Filed Pursuant to Rule 424b(3)
File Numbers: 333-69793; 333-69753
TRAVELERS RETIREMENT ACCOUNT ANNUITY PROSPECTUS:
THE TRAVELERS SEPARATE ACCOUNT FIVE FOR VARIABLE ANNUITIES
THE TRAVELERS SEPARATE ACCOUNT SIX FOR VARIABLE ANNUITIES
This prospectus describes TRAVELERS RETIREMENT ACCOUNT ANNUITY, a flexible
premium deferred variable annuity contract (the "Contract") issued by The
Travelers Insurance Company or The Travelers Life and Annuity Company. The
Travelers Life and Annuity Company does not solicit or issue insurance products
in the state of New York. Refer to the first page of your Contract for the name
of your issuing company. The Contract is available in connection with certain
retirement plans that qualify for special federal income tax treatment
("Qualified Contracts".) We may issue it as an individual Contract or as a group
Contract. When we issue a group Contract, you will receive a certificate
summarizing the Contract's provisions. For convenience, we refer to Contracts
and certificates as "Contracts."
You can choose to have your premium ("Purchase Payments") and any applicable
Purchase Payment Credits accumulate on a variable and, subject to availability,
fixed basis in one of our funding options. Your Contract Value before the
Maturity Date and the amount of monthly income afterwards will vary daily to
reflect the investment experience of the Variable Funding Options you select.
You bear the investment risk of investing in the Variable Funding Options. The
Variable Funding Options are:
Capital Appreciation Fund PUTNAM VARIABLE TRUST
High Yield Bond Trust Putnam VT Small Cap Value Fund -- Class IB Shares
Managed Assets Trust SALOMON BROTHERS VARIABLE SERIES FUNDS INC.
Money Market Portfolio All Cap Fund -- Class I(4)
AMERICAN FUNDS INSURANCE SERIES Investors Fund -- Class I
Global Growth Fund -- Class 2 Shares Small Cap Growth Fund -- Class I Growth
Fund -- Class 2 Shares SMITH BARNEY INVESTMENT SERIES
Growth-Income Fund -- Class 2 Shares Smith Barney Premier Selections All Cap Growth Portfolio
CITISTREET FUNDS, INC. THE TRAVELERS SERIES TRUST
CitiStreet Diversified Bond Fund -- Class I Convertible Securities Portfolio
CitiStreet International Stock Fund -- Class I Disciplined Mid Cap Stock Portfolio
CitiStreet Large Company Stock Fund -- Class I Equity Income Portfolio
CitiStreet Small Company Stock Fund -- Class I Large Cap Portfolio
DELAWARE VIP TRUST Lazard International Stock Portfolio
Delaware VIP REIT Series -- Standard Class Merrill Lynch Large Cap Core Portfolio(5)
Delaware VIP Small Cap Value Series -- Standard Class MFS Emerging Growth Portfolio
DREYFUS VARIABLE INVESTMENT FUND MFS Mid Cap Growth Portfolio
Dreyfus Variable Investment Fund -- Appreciation Portfolio -- MFS Value Portfolio
Initial Shares Pioneer Fund Portfolio(6)
Dreyfus Variable Investment Fund -- Developing Leaders Social Awareness Stock Portfolio
Portfolio -- Initial Shares(1) Travelers Quality Bond Portfolio
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST U.S. Government Securities Portfolio
Mutual Shares Securities Fund -- Class 2 Shares TRAVELERS SERIES FUND INC.
Templeton Developing Markets Securities Fund -- Class 2 Shares AIM Capital Appreciation Portfolio
Templeton Foreign Securities Fund -- Class 2 Shares MFS Total Return Portfolio
Templeton Growth Securities Fund -- Class 2 Shares Pioneer Strategic Income Portfolio(7)
GREENWICH STREET SERIES FUND SB Adjustable Rate Income Portfolio Smith Barney Class
Appreciation Portfolio Smith Barney Aggressive Growth Portfolio
Equity Index Portfolio -- Class II Shares Smith Barney High Income Portfolio
JANUS ASPEN SERIES Smith Barney Large Capitalization Growth Portfolio
Mid Cap Growth Portfolio -- Service Shares(2) Strategic Equity Portfolio(8)
LAZARD RETIREMENT SERIES, INC. VAN KAMPEN LIFE INVESTMENT TRUST
Lazard Retirement Small Cap Portfolio Comstock Portfolio Class II Shares
LORD ABBETT SERIES FUND, INC. Emerging Growth Portfolio Class II Shares
Growth and Income Portfolio VARIABLE ANNUITY PORTFOLIOS
Mid-Cap Value Portfolio Smith Barney Small Cap Growth Opportunities Portfolio
OPPENHEIMER VARIABLE ACCOUNT FUNDS VARIABLE INSURANCE PRODUCTS FUND II
Oppenheimer Main Street Fund/VA -- Service Shares(3) Asset Manager Portfolio -- Service Class 2
PIMCO VARIABLE INSURANCE TRUST Contrafund(R)Portfolio -- Service Class 2
Total Return Portfolio -- Administrative Class VARIABLE INSURANCE PRODUCTS FUND III
Mid Cap Portfolio -- Service Class 2
- --------------
(1) Formerly Small Cap Portfolio -- Initial Shares (5) Formerly MFS Research Portfolio
(2) Formerly Aggressive Growth Portfolio -- Service Shares (6) Formerly Utilities Portfolio
(3) Formerly Oppenheimer Main Street Growth & Income (7) Formerly Putnam Diversified Income Portfolio
Fund/VA -- Service Shares (8) Formerly Alliance Growth Portfolio
(4) Formerly Capital Fund -- Class I
We also offer variable annuity Contracts that do not have Purchase Payment
Credits, and therefore may have lower fees. Over time, the value of the Purchase
Payment Credits could be more than offset by higher charges. You should
carefully consider whether or not this Contract is the most appropriate
investment for you.
The Contract, certain Contract features and/or some of the funding options may
not be available in all states. This prospectus provides the information that
you should know before investing in the Contract. Please keep this prospectus
for future reference. You can receive additional information about your Contract
by requesting a copy of the Statement of Additional Information ("SAI") dated
May 3, 2004. We filed the SAI with the Securities and Exchange Commission
("SEC"), and it is incorporated by reference into this prospectus. To request a
copy, write to The Travelers Insurance Company, Annuity Investor Services, One
Cityplace, 3 CP, Hartford, Connecticut 06103-3415, call 1-800-842-9406 or access
the SEC's website (http://www.sec.gov). See Appendix E for the SAI's table of
contents.
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.
VARIABLE ANNUITY CONTRACTS 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
Glossary............................................. 3 Payment Options........................................ 33
Summary.............................................. 5 Election of Options................................. 33
Fee Table............................................ 8 Annuity Options..................................... 34
Condensed Financial Information...................... 14 Miscellaneous Contract Provisions...................... 34
The Annuity Contract................................. 14 Right to Return..................................... 34
Contract Owner Inquiries.......................... 15 Termination......................................... 34
Purchase Payments................................. 15 Required Reports.................................... 35
Purchase Payment Credits ......................... 16 Suspension of Payments.............................. 35
Conservation Credit............................... 16 The Separate Accounts.................................. 35
Accumulation Units................................ 16 Performance Information............................. 35
The Variable Funding Options...................... 16 Federal Tax Considerations............................. 36
Fixed Account ....................................... 23 General Taxation of Annuities....................... 36
Charges and Deductions............................... 23 Types of Contracts: Qualified and Non-qualified..... 36
General........................................... 23 Qualified Annuity Contracts......................... 36
Withdrawal Charge................................. 24 Taxation of Qualified Annuity Contracts........... 36
Free Withdrawal Allowance......................... 25 Mandatory Distributions for Qualified Plans....... 37
Transfer Charge................................... 25 Non-qualified Annuity Contracts..................... 37
Mortality and Expense Risk Charge................. 25 Diversification Requirements for Variable
Variable Funding Option Expenses.................. 25 Annuities....................................... 38
Floor Benefit/Liquidity Benefit Charges........... 25 Ownership of the Investments...................... 38
CHART Asset Allocation Program Charges ........... 25 Taxation of Death Benefit Proceeds................ 38
Premium Tax....................................... 26 Other Tax Considerations............................ 38
Changes in Taxes Based upon Premium or Treatment of Charges for Optional Benefits........ 38
Value............................................. 26 Penalty Tax for Premature Distribution............ 38
Transfers............................................ 26 Puerto Rico Tax Considerations.................... 39
Access to Your Money................................. 27 Non-Resident Aliens............................... 39
Systematic Withdrawals............................ 27 Available Information.................................. 39
Ownership Provisions................................. 28 Incorporation of Certain Documents by
Types of Ownership................................ 28 Reference........................................... 39
Contract Owner.................................. 28 Other Information...................................... 40
Beneficiary..................................... 28 The Insurance Companies............................. 40
Death Benefit........................................ 28 Financial Statements................................ 40
Death Proceeds before the Maturity Date........... 28 Distribution of Variable Annuity Contracts.......... 40
Step-Up Death Benefit Value....................... 29 Conformity with State and Federal Laws.............. 41
Payment of Proceeds............................... 29 Voting Rights....................................... 42
Beneficiary Contract Continuance.................. 30 Restrictions on Financial Transactions.............. 42
Planned Death Benefit............................. 30 Legal Proceedings and Opinions...................... 42
Death Proceeds after the Maturity Date............ 31 Appendix A: Condensed Financial
The Annuity Period................................... 31 Information for The Travelers Insurance
Maturity Date..................................... 31 Company: Separate Account Five...................... A-1
Liquidity Benefit ................................ 31 Appendix B: Condensed Financial Information
Allocation of Annuity............................. 32 for The Travelers Life and Annuity
Variable Annuity.................................. 32 Company: Separate Account Six....................... B-1
Fixed Annuity..................................... 33 Appendix C: Waiver of Withdrawal Charge
for Nursing Home Confinement........................ C-1
Appendix D: Market Value Adjustment.................... D-1
Appendix E: Contents of the Statement
of Additional Information........................... E-1
2
GLOSSARY
ACCUMULATION UNIT -- an accounting unit of measure used to calculate the value
of this Contract before Annuity Payments begin.
ANNUITANT -- the person on whose life the Maturity Date and Annuity Payments
depend.
ANNUITY PAYMENTS -- a series of periodic payments (a) for life; (b) for life
with a minimum number of payments; (c) for the joint lifetime of the Annuitant
and another person, and thereafter during the lifetime of the survivor; or (d)
for a fixed period.
ANNUITY UNIT -- an accounting unit of measure used to calculate the amount of
Annuity Payments.
CASH SURRENDER VALUE -- the Contract Value less any withdrawal charge and
premium tax not previously deducted.
CODE -- the Internal Revenue Code of 1986, as amended, and all related laws and
regulations that are in effect during the term of this Contract.
CONTINGENT ANNUITANT -- the individual who becomes the Annuitant when the
Annuitant who is not the owner dies prior to the Maturity Date.
CONTRACT DATE -- the date on which the Contract is issued.
CONTRACT OWNER (you) -- the person named in the Contract (on the specifications
page) as the owner of the Contract.
CONTRACT VALUE -- Purchase Payments and any associated Purchase Payment Credits,
plus or minus any investment experience on the amounts allocated to the variable
funds or interest on amounts allocated to the Fixed Account, adjusted by any
applicable charges and withdrawals.
CONTRACT YEARS -- twelve month periods beginning with the Contract Date.
DEATH REPORT DATE -- the day on which we have received 1) Due Proof of Death and
2) written payment instructions or election of spousal or beneficiary contract
continuation.
DUE PROOF OF DEATH -- (i) a copy of a certified death certificate; (ii) a copy
of a certified decree of a court of competent jurisdiction as to the finding of
death; (iii) a written statement by a medical doctor who attended the deceased;
or (iv) any other proof satisfactory to us.
FIXED ACCOUNT -- an account that consists of all of the assets under this
Contract other than those in the Separate Account.
HOME OFFICE -- the Home Office of The Travelers Insurance Company or The
Travelers Life and Annuity Company or any other office that we may designate for
the purpose of administering this Contract.
MATURITY DATE -- the date on which the Annuity Payments are to begin.
PAYMENT OPTION -- an Annuity or Income option elected under your Contract.
PURCHASE PAYMENT -- any premium paid by you to initiate or supplement this
Contract.
PURCHASE PAYMENT CREDIT -- an amount credited to your Contract Value that equals
a percentage of each Purchase Payment made.
QUALIFIED CONTRACT -- a contract used in a retirement plan or program that is
intended to qualify under Sections 401, 403, 408, or 414(d) of the Code.
SEPARATE ACCOUNT -- a segregated account registered with the Securities and
Exchange Commission ("SEC"), the assets of which are invested solely in the
Underlying Funds. The assets of the Separate Account are held exclusively for
the benefit of Contract Owners.
SUBACCOUNT -- that portion of the assets of a Separate Account that is allocated
to a particular Underlying Fund.
3
UNDERLYING FUND -- a portfolio of an open-end management investment company that
is registered with the SEC in which the Subaccounts invest.
VALUATION DATE -- a date on which a Subaccount is valued.
VALUATION PERIOD -- the period between successive valuations.
VARIABLE FUNDING OPTION -- an open-end diversified management investment company
that serves as an investment option under the Separate Account.
WE, US, OUR -- The Travelers Insurance Company or the Travelers Life and Annuity
Company.
WRITTEN REQUEST -- written information sent to us in a form and content
satisfactory to us and received at our Home Office.
YOU, YOUR -- the Contract Owner.
4
SUMMARY:
TRAVELERS RETIREMENT ACCOUNT
THIS SUMMARY DETAILS SOME OF THE MORE IMPORTANT POINTS THAT YOU SHOULD KNOW AND
CONSIDER BEFORE PURCHASING THE CONTRACT. PLEASE READ THE ENTIRE PROSPECTUS
CAREFULLY.
WHAT COMPANY WILL ISSUE MY CONTRACT? Your issuing company is either The
Travelers Insurance Company or The Travelers Life and Annuity Company, ("the
Company," "we" or "us"). The Travelers Life and Annuity Company does not solicit
or issue insurance products in the state of New York. Refer to your Contract for
the name of your issuing Company. Each company sponsors its own segregated
account ("Separate Account"). The Travelers Insurance Company sponsors the
Travelers Separate Account Five for Variable Annuities ("Separate Account
Five"); The Travelers Life and Annuity Company sponsors the Travelers Separate
Account Six for Variable Annuities ("Separate Account Six"). When we refer to
the Separate Account, we are referring to either Separate Account Five or
Separate Account Six, depending upon your issuing Company. The Contract may not
currently be available for sale in all states.
CAN YOU GIVE ME A GENERAL DESCRIPTION OF THE CONTRACT? We designed the Contract
for retirement savings or other long-term investment purposes. The Contract
provides a death benefit as well as guaranteed payout options. You direct your
payment(s) to one or more of the Variable Funding Options and/or to the Fixed
Account that is part of our general account (the "Fixed Account"). We guarantee
money directed to the Fixed Account as to principal and interest. The Variable
Funding Options fluctuate with the investment performance of the Underlying
Funds and are not guaranteed. You can also lose money in the Variable Funding
Options.
The Contract, like all deferred variable annuity contracts, has two phases: the
accumulation phase and the payout phase (annuity period). During the
accumulation phase generally, your pre-tax contributions accumulate on a
tax-deferred basis and are taxed as income when you make a withdrawal,
presumably when you are in a lower tax bracket. The payout phase occurs when you
begin receiving payments from your Contract. The amount of money you accumulate
in your Contract determines the amount of income (Annuity Payments) you receive
during the payout phase.
During the payout phase, you may choose one of a number of annuity options. You
may receive income payments from the Variable Funding Options and/or the Fixed
Account. If you elect variable income payments, the dollar amount of your
payments may increase or decrease. Once you choose one of the annuity options
and begin to receive payments, it cannot be changed.
WHO CAN PURCHASE THIS CONTRACT? The Contract is currently only available for use
in connection with tax qualified retirement plans ("Plans"), which include
Contracts qualifying under Section 401(a), 403(b), 408 or 457 of the Internal
Revenue Code of 1986, as amended, as well as beneficiary-directed transfers of
death benefit proceeds from another contract. Purchase of this Contract through
a Plan does not provide any additional tax deferral benefits beyond those
provided by the Plan. Accordingly, you should consider purchasing this Contract
for its death benefit, annuity option benefits, and other non-tax-related
benefits.
You may purchase the Contract with an initial payment of at least $20,000. You
may make additional payments of at least $5,000 at any time during the
accumulation phase.
This product is available to owners and Annuitants under the age of 85 as of the
Contract Date.
CAN I EXCHANGE MY CURRENT ANNUITY CONTRACT FOR THIS CONTRACT? The Code generally
permits you to exchange one annuity contract for another in a "tax-free
exchange." Therefore, you can transfer the proceeds from another annuity
contract to make Purchase Payments under this Contract. Before making an
exchange to acquire this Contract, you should carefully compare this Contract to
your current contract. You may have to pay a surrender charge under your current
contract to exchange it for this Contract, and this Contract has its own
surrender charges that would apply to you. The other fees and charges under this
Contract may be higher or lower and the benefits may be different than those of
your current contract. In addition, you may have to pay federal income or
penalty taxes on the exchange if it does not qualify for tax-free treatment. You
should not exchange another contract for this Contract unless you determine,
after evaluating all the facts, that the exchange is in your best interests.
Remember that the person selling you the Contract generally will earn a
commission on the sale.
5
WHO IS THE CONTRACT ISSUED TO? If you purchase an individual Contract, you are
the Contract Owner. 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 the group participant, as applicable. We refer to
both contracts and certificates as "Contracts." If a group unallocated Contract
is purchased, we issue only the Contract.
We issue group Contracts in connection with retirement plans. Depending on your
Plan, certain features and/or Variable Funding Options described in this
prospectus may not be available to you. Your Plan provisions supercede the
prospectus. If you have any questions about your specific Plan, contact your
Plan administrator.
IS THERE A RIGHT TO RETURN PERIOD? If you cancel the Contract within ten days
after you receive it, you will receive a full refund of your Contract Value plus
any Contract charges and premium taxes you paid (but not fees and charges
assessed by the Underlying Funds). Where state law requires a different right to
return period, or the return of Purchase Payments, the Company will comply. You
bear the investment risk on the Purchase Payment allocated to a Variable Funding
Option during the right to return period; therefore, the Contract Value we
return may be greater or less than your Purchase Payment.
If you purchased your Contract as an Individual Retirement Annuity, and you
return it within the first seven days after delivery, or longer if your state
permits, we will refund your full Purchase Payment. During the remainder of the
right to return period, we will refund your Contract Value (including charges we
assessed). We will determine your Contract Value at the close of business on the
day we receive a Written Request for a refund.
During the right to return period, you will not bear any Contract fees
associated with the Purchase Payment Credits. If you exercise your right to
return, you will be in the same position as if you had exercised the right to
return in a variable annuity Contract with no Purchase Payment Credit. You
would, however, receive any gains, and we would bear any losses attributable to
the Purchase Payment Credits.
CAN YOU GIVE A GENERAL DESCRIPTION OF THE VARIABLE FUNDING OPTIONS AND HOW THEY
OPERATE? Through its Subaccounts, the Separate Account uses your Purchase
Payments to purchase shares, at your direction, of one or more of the Variable
Funding Options. In turn, each Variable Funding Option invests in an underlying
mutual fund ("Underlying Fund") that holds securities consistent with its own
investment policy. Depending on market conditions, you may make or lose money in
any of these Variable Funding Options.
You can transfer among the Variable Funding Options as frequently as you wish
without any current tax implications. Currently there is no charge for
transfers, nor a limit to the number of transfers allowed. We may, in the
future, charge a fee for any transfer request, or limit the number of transfers
allowed. At a minimum, we would always allow one transfer every six months. We
reserve the right to restrict transfers that we determine will disadvantage
other Contract Owners.
WHAT EXPENSES WILL BE ASSESSED UNDER THE CONTRACT? The Contract has insurance
features and investment features, and there are costs related to each. We deduct
a mortality and expense risk ("M&E") charge daily from the amounts you allocate
to the Separate Account. We deduct the M&E at an annual rate of 0.80% for the
Standard Death Benefit, and 1.25% for the Optional Death Benefit. Each
Underlying Fund also charges for management costs and other expenses.
We will apply a withdrawal charge to withdrawals from the Contract, and will
calculate it as a percentage of the Purchase Payments and any associated
Purchase Payment Credits withdrawn. The maximum percentage is 5%, decreasing to
0% in years six and later.
Upon annuitization, if you select the Variable Annuitization Floor Benefit,
there is a Floor Benefit charge assessed. This charge will vary based upon
market conditions, and will be set at the time you choose this option. Once
established, this charge will remain the same throughout the term of the
annuitization. If you select the Liquidity Benefit, there is a charge of 5% of
the amounts withdrawn.
HOW WILL MY PURCHASE PAYMENTS AND WITHDRAWALS BE TAXED? Generally, the payments
you make to a Qualified Contract during the accumulation phase are made with
before-tax dollars. Generally, you will be taxed on your Purchase Payments,
Purchase Payment Credits and on any earnings when you make a withdrawal or begin
receiving Annuity Payments. Payments to the Contract are made with after-tax
dollars, and any credits and earnings will generally accumulate tax-deferred.
You will be taxed on these earnings when they are withdrawn from the Contract.
If you are younger than 59 1/2 when you take money out, you may be charged a 10%
federal penalty tax on the amount withdrawn.
6
HOW MAY I ACCESS MY MONEY? You can take withdrawals any time during the
accumulation phase. Withdrawal charges may apply, and income taxes, and/or a
penalty tax may apply to taxable amounts withdrawn.
WHAT IS THE DEATH BENEFIT UNDER THE CONTRACT? You may choose to purchase the
Standard or Optional Death Benefit. If you die before the Contract is in the
payout phase, the person you have chosen as your beneficiary will receive a
death benefit. We calculate the death benefit value at the close of the business
day on which our Home Office receives (1) Due Proof of Death and (2) written
payment instructions or the election of beneficiary contract continuance. Please
refer to the Death Benefit section in the prospectus for more details.
WHERE MAY I FIND OUT MORE ABOUT ACCUMULATION UNIT VALUES? The Condensed
Financial Information in Appendix A or Appendix B to this prospectus provides
more information about Accumulation Unit values.
ARE THERE ANY ADDITIONAL FEATURES? This Contract has other features you may be
interested in. These include:
o DOLLAR COST AVERAGING. This is a program that allows you to invest a
fixed amount of money in Variable Funding Options each month,
theoretically giving you a lower average cost per unit over time than
a single one-time purchase. Dollar Cost Averaging requires regular
investments regardless of fluctuating price levels, and does not
guarantee profits or prevent losses in a declining market. Potential
investors should consider their financial ability to continue
purchases through periods of low price levels.
o SYSTEMATIC WITHDRAWAL OPTION. Before the Maturity Date, you can
arrange to have money sent to you at set intervals throughout the
year. Of course, any applicable income and penalty taxes will apply
on amounts withdrawn. Withdrawals in excess of the free withdrawal
allowance may be subject to a withdrawal charge.
o MANAGED DISTRIBUTION PROGRAM. This program allows us to automatically
calculate and distribute to you, in November of the applicable tax
year, an amount that will satisfy the Internal Revenue Service's
minimum distribution requirements imposed on certain Contracts once
the owner reaches age 70 1/2or retires. These minimum distributions
occur during the accumulation phase.
o ASSET ALLOCATION ADVICE. If allowed, you may elect to enter into a
separate advisory agreement with CitiStreet Financial Services LLC.
("CitiStreet"), an affiliate of the Company, for the purpose of
receiving asset allocation advice under CitiStreet's CHART Program.
The CHART Program allocates all Purchase Payments among the
CitiStreet Funds. The CHART Program and applicable fees are fully
described in a separate disclosure statement.
o BENEFICIARY CONTRACT CONTINUANCE (NOT PERMITTED FOR NON-NATURAL
BENEFICIARIES). If you die before the Maturity Date, and if the value
of any beneficiary's portion of the death benefit is between $20,000
and $1,000,000 as of the date of your death, that beneficiary(s) may
elect to continue his/her portion of the Contract.
7
FEE TABLE
- --------------------------------------------------------------------------------
The following tables describe the fees and expenses that you will pay when
buying, owning, and surrendering the Contract. The first table describes the
fees and expenses that you will pay at the time that you buy the Contract,
surrender the Contract, or transfer Contract Value between Variable Funding
Options. Expenses shown do not include premium taxes, which may be applicable.
CONTRACT OWNER TRANSACTION EXPENSES
WITHDRAWAL CHARGE............................................. 5%(1)
(AS A PERCENTAGE OF THE PURCHASE PAYMENTS AND ANY APPLICABLE PURCHASE
PAYMENT CREDITS WITHDRAWN)
TRANSFER CHARGE............................................... $10(2)
(ASSESSED ON TRANSFERS THAT EXCEED 12 PER YEAR)
LIQUIDITY BENEFIT CHARGE...................................... 5%
(DURING THE ANNUITY PERIOD, IF YOU HAVE ELECTED THE LIQUIDITY BENEFIT, A
SURRENDER CHARGE OF 5% OF THE AMOUNT WITHDRAWN WILL BE ASSESSED. SEE
"LIQUIDITY BENEFIT").
- --------------
(1) The withdrawal charge declines to zero after the Purchase Payment has
been in the Contract for 5 years. The charge is as follows:
YEARS SINCE PURCHASE WITHDRAWAL
PAYMENT MADE CHARGE
- ------------------------------------------- ----------------------
GREATER THAN OR EQUAL TO BUT LESS THAN
0 years 1 years 5%
1 years 2 years 4%
2 years 3 years 3%
3 years 4 years 2%
4 years 5 years 1%
5 years+ 0%
(2) We do not currently assess the transfer charge.
The next table describes the fees and expenses that you will pay periodically
during the time that you own the Contract, not including Underlying Fund fees
and expenses.
ANNUAL SEPARATE ACCOUNT CHARGES
(AS A PERCENTAGE OF THE AVERAGE DAILY NET ASSETS OF THE SEPARATE ACCOUNT)
STANDARD DEATH BENEFIT: OPTIONAL DEATH BENEFIT:
- -------------------------------------------------- -----------------------------------------------
Mortality and Expense Risk Charge............... 0.80% Mortality and Expense Risk Charge............. 1.25%
Administrative Expense Charge................... None Administrative Expense Charge................. None
------- -------
Total Annual Separate Account Charges...... 0.80% Total Annual Separate Account Charges.... 1.25%
During the annuity period, if you have elected the Variable Annuitization Floor
Benefit, a total annual separate account charge of up to 3.80% or 4.25% may
apply. See "Variable Annuitization Floor Benefit".
8
UNDERLYING FUND EXPENSES AS OF DECEMBER 31, 2003 (UNLESS OTHERWISE INDICATED):
The first table below shows the range (minimum and maximum) of the total annual
operating expenses charged by all of the Underlying Funds, before any voluntary
or contractual fee waivers and/or expense reimbursements. The second table shows
each Underlying Fund's management fee, distribution and/or service fees (12b-1)
if applicable, and other expenses. The Underlying Funds provided this
information and we have not independently verified it. More detail concerning
each Underlying Fund's fees and expenses is contained in the prospectus for each
Underlying Fund. Current prospectuses for the Underlying Funds can be obtained
by calling 1-800-842-9406.
MINIMUM AND MAXIMUM TOTAL ANNUAL UNDERLYING FUND OPERATING EXPENSES
MINIMUM MAXIMUM
-------------------------- --------------------------
TOTAL ANNUAL FUND OPERATING EXPENSES 0.42% 4.72%
(expenses that are deducted from Underlying Fund
assets, including management fees, distribution
and/or service fees (12b-1) fees, and other expenses.)
UNDERLYING FUND FEES AND EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
DISTRIBUTION
AND/OR CONTRACTUAL FEE NET TOTAL
SERVICE TOTAL ANNUAL WAIVER ANNUAL
MANAGEMENT (12b-1) OTHER OPERATING AND/OR EXPENSE OPERATING
UNDERLYING FUND: FEE FEES EXPENSES EXPENSES REIMBURSEMENT EXPENSES
- ----------------- --------------- ------------ -------- ------------ --------------- ------------
Capital Appreciation Fund.... 0.75% -- 0.07% 0.82% -- 0.82%(17)
High Yield Bond Trust........ 0.52% -- 0.13% 0.65% -- 0.65%(1)
Managed Assets Trust......... 0.50% -- 0.09% 0.59% -- 0.59%(17)
Money Market Portfolio....... 0.32% -- 0.10% 0.42% -- 0.42%(2)
AIM VARIABLE INSURANCE
FUNDS, INC.
AIM V.I. Premier Equity
Fund -- Series I+....... 0.61% -- 0.24% 0.85% -- 0.85%
AMERICAN FUNDS INSURANCE
SERIES
Global Growth Fund --
Class 2 Shares*......... 0.66% 0.25% 0.04% 0.95% -- 0.95%
Growth Fund --
Class 2 Shares*......... 0.37% 0.25% 0.02% 0.64% -- 0.64%
Growth-Income Fund --
Class 2 Shares*......... 0.33% 0.25% 0.01% 0.59% -- 0.59%
CITISTREET FUNDS, INC.
CitiStreet Diversified
Bond Fund -- Class I.... 0.44% -- 0.11% 0.55% -- 0.55%
CitiStreet International
Stock Fund -- Class I... 0.74% -- 0.16% 0.90% -- 0.90%
CitiStreet Large Company
Stock Fund -- Class I... 0.53% -- 0.10% 0.63% -- 0.63%
CitiStreet Small Company
Stock Fund -- Class I... 0.60% -- 0.19% 0.79% -- 0.79%
CITISTREET FUNDS, INC. **
CitiStreet Diversified
Bond Fund -- Class I.... 0.44% -- 1.36% 1.80% -- 1.80%
CitiStreet International
Stock Fund -- Class I... 0.74% -- 1.41% 2.15% -- 2.15%
CitiStreet Large Company
Stock Fund -- Class I... 0.53% -- 1.35% 1.88% -- 1.88%
CitiStreet Small Company
Stock Fund -- Class I... 0.60% -- 1.44% 2.04% -- 2.04%
9
DISTRIBUTION
AND/OR CONTRACTUAL FEE NET TOTAL
SERVICE TOTAL ANNUAL WAIVER ANNUAL
MANAGEMENT (12b-1) OTHER OPERATING AND/OR EXPENSE OPERATING
UNDERLYING FUND: FEE FEES EXPENSES EXPENSES REIMBURSEMENT EXPENSES
- ----------------- --------------- ------------ -------- ------------ --------------- ------------
CREDIT SUISSE TRUST
Credit Suisse Trust
Emerging Market
Portfolio+.............. 1.25% -- 0.56% 1.81% -- --(24)
DELAWARE VIP TRUST
Delaware VIP REIT Series
-- Standard Class....... 0.75% -- 0.11% 0.86% -- 0.86%(3)
Delaware VIP Small Cap
Value Series --
Standard Class.......... 0.75% -- 0.11% 0.86% -- 0.86%(4)
DREYFUS VARIABLE
INVESTMENT FUND
Dreyfus Variable
Investment Fund --
Appreciation Portfolio
-- Initial Shares....... 0.75% -- 0.05% 0.80% -- 0.80%
Dreyfus Variable
Investment Fund --
Developing Leaders
Portfolio --
Initial Shares.......... 0.75% -- 0.07% 0.82% -- 0.82%
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
Mutual Shares Securities
Fund -- Class 2 Shares*. 0.60% 0.25% 0.20% 1.05% -- 1.05%(5)
Templeton Developing
Markets Securities Fund
-- Class 2 Shares*...... 1.25% 0.25% 0.30% 1.80% -- 1.80%
Templeton Foreign
Securities Fund --
Class 2 Shares*......... 0.69% 0.25% 0.22% 1.16% 0.04% 1.12%(6)
Templeton Growth
Securities Fund --
Class 2 Shares*......... 0.81% 0.25% 0.07% 1.13% -- 1.13%(7)
GREENWICH STREET SERIES FUND
Appreciation Portfolio.... 0.75% -- 0.02% 0.77% -- 0.77%
Equity Index Portfolio --
Class II Shares*........ 0.31% 0.25% 0.04% 0.60% -- 0.60%
Fundamental Value
Portfolio+.............. 0.75% -- 0.02% 0.77% -- 0.77%
JANUS ASPEN SERIES
Balanced Portfolio --
Service Shares*+........ 0.65% 0.25% 0.02% 0.92% -- 0.92%
Mid Cap Growth Portfolio
-- Service Shares*...... 0.65% 0.25% 0.02% 0.92% -- 0.92%
Worldwide Growth
Portfolio -- Service
Shares*+................ 0.65% 0.25% 0.06% 0.96% -- 0.96%
LAZARD RETIREMENT SERIES,
INC.
Lazard Retirement
Small Cap Portfolio*.... 0.75% 0.25% 0.42% 1.42% 0.17% 1.25%(8)
LORD ABBETT SERIES FUND, INC.
Growth and Income 0.50% -- 0.35% 0.85% -- 0.85%
Portfolio...............
Mid-Cap Value Portfolio... 0.75% -- 0.33% 1.08% -- 1.08%
OPPENHEIMER VARIABLE ACCOUNT
FUNDS
Oppenheimer Main
Street Fund/VA --
Service Shares*......... 0.68% 0.25% 0.03% 0.96% -- 0.96%
PIMCO VARIABLE INSURANCE
TRUST
Total Return Portfolio --
Administrative Class*... 0.25% 0.15% 0.26% 0.66% 0.01% 0.65%(9)
10
DISTRIBUTION
AND/OR CONTRACTUAL FEE NET TOTAL
SERVICE TOTAL ANNUAL WAIVER ANNUAL
MANAGEMENT (12b-1) OTHER OPERATING AND/OR EXPENSE OPERATING
UNDERLYING FUND: FEE FEES EXPENSES EXPENSES REIMBURSEMENT EXPENSES
- ----------------- --------------- ------------ -------- ------------ --------------- ------------
PUTNAM VARIABLE TRUST
Putnam VT Discovery
Growth Fund --
Class IB Shares*+....... 0.70% 0.25% 0.86% 1.81% -- 1.81%(10)
Putnam VT International
Equity Fund --
Class IB Shares*+....... 0.77% 0.25% 0.22% 1.24% -- 1.24%(10)
Putnam VT Small Cap Value
Fund -- Class IB Shares* 0.80% 0.25% 0.12% 1.17% -- 1.17%(10)
SALOMON BROTHERS VARIABLE
SERIES FUNDS INC.
All Cap Fund -- Class I... 0.85% -- 0.13% 0.98% -- 0.98%
Investors Fund -- Class I. 0.70% -- 0.12% 0.82% -- 0.82%
Small Cap Growth Fund --
Class I................. 0.75% -- 0.51% 1.26% -- 1.26%
Total Return Fund --
Class I+................ 0.80% -- 0.21% 1.01% -- --(24)
SMITH BARNEY INVESTMENT
SERIES
Smith Barney Large Cap
Core Portfolio+......... 0.75% -- 0.16% 0.91% -- 0.91%
Smith Barney Premier
Selections All Cap
Growth Portfolio........ 0.75% -- 0.15% 0.90% -- 0.90%
STRONG VARIABLE INSURANCE
FUNDS, INC.
Strong Multi Cap Value
Fund II+................ 0.75% -- 0.86% 1.61% -- --(11)
THE TRAVELERS SERIES TRUST
Convertible Securities
Portfolio............... 0.60% -- 0.18% 0.78% -- 0.78%(12)
Disciplined Mid Cap
Stock Portfolio......... 0.70% -- 0.12% 0.82% -- 0.82%(13)
Equity Income Portfolio... 0.75% -- 0.12% 0.87% -- 0.87%(13)
Federated Stock Portfolio+ 0.63% -- 0.28% 0.91% -- 0.91%(13)
Large Cap Portfolio....... 0.75% -- 0.11% 0.86% -- 0.86%(13)
Lazard International
Stock Portfolio......... 0.83% -- 0.17% 1.00% -- 1.00%(17)
Merrill Lynch Large Cap
Core Portfolio.......... 0.80% -- 0.19% 0.99% -- 0.99%(14)
MFS Emerging
Growth Portfolio........ 0.75% -- 0.14% 0.89% -- 0.89%(13)
MFS Mid Cap
Growth Portfolio........ 0.80% -- 0.12% 0.92% -- 0.92%(14)
MFS Value Portfolio....... 0.75% -- 0.33% 1.08% -- --(14)
Pioneer Fund Portfolio.... 0.72% -- 0.40% 1.12% -- 1.12%(15)
Social Awareness
Stock Portfolio......... 0.62% -- 0.16% 0.78% -- 0.78%(17)
Travelers Quality
Bond Portfolio.......... 0.32% -- 0.11% 0.43% -- 0.43%(16)
U.S. Government
Securities Portfolio.... 0.32% -- 0.10% 0.42% -- 0.42%(17)
TRAVELERS SERIES FUND INC.
AIM Capital
Appreciation Portfolio.. 0.80% -- 0.05% 0.85% -- 0.85%
MFS Total Return Portfolio 0.80% -- 0.02% 0.82% -- 0.82%
Pioneer Strategic
Income Portfolio........ 0.75% -- 0.25% 1.00% -- 1.00%
11
DISTRIBUTION
AND/OR CONTRACTUAL FEE NET TOTAL
SERVICE TOTAL ANNUAL WAIVER ANNUAL
MANAGEMENT (12b-1) OTHER OPERATING AND/OR EXPENSE OPERATING
UNDERLYING FUND: FEE FEES EXPENSES EXPENSES REIMBURSEMENT EXPENSES
- ----------------- --------------- ------------ -------- ------------ --------------- ------------
TRAVELERS SERIES FUND INC.
(CONTINUED)
SB Adjustable Rate Income
Portfolio Smith
Barney Class*........... 0.60% 0.25% 3.87% 4.72% 3.72% 1.00%(18)
Smith Barney Aggressive
Growth Portfolio........ 0.80% -- 0.02% 0.82% -- 0.82%
Smith Barney High
Income Portfolio........ 0.60% -- 0.09% 0.69% -- 0.69%
Smith Barney
International All Cap
Growth Portfolio+....... 0.90% -- 0.09% 0.99% -- 0.99%
Smith Barney Large
Capitalization
Growth Portfolio........ 0.75% -- 0.04% 0.79% -- 0.79%
Strategic Equity Portfolio 0.80% -- 0.04% 0.84% -- 0.84%
VAN KAMPEN LIFE
INVESTMENT TRUST
Comstock Portfolio
Class II Shares*........ 0.60% 0.25% 0.05% 0.90% -- 0.90%
Emerging Growth Portfolio
Class II Shares*........ 0.70% 0.25% 0.07% 1.02% -- 1.02%
Enterprise Portfolio
Class II Shares*+....... 0.50% 0.25% 0.14% 0.89% -- --(19)
VARIABLE ANNUITY PORTFOLIOS
Smith Barney Small Cap
Growth Opportunities
Portfolio............... 0.75% -- 0.40% 1.15% -- --(24)
VARIABLE INSURANCE PRODUCTS
FUND II
Asset Manager Portfolio
-- Service Class 2*..... 0.53% 0.10% 0.11% 0.74% -- --(20)
Contrafund(R)Portfolio --
Service Class 2*........ 0.58% 0.25% 0.10% 0.93% -- --(21)
VARIABLE INSURANCE PRODUCTS
FUND III
Dynamic Capital
Appreciation Portfolio
-- Service Class 2*+.... 0.58% 0.25% 1.27% 2.10% -- --(22)
Mid Cap Portfolio --
Service Class 2*........ 0.58% 0.25% 0.12% 0.95% -- --(23)
- --------------
* The 12b-1 fees deducted from these classes cover certain distribution,
shareholder support and administrative services provided by
intermediaries (the insurance company, broker dealer or other service
provider).
** Includes 0.0125 CHART asset allocation fee.
+ Closed to new investors.
NOTES
(1) Management fee is based on 0.50% on first $50 million of net assets;
0.40% on the next $100 million; 0.30% on the next $100 million and 0.25%
on assets in excess of $250 million. Other Expenses include 0.06%
adminstrative services fee the Fund pays to Travelers Insurance Company.
(2) Fund has a voluntary waiver of 0.40%. Other Expenses include 0.06%
administrative services fee the Fund pays to Travelers Insurance Company.
(3) The investment advisor for the Delaware VIP REIT Series is Delaware
Management Company ("DMC"). For the period May 1, 2002 through April 30,
2004, the advisor waived its management fee and/or reimbursed the Series
for expenses to the extent that total expenses (excluding any taxes,
interest, brokerage fees, and extraordinary expenses) would not exceed
0.95%. Effective May 1, 2004 through April 30, 2005, DMC has
contractually agreed to waive its management fee and/or reimburse the
Series for expenses to the extent that total expenses (excluding any
taxes, interest, brokerage fees, and extraordinary expenses) would not
exceed 0.95%. Under its Management Agreement, the Series pays a
management fee based on average daily net assets as follows: 0.75% on the
first $500 million, 0.70% on the next $500 million, 0.65% on the next
$1,500 million, 0.60% on assets in excess of $2,500 million, all per
year.
12
(4) The investment advisor for the Delaware VIP Small Cap Value Series is
Delaware Management Company ("DMC"). For the period May 1, 2002 through
April 30, 2004, the advisor waived its management fee and/or reimbursed
the Series for expenses to the extent that total expenses (excluding any
taxes, interest, brokerage fees, and extraordinary expenses) would not
exceed 0.95%. Effective May 1, 2004 through April 30, 2005, DMC has
contractually agreed to waive its management fee and/or reimbursed the
Series for expenses to the extent that total expenses (excluding any
taxes, interest, brokerage fees, and extraordinary expenses) would not
exceed 0.95%. Under its Management Agreement, the Series pays a
management fee based on average daily net assets as follows: 0.75% on the
first $500 million, 0.70% on the next $500 million, 0.65% on the next
$1,500 million, 0.60% on assets in excess of $2,500 million, all per
year.
(5) While the maximum amount payable under the Fund's Class 2 rule 12b-1 plan
is 0.35% per year of the Fund's Class 2 average annual net assets, the
Fund's Board of Trustees has set the current rate at 0.25% per year.
(6) The manager has agreed in advance to reduce its fee to reflect reduced
services resulting from the Fund's investment in a Franklin Templeton
money fund. This reduction is required by the Fund's Board of Trustees
(Board) and an order of the Securities and Exchange Commission (SEC).
(7) The Fund administration fee is paid indirectly through the management
fee. While the maximum amount payable under the Fund's Class 2 rule 12b-1
plan is 0.35% per year of the Fund's Class 2 average annual net assets,
the Fund's Board of Trustees has set the current rate at 0.25% per year.
(8) Reflects a contractual obligation by the Investment Manager to waive its
fee and, if necessary, reimburse the Portfolio through December 31, 2004
to the extent Total Annual Portfolio Operating Expenses exceed 1.25% of
the Portfolio's average daily net assets.
(9) "Other Expenses" reflects a 0.25% administrative fee, and 0.01%
representing the Portfolio's pro rata Trustees' fees. PIMCO has
contractually agreed to reduce total annual portfolio operating expenses
for the Administrative Class shares to the extent they would exceed, due
to the payment of organizational expenses and Trustees' fees 0.65% of
average daily net assets. Under the Expense Limitation Agreement, PIMCO
may recoup these waivers and reimbursements in future periods, not
exceeding three years, provided total expenses, including such
recoupment, do not exceed the annual expense limit.
(10) There was no fee waiver or expense reimbursement for 2003, but effective
January 28, 2004 there will be a limit in effect. Effective January 28,
2004, Putnam Management has agreed to limit its compensation (and, to the
extent necessary, bear other expenses) through December 31, 2004, to the
extent that each fund's net expenses as a percentage of its net assets
exceed the average expense ratio for the fund's Lipper peer group of
funds underlying variable insurance products.
(11) The Fund participated in a program under which it received a credit for
part of the brokerage commission paid in transactions with participating
brokers. This credit was applied to the Fund's Operating Expenses that
were not attributable to Strong or its affiliates. Total Annual Operating
Expenses do not reflect these credits or voluntary waiver of fess and/or
expense absorptions. After giving effect to these credits and with
waivers and/or absorptions, Total Annual Operating expenses were 1.13%.
We can modify or terminate voluntary waivers and/or absorptions at any
time.
(12) Fund has a voluntary waiver of 0.80%. Other Expenses include 0.06%
administrative services fee the Fund pays to Travelers Insurance Company.
(13) Fund has a voluntary waiver of 0.95%. Other Expenses include 0.06%
administrative services fee the Fund pays to Travelers Insurance Company.
(14) Fund has a voluntary waiver of 1.00%. Other Expenses include 0.06%
administrative services fee the Fund pays to Travelers Insurance Company.
(15) Effective 5/1/03, shareholders approved a new Investment Advisory
Agreement that increased the management fee from 0.65% to 0.75%. The
actual Management Fee for the year was a blended rate of 0.72%. Other
Expenses include 0.06% adminstrative services fee the Fund pays to
Travelers Insurance Company.
(16) Fund has a voluntary waiver of 0.75%. Other Expenses include 0.06%
administrative services fee the Fund pays to Travelers Insurance Company.
(17) Fund has a voluntary waiver of 1.25%. Other Expenses include 0.06%
administrative services fee the Fund pays to Travelers Insurance Company.
(18) Pursuant to an agreement, the Investment Advisor has agreed, for the
period of one year, commencing November 1, 2003, to limit its fee and to
reimburse expenses to the extent necessary to limit total operating
expenses to 1.00%.
(19) Under the terms of the Advisory agreement, if the total ordinary business
expenses, exclusive of taxes, distribution fees and interest, exceed .95%
of the average daily net assets of the Portfolio, the Adviser will
reimburse the Portfolio for the amount of the excess. Additionally, the
Adviser has voluntarily agreed to reimburse the Portfolio for all
expenses as a percentage of average daily net assets in excess of .60%
and .85% for Classes I and II, respectively. For the year ended December
31, 2003, the Adviser waived $57,431 of its investment advisory fees.
This waiver is voluntary in nature and can be discontinued at the
Adviser's discretion.
(20) A portion of the brokerage commissions that the fund pays may be
reimbursed and used to reduce the fund's expenses. In addition, through
arrangements with the fund's custodian, credits realized as a result of
uninvested cash balances are used to reduce the fund's custodian
expenses. Including these reductions, the total class operating expenses
would have been 0.73%. These offsets may be discontinued at any time.
(21) A portion of the brokerage commissions that the fund pays may be
reimbursed and used to reduce the fund's expenses. In addition, through
arrangements with the fund's custodian, credits realized as a result of
uninvested cash balances are used to reduce the fund's custodian
expenses. Including these reductions, the total class operating expenses
would have been 0.90%. These offsets may be discontinued at any time.
(22) A portion of the brokerage commissions that the fund pays may be
reimbursed and used to reduce the fund's expenses. Including this
reduction, the total class operating expenses would have been 1.15%. The
fund's manager has voluntarily agreed to reimburse the class to the
extent that total operating expenses (excluding interest, taxes, certain
securities lending costs, brokerage commissions and extraordinary
expenses) exceed 1.25%. The expense ratio shown reflects the expense cap
in effect at period end. This arrangement can be discountinued by the
fund's manager at any time.
(23) A portion of the brokerage commissions that the fund pays may be
reimbursed and used to reduce the fund's expenses. In addition, through
arrangements with the fund's custodian, credits realized as a result of
uninvested cash balances are used to reduce the fund's custodian
expenses. Including these reductions, the total class operating expenses
would have been 0.93%. These offsets may be discontinued at any time.
(24) The table below shows the amount of the waiver or reimbursement and the
net total annual operating expenses for Underlying Funds that have
entered into a voluntary fee waiver and/or expense reimbursement
arrangement. The net total annual operating expense figure reflects the
fee waivers and/or expense reimbursements that were in effect as of the
Underlying Fund's fiscal year end. However, as these arrangements are
voluntary, they may be changed or terminated at any time, in which case
the Underlying Fund would be subject to different net total annual
operating expenses. Without such waivers performance would be lower.
13
VOLUNTARY FEE
WAIVER AND/OR
EXPENSE NET TOTAL ANNUAL
FUNDING OPTION REIMBURSEMENT OPERATING EXPENSES
----------------- ------------------------ ------------------------
Credit Suisse Trust Emerging Market Portfolio...................... 0.41% 1.40%
Total Return Fund -- Class I....................................... 0.01% 1.00%
Strong Multi Cap Value Fund II..................................... 0.48% 1.13%
MFS Value Portfolio................................................ 0.08% 1.00%
Enterprise Portfolio Class II Shares............................... 0.04% 0.85%
Smith Barney Small Cap Growth Opportunities Portfolio.............. 0.25% 0.90%
Asset Manager Portfolio -- Service Class 2......................... 0.01% 0.73%
Contrafund(R) Portfolio -- Service Class 2......................... 0.03% 0.90%
Dynamic Capital Appreciation Portfolio -- Service Class 2.......... 0.95% 1.15%
Mid Cap Portfolio -- Service Class 2............................... 0.02% 0.93%
EXAMPLES
These examples are intended to help you compare the cost of investing in the
Contract with the cost of investing in other variable annuity Contracts. These
costs include Contract Owner transaction expenses, Contract fees, separate
account annual expenses, and Underlying Fund total annual operating expenses.
These examples do not represent past or future expenses. Your actual expenses
may be more or less than those shown.
These examples assume that you invest $10,000 in the Contract for the time
periods indicated and that your investment has a 5% return each year. The
examples reflect the annual Contract administrative charge, factoring in that
the charge is waived for contracts over a certain value. Additionally, the
examples are based on the minimum and maximum Underlying Fund total annual
operating expenses shown above, and do not reflect any Underlying Fund fee
waivers and/or expense reimbursements.
The examples assume you have elected the Optional Death Benefit and that you
have allocated all of your Contract Value to either the Underlying Fund with the
maximum total annual operating expenses or the Underlying Fund with the minimum
total annual operating expenses. Your actual expenses will be less than those
shown if you do not elect the Optional Death Benefit.
EXAMPLE MAXIMUM CHARGES (ASSUMING YOU SELECT THE OPTIONAL DEATH BENEFIT)
IF CONTRACT IS SURRENDERED IF CONTRACT IS NOT SURRENDERED OR
AT THE END OF PERIOD SHOWN ANNUITIZED AT THE END OF PERIOD SHOWN
--------------------------------------- ----------------------------------------
FUNDING OPTION 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------- -------- --------- --------- --------- -------- ---------- --------- ---------
Underlying Fund with Minimum Total
Annual Operating Expenses........... 670 826 1007 1976 170 526 907 1976
Underlying Fund with Maximum Total
Annual Operating Expenses........... 1094 2065 3013 5688 594 1765 2913 5688
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
See Appendices A and B.
THE ANNUITY CONTRACT
- --------------------------------------------------------------------------------
Travelers Retirement Account Annuity is a Contract between the Contract Owner
("you") and the Company. This is the prospectus -- it is not the Contract. The
prospectus highlights many Contract provisions to focus your attention on the
Contract's essential features. Your rights and obligations under the Contract
will be determined by the language of the Contract itself. When you receive your
Contract, we suggest you read it promptly and carefully. There may be
differences in your Contract from the descriptions in this prospectus because of
the requirements of the state where we issued your Contract. We will include any
such differences in your Contract.
14
The Company offers several different annuities that your investment professional
may be authorized to offer to you. Each annuity offers different features and
benefits that may be appropriate for you. In particular, the annuities differ
based on variations in the standard and optional death benefit protection
provided for your beneficiaries, the availability of optional living benefits,
the ability to access your Contract Value if necessary and the charges that you
will be subject to if you make a withdrawal or surrender the annuity. The
separate account charges and other charges may be different between each annuity
we offer. Optional death benefits and living benefits are subject to a separate
charge for the additional protections they offer to you and your beneficiaries.
Furthermore, annuities that offer greater flexibility to access your Contract
Value generally are subject to higher separate account charges than annuities
that deduct charges if you make a withdrawal or surrender.
We encourage you to evaluate the fees, expenses, benefits and features of this
annuity against those of other investment products, including other annuity
products offered by us and other insurance companies. Before purchasing this or
any other investment product you should consider whether the product you
purchase is consistent with your risk tolerance, investment objectives,
investment time horizon, financial and tax situation, liquidity needs and how
you intend to use the annuity.
You make Purchase Payments to us and we credit them to your Contract. We promise
to pay you an income, in the form of Annuity Payments, beginning on a future
date that you choose, the Maturity Date. The Purchase Payments accumulate tax
deferred in the funding options of your choice. We offer multiple Variable
Funding Options. We may also offer a Fixed Account option. Where permitted by
law, we reserve the right to restrict Purchase Payments into the Fixed Account
whenever the credited interest rate on the Fixed Account is equal to the minimum
guaranteed interest rate specified under the Contract. The Contract Owner
assumes the risk of gain or loss according to the performance of the Variable
Funding Options. The Contract Value is the amount of Purchase Payments and any
associated Purchase Payment Credits, plus or minus any investment experience on
the amounts you allocate to the Separate Account ("Separate Account Contract
Value") or interest on the amounts you allocate to the Fixed Account ("Fixed
Account Contract Value"). The Contract Value also reflects all withdrawals made
and charges deducted. There is generally no guarantee that at the Maturity Date
the Contract Value will equal or exceed the total Purchase Payments made under
the Contract. The date the Contract and its benefits become effective is
referred to as the Contract Date. Each 12-month period following the Contract
Date is called a Contract Year.
Certain changes and elections must be made in writing to the Company. Where the
term "Written Request" is used, it means that you must send written information
to our Home Office in a form and content satisfactory to us.
This product is available to owners and Annuitants under the age of 85 as of the
Contract Date.
Purchase of this Contract through a tax qualified retirement plan or IRA does
not provide any additional tax deferral benefits beyond those provided by the
plan or the IRA. Accordingly, if you are purchasing this Contract through a plan
or IRA, you should consider purchasing this Contract for its Death Benefit,
Annuity Option Benefits, and other non-tax-related benefits. You should consult
with your financial adviser to determine if this Contract is appropriate for
you.
CONTRACT OWNER INQUIRIES
Any questions you have about your Contract should be directed to our Home Office
at 1-800-842-9406.
PURCHASE PAYMENTS
Your initial Purchase Payment is due and payable before the Contract becomes
effective. The initial Purchase Payment must be at least $20,000. You may make
additional payments of at least $5,000 at any time. No additional payments are
allowed if this Contract is purchased with a beneficiary-directed transfer of
death benefit proceeds. Under certain circumstances, we may waive the minimum
Purchase Payment requirement. Purchase Payments over $1,000,000 may be made only
with our prior consent.
We will apply the initial Purchase Payment less any applicable premium tax (net
Purchase Payment) within two business days after we receive it in good order at
our Home Office. We will credit subsequent Purchase Payments to a Contract on
the same business day we receive it, if it is received in good order by our Home
Office by 4:00 p.m. Eastern time. A business day is any day that the New York
Stock Exchange is open for
15
regular trading (except when trading is restricted due to an emergency as
defined by the Securities and Exchange Commission). Purchase Payments allocated
to the Fixed Account are not eligible for Purchase Payment Credits.
Where permitted by state law, we reserve the right to restrict Purchase Payments
into the Fixed Account whenever the credited interest rate on the Fixed Account
is equal to the minimum guaranteed interest rate specified under the Contract.
PURCHASE PAYMENT CREDITS
If, for an additional charge, you select the Optional Death Benefit, we will add
a credit to your Contract with each Purchase Payment. Each credit is added to
the Contract Value when the corresponding Purchase Payment is applied, and will
equal 2% of each Purchase Payment. These credits are applied pro rata to the
same Variable Funding Options to which your Purchase Payment was applied.
Purchase Payments allocated to the Fixed Account are not eligible for Purchase
Payment Credits.
You should know that over time and under certain circumstances (such as a period
of poor market performance) the costs associated with the Purchase Payment
Credits may more than offset the Purchase Payment Credits and related earnings.
You should consider this possibility before purchasing the Optional Death
Benefit.
CONSERVATION CREDIT
If you are purchasing this Contract with funds from another Contract issued by
us or our affiliates, you may receive a conservation credit to your Purchase
Payments. If applied, we will determine the amount of such credit.
ACCUMULATION UNITS
The period between the Contract Date and the Maturity Date is the Accumulation
Period. During the Accumulation Period, and Accumulation Unit is used to
calculate the value of a Contract. Each Variable Funding Option has a
corresponding Accumulation Unit value. The Accumulation Units are valued each
business day and their values may increase or decrease from day to day. The
number of Accumulation Units we will credit to your Contract once we receive a
Purchase Payment is determined by dividing the amount directed to each Variable
Funding Option by the value of its Accumulation Unit. We calculate the value of
an Accumulation Unit for each Variable Funding Option each day the New York
Stock Exchange is open. The values are calculated as of 4:00 p.m. Eastern time.
After the value is calculated, we credit your Contract. During the Annuity
Period (i.e., after the Maturity Date), you are credited with Annuity Units.
THE VARIABLE FUNDING OPTIONS
You choose the Variable Funding Options to which you allocate your Purchase
Payments. These Variable Funding Options are Subaccounts of the Separate
Account. The Subaccounts invest in the Underlying Funds. You are not investing
directly in the Underlying Fund. Each Underlying Fund is a portfolio of an
open-end management investment company that is registered with the SEC under the
Investment Company Act of 1940. These Underlying Funds are not publicly traded
and are offered only through variable annuity and variable life insurance
products. They are not the same retail mutual funds as those offered outside of
a variable annuity or variable life insurance product, although the investment
practices and fund names may be similar, and the portfolio managers may be
identical. Accordingly, the performance of the retail mutual fund is likely to
be different from that of the Underlying Fund, and Contract Owners should not
compare the two.
The Underlying Funds offered though this product are selected by the Company
based on several criteria, including asset class coverage, the strength of the
manager's reputation and tenure, brand recognition, performance, and the
capability and qualification of each sponsoring investment firm. Another factor
the Company considers during the initial selection process is whether the
Underlying Fund or an affiliate of the Underlying Fund will compensate the
Company for providing administrative, marketing, and support services that would
otherwise be provided by the Fund, the Fund's investment advisor, or its
distributor. Finally, when the Company develops a variable annuity product in
cooperation with a fund family or distributor (e.g. a "private label" product),
the Company will generally include Underlying Funds based on recommendations
made by the fund family or distributor, whose selection criteria may differ from
the Company's selection criteria.
16
Each Underlying Fund is reviewed periodically after having been selected. Upon
review, the Company may remove an Underlying Fund or restrict allocation of
additional Purchase Payments to an Underlying Fund if the Company determines the
Underlying Fund no longer meets one or more of the criteria and/or if the
Underlying Fund has not attracted significant contract owner assets.
In addition, if any of the Underlying Funds become unavailable for allocating
Purchase Payments, or if we believe that further investment in an Underlying
Fund is inappropriate for the purposes of the Contract, we may substitute
another funding option. However, we will not make any substitutions without
notifying you and obtaining any state and SEC approval, if necessary. From time
to time we may make new funding options available.
You will find detailed information about the Underlying Funds and their inherent
risks in the current prospectuses for the Underlying Funds. Since each option
has varying degrees of risk, please read the prospectuses carefully. There is no
assurance that any of the Underlying Funds will meet its investment objectives.
Contact your registered representative or call 1-800-842-9406 to request copies
of the prospectuses.
ADMINISTRATIVE, MARKETING AND SUPPORT SERVICE FEES. As described above, the
Company and TDLLC have arrangements with the investment adviser, subadviser,
distributor, and/or affiliated companies of most of the Underlying Funds under
which the Company and TDLLC receive payments in connection with our provision of
administrative, marketing or other support services to the Funds. Proceeds of
these payments may be used for any corporate purpose, including payment of
expenses that the Company and TDLLC incur in promoting, issuing, distributing
and administering the contracts. The Company and its affiliates may profit from
these fees.
The payments are generally based on a percentage of the average assets of each
Underlying Fund allocated to the Variable Funding Options under the Contract or
other contracts offered by the Company. The amount of the fee that an Underlying
Fund and its affiliates pay the Company and/or the Company's affiliates is
negotiated and varies with each Underlying Fund. Aggregate fees relating to the
different Underlying Funds may be as much as 0.60% of the average net assets of
an Underlying Fund attributable to the relevant contracts. A portion of these
payments may come from revenue derived from the Distribution and/or Service Fees
(12b-1 fees) that are paid by an Underlying Fund out its assets as part of its
Total Annual Operating Expenses.
The current Variable Funding Options are listed below, along with their
investment advisers and any subadviser:
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
Capital Appreciation Fund Seeks growth of capital. The Fund Travelers Asset Management
normally invests in equity securities International Company LLC ("TAMIC")
of issuers of any size and in any Subadviser: Janus Capital Corp.
industry.
High Yield Bond Trust Seeks high current income. The Fund Travelers Asset Management
normally invests in below International Company LLC ("TAMIC")
investment-grade bonds and debt
securities.
Managed Assets Trust Seeks high total return. The Fund Travelers Asset Management
normally invests in equities, International Company LLC ("TAMIC")
convertible and fixed-income Subadviser: Travelers Investment
securities. The Fund's policy is to Management Company ("TIMCO")
allocate investments among asset
classes.
Money Market Portfolio Seeks high current return with Travelers Asset Management
preservation of capital and liquidity. International Company LLC ("TAMIC")
The Fund normally invests in
high-quality short term money market
instruments.
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Premier Equity Fund -- Seeks to achieve long term growth of A I M Advisers, Inc.
Series I+ capital. Income is a secondary
objective. The Fund normally invests
in equity securities, including
convertible securities.
AMERICAN FUNDS INSURANCE SERIES
Global Growth Fund -- Class 2 Seeks capital appreciation. The Fund Capital Research and Management
Shares normally invests in common stocks of Co. ("CRM")
companies located around the world.
17
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
Growth Fund -- Class 2 Shares Seeks capital appreciation. The Fund Capital Research and Management Co.
normally invests in common stocks of
companies that appear to offer superior
opportunities for growth of capital.
Growth-Income Fund -- Class 2 Seeks capital appreciation and income. Capital Research and Management Co.
Shares The Fund normally invests in common
stocks or other securities that
demonstrate the potential for
appreciation and/or dividends.
CITISTREET FUNDS, INC.
CitiStreet Diversified Bond Fund Seeks maximum long term total return. CitiStreet Funds Management LLC
-- Class I The Fund normally invests in fixed ("CitiStreet")
income securities. Subadviser: Western
AssetManagement Company; Salomon
Brothers Asset Management
("SBAM"); and SSgA Funds
Management ("SSgA")
CitiStreet International Stock Seeks maximum long term total return. CitiStreet
Fund -- Class I The Fund normally invests in the common Subadviser: Bank of Ireland Asset
stocks of established non-U.S. Management (U.S.) Limited;
companies. Citigroup Asset Management
Limited, and SSgA
CitiStreet Large Company Stock Seeks maximum long term total return. CitiStreet
Fund -- Class I The Fund normally invests in the common Subadviser: Wellington Management
stocks of large, well established Company; Smith Barney Fund
companies. Management LLC, and SSgA
CitiStreet Small Company Stock Seeks maximum long term total return. CitiStreet
Fund -- Class I The Fund normally invests in the common Subadviser: TCW Investment
stocks of small companies. Management; SBAM; and SSgA
CREDIT SUISSE TRUST
Credit Suisse Trust Emerging Seeks long term growth of capital. The Credit Suisse Asset Management, LLC
Market Portfolio+ Fund normally invests in equity Subadviser: Credit Suisse Asset
securities of companies located in, or Management Limited
conducting a majority of their
business, in emerging markets.
DELAWARE VIP TRUST
Delaware VIP REIT Series -- Seeks to achieve maximum long term Delaware Management
Standard Class total return with capital appreciation Company("Delaware")
as a secondary objective. The Fund
normally invests in companies that
manage a portfolio of real estate to
earn profits for shareholders (REITS).
Delaware VIP Small Cap Value Seeks capital appreciation. The Fund Delaware Management Company
Series -- Standard Class normally invests in securities of small
capitalization companies.
DREYFUS VARIABLE INVESTMENT FUND
Dreyfus Variable Investment Fund Seeks long term capital growth The Dreyfus Corporation ("Dreyfus")
-- Appreciation Portfolio -- consistent with the preservation of Subadviser: Fayez Sarofim & Co.
Initial Shares capital. Current income is a secondary
objective. The Fund normally invests
in common stocks of established
companies.
Dreyfus Variable Investment Fund Seeks to maximize capital appreciation. The Dreyfus Corporation
-- Developing Leaders Portfolio The Fund normally invests in companies
-- Initial Shares with market capitalizations of less
than $2 billion at the time of purchase.
FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST
Mutual Shares Securities Fund -- Seeks capital appreciation. Income is a Franklin Mutual Advisers, LLC
Class 2 Shares secondary objective. The Fund normally
invests in equity securities of
companies believed to be undervalued.
18
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
Templeton Developing Markets Seeks long-term capital appreciation. Templeton Asset Management Ltd.
Securities Fund -- Class 2 Shares The Fund normally invests in the
investments of emerging market
countries, primarily equity securities.
Templeton Foreign Securities Seeks long-term capital growth. The Templeton Investment Counsel, LLC
Fund -- Class 2 Shares Fund normally invests in investments,
primarily equity securities, of issuers
located outside of the U.S., including
those in emerging markets.
Templeton Growth Securities Seeks long-term capital growth. The Templeton Global Advisors Limited
Fund -- Class 2 Shares Fund normally invests in equity
securities of companies located
anywhere in the world, including the
U.S. and emerging markets.
GREENWICH STREET SERIES FUND
Appreciation Portfolio Seeks long- term appreciation of Smith Barney Fund Management LLC
capital. The Fund normally invests in ("SBFM")
equity securities of U.S. companies.
Equity Index Portfolio -- Class II Seeks investment results that, before TIMCO
Shares expenses, correspond to the price and
yield performance of the S&P 500
Index. The Fund normally invests in
equity securities, or other
investments with similar economic
characteristics that are included in
the S&P 500 Index.
Fundamental Value Portfolio+ Seeks long-term capital growth. Current SBFM
income is a secondary consideration.
The Fund normally invests in common
stocks, and common stock equivalents of
companies, believed to be undervalued.
JANUS ASPEN SERIES
Balanced Portfolio -- Service Seeks long term capital growth, Janus Capital
Shares+ consistent with preservation of capital
and balanced by current income. The
Fund normally invests in common stocks
selected for their growth potential
and other securities selected for
their income potential.
Mid Cap Growth Portfolio -- Seeks capital growth. The Fund normally Janus Capital Management LLC
Service Shares invests in equity securities of ("Janus Capital")
mid-sized companies.
Worldwide Growth Portfolio -- Seeks growth of capital in a manner Janus Capital
Service Shares+ consistent with the preservation of
capital. The Fund normally invests in
the common stocks of companies of any
size throughout the world.
LAZARD RETIREMENT SERIES, INC.
Lazard Retirement Small Cap Seeks long-term capital appreciation. Lazard Asset Management, LLC
Portfolio The Fund normally invests in equity
securities, principally common stocks,
of relatively small U.S. companies that
are believed to be undervalued based on
their earnings, cash flow or asset
values.
LORD ABBETT SERIES FUND, INC.
Growth and Income Portfolio Seeks long-term growth of capital and Lord Abbett & Co.
income without excessive fluctuations
in market value. The Fund normally
invests in equity securities of large,
seasoned, U.S. and multinational
companies believed to be undervalued.
Mid-Cap Value Portfolio Seeks capital appreciation. The Fund Lord Abbett & Co.
normally invests in common stocks of
mid-sized companies believed to be
undervalued.
19
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Main Street Fund/VA -- Seeks high total return. The Fund OppenheimerFunds, Inc.
Service Shares normally invests in common stocks of
U.S. companies and it may invest in
debt securities, as well.
PIMCO VARIABLE INSURANCE TRUST
Total Return Portfolio -- Seeks maximum total return, consistent Pacific Investment Management
Administrative Class with preservation of capital and Company LLC
prudent investment management. The Fund
normally invests in intermediate
maturity fixed income securities.
PUTNAM VARIABLE TRUST
Putnam VT Discovery Growth Fund -- Seeks long-term growth of capital. The Putnam Investment Management
Class IB Shares+ Fund normally invests in the common
stocks of U.S. companies believed to be
fast-growing and whose earnings are
likely to increase over time.
Putnam VT International Equity Seeks capital appreciation. The Fund Putnam Investment Management
Fund -- Class IB Shares+ normally invests in common stocks of ("Putnam")
companies outside the U.S.
Putnam VT Small Cap Value Fund -- Seeks capital appreciation. The Fund Putnam Investment Management
Class IB Shares normally invests in the common stocks
of U.S. companies believed to be
undervalued in the market.
SALOMON BROTHERS VARIABLE SERIES
FUNDS INC.
All Cap Fund -- Class I Seeks capital appreciation. The Fund Salomon Brothers Asset Management
normally invests in common stocks and ("SBAM")
their equivalents of companies believed
to be undervalued in the marketplace.
Investors Fund -- Class I Seeks long term growth of capital. SBAM
Secondarily seeks current income. The
Fund normally invests in common stocks
of established companies.
Small Cap Growth Fund -- Class I Seeks long term growth of capital. The SBAM
Fund normally invests in equity
securities of companies with small
market capitalizations.
Total Return Fund -- Class I+ Seeks above average income (compared to SBAM
a portfolio invested entirely in equity
securities). Secondarily seeks growth
of capital and income. The Fund
normally invests in a broad range of
equity and fixed-income securities of
U.S. and foreign issuers.
SMITH BARNEY INVESTMENT SERIES
Smith Barney Large Cap Seeks capital appreciation. The Fund Smith Barney Fund Management LLC
Core Portfolio+ normally invests in the equity
securities of U.S. companies with large
market capitalizations.
Smith Barney Premier Selections Seeks long term capital growth. The Smith Barney Fund Management LLC
All Cap Growth Portfolio Fund consists of a Large Cap Growth
segment, Mid Cap Growth segment and
Small Cap Growth segment. All three
segments normally invest in equity
securities. The Large Cap Growth
segment invests in large sized
companies. The Mid Cap Growth segment
invests in medium sized companies. The
Small Cap Growth segment invests in
small sized companies.
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Multi Cap Value Fund II+ Seeks long term capital growth. Current Strong Capital Management Inc.
income is a secondary objective. The
Fund normally invests in the common
stocks of U.S. companies believed to be
undervalued relative to the market.
20
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
THE TRAVELERS SERIES TRUST
Convertible Securities Portfolio Seeks current income and capital Travelers Asset Management
appreciation. The Fund normally invests International Company LLC ("TAMIC")
in convertible securities.
Disciplined Mid Cap Stock Portfolio Seeks growth of capital. The Fund TAMIC
normally invests in the equity Subadviser: Travelers Investment
securities of companies with mid-size Management Company ("TIMCO")
market capitalizations.
Equity Income Portfolio Seeks reasonable income. The Fund TAMIC
normally invests in equity securities Subadviser: Fidelity Management &
with a focus on income producing Research Company ("FMR")
equities.
Federated Stock Portfolio+ Seeks growth of income and capital. The TAMIC
Fund normally invests in equity Subadviser: Federated Investment
securities that are selected on the Management Company
basis of traditional research
techniques.
Large Cap Portfolio Seeks long term growth of capital. The TAMIC
Fund normally invests in the Subadviser: FMR
securities of companies with large
market capitalizations.
Lazard International Stock Seeks capital appreciation. The Fund TAMIC
Portfolio normally invests in equity securities Subadviser: Lazard Asset Management
of non-U.S. domiciled companies located
in developed markets.
Merrill Lynch Large Cap Core Seeks long-term capital growth. The TAMIC
Portfolio Fund normally invests in a diversified Subadviser: Merrill Lynch
portfolio of equity securities of large Investment Managers, L.P. ("MLIM")
cap companies located in the United
States.
MFS Emerging Growth Portfolio Seeks long term growth of capital. The TAMIC
Fund normally invests in common stock Subadviser: Massachusetts Financial
and related securities of emerging Services ("MFS")
growth companies.
MFS Mid Cap Growth Portfolio Seeks long term growth of capital. The TAMIC
Fund normally invests in equity Subadviser: MFS
securities of companies with medium
market capitalization that are believed
to have above average growth potential.
MFS Value Portfolio Seeks capital appreciation and TAMIC
reasonable income. The Fund normally Subadviser: MFS
invests in income producing equity
securities of companies believed to be
undervalued in the market.
Pioneer Fund Portfolio Seeks reasonable income and capital TAMIC
growth. The Fund normally invests in Subadviser: Pioneer Investment
equity securities that are carefully Management Inc.
selected, reasonably
priced securities.
Social Awareness Stock Portfolio Seeks long term capital appreciation Smith Barney Fund Management LLC
and retention of net investment ("SBFM")
income. The Fund normally invests in
equity securities. The Fund seeks
companies that meet certain investment
criteria and social criteria.
Travelers Quality Bond Portfolio Seeks current income and total return TAMIC
with moderate capital volatility. The
Fund normally invests in
investment-grade bonds and debt
securities.
U.S. Government Securities Seeks current income, total return and TAMIC
Portfolio high credit quality. The Fund normally
invests in securities issued or
guaranteed by the U.S. Government, its
agencies or instrumentalities.
21
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
TRAVELERS SERIES FUND INC.
AIM Capital Appreciation Portfolio Seeks capital appreciation. The Fund Travelers Investment Adviser Inc.
normally invests in common stocks of ("TIA")
companies that are likely to benefit Subadviser: AIM Capital Management
from new products, services or Inc.
processes or have experienced
above-average earnings growth.
MFS Total Return Portfolio Seeks above average income consistent TIA
with the prudent employment of capital. Subadviser: MFS
Secondarily, seeks growth of capital
and income. The Fund normally invests
in a broad range of equity and
fixed-income securities of both U.S.
and foreign issuers.
Pioneer Strategic Income Portfolio Seeks high current income consistent TIA
with preservation of capital. The Fund Subadviser: Putnam Investment
normally invests in debt securities of Management, Inc.
U.S. and foreign governments and
corporations.
SB Adjustable Rate Income Seeks high current income and to limit Smith Barney Fund Management LLC
Portfolio Smith Barney Class the degree of fluctuation of its net
asset value resulting from movements
in interest rates. The Fund normally
invests in adjustable rate securities.
Smith Barney Aggressive Seeks long-term capital appreciation. SBFM
Growth Portfolio The Fund normally invests in common
stocks of companies that are
experiencing, or are expected to
experience, growth in earnings.
Smith Barney High Income Portfolio Seeks high current income. Secondarily, SBFM
seeks capital appreciation. The Fund
normally invests in high yield
corporate debt and preferred stock of
U.S. and foreign issuers.
Smith Barney International All Cap Seeks total return on assets from SBFM
Growth Portfolio+ growth of capital and income. The Fund
normally invests in equity securities
of foreign companies.
Smith Barney Large Capitalization Seeks long term growth of capital. The SBFM
Growth Portfolio Fund normally invests in equities, or
similar securities, of companies with
large market capitalizations.
Strategic Equity Portfolio Seeks capital appreciation. The Fund TIA
normally invests in the equity Subadviser: Fidelity Management &
securities, primarily in common stocks Research Company ("FMR")
of domestic issuers, and is not
constrained to any particular
investment style.
VAN KAMPEN LIFE INVESTMENT TRUST
Comstock Portfolio Class II Shares Seeks capital growth and income. The Van Kampen Asset Management Inc.
Fund normally invests in common and ("Van Kampen")
preferred stocks, and convertible
securities, of well established
undervalued companies.
Emerging Growth Portfolio Class II Seeks capital appreciation. The Fund Van Kampen Asset Management Inc.
Shares normally invests in common stocks of ("Van Kampen")
emerging growth companies.
Enterprise Portfolio Class II Seeks capital appreciation. The Fund Van Kampen Asset Management Inc.
Shares+ normally invests in common stocks of ("Van Kampen")
companies believed to have
above-average potential for capital
appreciation.
VARIABLE ANNUITY PORTFOLIOS
Smith Barney Small Cap Growth Seeks long term capital growth. The Citi Fund Management, Inc.
Opportunities Portfolio Fund normally invests in equity
securities of small cap companies and
related investments.
22
FUNDING INVESTMENT INVESTMENT
OPTION OBJECTIVE ADVISER/SUBADVISER
- --------------------------------------- ----------------------------------------- ------------------------------------
VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio -- Seeks high total return with reduced Fidelity Management & Research
Service Class 2 risk over the long-term. The Fund Company ("FMR")
normally invests by allocating assets
among stocks, bonds and short-term
instruments.
Contrafund(R) Portfolio -- Service Seeks long term capital appreciation. Fidelity Management & Research
Class 2 The Fund normally invests in common Company ("FMR")
stocks of companies whose value may not
be fully recognized by the public.
VARIABLE INSURANCE PRODUCTS FUND III
Dynamic Capital Appreciation Seeks capital appreciation. The Fund Fidelity Management & Research
Portfolio -- Service Class 2+ normally invests in growth and/or value Company ("FMR")
common stocks of domestic and foreign
issuers.
Mid Cap Portfolio -- Service Class 2 Seeks long term growth of capital. The Fidelity Management & Research
Fund normally invests in common stocks Company ("FMR")
of companies with medium market
capitalizations.
- --------------
+ Closed to new investors.
FIXED ACCOUNT
- --------------------------------------------------------------------------------
We may offer our Fixed Account as a funding option. Please see separate
prospectus for more information.
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
GENERAL
We deduct the charges described below. The charges are for the service and
benefits we provide, costs and expenses we incur, and risks we assume under the
Contracts. Services and benefits we provide include:
o the ability for you to make withdrawals and surrenders under the
Contracts
o the death benefit paid on the death of the Contract Owner, Annuitant,
or first of the joint owners
o the available funding options and related programs (including dollar
cost averaging, portfolio rebalancing, and systematic withdrawal
programs)
o administration of the annuity options available under the Contracts
o the distribution of various reports to Contract Owners
Costs and expenses we incur include:
o losses associated with various overhead and other expenses associated
with providing the services and benefits provided by the Contracts
o sales and marketing expenses including commission payments to your
sales agent
o other costs of doing business.
Risks we assume include:
o that Annuitants may live longer than estimated when the annuity
factors under the Contracts were established
o that the amount of the death benefit will be greater than the
Contract Value
o that the costs of providing the services and benefits under the
Contracts will exceed the charges deducted.
23
We may also deduct a charge for taxes.
Unless otherwise specified, charges are deducted proportionately from all
funding options in which you are invested.
We may reduce or eliminate the withdrawal charge and/or the mortality and
expense risk charge under the Contract when certain sales or administration of
the Contract result in savings or reduced expenses and/or risks. For certain
trusts, we may change the order in which Purchase Payments and earnings are
withdrawn in order to determine the withdrawal charge. We will not reduce or
eliminate the withdrawal charge where such reduction or elimination would be
unfairly discriminatory to any person.
The amount of a charge may not necessarily correspond to the costs associated
with providing the services or benefits indicated by the designated charge. For
example, the withdrawal charge we collect may not fully cover all of the sales
and distribution expenses we actually incur. The amount of any fee or charge is
not impacted by an outstanding loan. We may also profit on one or more of the
charges. We may use any such profits for any corporate purpose, including the
payment of sales expenses.
WITHDRAWAL CHARGE
We do not deduct a sales charge from Purchase Payments when they are made to the
Contract. However, a withdrawal charge will apply if Purchase Payments and any
applicable Purchase Payment Credits are withdrawn before they have been in the
Contract for five years. We will assess the charge as a percentage of the
Purchase Payment and any applicable Purchase Payment Credits withdrawn as
follows:
YEARS SINCE PURCHASE WITHDRAWAL
PAYMENT MADE CHARGE
--------------------------------------------- ----------------------
GREATER THAN OR EQUAL TO BUT LESS THAN
0 years 1 year 5%
1 year 2 years 4%
2 years 3 years 3%
3 years 4 years 2%
4 years 5 years 1%
5+ years 0%
For purposes of the withdrawal charge calculation, withdrawals are deemed to be
taken first from:
(a) any Purchase Payment and any applicable Purchase Payment Credits to
which no withdrawal charge applies then;
(b) any remaining free withdrawal allowance (as described below) (after
being reduced by (a), then;
(c) any remaining Purchase Payment and any applicable Purchase Payment
Credits to which a withdrawal charge applies (on a first-in,
first-out basis), then;
(d) any Contract earnings.
Unless you instruct us otherwise, we will deduct the withdrawal charge from the
amount requested.
IF YOU DID NOT PURCHASE YOUR CONTRACT UNDER A 457 OR 403(B) QUALIFIED PLAN, WE
WILL NOT DEDUCT A WITHDRAWAL CHARGE:
o from payments we make due to the death of the Annuitant
o if a life annuity payout has begun, other than the Liquidity Benefit
Option (See "Liquidity Benefit")
o if an income option of at least ten years' duration is elected
o from amounts withdrawn which are deposited to other contracts issued
by us or our affiliate, subject to our approval
o if withdrawals are taken under our Managed Distribution Program, if
elected by you (see Access to Your Money) or
o if you are confined to an eligible nursing home, as described in
Appendix C
24
IF YOU PURCHASED YOUR CONTRACT UNDER A 457 OR 403(b) QUALIFIED PLAN, WE WILL NOT
DEDUCT A WITHDRAWAL CHARGE:
o from payments we make due to the death of the Annuitant
o if a life annuity payout has begun
o if payments for a period of at least five years have begun
o from amounts withdrawn which are deposited to other contracts issued
by us or our affiliate, subject to our approval
o if withdrawals are taken as a minimum distribution, as defined under
The Code
o if withdrawals are taken due to a hardship, as defined under The Code
o if withdrawals are taken due to a disability, as defined under The
Code, of the Annuitant;
o if you are confined to an eligible nursing home, as described in
Appendix C (403 (b) PLANS ONLY).
FREE WITHDRAWAL ALLOWANCE
Beginning in the second Contract Year, you may withdraw up to 20% of the
Contract Value annually. We calculate the available withdrawal amount as of the
end of the previous Contract Year. The free withdrawal provision applies to all
withdrawals except those transferred directly to annuity contracts issued by
other financial institutions. We reserve the right to modify the free withdrawal
provision.
TRANSFER CHARGE
We reserve the right to assess a transfer charge of up to $10.00 on transfers
exceeding 12 per year. We will notify you in writing at your last known address
at least 31 days before we impose any such transfer charge.
MORTALITY AND EXPENSE RISK CHARGE
Each business day, we deduct a mortality and expense risk ("M&E") charge from
amounts we hold in the Variable Funding Options. We reflect the deduction in our
calculation of accumulation and Annuity Unit values. The charges stated are the
maximum for this product. We reserve the right to lower this charge at any time.
If you choose the Standard Death Benefit, the M&E charge is 0.80% annually. If
you choose the Optional Death Benefit, the M&E charge is 1.25% annually. This
charge compensates the Company for risks assumed, benefits provided and expenses
incurred, including the payment of commissions to your sales agent.
VARIABLE FUNDING OPTION EXPENSES
We summarized the charges and expenses of the Underlying Funds in the fee table.
Please review the prospectus for each Underlying Fund for a more complete
description of that fund and its expenses. Underlying Fund expenses are not
fixed or guaranteed and are subject to change by the Fund.
FLOOR BENEFIT/LIQUIDITY BENEFIT CHARGES
If you select the Variable Annuitization Floor Benefit, we deduct a charge upon
election of this benefit. This charge compensates us for guaranteeing a minimum
variable Annuity Payment regardless of the performance of the Variable Funding
Options you selected. This charge will vary based upon market conditions, but
will never increase your annual Separate Account charge by more than 3%. The
charge will be set at the time of election, and will remain level throughout the
term of annuitization. If the Liquidity Benefit is selected, there is a
surrender charge of 5% of the amounts withdrawn. Please refer to Payment Options
for a description of these benefits.
CHART ASSET ALLOCATION PROGRAM CHARGES
Under the CHART Program, Purchase Payments and cash values are allocated among
the specified asset allocation funds. The charge for this advisory service is
equal to a maximum of 0.80% of the assets subject to the CHART Program. The
CHART Program fee will be paid by quarterly withdrawals from the cash values
allocated
25
to the asset allocation funds. We will not treat these withdrawals as taxable
distributions. Please refer to Miscellaneous Contract Provisions for further
information.
PREMIUM TAX
Certain state and local governments charge premium taxes ranging from 0% to 5%,
depending upon jurisdiction. We are responsible for paying these taxes and will
determine the method used to recover premium tax expenses incurred. We will
deduct any applicable premium taxes from your Contract Value either upon death,
surrender, annuitization, or at the time you make Purchase Payments to the
Contract, but no earlier than when we have a tax liability under state law.
CHANGES IN TAXES BASED UPON PREMIUM OR VALUE
If there is any change in a law assessing taxes against the Company based upon
premiums, Contract gains or value of the Contract, we reserve the right to
charge you proportionately for this tax.
TRANSFERS
- --------------------------------------------------------------------------------
Subject to the limitations described below, you may transfer all or part of your
Contract Value between Variable Funding Options at any time up to 30 days before
the Maturity Date. After the Maturity Date, you may make transfers only if
allowed by your Contract or with our consent. Transfer requests received at our
Home Office that are in good order before the close of the New York Stock
Exchange (NYSE) will be processed according to the value(s) next computed
following the close of business. Transfer requests received on a non-business
day or after the close of the NYSE will be processed based on the value(s) next
computed on the next business day.
Where permitted by state law, we reserve the right to restrict transfers from
the Variable Funding Options to the Fixed Account whenever the credited interest
rate on the Fixed Account is equal to the minimum guaranteed interest rate
specified under the Contract.
Currently, there are no charges for transfers; however, we reserve the right to
charge a fee for any transfer request which exceeds twelve per year. Since each
Underlying Fund may have different overall expenses, a transfer of Contract
Values from one Variable Funding Option to another could result in your
investment becoming subject to higher or lower expenses. Also, when making
transfers, you should consider the inherent risks associated with the Variable
Funding Options to which your Contract Value is allocated.
MARKET TIMING/EXCESSIVE TRADING
THE CONTRACT IS INTENDED FOR USE AS A LONG-TERM INVESTMENT VEHICLE AND IS NOT
DESIGNED TO SERVE AS A VEHICLE FOR EXCESSIVE TRADING OR MARKET TIMING IN AN
ATTEMPT TO TAKE ADVANTAGE OF SHORT-TERM FLUCTUATIONS IN THE STOCK MARKET. If, in
our sole discretion, we determine you are engaging in excessive trading
activity, trading activity that we believe is indicative of market timing, or
any similar trading activity which will potentially hurt the rights or interests
of other Contract Owners, we will exercise our contractual right to restrict
your number of transfers to one every six months. We will notify you in writing
if we choose to exercise our contractual right to restrict your transfers.
In determining whether we believe you are engaged in excessive trading or market
timing activity, we will consider, among other things, the following factors:
o the dollar amount you request to transfer;
o the number of transfers you made within the previous three
months;
o whether your transfers follow a pattern designed to take
advantage of short term market fluctuations; and
o whether your transfers are part of a group of transfers made
by a third party on behalf of several individual Contract
Owners.
26
Transfers made under a Dollar Cost Averaging Program, a rebalancing program, or,
if applicable, any asset allocation program described in this prospectus are not
treated as a transfer when we evaluate trading patterns for market timing or
excessive trading.
We also reserve the right to restrict the right to request transfers by any
market timing firm or any other third party who has been authorized to initiate
transfers on behalf of multiple Contract Owners. We may, among other things:
o reject the transfer instructions of any agent acting under a
power of attorney on behalf of more than one owner, or
o reject the transfer or exchange instructions of individual
owners who have executed pre-authorized transfer forms which
are submitted by market timing firms or other third parties
on behalf of more than one owner.
We will notify you in writing before we restrict your right to request transfers
through such market timing firm or other third party.
The policy of the Company is to seek to apply its anti-market timing and
excessive trading procedures uniformly.
FUTURE MODIFICATIONS. We will continue to monitor the transfer activity
occurring among the Variable Funding Options, and may modify these transfer
restrictions at any time if we deem it necessary to protect the interest of all
Contract Owners. These modifications may include curtailing or eliminating,
without notice, the ability to use the Internet, facsimile or telephone in
making transfers.
ACCESS TO YOUR MONEY
- --------------------------------------------------------------------------------
Any time before the Maturity Date, you may redeem all or any portion of the Cash
Surrender Value, that is, the Contract Value less any withdrawal charge and any
premium tax not previously deducted. Unless you submit a Written Request
specifying the fixed or Variable Funding Option(s) from which we are to withdraw
amounts, we will make the withdrawal on a pro rata basis. We will determine the
Cash Surrender Value as of the close of business after we receive your surrender
request at our Home Office. The Cash Surrender Value may be more or less than
the Purchase Payments you made. You may not make withdrawals during the annuity
period.
For amounts allocated to the Variable Funding Options, we may defer payment of
any Cash Surrender Value for a period of up to five business days after the
Written Request is received. For amounts allocated to the Fixed Account, we may
defer payment of any Cash Surrender Value for a period up to six months. In
either case, it is our intent to pay as soon as possible. We cannot process
requests for withdrawals that are not in good order. We will contact you if
there is a deficiency causing a delay and will advise what is needed to act upon
the withdrawal request.
SYSTEMATIC WITHDRAWALS
Before the Maturity Date, you may choose to withdraw a specified dollar amount
(at least $100) on a monthly, quarterly, semiannual or annual basis. We will
deduct any applicable premium taxes and withdrawal charge. To elect systematic
withdrawals, you must have a Contract Value of at least $15,000 and you must
make the election on the form we provide. We will surrender Accumulation Units
pro rata from all funding options in which you have an interest, unless you
instruct us otherwise. You may begin or discontinue systematic withdrawals at
any time by notifying us in writing, but you must give at least 30 days notice
to change any systematic withdrawal instructions that are currently in place.
We reserve the right to discontinue offering systematic withdrawals or to assess
a processing fee for this service upon 30 days written notice to Contract Owners
(where allowed by state law).
Each systematic withdrawal is subject to federal income taxes on the taxable
portion. In addition, a 10% federal penalty tax may be assessed on systematic
withdrawals if the Contract Owner is under age 59 1/2. You should consult with
your tax adviser regarding the tax consequences of systematic withdrawals.
MANAGED DISTRIBUTION PROGRAM. Under the systematic withdrawal option, you may
choose to participate in the Managed Distribution Program. At no cost to you,
you may instruct us to calculate and make minimum
27
distributions that may be required by the IRS upon reaching age 70 1/2. (See
Federal Tax Considerations") These payments will not be subject to the
withdrawal charge and will be in lieu of the free withdrawal allowance. No
Dollar Cost Averaging will be permitted if you are participating in the Managed
Distribution Program.
OWNERSHIP PROVISIONS
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TYPES OF OWNERSHIP
CONTRACT OWNER
The Contract belongs to the Contract Owner named in the Contract (on the
Contract Specifications page). The Annuitant is the individual upon whose life
the Maturity Date and the amount of monthly payments depend. Because this is a
Qualified Contract, the owner and the Annuitant must always be the same person,
and there can be only one Contract Owner. You have sole power to exercise any
rights and to receive all benefits given in the Contract provided you have not
named an irrevocable beneficiary.
If this Contract is purchased by a beneficiary of another contract who directly
transferred the death proceeds due under that contract, he/she will be granted
the same rights the owner has under the Contract except that he/she cannot take
a loan or make additional Purchase Payments.
BENEFICIARY
You name the beneficiary in a Written Request. The beneficiary has the right to
receive any death benefit proceeds remaining under the Contract upon the death
of the Contract Owner. If more than one beneficiary survives the Annuitant or
Contract Owner, they will share equally in benefits unless you recorded
different shares with the Company by Written Request before the death of the
Contract Owner. In the case of a non-spousal beneficiary or a spousal
beneficiary who has not chosen to assume the Contract, we will not transfer or
otherwise remove the death benefit proceeds from either the Variable Funding
Options or the Fixed Account, as most recently elected by the Contract Owner,
until the Death Report Date.
Unless you have named an irrevocable beneficiary you have the right to change
any beneficiary by Written Request during the lifetime of the Annuitant and
while the Contract continues.
DEATH BENEFIT
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Before the Maturity Date, generally, a death benefit is payable when you die. At
purchase, you elect either the standard death benefit or the optional death
benefit. We calculate the death benefit at the close of the business day on
which our Home Office receives (1) Due Proof of Death and (2) written payment
instructions or election of beneficiary contract continuance ("Death Report
Date").
DEATH PROCEEDS BEFORE THE MATURITY DATE
STANDARD DEATH BENEFIT
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ANNUITANT'S AGE ON THE CONTRACT DATE DEATH BENEFIT PAYABLE
- -------------------------------------------------------------------------------------------------------------------------------
Before Age 80 Greater of:
1) Contract Value on the Death Report Date, or
2) Total Purchase Payments less the total of any withdrawals (and
related charges).
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On or after Age 80 Contract Value
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OPTIONAL DEATH BENEFIT AND CREDIT
The Optional Death Benefit and Credit varies depending on the Annuitant's age on
the Contract Date.
- -------------------------------------------------------------------------------------------------------------------------------
ANNUITANT'S AGE ON THE CONTRACT DATE DEATH BENEFIT PAYABLE
- -------------------------------------------------------------------------------------------------------------------------------
Under Age 70 Greater of:
1) Contract Value on the Death Report Date, or
2) Total Purchase Payments less the total of any withdrawals
(and related charges); or
3) Maximum Step-Up death benefit value (described below)
associated with Contract Date anniversaries beginning with
the 5th, and ending with the last before the Annuitant's
76th birthday.
- -------------------------------------------------------------------------------------------------------------------------------
Age 70-75 Greater of:
1) Contract Value, or
2) Total Purchase Payments less the total of any withdrawals
(and related charges); or
3) Step-Up death benefit value (described below) associated
with the 5th Contract Date anniversary.
- -------------------------------------------------------------------------------------------------------------------------------
Age 76-80 Greater of (1) or (2) above.
- -------------------------------------------------------------------------------------------------------------------------------
Age over 80 Contract Value
- -------------------------------------------------------------------------------------------------------------------------------
STEP-UP DEATH BENEFIT VALUE
We will establish a separate Step-Up death benefit value on the fifth Contract
Date anniversary and on each subsequent Contract Date anniversary on or before
the Death Report Date. The Step-Up death benefit value will initially equal the
Contract Value on that anniversary. After a Step-Up death benefit value has been
established, we will recalculate it each time a Purchase Payment is made or a
withdrawal is taken until the Death Report Date. We will recalculate Step-Up
death benefit values by increasing them by the amount of each applicable
Purchase Payment and by reducing them by a partial surrender reduction (as
described below) for each applicable withdrawal. Recalculations of Step-Up death
benefit values related to any Purchase Payments or any withdrawals will be made
in the order that such Purchase Payments or partial surrender reductions occur.
PARTIAL SURRENDER REDUCTION. If you make a withdrawal, we will reduce the
Step-Up value by a partial surrender reduction which equals: (1) the step-up
value immediately prior to the withdrawal, multiplied by (2) the amount of the
withdrawal, divided by (3) the Contract Value before the withdrawal.
For example, assume your current Contract Value is $55,000. If your step-up
value immediately prior to the withdrawal is $50,000, and you decide to make a
withdrawal of $10,000, we would reduce the step-up value as follows:
50,000 x (10,000/55,000) = 9,090
Your new step-up value would be 50,000-9,090, or $40,910.
The following example shows what would happen in a declining market. Assume your
current Contract Value is $30,000. If your step-up value immediately prior to
the withdrawal is $50,000, and you decide to make a withdrawal of $10,000, we
would reduce the step-up value as follows:
50,000 x (10,000/30,000) = 16,666
Your new step-up value would be 50,000-16,666, or $33,334.
PAYMENT OF PROCEEDS
We describe the process of paying death benefit proceeds before the Maturity
Date in the chart below. The chart does not encompass every situation and is
merely intended as a general guide. More detailed information is provided in
your Contract. Generally, the person(s) receiving the benefit may request that
the proceeds be paid in a lump sum, or be applied to one of the settlement
options available under the Contract.
29
- ---------------------------------------------------------------------------------------------------------------------------
MANDATORY
BEFORE THE MATURITY DATE, THE COMPANY WILL PAYOUT RULES
UPON THE DEATH OF THE PAY THE PROCEEDS TO: APPLY*
- ---------------------------------------------------------------------------------------------------------------------------
OWNER/ANNUITANT The beneficiary (ies), or if none, to Yes
the CONTRACT OWNER's estate.
- ---------------------------------------------------------------------------------------------------------------------------
BENEFICIARY No death proceeds are payable; N/A
Contract continues.
- ---------------------------------------------------------------------------------------------------------------------------
CONTINGENT BENEFICIARY No death proceeds are payable; N/A
Contract continues.
- ---------------------------------------------------------------------------------------------------------------------------
- --------------
* Certain payout rules of the Internal Revenue Code (IRC) are triggered upon
the death of the Owner. Non-spousal beneficiaries (as well as spousal
beneficiaries who choose not to assume the Contract) must begin taking
distributions based on the beneficiary's life expectancy within one year of
death or take a complete distribution of Contract proceeds within 5 years of
death. If mandatory distributions have begun, the 5 year payout option is
not available.
BENEFICIARY CONTRACT CONTINUANCE (NOT PERMITTED FOR NON-NATURAL BENEFICIARIES)
If you die before the Maturity Date, and if the value of any beneficiary's
portion of the death benefit is between $20,000 and $1,000,000 as of the Death
Report Date, (more than $1,000,000 is subject to Home Office approval), your
beneficiary(s) may elect to continue his/her portion of the Contract subject to
applicable Internal Revenue Code distribution requirements, rather than receive
the death benefit in a lump sum. If the beneficiary chooses to continue the
Contract, the beneficiary can extend the payout phase of the Contract enabling
the beneficiary to "stretch" the death benefit distributions out over his life
expectancy as permitted by the Internal Revenue Code.
If your beneficiary elects to continue the Contract, the death benefit will be
calculated as of the Death Report Date. The initial Contract Value of the
continued Contract (the "adjusted Contract Value") will equal the greater of the
Contract Value or the death benefit calculated on the Death Report Date and will
be allocated to the funding options in the same proportion as prior to the Death
Report Date. If the adjusted Contract Value is allocated to the Variable Funding
Options, the beneficiary bears the investment risk.
The beneficiary who continues the Contract will be granted the same rights as
the owner under the original Contract, except the beneficiary cannot:
o take a loan
o make additional Purchase Payments
The beneficiary may also name his/her own beneficiary ("succeeding beneficiary")
and has the right to take withdrawals at any time after the Death Report Date
without a withdrawal charge. All other fees and charges applicable to the
original Contract will also apply to the continued Contract. All benefits and
features of the continued Contract will be based on the beneficiary's age on the
Death Report Date as if the beneficiary had purchased the Contract with the
adjusted Contract Value on the Death Report Date.
PLANNED DEATH BENEFIT (INDIVIDUAL CONTRACTS ONLY)
You may request that rather than receive a lump-sum death benefit, the
beneficiary(ies) receive all or a portion of the death benefit proceeds either:
o through an annuity for life or a period that does not exceed the
beneficiary's life expectancy or
o under the terms of the Beneficiary Continuance provision described
above. If the Beneficiary Continuance provision is selected as a
planned death benefit, no surrenders will be allowed other than
payments meant to satisfy minimum distribution amounts or systematic
withdrawal amounts, if greater.
You must make the planned death benefit request as well as any revocation of
this request in writing. Upon your death, your beneficiary(s) cannot revoke or
modify this request. If the death benefit at the time we receive Due Proof of
Death is less than $2,000, we will only pay a lump sum to the beneficiary. If
periodic payments due
30
under the planned death benefit election are less than $100, we reserve the
right to make Annuity Payments at less frequent intervals, resulting in a
payment of at least $100 per year. If no beneficiary is alive when death
benefits become payable, we will pay the death benefit as provided in your
Contract.
DEATH PROCEEDS AFTER THE MATURITY DATE
If any Contract Owner or the Annuitant dies on or after the Maturity Date, the
Company will pay the beneficiary a death benefit consisting of any benefit
remaining under the annuity or income option then in effect.
THE ANNUITY PERIOD
- --------------------------------------------------------------------------------
MATURITY DATE
Under the Contract, you can receive regular payments ("Annuity Payments"). You
can choose the month and the year in which those payments begin ("Maturity
Date"). You can also choose among income payouts (annuity options) or elect a
lump sum distribution. While the Annuitant is alive, you can change your
selection any time up to the Maturity Date. Annuity Payments will begin on the
Maturity Date stated in the Contract unless (1) you fully surrendered the
Contract; (2) we paid the proceeds to the beneficiary before that date; or (3)
you elected another date. Annuity Payments are a series of periodic payments (a)
for life; (b) for life with either a minimum number of payments or a specific
amount assured; or (c) for the joint lifetime of the Annuitant and another
person, and thereafter during the lifetime of the survivor. We may require proof
that the Annuitant is alive before we make Annuity Payments. Not all options may
be available in all states.
You may choose to annuitize at any time after you purchase your Contract. Unless
you elect otherwise, the Maturity Date will be the Annuitant's 90th birthday or
ten years after the effective date of the Contract, if later.
At least 30 days before the original Maturity Date, you may elect to extend the
Maturity Date to any time prior to the Annuitant's 90th birthday or to a later
date with our consent. You may use certain annuity options taken at the Maturity
Date to meet the minimum required distribution requirements of federal tax law,
or you may use a program of withdrawals instead. These mandatory distribution
requirements take effect generally upon the death of the Contract Owner, or with
certain Qualified Contracts upon either the later of the Contract Owner's
attainment of age 70 1/2 or year of retirement; or the death of the Contract
Owner. You should seek independent tax advice regarding the election of minimum
required distributions.
LIQUIDITY BENEFIT (BENEFIT NOT AVAILABLE UNDER 457 PLANS)
If you select any annuity option that guarantees you payments for a minimum
period of time ("period certain"), you may take a lump sum payment (equal to a
portion or all of the value of the remaining payments) any time after the first
Contract Year. There is a charge of 5% of the amount withdrawn under this
option.
For variable Annuity Payments, we use the Assumed Net Investment Factor,
("ANIF") as the interest rate to determine the lump sum amount. If you request
only a percentage of the amount available, we will reduce the amount of each
payment during the rest of the period certain by that percentage. After the
period expires, your payments will increase to the level they would have been
had no liquidation taken place.
For fixed Annuity Payments, we calculate the present value of the remaining
period certain payments using a current interest rate. The current interest rate
used depends on the amount of time left in the annuity option you elected. The
current rate will be the same rate we would give someone electing an annuity
option for that same amount of time. If you request a percentage of the amount
available during the period certain, we will reduce the amount of each payment
during the rest of the period certain by that percentage. After the period
certain expires, your payments will increase to the level they would have been
had no liquidation taken place.
31
The market value adjustment formula for calculating the present value described
above for fixed Annuity Payments is as follows:
n t/365
Present Value = [sigma] [Payments X (1/1 + iC)
s = 1
Where
iC = the interest rate described above
n = the number of payments remaining in the Contract Owner's period
certain at the time of request for this benefit
t = the number of days remaining until that payment is made, adjusting
for leap years.
See Appendix E for examples of this market value adjustment.
ALLOCATION OF ANNUITY
You may elect to receive your Annuity Payments in the form of a variable
annuity, a fixed annuity, or a combination of both. If, at the time Annuity
Payments begin, you have not made an election, we will apply your Contract Value
to provide an annuity funded by the same funding options as you have selected
during the accumulation period. At least 30 days before the Maturity Date, you
may transfer the Contract Value among the funding options in order to change the
basis on which we will determine Annuity Payments. (See Transfers.)
ANNUITIZATION CREDIT. This credit is applied to the Contract Value used to
purchase one of the annuity options described below. The credit equals 0.5% of
your Contract Value if you annuitize during Contract Years 2-5, 1% during
Contract Years 6-10, and 2% after Contract Year 10. There is no credit applied
to Contracts held less than 1 year.
VARIABLE ANNUITY
You may choose an annuity payout that fluctuates depending on the investment
experience of the Variable Funding Options. We determine the number of Annuity
Units credited to the Contract by dividing the first monthly Annuity Payment
attributable to each Variable Funding Option by the corresponding Accumulation
Unit value as of 14 days before the date Annuity Payments begin. We use an
Annuity Unit to measure the dollar value of an Annuity Payment. The number of
Annuity Units (but not their value) remains fixed during the annuity period.
DETERMINATION OF FIRST ANNUITY PAYMENT. Your Contract contains the tables we use
to determine your first monthly Annuity Payment. If you elect a variable
annuity, the amount we apply to it will be the Contract Value as of 14 days
before the date Annuity Payments begin, less any applicable premium taxes not
previously deducted.
The amount of your first monthly payment depends on the annuity option you
elected and the Annuitant's adjusted age. Your Contract contains the formula for
determining the adjusted age. We determine the total first monthly Annuity
Payment by multiplying the benefit per $1,000 of value shown in the Contract
tables by the number of thousands of dollars of Contract Value you apply to that
annuity option. The Contract tables factor in an assumed daily net investment
factor. We call this your net investment rate. For example, a net investment
rate of 3% corresponds to an annual interest rate of 3%. This means that if the
annualized investment performance, after expenses, of your Variable Funding
Options is less than 3%, then the dollar amount of your variable Annuity
Payments will decrease. However, if the annualized investment performance, after
expenses, of your Variable Funding Options is greater than 3%, then the dollar
amount of your variable Annuity Payments will increase.
DETERMINATION OF SECOND AND SUBSEQUENT ANNUITY PAYMENTS. The dollar amount of
all subsequent Annuity Payments changes from month to month based on the
investment experience, as described above, of the applicable funding options.
The total amount of each Annuity Payment will equal the sum of the basic
payments in each
32
funding option. We determine the actual amounts of these payments by multiplying
the number of Annuity Units we credited to each funding option by the
corresponding Annuity Unit value as of the date 14 days before the date the
payment is due.
FIXED ANNUITY
You may choose a fixed annuity that provides payments that do not vary during
the annuity period. We will calculate the dollar amount of the first fixed
Annuity Payment as described under Variable Annuity, except that the amount we
apply to begin the annuity will be your Contract Value as of the date Annuity
Payments begin. Payout rates will not be lower than that shown in the Contract.
If it would produce a larger payment, the first fixed Annuity Payment will be
determined using the Life Annuity Tables in effect on the Maturity Date.
If you have elected the Increasing Benefit Option, the payments will be
calculated as above. However, the initial payment will be less than that
reflected in the table and the subsequent payments will be increased by the
percentage you elected.
PAYMENT OPTIONS
- --------------------------------------------------------------------------------
ELECTION OF OPTIONS
While the Annuitant is alive, you can change your annuity option selection any
time up to the Maturity Date. Once Annuity Payments have begun, no further
elections are allowed.
During the Annuitant's lifetime, if you do not elect otherwise before the
Maturity Date, we will pay you (or another designated payee) the first of a
series of monthly Annuity Payments based on the life of the Annuitant, in
accordance with Annuity Option 2 (Life Annuity with 120 monthly payments
assured). For certain Qualified Contracts, Annuity Option 4 (Joint and Last
Survivor Life Annuity -- Annuity Reduced on Death of Primary Payee) will be the
automatic option as described in the Contract.
The minimum amount that can be placed under an annuity option will be $2,000
unless we agree to a lesser amount. If any monthly periodic payment due is less
than $100, the Company reserves the right to make payments at less frequent
intervals, or to pay the Contract Value in a lump-sum.
On the Maturity Date, we will pay the amount due under the Contract in
accordance with the Payment Option that you select. You may choose to receive a
single lump-sum payment. You must elect an option in writing, in a form
satisfactory to the Company. Any election made during the lifetime of the
Annuitant must be made by the Contract Owner.
VARIABLE ANNUITIZATION FLOOR BENEFIT (BENEFIT NOT AVAILABLE UNDER 457 PLANS).
This benefit may not be available, or may only be available under certain
annuity options, if we determine market conditions so dictate. If available, we
will guarantee that, regardless of the performance of the Variable Funding
Options selected by you, your Annuity Payments will never be less than a certain
percentage of your first Annuity Payment. This percentage will vary depending on
market conditions, but will never be less than 50%. You may not elect this
benefit if you are over age 80. Additionally, you must select from certain funds
available under this guarantee. Currently, these funds are the Equity Index
Portfolio Class II, the Travelers Quality Bond Portfolio, and the U.S.
Government Securities Portfolio. We may, at our discretion, increase or decrease
the number of funds available under this benefit. This benefit is not currently
available under Annuity Option 5. The benefit is not available with the 5% ANIF
under any Option. If you select this benefit, you may not elect to liquidate any
portion of your Contract.
There is a charge for this guarantee, which will begin upon election of this
benefit. This charge will vary based upon market conditions, and will be
established at the time the benefit is elected. Once established, the charge
will remain level throughout the remainder of the annuitization, and will never
increase your annual Separate Account charge by more than 3% per year.
We reserve the right to restrict the amount of Contract Value to be annuitized
under this benefit.
33
ANNUITY OPTIONS
Subject to the conditions described in "Election of Options" above, we may pay
all or any part of the Cash Surrender Value under one or more of the following
annuity options. Payments under the annuity options are generally made on a
monthly basis. We may offer additional options.
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 -- 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 4 -- Joint and Last Survivor Life Annuity -- Annuity Reduced on Death of
Primary Payee. The Company will make Annuity Payments during the lifetimes of
the Annuitant and a second person. You will designate one as primary payee, and
the other will be designated as secondary payee. On the death of the secondary
payee, the Company will continue to make monthly Annuity Payments to the primary
payee in the same amount that would have been payable during the joint lifetime
of the two persons. On the death of the primary payee, the Company will continue
to make Annuity Payments to the secondary payee in an amount equal to 50% of the
payments, which would have been made during the lifetime of the primary payee.
No further payments will be made once both payees have died.
Option 5 -- Payments for a Fixed Period without Life Contingency. We will make
periodic payments for the period selected.
Option 6 -- Other Annuity Options. We will make any other arrangements for
Annuity Payments as may be mutually agreed upon.
MISCELLANEOUS CONTRACT PROVISIONS
- --------------------------------------------------------------------------------
RIGHT TO RETURN
You may return the Contract for a full refund of the Contract Value plus any
Contract charges and premium taxes you paid (but not any fees and charges the
Underlying Fund assessed) within ten days after you receive it (the "right to
return period"). You bear the investment risk of investing in the Variable
Funding Options during the right to return period; therefore, the Contract Value
we return may be greater or less than your Purchase Payment.
If you purchase the Contract as an Individual Retirement Annuity, and return it
within the first seven days after delivery, or longer if your state permits, we
will refund your Purchase Payment in full; during the remainder of the right to
return period, we will refund the Contract Value (including charges).
We will determine the Contract Value following the close of the business day on
which we receive your Contract and a Written Request for a refund. Where state
law requires a different period, or the return of Purchase Payments or other
variations of this provision, we will comply. Refer to your Contract for any
state-specific information.
TERMINATION
You do not need to make any Purchase Payments after the first to keep the
Contract in effect. However, we reserve the right to terminate the Contract on
any business day if your Contract Value as of that date is less than $2,000 and
you have not made Purchase Payments for at least two years, unless otherwise
specified by state law. Termination will not occur until 31 days after we have
mailed notice of termination to your last known address
34
and to any assignee of record. If we terminate the Contract, we will pay you the
Cash Surrender Value less any applicable taxes.
REQUIRED REPORTS
As often as required by law, but at least once in each Contract Year before the
due date of the first Annuity Payment, we will furnish a report showing the
number of Accumulation Units credited to the Contract and the corresponding
Accumulation Unit value(s) as of the report date for each funding option to
which the Contract Owner has allocated amounts during the applicable period. The
Company will keep all records required under federal and state laws.
SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the date of any payment or
determination of values on any business day (1) when the New York Stock Exchange
("the Exchange") is closed; (2) when trading on the Exchange is restricted; (3)
when an emergency exists, as determined by the SEC, so that the sale of
securities held in the Separate Account may not reasonably occur, or so that the
Company may not reasonably determine the value the Separate Account's net
assets; or (4) during any other period when the SEC, by order, so permits for
the protection of security holders. Payments from the Fixed Account may be
delayed up to 6 months.
THE SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
The Travelers Insurance Company and The Travelers Life and Annuity Company each
sponsor Separate Accounts: Separate Account Five and Separate Account Six,
respectively. Both Separate Account Five and Separate Account Six were
established on March 27, 1997 and are registered with the SEC as unit investment
trusts ("Separate Account") under the Investment Company Act of 1940, as
amended. We will invest Separate Account assets attributable to the Contracts
exclusively in the shares of the Variable Funding Options.
We hold the assets of Separate Account Five and Separate Account Six for the
exclusive and separate benefit of the owners of each Separate Account, according
to the laws of Connecticut. Income, gains and losses, whether or not realized,
from assets allocated to the Separate Account are, in accordance with the
Contracts, credited to or charged against the Separate Account without regard to
other income, gains and losses of the Company. The assets held by the Separate
Account are not chargeable with liabilities arising out of any other business
that we may conduct. Obligations under the Contract are obligations of the
Company.
All investment income and other distributions of the funding options are payable
to the Separate Account. We reinvest all such income and/or distributions in
shares of the respective funding option at net asset value. Shares of the
funding options are currently sold only to life insurance company Separate
Accounts to fund variable annuity and variable life insurance contracts.
Certain variable annuity Separate Accounts and variable life insurance Separate
Accounts may invest in the funding options simultaneously (called "mixed" and
"shared" funding). It is conceivable that in the future it may be
disadvantageous to do so. Although the Company and the Variable Funding Options
do not currently foresee any such disadvantages either to variable annuity
Contract Owners or variable life policy owners, each Variable Funding Option's
Board of Directors intends to monitor events in order to identify any material
conflicts between them and to determine what action, if any, should be taken. If
a Board of Directors was to conclude that separate funds should be established
for variable life and variable annuity Separate Accounts, the variable annuity
Contract Owners would not bear any of the related expenses, but variable annuity
Contract Owners and variable life insurance policy owners would no longer have
the economies of scale resulting from a larger combined fund.
PERFORMANCE INFORMATION
In advertisements for the Contract, we may include performance figures to show
you how a Variable Funding Option has performed in the past. These figures are
rates of return or yield quotations shown as a percent. These figures show past
performance of a Variable Funding Option and are not an indication of how a
Variable Funding Option will perform in the future.
35
Our advertisements may show performance figures assuming that you do not elect
any optional features such as the Optional Death Benefit. However, if you elect
optional features, they involve additional charges that will serve to decrease
the performance of your Variable Funding Options. You may wish to speak with
your registered representative to obtain performance information specific to the
optional features you may wish to select.
Performance figures for each Variable Funding Option are based in part on the
performance of a corresponding Underlying Fund. In some cases, the Underlying
Fund may have existed before the technical inception of the corresponding
Variable Fund Option. In those cases, we can create "hypothetical historical
performance" of a Variable Fund Option. These figures show the performance that
the Variable Fund Option would have achieved had it been available during the
entire history of the Underlying Fund.
FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
The following general discussion of the federal income tax consequences related
to your investment in this Contract is not intended to cover all situations, and
is not meant to provide tax or legal advice. Because of the complexity of the
law and the fact that the tax results will vary depending on many factors, you
should consult your tax and/or legal adviser regarding the tax implications of
purchasing this Contract based upon your individual situation. For further tax
information, an additional discussion of certain tax matters is contained in the
SAI.
GENERAL TAXATION OF ANNUITIES
Congress has recognized the value of saving for retirement by providing certain
tax benefits, in the form of tax deferral, for premiums paid under an annuity
and permitting tax-free transfers between the various investment options offered
under the Contract. The Internal Revenue Code ("Code") governs how earnings on
your investment in the Contract are ultimately taxed, depending upon the type of
Contract, qualified or non-qualified, and the manner in which the money is
distributed, as briefly described below. In analyzing the benefits of tax
deferral it is important to note that the Jobs and Growth Tax Relief
Reconciliation Act of 2003 amended Code Section 1 to reduce the marginal tax
rates on long-term capital gains and dividends to 5% and 15%. The reduced rates
apply during 2003 through 2008, and thereafter will increase to prior levels.
Earnings under annuity Contracts continue to be taxed as ordinary income (top
rate of 35%).
TAX-FREE EXCHANGES: Code Section 1035 provides that, if certain conditions are
met, no gain or loss is recognized when an annuity contract is received in
exchange for a life, endowment, or annuity contract. Since different annuity
Contracts have different expenses, fees and benefits, a tax-free exchange could
result in your investment becoming subject to higher or lower fees and/or
expenses.
TYPES OF CONTRACTS: QUALIFIED AND NON-QUALIFIED
QUALIFIED ANNUITY CONTRACTS
If you purchase your Contract with proceeds of an eligible rollover distribution
from any qualified employee pension plan or individual retirement annuity (IRA),
your Contract is referred to as a Qualified Contract. Some examples of Qualified
Contracts are: IRAs, tax-sheltered annuities established by public school
systems or certain tax-exempt organizations under Code Section 403(b), corporate
sponsored pension and profit-sharing plans (including 401(k) plans), Keogh Plans
(for self-employed individuals), and certain other qualified deferred
compensation plans. Another type of Qualified Contract is a Roth IRA, under
which after-tax contributions accumulate until maturity, when amounts (including
earnings) may be withdrawn tax-free. The rights and benefits under a Qualified
Contract may be limited by the terms of the retirement plan, regardless of the
terms and conditions of the Contract. Plan participants making contributions to
Qualified Contracts will be subject to minimum distribution rules as provided by
the Code and described below.
TAXATION OF QUALIFIED ANNUITY CONTRACTS
Under a qualified annuity, since amounts paid into the Contract have generally
not yet been taxed, the full amount of such distributions, including the amount
attributable to Purchase Payments, whether paid in the form
36
of lump-sum withdrawals or Annuity Payments, are generally taxed at the ordinary
income tax rate unless the distribution is transferred to an eligible rollover
account or Contract. The Contract is available as a vehicle for IRA rollovers
and for other Qualified Contracts. There are special rules which govern the
taxation of Qualified Contracts, including withdrawal restrictions, requirements
for mandatory distributions, and contribution limits. We have provided a more
complete discussion in the SAI.
MANDATORY DISTRIBUTIONS FOR QUALIFIED PLANS
Federal tax law requires that minimum annual distributions begin by April 1st of
the calendar year following the calendar year in which an IRA owner attains age
70 1/2. Participants in qualified plans and 403(b) annuities may defer minimum
distributions until the later of April 1st of the calendar year following the
calendar year in which they attain age 70 1/2 or the year of retirement. If you
own more than one individual retirement annuity and/or account, you may satisfy
the minimum distribution rules on an aggregate basis (i.e. determine the total
amount of required distributions from all IRAs and take the required amount from
any one or more IRAs). A similar aggregate approach is available to meet your
403(b) minimum distribution requirements if you have multiple 403(b) annuities.
MINIMUM DISTRIBUTIONS FOR BENEFICIARIES UPON THE CONTRACT OWNER'S DEATH: Upon
the death of the Contract Owner and/or Annuitant of a Qualified Contract, the
funds remaining in the Contract must be completely withdrawn within 5 years from
the date of death (including in a single lump sum) or minimum distributions may
be taken over the life expectancy of the beneficiary provided such distributions
are payable at least annually and begin within one year from the date of death.
Special rules apply where the beneficiary is the surviving spouse, which allow
the spouse to assume the Contract and defer the minimum distribution
requirements. 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, the permissible contribution limit for
income tax purposes may be different at the federal level from your state's
income tax laws. Therefore, in certain states, a portion of the contributions
may not be excludible or deductible from state income taxes. Please consult your
employer or tax adviser regarding this issue.
NON-QUALIFIED ANNUITY CONTRACTS
If you purchase the Contract on an individual basis with after-tax dollars and
not under one of the programs described above, your Contract is referred to as
non-qualified.
As the owner of a non-qualified annuity, you do not receive any tax benefit
(deduction or deferral of income) on Purchase Payments, but you will not be
taxed on increases in the value of your Contract until a distribution occurs --
either as a withdrawal (distribution made prior to the Maturity Date), or as
Annuity Payments. When a withdrawal is made, you are taxed on the amount of the
withdrawal that is considered earnings under federal tax laws. Similarly, when
you receive an Annuity Payment, part of each payment is considered a return of
your Purchase Payments and will not be taxed. The remaining portion of the
Annuity Payment (i.e., any earnings) will be considered ordinary income for
federal income tax purposes.
If a non-qualified annuity is owned by other than an individual, however, (e.g.,
by a corporation), increases in the value of the Contract attributable to
Purchase Payments made after February 28, 1986 are includable in income annually
and taxed at ordinary income tax rates. Furthermore, for Contracts issued after
April 22, 1987, if you transfer the Contract to another person or entity without
adequate consideration, all deferred increases in value will be includable in
your income at the time of the transfer.
If you make a partial withdrawal, this money will generally be taxed as first
coming from earnings, (income in the Contract), and then from your Purchase
Payments. These withdrawn earnings are includable in your taxable income. (See
Penalty Tax for Premature Distributions below.) There is income in the Contract
to the extent the Contract Value exceeds your investment in the Contract. The
investment in the Contract equals the total Purchase Payments you paid less any
amount received previously which was excludible 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 distribution under the tax law,
and will have tax consequences in the year taken.
Federal tax law requires that non-qualified annuity Contracts meet minimum
mandatory distribution requirements upon the death of the Contract Owner,
including the death of either of the joint owners. If these
37
requirements are not met, the Contract will not be treated as an annuity
Contract for federal income tax purposes and earnings under the Contract will be
taxable currently, not when distributed. The distribution required depends,
among other things, upon whether an annuity option is elected or whether the
succeeding Contract Owner is the surviving spouse. We will administer Contracts
in accordance with these rules and we will notify you when you should begin
receiving payments. There is a more complete discussion of these rules in the
SAI.
DIVERSIFICATION REQUIREMENTS FOR VARIABLE ANNUITIES
The Code requires that any non-qualified variable annuity Contracts based on a
Separate Account must meet specific diversification standards. Non-qualified
variable annuity Contracts shall not be treated as an annuity for Federal income
tax purposes if investments made in the account are not adequately diversified.
Final tax regulations define how Separate Accounts must be diversified. The
Company monitors the diversification of investments constantly and believes that
its accounts are adequately diversified. The consequence of any failure to
diversify is essentially the loss to the Contract Owner of tax-deferred
treatment, requiring the current inclusion of a proportionate share of the
income and gains from the Separate Account assets in the income of each Contract
Owner. The Company intends to administer all Contracts subject to this provision
of law in a manner that will maintain adequate diversification.
OWNERSHIP OF THE INVESTMENTS
In certain circumstances, owners of variable annuity contracts have been
considered to be the owners of the assets of the underlying Separate Account for
Federal income tax purposes due to their ability to exercise investment control
over those assets. When this is the case, the contract owners have been
currently taxed on income and gains attributable to the variable account assets.
There is little guidance in this area, and some features of the Contract, such
as the number of funds available and the flexibility of the Contract Owner to
allocate premium payments and transfer amounts among the funding options, have
not been addressed in public rulings. While we believe that the Contract does
not give the Contract Owner investment control over Separate Account assets, we
reserve the right to modify the Contract as necessary to prevent a Contract
Owner from being treated as the owner of the Separate Account assets supporting
the Contract.
TAXATION OF DEATH BENEFIT PROCEEDS
Amounts may be distributed from a non-qualified Contract because of the death of
an owner or annuitant. Generally, such amounts are includable in the income of
the recipient as follows: (i) if distributed in a lump sum, they are taxed in
the same manner as a full surrender of the Contract; or (ii) if distributed
under a payment option, they are taxed in the same way as Annuity Payments.
OTHER TAX CONSIDERATIONS
TREATMENT OF CHARGES FOR OPTIONAL BENEFITS
The Contract may provide one or more optional enhanced death benefits or other
minimum guaranteed benefit that in some cases may exceed the greater of purchase
price or the Contract Value. It is possible that the Internal Revenue Service
may take the position that the charges for the optional enhanced benefit(s) are
deemed to be taxable distributions to you. Although we do not believe that a
charge under such optional enhanced benefit should be treated as a taxable
withdrawal, you should consult with your tax adviser before selecting any rider
or endorsement to the Contract.
PENALTY TAX FOR PREMATURE DISTRIBUTIONS
For both Qualified and Non-qualified Contracts, taxable distributions taken
before the Contract Owner has reached the age of 591/2 will be subject to a 10%
additional tax penalty unless the distribution is taken in a series of periodic
distributions, for life or life expectancy, or unless the distribution follows
the death or disability of the Contract Owner. Other exceptions may be available
in certain qualified plans. The 10% additional tax is in addition to any
penalties that may apply under your Contract and the normal income taxes due on
the distribution.
38
PUERTO RICO TAX CONSIDERATIONS
The Puerto Rico Internal Revenue Code of 1994 (the "1994 Code") taxes
distributions from non-qualified annuity Contracts differently than in the U.S.
Distributions that are not in the form of an annuity (including partial
surrenders and period certain payments) are treated under the 1994 Code first as
a return of investment. Therefore, no taxable income is recognized for Puerto
Rico tax purposes until the cumulative amount paid exceeds your tax basis. The
amount of income on annuity distributions (payable over your lifetime) is also
calculated differently under the 1994 Code. Since Puerto Rico residents are also
subject to U.S. income tax on all income other than income sourced to Puerto
Rico, the timing of recognition of income from an annuity Contract could vary
between the two jurisdictions. Although the 1994 Code provides a credit against
the Puerto Rico income tax for U.S. income taxes paid, an individual may not get
full credit because of the timing differences. You should consult with a
personal tax adviser regarding the tax consequences of purchasing an annuity
Contract and/or any proposed distribution, particularly a partial distribution
or election to annuitize.
NON-RESIDENT ALIENS
Distributions to non-resident aliens ("NRAs") are subject to special and complex
tax and withholding rules under the Code, some of which are based upon the
particular facts and circumstances of the Contract Owner, the beneficiary and
the transaction itself. In addition, Annuity Payments to NRAs in many countries
are exempt from U.S. tax (or subject to lower rates) based upon a tax treaty.
NRAs should seek guidance from a tax adviser regarding their personal situation.
AVAILABLE INFORMATION
- --------------------------------------------------------------------------------
The Companies are both subject to the information requirements of the Securities
and Exchange Act of 1934 ("the 1934 Act"), as amended, and file reports, proxy
statements and other information with the Securities and Exchange Commission
("Commission"). 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., 20549
o the Commission's Regional Offices located at 233 Broadway, New York,
New York 10279
o the Commission's Regional Offices located at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661.
Under the Securities Act of 1933, the Companies have each filed with the
Commission registration statements (the "Registration Statement") relating to
the Contracts offered by this prospectus. This prospectus has been filed as a
part of the Registration Statement and does not contain all of the information
set forth in the Registration Statement and the exhibits. Reference is hereby
made to such Registration Statement and exhibits for further information about
the Companies and the Contracts. The Registration Statement and the exhibits may
be inspected and copied as described above. Although the Companies each furnish
the annual reports on Form 10-K for the year ended December 31, 2003 to owners
of Contracts or certificates, we do 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
- --------------------------------------------------------------------------------
Each Company's latest annual report on Form 10-K has been filed with the
Commission. They are both incorporated by reference into this prospectus and a
copy of your issuing Company's 10-K must accompany this prospectus.
The Forms 10-K for the fiscal year ended December 31, 2003 contain additional
information about each Company including audited financial statements for the
latest fiscal year. The Travelers Insurance Company filed its Form 10-K on March
22, 2004 via Edgar, File No. 33-03094. The Travelers Life and Annuity Company
filed its Form 10-K on March 22, 2004 via Edgar, File No. 33-58677.
39
If requested, we 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, 3 CP, Hartford, Connecticut 06103-3415, Attention: Annuity
Services. The telephone number is (800) 842-9406. You may also obtain copies of
any documents, incorporated by reference into this prospectus by accessing the
SEC's website (http://www.sec.gov).
OTHER INFORMATION
- --------------------------------------------------------------------------------
THE INSURANCE COMPANIES
Please refer to your Contract to determine which Company issued your Contract.
The Travelers Insurance Company is a stock insurance company chartered in 1863
in Connecticut and continuously engaged in the insurance business since that
time. It 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 Travelers Life and Annuity Company is a stock insurance company chartered in
1973 in Connecticut and continuously engaged in the insurance business since
that time. It is licensed to conduct life insurance business in all states of
the United States (except New York), the District of Columbia and Puerto Rico.
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.
FINANCIAL STATEMENTS
The financial statements for the Company and its Separate Account are located in
the Statement of Additional Information.
DISTRIBUTION OF VARIABLE ANNUITY CONTRACTS
DISTRIBUTION AND PRINCIPAL UNDERWRITING AGREEMENT. Travelers Distribution LLC
("TDLLC") serves as the principal underwriter and distributor of the securities
offered through this Prospectus pursuant to the terms of the Distribution and
Principal Underwriting Agreement. TDLLC also acts as the principal underwriter
and distributor of other variable annuity contracts and variable life insurance
policies issued by the Company and its affiliated companies.
TDLLC's principal executive offices are located at One Cityplace, Hartford,
Connecticut 06103. TDLLC is registered as a broker-dealer with the Securities
and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as
well as the securities commissions in the states in which it operates, and is a
member of the National Association of Securities Dealers, Inc. ("NASD"). TDLLC
is affiliated with the Company and each Separate Account. TDLLC, as the
principal underwriter and distributor, does not retain any fees under the
Contracts.
The Contracts are offered on a continuous basis. TDLLC enters into selling
agreements with broker-dealers who are registered with the SEC and are members
of the NASD, and with entities that may offer the Contracts but are exempt from
registration. Applications for the Contract are solicited by registered
representatives who are associated persons of such broker-dealer firms. Such
representatives act as appointed agents of the Company under applicable state
insurance law and must be licensed to sell variable insurance products. We
intend to offer the Contract in all jurisdictions where we are licensed to do
business and where the Contract is approved.
COMPENSATION. Broker-dealers who have selling agreements with TDLLC are paid
compensation for the promotion and sale of the Contracts according to one or
more schedules. Registered representatives who solicit sales of the Contract
typically receive a portion of the compensation payable to the broker-dealer
firm, depending on the agreement between the firm and the registered
representative. Compensation paid on the Contracts, as well as other incentives
or payments, are not assessed as an additional direct charge to Contract owners
or the Separate Account. We intend to recoup commissions and other sales
expenses through fees and
40
charges imposed under the Contract and from profits on payments received by the
Company and TDLLC for providing administrative, marketing and other support and
services to the Funds.
The amount and timing of compensation may vary depending on the selling
agreement but is not expected to exceed 10% of Purchase Payments (if up-front
compensation is paid to registered representatives) and up to 2% annually of
average account value (if asset-based compensation is paid to registered
representatives). We may also periodically establish commission specials;
however, commissions paid under these specials will not exceed the amounts
described immediately above. To the extent permitted by NASD rules and other
applicable laws and regulations, TDLLC may pay or allow other promotional
incentives or payments in the form of cash or other compensation.
Broker-dealer firms may receive separate compensation or reimbursement for,
among other things, training of sales personnel, marketing or other services
they provide to the Company or our affiliates. In addition, the Company or TDLLC
may enter into special compensation arrangements with certain broker-dealer
firms based on aggregate or anticipated sales of the Contracts or other
criteria. These special compensation arrangements will not be offered to all
broker-dealer firms and the terms of such arrangements may differ between
broker-dealer firms.
The Company and TDLLC have entered into such arrangements with AIG Advisor Group
(including Advantage Capital Corporation, FSC Securities Corporation, Royal
Alliance Associates, Inc., Sentra Securities Corporation, Spelman & Co., Inc.
and SunAmerica Securities, Inc.), ING Advisors Network (including Financial
Network Corporation, Locust Street Securities, Multi-Financial Securities, IFG
Network Securities, VESTAX Securities, Washington Square Securities and
PrimeVest Financial Services), Merrill Lynch, NFP Securities, Inc., and Piper
Jaffray. Any such compensation payable to a broker-dealer firm will be made by
TDLLC or the Company out of their own assets and will not result in any
additional direct charge to you.
The Company and TDLLC have entered into selling agreements with certain
broker-dealer firms that have an affiliate that acts as investment adviser to
one or more Underlying Funds or serves as a subadviser to a Portfolio of The
Travelers Series Trust or Travelers Series Fund Inc., which are offered under
the Contracts. These firms include Fidelity Management & Research Company,
Morgan Stanley Investment Advisers Inc., Merrill Lynch Investment Managers,
L.P., Salomon Brothers Asset Management and Smith Barney Fund Management.
TOWER SQUARE SECURITIES. TDLLC has entered into a selling agreement with Tower
Square Securities, Inc. ("Tower Square"), which is affiliated with the Company.
Registered representatives of Tower Square, who are properly licensed and
appointed, may offer the Contract to customers. Such representatives are
eligible for various cash benefits, such as bonuses, commission advances and
non-cash compensation programs offered by the Company. Sales of the Contracts
may help qualify a Tower Square representative for such benefits. Sales
representatives may receive other payments from the Company for services that do
not directly involve the sale of the Contracts, including payments made for the
recruitment and training of personnel, production of promotional literature, and
similar services. In addition, sales representatives who meet certain Company
productivity, persistency and length of the services standards may be eligible
for additional compensation.
CITISTREET EQUITIES LLC/CITISTREET ASSOCIATES LLC. CitiStreet Equities LLC and
its affiliate, CitiStreet Associates LLC, are part of a joint venture between
Citigroup Inc., the Company's ultimate parent, and State Street Corporation. The
Company pays CitiStreet Equities LLC compensation of up to 12% of Purchase
Payments and/or 2% of Contract Value in connection with the sale of the
Contracts. In addition, CitiStreet Equities LLC receives compensation for the
hiring and training of sales representatives and for meeting certain gross sales
goals and net sales goals (sales less redemptions) which may cause CitiStreet
Equities LLC or its representatives to favor the Company's products. The Company
has also entered into an agreement with CitiStreet Associates LLC whereby the
Company pays CitiStreet Associates LLC fees in connection with CitiStreet
Associates' provision of certain administrative, recordkeeping, marketing and
support services in relation to annuity contracts sold by CitiStreet Equities
LLC in connection with Section 401(a), 401(k), 403(b), 457(b) and 408(b) plans.
Any compensation payable to CitiStreet Associates LLC or CitiStreet Equities LLC
will be made by TDLLC or the Company out of its own assets and will not result
in any additional direct charge to you.
CONFORMITY WITH STATE AND FEDERAL LAWS
The laws of the state in which the Contract is issued govern that Contract.
Where a state has not approved a Contract feature or funding option, it will not
be available in that state. Any paid-up annuity, Cash Surrender Value or death
benefits that are available under the Contract are not less than the minimum
benefits required by
41
the statutes of the state in which we delivered the Contract. We reserve the
right to make any changes, including retroactive changes, in the Contract to the
extent that the change is required to meet the requirements of any law or
regulation issued by any governmental agency to which the Company, the Contract
or the Contract Owner is subject.
VOTING RIGHTS
The Company is the legal owner of the shares of the Underlying Funds. However,
we believe that when an Underlying Fund solicits proxies in conjunction with a
vote of shareholders we are required to obtain from you and from other owners
instructions on how to vote those shares. We will vote all shares, including
those we may own on our own behalf, and those where we have not received
instructions from Contract Owners, in the same proportion as shares for which we
received voting instructions. Should we determine that we are no longer required
to comply with the above, we will vote on the shares in our own right. In
certain limited circumstances, and when permitted by law, we may disregard
voting instructions. If we do disregard voting instructions, a summary of that
action and the reasons for such action would be included in the next annual
report to Contract Owners.
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 transfers,
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.
LEGAL PROCEEDINGS AND OPINIONS
Legal matters in connection with the federal laws and regulations affecting the
issue and sale of the contract described in this prospectus, as well as the
organization of the Companies, their authority to issue variable annuity
contracts under Connecticut law and the validity of the forms of the variable
annuity contracts under Connecticut law, have been passed on by the Deputy
General Counsel of the Companies.
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 Companies have 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 Companies'
variable product operations on market timing, late trading and revenue sharing.
The Companies are cooperating fully with all of these reviews and are not able
to predict their outcomes.
Notwithstanding the above, there are no pending legal proceedings affecting
either the Separate Account or the principal underwriter. There are no pending
legal proceedings against either Company likely to have a material adverse
affect on the ability of either Company to meet its obligations under the
applicable Contract.
42
APPENDIX A--CONDENSED FINANCIAL INFORMATION
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THE TRAVELERS SEPARATE ACCOUNT FIVE FOR VARIABLE ANNUITIES
ACCUMULATION UNIT VALUES (IN DOLLARS)
The following Accumulation Unit Value ("AUV") information should be read in
conjunction with the Separate Account's audited financial statement and notes,
which are included in the Statement of Additional Information ("SAI"). The first
table provides the AUV information for the MINIMUM Separate Account Charge
available under the contract. The second table provides the AUV information for
the MAXIMUM Separate Account Charge available under the contract. The Separate
Account Charges that fall in between this range are included in the SAI, which
is free of charge. You may request a copy of the SAI by calling the toll-free
number found on the first page of this prospectus or by mailing in the coupon
attached in Appendix E. Please refer to the Fee Table section of this prospectus
for more information on Separate Account Charges.
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Capital Appreciation Fund (5/00)......................... 2003 0.406 0.503 148,185
2002 0.547 0.406 213,843
2001 0.745 0.547 6,402
2000 1.000 0.745 --
High Yield Bond Trust (9/99)............................. 2003 1.107 1.418 27,244
2002 1.067 1.107 --
2001 0.982 1.067 --
2000 0.980 0.982 --
1999 1.000 0.980 --
Managed Assets Trust (6/99).............................. 2003 0.918 1.111 25,510
2002 1.013 0.918 25,510
2001 1.076 1.013 25,510
2000 1.102 1.076 20,767
1999 1.000 1.102 13,609
Money Market Portfolio (9/99)............................ 2003 1.125 1.125 289,912
2002 1.119 1.125 264,365
2001 1.087 1.119 77,342
2000 1.032 1.087 76,073
1999 1.000 1.032 36,453
AIM Variable Insurance Funds
AIM V.I. Premier Equity Fund -- Series I (5/01).......... 2003 0.615 0.763 --
2002 0.888 0.615 --
2001 1.000 0.888 --
A-1
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
CitiStreet Funds, Inc.
CitiStreet Diversified Bond Fund -- Class I (9/99)....... 2003 1.251 1.310 481,357
2002 1.157 1.251 470,261
2001 1.092 1.157 --
2000 0.979 1.092 12,041
1999 1.000 0.979 37,502
CitiStreet International Stock Fund -- Class I (7/99).... 2003 0.697 0.899 291,178
2002 0.904 0.697 223,222
2001 1.160 0.904 --
2000 1.272 1.160 1,916
1999 1.000 1.272 6,933
CitiStreet Large Company Stock Fund -- Class I (9/99).... 2003 0.537 0.683 525,471
2002 0.702 0.537 430,013
2001 0.840 0.702 --
2000 0.995 0.840 10,384
1999 1.000 0.995 21,459
CitiStreet Small Company Stock Fund -- Class I (9/99).... 2003 1.220 1.732 83,489
2002 1.612 1.220 66,192
2001 1.600 1.612 --
2000 1.465 1.600 1,472
1999 1.000 1.465 6,201
Credit Suisse Trust
Emerging Markets Portfolio (10/99)....................... 2003 0.804 1.140 11,251
2002 0.916 0.804 11,251
2001 1.022 0.916 --
2000 1.506 1.022 --
1999 1.000 1.506 --
Delaware VIP Trust
Delaware VIP REIT Series -- Standard Class (9/00)........ 2003 1.366 1.816 31,398
2002 1.318 1.366 19,794
2001 1.221 1.318 --
2000 1.000 1.221 --
A-2
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Delaware VIP Small Cap Value Series -- 2003 1.208 1.701 22,455
Standard Class (10/99)...................................
2002 1.289 1.208 10,600
2001 1.162 1.289 --
2000 0.991 1.162 --
1999 1.000 0.991 --
Dreyfus Variable Investment Fund
Dreyfus VIF Appreciation Portfolio --
Initial Shares (7/99).................................... 2003 0.792 0.952 42,639
2002 0.958 0.792 54,702
2001 1.065 0.958 27,197
2000 1.081 1.065 24,552
1999 1.000 1.081 24,552
Dreyfus VIF Developing Leaders Portfolio --
Initial Shares (10/99)................................... 2003 1.041 1.360 57,302
2002 1.298 1.041 58,130
2001 1.394 1.298 13,264
2000 1.240 1.394 3,246
1999 1.000 1.240 --
Franklin Templeton Variable Insurance Products Trust
Mutual Shares Securities Fund --
Class 2 Shares (5/03).................................... 2003 1.000 1.204 6,200
Greenwich Street Series Fund
Appreciation Portfolio (5/01)............................ 2003 0.772 0.954 45,111
2002 0.943 0.772 20,346
2001 1.000 0.943 3,353
Equity Index Portfolio -- Class II Shares (7/99)......... 2003 0.682 0.864 126,629
2002 0.886 0.682 47,426
2001 1.019 0.886 23,609
2000 1.133 1.019 14,389
1999 1.000 1.133 13,350
Fundamental Value Portfolio (5/01)....................... 2003 0.722 0.992 157,189
2002 0.924 0.722 30,684
2001 1.000 0.924 --
A-3
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Janus Aspen Series
Balanced Portfolio -- Service Shares (5/01).............. 2003 0.891 1.005 25,695
2002 0.962 0.891 --
2001 1.000 0.962 --
Mid Cap Growth Portfolio -- Service Shares (5/01)........ 2003 0.551 0.736 5,302
2002 0.772 0.551 33,784
2001 1.000 0.772 --
Worldwide Growth Portfolio --
Service Shares (5/00).................................... 2003 0.453 0.556 5,661
2002 0.615 0.453 5,661
2001 0.801 0.615 5,661
2000 1.000 0.801 --
PIMCO Variable Insurance Trust
Total Return Portfolio -- Administrative Class (5/01).... 2003 1.144 1.192 6,319
2002 1.057 1.144 7,538
2001 1.000 1.057 --
Putnam Variable Trust
Putnam VT Discovery Growth Fund --
Class IB Shares (5/01)................................... 2003 0.564 0.739 --
2002 0.808 0.564 --
2001 1.000 0.808 --
Putnam VT International Equity Fund --
Class IB Shares (5/01)................................... 2003 0.703 0.897 6,667
2002 0.861 0.703 --
2001 1.000 0.861 --
Putnam VT Small Cap Value Fund --
Class IB Shares (5/01)................................... 2003 0.886 1.315 43,406
2002 1.093 0.886 40,852
2001 1.000 1.093 --
A-4
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Salomon Brothers Variable Series Funds Inc.
All Cap Fund -- Class I (4/00)........................... 2003 1.077 1.486 3,532
2002 1.449 1.077 --
2001 1.433 1.449 --
2000 1.000 1.433 --
Investors Fund -- Class I (10/99)........................ 2003 0.903 1.185 --
2002 1.183 0.903 6,424
2001 1.244 1.183 --
2000 1.088 1.244 --
1999 1.000 1.088 13,535
Small Cap Growth Fund -- Class I (5/01).................. 2003 0.631 0.932 --
2002 0.974 0.631 --
2001 1.000 0.974 --
Total Return Fund -- Class I (9/00)...................... 2003 0.975 1.121 --
2002 1.055 0.975 --
2001 1.072 1.055 --
2000 1.000 1.072 --
Smith Barney Investment Series
Smith Barney Large Cap Core Portfolio (5/01)............. 2003 0.659 0.807 6,455
2002 0.897 0.659 --
2001 1.000 0.897 --
Smith Barney Premier Selections All Cap
Growth Portfolio (5/01).................................. 2003 0.652 0.869 --
2002 0.898 0.652 --
2001 1.000 0.898 --
Strong Variable Insurance Funds, Inc.
Strong Multi Cap Value Fund II (3/00).................... 2003 0.739 1.014 8,864
2002 0.969 0.739 8,864
2001 0.938 0.969 --
2000 1.000 0.938 --
The Travelers Series Trust
Disciplined Mid Cap Stock Portfolio (8/99)............... 2003 1.060 1.406 38,942
2002 1.247 1.060 22,864
A-5
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Disciplined Mid Cap Stock Portfolio (continued)......... 2001 1.310 1.247 4,950
2000 1.132 1.310 4,950
1999 1.000 1.132 4,950
Equity Income Portfolio (7/99)........................... 2003 0.874 1.137 192,847
2002 1.024 0.874 151,978
2001 1.105 1.024 109,815
2000 1.021 1.105 12,381
1999 1.000 1.021 12,381
Federated Stock Portfolio (11/01)........................ 2003 0.802 1.015 4,216
2002 1.002 0.802 4,216
2001 1.000 1.002 --
Large Cap Portfolio (7/99)............................... 2003 0.652 0.807 96,847
2002 0.851 0.652 96,847
2001 1.038 0.851 96,847
2000 1.224 1.038 52,127
1999 1.000 1.224 12,719
Lazard International Stock Portfolio (8/99).............. 2003 0.663 0.846 6,318
2002 0.768 0.663 6,318
2001 1.049 0.768 4,591
2000 1.194 1.049 4,591
1999 1.000 1.194 4,591
Merrill Lynch Large Cap Core Portfolio (6/00)............ 2003 0.649 0.780 --
2002 0.874 0.649 --
2001 1.136 0.874 --
2000 1.000 1.136 --
MFS Emerging Growth Portfolio (5/01)..................... 2003 0.531 0.681 --
2002 0.814 0.531 --
2001 1.000 0.814 --
MFS Mid Cap Growth Portfolio (10/99)..................... 2003 0.668 0.909 47,678
2002 1.317 0.668 45,675
2001 1.739 1.317 33,694
2000 1.603 1.739 30,494
1999 1.000 1.603 --
A-6
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Pioneer Fund Portfolio (8/99)............................ 2003 0.625 0.768 31,058
2002 0.903 0.625 24,128
2001 1.183 0.903 --
2000 0.959 1.183 --
1999 1.000 0.959 --
Social Awareness Stock Portfolio (7/99).................. 2003 0.686 0.877 18,473
2002 0.921 0.686 14,167
2001 1.100 0.921 14,167
2000 1.115 1.100 14,167
1999 1.000 1.115 14,167
Travelers Quality Bond Portfolio (8/99).................. 2003 1.186 1.259 36,759
2002 1.130 1.186 19,941
2001 1.063 1.130 19,941
2000 1.002 1.063 19,941
1999 1.000 1.002 19,941
U.S. Government Securities Portfolio (8/99).............. 2003 1.301 1.326 328,667
2002 1.154 1.301 366,169
2001 1.099 1.154 20,423
2000 0.968 1.099 20,423
1999 1.000 0.968 20,423
Travelers Series Fund Inc.
AIM Capital Appreciation Portfolio (5/01)................ 2003 0.654 0.840 --
2002 0.867 0.654 --
2001 1.000 0.867 --
MFS Total Return Portfolio (7/99)........................ 2003 1.073 1.240 153,776
2002 1.141 1.073 135,391
2001 1.150 1.141 53,295
2000 0.994 1.150 --
1999 1.000 0.994 --
Pioneer Strategic Income Portfolio (1/01)................ 2003 1.084 1.285 32,760
2002 1.032 1.084 27,083
2001 1.000 1.032 --
A-7
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
SB Adjustable Rate Income Portfolio -- 2003 1.000 1.001 1,000
Class I Shares (9/03)....................................
Smith Barney Aggressive Growth Portfolio (5/01).......... 2003 0.634 0.846 251,625
2002 0.949 0.634 15,408
2001 1.000 0.949 2,646
Smith Barney High Income Portfolio (8/99)................ 2003 0.842 1.065 22,349
2002 0.877 0.842 20,231
2001 0.918 0.877 20,231
2000 1.007 0.918 20,231
1999 1.000 1.007 20,231
Smith Barney International All Cap Growth
Portfolio (12/99)........................................ 2003 0.597 0.755 3,291
2002 0.810 0.597 3,291
2001 1.186 0.810 3,291
2000 1.569 1.186 3,291
1999 1.000 1.569 --
Smith Barney Large Capitalization Growth
Portfolio (10/99)........................................ 2003 0.677 0.991 5,766
2002 0.907 0.677 --
2001 1.045 0.907 --
2000 1.132 1.045 --
1999 1.000 1.132 --
Strategic Equity Portfolio (7/99)........................ 2003 0.598 0.787 67,954
2002 0.908 0.598 67,954
2001 1.057 0.908 67,954
2000 1.303 1.057 56,806
1999 1.000 1.303 17,222
Van Kampen Life Investment Trust
Comstock Portfolio -- Class II Shares (5/03)............. 2003 1.000 1.257 --
Emerging Growth Portfolio -- Class II Shares (5/01)...... 2003 0.546 0.688 --
2002 0.817 0.546 --
2001 1.000 0.817 --
A-8
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Enterprise Portfolio -- Class II Shares (5/01)........... 2003 0.637 0.794 --
2002 0.911 0.637 --
2001 1.000 0.911 --
Variable Annuity Portfolios
Smith Barney Small Cap Growth
Opportunities Portfolio (5/01)........................... 2003 0.700 0.986 --
2002 0.949 0.700 --
2001 1.000 0.949 --
Variable Insurance Products Fund II
Asset Manager Portfolio -- Service Class 2 (5/00)........ 2003 0.813 0.949 23,009
2002 0.900 0.813 51,769
2001 0.949 0.900 --
2000 1.000 0.949 --
Contrafund(R) Portfolio -- Service Class 2 (5/01)........ 2003 0.852 1.083 75,992
2002 0.950 0.852 14,509
2001 1.000 0.950 --
Variable Insurance Products Fund III
Dynamic Capital Appreciation Portfolio --
Service Class 2 (5/01)................................... 2003 0.776 0.962 12,814
2002 0.846 0.776 12,814
2001 1.000 0.846 2,853
Mid Cap Portfolio -- Service Class 2 (5/01).............. 2003 0.921 1.264 47,487
2002 1.032 0.921 9,533
2001 1.000 1.032 --
A-9
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 1.25%, PLUS 1.40% FLOOR BENEFIT
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Greenwich Street Series Fund
Equity Index Portfolio -- Class II Shares (7/99)......... 2003 0.636 0.791 --
2002 0.841 0.636 --
2001 0.986 0.841 --
2000 1.117 0.986 --
1999 1.000 1.117 --
NOTES
Effective April 30, 2003 Putnam Variable Trust: Putnam VT Voyager II Fund --
Class IB Shares changed its name to Putnam VT Discovery Growth Fund -- Class IB
Shares.
Effective April 30, 2003 Putnam Variable Trust: Putnam VT International Growth
Fund -- Class IB Shares changed its name to Putnam VT International Equity Fund
- -- Class IB Shares.
Effective April 30, 2003 Salomon Brother Variable Series Funds Inc.: Capital
Fund -- Class I changed its name to All Cap Fund -- Class I.
Effective May 1, 2003 Janus Aspen Series: Aggressive Growth Portfolio -- Service
Shares changed its name to Mid Cap Growth Portfolio -- Service Shares.
Effective May 1, 2003 The Travelers Series Trust: Utilities Portfolio changed
its name to Pioneer Fund Portfolio.
Effective July 1, 2003: The Travelers Series Fund Inc.: Putnam Diversified
Income Portfolio changed its name to Pioneer Strategic Income Portfolio
Effective September 15, 2003: The Travelers Series Fund Inc. Alliance Growth
Portfolio changed its name to Strategic Equity Portfolio.
Effective November 17, 2003: The Travelers Series Trust: MFS Research Portfolio
changed its name to Merrill Lynch Large Cap Core Portfolio.
Effective May 1, 2003 Dreyfus Variable Investment Fund: Small Cap Portfolio --
Initial Shares changed its name to Dreyfus VIF Development Leaders Portfolio --
Initial Shares.
Effective May 1, 2003 Dreyfus Variable Investment Fund: Appreciation Portfolio
- -- Initial Shares changed its name to Dreyfus VIF Appreciation Portfolio --
Initial Shares.
Funding options not listed above had no amount allocated to them or where not
available as of December 31, 2003.
"Number of Units outstanding at the end of the period" may include units for
Contracts Owners in payout phase, where appropriate.
The date next to each funding option's name reflects the date money first came
into the funding option through the Separate Account.
A-10
NOTES (CONTINUED)
Putnam Variable Trust: Putnam VT Discovery Growth Funds -- Class IB Share is no
longer available to new contract owners.
Credit Suisse Trust: Emerging Markets Portfolio is no longer available to new
contract owners.
Strong Variable Insurance Funds, Inc.: Strong Multi Cap Value Fund II is no
longer available to new contract owners.
A-11
APPENDIX B--CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
THE TRAVELERS SEPARATE ACCOUNT SIX FOR VARIABLE ANNUITIES
ACCUMULATION UNIT VALUES (IN DOLLARS)
The following Accumulation Unit Value ("AUV") information should be read in
conjunction with the Separate Account's audited financial statement and notes,
which are included in the Statement of Additional Information ("SAI"). The first
table provides the AUV information for the MINIMUM Separate Account Charge
available under the contract. The second table provides the AUV information for
the MAXIMUM Separate Account Charge available under the contract. The Separate
Account Charges that fall in between this range are included in the SAI, which
is free of charge. You may request a copy of the SAI by calling the toll-free
number found on the first page of this prospectus or by mailing in the coupon
attached in Appendix E. Please refer to the Fee Table section of this prospectus
for more information on Separate Account Charges.
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Capital Appreciation Fund (5/00)......................... 2003 0.406 0.503 1,630,081
2002 0.547 0.406 1,837,286
2001 0.745 0.547 1,046,590
2000 1.000 0.745 1,006,482
High Yield Bond Trust (5/99)............................. 2003 1.107 1.418 381,556
2002 1.067 1.107 411,756
2001 0.982 1.067 314,101
2000 0.980 0.982 101,750
1999 1.000 0.980 92,789
Managed Assets Trust (3/99).............................. 2003 0.918 1.111 968,180
2002 1.013 0.918 1,042,680
2001 1.076 1.013 1,174,637
2000 1.102 1.076 913,007
1999 1.000 1.102 232,345
Money Market Portfolio (4/99)............................ 2003 1.125 1.125 1,753,058
2002 1.119 1.125 1,258,377
2001 1.087 1.119 990,283
2000 1.032 1.087 700,403
1999 1.000 1.032 239,890
AIM Variable Insurance Funds
AIM V.I. Premier Equity Fund -- Series I (7/01).......... 2003 0.615 0.763 103,682
2002 0.888 0.615 55,895
2001 1.000 0.888 --
B-1
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
CitiStreet Funds, Inc.
CitiStreet Diversified Bond Fund -- Class I (3/99)....... 2003 1.251 1.310 3,142,575
2002 1.157 1.251 3,360,816
2001 1.092 1.157 2,080,975
2000 0.979 1.092 601,543
1999 1.000 0.979 139,623
CitiStreet International Stock Fund -- Class I (3/99).... 2003 0.697 0.899 2,010,293
2002 0.904 0.697 2,025,194
2001 1.160 0.904 1,238,125
2000 1.272 1.160 474,746
1999 1.000 1.272 90,221
CitiStreet Large Company Stock Fund -- Class I (3/99).... 2003 0.537 0.683 4,110,325
2002 0.702 0.537 3,575,681
2001 0.840 0.702 2,080,499
2000 0.995 0.840 959,029
1999 1.000 0.995 228,230
CitiStreet Small Company Stock Fund -- Class I (3/99).... 2003 1.220 1.732 844,568
2002 1.612 1.220 739,822
2001 1.600 1.612 542,731
2000 1.465 1.600 462,418
1999 1.000 1.465 113,574
Credit Suisse Trust
Emerging Markets Portfolio (5/99)........................ 2003 0.804 1.140 46,418
2002 0.916 0.804 45,812
2001 1.022 0.916 54,766
2000 1.506 1.022 71,391
1999 1.000 1.506 54,662
Delaware VIP Trust
Delaware VIP REIT Series -- Standard Class (7/99)........ 2003 1.366 1.816 282,138
2002 1.318 1.366 242,450
2001 1.221 1.318 128,487
2000 0.937 1.221 102,023
1999 1.000 0.937 --
B-2
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Delaware VIP Small Cap Value Series -- 2003 1.208 1.701 177,208
Standard Class (4/99)....................................
2002 1.289 1.208 139,177
2001 1.162 1.289 13,468
2000 0.991 1.162 5,110
1999 1.000 0.991 --
Dreyfus Variable Investment Fund
Dreyfus VIF Appreciation Portfolio --
Initial Shares (3/99).................................... 2003 0.792 0.952 331,736
2002 0.958 0.792 356,023
2001 1.065 0.958 396,091
2000 1.081 1.065 311,873
1999 1.000 1.081 244,529
Dreyfus VIF Developing Leaders Portfolio --
Initial Shares (4/99).................................... 2003 1.041 1.360 589,418
2002 1.298 1.041 540,784
2001 1.394 1.298 388,047
2000 1.240 1.394 305,761
1999 1.000 1.240 45,091
Franklin Templeton Variable Insurance Products Trust
Mutual Shares Securities Fund --
Class 2 Shares (8/03).................................... 2003 1.000 1.204 17,090
Greenwich Street Series Fund
Appreciation Portfolio (8/01)............................ 2003 0.772 0.954 100,091
2002 0.943 0.772 82,395
2001 1.000 0.943 14,712
Equity Index Portfolio -- Class II Shares (3/99)......... 2003 0.682 0.864 1,719,505
2002 0.886 0.682 1,579,821
2001 1.019 0.886 1,055,882
2000 1.133 1.019 842,129
1999 1.000 1.133 207,054
Fundamental Value Portfolio (5/01)....................... 2003 0.722 0.992 637,061
2002 0.924 0.722 486,577
2001 1.000 0.924 106,535
B-3
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Janus Aspen Series
Balanced Portfolio -- Service Shares (5/01).............. 2003 0.891 1.005 123,022
2002 0.962 0.891 83,565
2001 1.000 0.962 --
Mid Cap Growth Portfolio -- Service Shares (8/01)........ 2003 0.551 0.736 --
2002 0.772 0.551 --
2001 1.000 0.772 --
Worldwide Growth Portfolio --
Service Shares (5/00).................................... 2003 0.453 0.556 319,311
2002 0.615 0.453 382,579
2001 0.801 0.615 441,531
2000 1.000 0.801 424,750
PIMCO Variable Insurance Trust
Total Return Portfolio -- Administrative Class (6/01).... 2003 1.144 1.192 385,107
2002 1.057 1.144 388,046
2001 1.000 1.057 42,621
Putnam Variable Trust
Putnam VT Discovery Growth Fund --
Class IB Shares (12/01).................................. 2003 0.564 0.739 11,671
2002 0.808 0.564 11,671
2001 1.000 0.808 --
Putnam VT International Equity Fund --
Class IB Shares (5/01)................................... 2003 0.703 0.897 88,330
2002 0.861 0.703 89,130
2001 1.000 0.861 36,530
B-4
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Putnam VT Small Cap Value Fund -- 2003 0.886 1.315 173,137
Class IB Shares (6/01)...................................
2002 1.093 0.886 235,414
2001 1.000 1.093 1,734
Salomon Brothers Variable Series Funds Inc.
All Cap Fund -- Class I (3/99)........................... 2003 1.077 1.486 357,262
2002 1.449 1.077 340,827
2001 1.433 1.449 172,311
2000 1.222 1.433 70,934
1999 1.000 1.222 13,279
Investors Fund -- Class I (3/99)......................... 2003 0.903 1.185 151,723
2002 1.183 0.903 140,603
2001 1.244 1.183 102,276
2000 1.088 1.244 20,655
1999 1.000 1.088 5,119
Small Cap Growth Fund -- Class I (6/01).................. 2003 0.631 0.932 --
2002 0.974 0.631 --
2001 1.000 0.974 997
Total Return Fund -- Class I (3/99)...................... 2003 0.975 1.121 13,990
2002 1.055 0.975 10,605
2001 1.072 1.055 7,423
2000 1.002 1.072 5,470
1999 1.000 1.002 --
Smith Barney Investment Series
Smith Barney Large Cap Core Portfolio (5/01)............. 2003 0.659 0.807 20,096
2002 0.897 0.659 20,096
2001 1.000 0.897 20,096
Smith Barney Premier Selections All Cap
Growth Portfolio (6/01).................................. 2003 0.652 0.869 --
2002 0.898 0.652 --
2001 1.000 0.898 --
B-5
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Strong Variable Insurance Funds, Inc.
Strong Multi Cap Value Fund II (7/99).................... 2003 0.739 1.014 9,511
2002 0.969 0.739 9,511
2001 0.938 0.969 6,351
2000 0.877 0.938 6,351
1999 1.000 0.877 6,351
The Travelers Series Trust
Disciplined Mid Cap Stock Portfolio (6/99)............... 2003 1.060 1.406 298,395
2002 1.247 1.060 244,570
2001 1.310 1.247 156,409
2000 1.132 1.310 87,378
1999 1.000 1.132 --
Equity Income Portfolio (3/99)........................... 2003 0.874 1.137 1,133,992
2002 1.024 0.874 1,011,873
2001 1.105 1.024 343,935
2000 1.021 1.105 212,588
1999 1.000 1.021 216,322
Federated Stock Portfolio (4/99)......................... 2003 0.802 1.015 60,043
2002 1.002 0.802 52,941
2001 0.993 1.002 24,072
2000 0.965 0.993 4,126
1999 1.000 0.965 --
Large Cap Portfolio (3/99)............................... 2003 0.652 0.807 524,562
2002 0.851 0.652 448,487
2001 1.038 0.851 409,069
2000 1.224 1.038 334,348
1999 1.000 1.224 247,021
Lazard International Stock Portfolio (4/99).............. 2003 0.663 0.846 57,438
2002 0.768 0.663 39,307
2001 1.049 0.768 43,074
2000 1.194 1.049 43,159
1999 1.000 1.194 13,922
Merrill Lynch Large Cap Core Portfolio (3/99)............ 2003 0.649 0.780 15,265
2002 0.874 0.649 16,447
B-6
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Merrill Lynch Large Cap Core Portfolio (continued)...... 2001 1.136 0.874 17,029
2000 1.213 1.136 80,150
1999 1.000 1.213 --
MFS Emerging Growth Portfolio (8/01)..................... 2003 0.531 0.681 --
2002 0.814 0.531 --
2001 1.000 0.814 --
MFS Mid Cap Growth Portfolio (5/99)...................... 2003 0.668 0.909 256,356
2002 1.317 0.668 249,539
2001 1.739 1.317 238,188
2000 1.603 1.739 201,277
1999 1.000 1.603 22,378
Pioneer Fund Portfolio (5/99)............................ 2003 0.625 0.768 139,015
2002 0.903 0.625 177,705
2001 1.183 0.903 175,971
2000 0.959 1.183 136,065
1999 1.000 0.959 52,624
Social Awareness Stock Portfolio (3/99).................. 2003 0.686 0.877 190,338
2002 0.921 0.686 205,434
2001 1.100 0.921 252,885
2000 1.115 1.100 338,770
1999 1.000 1.115 204,232
Travelers Quality Bond Portfolio (3/99).................. 2003 1.186 1.259 336,903
2002 1.130 1.186 324,873
2001 1.063 1.130 229,303
2000 1.002 1.063 89,190
1999 1.000 1.002 30,445
U.S. Government Securities Portfolio (3/99).............. 2003 1.301 1.326 641,656
2002 1.154 1.301 674,168
2001 1.099 1.154 329,688
2000 0.968 1.099 147,364
1999 1.000 0.968 81,239
B-7
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Travelers Series Fund Inc.
AIM Capital Appreciation Portfolio (11/01)............... 2003 0.654 0.840 35,106
2002 0.867 0.654 38,688
2001 1.000 0.867 --
MFS Total Return Portfolio (4/99)........................ 2003 1.073 1.240 1,112,494
2002 1.141 1.073 994,730
2001 1.150 1.141 458,197
2000 0.994 1.150 177,102
1999 1.000 0.994 56,338
Pioneer Strategic Income Portfolio (6/99)................ 2003 1.084 1.285 37,669
2002 1.032 1.084 29,999
2001 0.998 1.032 17,469
2000 1.010 0.998 --
1999 1.000 1.010 --
SB Adjustable Rate Income Portfolio --
Class I Shares (10/03)................................... 2003 1.000 1.001 12,265
Smith Barney Aggressive Growth Portfolio (5/01).......... 2003 0.634 0.846 829,147
2002 0.949 0.634 372,023
2001 1.000 0.949 148,073
Smith Barney High Income Portfolio (5/99)................ 2003 0.842 1.065 20,424
2002 0.877 0.842 17,421
2001 0.918 0.877 26,499
2000 1.007 0.918 12,407
1999 1.000 1.007 --
Smith Barney International All Cap
Growth Portfolio (3/99).................................. 2003 0.597 0.755 182,229
2002 0.810 0.597 184,371
2001 1.186 0.810 202,204
2000 1.569 1.186 76,324
1999 1.000 1.569 33,821
Smith Barney Large Capitalization
Growth Portfolio (3/99).................................. 2003 0.677 0.991 414,434
2002 0.907 0.677 335,753
B-8
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Smith Barney Large Capitalization Growth 2001 1.045 0.907 323,325
Portfolio (continued)...................................
2000 1.132 1.045 265,016
1999 1.000 1.132 100,647
Strategic Equity Portfolio (3/99)........................ 2003 0.598 0.787 861,404
2002 0.908 0.598 907,697
2001 1.057 0.908 1,013,052
2000 1.303 1.057 787,876
1999 1.000 1.303 274,568
Van Kampen Life Investment Trust
Comstock Portfolio -- Class II Shares (8/03)............. 2003 1.000 1.257 15,449
Emerging Growth Portfolio -- Class II Shares (1/02)...... 2003 0.546 0.688 --
2002 0.817 0.546 --
2001 1.000 0.817 --
Enterprise Portfolio -- Class II Shares (10/01).......... 2003 0.637 0.794 --
2002 0.911 0.637 --
2001 1.000 0.911 --
Variable Annuity Portfolios
Smith Barney Small Cap Growth
Opportunities Portfolio (5/01)........................... 2003 0.700 0.986 --
2002 0.949 0.700 --
2001 1.000 0.949 --
Variable Insurance Products Fund II
Asset Manager Portfolio -- Service Class 2 (6/00)........ 2003 0.813 0.949 262,244
2002 0.900 0.813 227,798
2001 0.949 0.900 178,530
2000 1.000 0.949 133,640
Contrafund(R) Portfolio -- Service Class 2 (9/01)........ 2003 0.852 1.083 244,184
2002 0.950 0.852 208,513
2001 1.000 0.950 --
B-9
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 0.80% 3% AIR (CONTINUED)
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Variable Insurance Products Fund III
Dynamic Capital Appreciation Portfolio --
Service Class 2 (5/01)................................... 2003 0.776 0.962 5,993
2002 0.846 0.776 5,993
2001 1.000 0.846 --
Mid Cap Portfolio -- Service Class 2 (7/01).............. 2003 0.921 1.264 103,818
2002 1.032 0.921 100,887
2001 1.000 1.032 --
B-10
ACCUMULATION UNIT VALUES (IN DOLLARS)
SEPARATE ACCOUNT CHARGES 1.25%, PLUS 1.40% FLOOR BENEFIT
UNIT VALUE AT NUMBER OF UNITS
BEGINNING OF UNIT VALUE AT OUTSTANDING AT
PORTFOLIO NAME YEAR YEAR END OF YEAR END OF YEAR
- -------------- ---- ------------- ------------- ---------------
Greenwich Street Series Fund
Equity Index Portfolio -- Class II Shares (3/99)......... 2003 0.636 0.791 --
2002 0.841 0.636 --
2001 0.986 0.841 --
2000 1.117 0.986 --
1999 1.000 1.117 --
NOTES
Effective April 30, 2003 Putnam Variable Trust: Putnam VT Voyager II Fund --
Class IB Shares changed its name to Putnam VT Discovery Growth Fund -- Class IB
Shares.
Effective April 30, 2003 Putnam Variable Trust: Putnam VT International Growth
Fund -- Class IB Shares changed its name to Putnam VT International Equity Fund
- -- Class IB Shares.
Effective April 30, 2003 Salomon Brother Variable Series Funds Inc.: Capital
Fund -- Class I changed its name to All Cap Fund -- Class I.
Effective May 1, 2003 Janus Aspen Series: Aggressive Growth Portfolio -- Service
Shares changed its name to Mid Cap Growth Portfolio -- Service Shares.
Effective May 1, 2003 The Travelers Series Trust: Utilities Portfolio changed
its name to Pioneer Fund Portfolio.
Effective July 1, 2003: The Travelers Series Fund Inc.: Putnam Diversified
Income Portfolio changed its name to Pioneer Strategic Income Portfolio
Effective September 15, 2003: The Travelers Series Fund Inc. Alliance Growth
Portfolio changed its name to Strategic Equity Portfolio.
Effective November 17, 2003: The Travelers Series Trust: MFS Research Portfolio
changed its name to Merrill Lynch Large Cap Core Portfolio.
Effective May 1, 2003 Dreyfus Variable Investment Fund: Small Cap Portfolio --
Initial Shares changed its name to Dreyfus VIF Development Leaders Portfolio --
Initial Shares.
Effective May 1, 2003 Dreyfus Variable Investment Fund: Appreciation Portfolio
- -- Initial Shares changed its name to Dreyfus VIF Appreciation Portfolio --
Initial Shares.
Funding options not listed above had no amount allocated to them or where not
available as of December 31, 2003.
"Number of Units outstanding at the end of the period" may include units for
Contracts Owners in payout phase, where appropriate.
The date next to each funding option's name reflects the date money first came
into the funding option through the Separate Account.
B-11
NOTES (CONTINUED)
Putnam Variable Trust: Putnam VT Discovery Growth Funds -- Class IB Share is no
longer available to new contract owners.
Credit Suisse Trust: Emerging Markets Portfolio is no longer available to new
contract owners.
Strong Variable Insurance Funds, Inc.: Strong Multi Cap Value Fund II is no
longer available to new contract owners.
B-12
APPENDIX C
- --------------------------------------------------------------------------------
WAIVER OF WITHDRAWAL CHARGE FOR NURSING HOME CONFINEMENT
NOT AVAILABLE UNDER SECTION 457 PLANS
NOT AVAILABLE IF OWNER IS AGE 71 OR OLDER ON THE CONTRACT DATE.
PLEASE REFER TO YOUR CONTRACT FOR STATE VARIATIONS OF THIS WAIVER.
If, after the first Contract Year and before the Maturity Date, the Annuitant
begins confinement in an eligible nursing home, you may surrender or make
withdrawal, subject to the maximum withdrawal amount described below, without
incurring a withdrawal charge. In order for the Company to waive the withdrawal
charge, the withdrawal must be made during continued confinement in an eligible
nursing home after the qualifying period has been satisfied, or within sixty
(60) days after such confinement ends. The qualifying period is confinement in
an eligible nursing home for ninety (90) consecutive days. We will require proof
of confinement in a form satisfactory to us, which may include certification by
a licensed physician that such confinement is medically necessary.
An eligible nursing home is defined as an institution or special nursing unit of
a hospital which:
(a) is Medicare approved as a provider of skilled nursing care
services; and
(b) is not, other than in name only, an acute care hospital, a home for
the aged, a retirement home, a rest home, a community living
center, or a place mainly for the treatment of alcoholism, mental
illness or drug abuse.
OR
Meets all of the following standards:
(a) is licensed as a nursing care facility by the state in which it is
licensed;
(b) is either a freestanding facility or a distinct part of another
facility such as a ward, wing, unit or swing-bed of a hospital or
other facility;
(c) provides nursing care to individuals who are not able to care for
themselves and who require nursing care;
(d) provides, as a primary function, nursing care and room and board;
and charges for these services;
(e) provides care under the supervision of a licensed physician,
registered nurse (RN) or licensed practical nurse (LPN);
(f) may provide care by a licensed physical, respiratory, occupational
or speech therapist; and
(g) is not, other than in name only, an acute care hospital, a home for
the aged, a retirement home, a rest home, a community living
center, or a place mainly for the treatment of alcoholism, mental
illness or drug abuse.
FILING A CLAIM: You must provide the Company with written notice of a claim
during continued confinement after the 90-day qualifying period, or within sixty
days after such confinement ends.
The maximum withdrawal amount for which we will waive the withdrawal charge is
the Contract Value on the next Valuation Date following written proof of claim,
less any Purchase Payments made within a one-year period before confinement in
an eligible nursing home begins, less any Purchase Payments made on or after the
Annuitant's 71st birthday.
We will pay any withdrawal requested under the scope of this waiver as soon as
we receive proper written proof of your claim, and we will pay the withdrawal in
a lump sum. You should consult with your personal tax adviser regarding the tax
impact of any withdrawals taken from your Contract.
C-1
APPENDIX D
- --------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENT
If you have selected any period certain option, you may elect to surrender a
payment equal to a portion of the present value of the remaining period certain
payments any time after the first Contract Year. There is a surrender charge of
5% of the amount withdrawn under this option.
For fixed Annuity Payments, we calculate the present value of the remaining
period certain payments using a current interest rate. The current interest rate
is the then current annual rate of return offered by Us on a new Fixed Annuity
Period Certain Only annuitizations for the amount of time remaining in the
certain period. If the period of time remaining is less that the minimum length
of time for which we offer a new Fixed Annuity Period Certain Only
annuitization, then the interest rate will be the rate of return for that
minimum length of time.
The formula for calculating the Present Value is as follows:
N t/365
Present Value = [sigma] [Payments X (1/1 + iC)
s = 1
Where
iC = the interest rate described above
n = the number of payments remaining in the Contract Owner's certain
period at the time of request for this benefit
t = number of days remaining until that payment is made, adjusting for
leap years.
If you request a percentage of the total amount available, then the remaining
period certain payments will be reduced by that percentage for the remainder of
the certain period. After the certain period expires, any remaining payments, if
applicable, will increase to the level they would have been had no liquidation
taken place.
ILLUSTRATION:
Amount Annuitized $12,589.80
Annuity Option Life with 10 year certain period
Annuity Payments $1,000 Annually -- first payment immediately
For the purposes of illustration, assume after two years (immediately preceding
the third payment), you choose to receive full liquidity, and the current rate
of return that we are then crediting for 8 year fixed Period Certain Only
Annuitizations is 4.00%. The total amount available for liquidity is calculated
as follows:
1000 + (1000/1.04) + (1000/1.04)^2 + (1000/1.04)^3 + (1000/1.04)^4 +
(1000/1.04)^5 + (1000/1.04)^6 + (1000/1.04)^7 = $7002.06
The surrender penalty is calculated as 5% of $7,002.06, or $350.10.
The net result to you after subtraction of the surrender penalty of $350.10
would be $6,651.96.
You would receive no more payments for 8 years. After 8 years, if you are still
living, you will receive $1,000 annually until your death.
D-1
APPENDIX E
- --------------------------------------------------------------------------------
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains more specific information and
financial statements relating to The Travelers Insurance Company or The
Travelers Life and Annuity Company. A list of the contents of the Statement of
Additional Information is set forth below:
The Insurance Company
Principal Underwriter
Distribution and Principal Underwriting Agreement
Valuation of Assets
Federal Tax Considerations
Independent Accountants
Condensed Financial Information
Financial Statements
- --------------------------------------------------------------------------------
Copies of the Statement of Additional Information dated May 3, 2004 are
available without charge. To request a copy, please clip this coupon on the line
above, enter your name and address in the spaces provided below, and mail to:
The Travelers Insurance Company, Annuity Investor Services, One Cityplace, 3 CP,
Hartford, Connecticut 06103-3415. The Travelers Insurance Company Statement of
Additional Information is printed on Form L-21256S, and The Travelers Life and
Annuity Statement of Additional Information is printed on Form L-21257S.
Name:
---------------------------------------------------
Address:
---------------------------------------------------
---------------------------------------------------
E-1
THIS PAGE INTENTIONALLY LEFT BLANK.
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
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 33-58677
----------------------
THE TRAVELERS LIFE AND ANNUITY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-0904249
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE 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 30,000 shares of common stock, par
value $100 per share, of the registrant, all of which were owned by The
Travelers Insurance Company, an indirect wholly owned subsidiary of Citigroup
Inc.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
THE TRAVELERS LIFE AND ANNUITY COMPANY
TABLE OF CONTENTS
FORM 10-K
ITEM NUMBER PART I PAGE
1. Business...................................................................................................2
2. Properties.................................................................................................4
3. Legal Proceedings..........................................................................................5
4. Submission of Matters to a Vote of Security Holders........................................................5
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters......................................5
6. Selected Financial Data....................................................................................5
7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................5
7A. Quantitative and Qualitative Disclosures About Market Risk................................................11
8. Financial Statements and Supplementary Data...............................................................13
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................46
9A. Controls and Procedures...................................................................................46
PART III
10. Directors and Executive Officers of the Registrant........................................................47
11. Executive Compensation....................................................................................47
12. Security Ownership of Certain Beneficial Owners and Management............................................47
13. Certain Relationships and Related Transactions............................................................47
14. Principal Accountant Fees and Services....................................................................47
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................................49
Exhibit Index.............................................................................................50
Signatures ...............................................................................................51
Index to Financial Statements and Financial Statement Schedules...........................................52
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS.
GENERAL
The Travelers Life and Annuity Company (the Company) is a wholly owned
subsidiary of The Travelers Insurance Company (TIC), an indirect wholly owned
subsidiary of Citigroup Inc. (Citigroup). Citigroup is a diversified 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 and TIC provide additional business and financial
information concerning those companies and their consolidated subsidiaries. On
March 27, 2002, Travelers Property Casualty Corp. (TPC), TIC's parent at
December 31, 2001, completed its initial public offering (IPO). 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 Citigroup Insurance Holding Corporation (CIHC)
so that TIC and the Company would remain indirect wholly owned subsidiaries of
Citigroup. TIC 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.
The Company is a stock insurance company chartered in 1973 in the State of
Connecticut and has been continuously engaged in the insurance business since
that time. The Company is licensed to conduct life and annuity insurance
business in all the states except New York. The Company is also licensed to
conduct life and annuity insurance business in the District of Columbia and
Puerto Rico.
The Company offers individual annuity and life insurance products to individuals
and small businesses. Among the range of individual annuity products offered are
deferred fixed and variable annuities and payout annuities. Individual life
insurance products include term, universal and variable life insurance. These
products are distributed primarily through Smith Barney (SB), a division of
Citigroup Global Markets Inc., and Primerica Financial Services (PFS), both
affiliates of the Company. Individual annuity sales by SB accounted for 32% of
total individual annuity sales in 2003 and 2002. Sales by PFS accounted for 29%
and 26% in 2003 and 2002, respectively. In addition, the Company distributes
these products through CitiStreet Retirement Services, a division of CitiStreet
LLC, (CitiStreet) and Citibank, N.A. (Citibank), also affiliates of the Company,
a nationwide network of independent agents and the outside broker-dealer
channel.
In the past, the Company offered group pension close-out business. The Company
no longer actively markets this product and all new sales are reported in TIC.
Periodically, premiums are collected from the business that remains on the
books. Reserves related to this block of business remain recorded in the
Company's balance sheets.
The Company has assets held in a separate account related to reserves on
structured settlement contracts that provide guarantees for the contractholders
independent of the investment performance of the separate account assets. The
assets held in this separate account are owned by the Company and
contractholders do not share in their investment performance. The assets,
liabilities and earnings related to the structured settlements are classified
consistently with general account assets, liabilities and earnings. These
contracts were purchased by TPC in connection with the settlement of certain of
their policyholder obligations. Effective April 1998, the Company no longer
writes structured settlement contracts.
2
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K, its quarterly reports on Form 10-Q and
any current reports on Form 8-K, and all amendments to these reports are
available on the Citigroup website at HTTP://WWW.CITIGROUP.COM by selecting the
"Investor Relations" page and selecting "SEC Filings".
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 of the Company during the years ended December 31, 2003 and 2002.
RISK-BASED CAPITAL (RBC) REQUIREMENTS
In order to enhance the regulation of insurer solvency, the NAIC adopted a
formula and model law to implement RBC requirements for most life and annuity
insurance companies, which are designed to determine minimum capital
requirements and to raise the level of protection that statutory surplus
provides for policyholder obligations. For this purpose, an insurer's total
adjusted capital is measured in relation to its specific asset and liability
profiles. A company's risk-based capital is calculated by applying factors to
various asset, premium and reserve items, where the factor is higher for those
items with greater underlying risk and lower for less risky items.
The RBC formula for life insurers measures four major areas of risk:
o asset risk (I.E., the risk of asset default),
o insurance risk (I.E., the risk of adverse mortality and morbidity
experience),
o interest rate risk (I.E., the risk of loss due to changes in
interest rates) and
o business risk (I.E., normal business and management risk).
Under laws adopted by the states, insurers having less total adjusted capital
than that required by the RBC calculation will be subject to varying degrees of
regulatory action, depending upon the level of capital inadequacy.
The RBC law provides for four levels of regulatory action as defined by the
NAIC. The extent of regulatory intervention and action increases as the level of
total adjusted capital to RBC falls. The first level, the company action level,
requires an insurer to submit a plan of corrective actions to the regulator if
total adjusted capital falls below 200% of the RBC amount. The second level, the
regulatory action
3
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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%
or the RBC amount.
The formulas have not been designed to differentiate among adequately
capitalized companies, which operate with higher levels of capital. Therefore,
it is inappropriate and ineffective to use the formula to rate or rank
companies. At December 31, 2003, the Company had total adjusted capital in
excess of amounts requiring company action or any level of regulatory action at
any prescribed RBC level.
INSURANCE REGULATION CONCERNING DIVIDENDS
The Company is domiciled in the State of Connecticut. The insurance holding
company law of Connecticut requires notice to, and approval by, the State of
Connecticut Insurance Department for the declaration or payment of any dividend
which, together with other distributions made within the preceding twelve
months, exceeds the greater of (i) 10% of the insurer's surplus or (ii) the
insurer's net gain from operations for the twelve-month period ending on the
preceding December 31st, in each case determined in accordance with statutory
accounting practices. Such declaration or payment is further limited by adjusted
unassigned funds (surplus), reduced by 25% of the change in net unrealized
capital gains, as determined in accordance with statutory accounting practices.
In accordance with the Connecticut statute, after reducing the Company's
unassigned funds (surplus) by 25% of the change in net unrealized capital gains,
the Company may not pay dividends during 2004 without prior approval of the
State of Connecticut Insurance Department.
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 and TIC moved their executive offices to One Cityplace, Hartford,
Connecticut, during the first quarter of 2003. The Company and TIC occupy
373,000 square feet at this location under an operating lease (in which TIC is
the lessee) that runs through October 31, 2008.
At December 31, 2002 TIC 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 also occupied this space leased by TIC and was allocated
expense according to cost sharing agreements. Management believes that these
facilities are suitable and adequate for the Company's current needs.
The preceding discussion does not include information on investment properties.
4
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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, the Company is a defendant or co-defendant
in various litigation matters incidental to and typical of the businesses in
which it is engaged. In the opinion of the Company's management, the ultimate
resolution of these legal proceedings would not be likely to have a material
adverse effect on the Company's results of operations, financial condition or
liquidity. This statement is a forward-looking statement within the meaning of
the Private Securities Litigation Reform Act. See "Forward-Looking Statements"
on page 10.
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 STOCKHOLDER MATTERS.
The Company has 100,000 authorized shares of common stock, of which 30,000 are
issued and outstanding as of December 31, 2003. All outstanding shares of the
Company's common stock are held by TIC, and there exists no established public
trading market for the common stock of the Company. The Company did not pay
dividends in 2003 or 2002. See Note 7 of Notes to Financial Statements for
dividend restrictions.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's narrative analysis of the results of operations is presented in
lieu of Management's Discussion and Analysis of Financial Condition and Results
of Operations, pursuant to General Instruction I(2)(a) of Form 10-K.
CRITICAL ACCOUNTING POLICIES
The Notes to 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, which are discussed below.
5
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life, universal life (UL) and deferred 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).
DAC for deferred annuities, both fixed and variable, 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 UL 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 this product is currently being amortized over
16-25 years.
DAC relating to traditional life, including term insurance and other products,
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 this product
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 Company
experience and are adjusted to reflect deviations such as substandard mortality
in structured settlement benefits. The interest rates range from 2.07% to 7.85%
for these annuity products with a weighted average interest rate of 6.6%,
including adverse deviation. Traditional life products include whole life and
term insurance. Future policy benefits for traditional life products are
estimated on the basis of
6
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
actuarial assumptions as to mortality, persistency and interest, established at
policy issue and 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. Interest
assumptions applicable to traditional life products range from 3.0% to 7.0%,
with a weighted average of 5.8%.
INVESTMENTS IN FIXED MATURITIES
Fixed maturities, which comprise 88% and 82% of total investments at December
31, 2003 and 2002, respectively, include bonds, notes and redeemable preferred
stocks. Fixed maturities, including financial instruments subject to securities
lending agreements (see Note 2 of Notes to Financial Statements), are classified
as "available for sale" and are reported at fair value, with unrealized
investment gains and losses, net of income taxes, credited or charged directly
to shareholder's equity. 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 the assumptions could affect the fair values of investments 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.
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.
RESULTS OF OPERATIONS ($ IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002
------------------------------- ------ ------
Revenues $646.3 $533.5
Benefits and interest credited 306.7 275.1
Operating expenses 185.6 99.4
------ ------
Income before taxes 154.0 159.0
Income taxes 34.6 55.6
------ ------
Net income $119.4 $103.4
====== ======
Net income was $119.4 million for the year ended December 31, 2003, compared to
$103.4 million for the year ended December 31, 2002. This 15% increase resulted
from lower realized investment
7
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
losses, higher business volumes and favorable income taxes, partially offset by
an 87% increase in operating expenses, due to an increase in amortization of DAC
and lower fixed income yields. Net income ncluded net realized investment losses
of $4.7 million and $19.9 million for the years ended December 31, 2003 and
2002, respectively. This decrease was primarily the result of the absence of
prior-year impairments on WorldCom Inc. investments of $12.9 million. A tax
benefit related to an adjustment to the Dividends Received Deduction in 2003 of
$13.1 million for the year ended December 31, 2003 contributed to a 22.5%
effective tax rate for the year compared to 35% in the prior year period.
Revenues increased 21% in 2003 over prior year. This increase was driven by net
investment income (NII) and fee income. NII was $356.5 million in 2003 compared
to $311.9 million in 2002. This increase was primarily due to a larger invested
asset base created from higher business volumes. Fee income in the individual
annuity and individual life product lines together increased $47.7 million, or
25%, in the current year compared to that of 2002, reflecting increased business
volumes from in-force policy retention related to lower surrender rates,
positive net sales and variable annuity equity market growth.
Insurance benefits and interest credited were 11.5% higher in 2003 versus 2002,
primarily related to the volume growth in individual annuity and universal life
contractholder funds. Operating expenses in 2003 were up $86.2 million, or 87%,
over the prior year due to an increase in the amortization of DAC, which was
$136.3 million in 2003 versus $67.0 million in 2002 and other expenses related
to business volume.
The amortization of capitalized DAC is a significant component of the Company's
expenses. The Company's recording of DAC amortization varies based upon product
type. DAC for deferred annuities, both fixed and variable employs a level yield
methodology. DAC for UL is amortized in relation to estimated gross profits,
with traditional life, including term insurance and other products, amortized in
relation to anticipated premiums.
The following is a summary of capitalized DAC by type:
Traditional Deferred
($ in millions) Life Annuity UL Total
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning balance January 1, 2002 $ 47.7 $ 511.5 $ 255.2 $ 814.4
Commissions and expenses deferred 16.5 169.4 130.8 316.7
Amortization expense (8.9) (72.6) (9.3) (90.8)
Underlying lapse and interest rate assumptions -- 29.8 -- 29.9
Amortization related to SFAS 91 reassessment -- (6.0) -- (6.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2002 55.3 632.1 376.7 1,064.1
Commissions and expenses deferred 14.3 172.1 164.9 351.3
Amortization expense (10.2) (107.6) (18.5) (136.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2003 $ 59.4 $ 696.6 $ 523.1 $ 1,279.1
- ------------------------------------------------------------------------------------------------------------------------------------
DAC capitalization increased 11% in 2003 versus 2002. The 2003 growth was driven
by a 26% increase in universal life capitalization related to a significant
increase in production. During the first quarter of 2002 there was a one-time
decrease in deferred annuity DAC amortization of $29.8 million due to changes in
underlying lapse and interest rate assumptions. These adjustments are to be
treated
8
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
retrospectively as per SFAS 91 by adjusting the DAC asset through amortization
expense and employing the new assumptions prospectively. In the fourth quarter
of 2002, the Company increased its deferred annuity DAC amortization by $6.0
million due to a significant decline in its individual annuities account
balances and benefit reserves, largely resulting from decreases in the stock
market which caused account balances to decline. In contrast to lapse and
interest rate assumptions, variances in expected versus actual market returns
are treated prospectively, resulting in a new amortization pattern over the
remaining estimated life of the business. The new amortization pattern is the
primary reason for the increase in deferred annuity DAC amortization in 2003
over 2002.
The following table shows net written premiums and deposits by product line for
the years ended December 31, 2003 and 2002. The majority of the annuity business
and a substantial portion of the life business written by the Company are
accounted for as investment contracts, with the result that the deposits
collected are reported as liabilities and are not included in revenues. Deposits
represent a statistic used for measuring business volumes, which management of
the Company uses to manage the life insurance and annuities operations, and may
not be comparable to similarly captioned measurements used by other life
insurance companies.
PREMIUMS AND DEPOSITS ($ IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, 2003 2002
PREMIUMS
Individual Life $ 37 $ 38
Other Annuity 4 5
------ ------
Total Premiums $ 41 $ 43
------ ------
DEPOSITS
Individual Annuity - Fixed $606 $1,244
Individual Annuity - Variable 1,581 1,343
Individual Life 599 433
Other Annuity 4 4
------ ------
Total Deposits $2,790 $3,024
------ ------
Individual annuity deposits collected for the year ended December 31, 2003
decreased 15% from the prior year primarily driven by a 51% decline in fixed
annuity sales due to competitive pressures and current market perception of
fixed rate products. This decrease was offset by an increase in variable annuity
sales which improved as equity market conditions improved. Individual annuity
account balances were $13.0 billion and $10.0 billion at December 31, 2003 and
2002, respectively. This increase is reflective of market appreciation over the
past year and in-force retention related to lower surrender rates and positive
net sales.
The 38% increase in individual life deposits for the twelve months ended
December 31, 2003 versus 2002 was the result of record universal life production
in the third and fourth quarters of 2003. Life insurance in force was $44
billion at December 31, 2003, up from $36 billion at December 31, 2002.
OUTLOOK
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. See "Forward-Looking
Statements" on the following page.
9
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
The Company is included in the Travelers Life & Annuity (TLA) segment of TIC and
its outlook should be considered within that context. 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. 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.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 1 of Notes to 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,"
10
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
"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 page 9.
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.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.
The primary market risk to the Company's investment portfolio is interest rate
risk. The Company's exposure to equity price risk and foreign exchange risk is
not significant. The Company has no direct commodity risk.
The interest rate risk taken in the investment portfolio is managed relative to
the duration of the liabilities. The portfolio is differentiated by business
unit, with each unit's portfolio structured to meet its particular needs.
Potential liquidity needs of the business are also key factors in managing the
investment portfolio. The portfolio duration relative to the liabilities'
duration is primarily managed through cash market transactions. For additional
information regarding the Company's investment portfolio see Note 2 of Notes to
Financial Statements.
There were no significant changes in the Company's primary market risk exposures
or in how those exposures are managed compared to the year ended December 31,
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" on the previous page.
SENSITIVITY ANALYSIS
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near-term" means a period of time going forward up to one year from the
date of the financial statements. Actual results may differ from the
hypothetical change in market rates assumed in this report, especially since
this sensitivity analysis does not reflect the results of any actions that would
be taken by the Company to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, mortgage loans, short-term securities, cash,
investment income accrued, policy loans, contractholder funds, and derivative
financial instruments. In addition, certain non-financial instrument liabilities
have been included in the
11
THE TRAVELERS LIFE AND ANNUITY COMPANY
ANNUAL REPORT ON FORM 10-K
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
$299 million and $262 million 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 $254 million and $242 million 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 as a result of a 100
basis point increase in interest rates as of December 31, 2003 and 2002 is not
material.
12
THE TRAVELERS LIFE AND ANNUITY COMPANY
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report............................................14
Financial Statements:
Statements of Income for the years ended
December 31, 2003, 2002 and 2001....................................15
Balance Sheets as of December 31, 2003 and 2002.....................16
Statements of Changes in Shareholder's Equity for the years
ended December 31, 2003, 2002 and 2001..............................17
Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001....................................18
Notes to Financial Statements.......................................19
13
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Life and Annuity Company:
We have audited the accompanying balance sheets of The Travelers Life and
Annuity Company as of December 31, 2003 and 2002, and the related 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 financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Travelers Life and Annuity
Company as of December 31, 2003 and 2002, and the results of its operations and
its 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 financial statements, the Company changed its
method of accounting 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
14
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF INCOME
($ IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
---- ---- ----
REVENUES
Premiums $ 40,866 $ 42,893 $ 39,222
Net investment income 356,463 311,946 251,054
Realized investment gains (losses) (7,202) (30,584) 26,144
Fee income 237,366 189,686 173,113
Other revenues 18,834 19,530 14,317
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues 646,327 533,471 503,850
- ------------------------------------------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Current and future insurance benefits 89,729 94,513 88,842
Interest credited to contractholders 216,952 180,610 125,880
Amortization of deferred acquisition costs 136,310 66,972 89,475
General and administrative expenses 49,288 32,352 23,404
- ------------------------------------------------------------------------------------------------------------------------------------
Total Benefits and Expenses 492,279 374,447 327,601
- ------------------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes and cumulative effect of
change in accounting principle 154,048 159,024 176,249
- ------------------------------------------------------------------------------------------------------------------------------------
Federal income taxes
Current 73,423 (31,143) (19,007)
Deferred (38,835) 86,797 80,096
- ------------------------------------------------------------------------------------------------------------------------------------
Total Federal Income Taxes 34,588 55,654 61,089
- ------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting principle
119,460 103,370 115,160
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of tax
-- -- (62)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 119,460 $ 103,370 $ 115,098
====================================================================================================================================
See Notes to Financial Statements.
15
THE TRAVELERS LIFE AND ANNUITY COMPANY
BALANCE SHEETS
($ IN THOUSANDS)
AT DECEMBER 31, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturities, available for sale at fair value (including $130,895 and
$144,284 subject to securities lending agreements) (cost $5,033,778
and $4,385,801) $ 5,357,225 $ 4,520,299
Equity securities, at fair value (cost $8,253 and $14,939) 8,307 14,495
Mortgage loans 135,347 134,078
Short-term securities 195,279 475,365
Other invested assets 392,638 384,616
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments 6,088,796 5,528,853
- ------------------------------------------------------------------------------------------------------------------------------------
Separate and variable accounts 9,690,455 6,862,009
Deferred acquisition costs 1,279,118 1,064,118
Premiums and fees receivable 67,272 59,636
Other assets 312,546 179,558
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $17,438,187 $13,694,174
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Future policy benefits and claims $ 1,097,704 $ 1,145,692
Contractholder funds 4,511,813 3,886,083
Separate and variable accounts 9,690,455 6,862,009
Deferred federal income taxes 224,821 199,350
Other liabilities 514,718 441,249
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 16,039,511 12,534,383
- ------------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
Common stock, par value $100; 100,000 shares authorized,
30,000 issued and outstanding 3,000 3,000
Additional paid-in capital 417,316 417,316
Retained earnings 763,994 644,534
Accumulated other changes in equity from nonowner sources 214,366 94,941
- ------------------------------------------------------------------------------------------------------------------------------------
Total Shareholder's Equity 1,398,676 1,159,791
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $17,438,187 $13,694,174
====================================================================================================================================
See Notes to Financial Statements.
16
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
($ IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 3,000 $ 3,000 $ 3,000
Changes in common stock -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 3,000 $ 3,000 $ 3,000
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 417,316 $ 417,316 $ 417,316
Capital contributed by parent -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 417,316 $ 417,316 $ 417,316
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 644,534 $ 541,164 $ 426,066
Net income 119,460 103,370 115,098
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 763,994 $ 644,534 $ 541,164
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES
IN EQUITY FROM NONOWNER SOURCES
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 94,941 $ 16,084 $ 13,622
Cumulative effect of change in accounting principle for
derivative instruments and hedging activities, net of tax -- -- 62
Unrealized gains (losses), net of tax 120,993 73,750 (924)
Derivative instrument hedging activity gains (losses),
net of tax (1,568) 5,107 3,324
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 214,366 $ 94,941 $ 16,084
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF CHANGES IN EQUITY
FROM NONOWNER SOURCES
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 119,460 $ 103,370 $ 115,098
Other changes in equity from nonowner sources 119,425 78,857 2,462
- ------------------------------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $ 238,885 $ 182,227 $ 117,560
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDER'S EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 1,159,791 $ 977,564 $ 860,004
Changes in total shareholder's equity 238,885 182,227 117,560
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,398,676 $ 1,159,791 $ 977,564
====================================================================================================================================
See Notes to Financial Statements.
17
THE TRAVELERS LIFE AND ANNUITY COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
($ IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Premiums collected $ 43,903 $ 43,490 $ 37,915
Net investment income received 319,629 276,813 211,179
Fee and other income received 265,410 238,970 211,885
Benefits and claims paid (105,867) (103,513) (103,224)
Interest paid to contractholders (216,952) (180,610) (125,880)
Operating expenses paid (437,335) (343,932) (354,506)
Income taxes (paid) received (134,927) 88,888 45,257
Other 41,239 (21,047) (31,175)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (224,900) (941) (108,549)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 519,960 255,009 97,712
Mortgage loans 22,628 36,193 20,941
Proceeds from sales of investments
Fixed maturities 1,657,663 1,689,931 938,987
Equity securities 7,769 35,556 6,363
Real estate held for sale 794 -- (36)
- -----------------------------------------------------------------------------------------------------------------------------------
Purchases of investments
Fixed maturities (2,823,940) (3,018,069) (2,022,618)
Equity securities (3,506) (35,735) (2,274)
Mortgage loans (27,456) (44,632) (14,494)
Policy loans, net 665 (11,201) (3,395)
Short-term securities (purchases) sales, net 280,086 (268,606) 40,618
Other investment (purchases) sales, net (45,906) (20,915) (6,334)
Securities transactions in course of settlement, net (3,561) 117,806 64,698
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (414,804) (1,264,663) (879,832)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Contractholder fund deposits 913,546 1,486,056 1,178,421
Contractholder fund withdrawals (287,816) (224,542) (185,464)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 625,730 1,261,514 992,957
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (13,974) (4,090) 4,576
Cash at beginning of year 15,424 19,514 14,938
- -----------------------------------------------------------------------------------------------------------------------------------
Cash at December 31, $ 1,450 $ 15,424 $ 19,514
===================================================================================================================================
See Notes to Financial Statements.
18
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies used in the preparation of the accompanying
financial statements follow.
BASIS OF PRESENTATION
The Travelers Life and Annuity Company (the Company) is a wholly owned
subsidiary of The Travelers Insurance Company (TIC), an indirect wholly
owned subsidiary of Citigroup Inc. (Citigroup), a diversified global
financial services holding company whose businesses provide a broad range
of financial services to consumer and corporate customers around the world.
On March 27, 2002, Travelers Property Casualty Corp. (TPC), TIC's parent at
December 31, 2001, completed its initial public offering (IPO). On August
20, 2002, Citigroup made a tax-free distribution of the majority of its
remaining interest in TPC to Citigroup Stockholders. Prior to the IPO, the
common stock of TIC was distributed by TPC to Citigroup Insurance Holding
Corporation (CIHC) so that TIC and the Company would remain indirect wholly
owned subsidiaries of Citigroup. TIC 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.
The financial statements and accompanying footnotes of the Company are
prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP). The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and benefits and expenses
during the reporting period. Actual results could differ from those
estimates.
The Company offers a variety of variable annuity products where the
investment risk is borne by the contractholder, not the Company, and the
benefits are not guaranteed. The premiums and deposits related to these
products are reported in separate accounts. The Company considers it
necessary to differentiate, for financial statement purposes, the results
of the risks it has assumed from those it has not.
Certain prior year amounts have been reclassified to conform to the 2003
presentation.
ACCOUNTING CHANGES
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board (FASB) released
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46). FIN 46 changes the method of determining whether certain
entities, including securitization entities, should be included in the
Company's 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,
19
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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.
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. The Company elected to implement
the provisions of FIN 46 in the 2003 third quarter. Based upon the
implementation guidance, the Company is not considered a primary
beneficiary of any VIEs, thus no consolidations were required due to the
implementation of FIN 46 on July 1, 2003. The Company does, however, hold a
significant interest in other VIEs, none of which were material to the
Company's financial statements.
The implementation of FIN 46 encompassed a review of numerous entities to
determine the impact of adoption and considerable judgment was used in
evaluating whether or not a VIE should be consolidated. The FASB continues
to provide additional guidance on implementing FIN 46 through FASB Staff
Positions.
In 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 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 on the Company's balance
sheet will be immaterial. As the Company continues to evaluate the impact
of applying FIN 46-R, entities may be identified that would need to be
consolidated.
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 an impact on the Company's
financial statements.
20
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 have an impact on the Company's financial statements.
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.
Similar to Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", the alternative method of accounting, an
offsetting increase to shareholder's equity under SFAS 123 is recorded
equal to the amount of compensation expense charged. The adoption of SFAS
123 did not have a significant impact on the Company's financial
statements.
BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted 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.
All goodwill was fully amortized at December 31, 2001 and the Company did
not have any other intangible assets with an indefinite useful life. Other
intangible assets that are not deemed to have an indefinite useful life
will continue to be amortized over their useful lives. See Note 4.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted SFAS 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
21
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the consolidated balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
recognized asset or liability or of a forecasted transaction, or (c) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security,
or a foreign-currency-denominated forecasted transaction. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting
designation. The cumulative effect of adopting SFAS 133 was an after-tax
charge of $62 thousand included in net income and an after-tax benefit of
$62 thousand included in accumulated other changes in equity from nonowner
sources.
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND RETAINED
BENEFICIAL INTEREST 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 of 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. Interest income on a beneficial interest falling
within the scope of EITF 99-20 is to be recognized prospectively. The
adoption of EITF 99-20 had no effect on the Company's 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 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.
22
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
ACCOUNTING POLICIES
INVESTMENTS
Fixed maturities include bonds, notes and redeemable preferred stocks.
Fixed maturities, including financial instruments subject to securities
lending agreements (see Note 2), are classified as "available for sale" and
are reported at fair value, with unrealized investment gains and losses,
net of income taxes, credited or charged directly to shareholder's equity.
Fair values of investments in fixed maturities are based on quoted market
prices or dealer quotes. If these 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 the
assumptions could affect the fair values of investments. 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 investment's
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 are carried at fair
value based primarily on quoted market prices. Changes in fair values of
equity securities are charged or credited directly to shareholder's equity,
net of income taxes.
Mortgage loans are carried at amortized cost. A mortgage loan is considered
impaired when it is probable that the Company will be unable to collect
principal and interest amounts due. For mortgage loans that are determined
to be impaired, a reserve is established for the difference between the
amortized cost and fair market value of the underlying collateral. In
estimating fair value, the Company uses interest rates reflecting the
current real estate financing market.
Short-term securities, consisting primarily of money market instruments and
other debt issues purchased with a maturity of less than one year, are
carried at amortized cost, which approximates fair value.
Other invested assets include trading securities, partnership investments
and real estate joint ventures which are accounted for on the equity method
of accounting. Undistributed income of these investments is reported in net
investment income. Also included in other invested assets are policy loans
which are carried at the amount of the unpaid balances that are not in
excess of the net cash
23
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
surrender values of the related insurance policies. The carrying value of
policy loans, which have no defined maturities, is considered to be fair
value.
Accrual of investment income, included in other assets, is suspended on
fixed maturities or mortgage loans that are in default, or on which it is
likely that future payments will not be made as scheduled. Interest income
on investments in default is recognized only as payment is received.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures contracts, swaps, options and forward contracts as a means of
hedging exposure to interest rate changes, equity price change and foreign
currency risk. The Company does not hold or issue derivative instruments
for trading purposes. (See Note 9 for a more detailed description of the
Company's derivative use.) Derivative financial instruments in a gain
position are reported in the balance sheet in other assets, derivative
financial instruments in a loss position are reported in the 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 net amount is reflected in current
earnings. The Company's fair value hedges are primarily of
available-for-sale securities.
For cash flow hedges, the accounting treatment depends on the effectiveness
of the hedge. To the extent that derivatives are effective in offsetting
the variability of the hedged cash flows, changes in the derivatives' fair
value will not be included in current earnings but are reported in the
accumulated other changes in equity from nonowner sources. 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 changes
in fair value is immediately included in realized investment gains and
losses. The Company's cash flow hedges primarily include hedges of foreign
denominated funding agreements and floating rate available-for-sale
securities.
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
24
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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 derivatives 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 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 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.
SEPARATE ACCOUNTS
The Company has separate accounts that primarily represent funds for which
investment income and investment gains and losses accrue directly to, and
investment risk is borne by, the contractholders. Each of these accounts
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.
25
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Amounts assessed to the separate account contractholders for management
services are included in revenues. Deposits, net investment income and
realized investment gains and losses for these accounts are excluded from
revenues, and related liability increases are excluded from benefits and
expenses.
DEFERRED ACQUISITION COSTS
Costs of acquiring traditional life, universal life (UL) and deferred
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 DAC 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, 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 UL 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 this product
is currently being amortized over 16-25 years.
DAC relating to traditional life, including term 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 this
product 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. See Note 4.
VALUE OF INSURANCE IN FORCE
The value of insurance in force, reported in other assets, is an asset that
represents the actuarially determined present value of anticipated profits
to be realized from annuity contracts at the date of acquisition using the
same assumptions that were used for computing related liabilities, where
26
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
appropriate. The value of insurance in force was the actuarially determined
present value of the projected future profits discounted at an interest
rate of 16% for the annuity business acquired. The annuity contracts are
amortized employing a level yield method over 31 years. The value of
insurance in force is reviewed periodically for recoverability to determine
if any adjustment is required. Adjustments, if any, are charged to income.
See Note 4.
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 Company experience and are adjusted to reflect deviations such as
substandard mortality in structured settlement benefits. The interest rates
range from 2.07% to 7.85% for these annuity products with a weighted
average interest rate of 6.6%, including adverse deviation. 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 and 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. Interest assumptions applicable to traditional life products
range from 3.0% to 7.0%, with a weighted average of 5.8%.
CONTRACTHOLDER FUNDS
Contractholder funds represent deposits from the issuance of UL pension
investment and certain deferred annuity and structured settlement
contracts. For UL contracts, contractholder fund balances are increased by
receipts for mortality coverage, contract administration, surrender charges
and interest accrued where one or more elements are not fixed or
guaranteed. These balances are decreased by withdrawals, mortality charges
and administrative expenses charged to the contractholders where these
charges and expenses may not be fixed or guaranteed. Interest rates
credited to contractholder funds related to universal life range from 4.0%
to 5.95%, with a weighted average interest rate of 5.01%.
Pension investment and certain annuity contracts do not contain significant
insurance risk 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 these investment-type contracts range from 1.0 %
to 7.75% with a weighted average interest rate of 5.35%.
GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS
Included in other liabilities is the Company's estimate of its liability
for guaranty fund and other insurance-related assessments. State guaranty
fund assessments are based upon the Company's share of premiums written or
received in one or more years prior to an insolvency occurring in the
industry. Once an insolvency has occurred, the Company recognizes a
liability for such assessments if it is probable that an assessment will be
imposed and the amount of the assessment can be reasonably estimated. At
December 31, 2003 and 2002, the Company's liability for guaranty fund
assessments was not significant.
27
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company, domiciled in the State of Connecticut, prepares statutory
financial statements in accordance with the accounting practices prescribed
or permitted by the State of Connecticut Insurance Department. Prescribed
statutory accounting practices are those practices that are incorporated
directly or by reference in state laws, regulations, and general
administrative rules applicable to all insurance enterprises domiciled in a
particular state. Permitted statutory accounting practices include
practices not prescribed by the domiciliary state, but allowed by the
domiciliary state regulatory authority. The Company does not have any
permitted statutory accounting practices.
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.
FEE INCOME
Fee income is recognized on deferred annuity and UL 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.
CURRENT AND FUTURE INSURANCE BENEFITS
Current and future insurance benefits represent charges for mortality and
morbidity related to fixed annuities, universal life and term life
insurance benefits.
INTEREST CREDITED TO CONTRACTHOLDERS
Interest credited to contractholders represents amounts earned by universal
life, pension investment 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.
28
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
2. INVESTMENTS
FIXED MATURITIES
The amortized cost and fair values of investments in fixed maturities were
as follows:
GROSS GROSS
DECEMBER 31, 2003 AMORTIZED UNREALIZED UNREALIZED FAIR
($ IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 644,362 $ 18,352 $ 1,598 $ 661,116
U.S. Treasury securities and obligations
of U.S. Government and government agencies
and authorities 192,271 4,756 731 196,296
Obligations of states and political
subdivisions 52,867 6,151 -- 59,018
Debt securities issued by foreign
governments 57,656 3,386 83 60,959
All other corporate bonds 3,179,328 240,472 5,329 3,414,471
All other debt securities 903,211 59,113 3,105 959,219
Redeemable preferred stock 4,083 2,155 92 6,146
- ------------------------------------------------------------------------------------------------------------------------------------
Total Available For Sale $5,033,778 $ 334,385 $ 10,938 $5,357,225
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS GROSS
DECEMBER 31, 2002 AMORTIZED UNREALIZED UNREALIZED FAIR
($ IN THOUSANDS) COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Mortgage-backed securities - CMOs and
pass-through securities $ 423,318 $ 21,809 $ 90 $ 445,037
U.S. Treasury securities and obligations
of U.S. Government and government agencies
and authorities 217,602 5,958 2,115 221,445
Obligations of states and political
subdivisions 49,472 7,170 -- 56,642
Debt securities issued by foreign
governments 21,530 2,146 296 23,380
All other corporate bonds 2,932,069 157,225 82,175 3,007,119
All other debt securities 737,215 35,255 10,926 761,544
Redeemable preferred stock 4,595 1,785 1,248 5,132
- ------------------------------------------------------------------------------------------------------------------------------------
Total Available For Sale $4,385,801 $ 231,348 $ 96,850 $4,520,299
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of fixed maturities classified as available for sale
were $1.7 billion, $1.7 billion and $939 million in 2003, 2002 and 2001,
respectively. Gross gains of $48.2 million, $85.6 million
29
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
and $67.0 million and gross losses of $52.4 million, $29.9 million and
$22.4 million in 2003, 2002 and 2001, respectively, were realized on those
sales. Additional losses of $10.2 million, $66.9 million and $11.5 million
were realized due to other-than-temporary losses in value in 2003, 2002 and
2001, respectively. Impairment activity increased significantly in 2002.
These prior year 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 $1.0
billion and $840.4 million at December 31, 2003 and 2002, respectively.
The amortized cost and fair value of fixed maturities available for sale at
December 31, 2003, by contractual maturity, are shown below. Actual
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
-----------------------------------------------------------------------
AMORTIZED FAIR
($ IN THOUSANDS) COST VALUE
-----------------------------------------------------------------------
MATURITY:
Due in one year or less $210,086 $214,645
Due after 1 year through 5 years 1,529,425 1,634,709
Due after 5 years through 10 years 1,821,121 1,963,235
Due after 10 years 828,784 883,520
-----------------------------------------------------------------------
4,389,416 4,696,109
-----------------------------------------------------------------------
Mortgage-backed securities 644,362 661,116
-----------------------------------------------------------------------
Total Maturity $5,033,778 $5,357,225
-----------------------------------------------------------------------
The Company makes significant investments in collateralized mortgage
obligations (CMOs). CMOs typically have high credit quality, offer good
liquidity, and provide a significant advantage in yield and total return
compared to U.S. Treasury securities. The Company's investment strategy is
to purchase CMO tranches which are protected against prepayment risk,
including planned amortization class tranches and last cash flow tranches.
Prepayment protected tranches are preferred because they provide stable
cash flows in a variety of interest rate scenarios. The Company does invest
in other types of CMO tranches if an assessment indicates a favorable
risk/return tradeoff. The Company does not purchase residual interests in
CMOs.
At December 31, 2003 and 2002, the Company held CMOs classified as
available for sale with a fair value of $332.4 million and $265.5 million,
respectively. Approximately 34% and 33%, 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 $327.7 million
and $177.8 million of GNMA, FNMA or FHLMC mortgage-backed pass-through
securities at December 31, 2003 and 2002, respectively. All of these
securities are rated AAA.
30
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO 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 in a short-term investment pool. See Note 11.
The loaned securities remain a recorded asset of the Company. 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 $154.0 million and $149.0 million,
respectively.
The Company participates in dollar roll repurchase transactions as a way to
generate investment income. These transactions involve the sale of
mortgage-backed securities with the agreement to repurchase substantially
the same securities from the same counterparty. Cash is received from the
sale, which is invested in the Company's short-term money market pool. The
cash is returned at the end of the roll period when the mortgage-backed
securities are repurchased. The Company will generate additional investment
income based upon the difference between the sale and repurchase prices.
These transactions are recorded as secured borrowings. The mortgage-backed
securities remain recorded as assets. The cash proceeds are reflected in
short-term investments and a liability is established to reflect the
Company's obligation to repurchase the securities at the end of the roll
period. This liability is classified as other liabilities in the balance
sheets and fluctuates based upon the timing of the repayments. The balances
were insignificant at December 31, 2003 and 2002, respectively.
EQUITY SECURITIES
The cost and fair values of investments in equity securities were as
follows:
-----------------------------------------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
($ IN THOUSANDS) COST GAINS LOSSES VALUE
-----------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003
Common stocks $1,645 $343 $249 $1,739
Non-redeemable preferred stocks 6,608 30 70 6,568
-----------------------------------------------------------------------------------------------------------
Total Equity Securities $8,253 $373 $319 $8,307
-----------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002
Common stocks $2,599 $37 $699 $1,937
Non-redeemable preferred stocks 12,340 394 176 12,558
-----------------------------------------------------------------------------------------------------------
Total Equity Securities $14,939 $431 $875 $14,495
-----------------------------------------------------------------------------------------------------------
Proceeds from sales of equity securities were $7.8 million, $35.6 million
and $6.4 million in 2003, 2002 and 2001, respectively. Gross gains and
losses on sales and impairments were insignificant.
OTHER-THAN-TEMPORARY LOSSES ON INVESTMENTS
At December 31, 2003, the cost of approximately 220 investments in fixed
maturity and equity securities exceeded their fair value by $11.3 million.
Of the $11.3 million, $9.2 million represents
31
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
fixed maturity investments that have been in a gross unrealized loss
position for less than a year and of these 87% are rated investment grade.
Fixed maturity investments that have been in a gross unrealized loss
position for a year or more total $1.8 million and 32% of these are rated
investment grade. The gross unrealized loss on equity securities was $.3
million at December 31, 2003.
Management has determined that the unrealized losses on the Company's
investments in fixed maturity and equity securities at December 31, 2003
are temporary in nature. The Company conducts a rigorous review each
quarter to identify and evaluate investments that have possible indications
of impairment. An investment in a debt or equity security is impaired if
its fair value falls below its cost and the decline is considered
other-than-temporary. Factors considered in determining whether a loss is
temporary include the length of time and extent to which fair value has
been below cost; the financial condition and near-term prospects of the
issuer; and the Company's ability and intent to hold the investment for a
period of time sufficient to allow for any anticipated recovery. The
Company's review for impairment generally entails:
o Identification and evaluation of investments that have possible
indications of impairment;
o Analysis of individual investments that have fair values less
than 80% of amortized cost, including consideration of length of
time the investment has been in an unrealized loss position.
o Discussion of evidential matter, including an evaluation of
factors or triggers that would or could cause individual
investments to qualify as having other-than-temporary impairments
and those that would not support other-than-temporary impairment;
o Documentation of the results of these analyses, as required under
business policies.
The table below shows the fair value of investments in fixed maturities and
equity securities in an unrealized loss position at December 31, 2003:
GROSS UNREALIZED LOSSES
Less Than One Year One Year or Longer Total
----------------------------------------------------------------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
($ IN THOUSANDS) Value Losses Value Losses Value Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available-for-sale:
Mortgage-backed securities-CMO's and
pass-through securities $142,683 $1,598 $-- $-- $142,683 $1,598
U.S. Treasury securities and obligations of
U.S. Government and government agencies
and authorities 132,402 731 -- -- 132,402 731
Debt securities issued by foreign governments 2,183 83 -- -- 2,183 83
All other corporate bonds 237,621 4,266 19,461 1,063 257,082 5,329
All other debt securities 122,769 2,461 20,054 644 142,823 3,105
Redeemable preferred stock 650 41 659 51 1,309 92
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities $638,308 $9,180 $40,174 $1,758 $678,482 $10,938
Equity securities $2,642 $56 $946 $263 $3,588 $319
- ------------------------------------------------------------------------------------------------------------------------------------
32
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
MORTGAGE LOANS
At December 31, 2003 and 2002, the Company's mortgage loan portfolios
consisted of the following:
------------------------------------------------------------------------
($ IN THOUSANDS) 2003 2002
------------------------------------------------------------------------
Current Mortgage Loans $135,347 $130,303
Underperforming Mortgage Loans -- 3,775
------------------------------------------------------------------------
Total $135,347 $134,078
------------------------------------------------------------------------
Underperforming assets include delinquent mortgage loans over 90 days past
due, loans in the process of foreclosure and loans modified at interest
rates below market.
Aggregate annual maturities on mortgage loans at December 31, 2003 are as
shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to prepay obligations with or without
prepayment penalties.
---------------------------------------------------------------
YEAR ENDING DECEMBER 31,
($ IN THOUSANDS)
---------------------------------------------------------------
2004 $11,301
2005 6,137
2006 27,827
2007 5,155
2008 5,804
Thereafter 79,123
---------------------------------------------------------------
Total $135,347
===============================================================
OTHER INVESTED ASSETS
Other invested assets are composed of the following:
-----------------------------------------------------------------------
($ IN MILLIONS) 2003 2002
-----------------------------------------------------------------------
Private equity and arbitrage investments $203 $142
Derivatives 115 162
Trading Securities 33 27
Policy Loans 27 28
Real estate investments 15 26
-----------------------------------------------------------------------
Total $393 $385
-----------------------------------------------------------------------
33
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
CONCENTRATIONS
The Company participates in a short-term investment pool maintained by TIC.
See Note 11.
The Company's industry concentrations of investments, excluding those in
federal and government agencies, primarily fixed maturities at fair value,
were as follows:
-------------------------------------------------------------------
($ IN THOUSANDS) 2003 2002
-------------------------------------------------------------------
Finance $555,067 $562,179
Electric Utilities 454,960 512,950
Banking 364,094 265,442
Media 354,213 324,008
Telecommunications 287,955 304,171
Insurance 261,198 200,525
-------------------------------------------------------------------
The Company held investments in foreign banks in the amount of $152 million
and $147 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 preceding table include $157 million and $109
million in Electric Utilities, $31 million and $35 million in Media, and
$34 million and $53 million in Telecommunications at December 31, 2003 and
2002, respectively. Below investment grade assets in other categories were
insignificant. Total below investment grade assets were $506 million and
$414 million at December 31, 2003 and 2002, respectively.
Included in mortgage loans were the following group concentrations:
($ IN THOUSANDS)
-------------------------------------------------------------------
At December 31, 2003 2002
-------------------------------------------------------------------
STATE
California $34,304 $42,169
New York 30,766 22,636
-------------------------------------------------------------------
PROPERTY TYPE
Agricultural $63,672 $79,075
Office 61,812 44,094
-------------------------------------------------------------------
The Company monitors creditworthiness of counterparties to all financial
instruments by using controls that include credit approvals, credit limits
and other monitoring procedures. Collateral for fixed maturities often
includes pledges of assets, including stock and other assets, guarantees
and letters of credit. The Company's underwriting standards with respect to
new mortgage loans generally require loan to value ratios of 75% or less at
the time of mortgage origination.
34
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
RESTRUCTURED INVESTMENTS
Mortgage loan and debt securities which were restructured at below market
terms at December 31, 2003 and 2002 were insignificant. The new terms of
restructured investments typically defer a portion of contract interest
payments to varying future periods. Gross interest income on restructured
assets that would have been recorded in accordance with the original terms
of such assets was insignificant. Interest on these assets, included in net
investment income, was insignificant.
NET INVESTMENT INCOME
----------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) 2003 2002 2001
----------------------------------------------------------------------------------------------------
GROSS INVESTMENT INCOME
Fixed maturities $316,790 $276,818 $217,813
Other invested assets 33,118 27,886 22,542
Mortgage loans 10,931 10,578 11,327
Other 935 1,402 2,227
----------------------------------------------------------------------------------------------------
Total gross investment income 361,774 316,684 253,909
----------------------------------------------------------------------------------------------------
Investment expenses 5,311 4,738 2,855
----------------------------------------------------------------------------------------------------
Net investment income $356,463 $311,946 $251,054
----------------------------------------------------------------------------------------------------
35
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) for the periods were as follows:
-----------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) 2003 2002 2001
-----------------------------------------------------------------------------------------------------------
REALIZED
Fixed maturities $(14,361) $(11,185) $33,061
Other invested assets 8,152 (19,423) (4,980)
Mortgage loans (886) (61) (707)
Other (107) 85 (1,230)
-----------------------------------------------------------------------------------------------------------
Total realized investment gains (losses) $(7,202) $(30,584) $26,144
-----------------------------------------------------------------------------------------------------------
Changes in net unrealized investment gains (losses) that are included as
accumulated other changes in equity from nonowner sources in shareholder's
equity were as follows:
------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
($ IN THOUSANDS) 2003 2002 2001
------------------------------------------------------------------------------------------------------------
UNREALIZED
Fixed maturities $188,949 $91,013 $14,761
Other invested assets (2,805) 22,449 (16,182)
------------------------------------------------------------------------------------------------------------
Total unrealized investment gains (losses) 186,144 113,462 (1,421)
Related taxes 65,151 39,712 (497)
------------------------------------------------------------------------------------------------------------
Change in unrealized investment gains (losses) 120,993 73,750 (924)
Balance beginning of year 86,448 12,698 13,622
------------------------------------------------------------------------------------------------------------
Balance end of year $207,441 $86,448 $12,698
------------------------------------------------------------------------------------------------------------
3. REINSURANCE
The Company uses reinsurance in order to limit losses, minimize exposure to
large risks, provide additional capacity for future growth and to effect
business-sharing arrangements. Reinsurance is accomplished through various
plans of reinsurance, primarily yearly renewable term (YRT) coinsurance and
modified coinsurance. The Company remains primarily liable as the direct
insurer on all risks reinsured.
Since 1997 the majority of UL 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 UL 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 life insurance in-force ceded under reinsurance contracts was $35.0
billion and $29.3 billion at December 31, 2003 and 2002, including $4.5
million and $6.0 million, respectively to TIC. Total life
36
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
insurance premiums ceded were $24.9 million, $14.9 million and $11.9
million in 2003, 2002 and 2001, respectively. Ceded premiums paid to TIC
were insignificant for these same periods.
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 $9.9 billion,
including $5.4 billion or 55% which was reinsured, and $7.1 billion, of
which $4.9 billion or 69% is 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 was $887 million
and $2.2 billion at December 31, 2003 and 2002, respectively. NAR included
$816 million, or 92%, and $1.9 billion, or 86%, which was reinsured at
December 31, 2003 and 2002, respectively.
4. INTANGIBLE ASSETS
The Company has two intangible, amortizable assets, DAC and the value of
insurance in force. The following is a summary of capitalized DAC by
product type:
Traditional Deferred
($ IN MILLIONS) Life Annuity UL Total
-----------------------------------------------------------------------------------------
Beginning balance
January 1, 2002 $ 47.7 $ 511.5 $ 255.2 $ 814.4
Commissions and expenses deferred 16.5 169.4 130.8 316.7
Amortization expense (8.9) (72.6) (90.8)
(9.3)
Underlying lapse and interest rate
assumptions -- 29.8 -- 29.8
Amortization related to FAS 91
reassessment -- (6.0) -- (6.0)
-----------------------------------------------------------------------------------------
Balance December 31, 2002 55.3 632.1 376.7 1,064.1
Commissions and expenses deferred 14.3 172.1 164.9 351.3
Amortization expense (10.2) (107.6) (18.5) (136.3)
-----------------------------------------------------------------------------------------
Balance December 31, 2003 $ 59.4 $ 696.6 $ 523.1 $ 1,279.1
-----------------------------------------------------------------------------------------
The value of insurance in force totaled $11.7 million and $12.5 million at
December 31, 2003 and 2002, respectively, and was reported in other assets.
Amortization expense of value of insurance in force was insignificant for
2003, 2002 and 2001.
5. DEPOSIT FUNDS AND RESERVES
At December 31, 2003 and 2002, the Company had $5.6 billion and $5.0
billion of life and annuity deposit funds and reserves, respectively. Of
those totals, $1.6 billion were not subject to discretionary withdrawal
based on contract terms for 2003 and 2002. The remaining amounts were life
and annuity products that were subject to discretionary withdrawal by the
contractholders.
37
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Included in the amounts that are subject to discretionary withdrawal were
$2.6 billion and $2.4 billion of liabilities that are surrenderable with
market value adjustments. Also included are an additional $1.3 billion and
$.9 billion of life insurance and individual annuity liabilities which are
subject to discretionary withdrawals with an average surrender charge of
4.7% and 4.2%, respectively. The remaining $.1 billion in 2003, and $.1
billion in 2002, is surrenderable without charge. The life insurance risks
would have to be underwritten again if transferred to another carrier,
which is considered a significant deterrent for long-term policyholders.
Insurance liabilities that are surrendered or withdrawn from the Company
are reduced by outstanding policy loans and related accrued interest prior
to payout.
6. FEDERAL INCOME TAXES
EFFECTIVE TAX RATE
($ IN THOUSANDS)
------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
------------------------------------------------------------------------------------------------------
Income before federal income taxes $ 154,048 $ 159,024 $ 176,249
Statutory tax rate 35% 35% 35%
------------------------------------------------------------------------------------------------------
Expected federal income taxes 53,917 55,658 61,687
Tax effect of:
Non-taxable investment income (11,626) -- (36)
Tax reserve release (7,852) -- --
Other, net 149 4 (562)
------------------------------------------------------------------------------------------------------
Federal income taxes $ 34,588 $ 55,654 $ 61,089
======================================================================================================
Effective tax rate 22% 35% 35%
------------------------------------------------------------------------------------------------------
COMPOSITION OF FEDERAL INCOME TAXES
Current:
United States $ 72,983 $ (30,830) $ (19,007)
Foreign 440 (313) --
------------------------------------------------------------------------------------------------------
Total 73,423 (31,143) (19,007)
------------------------------------------------------------------------------------------------------
Deferred:
United States (38,835) 86,797 80,096
Foreign -- -- --
------------------------------------------------------------------------------------------------------
Total (38,835) 86,797 80,096
------------------------------------------------------------------------------------------------------
Federal income taxes $ 34,588 $ 55,654 $ 61,089
======================================================================================================
38
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The net deferred tax liabilities at December 31, 2003 and 2002 were
comprised of the tax effects of temporary differences related to the
following assets and liabilities:
($ IN THOUSANDS) 2003 2002
-----------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Benefit, reinsurance and other reserves $ 251,017 $ 151,454
Other 6,496 2,286
-----------------------------------------------------------------------------------------------------------
Total 257,513 153,740
-----------------------------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Investments, net (117,613) (48,363)
Deferred acquisition costs and value of insurance in force (363,670) (303,652)
Other (1,051) (1,075)
-----------------------------------------------------------------------------------------------------------
Total (482,334) (353,090)
-----------------------------------------------------------------------------------------------------------
Net Deferred Tax Liability $(224,821) $(199,350)
-----------------------------------------------------------------------------------------------------------
TIC and its subsidiaries, including the Company, 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. TLAC had a $9.1
million recoverable from TIC at December 31, 2003 and a $53.6 million
payable to TIC at December 31, 2002 pursuant 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 $2.1 million. Income taxes are not provided for on this
amount because under current U.S. tax rules such taxes will become payable
only to the extent such amounts are distributed as a dividend or exceed
limits prescribed by federal law. Distributions are not contemplated from
this account. At current rates the maximum amount of such tax would be
approximately $700 thousand.
7. SHAREHOLDER'S EQUITY
SHAREHOLDER'S EQUITY AND DIVIDEND AVAILABILITY
The Company's statutory net income (loss) was $37.3 million, $(133.9)
million and $(73.4) million for the years ended December 31, 2003, 2002 and
2001, respectively. Statutory capital and surplus was $494 million and $397
million at December 31, 2003 and 2002, respectively.
Effective January 1, 2001, the Company began preparing its statutory basis
financial statements in accordance with the National Association of
Insurance Commissioners' ACCOUNTING PRACTICES AND PROCEDURES MANUAL -
VERSION EFFECTIVE JANUARY 1, 2001, subject to any deviations prescribed or
39
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
permitted by its domicilary insurance commissioner (see Permitted Statutory
Accounting Practices in Note 1). The impact of this change on statutory
capital and surplus was not significant.
The Company is currently subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to its parent
without prior approval of insurance regulatory authorities. In accordance
with Connecticut statutes, after reducing the Company's unassigned funds
(surplus) by 25% of the change in net unrealized capital gains, the Company
may not pay dividends during 2004 without prior approval of the State of
Connecticut Insurance Department.
ACCUMULATED OTHER CHANGES IN EQUITY FROM NONOWNER SOURCES, NET OF TAX
Changes in each component of Accumulated Other Changes in Equity from Nonowner
Sources were as follows:
NET ACCUMULATED
UNREALIZED DERIVATIVE OTHER CHANGES
GAIN/LOSS ON INSTRUMENTS & IN EQUITY FROM
INVESTMENT HEDGING NONOWNER
($ IN THOUSANDS) SECURITIES ACTIVITIES SOURCES
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 $ 13,622 $ -- $ 13,622
Cumulative effect of change in accounting for derivative
instruments
and hedging activities, net of tax of $33 -- 62 62
Unrealized gains on investment securities,
net of tax of $10,673 19,821 -- 19,821
Less: Reclassification adjustment for gains
included in net income, net of tax of $(11,170) (20,745) -- (20,745)
Add: Derivative instrument hedging activity gains, net of
tax of $1,789 -- 3,324 3,324
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE (924) 3,386 2,462
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 12,698 3,386 16,084
Unrealized gains on investment securities, net of tax of $35,352 65,653 -- 65,653
Add: Reclassification adjustment for losses included in net
income, net of tax of $4,360 8,097 -- 8,097
Add: Derivative instrument hedging activity gains, net of
tax of $2,750 -- 5,107 5,107
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 73,750 5,107 78,857
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 86,448 8,493 94,941
Unrealized gains on investment securities,
net of tax of $60,482 112,322 -- 112,322
Add: Reclassification adjustment for losses included in net
income, net of tax of $4,669 8,671 -- 8,671
Less: Derivative instrument hedging activity loss, net of
tax benefits of $(845) -- (1,568) (1,568)
- ------------------------------------------------------------------------------------------------------------------------------------
PERIOD CHANGE 120,993 (1,568) 119,425
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 $ 207,441 $ 6,925 $ 214,366
- ------------------------------------------------------------------------------------------------------------------------------------
40
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
8. BENEFIT PLANS
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company participates in a qualified, noncontributory defined benefit
pension plan, a non-qualified pension plan and other postretirement
benefits to retired employees through plans sponsored by Citigroup. The
Company's share of net expense for these plans was not significant for
2003, 2002 and 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. See Note 11. The Company's
expenses in connection with the 401(k) savings plan were not significant in
2003, 2002 and 2001.
9. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments, including financial
futures, interest rate swaps, options and forward contracts, as a means of
hedging exposure to foreign currency, equity price changes and/or interest
rate risk on anticipated transactions or existing assets and liabilities.
The Company does not hold or issue derivative instruments for trading
purposes.
The Company uses exchange traded financial futures contracts to manage its
exposure to changes in interest rates that arise from the sale of certain
insurance and investment products, or the need to reinvest proceeds from
the sale or maturity of investments. To hedge against adverse changes in
interest rates, the Company enters long or short positions in financial
futures contracts, which offset asset price changes resulting from changes
in market interest rates until an investment is purchased, or a product is
sold. Futures contracts are commitments to buy or sell at a future date a
financial instrument, at a contracted price, and may be settled in cash or
through delivery.
The Company uses equity option contracts to manage its exposure to changes
in equity market prices that arise from the sale of certain insurance
products. To hedge against adverse changes in the equity market prices, the
Company enters long positions in equity option contracts with major
financial institutions. These contracts allow the Company, for a fee, the
right to receive a payment if the Standard and Poor's 500 Index falls below
agreed upon strike prices.
The Company enters into interest rate swaps in connection with other
financial instruments to provide greater risk diversification and better
match assets and liabilities. Under interest rate swaps, the Company agrees
with other parties to exchange, at specified intervals, the difference
between fixed rate and floating rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no cash is
exchanged at the outset of the contract and no principal payments are made
by either party. A single net payment is usually made by one counterparty
at each due date.
Forward contracts are used on an ongoing basis to hedge the Company's
exposure to foreign currency exchange rates that result from the net
investment in the Company's direct foreign currency investments. To hedge
against adverse changes in exchange rates, the Company enters into
contracts
41
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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.
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 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, 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 $69.7million.
The following table summarizes certain information related to the Company's
hedging activities for the years ended December 31, 2003 and 2002:
Year Ended Year Ended
($ IN THOUSANDS) December 31, 2003 December 31, 2002
---------------------------------------------------------------------------
Hedge ineffectiveness recognized
related to fair value hedges $(3,309) $(5,215)
Hedge ineffectiveness recognized
related to cash flow hedges (296) 1,141
Net gain or loss from economic
hedges in earnings 8,076 (13,597)
During the year ended December 31, 2002 the Company recorded a gain of $.3
million from discontinued forecasted transactions. There was no such gain
in 2003.
Cash flow transaction amounts 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 not significant.
The Company had interest rate and equity options with fair values of $115.1
million and $161.7 million, at December 31, 2003 and 2002, respectively.
Included in these amounts were $3.5 million and $4.8 million with
affiliates, respectively.
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
notional values of loan commitments at December 31, 2003 and 2002 were $6.2
million and $23.9 million respectively. The notional values of unfunded
commitments were $31.0 million and $35.5 million at December 31, 2003 and
2002, respectively.
42
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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, investments in fixed maturities had a carrying value
and a fair value of $5.4 billion compared with a carrying value and a fair
value of $4.5 billion at December 31, 2002. See Notes 1 and 2.
At December 31, 2003, mortgage loans had a carrying value of $135.4 million
and a fair value of $147.6 million and at December 31, 2002 had a carrying
value of $134.1 million and a fair value of $148.0 million. In estimating
fair value, the Company used interest rates reflecting the current real
estate financing market.
The carrying values of short-term securities were $195.3 million and $475.4
million in 2003 and 2002, respectively, which approximated their fair
values. Policy loans which are included in other invested assets had
carrying values of $26.8 million and $27.4 million in 2003 and 2002,
respectively, which also approximated their fair values.
The carrying values of $260.6 million and $151.5 million of financial
instruments classified as other assets approximated their fair values at
December 31, 2003 and 2002, respectively. The carrying values of $439.2
million and $319.8 million of financial instruments classified as other
liabilities also approximated their fair values at December 31, 2003 and
2002, respectively. Fair value is determined using various methods,
including discounted cash flows, as appropriate for the various financial
instruments.
At December 31, 2003, contractholder funds with defined maturities had a
carrying value of $2.8 billion and a fair value of $3.0 billion, compared
with a carrying value of $2.7 billion and a fair value of $2.9 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 $677.7 million and
a fair value of $527.3 million at December 31, 2003, compared with a
carrying value of $605 million and a fair value of $416.2 million at
December 31, 2002. These contracts generally are valued at surrender value.
10. 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.
43
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
In the ordinary course of business, the Company is a defendant or
co-defendant in various litigation matters incidental to and typical of the
businesses in which it is engaged. In the opinion of the Company's
management, the ultimate resolution of these legal proceedings would not be
likely to have a material adverse effect on the Company's results of
operations, financial condition or liquidity.
11. RELATED PARTY TRANSACTIONS
TIC handles banking functions, including payment of salaries and expenses
for the Company and some of its non-insurance affiliates. In addition,
Citigroup and certain of its subsidiaries provide investment management and
accounting services, data processing services, benefit management and
administration, property management and investment technology services to
the Company as of December 31, 2003 and 2002. At December 31, 2001 the
majority of these services were provided by either Citigroup and its
subsidiaries or TPC, a former affiliate. Charges for these services are
shared by the Company and TIC on cost allocation methods, based generally
on estimated usage by department and were insignificant for the Company in
2003, 2002 and 2001.
TIC maintains a short-term investment pool in which the Company
participates. The position of each company participating in the pool is
calculated and adjusted daily. At December 31, 2003 and 2002, the pool
totaled approximately $3.8 billion and $4.2 billion, respectively. The
Company's share of the pool amounted to $124.6 million and $356.0 million
at December 31, 2003 and 2002, respectively, and is included in short-term
securities in the balance sheet.
At December 31, 2003 and 2002, the Company had investments in Tribeca
Citigroup Investments Ltd., an affiliate of the Company, in the amounts of
$25.5 million and $26.7 million, respectively. Income of $6.6 million, $1.9
million and $4.5 million was earned on these investments in 2003, 2002 and
2001, respectively. The Company also had investments in an affiliated joint
venture, Tishman Speyer, in the amount of $11.8 million and $24.1 million
at December 31, 2003 and 2002, respectively. Income earned on these
investments in 2003 was insignificant and was $19.8 million and $8.5
million in 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.
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., in the amount of $7.1 million and $10.2 million, respectively.
The Company has other affiliated investments. The individual investment
with any one affiliate was insignificant at December 31, 2003 and 2002.
The Company's Travelers Target Maturity (TTM) Modified Guaranteed Annuity
Contracts are subject to a limited guarantee agreement by TIC in a
principal amount of up to $450 million. TIC's obligation is to pay in full
to any owner or beneficiary of the TTM Modified Guaranteed Annuity
Contracts principal and interest as and when due under the annuity contract
to the extent that the Company fails to make such payment. In addition, TIC
guarantees that the Company will maintain a minimum statutory capital and
surplus level.
44
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
The Company distributes fixed and variable annuity products through SB.
Premiums and deposits related to these products were $.7 billion, $.8
billion and $1.2 billion in 2003, 2002 and 2001, respectively. The Company
also markets term and universal life products through SB. Premiums related
to such products were $87.5 million, $87.2 million and $74.5 million in
2003, 2002 and 2001, respectively. Commissions and fees paid to SB were
$56.7 million, $57.5 million and $68.1 million in 2003, 2002 and 2001,
respectively.
The Company also distributes deferred annuity products through its
affiliates Primerica Financial Services (PFS), CitiStreet Retirement
Services, a division of CitiStreet LLC, (together with its subsidiaries,
CitiStreet) and Citibank, N.A. (Citibank). Deposits received from PFS were
$628 million, $662 million and $738 million in 2003, 2002 and 2001,
respectively. Commissions and fees paid to PFS were $52.4 million, $47.1
million and $51.6 million in 2003, 2002 and 2001, respectively.
Deposits from Citibank and CitiStreet were $162 million and $82 million
respectively, for 2003, $117 million and $184 million, respectively, for
2002, and $166 million and $136 million, respectively, for 2001.
Commissions and fees paid to Citibank and CitiStreet were $12.4 million and
$2.3 million, respectively, in 2003, $7.2 million and $2.6 million,
respectively, in 2002 and $9.8 million and $2.9 million, respectively, in
2001 .
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.
Prior to the IPO of TPC, most leasing functions for TIC and its
subsidiaries, including the Company, were handled by its property-casualty
insurance affiliates. Rent expense related to these leases was shared by
the companies on a cost allocation method based generally on estimated
usage by department. In 2002, TIC sold its home office buildings in
Hartford, Connecticut and now leases space from a third party. The
Company's rent expense was insignificant in 2003, 2002 and 2001.
45
THE TRAVELERS LIFE AND ANNUITY COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
12. RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES
The following table reconciles net income to net cash used in operating
activities:
----------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
($ IN THOUSANDS)
----------------------------------------------------------------------------------------------------------------
Net Income $ 119,460 $ 103,370 $ 115,160
Adjustments to reconcile net income to cash used in operating
activities:
Realized (gains) losses 7,202 30,584 (26,144)
Deferred federal income taxes (38,835) 86,797 80,096
Amortization of deferred policy acquisition costs 136,310 66,972 89,475
Additions to deferred policy acquisition costs (351,310) (316,721) (324,277)
Investment income accrued (36,834) (35,133) (39,875)
Insurance reserves (16,138) (9,000) (14,382)
Other (44,755) 72,190 11,398
----------------------------------------------------------------------------------------------------------------
Net cash used in operations $(224,900) $ (941) $(108,549)
----------------------------------------------------------------------------------------------------------------
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.
46
THE TRAVELERS LIFE AND ANNUITY COMPANY
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:
AUDIT FEES: Audit fees include fees paid by the Company to KPMG in
connection with the annual audit of the Company's 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 our 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 totaled $70 thousand and $60
thousand in each of the years ended December 31, 2003 and December 31,
2002, 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 were $3 thousand for each of
the years ended December 31, 2003 and December 31, 2002.
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 for the
years ended December 31, 2003 and December 31, 2002.
47
THE TRAVELERS LIFE AND ANNUITY COMPANY
ALL OTHER FEES: The Company did not incur any charges from KPMG for other
services rendered to the Company 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.
48
THE TRAVELERS LIFE AND ANNUITY COMPANY
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed:
(1) Financial Statements. See index on page 13 of this report.
(2) Financial Statement Schedules. See index on page 52 of this report.
(3) Exhibits. See Exhibit Index on the following page.
(b) Reports on Form 8-K:
None.
49
THE TRAVELERS LIFE AND ANNUITY COMPANY
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3. Articles of Incorporation and By-Laws
a.) Charter of The Travelers Life and Annuity Company (the
"Company"), as amended on April 10, 1990, incorporated
herein by reference to Exhibit 6(a) to the Registration
Statement on Form N-4, File No. 33-58131, filed on March 17,
1995.
b.) By-laws of the Company as amended October 20, 1994,
incorporated herein by reference to Exhibit 6(b) to the
Registration Statement on Form N-4, File No. 33-58131, filed
on March 17, 1995.
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.
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 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------
+Filed herewith
50
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 LIFE AND ANNUITY COMPANY
(Registrant)
By: /s/Glenn D. Lammey
--------------------------------------------
Glenn D. Lammey
Executive Vice President,
Chief Financial Officer and Chief Accounting Officer
(Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities indicated on the 22nd day of March, 2004.
SIGNATURE CAPACITY
/s/ George C. Kokulis Director, Chief Executive Officer
- --------------------- (Principal Executive Officer)
(George C. Kokulis)
/s/ Glenn D. Lammey Director, Chief Financial Officer and
- ------------------- Chief Accounting Officer
(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.
51
THE TRAVELERS LIFE AND ANNUITY COMPANY
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
The Travelers Life and Annuity Company
Independent Auditors' Report *
Statements of Income *
Balance Sheets *
Statements of Changes in Shareholder's Equity *
Statements of Cash Flows *
Notes to Financial Statements *
Independent Auditors' Report 53
Schedule I - Summary of Investments - Other than Investments in Related Parties 2003 54
Schedule III - Supplementary Insurance Information 2001-2003 55
Schedule IV - Reinsurance 2001-2003 56
All other schedules are inapplicable for this filing.
* See index on page 13.
52
THE TRAVELERS LIFE AND ANNUITY COMPANY
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
The Travelers Life and Annuity Company:
Under date of February 26, 2004, we reported on the balance sheets of The
Travelers Life and Annuity Company as of December 31, 2003 and 2002, and the
related 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
financial statements, we also audited the related financial statement schedules
as listed in the accompanying index. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, the Company changed its
methods of accounting 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
53
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2003
($ IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
AMOUNT SHOWN IN
TYPE OF INVESTMENT COST VALUE BALANCE SHEET (1)
- ------------------------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
U.S. Government and government agencies and authorities $624,596 $637,700 $637,700
States, municipalities and political subdivisions 52,867 59,018 59,018
Foreign governments 57,656 60,959 60,959
Public utilities 346,616 377,238 377,238
Convertible bonds and bonds with warrants attached 20,734 24,014 24,014
All other corporate bonds 3,927,226 4,192,150 4,192,150
- ------------------------------------------------------------------------------------------------------------------------
Total Bonds 5,029,695 5,351,079 5,351,079
Redeemable Preferred Stocks 4,083 6,146 6,146
- ------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities 5,033,778 5,357,225 5,357,225
- ------------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks:
Industrial, miscellaneous and all other 1,645 1,739 1,739
- ------------------------------------------------------------------------------------------------------------------------
Total Common Stocks 1,645 1,739 1,739
Non-Redeemable Preferred Stocks 6,608 6,568 6,568
- ------------------------------------------------------------------------------------------------------------------------
Total Equity Securities 8,253 8,307 8,307
- ------------------------------------------------------------------------------------------------------------------------
Mortgage Loans 135,347 135,347
Policy Loans (4) 26,827 26,827
Short-Term Securities 195,279 195,279
Other Investments (2) (3) 289,599 287,168
- ------------------------------------------------------------------------------------------------------------------------
Total Investments $5,689,083 $6,010,153
========================================================================================================================
(1) Determined in accordance with methods described in Notes 1 and 2 of Notes
to Financial Statements.
(2) Excludes cost and carrying value of investments in related parties of
$75,313 and $76,349, respectively.
(3) Includes derivatives marked to market and recorded at fair value in the
balance sheet.
(4) Included in other invested assets on balance sheet.
54
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
2001-2003
($ IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
FUTURE POLICY BENEFITS, CLAIMS, AMORTIZATION OF
BENEFITS, LOSSES, NET LOSSES AND DEFERRED POLICY OTHER
DEFERRED POLICY CLAIMS AND LOSS PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
ACQUISITION COSTS EXPENSES (1) REVENUE INCOME EXPENSES (2) COSTS EXPENSES WRITTEN
- ------------------------------------------------------------------------------------------------------------------------------------
2003 $1,279,118 $5,609,517 $40,866 $356,463 $306,681 $136,310 $49,288 $40,866
2002 $1,064,118 $5,031,775 $42,893 $311,946 $275,123 $ 66,972 $32,352 $42,893
2001 $ 814,369 $3,665,426 $39,222 $251,054 $214,722 $ 89,475 $23,404 $39,222
(1) Includes contractholder funds.
(2) Includes interest credited on contractholder funds.
55
THE TRAVELERS LIFE AND ANNUITY COMPANY
SCHEDULE IV
REINSURANCE
($ IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED FROM OF AMOUNT
OTHER OTHER NET AMOUNT ASSUMED TO
GROSS AMOUNT COMPANIES COMPANIES NET
- --------------------------------------------------------------------------------------------------------------------------------
2003
Life Insurance In Force $43,671,192 $34,973,161 $-- $8,698,031 --%
Premiums:
Annuity $3,696 $ -- $-- $3,696
Individual life 62,034 24,864 -- 37,170
------- ------- --- -------
Total Premiums $65,730 $24,864 $-- $40,866 --%
======= ======= === =======
2002
Life Insurance In Force $35,807,212 $29,261,075 $-- $6,546,137 --%
Premiums:
Annuity $4,515 $ -- $-- $4,515
Individual Life 53,310 14,932 - 38,378
------- ------- --- -------
Total Premiums $57,825 $14,932 $-- $42,893 --%
======= ======= === =======
2001
Life Insurance In Force $28,793,622 $23,818,768 $-- $4,974,854 --%
Premiums:
Annuity $3,319 $-- $-- $3,319
Individual life 47,826 11,923 35,903
------- ------- --- -------
Total Premiums $51,145 $11,923 $-- $39,222 --%
======= ======= === =======
56
L-21256 May 3, 2004