tax-free distribution of the majority of its remaining interest in TPC to
Citigroup's stockholders. Prior to the IPO, the common stock of TIC was
distributed by TPC to CIHC so that TIC would remain an indirect wholly owned
subsidiary of Citigroup. See Note 14 of Notes to Consolidated Financial
Statements.
Additional information about the Company is available on the Citigroup website
at http://www.citigroup.com by selecting the "Investor Relations" page and
selecting "SEC Filings."
BUSINESS BY SEGMENT
TRAVELERS LIFE & ANNUITY
Travelers Life & Annuity (TLA) core offerings include individual annuity,
individual life, corporate owned life insurance (COLI) and group annuity
insurance products distributed by TIC and TLAC principally under the Travelers
Life & Annuity name. The Company has a license from TPC to use the names
"Travelers Life & Annuity," "The Travelers Insurance Company," "The Travelers
Life and Annuity Company" and related names in connection with the Company's
business. Among the range of individual products offered are deferred fixed and
variable annuities, payout annuities and term, universal and variable life
insurance. The COLI product is a variable universal life product distributed
through independent specialty brokers. The group products include institutional
pensions, including guaranteed investment contracts (GICs), payout annuities,
group annuities sold to employer-sponsored retirement and savings plans,
structured settlements and funding agreements.
2
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
Individual deferred fixed and variable annuities are primarily used for
retirement funding purposes. Variable annuities permit policyholders to direct
retirement funds into a number of separate accounts, which offer differing
investment options. Individual payout annuities offer a guaranteed payment
stream over a specified or life contingent period.
Individual annuity products are distributed through affiliated channels and
non-affiliated channels. The affiliated channels include CitiStreet Retirement
Services, a division of CitiStreet LLC, (CitiStreet), a joint venture between
Citigroup and State Street Bank; Smith Barney (SB), a division of Citigroup
Global Markets Inc.; Primerica Financial Services (PFS); and Citibank. The
non-affiliated channels primarily include a nationwide network of independent
financial professionals and independent broker-dealers. CitiStreet is a sales
organization of personal retirement planning specialists focused primarily on
the qualified periodic deferred compensation marketplace. CitiStreet's share of
total individual annuity premiums and deposits was 30% in 2003. SB distributes
TLA's individual annuities and individual life products, and accounted for 18%
of total individual annuity premiums and deposits in 2003. Sales by PFS and
Citibank accounted for 16% and 8%, respectively, of total individual annuity
premiums and deposits in 2003. The non-affiliated channels accounted for 28% of
individual annuity premiums and deposits.
Individual life insurance is used to meet estate, business planning and
retirement needs and also to provide protection against financial loss due to
death. Individual life products are primarily marketed by the independent
financial professionals, by SB and by Citibank, who accounted for 81% , 11% and
5%, respectively, of total individual life sales for 2003.
Group annuity products, including fixed and variable rate GICs, which provide a
guaranteed return on investment, continue to be a popular investment choice for
employer-sponsored retirement and savings plans. Annuities purchased by
employer-sponsored plans fulfill retirement obligations to individual employees.
Payout annuities are used primarily as a pension close-out investment for
companies. Structured settlements are purchased as a means of settling certain
indemnity claims and making other payments to policyholders over a period of
time. Funding agreement transactions offer fixed term and fixed or variable rate
investment options with policyholder status to domestic and foreign
institutional investors. These group annuity products are sold through direct
sales and various intermediaries.
TIC is licensed to sell and market its individual products in all 50 states, the
District of Columbia, Puerto Rico, Guam, the Bahamas and the U.S. and British
Virgin Islands.
The Company operates Tower Square Securities, Inc., which is an introducing
broker-dealer offering a full line of brokerage services. Tower Square
Securities facilitates the sale of individual variable life and annuity
insurance products by the independent financial professionals. Travelers
Distribution LLC, a limited purpose broker-dealer, is the principal underwriter
and distributor for TLA variable products.
3
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
PRIMERICA
Primerica Life and its subsidiaries, Primerica Life Insurance Company of Canada,
CitiLife and NBL, are the insurance operations of PFS. Their primary product is
individual term life insurance marketed through a sales force composed of
approximately 107,000 representatives. A great majority of the domestic licensed
sales force works on a part-time basis. NBL also provides statutory disability
benefit insurance and other insurance, primarily in New York, as well as direct
response student term life insurance nationwide. CitiLife was established in
September 2000 to underwrite insurance in Europe. Primerica, directly or through
its subsidiaries, is licensed or otherwise authorized to sell and market term
life insurance in all 50 states, the District of Columbia, Puerto Rico, Guam,
the U.S. Virgin Islands, Northern Mariana Islands, Canada, the United Kingdom
and Spain.
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 "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. No regulatory
action has been taken by any state insurance department or the NAIC with respect
to IRIS ratios during the two years ended December 31, 2003.
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.
4
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
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 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% of 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, 2003, the Company's principal domestic insurance
entities all 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
TIC 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), reduced by 25% of the change in net unrealized capital gains,
as determined in accordance with statutory accounting practices. The insurance
holding company laws of other states in which the Company's insurance
subsidiaries are domiciled generally contain similar (although in certain
instances somewhat more restrictive) limitations on the payment of dividends. A
maximum of $845 million is available by the end of the year 2004 for such
dividends without prior approval of the State of Connecticut Insurance
Department, depending upon the amount and timing of the payments. In accordance
with the Connecticut statute, TLAC, after reducing its unassigned funds
(surplus) by 25% of the change in unrealized capital gains, may not pay a
dividend to TIC without prior approval of the State of Connecticut Insurance
Department. Primerica may pay up to $242 million to TIC in 2004 without prior
approval of the Commonwealth of Massachusetts Insurance Department.
5
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
In February 2004, the Company requested prior approval of the State of
Connecticut Insurance Department to pay a proposed extraordinary dividend in
March 2004. Under Connecticut law, the ordinary dividend limitation amount is
based upon the cumulative total of all dividend payments made within the
preceding twelve months. The Company's proposed dividend payment of $467.5
million payable on March 30 would exceed the ordinary dividend limitation by
approximately $103 million. The State of Connecticut Insurance Department
approved the request on March 12, 2004. The Company may seek approval from the
Connecticut Insurance Department for additional extraordinary dividend payments
during 2004. This statement is a forward-looking statement within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 15.
CODE OF ETHICS
The Company has adopted a code of ethics for financial professionals which
applies to the Company's principal executive officer and principal financial and
accounting officer. The code of ethics for financial professionals has been
included as an exhibit to this Form 10-K and can be found on the Citigroup
website by selecting the "Corporate Governance" page.
ITEM 2. PROPERTIES.
The Company's executive offices are located in Hartford, Connecticut. The
Company moved its executive offices to One Cityplace, Hartford, Connecticut,
during the first quarter of 2003. The Company occupies 373,000 square feet at
this location under an operating lease that runs through October 31, 2008. At
December 31, 2002 the Company leased approximately 284,000 square feet from TPC
at One Tower Square, Hartford, Connecticut under a lease that ran through March
31, 2003. The Company previously owned the complex of buildings at One Tower
Square, and sold it as well as a building in Norcross, Georgia housing TPC's
information systems department, to TPC for $68 million in 2002 in connection
with the TPC spin-off from Citigroup. See Note 14 of Notes to Consolidated
Financial Statements.
Other leasehold interests of the Company include approximately 760,000 square
feet of office space in 25 locations throughout the United States.
Management believes that these facilities are suitable and adequate for the
Company's current needs. See Note 10 of Notes to Consolidated Financial
Statements for additional information regarding these facilities.
The preceding discussion does not include information on investment properties.
ITEM 3. LEGAL PROCEEDINGS.
In 2003, several issues in the mutual fund and variable insurance product
industries have come under the scrutiny of federal and state regulators. Like
many other companies in our industry, the Company has received a request for
information from the Securities and Exchange Commission (SEC) and a subpoena
from the New York Attorney General regarding market timing and late trading. In
March 2004 the SEC requested additional information about the Company's variable
product operations on market timing, late trading and revenue sharing. The
Company is cooperating fully with all of these reviews and is not able to
predict their outcomes.
In the ordinary course of business, TIC and its subsidiaries are defendants or
co-defendants in various litigation matters incidental to and typical of the
businesses in which they are engaged. These include civil actions, arbitration
proceedings and other matters arising in the normal course of business out of
activities as an insurance company, a broker and dealer in securities or
otherwise. In the opinion of the Company's management, the ultimate resolution
of these legal proceedings would not be likely to have a material adverse effect
on the Company's results of operations, financial condition or liquidity.
Certain of these statements are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 15.
6
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company has 40,000,000 authorized shares of common stock, all of which are
issued and outstanding as of December 31, 2003. All shares are held by an
indirect subsidiary of Citigroup, and there exists no established public trading
market for the common equity of the Company. The Company paid dividends to its
parent of $545 million and $586 million in 2003 and 2002, respectively. See Note
8 of Notes to Consolidated Financial Statements for certain information
regarding 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.
SEGMENTS
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company) is composed of two business segments, Travelers Life & Annuity (TLA)
and Primerica.
CRITICAL ACCOUNTING POLICIES
The Notes to Consolidated 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
critical to the portrayal of the Company's financial condition, since they
require management to make difficult, complex or subjective judgments, some of
which may relate to matters that are inherently uncertain.
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life, universal life, COLI, deferred annuities
and payout annuities are deferred. These deferred acquisition costs (DAC)
include principally commissions and certain expenses related to policy issuance,
underwriting and marketing, all of which vary with and are primarily related to
the production of new business. The method for determining amortization of
deferred acquisition costs varies by product type based upon three different
accounting pronouncements: Statement of Financial Accounting Standards (SFAS)
No. 60, "Accounting and Reporting by Insurance Enterprises" (SFAS 60), SFAS No.
91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long Duration
Contracts and for Realized Gains and Losses from the Sale of Investments" (SFAS
97).
7
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
DAC for deferred annuities, both fixed and variable, and payout annuities is
amortized employing a level effective yield methodology per SFAS 91 as indicated
by AICPA Practice Bulletin 8. An amortization rate is developed using the
outstanding DAC balance and projected account balances. This rate is applied to
actual account balances to determine the amount of DAC amortization. The
projected account balances are derived using a model that contains assumptions
related to investment returns and persistency. The model rate is evaluated at
least annually, and changes in underlying lapse and interest rate assumptions
are to be treated retrospectively. Variances in expected equity market returns
versus actual returns are treated prospectively and a new amortization pattern
is developed so that the DAC balances will be amortized over the remaining
estimated life of the business. DAC for these products is currently being
amortized over 10-15 years.
DAC for universal life and COLI is amortized in relation to estimated gross
profits from surrender charges, investment, mortality, and expense margins per
SFAS 97. Actual profits can vary from management's estimates, resulting in
increases or decreases in the rate of amortization. Re-estimates of gross
profits, performed at least annually, result in retrospective adjustments to
earnings by a cumulative charge or credit to income. DAC for these products is
currently being amortized over 16-25 years.
DAC relating to traditional life, including term insurance, and health insurance
is amortized in relation to anticipated premiums per SFAS 60. Assumptions as to
the anticipated premiums are made at the date of policy issuance or acquisition
and are consistently applied over the life of the policy. DAC for these products
is currently being amortized over 5-20 years.
All DAC is reviewed at least annually to determine if it is recoverable from
future income, including investment income, and, if not recoverable, is charged
to expense. All other acquisition expenses are charged to operations as
incurred.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life products. The annuity payout
reserves are calculated using the mortality and interest assumptions used in the
actual pricing of the benefit. Mortality assumptions are based on the Company's
experience and are adjusted to reflect deviations such as substandard mortality
in structured settlement benefits. The interest rates range from 2.0% to 9.0%,
with a weighted average rate of 7.02% for these annuity products. Traditional
life products include whole life and term insurance. Future policy benefits for
traditional life products are estimated on the basis of actuarial assumptions as
to mortality, persistency and interest, established at policy issue. Actuarial
and interest assumptions include a margin for adverse deviation and are based on
the Company's experience. Interest assumptions applicable to traditional life
products range from 2.5% to 7.0%, with a weighted average of 5.23%.
INVESTMENTS IN FIXED MATURITIES
Fixed maturities, which comprise 75% and 72% of total investments at December
31, 2003 and 2002, respectively, include bonds, notes and redeemable preferred
stocks. Fixed maturities, including instruments subject to securities lending
agreements (see Note 3 of Notes to Consolidated 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. Fair values of investments in fixed maturities
are based on quoted market prices or dealer quotes. If quoted market prices are
not available, discounted expected cash flows using market rates commensurate
with the credit quality and maturity of the investment are used to determine
fair value. Changes in assumptions could affect the fair values of fixed
maturities. Impairments are realized when investment losses in value are deemed
other-than-temporary. The Company conducts a rigorous review each quarter to
identify and evaluate investments that have possible indications of
8
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
impairment. An investment in a debt or equity security is impaired if its fair
value falls below its cost and the decline is considered other-than-temporary.
Factors considered in determining whether a loss is temporary include the length
of time and extent to which fair value has been below cost; the financial
condition and near- term prospects of the issuer; and the Company's ability and
intent to hold the investment for a period of time sufficient to allow for any
anticipated recovery. Changing economic conditions - global, regional, or
related to specific issuers or industries - could result in other-than-temporary
losses.
PREMIUMS
Premiums are recognized as revenues when due. Premiums for contracts with a
limited number of premium payments, due over a significantly shorter period than
the period over which benefits are provided, are considered revenue when due.
The portion of premium which is not required to provide for benefits and
expenses is deferred and recognized in revenues in a constant relationship to
insurance benefits in force.
CONSOLIDATED OVERVIEW
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
- -------------------------------- ---- ----
($ IN MILLIONS)
Revenues $6,139 $5,234
Insurance benefits and interest credited 3,350 2,931
Operating expenses 960 800
------ ------
Income before taxes 1,829 1,503
Income taxes 471 421
--- ---
Net income $1,358 $1,082
====== ======
Net income in 2003 increased 26% from 2002, primarily attributable to increased
revenues due to better net pre-tax realized investment portfolio gain (loss)
activity, better fee income and higher net investment income (NII) from
increased business volumes and an increased invested asset base. These increases
were partially offset by higher insurance benefits and claims from the increased
business volumes, higher DAC amortization and lower investment yields. Included
in net income are current year realized investment gains of $24 million compared
to prior year investment losses of $209 million. The 2002 loss reflects
impairments to the fixed maturities portfolio related to WorldCom Inc. of $126
million, as well as other fixed maturities and equity investment impairments.
See the detailed description of each business segment for additional
information.
9
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
TRAVELERS LIFE & ANNUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
- -------------------------------- ---- ----
($ IN MILLIONS)
Revenues $4,479 $3,653
Insurance benefits and interest credited 2,816 2,404
Operating expenses 505 364
------ ------
Income before taxes 1,158 885
Income taxes 240 212
------ ------
Net income $ 918 $ 673
====== ======
Net income of $918 million in 2003, which increased 36% from $673 million in
2002, includes net realized investment gains of $20 million compared to net
realized investment losses of $211 million in 2002, largely resulting from the
absence of prior year impairments to the fixed maturities portfolio investments
in WorldCom Inc. of $122 million, as well as other fixed maturities and equity
investment impairments. The increase in 2003 net income was also due to higher
fee revenues and NII from business volumes, and $50 million in tax benefits
related to an adjustment to the Dividends Received Deduction. These increases
were partially offset by higher insurance benefits and claims from the increased
business volumes, higher DAC amortization and lower investment yields.
TLA NII increased 4% to $2,743 million in 2003 from $2,646 million in 2002
despite overall rate deterioration. Fixed maturities suffered from the lower
interest rate environment and credit issues. The increase was driven by a larger
invested asset base from higher business volumes and significant returns from
risk arbitrage activity through the trading portfolio.
10
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The following table shows net written premiums and deposits by product line for
each of the years ended December 31, 2003 and 2002. The majority of the annuity
business and a substantial portion of the life business written by TLA are
accounted for as investment contracts, with the result that the deposits
collected are reported as liabilities and are not included in revenues. Deposits
represent a statistic used for measuring business volumes, which management of
the Company uses to manage the life insurance and annuities operations, and may
not be comparable to similarly captioned measurements used by other life
insurance companies.
2003 2002
IN MILLIONS OF DOLLARS PREMIUMS DEPOSITS PREMIUMS DEPOSITS
-------- -------- -------- --------
Individual annuities
Fixed $ -- $ 535 $ -- $ 1,237
Variable -- 3,983 -- 4,004
Individual payout 26 28 28 29
-------- -------- -------- --------
Total individual annuities 26 4,546 28 5,270
Group annuities 908 6,494 545 5,747
Individual life insurance:
Direct periodic premiums & deposits 140 686 135 636
Single premium deposits -- 405 -- 285
Reinsurance (40) (99) (28) (85)
-------- -------- -------- --------
Total individual life insurance 100 992 107 836
Other 48 -- 50 --
-------- -------- -------- --------
Total $ 1,082 $ 12,032 $ 730 $ 11,853
======== ======== ======== ========
Individual annuity deposits decreased 14% in 2003 to $4.546 billion from $5.270
billion in 2002. The decrease was primarily driven by a decline in fixed annuity
sales due to competitive pressures and current market perception of fixed rate
products. Variable annuity production declined slightly in 2003, primarily in
the first half of the year, which was the continuation of the weak equity market
conditions from the prior year. Production rebounded in the second half of the
year as equity market conditions improved. Individual annuity account balances
and benefits reserves were $32.9 billion at December 31, 2003, up from $27.5
billion at December 31, 2002. This increase reflects equity market growth in
variable annuity investments of $4.0 billion in 2003 and $1.2 billion of net
sales from good in-force retention.
Group Annuity written premiums increased 67%, primarily related to group payout
sales, which increased 129% due to the sale of a group pension close-out
contract of $290 million. Deposits (excluding the Company's employee pension
plan deposits) in 2003 increased 13% from 2002, reflecting higher fixed and
variable rate guaranteed investment contracts (GIC) sales, including a $1.0
billion fixed rate GIC sale to The Federal Home Loan Bank of Boston. Group
annuity account balances and benefit reserves reached $25.2 billion at December
31, 2003, an increase of $2.9 billion, or 13%, from $22.3 billion at December
31, 2002, reflecting continued strong retention in all products, a $105 million,
or 21%, increase in total structured settlement premiums and deposits, as well
as continued strong GIC and group payout sales.
Deposits for the life insurance business increased 19% from 2002. This increase
was related to a 42% increase in single premium sales and higher direct periodic
deposits for individual life insurance in 2003, driven by independent agent
high-end estate planning, partially offset by a 42% decrease in COLI sales. Life
insurance in force was $89.5 billion at December 31, 2003 up from $82.3 billion
at December 31, 2002.
During 2003, TLA expenses increased primarily due to higher DAC amortization and
volume-related insurance expenses.
11
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The amortization of capitalized DAC is a significant component of TLA expenses.
TLA's recording of DAC amortization varies based upon product type. DAC for
deferred annuities, both fixed and variable, and payout annuities employs a
level yield methodology as described in SFAS 91. DAC for universal life (UL) and
COLI is amortized in relation to estimated gross profits as described in SFAS
97, with traditional life, including term insurance and other products amortized
in relation to anticipated premiums as per SFAS 60. The following is a summary
of capitalized DAC by type:
Deferred & Payout Traditional Life
In millions of dollars Annuities UL & COLI & Other Total
- ----------------------------------------------------------------------------------------------------------------------------
Balance January 1, 2002 $ 1,137 $ 430 $ 106 $ 1,673
Commissions and expenses deferred & other 347 172 26 545
Amortization expense (142) (24) (19) (185)
Underlying lapse and interest rate adjustment
22 -- -- 22
Amortization related to SFAS 91 reassessment
(11) -- -- (11)
------------------------------------------------------------------------
Balance December 31, 2002 1,353 578 113 2,044
Commissions and expenses deferred 340 221 22 583
Amortization expense (212) (33) (21) (266)
------------------------------------------------------------------------
Balance December 31, 2003 $ 1,481 $ 766 $ 114 $ 2,361
- ----------------------------------------------------------------------------------------------------------------------------
DAC capitalization increased 5% during 2003, driven by the increase in UL and
COLI, which is consistent with the increase in premiums and deposits for those
lines of business. The increase in amortization expense in 2003 was primarily
attributable to deferred annuities. During the first quarter of 2002, there was
a one-time decrease in deferred annuity DAC amortization of $22 million due to
changes in underlying lapse and interest rate assumptions. In contrast to equity
market performance differences, these adjustments are to be treated
retrospectively as described in SFAS 91 by adjusting the DAC asset through
amortization expense and employing the new assumptions prospectively. In the
fourth quarter of 2002, TLA increased its deferred annuities DAC amortization by
$11 million due to a significant decline in its individual annuity account
balances and benefit reserves, largely resulting from decreases in the stock
market which caused account balances to decline. Under SFAS 91, variances in
expected versus actual market returns are treated prospectively, resulting in a
new amortization pattern over the remaining estimated life of the business. The
2003 UL and COLI amortization also increased 38% over 2002, primarily due to
volume growth.
TLA OUTLOOK
TLA 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. TLA
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, retirement and estate planning
products sold through established distribution channels.
However, competition in both product pricing and customer service is
intensifying. There has been consolidation within the industry, and among other
financial services organizations that are increasingly involved in the sale
and/or distribution of insurance products. Also, the annuities business is
interest rate and market sensitive. TLA's business is significantly affected by
movements in the U.S. equity and fixed income credit markets.
12
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
U.S. equity and credit market events can have both positive and negative effects
on the deposit, revenue and policy retention performance of the business. A
sustained weakness in the equity markets will decrease revenues and earnings in
variable annuity products. Declines in credit quality of issuers will have a
negative effect on earnings.
In order to strengthen its competitive position, TLA expects to maintain a
current product portfolio, further diversify its distribution channels, and
retain its financial position through strong sales growth and maintenance of an
efficient cost structure. Federal and state regulators have focused on, and
continue to devote substantial attention to, the mutual fund and variable
insurance product industries. As a result of publicity relating to widespread
perceptions of industry abuses, there have been numerous proposals for
legislative and regulatory reforms, including mutual fund governance, new
disclosure requirements concerning mutual fund share classes, commission
breakpoints, revenue sharing, advisory fees, market timing, late trading,
portfolio pricing, annuity products, hedge funds, and other issues. It is
difficult to predict at this time whether changes resulting from new laws and
regulations will affect the industries or the Company's businesses, and, if so,
to what degree.
The statements above are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. See "Forward-Looking Statements" on
page 15.
PRIMERICA
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
-------------------------------- ---- ----
($ IN MILLIONS)
Revenues $1,660 $1,581
Insurance benefits and interest credited 534 527
Operating expenses 455 436
------ ------
Income before taxes 671 618
Income taxes 231 209
------ ------
Net income $ 440 $ 409
====== ======
Net income increased 8% to $440 million from $409 million in 2002. The increase
in net income reflects growth in life insurance in force from $466.8 billion at
December 31, 2002 to $503.6 billion at December 31, 2003 and higher NII from a
larger invested capital base. The increase in expense for DAC is the result of
an increase in life insurance production. Other general expense increased
slightly consistent with the increase in in-force. Mortality experience was
favorable in 2003, compared to 2002, however, there was an increase in incurred
claims. This increase is provided for by growth in the in-force, associated
premium revenues and policyholders reserve balances.
Net income also includes net realized investment gains of $4 million in 2003
compared to net realized investment gains of $2 million in 2002, including the
impairment of the fixed maturities portfolio investment in WorldCom Inc.
totaling $4 million.
The amortization of capitalized DAC is a significant component of Primerica's
expenses. All of Primerica's DAC is associated with traditional life products.
DAC is amortized in relation to anticipated premiums as per SFAS 60. Amortized
DAC has remained level as a percentage of direct premiums. The increase in the
amount of amortization over 2002 is associated with growth in sales and
in-force.
13
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The following is a summary of capitalized DAC:
IN MILLIONS OF DOLLARS
---------------------------------------------------------------------
Balance January 1, 2002 $1,788
Deferred expenses and other 323
Amortization expense (219)
---------------------------------------------------------------------
Balance December 31, 2002 1,892
---------------------------------------------------------------------
Deferred expenses and other 377
Amortization expense (235)
---------------------------------------------------------------------
Balance December 31, 2003 $2,034
---------------------------------------------------------------------
EARNED PREMIUMS, NET OF REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
-------------------------------- ---- ----
($ IN MILLIONS)
Individual term life $1,179 $1,127
Other 66 67
$1,245 $1,194
====== ======
The total face amount of term life insurance issued was $82.2 billion in 2003
compared to $79.3 billion in 2002. This increase in term life production
resulted from the increase in licensed life representatives. Life insurance in
force at year-end 2003 reached $503.6 billion, up from $466.8 billion at
year-end 2002, reflecting consistent in-force policy retention and higher volume
of sales.
PRIMERICA OUTLOOK
Over the last few years, programs including sales and product training have been
designed to maintain high compliance standards, increase the number of producing
agents and customer contacts and, ultimately, increase production levels. A
continuation of these trends could positively influence future operations. This
statement is a forward-looking statement within the meaning of the Private
Securities Litigation Reform Act. See "Forward-Looking Statements" on page 15.
14
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to Consolidated Financial Statements for Future Application
of Accounting Standards.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words "believe," "expect," "anticipate," "intend,"
"estimate," "may increase," "may fluctuate," and similar expressions or future
or conditional verbs such as "will," "should," "would," and "could." These
forward-looking statements involve risks and uncertainties including, but not
limited to, regulatory matters, the resolution of legal proceedings, the impact
that the adoption of recent legislation may have on the demand for life and
annuity products, the potential impact of a decline in credit quality of
investments on earnings; the Company's market risk and the discussions of the
Company's prospects under "Outlook" on the previous pages.
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, 2003.
MARKET RISK SENSITIVE INSTRUMENTS ENTERED INTO FOR PURPOSES OTHER THAN TRADING
The primary market risk to the Company's investment portfolio is interest rate
risk associated with investments. 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 product
line, with each product line'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 3
of Notes to Consolidated 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,
2002. 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.
15
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
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, interest-bearing non-redeemable preferred stock,
mortgage loans, short-term securities, cash, investment income accrued, policy
loans, contractholder funds, guaranteed separate account assets and liabilities
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, 2003 and 2002. The sensitivity analysis model used by the Company produces a
loss in fair value of interest rate sensitive invested assets of approximately
$2.2 billion and $1.9 billion based on a 100 basis point increase in interest
rates as of December 31, 2003 and 2002, 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 $1.7 billion and $1.5 billion based
on a 100 basis point increase in interest rates as of December 31, 2003 and
2002, respectively. Based on the sensitivity analysis model used by the Company,
the net loss in fair value of market sensitive instruments, including
non-financial instrument liabilities, as a result of a 100 basis point increase
in interest rates as of December 31, 2003 and 2002 is not material.
MARKET RISK SENSITIVE INSTRUMENTS ENTERED INTO FOR TRADING PURPOSES
The Company maintains a trading portfolio consisting of convertible bonds and
common stocks with carrying values of $1,707 million and $1,531 million as of
December 31, 2003 and 2002, respectively, and $637 million and $598 million of
liabilities resulting from common stocks sold not yet purchased (referred to as
short sales) as of December 31, 2003 and 2002, respectively. The primary market
risk to the trading portfolio is equity risk. Assets are reported as trading
securities and liabilities are reported as trading securities sold not yet
purchased.
16
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
The Company's primary investment strategy is convertible bond arbitrage where
convertible bonds are paired with short sales of the common stocks of companies
issuing the convertible bonds. These positions are established and maintained so
that general changes in equity markets and interest rates should not materially
impact the value of the portfolio.
TABULAR PRESENTATION
The table below provides information about the trading portfolio's financial
instruments that are primarily exposed to equity price risk. This table presents
the fair values of these instruments as of December 31, 2003 and 2002. Fair
values are based upon quoted market prices.
($ IN MILLIONS) Fair value as of Fair value as of
--------------- December 31, 2003 December 31, 2002
----------------- -----------------
Assets
Trading securities
Convertible bond arbitrage $1,447 $1,442
Other 260 89
------ ------
$1,707 $1,531
====== ======
LIABILITIES
Trading securities sold not yet purchased
Convertible bond arbitrage $629 $520
Other 8 78
------ ------
$ 637 $ 598
====== ======
The Company's trading portfolio investments and related liabilities are normally
held for periods less than six months. Therefore, expected future cash flows for
these assets and liabilities are expected to be realized in less than one year.
17
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report..............................................19
Consolidated Financial Statements:
Consolidated Statements of Income for
the years ended December 31, 2003, 2002 and 2001.......................20
Consolidated Balance Sheets - December 31, 2003 and 2002...............21
Consolidated Statements of Changes in Shareholder's Equity
for the years ended December 31, 2003, 2002 and 2001...................22
Consolidated Statements of Cash Flows for
the years ended December 31, 2003, 2002 and 2001.......................23
Notes to Consolidated Financial Statements..........................24-63
18
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company:
We have audited the accompanying consolidated balance sheets of The Travelers
Insurance Company and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in shareholder's equity, and
cash flows for each of the years in the three-year period ended December 31,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Travelers
Insurance Company and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for variable interest entities in 2003, for
goodwill and intangible assets in 2002, and for derivative instruments and
hedging activities and for securitized financial assets in 2001.
/s/KPMG LLP
Hartford, Connecticut
February 26, 2004
19
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
---- ---- ----
REVENUES
Premiums $2,327 $1,924 $2,102
Net investment income 3,058 2,936 2,831
Realized investment gains (losses) 37 (322) 125
Fee income 606 560 537
Other revenues 111 136 107
- ------------------------------------------------------------------------------------------------------------------------------
Total Revenues 6,139 5,234 5,702
- ------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 2,102 1,711 1,862
Interest credited to contractholders 1,248 1,220 1,179
Amortization of deferred acquisition costs 501 393 379
General and administrative expenses 459 407 371
- ------------------------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 4,310 3,731 3,791
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations before federal income taxes and cumulative effects of
changes in accounting principles 1,829 1,503 1,911
- ------------------------------------------------------------------------------------------------------------------------------
Federal income taxes
Current 360 236 471
Deferred 111 185 159
- ------------------------------------------------------------------------------------------------------------------------------
Total Federal Income Taxes 471 421 630
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effects of changes in accounting principles 1,358 1,082 1,281
Cumulative effect of change in accounting for derivative instruments and
hedging activities, net of tax -- -- (6)
Cumulative effect of change in accounting for securitized financial assets,
net of tax -- -- (3)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $1,358 $1,082 $1,272
==============================================================================================================================
See Notes to Consolidated Financial Statements.
20
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
AT DECEMBER 31, 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value (including $2,170 and $2,687
subject to securities lending agreements) (cost $40,119; $35,428) $42,323 $36,434
Equity securities, at fair value (cost $323; $328) 362 332
Mortgage loans 1,886 1,985
Real estate 96 36
Policy loans 1,135 1,168
Short-term securities 3,603 4,414
Trading securities, at fair value 1,707 1,531
Other invested assets 5,092 4,909
- ----------------------------------------------------------------------------------------------------------------------------
Total Investments 56,204 50,809
- ----------------------------------------------------------------------------------------------------------------------------
Cash 149 186
Investment income accrued 567 525
Premium balances receivable 165 151
Reinsurance recoverables 4,470 4,301
Deferred acquisition costs 4,395 3,936
Separate and variable accounts 26,972 21,620
Other assets 2,426 1,467
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets $95,348 $82,995
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Contractholder funds $30,252 $26,634
Future policy benefits and claims 15,964 15,009
Separate and variable accounts 26,972 21,620
Deferred federal income taxes 2,030 1,448
Trading securities sold not yet purchased, at fair value 637 598
Other liabilities 6,136 6,051
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 81,991 71,360
- ----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $2.50; 40 million shares authorized, issued and outstanding 100 100
Additional paid-in capital 5,446 5,443
Retained earnings 6,451 5,638
Accumulated other changes in equity from nonowner sources 1,360 454
- ----------------------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 13,357 11,635
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $95,348 $82,995
============================================================================================================================
See Notes to Consolidated Financial Statements.
21
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 100 $ 100 $ 100
Changes in common stock -- -- --
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 100 $ 100 $ 100
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
- -------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 5,443 $ 3,864 $ 3,843
Stock option tax benefit (expense) 3 (17) 21
Capital contributed by parent -- 1,596 --
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 5,446 $ 5,443 $ 3,864
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
- -------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 5,638 $ 5,142 $ 4,342
Net income 1,358 1,082 1,272
Dividends to parent (545) (586) (472)
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 6,451 $ 5,638 $ 5,142
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- -------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 454 $ 74 $ 104
Cumulative effect of accounting for
derivative instruments and hedging activities, net
of tax -- -- (29)
Unrealized gains, net of tax 818 455 68
Foreign currency translation, net of tax 4 3 (3)
Derivative instrument hedging activity losses, net
of tax 84 (78) (66)
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,360 $ 454 $ 74
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- -------------------------------------------------------------------------------------------------------------------
Net income $ 1,358 $ 1,082 $ 1,272
Other changes in equity from nonowner sources 906 380 (30)
- -------------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 2,264 $ 1,462 $ 1,242
===================================================================================================================
- -------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY
- -------------------------------------------------------------------------------------------------------------------
Changes in total shareholder's equity $ 1,722 $ 2,455 $ 791
Balance, beginning of year 11,635 9,180 8,389
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 13,357 $ 11,635 $ 9,180
===================================================================================================================
See Notes to Consolidated Financial Statements.
22
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 2,335 $ 1,917 $ 2,109
Net investment income received 2,787 2,741 2,430
Other revenues received 335 384 867
Benefits and claims paid (1,270) (1,218) (1,176)
Interest paid to contractholders (1,226) (1,220) (1,159)
Operating expenses paid (1,375) (1,310) (1,000)
Income taxes paid (456) (197) (472)
Trading account investments (purchases), sales, net (232) 76 (92)
Other (84) (105) (227)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 814 1,068 1,280
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 7,446 4,459 3,706
Mortgage loans 358 374 455
Proceeds from sales of investments
Fixed maturities 15,078 15,472 14,110
Equity securities 124 212 112
Real estate held for sale 5 26 6
Purchases of investments
Fixed maturities (26,766) (23,623) (22,556)
Equity securities (144) (134) (50)
Mortgage loans (317) (355) (287)
Policy loans, net 34 39 41
Short-term securities purchases, net 814 (1,320) (914)
Other investments (purchases), sales, net 108 (69) 103
Securities transactions in course of settlement, net (618) 529 1,086
- ------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (3,878) (4,390) (4,188)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 8,326 8,505 8,308
Contractholder fund withdrawals (4,754) (4,729) (4,932)
Capital contribution by parent -- 172 --
Dividends to parent company (545) (586) (472)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 3,027 3,362 2,904
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (37) 40 (4)
Cash at December 31, previous year 186 146 150
- ------------------------------------------------------------------------------------------------------------------
Cash at December 31, current year $ 149 $ 186 $ 146
===================================================================================================================
See Notes to Consolidated Financial Statements.
23
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the accompanying
financial statements follow.
BASIS OF PRESENTATION
The Travelers Insurance Company (TIC, together with its subsidiaries, the
Company), is a wholly owned subsidiary of Citigroup Insurance Holding
Corporation (CIHC), an indirect wholly owned subsidiary of Citigroup Inc.
(Citigroup), a diversified global financial services holding company whose
businesses provide a broad range of financial services to consumer and
corporate customers around the world. The consolidated financial statements
include the accounts of the Company and its insurance and non-insurance
subsidiaries on a fully consolidated basis. The primary insurance entities
of the Company are TIC and its subsidiaries, The Travelers Life and Annuity
Company (TLAC), Primerica Life Insurance Company (Primerica Life), and its
subsidiaries, Primerica Life Insurance Company of Canada, CitiLife
Financial Limited (CitiLife) and National Benefit Life Insurance Company
(NBL). Significant intercompany transactions and balances have been
eliminated. The Company consolidates entities deemed to be variable
interest entities when the Company is determined to be the primary
beneficiary under Financial Accounting Standards Board (FASB)
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN
46).
At December 31, 2001, the Company was a wholly owned subsidiary of The
Travelers Insurance Group, Inc. (TIGI). On February 4, 2002, TIGI changed
its name to Travelers Property Casualty Corp. (TPC). TPC completed its
initial public offering (IPO) on March 27, 2002 and on August 20, 2002
Citigroup made a tax-free distribution of the majority of its remaining
interest in TPC, to Citigroup's stockholders. Prior to the IPO, the common
stock of TIC was distributed by TPC to CIHC so that TIC would remain an
indirect wholly owned subsidiary of Citigroup. See Note 14.
The financial statements and accompanying footnotes of the Company are
prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and benefits and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain prior year amounts have been reclassified to conform to the 2003
presentation.
ACCOUNTING CHANGES
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FIN 46, which changes the method of
determining whether certain entities, including securitization entities,
should be included in the Company's consolidated financial statements. An
entity is subject to FIN 46 and is called a variable interest entity (VIE)
if it has (1) equity that is insufficient to permit the entity to finance
its activities without additional subordinated financial support from other
parties, or (2) equity investors that cannot make significant decisions
about the entity's operations, or that do not absorb the expected losses or
receive the expected returns of the entity. All other entities are
evaluated for consolidation under Statement of Financial Accounting
Standards (SFAS) No. 94, "Consolidation of All Majority-Owned Subsidiaries"
(SFAS 94). A VIE is consolidated by its primary beneficiary, which is the
party involved with the VIE that has a majority of the expected losses or a
majority of the expected residual returns or both.
24
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For any VIEs that must be consolidated under FIN 46 that were created
before February 1, 2003, the assets, liabilities and noncontrolling
interest of the VIE are initially measured at their carrying amounts with
any difference between the net amount added to the balance sheet and any
previously recognized interest being recognized as the cumulative effect of
an accounting change. If determining the carrying amounts is not
practicable, fair value at the date FIN 46 first applies may be used to
measure the assets, liabilities and noncontrolling interest of the VIE. In
October 2003, the FASB announced that the effective date of FIN 46 was
deferred from July 1, 2003 to periods ending after December 15, 2003 for
VIEs created prior to February 1, 2003. TIC elected to implement the
provisions of FIN 46 in the 2003 third quarter, resulting in the
consolidation of VIEs, increasing both assets and liabilities by
approximately $407 million.
The implementation of FIN 46 encompassed a review of numerous entities to
determine the impact of adoption and considerable judgment was used in
evaluating whether or not a VIE should be consolidated. The FASB continues
to provide additional guidance on implementing FIN 46 through FASB Staff
Positions.
In December 2003, the FASB released a revision of FIN 46 (FIN 46-R or the
interpretation), which includes substantial changes from the original. The
calculation of expected losses and expected residual returns have both been
altered to reduce the impact of decision maker and guarantor fees in the
calculation of expected residual returns and expected losses. In addition,
FIN 46-R changes the definition of a variable interest. The interpretation
permits adoption of either the original or the revised versions of FIN 46
until the first quarter of 2004, at which time FIN 46-R must be adopted.
For 2003 year-end, the Company's consolidated financial statements are in
accordance with the original.
The Company is evaluating the impact of applying FIN 46-R to existing VIEs
in which it has variable interests and has not yet completed this analysis.
At this time, it is anticipated that the effect of adopting FIN 46-R on the
Company's consolidated balance sheet would be immaterial. As the Company
continues to evaluate the impact of applying FIN 46-R, additional entities
may be identified that would need to be consolidated. See Note 3.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." In particular, this Statement clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative and when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
This Statement is generally effective for contracts entered into or
modified after June 30, 2003 and did not have a significant impact on the
Company's consolidated financial statements.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires
that a liability for costs associated with exit or disposal activities,
other than in a business combination, be recognized when the liability is
incurred. Previous generally accepted accounting principles provided for
the recognition of such costs at the date of management's commitment to an
exit plan. In addition, SFAS 146 requires that the liability be measured at
fair value and be adjusted for changes in estimated cash flows. The
provisions of the new standard are effective for exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS 146 did
not affect the Company's consolidated financial statements.
25
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
STOCK-BASED COMPENSATION
The Company and its employees participate in stock option plans of
Citigroup. On January 1, 2003, the Company adopted the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), prospectively for all awards granted, modified,
or settled after January 1, 2003. The prospective method is one of the
adoption methods provided for under SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," issued in December
2002. SFAS 123 requires that compensation cost for all stock awards be
calculated and recognized over the service period (generally equal to the
vesting period). This compensation cost is determined using option pricing
models, intended to estimate the fair value of the awards at the grant
date. Prior to January 1, 2003, the Company applied Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25),
and related interpretations in accounting for its stock-based compensation
plans. Under APB 25, there is generally no charge to earnings for employee
stock option awards because the options granted under these plans have an
exercise price equal to the market value of the underlying common stock on
the grant date. Similar to APB 25, an offsetting increase to shareholder's
equity under SFAS 123 is recorded equal to the amount of compensation
expense charged.
Had the Company applied SFAS 123 prior to 2003 in accounting for Citigroup
stock options, net income would have been the pro forma amounts indicated
below:
-----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003 2002 2001
($ IN MILLIONS)
-----------------------------------------------------------------------------------------------------------------------
Compensation expense related to stock option As reported $2 $-- $--
plans, net of tax Pro forma 7 9 15
-----------------------------------------------------------------------------------------------------------------------
Net income As reported $1,358 $1,082 $1,272
Pro forma 1,353 1,073 1,257
-----------------------------------------------------------------------------------------------------------------------
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the FASB SFAS No. 141,
"Business Combinations" (SFAS 141) and No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These standards change the accounting for
business combinations by, among other things, prohibiting the prospective
use of pooling-of-interests accounting and requiring companies to stop
amortizing goodwill and certain intangible assets with an indefinite useful
life created by business combinations accounted for using the purchase
method of accounting. Instead, goodwill and intangible assets deemed to
have an indefinite useful life will be subject to an annual review for
impairment. Other intangible assets that are not deemed to have an
indefinite useful life will continue to be amortized over their useful
lives. See Note 5.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 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
26
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
liabilities in the consolidated balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
recognized asset or liability or of a forecasted transaction, or (c) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security,
or a foreign-currency-denominated forecasted transaction. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting
designation. The cumulative effect of the adoption of SFAS 133 was an
after-tax charge of $6 million included in net income and an after-tax
charge of $29 million to accumulated other changes in equity from nonowner
sources.
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 a beneficial interest falling within the scope of EITF
99-20 is to be recognized prospectively. As a result of adopting EITF
99-20, the Company recorded an after-tax charge of $3 million in the
consolidated statement of income. The implementation of this EITF did not
have a significant impact on the Company's consolidated financial
statements.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS
In July 2003, Statement of Position 03-01 "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts" (SOP 03-01) was released. SOP 03-01 provides
guidance on accounting and reporting by insurance enterprises for separate
account presentation, accounting for an insurer's interest in a separate
account, transfers to a separate account, valuation of certain liabilities,
contracts with death or other benefit features, contracts that provide
annuitization benefits, and sales inducements to contract holders. SOP
03-01 is effective for financial statements for fiscal years beginning
after December 15, 2003. The adoption of SOP 03-01 will not have a material
impact on the Company's consolidated financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB released a revision of FIN 46 (FIN 46-R). See
"Consolidation of Variable Interest Entities" in the "Accounting Changes"
section of this Note for a discussion of FIN 46-R.
27
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING POLICIES
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities, including instruments subject to securities lending
agreements (see Note 3), are classified as "available for sale" and are
reported at fair value, with unrealized investment gains and losses, net of
income taxes, credited or charged directly to shareholder's equity. Fair
values of investments in fixed maturities are based on quoted market prices
or dealer quotes. If quoted market prices are not available, discounted
expected cash flows using market rates commensurate with the credit quality
and maturity of the investment are used to determine fair value. Changes in
assumptions could affect the fair values of fixed maturities. Impairments
are realized when investment losses in value are deemed
other-than-temporary. The Company conducts a rigorous review each quarter
to identify and evaluate investments that have possible indications of
impairment. An investment in a debt or equity security is impaired if its
fair value falls below its cost and the decline is considered
other-than-temporary. Factors considered in determining whether a loss is
temporary include the length of time and extent to which fair value has
been below cost; the financial condition and near-term prospects of the
issuer; and the Company's ability and intent to hold the investment for a
period of time sufficient to allow for any anticipated recovery. Changing
economic conditions - global, regional, or related to specific issuers or
industries - could result in other-than-temporary losses.
Also included in fixed maturities are loan-backed and structured securities
(including beneficial interests in securitized financial assets).
Beneficial interests in securitized financial assets that are rated "A" and
below are accounted for under the prospective method in accordance with
EITF 99-20. Under the prospective method of accounting, the investments
effective yield and impairment for other-than-temporary losses in value are
based upon projected future cash flows. All other loan-backed and
structured securities are amortized using the retrospective method. The
effective yield used to determine amortization is calculated based upon
actual historical and projected future cash flows.
Equity securities, which include common and non-redeemable preferred
stocks, are classified as "available for sale" and carried at fair value
based primarily on quoted market prices. Changes in fair values of equity
securities are charged or credited directly to shareholder's equity, net of
income taxes.
Mortgage loans are carried at amortized cost. A mortgage loan is considered
impaired when it is probable that the Company will be unable to collect
principal and interest amounts due. For mortgage loans that are determined
to be impaired, a reserve is established for the difference between the
amortized cost and fair market value of the underlying collateral. In
estimating fair value, the Company uses interest rates reflecting the
higher returns required in the current real estate financing market.
Real estate held for sale is carried at the lower of cost or fair value
less estimated cost to sell. Fair value of foreclosed properties is
established at the time of foreclosure by internal analysis or external
appraisers, using discounted cash flow analyses and other accepted
techniques. Thereafter, an impairment for losses on real estate held for
sale is established if the carrying value of the property exceeds its
current fair value less estimated costs to sell. These impairments were
insignificant at December 31, 2003 and 2002.
Policy loans are carried at the amount of the unpaid balances that are not
in excess of the net cash surrender values of the related insurance
policies. The carrying value of policy loans, which have no defined
maturities, is considered to be fair value.
28
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Short-term securities, consisting primarily of money market instruments and
other debt issues purchased with a maturity of less than one year, are
carried at amortized cost, which approximates fair value.
Trading securities and related liabilities are normally held for periods
less than six months. These investments are marked to market with the
change recognized in net investment income during the current period.
Other invested assets include equity investments, partnership investments
and real estate joint ventures accounted for on the equity method of
accounting. Undistributed income is reported in net investment income. Also
included in other invested assets is an investment in Citigroup Preferred
Stock, which is recorded at cost. See Note 13.
Accrual of investment income is suspended on fixed maturities or mortgage
loans that are in default, or on which it is likely that future payments
will not be made as scheduled. Interest income on investments in default is
recognized only as payment is received.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, swaps, options and forward contracts, as a means of
hedging exposure to interest rate changes, equity price change, credit and
foreign currency risk. The Company also uses derivative financial
instruments to enhance portfolio income and replicate cash market
investments. The Company, through Tribeca Citigroup Investments Ltd., holds
and issues derivative instruments in conjunction with these investment
strategies. (See Note 11 for a more detailed description of the Company's
derivative use.) Derivative financial instruments in a gain position are
reported in the consolidated balance sheet in other assets, derivative
financial instruments in a loss position are reported in the consolidated
balance sheet in other liabilities and derivatives purchased to offset
embedded derivatives on variable annuity contracts are reported in other
invested assets.
To qualify for hedge accounting, the hedge relationship is designated and
formally documented at inception detailing the particular risk management
objective and strategy for the hedge which includes the item and risk that
is being hedged, the derivative that is being used, as well as how
effectiveness is being assessed.
A derivative has to be highly effective in accomplishing the objective of
offsetting either changes in fair value or cash flows for the risk being
hedged.
For fair value hedges, in which derivatives hedge the fair value of assets
and liabilities, changes in the fair value of derivatives are reflected in
realized investment gains and losses, together with changes in the fair
value of the related hedged item. The Company primarily hedges
available-for-sale securities.
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, the
ineffective portion of the change in fair value is immediately included in
realized investment gains and losses. The Company primarily hedges
foreign-denominated funding agreements and floating rate available-for-sale
securities.
29
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
For net investment hedges, in which derivatives hedge the foreign currency
exposure of a net investment in a foreign operation, the accounting
treatment will similarly depend on the effectiveness of the hedge. The
effective portion of the change in fair value of the derivative, including
any premium or discount, is reflected in the accumulated other changes in
equity from nonowner sources as part of the foreign currency translation
adjustment in shareholder's equity. The ineffective portion is reflected in
realized investment gains and losses.
The effectiveness of these hedging relationships is evaluated on a
retrospective and prospective basis using quantitative measures of
correlation. If a hedge relationship is found to be ineffective, it no
longer qualifies as a hedge and any gains or losses attributable to such
ineffectiveness as well as subsequent changes in fair value are recognized
in realized investment gains and losses.
For those fair value and cash flow 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, the accumulated changes in fair value of the end-user
derivative recorded in shareholder's equity are immediately reflected in
realized investment gains and losses.
The Company enters into derivative contracts that are economic hedges but
do not qualify or are not designated as hedges for accounting purposes.
These derivative contracts are carried at fair value, with changes in value
reflected in realized investment gains and losses.
FINANCIAL INSTRUMENTS WITH EMBEDDED DERIVATIVES
The Company bifurcates an embedded derivative where the economic
characteristics and risks of the embedded instrument are not clearly and
closely related to the economic characteristics and risks of the host
contract, the entire instrument would not otherwise be remeasured at fair
value and a separate instrument with the same terms of the embedded
instrument would meet the definition of a derivative under SFAS 133.
The Company purchases investments that have embedded derivatives, primarily
convertible debt securities. These embedded derivatives are carried at fair
value with changes in value reflected in realized investment gains and
losses. Derivatives embedded in convertible debt securities are classified
in the consolidated balance sheet as fixed maturity securities, consistent
with the host instruments.
The Company markets certain investment 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 and losses. Derivatives embedded in
variable annuity contracts are classified in the consolidated balance sheet
as future policy benefits and claims.
INVESTMENT GAINS AND LOSSES
Realized investment gains and losses are included as a component of pre-tax
revenues based upon specific identification of the investments sold on the
trade date. Impairments are realized when investment losses in
30
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
value are deemed other-than-temporary. The Company conducts regular reviews
to assess whether other- than-temporary losses exist. Changing economic
conditions - global, regional, or related to specific issuers or industries
- could result in other-than-temporary losses. Also included in pre-tax
revenues are gains and losses arising from the remeasurement of the local
currency value of foreign investments to U.S. dollars, the functional
currency of the Company. The foreign exchange effects of Canadian
operations are included in unrealized gains and losses.
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life and health insurance, universal life,
corporate owned life insurance (COLI), deferred annuities and payout
annuities are deferred. These deferred acquisition costs (DAC) include
principally commissions and certain expenses related to policy issuance,
underwriting and marketing, all of which vary with and are primarily
related to the production of new business. The method for determining
amortization of deferred acquisition costs varies by product type based
upon three different accounting pronouncements: SFAS No. 60, "Accounting
and Reporting by Insurance Enterprises" (SFAS 60), SFAS No. 91, "Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases" (SFAS 91) and SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises for Certain Long
Duration Contracts and for Realized Gains and Losses from the Sale of
Investments" (SFAS 97).
DAC for deferred annuities, both fixed and variable, and payout annuities
is amortized employing a level effective yield methodology per SFAS 91 as
indicated by AICPA Practice Bulletin 8. An amortization rate is developed
using the outstanding DAC balance and projected account balances and is
applied to actual account balances to determine the amount of DAC
amortization. The projected account balances are derived using a model that
contains assumptions related to investment returns and persistency. The
model rate is evaluated at least annually, and changes in underlying lapse
and interest rate assumptions are to be treated retrospectively. Variances
in expected equity market returns versus actual returns are treated
prospectively and a new amortization pattern is developed so that the DAC
balances will be amortized over the remaining estimated life of the
business. DAC for these products is currently being amortized over 10-15
years.
DAC for universal life and COLI is amortized in relation to estimated gross
profits from surrender charges, investment, mortality, and expense margins
per SFAS 97. Actual profits can vary from management's estimates, resulting
in increases or decreases in the rate of amortization. Re-estimates of
gross profits, performed at least annually, result in retrospective
adjustments to earnings by a cumulative charge or credit to income. DAC for
these products is currently being amortized over 16-25 years.
DAC relating to traditional life, including term insurance, and health
insurance is amortized in relation to anticipated premiums per SFAS 60.
Assumptions as to the anticipated premiums are made at the date of policy
issuance or acquisition and are consistently applied over the life of the
policy. DAC for these products is currently being amortized over 5-20
years.
All DAC is reviewed at least annually to determine if it is recoverable
from future income, including investment income, and if not recoverable, is
charged to expenses. All other acquisition expenses are charged to
operations as incurred. See Note 5.
31
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
VALUE OF INSURANCE IN FORCE
The value of insurance in force is an asset that represents the actuarially
determined present value of anticipated profits to be realized from life
insurance and annuities contracts at the date of acquisition using the same
assumptions that were used for computing related liabilities where
appropriate. The value of insurance in force was the actuarially determined
present value of the projected future profits discounted at interest rates
ranging from 14% to 18%. Traditional life insurance is amortized in
relation to anticipated premiums; universal life is amortized in relation
to estimated gross profits; and annuity contracts are amortized employing a
level yield method. The value of insurance in force, which is included in
other assets, is reviewed periodically for recoverability to determine if
any adjustment is required. Adjustments, if any, are charged to income. See
Note 5.
SEPARATE AND VARIABLE ACCOUNTS
Separate and variable accounts primarily represent funds for which
investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contractholders. Each account has specific
investment objectives. The assets of each account are legally segregated
and are not subject to claims that arise out of any other business of the
Company. The assets of these accounts are carried at fair value. Certain
other separate accounts provide guaranteed levels of return or benefits and
the assets of these accounts are primarily carried at fair value.
Amounts assessed to the separate account contractholders for management
services are included in revenues. Deposits, net investment income and
realized investment gains and losses for these accounts are excluded from
revenues, and related liability increases are excluded from benefits and
expenses.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are included in other assets. Prior to the
adoption of FASB SFAS No. 141, "Business Combinations" (SFAS 141) and No.
142, "Goodwill and Other Intangible Assets" (SFAS 142) in the first quarter
of 2002, goodwill was being amortized on a straight-line basis principally
over a 40-year period. The carrying amount of goodwill and other intangible
assets is reviewed at least annually for indication of impairment in value
that in the view of management would be other-than-temporary. If it is
determined that goodwill and other intangible assets are unlikely to be
recovered, impairment is recognized on a discounted cash flow basis.
Upon adoption of SFAS 141 and SFAS 142, the Company stopped amortizing
goodwill and intangible assets deemed to have an infinite useful life.
Instead, these assets are subject to an annual review for impairment. Other
intangible assets that are not deemed to have an indefinite useful life
will continue to be amortized over their useful lives. See Note 5.
CONTRACTHOLDER FUNDS
Contractholder funds represent receipts from the issuance of universal
life, COLI, pension investment, guaranteed investment contracts (GICs), and
certain deferred annuity contracts. For universal life and COLI contracts,
contractholder fund balances are increased by receipts for mortality
coverage, contract administration, surrender charges and interest accrued,
where one or more of these elements are not fixed or guaranteed. These
balances are decreased by withdrawals, mortality charges and administrative
expenses
32
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
charged to the contractholder. Interest rates credited to contractholder
funds related to universal life and COLI range from 3.50% to 5.95%, with a
weighted average interest rate of 4.52%.
Pension investment, GICs and certain annuity contracts do not contain
significant insurance risks and are considered investment-type contracts.
Contractholder fund balances are increased by receipts and credited
interest, and reduced by withdrawals and administrative expenses charged to
the contractholder. Interest rates credited to those investment type
contracts range from 1.00% to 8.05% with a weighted average interest rate
of 4.46%.
FUTURE POLICY BENEFITS
Future policy benefits represent liabilities for future insurance policy
benefits for payout annuities and traditional life product. The annuity
payout reserves are calculated using the mortality and interest assumptions
used in the actual pricing of the benefit. Mortality assumptions are based
on Company experience and are adjusted to reflect deviations such as
substandard mortality in structured settlement benefits. The interest rates
range from 2.0% to 9.0% with a weighted average of 7.02% for these
products. Traditional life products include whole life and term insurance.
Future policy benefits for traditional life products are estimated on the
basis of actuarial assumptions as to mortality, persistency and interest,
established at policy issue. Interest assumptions applicable to traditional
life products range from 2.5% to 7.0%, with a weighted average of 5.23%.
Assumptions established at policy issue as to mortality and persistency are
based on the Company's experience, which, together with interest
assumptions, include a margin for adverse deviation. Appropriate
recognition has been given to experience rating and reinsurance.
GUARANTY FUND AND OTHER INSURANCE RELATED ASSESSMENTS
Included in other liabilities is the Company's estimate of its liability
for guaranty fund and other insurance-related assessments. State guaranty
fund assessments are based upon the Company's share of premium written or
received in one or more years prior to an insolvency occurring in the
industry. Once an insolvency has occurred, the Company recognizes a
liability for such assessments if it is probable that an assessment will be
imposed and the amount of the assessment can be reasonably estimated. At
December 31, 2003 and 2002, the Company had a liability of $22.5 million
and $22.6 million, respectively, for guaranty fund assessments and a
related premium tax offset recoverable of $4.6 million and $4.2 million,
respectively. The assessments are expected to be paid over a period of
three to five years and the premium tax offsets are expected to be realized
over a period of 10 to 15 years.
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's insurance subsidiaries, domiciled principally in Connecticut
and Massachusetts, prepare statutory financial statements in accordance
with the accounting practices prescribed or permitted by the insurance
departments of the states of domicile. Prescribed statutory accounting
practices are those practices that are incorporated directly or by
reference in state laws, regulations, and general administrative rules
applicable to all insurance enterprises domiciled in a particular state.
Permitted statutory accounting practices include practices not prescribed
by the domiciliary state, but allowed by the domiciliary state regulatory
authority. The Company does not have any permitted statutory accounting
practices.
PREMIUMS
Premiums are recognized as revenue when due. Premiums for contracts with a
limited number of premium payments, due over a significantly shorter period
than the period over which benefits are provided, are
33
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
considered revenue when due. The portion of premium which is not required
to provide for benefits and expenses is deferred and recognized in revenues
in a constant relationship to insurance benefits in force.
FEE INCOME
Fee income is recognized on deferred annuity and universal life contracts
for mortality, administrative and equity protection charges according to
contract due dates. Fee income is recognized on variable annuity and
universal life separate accounts either daily, monthly, quarterly or
annually as per contract terms.
OTHER REVENUES
Other revenues include surrender penalties collected at the time of a
contract surrender, and other miscellaneous charges related to annuity and
universal life contracts recognized when received. Also included are
revenues from unconsolidated non-insurance subsidiaries. Amortization of
deferred income related to reinsured blocks of business are recognized in
relation to anticipated premiums and are reported in other revenues.
CURRENT AND FUTURE INSURANCE BENEFITS
Current and future insurance benefits represent charges for mortality and
morbidity related to fixed annuities, universal life, term life and health
insurance benefits.
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, COLI, pension investment, GICs and certain deferred annuity contracts
in accordance with contract provisions.
FEDERAL INCOME TAXES
The provision for federal income taxes is comprised of two components,
current income taxes and deferred income taxes. Deferred federal income
taxes arise from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
2. OPERATING SEGMENTS
The Company has two reportable business segments that are separately
managed due to differences in products, services, marketing strategy and
resource management. The business of each segment is maintained and
reported through separate legal entities within the Company. The management
groups of each segment report separately to the common ultimate parent,
Citigroup Inc.
TRAVELERS LIFE & ANNUITY (TLA) core offerings include individual annuity,
individual life, COLI and group annuity insurance products distributed by
TIC and TLAC principally under the Travelers Life & Annuity name. Among the
range of individual products offered are deferred fixed and variable
annuities, payout annuities and term, universal and variable life
insurance. The COLI product is a variable universal life product
distributed through independent specialty brokers. The group products
include institutional pensions, including GICs, payout annuities, group
annuities sold to employer-sponsored retirement and savings plans,
structured settlements and funding agreements.
34
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The PRIMERICA business segment consolidates the businesses of Primerica
Life, Primerica Life Insurance Company of Canada, CitiLife and NBL. The
Primerica business segment offers individual life products, primarily term
insurance, to customers through a sales force of approximately 107,000
representatives. A great majority of the domestic licensed sales force
works on a part-time basis.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). The amount of
investments in equity method investees and total expenditures for additions
to long-lived assets other than financial instruments, long-term customer
relationships of a financial institution, mortgage and other servicing
rights, and deferred tax assets, were not material.
35
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
($ IN MILLIONS)
REVENUES BY SEGMENT 2003 2002 2001
- ------------------- ---- ---- ----
TLA $ 4,479 $ 3,653 $ 4,089
Primerica 1,660 1,581 1,613
------- ------- -------
Total Revenues $ 6,139 $ 5,234 $ 5,702
======= ======= =======
NET INCOME BY SEGMENT
TLA $ 918 $ 673 $ 826
Primerica 440 409 446
------- ------- -------
Net Income $ 1,358 $ 1,082 $ 1,272
======= ======= =======
ASSETS BY SEGMENT
TLA $85,881 $74,562 $69,836
Primerica 9,467 8,433 8,030
------- ------- -------
Total segments $95,348 $82,995 $77,866
======= ======= =======
The following tables contain key segment measurements.
BUSINESS SEGMENT INFORMATION:
- --------------------------------------------------------------------------------
FOR THE YEAR
ENDED DECEMBER 31, 2003
($ IN MILLIONS) TLA PRIMERICA
- --------------------------------------------------------------------------------
Premiums $1,082 $1,245
Net investment income 2,743 315
Interest credited to contractholders 1,248 --
Amortization of deferred acquisition costs 266 235
Expenditures for deferred acquisition costs 583 377
Federal income taxes 240 231
BUSINESS SEGMENT INFORMATION:
- --------------------------------------------------------------------------------
FOR THE YEAR
ENDED DECEMBER 31, 2002
($ IN MILLIONS) TLA PRIMERICA
- --------------------------------------------------------------------------------
Premiums $ 730 $1,194
Net investment income 2,646 290
Interest credited to contractholders 1,220 --
Amortization of deferred acquisition costs 174 219
Expenditures for deferred acquisition costs 556 323
Federal income taxes 212 209
36
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
---------------------------------------------------------------------------
FOR THE YEAR
ENDED DECEMBER 31, 2001
($ IN MILLIONS) TLA PRIMERICA
---------------------------------------------------------------------------
Premiums $ 957 $1,145
Net investment income 2,530 301
Interest credited to contractholders 1,179 --
Amortization of deferred acquisition costs 171 208
Total expenditures for deferred acquisition costs 553 298
Federal income taxes 394 236
The majority of the annuity business and a substantial portion of the life
business written by TLA are accounted for as investment contracts, with the
result that the deposits collected are reported as liabilities and are not
included in revenues. Deposits represent a statistic integral to managing
TLA operations, which management uses for measuring business volumes, and
may not be comparable to similarly captioned measurements used by other
life insurance companies. For the years ended December 31, 2003, 2002 and
2001, deposits collected amounted to $12.0 billion, $11.9 billion and $13.1
billion, respectively.
The Company's revenue was derived almost entirely from U.S. domestic
business. Revenue attributable to foreign countries was insignificant.
The Company had no transactions with a single customer representing 10% or
more of its revenue.
37
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair value of investments in fixed maturities were
as follows:
- --------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2003 AMORTIZED UNREALIZED UNREALIZED FAIR
($ IN MILLIONS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 8,061 $ 326 $ 18 $ 8,369
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 2,035 22 12 2,045
Obligations of states, municipalities and
political subdivisions 379 21 2 398
Debt securities issued by foreign governments 690 51 1 740
All other corporate bonds 23,098 1,507 64 24,541
Other debt securities 5,701 377 22 6,056
Redeemable preferred stock 155 20 1 174
- --------------------------------------------------------------------------------------------------------------------------
Total Available For Sale $40,119 $ 2,324 $ 120 $42,323
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2003 AMORTIZED UNREALIZED UNREALIZED FAIR
($ IN MILLIONS) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 6,975 $ 434 $ 2 $ 7,407
U.S. Treasury securities and obligations of
U.S. Government and government agencies and
authorities 2,402 39 19 2,422
Obligations of states, municipalities and
political subdivisions 297 22 -- 319
Debt securities issued by foreign governments 365 30 2 393
All other corporate bonds 20,894 982 608 21,268
Other debt securities 4,348 229 66 4,511
Redeemable preferred stock 147 1 34 114
- --------------------------------------------------------------------------------------------------------------------------
Total Available For Sale $35,428 $ 1,737 $ 731 $36,434
- --------------------------------------------------------------------------------------------------------------------------
38
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Proceeds from sales of fixed maturities classified as available for sale
were $15.1 billion, $15.5 billion and $14.1 billion in 2003, 2002 and 2001,
respectively. Gross gains of $476 million, $741 million and $633 million
and gross losses of $394 million, $309 million and $273 million in 2003,
2002 and 2001, respectively, were realized on those sales. Additional
losses of $110 million, $639 million and $153 million in 2003, 2002 and
2001, respectively, were realized due to other-than-temporary losses in
value. Impairment activity increased significantly beginning in the fourth
quarter of 2001 and continued throughout 2002. Impairments were
concentrated in telecommunication and energy company investments.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes or, if these are not available, discounted expected
cash flows using market rates commensurate with the credit quality and
maturity of the investment. The fair value of investments for which a
quoted market price or dealer quote is not available amounted to $6.4
billion and $5.1 billion at December 31, 2003 and 2002, respectively.
The amortized cost and fair value of fixed maturities at December 31, 2003,
by contractual maturity, are shown below. Actual maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
---------------------------------------------------------------------------
AMORTIZED
($ IN MILLIONS) COST FAIR VALUE
---------------------------------------------------------------------------
MATURITY:
Due in one year or less $2,532 $2,582
Due after 1 year through 5 years 11,559 12,188
Due after 5 years through 10 years 9,866 10,561
Due after 10 years 8,101 8,623
---------------------------------------------------------------------------
32,058 33,954
---------------------------------------------------------------------------
Mortgage-backed securities 8,061 8,369
---------------------------------------------------------------------------
Total Maturity $40,119 $42,323
---------------------------------------------------------------------------
The Company makes investments in collateralized mortgage obligations
(CMOs). CMOs typically have high credit quality, offer good liquidity, and
provide a significant advantage in yield and total return compared to U.S.
Treasury securities. The Company's investment strategy is to purchase CMO
tranches which are protected against prepayment risk, including planned
amortization class and last cash flow tranches. Prepayment protected
tranches are preferred because they provide stable cash flows in a variety
of interest rate scenarios. The Company does invest in other types of CMO
tranches if a careful assessment indicates a favorable risk/return
tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 2003 and 2002, the Company held CMOs classified as
available for sale with a fair value of $5.2 billion and $4.7 billion,
respectively. Approximately 30% and 35%, respectively, of the Company's CMO
holdings are fully collateralized by GNMA, FNMA or FHLMC securities at
December 31, 2003 and 2002. In addition, the Company held $3.0 billion and
$2.6 billion of GNMA, FNMA or FHLMC mortgage-backed pass-through securities
at December 31, 2003 and 2002, respectively. All of these securities are
rated AAA.
39
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company engages in securities lending transactions 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 invests it in the Company's short-term money market
pool (See Note 13). The loaned securities remain a recorded asset of the
Company, however, the Company records a liability for the amount of the
cash collateral held, representing its obligation to return the cash
collateral related to these loaned securities, and reports that liability
as part of other liabilities in the consolidated balance sheet. At December
31, 2003 and 2002, the Company held cash collateral of $2.4 billion and
$2.8 billion, respectively.
The Company participates in dollar roll repurchase transactions as a way to
generate investment income. These transactions involve the sale of
mortgage-backed securities with the agreement to repurchase substantially
the same securities from the same counterparty. Cash is received from the
sale, which is invested in the Company's short-term money market pool. The
cash is returned at the end of the roll period when the mortgage-backed
securities are repurchased. The Company will generate additional investment
income based upon the difference between the sale and repurchase prices.
These transactions are recorded as secured borrowings. The mortgage-backed
securities remain recorded as assets. The cash proceeds are reflected in
short-term investments and a liability is established to reflect the
Company's obligation to repurchase the securities at the end of the roll
period. The liability is classified as other liabilities in the
consolidated balance sheets and fluctuates based upon the timing of the
repayments. The balances were insignificant at December 31, 2003 and 2002.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as
follows:
-------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES: GROSS UNREALIZED GROSS UNREALIZED FAIR
($ IN MILLIONS) COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003
Common stocks $109 $27 $2 $134
Non-redeemable preferred stocks 214 14 -- 228
-------------------------------------------------------------------------------------------------------------------
Total Equity Securities $323 $41 $2 $362
-------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002
Common stocks $48 $8 $6 $50
Non-redeemable preferred stocks 280 9 7 282
-------------------------------------------------------------------------------------------------------------------
Total Equity Securities $328 $17 $13 $332
-------------------------------------------------------------------------------------------------------------------
Proceeds from sales of equity securities were $124 million, $212 million
and $112 million in 2003, 2002 and 2001, respectively. Gross gains of $23
million, $8 million and $10 million and gross losses of $2 million, $4
million and $13 million in 2003, 2002 and 2001, respectively, were realized
on those sales. Additional losses of $11 million, $19 million and $96
million in 2003, 2002 and 2001, respectively, were realized due to
other-than-temporary losses in value.
40
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER-THAN-TEMPORARY LOSSES ON INVESTMENTS
At December 31, 2003, the cost of approximately 670 investments in fixed
maturity and equity securities exceeded their fair value by $122 million.
Of the $122 million, $91 million represents fixed maturity investments that
have been in a gross unrealized loss position for less than a year and of
these 78% are rated investment grade. Fixed maturity investments that have
been in a gross unrealized loss position for a year or more total $29
million and 38% of these are rated investment grade. The gross unrealized
loss on equity securities was $2 million at December 31, 2003.
Management has determined that the unrealized losses on the Company's
investments in fixed maturity and equity securities at December 31, 2003
are temporary in nature. The Company conducts a rigorous review each
quarter to identify and evaluate investments that have possible indications
of impairment. An investment in a debt or equity security is impaired if
its fair value falls below its cost and the decline is considered
other-than-temporary. Factors considered in determining whether a loss is
temporary include the length of time and extent to which fair value has
been below cost; the financial condition and near-term prospects of the
issuer; and the Company's ability and intent to hold the investment for a
period of time sufficient to allow for any anticipated recovery. The
Company's review for impairment generally entails:
o Identification and evaluation of investments that have possible
indications of impairment;
o Analysis of individual investments that have fair values less than 80%
of amortized cost, including consideration of the length of time the
investment has been in an unrealized loss position;
o Discussion of evidential matter, including an evaluation of factors or
triggers that would or could cause individual investments to qualify
as having other-than-temporary impairments and those that would not
support other-than-temporary impairment; o Documentation of the
results of these analyses, as required under business policies.
The table below shows the fair value of investments in fixed maturities and
equity securities in an unrealized loss position at December 31, 2003:
GROSS UNREALIZED LOSSES
Less Than One Year One Year or Longer Total
----------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
($ IN MILLIONS) Value Losses Value Losses Value Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available-for-sale:
Mortgage-backed securities-CMOs and pass-through
securities $1,182 $ 18 $ 17 $ -- $1,199 $ 18
U.S. Treasury securities and obligations of U.S.
Government and government agencies and authorities 1,180 12 -- -- 1,180 12
Obligations of states, municipalities and political
subdivisions 45 2 -- -- 45 2
Debt securities issued by foreign governments 55 1 -- -- 55 1
All other corporate bonds 1,793 39 503 25 2,296 64
Other debt securities 755 18 89 3 844 22
Redeemable preferred stock 12 1 11 1 23 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities $5,022 $ 91 $ 620 $ 29 $5,642 $ 120
Equity securities $ 25 $ 1 $ 5 $ 1 $ 30 $ 2
- ------------------------------------------------------------------------------------------------------------------------------------
41
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
MORTGAGE LOANS AND REAL ESTATE
At December 31, 2003 and 2002, the Company's mortgage loan and real estate
portfolios consisted of the following:
--------------------------------------------------------------------------
($ IN MILLIONS) 2003 2002
--------------------------------------------------------------------------
Current Mortgage Loans $1,841 $1,941
Underperforming Mortgage Loans 45 44
--------------------------------------------------------------------------
Total Mortgage Loans 1,886 1,985
--------------------------------------------------------------------------
Real Estate - Foreclosed 63 17
Real Estate - Investment 33 19
--------------------------------------------------------------------------
Total Real Estate 96 36
--------------------------------------------------------------------------
Total Mortgage Loans and Real Estate $1,982 $2,021
==========================================================================
Underperforming mortgage loans include delinquent mortgage loans over 90
days past due, loans in the process of foreclosure and loans modified at
interest rates below market.
Aggregate annual maturities on mortgage loans at December 31, 2003 are
shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to prepay obligations with or without
prepayment penalties.
----------------------------------------------------------------------
YEAR ENDING DECEMBER 31,
($ IN MILLIONS)
----------------------------------------------------------------------
2004 $ 173
2005 107
2006 347
2007 131
2008 141
Thereafter 987
----------------------------------------------------------------------
Total $1,886
======================================================================
42
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
TRADING SECURITIES
Trading securities of the Company are held primarily in Tribeca Citigroup
Investments Ltd. The assets and liabilities are valued at fair value as
follows:
($ IN MILLIONS) Fair value as of Fair value as of
--------------- December 31, 2003 December 31, 2002
----------------- -----------------
ASSETS
Trading securities
Convertible bond arbitrage $1,447 $1,442
Other 260 89
------ ------
$1,707 $1,531
====== ======
LIABILITIES
Trading securities sold not yet purchased
Convertible bond arbitrage $629 $520
Other 8 78
---- ----
$637 $598
==== ====
The Company's trading portfolio investments and related liabilities are
normally held for periods less than six months. See Note 11.
43
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER INVESTED ASSETS
Other invested assets are composed of the following:
------------------------------------------------------------------------
($ IN MILLIONS) 2003 2002
------------------------------------------------------------------------
Investment in Citigroup Preferred Stock $3,212 $3,212
Private equity and arbitrage investments 1,315 1,006
Real estate investments 327 390
Derivatives 182 263
Other 56 38
------------------------------------------------------------------------
Total $5,092 $4,909
------------------------------------------------------------------------
CONCENTRATIONS
At December 31, 2003 and 2002, the Company had an investment in Citigroup
Preferred Stock of $3.2 billion. See Note 13.
The Company both maintains and participates in a short-term investment pool
for its insurance affiliates. See Note 13.
The Company had concentrations of investments, excluding those in federal
and government agencies, primarily fixed maturities at fair value, in the
following industries:
------------------------------------------------------------------------
($ IN MILLIONS) 2003 2002
------------------------------------------------------------------------
Finance $5,056 $3,681
Electric Utilities 3,552 3,979
Banking 2,830 1,900
------------------------------------------------------------------------
The Company held investments in foreign banks in the amount of $1,018
million and $869 million at December 31, 2003 and 2002, respectively, which
are included in the table above. The Company defines its below investment
grade assets as those securities rated Ba1 by Moody's Investor Services (or
its equivalent) or below by external rating agencies, or the equivalent by
internal analysts when a public rating does not exist. Such assets include
publicly traded below investment grade bonds and certain other privately
issued bonds and notes that are classified as below investment grade. Below
investment grade assets included in the categories of the preceding table
include $1,118 million and $878 million in Electric Utilities at December
31, 2003 and 2002, respectively. Below investment grade assets in Finance
and Banking were insignificant at December 31, 2003 and 2002. Total below
investment grade assets were $5.2 billion and $3.8 billion at December 31,
2003 and 2002, respectively.
Included in mortgage loans were the following group concentrations:
------------------------------------------------------------------------
($ IN MILLIONS) 2003 2002
------------------------------------------------------------------------
STATE
California $732 $788
PROPERTY TYPE
Agricultural $1,025 $1,212
------------------------------------------------------------------------
44
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, credit limits
and other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit. The Company's underwriting standards with respect to
new mortgage loans generally require loan to value ratios of 75% or less at
the time of mortgage origination.
NON-INCOME PRODUCING INVESTMENTS
Investments included in the consolidated balance sheets that were
non-income producing amounted to $104.4 million and $58.5 million at
December 31, 2003 and 2002, respectively.
RESTRUCTURED INVESTMENTS
The Company had mortgage loans and debt securities that were restructured
at below market terms at December 31, 2003 and 2002. The balances of the
restructured investments were insignificant. The new terms typically defer
a portion of contract interest payments to varying future periods. Gross
interest income on restructured assets that would have been recorded in
accordance with the original terms of such loans was insignificant in 2003,
2002 and 2001. Interest on these assets, included in net investment income,
was also insignificant in 2003, 2002 and 2001.
NET INVESTMENT INCOME
---------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
($ IN MILLIONS)
---------------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $2,465 $2,359 $2,328
Mortgage loans 158 167 210
Trading 222 9 131
Other invested assets 58 203 71
Citigroup Preferred Stock 203 178 53
Other, including policy loans 82 104 165
---------------------------------------------------------------------------
Total gross investment income 3,188 3,020 2,958
---------------------------------------------------------------------------
Investment expenses 130 84 127
---------------------------------------------------------------------------
Net Investment Income $3,058 $2,936 $2,831
---------------------------------------------------------------------------
45
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the periods were as follows:
----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
($ IN MILLIONS)
----------------------------------------------------------------------------------------------
REALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $(28) $(207) $207
Equity securities 10 (15) (99)
Mortgage loans (14) -- 5
Real estate held for sale 1 8 3
Other invested assets 49 (19) --
Derivatives 20 (87) 14
Other (1) (2) (5)
----------------------------------------------------------------------------------------------
Total realized investment gains (losses) $ 37 $(322) $125
----------------------------------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are reported in
accumulated other changes in equity from nonowner sources were as follows:
---------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
($ IN MILLIONS)
---------------------------------------------------------------------------------------------
UNREALIZED INVESTMENT GAINS (LOSSES)
Fixed maturities $1,198 $664 $ 85
Equity securities 35 3 40
Other 6 31 (20)
--------------------------------------------------------------------------------------------
Total unrealized investment gains (losses) 1,239 698 105
--------------------------------------------------------------------------------------------
Related taxes 421 243 37
--------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) 818 455 68
Balance beginning of year 626 171 103
---------------------------------------------------------------------------------------------
Balance end of year $1,444 $626 $171
---------------------------------------------------------------------------------------------
VARIABLE INTEREST ENTITIES
In January 2003, the FASB released FIN 46, which changes the method of
determining whether certain entities, including securitization entities,
should be included in the Company's consolidated financial statements.
The implementation of FIN 46 encompassed a review of numerous entities to
determine the impact of adoption and considerable judgment was used in
evaluating whether or not a VIE should be consolidated. In December 2003,
the FASB released a revision of FIN 46 (FIN 46-R or the interpretation),
which includes substantial changes from the original. The calculation of
expected losses and expected residual returns have both been altered to
reduce the impact of decision maker and guarantor fees in the calculation
of expected residual returns and expected losses. In addition, FIN 46-R
changes the definition of a variable interest. The interpretation permits
adoption of either the original or the revised versions of FIN 46 until the
first quarter of 2004, at which time FIN 46-R must be adopted. For 2003
year-end, the Company's consolidated financial statements are in accordance
with the original. (See "Consolidation of Variable Interest Entities" in
the "Accounting Changes" section of Note 1.)
46
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table represents the carrying amounts and classification of
consolidated assets that are collateral for VIE obligations. The assets in
this table represent two investment vehicles that the Company was involved
with prior to February 1, 2003. These two VIEs are a collateralized debt
obligation and a real estate joint venture:
$ IN MILLIONS DECEMBER 31, 2003
-------------------------------------------------------------
Investments $400
Cash 11
Other 4
-------------------------
Total assets of consolidated VIEs $415
-------------------------------------------------------------
The debt holders of these VIEs have no recourse to the Company. The
Company's maximum exposure to loss is limited to its investment of
approximately $8 million. The Company regularly becomes involved with VIEs
through its investment activities. This involvement is generally restricted
to small passive debt and equity investments.
4. REINSURANCE
Reinsurance is used in order to limit losses, minimize exposure to large
risks, provide additional capacity for future growth and to effect
business-sharing arrangements. Reinsurance is accomplished through various
plans of reinsurance, primarily yearly renewable term (YRT), coinsurance
and modified coinsurance. Reinsurance involves credit risk and the Company
monitors the financial condition of these reinsurers on an ongoing basis.
The Company remains primarily liable as the direct insurer on all risks
reinsured.
Since 1997 the majority of universal life business has been reinsured under
an 80%/20% YRT quota share reinsurance program and term life business has
been reinsured under a 90%/10% YRT quota share reinsurance program.
Beginning in September 2002, newly issued term life business has been
reinsured under a 90%/10% coinsurance quota share reinsurance program.
Maximum retention of $2.5 million is generally reached on policies in
excess of $12.5 million for universal life and $25.0 million for term
insurance. For other plans of insurance, it is the policy of the Company to
obtain reinsurance for amounts above certain retention limits on individual
life policies, which limits vary with age and underwriting classification.
Generally, the maximum retention on an ordinary life risk is $2.5 million.
Total in-force business ceded under reinsurance contracts is $356.3 billion
and $321.9 billion at December 31, 2003 and 2002, respectively.
Effective July 1, 2000 the Company sold 90% of its individual long-term
care insurance business to General Electric Capital Assurance Company and
its subsidiary in the form of indemnity reinsurance arrangements. Written
premiums ceded per these arrangements were $226.8 million, $231.8 million
and $233.3 million in 2003, 2002 and 2001, respectively, and earned
premiums ceded were $226.7 million, $233.8 million and $240.1 million in
2003, 2002 and 2001, respectively.
On January 3, 1995, the Company sold its group life business to The
Metropolitan Life Insurance Company (MetLife) under the form of an
indemnity insurance arrangement. Premiums written and earned in 2003, 2002
and 2001 were insignificant.
47
TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Prior to April 1, 2001, the Company also reinsured substantially all of the
guaranteed minimum death benefit (GMDB) on its variable annuity product.
Total variable annuity account balances with GMDB were $23.5 billion, of
which $12.9 billion, or 55%, was reinsured, and $19.1 billion, of which
$12.4 billion, or 65%, was reinsured at December 31, 2003 and 2002,
respectively. GMDB is payable upon the death of a contractholder. When the
benefit payable is greater than the account value of the variable annuity,
the difference is called the net amount at risk (NAR). NAR totals $1.7
billion, of which $1.4 billion, or 81%, is reinsured and $4.6 billion, of
which $3.8 billion, or 82%, is reinsured at December 31, 2003 and 2002,
respectively.
TIC writes workers' compensation business. This business is reinsured
through a 100% quota-share agreement with The Travelers Indemnity Company,
an insurance subsidiary of TPC.
A summary of reinsurance financial data reflected within the consolidated
statements of income and balance sheets is presented below ($ in millions):
FOR THE YEARS ENDING DECEMBER 31,
WRITTEN PREMIUMS 2003 2002 2001
--------------------------------------------------------------------------------------------------
Direct $2,979 $2,610 $2,848
Assumed 1 -- 1
Ceded to:
The Travelers Indemnity Company 2 (83) (146)
Other companies (638) (614) (591)
--------------------------------------------------------------------------------------------------
Total Net Written Premiums $2,344 $1,913 $2,112
==================================================================================================
EARNED PREMIUMS 2003 2002 2001
--------------------------------------------------------------------------------------------------
Direct $3,001 $2,652 $2,879
Assumed 1 -- 1
Ceded to:
The Travelers Indemnity Company (21) (109) (180)
Other companies (654) (619) (598)
--------------------------------------------------------------------------------------------------
Total Net Earned Premiums $2,327 $1,924 $2,102
==================================================================================================
The Travelers Indemnity Company was an affiliate in 2001 and for part of
2002. See Note 14.
Reinsurance recoverables at December 31, 2003 and 2002 include amounts
recoverable on unpaid and paid losses and were as follows ($ in millions):
REINSURANCE RECOVERABLES 2003 2002
------------------------------------------------------------------------
Life and accident and health business $2,885 $2,589
Property-casualty business:
The Travelers Indemnity Company 1,585 1,712
------------------------------------------------------------------------
Total Reinsurance Recoverables $4,470 $4,301
========================================================================
Reinsurance recoverables for the life and accident and health business
include $1,617 million and $1,351 million at December 31, 2003 and 2002,
respectively, from General Electric Capital Assurance Company. Assets
collateralizing these receivables are held in trust for the purpose of
paying Company claims.
48
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Reinsurance recoverables also include $435 million and $472 million at
December 31, 2003 and 2002, respectively, from MetLife.
5. INTANGIBLE ASSETS
The Company's intangible assets are DAC, goodwill and the value of
insurance in force. DAC and the value of insurance in force are
amortizable. The following is a summary of capitalized DAC by type.
Deferred & Payout Traditional Life &
In millions of dollars Annuities UL & COLI Other Total
----------------------------------------------------------------------------------------------------------
Balance January 1, 2002 $ 1,137 $ 430 $ 1,894 $ 3,461
Deferred expenses & other 347 172 349 868
Amortization expense (142) (24) (238) (404)
Underlying lapse and interest
rate adjustment 22 -- -- 22
Amortization related to SFAS
91 reassessment (11) -- -- (11)
---------------------------------------------------------------------------
Balance December 31, 2002 1,353 578 2,005 3,936
Deferred expenses & other 340 221 399 960
Amortization expense (212) (33) (256) (501)
---------------------------------------------------------------------------
Balance December 31, 2003 $ 1,481 $ 766 $ 2,148 $ 4,395
----------------------------------------------------------------------------------------------------------
The value of insurance in force totaled $112 million and $130 million at
December 31, 2003 and 2002, respectively, and is included in other assets.
Amortization expense on the value of insurance in force was $18 million,
$25 million and $26 million for the year ended December 31, 2003, 2002 and
2001, respectively. Amortization expense related to the value of insurance
in force is estimated to be $18 million in 2004, $17 million in 2005, $14
million in 2006, $12 million in 2007 and $8 million in 2008. In 2002 there
was an opening balance sheet reclassification between DAC and the value of
insurance in force in the amount of $11 million. This had no impact on
results of operations or shareholder's equity.
The Company stopped amortizing goodwill on January 1, 2002. During 2001,
the Company reversed $8 million of negative goodwill. Net income adjusted
to exclude the impact of goodwill amortization for the year ended December
31, 2001 is as follows:
Year Ended
December 31, 2001
($ IN MILLIONS) -----------------
Net income:
Reported net income $1,272
Negative goodwill reversal (8)
Goodwill amortization 7
------
Adjusted net income $1,271
======
49
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
6. DEPOSIT FUNDS AND RESERVES
At December 31, 2003 and 2002, the Company had $43.5 billion and $38.8
billion, respectively, of life and annuity deposit funds and reserves. Of
that total, $24.7 billion and $21.8 billion is not subject to discretionary
withdrawal based on contract terms. The remaining $18.8 billion and $17.0
billion is for life and annuity products that are subject to discretionary
withdrawal by the contractholder. Included in the amounts that are subject
to discretionary withdrawal is $7.0 billion and $5.7 billion of liabilities
that are surrenderable with market value adjustments. Also included are an
additional $6.1 billion and $5.5 billion of life insurance and individual
annuity liabilities which are subject to discretionary withdrawals, and
have an average surrender charge of 5.0% and 4.7%, respectively. In the
payout phase, these funds are credited at significantly reduced interest
rates. The remaining $5.7 billion and $5.8 billion of liabilities are
surrenderable without charge. Approximately 10.0% of these relate to
individual life products for each of 2003 and 2002. These risks would have
to be underwritten again if transferred to another carrier, which is
considered a significant deterrent against withdrawal by long-term
policyholders. Insurance liabilities that are surrendered or withdrawn are
reduced by outstanding policy loans and related accrued interest prior to
payout.
Included in contractholder funds and in the preceding paragraph are GICs
totaling $14.4 billion. The scheduled maturities for these GICs, including
interest, are $4.808 billion, $1.333 billion, $1.665 billion, $1.182
billion, $1.149 billion and $2.415 billion in 2004, 2005, 2006, 2007, 2008
and thereafter, respectively. These GICs have a weighted average interest
rate of 4.07% at December 31, 2003.
50
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. FEDERAL INCOME TAXES
EFFECTIVE TAX RATE
($ IN MILLIONS)
--------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
--------------------------------------------------------------------------------------------------------------------
Income before federal income taxes $ 1,829 $ 1,503 $ 1,911
Statutory tax rate 35% 35% 35%
--------------------------------------------------------------------------------------------------------------------
Expected federal income taxes 640 526 669
Tax effect of:
Non-taxable investment income (91) (62) (20)
Tax reserve release (79) (43) (18)
Other, net 1 -- (1)
--------------------------------------------------------------------------------------------------------------------
Federal income taxes $ 471 $ 421 $ 630
====================================================================================================================
Effective tax rate 26% 28% 33%
--------------------------------------------------------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 330 $ 217 $ 424
Foreign 30 19 47
--------------------------------------------------------------------------------------------------------------------
Total 360 236 471
--------------------------------------------------------------------------------------------------------------------
Deferred:
United States 108 182 166
Foreign 3 3 (7)
--------------------------------------------------------------------------------------------------------------------
Total 111 185 159
--------------------------------------------------------------------------------------------------------------------
Federal income taxes $ 471 $ 421 $ 630
====================================================================================================================
Additional tax benefits (expense) attributable to employee stock plans
allocated directly to shareholder's equity for the years ended December 31,
2003, 2002 and 2001 were $3 million, $(17) million and $21 million,
respectively.
51
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liability at December 31, 2003 and 2002 was comprised
of the tax effects of temporary differences related to the following assets
and liabilities:
---------------------------------------------------------------------------------------------------------------
($ IN MILLIONS) 2003 2002
---------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $574 $422
Operating lease reserves 52 57
Employee benefits 201 199
Other 392 289
----------------------------------------------------------------------------------------------- ----------------
Total 1,219 967
----------------------------------------------------------------------------------------------- ----------------
Deferred Tax Liabilities:
Deferred acquisition costs and value of insurance in force (1,225) (1,097)
Investments, net (1,795) (1,180)
Other (229) (138)
---------------------------------------------------------------------------------------------------------------
Total (3,249) (2,415)
---------------------------------------------------------------------------------------------------------------
Net Deferred Tax Liability $(2,030) $(1,448)
---------------------------------------------------------------------------------------------------------------
The Company and its subsidiaries file a consolidated federal income tax
return with Citigroup. Federal income taxes are allocated to each member of
the consolidated group, according to a Tax Sharing Agreement (the
Agreement), on a separate return basis adjusted for credits and other
amounts required by the Agreement.
TIC had $52 million and $156 million payable to Citigroup at December 31,
2003 and 2002, respectively, related to the Agreement.
At December 31, 2003 and 2002, the Company had no ordinary or capital loss
carryforwards.
The policyholders' surplus account, which arose under prior tax law, is
generally that portion of the gain from operations that has not been
subjected to tax, plus certain deductions. The balance of this account is
approximately $932 million. Income taxes are not provided for on this
amount because under current U.S. tax rules such taxes will become payable
only to the extent such amounts are distributed as a dividend or exceed
limits prescribed by federal law. Distributions are not currently
contemplated from this account. At current rates the maximum amount of such
tax would be approximately $326 million.
52
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. SHAREHOLDER'S EQUITY
SHAREHOLDER'S EQUITY AND DIVIDEND AVAILABILITY
The Company's statutory net income, which includes the statutory net income
of all insurance subsidiaries, was $1,104 million, $256 million and $330
million for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company's statutory capital and surplus was $7.6 billion and $6.9
billion at December 31, 2003 and 2002, respectively.
Effective January 1, 2001, the Company began preparing its statutory basis
financial statements in accordance with the National Association of
Insurance Commissioners' ACCOUNTING PRACTICES AND PROCEDURES MANUAL -
VERSION EFFECTIVE JANUARY 1, 2001, subject to any deviations prescribed or
permitted by its domicilary insurance commissioners (see Permitted
Statutory Accounting Practices in Note 1). The impact of this change on the
Company's statutory capital and surplus was not significant. The impact of
this change on statutory net income was $119 million in 2001, related to
recording equity method investment earnings as unrealized gains versus net
investment income.
The Company is currently subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to its parent
without prior approval of insurance regulatory authorities. A maximum of
$845 million is available by the end of the year 2004 for such dividends
without prior approval of the State of Connecticut Insurance Department,
depending upon the amount and timing of the payments. In accordance with
the Connecticut statute, TLAC, after reducing its unassigned funds
(surplus) by 25% of the change in net unrealized capital gains, may not pay
dividends during 2004 without prior approval of the State of Connecticut
Insurance Department. Primerica may pay up to $242 million to TIC in 2004
without prior approval of the Commonwealth of Massachusetts Insurance
Department. The Company paid dividends of $545 million, $586 million and
$472 million in 2003, 2002 and 2001, respectively.
In connection with the TPC IPO and distribution, the Company's additional
paid-in capital increased $1,596 million during 2002 as follows:
($ IN MILLIONS)
Citigroup Series YYY Preferred Stock $2,225
TLA Holdings LLC 142
Cash and other assets 189
Pension, postretirement, and post-
employment benefits payable (279)
Deferred tax assets 98
Deferred tax liabilities (779)
------
$1,596
======
See Note 14.
53
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. SHAREHOLDER'S EQUITY
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX
Changes in each component of Accumulated Other Changes in Equity from
Nonowner Sources were as follows:
NET UNREALIZED ACCUMULATED OTHER
GAIN/LOSS FOREIGN CURRENCY DERIVATIVE CHANGES IN EQUITY
ON INVESTMENT TRANSLATION INSTRUMENTS AND FROM NONOWNER
($ IN MILLIONS) SECURITIES ADJUSTMENTS HEDGING ACTIVITIES SOURCES
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 $ 104 $ -- $ -- $ 104
Cumulative effect of change in accounting
for derivative instruments and hedging
activities, net of tax of $(16) 14 -- (43) (29)
Unrealized gains on investment securities,
net of tax of $74 138 -- -- 138
Less: Reclassification adjustment for gains
included in net income, net of tax of $(38) (70) -- -- (70)
Foreign currency translation adjustment, net
of tax of $(2) -- (3) -- (3)
Less: Derivative instrument hedging activity
losses, net of tax of $(35) -- -- (66) (66)
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 82 (3) (109) (30)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 186 (3) (109) 74
Unrealized gains on investment securities,
net of tax of $167 311 -- -- 311
Add: Reclassification adjustment for losses
included in net income, net of tax of $78 144 -- -- 144
Foreign currency translation adjustment, net
of tax of $2 -- 3 -- 3
Less: Derivative instrument hedging activity
losses, net of tax of $(42) -- -- (78) (78)
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 455 3 (78) 380
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 641 -- (187) 454
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized gains on investment securities,
net of tax of $407 793 -- -- 793
Add: Reclassification adjustment for losses
included in net income, net of tax of $13 25 -- -- 25
Foreign currency translation adjustment, net
of tax of $3 -- 4 -- 4
Add: Derivative instrument hedging activity
gains, net of tax of $46 -- -- 84 84
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 818 4 84 906
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 $ 1,459 $ 4 $ (103) $ 1,360
- ------------------------------------------------------------------------------------------------------------------------------------
54
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
9. BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company participates in a qualified, noncontributory defined benefit
pension plan sponsored by Citigroup. The Company's share of the expense
related to this plan was insignificant in 2003, 2002 and 2001.
The Company also participates in a non-qualified, noncontributory defined
benefit pension plan sponsored by Citigroup. During 2002, the Company
assumed TPC's share of the non-qualified pension plan related to inactive
employees of the former Travelers Insurance entities as part of the TPC
spin-off. The Company's share of net expense for this plan was $5 million
in 2003, $10 million in 2002, and insignificant in 2001.
In addition, the Company provides certain other postretirement benefits to
retired employees through a plan sponsored by Citigroup. The Company
assumed TPC's share of the postretirement benefits related to inactive
employees of the former Travelers Insurance entities during 2002 as part of
the TPC spin-off. The Company's share of net expense for the other
postretirement benefit plans was $28 million in 2003, $18 million in 2002
and not significant for 2001.
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 2003, 2002
and 2001. See Note 13.
10. LEASES
Most leasing functions for the Company are administered by a Citigroup
subsidiary. Net rent expense for the Company was $21 million, $24 million,
and $26 million in 2003, 2002 and 2001, respectively.
----------------------------------------------------------------------------
YEAR ENDING DECEMBER 31, MINIMUM OPERATING MINIMUM CAPITAL
($ IN MILLIONS) RENTAL PAYMENTS RENTAL PAYMENTS
----------------------------------------------------------------------------
2004 $ 47 $ 5
2005 52 5
2006 58 5
2007 58 6
2008 58 6
Thereafter 83 18
----------------------------------------------------------------------------
Total Rental Payments $355 $45
============================================================================
Future sublease rental income of approximately $60 million will partially
offset these commitments. Also, the Company will be reimbursed for 50%,
totaling $135 million through 2011, of the rental expense for a particular
lease by an affiliate.
55
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL
INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, swaps, options and forward contracts, as a means of
hedging exposure to interest rate changes, equity price changes, credit and
foreign currency risk. The Company also uses derivative financial
instruments to enhance portfolio income and replicate cash market
investments. The Company, through Tribeca Citigroup Investments Ltd., holds
and issues derivative instruments in conjunction with these investment
strategies.
The Company uses exchange traded financial futures contracts to manage its
exposure to changes in interest rates that arise from the sale of certain
insurance and investment products, or the need to reinvest proceeds from
the sale or maturity of investments. To hedge against adverse changes in
interest rates, the Company enters long or short positions in financial
futures contracts, which offset asset price changes resulting from changes
in market interest rates until an investment is purchased, or a product is
sold. Futures contracts are commitments to buy or sell at a future date a
financial instrument, at a contracted price, and may be settled in cash or
through delivery.
The Company uses equity option contracts to manage its exposure to changes
in equity market prices that arise from the sale of certain insurance
products. To hedge against adverse changes in the equity market prices, the
Company enters long positions in equity option contracts with major
financial institutions. These contracts allow the Company, for a fee, the
right to receive a payment if the Standard and Poor's 500 Index falls below
agreed upon strike prices.
Currency option contracts are used on an ongoing basis to hedge the
Company's exposure to foreign currency exchange rates that result from the
Company's direct foreign currency investments. To hedge against adverse
changes in exchange rates, the Company enters into contracts that give it
the right, but not the obligation, to sell the foreign currency within a
limited time at a contracted price that may also be settled in cash, based
on differentials in the foreign exchange rate. These contracts cannot be
settled prior to maturity.
The Company enters into interest rate swaps in connection with other
financial instruments to provide greater risk diversification and better
match assets and liabilities. Under interest rate swaps, the Company agrees
with other parties to exchange, at specified intervals, the difference
between fixed rate and floating rate interest amounts calculated by
reference to an agreed upon notional principal amount. The Company also
enters into basis swaps in which both legs of the swap are floating with
each based on a different index. Generally, no cash is exchanged at the
outset of the contract and no principal payments are made by either party.
A single net payment is usually made by one counterparty at each due date.
The Company enters into currency swaps in connection with other financial
instruments to provide greater risk diversification and better match assets
purchased in U.S. Dollars with a corresponding liability originated in a
foreign currency. Under currency swaps, the Company agrees with other
parties to exchange, at specified intervals, foreign currency for U.S.
Dollars. Generally, there is an exchange of foreign currency for U.S.
Dollars at the outset of the contract based upon prevailing foreign
exchange rates. Swap agreements are not exchange traded so they are subject
to the risk of default by the counterparty.
Forward contracts are used on an ongoing basis to hedge the Company's
exposure to foreign currency exchange rates that result from the net
investment in the Company's Canadian operations as well as direct
56
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
foreign currency investments. To hedge against adverse changes in exchange
rates, the Company enters into contracts to exchange foreign currency for
U.S. Dollars with major financial institutions. These contracts cannot be
settled prior to maturity. At the maturity date the Company must purchase
the foreign currency necessary to settle the contracts.
The Company enters into credit default swaps in conjunction with a fixed
income investment to reproduce the investment characteristics of a
different investment. The Company will also enter credit default swaps to
reduce exposure to certain corporate debt security investment exposures
that it holds. Under credit default swaps, the Company agrees with other
parties to receive or pay, at specified intervals, fixed or floating rate
interest amounts calculated by reference to an agreed notional principal
amount in exchange for the credit default risk of a specified bond. Swap
agreements are not exchange traded so they are subject to the risk of
default by the counterparty.
Several of the Company's hedging strategies do not qualify or are not
designated as hedges for accounting purposes. This can occur when the
hedged item is carried at fair value with changes in fair value recorded in
earnings, the derivative contracts are used in a macro hedging strategy,
the hedge is not expected to be highly effective, or structuring the hedge
to qualify for hedge accounting is too costly or time consuming.
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.
Additionally, the Company enters into collateral agreements with its
derivative counterparties. As of December 31, 2003, the Company held
collateral under these contracts amounting to approximately $96.9 million.
The following table summarizes certain information related to the Company's
hedging activities for the years ended December 31, 2003 and 2002:
Year Ended Year Ended
In millions of dollars December 31, 2003 December 31, 2002
---------------------------------------------------------------------------
Hedge ineffectiveness recognized
related to fair value hedges $(23.2) $(18.3)
Hedge ineffectiveness recognized
related to cash flow hedges (3.4) 14.8
Net loss recorded in accumulated
other changes in equity from
nonowner sources related to
net investment hedges (33.6) (8.4)
Net loss from economic
hedges recognized in earnings (1.6) (32.8)
During the year ended December 31, 2002 the Company recorded a gain of $.3
million from discontinued forecasted transactions. During the year ended
December 31, 2003 there were no discontinued forecasted transactions. The
amount expected to be reclassified from accumulated other changes in equity
from nonowner sources into pre-tax earnings within twelve months from
December 31, 2003 is $(90.4) million.
57
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company issues fixed and variable
rate loan commitments and has unfunded commitments to partnerships and
joint ventures. All of these commitments are to unaffiliated entities. The
off-balance sheet risk of fixed and variable rate loan commitments was
$253.5 million and $240.9 million at December 31, 2003 and 2002,
respectively. The Company had unfunded commitments of $527.8 million and
$630.0 million to these partnerships at December 31, 2003 and 2002,
respectively.
FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS
The Company uses various financial instruments in the normal course of its
business. Certain insurance contracts are excluded by SFAS No. 107,
"Disclosure about Fair Value of Financial Instruments," and therefore are
not included in the amounts discussed.
At December 31, 2003 and 2002, investments in fixed maturities had a
carrying value and a fair value of $42.3 billion and $36.4 billion,
respectively. See Notes 1 and 3.
At December 31, 2003, mortgage loans had a carrying value of $1.9 billion
and a fair value of $2.0 billion and at year-end 2002 had a carrying value
of $2.0 billion and a fair value of $2.2 billion. In estimating fair value,
the Company used interest rates reflecting the current real estate
financing market.
Included in other invested assets are 2,225 shares of Citigroup Cumulative
Preferred Stock Series YYY, carried at cost of $2,225 million at December
31, 2003 and 2002, acquired as a contribution from TPC. This Series YYY
Preferred Stock pays cumulative dividends at 6.767%, has a liquidation
value of $1 million per share and has perpetual duration, is not subject to
a sinking fund or mandatory redemption but may be optionally redeemed by
Citigroup at any time on or after February 27, 2022. Dividends totaling
$151 million and $125 million were received in 2003 and 2002, respectively.
There is no established market for this investment and it is not
practicable to estimate the fair value of the preferred stock.
Included in other invested assets are 987 shares of Citigroup Cumulative
Preferred Stock Series YY, carried at cost of $987 million at December 31,
2003 and 2002. This Series YY Preferred Stock pays cumulative dividends at
5.321%, has a liquidation value of $1 million per share, and has perpetual
duration, is not subject to a sinking fund or mandatory redemption but may
be optionally redeemed by Citigroup at any time on or after December 22,
2018. Dividends totaling $53 million were received during each of 2003,
2002 and 2001. There is no established market for this investment and it is
not practicable to estimate the fair value of the preferred stock.
At December 31, 2003, contractholder funds with defined maturities had a
carrying value of $13.5 billion and a fair value of $13.7 billion, compared
with a carrying value and a fair value of $12.5 billion and $13.3 billion
at December 31, 2002. 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 $13.1 billion and
a fair value of $12.8 billion at December 31, 2003, compared with a
carrying value of $11.1 billion and a fair value of $10.7 billion at
December 31, 2002. These contracts generally are valued at surrender value.
The carrying values of $698 million and $321 million of financial
instruments classified as other assets approximated their fair values at
December 31, 2003 and 2002, respectively. The carrying value of $2.5
billion and $1.5 billion of financial instruments classified as other
liabilities at December 31, 2003 and 2002
58
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
also approximated their fair values at both December 31, 2003 and 2002.
Fair value is determined using various methods, including discounted cash
flows, as appropriate for the various financial instruments.
Both the assets and liabilities of separate accounts providing a guaranteed
return had a carrying value and a fair value of $350 million at December
31, 2003, compared with a carrying value and a fair value of $511 million
at December 31, 2002.
The carrying values of cash, trading securities and trading securities sold
not yet purchased are carried at fair value. The carrying values of
short-term securities and investment income accrued approximated their fair
values. The carrying value of policy loans, which have no defined
maturities, is considered to be fair value.
12. COMMITMENTS AND CONTINGENCIES
LITIGATION
In 2003, several issues in the mutual fund and variable insurance product
industries have come under the scrutiny of federal and state regulators.
Like many other companies in our industry, the Company has received a
request for information from the Securities and Exchange Commission (SEC)
and a subpoena from the New York Attorney General regarding market timing
and late trading. In March 2004 the SEC requested additional information
about the Company's variable product operations on market timing, late
trading and revenue sharing. The Company is cooperating fully with all of
these reviews and is not able to predict their outcomes.
The Company is a defendant or co-defendant in various litigation matters in
the normal course of business. These include civil actions, arbitration
proceedings and other matters arising in the normal course of business out
of activities as an insurance company, a broker and dealer in securities or
otherwise. In the opinion of the Company's management, the ultimate
resolution of these legal proceedings would not be likely to have a
material adverse effect on the Company's consolidated results of
operations, financial condition or liquidity.
OTHER
The Company is a member of the Federal Home Loan Bank of Boston (the Bank),
and in this capacity has entered into a funding agreement (the agreement)
with the Bank where a blanket lien has been granted to collateralize the
Bank's deposits. The Company maintains control of these assets, and may
use, commingle, encumber or dispose of any portion of the collateral as
long as there is no event of default and the remaining qualified collateral
is sufficient to satisfy the collateral maintenance level. The agreement
further states that upon any event of default, the Bank's recovery is
limited to the amount of the member's outstanding funding agreement. The
amount of the Company's liability for funding agreements with the Bank as
of December 31, 2003 is $1 billion, included in contractholder funds. The
Company holds $50 million of common stock of the Bank, included in equity
securities.
The Company has provided a guarantee on behalf of Citicorp International
Life Insurance Company, Ltd. (CILIC), an affiliate. The Company has
guaranteed to pay claims up to $1 billion of life insurance coverage for
CILIC. This guarantee takes effect if CILIC cannot pay claims because of
insolvency, liquidation or rehabilitation. Life insurance coverage in force
under this guarantee at December 31, 2003 is $61 million. The Company does
not hold any collateral related to this guarantee.
59
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. RELATED PARTY TRANSACTIONS
Citigroup and certain of its subsidiaries provide investment management and
accounting services, payroll, internal auditing, benefit management and
administration, property management and investment technology services to
the Company as of December 31, 2003. At December 31, 2001 the majority of
these services were provided by either Citigroup and its subsidiaries or
TPC. The Company paid Citigroup and its subsidiaries $55.3 million, $56.9
million and $43.6 million in 2003, 2002 and 2001, respectively, for these
services. The Company paid TPC $4.9 million, $33.6 million and $30.0
million in 2003, 2002 and 2001, respectively, for these services. The
amounts due to affiliates related to these services, included in other
liabilities at December 31, 2003 and 2002, were insignificant. See Note 14.
The Company has received reimbursements from Citigroup and its affiliates
related to the Company's increased benefit and lease expenses after the TPC
spin-off. These reimbursements totaled $34.3 million in 2003 and $15.5
million in 2002.
The Company maintains a short-term investment pool in which its insurance
affiliates participate. The position of each company participating in the
pool is calculated and adjusted daily. At December 31, 2003 and 2002, the
pool totaled approximately $3.8 billion and $4.2 billion, respectively. The
Company's share of the pool amounted to $3.3 billion and $3.8 billion at
December 31, 2003 and 2002, respectively, and is included in short-term
securities in the consolidated balance sheets.
At December 31, 2003 and 2002, the Company had outstanding loaned
securities to its affiliate Smith Barney (SB), a division of Citigroup
Global Markets, Inc., of $238.5 million and $267.1 million, respectively.
Included in other invested assets is a $3.2 billion investment in Citigroup
Preferred Stock at December 31, 2003 and 2002, carried at cost. Dividends
received on these investments were $204 million in 2003, $178 million in
2002 and $53 million in 2001. See Note 11.
The Company had investments in an affiliated joint venture, Tishman Speyer,
in the amount of $166.3 million and $186.1 million at December 31, 2003 and
2002, respectively. Income of $18.6 million, $99.7 million and $65.5
million was earned on these investments in 2003, 2002 and 2001,
respectively.
The Company also had an investment in Greenwich Street Capital Partners I,
an affiliated private equity investment, in the amount of $48.3 million and
$23.6 million at December 31, 2003 and 2002, respectively. Income (loss) of
$33.9 million, $0 million and $(41.6) million were earned on this
investment in 2003, 2002 and 2001, respectively.
In the ordinary course of business, the Company purchases and sells
securities through affiliated broker-dealers. These transactions are
conducted on an arm's-length basis.
The Company markets deferred annuity products and life insurance through
SB. Annuity deposits related to these products were $835 million, $1.0
billion, and $1.5 billion in 2003, 2002 and 2001, respectively. Life
premiums were $114.9 million, $109.7 million and $96.5 million in 2003,
2002 and 2001, respectively. Commissions and fees paid to SB were $70.3
million, $77.0 million and $84.6 million in 2003, 2002 and 2001,
respectively.
60
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company also markets individual annuity and life insurance through
CitiStreet Retirement Services, a division of CitiStreet LLC, (CitiStreet),
a joint venture between Citigroup and State Street Bank. Deposits received
from CitiStreet were $1.4 billion in 2003 and $1.6 billion in each of 2002
and 2001. Commissions and fees paid to CitiStreet were $52.9 million, $54.0
million and $59.1 million in 2003, 2002 and 2001, respectively.
The Company markets individual annuity products through an affiliate
Citibank, N.A. (together with its subsidiaries, Citibank). Deposits
received from Citibank were $357 million, $321 million and $564 million in
2003, 2002 and 2001, respectively. Commissions and fees paid to Citibank
were $29.8 million, $24.0 million and $37.2 million in 2003, 2002 and 2001,
respectively.
Primerica Financial Services (PFS), an affiliate, is a distributor of
products for TLA. PFS sold $714 million, $787 million and $901 million of
individual annuities in 2003, 2002 and 2001, respectively. Commissions and
fees paid to PFS were $58.1 million, $60.4 million and $67.8 million in
2003, 2002 and 2001, respectively.
Primerica Life has entered into a General Agency Agreement with PFS that
provides that PFS will be Primerica Life's general agent for marketing all
insurance of Primerica Life. In consideration of such services, Primerica
Life agreed to pay PFS marketing fees of no less than $10 million per year
based upon U.S. gross direct premiums received by Primerica Life. In each
of 2003, 2002, and 2001 the fees paid by Primerica Life were $12.5 million.
The Company sells structured settlement annuities to the property-casualty
subsidiaries of TPC. See Note 14.
TIC has made a solvency guarantee for an affiliate, CILIC. See Note 12.
The Company participates in a stock option plan sponsored by Citigroup that
provides for the granting of stock options in Citigroup common stock to
officers and other employees. To further encourage employee stock
ownership, Citigroup introduced the WealthBuilder stock option program
during 1997 and the Citigroup Ownership Program in 2001. Under these
programs, all employees meeting established requirements have been granted
Citigroup stock options. During 2001, Citigroup introduced the 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. During 2003 Citigroup introduced the Citigroup 2003
Stock Purchase Program, which allowed eligible employees of Citigroup,
including the Company's employees, to enter into fixed subscription
agreements to purchase shares at the lesser of the market value on the
first date of the offering period or the market value at the close of the
offering period. Enrolled employees are permitted to make one purchase
prior to the expiration date. The Company's charge to income for these
plans was insignificant in 2003, 2002 and 2001.
The Company also participates in the Citigroup Capital Accumulation
Program. Participating officers and other employees receive a restricted
stock award in the form of Citigroup common stock. These restricted stock
awards generally vest after a three-year period and, except under limited
circumstances, the stock can not be sold or transferred during the
restricted period by the participant, who is required to render service to
the Company during the restricted period. The Company's charge to income
for this program was insignificant in 2003, 2002 and 2001.
61
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Unearned compensation expense associated with the Citigroup restricted
common stock grants, which represents the market value of Citigroup's
common stock at the date of grant, is included in other assets in the
consolidated balance sheet and is recognized as a charge to income ratably
over the vesting period. The Company's charge to income was insignificant
during 2003, 2002 and 2001.
14. TRAVELERS PROPERTY CASUALTY SPIN-OFF
On March 27, 2002, TPC, the Company's parent at December 31, 2001,
completed its IPO. On August 20, 2002, Citigroup made a tax-free
distribution to its stockholders of a majority portion of its remaining
interest in TPC. Prior to the IPO the following transactions occurred:
o The common stock of the Company was distributed by TPC to CIHC so
the Company would remain an indirect wholly owned subsidiary of
Citigroup.
o The Company sold its home office buildings in Hartford,
Connecticut and a building housing TPC's information systems in
Norcross, Georgia to TPC for $68 million.
o TLA Holdings LLC, a non-insurance subsidiary valued at $142
million, was contributed to the Company by TPC.
o The Company assumed pension, postretirement and post employment
benefits payable to all inactive employees of the former
Travelers Insurance entities and received $189 million of cash
and other assets from TPC to offset these benefit liabilities. In
March 2003, TPC paid the Company $22.6 million as a settlement
for these benefit-related liabilities.
o The Company received 2,225 shares of Citigroup's 6.767%
Cumulative Preferred Stock, Series YYY, with a par value of $1.00
per share and a liquidation value of $1 million per share as a
contribution from TPC.
At December 31, 2001, TPC and its subsidiaries were affiliates of the
Company and provided certain services to the Company. These services
included data processing, facilities management, banking and financial
functions, benefits administration and others. During 2002, the Company
began phasing out these services. The Company still receives certain
services from TPC on a contract basis. The Company paid TPC $4.9 million,
$33.6 million and $30.0 million in 2003, 2002 and 2001, respectively, for
these services.
The Company sells structured settlement annuities to the property-casualty
insurance subsidiaries of TPC. Such premiums and deposits were $159 million
and $194 million for 2002 and 2001, respectively.
The Company has a license from TPC to use the names "Travelers Life &
Annuity," "The Travelers Insurance Company," "The Travelers Life and
Annuity Company" and related names in connection with the Company's
business.
62
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
The following table reconciles net income to net cash provided by operating
activities:
-----------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
($ IN MILLIONS)
-----------------------------------------------------------------------------------------
Net Income $ 1,358 $ 1,082 $ 1,281
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized (gains) losses (37) 322 (125)
Deferred federal income taxes 58 185 159
Amortization of deferred policy
acquisition costs 501 393 379
Additions to deferred policy acquisition costs (960) (879) (851)
Investment income (503) (119) (493)
Premium balances 8 (7) 7
Insurance reserves and accrued expenses 832 493 686
Other (443) 237 (402)
-----------------------------------------------------------------------------------------
Net cash provided by operations $ 814 $ 1,068 $ 1,280
-----------------------------------------------------------------------------------------
16. NON-CASH INVESTING AND FINANCING ACTIVITIES
In 2003, significant non-cash investing and financing activities include
the acquisition of real estate through foreclosures of mortgage loans
amounting to $129 million. In 2002, these activities include the
contribution of $2,225 million of Citigroup YYY Preferred Stock and related
deferred tax liability of $779 million; a $17 million COLI asset and $98
million deferred tax asset related to the transfer of $279 million of
pension and postretirement benefits, transferred for $172 million cash; and
the contribution of a non-insurance company, TLA Holdings, LLC, for $142
million. In 2001, these activities were insignificant.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended ("Exchange Act")) as of the end of the period covered by this report.
Based on such evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During 2003 the Securities and Exchange Commission (SEC) changed the definitions
of certain terms used by public companies to categorize and disclose various
types of services performed by independent auditors. The following is a
description of the fees earned by KPMG for services rendered to the Company for
the years ended December 31, 2003 and 2002:
64
AUDIT FEES: Audit fees include fees paid by the Company to KPMG in connection
with the annual audit of the Company's consolidated financial statements, KPMG's
audits of subsidiary financial statements and KPMG's review of the Company's
interim financial statements. Audit fees also include fees for services
performed by KPMG that are closely related to the audit and in many cases could
only be provided by the Company's independent auditors. Such services include
comfort letters and consents related to SEC registration statements and other
capital raising activities and certain reports relating to the Company's
regulatory filings, reports on internal control reviews required by regulators,
due diligence on completed acquisitions, accounting advice on completed
transactions, and certain forensic services in connection with audit services.
The aggregate fees earned by KPMG for audit services rendered to the Company and
its subsidiaries for the years ended December 31, 2003 and December 31, 2002
totaled approximately $1.3 million and $1.1 million, respectively.
AUDIT RELATED FEES: Audit related services include due diligence services
related to contemplated mergers and acquisitions, accounting consultations,
internal control reviews not required by regulators, securitization related
services, employee benefit plan audits and certain attest services as well as
certain agreed upon procedures. The aggregate fees earned by KPMG for audit
related services rendered to the Company and its subsidiaries for the years
ended December 31, 2003 and December 31, 2002 were $37 thousand and $40
thousand, respectively.
TAX FEES: Tax fees include corporate tax compliance, counsel and advisory
services as well as expatriate tax services. The Company did not incur any
charges from KPMG for tax related services rendered to the Company and its
subsidiaries for the years ended December 31, 2003 and December 31, 2002.
ALL OTHER FEES: The Company did not incur any charges from KPMG for other
services rendered to the Company and its subsidiaries for matters such as
general consulting for the years ended December 31, 2003 and December 31, 2002.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES: The Company did
not engage KPMG to provide advice to the Company regarding financial information
systems design and implementation during the years ended December 31, 2003 and
December 31, 2002.
APPROVAL OF INDEPENDENT AUDITOR SERVICES AND FEES
Citigroup's audit and risk management committee has consistently reviewed and
approved all fees charged by Citigroup's independent auditors, and actively
monitored the relationship between audit and non-audit services provided. The
audit and risk management committee has concluded that the provision of services
by KPMG was consistent with the maintenance of the external auditors'
independence in the conduct of its auditing functions. Effective January 1,
2003, Citigroup adopted a policy that it and its subsidiaries would no longer
engage its primary independent auditors for non-audit services other than "audit
related services," as defined by the SEC, certain tax services, and other
permissible non-audit services as specifically approved by the chair of the
audit and risk management committee and presented to the full committee at its
next regular meeting.
Under the Citigroup policy approved by the audit and risk management committee,
the committee must pre-approve all services provided by Citigroup's independent
auditors and fees charged. The committee will consider annually the provision of
audit services and, if appropriate, pre-approve certain defined audit fees,
audit related fees, tax fees and other fees with specific dollar value limits
for each category of service. The audit and risk management committee will also
consider on a case by case basis and, if appropriate, approve specific
engagements that are not otherwise pre-approved. Any proposed engagement that
does not fit within the definition of a pre-approved service may be presented to
the chair of the audit and risk management committee for approval and to the
full audit and risk management committee at its next regular meeting. The policy
includes limitations on hiring of partners or other professional employees of
KPMG that require adjustments to KPMG 's audit approach if there is any apparent
conflict, and at all times we are mindful of the independence requirements of
the SEC in considering employment of these individuals.
Administration of the policy is centralized within, and monitored by, Citigroup
senior corporate financial management, which reports throughout the year to the
audit and risk management committee.
65
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed:
(1) Financial Statements. See index on page 18 of this report.
(2) Financial Statement Schedules. See index on page 69 of this report.
(3) Exhibits. See Exhibit Index on page 67.
(b) Reports on Form 8-K:
None
66
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3. Articles of Incorporation and By-Laws
a) Charter of The Travelers Insurance Company (the
"Company"), as effective October 19, 1994, incorporated
by reference to Exhibit 3.01 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
September 30, 1994 (File No. 33-33691) (the "Company's
September 30, 1994 10-Q").
b) By-laws of the Company, as effective October 20, 1994,
incorporated by reference to Exhibit 3.02 to the
Company's September 30, 1994 10-Q.
10.01 Lease for office space in Hartford, Connecticut dated as of April
2, 1996, by and between the Company and The Travelers Indemnity
Company, incorporated by reference to Exhibit 10.14 to the Annual
Report on Form 10-K of Travelers Property Casualty Corp. for the
fiscal year ended December 31, 1996 (file No. 1-14328).
10.02 Trademark License Agreement between Travelers Property Casualty
Corp. and The Travelers Insurance Company, effective as of August
20, 2002, incorporated by reference to Exhibit 10.01 to the
Company's Quarterly Report on form 10-Q for the fiscal quarter
ended September 30, 2002.
10.03 Lease for office space at Cityplace, Hartford, Connecticut, dated
March 28, 1996, by and between Aetna Life and Casualty Company
and The Travelers Indemnity Company, (the "Cityplace Lease"),
incorporated by reference to Exhibit 10.10 to the Registration
Statement on Form S-1 of Travelers Insurance Group Holdings Inc.
(then known as Travelers/Aetna Property Casualty Corp.) on April
22, 1996 (File No. 333-2254).
10.04 First Amendment, dated May 15, 2001, by and between Aetna Inc.
(formerly Aetna Life and Casualty Company) as Landlord and The
Travelers Indemnity Company, as Tenant, with respect to the
Cityplace Lease, incorporated by reference to Exhibit 10.04 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.
10.05 Assignment and Assumption Agreement dated as of August 19, 2002,
by and between The Travelers Indemnity Company as Assignor and
the Company as Assignee, with respect to the Cityplace Lease,
incorporated by reference to Exhibit 10.05 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
14.01 Citigroup Code of Ethics for Financial Professionals,
incorporated by reference to Exhibit 14.01 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
21. Subsidiaries of the Registrant:
Omitted pursuant to General Instruction I (2)(b) of Form 10-K.
31.01+ Certification of chief financial officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.02+ Certification of chief executive officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.01+ Certification Pursuant to 18 USC Section 1350.
- -------------
+Filed herewith
67
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 22nd day of March,
2004.
THE TRAVELERS INSURANCE 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 22nd day of March, 2004.
SIGNATURE CAPACITY
/s/ George C. Kokulis Director and Chief Executive Officer
- --------------------- (Principal Executive Officer)
(George C. Kokulis)
/s/ Glenn D. Lammey Director, Chief Financial Officer and
- ------------------- Chief Accounting Officer
(Glenn D. Lammey) (Principal Financial Officer and
Principal Accounting Officer)
/s/ Kathleen L. Preston Director
- -----------------------
(Kathleen L. Preston)
/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.
68
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
The Travelers Insurance Company and Subsidiaries
Independent Auditors' Report *
Consolidated Statements of Income *
Consolidated Balance Sheets *
Consolidated Statements of Changes In Shareholder's Equity *
Consolidated Statements of Cash Flows *
Notes to Consolidated Financial Statements *
Independent Auditors' Report 70
Schedule I - Summary of Investments - Other than Investments in Related Parties 2003 71
Schedule III - Supplementary Insurance Information 2001-2003 72
Schedule IV - Reinsurance 2001-2003 73
All other schedules are inapplicable for this filing.
* See index on page 18
69
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Insurance Company:
Under date of February 26, 2004, we reported on the consolidated balance sheets
of The Travelers Insurance Company and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of income, changes in
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 2003, which are included in the Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules as listed in the accompanying index. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for variable interest entities in 2003, for
goodwill and intangible assets in 2002, and for derivative instruments and
hedging activities and for securitized financial assets in 2001.
/s/KPMG LLP
Hartford, Connecticut
February 26, 2004
70
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2003
($ IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------------
TYPE OF INVESTMENT AMOUNT SHOWN IN
COST VALUE BALANCE SHEET(1)
- -------------------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and
Authorities $ 6,487 $ 6,642 $ 6,642
States, municipalities and political subdivisions 379 398 398
Foreign governments 690 740 740
Public utilities 2,702 2,901 2,901
Convertible bonds and bonds with warrants attached 187 208 208
All other corporate bonds 29,519 31,260 31,260
- -------------------------------------------------------------------------------------------------------------------------
Total Bonds 39,964 42,149 42,149
Redeemable preferred stocks 155 174 174
- -------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 40,119 42,323 42,323
- -------------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Banks, trust and insurance companies 14 16 16
Industrial, miscellaneous and all other 95 118 118
- -------------------------------------------------------------------------------------------------------------------------
Total Common Stocks 109 134 134
Nonredeemable preferred stocks 214 228 228
- -------------------------------------------------------------------------------------------------------------------------
Total Equity Securities 323 362 362
- -------------------------------------------------------------------------------------------------------------------------
Mortgage Loans 1,886 1,886
Real Estate Held For Sale 96 96
Policy Loans 1,135 1,135
Short-Term Securities 3,603 3,603
Trading Securities 1,707 1,707
Other Investments(2)(3)(4) 1,465 1,465
- -------------------------------------------------------------------------------------------------------------------------
Total Investments $50,334 $52,577
=========================================================================================================================
(1) Determined in accordance with methods described in Notes 1 and 3 of the
Notes to Consolidated Financial Statements.
(2) Excludes $3.2 billion of Citigroup Inc. preferred stock. See Note 13 of
Notes to Consolidated Financial Statements.
(3) Also excludes $415 million fair value of investment in affiliated
partnership interests.
(4) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
71
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
($ IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
FUTURE
POLICY
BENEFITS, AMORTIZATION
DEFERRED LOSSES, OTHER POLICY OF DEFERRED
POLICY CLAIMS AND CLAIMS AND NET BENEFITS, POLICY OTHER
ACQUISITION LOSS BENEFITS PREMIUM INVESTMENT CLAIMS AND ACQUISITION OPERATING PREMIUMS
COSTS EXPENSES(1) PAYABLE REVENUE INCOME LOSSES(2) COSTS EXPENSES WRITTEN
- ------------------------------------------------------------------------------------------------------------------------------------
2003
Travelers Life & Annuity $2,361 $42,023 $532 $1,082 $2,743 $2,816 $266 $240 $1,093
Primerica 2,034 3,500 161 1,245 315 534 235 219 1,251
- ------------------------------------------------------------------------------------------------------------------------------------
Total $4,395 $45,523 $693 $2,327 $3,058 $3,350 $501 $459 $2,344
====================================================================================================================================
2002
Travelers Life & Annuity $2,043 $37,774 $461 $ 730 $2,646 $2,404 $174 $190 $ 729
Primerica 1,893 3,261 147 1,194 290 527 219 217 1,184
- ------------------------------------------------------------------------------------------------------------------------------------
Total $3,936 $41,035 $608 $1,924 $2,936 $2,931 $393 $407 $1,913
====================================================================================================================================
2001
Travelers Life & Annuity $1,672 $33,475 $368 $ 957 $2,530 $2,534 $171 $154 $ 955
Primerica 1,789 3,044 144 1,145 301 507 208 217 1,157
- ------------------------------------------------------------------------------------------------------------------------------------
Total $3,461 $36,519 $512 $2,102 $2,831 $3,041 $379 $371 $2,112
====================================================================================================================================
(1) Includes contractholder funds.
(2) Includes interest credited to contractholders.
72
THE TRAVELERS INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
($ IN MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF
CEDED TO OTHER ASSUMED FROM AMOUNT ASSUMED
GROSS AMOUNT COMPANIES OTHER COMPANIES NET AMOUNT TO NET
- -------------------------------------------------------------------------------------------------------------------
2003
Life Insurance In Force $593,006 $356,298 $ 3,519 $240,227 1.4%
Premiums:
Life insurance $ 2,672 419 $ 1 $ 2,254 --
Accident and health insurance 308 235 -- 73 --
Property casualty 21 21 -- -- --
-------- -------- -------- -------- --------
Total Premiums $ 3,001 $ 675 $ 1 $ 2,327 --
======== ======== ======== ======== ========
2002
Life Insurance In Force $549,066 $321,940 $ 3,568 $230,694 1.5%
Premiums:
Life insurance $ 2,227 377 $ -- $ 1,850 --
Accident and health insurance 316 242 -- 74 --
Property casualty 109 109 -- -- --
-------- -------- -------- -------- --------
Total Premiums $ 2,652 $ 728 $ -- $ 1,924 --
======== ======== ======== ======== ========
2001
Life Insurance In Force $510,457 $285,696 $ 3,636 $228,397 1.6%
Premiums:
Life insurance $ 2,378 $ 352 $ -- $ 2,026 --
Accident and health insurance 321 246 1 76 --
Property casualty 180 180 -- -- --
-------- -------- -------- -------- --------
Total Premiums $ 2,879 $ 778 $ 1 $ 2,102 --
======== ======== ======== ======== ========
73
T-MARK
MODIFIED GUARANTEED ANNUITY CONTRACTS
ISSUED BY
THE TRAVELERS INSURANCE COMPANY
ONE CITYPLACE
HARTFORD, CONNECTICUT 06103-3415
TIC Ed 5-2004
L-11167 Printed in U.S.A.